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Transport. Effective July 1, 1998, the unitary rate structure option for tandemswitched transmission is eliminated and the costs of tandemswitched transmission must be recovered through the existing threepart rate structure. For price cap LECs, a new flatrated monthly charge recovers the NTS costs of tandem switching attributable to dedicated ports. A new perminute rate element recovers the costs of multiplexers used between tandem switch DS1 port interfaces and the DS3 circuits used to transport traffic from tandem to end offices. For all incumbent LECs, the formula used to compute the tandemswitched transport rate is based on actual usage of the circuit, rather than an assumed 9000 minutes of use per month.  X$4?64. For all incumbent LECs, certain costs currently recovered through the TIC are reassigned to specified facilities charges, including tandemswitching rates. For price cap LECs, those costs of the TIC that remain (the "residual TIC") are recovered through the PICC. To the extent that the PICC ceiling prevents recovery of the entire residual TIC through the flatrated PICC, the remaining portion will be collected through a perminute residual TIC. As the ceilings on the PICCs increase, a larger percentage of the residual TIC will be recovered through the PICC. Beginning in July 1997, price cap reductions will be targeted to the perminute residual TIC until it is eliminated. We expect that the perminute TIC charge will be eliminated in two to three years. Residual perminute TICs shall be assessed only on incumbent LEC transport customers, and therefore shall no longer be assessed on competitive access providers (CAPs) that interconnect with the LEC switched network at the end office."''60*((aa%"Ԍ X4ԙ@65. SS7 Signalling. Price cap LECs may, but are not required to, adopt a rate structure for SS7 signalling that unbundles SS7 signalling functions, as was permitted in the  X4Ameritech SS7 Waiver Order.7 yOM'ԍ Ameritech Operating Companies Petition for Waiver of Part 69 of the Commission's Rules to Establish  {O'Unbundled Rate Elements for SS7 Signalling, Order, 11 FCC Rcd 3839 (1996) (Ameritech SS7 Waiver Order).  X4A66. Retail Marketing Expense. Price cap LECs may no longer recover certain marketing expenses through perminute access charges assessed on IXCs. These expenses are recovered from end users through perline charges on second and additional residential lines and multiline business lines, subject to ceilings on SLCs. Any residual shall be recovered through the PICCs on these lines and then through perminute charges on originating access, subject to the exception described in Section III.A, below.  X 4 !J:\ACCESS.REF\ORDER\I.AJR! #J:\ACCESS.REF\ORDER\IIIA.CF#   J  III. RATE STRUCTURE MODIFICATIONS ă  X ' A. Common Line  X '1. ` ` Overview  X4B67. In the 1983 Access Charge Order, the Commission established a comprehensive mechanism for incumbent LECs to recover the costs associated with their provision of accessJ  XS4service required to complete interstate and foreign telecommunications. 8&S" yO&'ԍ MTS and WATS Market Structure, CC Docket No. 7872, Third Report and Order, 93 F.C.C. 2d 241  {O'(1983) (Access Charge Order), modified, 97 F.C.C. 2d 682 (1983) (Reconsideration Order), further modified, 92  {O'F.C.C. 2d 834 (1984) (Second Reconsideration Order), aff'd in principal part and remanded in part sub nom.  {O'NARUC v. FCC, 737 F.2d 1095 (D.C. Cir. 1984), cert. denied, 469 U.S. 1227 (1985).  The access plan distinguished between traffic sensitive costs and NTS costs incurred by an incumbent LEC to provide interstate access service An incumbent LEC's NTS costs of providing interstate access, or costs that do not vary with the amount of usage, include the common line, or "local  X4loop," which connects an end user's home or business to a LEC central office.d9 {O'ԍ See, e.g., Access Charge Order, 93 FCC 2d at 26869.d  X4C68. In the Access Charge Order, the Commission emphasized that its long range goal was to have incumbent LECs recover a large share of the NTS common line costs from end users instead of carriers, and to recover these costs on a flatrated, rather than on a usage  X4sensitive, basis.?: {O#'ԍ Id. at 268269.? The Commission recognized, however, that a sudden increase in the flat rates imposed by LECs on end users could have a detrimental effect on universal service. For this reason, the rules adopted in 1983 apportioned charges for common line costs between a monthly flatrated enduser SLC and a perminute CCL charge assessed to the IXCs. The SLC is based on average interstateallocated common line costs, which the incumbent LEC"*4 :0*((aa""  X4may average over an entire region or over a study area,;& yOy'ԍ A "study area" is usually an incumbent LEC's existing service area in a given state. The study area  {OA'boundaries are fixed as of November 15, 1984. MTS and WATS Market Structure: Amendment of Part 67 of the  {O 'Commission's Rules and Establishment of a Joint Board, Decision and Order, 50 Fed. Reg. 939 (1985 Lifeline  {O'Order). depending on how it files its interstate tariff. These charges currently are the lesser of the perline average common line costs allocated to the interstate jurisdiction or $3.50 per month for residential and singleline  X4business users, and $6.00 per month for multiline business users.< yO" 'ԍ Revenues permitted under our price cap rules for common line services may be significantly different from the interstate allocated costs assigned to the common line access element by our Part 36 and Part 69 cost allocation rules. For each price cap basket, the rates allowed are determined based on price cap formulas, without reference to interstate allocation of costs. We measure the earnings of price cap carriers by comparing revenues to interstate allocated costs. See 47 C.F.R.  61.45(c), 65.702, & 69.104. The data indicate that only two study areas served by price cap LECs, (Bell Atlantic in the District of Columbia, and GTE in Minnesota) have interstateallocated common line costs that are less than the current $3.50 SLC. These two study areas  {O'represent less than two percent of subscriber lines nationwide. See Supporting Material filed with 1996 Annual  {Od'Access Tariff Filing, filed with Commission on April 2, 1996. (1996 LEC Annual Access Tariff Forecast Data.)  yO.'This LEC forecast data were used by LECs to set SLC rates that became effective on July 1, 1996.  Any remaining common line revenues permitted under our price cap rules are recovered by incumbent price cap LECs through perminute CCL charges assessed on the IXCs, and are ultimately recovered by IXCs  Xv4from endusers through long distance toll charges.=vR  yOy'ԍ The data indicate that incumbent price cap LECs recover approximately 10.4 billion dollars in total common line revenue. Approximately $7 billion of the common line costs are recovered through the SLC, and approximately $3.4 billion are recovered through the CCL charge. Thus, incumbent price cap LECs recover  {O'approximately onethird of their common line costs through perminute CCL charges. 1996 LEC Annual Access  {O'Tariff Forecast Data.  XH4D69. Because common line and other NTS costs do not increase with each additional minute of use transmitted over the loop, the current perminute CCL charge that recovers loop costs represents an economically inefficient costrecovery mechanism and implicit subsidy. A rate structure that recovers NTS costs through perminute charges creates an incentive for customers to underutilize the loop by requiring them to pay usage rates that significantly exceed the incremental cost of using the loop. Additionally, a rate structure that forces high volume customers to pay significantly more than the cost of the facilities used to service them is not sustainable in a competitive environment because highvolume customers can migrate to a competitive LEC able to offer an efficient combination of flat and perminute charges, even if the competitive LEC has the same or higher costs than the incumbent LEC.  XK4E70. The FederalState Universal Service Joint Board stated, in its Recommended  X64Decision, that primary residential and singleline business lines are essential to the provision"6=0*&&aa"  X4of universal service,> yOy'ԍ FederalState Joint Board on Universal Service, CC Docket No. 9645, Recommended Decision, 12 FCC  {OA'Rcd 87, 132133 (rel. Nov. 8, 1996) (Joint Board Recommended Decision). and that current rates for local services are generally affordable based  X4on subscribership levels.T?\" {O'ԍ Id. at 154. The Joint board noted that "[s]ubscribership levels, while not dispositive on the issue of affordability, provide an objective criterion to assess the overall success of state and federal universal service  {ON'policies in maintaining affordable rates." Id.T The Joint Board also concluded that the SLC, as a charge assessed directly on local telephone subscribers, has an impact on universal service concerns such as  X4affordability,;@F {O 'ԍ Id. at 472.; and recommended that the Commission leave the current SLC ceilings in place  X4for primary residential and singleline business lines.?A\ {O- 'ԍ Id.at 463. See also Separate Statement of FCC Commissioner Rachelle B. Chong, (dissenting from the Joint Board's recommendation that the Commission should lower the SLC for primary residential and singleline  {O'business lines). Id. at 556.? In our companion Universal Service  X4Order, consistent with that recommendation, we conclude that we should not raise the current  Xz4$3.50 SLC ceiling on primary residential and singleline business lines.WBz  {O''ԍ Universal Service Order, Section XII.C.W  XL4F71. We adjust the SLC ceilings for multiline business lines and residential lines beyond the primary connection. Adjusting the SLC ceilings for multiline business lines and nonprimary residential lines will permit incumbent LECs to recover directly from end users more of the common line revenues permitted under our price cap rules for those lines and will reduce the amount of NTS costs related to these lines that are currently recovered through CCL charges. Where the SLC ceilings do not allow the incumbent LEC to recover its price cap common line revenues through enduser charges, the remaining, or "residual" amount will be recovered through flat, perline charges assessed to each customer's presubscribed interexchange carrier. This presubscribed interexchange carrier charge, or "PICC", will increase gradually until the incumbent price cap LECs' full interstateallocated common line revenues permitted under our price cap rules are recovered through a combination of flatrated SLCs and PICCs. To the extent that the flatrated charges do not recover, during the initial phase, the full interstateallocated common line revenues permitted under our price cap rules, incumbent LECs may continue to assess the IXCs a perminute CCL charge based on the costs not recovered through flatrated charges. This perminute charge, however, will be generally much lower than today's CCL charge and will be eliminated once all common line revenues are recovered through a combination of SLCs and PICCs. " B0*&&aa"Ԍ X'v 2.` `  Subscriber Line Charge  X4  X'` ` a. Background  X4G72. In the NPRM, we proposed to increase the ceiling on the SLC for second and additional lines for residential customers, and for all lines for multiline business customers, tov  Xv4the perline loop costs assigned to the interstate jurisdiction.:Cv yO'ԍ NPRM at  65.: Alternatively, we proposed to eliminate the ceiling for multiline business customers and for residential connections beyond the primary connection, especially where the incumbent LEC has entered into interconnection  X14agreements and taken other steps to lower barriers to actual or potential local competition.3D1X {O: 'ԍ Id.3  X 4We sought comment on these proposals.:E  yO'ԍ NPRM at  65.: We also invited parties to comment on whether any changes that we adopt to the ceiling on SLCs for incumbent price cap LECs should be extended to incumbent rateofreturn LECs, and on the relationship of any such changes to the  X 4Joint Board Recommended Decision.3F z {O'ԍ Id.3 We sought comment on whether to establish a transition mechanism for this increase if the ceilings on SLCs for multiline business lines and residential lines beyond the primary connection are increased and whether such a transition  X4could be implemented consistent with section 254, the Act's universal service provision.?G  {OO'ԍ Id. at  66.? We sought comment on whether geographic averaging of SLCs is an implicit subsidy that is inconsistent with the requirements of section 254(e), and thus on whether we are required to  XM4deaverage SLCs.?HM {O'ԍ Id. at  67.?   X' ` ` b.  Discussion  X4  X4H73. The Commission has had the longstanding goal of ensuring that all consumers  X4have affordable access to telecommunications services.IZ0  {O!'ԍ See, e.g., MTS and WATS Market Structure, Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, CC Docket Nos. 7872, 80286; Decision and Order, FCC 85643 (rel. Dec. 27, 1985). In its Recommended Decision, the Joint Board stated that current rates for local telephone services are generally affordable and that the SLC, as a charge assessed directly on local telephone subscribers, has an impact on"R I0*&&aa("  X4universal service concerns such as affordability.dJ {Oy'ԍ Joint Board Recommended Decision, 12 FCC Rcd at 472.d The Joint Board further recommended that the Commission maintain the current SLC ceilings for primary residential and singleline  X4business lines,;KZ {O'ԍ Id. at 463.; and we adopt that recommendation in our companion Universal Service  X4Order.ZL {OZ'ԍ Universal Service Order at Section XII.C.Z Numerous parties in this proceeding argue that we should raise or eliminate the SLC ceiling on all lines to permit LECs to recover the full interstate allocated costs of the local  X4loop from endusers.MB~ {O 'ԍ See, e.g., GTE Service Corporation (GTE) Comments at 2629, Reply at 2021; Southwestern Bell Telephone Company (SWBT) Comments at 3738; Cincinnati Bell Telephone Company (Cincinnati Bell) Comments at 67; AT&T Corporation (AT&T) Comments 5154, Reply at 2526; Frontier Corporation (Frontier) Comments at 4, 57; Sprint Corporation (Sprint) Comments at 1115; 5051; Ad Hoc Telecommunications Users Committee (Ad Hoc) Reply at 4; General Services Administration/United States Department of Defense (GSA/DOD) Comments at 911, Reply at 5, 7; TeleCommunications, Inc. (TCI) Comments at 10; Reply at 45; Time Warner Communications Holdings, Inc. (Time Warner) Comments at 45; WorldCom, Inc. (WorldCom) Comments at 3031. This would increase the average SLC for all residential and singleline  Xz4business lines from $3.50 per month to $6.10 per month.Nz  yO'ԍ As discussed below, the data indicate that nationwide, the average interstate allocation of common line  {O{'costs is $6.10 per line. 1996 LEC Annual Access Tariff Forecast Data. We conclude that it would be inappropriate to make significant changes to the SLC cap for primary residential and singleline business lines. Primary residential and singleline business lines are central to the provision of universal service. Because of concerns about affordability, and in light of the significant changes that are still underway in this proceeding, in the federal universal service support proceeding, and possible future changes to the separations process, we conclude that the current SLC for these lines should not be raised. Consistent with the Joint Board's  X 4recommendation and our conclusion in the Universal Service Order, therefore, the ceiling on the SLC for primary residential and singleline business lines will remain at $3.50 or the permitted price cap common line revenues per line, whichever is less.  X4I74. With regard to multiline users, the Joint Board suggested in its Recommended  Xj4Decision that universal service support should not be extended to nonprimary residential lines and multiline business lines because it found that cost of service is unlikely to be a factor  X>4that would cause multiline users not to subscribe to telephone service.gO> {O"'ԍ Joint Board Recommended Decision, 12 FCC Rcd 87 at 133.g Subsequently, the state members of the Joint Board filed a report with the Commission in which they proposed that we retain high cost support for all lines served in high cost study areas during a transition"tO0*&&aa"  X4to a forwardlooking cost methodology.zP yOy'ԍ State Members Report on the Use of Cost Proxy Models at 3 (dated Mar. 26, 1997).z Consistent with that proposal, we adopt, in our  X4Universal Service Order, a modified version of the existing highcost support system and continue support for all residential and business connections in areas currently receiving high  X4cost support until at least January 1, 1999.dQX {O'ԍ Universal Service Order at Section IV.D and VII.D.d We therefore continue to provide high cost support for nonprimary residential and multiline business lines at this time, by allocating a  X4lower portion of these costs to the intrastate jurisdiction than would otherwise be the case.[R {O* 'ԍ Universal Service Order at Section VII.D.[ In that order, we also express our concern, however, that providing universal service support for nonprimary residential and multiline business lines in highcost areas may be inconsistent with our longterm universal service goals, and that overly expansive universal service support mechanisms potentially could harm all consumers by increasing the expense of  X 4telecommunications services for all.ZS | {OI'ԍ Universal Service Order at Section IV.D.Z We state that we will continue to evaluate the Joint Board's recommendation to limit universal service support to primary residential connections  X 4and businesses with single connections.`T  {O'ԍ Universal Service Order at Section IV.D. `  X 4J75. We conclude here that it is necessary to adjust the ceilings on the interstate SLCs on both nonprimary residential and multiline business lines in order to create a rate structure that supports our longterm universal service goals, is procompetitive, and is sustainable in a competitive local exchange market. Section 254 of the Act requires that all consumers have access to basic telephone service at just, reasonable, and affordable rates that are comparable  XM4among different regions of the nation.CUM yO'ԍ 47 U.S.C.  254(b)(3).C This section of the Act also requires that universal service support be achieved through support mechanisms that are "specific, predictable, and  X4sufficient."CV0  yO'ԍ 47 U.S.C.  254(b)(5).C Because universal service concerns about ensuring affordable access to basic telephone services are not as great for nonprimary residential and multiline business lines as they are for primary residential and singleline business lines, we must take action to remove the implicit subsidies contained in our current interstate access charges. Thus, we are adopting a rate structure that will permit LECs to recover greater amounts of their costs on a flatrated basis from end users and to reduce the amount of revenues they must recover through perminute access charges. Our initial implementation improves upon the current rate structure because it reduces subsidies by recovering more costs from the cost causer. It also"~ V0*&&aa" creates a rate structure that is more procompetitive than the existing one by providing for greater flatrated recovery of NTS costs. Without these modifications, new entrants, which are not subject to the noncostcausative rate structure requirements, would be in a position to target the incumbent LECs' most profitable, highvolume customers based on regulatory requirements. A loss of profitable customers would increase the incumbent LECs' costs of providing service to the rest of their customers, especially to those in highcost areas. Consistent with our universal service goal of ensuring that all consumers receive affordable rates that are comparable in different parts of the nation, however, the SLC adjustments will be subject to ceilings to prevent enduser customers in highcost areas from paying SLCs that are significantly higher than in other parts of the country.  X 4K76. In virtually all cases, current SLC ceilings do not permit incumbent LECs to  X 4recover their average perline interstateallocated common line costs.W"  yOe 'ԍ The data indicate that only two study areas served by price cap LECs, (Bell Atlantic in the District of Columbia, and GTE in Minnesota) have interstateallocated common line costs that are less than the current  {O'$3.50 SLC. These two study areas represent less than two percent of subscriber lines nationwide. See 1996 LEC  {M'Annual Access Tariff Forecast Data.Ŀ As a result of the existing SLC ceilings, which have been in place for the past decade, incumbent LECs must recover the shortfall through usagesensitive CCL charges assessed on IXCs. The IXCs in turn recover most or all of these costs from toll users in the form of perminute charges, keeping toll rates artificially high and discouraging demand for interstate long distance services. The high perminute toll charges also create support flows between different classes of customers. For example, because enduser customers vary widely in their use of interstate long distance services, lowvolume toll users do not pay the full cost of their loops while highvolume toll users contribute far more than the total cost of their loops. In addition highvolume toll users, who include significant numbers of lowincome customers, effectively  X4support nonprimary residential and multiline business customers.X$ {Oi'ԍ  See Robert W. Crandall, Universal Service Subsidies and Consumer Welfare: Long-distance Access  {O3'Charges," Brookings Institution (April, 1997), Table 1, (showing that roughly 30 percent of households with income under $10,000 spend more on long-distance calls than do 50 percent of the households with income over $75,000).  X4L77. In order to create a rate structure that supports our longterm universal service goals, is procompetitive, and is sustainable in a competitive market, we modify our rate structure requirements to permit incumbent LECs to recover costs in a manner that more accurately reflects the way those costs are incurred. Because common line costs do not vary with usage, these costs should be recovered on a flatrated instead of on a perminute basis. In addition, these costs should be assigned, where possible, to those customers who benefit from the services provided by the local loop. Accordingly, the SLC ceilings for nonprimary residential and multiline business lines will be adjusted generally to a level that permits incumbent LECs to recover, directly from the end user, their average perline interstate"  X0*&&aa"  X4common line revenues.4YX yOy'ԍ As discussed in Section IV.D, below, in addition to the average perline interstateallocated common line costs, price cap LECs may include, in the SLC for nonprimary residential and multiline business lines, certain marketing expenses attributable to these lines.4  X4M78. For multiline business lines, the SLC will be adjusted to recover the average perline interstateallocated common line costs beginning July 1, 1997. To the extent incumbent price cap LECs, mostly in rural areas, have common line costs that significantly exceed the national average, we establish a ceiling on SLCs for multiline business lines of $9.00, adjusted annually for inflation. To ameliorate any possible adverse impact of adjustments in SLC ceilings for nonprimary residential lines, we adopt an approach that will gradually phase in adjustments in the SLC ceilings for these lines. The SLC for nonprimary residential lines will be adjusted initially beginning January 1, 1998. For the first year, beginning January 1, 1998, the SLC ceiling for nonprimary residential lines will be adjusted to the incumbent LEC's average perline interstateallocated costs, but may not exceed $1.50 more than the current SLC ceiling. Beginning January 1, 1999, the monthly SLC ceiling for these lines will be adjusted for inflation and will increase annually by $1.00 perline, until the SLC ceiling for nonprimary residential lines is equal to the ceiling permitted for multiline business lines.  X4N79. The data indicate that the long term ceilings we are establishing will permit  Xy4incumbent price cap LECs to recover their average perline common line revenuesiZ\y yO'ԍ As discussed in Section III.A.3. below, when the multiline PICC no longer recovers common line  {O'revenues, the calculation of the SLC will be changed from one based on interstate allocated costs to one based on  {O'common line revenues permitted under our price cap rules.i from 99  Xb4percent of their nonprimary residential and multiline business lines.f[b  {O'ԍ See 1996 LEC Annual Access Tariff Forecast Data.f For the few incumbent price cap LECs that have common line costs in certain study areas that exceed the ceiling, the ceiling will serve as an economic safeguard for those customers who would otherwise pay  X4significantly higher SLCs.q\Z yOl'ԍ The data indicate that twelve study areas served by three price cap LECs (GTE, U S West, and Citizens Utilities) have average common line costs that exceed $9.00. These areas represent less than two percent of  {O'subscriber lines nationwide. See 1996 LEC Annual Access Tariff Forecast Data.q We conclude that maintaining a ceiling for nonprimary residential and multiline business customers in highcost areas is a reasonable response to a legitimate universal service concern because, consistent with section 254(b)(3), it ensures that these customers have access to telecommunication services at rates that are comparable to  X4rates charged for similar services in urban areas.C]  yO2$'ԍ 47 U.S.C.  254(b)(3).C  X4O80. We believe that the approach we adopt should prevent widespread discontinuance"!P ]0*&&aa" of lines by multiline customers. The record indicates that nationwide, the average interstate allocation of common line costs is only $6.10 per line, and that for more than half of multi X4line business lines, the interstate common line costs are below the existing $6.00 ceiling.`^ {OK'ԍ See 1996 LEC Annual Access Tariff Forecast Data.` Therefore, when the SLC ceiling is adjusted July 1, 1997, more than half of multiline business lines will see no immediate increase in their SLC. The $5.00 SLC ceiling for nonprimary residential lines for the first year is a net increase of $1.50 per month and the gradual increase, if any, in subsequent years, is designed to allow these customers time to adjust to the new rate structure. Moreover, we expect the rate structure modifications we adopt in this order to benefit the majority of multiline customers through reductions in perminute long  X14distance rates. Thus, for many customers, the access restructuring will lead to an overall reduction in their telephone bill. We also note that, because we are adjusting the SLC on nonprimary residential lines only to a level that recovers the average interstate allocated costs attributable to the line, to the extent that a customer chooses not to purchase an additional line because of the SLC increase, it is because the benefits of the second line to that customer are less than the average cost of the line.  X4P81. Many parties contend that adjusting the SLC ceiling for nonprimary residential  Xy4lines and multiline business lines will affect economic development in rural areas._yZ {O'ԍ See, e.g., Harris, Skrivan & Associates, LLC (Harris, Skrivan & Associates) Comments at 6; TCAInc.Telecommunications Consultants (TCA) Comments at 4; GVNW Inc./Management (GVNW) Comments at 7; John Staurulakis, Inc. (Staurulakis) Comments at 79; Western Alliance Comments at 2224; ITCs, Inc. (ITC) Comments at 3; National Exchange Carrier Association, Inc. (NECA) Comments at 13, Reply at 79; Rural Telephone Coalition (Rural Tel. Coalition) Comments at 8; Pennsylvania Internet Service Providers Comments at 89; Commercial Internet Exchange Association (CIEA) Comments at 13; Reply at 10. To respond to this concern, with the limited exception of cost allocation to new elements, discussed in Section V, below, we are limiting application of the rate structure modifications we adopt in this Order to incumbent price cap LECs only. Most consumers in rural areas are served by small rateofreturn LECs that are not affected by the SLC adjustment we are adopting. We will review rate structure modifications affecting small, rural carriers in a separate proceeding when we address access charge reform for those carriers. To the extent there are incumbent price cap LECs that serve highcost areas of the country and have common line costs that exceed the national average, we are maintaining a ceiling on the SLCs for these lines to ensure that subscribers do not pay rates that greatly exceed the national  X4average.` yO"'ԍ We will address access charge modifications as they apply to rateofreturn rural LECs in proceeding later  {O"'this year. See Section V.A, below.  Xe4Q82. We are not persuaded by arguments that an upward adjustment to a SLC ceiling that was set over a decade ago, and that has never been adjusted for inflation, would violate"N". `0*&&aa4" section 254(b)'s requirement that consumers in all regions of the nation have affordable access to telecommunications and information services at rates that are reasonably comparable to  X4those services provided in urban areas.aZ {OK'ԍ See, e.g., ITC Comments at 3; Rural Tel. Coalition Comments at 8, Reply at 11; TDS Telecommunications Corporation (TDS) Comments at 34, Reply at 4; Western Alliance Comments at 23; TCA Comments at 34. The data indicate that if the SLC ceilings for business and residential lines had been adjusted annually for inflation since they became effective in 1984 and 1989, respectively, the $6.00 business SLC ceiling would have increased by 1996 to $9.00 per line, and the $3.50 residential and singleline business SLC ceiling  Xv4would have increased to $4.39 per line.bv {O 'ԍ Calculations are based on Consumer Price Index for "All Items," Trends in Telephone Service, Table 6, (March 28, 1997). Thus, for multiline business customers, the SLC ceiling we adopt today is not significantly different from what it would have been, if it had been adjusted for inflation annually. Moreover, to adopt a ceiling lower than $9.00 would effectively create an additional impermissible subsidy for a class of customers not enumerated by Congress in section 254 of the 1996 Act as beneficiaries of fundamental universal service goals. We find that the $9.00 ceiling we adopt today strikes a reasonable balance between our desire to establish a more efficient interstate access charge rate structure consistent with our longterm universal service goals in a competitive local exchange environment, and the need to avoid precipitous rate increases to consumers in high cost areas. Although SLCs in some areas may ultimately be lower than SLCs in highcost areas, we conclude that $9.00  X4SLCs remain "reasonably comparable" to those in urban areas.cXD yO'ԍ In Section IV.D, below, we conclude that price cap LECs may recover certain marketing expenses through the SLC on nonprimary residential and multiline business lines. That, however, does not affect the SLC ceilings for these lines.  Xb4R83. We are also not persuaded that we should maintain the current SLC ceiling for nonprimary residential lines because of claims that incumbent LECs will be unable to identify second lines for purposes of billing different SLCs to these lines. Additional telephone lines are a wellestablished telecommunications product marketed by LECs. This product is supported by a marketing and billing infrastructure that will enable LECs to distinguish nonprimary residential lines for purposes of billing different SLCs. We note that we are not defining "primary" or "nonprimary" lines in this Order. In a further notice of proposed rulemaking in the Universal Service proceeding, we will address this issue, and release an order defining "primary"and "nonprimary" residential lines by the end of the  X4year.Xdd  {O#'ԍ Universal Service Order at Section IV.D.X  Xe4S84. We are unpersuaded by arguments that we should forgo these changes on the"e# d0*&&aaq" grounds that increasing the SLC ceilings for nonprimary residential lines will create undue incentives for subscribers to order their primary lines from the incumbent LEC and their additional lines from competitors. The changes we adopt in this Order are intended to permit incumbent LECs to move their prices for nonprimary residential and multiline business lines toward more economically efficient levels by substantially reducing implicit subsidies flowing between different classes of customers. Once these subsidies are eliminated and the new universal service regime is fully implemented, incumbent LECs will be able to recover their common line costs from customers through a rate structure that accurately reflects the manner in which these costs are incurred, and through a targeted, portable universal service contribution where necessary. At that point, both incumbent LECs and new entrants should be able to compete efficiently in the local exchange market. Subscribers, therefore, should not have an incentive to use other carriers for their additional lines unless a competitor is operating more efficiently and can offer local exchange service at a lower rate than the incumbent LEC is able to offer. Indeed, the ability of a competitive local exchange carrier to offer local exchange service at a lower rate is precisely the type of competition envisioned by the 1996 Act: it will encourage the incumbent LEC to reduce its costs of providing service in order to meet or beat the prices of its competition.  Xb4T85. To address the concerns of some commenters that charging a higher SLC for second and additional residential lines will encourage subscribers to order their additional line from competitors, we will permit LECs to charge competitors the higher SLC when the competitor provides a customer with a second line through resale of an incumbent LEC offering. If prior to the development of full competition, we find that disparity between SLC charges on primary and additional residential lines becomes a significant problem, we will reexamine this issue in conjunction with further reforms we adopt in an upcoming order.  X4U86. Certain incumbent LECs have requested that any rule that increases the SLC  X4ceiling for nonprimary residential lines should be optional for LECs.e {O 'ԍ See, e.g., Bell Atlantic Telephone Companies and NYNEX (BA/NYNEX) Comments at 3334; Pacific Telesis (PacTel) Reply at 22; Citizens Utilities Company (Citizens Utilities) Comments at 2829. We adopt this proposal in part and will not require LECs to charge a higher SLC for nonprimary residential lines. Thus, if an incumbent LEC finds that charging higher SLCs leads to a large number of disconnections, it is free to charge less. To the extent price cap LECs choose to charge a SLC that is less than the maximum allowed, however, they may not recover these foregone revenues through the PICC or CCL charges. This restriction is consistent with our current  X 4price cap rules, which prevent LECs from transferring SLC costs to the CCL charge.@f " yO"'ԍ 47 C.F.R.  69.104.@   X4V87. Several incumbent price cap LECs argue in favor of deaveraging SLCs, stating that an averaged SLC creates crosssubsidies between highcost and lowcost areas, in" $f0*&&aaH"  X4violation of section 254 of the Act.g {Oy'ԍ See, e.g., U S West Comments at 56; Ameritech Comments at 1213; BellSouth Comments at 32; GTE Comments at 3031. We will resolve this issue, along with issues concerning the timing and degrees of geographic deaveraging, pricing flexibility, and ultimate deregulation in an upcoming order.  X' _3.` ` Carrier Common Line Charge  Xv' ` ` a. Background  XH4W88. Because we are retaining the $3.50 ceiling on SLCs for primary residential and singleline business customers, virtually all price cap LECs will be unable to recover, through the SLC, all of their common line revenues permitted under our price cap rules. In the_ NPRM, we sought comment on possible revisions to the current CCL charge structure that would allow incumbent price cap LECs to recover these NTS common line costs in a way that reflects the way costs are incurred. We proposed a recovery mechanism suggested by the  X 4Joint Board in its Recommended Decisiondh " {O'ԍ Joint Board Recommended Decision, 12 FCC Rcd at 474.d that would permit incumbent LECs to recover common line costs not recovered from SLCs through a flat, perline charge assessed against  X4each enduser's presubscribed interexchange carrier.Gi yO'ԍ NPRM at  5963.G The Joint Board suggested that the Commission allow incumbent LECs to collect the flatrated charge directly from end users  Xd4who have not selected a primary interexchange carrier ("PIC.")fjdD {OY'ԍ Joint Board Recommended Decision, 12 FCC Rcd 87 at 474.f We sought comments on this approach and also invited parties to discuss any potential problems created when enduser customers have selected PICs, but use other IXCs for Internet, fax, interexchange, or other  X4interstate services by "dialingaround" the PIC.k yO'ԍ NPRM at  60. Customers are able to "dialaround" their presubscribed interexchange carrier by dialing 10XXX before their area code and 7digit exchange number.  X4X89. We also sought comment on several alternative approaches to the perminute recovery of interstate NTS loop costs proposed by the Competition Policy Institute (CPI), including a "bulk billing" method that would assess a charge against the IXC based upon its percentage share of interstate minutes of use or revenues, a "capacity charge," a "trunk port  X4charge," and a "trunk port and line port" charge.>l.  {Ot$'ԍ Id. at  61> We invited parties to comment on whether any changes that we adopt to the recovery of interstate NTS local loop costs for price"~% l0*&&aa" cap LECs should be extended to rateofreturn LECs, and on the relationship of interstate  X4NTS loop cost recovery to the universal service mechanisms proposed in the Joint Board  X4Recommended Decision. We asked parties to address how such an extension to rateofreturn  X4LECs would affect small business entities, especially small incumbent LECs.9m {O8'ԍ Id.9  X4Y90. Additionally, we asked parties to address whether an alternative mechanism for recovering common line costs currently recovered through the CCL charge would be necessary if we were to eliminate the SLC ceiling for certain lines. We asked interested parties to address the extent to which any proposed alternative recovery mechanism for recovering common line costs currently recovered through the CCL charge would affect small business entities, including small incumbent price cap LECs and new entrants. We also sought comment on whether section 254(g) precludes an IXC from charging its customers the flat, perline monthly rate assessed on that line if the amount of that charge varied among customers in different areas within a state or among customers in different states, and if so, whether conditions exist sufficient to require us to forbear from the application of section  X 4254(g) to IXC recovery of flatrate CCL charges.Fn Z {O'ԍ Id. at  6263.F  X}'  ` ` b. Discussion   XO4Z91. The $3.50 SLC ceiling for primary residential and singleline business customers prevents most incumbent price cap LECs from recovering, through enduser charges, all of the  X!4common line revenues permitted under our price cap rules.@o! {O'ԍ See n.32, above.@ To the extent that common line revenues are not recovered through SLCs, incumbent LECs will be allowed to recover these revenues through a PICC, a flat, perline charge assessed on the enduser's presubscribed interexchange carrier.  X4[92. We adopt the Joint Board's recommendation that incumbent LECs may collect directly, from any customer who does not select a presubscribed carrier, the PICC that could  X4otherwise be assessed against the presubscribed interexchange carrier. Assessing the PICC directly against end users that do not presubscribe to a long distance carrier should eliminate the incentive for customers to access longdistance services solely through "dialaround" carriers in order to avoid paying longdistance rates that reflect the PICC. Several parties argue that this type of billing arrangement will create administrative difficulties because it will require LECs to prorate charges for both the end user and the IXC when a customer leaves an IXC in the middle of the billing cycle. To avoid any potential administrative difficulties resulting from customers leaving their presubscribed interexchange carriers in the middle of a"&~o0*&&aa" billing cycle, we will permit LECs to assess the full PICC at the beginning of each billing cycle.  X4\93. We recognize that this flat, perline PICC will not prevent customers from "dialing around" their presubscribed long distance carrier to obtain interstate service. Collecting a PICC from a customer, however, in and of itself, creates no incentive for a customer to presubscribe to one carrier and use "dialaround" service of another. If the presubscribed carrier is an efficient competitor, it should be able to offer usagebased rates comparable to the prices of a competitor, thus eliminating any artificial benefits of "dialaround" capability. A combination of lower perminute long distance rates and attractive longdistance pricing packages that reward customers for increasing their usage of the presubscribed interexchange carrier's services should also help deter customers from using separate longdistance carriers for various services solely because of regulation. There is customer contact value in being a customer's presubscribed interexchange carrier. Regulators have long concluded that the convenience of making a longdistance call by simply dialing  X 4"1+" conveys certain advantages.rp  {O 'Ѝ See, e.g., Local Competition Order, 11 FCC Rcd at 15511.r And the advantages of "1+" dialing will only increase if, as many predict, we move to a world in which "onestop shopping" for a multiplicity of services becomes the primary paradigm for provision of telecommunication services. We conclude that the record does not support a finding that assessing a charge on the presubscribed carrier will artificially encourage "dialaround" traffic to such a degree that we should not adopt access charge modifications that will move substantially toward efficient pricing for common line elements and lower usage charges for longdistance service. If evidence appears to us that our rules do substantially contribute to undue use of "dialaround" capabilities to circumvent presubscribed interexchange services, we stand ready to revisit this  X4issue at a later time.  X4]94. The rate structure we are adopting calls for the singleline PICC ultimately to recover the difference between revenues collected through the SLC and the perline common line revenues for primary residential lines and singleline business lines permitted under our  Xe4price cap rules.qXeZ yOp'ԍ As discussed in Section III.B, below, line port costs will be reassigned from the local switching rate element to the common line rate element. As discussed in Section III.D, price cap LECs may also recover residual TIC revenues through PICCs. In order to provide incumbent LECs and IXCs with adequate time to adjust to this rate structure change, we cap the PICC for primary residential and singleline business lines at $0.53 per month for the first year, beginning January 1, 1998, and establish ceilings on increases thereafter. We note that the monthly $0.53 PICC is approximately equal to the current presubscribed perline charges that are assessed to IXCs for the Universal Service" 'zq0*&&aa"  X4Fund and Lifeline Assistance plan,r yOy'ԍ IXCs currently pay $0.0991 for the Lifeline Assistance and $0.4380 for the Universal Service Fund, a total of $0.5371. NECA Transmittal No. 729, F.CC. Tariff No. 5, (filed Nov. 15, 1996). which are being eliminated in our Universal Service  X4Order.js  {O'ԍ See Universal Service Order, at Sections VII.C and XIII.F.j Beginning January 1, 1999, the ceiling on the monthly PICC on primary residential and singleline business lines will be adjusted for inflation and will increase by $0.50 per year until the sum of the SLC plus the flatrated PICC is equal to the price cap LEC's permitted common line revenues per line. In no event shall the sum of the singleline SLC and PICC exceed the sum of the maximum allowable multiline SLC and multiline PICC.  Xc4^95. Sprint asserts that if LECs recover NTS common line costs through deaveraged  XL4rates assessed on IXCs, we must forbear from applying section 254(g))tXL yO 'ԍ Section 254(g) requires that "rates charged by providers of interexchange telecommunications services to rural and high cost areas shall be no higher than the rates charged by each such provider to its subscribers in urban areas." 47 U.S.C.  254 (g).) to the extent it requires an IXC to average geographically any flat charges an IXC passes on to its  X 4customers.Nu  {O'ԍ See, e.g., Sprint Reply at 27.N WorldCom asserts that IXCs should be permitted to recover their costs in any manner the market will allow, and that unless the Commission forbears with respect to the application of section 254(g) to these costs, IXCs that operate nationally will be forced to average together numerous subscribers' loop costs, and thus use longdistance rates as a  X 4vehicle for crosssubsidies that run counter to the overall policies of section 254(b) and (c).Bv d  yO'ԍ WorldCom Comments at 34.B We conclude that the information in the record before us does not demonstrate that we are  X4required, by section 10(a) of the Act,=w  yO9'ԍ 47 C.F.R.  160.= to forbear from enforcing section 254(g) as it relates to the manner in which IXCs recover their costs.  XO4_96. Section 10(a) of the 1934 Act requires the Commission to forbear from applying any regulation or provision of the Communications Act of 1934 if: (1) enforcement of that provision is unnecessary to ensure that the relevant charges and practices are just and reasonable and not unjustly or unreasonably discriminatory; (2) enforcement of that provision is unnecessary to protect consumers; and (3) forbearance from applying such provision or  X4regulation is consistent with the public interest.3x  {O$'ԍ Id.3 We conclude that, on the basis of the current record, IXCs have not demonstrated that forbearance of section 254(g) is warranted at this time. "(x0*&&aa("Ԍ X4ԙ`97. We find that establishing a broad exception to section 254(g) to permit IXCs to pass through flatrated charges on a deaveraged basis may create a substantial risk that many subscribers in rural and highcost areas may be charged significantly more than subscribers in other areas. Accordingly, we cannot conclude that enforcing our rate averaging requirement is unnecessary to ensure that charges are just and reasonable. In addition, because assessing subscribers flatrated charges on a deaveraged basis could lead to significantly higher rates for subscribers in highcost areas, we find no basis in this record to conclude that it is unnecessary to enforce section 254(g) to ensure protection of consumers or to protect the public interest. In contrast, IXCs cite no countervailing public interest considerations but merely make broad, unsupported assertions of the need to deaverage rates in light of the varying PICC amounts expected to be assessed by incumbent LECs. We also note that IXCs now pay access charges that often vary from location to location and from incumbent LEC to incumbent LEC, and still maintain geographically averaged rates. We therefore conclude that, based on the record before us, the IXCs have not met the test set forth in section 10(a) of the Act, and forbearance of section 254(g) is not warranted.  X4a98. We note that we will continue to examine the issue of whether conditions exist that require us to forbear from application of section 254(g) as it relates to recovery of the PICC costs from subscribers. We will resolve this and other specific issues concerning the timing and degrees of pricing flexibility and ultimate deregulation in an upcoming order.  X4b99. To the extent that the SLC ceilings on all lines and the PICC ceilings on primary residential and singleline business lines prevent recovery of the full common line revenues permitted by our price cap rules, incumbent price cap LECs may recover the shortfall through  X4a flatrated, perline PICC on nonprimary residential and multiline business lines.yX yOQ'ԍ As discussed in Sections III.D and IV.D, price cap LECs may also recover residual TIC revenues and certain marketing expenses through PICCs on nonprimary residential and multiline business lines, subject to the ceilings described below. The incumbent LECs will calculate this additional charge by dividing residual permitted common line revenues by the number of nonprimary residential and multiline business lines served by the LEC. For the first year, the ceiling on the PICC will be $1.50 per month for nonprimary residential lines and $2.75 per month for multiline business lines. To the extent that these PICCs do not recover an incumbent LEC's remaining permitted CCL revenues, incumbent LECs will be allowed to recover any such residual common line revenues through perminute CCL charges assessed on originating access minutes. The perminute charges shall be calculated based on forecasts of originating access minutes as currently provided in our  X 4rules.Fz  yO#'ԍ  47 C.F.R.  69.105.F  X4c100. We generally will not permit incumbent LECs to recover residual common line")xz0*&&aak" revenues through perminute CCL charges assessed on terminating access minutes, because terminating minutes are not likely to be subject to as much competitive pressure as originating  X4access minutes. As discussed in Section III.D, below, we are similarly adopting a rule that requires that incumbent LECs be allowed to recover certain residual transport interconnection charge costs through access charges assessed on originating minutes. In placing these various residual costs on originating minutes only, however, we do not want to destroy the salutary effects of our access charge reforms by creating higher prices for originating minutes than exist under our current access charge rules. To the extent, therefore, that the sum of local switching charges, the perminute CCL charge, the perminute residual TIC, and any per X14minute charges related to marketing expensesJ{1 {O 'ԍ See Section IV.D, below.J exceed the current sum of local switching charges and the perminute CCL charge and TIC assessed on originating minutes, the excess may be recovered through charges assessed on terminating minutes. We emphasize that any such amounts recovered through charges assessed on terminating minutes would be temporary and would be phased out as the nonprimary residential SLC ceilings and the PICC ceilings are adjusted, and in any event, no later than July 1, 2000.  X4d101. Beginning January 1, 1999, the PICC will be adjusted for inflation and will increase by a maximum of $1.00 per year for nonprimary residential lines and $1.50 per year for multiline business lines, until incumbent LECs recover all their permitted common line revenues through a combination of flatrated SLC and PICCs. These increases will cease as the PICCs on primary residential and singleline business lines recover more of the common line revenues permitted under price cap rules. In addition, as the incumbent price cap LECs increase their PICCs for primary residential and singleline business lines, they shall reduce the amount recovered from the residual perminute CCL charges and reduce their PICCs on nonprimary residential and multiline business lines by a corresponding amount in accordance with the procedures described below. While the plan we adopt today does not eliminate, even on a flatrated basis, transitional higher rates for business users, it redistributes collection from a very few highvolume users to business users generally. This will permit the charges to be sustainable while we finish refining access charges and implement a forwardlooking costbased universal service mechanism for rural, insular, and high cost areas. We also acknowledge that our plan will require customers with multiple telephone lines to contribute, for a limited period, to the recovery of common line costs that incumbent LECs incur to serve singleline customers. We conclude that this aspect of the plan is a reasonable measure to avoid an adverse impact on residential customers.  X4e102. As the PICC ceilings on primary residential and singleline business lines increase, the residual perminute CCL charge will decrease until it is eliminated. After the residual perminute CCL is eliminated, incumbent LECs shall make further reductions due to the increase in the PICC ceilings for primary residential and singleline business lines, first to the PICCs on multiline business lines until the flatrated PICCs for those lines are equal to"#*Z{0*&&aa!" the flatrated PICCs for nonprimary residential lines. Thereafter, incumbent LECs shall apply the annual reductions to both classes of customers equally until the combined SLC and PICCs for primary residential and singleline business lines recover the full average perline common line revenues permitted under our price cap rules, and the additional flatrated PICCs on nonprimary residential and multiline business lines no longer recover common line  X4revenues.|  yO'ԍ As discussed in Sections III.D and IV.D, below, the PICC will recover TIC revenues and certain marketing expenses in addition to common line revenues. Therefore, multiline PICCs may continue to recover noncommon line revenues, even though SLCs and PICCs for primary residential and singleline business lines recover the average perline common line revenues permitted under our price cap rules. If the incumbent LEC's perline common line revenues permitted by our price cap rules exceed the SLC ceiling for nonprimary residential lines and multiline businesses, the flatrated charges will continue to apply to those lines so that the sum of the SLCs and  XH4flatrated charges is equal to the permitted common line revenues. Once the multi-line PICC no longer recovers any common line revenues, the calculation of the SLC will be changed  X 4from the average per-line interstate allocation of revenue requirementB}  yO{'ԍ 47 C.F.R.  69.104(c)B to the average per-line common line revenues permitted by our current price cap rules. With this change, the LEC will not be able to recover more than the average per-line common line revenues permitted under our price cap rules from any access line. We note that at least one party contends that under our current rules, certain price cap carriers could be required to charge negative carrier common line charges, if the revenues recovered through the SLC, which continues to be  X4developed on a costofservice basis, exceed the PCI for the common line basket.~@ {O'ԍ See Letter from Albert Shuldiner, Counsel for Aliant Communications Co. to William F. Caton, Acting Secretary, FCC, April 30, 1997. This adjustment to the calculation of the SLC will solve any such problem.  XK4f103. We are concerned that assessing PICCs on multiline business lines may create an artificial and undue incentive for some multiline customers to convert from switched access to special access to avoid the multiline PICC charges. A migration of multiline customers to special access could significantly reduce the amount of revenue that could be recovered through perminute charges, and would result in higher PICCs for the nonprimary residential and multiline business lines remaining on the switched network. We tentatively conclude that we should therefore apply PICCs to purchasers of special access lines as well. The NPRM, however, may not have provided sufficient notice to interested parties that we might apply certain rate structure modifications to special access lines. We therefore seek comment on this issue in Section VII.A, below.  XN4g104. We reject claims that a flatrated, perline recovery mechanism assessed on IXCs"N+~0*&&aa4"  X4would be inconsistent with section 254(b)@ yOy'ԍ 47 U.S.C.  254(b).@ which requires "equitable and nondiscriminatory  X4contribution to universal service" by all telecommunications providers.XX yO'ԍ Sprint Comments at 1516; AT&T Reply at 2829.X The PICC is not a universal service mechanism, but rather a flatrated charge that recovers local loop costs in a costcausative manner. Numerous commenters responding to the NPRM support a flatrated  X4cost recovery mechanism,H {O= 'ԍ See, e.g., United States Telephone Association (USTA) Comments at 5556; BA/NYNEX Comments at 3536; BellSouth Comments at 68, Reply at 1011; PacTel Comments at 64, Reply at 21; U S West Comments at 54; Citizens Utilities Comments at 2728; Roseville Telephone Company (Roseville Tel.) Comments at 4, 8; Rural Tel. Coalition Comments at 6, Reply at 9; Competitive Telecommunications Association (CompTel) Comments at 29; Cable and Wireless, Inc. (Cable & Wireless) Comments at 10; Excel Telecommunications, Inc. (Excel) Comments at 11; LCI International Telecom Corp. (LCI) Comments at 2021, Reply at 6; MCI Telecommunications Corporation (MCI) Comments at 77; Public Service Commission of the District of Columbia (District of Columbia Commission) Comments at 34; South Dakota Public Utilities Commission (South Dakota Commission) Comments at 3; National Association of Regulatory Utility Commissioners (NARUC) Comments at 13; National Cable Telephone Association, Inc. (NCTA) Comments at 26; American Communications Services, Inc. Reply at 17.H and we conclude that the PICC is preferable to the other proposals made in the NPRM. We agree with MCI and the Minnesota Independent Coalition that proposals based on the number of trunks or ports that an IXC purchases from the incumbent LEC may encourage IXCs to use fewer trunks or ports than are needed and thereby have an adverse effect on service quality. We decline to adopt the bulk billing approach set out in the NPRM, as well as Ameritech's proposed Loop/Port Recovery charge and the approach proposed by the Competition Policy Institute, because these mechanisms are substantially affected by usage and do not reflect the NTS manner in which common line costs are incurred. The Alliance for Public Technology's proposed "facilities charge," which is a hybrid system that accounts both for level of use and intensity of use by all telecommunication carriers that use the local network, is flawed because it is based partly on usage and is complex and administratively burdensome. A costrecovery mechanism that recovers common line costs through flatrated charges imposed on enduser customers and IXCs is an administratively simple mechanism. Further, under our plan, interstate common line access charges will become more closely aligned with allocated interstate costs than they would be under any of the alternative proposals.  X4h105. The plan we describe above should move us from the pricing scheme that has been in place for more than a decade to a flatrated pricing scheme that seeks to promote competition, while balancing universal service considerations. We recognize that the modifications we adopt in this Order do not eliminate all the existing support flows. The modifications, however, do move to eliminate subsidies built into the current rate structure, to an extent that is compatible with preserving the universal service goals of providing support to primary residential and singleline business and to customers in highcost areas pursuant to the",J 0*&&aa" mandate of section 254. As we set final support levels for universal service, address any legal issues related to the transition from embedded to forwardlooking economic costs, and factor in the development of competition, we will identify and deal with any remaining legal issues relating to the recovery of these revenues. In addition, the plan we are adopting allows incumbent price cap LECs to recover costs in the manner that reflects the way in which they are incurred. We believe that this realignment of rates with costs will reduce the perminute access charges assessed on IXCs and benefit consumers through lower longdistance rates, as well as create a procompetitive local exchange market in which LECs will be able to compete more efficiently.  X ' _4.` ` Common Line PCI Formula  X '` ` a. Background  X 4i106. When we adopted price cap regulation in 1990, we established a separate common line basket in order to balance the price cap goal of economically efficient prices with_ important goals, such as universal service, that were reflected in common line rates prior to the adoption of price caps. Because common line costs are nontraffic sensitive, growth in demand leads to a reduction in average perminute common line charges. Therefore, in the  XK4LEC Price Cap Order, we established a price cap index ("PCI") formula for the price cap basket that differed from the PCI formula we established for the other three baskets, to ensure  X4that carrier common line charges declined as common line demand increased.] {O'ԍ LEC Price Cap Order, 5 FCC Rcd at 6793, 6795.] Specifically, we added a term, "g/2," to the common line PCI formula, to represent half the growth in  X4demand per line in the prior year.Z {O'ԍ LEC Price Cap Order, 5 FCC Rcd at 6795. The Commission did not adopt a common line formula based on an average of the perline and perminute approaches, because in some circumstances, this would have  {O'produced the anomalous result of CCL rates increasing in response to increases in demand. Id. at 6795. The  {OX'mathematics of the common line formula are explained in detail in Appendix E of the LEC Price Cap Order, 5 FCC Rcd at 694244. This adjustment was made because we originally concluded that both LECs and IXCs have the ability to influence common line growth, and  X4that both LECs and IXCs should benefit from increases in demand.W {O'ԍ LEC Price Cap Order, 5 FCC Rcd at 6795. W  X4j107. In the LEC Price Cap Performance Review, we found that incumbent LECs in fact have little influence over perminute common line demand, and tentatively concluded that  Xi4we should remove the "g" term from the common line formula,ei {O$'ԍ LEC Price Cap Performance Review, 10 FCC Rcd at 9079. e because including an industrywide moving average XFactor in the common line formula might tend to double"R-4 0*&&aaN"ԫ X4count demand growth. We sought comment, in the Price Cap Fourth Further NPRM, whether to apply the same PCI formula to the common line basket that we use for the other  X4baskets if we were to adopt a TFPbased XFactor.= {OM'ԍ Id. at 13680. = We also invited comment on whether we could eliminate g/2 from the common line formula if we retain a separate common line  X4formula.dZ {O'ԍ Price Cap Fourth Further NPRM, 10 FCC Rcd at 1368. d In this Order, we adopt a plan that should quickly convert the CCL charge from a perminute charge to a flatrated perline charge assessed on interexchange carriers. We also revise the common line formula to reflect the phase out of the CCL charge.  XJ'` ` b. Discussion  X 4k108. We conclude that the separate common line PCI formula should be eliminated, and that the PCI formula for the trafficsensitive and trunking baskets should be used for the  X 4common line basket, once trafficsensitive CCL charges have been eliminated. In this Order, we have reduced substantially trafficsensitive CCL charges, and replaced them with the perline PICC. The remaining trafficsensitive CCL charges imposed by incumbent price cap LECs will be reduced and then eliminated over the next two or three years. Once common line costs are recovered solely through perline charges, increased minutes will not affect common line recovery. Therefore, when the trafficsensitive CCL charges have been eliminated, it will no longer be necessary to ensure that CCL rates decline as perminute demand increases. Incumbent price cap LECs that no longer assess perminute CCL charges  X64will use the same PCI formula for the common line basket as they use for the trafficsensitive and trunking baskets.  X4l109. In the LEC Price Cap Order, we established "g/2" as the common line PCI formula because we believed that because both LECs and IXCs contributed to encouraging common line demand growth, both LECs and IXCs should share in the benefits of common  X4line demand growth.W {OK'ԍ LEC Price Cap Order, 5 FCC Rcd at 6795.W In the LEC Price Cap Performance Review, we tentatively concluded that IXCs contributed more to common line demand growth, but declined to revise the common line formula at that time because we were contemplating eliminating the common  Xk4line PCI formula completely, and because we did not wish to create unnecessary rate churn.ik~ {O!'ԍ LEC Price Cap Performance Review, 10 FCC Rcd. at 907980.i To avoid unnecessary rate churn here, we decide to retain "g/2" while carriers continue to charge perminute CCL charges.  X4m110. We revise sections 61.45(c) and 61.46(d), which govern the common line PCI".0*&&aa" and API, respectively, to reflect our revisions to the common line rate structure in the common line PCI formula. First, we redesignate section 61.45(c) as 61.45(c)(1) and adopt a new section 61.45(c)(2) that requires price cap LECs to use the separate common line formula only while they continue to charge perminute CCL charges. Section 61.45(c)(2) also states that the common line PCI will be governed by the same PCI formula LECs use for the trafficsensitive and trunking baskets. Second, we redesignate section 61.46(d) as 61.46(d)(1), and amend section 61.46(d)(1) to recognize that LECs now impose PICC charges as well as CCL charges on IXCs. We also adopt a new section 61.46(d)(2) to govern PICC charges once perminute CCL charges have been phased out. These revisions are set forth in Appendix C of this Order.  X ' & 5.XAssessment of SLCs and PICCs on Derived Channels (#  X '` ` a.  Background (#  X 4n111. Integrated services digital network (ISDN) services permit digital transmission  X4over ordinary local loops through the use of advanced hardware and software.  yO 'ԍ In order for a LEC to provide ISDN, it must have a digital switch in the central office serving the customer, and substitute an ISDN line or trunk card for the standard cards that would otherwise be used in the central office with the loop facilities serving the customer. The customer also must use special ISDNcapable customer premises equipment. ISDN offers& data transmission at higher speeds and with greater reliability than standard analog service. Most incumbent LECs currently offer two types of ISDN service, Basic Rate Interface (BRI) service and Primary Rate Interface (PRI) service. BRI service allows a subscriber to obtain two voicegradeequivalent channels and a signalling/data channel over an ordinary local loop,  X4which generally is provided over a single twisted pair of copper wires.^ yO~'ԍ The two voicegradeequivalent channels, which are called bearer or B channels, can be used for voice local exchange service or for data transmission at speeds up to 64 kbps. The third channel is a 16 kbps data  yO'channel, called the delta or D channel, which is used for signalling and packet data services. The Bell Atlantic Telephone Companies Petition for Waiver of Section 69.104 of the Commission's Rules in Connection with  {O'ISDN Services (filed Feb. 10, 1995) at 4 n.8 (Bell Atlantic Waiver Petition).^ PRI service allows subscribers to obtain 23 voicegradeequivalent channels and one data signalling channel over  X4two pairs of twisted copper wires."b  yO 'ԍ In the case of PRI ISDN, the 23 B channels and the D channel can transmit voice or data at speeds up to 64 kbps. When a customer has more than one PRI connection at a given location, all of the B channels can share a single D channel, permitting the customer to obtain 24 voicegradeequivalent channels for each PRI  {OZ"'connection after the first one. Bell Atlantic Waiver Petition at 4, n.8 BRI service generally is used by individuals and small businesses, and PRI service generally is used by larger businesses. LEC services other than"/L 0*&&aa"  X4ISDN use derived channel technology to provide multiple channels over a single facility.&  yOy'ԍ For example, NYNEX Telephone Companies (NYNEX) uses derived channel technology to provide FLEXPATH service, which provides a customer with 24 digital voicegradeequivalent trunk channels over a T1 facility between a suitably equipped central office and a digital PBX. PBX Conversion Service, another NYNEX offering, provides digital trunking capability, with up to 24 trunk access lines, between a customer's digital PBX and an analogtodigital interface located at the central office switch. NYNEX's Data Over Voice service  yOa'provides customers with a voicegrade channel and a data channel over a single copper pair. Memorandum Opinion and Order, NYNEX Telephone Companies Revisions to Tariff F.C.C. No. 1, 7 FCC Rcd 7938 n.11  {O'(Com. Car. Bur. 1992), aff'd on recon., 10 FCC Rcd 2247 (1995).   Several other LECs provide similar services  {O'using derived channel technology. See, e.g., Cincinnati Bell Comments at 6.& The LECs also use derived channel technologies within their networks, for example, to provide customers with individual local loops. In such situations, the end user has not generally requested derived channel service and thus most likely is not aware that the LEC is using this technology.  Xv4o112. On May 30, 1995, we released a Notice of Proposed Rulemaking seeking  X_4comment on the application of SLCs to ISDN and other derived channel services._ yO'ԍ End User Common Line Charges, CC Docket No. 9572, Notice of Proposed Rulemaking, 10 FCC Rcd  {Ot'8565 (1995) (ISDN SLC NPRM). In that  XH4NPRM, we noted that our current rules, which assess one SLC per derived channel, may  X14discourage efficient use of ISDN services,1  yO'ԍ Section 69.104 of the Commission's rules, 47 C.F.R.  69.104, provides for a monthly per line charge for end users that subscribe to local exchange service, stating that surcharges shall be assessed for each line between the customer's premises and a Class 5 Office that is or may be used for local exchange transmissions. In 1992, NYNEX which had been charging a SLC for each of the voicegradeequivalent channels provided on a T1 facility, filed a tariff in which it proposed to assess only one SLC for each T1 facility used to provide a customer with certain services, even though the T1 facility provided that customer with up to 24 voicegradeequivalent channels. The Common Carrier rejected the Transmittal, finding that it did not comply with the commission's Part 69 rules governing assessment of SLCs. The Commission affirmed the Bureau's conclusion that Section 69.104 of the rules requires assessment of a SLC for each derived channel. Memorandum Opinion and Order, NYNEX Telephone Companies Revisions to Tariff F.C.C. No. 1, 7 FCC Rcd 7938,  2 (Com. Car.  {O'Bur. 1992) aff'd on recon., 10 FCC Rcd 2247 (1995).  and we sought comment on several options, ranging from continuation of the current rules applying one SLC to each derived channel to  X 4requiring LECs to assess one SLC per each pair of copper wires or each physical facility.I X {O 'ԍ ISDN SLC NPRM at  21.I Other options presented in the NPRM included: (1) basing the application of SLCs on a ratio of the average LEC cost of providing a derived channel service, including the trunk or line card costs, to the average cost of providing an ordinary local loop or T1 facility; (2) applying one SLC for every two derived channels; (3) reducing the number of SLCs applied to derived channel services while increasing slightly the SLC rates; or (4) giving LECs flexibility concerning the number of SLCs they assess for derived channel services, at the same time"y00*&&aa"  X4adjusting the price cap rules to prevent an increase in CCL charges.T {Oy'ԍ Id. at  2223, 2730, 3234.T  X4p113. In addition to the comments filed in response to the ISDN SLC NPRM, several  X4BOCs provided data on the relative NTS costs of single and derived channel services.HZ yO'ԍ In their responses, three of the BOCs, BellSouth, NYNEX, and Southwestern Bell, asked for confidential treatment of portions of the information submitted. NYNEX publicly filed the information we requested, but submitted as confidential additional information that contained more detailed cost data. The confidential data were not necessary to perform our analysis, and the following tables only include data that was filed on the public record. We have returned to the respective companies data for which confidential treatment was sought.H The cost data included information about all NTS cost components, including components located in the central office, such as line cards. As shown in Table 1 below, the cost data indicates that the ratio of NTS loop costs of BRI ISDN to standard analog service is approximately 1 to 1. The ratio of NTS loop costs of PRI ISDN to standard analog service, excluding NYNEX's data, is approximately 5 to 1. As shown in Table 2, NYNEX's data appear to be outliers because the ratios of its outside plant and NTS costs for PRI ISDN to standard analog service are almost twice those of other incumbent LECs. NYNEX's data, therefore, are excluded from the calculation of the average ratio for PRI ISDN to standard analog service. " 1 0*&&aa "  X' IdTABLE 1 ă  X' Ratio of costs of standard analog service to BRI ISDN service T ddx !ddx2 T  z  V  5y Outside Plant (loop only) costsV All NTS costsz q  V_  Ameritech_ 1:1.07_ 1:1.45q q  Bell Atlantic _ 1:1.01 _ 1:1.36q q  NYNEXq _ 1:0.85q _ 1:1.23q q   Pacific Bell _ 1:1.05 _ 1:1.13q q q  US WestS _ 1:0.80S _ 1:1.07q q   _ _ q   S  _c  Average ratio of costsNc 1:0.96*Nc 1:1.24*  c XN4  X 4Id TABLE 2 ă  X' Ratio of costs of standard analog service to PRI ISDN service ^ !ddx2 A(2 ^          + Outside Plant (loop only) costs  Outside Plant (loop only) costs (excluding NYNEX data) All NTS costs All NTS costs (excluding NYNEX data) !    Ameritech 1:5.68 1:5.68 1:8.9 1:8.9! !  Bell Atlantic 1:4.13 1:4.13 1:15.80 1:15.80! !  NYNEX: 1:10.94: excluded: 1:27.74: excluded! !  Pacific Bell[ 1:4.67[ 1:4.67[ 1:8.70[ 1:8.70! ! : US West| 1:5.33| 1:5.33| 1:10.60| 1:10.60! ! [         ! :  |   Average ratio of costs" 1:6.5*" 1:4.95*" 1:15.13*" 1:10.5*:    X"4  X#4*Averages may differ due to rounding.q(#  X%4q114. We incorporated by reference, in the current proceeding, all pleadings filed in"%20*&&aa#"  X4response to the 1995 ISDN SLC NPRM, as listed in Appendix A of that order. {Oy'ԍ All pleadings filed in response to the 1995 ISDN SLC NPRM will be so noted. In the NPRM for the current proceeding, we invited comments on the effect of the 1996 Act on determining how many SLCs should be applied to ISDN services. We also sought comment on whether mandatory rate structures or rate caps should be prescribed for ISDN service or  X4other derived channel services.:Z yO'ԍ NPRM at  70.:  Xv' b.` ` Discussion  XH4 r115. Consistent with the goal of this Order of realigning cost recovery in a manner that more closely reflects the manner in which those costs are incurred, we conclude that we should establish separate SLC rates for ISDN service based on the NTS loop costs of BRI and PRI ISDN service. We agree with the majority of commenters that a SLC for ISDN service equal to a SLC for singlechannel analog service multiplied by the number of derived channels exceeds the NTS costs of ISDN service and therefore artificially discourages efficient use of ISDN. We find that basing ISDN SLCs on relative costs is most likely to assign costs of ISDN service to customers who subscribe to, and benefit from, that service. Further, we find that the current SLCperderived channel rule requires LECs to assess charges that are not related to the NTS costs of the service provided.  XK4X` hp x (#%'0*,.8135@8:%0*&&B%"  {O'costs of modern digital switches is actually predominantly [traffic sensitive]." MTS and WATS Market Structure, Order on Reconsideration and Supplemental Notice of Proposed Rulemaking, 3 FCC Rcd 5518, 5526 (1988). In performing this analysis, therefore, the Commission did not indicate that it gave specific consideration to the costs associated with of line ports and dedicated trunk ports. These components must be provisioned in a 1:1 ratio with lines and trunks, respectively, and their costs do not vary with traffic levels. We have the authority and obligation, independent from the Joint Board, to":z0*&&aa" establish appropriate rate structures for recovering the costs the jurisdictional separations  X4process allocates to the interstate jurisdiction.\zj {O'ԍ E.g., 47 U.S.C. 151, 152, 154(ij).\ We take steps today to address the fact that the costs of line ports and dedicated trunk ports are more properly recovered for Part 69 purposes from the Common Line and DirectTrunked Transport rate elements as NTS charges, instead of from the traffic sensitive Local Switching element. We will, however, examine any jurisdictional separations issues presented by NTS switching costs in our upcoming separations NPRM.  XH4135. Costs may vary for shared local switching facilities according to the number of  X14lines connected, or the traffic over those lines.$1 j {O'Ѝ Compare Cable & Wireless Comments at 1213 and Citizens Utilities Comments at 30 and GSA/DOD  {O'Comments at 4 and Texas Commission Comments at 1112 with BellSouth Comments, Attachment 2 at 14.$ In the former case, the costs of the shared facility may be recovered in the most costcausative manner by imposing a proportionate share of the costs on each line while, in the latter case, usagesensitive charges may better reflect cost causation. With respect to such shared local switching facilities, including the switching matrix and shared trunk ports, we gave states flexibility in our interconnection  X 4proceeding to establish either perminute usage charges, or flatrated charges, as appropriate.m h j {O'ԍ Local Competition Order at  81018.m In the access context, however, we will continue to require price cap incumbent LECs to recover the costs of shared local switching facilities, including the central processor, switching matrix, and shared trunk ports, on a perminute basis. On the basis of the information in the record before us, it would be difficult to identify the NTS and trafficsensitive portions of the costs of shared switching facilities and to verify the accuracy of LEC studies attempting to do  X44so.@4 j yO'ԍ MCI Comments at 8082.@ Therefore, until we gain more experience with rate structures for unbundled network elements that are implemented pursuant to Sections 251 and 252 and that segregate these costs into trafficsensitive and NTS components, we will continue to adhere to the current, perminute rate structure for shared switching facilities. "; 0*&&aa "Ԍ X' 2.` ` Traffic Sensitive Charges  X4136. In the NPRM, we sought comment on several alternative rate structures for recovery of usagesensitive local switching costs. Specifically, we sought comment on whether the Commission should require or permit LECs to establish a separate charge for call setup, and if so, whether the charge should be levied on all call attempts, or only completed  Xv4calls.Avj yO'ԍ NPRM at  7576.A We also sought comment on whether the Commission should require or permit incumbent LECs to establish peak and offpeak pricing structures for shared local switching  XH4facilities,AHXj yOQ 'ԍ NPRM at  7778.A and whether the existing perminute rate structure adequately reflects the manner  X14in which trafficsensitive local switching costs are incurred.:1j yO 'ԍ NPRM at  79.:  X '` ` a. Call Setup Charges  X 4137. Among price cap carriers today, most call setup is performed with outofband  X 4signalling, generally using the SS7 signalling network.Z xj yO'Ѝ Ameritech comments that it uses SS7 for over 95 percent of its customers, that its use of SS7 is increasing, and that other large incumbent LECs probably have comparable figures. Ameritech Comments at 16.  {Ow'For a more detailed description of the operation of the SS7 signalling network, see Section III.E. In light of the widely varying  X 4estimates of the costs of call setup in the record,$ j yO'Ѝ While Sprint estimates that call setup costs represent approximately two to six percent of the costs of a typical call (Sprint Reply at 14), PacTel estimates that it costs five times more to set up a call than it does to provide a minute of use (PacTel Comments at 68). Using the industry average call duration cited by the California Commission (Reply at 3) of 3.86 minutes, call setup charges would represent a much larger percentage of the total costs of a typical call than Sprint estimates.$ we conclude that these costs may be more  X4than a de minimis portion of the costs of local switching. The record indicates that these call  X{4setup charges are incurred primarily on a percall rather than a perminute basis."{J j {Ov'Ѝ E.g., Excel Comments at 12; TRA Comments at 37; Ameritech Comments at 15; PacTel Comments at 69; Citizens Utilities Comments at 30; Frederick & Warinner Comments at 67; Minnesota Independent Coalition Comments at 15; Alabama Commission Comments at 8; California Commission at 23; Texas Commission at 14; TCI Comments at 12. By requiring recovery the costs of call setup on a perminute basis, our current rate structure mandates an implicit subsidy running from customers that make lengthy calls to those that make many shortduration calls. Therefore, we find that we should not continue to require the price cap LECs to recover costs of call setup from perminute local switching charges. "<40*&&aa"Ԍ X4138. Accordingly, we will revise Section 69.106 of our rules@j yOy'ԍ 47 C.F.R. 69.106.@ to permit, but not to require, price cap LECs to establish a separate percall setup charge assessed on IXCs for all calls handed off to the IXC's point of presence (POP). As noted earlier, because an incumbent LEC originating an interstate call incurs call setup costs even if the call is not completed at the called location, we permit these LECs to recover call setup charges on all originating interstate calls that are handed off to the IXC's POP, and on all terminating calls that are received from an IXC's POP. With respect to originating call attempts, we agree with the California Commission that, when the call is handed off to the IXC's POP, the incumbent LEC's switches and signalling network have performed their functions and the  X14incumbent LEC has incurred the full cost of call setup.K1Xj yO: 'ԍ California Commission Reply at 2.K We also permit incumbent LECs to impose a setup charge for terminating calls received from an IXC's POP, whether or not that call is completed at the called location, because the incumbent LEC signalling network in either case must perform its setup function.  X 4139. We conclude that the call setup charge should not be mandatory because some  X 4incumbent LECs may determine that call setup costs either are in fact de minimis or are otherwise outweighed by the costs of the network and operations support systems (OSS) upgrades necessary to install measurement and billing systems. In such cases, it would be economically inefficient to mandate a separate callsetup charge because the costs of collecting the charge might exceed the revenue collected from the charge itself. We are aware that, by making the callsetup charge permissive only, we may allow certain incumbent LECs' rate structures to continue to subsidize shortduration calls. We nevertheless conclude that we should not mandate separate collection of a callsetup charge in cases where the LEC determines that the costs of eliminating this subsidy exceed the benefits to be gained. In contrast, we find that those incumbent LECs that either have or obtain the ability to implement a callsetup charge should have the flexibility to adopt this costcausative rate structure.  X~4140. No party disputes the fact that incumbent LECs incur costs of call setup for call attempts, in addition to completed calls. Some parties, however, argue that call setup charges should be assessed only on completed calls in order to reduce customer confusion. We anticipate that consumer confusion will be minimal, however, because the call setup charge we permit will be imposed on IXCs, not end users. We find it unlikely that IXCs would choose to pass this charge along to their customers in the form of a separate charge per call attempt. For instance, IXCs today generally charge their customers for completed long"=0*&&aa"  X4distance calls even though they incur access charges for many uncompleted calls as well.Fj yOy'Ѝ IXCs today incur access charges for originating access minutes of use from the time when the originating LEC hands a call off to the IXC's POP, regardless of whether the call is completed at the called location. 47  {O 'C.F.R. 69.2(a). As a result, originating access minutes of use are approximately seven percent greater than  {O'originating conversation minutes of use. IXCs today do not generally choose to bill their customers directly for access minutes of use charged by the LEC for uncompleted calls or for the interval before the called party  {Oe'answers. See Federal Communications Commission, Com. Car. Bur., Industry Analysis Division, Telecommunications Industry Revenue: TRS Fund Worksheet Data, 8, fig. 3 (Estimates of Toll Rates and Access Costs per Conversation Minute) (Dec. 31, 1996).  X4141. Other commenters state that setup charges imposed on call attempts will result in charges being imposed on a caller that has not received service. LCI asserts that "customers do not expect to pay for uncompleted call attempts, and the carriers are not entitled to recover  X4their costs of uncompleted call attempts,"Bj yO'ԍ LCI Comments at 26 n.41.B citing the Commission's decision in VIA USA,  Xx4Ltd.TZxf j {O'Ѝ In VIA USA, the Commission stated as a factual matter that, "in the system as currently structured by facilitiesbased carriers, customers do not expect to pay for an uncompleted call. Nor do carriers expect to be compensated." 10 FCC Rcd 9540, 9545 (1995) (emphasis added).T The text cited from that order, however, addresses only customer expectations that have arisen because our current rules make no explicit provision for the recovery of costs of an uncompleted call. We now find that a call setup charge, assessed to an IXC, should not be prohibited because a rate structure that recovers some switching costs through a percall setup charge on all call attempts is more costcausative than one limited to the recovery of costs only from completed calls.  X 4142. Still other commenters argue that, if we permit call setup charges to be imposed for call attempts, we will, at best, open the door to unauditable billing errors or, at worst, facilitate incumbent LEC fraud and duplicity. These commenters argue that the incumbent LEC will be able to generate additional revenue, or degrade the service of IXC competitors, by blocking calls at its own switch. Based on this record, we conclude that these concerns are not wellfounded. By permitting a setup charge only for originating call attempts that are handed off to the IXC's POP, we minimize the originating incumbent LEC's incentive to engage in this type of activity because the incumbent LEC will receive no compensation for calls blocked at its own switch. In addition, incumbent LECs have compelling incentives to deliver interstate calls to an IXC's POP. As competition develops for local service, it appears doubtful that an incumbent LEC would find it advantageous to block deliberately interstate calls placed by their end user customers. Such practices would encourage entry by new competitors and increase the interest of affected end users in finding a more reliable service provider. We also find it unlikely that either originating or terminating incumbent LECs would intentionally risk the collection of often significant perminute access charge revenues"> 0*&&aa" on a completed longdistance call in order to collect additional, much smaller percall setup charges. Finally, we know of no significant allegations of degraded service quality attributable to the very similar current regime, under which incumbent LECs collect at least a full minute of originating access revenues on uncompleted calls delivered to the IXC's POP. We are prepared, however, to investigate claims that an incumbent LEC is blocking calls in an intentional or discriminatory manner.  X_4143. Several large business customers that make substantial numbers of shortduration calls, such as those associated with credit card authorization, automatic teller machine operation, or other transactionoriented data transfers, argue that imposing a call setup charge will be disruptive to their businesses and may force them to use alternatives to the public  X 4switched network. j yO| 'Ѝ CompuServe/Prodigy Comments at 2529, Reply at 1112; Bankers Clearing House Comments at 78; Ad Hoc Comments at 1920, Reply at 34. These commenters are the primary beneficiaries of the subsidy that is implicit in the current recovery of call setup costs on a perminute basis, running from customers that make lengthy calls to those that make many shortduration calls. The existing rate structure may well have encouraged users who make many short duration calls to use the publicswitched network in inefficient ways. Rate structures that are aligned with cost causation, on the other hand, should encourage economicallyefficient use of the telecommunications network. Transactionoriented users of the network may be motivated to develop more economically efficient processing methods, with resulting economic benefits. Because this group of IXC customers may need time to adjust to the new rate structure, however, incumbent LECs choosing to impose a percall setup charge on IXCs may do so, at the earliest, in their access tariff filings effective July 1, 1998. This gives a customer over one year to make any necessary adjustments. This time should be sufficient to mitigate any  X4potential disruptive effects of this rate structure change.i  j yO'Ѝ Our experience with Ameritech's tariffed unbundled SS7 signalling charges indicates that a call setup charge, if implemented, may in fact be relatively small. For call setup purposes, Ameritech has established separate signalling rate elements for SS7 call setup for both directtrunked and tandemswitched traffic. The first of these, the "ISDN User Part (ISUP) Signal Formulation Charge," is a "per signalling message charge for the formulation of the ISUP message at end offices and tandems" in the amount of .06 ($0.0006) per message assessed for both directtrunked and tandemswitched traffic. The second, the "Signal Transport Charge," is a "persignalling message charge for the transmission of signalling data between the local STP and an end office SP/SSP" in the amount of .012 ($0.00012) per message. The third, the "Signal Switching Charge" is a "per signalling message charge for switching an SS7 message at the local STP" in the amount of .025 ($0.00025) per message. The Signal Transport Charge and the Signal Switching Charge are assessed on directtrunked traffic only. For tandem switched traffic, the "Signal Tandem Switching Charge" is a "per signalling message charge for the bundled provision of multiple instances of signal switching and signal transport for the situation in which tandem routed facilities are provided to the end office" in the amount of .055 ($0.00055). The Signal Tandem Switching charge incorporates three instances of transport and two instances of switching at the STP. Both the Signal Switching and the Signal Tandem Switching rate elements include the costs of measuring device and  {Ox%'billing system changes. See Ameritech Operating Companies Tariff FCC No. 2, Tariff Transmittal No. 982, filed"x%0*&&G%" July 5, 1996.i"?X0*&&aa"Ԍ X4ԙ144. MCI asserts that there may be costs of call setup in addition to those associated  X4with signalling,=Xj yO'ԍ MCI Comments at 82.= such as a portion of the switch central processor costs.@j yO'ԍ MCI Comments at 8283.@ We limit the costs that an incumbent LEC may recover through call setup charges, however, to those associated with signalling because we agree with MCI that it would be extremely difficult to separate the costs of the switch CPU and other trafficsensitive costs into permessage and  X4perminute portions and to verify that the allocation has been done properly.3xj {O 'ԍ Id.3  X_4145. Several commenters caution that, if we permit a call setup charge, we should also ensure that the charge does not overlap with any SS7related charges now permitted or  X14developed in this proceeding.1 j {O'Ѝ E.g., AT&T Reply at 29; Bankers Clearing House Comments at 45; Ad Hoc Comments at 2325; TCI Comments at 1213. Because call setup is one function of the SS7 network, some  X 4of these costs may already be recovered through the current Part 69 SS7 rate elements.@ d j yO/'ԍ 47 C.F.R. 69.125.@ Currently, Section 69.125 of our rules permits LECs to recover from IXCs only (1) a flatrated signalling link charge for the Dedicated Network Access Line (DNAL); and (2) a flat  X 4rated Signal Transfer Point (STP) port termination charge.@ j yOz'ԍ 47 C.F.R. 69.125.@ While these elements recover the costs of some dedicated SS7 facilities, they do not include the usagebased signalling costs of call setup, including the costs incurred to switch messages at the local STP, to transmit messages between an STP and the incumbent LEC's end office or tandem switch, and to  Xy4process or formulate signal information at an end office or tandem switch.y j yO'Ѝ Neither section 69.125 nor any of our other signallingrelated cost recovery rules, discussed below, provide for recovery of the costs of these functions. As a result, these costs are recovered through perminute charges assessed on completed calls. 47 C.F.R. 69.106. As discussed below, LECs choosing to adopt a separate SS7 signalling rate elements, similar to those established by Ameritech under waiver, may recover a large part of their call setup costs through that mechanism.  XK4146. Currently, the setup costs of certain calls may be recovered through database  X44query charges, either for the line information database (LIDB)@44j yO%'ԍ 47 C.F.R. 69.120.@ or the 800 database.B4j yO'ԍ 47 C.F.R. 69.118.B In"4@X0*&&aa" addition, incumbent LECs recover some costs associated with the provision of certain signalling information necessary for third parties to offer tandem switching through the  X4"signalling for tandem switching" rate element.@Xj yO'ԍ 47 C.F.R. 69.129.@  X4147. Imposing a call setup charge for interexchange calls should not overlap with any of these existing rate elements. Nevertheless, we clarify that an incumbent LEC choosing to impose a call setup charge may not include in that charge any costs that it continues to recover either through other local switching charges, through charges for dedicated SS7 facilities, or through other signalling charges. In this Order, we also permit incumbent LECs to adopt a more detailed SS7 rate structure, modeled on that currently used by Ameritech  X 4under waiver.\^ j {O'Ѝ Ameritech Operating Companies Petition for Waiver of Part 69 of the Commission's Rules to Establish  {O}'Unbundled Rate Elements for SS7 Signalling, Order, 11 FCC Rcd 3839 (Com. Car. Bur. 1996) (Ameritech SS7  {OG'Waiver Order). See Section III.E.\ This SS7 rate structure may permit LECs to recover a significant portion of their call setup costs without an additional call setup charge. Given estimates in the record that SS7 is used to provide signalling for more than 95 percent of the large LECs'  X 4customers, j yO'Ѝ Ameritech Comments at 16. Ameritech states that, "SS7 technology is currently used for more than 95% of customers in the Ameritech network. This figure is probably comparable for other large [incumbent LECs.]" we conclude that, in the ordinary case, a price cap LEC will not need to use both the optional SS7 rate structure and a separate call setup charge to recover the costs of call setup. We recognize, however, that some call setup is still performed using inband, multifrequency (MF) signalling, rather than outofband signalling systems. Because SS7 charges will not recover costs of call setup using MF signalling, we do not prohibit the use of both SS7 and call setup charges. We caution LECs adopting both the optional SS7 rate structure and an additional call setup charge, however, that cost support filed with access tariffs must clearly indicate the allocation of individual costs of call setup between these two recovery mechanisms; the same costs cannot be doublerecovered using both mechanisms.  X'` ` b. Peak and OffPeak Pricing  X4148. We conclude that we should not now mandate a peakrate pricing structure for local switching. The record reflects significant practical difficulties that may make it difficult or impossible to establish and enforce a rational, efficient, and fair peakrate structure as a matter of regulation. For example, the record outlines a variety of difficulties that incumbent LECs will confront in determining peak and offpeak hours with any degree of certainty, based on geographic, usertype, service, and other variations. Moreover, peak usage periods may shift over time as usage patterns change, and as competitors enter the market. Based on"7Af 0*&&aa" these difficulties, some incumbent LECs may find it too costly or too difficult to develop, implement, and maintain a peakrate structure that will allow them to capture all or most of the benefits this structure could offer.  X4149. We do recognize the possible efficiency of a peakrate structure.Zj {O'ԍ Local Competition Order at  755.Z Accordingly, we will consider whether LECs should have the flexibility to develop such peak and offpeak rate structures for local switching on a permissive basis when we consider other issues of rate structure flexibility in a subsequent Report and Order that we will adopt in this proceeding.  X1' C.Transport  X 4150. Transport service is the component of interstate switched access consisting of  X 4transmission between the IXC's point of presence (POP) and LEC end offices.9^ Zj {O'Ѝ Transport Rate Structure and Pricing, Third Memorandum Opinion and Order on Reconsideration and  {O'Supplemental Notice of Proposed Rulemaking, 10 FCC Rcd 3030, 3033 (1994) (Third Transport Reconsideration  {O'Order).9 Currently, incumbent LECs offer two basic types of interoffice transport services. The first, directtrunked transport, uses dedicated circuits for transport between a LEC end office and the LEC serving wire center, or between any other two points the directtrunked transport customer requests. The second, tandem switched transport, uses common transport facilities to connect the end office to a tandem switch. Common transport circuits may be used to transmit the individual calls of many IXCs and even the incumbent LEC itself. Transport circuits dedicated to a particular access customer connect the tandem switch to the serving wire center. Dedicated entrance circuits carry traffic between the IXC POP and the serving wire center, whether the IXC uses directtrunked transport or tandemswitched transport.  X4151. In the NPRM, we expressed concern that some of our current Part 69 rulessj {O 'ԍ See, e.g., 47 C.F.R. 69.110, 69,111, 69.112, 69.124.s may require LECs to recover transport costs through rate structures that do not reflect accurately the way these costs are incurred. We sought comment on possible revisions to  X4many of these rate elements.Ej yOm 'ԍ See NPRM at  8095.E "B0*&&aa"Ԍ X'_ 1.` ` Entrance Facilities and DirectTrunked Transport (#`  X'` ` a. Background  X4152. Entrance facilities are dedicated circuits that connect an access customer's POP with the LEC's serving wire center. Directtrunked transport facilities are dedicated trunks _that carry an access customer's traffic from the LEC end office to the serving wire center  X_4without switching at the tandem switch. In the First Transport Order, we mandated an interim rate structure under which entrance facilities and direct trunked transport are priced on  X34a flatrated basis, which may be distance sensitive.3j {O 'Ѝ Transport Rate Structure and Pricing, Report and Order and Further Notice of Proposed Rulemaking, 7  {Ov 'FCC Rcd 7006, 70167017 (1992) (First Transport Order); see also 47 C.F.R. 69.110. Initial rate levels for directtrunked transport and entrance facilities were presumed reasonable if they were set equal to the rates for corresponding special access service components (special access service and special access  X 4channel termination, respectively). $j {O'Ѝ Transport Rate Structure and Pricing, First Memorandum Opinion and Order on Reconsideration, 8 FCC  {O'Rcd 5370, 5375 (1993) (First Transport Reconsideration Order). In the NPRM, we tentatively concluded that, because directtrunked transport and entrance facilities appear to be dedicated to individual customers, a flatrated pricing structure accurately reflected the way LECs incur the costs of these  X 4facilities.: j yO'ԍ NPRM at  86.: We sought comment on this tentative conclusion and on whether incumbent LECs should be permitted to offer transport services differentiated by whether the LEC or the  X{4IXC is responsible for channel facility assignments (CFAs).X{j yO<'Ѝ A channel facility assignment is the actual designation of the routing that a circuit takes within the incumbent LEC network. This assignment may be made either by an IXC purchasing a dedicated circuit, or the incumbent LEC itself. We also sought comment on whether any rules in addition to the interim rules are necessary to govern rate levels for these  XM4services.:M0 j yO.'ԍ NPRM at  86.:  X'` ` b. Discussion  X4153. We conclude that both entrance facilities and directtrunked transport services should continue to be priced on a flatrated basis and that charges for these services may be  X4distancesensitive. In the First Transport Order, we found that such a flat charge would facilitate competition in the directtrunked transport market and encourage incumbent LECs to"C 0*&&aa"  X4make efficient network decisions.Yj {Oy'ԍ First Transport Order, 7 FCC Rcd at 7022.Y For the same reasons, and because this pricing structure is reflective of the manner in which incumbent LECs incur the costs of provisioning these facilities, we confirm that the interim rate structure the Commission adopted for these facilities should be made final.  X4154. U S West and Sprint make a persuasive showing that, as carriers expand their use of fiberoptic ring architecture and other modern network designs, transport costs should become less distance sensitive because LECs may transport a call along any one of many  XH4paths to its destination based on transient network traffic levels.HZj yOS 'Ѝ As Sprint explains, LECs are moving toward ring configurations in response to customer demands for the increased service reliability gained from this architecture's route diversity and selfhealing qualities. "With the ring configuration, the tandemrouted traffic and directtrunked traffic will all be moving in the same ring, and the distance traversed will simply be a function of the provisioning path selected by the LEC for individual traffic. Utilization of available bandwidth between two nodes at any point in time will become a higher priority in the economic determinant of cost than the distance between the two nodes." Sprint Comments at 24. We conclude, however, that we need not amend our Part 69 rules now to reflect the decreasing sensitivity of transport costs to distance. Our rules permit, but do not mandate, the use of distance sensitive transport charges. Therefore, if an incumbent LEC determines that its transport costs have become less distance sensitive, it may reduce or eliminate the distancesensitivity of its directtrunked transport rates. For two reasons, we expect that incumbent LECs will adjust their rates to reflect any change in the distance sensitivity of transport costs. First, as U S West states, ring architecture will be most prevalent, and therefore, will reduce the distance sensitivity of rates  X4most dramatically, in densely populated areas.Ij {O'ԍ See U S West Reply at 30.I When an incumbent LEC obtains authority to deaverage access rates geographically, therefore, it may choose to offer a less distancesensitive pricing structure in more densely populated areas than it does in less densely populated areas. Such a structure would properly reflect the reduced distance sensitivity of the incumbent LEC's costs in more densely populated areas. Second, as competition develops, incumbent LECs will come under increasing market pressures to maintain rates that reflect the nature of the costs underlying the service. If they choose not to do so, we expect that new market entrants will develop competitive service offerings at prices more reflective of underlying costs.  X4155. We decline Ameritech's request in its comments for immediate flexibility to offer new technologies to switched access customers without obtaining a Part 69 waiver or  X|4passing a public interest test.P|d j {O$'ԍ See Ameritech Comments at 1718.P In our Third Report and Order in the Price Cap Performance  Xg4Review for Local Exchange Carriers (Price Cap Performance Review Third Report and"gD 0*&&aaq"  X4Order), adopted along with the NPRM in this proceeding, we eliminated the need for a Part 69 waiver for new services, and instead required incumbent LECs to file a petition demonstrating that introduction of the new service would be consistent with the public  X4interest.j {O6'Ѝ NPRM at  309310 (contained within the Third Report and Order portion of that item). The rule changes implementing this procedure will become effective on June 30, 1997. Such petitions will give LECs that desire to do so the opportunity to make their  X4cases and receive the requested flexibility.K"j {Oy'ԍ See 47 C.F.R. 69.4(g).K This procedure significantly streamlined the prior waiver process, and we conclude that the public interest will not suffer if we do not grant incumbent LECs additional immediate flexibility in this area as part of our basic rate structure modifications. We will give further consideration to Ameritech's request for additional flexibility to offer new technologies to switched access customers as part of our assessment of other aspects of pricing flexibility in a subsequent Report and Order in this proceeding.  X 4156. We also will consider whether LECs should be permitted to offer directtrunked transport services that are differentiated by whether the incumbent LEC or the transport customer is responsible for performing channel facility assignments in connection with our evaluation of other forms of pricing flexibility in a subsequent Report and Order in this proceeding. As MCI argues in its comments, it is unclear whether rates for directtrunked transport where the LEC controls the CFA should be higher or lower than the rates that apply  Xd4where the IXC controls the CFA.@dj yO'ԍ MCI Comments at 8485.@ Although the LEC may be able to make more efficient use of its network facilities when it controls the CFAs itself, this efficiency benefit may be offset by the additional costs the LEC incurs in performing the CFA function. We agree with MCI that an incumbent LEC may be able to increase its network efficiency by retaining or assuming control of CFAs, particularly if an IXC orders a relatively large amount of transport capacity. In those cases, however, rate differentiation based on CFA control appears to be the functional equivalent of a volume discount. As a result, we will consider this issue, along with other pricing flexibility issues, in a subsequent Report and Order planned in this docket.  X4157. In its comments, USTA requests that we forbear under Section 10 of the  X~4Communications Act=~Dj yOs!'ԍ 47 U.S.C. 160.= from regulating services in the interexchange basket, special access,  Xg4collocated directtrunked transport, and directory assistance.Agj yO#'ԍ USTA Comments at 3548.A We will address USTA's request along with other pricing flexibility issues, in a subsequent Report and Order planned in this docket."9Ed 0*&&aaE"Ԍ X'ԙ_ 2.` ` TandemSwitched Transport (#`  X'` ` a. Background  X4158. Tandemswitched transport uses trunks that are shared among many IXCs and the LEC itself to carry traffic between the end office and a tandem switch. The tandem switch _routes IXC traffic onto an appropriate dedicated trunk that runs between the tandem  X_4switch and the serving wire center.X_j yO'Ѝ An end office local switch may also serve as a tandem switch with certain software upgrades. Therefore, the tandem switching office is also often an end office in its own right. Similarly, an IXC typically uses a large end office, upgraded with additional trunking capacity to handle the IXC's traffic, as its serving wire center. An IXC may use tandemswitched transport either as its primary form of transport in lieu of directtrunked transport, or to carry traffic that overflows from its directtrunked transport facilities at peak periods. In 1982, the  X 4Modification of Final Judgment (MFJ) established an interim rule that required, until September 1, 1991, BOC charges to IXCs to be "equal, per unit of traffic" of a given type transported between end offices and facilities of the IXCs within an exchange area or within  X 4reasonable subzones of an exchange area.  j {Op'Ѝ United States v. American Tel. and Tel. Co., 552 F. Supp. 131, 23334 (AT&T Consent Decree,  {O:'Appendix B, Section B(3)), aff'd sub nom. Maryland v. United States, 460 U.S. 1001 (1983).   X 4159. The Commission replaced the "equal charge" rule in 1993 with an interim rate structure for tandemswitched transport. This interim structure allows IXCs to choose between two rate structures for the purchase of tandemswitched transport. Both options provide for a perminute tandem switching charge. Under the first option, an IXC may elect to pay "unitary" perminute charge for transmission of traffic from the end office, through the tandem switching office, to the serving wire center. This charge may be distance sensitive, with distance measured in airline miles from the end office to the serving wire center. Under the second option, the "threepart rate structure," in addition to the charge for the tandem switch, an IXC may elect to purchase transmission on a bifurcated basis, with the end officetotandem portion charged on a perminute basis, and the tandemtoserving wire center  X4portion charged as directtrunked transport facilities, i.e., on a flatrated basis. Under the threepart rate structure, both portions of the transmission charge may be distance sensitive  X4based on the airline mileage to the tandem office.mDj {O 'ԍ See First Transport Reconsideration Order, 8 FCC Rcd at 5372.m  Xi4160. In adopting the interim rate structure, the Commission stated that initial directtrunked and tandemswitched transport rates would be presumed reasonable if set based on"RF0*&&aa4"  X4special access rates in effect on September 1, 1992 using a DS3 to DS1j yOy'Ѝ A DS1 line is capable of transmitting 24 voice conversations, each digitally encoded at 64 kilobits per second, for a total capacity of 1.544 megabits per second. A DS3 line has 28 times the capacity of a DS1. rate ratio of at least  X49.6 to 1.dZ j {O'Ѝ First Transport Order, 7 FCC Rcd at 7029. Special access customers use a dedicated trunk running between the customer's premises and the IXC's POP, thereby bypassing the LEC's switched network facilities altogether. This service is primarily used by large volume users in densely populated areas.d Perminute tandemswitched transport rates were presumed reasonable if set using a weighted average of DS1 and DS3 rates reflecting the relative numbers of circuits of each type in use in the tandemtoend office link, and assuming circuit loading of 9000 minutes of  X4use per month per voicegrade circuit.?Bj {O 'ԍ Id. at 703637.?  Xv4161. Under the interim rate structure, whether a tandemswitched transport customer elects to purchase tandemswitched transport under the unitary or the threepart rate structure, the LEC imposes a separate, perminute charge on the tandemswitched transport customer for use of the tandem switch. The Commission set this charge initially to recover only twenty percent of the tandem revenue requirement, in order to: (1) protect small IXCs that use tandemswitched transport as their primary transport mechanism from substantial increases in  X 4tandemswitched transport rates; j {Oq'Ѝ See Competitive Telecommunications Ass'n v. FCC, 87 F.3d 522, 52627 (D.C. Cir. 1996) ("CompTel"). (2) ensure that the interim rate structure did not "endanger the availability of pluralistic supply in the interexchange market" that had developed under the  X 4equal charge rule;Y f j {O'ԍ First Transport Order, 7 FCC Rcd at 7008.Y and (3) allow IXCs a transitional period to reconfigure their networks to eliminate inefficiencies that had developed under the equal charge rule and to prepare for a  X4fully costbased rate structure.< j {O9'ԍ Id. at 7016.< Unlike the directtrunked and tandemswitched transport rates, which are set using overhead loadings based on special access, the tandem switching rates used higher overhead loadings applicable to switched access.  X44162. As part of the interim rate structure, the Commission also created the TIC to recover on a perminute basis from all switched access customers the difference between the Part 69 transport revenue requirement and the revenues projected to be recovered under the  X4interim rate structure.B j {O*#'ԍ Id. at 7038.B The TIC was explicitly intended to make the transition to the interim  X4rate structure revenue neutral.3j {O%'ԍ Id.3 Among other possible costs, the TIC recovers the remaining"G0*&&aan" 80 percent of the tandemswitching revenue requirement.  X4163. Portions of the interim transport rate structure were recently remanded to the  X4Commission by the United States Court of Appeals for the District of Columbia Circuit.Ej {O4'ԍ CompTel, 87 F.3d 522.E With respect to tandemswitching rates and the TIC, the Court ordered us either to implement a costbased rate structure or offer a "rational and nonconclusory analysis in support of [our]  Xv4determination that an alternative structure is preferable."AvZj {O 'ԍ Id. at 536.A With respect to overhead loadings, the Court ordered us either to substantiate that our current method of allocating overhead is costbased, choose a method that is, or provide a reasoned explanation of our decision to  X14pursue a noncostbased system.31j {O 'ԍ Id.3  X 4164. In the NPRM, we sought comment on several alternative rate structures for tandemswitched transport service facilities, including: (a) maintaining the interim rate structure, which permits the IXCs to choose between the two pricing alternatives above; (b) eliminating the unitary rate option and requiring the IXCs to purchase tandemswitched transport under the threepart rate structure; or (c) developing another, different rate  X4structure.E~j yO'ԍ NPRM at  8788, 91.E We also sought comment on whether, in conjunction with any of these pricing options, we should apply to tandem switching any of the options for local switching discussed above, including whether we should establish separate flatrated charges for the dedicated ports on the serving wire center side of the tandem or other NTS components of the tandem switch, and whether usagebased or flat rates more accurately reflect shared tandemswitching  X4costs.@j yO'ԍ NPRM at  89.@ We also sought comment on whether, in conjunction with any of these options, we should permit or require peak load pricing for usagebased charges for tandemswitched transport service, and on whether any portion of tandemswitched transport costs should be recovered from directtrunked transport customers.  X'` ` b. Overview of Rate Structure and Rate Level Changes  X|4165. In this section, we summarize the changes we make to the tandemswitched transport rate structure and rate levels below. We conclude that we should require incumbent LECs to implement a costbased rate structure for tandemswitched transport in four stages over a two year transition period. Unlike our previous transition plans, however, we set forth today, for the first time, the details of a final, costbased transport rate structure. We have" H0*&&aa"" long recognized that noncost based rate structures can, among other dangers, (1) threaten the longterm viability of the nations's telephone systems; (2) distort the decision whether to use alternative telecommunications technologies; and (3) encourage "uneconomic bypass" of the  X4public switched telecommunications network, raising rates for all.j {O4'Ѝ MTS and WATS Market Structure, Third Report and Order, 93 F.C.C.2d at 251252.  X4166. Until today, however, we have limited ourselves to interim transport rate structure plans, such as the equal charge rule and the interim rate structure described above. While the interim rate structure increased the costbased nature of our transport rate structure, it also included significant noncostbased elements. We have not, until today, laid out a clear transition plan that describes all the steps necessary to achieve costbased transport rates. As a result, although all carriers have no doubt been aware of our intention to move to a costbased rate structure, they have been able only to react to our transitional steps, announced piecemeal. Because we have not announced a definite and detailed end state a final, costbased rate structure we have afforded carriers little opportunity to plan, adjust, and develop their networks in preparation for such a rate structure, despite our lengthy period of "transition." Accordingly, because of the potential magnitude of the rate impact of these changes, we conclude that a fourstep implementation over a twoyear period will minimize the risk of rate shock and allow transport customers to adjust while we move as expeditiously  Xb4as possible to costbased transport rates as required by the CompTel decision.  X64167. The first step will occur in incumbent LEC access tariffs to become effective on January 1, 1998. In those tariffs, incumbent price cap LECs must establish new rate elements for recovery of the costs of DS3/DS1 and DS1/voicegrade multiplexers used in conjunction with the tandem switch. The rate element for the dedicated multiplexers on the serving wire center side of the tandem will recover these costs on a flatrated basis, while the rate element for the multiplexers on the end office side of the tandem will be assessed per minute of use. In addition, incumbent price cap LECs must establish in those tariffs a flatrated charge to recover the costs of dedicated trunk ports on the serving wire center side of the tandem. None of our existing rate elements currently recovers the costs of either these multiplexers or these dedicated trunk ports. Accordingly, we conclude that those costs are currently recovered through the TIC, and that incumbent price cap LECs must reduce the TIC to reflect the recovery of these costs through the new rate elements. Also on January 1, 1998, all incumbent LECs must take the first of three annual steps to reallocate to the tandemswitching rate element tandem switching revenues currently being recovered through the TIC. In tariffs filed to be effective on that date, we require incumbent LECs to reallocate one third of the portion of the tandem switching revenue requirement that they currently recover through the TIC, excluding signalling and dedicated port costs that we reallocate elsewhere, to the tandem switching rate element.  X#4168. The second step will occur in incumbent LEC tariffs to become effective July 1,"#IZ0*&&aa!" 1998. At that time, all incumbent LECs must eliminate the unitary pricing option for tandem switched transport. Instead, incumbent LECs will be required to provide tandemswitched transport under a threepart rate structure as follows: (1) a perminute charge for transport of traffic over common transport facilities between the LEC end office and the tandem office; (2) a perminute tandem switching charge; and (3) a flatrated charge for transport of traffic over dedicated transport facilities between the serving wire center and the tandem switching office. Incumbent LECs will continue to impose separate multiplexing and port charges established on January 1, 1998, as complementary to the threepart rate structure.  X14169. The third and fourth steps will consist of the reallocation of the remaining portion of the tandemswitching revenue requirement currently recovered through the TIC to the tandemswitching rate element. All incumbent LECs are to reallocate one half of the remaining portion of tandemswitching revenue requirement recovered through the TIC to the tandemswitching rate element in access tariffs to become effective January 1, 1999, and the final portion of the tandemswitching revenue requirement to the tandemswitching rate element in access tariffs to become effective on January 1, 2000. Before performing this reallocation, price cap incumbent LECs must account for Xfactor reductions to the tandemswitching revenues permitted under price caps that have occurred since the TIC was created, as described in Section III.C.2.d, below.  X4'` ` c. Rate Structure  X4170. Multiplexing Costs. As discussed above, we direct incumbent LECs to establish separate rate elements for the multiplexing equipment on each side of the tandem switch. LECs must establish a flatrated charge for DS1/DS3 multiplexers on the serving wire center side of the tandem, imposed prorata on the purchasers of dedicated DS3 trunks on the serving wire center side of the tandem, in proportion to the amount of DS3 trunking capacity purchased by each customer. Unlike DS3 rates, rates for DS1 dedicated trunks already  X~4include a portion of the DS1/DS3 multiplexer needed for transport.^~j {O'ԍ First Transport Order, 7 FCC Rcd at 7028 n.85.^ Multiplexing equipment on the end office side of the tandem shall be charged to users of common end officetotandem transport on a perminute of use basis. These multiplexer rate elements must be included in the LEC access tariff filings to be effective January 1, 1998.  X 4171. We sought comment in the NPRM on the claim that: XThe TIC . . . includes the two additional multiplexers needed in order to multiplex a DS3 circuit down to a DS1 level before switching at the tandem, and then back up to DS3 afterward for transmission to an end office. To the extent that analog tandem switches exist, two additional DS1/[voicegrade] multiplexers are needed to achieve the voicegrade interface with the tandem"#JZ0*&&aa!"  X4switch.j yOy'Ѝ NPRM at  106. It is also possible to combine the DS3/DS1 and DS1/voicegrade functions into a single multiplexer.  None of our existing rate elements explicitly recovers the costs of these multiplexers, and we conclude that these costs are currently recovered as part of the TIC. Accordingly, we establish two rate elements for multiplexers used on the serving wire center side of the tandem switch. The first will recover the costs of DS3/DS1 multiplexers used by purchasers of dedicated DS3 transport trunks from the serving wire center to the tandem switch, and may be levied only on purchasers of such DS3 transport. The second will recover the costs of DS1/voicegrade multiplexers used on the serving wire center side of analog tandem switches, and should be levied on purchasers of DS1 or greater capacity dedicated transport from the tandem switch to the serving wire center in proportion to the transport capacity purchased on that route. Like serving wire centerside trunks and trunk ports, both DS3/DS1 and DS1/voicegrade multiplexers on the serving wire center side of the tandem switch are dedicated to individual customers. Accordingly, flatrated NTS charges for these multiplexers are appropriate.  X4172. On the end office side of the tandem switch, we establish two additional rate elements. The first will recover the costs of DS3/DS1 multiplexers used on the end office side of the tandem switch. This rate element will be a perminute charge imposed on each IXC purchasing common transport on the end officetotandem link. This charge will be calculated based on actual minutes of use of the common transport circuits and will be assessed on IXCs in a 1:1 ratio with minutes of use of common transport. As with common transport trunks, because these multiplexers are shared among all users of common transport, trafficsensitive, perminute charges are appropriate. The second rate element should be assessed only at analog tandems, to recover in a similar manner the costs of DS1/voicegrade multiplexers needed at these analog tandems.  X4173. Price cap LECs must reallocate revenues currently being recovered through the TIC to these rate elements and begin recovery of multiplexing costs using these rate elements in their access tariffs to become effective January 1, 1998.  X74174. Dedicated Tandem Switch Trunk Port Costs. Price cap incumbent LECs must establish a separate rate element for dedicated trunk ports used to terminate dedicated trunks on the serving wire center side of the tandem switch. LECs incur the costs of these ports on an NTS basis, but currently must recover their costs through perminute charges for the tandem switch. Because we have allocated 80 percent of tandemswitching costs to the TIC, these port costs may currently be recovered through either perminute tandemswitching charges, or the perminute TIC. We now take this opportunity to establish a separate rate element for these costs. Price cap LECs must establish a flatrated element for dedicated""K 0*&&aa " trunk ports on the serving wire center side of the tandem, assessed on the purchaser of the dedicated trunk terminated at that port. This rate element shall be a flatrated charge assessed on the carrier purchasing the dedicated trunk terminated at that port, and must be also be included in tariff filings to become effective January 1, 1998.  X4175. ThreePart Rate Structure. We also direct all incumbent LECs to discontinue the unitary rate structure option for the transmission component of tandemswitched transport, effective July 1, 1998. In their access tariffs that take effect on July 1, 1998, incumbent LECs will be required to provide tandemswitched transport under a threepart rate structure as follows: (1) a perminute charge for transport of traffic over common transport facilities between the LEC end office and the tandem office; (2) a perminute tandem switching charge; and (3) a flatrated charge for transport of traffic over dedicated transport facilities between the serving wire center and the tandem switching office. This three part rate structure reflects the manner in which the incumbent LEC incurs the costs of providing each component of tandemswitched transport. By establishing a perminute, trafficsensitive rate for the shared common transport trunks and the tandem switch, incumbent LECs will recover these costs from each IXC in proportion to its use. The incumbent LEC, in contrast, incurs the costs of the dedicated serving wire centertotandem trunk on an NTS basis because, like other dedicated trunks, the LEC must provision the trunk for the exclusive use of one IXC. Once this capacity is dedicated, the cost of the trunk does not vary with the amount of traffic transmitted by the IXC.  X4176. The threepart rate structure may cause some tandemswitched transport customers to increase their use of directtrunked transport relative to tandemswitched transport. As discussed above, making this rate structure change effective on July 1, 1998, will provide tandemswitched transport customers that currently take service under the unitary rate structure with notice of this change sufficient to enable them to adjust their networks to provide service in the most efficient way possible, and to mitigate any sudden effect on rates such a change could have if implemented on shorter notice. In order to encourage transport customers to increase the efficiency of their transport networks quickly, we will require incumbent LECs to waive certain nonrecurring charges until six months after the threepart rate structure becomes mandatory. Therefore, from the effective date of this Order until six months after the effective date of tariffs eliminating the unitary pricing option for tandemswitched transport, the incumbent LECs shall not assess any nonrecurring charges for service connection when a transport customer converts trunks from tandemswitched to directtrunked  X4transport or orders the disconnection of overprovisioned trunks.j {OV"'Ѝ This waiver is similar to the one we ordered when we adopted the interim rate structure. First Transport  {O #'Order, 7 FCC Rcd at 7038.  X!4177. When we replaced the equal charge rule in 1991, we stated three principles that would guide our efforts to develop the transport rate structure: (1) to encourage efficient use""L$0*&&aa " of transport facilities by allowing pricing that reflects the way costs are incurred; (2) to avoid interference with the development of interstate access competition; and (3) to facilitate full  X4and fair interexchange competition.'\j {OK'Ѝ First Transport Order, 7 FCC Rcd at 7009. We reiterated these principles in the First Transport  {O'Reconsideration Order, 8 FCC Rcd at 5372, and the Third Transport Reconsideration Order, 10 FCC Rcd at 3035.' In 1991, we stated that the interim rate structure was a reasonable first step toward achieving these goals, because it was more costbased than the  X4equal charge rule.Yj {OA 'ԍ First Transport Order, 7 FCC Rcd at 7016.Y Even from its inception, however, we have recognized that the interim rate structure represents significant compromises that cause it to fall substantially short of  Xv4these goals in many ways.v~j {O 'Ѝ See First Transport Order, 7 FCC Rcd at 7016, 702122; Third Transport Reconsideration Order, 10 FCC Rcd at 304748.  XH4178. First, the unitary rate option does not accurately reflect the manner in which LECs incur costs in providing tandemswitched transport and, therefore, does not provide maximum incentive for IXCs to use transport facilities efficiently. IXCs may order, and LECs must provide, dedicated transport links with NTS costs on the serving wire centertotandem route with no assurance that the trafficsensitive, perminute revenues collected will cover the NTS costs of the link. As we stated at the time, the unitary rate structure was intended as an interim measure to allow IXCs time to prepare for a fully costbased transport  X 4rate structure.j j {O0'ԍ Third Transport Reconsideration Order, 10 FCC Rcd at 3048.j IXCs have now had well over a decade since divestiture to so prepare. We  X4agree with the CompTel decision that it is time to bring this period of preparation to a close  X{4as expeditiously as possible without causing severe disruption to carriers.H{j j {O'ԍ CompTel, 87 F.3d at 530.H  XM4179. Second, by bundling the dedicated and common portions of the transmission component of tandemswitched transport into a single, endtoend perminute charge, the unitary rate structure inhibits the development of competitive alternatives to incumbent LEC tandemswitched transport. While we have required incumbent LECs to provide the collocation, signalling, and unbundled network elements necessary for new entrants to compete with incumbent LECs without having to replicate the incumbent LEC's interoffice  X4transport network,^ j {Op#'Ѝ See Local Competition Order; Expanded Interconnection with Local Telephone Company Facilities,  {O:$'Memorandum Opinion and Order, 9 FCC Rcd 5154 (1994); Expanded Interconnection with Local Telephone  {O%'Company Facilities, Transport Phase II, Third Report and Order, 9 FCC Rcd 2718 (1994). we have not corrected the noncost based aspects of our tandemswitched transport rate structure that reduce incumbent LEC rates for tandemswitched transport"M"0*&&aa" services. Several commenters have noted that the tandemswitched transport market, despite  X4our efforts, is subject only to limited competition.j {Ob'ԍ E.g., Letter from David Sieradzki, Counsel for WorldCom, Inc., to William F. Caton, Acting Secretary,  yO,'FCC, February 25, 1997, Encl. at. 4. Moreover, several competitive entrants have stated that they have the capability and desire to offer some or all of the components of tandemswitched transport on a competitive basis, but that the present, unitary rate structure  X4inhibits the development of competition in this area. &"j {Ow'Ѝ E.g., Teleport Comments at 1314; ALTS Reply at 22. After the comment period closed in this proceeding, Teleport and CompTel proposed a compromise tandemswitched transport rate structure that would (1) retain the unitary rate structure for the transmission component of tandemswitched transport; (2) prohibit incumbent LECs from deaveraging TIC charges within a state for a five year transition period; and (3) provide that IXCs and CLECs that do not use transport facilities supplied by the incumbent LEC would be exempt from  {Oa 'paying the TIC for any switched access traffic carried over those facilities. See Ex Parte Letter from James M. Smith and Robert C. Atkinson to Hon. Reed E. Hundt, April 16, 1997. Teleport and CompTel characterize this third element of their proposal as the "most important." Exempting IXCs and CLECs that do not use transport facilities supplied by the incumbent LEC from paying the TIC for any switched access traffic carried over those  {O'facilities would be consistent with a recent Colorado Commission arbitration ruling. See TCG Colorado Petition for Arbitration Pursuant to 252(b) of the Telecommunications Act of 1996 to Establish an Interconnection  {O'Agreement with U S West, Docket No. 96A329T, Decision Regarding Petition for Arbitration, Decision No.  yO'C961186 (adopted Nov. 5, 1996). In that decision, the Colorado Commission stated that, X[I]f [U S West] provides all or part of the transport of an interstate call from the end office to the IXC, then [U S West] is entitled to collect its interstate rates, including [TIC]. If, however, [U S West] is not providing the transport of a call from an endoffice switch to an IXC, then [U S West] may not apply its switched access transport rates, including the [TIC], to those calls. We reject arbitrary splits of revenues. In jointly provisioned switched access services, each company will develop and apply its tariffed rates to the portion of service it provides.   {O'Id. at  I.O.7. Clarifying this position on reconsideration, the Colorado Commission stated, "[t]he [TIC] shall be applied on a pro rata basis determined from the proportional distance between the [Teleport] tandem and the end {Oy'office of [U S West]." TCG Colorado Petition for Arbitration Pursuant to 252(b) of the Telecommunications  {OC'Act of 1996 to Establish an Interconnection Agreement with U S West, Docket No. 96A329T, Order Denying Applications for Rehearing, Reargument, or Reconsideration, Decision No. C961344 (adopted Dec. 18, 1996), at  I.B.1.4. In addition, each component of tandemswitched transport is not equally susceptible to competitive entry; it is relatively easier for a new entrant to compete to provide the dedicated serving wire centertotandem link than it would be to compete to provide either the tandem switch itself or the myriad common transport end officetotandem links. Thus, in order to permit the fullest development of competitive alternatives to incumbent LEC networks, we need to unbundle reasonably segregable components of incumbent LEC transport services and price them in the manner in which costs are incurred.  X 4180. Third, the interim rate structure does not best promote "full and fair" interexchange competition. The unitary rate structure has facilitated the growth of small IXCs" N0*&&aaJ " to compete with larger carriers. It has achieved this, however, by requiring incumbent LECs to price facilities with NTS costs on a perminute, traffic sensitive basis, in order to allow small IXCs to offer interexchange services at rates comparable to those offered by larger carriers without regard to whether the charges paid by the small IXCs cover the costs of the facilities that they use. While this structure has protected "pluralistic supply in the  X4interexchange market,"]j {O'ԍ See First Transport Order, 7 FCC Rcd at 7007.] our rules should promote competition, not protect certain competitors. We have recently concluded that no carrier is dominant with respect to  X_4domestic, interexchange services._Zj {Oj 'Ѝ Motion of AT&T to be Reclassified as a NonDominant Carrier, Order, 11 FCC Rcd 3271 (1995). Therefore, to the extent that we designed the interim rate structure to facilitate the growth of small IXCs in competition with AT&T, we find that such protective rules are no longer necessary. In a competitive market, we believe that we should strive to make our rate structure rules consistent with costcausation principles, so long as those principles do not conflict with other statutory obligations, such as universal service. As  X 4the CompTel decision stated, "attempt[ing] to recover costs from IXCs that did not cause those costs to be incurred would impart the wrong incentives to both actual and potential providers of local transport, thereby inducing them to offer an inefficient mix of dedicated,  X 4[directtrunked transport], and tandemswitched service."" j {OF'Ѝ CompTel, 87 F.3d at 530531. Even though directly addressing the TIC and not the unitary rate structure, the Court's remarks are apposite because the unitary rate structure does not recover the costs of tandemswitched transport in the way that those costs are incurred and therefore results in the recovery of some costs of the transmission component of tandemswitched transport through the TIC. Because rules that do not reflect costcausation may cause IXCs to order an inefficient mix of transport services, such rules artificially raise the costs of providing interexchange services. Rules properly reflecting costcausation, in contrast, will benefit LECs, IXCs, and consumers alike by encouraging competitors to provide service using facilities efficiently. In adopting the interim rate structure, we cited AT&T's estimate that the efficiency benefit to consumers of costbased  X4pricing and competition could reach $1 billion annually.Yj {O'ԍ First Transport Order, 7 FCC Rcd at 7016.Y Our adoption of the threepart rate structure is intended to permit consumers the benefits of even greater service efficiency.  X4181. We therefore adopt the threepart structure as the final tandemswitched transport rate structure because this structure most closely reflects the manner in which LECs incur the costs of each component of the overall tandemswitched transport service. When combined with our actions with respect to the TIC, our adoption of actual minutes of use as the appropriate factor for determining perminute rates for common transport circuits, and our allocation of the full cost of the tandemswitch to the tandemswitching rate elements, we expect that this structure will benefit LECs, IXCs, competitive providers of access services, and consumers. Tandemswitched transport facilities are sized to accommodate peak traffic"9Oh 0*&&aa+" loads, including overflow traffic from IXCs using directtrunked transport facilities. Several commenters have stated that, until now, these overflow customers have not borne the full costs of these facilities because overflow customers pay only the same perminute  X4transmission charges applicable to other IXCs.j {O4'Ѝ E.g., TCI Comments at 16, Reply at 1314. See also ACC Long Distance Comments at 1415; Telco Communications Group Comments at 67. The threepart rate structure will require the IXC purchasing tandemswitched transmission facilities to pay the full NTS costs of the dedicated serving wire centertotandem link, without regard for the amount of traffic transported. This benefit, in turn, will substantially increase IXC incentives to use tandemswitched transport efficiently for overflow traffic.  X14182. Some commenters argue that we should retain the unitary rate structure because tandemswitched transport, as a service, has traditionally been offered on an endtoend basis. We agree that the transmission component of tandemswitched transport has in fact been  X 4offered on an endtoend basis, but only pursuant to the requirements of the MFJ and our interim rate structure rules as part of a transition to costbased rates. We find, however, that  X 4the transmission component of tandemswitched transport is not, in fact, provisioned by the incumbent LEC on an endtoend basis. Purchasers of directtrunked transport purchase an endtoend service; they purchase from the incumbent LEC transport capacity between two end points. Tandemswitched transport customers, in contrast, purchase use of the tandem switch to route traffic to their POP. By virtue of their decision to choose tandemswitched transport, these customers specifically obligate the LEC to transport their traffic between the serving wire center and the tandem serving a particular end office or group of end offices and to perform the tandem switching function. Because they cause the incumbent LEC to incur the costs of transmitting their traffic between the serving wire center and the tandem, tandemswitched transport customers should, as a matter of costcausation, pay the costs of reaching the tandem. In providing tandemswitched service, incumbent LECs must provision two separate circuits with distinctly different cost characteristics one dedicated, and one shared. Tandemswitched service, therefore, is not provisioned on an endtoend basis between the end office and serving wire center, but in three parts: (1) transmission from one "end," the end office, to the tandem; (2) the tandem switching function itself; and (3) transmission from the tandem to the other "end," the serving wire center. Just as the tandemswitched transport customer pays a separate charge for the tandem switch, the tandemswitched transport customer should pay separately for the two distinct transmission components.  X 4183. Other commenters argue that the threepart rate structure will create LEC incentives to engage in inefficient network reconfiguration, placing tandems far from end  X4offices and serving wire centers simply to increase tandemswitched transport revenues.L"j {O$'ԍ E.g., Sprint Comments at 22.L These commenters further argue that, if we adopt the threepart rate structure, we need to" P0*&&aaH" control this incentive by establishing a process for review of the incumbent LECs' tandem deployment decisions. Based on this record, we conclude that these commenters' fears are not well founded. An incumbent LEC would likely incur substantial costs to reconfigure placement of its tandem switches specifically to disadvantage IXC users of tandem switched transport. Because we expect the three part rate structure to catalyze the development of competition, we conclude that the incumbent LEC would not be likely to incur such costs. Although the incumbent LEC might be able to increase its tandemswitched transmission revenues in the short term to reflect inefficient routing, as more efficiently configured competitors enter the market, the LEC would not be able to sustain such artificially inflated rates and would then need to incur additional costs to reconfigure its network efficiently. Because, under our new competitive paradigm, a multitude of investment opportunities, including wireless services, video, and interLATA toll, may emerge for incumbent LECs, we agree with Ameritech that "[s]uch misspent capital outlays and inefficient network  X 4configuration simply would not make good business sense."@ j yON'ԍ Ameritech Reply at 29.@  X 4184. Moreover, the redeployment of tandem switches affects network efficiency with respect to both the incumbent LEC's own local and toll traffic, as well as intrastate and  Xy4interstate access.JyXj {O'ԍ See Ameritech Reply at 29.J Therefore, inefficient network reconfiguration would cause harm both to tandemswitched transport customers and to the incumbent LEC itself. Any additional transport revenues that the incumbent LEC generated through inefficient network reconfiguration would be at least partially offset by the additional costs of transporting the LEC's own traffic in similarly inefficient ways. As discussed above, as competition develops in the local market, we expect that a LEC would be reluctant to take steps to decrease its own efficiency.  X4185. Some commenters argue that we should retain the unitary rate structure because directtrunked transport and tandemswitched transport circuits often travel along the same routes using the same physical facilities. These commenters argue, therefore, that it would be unfair or discriminatory to require tandemswitched transport users to purchase transmission based on airline mileage from the end office to the tandem to the serving wire center, while users of directtrunked transport are permitted to purchase the same route on the basis of airline mileage from end office to the serving wire center directly. Other commenters argue that we should require the LECs to offer both types of transport based on actual route miles, revealing actual LEC network efficiencies and inefficiencies.  X4186. We disagree with both of these proposed modifications. An IXC purchasing directtrunked transport requires the incumbent LEC to provide transport service between the end office and the serving wire center. Because the LEC must route directtrunked transport"!Q0*&&aa% " traffic between only these two points, our rate structure requires the IXC to pay only for the airline mileage between those two points, reflecting the direct mileage route between the locations in the incumbent LEC network designated by the access customer. In contrast, an IXC purchasing tandemswitched transport purchases use of the access tandem switch and therefore requires the incumbent LEC to provide service between the serving wire center and the tandem, and between the tandem and the end office. Under the three part rate structure, the tandemswitched transport customer, like the directtrunked transport customer, pays for the direct mileage between the locations in the incumbent LEC network designated by the customer for tandemswitched transport, the serving wire center to tandem, and the tandem to the end office. Because the IXC has chosen to make use of the LEC tandem switching facilities, it should pay explicitly for the transport necessary to reach the tandem. The directtrunked transport customer, in contrast, does not make use of the tandem switching facilities; even if the LEC routes directtrunked transport traffic through the tandem office, this traffic is not switched at the tandem. While the incumbent LEC may choose to route directtrunked traffic through the tandem office based on its own assessment of whether it is economically efficient to do so, the directtrunked transport customer pays only for direct mileage between the locations it designated in the network.  Xb4187. We are not persuaded by arguments that we should retain the unitary pricing structure because the incumbent LEC, and not the tandemswitched transport customer, has selected the tandem location and, consequently, the tandemswitched transport customer should not pay for the direct mileage to and from the tandem location. The incumbent LEC equally chooses the locations of the serving wire center and end office, and yet access customers routinely pay mileage charges to and from those locations, rather than between the end points of the access service the POP and the end user location. Similarly, we find that the threepart rate structure does not discriminate against IXCs using tandemswitched transport. As discussed above, the tandemswitched transport customer, unlike the direct X4trunked transport customer, requires the incumbent LEC to route its traffic to the tandem, and so should pay the costs of reaching the tandem. In addition, an IXC operating efficiently often may choose to locate its POP at or close to the tandem, if the tandemswitching office also can function as the serving wire center, thus eliminating virtually all of the dedicated transport costs of the tandemtoserving wire center link. While such an arrangement may be the most efficient transport architecture for tandemswitched transport, our current unitary pricing structure does not reflect the underlying costs of tandemswitched transport transmission facilities and so does not encourage efficient transport architectures.  X 4188. The introduction of more modern network architectures, such as Synchronous Optical Network (SONET) rings, does not alter our conclusion that the threepart rate structure most closely approximates the nature of costs associated with each component of tandemswitched transport. WorldCom, for instance, asserts that the "pyramid" diagram"#R0*&&aa!"  X4included in the NPRM as Figure 1 is outdatedZj yOy'ԍ NPRM at  24 (diagram follows the paragraph).Z and submits a diagram illustrating interoffice  X4tandemswitched transport in a ringbased network.FXj yO'ԍ WorldCom Reply at iii.F WorldCom states that the multiple routing options and the reduced distance sensitivity of transport costs in a SONET  X4environment compel retention of the unitary rate structure.Bj yOT'ԍ WorldCom Reply at 2931.B We conclude, however, that the differences WorldCom identifies do not support retention of the unitary rate structure because, even in a ringbased network, the threepart rate structure treats directtrunked and tandemswitched transport consistently. In a fiberoptic or ringbased network, dedicated, directtrunked transport circuits are given a constant, and exclusive, time slot assignment on a large, timedivision multiplexed fiberoptic cable. The incumbent LEC routes traffic for the IXC purchasing the direct trunk into the dedicated circuit or time slot, where it is received elsewhere on the ring or in the network at the serving wire center. The direction or precise routing of the signal around the ring is irrelevant for purposes of the rate structure because the transport is priced on an airlinemileage basis between the two end points. Capacity dedicated to a particular IXC, however, is not available to the LEC for other purposes.  X 4189. SONET ring architecture offers the LEC the capability to transport large traffic volumes with redundant routing options, but it does not alter the fundamental nature of tandemswitched transport. Tandemswitched transport is functionally very different from directtrunked transport because, by definition, the incumbent LEC must route an IXC's tandemswitched traffic through the tandem switch serving a particular end office. Whether using a SONET ring or not, the LEC must route its tandemswitched traffic into one of many shared common transport circuits or time slots allocated for transport between the end office  X4and the tandem switch, and onto a second dedicated circuit or time slot for transport between the serving wire center and the tandem. Despite parties' arguments to the contrary, the precise routing of the traffic to the tandem, including the direction it may take around a SONET ring, is irrelevant to the rate structure because IXCs purchase transport under the threepart rate structure based on airline mileage to the tandem.  X~4190. As discussed in connection with directtrunked transport, above, ring network architectures may cause incumbent LECs transport costs to become less distance sensitive. Because our rate structure permits, but does not require, transport rates to be distance sensitive, LECs remain free to establish less distance sensitive transport rates to reflect the changing nature of these costs.  X4191. We also decline Teleport's suggestion to establish a flatrated charge for the tandem switch, tied to the amount of dedicated capacity each IXC's serving wire centerside"Sx0*&&aa" trunk ports provide. While the costs of these dedicated trunk ports are NTS, the record before us does not reflect that all of tandemswitching costs are similarly NTS. Rather, we conclude at this time that the costs of tandem switching likely vary, as do those of local switching, on a trafficsensitive basis. In light of this conclusion, we find that it would be unreasonable to permit the incumbent LEC to recover all of its tandemswitching costs through flatrated charges. As with the local switch, until we gain more experience with rate structures for unbundled network elements that are implemented pursuant to Sections 251 and 252 and that segregate switching costs into trafficsensitive and NTS components, we will continue to adhere to the current, perminute rate structure for shared switching facilities.  X 4192. We also decline to adopt in full suggestions that we (1) retain the unitary pricing structure for tandemswitched transport, while (2) exempting IXCs and competing LECs that do not use the transport facilities supplied by the incumbent LEC from paying the TIC and (3) preventing the incumbent LEC from deaveraging the TIC within a state during a five year  X 4transition period. j {O7'Ѝ See Letter from James M. Smith, President, CompTel, and Robert C. Atkinson, Senior Vice President, Teleport Communications Group Inc., to Hon. Reed E. Hundt, Chairman, FCC, April 16, 1997. We are modifying our rules to prohibit incumbent LECs from assessing any perminute residual TIC charge on any switched minutes of CAPs that interconnect with  X4the incumbent LEC switched access network at the end office.<"j yOc'ԍ Section III.D.2.b.< In doing so, we adopt a position substantially similar to the second enumerated point, above, which Teleport and  Xb4CompTel characterize as the "most important" feature of this proposal.bj {O'Ѝ See Letter from James M. Smith, President, CompTel, and Robert C. Atkinson, Senior Vice President, Teleport Communications Group Inc., to Hon. Reed E. Hundt, Chairman, FCC, April 16, 1997. In addition, we are also taking other measures that will reduce substantially or eliminate the TIC in an expeditious manner. We decline, however, to adopt the other two suggestions. As explained in more detail above, the unitary rate structure is not costbased in that it requires incumbent LECs to recover costs incurred on an NTS basis through perminute charges and inhibits the development of competition by bundling reasonably segregable components of tandemswitched transport together and pricing them in a manner that does not reflect cost causation. We conclude that our new paradigm of promoting efficient competition requires that incumbent LECs adopt a costbased transport rate structure and that entrants providing transport facilities in competition with the incumbent LEC not pay the TIC.  Xe4193. Although in their comments in this proceeding the incumbent LECs virtually unanimously favor the threepart rate structure as most consistent with principles of costcausation, we recognize that incumbent LECs may face competition from competitors that are not limited to the threepart rate structure we adopt for incumbent LECs today. As such competition develops, the incumbent LEC may wish to respond by offering tandemswitched" T 0*&&aa" transport on a unitary pricing basis. We will address issues relating to when incumbent LECs should have the flexibility to offer a unitary tandemswitched transport rate structure in connection with our discussion of other pricing flexibility issues in a subsequent Report and Order that we will adopt in this proceeding.  X4194. Peak and OffPeak Pricing. As with the local switch, we conclude that we should not mandate a peakrate pricing structure for the tandem switch or common transport at this time. Many of the same practical difficulties with establishing, verifying, and enforcing a rational, efficient, and fair peakrate structure exist in the context of the tandem switch. We will consider whether incumbent LECs should have the flexibility to develop such peak and offpeak rate structures for local switching on a permissive basis when we consider other issues of rate structure flexibility in a subsequent Report and Order that we will adopt in this proceeding.  X '` ` d. Rate Levels  X4195. Allocation of 80 Percent of the Tandem Switching Revenue Requirement to the  X}4TIC. In establishing the interim transport rate structure, we required incumbent LECs to base their initial tandem switching charge on 20 percent of the interstate tandemswitching revenue requirement. In remanding this portion of the interim rate structure to us, the D.C. Circuit directed us either to implement a costbased tandem switching rate or offer a rational and nonconclusory analysis in support of our determination that an alternative structure is preferable.  X4196. Based on the record in this proceeding, we reallocate much of the remaining 80 percent of the tandem switch revenue requirement back to the tandem switching rate elements in three steps. We conclude that this action is most consistent with costcausation, and with the general approach we are taking in this Order regarding pricing issues. We do not require all of the 80 percent to be reallocated to tandem switching rates because the tandemswitching revenue requirement includes, not only the costs of the tandem switch, but other costs, such as SS7 signalling costs and tandem port costs, which we are requiring to be reallocated elsewhere.  X4197. Furthermore, if we required the price cap LECs to reallocate, dollarfordollar, the entire portion of the tandem switching revenue requirement that we reallocated to the  X4original TIC in the First Transport Order, we would deny tandemswitched transport customers the continuing benefits of past Xfactor reductions in the revenues permitted under price caps. Therefore, in order to preclude recovery of tandem switching costs in excess of the current revenues permitted under price caps, we direct price cap incumbent LECs first to account in the following manner for the effects of "GDPPI minus Xfactor" reductions to the  Xp$4original portion of the tandem switching revenue requirement allocated to the TIC in the First  X[%4Transport Order. Each price cap LEC first should calculate the percentage of its total"[%U0*&&aae#" original TIC that represented the 80 percent reallocation of its tandem switching costs when the TIC was created. It should then calculate this percentage of its current TIC, which represents the extant portion of the reallocated tandem switching costs. It is this extant portion that the price cap LECs should reallocate to tandem switching as described in the next paragraph.  Xv4198. In access tariff filings to become effective on January 1, 1998, incumbent LECs must identify the portion of the tandemswitching revenue requirement currently in the TIC that they reallocate to each rate element, including, as applicable, SS7 signalling, tandem port costs, or other rate elements. They must then reallocate one third of the tandem switching revenue requirement remaining in the TIC to the tandem switching rate element. Effective January 1, 1999, incumbent LECs shall reallocate approximately one half of the remaining amount of the tandem switching revenue requirement in the TIC to the tandem switching rate elements. Effective January 1, 2000, incumbent LECs shall reallocate any portion of the tandem switching revenue requirement remaining in the TIC to the tandem switching rate element. This threestep implementation of this change permits IXCs time to adjust their use of various incumbent LEC transport services, but sets a definite end date in the near future,  Xy4thus responding to the CompTel decision's concerns regarding the length of the transition to a costbased transport rate structure.  X64199. Some commenters argue that, rather than reallocating revenues from the TIC to other rate elements, we should reinitialize tandemswitched transport rates to levels reflecting long run incremental costs, making reallocation of TIC revenues to other transport rate elements unnecessary. We have decided in this Order, however, not to reinitialize access rates based on forwardlooking cost principles. We have instead determined that the first step in access reform is to make the current system as economically efficient as is possible within the limits of current ratemaking practices. Thus, the focus of this portion of this proceeding is on the development of costcausative rate structure rules. While we are taking several prescriptive steps using existing ratemaking methods to reduce initial baseline rates, we are generally adopting a marketbased approach, with a prescriptive backdrop, to move rates over time to levels reflecting forwardlooking economic costs. We disagree with those commenters  X94that argue that the Local Competition Order requires us immediately to prescribe rate levels  X$4for access elements based on longrun incremental costs. The Local Competition Order  X4addressed, inter alia, the pricing of unbundled network elements. While unbundled network elements may be used to provide interstate access services, their availability at TELRICbased prices does not compel adoption of similar rates for access services. We intend instead to rely on the availability of unbundled network elements to place marketbased downward pressures on access rates, subject to a prescriptive backstop. We will further address questions related to reinitialization to TELRIC rate levels in connection with our discussion of the prescriptive  X#4approach to access reform.C#j {O&'ԍ See Section IV.B.2.C"#VZ0*&&aa!"Ԍ X4ԙ200. Use of Switched Access Overhead Loadings for Initial Tandem Switching Rates. In setting rates, the interim transport rate structure derived both directtrunked transport rates and tandemswitched transmission rates using relatively low overhead loadings applicable to special access. Tandem switching rates, in contrast, were set using relatively higher switched access overhead loadings. As a result, the tandem switching revenue requirement became relatively high, in comparison to other transport rate elements.  Xa4201. Several commenters in this proceeding contend that our use of special access overheads in setting direct trunked transport rates was inappropriate because, while special access is used almost exclusively in high density, generally urban areas, directtrunked transport and, to an even greater extent, tandemswitched transport are used in less dense  X 4areas.^ j {O~ 'ԍ See, e.g., BellSouth Comments at 77, 80.^ In these less dense areas, overhead costs associated with transport may be higher than those associated with special access in urban areas. Some commenters have argued that we should either (1) equalize the overhead loading factors for all transport options by directing that the difference in transport rates is equal to the difference in the long run incremental cost of each transport option (DS3, DS1, and tandemswitched transport); or (2) otherwise ensure that transport customers pay an equal dollar amount of overhead per unit of  X{4traffic transported.J{Zj yO'ԍ Cable & Wireless Comments at 19.J  XM4202. We conclude that we need to make no change to the overheads attributed to tandem switching. As discussed above, we have decided not to base access prices directly at this time on incremental cost studies, but instead to make significant changes in existing ratemaking practices as the first step in access reform. Our current methods allocate overhead in a reasonable, costbased manner. In consultation with the Joint Board on Jurisdictional Separations, the Commission established procedures for allocating overhead expenses between  X4the state and interstate jurisdictions.;Zj {O^'Ѝ See, e.g., 47 C.F.R. 36.192, separating Corporate Operations Expenses, USOA Accounts 6710 and 6720, on the basis of the separation of the Big Three Expenses: Plant Specific Expenses, Plant NonSpecific Expenses, and Customer Operations Expenses.; Our Part 69 cost allocation rules in turn allocated interstate direct investment to broad categories, including Central Office Equipment (with respect to both local switching and tandem switching) and Carrier Cable and Wire Facilities (with respect to special access, directtrunked transport, and tandemswitched transport  Xg4transmission facilities).Mg j yO$#'ԍ 47 C.F.R. 69.305 69.306.M Other investment, including overhead, was allocated among these categories in proportion to the dollar amounts of net direct investment allocated to these"PW0*&&aaN"  X4categories.@j yOy'ԍ 47 C.F.R. 69.309.@ Similarly, direct expenses, where possible, were allocated to the category to  X4which the expenses are related.LXj {O'ԍ E.g., 47 C.F.R. 69.401.L Other expenses, including overheads, are allocated on the same basis as other investment, according to relative dollar amounts allocated to the various  X4categories.@j yOV'ԍ 47 C.F.R. 69.411.@ The Commission has stated that initial allocation of overheads based on relative costs closely approximates an economically efficient method assuming that the elasticity of  X4demands for the various outputs is not too dissimilar.u zj {O 'ԍ See, e.g., First Transport Order, 7 FCC Rcd at 7030 n.91.u  X_4203. Our Part 69 cost allocation rules, therefore, established category revenue requirements that included overheads allocated generally based on relative costs. Once these initial revenue requirements were established, our Part 69 rules permitted incumbent LECs to recover all costs assigned to each category through the rate elements established for that  X 4category.> X j yO'ԍ Since 1991, of course, the amounts recovered by price cap LECs have been subject to the price cap formulae. For all incumbent LECs, however, the relative allocation of overheads was originally established under costofservice regulation by the Part 69 cost allocation rules.> The incumbent LECs were permitted to assign overhead costs among the category rate elements in any way that is just and reasonable and not unreasonably  X 4discriminatory.F  , j yO'ԍ 47 U.S.C. 201202.F We find that it is reasonable to have set overhead loadings for tandem switching consistently with the overhead loadings for local switching, and disagree with those parties that argue that there is no cost justification for the current allocation of overheads to the tandem switch. The direct costs of both kinds of switching are fundamentally the same in that both types of switches are comprised of ports and a switching matrix. By contrast, the direct costs of transmission consist of outside plant and circuit equipment and certain central office equipment. So long as consistent overhead loading methodologies were used across switching functions, and across transmission functions, we find that a reasonable crossover is established for access customers between directtrunked transport and tandemswitched transport. As competition develops, we can also rely on market forces to pressure incumbent LECs to allocate overheads among rate elements in economically efficient ways. We address issues concerning the use of special access prices to initialize directtrunked transport rates in the interim rate restructure below in our discussion of the TIC.  X4204. We also decline to adopt a requirement for equalized overhead loadings. Overhead loadings are used to assign costs that do not qualify as the direct costs of a"|X 0*&&aa" particular service. Reasonable definitions of direct costs often leave in the overhead category costs that might reasonably be deemed attributable to a given service. Thus, if all of a carrier's costs are classified as either "direct costs" or "overheads," the overhead category will likely include costs that should not necessarily apply uniformly to all services. As a result, we think it desirable not to adopt a policy that is too specific and too rigid, and that might not permit recognition of legitimate differences in costing definitions. Furthermore, in a competitive market, it would be mere happenstance if different products or services of a single company recovered uniform amounts of overhead. If we were to require equalized overhead loadings, we would be interfering with the market discipline on which we are primarily relying. We might, for example, prevent an entrant from realizing a reasonable profit opportunity based on a rigid overhead loading requirement.  X 4205. In determining that our existing cost allocation rules reasonably allocated overhead to the initial tandem switching rate element and that we thus need not change the overheads currently attributed to tandem switching, we recognize that the D.C. Circuit in  X 4CompTel remanded the overhead issue to the Commission for further explanation and stated that the "cost allocation to the tandem switch" under the existing allocation rules "is, by the  X{4Commission's own estimation, grossly excessive."H {j {O'ԍ CompTel, 87 F.3d at 533.H The court did not provide a cite for its characterization of the Commission's "estimation," but the court may have been referring to  XM4the agency's finding in the First Transport Order that "most, but not all, of the interstate  X84tandem revenue requirement is attributable to tandemswitched transport."M 8Zj yOC'ԍ 7 FCC Rcd at 7062 (emphasis added).M The Commission in that order also identified only one category of costs having to do with SS7 technology  X 4that appeared to be misallocated to tandem switching.3 j {O'ԍ Id.3 Elsewhere in this Order, we have  X4taken steps to address that misallocation of SS7 costs.D|j {O 'ԍ See Section III.D.2.D That correction having been made,  X4 we find that our existing rules reasonably allocate overhead to tandem switching for the reasons discussed above.  X4206. Use of actual minutes of use rather than an assumed 9000 minutes of use. For tandemswitched transport rates to be presumed reasonable, the interim rate structure requires incumbent LECs to set perminute tandemswitched transport rates using a weighted average of DS1 and DS3 rates reflecting the relative numbers of circuits of each type in use in the tandemtoend office link, and assuming circuit loading of 9000 minutes of use per month per  X&4voicegrade circuit.\&j {O%'ԍ First Transport Order, 7 FCC Rcd at 703637.\ Based on the record before us, we find that continued use of this 9000"&Y0*&&aa" minutes of use assumption is no longer reasonable. Many commenters state that their actual traffic levels are substantially lower than 9000 minutes of use per month. Some incumbent LECs, particularly smaller LECs in rural areas, indicate that their actual traffic levels may be as low as 4000 minutes of use per month per voicegrade circuit. Accordingly, we conclude that rates for the common transport portion of tandemswitched transport must be set using a weighted average of DS1 and DS3 rates reflecting the relative numbers of DS1 and DS3 circuits in use in the tandemtoend office link, and using the actual voicegrade switched access common transport circuit loadings, measured as total actual minutes of use, geographically averaged on a studyareawide basis, that the incumbent LEC experiences based on the prior year's annual use. Incumbent LECs that deaverage their transport rates  X 4under our existing zonebased deaveraging rulesJ j {O 'ԍ See 47 C.F.R. 69.123.J may similarly deaverage the actual minutes of use figures that they use to calculate perminute common transport rates.  X 4207. Our assumption that voicegrade common transport circuits experience uniform loadings of 9000 minutes of use was initially based on 1983 data submitted in the original  X 4MTS and WATS Market Structure proceeding. Zj {O'Ѝ MTS and WATS Market Structure, Memorandum Opinion and Order, 97 F.C.C.2d at 862. In using this assumption as part of the interim rate structure, we stated that, "[t]he 9000 minutes per circuit per month standard  X{4serves as a convenient starting point in the context of a shortterm, interim rate structure."i{j {O'ԍ First Transport Reconsideration Order, 8 FCC Rcd at 5377.i We rejected at that time requests to develop a loading factor for small LECs that would reflect their actual, substantially lower circuit loading levels, stating that, "the benefits to be obtained from use of more individualized loading factors are outweighed by the benefits of the administrative convenience of a uniform loading factor and of avoiding verification  X4difficulties."3~j {O7'ԍ Id.3 Given the new competitive paradigm embodied in the 1996 Act, we conclude that this assumption must give way to charges based on actual usage levels. The same  X4conversion factor is not appropriate for each incumbent LEC.?j yO'ԍ U S West Reply at 32.? Because the 9000 minute assumption appears to have substantially overstated the actual traffic levels on many circuits, we now conclude that the current rate structure is unlikely to recover the full costs of common transport. Costs that properly should be recovered from common transport rate elements may currently be recovered through TIC revenues. Because the 9000 minutes of use loading factor has contributed, possibly significantly, to the level of the noncostbased TIC, we find that continued use of this factor is no longer reasonable.  X"4208. We therefore direct incumbent LECs to develop common transport rates based""Z0*&&aa"" on the relative numbers of DS1 and DS3 circuits in use in the tandemtoend office link, and using actual voicegrade circuit loadings, geographically averaged on a studyareawide basis, that the incumbent LEC experiences based on the prior year's annual use. As discussed above, incumbent LECs that deaverage their transport rates under our existing zonebased deaveraging rules may similarly deaverage the actual minutes of use figures that they use to calculate perminute common transport rates. As they develop transport rates based on actual minutes of use, we require incumbent LECs to use any increase in common transport revenues to decrease the TIC. These rates must be included in the LEC access tariff filings effective January 1, 1998.  X 4209. We disagree with commenters arguing that the actual number of minutes a  X 4circuit is in use is irrelevant in a ratesetting context.V j {O| 'ԍ See, e.g., WorldCom Reply at 35.V These commenters argue that rates should be set based on forwardlooking cost studies using Commissiondetermined "efficient" traffic levels, which they argue may be far higher than either the actual traffic levels, or the 9000 minutes of use assumption. As explained elsewhere, we are not taking the general approach of prescribing rates at forward looking economic costs, and we decline to make an exception in this instance. We are instead reforming access charges so that they more closely reflect the costs imposed by individual access customers. We also do not find it necessary to employ different principles here to ensure that incumbent LECs face sufficient incentives to design their networks to achieve efficient usage levels. LECs subject to price cap regulation already have only limited ability to raise rates to cover the costs of inefficient network designs, and are able to benefit from increased profits as their efficiency improves. In addition, as competition develops for local service, all incumbent LECs will face increasing pressure to provide service as efficiently as possible.  X' _D.Transport Interconnection Charge (TIC)  X'1.` ` Background  Xe4210. Under our Part 36 separations rules, certain costs of the incumbent LEC network are assigned to the interstate jurisdiction. The Part 69 cost allocation rules allocate these costs  X74_among the various access and interexchange services, including transport. In the First  X"4Transport Order,V"Zj {O-!'ԍ First Transport Order, 7 FCC Rcd 7006.V we restructured interstate transport rates for incumbent LECs. The restructure created facilitybased rates for dedicated transport services based on comparable special access rates as of September 1, 1991, derived perminute tandemswitched transport transmission rates from those dedicated rates, established a tandem switching rate, and established a TIC that initially recovered the difference between the revenues from the new facilitybased rates and the revenues that would have been realized under the preexisting"![0*&&aa% " "equal charge rule." Under the equal charge rule, which arose from the AT&T divestiture of  X4the BOCs,nj {Ob'ԍ United States v. American Tel. and Tel. Co., 552 F. Supp. 131.n the BOCs were required to charge a perminute, distancesensitive rate for their transport offerings, regardless of how the underlying costs were incurred. The TIC was intended as a transitional measure that initially made the transport rate restructure revenue neutral for incumbent LECs and reduced any harmful interim effects on small IXCs caused by  X4the restructuring of transport rates.\Zj {O'ԍ First Transport Order, 7 FCC Rcd at 703840.\ Approximately 70 percent of incumbent LEC transport revenues are generated through TIC charges, or approximately $3.1 billion, according to  X_4USTA.G_j yO 'ԍ USTA Comments, Attachment 11.G  X14211. The TIC is a perminute charge assessed on all switched access minutes, including those of competitors that interconnect with the LEC switched access network through expanded interconnection. In the NPRM, we sought comment on how to reduce and eliminate the TIC in a manner that fosters competition and responds to the D.C. Circuit's  X 4CompTel remand. We sought comment on different methods of recovering the costs currently recovered by the TIC, including: (1) giving the incumbent LECs significant pricing flexibility and allowing market forces to discipline the recovery of the TIC, either alone or in conjunction with a phaseout of the TIC; (2) quantifying and correcting all identifiable cost misallocations and other practices that result in costs being recovered through the TIC; (3) combining the above approaches, for example, by addressing directly the most significant and readilycorrected misallocations, and then relying on a marketbased approach to reduce what remains of the TIC; (4) providing for the termination of the TIC over a specified time, such as three years. We specifically sought comment on the possible reassignment of costs based on several explanations for the amounts in the TIC. The NPRM also sought comment on how the resolution of the issues surrounding the TIC would be affected by decisions on universal service, by the level of any residual costs, and by the adoption of either the marketbased or prescriptive approach to access reform.  X' 2.` ` Discussion  Xg4212. As a perminute charge assessed on all switched access minutes, including those of competing providers of transport service that interconnect with the LEC switched access network through expanded interconnection, the TIC adversely affects the development of competition in the interstate access market. First, as discussed more fully below, some of the revenues recovered through the TIC should be recovered through other switched access elements, including transport rates other than the TIC. The TIC, as currently structured, provides the incumbent LECs with a competitive advantage for some of their interstate"\|0*&&aa" switched access services because the charges for those services do not recover their full costs.  X4At the same time, the incumbent LECs' competitors using expanded interconnection"j yOb'Ѝ Under our expanded interconnection rules and policies, competitors may interconnect with the incumbent LEC's facilities at the end office and supply their own transport. For a more detailed discussion of expanded  {O'interconnection, see Expanded Interconnection with Local Telephone Company Facilities, Memorandum Opinion and Order, 9 FCC Rcd at 5157. must pay a share of incumbent LEC transport costs through the TIC. Second, all other things being equal, the usagerated TIC increases the perminute access charges paid by IXCs and longdistance consumers, thus artificially suppressing usage of such services and encouraging customers to explore ways to bypass the LEC switched access network, particularly through the use of switched facilities of providers other than the incumbent LEC that may be less economically efficient than incumbent LECs.  X14213. As we noted in the NPRM, our goal is to establish a mechanism to reduce and eliminate the TIC in a manner that fosters competition and responds to the D.C. Circuit's remand. To that end, we below identify several costs included in the TIC that should be reallocated to other access elements. We conclude, however, that on the present record, we cannot immediately eliminate the TIC entirely through these reassignments. We establish a mechanism that should substantially reduce the remaining TIC over a short, but reasonable period. In addition, we will in the near future refer a broad range of separations issues to a Joint Board for purposes of determining whether certain costs currently allocated to the interstate jurisdiction and recovered through the TIC more properly should be allocated to the intrastate jurisdiction. Finally, we establish the means by which the remaining TIC amounts are to be recovered.  X' ` ` a. Reallocation of costs in the TIC  X4  X4214. The record in response to the NPRM clearly establishes that some costs in the TIC should be reallocated to other access elements. USTA, in conjunction with the incumbent LECs, submitted extensive comments setting forth an incumbent LEC consensus explanation of the causes for the sums in the TIC and estimates of the amounts associated  X4with each explanation.Oj yO'ԍ USTA Comments, Attachments 10 and 11.O While the current rulemaking record will not permit us to prescribe specific amounts that individual incumbent LECs must shift from the TIC to specific access rate elements, it does permit us to direct incumbent LECs to make certain cost reallocations and to require them to calculate the appropriate level of the reallocation in the supporting materials filed with the tariffs implementing the changes. Below, we discuss each of the identified causes of costs being included in the TIC and the extent to which costs should be reallocated to other access elements or categories. "]B0*&&aa"Ԍ X4215. In this Order, we do not address certain rate structure issues relating to incumbent LECs subject to rateofreturn regulation. These LECs account for relatively few  X4access lines.!j {OK'Ѝ As of December 31, 1995, larger, reporting local exchange carriers (i.e., those with revenues of at least $100 million) account for 92.6 percent of the total presubscribed lines. Federal Communications Commission,  {O'CCB, Industry Analysis Division, Preliminary Statistics of Common Carriers, Tbl. 2.3, Total Presubscribed Lines for all Local Exchange Companies (July 1996). Thus, small local exchange carriers account for 7.4 percent of the presubscribed lines.! In some instances we direct price cap LECs to allocate costs to new rate elements that do not currently exist for rateofreturn LECs. We anticipate that we will propose similar rate elements in the forthcoming notice of proposed rulemaking addressing rate structure issues for incumbent LECs subject to rateofreturn regulation. Recognizing the expense and difficulties of modifying billing systems, we conclude that, until the rate structure issues are resolved for rateofreturn companies, the costs allocated to new elements and any residual TIC revenues may continue to be recovered by the incumbent LECs that are not subject to price cap regulation through perminute TIC rates assessed on both originating and terminating access.  X 4216. As their primary challenge to the incumbent LEC proposals to reallocate costs from the TIC, several parties argue that we should use forwardlooking cost principles, or TELRIC, in determining how much to shift from the TIC to other access categories. Some parties advocating the use of such forwardlooking cost standards assert that any costs not meeting these forwardlooking cost standards should be eliminated from the TIC, and the incumbent LECs should not be permitted to recover those amounts. One group of consumer advocates proposes that we need not complete TELRIC studies before substantially reducing the TIC because BA/NYNEX has already proposed, as part of their access charge reform compromise plan, to eliminate up to 80 percent of the TIC pending a determination of  X4"service related" costs by the Commission.VZ|j {OJ'Ѝ See Letter from Brian R. Moir, Esq., Counsel to the International Communications Association, to William F. Caton, Acting Secretary, FCC, April 16, 1997; Letter from G.R. Evans, Vice President, Federal Regulatory Affairs, NYNEX, to William Caton, Acting Secretary, FCC, April 4, 1997.V We conclude, however, that immediate, widespread, prescriptive action is not necessary to pressure access rates toward marketbased levels. Instead, we have determined that the most appropriate first step towards access reform is to make the current rate structure as economically efficient as possible within the limits of past ratemaking practices. These practices include setting rates based on interstateallocated  X4costs, subject to price cap constraints for most large carriers.Ej {O!'ԍ See Section I, above.E As we discuss more fully in Section IV, below, we intend in the future to rely primarily on market forces, with a prescriptive backdrop, to move rates toward forwardlooking economic cost. Therefore, because we currently are not prescribing a forwardlooking cost method for access reform, we will require reassignment of certain TIC revenues based on an analysis of the separated,"N^0 0*&&aa4" booked costs already recovered through the TIC.  X4217. SS7 costs. Based on the record before us, we conclude that SS7 costs that are recovered by the TIC should be removed from the TIC and allocated to the trafficsensitive basket. The record demonstrates that these costs are related to the signalling function and should be recovered through local switching or signalling rate elements. The costs to be removed are the costs of signal transfer points (STPs) that were included in the tandemswitching category for jurisdictional separations purposes and the cost of the link between the end office and the STP that is used only for SS7 signalling. The incumbent LECs shall distribute the STP costs reallocated from the TIC to local switching or, if the incumbent LEC has established an unbundled signalling rate structure, to appropriate SS7 elements, in tariffs filed to be effective January 1, 1998. The incumbent LEC shall distribute the costs of the link between the local switch and the STP that are included in the TIC to local switching or, if provided, to the callsetup charge. This change means that the incumbent LECs' SS7 prices will reflect the full cost of providing SS7 signalling and provide the proper price signals to developers of new services utilizing SS7. We decline to adopt the suggestion of US West that we reallocate SS7 costs to services in the trunking basket. As we conclude below in conjunction with our consideration of the SS7 rate structure, the costs being reallocated are appropriately included in the trafficsensitive basket.  X64218. Tandem switching costs. Several parties argue that the tandem switching rate must be set to reflect the cost of providing the service. In the preceding section, we modified the existing tandemswitched transport rate structure and revised certain of the pricing rules applicable to elements of tandemswitched transport to establish a costbased structure and to  X4respond to the court remand in CompTel v. FCC. The revised pricing rules applicable to tandem switching include two separate elements a flatrated port charge to be assessed when a port is dedicated to a single customer and a per minute charge to be assessed for the trafficsensitive portion of the tandem switch. In three approximately equal annual steps, beginning January 1, 1998, we require reallocation of all tandemswitching revenues currently allocated to the TIC to the tandemswitching rate element. As a result of this modification, the total revenues recovered through the tandem switching rates will, subject to price cap limits, increase to the level of costs assigned to the interstate jurisdiction by the separations process at the end of our plan. Equivalent changes to the amounts recovered through the TIC must be made to ensure that overrecovery does not occur. After this adjustment, in  X4accordance with the CompTel remand, and to facilitate the development of economicallyefficient competition for tandemswitching services, the TIC will not recover any costs that are attributable to tandem switching.  X"4219. DS1/voicegrade multiplexer costs. We conclude that the costs of DS1/voice""_0*&&aa "ԫ X4grade multiplexing j yOy'Ѝ DS1 transport trunks need to be demultiplexed into individual voicegrade circuits before being switched at analog end office switches. DS1/voicegrade multiplexers perform this function. associated with analog local switches should be reassigned to the newly created trunk ports category within the traffic sensitive basket. Analog switches require a voicegrade interface on the trunkside of the end office switch. Our separations rules assign the costs of DS1/voicegrade multiplexers to the cable and wire category. The costs of these multiplexers associated with switched access were originally included in the Part 69 transport revenue requirement. The revised transport rules adopted in 1992 established transport rates based on DS1 switch interfaces, and thus the rates did not include the costs of DS1/voicegrade multiplexers. The costs of the DS1/voicegrade multiplexers are, therefore, included in the TIC. Therefore, the costs associated with DS1/voicegrade multiplexing associated with analog local switches should be reassigned to the trunk ports category within the traffic sensitive basket, to be considered in conjunction with the development of appropriate rates for trunk ports, in tariffs filed to become effective January 1, 1998. This will make recovery of the costs necessary to use an analog switch port equivalent to the recovery of digital switch port costs, in which the multiplexing function is included in the port itself.  X 4220. Host/remote trunking costs. We agree with the parties that allege that the costs of host/remote links not recovered by the current tandemswitched transport rates should be included in the tandemswitched transport category. The record reflects that the rates for carrying traffic between the host and a remote switch, for which the tandemswitched transport rates, both fixed and per mile, are assessed, do not recover the full costs of this transmission service. These charges for host/remote service are in addition to charges that an IXC is assessed for either directtrunked transport, or tandemswitched transport, between the serving wire center and the host end office. This reassignment will ensure that these transmission costs will be recovered from those using the transmission facilities, and must be included in tariff filings to become effective January 1, 1998. We reject NECA's suggestion that we include these costs in local switching on the theory that remote facilities are installed when it is more cost effective to do that than it is to install a new switch at the remote location. That would require all users of local switching to pay for these host/remote transmission facilities. Imposing the host/remote transmission cost on the users of host/remote facilities is more cost causative and will facilitate the development of access competition. ` `  X94221. Additional multiplexers associated with tandem switching. Based on the record before us, we conclude that an IXC's decision to utilize tandemswitched transport imposes the need for additional multiplexing on each side of the tandem switch. The revised tandemswitched transport rate structure provides for these multiplexers. For price cap LECs, recovery of the costs associated with the multiplexers should, therefore, be shifted from the TIC to the tandemswitched transport category as of January 1, 1998, as explained in Section III.C. This realignment of costs helps ensure that tandemswitched transport rates are cost  X"4based, as required by the CompTel decision, and facilitates competitive entry for those""`  0*&&aa " services.  X4222. Use of actual minutes of use rather than an assumed 9000 minutes of use. The data in the record provided by USTA and other incumbent LECs support a finding that for many incumbent LECs, especially those serving less densely populated areas, the assumed 9000 minutes of use per circuit is far higher than actual minutes of use. A tandemswitched transport rate derived by dividing the cost of a circuit by an assumed usage level does not recover the costs of the circuit when the actual usage is below that level. The costs not recovered through tandemswitched transport rates based on our current 9000 minutes of use assumption are being recovered through the TIC. In the preceding section, we conclude that the pricing of tandemswitched transport transmission should be based on the actual average minutes of use on the shared circuits and that such pricing would produce a costbased rate. Accordingly, costs should be removed from the TIC equal to the additional revenues realized from the new tandemswitched transport rates when it is implemented in accordance with the rate structure established in Section III.C.  X4223. Central Office Equipment (COE) Maintenance Expenses. The record in this proceeding demonstrates that allocating COE maintenance expenses on the basis of combined COE investment produces misallocations of these expenses among access services. USTA correctly traces this problem to the Part 36 separations rules; the problem is then tracked in our Part 69 cost allocation rules. Under our current rules, COE maintenance expenses are  X!4allocated among separations categories, and then access services, based on the combined investment in the three categories of the COE plant being maintained Central Office  X4Switching, Operator Systems, and Central OfficeTransmission rather than on the individual investment in each of those categories. As a result, a portion of the expense of maintaining local switches and operator systems is recovered in rates for common line, transport, and  X4special access even though those do not utilize any local switching or operator systems.C!j yO+'ԍ BellSouth Comments at 78.C Correcting this misallocation through changes to Part 36 would require referral to a FederalState Joint Board and therefore could not be done in this proceeding. The misallocation can, however, be corrected by modifying section 69.401 of our rules to provide that the COE expenses assigned to the interstate jurisdiction should be allocated on the basis of the allocation of the specific type of COE investment being maintained, and we make the correction here. This will shift some costs to local switching from common line and transport, and result in more costbased rates. This shift must be reflected in tariff filings to be effective January 1, 1998. We also plan to refer the underlying separations issue to a Joint Board for its recommendation.  X!4224. Separationsrelated causes. Several incumbent LECs argue that a substantial portion of the TIC can be traced to decisions separating costs between the interstate and intrastate jurisdictions. As explained by USTA and incumbent LECs, the largest portion of"#aX!0*&&aa!" the amounts recovered by the TIC results from the differences in the jurisdictional separations  X4allocation procedures for message (i.e., switched) services and special access services, and from the consequent effects of the Commission's decision to use special access rates to establish transport transmission rates when the Commission restructured transport rates. The current jurisdictional separations process separates the costs of message services based on average cost factors; costs of DS1 and DS3 special access services, in contrast, are separated using unit costing methods. Because of the differences in these separations methodologies, special accessderived rates reflect the costs of transport in areas in which special access services are most often offered (urban, higher density areas), and do not reflect the costs of transport in rural, less dense areas. Another alleged separationsrelated cause of the amounts in the TIC is the use of circuit termination counts in the separations process to allocate costs between special access and switched services before they are allocated between federal and state jurisdictions. This practice appears to allocate costs disproportionately to switched services. The incumbent LECs assert that the use of direct costing methods would assign many of these costs to local and intrastate services and to interstate services other than  X 4transport." j yO"'ԍ If the Joint Board on Jurisdictional Separations takes action to address this issue, we will then consider what corresponding reallocations should be made.  X{4225. We find that some of the remaining costs recovered by the TIC result from at least two different causes: (1) the separations process assigned costs differently to private line  XM4and message (i.e., switched) services, resulting in costs allocated to special access being lower than those allocated to the message category, even though the two services use comparable facilities rates for directtrunked transport and the transmission component of tandemswitched transport, which are switched services, therefore, do not recover the full amount of separated costs; and (2) the cost of providing transport services in less densely populated areas is higher than that reflected by transport rates derived from those special access rates. The existing record is inadequate to permit us to identify more costs that could clearly be reallocated to interstate services. Furthermore, the record indicates that some residual TIC costs may be appropriately allocated to intrastate services. Because we will soon be considering a Notice of Proposed Rulemaking to refer to a Joint Board questions regarding separations, we will leave the determination of the ultimate allocation of the remaining costs recovered by the TIC until the conclusion of that proceeding.  X$4226. Incumbent LEC parties generally contend that special access rates provided an acceptable initializing pricing level for transport transmission services in geographic areas where significant amounts of special access services are provided, but do not reflect the cost of providing transport service in lowdensity areas in which special access services are not as"b "0*&&aaQ"  X4widespread.#j {Oy'Ѝ See, e.g., USTA Comments at 65; GTE Comments at 38; Aliant Comments at 3. See also Cable & Wireless Comments at 2122. We recognize that rates for directtrunked transport and for the transmission component of tandemswitched transport, because they were established based on special access rates, do not reflect the full cost of providing transport services in highercost, rural areas. Because none of our other facilitiesbased rate elements recover costs reflecting this differential, we conclude that the additional costs of rural transport currently are recovered through the TIC. On the basis of the current record, however, we are unable to quantify these cost differentials. Moreover, based on differences in network architectures, population density variations, topography, and other factors that vary among LECs, we find that transport cost differentials are also likely to vary greatly among incumbent LECs and among study areas served by the same incumbent LEC. We do not believe, however, that we need to quantify these differences in this Order to ameliorate this distortion caused by the current rate structure, because the requirements set forth in the next paragraph will address this issue.  X 4227. If an incumbent LEC deaverages its transport rates, either by implementing zone X 4density pricing under our rules@$ "j yO'ԍ 47 C.F.R. 69.123.@ or by waiver, the underlying predicate is that the costs in lowdensity areas are higher than those in higherdensity areas. The rates it sets for the different areas should reveal a cost differential of at least that magnitude between lowdensity and highdensity areas served by that LEC. When an incumbent LEC deaverages transport rates, therefore, we require it to reallocate additional TIC amounts to facilitiesbased transport rates, reflecting the higher costs of serving lowerdensity areas. The reallocation we require here will permit incumbent LECs, in deaveraging their transport rates, to achieve costbased transport rates while ensuring that a significant portion of costs reflecting the geographic cost difference are removed from the TIC. Each incumbent LEC must reallocate costs from the TIC each time it increases the deaveraging differential. We find that any incumbent LEC that has already deaveraged its rates must move an equivalent amount from the TIC to its transport services. Under any of these scenarios, the costs shall be reassigned to directtrunked transport and tandemswitched transport categories or subcategories in a manner that reflects the way deaveraging is being implemented by the incumbent LEC. We do not require incumbent LECs that average their transport rates to make a similar reallocation at this time, because of the difficulty in determining the amount to be reallocated.  X74228. Price Cap Implementation issues. For purposes of phasing out the TIC, we are keeping the TIC in its own service category in the trunking basket. The reallocation of costs from the TIC to other access elements will require price cap LECs to adjust their price cap indices (PCIs) and service band indices (SBIs) to reflect the new revenue streams. To accomplish these reallocations, price cap LECs shall make exogenous adjustments to their PCIs and SBIs that are targeted to the indices in question, rather than applying the exogenous" c$0*&&aaH" adjustment proportionately across all categories in the affected price cap basket. Thus, when a reallocation occurs within a price cap basket, only the affected SBIs will be adjusted. When the reallocation affects service categories in more than one basket, however, the affected PCIs and SBIs must be adjusted. The upward or downward adjustment to the PCIs and upper SBIs shall be calculated as the percentage of the revenues being added or subtracted from a basket or category, divided by the total revenues recovered through the basket or category at the time of the adjustment. For example, if ten percent of the revenues are being reallocated from a service category, the category upper SBI will be reduced by ten percent. If that revenue amount is only three percent of the PCI for the basket, the PCI is reduced by three percent.  X ' ` ` b. Treatment of Remaining Costs Recovered by the TIC  X 4 ` `   X 4229. Residual TIC reduction plan. After the costs identified above have been reallocated to other access services, some costs will continue to be recovered by the TIC. While it is desirable to eliminate the TIC as soon as possible by shifting the costs recovered by the TIC to facilitiesbased rates, referring separations questions to a Joint Board is the best means of reaching that ultimate objective, as we noted earlier. Even as we make this referral, we will require incumbent LECs to target to the TIC price cap reductions arising in any price cap basket as a result of the application of the "GDPPI minus Xfactor" formula until the  XM4perminute TIC is eliminated, as many parties have suggested.%Mj {O'Ѝ See, e.g., PacTel Comments at 72; Sprint Comments at 29,52; Ameritech Reply at 3233; BA/NYNEX  {O'Comments at 38. These parties submit that this targeting will permit incumbent LECs to manage the reduction in revenues recovered by the TIC, while reducing the amount at issue in the TIC. Sprint states that, using a targeting approach, we would not need to address the cost allocation issues raised by Part 36 and Part  X469.@&$j yO'ԍ Sprint Reply at 1718.@ Targeting these price cap reductions to the TIC reduces the TIC over a reasonable period, thereby ultimately substantially reducing what is widely recognized to be an inefficient aspect of the access rate structure. We require pricecap LECs to begin these targeted Xfactor reductions to the TIC in tariff filings to become effective July 1, 1997.  X~4230. Targeting PCI reductions to the perminute TIC will not change the overall revenue levels that our price cap mechanisms permit incumbent LECs to receive. We have reallocated those costs that the record shows are clearly related to other facilitiesbased elements. The upcoming separations proceeding may provide additional data that will permit us to reallocate more costs to facilitiesbased rate elements, or to the intrastate jurisdiction. The approach we take is a reasonable response to the D.C. Circuit's remand directive, and establishes a plan that should substantially reduce the TIC within a reasonable period, pending review of the jurisdictional separations process. " d&0*&&aaH"Ԍ X4231. We reject ALTS' allegation that targeting the productivity factor to the TIC undercuts the rationale for the "just and reasonable" status of all pricecap rates, which ALTS contends is dependant on the widespread application of the Xfactor. The targeting approach that we adopt will eliminate anticompetitive aspects of the TIC, which promotes inefficient entry into the transport market by imposing some transport costs on IXCs that do not cause the costs to be incurred. In addition, by spreading current TIC revenues across all price cap PCIs and SBIs, our targeting method does not offer TIC revenues special insulation against the pressures of the competitive marketplace, as would some proposals to bulkbill the TIC to IXCs. We also decline to adopt the approach of spreading the remaining costs recovered by the TIC proportionately among all transport services, as proposed by State Consumer  X 4Advocates.U' j yO 'ԍ State Consumer Advocates Comments at 3437.U That approach might, because of the unknown nature of the costs that will remain in the TIC, result in an excessive reallocation to transport.  X 4232. The D.C. Circuit instructed us to revise our transport rate structure rules to be more consistent with costcausation principles. There is conflicting evidence in the record concerning the nature of the costs contained within the residual TIC; these costs may be traffic sensitive or NTS and may be associated with common line, transport or switching services. BA/NYNEX states, without explanation, that the costs in the TIC are NTS in  Xb4nature.(bXj yOk'Ѝ BA/NYNEX Reply at 3940. USTA and many incumbent LECs proposed recovering the remaining TIC  {O3'costs through a bulk billing mechanism based on an IXC's share of presubscribed lines or revenues. See, e.g., USTA Comments at 66; BA/NYNEX Comments at 38; PacTel Comments at 72; SNET Reply at 2728. This proposal to use presubscribed lines is consistent with treating the remaining costs recovered by the TIC as NTS costs. To the extent that some portion of the residual TIC has its origin in the methods used to separate cable and wire facilities between the regulatory jurisdictions, it seems likely that BA/NYNEX is partially correct in this assertion. The evidence, however, does not clearly resolve this issue.  X4233. If the costs remaining in the residual TIC are NTS, as BA/NYNEX suggests, then trafficsensitive recovery could artificially raise perminute rates for interstate access. These higher perminute access rates could distort the market for interstate toll services by artificially suppressing demand for interstate toll services and by encouraging users that efficiently could make use of the network to instead seek other alternatives. Conversely, if costs remaining in the residual TIC are usagesensitive, flatrating may also create a distortion by encouraging inefficient overuse of interstate toll services. Because the limited evidence in the record suggests that at least some amount of the residual TIC represents NTS costs, and because we wish to see that consumers enjoy the benefits of usage of the network to the greatest extent possible, we find that we should err, if at all, on the side of NTS recovery of these costs. For elements not demonstrably reflecting usagesensitive costs, therefore, we" e (0*&&aa" find, on balance, compelling policy arguments in favor of flatrated pricing because usagesensitive recovery of any NTS costs artificially suppresses demand for interexchange calling by inflating perminute rates. In the absence of definitive evidence as to the nature of the residual TIC amounts, we conclude that the public interest would be better served by imposing these costs on IXCs on a flat perline basis, rather than on a perminute basis.  Xv4234. Accordingly, we seek to migrate the current usagebased charges into flatrated charges as quickly as possible consistent with avoiding shortterm market distortions. We do that by: (1) on July 1, 1997, drawing down the perminuteofuse residual TIC charge by targeting the price cap productivity (Xfactor) adjustment to the trunking PCI and, specifically, the TIC SBI, thus effectively spreading those residual TIC revenues, which otherwise would be recovered exclusively on a minute of use basis, among the universe of (both trafficsensitive and NTS) access services and moving TIC recovery closer to flatrated recovery; (2) starting in January 1998, recovering remaining residual TIC revenues through PICC charges each year, subject to the PICC cap; and (3) drawing down any remaining residual perminute TIC revenues each July by targeting the annual XFactor adjustments to those revenues.  Xb4235. The targeting of price cap productivity reductions to the TIC will be accomplished in the following manner. Because the price cap LECs will not have reallocated facilitiesbased costs contained in the TIC before they file tariffs to be effective July 1, 1997, we first direct the price cap LECs to compute their anticipated "residual" TIC amount by excluding revenues that are expected to be reassigned on a costcausative basis to facilitiesbased charges in the future, pursuant to the transition plan described in this Order. To determine TIC amounts so excluded, NYNEX, BellSouth, U S West, and Bell Atlantic shall  X4use the residual TIC percentage estimates contained in USTA's ex parte letter filed May 2,  X41997, to compute their respective anticipated residual TICs.S)Zj yO%'Ѝ These percentages are as follows: NYNEX, 77.63 percent; BellSouth, 56.93 percent; U S West, 59.14  {O'percent; and Bell Atlantic, 63.96 percent. See Letter from Linda Kent, Associate General Counsel, USTA, to William F. Caton, Acting Secretary, filed May 2, 1997.S SBC Communications shall use  X4the cost data for SWBT, Pacific Bell, and Nevada Bell contained in its ex parte letter filed  X4April 24, 1997 to estimate its residual TICs.j*Zj yO'Ѝ These percentages, calculated from TIC data supplied, are: SWBT, 69.11 percent; Pacific Bell and  {O'Nevada Bell combined, 53.52 percent. See Letter from Todd F. Silbergeld, Director Federal Regulatory, SBC Communications, Inc., to William F. Caton, Acting Secretary, April 24, 1997.j Each remaining price cap LEC shall estimate a "residual" TIC in an amount equal to 55 percent of its current TIC revenues. For these remaining price cap LECs, we find that this 55 percent level represents a reasonable, but conservative estimate. The 55 percent level corresponds approximately to the lowest residual TIC percentage identified in the record, and three of the price cap LECs that submitted data on the record are within a few percentage points of this level. We therefore find that residual" f *0*&&aa" TIC estimates at the 55 percent level for companies that have not developed actual percentage estimates on the record will be reasonable, but will also minimize the risk that we will eliminate facilitiesbased TIC costs with targeted Xfactor price cap reductions.  X4236. The "GDPPI minus X" adjustments LECs ordinarily would apply to each of their price cap indices (i.e. revenues) for the July 1, 1997, annual filing shall be applied by LECs to reduce their calculated anticipated "residual" TIC revenues. For tariffs to become effective July 1, 1997, the price cap LECs shall calculate the annual price cap reduction resulting from the application of the productivity adjustment to each basket other than the interexchange basket, and shall sum the dollar effects of the adjustment. If the effect is to reduce PCIs, the dollar amount shall be targeted completely to the trunking basket PCI and the TIC SBI, without changing the PCIs or SBIs for any other basket or service category. The percentage reduction in the PCI and SBI shall equal the ratio of the total dollar effect of the price cap annual adjustment to the dollar value of the PCI and SBI, respectively. If the effect of the productivity adjustment would increase the PCIs, the PCIs shall be adjusted in their usual fashion, and no targeting to the TIC shall occur. This avoids exacerbating an already inefficient aspect of the access rate structure.  Xb4237. Price cap LECs will begin reallocation of facilitiesbased TIC components on January 1, 1998. At that time, the price cap LECs should all have actual cost data reflecting the facilitiesbased components of the TIC. If, at that time, any price cap incumbent LEC determines that its use of the applicable residual TIC estimate, above, resulted in more PCI reductions being targeted to the interconnection charge in its tariff filing to become effective on July 1, 1997, than were required to eliminate the perminute interconnection charge, then that price cap LEC shall make necessary exogenous adjustments to its PCIs and SBIs to reverse the effects of the excess targeting.  X4238. For tariff filings to become effective July 1, 1998, and annually in July thereafter, all price cap LECs will have actual cost data reflecting the facilitiesbased components of the TIC and will be able to target reductions to actual anticipated residual perminute TIC amounts without resort to the percentage estimates prescribed above. For these filings, "GDPPI minus X" adjustments similar to those described above shall be targeted to the trunking basket PCI and the TIC SBI to reduce residual perminute TIC amounts recovered through perminute originating and terminating access charges.  X4239. To avoid the adverse effects of perminute pricing of costs that may be NTS, we require price cap LECs to recover residual TIC amounts not otherwise eliminated by targeted Xfactor reductions, described above, through the flatrated PICC to the extent the PICC is below its ceiling. In order to ensure that primary residential and single line business subscribers do not pay more than their fair share of the residual TIC, however, we prohibit price cap LECs from charging a PICC on primary residential or singleline business lines that recovers TIC revenues that exceed residual TIC revenues permitted under our price cap rules"Q%g*0*&&aae#" divided by the total number of access lines. As the PICC caps increase each year, more of the residual TIC charge can be included in the flatrated PICC. Any residual TIC amounts that cannot be recovered through the PICC shall be recovered on a perminute basis from originating traffic, subject to a cap on perminute originating access charges, as explained in  X4Section III.A, above.E+j {O'ԍ See para. 100, above.E If this cap is exceeded, the residual TIC shall be recovered through perminute terminating switched access rates. Although a portion of the residual TIC will be recovered through PICC charges, the TIC will remain in the trunking basket. Therefore, to ensure that excess headroom is not created in the trunking basket, price cap LECs shall include the TIC revenues received from the flatrated PICC in calculating the API for the trunking basket and the SBI for the TIC.  X 4240. The policies adopted when the TIC was created require incumbent LECs to assess the TIC on all minutes that interconnect with the incumbent LEC switched access network, including minutes that transit a CAP's transport network without using any  X 4incumbent LEC transport facilities. As we noted in the NPRM,:, Zj yO'ԍ NPRM at  97.: and as some commenters  X 4assert,y- j {OB'ԍ See, e.g., Teleport Comments at 3032; Time Warner Comments at 1213, 15.y if the incumbent LEC's transport rates are kept artificially low and the difference is recovered through the TIC, competitors of the incumbent LEC pay some of the incumbent LEC's transport costs. In a recent arbitration between Teleport and US West, the Colorado Commission has precluded US West from imposing the TIC on competitors for the portion of  XK4transport that U S West does not provide..K|j {Ox'Ѝ See TCG Colorado Petition for Arbitration Pursuant to 252(b) of the Telecommunications Act of 1996  {OB'to Establish an Interconnection Agreement with U S West, Docket No. 96A329T, Decision Regarding Petition  {O 'for Arbitration, Decision No. C961186 (adopted Nov. 5, 1996); TCG Colorado Petition for Arbitration Pursuant  {O'to 252(b) of the Telecommunications Act of 1996 to Establish an Interconnection Agreement with U S West, Docket No. 96A329T, Order Denying Applications for Rehearing, Reargument, or Reconsideration, Decision No. C961344 (adopted Dec. 18, 1996), at  I.B.1.4; Letter from Judith Herrman, Manager, Federal Regulatory  yO0'Affairs, Teleport Communications Group, to Richard Lerner, Competitive Pricing Division, FCC, April 11, 1997. á We find that our current policy, which requires competitive entrants to pay the TIC even in cases where it provides its own transport, is inconsistent with the procompetitive goals of the 1996 Act. We therefore modify our rules to permit incumbent LECs to assess any perminute residual TIC charge only on minutes that utilize incumbent LEC transport facilities, and not on any switched minutes of CAPs that interconnect with the incumbent LEC switched access network at the end office.  X4241. Other Approaches. We reject alternative methods for recovering the TIC that were proposed in the record. The majority of the incumbent LEC parties supported recovering any remaining costs in the TIC by bulk billing such amounts to IXCs based on"~h .0*&&aa"  X4each IXC's share of revenues, or presubscribed lines./j {Oy'ԍ See, e.g., USTA Comments at 66; BellSouth Comments at 1314; PacTel Comments at 72. Other incumbent LECs proposed  X4establishing "public policy" elements to recover the residual TIC.0Zj {O'ԍ See, e.g., U S West Comments at 7173; SWBT Reply at 11; GTE Comments at 39, 4144. These approaches would insulate TIC costs from the pressures of the competitive market and guarantee incumbent LECs the recovery of these amounts, even where such costs have resulted from inefficiencies that the competitive market but not regulators detected and otherwise would eliminate. This would be inconsistent with the development of an efficient competitive market. Our resolution of the TIC will allow LECs a reasonable opportunity to recover their costs, without providing a guarantee. We also reject the idea of spreading the remaining costs recovered by  XH4the TIC proportionately over all transport services, as suggested by AARP, et al. As we noted earlier, some of the remaining costs in the TIC may implicate certain Commission decisions separating costs between the federal and state jurisdictions and thus may be related to services other than transport. We, therefore, believe that awaiting further consideration by a Joint Board is a more practical means of ultimately resolving the TIC issue.  X 4242. Some parties have requested that a portion of the costs recovered by the TIC  X 4should be considered to be universal service costs.{1 j {OF'ԍ See, e.g., WITA Comments at 8; Texas Public Utility Counsel Comments at 21.{ We do not find this argument persuasive. Elsewhere in this Order, we have reallocated the TIC's identifiable cost components. On the basis of the record before us, we cannot clearly associate the remaining TIC revenues with any particular facilities or services. The parties arguing that these costs are related to universal service have not made any clear showing as to the source of these costs or demonstrated why they believe that these TIC revenues are either costs of universal service that should be recovered from the universal service fund or constituent costs of supported services.  X4243. We have analyzed the effect of the reallocation of TIC costs and the new recovery procedures on small business entities, including small LECs and new entrants, and find that the changes will facilitate the development of a competitive marketplace by moving incumbent LEC rates toward costbased levels and by eliminating the ability of incumbent LECs to assess the TIC on switched access minutes that do not use incumbent LEC transport facilities. These pricing revisions may create new opportunities for small entities wishing to enter the telecommunications market. "9i~10*&&aa"Ԍ X' 'J:\ACCESS.REF\ORDER\III-BCD.RRC' $J:\ACCESS.REF\ORDER\IIIE.PLG$    vE.SS7 Signalling  X' 1.` ` Background  X4244. SS7 is a network protocol used to transmit signalling information over common  X4channel signalling networks. As described in greater detail in the NPRM, signalling networksv  Xv4like SS7 establish and close transmission paths over which telephone calls are carried.B2vj yO'ԍ NPRM at  12325.B Signalling networks are also used to retrieve information from remote data bases to enable credit card and collect calling. SS7 systems are also used to transmit information needed to  X14provide custom local area signalling services like automatic call back.v31Xj {O: 'ԍ See Ameritech SS7 Waiver Order, 11 FCC Rcd at 3841 (1996).v  X 4245. An SS7 network consists of several primary components signalling points, signal transport links, and dedicated lines used for access to an incumbent LEC's signalling network (signal links). Signalling points are nodes in an SS7 network that originate, transmit, or route signalling messages. There are three principal types of signalling points: service switching points (SSPs), service control points (SCPs), and signalling transfer points (STPs). An SSP is a switch that can originate, transmit, and receive messages for call setup and database transactions. An SCP serves as a database that stores and provides information used in the routing of calls, such as the line information database (LIDB) used to validate calling cards or the database that identifies the designated longdistance carrier for tollfree service. An STP is a specialized packet switch that performs screening and security functions and switches SS7 messages within the signalling network.  X4246. Signal transport links are facilities dedicated to the transport of SS7 messages within the incumbent LEC's signalling network. Finally, dedicated network access lines (DNALs) consist of dedicated circuits that transmit queries between the incumbent LEC's signalling network and the signalling networks of other individual carriers, such as IXCs. A carrier's DNAL is connected to an incumbent LEC's signalling network through a port on an incumbent LEC's STP.  XN4247. Under the interim transport rate structure, incumbent LECs charge IXCs and other access customers a flatrated charge (dedicated signalling transport) under Part 69 for the use of dedicated facilities used to connect to the incumbent LEC's signalling network. This rate element has two subelements a flatrated signalling link charge for the dedicated  X4network access line (dedicated signalling line) and a flatrated STP port termination charge.@4j yO$'ԍ 47 C.F.R.  69.125.@ Most other signalling costs, such as costs for switching messages at the STP and transmitting"jz40*&&aa%" messages within the signalling network, are not recovered through facilitybased charges and thus most, if not all, of these costs are embedded in the TIC or in the local switching charge and recovered through perminuteofuse charges. Retrieval of information from databases for  X4tollfree calls and LIDB databases, however, is charged on a perquery basis.@5j yO4'ԍ 47 C.F.R.  69.120.@  X4248. In the NPRM, we solicited comment on whether the Commission should revise its rate structure for SS7 services to reflect the SS7 rate structure implemented by  X_4Ameritech.;6_Xj yOh 'ԍ NPRM at  127.; In March, 1996, the Commission granted a waiver to Ameritech, allowing it to  XH4restructure its recovery of SS7 costs through four unbundled charges.i7Hj {O 'ԍ Ameritech SS7 Waiver Order, 11 FCC Rcd 3839 (1996).i These charges correspond to various functions performed by signalling networks: signal link, STP port termination, signal transport, and signal switching.  X 4249. The Ameritech waiver was granted to allow Ameritech to realign its charges for SS7 services more closely with the manner in which such costs are incurred. Unbundling of SS7 services from transport and local switching ensures that transport and local switching customers do not pay for SS7 services they do not use. Unbundling also enables Ameritech to offer SS7 services to competing providers of local exchange and exchange access services  Xy4without requiring the purchase of other elements that the competitors do not need.=8yzj yO'ԍ 11 FCC Rcd at 3853.= In support of its waiver petition, Ameritech noted that it had received numerous customer requests for such unbundling. It also explained that it had deployed equipment necessary for measuring thirdparty usage of its SS7 networks, enabling the company to bill its SS7 services  X4separately from its switched access services.=9 j yO'ԍ 11 FCC Rcd at 3848.=  X4250. The NPRM also requested comment on whether incumbent LECs should be allowed to impose separate charges for ISDN User Part (ISUP) messages and Transaction  X4Capabilities Application Part (TCAP) messages.;:j yO !'ԍ NPRM at  135.; ISUP messages are used to set up and take down calls. For example, ISUP messages include the initial address message used to establish  X4and close the transmission path used to carry a telephone call.@;* j yOn$'ԍ 11 FCC Rcd at 384142.@ TCAP messages, on the other hand, are used to carry information between SSPs that support particular services, such"|k ;0*&&aa" as toll free services, LIDB services and certain custom local area signalling services (CLASS)  X4like automatic call back.3<j {Ob'ԍ Id.3 We noted that differentiation between charges for ISUP and TCAP messages may be economically justified because TCAP messages tend to be shorter in  X4average length and place lower demands on the signalling network that ISUP messages.;=Zj yO'ԍ NPRM at  135.;  X4251. The NPRM also requested comment regarding the appropriate placement of SS7 signalling elements in price cap baskets. Currently, STP port termination rates and charges  X_4for the signalling link, or DNAL, are placed in the trunking basket.`>_j yO 'ԍ 47 C.F.R.  61.42(d)(3); NPRM at  128, 130.` Because both services are dedicated to particular SS7 customers, rates for these elements are flatrated. We requested comment on whether the STP port termination charge should be placed in its own service category in the trafficsensitive basket. We noted that interconnectors can provide their own signalling link, exposing that service element to some measure of competition. The STP port termination, on the other hand, is relatively insulated from competitive pressures because it is part of the incumbent LEC's STP and must be purchased from the incumbent LEC under existing network architecture.  X '  X'  2.` ` Discussion  Xb4252. As we noted in the Ameritech SS7 Waiver Order, the removal of SS7 costs from the local switching and transport interconnection charge rate elements would benefit access customers that pay for these services but do not actually use an incumbent LEC's signalling services. It would also benefit alternative local service providers by enabling them to purchase separate SS7 services from incumbent LECs to support their provision of competing  X4local exchange or exchange access services.=?zj yO'ԍ 11 FCC Rcd at 3853.= Unbundling the individual SS7 components into separate charges would further promote efficiency by ensuring that signalling charges more accurately reflect the costs of providing such services. Competitive service providers  X4could limit their signalling costs by purchasing only the signalling elements they need.3@ j {Og 'ԍ Id.3 Despite these benefits, however, we are reluctant to impose on incumbent LECs the cost burden of installing metering or other equipment needed to measure third party usage of"~l@0*&&aa"  X4signalling facilities./AXj yOy'ԍ Bell Atlantic and NYNEX estimate the cost of installing facilities to measure SS7 usage ranges between $15 million and $40 million. BA/NYNEX Comments at 40. Sprint estimates that the cost would run between $15 million and $20 million. Sprint Comments at 31. / In granting Ameritech a waiver to implement its unbundled SS7 rate structure, we noted that Ameritech had previously installed the equipment and other facilities  X4needed to meter independent signalling usage.@Bj yOk'ԍ 11 FCC Rcd at 384445.@ Although we encourage actions that would promote disaggregation and unbundling of SS7 services, we will not require incumbent LECs to implement such an approach and incur the associated equipment costs of doing so. The record indicates that, as a general matter, the costs of mandating the installation of metering  Xv4equipment may well exceed the benefits of doing so.Cvxj yO 'ԍ USTA Comments at 37; BA/NYNEX Comments at 40; PacTel Comments at 73; GTE Comments at 53.  XH4253. Instead, we will permit incumbent LECs to adopt unbundled signalling rate structures at their discretion and acquire the appropriate measuring equipment as needed to implement such a plan. Specifically, incumbent LECs may implement the same unbundled  X 4rate structure for SS7 services that we approved in the Ameritech SS7 Waiver Order.D j yO'ԍ A carrier could adopt the Ameritech rate structure pursuant to 47 C.F.R. 69.4(g), which permits a carrier to implement rate structures previously approved by the Commission for other carriers. We recognize, however, that other signalling rate structures may achieve the same benefits that are available under the Ameritech rate structure. Hence, an incumbent LEC may implement an unbundled signalling rate structure that varies from the approach implemented in the  X 4Ameritech SS7 Waiver Order by filing a petition demonstrating that the establishment of new  X4rate elements implementing such a service is consistent with the public interest.GE` j yO'ԍ 47 C.F.R.  69.4(g).G We note, however, that variations in signalling rate structures among incumbent LECs could impose burdens on IXCs if IXCs must adapt to a diverse range of unbundled signalling rate  XQ4structures.JFQ j {O'ԍ See Sprint Comments at 31.J We anticipate that, if incumbent LECs choose to adopt unbundled rate structures for their SS7 network services, they will evaluate how the implementation of these plans will  X#4affect their prospective customers.G# j yOV!'ԍ Sprint suggests that an industry forum may be appropriate to develop an optimum rate structure for unbundled signalling services. Sprint Comments at 31.  X4254. With respect to rate differentiation between ISUP and TCAP messages, the  X4NPRM expressed the concern that imposing rate differentiation may be inconsistent with rate"mG0*&&aan"  X4structure simplicity.;Hj yOy'ԍ NPRM at  135.; Several c ommenters indicate that the costs of implementing rate  X4differentiation would exceed the benefits of such an approach.tIXj yO'ԍ MCI Comments at 89; Time Warner Comments at 17; CompTel Comments at 3132.t We further note that commenters offered little, if any, general support for the adoption of rate differentiation. Accordingly, to avoid unnecessary complexity and to avoid the imposition of unnecessary regulatory costs, we will not impose a rate differential between ISUP and TCAP messages.  Xv4 255. With respect to the placement of SS7 rate elements in price cap baskets, we have previously recognized that the signalling link and the STP port termination are not subject to  XH4the same level of competition. As noted in the Ameritech SS7 Waiver Order, STP port termination is provided only by incumbents while the signalling link can be provided by SS7  X 4customers themselves or by other alternative providers.VJ j yO'ԍ 11 FCC Rcd at 3859. NPRM at  130.V Comments filed in this proceeding  X 4also acknowledge this competitive disparity.UK xj yO.'ԍ MCI Comments at 8788; AT&T Reply at 3334.U Although Ameritech discounts the risk that STP port termination charges would be used to offset price reductions for the signal link, it nevertheless acknowledges the existence of the competitive differential we suggested in the NPRM. Other commenters argue that the competitive disparity is sufficient to justify concerns that price cap LECs would adjust their rates to account for the competitive differential. Accordingly, we will establish a new STP port termination rate element in the trafficsensitive basket. Placing these SS7 services in different price cap baskets will ensure consistency with the Commission's general approach of maintaining elements with similar competitive characteristics in the same service baskets.  X' $J:\ACCESS.REF\ORDER\IIIE.PLG$ $J:\ACCESS.REF\ORDER\IIIF.PLG$ F.Impact of New Technologies  X4256. The NPRM requested comment regarding the rate structure treatment of new technologies that enable new telecommunications services and, by enhancing the productivity of telecommunications facilities, lower prices for services in the future. These technologies, which we describe in greater detail in the NPRM, include synchronous optical networks (SONET), Asynchronous Transfer Mode (ATM) switching, and advanced intelligent networks (AIN). We invited commenters to recommend specific rate structure rules that would reflect the manner in which incumbent LECs incur costs when providing services utilizing such new  XP4technologies.;LPj yO $'ԍ NPRM at  139.;  X"4257. As a general matter, the Commission is reluctant to adopt detailed rules""nL0*&&aa"" governing rate structures for recovering the cost of deploying advanced technologies. We  X4note that, in the Price Cap Third Report and Order, we adopted rules that permit price cap LECs to petition the Commission for the establishment of one or more switched access rate  X4elements to accommodate new services.`Mj {O6'ԍ Price Cap Third Report and Order at  30910.` Under these rules, petitioners must demonstrate either of the following: 1) that the new rate elements would be in the public interest; or 2) that another LEC has previously obtained approval to establish identical rate elements and that the original petition did not rely upon a competitive showing as part of its public interest  Xa4justification.ANaZj yOl 'ԍ 47 C.F.R.  69.4(g).A Because technological advancements emerge rapidly, the adoption of uniform rate structures corresponding to particular technologies may slow investment in the development of newer technologies or improvements in current technologies. Indeed, as a general matter, incumbent LECs oppose the adoption of uniform rate structures for new technologies, suggesting that strict uniform rules in this regard could inhibit development of such technologies. Accordingly, we will refrain from adopting in this Order specific rate structures with respect to SONET, AIN, or other new technologies. As noted above, however, our rules already accommodate rate element adjustments that may be needed on an ad hoc basis when technological advancements justify such modifications. As particular new technologies become used on a widespread basis, we can always consider whether there is a need for a uniform rate structure at that point.  XM' $J:\ACCESS.REF\ORDER\IIIF.PLG$ #J:\ACCESS.REF\ORDER\IVA.JSL# #Xj\  P6G;9XP#   L IV. BASELINE RATE LEVELS \  X' A.XPrimary Reliance on a MarketBased Approach (# With A Prescriptive Backdrop and the  X'Adoption of Several Initial Prescriptive Measures  X' 1.` ` Background  X4258. In the NPRM, we established a goal of encouraging efficient competitors to enter local exchange access markets so that incumbent LECs would face substantial competition for  Xg4 the entire array of interstate access services.;Ogj yO 'ԍ NPRM at  140.; As a particular service becomes subject to substantial competition from new providers, we proposed to remove that service from price  X94cap and tariff regulation.;P9zj yOd#'ԍ NPRM at  149.; We sought comment on two general approaches for a transition to reliance on substantial competition to ensure that interstate access charges are closely related to forwardlooking economic costs: a "marketbased" approach and a "prescriptive" approach. " o P0*&&aa#" Under a marketbased approach, we would permit market forces to operate as competition emerges, allowing an incumbent to change its prices in response to competitive entry. To that end, we proposed a twophase approach in which incumbent LECs would be permitted certain pricing flexibility upon a showing that meaningful competitive entry is possible within a particular local exchange and exchange access market, followed by a further relaxation of  X4price cap regulation when meaningful actual competition developed within the market.;Qj yO'ԍ NPRM at  140.; We did not propose, however, to abandon the possibility of using the prescriptive tools at our disposal in the event that competition does not develop in some places.  X14259. As an alternative to the proposed marketbased approach, we also sought comment on a prescriptive approach, under which incumbent LECs would be required to change their prices for some or all exchange access services using specific measures adopted by the Commission to more accurately ensure that access charges are closely related to the  X 4economic costs of providing interstate access services.;R Xj yO'ԍ NPRM at  141.; We also invited comment whether  X 4the two approaches could be merged in some fashion.;S j yOW'ԍ NPRM at  144.; We emphasized that our ultimate goal under any approach, whether marketbased, prescriptive or combined, is to remove from price cap regulation LEC services that are subject to substantial competition. Instead of price cap regulation, we expect eventually to rely on the operation of competitive local markets to prevent incumbent LECs from exercising market power, and thereby to protect consumers.   X44260. In this section, we endorse the use of a marketbased approach generally. Our marketbased approach will retain the protection afforded by price cap regulation, while relaxing particular restrictions on incumbent LEC pricing as competition emerges, thereby permitting the development and operation of competitive markets, which will maximize the efficient allocation of telecommunications services and promote consumer welfare. This section also explains how, if competition fails to emerge over time for certain access services in particular geographic areas, we will ensure that the rates for those services reflect the forwardlooking economic costs of providing the services. In the NPRM, we sought comment on a number of specific issues concerning the timing and degrees of pricing flexibility and ultimate deregulation. We recognize that we must attend carefully to this task of granting incumbent LECs increased pricing flexibility commensurate with competitive developments, and we will resolve these issues of timing and degree in detail in a subsequent report and order in this docket, where we can more fully discuss these matters.  X4261. Elsewhere in this Order, we adopt or propose several measures that work within our current price cap structure to lower baseline access charge rate levels consistent with"pxS0*&&aa" evidence that the revised rate levels better reflect the underlying costs of providing interstate access services. In Section IV.C below, we order an exogenous cost reduction to reflect the completion of the amortization of equal access costs. In Section IV.D, we order reallocation of certain marketing and retail expenses and discuss the reallocation of GSF costs. We issue  X4a further notice on GSF costs in Section VII. In the companion Price Cap Fourth Report and  X4Order, which we also adopt today, we modify our current price cap plan by adopting a single productivity offset (XFactor) of 6.5 percent and eliminating sharing while maintaining the lowend adjustment.  X5' 2.` ` Discussion  X 4262. The Commission's objective is the one set forth in the 1996 Act "opening all  X 4telecommunications markets to competition."LT j {Oi 'ԍ Joint Explanatory Statement.L Therefore, we must ensure that our own regulations do not unduly interfere with the development and operation of these markets as competition develops. If we successfully reform our access charge rules to promote the operation of competitive markets, interstate access charges will ultimately reflect the forwardlooking economic costs of providing interstate access services. This is so, in part, because Congress established in the 1996 Act a costbased pricing requirement for incumbent LECs' rates for interconnection and unbundled network elements, which are sold by carriers to other carriers. As we have recognized, interstate access services can be replaced with some  X84interconnection services or with functionality offered by unbundled elements.MU8Zj {OC'ԍ E.g., NPRM  89, 170.M Because these policies will greatly facilitate competitive entry into the provision of all telecommunications services, we expect that interstate access services will ultimately be priced at competitive levels even without direct regulation of those service prices.  X4263. We decide that adopting a primarily marketbased approach to reforming access charges will better serve the public interest than attempting immediately to prescribe new rates for all interstate access services based on the longrun incremental cost or forwardlooking economic cost of interstate access services. Competitive markets are superior mechanisms for protecting consumers by ensuring that goods and services are provided to consumers in the most efficient manner possible and at prices that reflect the cost of production. Accordingly, where competition develops, it should be relied upon as much as possible to protect consumers and the public interest. In addition, using a marketbased approach should minimize the potential that regulation will create and maintain distortions in the investment decisions of competitors as they enter local telecommunications markets. Finally, under the 1996 Act, implicit universal service subsidies, wherever possible, are to be made explicit and"qU0*&&aak"  X4supported by all carriers on an equitable and nondiscriminatory basis.=Vj yOy'ԍ 47 U.S.C. 254.= To the extent that any implicit subsidies remain in interstate access charges because it was not feasible to identify them or make them explicit, our marketbased approach will have the effect of making those implicit subsidies subject to being competed away as competitors offer comparable services at prices that do not include the subsidies. In addition, we note that the rate structure changes we adopt today go a long way towards achieving such ends because the inefficiency produced by distortions in markets "rises as a quadratic function of the relative  X_4price distortion."OW_Xj {Oh 'ԍ Scherer & Ross, supra., at 662.O Therefore, the first steps made toward removing distortions caused by our regulations will produce the greatest benefits.  X 4264. The marketbased approach to access charge reform that we adopt will not, as some parties assert, expose customers of interstate access services to the unfettered exercise of  X 4market power.QX j {O'ԍ Appendix B, Section IV.A., infra.Q We will continue to maintain the current mechanisms upon which we rely  X 4to ensure that rates for these services are "just and reasonable,"=Y |j yO'ԍ 47 U.S.C. 201.= and not unjustly or  X 4unreasonably discriminatory.=Z j yO{'ԍ 47 U.S.C. 202.= Instead of exposing customers to harm, we expect that permitting incumbent LECs certain kinds of pricing flexibility in response to the development of competition will allow prices for interstate access services to adjust in ways that reflect the underlying economic costs of providing those services without moving outside the range of rates that are just and reasonable. This process of relaxing regulation as competition develops, and ultimately deregulating services subject to effective competition, is well established. For example, many of the types of pricing flexibility discussed in the NPRM are similar to forms of pricing flexibility we have in the past accorded incumbent LECs and IXCs  X4facing increased competition in markets for particular services.[&j {OS'ԍ See, e.g., Expanded Interconnection with Local Telephone Company Facilities, CC Docket No.91141,  {O'Report & Order & Notice of Proposed Rulemaking, 7 FCC Rcd 7369 (1992) (geographic deaveraging); AT&T  {O'Communications (Revisions to Tariff FCC No. 12), CC Docket No. 87568, Memorandum Opinion & Order, 4FCC Rcd 4932 (1989).  X4265. Economic teaching also leads to the conclusion that rates for interstate access services will generally move toward the forwardlooking economic cost of providing such services in response to increased competition in local exchange and exchange access"r [0*&&aa"  X4markets.\j {Oy'ԍ See, e.g., Dennis W. Carlton & Jeffrey M. Perloff, Modern Industrial Organization 9293 (2d ed. 1994) In addition, competition will do a better job of determining the true economic cost of providing such services. As competitive entry becomes increasingly possible, IXCs that now purchase interstate switched access services from incumbent LECs will be able to bypass those services where the prices (interstate access charges) do not reflect the economic costs of providing the underlying services. Those IXCs can do this by entering the local markets themselves as local exchange service providers, thereby selfproviding interstate access services for their new local exchange service customers. They can also seek out competitive providers of comparable services. As customers choose providers other than incumbent LECs as their local providers, interstate access services will come to be priced competitively. Incumbent LECs will have to respond to competitors' offerings with lowerpriced access services of their own in order to retain customers that would otherwise switch to competitors' networks, further increasing the effect of competition on overall access charge payments.   X 4 266. The 1996 Act has created an unprecedented opportunity for competition to develop in local telephone markets. It also has provided this Commission with tools for opening markets to competition, and for implementing our marketbased relaxation of regulation so that interstate access charges reflect forwardlooking economic costs. We recognize, however, that competition is unlikely to develop at the same rate in different locations, and that some services will be subject to increasing competition more rapidly than  X44others.,] 4Zj yO?'ԍ The observation that competitive entry will occur in some places, and for some services, more rapidly  {O'than others is a corollary to the rule that firms in competitive markets seek to maximize their profits. See, e.g.,  {O'Carlton & Perloff, supra, at 89. To maximize profits, firms naturally seek out those customers and services on which they can generate the most profits. Therefore, some customers are naturally more desirable than others at any given point in time. As competitors attempt to gain the patronage of the customers offering the greatest profit opportunities, they offer lowerpriced or more desirable services. These actions have the effect of reducing over time the profitability of serving those particular customers and, as this occurs, the relative profitability of serving other customers or offering other services increases. Therefore, competitors begin seeking to serve these other customers, and entry occurs in new places, or for new services. , Accordingly, we anticipate that competition will drive rates for some interstate access services toward more economically efficient levels more rapidly in some areas than rates for other services or in other areas. Where competition develops, we will provide incumbent LECs with additional flexibility, culminating in the removal of incumbent LECs' interstate access services from price regulation where they are subject to sufficient competition to ensure that the rates for those services are just and reasonable, and are not unjustly or unreasonably discriminatory.  X|4 267. We also recognize, however, that there will be areas and services for which competition may not develop. Therefore, we shall retain many of the existing safeguards afforded by our price cap regulation, including the productivity offset (XFactor), which"Ns. ]0*&&aa" requires incumbent LECs to adjust their access charges to reflect changes in the economic cost of providing service. In addition, we also adopt a prescriptive "backstop" to our marketbased approach that will serve to ensure that all interstate access customers receive the benefits of more efficient prices, even in those places and for those services where competition does not develop quickly. To implement our backstop to marketbased access charge reform, we require each incumbent price cap LEC to file a cost study no later than February 8, 2001, demonstrating the cost of providing those interstate access services that remain subject to price cap regulation because they do not face substantial competition. The Commission will require submission of such studies before that date if competition is not developing sufficiently for our market-based approach to work. Studies should identify and quantify forwardlooking costs, shortrun and longrun, that are incremental to providing each such service, and also costs that are common as between various services. These studies are required only for noncompetitive services; as stated above, we do not intend to regulate prices of services that are subject to substantial competition.  X 4 268. We have chosen this date in order to give competition sufficient time to develop substantially in the various markets for interstate exchange access services. We have also chosen this date to permit us and all interested parties to take into account the effects of implementing the substantial changes that we adopt in this Order and that we will be adopting elsewhere to satisfy the universal service goals in section 254. By this date, we also expect to have additional regulatory tools by which to assess the reasonableness of access charges. We may, for example, be able to establish benchmarks based on prices for the interstate access services for which competition has emerged, and use the prices actually charged in competitive markets to set rates for noncompetitive services and markets. Carriers could be required either to set their rates in accordance with the benchmarks or to justify their rates using their cost studies.   X4 269. We anticipate that the procompetitive regime created by the 1996 Act, and  X|4implemented in the Local Competition Order and numerous state commission decisions, will generate competition over the next few years. Further, it would be imprudent to prejudge the effectiveness of those measures at creating competitive local markets. Rather than ignore or interfere with the effects of this developing competition on prices for interstate access services, we find that the public interest is best served by permitting emerging competition to affect access charge rate levels. In addition, the experience we gain from observing the effects of emerging competition on interstate access services will permit us more effectively and efficiently to implement any prescriptive measures that may be needed in the future to ensure that interstate access services remaining subject to regulation are priced in accordance with the forwardlooking economic cost of providing those services.  X#4 270. Economic logic holds that giving incumbent LECs increased pricing flexibility will permit them to respond to competitive entry, which will allow prices to move in a way"j$t]0*&&aa""  X4that they would not have moved were the pricing restrictions maintained.^j {Oy'ԍ E.g., JeanJaques Laffont & Jean Tirole, Creating Competition Through Interconnection: Theory and  {OC'Practice, 10 J. Reg. Econ. 22756 (1996). This can lead to better operating markets and produce more efficient outcomes. Deregulation before competition has established itself, however, can expose consumers to the unfettered exercise of monopoly power and, in some cases, even stifle the development of competition, leaving a  X4monopolistic environment that adversely affects the interests of consumers._$j {Oy'ԍ See, e.g., Jean Tirole, The Theory of Industrial Organization 230 (1988). Therefore, it is important that we design our marketbased approach carefully. We must, among other things, decide which, if any, of the rules setting forth specific competitive triggers and corresponding flexibility as proposed in the NPRM we should adopt. We will resolve these issues in the subsequent report and order in this docket.  X 4271. As set forth in the summary of comments appended to this order, AT&T cites to  X 4Farmers Union Central Exchange, Inc. v. FERC` j {Oj'ԍ 734 F.2d 1486, 1508 (D.C. Cir.) (Farmers Union), cert. denied, Williams Pipe Line Co. v. Farmers  {O4'Union Central Exchange, Inc., 469 U.S. 1034 (1984). for the proposition that "[r]eliance on competitive forces to constrain exchange access rates, particularly in the presence of strong indications that market forces will not produce the intended results, would be arbitrary and capricious and contravene the Commission's statutory duty to ensure just, reasonable, and  X 4nondiscriminatory rates."Oa j {Ol'ԍ Appendix B, Sec. IV.A., infra. O We disagree with AT&T's assertion. In Farmers Union, FERC had stated in its relevant order that ratemaking for oil pipelines should be used solely to prevent price gouging, and had interpreted the Congressional mandate of "just and reasonable" rates as requiring that rates be kept within the zone of commercial reasonableness, not public  XO4utility reasonableness.QbOj {O'ԍ Farmers' Union, 734 F.2d at 1492.Q Under this interpretation, FERC had concluded that it would rely  X84primarily on market forces to keep rates reasonable.3c86 j {O'ԍ Id.3  X 4272. The court in Farmers Union recognized that "[m]oving from heavy to lighthanded regulation... can be justified by a showing that... the goals and purposes of the statute will be accomplished through substantially less regulatory oversight," but objected to FERC's failure to establish that its new approach would satisfy the "just and reasonable"  X4standard.<d j {O)%'ԍ Id. at 1510.< The court rejected FERC's position that oil pipeline ratemaking should protect"uZ d0*&&aa" only against "egregious exploitation and gross abuse" as being inconsistent with the mandate  X4that Congress had established for FERC.<ej {Ob'ԍ Id. at 1502.< The court concluded that FERC had not shown  X4that market forces were sufficient to rely upon in setting reasonable rates.<fZj {O'ԍ Id. at 1508.<  X4273. We reject AT&T's argument that our marketbased approach to access charge  X4reform is analogous to FERC's conduct at issue in Farmer's Union. Our access charge and price cap rules are designed to ensure that access charges remain within the "zone of  Xa4reasonableness"<gaj {O 'ԍ Id. at 1502.< defining rates that are "just and reasonable,"@ha~j yO 'ԍ 47 U.S.C.  201(b).@ and our marketbased approach will also be designed to implement this statutory requirement. It will not remove incumbent LECs from regulation immediately, but will implement deregulation in steps, as competitive conditions warrant. Throughout the transition to deregulation in the face of substantial competition, we will maintain many safeguards against unjust or unreasonable rates, such as the price cap indices. We will deregulate incumbent LEC services only when it is reasonable to conclude that competition has developed to such an extent that the market  X 4will ensure just and reasonable rates.eiZ j yO'ԍ Such marketbased regulation of prices has been upheld where the market being relied upon is sufficiently competitive and the regulator maintains its authority to step in to ensure that rates remain just and  {O'reasonable. Elizabethtown Gas Co. v. FERC, 10 F.3d 866, 87071 (D.C. Cir. 1993).e  X4274. Second, our marketbased approach is an eminently reasonable method for pursuing our goal of promoting competition and ensuring the economically efficient pricing of interstate access services. As competition emerges, the marketbased approach will permit access charges to move towards the levels that will prevail in competitive markets. During the transition to competitive markets, access services not subject to competition will remain subject to price cap regulation, and we will eventually prescribe rates for those services at forwardlooking economic cost levels, to ensure that all consumers reap the benefits of  X4economicallyefficient prices. Unlike the FERC regulation at issue in Farmers Union, our marketbased approach to promoting the development of competitive markets and economicallyefficient pricing will not be based on "largely undocumented reliance on market  X4forces...."sj0 j {O#'ԍ AT&T Comments at 48 (citing Farmers Union, 734 F.2d at 1508).s Instead, we will design our approach so that deregulation occurs only when the reliability of market forces can be fully determined with respect to a particular service.  X4Finally, we observe that FERC's mandate in Farmers Union was one of rate regulation due to"v j0*&&aa"  X4market failure and concern over monopoly power.Qkj {Oy'ԍ Farmers' Union, 734 F.2d at 1508.Q In light of the 1996 Act, our mandate is no longer strictly or solely one of rate regulation. Congress has stated its desire to establish  X4"a procompetitive, deregulatory national policy framework."LlZj {O'ԍ Joint Explanatory Statement.L Our marketbased approach will be designed to coincide with and promote this objective.  X4275. Price Squeeze Concerns Are Adequately Addressed. Several parties have argued that current access charge rate levels create the conditions for an anticompetitive price squeeze  Xa4when a LEC affiliate offers interexchange services in competition with IXCs.Qmaj {O 'ԍ Appendix B, Section IV.A, infra. Q A price squeeze, as the term is used by these parties, refers to a particular, welldefined strategy of predation that would involve the incumbent LEC setting "high" prices for interstate exchange access services, over which the LEC has monopoly power (albeit constrained by regulation), while its affiliate is offering "low" prices for longdistance services in competition with the other longdistance carriers. Because interstate exchange access services are a necessary input for longdistance services, these parties argue that an incumbent LEC can create a situation where the relationship between the LEC's "high" exchange access prices and its affiliate's "low" prices for longdistance services forces competing longdistance carriers either to lose money or to lose customers even if they are more efficient than the LEC's affiliate at providing longdistance services. It is this nonremunerative relationship between the input prices and the affiliate's prices, and not the absolute levels of those prices, that defines a price squeeze. In the most extreme case, a price squeeze involves a monopolist setting input prices that are actually higher than its prices in the output market.  X4276. Price cap regulation of access prices limits the ability of LECs to raise the prices of the input services. Commenters raising price squeeze concerns argue, however, that a LEC's interexchange affiliate will still be in a position to implement a price squeeze by setting longdistance rates close to the rates for access services, thereby forcing IXCs to charge belowcost rates to retain customers. They argue that LECs' interexchange affiliates have lower costs of providing interexchange services because of their affiliation with monopoly providers of interstate access services, and not as a result of being more efficient. According to these commenters, the relevant economic costs of providing interstate interexchange services will be lower for the LEC affiliate offering interexchange services than for competing IXCs because it only has to recover the true economic cost of providing the interstate access services (since the owners of the LEC and its interexchange affiliate will want the two entities to maximize their joint profits), whereas the IXCs will be forced to pay interstate access charges that are above the true economic cost of providing the underlying services."w~m0*&&aa"Ԍ X4ԙ277. Absent appropriate regulation, an incumbent LEC and its interexchange affiliate could potentially implement a price squeeze once the incumbent LEC began offering inregion, interexchange toll services. Although no BOC affiliate may offer such services at this time, GTE, SNET, Sprint and other incumbent LECs do have affiliates offering such services. The incumbent LEC could do this by raising the price of interstate access services to all interexchange carriers, which would cause competing inregion carriers to either raise their retail rates to maintain their profit margins or to attempt to maintain their market share by not raising their prices to reflect the increase in access charges, thereby reducing their profit margins. If the competing inregion, interexchange providers raised their prices to recover the increased access charges, the incumbent LEC's interexchange affiliate could seek to expand its market share by not matching the price increase. The incumbent LEC affiliate could also set its inregion, interexchange prices at or below its access prices. Its competitors would then be faced with the choice of lowering their retail rates for interexchange services, thereby reducing their profit margins, or maintaining their retail rates at the higher price and risk losing market share.  X4278. We conclude that, although an incumbent LEC's control of exchange and exchange access facilities may give it the incentive and ability to engage in a price squeeze,  Xb4we have in place adequate safeguards against such conduct. The Fifth Competitive Carrier  XM4Report and OrderRn^Mj {O'ԍ Policy and Rules Concerning Rates for Competitive Common Carrier Services and Facilities  {O'Authorizations Therefor, CC Docket No. 79252, Fifth Report & Order, 98 FCC 2d 1191, 1198 9 (1984) (Fifth  {OZ'Competitive Carrier Report and Order).R requirements aid in the prevention and detection of such anticompetitive  X84conduct. In our recent InRegion Interexchange Order we decided to retain the Fifth  X#4Competitive Carrier Report and Order separation requirements for incumbent LEC provision  X4of inregion interLATA services.o&j {O'ԍ Regulatory Treatment of LEC Provision of Interexchange Services Originating in the LEC's Local  {Ow'Exchange Area and Policy and Rules Concerning the Interstate, Interexchange Marketplace, Second Report and Order in CC Docket No. 96-149 and Third Report and Order in CC Docket No. 96-61, __ FCC Rcd ____,  {O 'FCC97-142 (Apr. 18, 1997) (Dom/Nondom R&O) These requirements apply both to BOCs and to other incumbent LECs. In addition, as discussed in that order, BOC interexchange affiliates are  X4subject to the safeguards set forth in section 272 of the Act.3pj {Om'ԍ Id.3  X4279. The Fifth Competitive Carrier Report and Order separation requirements have been in place for over ten years, and independent (nonBOC) incumbent LECs have been providing inregion, interexchange services on a separated basis with no substantiated complaints of a price squeeze. Under these separation requirements, incumbent LECs are required to maintain separate books of account, permitting us to trace and document improper allocation of costs and/or assets between a LEC and its longdistance affiliate, as well as to"Axn p0*&&aa" detect discriminatory conduct. In addition, we prohibit joint ownership of facilities, which further reduces the risk of improper allocations of the costs of common facilities between the  X4incumbent LEC and its interexchange affiliate, as discussed at length in the InRegion  X4Interexchange OrderJqj {O6'ԍ Id. 16369.J and the NonAccounting Safeguards Order (addressing the Act's prohibition of BOC joint ownership with its interexchange affiliate pursuant to Section  X4272).ZrZj {O'ԍ Implementation of the NonAccounting Safeguards of Sections 271 and 272 of the Communications Act of  {Of '1934, as amended, First Report and Order and Further Notice of Proposed Rulemaking, FCC 96489 15962  {O0 '(Dec. 24, 1996) (NonAccounting Safeguards Order), on recon., FCC 9752 (Feb. 19, 1997), recon. pending,  {O 'CCDocket No. 96149, petition for summary review in part denied and motion for voluntary remand granted sub  {O 'nom., Bell Atlantic v. FCC, No.971067 (D.C. Cir. filed Mar. 31, 1997), petition for review pending sub nom.,  {O 'SBC Communications v. FCC, No. 971118 (D.C. Cir. filed Mar. 6, 1997) (held in abeyance pursuant to court order filed May 7, 1997).Z As we also discussed at length in those orders, the prohibition on jointlyowned facilities also helps to deter any discrimination in access to the LEC's transmission and switching facilities by requiring the affiliates to follow the same procedures as competing interexchange carriers to obtain access to those facilities. Finally, our requirement that incumbent LECs offer services at tariffed rates, or on the same basis as requesting carriers  X 4that have negotiated interconnection agreements pursuant to section251=s j {Ou'ԍ Id. 164.= reduces the risk of a price squeeze to the extent that an affiliate's longdistance prices would have to exceed their costs for tariffed services.  X 4280. Current conditions in markets for interexchange services give us comfort that an anticompetitive price squeeze is unlikely to occur as a result of our decision not to prescribe immediately access charge rates at forwardlooking economic cost levels. If an incumbent LEC does attempt to engage in an anticompetitive price squeeze against rival longdistance providers, the provisions of the Act should permit new entrants or other competitors to seek out or provide competitive alternatives to tariffed incumbent LEC access services. For  X84example, under the provisions of section251,Ct88 j yO!'ԍ 47 U.S.C. 251(c)(3).C a competitor will be able to purchase unbundled network elements to compete with the incumbent LEC's offering of local exchange access. Therefore, so long as an incumbent LEC is required to provide unbundled network elements quickly, at economic cost, and in adequate quantities, an attempted price squeeze seems likely to induce substantial additional entry in local markets. Accordingly, there should be a reduced likelihood that an incumbent LEC could successfully employ such a strategy to obtain the power to raise longdistance prices to the detriment of consumers.  X4281. Furthermore, even if a LEC were able to allocate improperly the costs of its"y t0*&&aa" affiliate's interexchange services, we conclude that it is unlikely that the LEC's interexchange  X4affiliate could engage successfully in predation.uj {Ob'ԍ See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 589 (1986) ("[P]redatory pricing schemes are rarely tried, and even more rarely successful."). At least four interexchange carriers AT&T, MCI, Sprint, and LDDS WorldCom have nationwide, or nearnationwide, network  X4facilities that cover every LEC's region.v"j {O'ԍMotion of AT&T Corp. to be Reclassified as a NonDominant Carrier, 11 FCC Rcd 3271, 3304 60-61 (1996). These are large, wellestablished companies with millions of customers throughout the nation. It is unlikely, therefore, that one or more of these national companies can be driven from the market with a price squeeze, even if effectuated by several LECs simultaneously, whether acting together or independently. Even if it could be done, it is doubtful that the LECs' interexchange affiliates would later be able to raise, and profitably sustain, prices above competitive levels. As Professor Spulber has observed, "[e]ven in the unlikely event that [LECs' interexchange affiliates] could drive one of the three large interexchange carriers into bankruptcy, the fiberoptic transmission capacity of that carrier would remain intact, ready for another firm to buy the capacity at distress sale  X 4and immediately undercut the [affiliates'] noncompetitive prices."w |j {O'ԍ Daniel F. Spulber, Deregulating Telecommunications, 12 Yale J. Reg. 25, 60 (1995).  X 4282. Finally, in addition to our regulations and the provisions of section 251 of the  X 4Act, the antitrust laws also offer a measure of protection against a possible price squeeze.x2 j {Of'ԍ Beginning with Judge Learned Hand's opinion in United States v. Aluminum Co. of America (Alcoa), 148 F.2d 416, 43738 (2d Cir. 1945), a specific body of precedent has developed under federal antitrust law defining situations where a price squeeze can be actionable as a form of monopolization or attempted monopolization under Section 2 of the Sherman Act. 15 U.S.C. 2. Under this precedent, a price squeeze can violate the antitrust laws where (1)a firm has monopoly power with respect to an "upstream" product; (2)it sells that product at "higher than a 'fair price,'"; (3)the product is a necessary input for the product being sold by other firms in competition with the monopoly or its affiliate in a "downstream" market; and (4) the monopolist offers the "downstream" product at a price so low that (equallyefficient) competitors cannot match the price and still  {O'earn a "living profit." Alcoa, 148 F.2d at 43738. Over time, courts have developed several tests for determining when the relationship between the two prices is sufficiently adverse to competitors that it constitutes  {O:'an anticompetitive price squeeze. See, e.g., Bonjorno v. Kaiser Aluminum & Chem. Corp., 752 F.2d 802, 80809  {O'(3d Cir. 1984), cert.denied, 477 U.S. 908 (1986); Ray v. Indiana & Mich. Elec. Co., 606 F.Supp. 757, 776  {O'(N.D. Ind. 1984), aff'd, 758 F.2d 1148 (7th Cir. 1985). Although we believe it would not serve the public interest for us knowingly to permit a price squeeze to occur, and to rely entirely on the adequacy of antitrust law remedies to protect the public, we take comfort in the fact that such remedies exist should an anticompetitive price"bzx0*&&aa"  X4squeeze occur in spite of the safeguards we have adopted.5y~j yOy'ԍ Because the rates charged by LEC interexchange affiliates will not be regulated, we do not believe that a court would reject a price squeeze claim under the antitrust laws on the grounds that "'normally' a price squeeze  {O 'will not constitute an exclusionary practice in the context of a fully regulated monopoly." Town of Concord v.  {O'Boston Edison Co., 915 F.2d 17 (1st Cir.1990) (J. Breyer), cert. denied, ___ U.S. ___, 111 S.Ct. 1337 (1991). Indeed, the court in that case explicitly declined to address the "special problem" posed by a price squeeze allegation against a firm regulated in the input market and undercutting rivals' prices in the unregulated market  {O-'where inputs are used. Id. at 29.5 In particular, although a price squeeze engaged in by several LECs, particularly if it involved more than one of the BOCs or GTE, could have a significant impact on interexchange competitors, we believe that the antitrust laws will act as a strong backstop to our own enforcement process so that the risk of  X4such concerted activity is sufficiently limited.mzj {Oc 'ԍ See NonAccounting Safeguards Order FCC 97142 70.m  Xv4283. Other Concerns Raised by Commenters. Several commenters raised concerns that our marketbased approach to access charge reform might permit incumbent LECs to engage in cross subsidization, either between competitive and noncompetitive services, or  X34between interstate access services and other services such as video distribution.Z{3j {O'ԍ See Appendix B, Section IV.A, infra.Z No evidence has been presented, however, indicating any likelihood that current price cap regulation, which is designed, in part, to prevent cross subsidization, might become less effective under a marketbased approach to access charge reform. Those price cap regulations will remain in place until there is sufficient competition to prevent an incumbent LEC from charging rates that are not just and reasonable. Therefore, we find that the record does not contain substantial evidence that a marketbased approach to access charge reform is any less likely than current regulation to permit incumbent LECs to engage in unreasonable cross subsidization with their interstate access charges.  XM4284. Finally, several commenters based their support for a marketbased approach, in part, on arguments that it would reduce, or minimize, administrative burdens. Other commenters, on the other hand, opposed a marketbased approach on the grounds that it would increase administrative burdens. Based on the record before us, however, we cannot reach a conclusion as to the relative administrative burdens of the two approaches. Some parts of our proposed marketbased approach, such as grants of increased pricing flexibility as competitive conditions warranted, were modeled on waivers that we have granted within the context of our current price cap plan and would likely be necessary even if we had adopted a primarily prescriptive approach to access charge rate level reform. Similarly, some parts of a prescriptive approach, such as annual changes in price cap calculations, will necessarily be a part of our marketbased approach. Accordingly, we can see no basis in this record for concluding that a marketbased approach to access charge reform will be any more or less"P{2 {0*&&aa4" burdensome than any other alternative.  X' #J:\ACCESS.REF\ORDER\IVA.JSL# "J:\ACCESS.REF\ORDER\IVB.SS" 3B.Prescriptive Approaches  X' 1.` ` Prescription of a New XFactor     Xv'` ` a. Background  XH4285. In the NPRM, we observed that the Commission had initiated a rulemaking  X14proceeding in the Price Cap Fourth Further NPRM to examine a number of proposals for 3revising the productivity offset component of the XFactor, and to consider related issues such  X 4as eliminating sharing obligations and the lowend adjustment mechanism.)|~ j yO~ 'ԍ NPRM at  233. With respect to the productivity offset, we invited comment on, among other things, basing it on total factor productivity (TFP). TFP is the ratio of an index of a firm's total outputs to an index of  {O'its total inputs. NPRM at  233 n.300, citing Price Cap Fourth Further NPRM, 10 FCC Rcd at 1266371. With respect to sharing, we noted that, although sharing tends to blunt the efficiency incentives otherwise created by the price cap plan, it also serves beneficial functions, and we invited comment on eliminating sharing and  {Oh'establishing other mechanisms to serve those functions. NPRM at  233 n.301, citing Price Cap Fourth Further  {O2'NPRM, 10 FCC Rcd at 1267680. ) We invited  X 4parties to discuss in this proceeding whether the record developed pursuant to the Price Cap  X 4Fourth Further NPRM justified increasing the productivity offset, and specifically invited comment on the effects of a forwardlooking cost of capital and economic depreciation on  X 4total factor productivity (TFP) measurement.}\ j {Ol'ԍ NPRM at  233. GTE notes that, while the XFactor received considerable attention in the Price Cap  {O6'Fourth Further NPRM proceeding, the discussion did not focus on the effects of the 1996 Act. GTE Comments at 57.   X'` ` b. Discussion  XQ4286. The commenters generally repeat arguments made in the Price Cap Fourth  X<4Further NPRM proceeding. For reasons explained in detail in our companion Price Cap  X'4Fourth Report and Order, we conclude that we should prescribe an XFactor on the basis of total factor productivity studies, the difference between LEC input price changes and input price changes in the economy as a whole, and the 0.5 percent consumer productivity dividend (CPD). In the companion order we find that this results in an XFactor prescription of 6.5 percent. "|2 }0*&&aa@"Ԍ X' 2.` ` Other Prescriptive Approaches  X'` ` a. Background  X4287. In the NPRM, we sought comment on four options for a prescriptive approach:  X4reinitializing price cap indices (PCIs) to economic costbased levels;B~j yO'ԍ NPRM at  22327.B reinitializing PCIs to levels targeted to yield no more than an 11.25 percent rate of return, or some other rate of  X_4return;B_Xj yOh 'ԍ NPRM at  22830.B adding a policybased mechanism similar to the CPD to the XFactor;B_j yO 'ԍ NPRM at  23132.B or  XH4prescribing economic costbased rates.BHxj yOq'ԍ NPRM at  23638.B We have decided above to rely primarily on a marketbased approach, and impose prescriptive requirements only when market forces are inadequate to ensure just and reasonable rates for particular services or areas. We will determine the details of our marketbased approach in a future Order. In that Order, we will also discuss in more detail what prescriptive requirements we will use as a backstop to our  X 4marketbased access charge reform. j yO'ԍ In Section IV.A of this Order, we state that we will require incumbent price cap LECs to file forwardlooking economic cost studies on or before February 8, 2001. In this Section, we explain why we have decided not to adopt any specific prescriptive mechanism in this Order.  X'` ` b. Rate Prescription  Xb4288. Background. We sought comment on prescribing new interstate access rates because simply reinitializing PCIs would not necessarily compel incumbent LECs to establish  X64reasonable rate structures.;6` j yOG'ԍ NPRM at  236.; We also noted, however, that prescribing access rates on a TSLRIC basis could raise common cost allocation issues to a much greater extent than did  X4TELRIC pricing for unbundled network elements.; j yO 'ԍ NPRM at  237.;  X4 289. Discussion. In Section IV.A, above, we explain why we can and should rely primarily on market forces to cause interstate access rates to move toward economic cost levels over the next several years. Prescribing TSLRICbased access rates would be the most direct, uniform way of moving those rates to cost. But, precisely because of its directness and"} 0*&&aa" uniformity, rate regulation can only be, at best, an imperfect substitute for market forces. Regulation cannot replicate the complex and dynamic ways in which competition will affect the prices, service offerings, and investment decisions of both incumbent LECs and their competitors. A marketbased approach to rate regulation should produce, for consumers of telecommunications services, a better combination of prices, choices, and innovation than can be achieved through rate prescription. A marketbased approach, with continued price cap regulation of services not subject to substantial competition and with the prescriptive backstop described in Section IV.A, is thus consistent both with the procompetitive, deregulatory goals of the 1996 Act and with our responsibility under Title II, Part I of the Communications Act to ensure just and reasonable rates.  X 4!290. Furthermore, immediate prescription of TSLRICbased rates would not necessarily move rates to those levels faster than the marketbased approach and prescriptive backstop developed in Section IV.A. Some parties that favor a prescriptive approach have asserted that setting access rates immediately at TSLRIC levels would reduce incumbent LEC  X 4revenues by $10 billion or more.] j {O 'ԍ See NPRM at  7 and sources cited therein.] Were we to make such a rate prescription, we would consider phasing in rate reductions of that magnitude over a period of years, in order to avoid  Xy4the rate shock that would accompany such a great rate reduction at one time.yZj {O'ԍ See Investigation of Special Access Tariffs of Local Exchange Carriers, CC Docket No. 85166, Phase I and Phase II, Part 1, FCC 84524, 57 Rad.Reg. 2d 188, 209 (released Nov. 9, 1984). Finally, because we have adopted a more efficient rate structure for interstate switched access services, it is not necessary to prescribe new rates in order to achieve efficient rate structures, as TRA and TCI recommend. Accordingly, we will not prescribe TSLRICbased access rates at this time.  X'` ` c. Reinitialization of PCIs on a RateofReturn Basis  X4"291. Discussion. We reject reinitialization on the basis of any rate of return at this time. As a general matter, the parties advocating a rateofreturn based reinitialization do not provide any persuasive reason for adopting that particular approach. They favor reinitialization largely because they believe interstate access charges should be lower than they are now. As explained above, however, we are adopting a primarily marketbased approach to rate level adjustments. The prescriptive backstop to that approach will be based on TSLRIC cost studies and, most likely, applied to geographically deaveraged rates. That approach is more likely to result in rates that are aligned with economic costs than would reinitialization to a particular rate of return on an embedded cost rate base.  X4#292. Moreover, because the basic theory of our existing price cap regime is that the prospect of retaining higher earnings gives carriers an incentive to become more efficient, we" ~0*&&aaH" believe that rate of returnbased reinitialization would have substantial pernicious effects on  X4the efficiency objectives of our current policies.\Bj yOb'ԍ Ad Hoc's suggestion that we require a PCI reinitialization based on the currentlyauthorized 11.25 percent rate of return while administratively simpler than some other ways of changing rate levels would undermine productivity incentives by imposing the greatest penalties (rate reductions) on those carriers that had improved their efficiency the most. Reinitialization to another rate of return level, as API suggests, could, in  {O'addition, require resolution of complex and timeconsuming issues. See, e.g., Represcribing the Authorized Rate of Return for Interstate Services of Local Exchange Carriers, CC Docket No. 89624, 5 FCC Rcd 7507 (1990) (taking about a year to resolve all relevant issues raised in prescribing the currentlyauthorized 11.25 percent rate of return).\ In this regard, we have often expressed concern in past price cap orders that maintaining links between rate levels and a carrier's achieved rate of return would undercut the efficiency incentives price cap regulation was  X4designed to encourage. In the LEC Price Cap Order, we rejected a socalled "automatic stabilizer" adjustment to the price cap index that like reinitialization would have permanently adjusted index levels downward in the event that carriers achieved earnings  Xa4above a certain rate of return.aj {O'ԍ LEC Price Cap Order, 5 FCC Rcd at 6803. We adopted instead a sharing mechanism that made onetime earningsrelated adjustments to PCI levels to ensure that carriers would "share" significant productivity gains in a given year with ratepayers, but would not be penalized by permanent downward adjustments to the track that the PCI otherwise would have taken. We have found that even the sharing mechanism tends to blunt efficiency incentives, and, in part for that reason, we are removing the sharing mechanism as well in Section IV of our  {O'companion Price Cap Fourth Report and Order. ġ Similarly, in our 1995 LEC Price Cap Performance Review  XL4Order, we cited as a disadvantage of AT&T's "Direct Model" method of determining the PCI formula's "XFactor" the fact that "a target rate of return is a critical factor in measuring  X 4productivity."s N j {O'ԍ LEC Price Cap Performance Review Order, 10 FCC Rcd at 9034. s And although we sought comment in the Access Reform NPRM on the question of rate of returnbased reinitialization of the price cap indices, we once again expressed concern that such action "could have a negative effect on the productivity incentives  X 4of the LEC price cap plan."< j yOn'ԍ NPRM at  230. < We, of course, have authority to change our methods and theories of regulating LEC rates when we believe the purposes of the Communications Act would be better served by doing so. However, we find that, given our consistently critical past statements about rate of returnbased adjustments to price caps, a decision now to reinitialize PCIs to any specified rate of return would further undermine future efficiency incentives by making carriers less confident in the constancy of our regulatory policies.  X<4$293. In declining to reinitialize PCIs on the basis of carriers' rates of return, we reject GSA/DOD's suggestion that access rates have been excessive merely because the earnings of most price cap carriers have exceeded 11.25 percent, and, in some cases, by substantial amounts. When the Commission adopted price cap regulation, it specifically permitted price"p0*&&aaC" cap carriers to earn in excess of 11.25 percent in order to encourage them to become more  X4productive.Wj {Ob'ԍ LEC Price Cap Order, 5 FCC Rcd at 6787.W The Commission also concluded that complaints alleging excessive earnings relative to costs will not lie as long as the carrier is in compliance with the sharing  X4mechanism.WZj {O'ԍ LEC Pric