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                           Before the 
                FEDERAL COMMUNICATIONS COMMISSION
                     Washington, D.C.  20554

In the Matter of                   )
                              )
Amendment of Part 36 of The        )         CC Docket No. 80-286
Commission's Rules and             )
Establishment of a Joint Board          )




                        REPORT AND ORDER 


     Adopted:  February 3, 1997              Released:  February 3, 1997


By the Commission:

                         I.  INTRODUCTION

     1.   On September 27, 1996, the Federal-State Joint Board in CC Docket No. 80-286
adopted a recommended decision regarding permanent rules to govern the procedures incumbent
local exchange carriers (ILECs) use for allocating Other Billing and Collecting (OB&C) expenses
between the intrastate and interstate jurisdictions.  The Joint Board recommended that OB&C
expenses be divided equally among three services:  interstate toll; intrastate toll; and local exchange,
with two thirds of the OB&C expenses thus allocated to the state jurisdiction, and one third allocated
to the interstate jurisdiction.  In cases in which an ILEC provides no interstate billing and collecting
for an interexchange carrier (IXC), the Joint Board recommends an automatic reduction of the
interstate assignment to five percent to cover the cost of billing the federal Subscriber Line Charge
(SLC).  For reasons set forth in this Report and Order, and in the Joint Board's Recommended
Decision, we adopt the Joint Board's recommendations and the permanent rules attached to this
Order in an Appendix.  

                        II.  BACKGROUND  

     2.   The expenses ILECs incur in preparing and rendering end user customer bills, and
in accounting for revenues generated by those bills, are categorized as OB&C expenses.  Because
we detariffed interstate billing and collecting services in 1986, most of the OB&C expenses
allocated to the interstate jurisdiction cannot be recovered by ILECs through interstate access
charges.  Instead, these expenses are allocated to nonregulated activities, and, except for the cost of
billing and collecting the SLC, ILECs recover them through untariffed charges. 
     
     3.   Prior to 1987, the rules for jurisdictional separation of OB&C expenses required
ILECs to measure the amount of time they spent billing for interstate services and for intrastate
services.  In 1987, the Federal-State Joint Board in CC Docket No. 80-286 recommended, and we
adopted, an interstate apportionment formula that replaced this method with one based on counting
the number of users billed by each ILEC for specific interstate and intrastate services.  This formula
established an upper bound of thirty-three percent and a lower bound of five percent for the interstate
assessment of OB&C expenses.   

     4.   Although we had expected that the new procedures would result in reduced interstate
assignments, it became apparent that the new procedures would have the opposite effect, at least in
some cases.   In 1988, this unanticipated result, combined with the difficulty carriers had
administering the new formula (as evidenced by waiver requests), led us, on reconsideration, to
reinstate on an interim basis a portion of the allocation rules that were in effect prior to 1987.  

     5.   On May 4, 1995 we adopted a Notice of Proposed Rulemaking (Notice) in which we
proposed replacing those interim rules with permanent rules for allocating OB&C expenses between
the jurisdictions.  In the Notice, we sought comment on permanent separations procedures that
would reflect principles of cost causation, and that would not be unnecessarily burdensome to
implement and administer.  We also expressed our belief that, because OB&C expenses are generally
not attributable to any specific service, an allocation procedure based on measuring the use of
individual services would not allocate expenses more accurately than would a fixed allocation
factor.  Believing that a fixed allocation factor would be simpler to administer and audit, and more
predictable in its effect, we proposed four alternative fixed allocation methods.  Based on the record,
the Joint Board has recommended that we adopt one of the four alternatives we proposed in the
Notice.

        III.  SUMMARY OF THE JOINT BOARD'S RECOMMENDATION 

     6.   Of primary significance among the Joint Board's findings is that nearly all OB&C
expenses are joint or common with respect to the individual services appearing on customer bills,
and that there is no method of allocating these joint and common expenses that reflects cost
causation better than a fixed allocator does.  The Joint Board explained that a carrier's ability to
attribute costs to individual services largely depends on the nature of the costs, i.e., on whether the
costs are incremental, joint, or common.  If a cost is incurred solely for a particular service, that cost
is "incremental" with respect to the service.  The Joint Board observed, however, that the costs of
some shared facilities and operations are not incremental with respect to the individual services they
support, and referred to such non-incremental costs as joint or common.  
     7.   The Joint Board determined that most OB&C expenses are not incremental but rather
are joint and common expenses, and as such are ill-suited to a measured-use method of allocation,
because such measurements are not based on cost causation.  The Joint Board then recommended
adoption of a fixed allocation factor for OB&C expenses, because a fixed allocator would be easier
to administer, easier to audit, and more certain and predictable in its effect than allocators based on
usage measurements.  The Joint Board also reasoned that a simple fixed allocator should be less
expensive for ILECs to implement than procedures requiring time-consuming separations studies.

     8.   Some ILECs contended that separations results obtained by using a fixed factor would
be inherently arbitrary and not reflective of relative use, and that "the Commission's rules
contemplate separations 'shortcuts' only where 'practicable' and where 'their application produces
substantially the same results as would be obtained by the use of more detailed procedures.'"  In
response, the Joint Board explained that, because of the joint and common nature of these expenses,
there are no "more detailed procedures" that would produce precise separations results, and therefore
fixed-factor methodology should not be regarded as a separations shortcut.  Instead, from an
economic perspective, the Joint Board viewed using a fixed-factor as an equally valid alternative
approach with the significant advantage of simplicity and ease of administration.  

     9.   Having determined to recommend use of a fixed factor to allocate OB&C expenses,
the Joint Board then decided which factor to recommend.  The factor the Joint Board recommended
is among the four alternative factors we referred to its consideration in the Notice.  The Joint Board
considered the alternative plans in the Notice, the plans suggested by parties, and its own 1987
recommendation, in which it said that "[w]e believe that assignment of these [OB&C] costs should
reflect the three basic services for which the ILECs render bills:  local, state toll and interstate toll." 
The Joint Board found that the other alternatives proposed in the Notice, or the fixed-factor
proposals made by parties, did not improve on the suggested alternative that corresponded to its 1987
proposal.  The Joint Board also stated that it saw no justification for departing from the established
industry benchmark of allocating five percent of OB&C expenses to cover the cost of billing the
SLC, and explained that allocating the larger share called for in some of the plans would consume
an unreasonably high percentage of the total SLC revenue.  The Joint Board anticipated, however,
that the five percent assignment will be used only by those ILECs that do not perform billing
functions for one or more IXC.         

     10.       The Joint Board acknowledged that dividing the allocation of OB&C expenses
equally among interstate toll, intrastate toll, and local service may in at least some cases increase the
allocation to the interstate jurisdiction, and that some commenters from the ILEC industry viewed
this increased allocation to interstate as a drawback.  The Joint Board did not, however, view this
possible increase in the allocation to the interstate jurisdiction as a defect in its recommendation. 
In response to comments that the advent of competition may disrupt the traditional billing
relationship between ILECs and IXCs, the Joint Board noted that the circumstances of individual
ILECs are likely to vary significantly, and declined to speculate on the effect of local competition
on the billing activities of ILECs.  The Joint Board stated that, under its recommended procedures,
ILECs that lose their IXC OB&C customers (or that never handled billing and collecting for IXCs)
should allocate five percent of OB&C expenses to the interstate jurisdiction to cover the cost of
billing the federal SLC. 

     11.       The Joint Board expressed skepticism in regard to the concern of some ILECs that,
rather than pay ILECs for any increased interstate allocation, the IXCs would stop using the ILECs
as billing agents altogether.  The Joint Board noted that the IXCs must bill their customers in some
manner, and asserted that sharing the OB&C expense with the ILECs, rather than bearing the entire
billing expense themselves, would continue to be an attractive option for cost-conscious and highly
competitive IXCs.  The Joint Board also discounted the concern of some ILECs that, because
ILECs provide billing and collecting services to IXCs under fixed contractual arrangements, they
would not be able to recover the increased allocation of OB&C expenses to interstate unless they
could successfully renegotiate contracts with their IXC customers.  The Joint Board observed that
the ILECs are free to renegotiate their contracts with IXCs, and foresaw a one-third allocation to the
interstate jurisdiction causing, at worst, a temporary decline in the profitability of some ILECs'
billing operations.  The Joint Board found that the likelihood of ILECs being unable to recover a
large amount of their billing and collection expenses, or of their losing the IXCs' billing and
collection business altogether, had been greatly exaggerated. Therefore the Joint Board
recommended that we not adopt the suggestion of the Pennsylvania Public Utility Commission
(PaPUC) that non-price cap companies be allowed to choose among a fixed-factor, a user-count, or
a relative-use methodology in allocating their OB&C expenses.  The Joint Board noted, however,
that if cases occur where the effect of the allocation rules on an ILEC would be unduly harsh, the
ILEC could file a petition for waiver.  

     12.       In the Notice, we suggested that the proposed fixed allocation methods might require
an adjustment mechanism that would be triggered if  IXCs substantially reduced their use of ILEC
billing and collecting services.  The Notice suggested two possible adjustment triggers.  The first
would permit an adjustment, or recourse to an alternative procedure, if an ILEC lost 50 percent of
its existing interstate toll billing and collecting operations. The second would use the ILEC's loss of
its largest IXC customer for billing services to activate the alternative allocation procedure.  Under
either procedure, the Commission could adjust the fixed allocator to take into account the decrease
in the ILEC's interstate toll billing and collecting operations.  The Joint Board, however, found little
support from commenters for the proposed automatic adjustment mechanism to a fixed-factor
allocation system, and therefore recommended that we not adopt a specific automatic adjustment
mechanism at this time.  The Joint Board explained that if, contrary to its expectation, a pattern of
waiver requests developed indicating that non-price cap ILECs appear to need other separations rules
for allocation of OB&C expenses, we could refer that issue, and the record accumulated through the
waiver process, to the Joint Board for consideration.  

                          IV. DISCUSSION
     
     13.  We hereby adopt the Joint Board's recommendations regarding the separations
procedures applicable to OB&C expenses.  We believe that adoption of these rules will further our
goal of simplifying the separations process.  In its Recommended Decision, the Joint Board carefully
considered the nature of OB&C expenses, explained why a fixed factor is the most sensible approach
to allocating these expenses among services and between the jurisdictions, and explained its
recommendation that OB&C expenses be allocated equally among local exchange service, intrastate
toll service, and interstate toll service.  We also adopt as our own the Joint Board's reasoning in
support of its recommendations. 

     14.  We agree with the Joint Board's characterization of OB&C expenses as joint and
common expenses.  In the Notice, we suggested that postage costs constitute a substantial portion
of OB&C costs, and that such costs are not directly attributable to any individual service, because
several pages containing many itemized charges can be included in a customer's bill without
increasing the postage charge.  In addition, because the same group of employees perform the
billing and collecting function for various services, segregation of their work by services is difficult
and of doubtful usefulness.  We agree, therefore, with the Joint Board that there is no method of
allocating these joint and common expenses that reflects cost causation better than a fixed allocator
does, and other considerations such as predictability and ease of administration strongly militate in
favor of using a fixed factor.  The Joint Board's recommended methodology is clear and
straightforward, and will be predictable in its effect, and will also be easier to administer and to audit
than the current rules.  Thus the Joint Board's recommendations fully satisfy the criteria for
permanent rules for allocating OB&C expenses that we set forth in the Notice.

     15.  In the 1988 Reconsideration Order, we said that "[a]lthough these [OB&C] costs are
fixed, only a specific and decreasing portion of the expenses in this category are related to interstate
services [and] the reduction in the amount of billing and collecting the LECs perform on behalf of
the [IXCs] should be reflected in reduced interstate assignments."  We now believe that statement
rested on faulty analysis.  The Joint Board has correctly stated that nearly all the costs associated
with OB&C are joint and common with respect to the services billed.  In contrast to incrementally
incurred costs, which are by nature specific, the interstate portion of these joint and common costs
cannot meaningfully be described as "specific and decreasing."  Because the causation of joint and
common costs is not attributable to individual services, no economic reason exists for concluding
that a "reduction in the amount of billing and collecting the LECs perform on behalf of IXCs should
be reflected in reduced interstate assignments" unless, of course, the service is no longer billed at
all.  We are further persuaded that noneconomic considerations of fairness and convenience do not,
in the case of allocating OB&C expenses, call for adoption of a usage-based surrogate for
measurable cost causation.  The nature of OB&C expenses, which are unrelated to such possible
surrogates for measurable cost causation as facilities investment or subscriber use, makes the option
of allocating the costs equally among the billed services particularly attractive in this case.  

     16.  Thus we also find the factor chosen by the Joint Board -- one third each to local
exchange service, intrastate toll service, and interstate toll service -- to be reasonable.  The Joint
Board saw no reason to depart from the tripartite division of services into local exchange, intrastate
toll, and interstate toll that it recommended in 1987, stating that, "Neither the three alternatives
proposed in the Notice nor the fixed-factor proposals made by . . . [various commenters], surpass the
simplicity or clarity of the three-way division we recommended in 1987 or otherwise offer benefits
that induce us to depart from that position."  We agree that the other possible factors that we and
the commenters suggested do not improve on the three-way division recommended by the Joint
Board.  We also agree with the Joint Board that, for ILECs that do no billing or collecting for IXCs,
there is no justification for departing at this time from the established industry benchmark of five
percent as an appropriate allocation to cover the costs of billing the federal SLC.

     17.   We do not find troubling the possibility that the new rules for allocating OB&C
expenses may increase some ILECs' allocation to the interstate jurisdiction.  We recognize that
ILECs may wish to renegotiate IXC contracts that were based on the interim rules.  Like the Joint
Board, however, we find exaggerated the concern of some ILECs that, rather than pay a minor
increase in OB&C expenses, IXCs will prefer to take on the entire cost of running a billing operation
themselves.  If IXCs discontinue employing ILECs as their billing agents, we think that other
developments, such as the IXCs competing with ILECs in local service markets, will influence the
IXCs' decisions in this regard much more than will this change to our OB&C expense allocation
rules.  If market forces or these rules do in fact cause an ILEC to lose all IXC billing and collecting
business, that ILEC will no longer be required to allocate a third of its OB&C expenses to the
interstate jurisdiction, but instead will allocate only five percent of its OB&C expenses to the
interstate jurisdiction to cover the cost of billing the SLC.  

     18.  We also agree with the Joint Board's rejection of PaPUC's suggestion that small
ILECs choose among three different allocation procedures.  We conclude that PaPUC's proposal
would be burdensome to administer, difficult to audit, and could have uncertain and unpredictable
effects, and would therefore be a disproportionate response to a speculative concern.  

     19.       If unforeseen circumstances cause these or any of our rules to place an undue burden
on specific carriers, those carriers may seek a waiver.  We believe, however, for the reasons state
above, that the new rules will not cause significant IXC abandonment of their billing relationship
with ILECs, but rather will simplify the needlessly complex separations procedures currently in use,
and will therefore reduce the administrative burden on carriers.       

          V.  FINAL REGULATORY FLEXIBILITY ACT ANALYSIS 

     20.   In the Notice (Amendment of Part 36 of the Commission's Rules and Establishment
of a Joint Board, Notice of Proposed Rulemaking, 10 FCC Rcd 7013 (1995)), the Commission
certified that the Regulatory Flexibility Act (RFA) of 1980 did not apply to this rulemakingbecause the rules it proposed to adopt in this proceeding would not have a significant impact on a
substantial number of small businesses.  Although we did not in the Notice specifically request
written public comment on the impact of the proposed rule changes on smaller ILECs, one
commenter, the Pennsylvania Public Utility Commission (PaPUC), discussed regulatory flexibility
in view of the possible impact of the proposed changes on smaller ILECs, and we discuss their
comments below.  The Commission's FRFA in this Report and Order (Amendment of Part 36 of
the Commission's Rules and Establishment of a Joint Board, Report and Order, CC Docket No. 80-
286, FCC 96-xxx (1996)) conforms to the RFA, as amended by the Contract With America
Advancement Act of 1996 (CWAAA), Pub. L. No. 104-121, 110 Stat. 847 (1996). 

     21.  Need for and Objectives of the Proposed Rules. To reflect the fact that their facilities
are used for both intrastate and interstate communication, ILECs must allocate their costs and
expenses between the state and interstate jurisdictions.  Prior to 1987, the rules for jurisdictional
separation of OB&C expenses required ILECs to determine the amount of time spent billing for
interstate services and for intrastate services.  In 1987, the Commission adopted, at the
recommendation of the Federal-State Joint Board, a new apportionment formula based on the
number of users billed by each ILEC for specific interstate and intrastate services.  Because the
new system led to unpredictable results, and because carriers had difficulty administering the new
formula (as evidenced by waiver requests), in 1988 the Commission reinstated, on an interim basis,
a portion of the allocation rules that were in effect prior to 1987.  In this proceeding, we establish
permanent rules that satisfy our stated goals that the permanent rules (1) reflect principles of cost
causation, (2) not be unnecessarily burdensome to implement and administer, (3) be simple to audit,
and (4) be certain and predictable in their effect.  
       
     22.       Summary of Significant Issues Raised by the Public Regarding Regulatory Flexibility. 
PaPUC expressed concern over what it saw as a likely shift of OB&C expenses to the interstate
jurisdiction, with the possible result that ILECs could either lose money on billing and collection,
or lose their IXC billing and collecting contracts altogether.  PaPUC argued that a shift of OB&C
expenses to the interstate jurisdiction might keep small ILECs from providing billing and collection
services to IXCs, and convenient single-source billing to end users.  PaPUC particularly urged the
Commission to consider how this might affect small ILECs, and suggested that non-price cap
companies should have the option of either using whatever fixed allocator is adopted, or user counts,
or relative use among service categories. The Joint Board, however, thought the likelihood of
ILECs being unable to recover a large amount of their billing and collection expenses, or of their
losing the IXCs' billing and collection business altogether, had been greatly exaggerated.  The Joint
Board therefore recommended that we not adopt the PaPUC's suggestion that non-price cap
companies be allowed to choose among several methodologies in allocating their OB&C expenses. 
The Joint Board also stated that, under its recommended procedures, ILECs that lose their IXC
OB&C customers (or that never handled billing and collecting for IXCs) need only allocate five
percent of OB&C expenses to the interstate jurisdiction to cover the cost of billing the federal SLC. 


     23.       The Joint Board's recommendation included the preference for waivers of the fixed
allocation for OB&C expenses over an automatic adjustment mechanism expressed by PaPUC and
the National Association of Regulatory Utility Commissioners (NARUC).  PaPUC and NARUC
argued that waivers were preferable to a specific alternative procedure, because the waiver process
would be flexible and sensitive to individual circumstances.  If, contrary to the Joint Board's
expectation, a pattern of waiver requests developed indicating that non-price cap ILECs might need
other separations rules for allocation of OB&C expenses, the Joint Board suggested the Commission
refer that issue, and the record accumulated through the waiver process, to it for consideration.  

     24.  We concur with the Joint Board's reasoning.  As we have said, if IXCs discontinue
employing ILECs as their billing agents, other developments, such as the IXCs competing with
ILECs in local service markets, will probably influence their decision much more than this change
to our allocation rules.  If market forces or these rules do in fact cause an ILEC to lose all IXC
billing and collecting business, that carrier will allocate only five percent of its OB&C expenses to
the interstate jurisdiction to cover the cost of billing the SLC.  PaPUC's suggestion that small ILECs
choose among three different procedures could be burdensome to administer, difficult to audit, and
have uncertain and unpredictable effects, and would therefore be a disproportionate response to a
speculative concern.  If a pattern of waiver requests indicates that non-price cap ILECs need other
rules for the allocation of OB&C expenses, the record accumulated through the waiver process could
form a record for the Joint Board's consideration.  We believe, however, that the new rules will not
cause significant IXC abandonment of their billing relationship with ILECs, but rather will simplify
the needlessly complex procedures currently in use, and thus reduce the burden on carriers.    

     25.  Description and Estimates of the Number of Small Entities to which Rules will Apply. 
For the purposes of this Order, the RFA defines a "small business" to be the same as a "small
business concern" under the Small Business Act, 15 U.S.C.  632, unless the Commission has
developed one or more definitions that are appropriate to its activities.  Under the Small Business
Act, a "small business concern" is one that:  (1) is independently owned and operated; (2) is not
dominant in its field of operation; and (3) meets any additional criteria established by the Small
Business Administration (SBA).  SBA has defined a small business for Standard Industrial
Classification (SIC) categories 4812 (Radiotelephone Communications) and 4813 (Telephone
Communications, Except Radiotelephone) to be small entities when they have fewer than 1,500
employees.  We first discuss generally the total number of small telephone companies falling
within both of those SIC categories.  Then, we discuss the number of small businesses within the two
subcategories, and attempt to refine further those estimates to correspond with the categories of
telephone companies that are commonly used under our rules.

     26.       We have found incumbent LECs to be "dominant in their field of operation" since the
early 1980's, and we consistently have certified under the RFA that incumbent LECs are not subject
to regulatory flexibility analyses because they are not small businesses.  We have made similar
determinations in other areas. We recognize SBA's special role and expertise with regard to the
RFA, and intend to continue to consult with SBA outside the context of this proceeding to ensure
that the Commission is fully implementing the RFA.  Although we are not persuaded on the basis
of this record that our prior practice has been incorrect, we will, nevertheless, include small
incumbent LECs in this FRFA to remove any possible issue of RFA compliance. 

     27.    Total Number of Telephone Companies Affected.  Many of the decisions and rules
adopted herein may have a significant effect on a substantial number of the small telephone
companies identified by SBA.  The United States Bureau of the Census ("the Census Bureau")
reports that, at the end of 1992, there were 3,497 firms engaged in providing telephone services, as
defined therein, for at least one year.  This number contains a variety of different categories of
carriers, including local exchange carriers, interexchange carriers, competitive access providers,
cellular carriers, mobile service carriers, operator service providers, pay telephone operators, PCS
providers, covered SMR providers, and resellers.  It seems certain that some of those 3,497 telephone
service firms may not qualify as small entities or small incumbent LECs because they are not
"independently owned and operated."  For example, a PCS provider that is affiliated with an
interexchange carrier having more than 1,500 employees would not meet the definition of a small
business.  It seems reasonable to conclude, therefore, that fewer than 3,497 telephone service firms
are small entity telephone service firms or small incumbent LECs that may be affected by this Order.

     28.    Local Exchange Carriers.  Neither the Commission nor SBA has developed a definition
of small providers of local exchange services (LECs).  The closest applicable definition under SBA
rules is for telephone communications companies other than radiotelephone (wireless) companies
(SIC 4813).  The most reliable source of information regarding the number of LECs nationwide of
which we are aware appears to be the data that we collect annually in connection with the
Telecommunications Relay Service (TRS).  According to our most recent data, 1,347 companies
reported that they were engaged in the provision of local exchange services.  Although it seems
certain that some of these carriers are not independently owned and operated, or have more than
1,500 employees, we are unable at this time to estimate with greater precision the number of LECs
that would qualify as small business concerns under SBA's definition.  Consequently, we estimate
that there are fewer than 1,347 small incumbent LECs that may be affected by the decisions and
rules adopted in this Order.

     29.       Interexchange Carriers.  Neither the Commission nor SBA has developed a definition
of small entities specifically applicable to IXCs (SIC 4813).  The closest applicable definition is for
telephone carriers other than radiotelephone (wireless) companies.  The most reliable source of
information regarding the number of IXCs nationwide of which we are aware appears to be the data
that we collect annually in connection with TRS.  According to our most recent data, 97 companies
reported that they were engaged in the provision of interexchange service.  Although it seems
certain that some of these carriers are not independently owned and operated, or have fewer than
1500 employees, we are unable at this time to estimate with greater precision the number of IXCs
that would qualify as small business concerns under SBA's definition.  Tentatively, we conclude that
there are fewer than 97 small IXCs that may be affected by the permanent OB&C separations rules.

     30.    Description of Projected Reporting, Record Keeping and other Compliance
Requirements of the Rules.  The Commission's Part 36 rules apply to all incumbent local exchange
carriers.  This order reduces current reporting, record keeping or other compliance requirements,
because carriers, including small ILECs, will no longer be required to segregate expenses assigned
to the OB&C classification on the basis of the number of users of various services.  We anticipate
that carriers, including small ILECs, will need to devote less staff time to comply with these
permanent rules than was needed to comply with the interim rules.  No new skills are required to
comply with these rules. 

     31.   Steps Taken to Minimize Impact on Small Entities Consistent with Stated Objectives. 
The Joint Board recommended a fixed-factor plan that was consistent with our stated objectives that
the permanent rules be easy to implement and administer, simple to audit, and certain and predictable
in their effect.  As we explain in paragraph 22 above, the Joint Board recommended that we not
adopt the PaPUC's suggestion that non-price cap companies be allowed to choose among several
methodologies for allocating their OB&C expenses, because the Joint Board thought the likelihood
of ILECs being unable to recover a large amount of their OB&C expenses, or of their losing their
IXC OB&C customers, had been greatly exaggerated.  We agree that having small ILECs choose
among three different procedures would be needlessly complex to administer, difficult to audit, and
unpredictable in result, and we consider such a complicated approach to be an excessive precaution
against a speculative concern.   We do, however, entertain waiver petitions for good cause
shown,and if a pattern of waiver petitions develops that indicates, contrary to our expectation, that
these rules are not satisfactory in regard to small ILECs, the waiver requests could form a basis for
the Joint Board to recommend a solution tailored to any problem that is revealed.  We also note that
the Joint Board found greater support among commenters for waivers than for the alternative
procedures we suggested in the Notice. 
     
     32.       Significant alternatives considered and rejected.  The Joint Board considered and
rejected an allocation procedure based on relative-use measurements.  The Joint Board reasoned that
measuring use produced results no more indicative of cost causation than applying a fixed factor,
and that our other goals -- ease of administration, auditability, and predictable results -- were best
met by adopting a fixed allocation factor.  The Joint Board considered the contention of some parties
that a measured-use method would be more convenient because it was self-adjusting, and that
changing separations procedures was itself burdensome, but was persuaded by other commenters,
including all the participating state public utility commissions, that the convenience of allocating
OB&C expenses by a fixed factor outweighed these considerations and best met our goals. 

     33.       After determining to recommend allocation by fixed factor, the Joint Board
considered all the possible factors set forth for its consideration by this Commission and by parties. 
The Joint Board took the approach that any plan that called for it to revise its 1987 view that there
are three essential services (local exchange service, intrastate toll service, and interstate toll service)
bore the burden of convincing the Joint Board of its superiority, and no plan overcame that
challenge.  We consider the Joint Board's approach reasonable.  The Joint Board considered the
argument that it should choose a factor that would result in an allocation to the interstate jurisdiction
similar to that arrived at by using the interim rules, but rejected that approach because the results
produced by the interim rules bear no special relation to cost causation that would justify their use
as a benchmark.      
  
     34.       Report to Congress.  The Secretary shall send a copy of this Final Regulatory
Flexibility Analysis, along with this Report and Order, in a report to Congress pursuant to the Small
Business Regulatory Enforcement Fairness Act of 1996, 5 U.S.C.  801(a)(1)(A).  A copy of this
Final Regulatory Flexibility Analysis shall also be published in the Federal Register.

                      VI.  ORDERING CLAUSES

     35.       Accordingly, pursuant to Sections 1, 4(i), 220, 221(c) and 410(c) of the
Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 220, 221(c), and 410(c), IT
IS ORDERED that the recommendations of the Federal-State Joint Board in CC Docket No. 80-286
ARE ADOPTED.   

     36.       IT IS FURTHER ORDERED that, pursuant to Sections 1, 4(i), 220, and 221(c) and
410(c) of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 220, and 221(c), Part 36 of the Commission's Rules and Regulations, 47 C.F.R. Part 36, Subpart D, is
amended as shown in the Appendix to this Report and Order. 


                    FEDERAL COMMUNICATIONS COMMISSION



                    William F. Caton
                    Acting SecretaryAppendix A

Parties Filing Comments to the Notice of Proposed Rulemaking

Ameritech Operating Companies   ("Ameritech") 
AT&T Corp.   ("AT&T")    
Bell Atlantic Telephone Companies   ("Bell Atlantic") 
BellSouth Telecommunications, Inc.   ("BellSouth") 
Cathey, Hutton & Associates, Inc.   ("CHA")
Cincinnati Bell Telephone   ("CBT") 
GVNW Inc./Management   ("GVNW") 
GTE Service Corporation   ("GTE")  
ICORE Inc.   ("ICORE")  
John Staurulakis, Inc.   ("JSI") 
MCI Telecommunications Corp.   ("MCI")
National Exchange Carrier Association   ("NECA") 
National Telephone Cooperative Association   ("NTCA")
NYNEX Telephone Companies   ("NYNEX") 
Organization for the Protection and Advancement of Small Telephone Companies  ("OPASTCO")
Pacific Bell and Nevada Bell   ("Pacific") 
Roseville Telephone Company   ("Roseville") 
Southwestern Bell   ("SWBT") 
United and Central Telephone   ("United") 
US West Communications, Inc.   ("US West")
Washington Utilities and Transportation Commission   ("WUTC")  

Parties Filing Reply Comments


Pennsylvania Public Utility Commission   ("PaPUC") 
National Association of Regulatory Utility Commissioners   ("NARUC") 
New York Department of Public Service   ("NYDPS") 
United States Telephone Association   ("USTA")   
Appendix B

PART 36 of Title 47 of the Code of Federal Regulations is amended as follows:

Section 36.380 is amended by deleting current subsections (b) and (c), and adding new subsections
(b) and (c) to read as follows:

 36.380 Other billing and collecting expense.

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(b)  Local exchange carriers that bill or collect from end users on behalf of interexchange carriers
shall allocate one third of the expenses assigned this classification to the interstate jurisdiction, and
two thirds of the expenses assigned this classification to the state jurisdiction.  

(c)  Local exchange carriers that do not bill or collect from end users on behalf of interexchange
carriers shall allocate five percent of the expenses assigned this classification to the interstate
jurisdiction, and ninety-five percent of the expenses assigned this classification to the state
jurisdiction. 

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