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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 ) In the Matter of ) ) Alascom, Inc., Cost Allocation ) Plan for the Separation of Bush ) AAD 94-119 and Non-Bush Costs ) ) MEMORANDUM OPINION AND ORDER ON RECONSIDERATION AND ORDER APPROVING COST ALLOCATION PLAN Adopted: February 10, 1997 Released: February 10, 1997 By the Chief, Common Carrier Bureau: I. INTRODUCTION 1. The Common Carrier Bureau ("Bureau") has before it a petition for reconsideration filed by General Communication, Inc., which seeks to reverse the Bureau's approval of a Cost Allocation Plan ("CAP") filed by Alascom, Inc. The Alascom CAP sets forth Alascom's methodology for apportioning its costs between two geographic rate zones in Alaska. The Commission required Alascom to file the CAP as part of a plan to facilitate a new telecommunications market structure for Alaska that is designed to increase competition in telecommunications services to and from locations in Alaska. The Bureau also has before it a revised CAP, filed by Alascom as required by the Cap Approval Order. In this Order, we clarify our policy regarding the locations to be included in the two rate zones; we require Alascom to modify the factor in the CAP for allocating satellite costs; we reject GCI's request that we reverse our approval of the CAP and we also approve Alascom's revised CAP subject to the revisions required herein. II. BACKGROUND 2. The Commission, acting on a recommendation of the Alaska Joint Board, adopted a plan for a new competitive market structure for Alaska in a Memorandum Opinion and Order released on May 24, 1994. In recommending the new market structure plan, the Alaska Joint Board's Final Recommended Decision found that Alascom should be allowed to file Common Carrier Service tariffs for two geographic rate zones: bush and non-bush. As recommended by the Joint Board, the Commission required, in its adoption of the new market structure plan, that Alascom establish two geographic rate zones under its Common Carrier Service tariff and that the costs of providing service to these zones be defined pursuant to a CAP developed by Alascom and subject to Commission approval. The Commission delegated to the Chief, Common Carrier Bureau, authority to review Alascom's CAP and, based on the Bureau's analysis and consideration of public comment, to require revisions if necessary. 3. Alascom filed its CAP initially on August 29, 1994. The Bureau found that the initial CAP did not provide adequate information to determine how Alascom intended to allocate its costs between the bush and non-bush rate zones and did not comply with the Commission's cost allocation rules. Therefore, on May 4, 1995, the Bureau rejected the initial CAP and required Alascom to submit a revised CAP within 60 days. 4. Alascom filed its revised CAP on July 3, 1995. Upon review, the Bureau concluded that Alascom's revised CAP provided sufficient explanations of its methodologies for cost allocations to ensure that all costs would be reasonably apportioned between the rate zones and that it was in compliance with the Commission's cost allocation rules. Accordingly, the Bureau approved the revised CAP on September 11, 1995. The CAP Approval Order, however, also required Alascom to review and revise its approved CAP to reflect any changes to its CAP including changes resulting from the transfer of control from Pacific Telecom Inc. ("PTI") to AT&T and to file its revisions within 60 days of the release of the order. 5. On November 13, 1995, Alascom filed a revised CAP. The revisions reclassified as non-bush 19 locations classified previously as bush and provided additional details regarding Alascom's cost apportionment procedures. The revisions also updated the affiliate transaction information to reflect a transfer of control from PTI to AT&T. 6. In its Petition for Reconsideration, GCI argues that our approval of the CAP should be reversed, and in its Comments on the revised CAP, GCI argues that the revised CAP should likewise be rejected because the criteria used to identify bush and non-bush locations in the approved CAP conflict with criteria used in previous Commission orders; changes in the approved CAP do not resolve deficiencies found by the Commission in the original CAP; GCI cannot determine from the CAP whether Alascom has established cost-based rates; and the Bureau failed to audit Alascom's CAP as required by the Commission. These arguments are discussed below. III. COMMENTS AND DISCUSSION A. Identification of Bush and Non-Bush Locations 1. Comments 7. In its Petition, GCI argues that the distinction between bush and non-bush locations approved by the Bureau in the CAP Approval Order conflicts with previous Commission orders. GCI argues that the definition of bush locations grows out of a finding of mutual exclusivity between applicants for authority to construct and operate a satellite earth station for the same individual Alaska communities. It contends that the term "bush" applies only to situations involving mutually exclusive Alaska earth station applications for communities of fewer than 1,000 persons. In support of its argument, GCI describes the evolution of the Commission's earth station ownership policy, and the relationship of this policy to the term "bush." GCI states that, in the 1984 Final Decision, the Commission determined that duplicate interstate message telephone service ("MTS") earth stations in bush locations would not be in the public interest. GCI maintains that, for purposes of Commission policy, bush locations are those locations where interexchange carriers other than Alascom are not permitted to build or operate earth stations, and non-bush locations are all other locations. 8. GCI asserts that Alascom's CAP distorts the Commission's definitions by redefining bush locations as those locations where facilities competition does not exist and non- bush locations as those locations where facilities competition does exist. GCI further asserts that the Bureau's acceptance and endorsement of Alascom's interpretation violates Commission precedent. GCI maintains that this interpretation allows Alascom to recategorize each community in Alaska from bush to non-bush based on the entrance of a competitor into that market even though the cost of serving a location does not depend on the presence or absence of a competitor. In its Reply, GCI contends that the Bureau should reverse its order approving the CAP and require Alascom to correct the invalid definitions for bush and non-bush locations. In its Comments, GCI contends that the Bureau should, likewise, reject Alascom's revised CAP. 9. MCI also asserts that the Commission should direct Alascom to amend its CAP to correct the definition of bush and non-bush locations. MCI contends that, consistent with the Joint Board's and the Commission's long-standing policy, the only locations where a facilities monopoly has been prescribed are those communities of fewer than 1,000 persons in which an earth station has already been installed. MCI argues that Alascom's definition provides Alascom with a substantial degree of pricing flexibility not contemplated by the Joint Board or the Commission because it allows Alascom to define cost pools based on the presence or absence of competition, which allows it to shift costs between those pools. 10. In its Reply, MCI maintains that the Commission should grant GCI's Petition because Alascom has not explained why its CAP departs from the Joint Board's and the Commission's decision with respect to the definition of bush areas in the Alaska market. MCI argues that in the absence of express language authorizing Alascom to take liberties with the definition of bush, or explicit precedent authorizing Alascom to reclassify markets based on whether Alascom believes it faces competition, Alascom has no basis for the type of self-regulation it seeks in its CAP. 11. In its Opposition, Alascom states there is no basis for GCI's claim that its definition of bush and non-bush locations is inconsistent with Commission precedent. Alascom contends that its definition of bush and non-bush locations is consistent with the rationale underlying the Final Recommended Decision and the Market Structure Order, which created the two rate zones. Alascom maintains the rationale underlying the Joint Board recommended decision and Commission order is that Alascom's rates in monopoly areas should be cost-based, and that the required distinction will be made by specifically identifying the locations where carriers have an opportunity to choose among transport suppliers and those locations where carriers have no choice of suppliers. 12. Alascom also maintains that GCI's contention that the term "bush" has a particular meaning is untrue because the definition of the Commission's earth station policy for bush locations was never "cast in stone," but was an effort to accommodate the rules to practical realities. Alascom states that even though the Commission, in its earth station policy, referred to the bush as communities with fewer than 1,000 persons, it excepted communities that were not isolated and thus not considered to be located in the Alaska bush. Also, Alascom contends that the state of Alaska defines "bush" differently. Moreover, Alascom asserts that it is reviewing and revising its CAP to increase the number of non-bush locations to approximately thirty to include all locations for which there is actual facilities-based competition as required under the CAP Approval Order. 13. In its Reply, Alascom states that GCI's definition of "bush" is inconsistent with the Joint Board's goal of promoting competition because, under GCI's definition, costs would inappropriately shift from the bush to the non-bush cost category resulting in higher rates at locations where Alascom competes with GCI and other carriers. Alascom contends that higher rates are contrary to the public interest because they create an "artificial incentive" for other carriers to bypass Alascom's facilities thereby limiting Alascom's ability to compete. Alascom argues that GCI's definition of non-bush as communities where competition is allowed does not reflect market conditions because it would include, in the non-bush category, 24 communities in which Alascom has remained the monopoly provider even though GCI has been allowed to construct earth stations. Further, Alascom argues that GCI's definition would also include, in the non-bush category, 50 additional locations for which GCI has recently received permission to construct earth stations, but for which Alascom is currently the monopoly provider. 2. Discussion 14. GCI and MCI argue that the terms "bush" and "non-bush" used by the Joint Board in the Final Recommended Decision and the Commission in the Market Structure Order are based on the Commission's 1984 Final Decision, in which the Commission stated that its earth station policy prohibits duplicate earth station facilities in bush communities. Specifically, GCI and MCI argue that the Commission must apply the standard contained in the summary of its discussion on bush and non-bush in the Final Recommended Decision; that non-bush locations would exist "where facilities competition is allowed;" and bush locations exist "where a facilities monopoly is prescribed." GCI and MCI maintain that the only monopoly facilities that have been prescribed in Alaska are earth stations located in rural bush communities and that this strict interpretation must be applied to define into which of the two rate zones created under the Market Structure Order a specific community falls. Under this interpretation, only communities that have fewer than 1,000 persons and one earth station would be included in the bush rate zone. All other communities would automatically be included in the non-bush rate zone, including approximately 170 small rural communities that are served only by Alascom with microwave facilities instead of earth stations. 15. The Commission's Market Structure Order states that the locations Alascom serves would be divided into two categories; "locations subject to facilities competition (non-bush) and ... locations where Alascom has a facilities monopoly (bush)" (emphasis added). The Market Structure Order clearly does not repeat the phrase from the Final Recommended Decision, "where a facilities monopoly is prescribed," that GCI argues is the definitive definition of bush. We recognize that the language in the Market Structure Order is ambiguous since the phrase "subject to facilities competition" could include locations at which competition has been authorized by the grant of a license or permit to a competitor but where it does not yet actually exist. We believe that the better reading of this language is to interpret it to refer to locations where competition actually exists. Such reading is more consistent with the Joint Board's goals of preventing cross- subsidization of locations at which facilities-based competition is present and recognizes the cost differences between Alascom's bush and non-bush rate zones as expressed in the Final Recommended Decision. The Commission, in adopting the Final Recommended Decision, concurred with "the (Joint) Board's evaluation of the record, and the legal and policy analyses and recommendations that are presented in the Final Recommended Decision." Because the language in the Market Structure Order is subject to several reasonable interpretations, we turn to the Final Recommended Decision that was adopted by the Market Structure Order to determine what standard should be used to assign locations to either the bush and non-bush rate zone cost categories. 16. We believe that the Joint Board, in adopting the Final Recommended Decision, meant to assign locations at which Alascom faces competition to the non-bush rate zone cost category and locations at which Alascom is the monopoly provider to the bush rate zone cost category. There is ample language in the Final Recommended Decision to support this view. A footnote defines the rate zones by stating that "[i]n this order we will generally refer to geographic rate zones as the difference in rate schedules for services associated with locations where Alascom holds a facilities monopoly (bush) and services for all other locations (non-bush)." The Joint Board further states that the Alascom CAP shall be designed to separate and identify the costs "for Alascom's monopoly Bush area operations, as distinct from those for its competitive, non-Bush operations." In another section, the order describes the tariff as containing "two geographic rate zones based on the respective costs of its facilities monopoly and competitive operations." The best indicator, however, of how the Joint Board intended to assign locations to one of these two rate zone cost categories is its discussion of the purposes for adopting this unique market structure and the goals that it believed such a structure would accomplish. The Joint Board expressed its concern that Alascom was in a position to engage in discrimination or cross-subsidization by assigning costs from its facilities-competitive areas to its monopoly areas. The Board stated that it had two goals for its proposed bush and non-bush market structure, as implemented through Alascom's CAP: (1) to prevent Alascom from assigning excessive costs to its bush services and (2) to recognize the apparent differences in costs within Alascom's network between its bush and non-bush geographic rate zones. 17. GCI contends that the Final Recommended Decision and the Market Structure Order require that Alascom define bush locations using the bush earth station policy criteria. GCI therefore maintains that "competition is allowed everywhere in Alaska except those locations having fewer than 1,000 persons served by a pre-existing earth station. GCI contends that in such communities, competition is not allowed under Commission precedent and thus monopoly is prescribed." GCI quotes language in the Final Recommended Decision that purports to summarize the definition of the rate zones by stating: [I]n summary, we recommend that there be two geographic rate zones under Alascom's Common Carrier Service tariff: one zone for services associated with locations where facilities competition is allowed and another zone for services involving the locations where the facilities monopoly is prescribed (emphasis added). GCI's petition ignores all of the language cited in paragraph 15, supra, and the apparent inconsistency between the "facilities monopoly is prescribed" language it relies on and the definitions and the discussion that precede that language. GCI, therefore, rests its entire argument on one phrase in the Final Recommended Decision, while failing to deal with inconsistent language or to examine whether the use of the bush earth station policy would accomplish the goals the Joint Board established when it adopted the Final Recommended Decision. 18. As a first step in assessing the validity of GCI's arguments regarding the meaning of "bush," we look at the history of the Commission's bush earth station policy. The term "bush" has been previously used in a variety of contexts in reference to the Alaska market. In the 1982 Tentative Decision, the Commission defined "Bush communities" as "small villages in rural Alaska that are isolated from the larger cities by rugged terrain and harsh weather conditions." In that proceeding, Alascom and the state of Alaska each had filed applications for earth station licenses to provide MTS service to 35 bush communities. In finding that the applications were mutually exclusive and granting only one earth station license per community, the Commission stated that, for economic reasons, the public interest would not be served by the grant of both licenses. In the 1984 Final Decision, the Commission affirmed its previous decision and stressed its limited nature by noting that the decision did not apply to toll interconnect facilities, including terrestrial microwave, other than the Alaska bush earth station network, and that it excluded a category of earth stations designated as "mid-route." Additionally, the Commission indicated that its finding was limited in time by stating that "duplicative MTS facilities must be avoided for now if basic telephone service is to be provided economically to these bush communities" (emphasis added). Finally, the Commission noted that the bush earth station policy would be limited to competing applications for earth stations providing MTS within a community of fewer than 1,000 persons. We note that the International Bureau has recently granted GCI a temporary waiver of the bush earth station policy to allow GCI to construct and operate up to 50 earth stations at locations previously designated as bush. A careful examination of the bush earth station policy decisions, therefore, demonstrates that the doctrine was intended to deal with specific problems in the Alaskan earth station market at the time the doctrine was adopted and was not a definition of the terms "bush" and "non-bush" for all purposes. 19. In the Tentative Recommendation, the Joint Board expressed concern that costs incurred in competitive locations might be recovered through rates applied to monopoly locations if separate rates were established. The Joint Board therefore tentatively recommended that rates for common carrier service should be averaged statewide. In their comments on the Tentative Recommendation, both GCI and MCI supported statewide averaged rates. They argued that, if rates were not averaged statewide, Alascom could shift costs to its monopoly areas in order to lower its costs in locations where facilities competition was permitted and that the Commission's tariff review process was insufficient to prevent this cost shifting. Alascom, AT&T, the State of Alaska, and United Utilities, Inc., on the other hand, either opposed or expressed concern about statewide average rates. These parties argued that averaging rates statewide would encourage AT&T to abandon Alascom's facilities because Alascom would be required to average the higher costs of bush locations, where it has a monopoly, with the lower costs of locations where it competes with other interexchange carriers. Alascom argued that if it were required to set rates based on statewide average costs, GCI would gain a competitive advantage because GCI was not similarly obligated to set rates based on average costs and was not required to serve the high cost, rural areas of the state. 20. In the Final Recommended Decision, the Joint Board stated that it was persuaded that it was highly likely that a significant disparity exists in the cost of service between the bush and non-bush areas of Alaska, and that costs of service are significantly higher in low- volume bush locations. It also stated that Alascom would be moving from a market structure that isolated it from the full effects of competition to a market where it would compete on equal footing. In support of its assessment, the Joint Board stated that "Alascom's principal competitor to date, GCI, has built extensive facilities throughout large portions of Alaska and is well- positioned to compete in the Alaska common carrier service market." The Joint Board was persuaded that mandatory statewide averaged rates would have required Alascom to price its services above cost in competitive locations thus providing a disincentive for AT&T and other interexchange carriers to use Alascom's network in those locations. The Joint Board therefore recommended that Alascom's operations be divided into two geographic rate zones. 21. The practical effect of applying the bush earth station policy advocated by GCI may be affected by changing circumstances such as the recent International Bureau decision to promote competition by granting a waiver of the bush earth station policy. The waiver granted by the International Bureau permits GCI to license up to 50 additional earth stations in communities that are currently classified as bush. Interpreting the Commission's Market Structure Order to require use of the bush earth station policy to classify locations as bush or non- bush under the CAP could compel inclusion in the non-bush category of up to 170 rural locations served by microwave and in which an Alascom facilities monopoly currently exists, as well as up to 50 additional rural earth station locations now served exclusively by Alascom and for which GCI has received a waiver of the bush earth station policy. GCI and MCI advocated a statewide average costing methodology in their comments to the Joint Board and that approach was specifically rejected in the Final Recommended Decision. The application of the bush earth station policy would achieve an effect similar to that of rates based on statewide cost averaging because, contrary to the intent of the Joint Board, it likely would include lower-cost urban areas with higher-cost rural locations in the non-bush cost category. 22. Application of the bush earth station policy would also frustrate the Joint Board's goal of recognizing the difference in service costs between locations included in the bush and non-bush cost categories. Only locations with fewer than 1000 persons, served by earth station facilities, would be included in the bush category while comparable locations that share similar cost and demand characteristics would be included in the non-bush category. 23. We reject the approach advocated by GCI and MCI as inconsistent with the Joint Board's objectives in recommending, and the Commission's objectives in adopting, a market structure with two rate zones. The Commission's bush earth station policy is a limited doctrine intended to address only earth station licensing issues; it does not extend to other network facilities, including terrestrial microwave facilities, that are an essential part of Alascom's network. In the present case, the Bureau is faced with the much broader issue of how to allocate properly the costs of Alascom's entire network, including elements not covered by the 1984 Final Decision. 24. We find therefore that the definition of bush and non-bush advocated by GCI would improperly assign small, presumably high-cost bush locations to the non-bush category. GCI's definition is inconsistent with the Bureau's approach in the CAP Approval Order and the Commission's approach in the Market Structure Order. Accordingly, we affirm our earlier approval of Alascom's CAP and approve Alascom's revised CAP subject to the conditions and other qualifications included herein. 25. We believe, however, that GCI and MCI have raised a valid concern about the reassignment of Alaska locations between Alascom's rate zones based solely on the presence or absence of competition in providing interexchange service to those locations. The new market structure that gave rise to these rate zones is intended to promote competition by establishing a competitive rate zone that includes locations in which more than one interexchange carrier competes for business. We assume that locations that attract additional carriers are likely to share certain characteristics such as greater populations with greater demand and lower costs than locations where Alascom has a facilities monopoly. As explained in the next paragraph, however, the process of reclassifying locations between rate zones based only on the presence of a competitor may actually discourage competition. 26. In the Final Recommended Decision, the Joint Board stated that there appears to be a large disparity in costs of serving the bush and non-bush areas of Alaska. It noted that Alascom claimed in that proceeding that its bush costs are $.406 per minute and its non-bush costs are $.106 per minute. Alascom attributed the higher cost per minute for bush locations in part to low traffic volumes in those locations. With such a large disparity in costs between the two rate zones, transferring a location from one zone to the other, based only on the presence of a competitor in that location, without a basis for finding that costs had radically changed, could frustrate efforts to promote competition. For example, a prospective competitor could decide to offer service to a bush location at a lower rate than Alascom's bush rate. Upon entering the market, the presence of the competitor would cause Alascom to reclassify that location from bush to non-bush. Alascom could then charge at that location the lower non-bush rate, which is based on the average of all its competitive locations and not on the actual service costs for that location. The prospective competitor would become frustrated because it could not set competitive prices based on location-specific service costs but would be forced to set prices to compete with Alascom's non-bush rate. While temporary benefit could accrue to ratepayers, such a rate reduction could cause the competitor to withdraw from that location. With the abandonment of the location by the prospective competitor, Alascom could reclassify the location back to the bush category and increase the rates to a level that reflects the average costs for all bush locations. The International Bureau's recent grant of a waiver of the bush earth station policy to allow GCI to apply for licenses to serve up to 50 locations formerly classified as bush increases the possibility that locations formerly served only by Alascom may, in the future, experience competition and, as a result, be reclassified from bush to non-bush. It is also possible that such a competitive location could become a monopoly location if GCI withdrew from providing service to that location. 27. We are concerned that Alascom's periodic reclassification of locations based on commencement or termination of competitive services at particular locations could deter competitors from beginning, or continuing, to provide service at those locations. In this way, these reclassifications could inhibit the introduction of new technologies and competitive services in such locations, which would not be in the public interest. We have reviewed the locations Alascom identified in its revised CAP and are satisfied that it has properly classified its service locations as bush and non-bush and that Alascom's costs are, therefore, reasonably apportioned between its monopoly bush area operations and its competitive, non-bush operations. No commenters disagreed with Alascom's classification of locations to the non-bush cost category. Our review of the 33 locations classified as non-bush in Alascom's revised CAP indicates that competition is sufficiently entrenched for those locations and that reclassifications are unlikely. It is likely however that one or more carrier(s) will commence competitive service at some of the 280 locations currently classified as bush, which would trigger a reclassification to non-bush under the definition in the Final Recommended Decision. According to Alascom's most recent tariff filing, the 33 non-bush locations Alascom identifies in its revised CAP account for more than half of its service costs and approximately 84 percent of its service demand, while Alascom's 280 bush locations account for less than half of its service costs and only 16 percent of its demand. Included in these non-bush service costs are approximately 84 percent of Alascom's network costs that, under the CAP, are apportioned between bush and non-bush on the basis of relative network demand. Because significant costs and demand are already associated with existing non-bush locations, shifting additional bush locations to the non-bush category would produce negligible incremental changes to non-bush costs. For example, if Alascom shifted all of its remaining 280 bush locations to the non-bush, the resulting shift in network demand would shift only the remaining 16 percent of its network costs to the non-bush category. We believe that continuing to reclassify locations based solely on the arrival of a competitor does not further the Joint Board's goals and would not materially affect the costs already included in the bush and non-bush cost categories. We find therefore that Alascom's revised CAP achieves the goals set forth by the Joint Board and, consequently, will not allow Alascom to reclassify its existing bush and non-bush locations. While we believe that future reclassifications will not materially affect the costs included in the two cost categories, we will entertain waivers upon a showing that reclassification of one or more location(s) materially affects the costs contained in the bush and non-bush categories. 28. In its Final Recommended Decision, the Joint Board stated that the proper development of rates within the two cost categories would be a matter for the Commission's tariff review process. The Joint Board's Final Recommended Decision, as adopted by the Market Structure Order, affirmed the importance of the tariff review process in the development of appropriate rates and rate structures in Alaska. Recognizing the importance of that process to achieving the Joint Board's goals, the Commission is currently investigating Alascom's initial interexchange service tariff. B. Alleged Deficiencies in the CAP. 1. Explanation of Cost Apportionment Procedures 29. GCI contends, that in the CAP Rejection Order, the Bureau directed Alascom to explain in detail its cost apportionment procedures and define each term used in its CAP, but that Alascom merely expanded its explanations and failed to provide more clarity. GCI also contends that Alascom should have provided details concerning the cost allocation model it uses to implement its CAP. In its Comments, GCI includes a description of an alternative CAP it filed in the original CAP proceeding. In response, Alascom asserts that GCI's allegations that the Alascom CAP is unclear are without merit and factually unsupported. Alascom further asserts that several of the alleged deficiencies in Alascom's CAP are actually complaints about Alascom's Common Carrier Services tariff and states that its responses to GCI's tariff claims are set forth in its reply to GCI's Petition to Reject Alascom's FCC Tariff F.C.C. No. 11, Transmittal No. 790, filed October 23, 1995. In its Reply, Alascom contends that GCI's alternative CAP is flawed because it fails to recognize cost-causative principles and is not location specific. 30. In response to the deficiencies addressed in the CAP Rejection Order, Alascom revised its explanations by adding considerable detail about its cost apportionment procedures; the Bureau found that those revisions sufficiently explained the procedures Alascom will use to apportion service costs between bush and non-bush rate zones. We do not agree with GCI's contention that a cost model Alascom developed to implement the CAP should have been provided as part of the CAP. The cost model is not part of the market structure plan. In fact, the Bureau did not receive a copy of the cost model until after it had released the CAP Approval Order and did not review the model or rely upon it in rendering that decision. In the CAP Approval Order, we determined that Alascom's CAP was acceptable and in this Order, we find, subject to certain revisions, that Alascom's revised CAP complies with the Joint Board's recommendations. We did not rely on the cost model in approving the revised CAP and therefore did not require that the cost model be disclosed. GCI's alternative CAP was reviewed when it was originally filed and was found unacceptable because it fails to recognize cost-causative principles and does not specifically apportion network service costs to each location. GCI's Comments merely summarize the methodology it proposes in its alternative CAP and offers no compelling reason to reverse our earlier finding. 2. Costs Associated With Nonregulated Activities 31. MCI asserts that, in the CAP Rejection Order, the Bureau required Alascom to demonstrate that costs associated with nonregulated activities are segregated from those associated with regulated activities and that Alascom has failed to make the required demonstration. MCI contends that the Bureau, in the CAP Rejection Order, found Alascom may have assigned nonregulated costs to regulated services because the original CAP included a nonregulated investment account, Account 1406. MCI maintains that the Bureau therefore required Alascom to demonstrate that all nonregulated costs are excluded from Alascom's cost apportionment processes and argues that a statement in the original CAP that "unregulated costs are removed prior to the cost apportionment procedures" does not constitute the demonstration intended by the Bureau. GCI and MCI aver that the Bureau had no basis to determine whether Alascom's assertions regarding nonregulated costs were true and therefore lacked a reasonable basis on which to approve the CAP. GCI further contends that the Joint Board developed information showing Alascom systematically assigned costs of providing military private line services to its MTS regulated accounts and that these private line service costs are improperly assigned to regulated services under the CAP. 32. In response to GCI, Alascom asserts there is no basis for allegations that the CAP improperly assigned nonregulated costs to Alascom's regulated Common Carrier Services because, prior to implementing the CAP, it removed all nonregulated investment and expense in accordance with Part 64 of the Commission's rules, including the amounts in Account 1406, Nonregulated investment and Account 7990, Nonregulated income. Alascom maintains that the costs of regulated private line services were separated prior to calculating rates for Alascom's Common Carrier Service tariff. 33. The Bureau initially believed that nonregulated costs might be included in the CAP because Alascom included Account 1406, Nonregulated investment, in the Master Apportionment Tables of its CAP. At meetings with Commission staff concerning proposed revisions to the CAP, Alascom provided additional explanations of its costing procedures and explained that Account 1406 was inadvertently included in the Master Apportionment Table because it was a Part 32 account. Account 1406 was removed in the revised CAP. 34. As a dominant interexchange carrier, Alascom is required to comply with the procedures for apportioning regulated and nonregulated costs mandated by Part 64 of the Commission's rules. As to GCI's allegations that nonregulated services are cross-subsidized by regulated service, the Bureau is unaware of any information developed by the Joint Board that would suggest that Alascom recovers nonregulated costs through rates for regulated services. GCI's allegations regarding possible cross-subsidization between military private line service and MTS service are unsubstantiated and are misplaced here because both services are regulated. 3. Direct Assignment of Costs 35. GCI contends that the CAP Rejection Order directed Alascom to revise its apportionment procedures to increase the level of costs directly assigned and that the Bureau approved the revised CAP despite Alascom's failure to increase the level of direct assignment. In response, Alascom asserts that a very high percentage of the costs identified in the CAP results from directly tracking costs to bush and non-bush locations. In the CAP Rejection Order, the Bureau directed Alascom to increase direct assignment or include in the CAP a detailed explanation of why its allocation process produces limited direct assignment. In its revised CAP, Alascom significantly revised its explanation of the methodology for apportioning costs between bush and non-bush embodied in the CAP. It included a new section describing how Alascom uses location codes to track costs of service by location or function, a new section describing how Part 32 account balances are categorized by similar cost-causative characteristics, and additional information regarding its cost categories. Based on the additional information in the revised CAP, we are satisfied that the CAP maximizes direct assignment and direct attribution of costs to bush and non-bush locations. 4. Satellite Costs 36. GCI and MCI contend that Alascom's CAP over-allocates satellite costs to bush locations. GCI estimates that three out of 16 transponders are used to support bush locations, which would yield an allocation factor of approximately 19 percent if GCI's estimate is correct. According to Alascom's CAP, the satellite costs are directly attributed on the basis of the ratio of bush versus non-bush earth stations supported by the satellite. This methodology allocates over 90 percent of the satellite costs to the bush. Alascom states that portions of 70 percent of the transponders on the satellite are used to provide MTS service to the bush, and over 40 percent of all transponder use is dedicated to bush locations. Moreover, Alascom states that the satellite's primary purpose is to support bush communities because 27 out of 33 non-bush locations are supported by terrestrial facilities. 37. We have reviewed the technical characteristics of satellites and earth stations and find that an allocation factor measured in terms of use of the satellite's transponders provides a more appropriate basis for apportioning satellite costs because it reflects the rules and more accurately apportions satellite costs to the cost causer. Alascom's method of allocating satellite costs based on the number of bush/non-bush earth stations served does not properly recognize relative use of the satellite for bush and non-bush services. The transponders on Alascom's satellites use older "dedicated channel" technology. Under this technology, Alascom divides the available bandwidth on each transponder into voice channels which it dedicates to specific earth stations. Because bush locations typically have lower traffic volumes, relatively few channels need to be dedicated to each bush earth station. The total number of channels dedicated to bush earth stations, therefore, is a relatively small percentage of the total number of channels used to support all earth stations, bush and non-bush. Although there are fewer non-bush locations, they account for a disproportionate share of the traffic and, presumably, the number of dedicated channels assigned. Any allocation mechanism that assigns satellite costs strictly on the basis of number of bush and non-bush locations would tend to over-allocate costs to the bush cost category. As described in paragraph 40 below, Alascom's CAP is modeled on the Commission's Part 64 cost allocation rules which provide procedures for separating regulated from nonregulated costs. In the Commission's Joint Cost Order, the Commission adopted cost allocation standards for carriers to use to apportion costs between regulated and nonregulated activities. The Joint Cost Order determined that the basic standard for apportioning central office equipment and outside plant costs is relative regulated and nonregulated usage. 38. Alascom fails to provide a rational basis for allocating over 90 percent of its satellite costs to bush locations; it merely states that 40 percent of the satellite's transponder use is dedicated to bush locations. Assuming Alascom's estimate of transponder use is correct, the allocation factor in the CAP allocates over 125 percent more satellite costs to bush locations than would be allocated using Alascom's estimate of usage. On reconsideration, we find that to apply the Commission's Part 64 rules correctly, Alascom's satellite costs should be allocated based on usage as measured by the number of channels dedicated to bush and non-bush locations. Accordingly, we require Alascom to revise its CAP to reflect an allocation factor for satellite costs based on bush versus non-bush use of the satellite's channels. C. Cost-Based Rates 39. GCI contends that because the cost support materials filed in Alascom's proposed Common Carrier Services tariff contain only generalized references to gross cost and demand, GCI cannot determine whether the rates are cost-based. GCI asserts that it should have been given access to a cost model Alascom developed to implement its CAP and maintains that the errors and anomalies in the tariff strongly indicate that the plan used to produce the tariff is fundamentally defective. In response, Alascom argues that GCI should not have access to its cost model because the model contains competitively-sensitive demand and financial data. In its Reply, Alascom questions GCI's contentions regarding high bush rates because, as of the date of its filing, GCI had not purchased any common carrier service. 40. The Joint Board recommended that Alascom's CAP be modeled on procedures described in the Computer III Remand Order for segregating regulated and nonregulated costs and on the Part 64 cost allocation rules. The Bureau has reviewed Alascom's CAP and its revised CAP and found that both the CAP and the revised CAP comply with procedures described in Part 64 of the Commission's rules. Alascom's tariff and the related projected costs and demand figures are the subject of an investigation and questions relating to them will be resolved there. To the extent that GCI wishes to address issues relating to the costs and demand projections provided in support of Alascom's Common Carrier Services tariff, it should do so in the tariff investigation proceeding. D. Audit of Alascom's CAP 41. GCI argues that the Joint Board required that the CAP be subject to an independent audit and that the Commission failed to complete the audit. Alascom argues that an audit of Alascom's cost and CAP data was not mandated by the Final Recommended Decision but rather such information would be "subject to" an independent audit. The Joint Board in its Final Recommended Decision stated that Alascom's cost of service data and the data supporting the CAP would be reviewed and would be subject to an independent audit. Neither the Final Recommended Decision nor the Market Structure Order adopting it imposed any requirement, explicitly or implicitly, that approval of the CAP was contingent on an audit. E. Effect of the 1996 Act 42. The Telecommunications Act of 1996 amended the Communications Act of 1934 after the Final Recommended Decision had recommended and the Commission had required that Alascom create a CAP dividing its service locations into two rate zone cost categories. We find this requirement to be consistent with the changes to the Communications Act, made by the 1996 Act. The 1996 Act adds only one section that might appear to apply to Alascom's CAP requirement, Section 254(g). Section 254(g) requires that IXCs average rates by providing that "the rates charged by a provider of interexchange telecommunications service to subscribers in rural and high cost areas shall be no higher than the rates charged by each such provider to its subscribers in urban areas (emphasis added)." The legislative history of this section indicates that Congress intended for the Commission to codify its pre-existing policies of rate averaging and rate integration, and to apply these policies to all carriers. The Joint Explanatory Statement states that "[n]ew section 254(g) is intended to incorporate the policies of geographic rate averaging and rate integration of interexchange services in order to ensure that subscribers in rural and high cost areas throughout the Nation are able to continue to receive both intrastate and interstate interexchange services at rates no higher than those paid by urban subscribers." 43. Alascom's rates include, for the bush and non-bush cost categories, two transport rates and a switching rate. One transport rate, Intra-Alaska transport, recovers from IXCs, the costs of transporting calls between Alascom's interconnection points with IXCs and Alascom's interconnection points with LECs located in Alaska. The second transport rate, Alaska/CONUS transport, recovers from IXCs, the costs of transporting calls between Alascom's Anchorage, Alaska switch and its Portland, Oregon switch. The switching rate recovers, from IXCs, Alascom's switching costs associated with transporting calls. The only services Alascom provides under the CAP are switching and transport services provided to, and paid for by, IXCs. The Commission has a long-standing policy of rate integration under which dominant IXCs are required to average rates for domestic interstate interexchange services. The Commission codified that policy to apply to all IXCs. Under our preexisting policy and under the current rule, subscribers to interexchange services in Alaska's bush and non-bush locations pay the same rates for the same interstate interexchange services. Under the Joint Board's market structure plan, Alascom charges IXCs two sets of rates based on the classification of the location served. For IXCs, these rates are business costs which in addition to other costs are recovered from their subscribers through averaged rates. The 1996 Act thus compels no alteration of the rate zone cost categories recommended by the Final Recommended Decision and approved in the Market Structure Order. IV. ORDERING CLAUSES 44. IT IS ORDERED that, pursuant to Sections 0.91 and 0.291 of the Commission's Rules, 47 C.F.R.  0.91 & 0.291, the Petition for Reconsideration filed by General Communication, Inc., is GRANTED to the extent indicated herein, and otherwise DENIED. 45. IT IS FURTHER ORDERED that, pursuant to Sections 0.91 and 0.291 of the Commission's Rules, 47 C.F.R.  0.91 & 0.291, that the revised CAP filed by Alascom, Inc. on November 13, 1995, is APPROVED except to the extent indicated in paragraph 46 infra. 46. IT IS FURTHER ORDERED that, pursuant to Sections 0.91 and 0.291 of the Commission's Rules, 47 C.F.R.  0.91 & 0.291, Alascom revise its CAP to reflect the new allocation factor for satellite costs based on the relative number of channels used by the satellite's transponders and shall submit its revised CAP within 60 days of the release date of this order. FEDERAL COMMUNICATIONS COMMISSION Regina M. Keeney Chief, Common Carrier Bureau