FCC 97-158

A. PICCs for Special Access Lines

397. In this Further Notice of Proposed Rulemaking, we seek comment on our proposal to allow incumbent local exchange carriers to impose a PICC on special access lines.

1. Background

398. As discussed in Section III.A., in most cases, the $3.50 SLC ceiling for primary residential and single-line business customers does not allow recovery through the SLC of the average per-line common line revenues permitted under our price cap rules. Similarly, in certain service areas, the $6.00 SLC for multi-line business lines is insufficient to recover the average per-line revenues permitted by price cap regulation. To alleviate this shortfall, we are instituting a number of changes, including raising the ceiling on the SLC for multi-line business and second and additional residential lines.⁽⁵⁹⁴⁾ Although this increase in the SLC will recover some of the shortfall, other measures are needed to allow recovery of the common line revenues permitted under our rules.

399. Therefore, we have permitted LECs to recover common line revenues not recovered from the SLC by assessing flat, per-line charges on the end-user's presubscribed interexchange carrier. Specifically, we are permitting LECs to assess a PICC on all lines, subject to ceilings which will be increased each year. To the extent that the revenues from SLCs and PICCs on primary residential lines and single-line business lines are insufficient to recover the full common line revenues permitted by our price cap rules for these lines, or the multi-line SLCs are at their ceilings, incumbent LECs shall recover the difference by assessing an additional PICC on non-primary residential and multi-line business lines. To the extent that these PICCs do not recover an incumbent LEC's remaining permitted CCL revenues, incumbent LECs generally shall recover any such residual common line revenues through per-minute CCL charges assessed on originating access minutes.

400. As a result of our new rules, certain multi-line businesses will be paying higher SLCs than they do now. Similarly, as the PICCs are phased in, IXCs initially will be required to pay higher PICCs for a multi-line business end user compared to the PICC paid for a primary residential end user or a single-line business end user.

401. In contrast, users of special access do not pay a SLC. Furthermore, under special access, IXCs do not incur the same local access charges that are incurred by end users using switched access. In light of our most recent changes to charges incurred by multi-line businesses, including the higher SLC and the new multi-line business PICC, it may be cost effective for some multi-line businesses that are currently using switched access to purchase instead special access lines.

402. We are concerned that these facts could lead to the migration of certain businesses from the public switched network to special access, which would result in a decrease in projected revenue from multi-line SLCs. As a result PICCs for all remaining switched access lines will necessarily increase to make up for the loss of revenue.

2. Proposal

403. We tentatively conclude that we should permit price cap LECs to assess a PICC on special access lines to recover revenues for the common line basket. The special access PICC would be no higher than the PICC that an incumbent LEC could charge for a multi-line business line. Under our proposal, the special access PICC would not recover TIC or marketing expense.

404. We acknowledge that our proposal is a departure from established Commission practice that special access will not subsidize other services. Although our proposal is a subsidy, it is temporary in nature and will be phased out as the single-line PICC is phased in. We tentatively conclude that our proposal is necessary for our transition from the per-minute CCL charge to the flat PICC to work.

405. We invite parties to comment on this proposal. We also seek comment on how special access connections should be counted for purposes of assessing a "per line" PICC. Parties should also address the extent to which our proposal affects large and small LECs differently and how small business entities, including small incumbent LECs and new entrants, will be affected.⁽⁵⁹⁵⁾

406. Consistent with our approach to reform the interstate access charge regime, however, we tentatively conclude that the scope of this proceeding should be limited to incumbent price cap LECs. As discussed in Section V., supra, we have limited the scope of access reform, with some limited exceptions, to price cap incumbent LECs.⁽⁵⁹⁶⁾ Similarly, we limit the scope of this NPRM. To the extent necessary, we will instead address the effect of these issues on rate-of-return carriers in our separate access reform proceeding for rate-of-return carriers in 1997. In that proceeding, we will have the opportunity to conduct a comprehensive review of the circumstances unique to these carriers. We seek comment on this tentative conclusion regarding the scope of this proceeding. We also invite parties to identify any changes that should be made to other access elements as a result of this proposed change.

B. General Support Facilities Costs

407. As discussed in Section IV. D above, the current allocation of GSF costs enables incumbent LECs to recover through regulated interstate access charges costs associated with the LECs' nonregulated billing and collection functions. In this section, we seek comment on proposed changes in the allocation of price cap LECs' interstate costs between regulated interstate services and nonregulated billing and collection activities.

1. Background

408. The costs that incumbent LECs recover through interstate access charges are determined by a multi-step process. Incumbent LECs first record their investment costs and booked expenses in the accounts prescribed by the Commission's Part 32 Uniform System of Accounts (USOA).⁽⁵⁹⁷⁾ They next divide the recorded investment and expenses between regulated and nonregulated services pursuant to Part 64 of the Commission's rules. Incumbent LECs then divide regulated expenses and investment costs between the state and interstate jurisdictions pursuant to the separations procedures prescribed in Part 36 of the Commission's rules.⁽⁵⁹⁸⁾ Finally, in accordance with our Part 69 access charge rules, the LEC apportions its regulated interstate costs among the interstate access and interexchange service categories.⁽⁵⁹⁹⁾

409. Because the Part 69 access charge rules are applied at the end of this multi-step process, they are written to accommodate the accounts defined by the USOA and the cost categories prescribed by the Separations Manual. In 1987, the Commission revised its access charge rules⁽⁶⁰⁰⁾ in response to the Commission's comprehensive revision of both the USOA⁽⁶⁰¹⁾ and the Separations Manual.⁽⁶⁰²⁾ In its Part 69 Conformance Order, the Commission amended Part 69 to reapportion regulated interstate costs, including General Support Facilities (GSF) investment expenses, among the existing access elements.

410. As discussed in Section IV.D above, the GSF investment category in Part 36 includes assets that support other operations, such as land, buildings, vehicles, as well as general purpose computer investment accounted for in USOA Account 2124.⁽⁶⁰³⁾ Some incumbent LECs use general purpose computer equipment, which is included in the GSF investment category, to provide nonregulated billing and collection services to IXCs.⁽⁶⁰⁴⁾ The costs of providing interstate billing and collection service are not, however, treated as nonregulated in the Part 64 cost allocation process. Instead, nonregulated interstate billing and collection costs are identified through the Part 36 and Part 69 cost allocation process. The separations process allocates these costs to the various separations categories based on the separations of the three largest categories of expenses, i.e., plant specific expenses, plant non-specific expenses, and customer operations expenses.⁽⁶⁰⁵⁾

411. In its comments in response to the NPRM, AT&T refers to the allocation of embedded GSF expenses, including general purpose computer expenses, among access categories as a misallocation resulting in an implicit cross-subsidy of incumbent LECs' nonregulated billing and collection services. This allocation, AT&T contends, results in the inappropriate support through regulated access charges of LECs' billing and collection service, which is a nonregulated, interstate service. AT&T estimates that $124 million of expenses recovered in interstate access support the nonregulated billing and collection category.⁽⁶⁰⁶⁾ Of the $124 million, AT&T states that $60.1 million is included in interstate switched access, and $20.5 million is in interstate special access, with the remainder recovered by the SLC.⁽⁶⁰⁷⁾

2. Proposal

412. The failure of Part 69 to assign general purpose computer costs to the billing and collection category can be traced to our decision in the Part 69 Conformance Order to use an investment-based allocator to apportion general support facilities (GSF) investment.⁽⁶⁰⁸⁾ As discussed in Section IV.D above, Section 69.307 of the Commission's rules apportions GSF investment among the billing and collection category, the interexchange category, and the access elements based on the amount of Central Office Equipment (COE), Cable and Wire Facilities (CWF), and Information Origination/Termination Equipment (IO/T) investment allocated to each Part 69 category.⁽⁶⁰⁹⁾ This rule appears on its face to provide for an allocation of GSF investment to billing and collection. Because no COE, CWF, or IO/T investment is allocated to the billing and collection category, however, no GSF investment, and thus no portion of general purpose computer investment, is allocated to the billing and collection category. Similarly, because expenses related to GSF investment are allocated in the same manner as GSF investment, no GSF expenses (including expenses related to general purpose computers) are allocated to billing and collection. Price cap LECs' costs allocated to the interstate billing and collection category are estimated to be approximately $480 million.⁽⁶¹⁰⁾

413. As discussed in Section V of the Access Reform Order, we limit the scope of access reform, with some limited exceptions, to price cap incumbent LECs. Consistent with our approach to reform the interstate access charge regime, we tentatively conclude that our proposed changes to the allocation of GSF investment will apply only to price cap LECs. We will address the misallocation of rate-of-return LECs' interstate costs between regulated interstate services and nonregulated billing and collection activities in our separate access reform proceeding for rate-of-return carriers in 1997, which will provide us with the opportunity to conduct a comprehensive review of the circumstances unique to these carriers. We seek comment on this tentative conclusion regarding the scope of this proceeding.

414. To the extent that incumbent LECs' costs are underallocated to the billing and collection category, incumbent LECs' regulated services are recovering through interstate access charges costs associated with unregulated services. We therefore tentatively conclude that price cap incumbent LECs' general purpose computer costs attributable to billing and collection should not be recovered through regulated access charges. We seek comment on two options for reassigning these costs to the billing and collection category.

415. Under the first option, a price cap LEC would study the uses of the general purpose computer assets recorded in Account 2124 to determine the percentage of investment in that account that is used for billing and collection activities.⁽⁶¹¹⁾ That percentage, multiplied by the ratio of the dollar amount in Account 2124 to the dollar amount in Account 2110,⁽⁶¹²⁾ which accumulates the total GSF investment, would be applied to the interstate portion of Account 2110 to determine a dollar amount that represents general purpose computer assets used for interstate billing and collection activities. The dollar amount so identified would be attributed directly to the billing and collection category. The remainder of the interstate portion of Account 2110 shall be apportioned among the access elements and the interexchange category using the current investment allocator. General purpose computer expenses recorded in Account 6124 would be treated in a similar fashion to Account 2124.⁽⁶¹³⁾ The interstate portion of Account 6124 would be allocated between (a) the billing and collection category and (b) all other elements and categories using the percentage derived for Account 2124. The remainder of Account 6120 (GSF expense) would be apportioned based on current GSF allocators.⁽⁶¹⁴⁾ Appropriate downward exogenous cost adjustments would be made to all price cap baskets.

416. Two objections are commonly raised to the use of special studies to make regulatory cost allocations. First, such studies are said to be costly. We recognize that there are costs attached to a special study approach. We note, however, that price cap LECs may already be required to study the use of computer investment in Account 2124 as part of the process of allocating that investment between regulated and nonregulated activities pursuant to the Part 64 joint cost rules. Second, it may be claimed that permitting price cap LECs to use special studies gives them too much discretion and that regulators are unable to ascertain the validity of the studies. To remedy this concern, we propose that each price cap LEC add to its cost allocation manual (CAM) a new section entitled "Interstate Billing and Collection." That section would describe: (1) the manner in which the price cap LEC provides interstate billing and collection services, and (2) the study it uses to determine the portion of Account 2124 investment that it attributes to the billing and collection category. The special study would then be subject to the same independent audit requirements as other regulated and nonregulated cost allocations. In addition, to obtain an independent certification of the validity of the procedures adopted by the price cap LEC, we would instruct the independent auditors to examine the design and execution of the study during the first independent audit following the addition of the billing and collection section to the CAM and to report their conclusions on the validity of the study.

417. Under the second option, we would modify Section 69.307 of our rules to require use of a general expense allocator to allocate the interstate portion of Account 2110 between: (1) the billing and collection category, and (2) all other elements and categories. We propose to use the "Big Three Expense" allocator used elsewhere in Part 69,⁽⁶¹⁵⁾ excluding, however, any account or portion of an account that is itself apportioned based on the apportionment of GSF to avoid circularity. The GSF investment not allocated to the billing and collection category would then be apportioned among the access elements and the interexchange category using the current investment allocator. This would ensure that GSF costs are allocated among all access categories, including the billing and collection category. The interstate portion of Account 6120 would be apportioned among all elements and categories based on the overall apportionment of GSF investment. This option covers only price cap incumbent LECs that provide interstate billing and collection using regulated assets. Carriers that acquire billing and collection services from unregulated affiliates through affiliate transactions or from third parties would continue recording their expenses for acquiring such services in Account 6623,⁽⁶¹⁶⁾ which is already apportioned to the billing and collection category.

418. We invite parties to comment on the feasibility of these two options and propose alternative methods for reassigning general purpose computer costs to the billing and collection category. Parties should also address the extent to which either option affects large and small LECs differently and how small business entities, including small incumbent LECs and new entrants, will be affected.⁽⁶¹⁷⁾ We invite parties to identify any changes that should be made to other access elements as a result of any changes we may make to the GSF allocation procedures.

594. See Section III.A. for additional revisions to the recovery of common line revenues.

595. See Regulatory Flexibility Act, 5 U.S.C. §§ 601 et seq.

596. These incumbent LECs are the seven Regional Bell Operating Companies (Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, SWBT, U S West), Citizens, Frontier, GTE, Aliant (formerly Lincoln), SNET, and United/Central.

597. See 47 C.F.R. Part 32.

598. See 47 C.F.R. Part 36.

599. See 47 C.F.R. Part 69.

600. Amendment of Part 69 of the Commission's Rules and Regulations, Access Charges, To Conform It With Part 36, Jurisdictional Separations Procedures, CC Docket No. 87-113, Report and Order, 2 FCC Rcd 6447 (1987) (Part 69 Conformance Order).

601. Revision of the Uniform System of Accounts and Financial Reporting Requirements for Class A and Class B Telephone Companies (Parts 31, 33, 42, and 43 of the FCC's Rules), CC Docket No. 78-196, Report and Order, FCC 86-221 (rel. May 15, 1986) (creating Part 32 of the Commission's rules).

602. MTS and WATS Market Structure, Amendments of Part 67 (New Part 36) of the Commission's Rules and Establishment of a Federal-State Joint Board, CC Docket Nos. 78-72, 80-286, and 86-297, Report and Order, 2 FCC Rcd 2639 (1987). See Part 36 of the Commission's rules, 47 C.F.R. Part 36.

603. See 47 C.F.R. § 36.111.

604. In 1986, the Commission found that the market for billing and collection service was sufficiently competitive that it was not necessary to require LECs to provide that service as a tariffed common carrier service. The Commission did not, however, pre-empt state regulation of billing and collection services. See Detariffing of Billing and Collection Services, CC Docket No. 85-88, 102 FCC 2d 1150 (1986) (Billing and Collection Detariffing Order); recon. denied, 1 FCC Rcd 445 (1986). The Commission later decided to treat billing and collection costs as regulated for accounting purposes because it found that such treatment was less likely to misallocate these costs between the interstate and intrastate jurisdictions. Separation of Costs of Regulated Telephone Service from Costs of Nonregulated Activities, Report and Order, CC Docket No. 86-111, 2 FCC Rcd 1298, 1309 (1987) (Joint Cost Order).

605. These three largest categories, or the "Big Three Expenses," are the combined expense groups comprising: (1) Plant Specific Operations Expense, Accounts 6110, 6120, 6210, 6220, 6230, 6310, and 6410; (2) Plant Nonspecific Operations Expenses, Accounts 6510, 6530, and 6540; and (3) Customer Operations Expenses, Accounts 6610 and 6620. 47 C.F.R. § 69.2(e). The "Big Three Expense Factors" are the ratios of the sum of Big Three Expenses apportioned to each element or category to the combined Big Three Expenses. 47 C.F.R. § 69.2(f).

606. AT&T Comments at 67-68, Appendix E at 2.

607. AT&T Comments Appendix E at 2.

608. Part 69 Conformance Order, 2 FCC Rcd at 6452.

609. 47 C.F.R. § 69.307(c).

610. 1996 ARMIS Access Report.

611. Investment in general purpose computer equipment is recorded in Account 2124. See 47 C.F.R. § 32.2124.

612. Investment in land and support assets is recorded in Account 2110. See 47 C.F.R. § 32.2110.

613. General purpose computers expenses are recorded in Account 6124. See 47 C.F.R. § 32.6124.

614. General support expenses are recorded in Account 6120. See 47 C.F.R. § 32.6120.

615. See 47 C.F.R. § 69.2(f).

616. See 47 C.F.R. § 32.6623.

617. See Regulatory Flexibility Act, 5 U.S.C. §§ 601 et seq.