FCC 97-158

A. Common Line

1. Overview

67. In the 1983 Access Charge Order, the Commission established a comprehensive mechanism for incumbent LECs to recover the costs associated with their provision of access service required to complete interstate and foreign telecommunications.⁽⁵⁶⁾ The access plan distinguished between traffic sensitive costs and NTS costs incurred by an incumbent LEC to provide interstate access service An incumbent LEC's NTS costs of providing interstate access, or costs that do not vary with the amount of usage, include the common line, or "local loop," which connects an end user's home or business to a LEC central office.⁽⁵⁷⁾

68. In the Access Charge Order, the Commission emphasized that its long range goal was to have incumbent LECs recover a large share of the NTS common line costs from end users instead of carriers, and to recover these costs on a flat-rated, rather than on a usage- sensitive, basis.⁽⁵⁸⁾ The Commission recognized, however, that a sudden increase in the flat rates imposed by LECs on end users could have a detrimental effect on universal service. For this reason, the rules adopted in 1983 apportioned charges for common line costs between a monthly flat-rated end-user SLC and a per-minute CCL charge assessed to the IXCs. The SLC is based on average interstate-allocated common line costs, which the incumbent LEC may average over an entire region or over a study area,⁽⁵⁹⁾ depending on how it files its interstate tariff. These charges currently are the lesser of the per-line average common line costs allocated to the interstate jurisdiction or $3.50 per month for residential and single-line business users, and $6.00 per month for multi-line business users.⁽⁶⁰⁾ Any remaining common line revenues permitted under our price cap rules are recovered by incumbent price cap LECs through per-minute CCL charges assessed on the IXCs, and are ultimately recovered by IXCs from end-users through long distance toll charges.⁽⁶¹⁾

69. Because common line and other NTS costs do not increase with each additional minute of use transmitted over the loop, the current per-minute CCL charge that recovers loop costs represents an economically inefficient cost-recovery mechanism and implicit subsidy. A rate structure that recovers NTS costs through per-minute charges creates an incentive for customers to underutilize the loop by requiring them to pay usage rates that significantly exceed the incremental cost of using the loop. Additionally, a rate structure that forces high- volume customers to pay significantly more than the cost of the facilities used to service them is not sustainable in a competitive environment because high-volume customers can migrate to a competitive LEC able to offer an efficient combination of flat and per-minute charges, even if the competitive LEC has the same or higher costs than the incumbent LEC.

70. The Federal-State Universal Service Joint Board stated, in its Recommended Decision, that primary residential and single-line business lines are essential to the provision of universal service,⁽⁶²⁾ and that current rates for local services are generally affordable based on subscribership levels.⁽⁶³⁾ The Joint Board also concluded that the SLC, as a charge assessed directly on local telephone subscribers, has an impact on universal service concerns such as affordability,⁽⁶⁴⁾ and recommended that the Commission leave the current SLC ceilings in place for primary residential and single-line business lines.⁽⁶⁵⁾ In our companion Universal Service Order, consistent with that recommendation, we conclude that we should not raise the current $3.50 SLC ceiling on primary residential and single-line business lines.⁽⁶⁶⁾

71. We adjust the SLC ceilings for multi-line business lines and residential lines beyond the primary connection. Adjusting the SLC ceilings for multi-line business lines and non-primary residential lines will permit incumbent LECs to recover directly from end users more of the common line revenues permitted under our price cap rules for those lines and will reduce the amount of NTS costs related to these lines that are currently recovered through CCL charges. Where the SLC ceilings do not allow the incumbent LEC to recover its price cap common line revenues through end-user charges, the remaining, or "residual" amount will be recovered through flat, per-line charges assessed to each customer's presubscribed interexchange carrier. This presubscribed interexchange carrier charge, or "PICC", will increase gradually until the incumbent price cap LECs' full interstate-allocated common line revenues permitted under our price cap rules are recovered through a combination of flat-rated SLCs and PICCs. To the extent that the flat-rated charges do not recover, during the initial phase, the full interstate-allocated common line revenues permitted under our price cap rules, incumbent LECs may continue to assess the IXCs a per-minute CCL charge based on the costs not recovered through flat-rated charges. This per-minute charge, however, will be generally much lower than today's CCL charge and will be eliminated once all common line revenues are recovered through a combination of SLCs and PICCs.

2. Subscriber Line Charge

a. Background

72. In the NPRM, we proposed to increase the ceiling on the SLC for second and additional lines for residential customers, and for all lines for multi-line business customers, to the per-line loop costs assigned to the interstate jurisdiction.⁽⁶⁷⁾ Alternatively, we proposed to eliminate the ceiling for multi-line business customers and for residential connections beyond the primary connection, especially where the incumbent LEC has entered into interconnection agreements and taken other steps to lower barriers to actual or potential local competition.⁽⁶⁸⁾ We sought comment on these proposals.⁽⁶⁹⁾ We also invited parties to comment on whether any changes that we adopt to the ceiling on SLCs for incumbent price cap LECs should be extended to incumbent rate-of-return LECs, and on the relationship of any such changes to the Joint Board Recommended Decision.⁽⁷⁰⁾ We sought comment on whether to establish a transition mechanism for this increase if the ceilings on SLCs for multi-line business lines and residential lines beyond the primary connection are increased and whether such a transition could be implemented consistent with section 254, the Act's universal service provision.⁽⁷¹⁾ We sought comment on whether geographic averaging of SLCs is an implicit subsidy that is inconsistent with the requirements of section 254(e), and thus on whether we are required to deaverage SLCs.⁽⁷²⁾

b. Discussion

73. The Commission has had the longstanding goal of ensuring that all consumers have affordable access to telecommunications services.⁽⁷³⁾ In its Recommended Decision, the Joint Board stated that current rates for local telephone services are generally affordable and that the SLC, as a charge assessed directly on local telephone subscribers, has an impact on universal service concerns such as affordability.⁽⁷⁴⁾ The Joint Board further recommended that the Commission maintain the current SLC ceilings for primary residential and single-line business lines,⁽⁷⁵⁾ and we adopt that recommendation in our companion Universal Service Order.⁽⁷⁶⁾ Numerous parties in this proceeding argue that we should raise or eliminate the SLC ceiling on all lines to permit LECs to recover the full interstate allocated costs of the local loop from end-users.⁽⁷⁷⁾ This would increase the average SLC for all residential and single-line business lines from $3.50 per month to $6.10 per month.⁽⁷⁸⁾ We conclude that it would be inappropriate to make significant changes to the SLC cap for primary residential and single-line business lines. Primary residential and single-line business lines are central to the provision of universal service. Because of concerns about affordability, and in light of the significant changes that are still underway in this proceeding, in the federal universal service support proceeding, and possible future changes to the separations process, we conclude that the current SLC for these lines should not be raised. Consistent with the Joint Board's recommendation and our conclusion in the Universal Service Order, therefore, the ceiling on the SLC for primary residential and single-line business lines will remain at $3.50 or the permitted price cap common line revenues per line, whichever is less.

74. With regard to multi-line users, the Joint Board suggested in its Recommended Decision that universal service support should not be extended to non-primary residential lines and multi-line business lines because it found that cost of service is unlikely to be a factor that would cause multi-line users not to subscribe to telephone service.⁽⁷⁹⁾ Subsequently, the state members of the Joint Board filed a report with the Commission in which they proposed that we retain high cost support for all lines served in high cost study areas during a transition to a forward-looking cost methodology.⁽⁸⁰⁾ Consistent with that proposal, we adopt, in our Universal Service Order, a modified version of the existing high-cost support system and continue support for all residential and business connections in areas currently receiving high cost support until at least January 1, 1999.⁽⁸¹⁾ We therefore continue to provide high cost support for non-primary residential and multi-line business lines at this time, by allocating a lower portion of these costs to the intrastate jurisdiction than would otherwise be the case.⁽⁸²⁾ In that order, we also express our concern, however, that providing universal service support for non-primary residential and multi-line business lines in high-cost areas may be inconsistent with our long-term universal service goals, and that overly expansive universal service support mechanisms potentially could harm all consumers by increasing the expense of telecommunications services for all.⁽⁸³⁾ We state that we will continue to evaluate the Joint Board's recommendation to limit universal service support to primary residential connections and businesses with single connections.⁽⁸⁴⁾

75. We conclude here that it is necessary to adjust the ceilings on the interstate SLCs on both non-primary residential and multi-line business lines in order to create a rate structure that supports our long-term universal service goals, is pro-competitive, and is sustainable in a competitive local exchange market. Section 254 of the Act requires that all consumers have access to basic telephone service at just, reasonable, and affordable rates that are comparable among different regions of the nation.⁽⁸⁵⁾ This section of the Act also requires that universal service support be achieved through support mechanisms that are "specific, predictable, and sufficient."⁽⁸⁶⁾ Because universal service concerns about ensuring affordable access to basic telephone services are not as great for non-primary residential and multi-line business lines as they are for primary residential and single-line business lines, we must take action to remove the implicit subsidies contained in our current interstate access charges. Thus, we are adopting a rate structure that will permit LECs to recover greater amounts of their costs on a flat-rated basis from end users and to reduce the amount of revenues they must recover through per-minute access charges. Our initial implementation improves upon the current rate structure because it reduces subsidies by recovering more costs from the cost causer. It also creates a rate structure that is more pro-competitive than the existing one by providing for greater flat-rated recovery of NTS costs. Without these modifications, new entrants, which are not subject to the non-cost-causative rate structure requirements, would be in a position to target the incumbent LECs' most profitable, high-volume customers based on regulatory requirements. A loss of profitable customers would increase the incumbent LECs' costs of providing service to the rest of their customers, especially to those in high-cost areas. Consistent with our universal service goal of ensuring that all consumers receive affordable rates that are comparable in different parts of the nation, however, the SLC adjustments will be subject to ceilings to prevent end-user customers in high-cost areas from paying SLCs that are significantly higher than in other parts of the country.

76. In virtually all cases, current SLC ceilings do not permit incumbent LECs to recover their average per-line interstate-allocated common line costs.⁽⁸⁷⁾ As a result of the existing SLC ceilings, which have been in place for the past decade, incumbent LECs must recover the shortfall through usage-sensitive CCL charges assessed on IXCs. The IXCs in turn recover most or all of these costs from toll users in the form of per-minute charges, keeping toll rates artificially high and discouraging demand for interstate long distance services. The high per-minute toll charges also create support flows between different classes of customers. For example, because end-user customers vary widely in their use of interstate long distance services, low-volume toll users do not pay the full cost of their loops while high-volume toll users contribute far more than the total cost of their loops. In addition high-volume toll users, who include significant numbers of low-income customers, effectively support non-primary residential and multi-line business customers.⁽⁸⁸⁾

77. In order to create a rate structure that supports our long-term universal service goals, is pro-competitive, and is sustainable in a competitive market, we modify our rate structure requirements to permit incumbent LECs to recover costs in a manner that more accurately reflects the way those costs are incurred. Because common line costs do not vary with usage, these costs should be recovered on a flat-rated instead of on a per-minute basis. In addition, these costs should be assigned, where possible, to those customers who benefit from the services provided by the local loop. Accordingly, the SLC ceilings for non-primary residential and multi-line business lines will be adjusted generally to a level that permits incumbent LECs to recover, directly from the end user, their average per-line interstate common line revenues.⁽⁸⁹⁾

78. For multi-line business lines, the SLC will be adjusted to recover the average per-line interstate-allocated common line costs beginning July 1, 1997. To the extent incumbent price cap LECs, mostly in rural areas, have common line costs that significantly exceed the national average, we establish a ceiling on SLCs for multi-line business lines of $9.00, adjusted annually for inflation. To ameliorate any possible adverse impact of adjustments in SLC ceilings for non-primary residential lines, we adopt an approach that will gradually phase in adjustments in the SLC ceilings for these lines. The SLC for non-primary residential lines will be adjusted initially beginning January 1, 1998. For the first year, beginning January 1, 1998, the SLC ceiling for non-primary residential lines will be adjusted to the incumbent LEC's average per-line interstate-allocated costs, but may not exceed $1.50 more than the current SLC ceiling. Beginning January 1, 1999, the monthly SLC ceiling for these lines will be adjusted for inflation and will increase annually by $1.00 per-line, until the SLC ceiling for non-primary residential lines is equal to the ceiling permitted for multi-line business lines.

79. The data indicate that the long term ceilings we are establishing will permit incumbent price cap LECs to recover their average per-line common line revenues⁽⁹⁰⁾ from 99 percent of their non-primary residential and multi-line business lines.⁽⁹¹⁾ For the few incumbent price cap LECs that have common line costs in certain study areas that exceed the ceiling, the ceiling will serve as an economic safeguard for those customers who would otherwise pay significantly higher SLCs.⁽⁹²⁾ We conclude that maintaining a ceiling for non-primary residential and multi-line business customers in high-cost areas is a reasonable response to a legitimate universal service concern because, consistent with section 254(b)(3), it ensures that these customers have access to telecommunication services at rates that are comparable to rates charged for similar services in urban areas.⁽⁹³⁾

80. We believe that the approach we adopt should prevent widespread discontinuance of lines by multi-line customers. The record indicates that nationwide, the average interstate allocation of common line costs is only $6.10 per line, and that for more than half of multi-line business lines, the interstate common line costs are below the existing $6.00 ceiling.⁽⁹⁴⁾ Therefore, when the SLC ceiling is adjusted July 1, 1997, more than half of multi-line business lines will see no immediate increase in their SLC. The $5.00 SLC ceiling for non-primary residential lines for the first year is a net increase of $1.50 per month and the gradual increase, if any, in subsequent years, is designed to allow these customers time to adjust to the new rate structure. Moreover, we expect the rate structure modifications we adopt in this order to benefit the majority of multi-line customers through reductions in per-minute long distance rates. Thus, for many customers, the access restructuring will lead to an overall reduction in their telephone bill. We also note that, because we are adjusting the SLC on non-primary residential lines only to a level that recovers the average interstate allocated costs attributable to the line, to the extent that a customer chooses not to purchase an additional line because of the SLC increase, it is because the benefits of the second line to that customer are less than the average cost of the line.

81. Many parties contend that adjusting the SLC ceiling for non-primary residential lines and multi-line business lines will affect economic development in rural areas.⁽⁹⁵⁾ To respond to this concern, with the limited exception of cost allocation to new elements, discussed in Section V, below, we are limiting application of the rate structure modifications we adopt in this Order to incumbent price cap LECs only. Most consumers in rural areas are served by small rate-of-return LECs that are not affected by the SLC adjustment we are adopting. We will review rate structure modifications affecting small, rural carriers in a separate proceeding when we address access charge reform for those carriers. To the extent there are incumbent price cap LECs that serve high-cost areas of the country and have common line costs that exceed the national average, we are maintaining a ceiling on the SLCs for these lines to ensure that subscribers do not pay rates that greatly exceed the national average.⁽⁹⁶⁾

82. We are not persuaded by arguments that an upward adjustment to a SLC ceiling that was set over a decade ago, and that has never been adjusted for inflation, would violate section 254(b)'s requirement that consumers in all regions of the nation have affordable access to telecommunications and information services at rates that are reasonably comparable to those services provided in urban areas.⁽⁹⁷⁾ The data indicate that if the SLC ceilings for business and residential lines had been adjusted annually for inflation since they became effective in 1984 and 1989, respectively, the $6.00 business SLC ceiling would have increased by 1996 to $9.00 per line, and the $3.50 residential and single-line business SLC ceiling would have increased to $4.39 per line.⁽⁹⁸⁾ Thus, for multi-line business customers, the SLC ceiling we adopt today is not significantly different from what it would have been, if it had been adjusted for inflation annually. Moreover, to adopt a ceiling lower than $9.00 would effectively create an additional impermissible subsidy for a class of customers not enumerated by Congress in section 254 of the 1996 Act as beneficiaries of fundamental universal service goals. We find that the $9.00 ceiling we adopt today strikes a reasonable balance between our desire to establish a more efficient interstate access charge rate structure consistent with our long-term universal service goals in a competitive local exchange environment, and the need to avoid precipitous rate increases to consumers in high cost areas. Although SLCs in some areas may ultimately be lower than SLCs in high-cost areas, we conclude that $9.00 SLCs remain "reasonably comparable" to those in urban areas.⁽⁹⁹⁾

83. We are also not persuaded that we should maintain the current SLC ceiling for non-primary residential lines because of claims that incumbent LECs will be unable to identify second lines for purposes of billing different SLCs to these lines. Additional telephone lines are a well-established telecommunications product marketed by LECs. This product is supported by a marketing and billing infrastructure that will enable LECs to distinguish non-primary residential lines for purposes of billing different SLCs. We note that we are not defining "primary" or "non-primary" lines in this Order. In a further notice of proposed rulemaking in the Universal Service proceeding, we will address this issue, and release an order defining "primary"and "non-primary" residential lines by the end of the year.⁽¹⁰⁰⁾

84. We are unpersuaded by arguments that we should forgo these changes on the grounds that increasing the SLC ceilings for non-primary residential lines will create undue incentives for subscribers to order their primary lines from the incumbent LEC and their additional lines from competitors. The changes we adopt in this Order are intended to permit incumbent LECs to move their prices for non-primary residential and multi-line business lines toward more economically efficient levels by substantially reducing implicit subsidies flowing between different classes of customers. Once these subsidies are eliminated and the new universal service regime is fully implemented, incumbent LECs will be able to recover their common line costs from customers through a rate structure that accurately reflects the manner in which these costs are incurred, and through a targeted, portable universal service contribution where necessary. At that point, both incumbent LECs and new entrants should be able to compete efficiently in the local exchange market. Subscribers, therefore, should not have an incentive to use other carriers for their additional lines unless a competitor is operating more efficiently and can offer local exchange service at a lower rate than the incumbent LEC is able to offer. Indeed, the ability of a competitive local exchange carrier to offer local exchange service at a lower rate is precisely the type of competition envisioned by the 1996 Act: it will encourage the incumbent LEC to reduce its costs of providing service in order to meet or beat the prices of its competition.

85. To address the concerns of some commenters that charging a higher SLC for second and additional residential lines will encourage subscribers to order their additional line from competitors, we will permit LECs to charge competitors the higher SLC when the competitor provides a customer with a second line through resale of an incumbent LEC offering. If prior to the development of full competition, we find that disparity between SLC charges on primary and additional residential lines becomes a significant problem, we will reexamine this issue in conjunction with further reforms we adopt in an upcoming order.

86. Certain incumbent LECs have requested that any rule that increases the SLC ceiling for non-primary residential lines should be optional for LECs.⁽¹⁰¹⁾ We adopt this proposal in part and will not require LECs to charge a higher SLC for non-primary residential lines. Thus, if an incumbent LEC finds that charging higher SLCs leads to a large number of disconnections, it is free to charge less. To the extent price cap LECs choose to charge a SLC that is less than the maximum allowed, however, they may not recover these foregone revenues through the PICC or CCL charges. This restriction is consistent with our current price cap rules, which prevent LECs from transferring SLC costs to the CCL charge.⁽¹⁰²⁾

87. Several incumbent price cap LECs argue in favor of deaveraging SLCs, stating that an averaged SLC creates cross-subsidies between high-cost and low-cost areas, in violation of section 254 of the Act.⁽¹⁰³⁾ We will resolve this issue, along with issues concerning the timing and degrees of geographic deaveraging, pricing flexibility, and ultimate deregulation in an upcoming order.

3. Carrier Common Line Charge

a. Background

88. Because we are retaining the $3.50 ceiling on SLCs for primary residential and single-line business customers, virtually all price cap LECs will be unable to recover, through the SLC, all of their common line revenues permitted under our price cap rules. In the NPRM, we sought comment on possible revisions to the current CCL charge structure that would allow incumbent price cap LECs to recover these NTS common line costs in a way that reflects the way costs are incurred. We proposed a recovery mechanism suggested by the Joint Board in its Recommended Decision⁽¹⁰⁴⁾ that would permit incumbent LECs to recover common line costs not recovered from SLCs through a flat, per-line charge assessed against each end-user's presubscribed interexchange carrier.⁽¹⁰⁵⁾ The Joint Board suggested that the Commission allow incumbent LECs to collect the flat-rated charge directly from end users who have not selected a primary interexchange carrier ("PIC.")⁽¹⁰⁶⁾ We sought comments on this approach and also invited parties to discuss any potential problems created when end-user customers have selected PICs, but use other IXCs for Internet, fax, interexchange, or other interstate services by "dialing-around" the PIC.⁽¹⁰⁷⁾

89. We also sought comment on several alternative approaches to the per-minute recovery of interstate NTS loop costs proposed by the Competition Policy Institute (CPI), including a "bulk billing" method that would assess a charge against the IXC based upon its percentage share of interstate minutes of use or revenues, a "capacity charge," a "trunk port charge," and a "trunk port and line port" charge.⁽¹⁰⁸⁾ We invited parties to comment on whether any changes that we adopt to the recovery of interstate NTS local loop costs for price cap LECs should be extended to rate-of-return LECs, and on the relationship of interstate NTS loop cost recovery to the universal service mechanisms proposed in the Joint Board Recommended Decision. We asked parties to address how such an extension to rate-of-return LECs would affect small business entities, especially small incumbent LECs.⁽¹⁰⁹⁾

90. Additionally, we asked parties to address whether an alternative mechanism for recovering common line costs currently recovered through the CCL charge would be necessary if we were to eliminate the SLC ceiling for certain lines. We asked interested parties to address the extent to which any proposed alternative recovery mechanism for recovering common line costs currently recovered through the CCL charge would affect small business entities, including small incumbent price cap LECs and new entrants. We also sought comment on whether section 254(g) precludes an IXC from charging its customers the flat, per-line monthly rate assessed on that line if the amount of that charge varied among customers in different areas within a state or among customers in different states, and if so, whether conditions exist sufficient to require us to forbear from the application of section 254(g) to IXC recovery of flat-rate CCL charges.⁽¹¹⁰⁾

b. Discussion

91. The $3.50 SLC ceiling for primary residential and single-line business customers prevents most incumbent price cap LECs from recovering, through end-user charges, all of the common line revenues permitted under our price cap rules.⁽¹¹¹⁾ To the extent that common line revenues are not recovered through SLCs, incumbent LECs will be allowed to recover these revenues through a PICC, a flat, per-line charge assessed on the end-user's presubscribed interexchange carrier.

92. We adopt the Joint Board's recommendation that incumbent LECs may collect directly, from any customer who does not select a presubscribed carrier, the PICC that could otherwise be assessed against the presubscribed interexchange carrier. Assessing the PICC directly against end users that do not presubscribe to a long distance carrier should eliminate the incentive for customers to access long-distance services solely through "dial-around" carriers in order to avoid paying long-distance rates that reflect the PICC. Several parties argue that this type of billing arrangement will create administrative difficulties because it will require LECs to prorate charges for both the end user and the IXC when a customer leaves an IXC in the middle of the billing cycle. To avoid any potential administrative difficulties resulting from customers leaving their presubscribed interexchange carriers in the middle of a billing cycle, we will permit LECs to assess the full PICC at the beginning of each billing cycle.

93. We recognize that this flat, per-line PICC will not prevent customers from "dialing around" their presubscribed long distance carrier to obtain interstate service. Collecting a PICC from a customer, however, in and of itself, creates no incentive for a customer to presubscribe to one carrier and use "dial-around" service of another. If the presubscribed carrier is an efficient competitor, it should be able to offer usage-based rates comparable to the prices of a competitor, thus eliminating any artificial benefits of "dial-around" capability. A combination of lower per-minute long distance rates and attractive long-distance pricing packages that reward customers for increasing their usage of the presubscribed interexchange carrier's services should also help deter customers from using separate long-distance carriers for various services solely because of regulation. There is customer contact value in being a customer's presubscribed interexchange carrier. Regulators have long concluded that the convenience of making a long-distance call by simply dialing "1+" conveys certain advantages.⁽¹¹²⁾ And the advantages of "1+" dialing will only increase if, as many predict, we move to a world in which "one-stop shopping" for a multiplicity of services becomes the primary paradigm for provision of telecommunication services. We conclude that the record does not support a finding that assessing a charge on the presubscribed carrier will artificially encourage "dial-around" traffic to such a degree that we should not adopt access charge modifications that will move substantially toward efficient pricing for common line elements and lower usage charges for long-distance service. If evidence appears to us that our rules do substantially contribute to undue use of "dial-around" capabilities to circumvent presubscribed interexchange services, we stand ready to revisit this issue at a later time.

94. The rate structure we are adopting calls for the single-line PICC ultimately to recover the difference between revenues collected through the SLC and the per-line common line revenues for primary residential lines and single-line business lines permitted under our price cap rules.⁽¹¹³⁾ In order to provide incumbent LECs and IXCs with adequate time to adjust to this rate structure change, we cap the PICC for primary residential and single-line business lines at $0.53 per month for the first year, beginning January 1, 1998, and establish ceilings on increases thereafter. We note that the monthly $0.53 PICC is approximately equal to the current presubscribed per-line charges that are assessed to IXCs for the Universal Service Fund and Lifeline Assistance plan,⁽¹¹⁴⁾ which are being eliminated in our Universal Service Order.⁽¹¹⁵⁾ Beginning January 1, 1999, the ceiling on the monthly PICC on primary residential and single-line business lines will be adjusted for inflation and will increase by $0.50 per year until the sum of the SLC plus the flat-rated PICC is equal to the price cap LEC's permitted common line revenues per line. In no event shall the sum of the single-line SLC and PICC exceed the sum of the maximum allowable multi-line SLC and multi-line PICC.

95. Sprint asserts that if LECs recover NTS common line costs through deaveraged rates assessed on IXCs, we must forbear from applying section 254(g)⁽¹¹⁶⁾ to the extent it requires an IXC to average geographically any flat charges an IXC passes on to its customers.⁽¹¹⁷⁾ WorldCom asserts that IXCs should be permitted to recover their costs in any manner the market will allow, and that unless the Commission forbears with respect to the application of section 254(g) to these costs, IXCs that operate nationally will be forced to average together numerous subscribers' loop costs, and thus use long-distance rates as a vehicle for cross-subsidies that run counter to the overall policies of section 254(b) and (c).⁽¹¹⁸⁾ We conclude that the information in the record before us does not demonstrate that we are required, by section 10(a) of the Act,⁽¹¹⁹⁾ to forbear from enforcing section 254(g) as it relates to the manner in which IXCs recover their costs.

96. Section 10(a) of the 1934 Act requires the Commission to forbear from applying any regulation or provision of the Communications Act of 1934 if: (1) enforcement of that provision is unnecessary to ensure that the relevant charges and practices are just and reasonable and not unjustly or unreasonably discriminatory; (2) enforcement of that provision is unnecessary to protect consumers; and (3) forbearance from applying such provision or regulation is consistent with the public interest.⁽¹²⁰⁾ We conclude that, on the basis of the current record, IXCs have not demonstrated that forbearance of section 254(g) is warranted at this time.

97. We find that establishing a broad exception to section 254(g) to permit IXCs to pass through flat-rated charges on a deaveraged basis may create a substantial risk that many subscribers in rural and high-cost areas may be charged significantly more than subscribers in other areas. Accordingly, we cannot conclude that enforcing our rate averaging requirement is unnecessary to ensure that charges are just and reasonable. In addition, because assessing subscribers flat-rated charges on a deaveraged basis could lead to significantly higher rates for subscribers in high-cost areas, we find no basis in this record to conclude that it is unnecessary to enforce section 254(g) to ensure protection of consumers or to protect the public interest. In contrast, IXCs cite no countervailing public interest considerations but merely make broad, unsupported assertions of the need to deaverage rates in light of the varying PICC amounts expected to be assessed by incumbent LECs. We also note that IXCs now pay access charges that often vary from location to location and from incumbent LEC to incumbent LEC, and still maintain geographically averaged rates. We therefore conclude that, based on the record before us, the IXCs have not met the test set forth in section 10(a) of the Act, and forbearance of section 254(g) is not warranted.

98. We note that we will continue to examine the issue of whether conditions exist that require us to forbear from application of section 254(g) as it relates to recovery of the PICC costs from subscribers. We will resolve this and other specific issues concerning the timing and degrees of pricing flexibility and ultimate deregulation in an upcoming order.

99. To the extent that the SLC ceilings on all lines and the PICC ceilings on primary residential and single-line business lines prevent recovery of the full common line revenues permitted by our price cap rules, incumbent price cap LECs may recover the shortfall through a flat-rated, per-line PICC on non-primary residential and multi-line business lines.⁽¹²¹⁾ The incumbent LECs will calculate this additional charge by dividing residual permitted common line revenues by the number of non-primary residential and multi-line business lines served by the LEC. For the first year, the ceiling on the PICC will be $1.50 per month for non-primary residential lines and $2.75 per month for multi-line business lines. To the extent that these PICCs do not recover an incumbent LEC's remaining permitted CCL revenues, incumbent LECs will be allowed to recover any such residual common line revenues through per-minute CCL charges assessed on originating access minutes. The per-minute charges shall be calculated based on forecasts of originating access minutes as currently provided in our rules.⁽¹²²⁾

100. We generally will not permit incumbent LECs to recover residual common line revenues through per-minute CCL charges assessed on terminating access minutes, because terminating minutes are not likely to be subject to as much competitive pressure as originating access minutes. As discussed in Section III.D, below, we are similarly adopting a rule that requires that incumbent LECs be allowed to recover certain residual transport interconnection charge costs through access charges assessed on originating minutes. In placing these various residual costs on originating minutes only, however, we do not want to destroy the salutary effects of our access charge reforms by creating higher prices for originating minutes than exist under our current access charge rules. To the extent, therefore, that the sum of local switching charges, the per-minute CCL charge, the per-minute residual TIC, and any per-minute charges related to marketing expenses⁽¹²³⁾ exceed the current sum of local switching charges and the per-minute CCL charge and TIC assessed on originating minutes, the excess may be recovered through charges assessed on terminating minutes. We emphasize that any such amounts recovered through charges assessed on terminating minutes would be temporary and would be phased out as the non-primary residential SLC ceilings and the PICC ceilings are adjusted, and in any event, no later than July 1, 2000.

101. Beginning January 1, 1999, the PICC will be adjusted for inflation and will increase by a maximum of $1.00 per year for non-primary residential lines and $1.50 per year for multi-line business lines, until incumbent LECs recover all their permitted common line revenues through a combination of flat-rated SLC and PICCs. These increases will cease as the PICCs on primary residential and single-line business lines recover more of the common line revenues permitted under price cap rules. In addition, as the incumbent price cap LECs increase their PICCs for primary residential and single-line business lines, they shall reduce the amount recovered from the residual per-minute CCL charges and reduce their PICCs on non-primary residential and multi-line business lines by a corresponding amount in accordance with the procedures described below. While the plan we adopt today does not eliminate, even on a flat-rated basis, transitional higher rates for business users, it redistributes collection from a very few high-volume users to business users generally. This will permit the charges to be sustainable while we finish refining access charges and implement a forward-looking cost-based universal service mechanism for rural, insular, and high cost areas. We also acknowledge that our plan will require customers with multiple telephone lines to contribute, for a limited period, to the recovery of common line costs that incumbent LECs incur to serve single-line customers. We conclude that this aspect of the plan is a reasonable measure to avoid an adverse impact on residential customers.

102. As the PICC ceilings on primary residential and single-line business lines increase, the residual per-minute CCL charge will decrease until it is eliminated. After the residual per-minute CCL is eliminated, incumbent LECs shall make further reductions due to the increase in the PICC ceilings for primary residential and single-line business lines, first to the PICCs on multi-line business lines until the flat-rated PICCs for those lines are equal to the flat-rated PICCs for non-primary residential lines. Thereafter, incumbent LECs shall apply the annual reductions to both classes of customers equally until the combined SLC and PICCs for primary residential and single-line business lines recover the full average per-line common line revenues permitted under our price cap rules, and the additional flat-rated PICCs on non-primary residential and multi-line business lines no longer recover common line revenues.⁽¹²⁴⁾ If the incumbent LEC's per-line common line revenues permitted by our price cap rules exceed the SLC ceiling for non-primary residential lines and multi-line businesses, the flat-rated charges will continue to apply to those lines so that the sum of the SLCs and flat-rated charges is equal to the permitted common line revenues. Once the multi-line PICC no longer recovers any common line revenues, the calculation of the SLC will be changed from the average per-line interstate allocation of revenue requirement⁽¹²⁵⁾ to the average per-line common line revenues permitted by our current price cap rules. With this change, the LEC will not be able to recover more than the average per-line common line revenues permitted under our price cap rules from any access line. We note that at least one party contends that under our current rules, certain price cap carriers could be required to charge negative carrier common line charges, if the revenues recovered through the SLC, which continues to be developed on a cost-of-service basis, exceed the PCI for the common line basket.⁽¹²⁶⁾ This adjustment to the calculation of the SLC will solve any such problem.

103. We are concerned that assessing PICCs on multi-line business lines may create an artificial and undue incentive for some multi-line customers to convert from switched access to special access to avoid the multi-line PICC charges. A migration of multi-line customers to special access could significantly reduce the amount of revenue that could be recovered through per-minute charges, and would result in higher PICCs for the non-primary residential and multi-line business lines remaining on the switched network. We tentatively conclude that we should therefore apply PICCs to purchasers of special access lines as well. The NPRM, however, may not have provided sufficient notice to interested parties that we might apply certain rate structure modifications to special access lines. We therefore seek comment on this issue in Section VII.A, below.

104. We reject claims that a flat-rated, per-line recovery mechanism assessed on IXCs would be inconsistent with section 254(b)⁽¹²⁷⁾ which requires "equitable and nondiscriminatory contribution to universal service" by all telecommunications providers.⁽¹²⁸⁾ The PICC is not a universal service mechanism, but rather a flat-rated charge that recovers local loop costs in a cost-causative manner. Numerous commenters responding to the NPRM support a flat-rated cost recovery mechanism,⁽¹²⁹⁾ and we conclude that the PICC is preferable to the other proposals made in the NPRM. We agree with MCI and the Minnesota Independent Coalition that proposals based on the number of trunks or ports that an IXC purchases from the incumbent LEC may encourage IXCs to use fewer trunks or ports than are needed and thereby have an adverse effect on service quality. We decline to adopt the bulk billing approach set out in the NPRM, as well as Ameritech's proposed Loop/Port Recovery charge and the approach proposed by the Competition Policy Institute, because these mechanisms are substantially affected by usage and do not reflect the NTS manner in which common line costs are incurred. The Alliance for Public Technology's proposed "facilities charge," which is a hybrid system that accounts both for level of use and intensity of use by all telecommunication carriers that use the local network, is flawed because it is based partly on usage and is complex and administratively burdensome. A cost-recovery mechanism that recovers common line costs through flat-rated charges imposed on end-user customers and IXCs is an administratively simple mechanism. Further, under our plan, interstate common line access charges will become more closely aligned with allocated interstate costs than they would be under any of the alternative proposals.

105. The plan we describe above should move us from the pricing scheme that has been in place for more than a decade to a flat-rated pricing scheme that seeks to promote competition, while balancing universal service considerations. We recognize that the modifications we adopt in this Order do not eliminate all the existing support flows. The modifications, however, do move to eliminate subsidies built into the current rate structure, to an extent that is compatible with preserving the universal service goals of providing support to primary residential and single-line business and to customers in high-cost areas pursuant to the mandate of section 254. As we set final support levels for universal service, address any legal issues related to the transition from embedded to forward-looking economic costs, and factor in the development of competition, we will identify and deal with any remaining legal issues relating to the recovery of these revenues. In addition, the plan we are adopting allows incumbent price cap LECs to recover costs in the manner that reflects the way in which they are incurred. We believe that this realignment of rates with costs will reduce the per-minute access charges assessed on IXCs and benefit consumers through lower long-distance rates, as well as create a pro-competitive local exchange market in which LECs will be able to compete more efficiently.

4. Common Line PCI Formula

a. Background

106. When we adopted price cap regulation in 1990, we established a separate common line basket in order to balance the price cap goal of economically efficient prices with important goals, such as universal service, that were reflected in common line rates prior to the adoption of price caps. Because common line costs are non-traffic sensitive, growth in demand leads to a reduction in average per-minute common line charges. Therefore, in the LEC Price Cap Order, we established a price cap index ("PCI") formula for the price cap basket that differed from the PCI formula we established for the other three baskets, to ensure that carrier common line charges declined as common line demand increased.⁽¹³⁰⁾ Specifically, we added a term, "g/2," to the common line PCI formula, to represent half the growth in demand per line in the prior year.⁽¹³¹⁾ This adjustment was made because we originally concluded that both LECs and IXCs have the ability to influence common line growth, and that both LECs and IXCs should benefit from increases in demand.⁽¹³²⁾

107. In the LEC Price Cap Performance Review, we found that incumbent LECs in fact have little influence over per-minute common line demand, and tentatively concluded that we should remove the "g" term from the common line formula,⁽¹³³⁾ because including an industry-wide moving average X-Factor in the common line formula might tend to double-count demand growth. We sought comment, in the Price Cap Fourth Further NPRM, whether to apply the same PCI formula to the common line basket that we use for the other baskets if we were to adopt a TFP-based X-Factor.⁽¹³⁴⁾ We also invited comment on whether we could eliminate g/2 from the common line formula if we retain a separate common line formula.⁽¹³⁵⁾ In this Order, we adopt a plan that should quickly convert the CCL charge from a per-minute charge to a flat-rated per-line charge assessed on interexchange carriers. We also revise the common line formula to reflect the phase out of the CCL charge.

b. Discussion

108. We conclude that the separate common line PCI formula should be eliminated, and that the PCI formula for the traffic-sensitive and trunking baskets should be used for the common line basket, once traffic-sensitive CCL charges have been eliminated. In this Order, we have reduced substantially traffic-sensitive CCL charges, and replaced them with the per-line PICC. The remaining traffic-sensitive CCL charges imposed by incumbent price cap LECs will be reduced and then eliminated over the next two or three years. Once common line costs are recovered solely through per-line charges, increased minutes will not affect common line recovery. Therefore, when the traffic-sensitive CCL charges have been eliminated, it will no longer be necessary to ensure that CCL rates decline as per-minute demand increases. Incumbent price cap LECs that no longer assess per-minute CCL charges will use the same PCI formula for the common line basket as they use for the traffic-sensitive and trunking baskets.

109. In the LEC Price Cap Order, we established "g/2" as the common line PCI formula because we believed that because both LECs and IXCs contributed to encouraging common line demand growth, both LECs and IXCs should share in the benefits of common line demand growth.⁽¹³⁶⁾ In the LEC Price Cap Performance Review, we tentatively concluded that IXCs contributed more to common line demand growth, but declined to revise the common line formula at that time because we were contemplating eliminating the common line PCI formula completely, and because we did not wish to create unnecessary rate churn.⁽¹³⁷⁾ To avoid unnecessary rate churn here, we decide to retain "g/2" while carriers continue to charge per-minute CCL charges.

110. We revise sections 61.45(c) and 61.46(d), which govern the common line PCI and API, respectively, to reflect our revisions to the common line rate structure in the common line PCI formula. First, we redesignate section 61.45(c) as 61.45(c)(1) and adopt a new section 61.45(c)(2) that requires price cap LECs to use the separate common line formula only while they continue to charge per-minute CCL charges. Section 61.45(c)(2) also states that the common line PCI will be governed by the same PCI formula LECs use for the traffic-sensitive and trunking baskets. Second, we redesignate section 61.46(d) as 61.46(d)(1), and amend section 61.46(d)(1) to recognize that LECs now impose PICC charges as well as CCL charges on IXCs. We also adopt a new section 61.46(d)(2) to govern PICC charges once per-minute CCL charges have been phased out. These revisions are set forth in Appendix C of this Order.

5. Assessment of SLCs and PICCs on Derived Channels

a. Background

111. Integrated services digital network (ISDN) services permit digital transmission over ordinary local loops through the use of advanced hardware and software.⁽¹³⁸⁾ ISDN offers data transmission at higher speeds and with greater reliability than standard analog service. Most incumbent LECs currently offer two types of ISDN service, Basic Rate Interface (BRI) service and Primary Rate Interface (PRI) service. BRI service allows a subscriber to obtain two voice-grade-equivalent channels and a signalling/data channel over an ordinary local loop, which generally is provided over a single twisted pair of copper wires.⁽¹³⁹⁾ PRI service allows subscribers to obtain 23 voice-grade-equivalent channels and one data signalling channel over two pairs of twisted copper wires.⁽¹⁴⁰⁾ BRI service generally is used by individuals and small businesses, and PRI service generally is used by larger businesses. LEC services other than ISDN use derived channel technology to provide multiple channels over a single facility.⁽¹⁴¹⁾ The LECs also use derived channel technologies within their networks, for example, to provide customers with individual local loops. In such situations, the end user has not generally requested derived channel service and thus most likely is not aware that the LEC is using this technology.

112. On May 30, 1995, we released a Notice of Proposed Rulemaking seeking comment on the application of SLCs to ISDN and other derived channel services.⁽¹⁴²⁾ In that NPRM, we noted that our current rules, which assess one SLC per derived channel, may discourage efficient use of ISDN services,⁽¹⁴³⁾ and we sought comment on several options, ranging from continuation of the current rules applying one SLC to each derived channel to requiring LECs to assess one SLC per each pair of copper wires or each physical facility.⁽¹⁴⁴⁾ Other options presented in the NPRM included: (1) basing the application of SLCs on a ratio of the average LEC cost of providing a derived channel service, including the trunk or line card costs, to the average cost of providing an ordinary local loop or T-1 facility; (2) applying one SLC for every two derived channels; (3) reducing the number of SLCs applied to derived channel services while increasing slightly the SLC rates; or (4) giving LECs flexibility concerning the number of SLCs they assess for derived channel services, at the same time adjusting the price cap rules to prevent an increase in CCL charges.⁽¹⁴⁵⁾

113. In addition to the comments filed in response to the ISDN SLC NPRM, several BOCs provided data on the relative NTS costs of single and derived channel services.⁽¹⁴⁶⁾ The cost data included information about all NTS cost components, including components located in the central office, such as line cards. As shown in Table 1 below, the cost data indicates that the ratio of NTS loop costs of BRI ISDN to standard analog service is approximately 1 to 1. The ratio of NTS loop costs of PRI ISDN to standard analog service, excluding NYNEX's data, is approximately 5 to 1. As shown in Table 2, NYNEX's data appear to be outliers because the ratios of its outside plant and NTS costs for PRI ISDN to standard analog service are almost twice those of other incumbent LECs. NYNEX's data, therefore, are excluded from the calculation of the average ratio for PRI ISDN to standard analog service.

Ratio of costs of standard analog service to BRI ISDN service

	Outside Plant (loop only) costs	All NTS costs
Ameritech	1:1.07	1:1.45
Bell Atlantic	1:1.01	1:1.36
NYNEX	1:0.85	1:1.23
Pacific Bell	1:1.05	1:1.13
US West	1:0.80	1:1.07
Average ratio of costs	1:0.96*	1:1.24*

Ratio of costs of standard analog service to PRI ISDN service

	Outside Plant (loop only) costs	Outside Plant (loop only) costs (excluding NYNEX data)	All NTS costs	All NTS costs (excluding NYNEX data)
Ameritech	1:5.68	1:5.68	1:8.9	1:8.9
Bell Atlantic	1:4.13	1:4.13	1:15.80	1:15.80
NYNEX	1:10.94	excluded	1:27.74	excluded
Pacific Bell	1:4.67	1:4.67	1:8.70	1:8.70
US West	1:5.33	1:5.33	1:10.60	1:10.60
Average ratio of costs	1:6.5*	1:4.95*	1:15.13*	1:10.5*

*Averages may differ due to rounding.

114. We incorporated by reference, in the current proceeding, all pleadings filed in response to the 1995 ISDN SLC NPRM, as listed in Appendix A of that order.⁽¹⁴⁷⁾ In the NPRM for the current proceeding, we invited comments on the effect of the 1996 Act on determining how many SLCs should be applied to ISDN services. We also sought comment on whether mandatory rate structures or rate caps should be prescribed for ISDN service or other derived channel services.⁽¹⁴⁸⁾

b. Discussion

115. Consistent with the goal of this Order of realigning cost recovery in a manner that more closely reflects the manner in which those costs are incurred, we conclude that we should establish separate SLC rates for ISDN service based on the NTS loop costs of BRI and PRI ISDN service. We agree with the majority of commenters that a SLC for ISDN service equal to a SLC for single-channel analog service multiplied by the number of derived channels exceeds the NTS costs of ISDN service and therefore artificially discourages efficient use of ISDN. We find that basing ISDN SLCs on relative costs is most likely to assign costs of ISDN service to customers who subscribe to, and benefit from, that service. Further, we find that the current SLC-per-derived channel rule requires LECs to assess charges that are not related to the NTS costs of the service provided.

116. As set out above, the record indicates that the NTS loop costs of PRI ISDN service, excluding switching costs, reflect a cost ratio of approximately 5:1 compared to the NTS loop costs of single-channel analog service. We therefore conclude that we should amend our rules to establish, effective July 1, 1997, a SLC rate for PRI ISDN service equal to five times the incumbent LEC's average per-line interstate-allocated common line costs, subject to a ceiling of five times $9.00, adjusted annually for inflation. Similarly, the record shows that the NTS loop costs of BRI ISDN service, excluding NTS switching costs, when rounded to the nearest half SLC, reflect a 1:1 cost ratio relative to the NTS loop costs of single-channel analog service. Therefore, we here amend our rules to provide for a SLC rate for BRI ISDN service equal to the incumbent LEC's average per-line interstate-allocated common line costs, subject to the same ceilings otherwise applicable to non-primary residential lines. Thus, beginning January 1, 1998, the SLC ceiling for BRI ISDN service will be set at the lesser of the incumbent LEC's average per-line interstate-allocated costs, or $5.00. Each subsequent year, beginning January 1, 1999, the SLC ceiling will be adjusted for inflation and increased by $1.00 per line, until the ceiling equals that permitted for multi-line business lines.

117. The cost data submitted by the BOCs in response to our request for information includes information about all NTS cost components, including components located in the central office, such as line cards and trunk cards. The data confirm that line cards and trunk cards for PRI ISDN service in particular constitute a significant portion of the total NTS costs that are dedicated to the provision of service to the subscriber, and that ISDN line cards and trunk cards are many times more expensive than the cards used for standard analog service. As discussed in Section III.B, below, LECs will be required to recover the difference between the cost of an ISDN line card and the cost of a line card used for basic, analog service through a separate charge assessed directly on ISDN end users. For purposes of determining the rate levels for ISDN SLCs, therefore, we considered only the NTS loop costs associated with providing ISDN service.

118. As with other non-primary residential and multi-line business lines, incumbent price cap LECs may assess flat-rated PICCs on ISDN service to the extent necessary to recover the shortfall of common line revenues caused by SLC ceilings. Incumbent price cap LECs are permitted to assess one PICC for BRI ISDN service and five PICCs for PRI ISDN service. It is necessary for incumbent LECs to be able to assess up to five PICCs on PRI ISDN service because, as discussed above, the record indicates that the NTS loop costs of providing PRI ISDN service, excluding switching costs, reflect a cost ratio of approximately 5:1 compared to NTS loop costs of single-channel analog service. Because the PICC recovers NTS common line costs not recovered through the SLC, prohibiting incumbent LECs from charging as many as five PICCs for PRI ISDN service could prevent them from recovering the common line costs associated with providing PRI ISDN service in cases where the common line costs exceed the SLC ceiling.

119. Incumbent LECs shall assess PICCs on BRI and PRI ISDN services in conjunction with those on the non-primary residential and multi-line business lines. For the first year, the BRI ISDN PICC will be capped at $1.50 per month, and the PRI ISDN PICC will be capped at $2.75 per month. Each subsequent year these two PICCs shall increase by no more than an inflation adjustment, plus $1.00 and $1.50, respectively.

120. The record does not contain sufficient information to enable us to determine the relative NTS costs of derived channel services other than ISDN. We therefore limit our decision to BRI and PRI ISDN service. We agree with NYNEX that we should not apply the rules we adopt here regarding SLCs when the LEC uses derived channel technology but the end user has not requested derived channel service. Unless a subscriber orders ISDN or another service that requires derived channel technology, we see no reason to vary from our general rule that the incumbent LEC should charge one SLC for each channel regardless of how it is provisioned.⁽¹⁴⁹⁾

121. We are not persuaded by PacTel's argument that ISDN service is not an interstate service and should not, therefore, be regulated by the Commission. ISDN lines are not directly assigned to the intrastate jurisdiction, but are treated as common lines. The Commission's jurisdiction thus includes the interstate-allocated portion of the costs of the ISDN lines. The rules we adopt in this order govern only the manner in which LECs recover the interstate-allocated common line costs associated with providing ISDN service.

122. Before the Commission initiated CC Docket No. 95-72, Bell Atlantic, Pacific Bell, GTE, Cincinnati Bell, U S West, and Bellsouth sought waivers of Section 69.104 of the Commission's rules as it applies to ISDN service.⁽¹⁵⁰⁾ In their petitions, these LECs urged the Commission to amend its rules regarding the application of SLCs to ISDN service. We have amended our rules regarding the applications of SLCs to ISDN service. We therefore dismiss the waiver petitions of Bell Atlantic, Pacific Bell, GTE, Cincinnati Bell, U S West, and Bellsouth on the grounds that they are moot.

B. Local Switching

1. Non-Traffic Sensitive Charges

a. Background

123. The local switch connects subscriber lines both with other local subscriber lines and with interoffice dedicated and common trunks. A local switch consists of (1) an analog or digital switching system; and (2) line and trunk cards, which connect subscriber lines and interoffice trunks, respectively, to the switch. Because all of this equipment is deployed within the central office, all of its costs are assigned to the central office switching accounts of the Commission's Uniform System of Accounts and to the local switching category of central office expenses for jurisdictional separations purposes.⁽¹⁵¹⁾ The interstate portion of these costs is currently recovered through per-minute local switching charges levied on IXCs.⁽¹⁵²⁾

124. In the NPRM we observed that a significant portion of local switching costs may not vary with usage. For example, the cost of line cards or line-side ports appears to vary with the number of loops connected to the switch, not with the level of traffic over the loops. We tentatively concluded that LECs should not recover these costs through per-minute charges. Instead, we tentatively concluded that it is more reasonable and economically efficient to recover costs of equipment dedicated to individual customers, such as line-side ports and trunk ports associated with dedicated transport, through flat-rated charges. Trunk-side ports not associated with dedicated transport and the central processing portion of the switch, on the other hand, are shared among multiple carriers. We asked if these costs are driven by usage or by the number of lines and trunks served by the switch. We sought comment on whether rate structures for shared local switching facilities should consist of usage-sensitive, flat-rated, or a combination of both flat-rated and usage-sensitive rate elements. We asked commenters to recommend methods of identifying non-traffic-sensitive (NTS) local switching costs.⁽¹⁵³⁾

b. Discussion

125. We conclude that, consistent with principles of cost-causation and economic efficiency, NTS costs associated with local switching should be recovered on a flat-rated, rather than usage sensitive, basis. The record before us indicates clearly that the costs of the line side port (including the line card, protector, and main distribution frame)are NTS. We conclude, therefore, that these costs should be recovered through flat-rated charges. Accordingly, for price-cap LECs, we reassign all line-side port costs from the Local Switching rate element⁽¹⁵⁴⁾ to the Common Line rate elements.⁽¹⁵⁵⁾ For price cap companies, these costs will be recovered through the common line rate elements, including the SLC and flat-rated PICC, described in Section III.A., above.

126. LECs incur differing costs for line ports used in the provision of different services. The SLC and PICC cost recovery mechanisms will recover only the cost of a line port used to provide basic, analog service, whether the end user has basic, analog service, or another form of service. As discussed above, data submitted in response to the ISDN SLC NPRM show that ISDN line cards cost significantly more than line cards associated with a basic, analog, subscriber line.⁽¹⁵⁶⁾ To the extent that the costs of ISDN line ports, and line ports associated with other services, exceed the costs of a port used for basic, analog service, price cap LECs will recover this excess amount through a separate end-user charge.

127. We conclude that the costs of a dedicated trunk port (including the trunk card and DS1/voice-grade multiplexers, if needed) should be recovered on a flat-rated basis because these costs are also NTS in nature. These costs should be recovered from the carrier purchasing the dedicated trunk terminated by that port. Similarly, we conclude that the costs of shared trunk ports should be recovered on a per-minute of use basis from the users of common transport trunks. We therefore establish two separate rate elements for recovery of these costs. Price cap LECs may recover the costs of each dedicated trunk port on a flat-rated basis from the purchaser of the dedicated trunk terminating at the port. In order to ensure that these purchasers of dedicated trunks do not pay the costs of shared trunk ports that they do not use, price cap LECs must also establish a usage-sensitive rate element for recovery of the costs of shared trunk ports. The costs of these shared trunk ports will be recovered on a per minute-of-use basis from users of common transport trunks terminating at these ports. We therefore add a separate category for all trunk port costs within the traffic sensitive basket, 47 C.F.R. § 61.42(e)(1). As with the other categories within this basket, the "trunk ports" category will have an upper service band index of +5 percent and no lower service band index.

128. We do not establish a fixed percentage of local switching costs that incumbent LECs must reassign to the Common Line basket or newly created Trunk Cards and Ports service category as NTS costs. In light of the widely varying estimates in the record, we conclude that the NTS portion of local switching costs likely varies among LEC switches. Accordingly, we require each price cap LEC to conduct a cost study to determine the geographically-averaged portion of local switching costs that is attributable to the line-side ports, as defined above, and to dedicated trunk side ports. These amounts, including cost support, should be reflected in the access charge elements filed in the LEC's access tariff effective January 1, 1998. Once established, this service category, like all others in the traffic sensitive basket, shall be subject to price cap adjustments for inflation and productivity. Although some LECs have obtained authority to geographically deaverage transport rates under a zone density pricing plan, because the costs of trunk ports will remain within the Traffic Sensitive basket, we conclude that trunk port costs should remain geographically averaged for now. We will consider deaveraging of these costs in connection with our assessment of other forms of pricing flexibility in a subsequent Order in this proceeding.

129. We direct all price cap LECs to include in their tariff filings implementing this Order an exogenous downward adjustment to the Traffic Sensitive basket, 47 C.F.R. § 61.42(d)(2), and corresponding exogenous upward adjustment to the Common Line Interstate Access Elements basket, 47 C.F.R. § 61.42(d)(1) to reflect the recovery of the interstate NTS costs of line-side ports from the Common Line rate elements.

130. USTA, SNET, and BA/NYNEX argue that we should not codify any specific local switching rate elements. We disagree. In the NPRM, we proposed to eliminate local switching rate elements only when an actual competitive presence is established for an exchange access service in a relevant geographic area, as measured by (1) demonstrated presence of competition; (2) full implementation of competitively neutral universal service support mechanisms; and (3) credible and timely enforcement of pro-competitive rules.⁽¹⁵⁷⁾ We tentatively concluded in the NPRM that, in the absence of actual competition, the mere availability of unbundled network elements under efficient rate structures would not provide incumbent LECs with sufficient incentive to adopt efficient, cost-causative access rate elements or structures.⁽¹⁵⁸⁾ The record before us indicates that flat-rated pricing for line ports and dedicated trunk ports is efficient, and reflective of cost causation. We will first amend the baseline switched access rate structure to reflect this determination. Then, in a subsequent Report and Order in this docket, we will determine when and under what circumstances we will allow incumbent LECs greater flexibility in designing interstate access rate structures.

131. In addition, despite arguments from BA/NYNEX to the contrary, we find that the benefits to be gained from a more efficient, cost-causative rate structure outweigh the burden of establishing these flat-rate elements. Independent estimates from Cable & Wireless and USTA, both using NYNEX data, indicate that as much as, or even more than, half of local switching costs may be NTS.⁽¹⁵⁹⁾ Since the current, per-minute rate structure for the local switch was established, digital switches have become increasingly predominant in the network.⁽¹⁶⁰⁾ Given USTA's estimate that six percent of the costs of an analog switch and 51 percent of the costs of a digital switch are NTS,⁽¹⁶¹⁾ we find that local switching costs have become increasingly NTS and now warrant the creation of a NTS recovery mechanism. Including NTS local switching costs in per-minute access charges contributes significantly toward unnecessarily high per-minute long distance rates for all customers. Restructuring rates to reflect more accurately cost-causation will promote competition, reduce per-minute charges, stimulate long-distance usage, and improve the overall efficiency of the rate structure.

132. We also reject proposals to recover the entire NTS portion of local switching costs from the new universal service support mechanisms.⁽¹⁶²⁾ In the Universal Service Order, we agreed with the Joint Board that we should establish a "nationwide benchmark based on average revenues per line for local, discretionary, interstate and intrastate access services, and other telecommunications revenues that will be used with either a cost model or a cost study to determine the level of support carriers will receive for lines in a particular geographic area."⁽¹⁶³⁾ We find that it would be inconsistent with the Joint Board's recommendation if we were to mandate recovery of NTS local switching costs directly from universal service support mechanisms, independent of the revenue benchmark, and the percentage of high cost support recoverable from the federal universal service mechanisms at this time.⁽¹⁶⁴⁾

133. It is not necessary to await action by the Joint Board on Separations⁽¹⁶⁵⁾ before revising the recovery mechanisms applicable to the interstate portion of the costs attributed to line ports and dedicated trunk ports. Our revision of the mechanisms used to recover the interstate portion of the costs in Part 32 local switching accounts that the jurisdictional separations process allocates to the interstate jurisdiction will have no direct effect on that allocation because these costs will continue to be separated in Part 36 based on relative dial-equipment-minutes of use. The fact that local switching costs are apportioned between jurisdictions based on a relative interstate and state usage is irrelevant to the choice of pricing structure for recovering those costs, however. Economic efficiency does not require the jurisdictional separation of NTS costs be based on an NTS (flat) factor. The jurisdictional separations process only determines whether the billed charges (flat or variable) are characterized as intrastate or interstate. Economic efficiency does require that NTS costs, regardless of how they are separated, be recovered in each jurisdiction through flat charges. Thus, there was no loss of economic efficiency when the Commission, agreeing with the recommendation of the Joint Board, simplified the separation of local switching by eliminating the former distinction between NTS and traffic-sensitive costs and creating a single switching category that is assigned to the jurisdictions based on dial equipment minutes.⁽¹⁶⁶⁾

134. On the other hand, economic efficiency will be increased if local switching costs (regardless of the jurisdiction to which they are assigned) are recovered through a combination of flat charges for NTS costs and traffic sensitive charges for the remainder. Because, at the time that the Commission established the current jurisdictional separations process, it did not consider the distinction between the switch and the port that we address today, the current jurisdictional separations process does not distinguish port costs from the costs of the local switch itself.⁽¹⁶⁷⁾ We have the authority and obligation, independent from the Joint Board, to establish appropriate rate structures for recovering the costs the jurisdictional separations process allocates to the interstate jurisdiction.⁽¹⁶⁸⁾ We take steps today to address the fact that the costs of line ports and dedicated trunk ports are more properly recovered for Part 69 purposes from the Common Line and Direct-Trunked Transport rate elements as NTS charges, instead of from the traffic sensitive Local Switching element. We will, however, examine any jurisdictional separations issues presented by NTS switching costs in our upcoming separations NPRM.

135. Costs may vary for shared local switching facilities according to the number of lines connected, or the traffic over those lines.⁽¹⁶⁹⁾ In the former case, the costs of the shared facility may be recovered in the most cost-causative manner by imposing a proportionate share of the costs on each line while, in the latter case, usage-sensitive charges may better reflect cost causation. With respect to such shared local switching facilities, including the switching matrix and shared trunk ports, we gave states flexibility in our interconnection proceeding to establish either per-minute usage charges, or flat-rated charges, as appropriate.⁽¹⁷⁰⁾ In the access context, however, we will continue to require price cap incumbent LECs to recover the costs of shared local switching facilities, including the central processor, switching matrix, and shared trunk ports, on a per-minute basis. On the basis of the information in the record before us, it would be difficult to identify the NTS and traffic-sensitive portions of the costs of shared switching facilities and to verify the accuracy of LEC studies attempting to do so.⁽¹⁷¹⁾ Therefore, until we gain more experience with rate structures for unbundled network elements that are implemented pursuant to Sections 251 and 252 and that segregate these costs into traffic-sensitive and NTS components, we will continue to adhere to the current, per-minute rate structure for shared switching facilities.

2. Traffic Sensitive Charges

136. In the NPRM, we sought comment on several alternative rate structures for recovery of usage-sensitive local switching costs. Specifically, we sought comment on whether the Commission should require or permit LECs to establish a separate charge for call setup, and if so, whether the charge should be levied on all call attempts, or only completed calls.⁽¹⁷²⁾ We also sought comment on whether the Commission should require or permit incumbent LECs to establish peak and off-peak pricing structures for shared local switching facilities,⁽¹⁷³⁾ and whether the existing per-minute rate structure adequately reflects the manner in which traffic-sensitive local switching costs are incurred.⁽¹⁷⁴⁾

a. Call Setup Charges

137. Among price cap carriers today, most call setup is performed with out-of-band signalling, generally using the SS7 signalling network.⁽¹⁷⁵⁾ In light of the widely varying estimates of the costs of call setup in the record,⁽¹⁷⁶⁾ we conclude that these costs may be more than a de minimis portion of the costs of local switching. The record indicates that these call setup charges are incurred primarily on a per-call rather than a per-minute basis.⁽¹⁷⁷⁾ By requiring recovery the costs of call setup on a per-minute basis, our current rate structure mandates an implicit subsidy running from customers that make lengthy calls to those that make many short-duration calls. Therefore, we find that we should not continue to require the price cap LECs to recover costs of call setup from per-minute local switching charges.

138. Accordingly, we will revise Section 69.106 of our rules⁽¹⁷⁸⁾ to permit, but not to require, price cap LECs to establish a separate per-call setup charge assessed on IXCs for all calls handed off to the IXC's point of presence (POP). As noted earlier, because an incumbent LEC originating an interstate call incurs call setup costs even if the call is not completed at the called location, we permit these LECs to recover call setup charges on all originating interstate calls that are handed off to the IXC's POP, and on all terminating calls that are received from an IXC's POP. With respect to originating call attempts, we agree with the California Commission that, when the call is handed off to the IXC's POP, the incumbent LEC's switches and signalling network have performed their functions and the incumbent LEC has incurred the full cost of call setup.⁽¹⁷⁹⁾ We also permit incumbent LECs to impose a setup charge for terminating calls received from an IXC's POP, whether or not that call is completed at the called location, because the incumbent LEC signalling network in either case must perform its setup function.

139. We conclude that the call setup charge should not be mandatory because some incumbent LECs may determine that call setup costs either are in fact de minimis or are otherwise outweighed by the costs of the network and operations support systems (OSS) upgrades necessary to install measurement and billing systems. In such cases, it would be economically inefficient to mandate a separate call-setup charge because the costs of collecting the charge might exceed the revenue collected from the charge itself. We are aware that, by making the call-setup charge permissive only, we may allow certain incumbent LECs' rate structures to continue to subsidize short-duration calls. We nevertheless conclude that we should not mandate separate collection of a call-setup charge in cases where the LEC determines that the costs of eliminating this subsidy exceed the benefits to be gained. In contrast, we find that those incumbent LECs that either have or obtain the ability to implement a call-setup charge should have the flexibility to adopt this cost-causative rate structure.

140. No party disputes the fact that incumbent LECs incur costs of call setup for call attempts, in addition to completed calls. Some parties, however, argue that call setup charges should be assessed only on completed calls in order to reduce customer confusion. We anticipate that consumer confusion will be minimal, however, because the call setup charge we permit will be imposed on IXCs, not end users. We find it unlikely that IXCs would choose to pass this charge along to their customers in the form of a separate charge per call attempt. For instance, IXCs today generally charge their customers for completed long distance calls even though they incur access charges for many uncompleted calls as well.⁽¹⁸⁰⁾

141. Other commenters state that setup charges imposed on call attempts will result in charges being imposed on a caller that has not received service. LCI asserts that "customers do not expect to pay for uncompleted call attempts, and the carriers are not entitled to recover their costs of uncompleted call attempts,"⁽¹⁸¹⁾ citing the Commission's decision in VIA USA, Ltd.⁽¹⁸²⁾ The text cited from that order, however, addresses only customer expectations that have arisen because our current rules make no explicit provision for the recovery of costs of an uncompleted call. We now find that a call setup charge, assessed to an IXC, should not be prohibited because a rate structure that recovers some switching costs through a per-call setup charge on all call attempts is more cost-causative than one limited to the recovery of costs only from completed calls.

142. Still other commenters argue that, if we permit call setup charges to be imposed for call attempts, we will, at best, open the door to unauditable billing errors or, at worst, facilitate incumbent LEC fraud and duplicity. These commenters argue that the incumbent LEC will be able to generate additional revenue, or degrade the service of IXC competitors, by blocking calls at its own switch. Based on this record, we conclude that these concerns are not well-founded. By permitting a setup charge only for originating call attempts that are handed off to the IXC's POP, we minimize the originating incumbent LEC's incentive to engage in this type of activity because the incumbent LEC will receive no compensation for calls blocked at its own switch. In addition, incumbent LECs have compelling incentives to deliver interstate calls to an IXC's POP. As competition develops for local service, it appears doubtful that an incumbent LEC would find it advantageous to block deliberately interstate calls placed by their end user customers. Such practices would encourage entry by new competitors and increase the interest of affected end users in finding a more reliable service provider. We also find it unlikely that either originating or terminating incumbent LECs would intentionally risk the collection of often significant per-minute access charge revenues on a completed long-distance call in order to collect additional, much smaller per-call setup charges. Finally, we know of no significant allegations of degraded service quality attributable to the very similar current regime, under which incumbent LECs collect at least a full minute of originating access revenues on uncompleted calls delivered to the IXC's POP. We are prepared, however, to investigate claims that an incumbent LEC is blocking calls in an intentional or discriminatory manner.

143. Several large business customers that make substantial numbers of short-duration calls, such as those associated with credit card authorization, automatic teller machine operation, or other transaction-oriented data transfers, argue that imposing a call setup charge will be disruptive to their businesses and may force them to use alternatives to the public switched network.⁽¹⁸³⁾ These commenters are the primary beneficiaries of the subsidy that is implicit in the current recovery of call setup costs on a per-minute basis, running from customers that make lengthy calls to those that make many short-duration calls. The existing rate structure may well have encouraged users who make many short duration calls to use the public-switched network in inefficient ways. Rate structures that are aligned with cost causation, on the other hand, should encourage economically-efficient use of the telecommunications network. Transaction-oriented users of the network may be motivated to develop more economically efficient processing methods, with resulting economic benefits. Because this group of IXC customers may need time to adjust to the new rate structure, however, incumbent LECs choosing to impose a per-call setup charge on IXCs may do so, at the earliest, in their access tariff filings effective July 1, 1998. This gives a customer over one year to make any necessary adjustments. This time should be sufficient to mitigate any potential disruptive effects of this rate structure change.⁽¹⁸⁴⁾

144. MCI asserts that there may be costs of call setup in addition to those associated with signalling,⁽¹⁸⁵⁾ such as a portion of the switch central processor costs.⁽¹⁸⁶⁾ We limit the costs that an incumbent LEC may recover through call setup charges, however, to those associated with signalling because we agree with MCI that it would be extremely difficult to separate the costs of the switch CPU and other traffic-sensitive costs into per-message and per-minute portions and to verify that the allocation has been done properly.⁽¹⁸⁷⁾

145. Several commenters caution that, if we permit a call setup charge, we should also ensure that the charge does not overlap with any SS7-related charges now permitted or developed in this proceeding.⁽¹⁸⁸⁾ Because call setup is one function of the SS7 network, some of these costs may already be recovered through the current Part 69 SS7 rate elements.⁽¹⁸⁹⁾ Currently, Section 69.125 of our rules permits LECs to recover from IXCs only (1) a flat-rated signalling link charge for the Dedicated Network Access Line (DNAL); and (2) a flat rated Signal Transfer Point (STP) port termination charge.⁽¹⁹⁰⁾ While these elements recover the costs of some dedicated SS7 facilities, they do not include the usage-based signalling costs of call setup, including the costs incurred to switch messages at the local STP, to transmit messages between an STP and the incumbent LEC's end office or tandem switch, and to process or formulate signal information at an end office or tandem switch.⁽¹⁹¹⁾

146. Currently, the setup costs of certain calls may be recovered through database query charges, either for the line information database (LIDB)⁽¹⁹²⁾ or the 800 database.⁽¹⁹³⁾ In addition, incumbent LECs recover some costs associated with the provision of certain signalling information necessary for third parties to offer tandem switching through the "signalling for tandem switching" rate element.⁽¹⁹⁴⁾

147. Imposing a call setup charge for interexchange calls should not overlap with any of these existing rate elements. Nevertheless, we clarify that an incumbent LEC choosing to impose a call setup charge may not include in that charge any costs that it continues to recover either through other local switching charges, through charges for dedicated SS7 facilities, or through other signalling charges. In this Order, we also permit incumbent LECs to adopt a more detailed SS7 rate structure, modeled on that currently used by Ameritech under waiver.⁽¹⁹⁵⁾ This SS7 rate structure may permit LECs to recover a significant portion of their call setup costs without an additional call setup charge. Given estimates in the record that SS7 is used to provide signalling for more than 95 percent of the large LECs' customers,⁽¹⁹⁶⁾ we conclude that, in the ordinary case, a price cap LEC will not need to use both the optional SS7 rate structure and a separate call setup charge to recover the costs of call setup. We recognize, however, that some call setup is still performed using in-band, multifrequency (MF) signalling, rather than out-of-band signalling systems. Because SS7 charges will not recover costs of call setup using MF signalling, we do not prohibit the use of both SS7 and call setup charges. We caution LECs adopting both the optional SS7 rate structure and an additional call setup charge, however, that cost support filed with access tariffs must clearly indicate the allocation of individual costs of call setup between these two recovery mechanisms; the same costs cannot be double-recovered using both mechanisms.

b. Peak and Off-Peak Pricing

148. We conclude that we should not now mandate a peak-rate pricing structure for local switching. The record reflects significant practical difficulties that may make it difficult or impossible to establish and enforce a rational, efficient, and fair peak-rate structure as a matter of regulation. For example, the record outlines a variety of difficulties that incumbent LECs will confront in determining peak and off-peak hours with any degree of certainty, based on geographic, user-type, service, and other variations. Moreover, peak usage periods may shift over time as usage patterns change, and as competitors enter the market. Based on these difficulties, some incumbent LECs may find it too costly or too difficult to develop, implement, and maintain a peak-rate structure that will allow them to capture all or most of the benefits this structure could offer.

149. We do recognize the possible efficiency of a peak-rate structure.⁽¹⁹⁷⁾ Accordingly, we will consider whether LECs should have the flexibility to develop such peak and off-peak rate structures for local switching on a permissive basis when we consider other issues of rate structure flexibility in a subsequent Report and Order that we will adopt in this proceeding.

C. Transport

150. Transport service is the component of interstate switched access consisting of transmission between the IXC's point of presence (POP) and LEC end offices.⁽¹⁹⁸⁾ Currently, incumbent LECs offer two basic types of interoffice transport services. The first, direct-trunked transport, uses dedicated circuits for transport between a LEC end office and the LEC serving wire center, or between any other two points the direct-trunked transport customer requests. The second, tandem switched transport, uses common transport facilities to connect the end office to a tandem switch. Common transport circuits may be used to transmit the individual calls of many IXCs and even the incumbent LEC itself. Transport circuits dedicated to a particular access customer connect the tandem switch to the serving wire center. Dedicated entrance circuits carry traffic between the IXC POP and the serving wire center, whether the IXC uses direct-trunked transport or tandem-switched transport.

151. In the NPRM, we expressed concern that some of our current Part 69 rules⁽¹⁹⁹⁾ may require LECs to recover transport costs through rate structures that do not reflect accurately the way these costs are incurred. We sought comment on possible revisions to many of these rate elements.⁽²⁰⁰⁾

1. Entrance Facilities and Direct-Trunked Transport

a. Background

152. Entrance facilities are dedicated circuits that connect an access customer's POP with the LEC's serving wire center. Direct-trunked transport facilities are dedicated trunks that carry an access customer's traffic from the LEC end office to the serving wire center without switching at the tandem switch. In the First Transport Order, we mandated an interim rate structure under which entrance facilities and direct trunked transport are priced on a flat-rated basis, which may be distance sensitive.⁽²⁰¹⁾ Initial rate levels for direct-trunked transport and entrance facilities were presumed reasonable if they were set equal to the rates for corresponding special access service components (special access service and special access channel termination, respectively).⁽²⁰²⁾ In the NPRM, we tentatively concluded that, because direct-trunked transport and entrance facilities appear to be dedicated to individual customers, a flat-rated pricing structure accurately reflected the way LECs incur the costs of these facilities.⁽²⁰³⁾ We sought comment on this tentative conclusion and on whether incumbent LECs should be permitted to offer transport services differentiated by whether the LEC or the IXC is responsible for channel facility assignments (CFAs).⁽²⁰⁴⁾ We also sought comment on whether any rules in addition to the interim rules are necessary to govern rate levels for these services.⁽²⁰⁵⁾

b. Discussion

153. We conclude that both entrance facilities and direct-trunked transport services should continue to be priced on a flat-rated basis and that charges for these services may be distance-sensitive. In the First Transport Order, we found that such a flat charge would facilitate competition in the direct-trunked transport market and encourage incumbent LECs to make efficient network decisions.⁽²⁰⁶⁾ For the same reasons, and because this pricing structure is reflective of the manner in which incumbent LECs incur the costs of provisioning these facilities, we confirm that the interim rate structure the Commission adopted for these facilities should be made final.

154. U S West and Sprint make a persuasive showing that, as carriers expand their use of fiber-optic ring architecture and other modern network designs, transport costs should become less distance sensitive because LECs may transport a call along any one of many paths to its destination based on transient network traffic levels.⁽²⁰⁷⁾ We conclude, however, that we need not amend our Part 69 rules now to reflect the decreasing sensitivity of transport costs to distance. Our rules permit, but do not mandate, the use of distance sensitive transport charges. Therefore, if an incumbent LEC determines that its transport costs have become less distance sensitive, it may reduce or eliminate the distance-sensitivity of its direct-trunked transport rates. For two reasons, we expect that incumbent LECs will adjust their rates to reflect any change in the distance sensitivity of transport costs. First, as U S West states, ring architecture will be most prevalent, and therefore, will reduce the distance sensitivity of rates most dramatically, in densely populated areas.⁽²⁰⁸⁾ When an incumbent LEC obtains authority to deaverage access rates geographically, therefore, it may choose to offer a less distance-sensitive pricing structure in more densely populated areas than it does in less densely populated areas. Such a structure would properly reflect the reduced distance sensitivity of the incumbent LEC's costs in more densely populated areas. Second, as competition develops, incumbent LECs will come under increasing market pressures to maintain rates that reflect the nature of the costs underlying the service. If they choose not to do so, we expect that new market entrants will develop competitive service offerings at prices more reflective of underlying costs.

155. We decline Ameritech's request in its comments for immediate flexibility to offer new technologies to switched access customers without obtaining a Part 69 waiver or passing a public interest test.⁽²⁰⁹⁾ In our Third Report and Order in the Price Cap Performance Review for Local Exchange Carriers (Price Cap Performance Review Third Report and Order), adopted along with the NPRM in this proceeding, we eliminated the need for a Part 69 waiver for new services, and instead required incumbent LECs to file a petition demonstrating that introduction of the new service would be consistent with the public interest.⁽²¹⁰⁾ Such petitions will give LECs that desire to do so the opportunity to make their cases and receive the requested flexibility.⁽²¹¹⁾ This procedure significantly streamlined the prior waiver process, and we conclude that the public interest will not suffer if we do not grant incumbent LECs additional immediate flexibility in this area as part of our basic rate structure modifications. We will give further consideration to Ameritech's request for additional flexibility to offer new technologies to switched access customers as part of our assessment of other aspects of pricing flexibility in a subsequent Report and Order in this proceeding.

156. We also will consider whether LECs should be permitted to offer direct-trunked transport services that are differentiated by whether the incumbent LEC or the transport customer is responsible for performing channel facility assignments in connection with our evaluation of other forms of pricing flexibility in a subsequent Report and Order in this proceeding. As MCI argues in its comments, it is unclear whether rates for direct-trunked transport where the LEC controls the CFA should be higher or lower than the rates that apply where the IXC controls the CFA.⁽²¹²⁾ Although the LEC may be able to make more efficient use of its network facilities when it controls the CFAs itself, this efficiency benefit may be offset by the additional costs the LEC incurs in performing the CFA function. We agree with MCI that an incumbent LEC may be able to increase its network efficiency by retaining or assuming control of CFAs, particularly if an IXC orders a relatively large amount of transport capacity. In those cases, however, rate differentiation based on CFA control appears to be the functional equivalent of a volume discount. As a result, we will consider this issue, along with other pricing flexibility issues, in a subsequent Report and Order planned in this docket.

157. In its comments, USTA requests that we forbear under Section 10 of the Communications Act⁽²¹³⁾ from regulating services in the interexchange basket, special access, collocated direct-trunked transport, and directory assistance.⁽²¹⁴⁾ We will address USTA's request along with other pricing flexibility issues, in a subsequent Report and Order planned in this docket.

2. Tandem-Switched Transport

a. Background

158. Tandem-switched transport uses trunks that are shared among many IXCs and the LEC itself to carry traffic between the end office and a tandem switch. The tandem switch routes IXC traffic onto an appropriate dedicated trunk that runs between the tandem switch and the serving wire center.⁽²¹⁵⁾ An IXC may use tandem-switched transport either as its primary form of transport in lieu of direct-trunked transport, or to carry traffic that overflows from its direct-trunked transport facilities at peak periods. In 1982, the Modification of Final Judgment (MFJ) established an interim rule that required, until September 1, 1991, BOC charges to IXCs to be "equal, per unit of traffic" of a given type transported between end offices and facilities of the IXCs within an exchange area or within reasonable subzones of an exchange area.⁽²¹⁶⁾

159. The Commission replaced the "equal charge" rule in 1993 with an interim rate structure for tandem-switched transport. This interim structure allows IXCs to choose between two rate structures for the purchase of tandem-switched transport. Both options provide for a per-minute tandem switching charge. Under the first option, an IXC may elect to pay "unitary" per-minute charge for transmission of traffic from the end office, through the tandem switching office, to the serving wire center. This charge may be distance sensitive, with distance measured in airline miles from the end office to the serving wire center. Under the second option, the "three-part rate structure," in addition to the charge for the tandem switch, an IXC may elect to purchase transmission on a bifurcated basis, with the end office-to-tandem portion charged on a per-minute basis, and the tandem-to-serving wire center portion charged as direct-trunked transport facilities, i.e., on a flat-rated basis. Under the three-part rate structure, both portions of the transmission charge may be distance sensitive based on the airline mileage to the tandem office.⁽²¹⁷⁾

160. In adopting the interim rate structure, the Commission stated that initial direct-trunked and tandem-switched transport rates would be presumed reasonable if set based on special access rates in effect on September 1, 1992 using a DS3 to DS1⁽²¹⁸⁾ rate ratio of at least 9.6 to 1.⁽²¹⁹⁾ Per-minute tandem-switched transport rates were presumed reasonable if set using a weighted average of DS1 and DS3 rates reflecting the relative numbers of circuits of each type in use in the tandem-to-end office link, and assuming circuit loading of 9000 minutes of use per month per voice-grade circuit.⁽²²⁰⁾

161. Under the interim rate structure, whether a tandem-switched transport customer elects to purchase tandem-switched transport under the unitary or the three-part rate structure, the LEC imposes a separate, per-minute charge on the tandem-switched transport customer for use of the tandem switch. The Commission set this charge initially to recover only twenty percent of the tandem revenue requirement, in order to: (1) protect small IXCs that use tandem-switched transport as their primary transport mechanism from substantial increases in tandem-switched transport rates;⁽²²¹⁾ (2) ensure that the interim rate structure did not "endanger the availability of pluralistic supply in the interexchange market" that had developed under the equal charge rule;⁽²²²⁾ and (3) allow IXCs a transitional period to reconfigure their networks to eliminate inefficiencies that had developed under the equal charge rule and to prepare for a fully cost-based rate structure.⁽²²³⁾ Unlike the direct-trunked and tandem-switched transport rates, which are set using overhead loadings based on special access, the tandem switching rates used higher overhead loadings applicable to switched access.

162. As part of the interim rate structure, the Commission also created the TIC to recover on a per-minute basis from all switched access customers the difference between the Part 69 transport revenue requirement and the revenues projected to be recovered under the interim rate structure.⁽²²⁴⁾ The TIC was explicitly intended to make the transition to the interim rate structure revenue neutral.⁽²²⁵⁾ Among other possible costs, the TIC recovers the remaining 80 percent of the tandem-switching revenue requirement.

163. Portions of the interim transport rate structure were recently remanded to the Commission by the United States Court of Appeals for the District of Columbia Circuit.⁽²²⁶⁾ With respect to tandem-switching rates and the TIC, the Court ordered us either to implement a cost-based rate structure or offer a "rational and non-conclusory analysis in support of [our] determination that an alternative structure is preferable."⁽²²⁷⁾ With respect to overhead loadings, the Court ordered us either to substantiate that our current method of allocating overhead is cost-based, choose a method that is, or provide a reasoned explanation of our decision to pursue a non-cost-based system.⁽²²⁸⁾

164. In the NPRM, we sought comment on several alternative rate structures for tandem-switched transport service facilities, including: (a) maintaining the interim rate structure, which permits the IXCs to choose between the two pricing alternatives above; (b) eliminating the unitary rate option and requiring the IXCs to purchase tandem-switched transport under the three-part rate structure; or (c) developing another, different rate structure.⁽²²⁹⁾ We also sought comment on whether, in conjunction with any of these pricing options, we should apply to tandem switching any of the options for local switching discussed above, including whether we should establish separate flat-rated charges for the dedicated ports on the serving wire center side of the tandem or other NTS components of the tandem switch, and whether usage-based or flat rates more accurately reflect shared tandem-switching costs.⁽²³⁰⁾ We also sought comment on whether, in conjunction with any of these options, we should permit or require peak load pricing for usage-based charges for tandem-switched transport service, and on whether any portion of tandem-switched transport costs should be recovered from direct-trunked transport customers.

b. Overview of Rate Structure and Rate Level Changes

165. In this section, we summarize the changes we make to the tandem-switched transport rate structure and rate levels below. We conclude that we should require incumbent LECs to implement a cost-based rate structure for tandem-switched transport in four stages over a two year transition period. Unlike our previous transition plans, however, we set forth today, for the first time, the details of a final, cost-based transport rate structure. We have long recognized that non-cost based rate structures can, among other dangers, (1) threaten the long-term viability of the nations's telephone systems; (2) distort the decision whether to use alternative telecommunications technologies; and (3) encourage "uneconomic bypass" of the public switched telecommunications network, raising rates for all.⁽²³¹⁾

166. Until today, however, we have limited ourselves to interim transport rate structure plans, such as the equal charge rule and the interim rate structure described above. While the interim rate structure increased the cost-based nature of our transport rate structure, it also included significant non-cost-based elements. We have not, until today, laid out a clear transition plan that describes all the steps necessary to achieve cost-based transport rates. As a result, although all carriers have no doubt been aware of our intention to move to a cost-based rate structure, they have been able only to react to our transitional steps, announced piecemeal. Because we have not announced a definite and detailed end state -- a final, cost-based rate structure -- we have afforded carriers little opportunity to plan, adjust, and develop their networks in preparation for such a rate structure, despite our lengthy period of "transition." Accordingly, because of the potential magnitude of the rate impact of these changes, we conclude that a four-step implementation over a two-year period will minimize the risk of rate shock and allow transport customers to adjust while we move as expeditiously as possible to cost-based transport rates as required by the CompTel decision.

167. The first step will occur in incumbent LEC access tariffs to become effective on January 1, 1998. In those tariffs, incumbent price cap LECs must establish new rate elements for recovery of the costs of DS3/DS1 and DS1/voice-grade multiplexers used in conjunction with the tandem switch. The rate element for the dedicated multiplexers on the serving wire center side of the tandem will recover these costs on a flat-rated basis, while the rate element for the multiplexers on the end office side of the tandem will be assessed per minute of use. In addition, incumbent price cap LECs must establish in those tariffs a flat-rated charge to recover the costs of dedicated trunk ports on the serving wire center side of the tandem. None of our existing rate elements currently recovers the costs of either these multiplexers or these dedicated trunk ports. Accordingly, we conclude that those costs are currently recovered through the TIC, and that incumbent price cap LECs must reduce the TIC to reflect the recovery of these costs through the new rate elements. Also on January 1, 1998, all incumbent LECs must take the first of three annual steps to reallocate to the tandem-switching rate element tandem switching revenues currently being recovered through the TIC. In tariffs filed to be effective on that date, we require incumbent LECs to reallocate one third of the portion of the tandem switching revenue requirement that they currently recover through the TIC, excluding signalling and dedicated port costs that we reallocate elsewhere, to the tandem switching rate element.

168. The second step will occur in incumbent LEC tariffs to become effective July 1, 1998. At that time, all incumbent LECs must eliminate the unitary pricing option for tandem switched transport. Instead, incumbent LECs will be required to provide tandem-switched transport under a three-part rate structure as follows: (1) a per-minute charge for transport of traffic over common transport facilities between the LEC end office and the tandem office; (2) a per-minute tandem switching charge; and (3) a flat-rated charge for transport of traffic over dedicated transport facilities between the serving wire center and the tandem switching office. Incumbent LECs will continue to impose separate multiplexing and port charges established on January 1, 1998, as complementary to the three-part rate structure.

169. The third and fourth steps will consist of the reallocation of the remaining portion of the tandem-switching revenue requirement currently recovered through the TIC to the tandem-switching rate element. All incumbent LECs are to reallocate one half of the remaining portion of tandem-switching revenue requirement recovered through the TIC to the tandem-switching rate element in access tariffs to become effective January 1, 1999, and the final portion of the tandem-switching revenue requirement to the tandem-switching rate element in access tariffs to become effective on January 1, 2000. Before performing this reallocation, price cap incumbent LECs must account for X-factor reductions to the tandem-switching revenues permitted under price caps that have occurred since the TIC was created, as described in Section III.C.2.d, below.

c. Rate Structure

170. Multiplexing Costs. As discussed above, we direct incumbent LECs to establish separate rate elements for the multiplexing equipment on each side of the tandem switch. LECs must establish a flat-rated charge for DS1/DS3 multiplexers on the serving wire center side of the tandem, imposed pro-rata on the purchasers of dedicated DS3 trunks on the serving wire center side of the tandem, in proportion to the amount of DS3 trunking capacity purchased by each customer. Unlike DS3 rates, rates for DS1 dedicated trunks already include a portion of the DS1/DS3 multiplexer needed for transport.⁽²³²⁾ Multiplexing equipment on the end office side of the tandem shall be charged to users of common end office-to-tandem transport on a per-minute of use basis. These multiplexer rate elements must be included in the LEC access tariff filings to be effective January 1, 1998.

171. We sought comment in the NPRM on the claim that:

The TIC . . . includes the two additional multiplexers needed in order to multiplex a DS3 circuit down to a DS1 level before switching at the tandem, and then back up to DS3 afterward for transmission to an end office. To the extent that analog tandem switches exist, two additional DS1/[voice-grade] multiplexers are needed to achieve the voice-grade interface with the tandem switch.⁽²³³⁾

None of our existing rate elements explicitly recovers the costs of these multiplexers, and we conclude that these costs are currently recovered as part of the TIC. Accordingly, we establish two rate elements for multiplexers used on the serving wire center side of the tandem switch. The first will recover the costs of DS3/DS1 multiplexers used by purchasers of dedicated DS3 transport trunks from the serving wire center to the tandem switch, and may be levied only on purchasers of such DS3 transport. The second will recover the costs of DS1/voice-grade multiplexers used on the serving wire center side of analog tandem switches, and should be levied on purchasers of DS1 or greater capacity dedicated transport from the tandem switch to the serving wire center in proportion to the transport capacity purchased on that route. Like serving wire center-side trunks and trunk ports, both DS3/DS1 and DS1/voice-grade multiplexers on the serving wire center side of the tandem switch are dedicated to individual customers. Accordingly, flat-rated NTS charges for these multiplexers are appropriate.

172. On the end office side of the tandem switch, we establish two additional rate elements. The first will recover the costs of DS3/DS1 multiplexers used on the end office side of the tandem switch. This rate element will be a per-minute charge imposed on each IXC purchasing common transport on the end office-to-tandem link. This charge will be calculated based on actual minutes of use of the common transport circuits and will be assessed on IXCs in a 1:1 ratio with minutes of use of common transport. As with common transport trunks, because these multiplexers are shared among all users of common transport, traffic-sensitive, per-minute charges are appropriate. The second rate element should be assessed only at analog tandems, to recover in a similar manner the costs of DS1/voice-grade multiplexers needed at these analog tandems.

173. Price cap LECs must reallocate revenues currently being recovered through the TIC to these rate elements and begin recovery of multiplexing costs using these rate elements in their access tariffs to become effective January 1, 1998.

174. Dedicated Tandem Switch Trunk Port Costs. Price cap incumbent LECs must establish a separate rate element for dedicated trunk ports used to terminate dedicated trunks on the serving wire center side of the tandem switch. LECs incur the costs of these ports on an NTS basis, but currently must recover their costs through per-minute charges for the tandem switch. Because we have allocated 80 percent of tandem-switching costs to the TIC, these port costs may currently be recovered through either per-minute tandem-switching charges, or the per-minute TIC. We now take this opportunity to establish a separate rate element for these costs. Price cap LECs must establish a flat-rated element for dedicated trunk ports on the serving wire center side of the tandem, assessed on the purchaser of the dedicated trunk terminated at that port. This rate element shall be a flat-rated charge assessed on the carrier purchasing the dedicated trunk terminated at that port, and must be also be included in tariff filings to become effective January 1, 1998.

175. Three-Part Rate Structure. We also direct all incumbent LECs to discontinue the unitary rate structure option for the transmission component of tandem-switched transport, effective July 1, 1998. In their access tariffs that take effect on July 1, 1998, incumbent LECs will be required to provide tandem-switched transport under a three-part rate structure as follows: (1) a per-minute charge for transport of traffic over common transport facilities between the LEC end office and the tandem office; (2) a per-minute tandem switching charge; and (3) a flat-rated charge for transport of traffic over dedicated transport facilities between the serving wire center and the tandem switching office. This three part rate structure reflects the manner in which the incumbent LEC incurs the costs of providing each component of tandem-switched transport. By establishing a per-minute, traffic-sensitive rate for the shared common transport trunks and the tandem switch, incumbent LECs will recover these costs from each IXC in proportion to its use. The incumbent LEC, in contrast, incurs the costs of the dedicated serving wire center-to-tandem trunk on an NTS basis because, like other dedicated trunks, the LEC must provision the trunk for the exclusive use of one IXC. Once this capacity is dedicated, the cost of the trunk does not vary with the amount of traffic transmitted by the IXC.

176. The three-part rate structure may cause some tandem-switched transport customers to increase their use of direct-trunked transport relative to tandem-switched transport. As discussed above, making this rate structure change effective on July 1, 1998, will provide tandem-switched transport customers that currently take service under the unitary rate structure with notice of this change sufficient to enable them to adjust their networks to provide service in the most efficient way possible, and to mitigate any sudden effect on rates such a change could have if implemented on shorter notice. In order to encourage transport customers to increase the efficiency of their transport networks quickly, we will require incumbent LECs to waive certain nonrecurring charges until six months after the three-part rate structure becomes mandatory. Therefore, from the effective date of this Order until six months after the effective date of tariffs eliminating the unitary pricing option for tandem-switched transport, the incumbent LECs shall not assess any nonrecurring charges for service connection when a transport customer converts trunks from tandem-switched to direct-trunked transport or orders the disconnection of overprovisioned trunks.⁽²³⁴⁾

177. When we replaced the equal charge rule in 1991, we stated three principles that would guide our efforts to develop the transport rate structure: (1) to encourage efficient use of transport facilities by allowing pricing that reflects the way costs are incurred; (2) to avoid interference with the development of interstate access competition; and (3) to facilitate full and fair interexchange competition.⁽²³⁵⁾ In 1991, we stated that the interim rate structure was a reasonable first step toward achieving these goals, because it was more cost-based than the equal charge rule.⁽²³⁶⁾ Even from its inception, however, we have recognized that the interim rate structure represents significant compromises that cause it to fall substantially short of these goals in many ways.⁽²³⁷⁾

178. First, the unitary rate option does not accurately reflect the manner in which LECs incur costs in providing tandem-switched transport and, therefore, does not provide maximum incentive for IXCs to use transport facilities efficiently. IXCs may order, and LECs must provide, dedicated transport links with NTS costs on the serving wire center-to-tandem route with no assurance that the traffic-sensitive, per-minute revenues collected will cover the NTS costs of the link. As we stated at the time, the unitary rate structure was intended as an interim measure to allow IXCs time to prepare for a fully cost-based transport rate structure.⁽²³⁸⁾ IXCs have now had well over a decade since divestiture to so prepare. We agree with the CompTel decision that it is time to bring this period of preparation to a close as expeditiously as possible without causing severe disruption to carriers.⁽²³⁹⁾

179. Second, by bundling the dedicated and common portions of the transmission component of tandem-switched transport into a single, end-to-end per-minute charge, the unitary rate structure inhibits the development of competitive alternatives to incumbent LEC tandem-switched transport. While we have required incumbent LECs to provide the collocation, signalling, and unbundled network elements necessary for new entrants to compete with incumbent LECs without having to replicate the incumbent LEC's interoffice transport network,⁽²⁴⁰⁾ we have not corrected the non-cost based aspects of our tandem-switched transport rate structure that reduce incumbent LEC rates for tandem-switched transport services. Several commenters have noted that the tandem-switched transport market, despite our efforts, is subject only to limited competition.⁽²⁴¹⁾ Moreover, several competitive entrants have stated that they have the capability and desire to offer some or all of the components of tandem-switched transport on a competitive basis, but that the present, unitary rate structure inhibits the development of competition in this area.⁽²⁴²⁾ In addition, each component of tandem-switched transport is not equally susceptible to competitive entry; it is relatively easier for a new entrant to compete to provide the dedicated serving wire center-to-tandem link than it would be to compete to provide either the tandem switch itself or the myriad common transport end office-to-tandem links. Thus, in order to permit the fullest development of competitive alternatives to incumbent LEC networks, we need to unbundle reasonably segregable components of incumbent LEC transport services and price them in the manner in which costs are incurred.

180. Third, the interim rate structure does not best promote "full and fair" interexchange competition. The unitary rate structure has facilitated the growth of small IXCs to compete with larger carriers. It has achieved this, however, by requiring incumbent LECs to price facilities with NTS costs on a per-minute, traffic sensitive basis, in order to allow small IXCs to offer interexchange services at rates comparable to those offered by larger carriers without regard to whether the charges paid by the small IXCs cover the costs of the facilities that they use. While this structure has protected "pluralistic supply in the interexchange market,"⁽²⁴³⁾ our rules should promote competition, not protect certain competitors. We have recently concluded that no carrier is dominant with respect to domestic, interexchange services.⁽²⁴⁴⁾ Therefore, to the extent that we designed the interim rate structure to facilitate the growth of small IXCs in competition with AT&T, we find that such protective rules are no longer necessary. In a competitive market, we believe that we should strive to make our rate structure rules consistent with cost-causation principles, so long as those principles do not conflict with other statutory obligations, such as universal service. As the CompTel decision stated, "attempt[ing] to recover costs from IXCs that did not cause those costs to be incurred would impart the wrong incentives to both actual and potential providers of local transport, thereby inducing them to offer an inefficient mix of dedicated, [direct-trunked transport], and tandem-switched service."⁽²⁴⁵⁾ Because rules that do not reflect cost-causation may cause IXCs to order an inefficient mix of transport services, such rules artificially raise the costs of providing interexchange services. Rules properly reflecting cost-causation, in contrast, will benefit LECs, IXCs, and consumers alike by encouraging competitors to provide service using facilities efficiently. In adopting the interim rate structure, we cited AT&T's estimate that the efficiency benefit to consumers of cost-based pricing and competition could reach $1 billion annually.⁽²⁴⁶⁾ Our adoption of the three-part rate structure is intended to permit consumers the benefits of even greater service efficiency.

181. We therefore adopt the three-part structure as the final tandem-switched transport rate structure because this structure most closely reflects the manner in which LECs incur the costs of each component of the overall tandem-switched transport service. When combined with our actions with respect to the TIC, our adoption of actual minutes of use as the appropriate factor for determining per-minute rates for common transport circuits, and our allocation of the full cost of the tandem-switch to the tandem-switching rate elements, we expect that this structure will benefit LECs, IXCs, competitive providers of access services, and consumers. Tandem-switched transport facilities are sized to accommodate peak traffic loads, including overflow traffic from IXCs using direct-trunked transport facilities. Several commenters have stated that, until now, these overflow customers have not borne the full costs of these facilities because overflow customers pay only the same per-minute transmission charges applicable to other IXCs.⁽²⁴⁷⁾ The three-part rate structure will require the IXC purchasing tandem-switched transmission facilities to pay the full NTS costs of the dedicated serving wire center-to-tandem link, without regard for the amount of traffic transported. This benefit, in turn, will substantially increase IXC incentives to use tandem-switched transport efficiently for overflow traffic.

182. Some commenters argue that we should retain the unitary rate structure because tandem-switched transport, as a service, has traditionally been offered on an end-to-end basis. We agree that the transmission component of tandem-switched transport has in fact been offered on an end-to-end basis, but only pursuant to the requirements of the MFJ and our interim rate structure rules as part of a transition to cost-based rates. We find, however, that the transmission component of tandem-switched transport is not, in fact, provisioned by the incumbent LEC on an end-to-end basis. Purchasers of direct-trunked transport purchase an end-to-end service; they purchase from the incumbent LEC transport capacity between two end points. Tandem-switched transport customers, in contrast, purchase use of the tandem switch to route traffic to their POP. By virtue of their decision to choose tandem-switched transport, these customers specifically obligate the LEC to transport their traffic between the serving wire center and the tandem serving a particular end office or group of end offices and to perform the tandem switching function. Because they cause the incumbent LEC to incur the costs of transmitting their traffic between the serving wire center and the tandem, tandem-switched transport customers should, as a matter of cost-causation, pay the costs of reaching the tandem. In providing tandem-switched service, incumbent LECs must provision two separate circuits with distinctly different cost characteristics -- one dedicated, and one shared. Tandem-switched service, therefore, is not provisioned on an end-to-end basis between the end office and serving wire center, but in three parts: (1) transmission from one "end," the end office, to the tandem; (2) the tandem switching function itself; and (3) transmission from the tandem to the other "end," the serving wire center. Just as the tandem-switched transport customer pays a separate charge for the tandem switch, the tandem-switched transport customer should pay separately for the two distinct transmission components.

183. Other commenters argue that the three-part rate structure will create LEC incentives to engage in inefficient network reconfiguration, placing tandems far from end offices and serving wire centers simply to increase tandem-switched transport revenues.⁽²⁴⁸⁾ These commenters further argue that, if we adopt the three-part rate structure, we need to control this incentive by establishing a process for review of the incumbent LECs' tandem deployment decisions. Based on this record, we conclude that these commenters' fears are not well founded. An incumbent LEC would likely incur substantial costs to reconfigure placement of its tandem switches specifically to disadvantage IXC users of tandem switched transport. Because we expect the three part rate structure to catalyze the development of competition, we conclude that the incumbent LEC would not be likely to incur such costs. Although the incumbent LEC might be able to increase its tandem-switched transmission revenues in the short term to reflect inefficient routing, as more efficiently configured competitors enter the market, the LEC would not be able to sustain such artificially inflated rates and would then need to incur additional costs to reconfigure its network efficiently. Because, under our new competitive paradigm, a multitude of investment opportunities, including wireless services, video, and interLATA toll, may emerge for incumbent LECs, we agree with Ameritech that "[s]uch misspent capital outlays and inefficient network configuration simply would not make good business sense."⁽²⁴⁹⁾

184. Moreover, the redeployment of tandem switches affects network efficiency with respect to both the incumbent LEC's own local and toll traffic, as well as intrastate and interstate access.⁽²⁵⁰⁾ Therefore, inefficient network reconfiguration would cause harm both to tandem-switched transport customers and to the incumbent LEC itself. Any additional transport revenues that the incumbent LEC generated through inefficient network reconfiguration would be at least partially offset by the additional costs of transporting the LEC's own traffic in similarly inefficient ways. As discussed above, as competition develops in the local market, we expect that a LEC would be reluctant to take steps to decrease its own efficiency.

185. Some commenters argue that we should retain the unitary rate structure because direct-trunked transport and tandem-switched transport circuits often travel along the same routes using the same physical facilities. These commenters argue, therefore, that it would be unfair or discriminatory to require tandem-switched transport users to purchase transmission based on airline mileage from the end office to the tandem to the serving wire center, while users of direct-trunked transport are permitted to purchase the same route on the basis of airline mileage from end office to the serving wire center directly. Other commenters argue that we should require the LECs to offer both types of transport based on actual route miles, revealing actual LEC network efficiencies and inefficiencies.

186. We disagree with both of these proposed modifications. An IXC purchasing direct-trunked transport requires the incumbent LEC to provide transport service between the end office and the serving wire center. Because the LEC must route direct-trunked transport traffic between only these two points, our rate structure requires the IXC to pay only for the airline mileage between those two points, reflecting the direct mileage route between the locations in the incumbent LEC network designated by the access customer. In contrast, an IXC purchasing tandem-switched transport purchases use of the access tandem switch and therefore requires the incumbent LEC to provide service between the serving wire center and the tandem, and between the tandem and the end office. Under the three part rate structure, the tandem-switched transport customer, like the direct-trunked transport customer, pays for the direct mileage between the locations in the incumbent LEC network designated by the customer -- for tandem-switched transport, the serving wire center to tandem, and the tandem to the end office. Because the IXC has chosen to make use of the LEC tandem switching facilities, it should pay explicitly for the transport necessary to reach the tandem. The direct-trunked transport customer, in contrast, does not make use of the tandem switching facilities; even if the LEC routes direct-trunked transport traffic through the tandem office, this traffic is not switched at the tandem. While the incumbent LEC may choose to route direct-trunked traffic through the tandem office based on its own assessment of whether it is economically efficient to do so, the direct-trunked transport customer pays only for direct mileage between the locations it designated in the network.

187. We are not persuaded by arguments that we should retain the unitary pricing structure because the incumbent LEC, and not the tandem-switched transport customer, has selected the tandem location and, consequently, the tandem-switched transport customer should not pay for the direct mileage to and from the tandem location. The incumbent LEC equally chooses the locations of the serving wire center and end office, and yet access customers routinely pay mileage charges to and from those locations, rather than between the end points of the access service -- the POP and the end user location. Similarly, we find that the three-part rate structure does not discriminate against IXCs using tandem-switched transport. As discussed above, the tandem-switched transport customer, unlike the direct-trunked transport customer, requires the incumbent LEC to route its traffic to the tandem, and so should pay the costs of reaching the tandem. In addition, an IXC operating efficiently often may choose to locate its POP at or close to the tandem, if the tandem-switching office also can function as the serving wire center, thus eliminating virtually all of the dedicated transport costs of the tandem-to-serving wire center link. While such an arrangement may be the most efficient transport architecture for tandem-switched transport, our current unitary pricing structure does not reflect the underlying costs of tandem-switched transport transmission facilities and so does not encourage efficient transport architectures.

188. The introduction of more modern network architectures, such as Synchronous Optical Network (SONET) rings, does not alter our conclusion that the three-part rate structure most closely approximates the nature of costs associated with each component of tandem-switched transport. WorldCom, for instance, asserts that the "pyramid" diagram included in the NPRM as Figure 1 is outdated⁽²⁵¹⁾ and submits a diagram illustrating interoffice tandem-switched transport in a ring-based network.⁽²⁵²⁾ WorldCom states that the multiple routing options and the reduced distance sensitivity of transport costs in a SONET environment compel retention of the unitary rate structure.⁽²⁵³⁾ We conclude, however, that the differences WorldCom identifies do not support retention of the unitary rate structure because, even in a ring-based network, the three-part rate structure treats direct-trunked and tandem-switched transport consistently. In a fiber-optic or ring-based network, dedicated, direct-trunked transport circuits are given a constant, and exclusive, time slot assignment on a large, time-division multiplexed fiber-optic cable. The incumbent LEC routes traffic for the IXC purchasing the direct trunk into the dedicated circuit or time slot, where it is received elsewhere on the ring or in the network at the serving wire center. The direction or precise routing of the signal around the ring is irrelevant for purposes of the rate structure because the transport is priced on an airline-mileage basis between the two end points. Capacity dedicated to a particular IXC, however, is not available to the LEC for other purposes.

189. SONET ring architecture offers the LEC the capability to transport large traffic volumes with redundant routing options, but it does not alter the fundamental nature of tandem-switched transport. Tandem-switched transport is functionally very different from direct-trunked transport because, by definition, the incumbent LEC must route an IXC's tandem-switched traffic through the tandem switch serving a particular end office. Whether using a SONET ring or not, the LEC must route its tandem-switched traffic into one of many shared common transport circuits or time slots allocated for transport between the end office and the tandem switch, and onto a second dedicated circuit or time slot for transport between the serving wire center and the tandem. Despite parties' arguments to the contrary, the precise routing of the traffic to the tandem, including the direction it may take around a SONET ring, is irrelevant to the rate structure because IXCs purchase transport under the three-part rate structure based on airline mileage to the tandem.

190. As discussed in connection with direct-trunked transport, above, ring network architectures may cause incumbent LECs transport costs to become less distance sensitive. Because our rate structure permits, but does not require, transport rates to be distance sensitive, LECs remain free to establish less distance sensitive transport rates to reflect the changing nature of these costs.

191. We also decline Teleport's suggestion to establish a flat-rated charge for the tandem switch, tied to the amount of dedicated capacity each IXC's serving wire center-side trunk ports provide. While the costs of these dedicated trunk ports are NTS, the record before us does not reflect that all of tandem-switching costs are similarly NTS. Rather, we conclude at this time that the costs of tandem switching likely vary, as do those of local switching, on a traffic-sensitive basis. In light of this conclusion, we find that it would be unreasonable to permit the incumbent LEC to recover all of its tandem-switching costs through flat-rated charges. As with the local switch, until we gain more experience with rate structures for unbundled network elements that are implemented pursuant to Sections 251 and 252 and that segregate switching costs into traffic-sensitive and NTS components, we will continue to adhere to the current, per-minute rate structure for shared switching facilities.

192. We also decline to adopt in full suggestions that we (1) retain the unitary pricing structure for tandem-switched transport, while (2) exempting IXCs and competing LECs that do not use the transport facilities supplied by the incumbent LEC from paying the TIC and (3) preventing the incumbent LEC from deaveraging the TIC within a state during a five year transition period.⁽²⁵⁴⁾ We are modifying our rules to prohibit incumbent LECs from assessing any per-minute residual TIC charge on any switched minutes of CAPs that interconnect with the incumbent LEC switched access network at the end office.⁽²⁵⁵⁾ In doing so, we adopt a position substantially similar to the second enumerated point, above, which Teleport and CompTel characterize as the "most important" feature of this proposal.⁽²⁵⁶⁾ In addition, we are also taking other measures that will reduce substantially or eliminate the TIC in an expeditious manner. We decline, however, to adopt the other two suggestions. As explained in more detail above, the unitary rate structure is not cost-based in that it requires incumbent LECs to recover costs incurred on an NTS basis through per-minute charges and inhibits the development of competition by bundling reasonably segregable components of tandem-switched transport together and pricing them in a manner that does not reflect cost causation. We conclude that our new paradigm of promoting efficient competition requires that incumbent LECs adopt a cost-based transport rate structure and that entrants providing transport facilities in competition with the incumbent LEC not pay the TIC.

193. Although in their comments in this proceeding the incumbent LECs virtually unanimously favor the three-part rate structure as most consistent with principles of cost-causation, we recognize that incumbent LECs may face competition from competitors that are not limited to the three-part rate structure we adopt for incumbent LECs today. As such competition develops, the incumbent LEC may wish to respond by offering tandem-switched transport on a unitary pricing basis. We will address issues relating to when incumbent LECs should have the flexibility to offer a unitary tandem-switched transport rate structure in connection with our discussion of other pricing flexibility issues in a subsequent Report and Order that we will adopt in this proceeding.

194. Peak and Off-Peak Pricing. As with the local switch, we conclude that we should not mandate a peak-rate pricing structure for the tandem switch or common transport at this time. Many of the same practical difficulties with establishing, verifying, and enforcing a rational, efficient, and fair peak-rate structure exist in the context of the tandem switch. We will consider whether incumbent LECs should have the flexibility to develop such peak and off-peak rate structures for local switching on a permissive basis when we consider other issues of rate structure flexibility in a subsequent Report and Order that we will adopt in this proceeding.

d. Rate Levels

195. Allocation of 80 Percent of the Tandem Switching Revenue Requirement to the TIC. In establishing the interim transport rate structure, we required incumbent LECs to base their initial tandem switching charge on 20 percent of the interstate tandem-switching revenue requirement. In remanding this portion of the interim rate structure to us, the D.C. Circuit directed us either to implement a cost-based tandem switching rate or offer a rational and non-conclusory analysis in support of our determination that an alternative structure is preferable.

196. Based on the record in this proceeding, we reallocate much of the remaining 80 percent of the tandem switch revenue requirement back to the tandem switching rate elements in three steps. We conclude that this action is most consistent with cost-causation, and with the general approach we are taking in this Order regarding pricing issues. We do not require all of the 80 percent to be reallocated to tandem switching rates because the tandem-switching revenue requirement includes, not only the costs of the tandem switch, but other costs, such as SS7 signalling costs and tandem port costs, which we are requiring to be reallocated elsewhere.

197. Furthermore, if we required the price cap LECs to reallocate, dollar-for-dollar, the entire portion of the tandem switching revenue requirement that we reallocated to the original TIC in the First Transport Order, we would deny tandem-switched transport customers the continuing benefits of past X-factor reductions in the revenues permitted under price caps. Therefore, in order to preclude recovery of tandem switching costs in excess of the current revenues permitted under price caps, we direct price cap incumbent LECs first to account in the following manner for the effects of "GDP-PI minus X-factor" reductions to the original portion of the tandem switching revenue requirement allocated to the TIC in the First Transport Order. Each price cap LEC first should calculate the percentage of its total original TIC that represented the 80 percent reallocation of its tandem switching costs when the TIC was created. It should then calculate this percentage of its current TIC, which represents the extant portion of the reallocated tandem switching costs. It is this extant portion that the price cap LECs should reallocate to tandem switching as described in the next paragraph.

198. In access tariff filings to become effective on January 1, 1998, incumbent LECs must identify the portion of the tandem-switching revenue requirement currently in the TIC that they reallocate to each rate element, including, as applicable, SS7 signalling, tandem port costs, or other rate elements. They must then reallocate one third of the tandem switching revenue requirement remaining in the TIC to the tandem switching rate element. Effective January 1, 1999, incumbent LECs shall reallocate approximately one half of the remaining amount of the tandem switching revenue requirement in the TIC to the tandem switching rate elements. Effective January 1, 2000, incumbent LECs shall reallocate any portion of the tandem switching revenue requirement remaining in the TIC to the tandem switching rate element. This three-step implementation of this change permits IXCs time to adjust their use of various incumbent LEC transport services, but sets a definite end date in the near future, thus responding to the CompTel decision's concerns regarding the length of the transition to a cost-based transport rate structure.

199. Some commenters argue that, rather than reallocating revenues from the TIC to other rate elements, we should reinitialize tandem-switched transport rates to levels reflecting long run incremental costs, making reallocation of TIC revenues to other transport rate elements unnecessary. We have decided in this Order, however, not to reinitialize access rates based on forward-looking cost principles. We have instead determined that the first step in access reform is to make the current system as economically efficient as is possible within the limits of current ratemaking practices. Thus, the focus of this portion of this proceeding is on the development of cost-causative rate structure rules. While we are taking several prescriptive steps using existing ratemaking methods to reduce initial baseline rates, we are generally adopting a market-based approach, with a prescriptive backdrop, to move rates over time to levels reflecting forward-looking economic costs. We disagree with those commenters that argue that the Local Competition Order requires us immediately to prescribe rate levels for access elements based on long-run incremental costs. The Local Competition Order addressed, inter alia, the pricing of unbundled network elements. While unbundled network elements may be used to provide interstate access services, their availability at TELRIC-based prices does not compel adoption of similar rates for access services. We intend instead to rely on the availability of unbundled network elements to place market-based downward pressures on access rates, subject to a prescriptive backstop. We will further address questions related to reinitialization to TELRIC rate levels in connection with our discussion of the prescriptive approach to access reform.⁽²⁵⁷⁾

200. Use of Switched Access Overhead Loadings for Initial Tandem Switching Rates. In setting rates, the interim transport rate structure derived both direct-trunked transport rates and tandem-switched transmission rates using relatively low overhead loadings applicable to special access. Tandem switching rates, in contrast, were set using relatively higher switched access overhead loadings. As a result, the tandem switching revenue requirement became relatively high, in comparison to other transport rate elements.

201. Several commenters in this proceeding contend that our use of special access overheads in setting direct trunked transport rates was inappropriate because, while special access is used almost exclusively in high density, generally urban areas, direct-trunked transport and, to an even greater extent, tandem-switched transport are used in less dense areas.⁽²⁵⁸⁾ In these less dense areas, overhead costs associated with transport may be higher than those associated with special access in urban areas. Some commenters have argued that we should either (1) equalize the overhead loading factors for all transport options by directing that the difference in transport rates is equal to the difference in the long run incremental cost of each transport option (DS3, DS1, and tandem-switched transport); or (2) otherwise ensure that transport customers pay an equal dollar amount of overhead per unit of traffic transported.⁽²⁵⁹⁾

202. We conclude that we need to make no change to the overheads attributed to tandem switching. As discussed above, we have decided not to base access prices directly at this time on incremental cost studies, but instead to make significant changes in existing ratemaking practices as the first step in access reform. Our current methods allocate overhead in a reasonable, cost-based manner. In consultation with the Joint Board on Jurisdictional Separations, the Commission established procedures for allocating overhead expenses between the state and interstate jurisdictions.⁽²⁶⁰⁾ Our Part 69 cost allocation rules in turn allocated interstate direct investment to broad categories, including Central Office Equipment (with respect to both local switching and tandem switching) and Carrier Cable and Wire Facilities (with respect to special access, direct-trunked transport, and tandem-switched transport transmission facilities).⁽²⁶¹⁾ Other investment, including overhead, was allocated among these categories in proportion to the dollar amounts of net direct investment allocated to these categories.⁽²⁶²⁾ Similarly, direct expenses, where possible, were allocated to the category to which the expenses are related.⁽²⁶³⁾ Other expenses, including overheads, are allocated on the same basis as other investment, according to relative dollar amounts allocated to the various categories.⁽²⁶⁴⁾ The Commission has stated that initial allocation of overheads based on relative costs closely approximates an economically efficient method assuming that the elasticity of demands for the various outputs is not too dissimilar.⁽²⁶⁵⁾

203. Our Part 69 cost allocation rules, therefore, established category revenue requirements that included overheads allocated generally based on relative costs. Once these initial revenue requirements were established, our Part 69 rules permitted incumbent LECs to recover all costs assigned to each category through the rate elements established for that category.⁽²⁶⁶⁾ The incumbent LECs were permitted to assign overhead costs among the category rate elements in any way that is just and reasonable and not unreasonably discriminatory.⁽²⁶⁷⁾ We find that it is reasonable to have set overhead loadings for tandem switching consistently with the overhead loadings for local switching, and disagree with those parties that argue that there is no cost justification for the current allocation of overheads to the tandem switch. The direct costs of both kinds of switching are fundamentally the same in that both types of switches are comprised of ports and a switching matrix. By contrast, the direct costs of transmission consist of outside plant and circuit equipment and certain central office equipment. So long as consistent overhead loading methodologies were used across switching functions, and across transmission functions, we find that a reasonable cross-over is established for access customers between direct-trunked transport and tandem-switched transport. As competition develops, we can also rely on market forces to pressure incumbent LECs to allocate overheads among rate elements in economically efficient ways. We address issues concerning the use of special access prices to initialize direct-trunked transport rates in the interim rate restructure below in our discussion of the TIC.

204. We also decline to adopt a requirement for equalized overhead loadings. Overhead loadings are used to assign costs that do not qualify as the direct costs of a particular service. Reasonable definitions of direct costs often leave in the overhead category costs that might reasonably be deemed attributable to a given service. Thus, if all of a carrier's costs are classified as either "direct costs" or "overheads," the overhead category will likely include costs that should not necessarily apply uniformly to all services. As a result, we think it desirable not to adopt a policy that is too specific and too rigid, and that might not permit recognition of legitimate differences in costing definitions. Furthermore, in a competitive market, it would be mere happenstance if different products or services of a single company recovered uniform amounts of overhead. If we were to require equalized overhead loadings, we would be interfering with the market discipline on which we are primarily relying. We might, for example, prevent an entrant from realizing a reasonable profit opportunity based on a rigid overhead loading requirement.

205. In determining that our existing cost allocation rules reasonably allocated overhead to the initial tandem switching rate element and that we thus need not change the overheads currently attributed to tandem switching, we recognize that the D.C. Circuit in CompTel remanded the overhead issue to the Commission for further explanation and stated that the "cost allocation to the tandem switch" under the existing allocation rules "is, by the Commission's own estimation, grossly excessive."⁽²⁶⁸⁾ The court did not provide a cite for its characterization of the Commission's "estimation," but the court may have been referring to the agency's finding in the First Transport Order that "most, but not all, of the interstate tandem revenue requirement is attributable to tandem-switched transport."⁽²⁶⁹⁾ The Commission in that order also identified only one category of costs -- having to do with SS7 technology -- that appeared to be misallocated to tandem switching.⁽²⁷⁰⁾ Elsewhere in this Order, we have taken steps to address that misallocation of SS7 costs.⁽²⁷¹⁾ That correction having been made, we find that our existing rules reasonably allocate overhead to tandem switching for the reasons discussed above.

206. Use of actual minutes of use rather than an assumed 9000 minutes of use. For tandem-switched transport rates to be presumed reasonable, the interim rate structure requires incumbent LECs to set per-minute tandem-switched transport rates using a weighted average of DS1 and DS3 rates reflecting the relative numbers of circuits of each type in use in the tandem-to-end office link, and assuming circuit loading of 9000 minutes of use per month per voice-grade circuit.⁽²⁷²⁾ Based on the record before us, we find that continued use of this 9000 minutes of use assumption is no longer reasonable. Many commenters state that their actual traffic levels are substantially lower than 9000 minutes of use per month. Some incumbent LECs, particularly smaller LECs in rural areas, indicate that their actual traffic levels may be as low as 4000 minutes of use per month per voice-grade circuit. Accordingly, we conclude that rates for the common transport portion of tandem-switched transport must be set using a weighted average of DS1 and DS3 rates reflecting the relative numbers of DS1 and DS3 circuits in use in the tandem-to-end office link, and using the actual voice-grade switched access common transport circuit loadings, measured as total actual minutes of use, geographically averaged on a study-area-wide basis, that the incumbent LEC experiences based on the prior year's annual use. Incumbent LECs that deaverage their transport rates under our existing zone-based deaveraging rules⁽²⁷³⁾ may similarly deaverage the actual minutes of use figures that they use to calculate per-minute common transport rates.

207. Our assumption that voice-grade common transport circuits experience uniform loadings of 9000 minutes of use was initially based on 1983 data submitted in the original MTS and WATS Market Structure proceeding.⁽²⁷⁴⁾ In using this assumption as part of the interim rate structure, we stated that, "[t]he 9000 minutes per circuit per month standard serves as a convenient starting point in the context of a short-term, interim rate structure."⁽²⁷⁵⁾ We rejected at that time requests to develop a loading factor for small LECs that would reflect their actual, substantially lower circuit loading levels, stating that, "the benefits to be obtained from use of more individualized loading factors are outweighed by the benefits of the administrative convenience of a uniform loading factor and of avoiding verification difficulties."⁽²⁷⁶⁾ Given the new competitive paradigm embodied in the 1996 Act, we conclude that this assumption must give way to charges based on actual usage levels. The same conversion factor is not appropriate for each incumbent LEC.⁽²⁷⁷⁾ Because the 9000 minute assumption appears to have substantially overstated the actual traffic levels on many circuits, we now conclude that the current rate structure is unlikely to recover the full costs of common transport. Costs that properly should be recovered from common transport rate elements may currently be recovered through TIC revenues. Because the 9000 minutes of use loading factor has contributed, possibly significantly, to the level of the non-cost-based TIC, we find that continued use of this factor is no longer reasonable.

208. We therefore direct incumbent LECs to develop common transport rates based on the relative numbers of DS1 and DS3 circuits in use in the tandem-to-end office link, and using actual voice-grade circuit loadings, geographically averaged on a study-area-wide basis, that the incumbent LEC experiences based on the prior year's annual use. As discussed above, incumbent LECs that deaverage their transport rates under our existing zone-based deaveraging rules may similarly deaverage the actual minutes of use figures that they use to calculate per-minute common transport rates. As they develop transport rates based on actual minutes of use, we require incumbent LECs to use any increase in common transport revenues to decrease the TIC. These rates must be included in the LEC access tariff filings effective January 1, 1998.

209. We disagree with commenters arguing that the actual number of minutes a circuit is in use is irrelevant in a rate-setting context.⁽²⁷⁸⁾ These commenters argue that rates should be set based on forward-looking cost studies using Commission-determined "efficient" traffic levels, which they argue may be far higher than either the actual traffic levels, or the 9000 minutes of use assumption. As explained elsewhere, we are not taking the general approach of prescribing rates at forward looking economic costs, and we decline to make an exception in this instance. We are instead reforming access charges so that they more closely reflect the costs imposed by individual access customers. We also do not find it necessary to employ different principles here to ensure that incumbent LECs face sufficient incentives to design their networks to achieve efficient usage levels. LECs subject to price cap regulation already have only limited ability to raise rates to cover the costs of inefficient network designs, and are able to benefit from increased profits as their efficiency improves. In addition, as competition develops for local service, all incumbent LECs will face increasing pressure to provide service as efficiently as possible.

D. Transport Interconnection Charge (TIC)

1. Background

210. Under our Part 36 separations rules, certain costs of the incumbent LEC network are assigned to the interstate jurisdiction. The Part 69 cost allocation rules allocate these costs among the various access and interexchange services, including transport. In the First Transport Order,⁽²⁷⁹⁾ we restructured interstate transport rates for incumbent LECs. The restructure created facility-based rates for dedicated transport services based on comparable special access rates as of September 1, 1991, derived per-minute tandem-switched transport transmission rates from those dedicated rates, established a tandem switching rate, and established a TIC that initially recovered the difference between the revenues from the new facility-based rates and the revenues that would have been realized under the preexisting "equal charge rule." Under the equal charge rule, which arose from the AT&T divestiture of the BOCs,⁽²⁸⁰⁾ the BOCs were required to charge a per-minute, distance-sensitive rate for their transport offerings, regardless of how the underlying costs were incurred. The TIC was intended as a transitional measure that initially made the transport rate restructure revenue neutral for incumbent LECs and reduced any harmful interim effects on small IXCs caused by the restructuring of transport rates.⁽²⁸¹⁾ Approximately 70 percent of incumbent LEC transport revenues are generated through TIC charges, or approximately $3.1 billion, according to USTA.⁽²⁸²⁾

211. The TIC is a per-minute charge assessed on all switched access minutes, including those of competitors that interconnect with the LEC switched access network through expanded interconnection. In the NPRM, we sought comment on how to reduce and eliminate the TIC in a manner that fosters competition and responds to the D.C. Circuit's CompTel remand. We sought comment on different methods of recovering the costs currently recovered by the TIC, including: (1) giving the incumbent LECs significant pricing flexibility and allowing market forces to discipline the recovery of the TIC, either alone or in conjunction with a phase-out of the TIC; (2) quantifying and correcting all identifiable cost misallocations and other practices that result in costs being recovered through the TIC; (3) combining the above approaches, for example, by addressing directly the most significant and readily-corrected misallocations, and then relying on a market-based approach to reduce what remains of the TIC; (4) providing for the termination of the TIC over a specified time, such as three years. We specifically sought comment on the possible reassignment of costs based on several explanations for the amounts in the TIC. The NPRM also sought comment on how the resolution of the issues surrounding the TIC would be affected by decisions on universal service, by the level of any residual costs, and by the adoption of either the market-based or prescriptive approach to access reform.

2. Discussion

212. As a per-minute charge assessed on all switched access minutes, including those of competing providers of transport service that interconnect with the LEC switched access network through expanded interconnection, the TIC adversely affects the development of competition in the interstate access market. First, as discussed more fully below, some of the revenues recovered through the TIC should be recovered through other switched access elements, including transport rates other than the TIC. The TIC, as currently structured, provides the incumbent LECs with a competitive advantage for some of their interstate switched access services because the charges for those services do not recover their full costs. At the same time, the incumbent LECs' competitors using expanded interconnection⁽²⁸³⁾ must pay a share of incumbent LEC transport costs through the TIC. Second, all other things being equal, the usage-rated TIC increases the per-minute access charges paid by IXCs and long-distance consumers, thus artificially suppressing usage of such services and encouraging customers to explore ways to bypass the LEC switched access network, particularly through the use of switched facilities of providers other than the incumbent LEC that may be less economically efficient than incumbent LECs.

213. As we noted in the NPRM, our goal is to establish a mechanism to reduce and eliminate the TIC in a manner that fosters competition and responds to the D.C. Circuit's remand. To that end, we below identify several costs included in the TIC that should be reallocated to other access elements. We conclude, however, that on the present record, we cannot immediately eliminate the TIC entirely through these reassignments. We establish a mechanism that should substantially reduce the remaining TIC over a short, but reasonable period. In addition, we will in the near future refer a broad range of separations issues to a Joint Board for purposes of determining whether certain costs currently allocated to the interstate jurisdiction and recovered through the TIC more properly should be allocated to the intrastate jurisdiction. Finally, we establish the means by which the remaining TIC amounts are to be recovered.

a. Reallocation of costs in the TIC

214. The record in response to the NPRM clearly establishes that some costs in the TIC should be reallocated to other access elements. USTA, in conjunction with the incumbent LECs, submitted extensive comments setting forth an incumbent LEC consensus explanation of the causes for the sums in the TIC and estimates of the amounts associated with each explanation.⁽²⁸⁴⁾ While the current rulemaking record will not permit us to prescribe specific amounts that individual incumbent LECs must shift from the TIC to specific access rate elements, it does permit us to direct incumbent LECs to make certain cost reallocations and to require them to calculate the appropriate level of the reallocation in the supporting materials filed with the tariffs implementing the changes. Below, we discuss each of the identified causes of costs being included in the TIC and the extent to which costs should be reallocated to other access elements or categories.

215. In this Order, we do not address certain rate structure issues relating to incumbent LECs subject to rate-of-return regulation. These LECs account for relatively few access lines.⁽²⁸⁵⁾ In some instances we direct price cap LECs to allocate costs to new rate elements that do not currently exist for rate-of-return LECs. We anticipate that we will propose similar rate elements in the forthcoming notice of proposed rulemaking addressing rate structure issues for incumbent LECs subject to rate-of-return regulation. Recognizing the expense and difficulties of modifying billing systems, we conclude that, until the rate structure issues are resolved for rate-of-return companies, the costs allocated to new elements and any residual TIC revenues may continue to be recovered by the incumbent LECs that are not subject to price cap regulation through per-minute TIC rates assessed on both originating and terminating access.

216. As their primary challenge to the incumbent LEC proposals to reallocate costs from the TIC, several parties argue that we should use forward-looking cost principles, or TELRIC, in determining how much to shift from the TIC to other access categories. Some parties advocating the use of such forward-looking cost standards assert that any costs not meeting these forward-looking cost standards should be eliminated from the TIC, and the incumbent LECs should not be permitted to recover those amounts. One group of consumer advocates proposes that we need not complete TELRIC studies before substantially reducing the TIC because BA/NYNEX has already proposed, as part of their access charge reform compromise plan, to eliminate up to 80 percent of the TIC pending a determination of "service related" costs by the Commission.⁽²⁸⁶⁾ We conclude, however, that immediate, widespread, prescriptive action is not necessary to pressure access rates toward market-based levels. Instead, we have determined that the most appropriate first step towards access reform is to make the current rate structure as economically efficient as possible within the limits of past ratemaking practices. These practices include setting rates based on interstate-allocated costs, subject to price cap constraints for most large carriers.⁽²⁸⁷⁾ As we discuss more fully in Section IV, below, we intend in the future to rely primarily on market forces, with a prescriptive backdrop, to move rates toward forward-looking economic cost. Therefore, because we currently are not prescribing a forward-looking cost method for access reform, we will require reassignment of certain TIC revenues based on an analysis of the separated, booked costs already recovered through the TIC.

217. SS7 costs. Based on the record before us, we conclude that SS7 costs that are recovered by the TIC should be removed from the TIC and allocated to the traffic-sensitive basket. The record demonstrates that these costs are related to the signalling function and should be recovered through local switching or signalling rate elements. The costs to be removed are the costs of signal transfer points (STPs) that were included in the tandem-switching category for jurisdictional separations purposes and the cost of the link between the end office and the STP that is used only for SS7 signalling. The incumbent LECs shall distribute the STP costs reallocated from the TIC to local switching or, if the incumbent LEC has established an unbundled signalling rate structure, to appropriate SS7 elements, in tariffs filed to be effective January 1, 1998. The incumbent LEC shall distribute the costs of the link between the local switch and the STP that are included in the TIC to local switching or, if provided, to the call-setup charge. This change means that the incumbent LECs' SS7 prices will reflect the full cost of providing SS7 signalling and provide the proper price signals to developers of new services utilizing SS7. We decline to adopt the suggestion of US West that we reallocate SS7 costs to services in the trunking basket. As we conclude below in conjunction with our consideration of the SS7 rate structure, the costs being reallocated are appropriately included in the traffic-sensitive basket.

218. Tandem switching costs. Several parties argue that the tandem switching rate must be set to reflect the cost of providing the service. In the preceding section, we modified the existing tandem-switched transport rate structure and revised certain of the pricing rules applicable to elements of tandem-switched transport to establish a cost-based structure and to respond to the court remand in CompTel v. FCC. The revised pricing rules applicable to tandem switching include two separate elements -- a flat-rated port charge to be assessed when a port is dedicated to a single customer and a per minute charge to be assessed for the traffic-sensitive portion of the tandem switch. In three approximately equal annual steps, beginning January 1, 1998, we require reallocation of all tandem-switching revenues currently allocated to the TIC to the tandem-switching rate element. As a result of this modification, the total revenues recovered through the tandem switching rates will, subject to price cap limits, increase to the level of costs assigned to the interstate jurisdiction by the separations process at the end of our plan. Equivalent changes to the amounts recovered through the TIC must be made to ensure that over-recovery does not occur. After this adjustment, in accordance with the CompTel remand, and to facilitate the development of economically-efficient competition for tandem-switching services, the TIC will not recover any costs that are attributable to tandem switching.

219. DS1/voice-grade multiplexer costs. We conclude that the costs of DS1/voice-grade multiplexing⁽²⁸⁸⁾ associated with analog local switches should be reassigned to the newly created trunk ports category within the traffic sensitive basket. Analog switches require a voice-grade interface on the trunk-side of the end office switch. Our separations rules assign the costs of DS1/voice-grade multiplexers to the cable and wire category. The costs of these multiplexers associated with switched access were originally included in the Part 69 transport revenue requirement. The revised transport rules adopted in 1992 established transport rates based on DS1 switch interfaces, and thus the rates did not include the costs of DS1/voice-grade multiplexers. The costs of the DS1/voice-grade multiplexers are, therefore, included in the TIC. Therefore, the costs associated with DS1/voice-grade multiplexing associated with analog local switches should be reassigned to the trunk ports category within the traffic sensitive basket, to be considered in conjunction with the development of appropriate rates for trunk ports, in tariffs filed to become effective January 1, 1998. This will make recovery of the costs necessary to use an analog switch port equivalent to the recovery of digital switch port costs, in which the multiplexing function is included in the port itself.

220. Host/remote trunking costs. We agree with the parties that allege that the costs of host/remote links not recovered by the current tandem-switched transport rates should be included in the tandem-switched transport category. The record reflects that the rates for carrying traffic between the host and a remote switch, for which the tandem-switched transport rates, both fixed and per mile, are assessed, do not recover the full costs of this transmission service. These charges for host/remote service are in addition to charges that an IXC is assessed for either direct-trunked transport, or tandem-switched transport, between the serving wire center and the host end office. This reassignment will ensure that these transmission costs will be recovered from those using the transmission facilities, and must be included in tariff filings to become effective January 1, 1998. We reject NECA's suggestion that we include these costs in local switching on the theory that remote facilities are installed when it is more cost effective to do that than it is to install a new switch at the remote location. That would require all users of local switching to pay for these host/remote transmission facilities. Imposing the host/remote transmission cost on the users of host/remote facilities is more cost causative and will facilitate the development of access competition.

221. Additional multiplexers associated with tandem switching. Based on the record before us, we conclude that an IXC's decision to utilize tandem-switched transport imposes the need for additional multiplexing on each side of the tandem switch. The revised tandem-switched transport rate structure provides for these multiplexers. For price cap LECs, recovery of the costs associated with the multiplexers should, therefore, be shifted from the TIC to the tandem-switched transport category as of January 1, 1998, as explained in Section III.C. This realignment of costs helps ensure that tandem-switched transport rates are cost based, as required by the CompTel decision, and facilitates competitive entry for those services.

222. Use of actual minutes of use rather than an assumed 9000 minutes of use. The data in the record provided by USTA and other incumbent LECs support a finding that for many incumbent LECs, especially those serving less densely populated areas, the assumed 9000 minutes of use per circuit is far higher than actual minutes of use. A tandem-switched transport rate derived by dividing the cost of a circuit by an assumed usage level does not recover the costs of the circuit when the actual usage is below that level. The costs not recovered through tandem-switched transport rates based on our current 9000 minutes of use assumption are being recovered through the TIC. In the preceding section, we conclude that the pricing of tandem-switched transport transmission should be based on the actual average minutes of use on the shared circuits and that such pricing would produce a cost-based rate. Accordingly, costs should be removed from the TIC equal to the additional revenues realized from the new tandem-switched transport rates when it is implemented in accordance with the rate structure established in Section III.C.

223. Central Office Equipment (COE) Maintenance Expenses. The record in this proceeding demonstrates that allocating COE maintenance expenses on the basis of combined COE investment produces misallocations of these expenses among access services. USTA correctly traces this problem to the Part 36 separations rules; the problem is then tracked in our Part 69 cost allocation rules. Under our current rules, COE maintenance expenses are allocated among separations categories, and then access services, based on the combined investment in the three categories of the COE plant being maintained -- Central Office Switching, Operator Systems, and Central Office-Transmission -- rather than on the individual investment in each of those categories. As a result, a portion of the expense of maintaining local switches and operator systems is recovered in rates for common line, transport, and special access even though those do not utilize any local switching or operator systems.⁽²⁸⁹⁾ Correcting this misallocation through changes to Part 36 would require referral to a Federal-State Joint Board and therefore could not be done in this proceeding. The misallocation can, however, be corrected by modifying section 69.401 of our rules to provide that the COE expenses assigned to the interstate jurisdiction should be allocated on the basis of the allocation of the specific type of COE investment being maintained, and we make the correction here. This will shift some costs to local switching from common line and transport, and result in more cost-based rates. This shift must be reflected in tariff filings to be effective January 1, 1998. We also plan to refer the underlying separations issue to a Joint Board for its recommendation.

224. Separations-related causes. Several incumbent LECs argue that a substantial portion of the TIC can be traced to decisions separating costs between the interstate and intrastate jurisdictions. As explained by USTA and incumbent LECs, the largest portion of the amounts recovered by the TIC results from the differences in the jurisdictional separations allocation procedures for message (i.e., switched) services and special access services, and from the consequent effects of the Commission's decision to use special access rates to establish transport transmission rates when the Commission restructured transport rates. The current jurisdictional separations process separates the costs of message services based on average cost factors; costs of DS1 and DS3 special access services, in contrast, are separated using unit costing methods. Because of the differences in these separations methodologies, special access-derived rates reflect the costs of transport in areas in which special access services are most often offered (urban, higher density areas), and do not reflect the costs of transport in rural, less dense areas. Another alleged separations-related cause of the amounts in the TIC is the use of circuit termination counts in the separations process to allocate costs between special access and switched services before they are allocated between federal and state jurisdictions. This practice appears to allocate costs disproportionately to switched services. The incumbent LECs assert that the use of direct costing methods would assign many of these costs to local and intrastate services and to interstate services other than transport.⁽²⁹⁰⁾

225. We find that some of the remaining costs recovered by the TIC result from at least two different causes: (1) the separations process assigned costs differently to private line and message (i.e., switched) services, resulting in costs allocated to special access being lower than those allocated to the message category, even though the two services use comparable facilities -- rates for direct-trunked transport and the transmission component of tandem-switched transport, which are switched services, therefore, do not recover the full amount of separated costs; and (2) the cost of providing transport services in less densely populated areas is higher than that reflected by transport rates derived from those special access rates. The existing record is inadequate to permit us to identify more costs that could clearly be reallocated to interstate services. Furthermore, the record indicates that some residual TIC costs may be appropriately allocated to intrastate services. Because we will soon be considering a Notice of Proposed Rulemaking to refer to a Joint Board questions regarding separations, we will leave the determination of the ultimate allocation of the remaining costs recovered by the TIC until the conclusion of that proceeding.

226. Incumbent LEC parties generally contend that special access rates provided an acceptable initializing pricing level for transport transmission services in geographic areas where significant amounts of special access services are provided, but do not reflect the cost of providing transport service in low-density areas in which special access services are not as widespread.⁽²⁹¹⁾ We recognize that rates for direct-trunked transport and for the transmission component of tandem-switched transport, because they were established based on special access rates, do not reflect the full cost of providing transport services in higher-cost, rural areas. Because none of our other facilities-based rate elements recover costs reflecting this differential, we conclude that the additional costs of rural transport currently are recovered through the TIC. On the basis of the current record, however, we are unable to quantify these cost differentials. Moreover, based on differences in network architectures, population density variations, topography, and other factors that vary among LECs, we find that transport cost differentials are also likely to vary greatly among incumbent LECs and among study areas served by the same incumbent LEC. We do not believe, however, that we need to quantify these differences in this Order to ameliorate this distortion caused by the current rate structure, because the requirements set forth in the next paragraph will address this issue.

227. If an incumbent LEC deaverages its transport rates, either by implementing zone-density pricing under our rules⁽²⁹²⁾ or by waiver, the underlying predicate is that the costs in low-density areas are higher than those in higher-density areas. The rates it sets for the different areas should reveal a cost differential of at least that magnitude between low-density and high-density areas served by that LEC. When an incumbent LEC deaverages transport rates, therefore, we require it to reallocate additional TIC amounts to facilities-based transport rates, reflecting the higher costs of serving lower-density areas. The reallocation we require here will permit incumbent LECs, in deaveraging their transport rates, to achieve cost-based transport rates while ensuring that a significant portion of costs reflecting the geographic cost difference are removed from the TIC. Each incumbent LEC must reallocate costs from the TIC each time it increases the deaveraging differential. We find that any incumbent LEC that has already deaveraged its rates must move an equivalent amount from the TIC to its transport services. Under any of these scenarios, the costs shall be reassigned to direct-trunked transport and tandem-switched transport categories or subcategories in a manner that reflects the way deaveraging is being implemented by the incumbent LEC. We do not require incumbent LECs that average their transport rates to make a similar reallocation at this time, because of the difficulty in determining the amount to be reallocated.

228. Price Cap Implementation issues. For purposes of phasing out the TIC, we are keeping the TIC in its own service category in the trunking basket. The reallocation of costs from the TIC to other access elements will require price cap LECs to adjust their price cap indices (PCIs) and service band indices (SBIs) to reflect the new revenue streams. To accomplish these reallocations, price cap LECs shall make exogenous adjustments to their PCIs and SBIs that are targeted to the indices in question, rather than applying the exogenous adjustment proportionately across all categories in the affected price cap basket. Thus, when a reallocation occurs within a price cap basket, only the affected SBIs will be adjusted. When the reallocation affects service categories in more than one basket, however, the affected PCIs and SBIs must be adjusted. The upward or downward adjustment to the PCIs and upper SBIs shall be calculated as the percentage of the revenues being added or subtracted from a basket or category, divided by the total revenues recovered through the basket or category at the time of the adjustment. For example, if ten percent of the revenues are being reallocated from a service category, the category upper SBI will be reduced by ten percent. If that revenue amount is only three percent of the PCI for the basket, the PCI is reduced by three percent.

b. Treatment of Remaining Costs Recovered by the TIC

229. Residual TIC reduction plan. After the costs identified above have been reallocated to other access services, some costs will continue to be recovered by the TIC. While it is desirable to eliminate the TIC as soon as possible by shifting the costs recovered by the TIC to facilities-based rates, referring separations questions to a Joint Board is the best means of reaching that ultimate objective, as we noted earlier. Even as we make this referral, we will require incumbent LECs to target to the TIC price cap reductions arising in any price cap basket as a result of the application of the "GDP-PI minus X-factor" formula until the per-minute TIC is eliminated, as many parties have suggested.⁽²⁹³⁾ These parties submit that this targeting will permit incumbent LECs to manage the reduction in revenues recovered by the TIC, while reducing the amount at issue in the TIC. Sprint states that, using a targeting approach, we would not need to address the cost allocation issues raised by Part 36 and Part 69.⁽²⁹⁴⁾ Targeting these price cap reductions to the TIC reduces the TIC over a reasonable period, thereby ultimately substantially reducing what is widely recognized to be an inefficient aspect of the access rate structure. We require price-cap LECs to begin these targeted X-factor reductions to the TIC in tariff filings to become effective July 1, 1997.

230. Targeting PCI reductions to the per-minute TIC will not change the overall revenue levels that our price cap mechanisms permit incumbent LECs to receive. We have reallocated those costs that the record shows are clearly related to other facilities-based elements. The upcoming separations proceeding may provide additional data that will permit us to reallocate more costs to facilities-based rate elements, or to the intrastate jurisdiction. The approach we take is a reasonable response to the D.C. Circuit's remand directive, and establishes a plan that should substantially reduce the TIC within a reasonable period, pending review of the jurisdictional separations process.

231. We reject ALTS' allegation that targeting the productivity factor to the TIC undercuts the rationale for the "just and reasonable" status of all price-cap rates, which ALTS contends is dependant on the widespread application of the X-factor. The targeting approach that we adopt will eliminate anticompetitive aspects of the TIC, which promotes inefficient entry into the transport market by imposing some transport costs on IXCs that do not cause the costs to be incurred. In addition, by spreading current TIC revenues across all price cap PCIs and SBIs, our targeting method does not offer TIC revenues special insulation against the pressures of the competitive marketplace, as would some proposals to bulk-bill the TIC to IXCs. We also decline to adopt the approach of spreading the remaining costs recovered by the TIC proportionately among all transport services, as proposed by State Consumer Advocates.⁽²⁹⁵⁾ That approach might, because of the unknown nature of the costs that will remain in the TIC, result in an excessive reallocation to transport.

232. The D.C. Circuit instructed us to revise our transport rate structure rules to be more consistent with cost-causation principles. There is conflicting evidence in the record concerning the nature of the costs contained within the residual TIC; these costs may be traffic sensitive or NTS and may be associated with common line, transport or switching services. BA/NYNEX states, without explanation, that the costs in the TIC are NTS in nature.⁽²⁹⁶⁾ To the extent that some portion of the residual TIC has its origin in the methods used to separate cable and wire facilities between the regulatory jurisdictions, it seems likely that BA/NYNEX is partially correct in this assertion. The evidence, however, does not clearly resolve this issue.

233. If the costs remaining in the residual TIC are NTS, as BA/NYNEX suggests, then traffic-sensitive recovery could artificially raise per-minute rates for interstate access. These higher per-minute access rates could distort the market for interstate toll services by artificially suppressing demand for interstate toll services and by encouraging users that efficiently could make use of the network to instead seek other alternatives. Conversely, if costs remaining in the residual TIC are usage-sensitive, flat-rating may also create a distortion by encouraging inefficient overuse of interstate toll services. Because the limited evidence in the record suggests that at least some amount of the residual TIC represents NTS costs, and because we wish to see that consumers enjoy the benefits of usage of the network to the greatest extent possible, we find that we should err, if at all, on the side of NTS recovery of these costs. For elements not demonstrably reflecting usage-sensitive costs, therefore, we find, on balance, compelling policy arguments in favor of flat-rated pricing because usage-sensitive recovery of any NTS costs artificially suppresses demand for interexchange calling by inflating per-minute rates. In the absence of definitive evidence as to the nature of the residual TIC amounts, we conclude that the public interest would be better served by imposing these costs on IXCs on a flat per-line basis, rather than on a per-minute basis.

234. Accordingly, we seek to migrate the current usage-based charges into flat-rated charges as quickly as possible consistent with avoiding short-term market distortions. We do that by: (1) on July 1, 1997, drawing down the per-minute-of-use residual TIC charge by targeting the price cap productivity (X-factor) adjustment to the trunking PCI and, specifically, the TIC SBI, thus effectively spreading those residual TIC revenues, which otherwise would be recovered exclusively on a minute of use basis, among the universe of (both traffic-sensitive and NTS) access services and moving TIC recovery closer to flat-rated recovery; (2) starting in January 1998, recovering remaining residual TIC revenues through PICC charges each year, subject to the PICC cap; and (3) drawing down any remaining residual per-minute TIC revenues each July by targeting the annual X-Factor adjustments to those revenues.

235. The targeting of price cap productivity reductions to the TIC will be accomplished in the following manner. Because the price cap LECs will not have reallocated facilities-based costs contained in the TIC before they file tariffs to be effective July 1, 1997, we first direct the price cap LECs to compute their anticipated "residual" TIC amount by excluding revenues that are expected to be reassigned on a cost-causative basis to facilities-based charges in the future, pursuant to the transition plan described in this Order. To determine TIC amounts so excluded, NYNEX, BellSouth, U S West, and Bell Atlantic shall use the residual TIC percentage estimates contained in USTA's ex parte letter filed May 2, 1997, to compute their respective anticipated residual TICs.⁽²⁹⁷⁾ SBC Communications shall use the cost data for SWBT, Pacific Bell, and Nevada Bell contained in its ex parte letter filed April 24, 1997 to estimate its residual TICs.⁽²⁹⁸⁾ Each remaining price cap LEC shall estimate a "residual" TIC in an amount equal to 55 percent of its current TIC revenues. For these remaining price cap LECs, we find that this 55 percent level represents a reasonable, but conservative estimate. The 55 percent level corresponds approximately to the lowest residual TIC percentage identified in the record, and three of the price cap LECs that submitted data on the record are within a few percentage points of this level. We therefore find that residual TIC estimates at the 55 percent level for companies that have not developed actual percentage estimates on the record will be reasonable, but will also minimize the risk that we will eliminate facilities-based TIC costs with targeted X-factor price cap reductions.

236. The "GDP-PI minus X" adjustments LECs ordinarily would apply to each of their price cap indices (i.e. revenues) for the July 1, 1997, annual filing shall be applied by LECs to reduce their calculated anticipated "residual" TIC revenues. For tariffs to become effective July 1, 1997, the price cap LECs shall calculate the annual price cap reduction resulting from the application of the productivity adjustment to each basket other than the interexchange basket, and shall sum the dollar effects of the adjustment. If the effect is to reduce PCIs, the dollar amount shall be targeted completely to the trunking basket PCI and the TIC SBI, without changing the PCIs or SBIs for any other basket or service category. The percentage reduction in the PCI and SBI shall equal the ratio of the total dollar effect of the price cap annual adjustment to the dollar value of the PCI and SBI, respectively. If the effect of the productivity adjustment would increase the PCIs, the PCIs shall be adjusted in their usual fashion, and no targeting to the TIC shall occur. This avoids exacerbating an already inefficient aspect of the access rate structure.

237. Price cap LECs will begin reallocation of facilities-based TIC components on January 1, 1998. At that time, the price cap LECs should all have actual cost data reflecting the facilities-based components of the TIC. If, at that time, any price cap incumbent LEC determines that its use of the applicable residual TIC estimate, above, resulted in more PCI reductions being targeted to the interconnection charge in its tariff filing to become effective on July 1, 1997, than were required to eliminate the per-minute interconnection charge, then that price cap LEC shall make necessary exogenous adjustments to its PCIs and SBIs to reverse the effects of the excess targeting.

238. For tariff filings to become effective July 1, 1998, and annually in July thereafter, all price cap LECs will have actual cost data reflecting the facilities-based components of the TIC and will be able to target reductions to actual anticipated residual per-minute TIC amounts without resort to the percentage estimates prescribed above. For these filings, "GDP-PI minus X" adjustments similar to those described above shall be targeted to the trunking basket PCI and the TIC SBI to reduce residual per-minute TIC amounts recovered through per-minute originating and terminating access charges.

239. To avoid the adverse effects of per-minute pricing of costs that may be NTS, we require price cap LECs to recover residual TIC amounts not otherwise eliminated by targeted X-factor reductions, described above, through the flat-rated PICC to the extent the PICC is below its ceiling. In order to ensure that primary residential and single line business subscribers do not pay more than their fair share of the residual TIC, however, we prohibit price cap LECs from charging a PICC on primary residential or single-line business lines that recovers TIC revenues that exceed residual TIC revenues permitted under our price cap rules divided by the total number of access lines. As the PICC caps increase each year, more of the residual TIC charge can be included in the flat-rated PICC. Any residual TIC amounts that cannot be recovered through the PICC shall be recovered on a per-minute basis from originating traffic, subject to a cap on per-minute originating access charges, as explained in Section III.A, above.⁽²⁹⁹⁾ If this cap is exceeded, the residual TIC shall be recovered through per-minute terminating switched access rates. Although a portion of the residual TIC will be recovered through PICC charges, the TIC will remain in the trunking basket. Therefore, to ensure that excess headroom is not created in the trunking basket, price cap LECs shall include the TIC revenues received from the flat-rated PICC in calculating the API for the trunking basket and the SBI for the TIC.

240. The policies adopted when the TIC was created require incumbent LECs to assess the TIC on all minutes that interconnect with the incumbent LEC switched access network, including minutes that transit a CAP's transport network without using any incumbent LEC transport facilities. As we noted in the NPRM,⁽³⁰⁰⁾ and as some commenters assert,⁽³⁰¹⁾ if the incumbent LEC's transport rates are kept artificially low and the difference is recovered through the TIC, competitors of the incumbent LEC pay some of the incumbent LEC's transport costs. In a recent arbitration between Teleport and US West, the Colorado Commission has precluded US West from imposing the TIC on competitors for the portion of transport that U S West does not provide.⁽³⁰²⁾ We find that our current policy, which requires competitive entrants to pay the TIC even in cases where it provides its own transport, is inconsistent with the procompetitive goals of the 1996 Act. We therefore modify our rules to permit incumbent LECs to assess any per-minute residual TIC charge only on minutes that utilize incumbent LEC transport facilities, and not on any switched minutes of CAPs that interconnect with the incumbent LEC switched access network at the end office.

241. Other Approaches. We reject alternative methods for recovering the TIC that were proposed in the record. The majority of the incumbent LEC parties supported recovering any remaining costs in the TIC by bulk billing such amounts to IXCs based on each IXC's share of revenues, or presubscribed lines.⁽³⁰³⁾ Other incumbent LECs proposed establishing "public policy" elements to recover the residual TIC.⁽³⁰⁴⁾ These approaches would insulate TIC costs from the pressures of the competitive market and guarantee incumbent LECs the recovery of these amounts, even where such costs have resulted from inefficiencies that the competitive market -- but not regulators -- detected and otherwise would eliminate. This would be inconsistent with the development of an efficient competitive market. Our resolution of the TIC will allow LECs a reasonable opportunity to recover their costs, without providing a guarantee. We also reject the idea of spreading the remaining costs recovered by the TIC proportionately over all transport services, as suggested by AARP, et al. As we noted earlier, some of the remaining costs in the TIC may implicate certain Commission decisions separating costs between the federal and state jurisdictions and thus may be related to services other than transport. We, therefore, believe that awaiting further consideration by a Joint Board is a more practical means of ultimately resolving the TIC issue.

242. Some parties have requested that a portion of the costs recovered by the TIC should be considered to be universal service costs.⁽³⁰⁵⁾ We do not find this argument persuasive. Elsewhere in this Order, we have reallocated the TIC's identifiable cost components. On the basis of the record before us, we cannot clearly associate the remaining TIC revenues with any particular facilities or services. The parties arguing that these costs are related to universal service have not made any clear showing as to the source of these costs or demonstrated why they believe that these TIC revenues are either costs of universal service that should be recovered from the universal service fund or constituent costs of supported services.

243. We have analyzed the effect of the reallocation of TIC costs and the new recovery procedures on small business entities, including small LECs and new entrants, and find that the changes will facilitate the development of a competitive marketplace by moving incumbent LEC rates toward cost-based levels and by eliminating the ability of incumbent LECs to assess the TIC on switched access minutes that do not use incumbent LEC transport facilities. These pricing revisions may create new opportunities for small entities wishing to enter the telecommunications market.

E. SS7 Signalling

1. Background

244. SS7 is a network protocol used to transmit signalling information over common channel signalling networks. As described in greater detail in the NPRM, signalling networks like SS7 establish and close transmission paths over which telephone calls are carried.⁽³⁰⁶⁾ Signalling networks are also used to retrieve information from remote data bases to enable credit card and collect calling. SS7 systems are also used to transmit information needed to provide custom local area signalling services like automatic call back.⁽³⁰⁷⁾

245. An SS7 network consists of several primary components -- signalling points, signal transport links, and dedicated lines used for access to an incumbent LEC's signalling network (signal links). Signalling points are nodes in an SS7 network that originate, transmit, or route signalling messages. There are three principal types of signalling points: service switching points (SSPs), service control points (SCPs), and signalling transfer points (STPs). An SSP is a switch that can originate, transmit, and receive messages for call setup and database transactions. An SCP serves as a database that stores and provides information used in the routing of calls, such as the line information database (LIDB) used to validate calling cards or the database that identifies the designated long-distance carrier for toll-free service. An STP is a specialized packet switch that performs screening and security functions and switches SS7 messages within the signalling network.

246. Signal transport links are facilities dedicated to the transport of SS7 messages within the incumbent LEC's signalling network. Finally, dedicated network access lines (DNALs) consist of dedicated circuits that transmit queries between the incumbent LEC's signalling network and the signalling networks of other individual carriers, such as IXCs. A carrier's DNAL is connected to an incumbent LEC's signalling network through a port on an incumbent LEC's STP.

247. Under the interim transport rate structure, incumbent LECs charge IXCs and other access customers a flat-rated charge (dedicated signalling transport) under Part 69 for the use of dedicated facilities used to connect to the incumbent LEC's signalling network. This rate element has two subelements -- a flat-rated signalling link charge for the dedicated network access line (dedicated signalling line) and a flat-rated STP port termination charge.⁽³⁰⁸⁾ Most other signalling costs, such as costs for switching messages at the STP and transmitting messages within the signalling network, are not recovered through facility-based charges and thus most, if not all, of these costs are embedded in the TIC or in the local switching charge and recovered through per-minute-of-use charges. Retrieval of information from databases for toll-free calls and LIDB databases, however, is charged on a per-query basis.⁽³⁰⁹⁾

248. In the NPRM, we solicited comment on whether the Commission should revise its rate structure for SS7 services to reflect the SS7 rate structure implemented by Ameritech.⁽³¹⁰⁾ In March, 1996, the Commission granted a waiver to Ameritech, allowing it to restructure its recovery of SS7 costs through four unbundled charges.⁽³¹¹⁾ These charges correspond to various functions performed by signalling networks: signal link, STP port termination, signal transport, and signal switching.

249. The Ameritech waiver was granted to allow Ameritech to realign its charges for SS7 services more closely with the manner in which such costs are incurred. Unbundling of SS7 services from transport and local switching ensures that transport and local switching customers do not pay for SS7 services they do not use. Unbundling also enables Ameritech to offer SS7 services to competing providers of local exchange and exchange access services without requiring the purchase of other elements that the competitors do not need.⁽³¹²⁾ In support of its waiver petition, Ameritech noted that it had received numerous customer requests for such unbundling. It also explained that it had deployed equipment necessary for measuring third-party usage of its SS7 networks, enabling the company to bill its SS7 services separately from its switched access services.⁽³¹³⁾

250. The NPRM also requested comment on whether incumbent LECs should be allowed to impose separate charges for ISDN User Part (ISUP) messages and Transaction Capabilities Application Part (TCAP) messages.⁽³¹⁴⁾ ISUP messages are used to set up and take down calls. For example, ISUP messages include the initial address message used to establish and close the transmission path used to carry a telephone call.⁽³¹⁵⁾ TCAP messages, on the other hand, are used to carry information between SSPs that support particular services, such as toll free services, LIDB services and certain custom local area signalling services (CLASS) like automatic call back.⁽³¹⁶⁾ We noted that differentiation between charges for ISUP and TCAP messages may be economically justified because TCAP messages tend to be shorter in average length and place lower demands on the signalling network that ISUP messages.⁽³¹⁷⁾

251. The NPRM also requested comment regarding the appropriate placement of SS7 signalling elements in price cap baskets. Currently, STP port termination rates and charges for the signalling link, or DNAL, are placed in the trunking basket.⁽³¹⁸⁾ Because both services are dedicated to particular SS7 customers, rates for these elements are flat-rated. We requested comment on whether the STP port termination charge should be placed in its own service category in the traffic-sensitive basket. We noted that interconnectors can provide their own signalling link, exposing that service element to some measure of competition. The STP port termination, on the other hand, is relatively insulated from competitive pressures because it is part of the incumbent LEC's STP and must be purchased from the incumbent LEC under existing network architecture.

2. Discussion

252. As we noted in the Ameritech SS7 Waiver Order, the removal of SS7 costs from the local switching and transport interconnection charge rate elements would benefit access customers that pay for these services but do not actually use an incumbent LEC's signalling services. It would also benefit alternative local service providers by enabling them to purchase separate SS7 services from incumbent LECs to support their provision of competing local exchange or exchange access services.⁽³¹⁹⁾ Unbundling the individual SS7 components into separate charges would further promote efficiency by ensuring that signalling charges more accurately reflect the costs of providing such services. Competitive service providers could limit their signalling costs by purchasing only the signalling elements they need.⁽³²⁰⁾ Despite these benefits, however, we are reluctant to impose on incumbent LECs the cost burden of installing metering or other equipment needed to measure third party usage of signalling facilities.⁽³²¹⁾ In granting Ameritech a waiver to implement its unbundled SS7 rate structure, we noted that Ameritech had previously installed the equipment and other facilities needed to meter independent signalling usage.⁽³²²⁾ Although we encourage actions that would promote disaggregation and unbundling of SS7 services, we will not require incumbent LECs to implement such an approach and incur the associated equipment costs of doing so. The record indicates that, as a general matter, the costs of mandating the installation of metering equipment may well exceed the benefits of doing so.⁽³²³⁾

253. Instead, we will permit incumbent LECs to adopt unbundled signalling rate structures at their discretion and acquire the appropriate measuring equipment as needed to implement such a plan. Specifically, incumbent LECs may implement the same unbundled rate structure for SS7 services that we approved in the Ameritech SS7 Waiver Order.⁽³²⁴⁾ We recognize, however, that other signalling rate structures may achieve the same benefits that are available under the Ameritech rate structure. Hence, an incumbent LEC may implement an unbundled signalling rate structure that varies from the approach implemented in the Ameritech SS7 Waiver Order by filing a petition demonstrating that the establishment of new rate elements implementing such a service is consistent with the public interest.⁽³²⁵⁾ We note, however, that variations in signalling rate structures among incumbent LECs could impose burdens on IXCs if IXCs must adapt to a diverse range of unbundled signalling rate structures.⁽³²⁶⁾ We anticipate that, if incumbent LECs choose to adopt unbundled rate structures for their SS7 network services, they will evaluate how the implementation of these plans will affect their prospective customers.⁽³²⁷⁾

254. With respect to rate differentiation between ISUP and TCAP messages, the NPRM expressed the concern that imposing rate differentiation may be inconsistent with rate structure simplicity.⁽³²⁸⁾ Several commenters indicate that the costs of implementing rate differentiation would exceed the benefits of such an approach.⁽³²⁹⁾ We further note that commenters offered little, if any, general support for the adoption of rate differentiation. Accordingly, to avoid unnecessary complexity and to avoid the imposition of unnecessary regulatory costs, we will not impose a rate differential between ISUP and TCAP messages.

255. With respect to the placement of SS7 rate elements in price cap baskets, we have previously recognized that the signalling link and the STP port termination are not subject to the same level of competition. As noted in the Ameritech SS7 Waiver Order, STP port termination is provided only by incumbents while the signalling link can be provided by SS7 customers themselves or by other alternative providers.⁽³³⁰⁾ Comments filed in this proceeding also acknowledge this competitive disparity.⁽³³¹⁾ Although Ameritech discounts the risk that STP port termination charges would be used to offset price reductions for the signal link, it nevertheless acknowledges the existence of the competitive differential we suggested in the NPRM. Other commenters argue that the competitive disparity is sufficient to justify concerns that price cap LECs would adjust their rates to account for the competitive differential. Accordingly, we will establish a new STP port termination rate element in the traffic-sensitive basket. Placing these SS7 services in different price cap baskets will ensure consistency with the Commission's general approach of maintaining elements with similar competitive characteristics in the same service baskets.

F. Impact of New Technologies

256. The NPRM requested comment regarding the rate structure treatment of new technologies that enable new telecommunications services and, by enhancing the productivity of telecommunications facilities, lower prices for services in the future. These technologies, which we describe in greater detail in the NPRM, include synchronous optical networks (SONET), Asynchronous Transfer Mode (ATM) switching, and advanced intelligent networks (AIN). We invited commenters to recommend specific rate structure rules that would reflect the manner in which incumbent LECs incur costs when providing services utilizing such new technologies.⁽³³²⁾

257. As a general matter, the Commission is reluctant to adopt detailed rules governing rate structures for recovering the cost of deploying advanced technologies. We note that, in the Price Cap Third Report and Order, we adopted rules that permit price cap LECs to petition the Commission for the establishment of one or more switched access rate elements to accommodate new services.⁽³³³⁾ Under these rules, petitioners must demonstrate either of the following: 1) that the new rate elements would be in the public interest; or 2) that another LEC has previously obtained approval to establish identical rate elements and that the original petition did not rely upon a competitive showing as part of its public interest justification.⁽³³⁴⁾ Because technological advancements emerge rapidly, the adoption of uniform rate structures corresponding to particular technologies may slow investment in the development of newer technologies or improvements in current technologies. Indeed, as a general matter, incumbent LECs oppose the adoption of uniform rate structures for new technologies, suggesting that strict uniform rules in this regard could inhibit development of such technologies. Accordingly, we will refrain from adopting in this Order specific rate structures with respect to SONET, AIN, or other new technologies. As noted above, however, our rules already accommodate rate element adjustments that may be needed on an ad hoc basis when technological advancements justify such modifications. As particular new technologies become used on a widespread basis, we can always consider whether there is a need for a uniform rate structure at that point.

56. MTS and WATS Market Structure, CC Docket No. 78-72, Third Report and Order, 93 F.C.C. 2d 241 (1983) (Access Charge Order), modified, 97 F.C.C. 2d 682 (1983) (Reconsideration Order), further modified, 92 F.C.C. 2d 834 (1984) (Second Reconsideration Order), aff'd in principal part and remanded in part sub nom. NARUC v. FCC, 737 F.2d 1095 (D.C. Cir. 1984), cert. denied, 469 U.S. 1227 (1985).

57. See, e.g., Access Charge Order, 93 FCC 2d at 268-69.

58. Id. at 268-269.

59. A "study area" is usually an incumbent LEC's existing service area in a given state. The study area boundaries are fixed as of November 15, 1984. MTS and WATS Market Structure: Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Decision and Order, 50 Fed. Reg. 939 (1985 Lifeline Order).

60. Revenues permitted under our price cap rules for common line services may be significantly different from the interstate allocated costs assigned to the common line access element by our Part 36 and Part 69 cost allocation rules. For each price cap basket, the rates allowed are determined based on price cap formulas, without reference to interstate allocation of costs. We measure the earnings of price cap carriers by comparing

revenues to interstate allocated costs. See 47 C.F.R. §§ 61.45(c), 65.702, & 69.104. The data indicate that only

two study areas served by price cap LECs, (Bell Atlantic in the District of Columbia, and GTE in Minnesota) have interstate-allocated common line costs that are less than the current $3.50 SLC. These two study areas represent less than two percent of subscriber lines nationwide. See Supporting Material filed with 1996 Annual Access Tariff Filing, filed with Commission on April 2, 1996. (1996 LEC Annual Access Tariff Forecast Data.) This LEC forecast data were used by LECs to set SLC rates that became effective on July 1, 1996.

61. The data indicate that incumbent price cap LECs recover approximately 10.4 billion dollars in total common line revenue. Approximately $7 billion of the common line costs are recovered through the SLC, and approximately $3.4 billion are recovered through the CCL charge. Thus, incumbent price cap LECs recover approximately one-third of their common line costs through per-minute CCL charges. 1996 LEC Annual Access Tariff Forecast Data.

62. Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Recommended Decision, 12 FCC Rcd 87, 132-133 (rel. Nov. 8, 1996) (Joint Board Recommended Decision).

63. Id. at 154. The Joint board noted that "[s]ubscribership levels, while not dispositive on the issue of affordability, provide an objective criterion to assess the overall success of state and federal universal service policies in maintaining affordable rates." Id.

64. Id. at 472.

65. Id.at 463. See also Separate Statement of FCC Commissioner Rachelle B. Chong, (dissenting from the Joint Board's recommendation that the Commission should lower the SLC for primary residential and single-line business lines). Id. at 556.

66. Universal Service Order, Section XII.C.

67. NPRM at ¶ 65.

68. Id.

69. NPRM at ¶ 65.

70. Id.

71. Id. at ¶ 66.

72. Id. at ¶ 67.

73. See, e.g., MTS and WATS Market Structure, Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, CC Docket Nos. 78-72, 80-286; Decision and Order, FCC 85-643 (rel. Dec. 27, 1985).

74. Joint Board Recommended Decision, 12 FCC Rcd at 472.

75. Id. at 463.

76. Universal Service Order at Section XII.C.

77. See, e.g., GTE Service Corporation (GTE) Comments at 26-29, Reply at 20-21; Southwestern Bell Telephone Company (SWBT) Comments at 37-38; Cincinnati Bell Telephone Company (Cincinnati Bell) Comments at 6-7; AT&T Corporation (AT&T) Comments 51-54, Reply at 25-26; Frontier Corporation (Frontier) Comments at 4, 5-7; Sprint Corporation (Sprint) Comments at 11-15; 50-51; Ad Hoc Telecommunications Users Committee (Ad Hoc) Reply at 4; General Services Administration/United States Department of Defense (GSA/DOD) Comments at 9-11, Reply at 5, 7; Tele-Communications, Inc. (TCI) Comments at 10; Reply at 4-5; Time Warner Communications Holdings, Inc. (Time Warner) Comments at 4-5; WorldCom, Inc. (WorldCom) Comments at 30-31.

78. As discussed below, the data indicate that nationwide, the average interstate allocation of common line costs is $6.10 per line. 1996 LEC Annual Access Tariff Forecast Data.

79. Joint Board Recommended Decision, 12 FCC Rcd 87 at 133.

80. State Members Report on the Use of Cost Proxy Models at 3 (dated Mar. 26, 1997).

81. Universal Service Order at Section IV.D and VII.D.

82. Universal Service Order at Section VII.D.

83. Universal Service Order at Section IV.D.

84. Universal Service Order at Section IV.D.

85. 47 U.S.C. § 254(b)(3).

86. 47 U.S.C. § 254(b)(5).

87. The data indicate that only two study areas served by price cap LECs, (Bell Atlantic in the District of Columbia, and GTE in Minnesota) have interstate-allocated common line costs that are less than the current $3.50 SLC. These two study areas represent less than two percent of subscriber lines nationwide. See 1996 LEC Annual Access Tariff Forecast Data.

88. See Robert W. Crandall, Universal Service Subsidies and Consumer Welfare: Long-distance Access Charges," Brookings Institution (April, 1997), Table 1, (showing that roughly 30 percent of households with income under $10,000 spend more on long-distance calls than do 50 percent of the households with income over $75,000).

89. As discussed in Section IV.D, below, in addition to the average per-line interstate-allocated common line costs, price cap LECs may include, in the SLC for non-primary residential and multi-line business lines, certain marketing expenses attributable to these lines.

90. As discussed in Section III.A.3. below, when the multi-line PICC no longer recovers common line revenues, the calculation of the SLC will be changed from one based on interstate allocated costs to one based on common line revenues permitted under our price cap rules.

91. See 1996 LEC Annual Access Tariff Forecast Data.

92. The data indicate that twelve study areas served by three price cap LECs (GTE, U S West, and Citizens Utilities) have average common line costs that exceed $9.00. These areas represent less than two percent of subscriber lines nationwide. See 1996 LEC Annual Access Tariff Forecast Data.

93. 47 U.S.C. § 254(b)(3).

94. See 1996 LEC Annual Access Tariff Forecast Data.

95. See, e.g., Harris, Skrivan & Associates, LLC (Harris, Skrivan & Associates) Comments at 6; TCA-Inc.-Telecommunications Consultants (TCA) Comments at 4; GVNW Inc./Management (GVNW) Comments at 7; John Staurulakis, Inc. (Staurulakis) Comments at 7-9; Western Alliance Comments at 22-24; ITCs, Inc. (ITC) Comments at 3; National Exchange Carrier Association, Inc. (NECA) Comments at 13, Reply at 7-9; Rural Telephone Coalition (Rural Tel. Coalition) Comments at 8; Pennsylvania Internet Service Providers Comments at 8-9; Commercial Internet Exchange Association (CIEA) Comments at 13; Reply at 10.

96. We will address access charge modifications as they apply to rate-of-return rural LECs in proceeding later this year. See Section V.A, below.

97. See, e.g., ITC Comments at 3; Rural Tel. Coalition Comments at 8, Reply at 11; TDS Telecommunications Corporation (TDS) Comments at 3-4, Reply at 4; Western Alliance Comments at 23; TCA Comments at 3-4.

98. Calculations are based on Consumer Price Index for "All Items," Trends in Telephone Service, Table 6, (March 28, 1997).

99. In Section IV.D, below, we conclude that price cap LECs may recover certain marketing expenses through the SLC on non-primary residential and multi-line business lines. That, however, does not affect the SLC ceilings for these lines.

100. Universal Service Order at Section IV.D.

101. See, e.g., Bell Atlantic Telephone Companies and NYNEX (BA/NYNEX) Comments at 33-34; Pacific Telesis (PacTel) Reply at 22; Citizens Utilities Company (Citizens Utilities) Comments at 28-29.

102. 47 C.F.R. § 69.104.

103. See, e.g., U S West Comments at 56; Ameritech Comments at 12-13; BellSouth Comments at 32; GTE Comments at 30-31.

104. Joint Board Recommended Decision, 12 FCC Rcd at 474.

105. NPRM at ¶¶ 59-63.

106. Joint Board Recommended Decision, 12 FCC Rcd 87 at 474.

107. NPRM at ¶ 60. Customers are able to "dial-around" their presubscribed interexchange carrier by dialing 10XXX before their area code and 7-digit exchange number.

108. Id. at ¶ 61

109. Id.

110. Id. at ¶¶ 62-63.

111. See n.32, above.

112. ¹¹² See, e.g., Local Competition Order, 11 FCC Rcd at 15511.

113. As discussed in Section III.B, below, line port costs will be reassigned from the local switching rate element to the common line rate element. As discussed in Section III.D, price cap LECs may also recover residual TIC revenues through PICCs.

114. IXCs currently pay $0.0991 for the Lifeline Assistance and $0.4380 for the Universal Service Fund, a total of $0.5371. NECA Transmittal No. 729, F.CC. Tariff No. 5, (filed Nov. 15, 1996).

115. See Universal Service Order, at Sections VII.C and XIII.F.

116. Section 254(g) requires that "rates charged by providers of interexchange telecommunications services to rural and high cost areas shall be no higher than the rates charged by each such provider to its subscribers in urban areas." 47 U.S.C. § 254 (g).

117. See, e.g., Sprint Reply at 27.

118. WorldCom Comments at 34.

119. 47 C.F.R. § 160.

120. Id.

121. As discussed in Sections III.D and IV.D, price cap LECs may also recover residual TIC revenues and certain marketing expenses through PICCs on non-primary residential and multi-line business lines, subject to the ceilings described below.

122. 47 C.F.R. § 69.105.

123. See Section IV.D, below.

124. As discussed in Sections III.D and IV.D, below, the PICC will recover TIC revenues and certain marketing expenses in addition to common line revenues. Therefore, multi-line PICCs may continue to recover non-common line revenues, even though SLCs and PICCs for primary residential and single-line business lines recover the average per-line common line revenues permitted under our price cap rules.

125. 47 C.F.R. § 69.104(c)

126. See Letter from Albert Shuldiner, Counsel for Aliant Communications Co. to William F. Caton, Acting Secretary, FCC, April 30, 1997.

127. 47 U.S.C. § 254(b).

128. Sprint Comments at 15-16; AT&T Reply at 28-29.

129. See, e.g., United States Telephone Association (USTA) Comments at 55-56; BA/NYNEX Comments at 35-36; BellSouth Comments at 68, Reply at 10-11; PacTel Comments at 64, Reply at 21; U S West Comments at 54; Citizens Utilities Comments at 27-28; Roseville Telephone Company (Roseville Tel.) Comments at 4, 8; Rural Tel. Coalition Comments at 6, Reply at 9; Competitive Telecommunications Association (CompTel) Comments at 29; Cable and Wireless, Inc. (Cable & Wireless) Comments at 10; Excel Telecommunications, Inc. (Excel) Comments at 11; LCI International Telecom Corp. (LCI) Comments at 20-21, Reply at 6; MCI Telecommunications Corporation (MCI) Comments at 77; Public Service Commission of the District of Columbia (District of Columbia Commission) Comments at 3-4; South Dakota Public Utilities Commission (South Dakota Commission) Comments at 3; National Association of Regulatory Utility Commissioners (NARUC) Comments at 13; National Cable Telephone Association, Inc. (NCTA) Comments at 26; American Communications Services, Inc. Reply at 17.

130. LEC Price Cap Order, 5 FCC Rcd at 6793, 6795.

131. LEC Price Cap Order, 5 FCC Rcd at 6795. The Commission did not adopt a common line formula based on an average of the per-line and per-minute approaches, because in some circumstances, this would have produced the anomalous result of CCL rates increasing in response to increases in demand. Id. at 6795. The mathematics of the common line formula are explained in detail in Appendix E of the LEC Price Cap Order, 5 FCC Rcd at 6942-44.

132. LEC Price Cap Order, 5 FCC Rcd at 6795.

133. LEC Price Cap Performance Review, 10 FCC Rcd at 9079.

134. Id. at 13680.

135. Price Cap Fourth Further NPRM, 10 FCC Rcd at 1368.

136. LEC Price Cap Order, 5 FCC Rcd at 6795.

137. LEC Price Cap Performance Review, 10 FCC Rcd. at 9079-80.

138. In order for a LEC to provide ISDN, it must have a digital switch in the central office serving the customer, and substitute an ISDN line or trunk card for the standard cards that would otherwise be used in the central office with the loop facilities serving the customer. The customer also must use special ISDN-capable customer premises equipment.

139. The two voice-grade-equivalent channels, which are called bearer or B channels, can be used for voice local exchange service or for data transmission at speeds up to 64 kbps. The third channel is a 16 kbps data channel, called the delta or D channel, which is used for signalling and packet data services. The Bell Atlantic Telephone Companies Petition for Waiver of Section 69.104 of the Commission's Rules in Connection with ISDN Services (filed Feb. 10, 1995) at 4 n.8 (Bell Atlantic Waiver Petition).

140. In the case of PRI ISDN, the 23 B channels and the D channel can transmit voice or data at speeds up to 64 kbps. When a customer has more than one PRI connection at a given location, all of the B channels can share a single D channel, permitting the customer to obtain 24 voice-grade-equivalent channels for each PRI connection after the first one. Bell Atlantic Waiver Petition at 4, n.8

141. For example, NYNEX Telephone Companies (NYNEX) uses derived channel technology to provide FLEXPATH service, which provides a customer with 24 digital voice-grade-equivalent trunk channels over a T-1 facility between a suitably equipped central office and a digital PBX. PBX Conversion Service, another NYNEX offering, provides digital trunking capability, with up to 24 trunk access lines, between a customer's digital PBX and an analog-to-digital interface located at the central office switch. NYNEX's Data Over Voice service provides customers with a voice-grade channel and a data channel over a single copper pair. Memorandum Opinion and Order, NYNEX Telephone Companies Revisions to Tariff F.C.C. No. 1, 7 FCC Rcd 7938 n.11 (Com. Car. Bur. 1992), aff'd on recon., 10 FCC Rcd 2247 (1995). Several other LECs provide similar services using derived channel technology. See, e.g., Cincinnati Bell Comments at 6.

142. End User Common Line Charges, CC Docket No. 95-72, Notice of Proposed Rulemaking, 10 FCC Rcd 8565 (1995) (ISDN SLC NPRM).

143. Section 69.104 of the Commission's rules, 47 C.F.R. § 69.104, provides for a monthly per line charge for end users that subscribe to local exchange service, stating that surcharges shall be assessed for each line between the customer's premises and a Class 5 Office that is or may be used for local exchange transmissions. In 1992, NYNEX which had been charging a SLC for each of the voice-grade-equivalent channels provided on a T-1 facility, filed a tariff in which it proposed to assess only one SLC for each T-1 facility used to provide a customer with certain services, even though the T-1 facility provided that customer with up to 24 voice-grade-equivalent channels. The Common Carrier rejected the Transmittal, finding that it did not comply with the commission's Part 69 rules governing assessment of SLCs. The Commission affirmed the Bureau's conclusion that Section 69.104 of the rules requires assessment of a SLC for each derived channel. Memorandum Opinion

and Order, NYNEX Telephone Companies Revisions to Tariff F.C.C. No. 1, 7 FCC Rcd 7938, ¶ 2 (Com. Car. Bur. 1992) aff'd on recon., 10 FCC Rcd 2247 (1995).

144. ISDN SLC NPRM at ¶ 21.

145. Id. at ¶¶ 22-23, 27-30, 32-34.

146. In their responses, three of the BOCs, BellSouth, NYNEX, and Southwestern Bell, asked for confidential treatment of portions of the information submitted. NYNEX publicly filed the information we requested, but submitted as confidential additional information that contained more detailed cost data. The confidential data were not necessary to perform our analysis, and the following tables only include data that was filed on the public record. We have returned to the respective companies data for which confidential treatment was sought.

147. All pleadings filed in response to the 1995 ISDN SLC NPRM will be so noted.

148. NPRM at ¶ 70.

149. This is consistent with our prior treatment, in other contexts, of derived channel technology. International Business Machines Corporation, Petition for Declaratory Ruling that LADT Services be Offered only through Telephone Company Organizations Separate from Network Operations, Memorandum, Opinion and Order, FCC 85-292 (rel. June 11, 1985) (LADT Order); recon., FCC 86-122 (rel. Mar 25, 1986).

150. The Bell Atlantic Telephone Companies Petition for Waiver of Section 69.104 of the Commission's Rules in Connection with ISDN Services (filed February 10, 1995); Pacific Bell Petition for Waiver of Part 69.104 as Applied to Derived Channel Services such as ISDN (filed February 21, 1995); The GTE Telephone Companies Petition for Waiver of Section 69.104 of the Commission's Rules in Connection with ISDN Services (filed March 2, 1995); Cincinnati Bell Telephone Company's Petition for Waiver of Section 69.104 of the Commission's Rules in Connection with ISDN-BRI Services (filed March 16, 1995); U S West Communications, Inc., Petition for Waiver of Section 69.104 of the Commission's Rules as Applied to ISDN Services (filed April 4, 1995); BellSouth Telecommunications, Inc. Petition for Waiver of Section 69.104 of the Commission's Rules in Connection with ISDN Services (filed April 5, 1995).

151. 47 C.F.R. §§ 32.2001(j), 36.125.

152. 47 C.F.R. § 69.106.

153. NPRM at ¶¶ 72-73.

154. ¹⁵⁴ Currently, NTS costs of line-side ports are recovered through per-minute local switching charges assessed under section 69.106 of our rules, 47 C.F.R. § 69.106.

155. ¹⁵⁵ Part 69 establishes two common line elements, the End User Common Line element, 47 C.F.R. § 69.4(a), and the Carrier Common Line element, 47 C.F.R. § 69.4(b)(2). Price cap LECs currently calculate adjustments to these charges in accordance with 47 C.F.R. § 61.46. Other LECs currently compute these charges in accordance with 47 C.F.R. §§ 69.104 - 69.105.

156. ¹⁵⁶ In response to our request for information in End User Common Line Charges, CC Docket No. 95-72, all of the BOCs submitted information on the NTS costs of providing ISDN service. See Letter and attachments from Anthony M. Alessi, Director, Federal Relations, Ameritech, to William F. Caton, Acting Secretary, Federal Communications Commission, October 23, 1995; Response to Data Request from Bell Atlantic, October 18, 1995; Letter and attachments from W.W. Jordan, Executive Director, Federal Regulatory, BellSouth, to Kathleen Wallman, Chief, Common Carrier Bureau, October 18, 1995; Letter and attachments from Joseph Di Bella, Counsel, NYNEX Government Affairs, to Kathleen M.H. Wallman, October 24, 1995; Letter and attachments from Sheryl L. Herauf, Director, Federal Regulatory Relations, Pacific Telesis, to William F. Caton, October 18, 1995; Letter and attachments from Paul Walters, Attorney, Southwestern Bell, to William F. Caton, October 11, 1995; Letter and attachments from Cyndie Eby, Executive Director, Federal Regulatory, US West, to William F. Caton, October 18, 1995. BellSouth, NYNEX, and Southwestern Bell requested confidential treatment for some of the information they submitted. In concluding that there are greater NTS costs associated with ISDN line cards, however, we did not rely on the allegedly confidential data because data adequate to support our conclusion was not subject to any request for confidential treatment.

157. NPRM at ¶¶ 201-02.

158. NPRM at ¶ 214.

159. USTA Comments, Attachment 2 at 31; Cable & Wireless Comments at 12-13.

160. ¹⁶⁰ We adopted the current, per-minute rate structure for local switching in 1983, MTS and WATS Market Structure, Phase I, Third Report and Order, 93 F.C.C.2d 241, 304-07 (1983). On reconsideration, we considered AT&T's proposal to redefine the local switching element to provide carriers with flexibility to establish a "transport termination" category, containing all equipment in the switch that terminates the line to trunk facilities from the IXC's POP, and a "common switching" category, containing the traffic sensitive local exchange switching used by a carrier. MTS and WATS Market Structure, Phase I, Memorandum Opinion and Order, 97 F.C.C.2d 682, 735-37 (1983). In response, we stated that, "[t]he flexibility that AT&T specifically requests for pricing the Local Switching element reflects a belief that our access charge plan should be revised to permit telephone companies to recover their costs for both end user and traffic sensitive access elements through a mixture of non-recurring charges and flat and usage-based periodic charges and that the carriers rather than this Commission should determine what that mixture should be . . . . While we believe that the access charge rules should evolve over time to reflect the menu of access services that AT&T foresees, we believe that the broad discretion AT&T proposes must await the development of the costing tools that can support the additional disaggregation of costs. Therefore we reject this proposal." Id. at 736. As digital switches have become increasingly prevalent within the network, we conclude that the time has come to establish some NTS elements for the NTS costs of line and dedicated trunk ports. We will consider questions of additional flexibility in connection with our assessment of the market-based approach to access reform.

161. USTA Comments, Attachment 2 at 31.

162. E.g., BellSouth Reply at 10.

163. See Universal Service Order at Section VII.C.5.

164. Id. at Section VII.C.6.

165. ¹⁶⁵ In allocating costs between the intrastate and interstate jurisdictions, the Commission consults with the states through the operation of the Joint Board on Separations. See 47 U.S.C. § 410(c); Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Notice of Proposed Rulemaking and Order Establishing a Joint Board, 78 F.C.C.2d 837 (1980).

166. MTS and WATS Market Structure, Report and Order, 2 FCC Rcd 2639, 2642 (1987).

167. ¹⁶⁷ 47 C.F.R. § 36.125(b). See MTS and WATS Market Structure, Report and Order, 2 FCC Rcd at 2642 (adopting Joint Board recommendation). The Commission subsequently explained that digital switches use concentrators to allow a small number of components to serve a large number of lines, taking advantage of the fact that most lines are unused most of the time. Because increased usage volume per line reduces the concentration level and increases the number of switch components required, the Commission concluded that "the costs of modern digital switches is actually predominantly [traffic sensitive]." MTS and WATS Market Structure, Order on Reconsideration and Supplemental Notice of Proposed Rulemaking, 3 FCC Rcd 5518, 5526 (1988). In performing this analysis, therefore, the Commission did not indicate that it gave specific consideration to the costs associated with of line ports and dedicated trunk ports. These components must be provisioned in a 1:1 ratio with lines and trunks, respectively, and their costs do not vary with traffic levels.

168. E.g., 47 U.S.C. §§ 151, 152, 154(i-j).

169. ¹⁶⁹ Compare Cable & Wireless Comments at 12-13 and Citizens Utilities Comments at 30 and GSA/DOD Comments at 4 and Texas Commission Comments at 11-12 with BellSouth Comments, Attachment 2 at 14.

170. Local Competition Order at ¶¶ 810-18.

171. MCI Comments at 80-82.

172. NPRM at ¶¶ 75-76.

173. NPRM at ¶¶ 77-78.

174. NPRM at ¶ 79.

175. ¹⁷⁵ Ameritech comments that it uses SS7 for over 95 percent of its customers, that its use of SS7 is increasing, and that other large incumbent LECs probably have comparable figures. Ameritech Comments at 16. For a more detailed description of the operation of the SS7 signalling network, see Section III.E.

176. ¹⁷⁶ While Sprint estimates that call setup costs represent approximately two to six percent of the costs of a typical call (Sprint Reply at 14), PacTel estimates that it costs five times more to set up a call than it does to provide a minute of use (PacTel Comments at 68). Using the industry average call duration cited by the California Commission (Reply at 3) of 3.86 minutes, call setup charges would represent a much larger percentage of the total costs of a typical call than Sprint estimates.

177. ¹⁷⁷ E.g., Excel Comments at 12; TRA Comments at 37; Ameritech Comments at 15; PacTel Comments at 69; Citizens Utilities Comments at 30; Frederick & Warinner Comments at 6-7; Minnesota Independent Coalition Comments at 15; Alabama Commission Comments at 8; California Commission at 2-3; Texas Commission at 14; TCI Comments at 12.

178. 47 C.F.R. § 69.106.

179. California Commission Reply at 2.

180. ¹⁸⁰ IXCs today incur access charges for originating access minutes of use from the time when the originating LEC hands a call off to the IXC's POP, regardless of whether the call is completed at the called location. 47 C.F.R. § 69.2(a). As a result, originating access minutes of use are approximately seven percent greater than originating conversation minutes of use. IXCs today do not generally choose to bill their customers directly for access minutes of use charged by the LEC for uncompleted calls or for the interval before the called party answers. See Federal Communications Commission, Com. Car. Bur., Industry Analysis Division, Telecommunications Industry Revenue: TRS Fund Worksheet Data, 8, fig. 3 (Estimates of Toll Rates and Access Costs per Conversation Minute) (Dec. 31, 1996).

181. LCI Comments at 26 n.41.

182. ¹⁸² In VIA USA, the Commission stated as a factual matter that, "in the system as currently structured by facilities-based carriers, customers do not expect to pay for an uncompleted call. Nor do carriers expect to be compensated." 10 FCC Rcd 9540, 9545 (1995) (emphasis added).

183. ¹⁸³ CompuServe/Prodigy Comments at 25-29, Reply at 11-12; Bankers Clearing House Comments at 7-8; Ad Hoc Comments at 19-20, Reply at 3-4.

184. ¹⁸⁴ Our experience with Ameritech's tariffed unbundled SS7 signalling charges indicates that a call setup charge, if implemented, may in fact be relatively small. For call setup purposes, Ameritech has established separate signalling rate elements for SS7 call setup for both direct-trunked and tandem-switched traffic. The first of these, the "ISDN User Part (ISUP) Signal Formulation Charge," is a "per signalling message charge for the formulation of the ISUP message at end offices and tandems" in the amount of .06¢ ($0.0006) per message assessed for both direct-trunked and tandem-switched traffic. The second, the "Signal Transport Charge," is a "per-signalling message charge for the transmission of signalling data between the local STP and an end office SP/SSP" in the amount of .012¢ ($0.00012) per message. The third, the "Signal Switching Charge" is a "per signalling message charge for switching an SS7 message at the local STP" in the amount of .025¢ ($0.00025) per message. The Signal Transport Charge and the Signal Switching Charge are assessed on direct-trunked traffic only. For tandem switched traffic, the "Signal Tandem Switching Charge" is a "per signalling message charge for the bundled provision of multiple instances of signal switching and signal transport for the situation in which tandem routed facilities are provided to the end office" in the amount of .055¢ ($0.00055). The Signal Tandem Switching charge incorporates three instances of transport and two instances of switching at the STP. Both the Signal Switching and the Signal Tandem Switching rate elements include the costs of measuring device and billing system changes. See Ameritech Operating Companies Tariff FCC No. 2, Tariff Transmittal No. 982, filed July 5, 1996.

185. MCI Comments at 82.

186. MCI Comments at 82-83.

187. Id.

188. ¹⁸⁸ E.g., AT&T Reply at 29; Bankers Clearing House Comments at 4-5; Ad Hoc Comments at 23-25; TCI Comments at 12-13.

189. 47 C.F.R. § 69.125.

190. 47 C.F.R. § 69.125.

191. ¹⁹¹ Neither section 69.125 nor any of our other signalling-related cost recovery rules, discussed below, provide for recovery of the costs of these functions. As a result, these costs are recovered through per-minute charges assessed on completed calls. 47 C.F.R. § 69.106. As discussed below, LECs choosing to adopt a separate SS7 signalling rate elements, similar to those established by Ameritech under waiver, may recover a large part of their call setup costs through that mechanism.

192. 47 C.F.R. § 69.120.

193. 47 C.F.R. § 69.118.

194. 47 C.F.R. § 69.129.

195. ¹⁹⁵ Ameritech Operating Companies Petition for Waiver of Part 69 of the Commission's Rules to Establish Unbundled Rate Elements for SS7 Signalling, Order, 11 FCC Rcd 3839 (Com. Car. Bur. 1996) (Ameritech SS7 Waiver Order). See Section III.E.

196. ¹⁹⁶ Ameritech Comments at 16. Ameritech states that, "SS7 technology is currently used for more than 95% of customers in the Ameritech network. This figure is probably comparable for other large [incumbent LECs.]"

197. Local Competition Order at ¶ 755.

198. ¹⁹⁸ Transport Rate Structure and Pricing, Third Memorandum Opinion and Order on Reconsideration and Supplemental Notice of Proposed Rulemaking, 10 FCC Rcd 3030, 3033 (1994) (Third Transport Reconsideration Order).

199. See, e.g., 47 C.F.R. §§ 69.110, 69,111, 69.112, 69.124.

200. See NPRM at ¶¶ 80-95.

201. ²⁰¹ Transport Rate Structure and Pricing, Report and Order and Further Notice of Proposed Rulemaking, 7 FCC Rcd 7006, 7016-7017 (1992) (First Transport Order); see also 47 C.F.R. § 69.110.

202. ²⁰² Transport Rate Structure and Pricing, First Memorandum Opinion and Order on Reconsideration, 8 FCC Rcd 5370, 5375 (1993) (First Transport Reconsideration Order).

203. NPRM at ¶ 86.

204. ²⁰⁴ A channel facility assignment is the actual designation of the routing that a circuit takes within the incumbent LEC network. This assignment may be made either by an IXC purchasing a dedicated circuit, or the incumbent LEC itself.

205. NPRM at ¶ 86.

206. First Transport Order, 7 FCC Rcd at 7022.

207. ²⁰⁷ As Sprint explains, LECs are moving toward ring configurations in response to customer demands for the increased service reliability gained from this architecture's route diversity and self-healing qualities. "With the ring configuration, the tandem-routed traffic and direct-trunked traffic will all be moving in the same ring, and the distance traversed will simply be a function of the provisioning path selected by the LEC for individual traffic. Utilization of available bandwidth between two nodes at any point in time will become a higher priority in the economic determinant of cost than the distance between the two nodes." Sprint Comments at 24.

208. See U S West Reply at 30.

209. See Ameritech Comments at 17-18.

210. ²¹⁰ NPRM at ¶¶ 309-310 (contained within the Third Report and Order portion of that item). The rule changes implementing this procedure will become effective on June 30, 1997.

211. See 47 C.F.R. § 69.4(g).

212. MCI Comments at 84-85.

213. 47 U.S.C. § 160.

214. USTA Comments at 35-48.

215. ²¹⁵ An end office local switch may also serve as a tandem switch with certain software upgrades. Therefore, the tandem switching office is also often an end office in its own right. Similarly, an IXC typically uses a large end office, upgraded with additional trunking capacity to handle the IXC's traffic, as its serving wire center.

216. ²¹⁶ United States v. American Tel. and Tel. Co., 552 F. Supp. 131, 233-34 (AT&T Consent Decree, Appendix B, Section B(3)), aff'd sub nom. Maryland v. United States, 460 U.S. 1001 (1983).

217. See First Transport Reconsideration Order, 8 FCC Rcd at 5372.

218. ²¹⁸ A DS1 line is capable of transmitting 24 voice conversations, each digitally encoded at 64 kilobits per second, for a total capacity of 1.544 megabits per second. A DS3 line has 28 times the capacity of a DS1.

219. ²¹⁹ First Transport Order, 7 FCC Rcd at 7029. Special access customers use a dedicated trunk running between the customer's premises and the IXC's POP, thereby bypassing the LEC's switched network facilities altogether. This service is primarily used by large volume users in densely populated areas.

220. Id. at 7036-37.

221. ²²¹ See Competitive Telecommunications Ass'n v. FCC, 87 F.3d 522, 526-27 (D.C. Cir. 1996) ("CompTel").

222. First Transport Order, 7 FCC Rcd at 7008.

223. Id. at 7016.

224. Id. at 7038.

225. Id.

226. CompTel, 87 F.3d 522.

227. Id. at 536.

228. Id.

229. NPRM at ¶¶ 87-88, 91.

230. NPRM at ¶ 89.

231. ²³¹ MTS and WATS Market Structure, Third Report and Order, 93 F.C.C.2d at 251-252.

232. First Transport Order, 7 FCC Rcd at 7028 n.85.

233. ²³³ NPRM at ¶ 106. It is also possible to combine the DS3/DS1 and DS1/voice-grade functions into a single multiplexer.

234. ²³⁴ This waiver is similar to the one we ordered when we adopted the interim rate structure. First Transport Order, 7 FCC Rcd at 7038.

235. ²³⁵ First Transport Order, 7 FCC Rcd at 7009. We reiterated these principles in the First Transport Reconsideration Order, 8 FCC Rcd at 5372, and the Third Transport Reconsideration Order, 10 FCC Rcd at 3035.

236. First Transport Order, 7 FCC Rcd at 7016.

237. ²³⁷ See First Transport Order, 7 FCC Rcd at 7016, 7021-22; Third Transport Reconsideration Order, 10 FCC Rcd at 3047-48.

238. Third Transport Reconsideration Order, 10 FCC Rcd at 3048.

239. CompTel, 87 F.3d at 530.

240. ²⁴⁰ See Local Competition Order; Expanded Interconnection with Local Telephone Company Facilities, Memorandum Opinion and Order, 9 FCC Rcd 5154 (1994); Expanded Interconnection with Local Telephone Company Facilities, Transport Phase II, Third Report and Order, 9 FCC Rcd 2718 (1994).

241. E.g., Letter from David Sieradzki, Counsel for WorldCom, Inc., to William F. Caton, Acting Secretary, FCC, February 25, 1997, Encl. at. 4.

242. ²⁴² E.g., Teleport Comments at 13-14; ALTS Reply at 22. After the comment period closed in this proceeding, Teleport and CompTel proposed a compromise tandem-switched transport rate structure that would (1) retain the unitary rate structure for the transmission component of tandem-switched transport; (2) prohibit incumbent LECs from deaveraging TIC charges within a state for a five year transition period; and (3) provide that IXCs and CLECs that do not use transport facilities supplied by the incumbent LEC would be exempt from paying the TIC for any switched access traffic carried over those facilities. See Ex Parte Letter from James M. Smith and Robert C. Atkinson to Hon. Reed E. Hundt, April 16, 1997. Teleport and CompTel characterize this third element of their proposal as the "most important." Exempting IXCs and CLECs that do not use transport facilities supplied by the incumbent LEC from paying the TIC for any switched access traffic carried over those facilities would be consistent with a recent Colorado Commission arbitration ruling. See TCG Colorado Petition for Arbitration Pursuant to § 252(b) of the Telecommunications Act of 1996 to Establish an Interconnection Agreement with U S West, Docket No. 96A-329T, Decision Regarding Petition for Arbitration, Decision No. C96-1186 (adopted Nov. 5, 1996). In that decision, the Colorado Commission stated that,

[I]f [U S West] provides all or part of the transport of an interstate call from the end office to the IXC, then [U S West] is entitled to collect its interstate rates, including [TIC]. If, however, [U S West] is not providing the transport of a call from an end-office switch to an IXC, then [U S West] may not apply its switched access transport rates, including the [TIC], to those calls. We reject arbitrary splits of revenues. In jointly provisioned switched access services, each company will develop and apply its tariffed rates to the portion of service it provides.

Id. at ¶ I.O.7. Clarifying this position on reconsideration, the Colorado Commission stated, "[t]he [TIC] shall be applied on a pro rata basis determined from the proportional distance between the [Teleport] tandem and the end-office of [U S West]." TCG Colorado Petition for Arbitration Pursuant to § 252(b) of the Telecommunications Act of 1996 to Establish an Interconnection Agreement with U S West, Docket No. 96A-329T, Order Denying Applications for Rehearing, Reargument, or Reconsideration, Decision No. C96-1344 (adopted Dec. 18, 1996), at ¶ I.B.1.4.

243. See First Transport Order, 7 FCC Rcd at 7007.

244. ²⁴⁴ Motion of AT&T to be Reclassified as a Non-Dominant Carrier, Order, 11 FCC Rcd 3271 (1995).

245. ²⁴⁵ CompTel, 87 F.3d at 530-531. Even though directly addressing the TIC and not the unitary rate structure, the Court's remarks are apposite because the unitary rate structure does not recover the costs of tandem-switched transport in the way that those costs are incurred and therefore results in the recovery of some costs of the transmission component of tandem-switched transport through the TIC.

246. First Transport Order, 7 FCC Rcd at 7016.

247. ²⁴⁷ E.g., TCI Comments at 16, Reply at 13-14. See also ACC Long Distance Comments at 14-15; Telco Communications Group Comments at 6-7.

248. E.g., Sprint Comments at 22.

249. Ameritech Reply at 29.

250. See Ameritech Reply at 29.

251. NPRM at ¶ 24 (diagram follows the paragraph).

252. WorldCom Reply at iii.

253. WorldCom Reply at 29-31.

254. ²⁵⁴ See Letter from James M. Smith, President, CompTel, and Robert C. Atkinson, Senior Vice President, Teleport Communications Group Inc., to Hon. Reed E. Hundt, Chairman, FCC, April 16, 1997.

255. Section III.D.2.b.

256. ²⁵⁶ See Letter from James M. Smith, President, CompTel, and Robert C. Atkinson, Senior Vice President, Teleport Communications Group Inc., to Hon. Reed E. Hundt, Chairman, FCC, April 16, 1997.

257. See Section IV.B.2.

258. See, e.g., BellSouth Comments at 77, 80.

259. Cable & Wireless Comments at 19.

260. ²⁶⁰ See, e.g., 47 C.F.R. § 36.192, separating Corporate Operations Expenses, USOA Accounts 6710 and 6720, on the basis of the separation of the Big Three Expenses: Plant Specific Expenses, Plant Non-Specific Expenses, and Customer Operations Expenses.

261. 47 C.F.R. §§ 69.305 - 69.306.

262. 47 C.F.R. § 69.309.

263. E.g., 47 C.F.R. § 69.401.

264. 47 C.F.R. § 69.411.

265. See, e.g., First Transport Order, 7 FCC Rcd at 7030 n.91.

266. Since 1991, of course, the amounts recovered by price cap LECs have been subject to the price cap formulae. For all incumbent LECs, however, the relative allocation of overheads was originally established under cost-of-service regulation by the Part 69 cost allocation rules.

267. 47 U.S.C. §§  201-202.

268. CompTel, 87 F.3d at 533.

269. 7 FCC Rcd at 7062 (emphasis added).

270. Id.

271. See Section III.D.2.

272. First Transport Order, 7 FCC Rcd at 7036-37.

273. See 47 C.F.R. § 69.123.

274. ²⁷⁴ MTS and WATS Market Structure, Memorandum Opinion and Order, 97 F.C.C.2d at 862.

275. First Transport Reconsideration Order, 8 FCC Rcd at 5377.

276. Id.

277. U S West Reply at 32.

278. See, e.g., WorldCom Reply at 35.

279. First Transport Order, 7 FCC Rcd 7006.

280. United States v. American Tel. and Tel. Co., 552 F. Supp. 131.

281. First Transport Order, 7 FCC Rcd at 7038-40.

282. USTA Comments, Attachment 11.

283. ²⁸³ Under our expanded interconnection rules and policies, competitors may interconnect with the incumbent LEC's facilities at the end office and supply their own transport. For a more detailed discussion of expanded interconnection, see Expanded Interconnection with Local Telephone Company Facilities, Memorandum Opinion and Order, 9 FCC Rcd at 5157.

284. USTA Comments, Attachments 10 and 11.

285. ²⁸⁵ As of December 31, 1995, larger, reporting local exchange carriers (i.e., those with revenues of at least $100 million) account for 92.6 percent of the total presubscribed lines. Federal Communications Commission, CCB, Industry Analysis Division, Preliminary Statistics of Common Carriers, Tbl. 2.3, Total Presubscribed Lines for all Local Exchange Companies (July 1996). Thus, small local exchange carriers account for 7.4 percent of the presubscribed lines.

286. ²⁸⁶ See Letter from Brian R. Moir, Esq., Counsel to the International Communications Association, to William F. Caton, Acting Secretary, FCC, April 16, 1997; Letter from G.R. Evans, Vice President, Federal Regulatory Affairs, NYNEX, to William Caton, Acting Secretary, FCC, April 4, 1997.

287. See Section I, above.

288. ²⁸⁸ DS1 transport trunks need to be demultiplexed into individual voice-grade circuits before being switched at analog end office switches. DS1/voice-grade multiplexers perform this function.

289. BellSouth Comments at 78.

290. If the Joint Board on Jurisdictional Separations takes action to address this issue, we will then consider what corresponding reallocations should be made.

291. ²⁹¹ See, e.g., USTA Comments at 65; GTE Comments at 38; Aliant Comments at 3. See also Cable & Wireless Comments at 21-22.

292. 47 C.F.R. § 69.123.

293. ²⁹³ See, e.g., PacTel Comments at 72; Sprint Comments at 29,52; Ameritech Reply at 32-33; BA/NYNEX Comments at 38.

294. Sprint Reply at 17-18.

295. State Consumer Advocates Comments at 34-37.

296. ²⁹⁶ BA/NYNEX Reply at 39-40. USTA and many incumbent LECs proposed recovering the remaining TIC costs through a bulk billing mechanism based on an IXC's share of presubscribed lines or revenues. See, e.g., USTA Comments at 66; BA/NYNEX Comments at 38; PacTel Comments at 72; SNET Reply at 27-28. This proposal to use presubscribed lines is consistent with treating the remaining costs recovered by the TIC as NTS costs.

297. ²⁹⁷ These percentages are as follows: NYNEX, 77.63 percent; BellSouth, 56.93 percent; U S West, 59.14 percent; and Bell Atlantic, 63.96 percent. See Letter from Linda Kent, Associate General Counsel, USTA, to William F. Caton, Acting Secretary, filed May 2, 1997.

298. ²⁹⁸ These percentages, calculated from TIC data supplied, are: SWBT, 69.11 percent; Pacific Bell and Nevada Bell combined, 53.52 percent. See Letter from Todd F. Silbergeld, Director -- Federal Regulatory, SBC Communications, Inc., to William F. Caton, Acting Secretary, April 24, 1997.

299. See para. 100, above.

300. NPRM at ¶ 97.

301. See, e.g., Teleport Comments at 30-32; Time Warner Comments at 12-13, 15.

302. ³⁰² See TCG Colorado Petition for Arbitration Pursuant to § 252(b) of the Telecommunications Act of 1996 to Establish an Interconnection Agreement with U S West, Docket No. 96A-329T, Decision Regarding Petition for Arbitration, Decision No. C96-1186 (adopted Nov. 5, 1996); TCG Colorado Petition for Arbitration Pursuant to § 252(b) of the Telecommunications Act of 1996 to Establish an Interconnection Agreement with U S West, Docket No. 96A-329T, Order Denying Applications for Rehearing, Reargument, or Reconsideration, Decision No. C96-1344 (adopted Dec. 18, 1996), at ¶ I.B.1.4; Letter from Judith Herrman, Manager, Federal Regulatory Affairs, Teleport Communications Group, to Richard Lerner, Competitive Pricing Division, FCC, April 11, 1997.

303. See, e.g., USTA Comments at 66; BellSouth Comments at 13-14; PacTel Comments at 72.

304. See, e.g., U S West Comments at 71-73; SWBT Reply at 11; GTE Comments at 39, 41-44.

305. See, e.g., WITA Comments at 8; Texas Public Utility Counsel Comments at 21.

306. NPRM at ¶¶ 123-25.

307. See Ameritech SS7 Waiver Order, 11 FCC Rcd at 3841 (1996).

308. 47 C.F.R. § 69.125.

309. 47 C.F.R. § 69.120.

310. NPRM at ¶ 127.

311. Ameritech SS7 Waiver Order, 11 FCC Rcd 3839 (1996).

312. 11 FCC Rcd at 3853.

313. 11 FCC Rcd at 3848.

314. NPRM at ¶ 135.

315. 11 FCC Rcd at 3841-42.

316. Id.

317. NPRM at ¶ 135.

318. 47 C.F.R. § 61.42(d)(3); NPRM at ¶¶ 128, 130.

319. 11 FCC Rcd at 3853.

320. Id.

321. Bell Atlantic and NYNEX estimate the cost of installing facilities to measure SS7 usage ranges between $15 million and $40 million. BA/NYNEX Comments at 40. Sprint estimates that the cost would run between $15 million and $20 million. Sprint Comments at 31.

322. 11 FCC Rcd at 3844-45.

323. USTA Comments at 37; BA/NYNEX Comments at 40; PacTel Comments at 73; GTE Comments at 53.

324. A carrier could adopt the Ameritech rate structure pursuant to 47 C.F.R. 69.4(g), which permits a carrier to implement rate structures previously approved by the Commission for other carriers.

325. 47 C.F.R. § 69.4(g).

326. See Sprint Comments at 31.

327. Sprint suggests that an industry forum may be appropriate to develop an optimum rate structure for unbundled signalling services. Sprint Comments at 31.

328. NPRM at ¶ 135.

329. MCI Comments at 89; Time Warner Comments at 17; CompTel Comments at 31-32.

330. 11 FCC Rcd at 3859. NPRM at ¶ 130.

331. MCI Comments at 87-88; AT&T Reply at 33-34.

332. NPRM at ¶ 139.

333. Price Cap Third Report and Order at ¶ 309-10.

334. 47 C.F.R. § 69.4(g).