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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) Access Charge Reform ) CC Docket No. 96-262 ) Price Cap Performance Review for Local ) CC Docket No. 94-1 Exchange Carriers ) ) Interexchange Carrier Purchases of Switched ) Access Services Offered by Competitive Local ) CCB/CPD File No. 98-63 Exchange Carriers ) ) Petition of U S West Communications, Inc. ) for Forbearance from Regulation as a Dominant ) CC Docket No. 98-157 Carrier in the Phoenix, Arizona MSA ) ) FIFTH REPORT AND ORDER AND FURTHER NOTICE OF PROPOSED RULEMAKING Adopted: August 5, 1999 Released: August 27, 1999 NPRM Comment Date: October 29, 1999 NPRM Reply Comment Date: November 29, 1999 By the Commission: Commissioner Ness issuing a statement; Commissioner Furchtgott-Roth approving in part, concurring in part, dissenting in part, and issuing a statement. Table of Contents Paragraph I. Introduction 1 II. Background and Summary 8 A. Price Cap Regime 8 B. Pricing Flexibility 14 C. Summary 19 1. Pricing Flexibility 19 2. Modifications to Rate Structure 27 3. CLEC Access Charges 31 III. New Services 34 A. Background 34 B. Discussion 37 IV. Removal of Interstate Inter- and IntraLATA Toll Services From Price Cap Regulation 45 A. Introduction 45 B. Background 46 C. Discussion 53 1. Price Cap LEC Ability to Exploit Market Power 53 2. Removal of Services from Price Caps and Relaxation of Tariff Requirements 56 V. Geographic Deaveraging of Rates for Trunking Basket Services58 A. Background 58 B. Discussion 59 VI. Pricing Flexibility Based on a Competitive Showing 67 A. Background 67 B. Geographic Scope of Relief 71 C. Phase I and Phase II Pricing Flexibility 77 1. General Approach 77 2. Phase I Triggers for Special Access and Dedicated Transport Services 81 3. Phase I Triggers for Other Switched Access Services108 4. Phase I Relief 122 5. Phase II for Special Access and Dedicated Transport141 D. Price Cap Issues 158 1. Revision of Price Cap Indices 158 2. Low-End Adjustment Mechanism 160 3. Common Line Basket Issues 169 E. Procedural Issues 170 1. Special Access and Dedicated Transport Services170 2. Treatment of Proprietary Data 176 3. Other Switched Access Services 178 F. U S West Forbearance Petition 179 VII. CLEC Access Charges 180 A. Background 180 B. AT&T's Petition for Declaratory Ruling 186 VIII. Notice of Proposed Rulemaking 190 A. Geographic Deaveraging for Switched Access Services 190 B. Phase II Pricing Flexibility for Switched Service 200 1. Triggers 201 2. Relief 204 C. Switching Issues 207 1. Local Switching 207 2. Tandem-Switched Transport 223 D. Price Cap Issues 226 1. Common Line Issues 226 2. Reorganization of Baskets and Bands 234 3. Inflation Measure 235 E. CLEC Access Charges 236 1. Background 236 2. Discussion 239 IX. Procedural Issues 258 A. Final Regulatory Flexibility Analysis 258 B. Initial Regulatory Flexibility Act Analysis 268 C. Paperwork Reduction Act 279 D. Filing Comments 281 X. Ordering Clauses 284 APPENDIX A APPENDIX B I. INTRODUCTION 1. In this Order, we revise the rules that govern the provision of interstate access services by those incumbent local exchange carriers (ILECs) subject to price cap regulation (collectively, "price cap LECs") to advance the pro-competitive, de-regulatory national policies embodied in the Telecommunications Act of 1996 (1996 Act). With these revisions, we continue the process the Commission began in 1997, with the Access Reform First Report and Order, to reform regulation of interstate access charges in order to accelerate the development of competition in all telecommunications markets and to ensure that our own regulations do not unduly interfere with the operation of these markets as competition develops. 2. In the Access Reform First Report and Order, the Commission adopted a primarily market-based approach to drive interstate access charges toward the costs of providing these services. The Commission envisioned that this approach would enable it to give carriers progressively greater flexibility to set rates as competition develops, until competition gradually replaces regulation as the primary means of setting prices. In this Order, the Commission fulfills its commitment to provide detailed rules for implementing the market-based approach, pursuant to which price cap LECs would receive pricing flexibility in the provision of interstate access services as competition for those services develops. 3. The pricing flexibility framework we adopt in this Order is designed to grant greater flexibility to price cap LECs as competition develops, while ensuring that: (1) price cap LECs do not use pricing flexibility to deter efficient entry or engage in exclusionary pricing behavior; and (2) price cap LECs do not increase rates to unreasonable levels for customers that lack competitive alternatives. In addition, these reforms will facilitate the removal of services from price cap regulation as competition develops in the marketplace, without imposing undue administrative burdens on the Commission or the industry. 4. Specifically, this Order grants immediate pricing flexibility to price cap LECs in the form of streamlined introduction of new services, geographic deaveraging of rates for services in the trunking basket, and removal, upon implementation of toll dialing parity, of certain interstate interexchange services from price cap regulation. We also establish a framework for granting price cap LECs greater flexibility in the pricing of all interstate access services once they satisfy certain competitive criteria. In Phase I, we allow price cap LECs to offer contract tariffs and volume and term discounts for those services for which they make a specific competitive showing. In Phase II, we permit price cap LECs to offer dedicated transport and special access services free from our Part 69 rate structure and Part 61 price cap rules, provided that the LECs can demonstrate a significantly higher level of competition for those services. 5. We address additional pricing flexibility proposals in the Notice of Proposed Rulemaking (Notice) portion of this item. We seek comment on proposals for geographic deaveraging of the rates for services in the common line and traffic-sensitive baskets. We also invite comment on the appropriate triggers for granting Phase II relief for services in the common line and traffic-sensitive baskets, as well as for the traffic-sensitive parts of tandem-switched transport service. 6. In addition to adopting rules to implement the market-based approach to access reform, we take this opportunity to re-examine the rate structure for the local switching service category of the traffic-sensitive basket. Accordingly, in the Notice, we seek comment on a number of proposed changes to the rate structure so that it better replicates the operation of a competitive market. Generally, we invite parties to discuss proposed revisions to our rules that would require price cap LECs to develop capacity-based local switching charges rather than per- minute charges. We also solicit comment on whether the traffic-sensitive price cap index (PCI) formula should be modified. For the same reasons that we consider revising the local switching rate structure, we also seek comment on whether similarly to revise the rate structure for tandem- switched transport. 7. Finally, we deny a petition for declaratory ruling filed by AT&T requesting that the Commission confirm that interexchange carriers (IXCs) may elect not to purchase switched access services offered under tariff by competitive local exchange carriers (CLECs). We decline to address AT&T's concerns in a declaratory ruling; however, we find that AT&T's petition and supporting comments suggest a need for the Commission to revisit the issue of CLEC access rates. Therefore, in the Notice, we initiate a rulemaking regarding the reasonableness of these charges and whether the Commission might adopt rules to address, by the least intrusive means, any failure of market forces to constrain CLEC access charges. II. BACKGROUND AND SUMMARY A. Price Cap Regime 1. Background 8. To recover the costs of providing interstate access services, incumbent LECs charge IXCs and end users for access services in accordance with our Part 69 access charge rules. Part 69 establishes two basic categories of access services: special access services and switched access services. Special access services do not use local switches; instead they employ dedicated facilities that run directly between the end user and the IXC's point of presence (POP). Switched access services, on the other hand, use local exchange switches to route originating and terminating interstate toll calls. The Commission has not prescribed specific rate elements in Part 69 for special access services. Part 69 does establish specific switched access elements and a mandatory switched access rate structure for each element. 9. Interoffice transmission services, known as transport services, carry interstate switched access traffic between an IXC's POP and the end office that serves the end user customer. Incumbent LEC transmission facilities that carry switched interstate traffic between an IXC's POP and the incumbent LEC end office serving the POP (this office is called the serving wire center, or SWC), are known as entrance facilities. Incumbent LECs currently offer two types of interstate switched transport service between a SWC and an end user's end office. Under the first service, direct-trunked transport, calls are transported between the SWC and the end office by means of a direct trunk, a dedicated facility, that does not pass through an intervening switch. The second service, tandem-switched transport, routes calls from the SWC to the end office through a tandem switch located between the SWC and the end office. Traffic travels over a dedicated circuit from the SWC to the tandem switch and then over a shared circuit, which carries the calls of many different IXCs, from the tandem switch to the incumbent LEC end office. Incumbent LEC tandem switches and end office switches switch interstate traffic between the transport trunks carrying traffic to and from the IXC POPs and the end users' local loops. 10. Charges for special access services generally are divided into channel termination charges and channel mileage charges. Channel termination charges recover the costs of facilities between the customer's premises and the LEC end office and the costs of facilities between the IXC POP and the serving wire center. Channel mileage charges recover the costs of facilities (also known as interoffice facilities) between the serving wire center and the LEC end office serving the end user. 2. Price Caps 11. In 1990, the Commission replaced rate-of-return regulation for the BOCs and GTE with an incentives-based system of regulation that encourages companies to: (1) improve their efficiency by developing profit-making incentives to reduce costs; (2) invest efficiently in new plant and facilities; and (3) develop and deploy innovative service offerings. The price cap plan is designed to replicate some of the efficiency incentives found in fully competitive markets and to act as a transitional regulatory scheme until actual competition makes price cap regulation unnecessary. 12. Under the original price cap plan, interstate access services were grouped into four different baskets: the common line, traffic-sensitive, special access, and interexchange baskets. In the Second Transport Order, the Commission combined transport and special access services into the newly created trunking basket. Each basket is subject to a price cap index (PCI), which caps the total charges a LEC may impose for interstate access services in that basket. The PCI is adjusted annually by a measure of inflation minus a "productivity factor," or "X-Factor." A separate adjustment is made to the PCI for "exogenous" cost changes, which are changes outside the carrier's control and not otherwise reflected in the price cap formula. 13. Within the traffic-sensitive and trunking baskets, services are grouped into service categories and subcategories. Rate revisions for these services are limited by upper and, in the original price cap plan, lower pricing bands established for that particular service. Originally, the pricing band limits for most of the service categories and subcategories were set at five percent above and below the Service Band Index (SBI). In 1995, however, the Commission increased the lower pricing bands to ten percent for those service categories in the trunking and traffic- sensitive baskets and 15 percent for those services subject to density zone pricing. These pricing bands give price cap LECs the ability to raise and lower rates for elements or services as long as the actual price index (API) for the relevant basket does not exceed the PCI for that basket, and the prices for each category of services within the basket are within the established pricing bands. Together, the PCI and pricing bands restrict a price cap LEC's ability to offset price reductions for services that are subject to competition with price increases for services that are not subject to competition. B. Pricing Flexibility 14. When it adopted the LEC Price Cap Order in 1990, the Commission required price cap LECs to offer all interstate special and switched access services at geographically averaged rates for each study area. Since that time, the Commission has taken significant steps to increase the LECs' pricing flexibility and ability to respond to the advent of competition in the exchange access market. In the Special Access and Switched Transport Expanded Interconnection Orders, the Commission permitted LECs to introduce density zone pricing for high capacity special access and switched transport services in a study area, provided that they could demonstrate the presence of "operational" special access and switched transport expanded interconnection arrangements and at least one competitor in the study area. The Commission also permitted price cap LECs to offer volume and term discounts for special access and switched transport services upon specific competitive showings. 15. Subsequently, the Commission eliminated the lower service band indices, concluding that this action would lead to lower prices and encourage LECs to charge rates that reflect the underlying costs of providing exchange access services. The Commission found that the PCI and upper pricing bands adequately control predatory pricing and that greater downward pricing flexibility would benefit consumers both directly through lower prices and indirectly by encouraging only efficient competitive entry. 16. In that same order, the Commission also relaxed the procedures for introducing new switched access services, in response to arguments that new services and technologies do not fit the Part 69 rate structure requirements. The Commission prescribed the original rate structure for introducing new switched access services in 1983. At that time, incumbent LECs were required to file a Part 69 waiver each time they wanted to introduce a new rate element for switched access service that did not conform to the prescribed switched access rate structure. A Part 69 waiver required incumbent LECs to demonstrate that "special circumstances warrant deviation from the general rule and that such deviation will serve the public interest." Incumbent LECs also had to comply with the "new services" test, which required an incumbent LEC to demonstrate that its tariffed rates for new services would recover no more than the carrier's direct costs of providing the service, plus a reasonable amount of overhead, and no less than the carrier's direct costs of providing the service. Finally, incumbent LECs were directed to file their tariffs introducing a new service on at least fifteen days' notice and to incorporate the new service into the appropriate price cap basket and indices within six to eighteen months after the new service tariff became effective. 17. The Commission found that the Part 69 rate structure imposed a costly, time- consuming, and unnecessary burden on incumbent LECs and significantly impeded the introduction of new services. Accordingly, the Commission modified the Part 69 rate structure rules to permit an incumbent LEC to introduce a new service by filing a petition based on a "public interest" standard that is easier to satisfy than the general standard applicable to waivers of the Commissions rules. In addition, under the new rules, once an initial incumbent LEC has satisfied the public interest requirement for establishing new rate elements for a new switched access service, another incumbent LEC may file a petition seeking authority to introduce an identical new service, and its petition will be reviewed within ten days of the release of a Public Notice. The LEC may introduce the new rate element following the ten-day period, unless the Common Carrier Bureau (the Bureau) informs the LEC before that time that its new service does not qualify for "me too" treatment. 18. The Commission also recognized that additional modifications to the Part 69 rate structure could increase consumer choice, streamline regulation, and increase consumer welfare by increasing incentives for innovation. The Commission, therefore, sought comment on whether to permit price cap LECs to establish new switched access rate elements without prior approval. The Commission also invited comment on whether to eliminate the new services test and permit LECs to offer new services free from price cap regulation. In the Access Reform First Report and Order, the Commission deferred resolution of these issues, as well as other issues concerning the timing and degree of pricing flexibility, to a future report and order. C. Summary 1. Pricing Flexibility 19. Since the release of the Access Reform First Report and Order, we have re-examined the record generated in response to the Access Reform NPRM and the Price Cap Second FNPRM; we have observed competition develop in the marketplace; and we have invited parties to update and refresh the record relating to access charge reform to reflect any changes that may have taken place since May 1997. In addition, we have received and reviewed several petitions (and the associated records) from BOCs seeking pricing flexibility in the form of forbearance from dominant carrier regulation in the provision of certain special access and high capacity services. Although our current price cap regime gives LECs some pricing flexibility and considerable incentives to operate efficiently, significant regulatory constraints remain. As the market becomes more competitive, such constraints become counter-productive. We recognize that the variety of access services available on a competitive basis has increased significantly since the adoption of our price cap rules. Therefore, in response to changing market conditions, we grant price cap LECs immediate flexibility to deaverage services in the trunking basket and to introduce new services on a streamlined basis. We also remove certain interstate interexchange services from price cap regulation upon implementation of intra- and interLATA toll dialing parity, and we establish a framework for granting price cap LECs further pricing flexibility upon satisfaction of certain competitive showings and seek comment on additional flexibility for certain switched access services. a. Immediate Regulatory Relief 20. As discussed above, the original rate structure for interstate switched transport services required price cap LECs to charge averaged rates throughout a study area. The Commission subsequently found that this requirement forced LECs to price above cost in the high-traffic, lower-cost areas where competition is more likely to develop. In the Switched Transport Expanded Interconnection Order, therefore, the Commission created a density zone pricing plan that allows some degree of deaveraging of rates for switched transport services. The Commission concluded that relaxing the pricing rules in this manner would enable price cap LECs to respond to increased competition in the interstate switched transport market. 21. Although the density zone pricing plan afforded some pricing flexibility to price cap LECs, it contained several constraints, such as the increased scrutiny applicable to plans with more than three zones. We now conclude that market forces, as opposed to regulation, are more likely to compel LECs to establish efficient prices. Accordingly, for purposes of deaveraging rates for services in the trunking basket, we eliminate the limitations inherent in our current density zone pricing plan and allow price cap LECs to define the scope and number of zones within a study area, provided that each zone, except the highest-cost zone, accounts for at least 15 percent of the incumbent LEC's trunking basket revenues in the study area and that annual price increases within a zone do not exceed 15 percent. In addition, we eliminate the requirement that LECs file zone pricing plans prior to filing their tariffs. 22. We also permit price cap LECs to introduce new services on a streamlined basis, without prior approval. Generally, we modify the Commission's rules to eliminate the public interest showing required by Section 69.4(g) and to eliminate the new services test (except in the case of loop-based new services) required under Sections 61.49(f) and (g). These modifications will eliminate the delays that now exist for the introduction of new services as well as encourage efficient investment and innovation. 23. Certain interstate interexchange services provided by price cap LECs are found in the interexchange basket, including interstate intraLATA services and certain interstate interLATA services called "corridor services." In this Order, we allow price cap LECs to remove from the interexchange basket, and, hence, price cap regulation, their interstate intraLATA toll services and corridor services, provided the price cap LEC has implemented intra- and interLATA toll dialing parity in all of the states in which it provides local exchange service. The presence of competitive alternatives for these services, coupled with implementation of dialing parity, should prevent price cap LECs from exploiting over a sustained period any market power may possess with respect to these services and thus warrants removal of these services from price cap regulation. b. Relief that Requires a Competitive Showing 24. In addition, we adopt a framework for granting further regulatory relief upon satisfaction of certain competitive showings. Relief generally will be granted in two phases and on an MSA (Metropolitan Statistical Area) basis. To obtain Phase I relief, price cap LECs must demonstrate that competitors have made irreversible, sunk investments in the facilities needed to provide the services at issue. For instance, for dedicated transport and special access services, price cap LECs must demonstrate that unaffiliated competitors have collocated in at least 15 percent of the LEC's wire centers within an MSA or collocated in wire centers accounting for 30 percent of the LEC's revenues from these services within an MSA. Higher thresholds apply, however, for channel terminations between a LEC end office and an end user customer. In that case, the LEC must demonstrate that unaffiliated competitors have collocated in 50 percent of the price cap LEC's wire centers within an MSA or collocated in wire centers accounting for 65 percent of the price cap LEC's revenues from this service within an MSA. For traffic-sensitive, common line, and the traffic-sensitive components of tandem-switched transport services, a LEC must show that competitors offer service over their own facilities to 15 percent of the price cap LEC's customer locations within an MSA. Phase I relief permits price cap LECs to offer, on one day's notice, volume and term discounts and contract tariffs for these services, so long as the services provided pursuant to contract are removed from price caps. To protect those customers that may lack competitive alternatives, however, LECs receiving Phase I flexibility must maintain their generally available, price cap constrained tariffed rates for these services. 25. To obtain Phase II relief, price cap LECs must demonstrate that competitors have established a significant market presence (i.e., that competition for a particular service within the MSA is sufficient to preclude the incumbent from exploiting any individual market power over a sustained period) for provision of the services at issue. Phase II relief for dedicated transport and special access services is warranted when a price cap LEC demonstrates that unaffiliated competitors have collocated in at least 50 percent of the LEC's wire centers within an MSA or collocated in wire centers accounting for 65 percent of the LEC's revenues from these services within an MSA. Again, a higher threshold applies to channel terminations between a LEC end office and an end user customer. In that case, a price cap LEC must show that unaffiliated competitors have collocated in 65 percent of the LEC's wire centers within an MSA or collocated in wire centers accounting for 85 percent of the LEC's revenues from this service within an MSA. Phase II relief permits price cap LECs to file tariffs for these services on one day's notice, free from both our Part 61 rate level and our Part 69 rate structure rules. 26. Because our ultimate goal is to continue to foster competition and allow market forces to operate where they are present, we also seek comment in the Notice on additional pricing flexibility for common line and traffic-sensitive services. First, we consider permitting price cap LECs to deaverage rates for services in the common line and traffic-sensitive baskets in conjunction with identification and removal of implicit universal service support in interstate access charges and implementation of an explicit high cost support mechanism. We also invite parties to comment on how we should define zones for purposes of deaveraging. In addition, we seek comment on which rate elements may be deaveraged and whether deaveraging should be subject to subscriber line charge (SLC) and presubscribed interexchange carrier charge (PICC) caps or any other constraint. We also seek comment on the appropriate Phase II triggers for granting greater pricing flexibility for traffic-sensitive, common line, and the traffic-sensitive components of tandem-switched transport services. 2. Modifications to Rate Structure 27. The Notice also seeks comment on certain price cap regulation issues. Specifically, consistent with the Access Reform First Report and Order's efforts to reform access charges so costs are recovered in a manner that reflects how they are incurred, we seek comment on adopting a capacity-based rate structure for local switching. The local switch, which consists of an analog or digital switching system and line and trunk cards, connects subscriber lines both with other local subscriber lines and with dedicated and common interoffice trunks. As discussed in more detail below, prior to the Access Reform First Report and Order, the interstate allocated portion of these costs was recovered entirely through per-minute charges assessed on IXCs. 28. Recognizing that a significant portion of these costs (i.e., the costs associated with line cards and trunk ports) do not vary with usage, however, the Commission determined that such non-traffic-sensitive costs should be recovered on a flat-rated, rather than usage sensitive, basis. Accordingly, consistent with principles of cost-causation and economic efficiency, the Commission directed price cap LECs to reassign all line-side port costs from the Local Switching rate element to the Common Line rate element and to recover these costs through the common line rate elements, including the SLC and flat-rated PICC. Because the record in that proceeding was not adequate, however, to determine whether and to what extent the remaining local switching costs were traffic-sensitive or non-traffic-sensitive, LECs continue to recover these costs through traffic-sensitive charges. 29. We take this opportunity to re-examine the local switching rate structure to determine whether it reasonably reflects the manner in which price cap LECs incur costs. In the Notice, we invite comment on whether and to what extent we should modify further our price cap rules for the traffic-sensitive basket to reflect a capacity-based local switching rate structure. 30. We also invite parties to discuss proposed revisions to our rules for the common line basket, and we consider redefining the price cap baskets and pricing bands. Specifically, we solicit comment on whether to increase the "g" factor in the common line PCI formula and whether we should revise the baskets so that services with flat rates are not placed in the same basket as services with traffic-sensitive rates. In addition, we seek comment on our tentative conclusion that the inflation measure in the PCI formula should be consistent with the measure defined by the Bureau of Labor Statistics (BLS). 3. CLEC Access Charges 31. In the Access Reform NPRM, the Commission sought comment on whether CLECs have market power in the provision of terminating access services and whether to regulate these services. In the Access Reform First Report and Order, the Commission decided to treat CLECs as non-dominant in the provision of terminating access service, because they did not appear at that time to possess market power. The Commission stated, however, that it would revisit the issue of regulating CLEC terminating access rates if there were sufficient indications that CLECs were imposing unreasonable terminating access charges. 32. On October 23, 1998, AT&T filed a petition for declaratory ruling requesting that the Commission confirm that, under existing Commission rules and policies, an IXC may elect not to accept service at a price chosen by the CLEC. In its petition, AT&T alleges that some CLECs impose switched access charges significantly higher than those charged by the ILEC competitors in the same area. AT&T points to a Commission pronouncement in the Access Reform First Report and Order that "terminating rates that exceed those charged by the ILEC serving the same market may suggest that a CLEC's terminating access rates are excessive," thereby warranting Commission regulation. 33. In this Order, we deny AT&T's petition. We find, however, that the record developed in response to AT&T's petition suggests the need for the Commission to revisit the issue of CLEC access rates. Accordingly, in the accompanying Notice, we initiate a rulemaking to determine the reasonableness of CLEC access rates and whether the Commission might adopt rules to address, by the least intrusive means, any failure of market forces to constrain CLEC access charges. III. NEW SERVICES A. Background 34. In 1983, the Commission prescribed a rate structure for switched access services in Part 69 of its rules. Originally, when an incumbent LEC wanted to offer a new switched access service, and the rate element or elements for that new service did not fit into the prescribed switched access rate structure, the LEC was required to obtain a waiver of Part 69 pursuant to Section 1.3 of the Commission's rules. In 1996, the Commission adopted Section 69.4(g) of its rules, which relaxed the switched access rate structure rules for price cap LECs. Under Section 69.4(g), a price cap LEC is no longer required to demonstrate that "special circumstances" warrant a Part 69 waiver; instead, it need only file a petition showing that the proposed new rate element would be in the "public interest," or that another LEC previously has established the same rate element. 35. In addition, a price cap LEC filing a tariff for a new service must comply with the new services test, which requires the LEC to show that its new service rates will recover no more than the carrier's direct costs of providing the service, plus a reasonable level of overheads, and no less than the carrier's direct costs of providing the service. Those tariffs must be filed on at least fifteen days' notice. Finally, the LEC is required to incorporate its new services into the appropriate price cap basket and indices within six to eighteen months after the new service tariff takes effect, in conjunction with the carrier's annual access tariff filing. 36. In the December 1996 Access Reform NPRM, the Commission invited comment on three proposals for further relaxation of its new service rules to create incentives for price cap LECs to introduce services using new technologies: (1) enabling price cap LECs to establish new switched access rate elements without prior approval; (2) eliminating the new services test; and (3) permitting price cap LECs to offer new services outside of price cap regulation. In the Access Reform First Report and Order, the Commission deferred consideration of pricing flexibility issues, including these new service issues, to a future Order. Bell Atlantic later proposed removing new services from price cap regulation "immediately," and the Commission invited comment on Bell Atlantic's proposal. Subsequently, the Commission granted a petition to forbear from enforcing Part 69 rate structure requirements with respect to new service tariffs filed by any incumbent LEC serving more than 50,000 access lines, but less than two percent of the nation's access lines. B. Discussion 37. We find that the record supports permitting incumbent LECs to introduce new services on a streamlined basis. The Commission adopted price cap regulation in part to encourage price cap LECs to innovate, and to develop new services. Thus, to the extent that our new service rules impede the introduction of new services, they undermine one of the Commission's goals in adopting price cap regulation. The new service rules clearly delay the introduction of new services, because the Commission needs time to review Section 69.4(g) public interest showings, and price cap LECs need time to prepare the cost support showing required by the new services test. Moreover, it is not clear that the new services rules provide any benefits that justify such delay. By definition, a new service expands the range of service options available to consumers. Thus, the introduction of a new service does not by itself compel any access customer to reconfigure its access services and so cannot adversely affect any access customer. Because new services may benefit some customers, and existing customers can continue to purchase existing services if they find the new service rate structure or rate level unattractive, we conclude that it serves the public interest to permit price cap LECs to introduce new services on a streamlined basis. 38. In addition, the Commission adopted Part 69 before the advent of competition. Now, the delay caused by the new service rules can place price cap LECs at a competitive disadvantage. Competitive LECs that have notice of a price cap LEC's Section 69.4(g) petition may be able to begin offering the service before the incumbent LEC has been granted permission to establish new rate elements for the new service, thus diminishing the incumbent's incentives to develop and offer new services. With the removal of this competitive disadvantage, price cap LECs will be better able to respond to competition from CLECs. 39. Accordingly, we revise Section 69.4 of the Commission's rules to eliminate the public interest showing required by Section 69.4(g), and to enable price cap LECs to establish any new switched access rate element, in addition to the access rate elements currently required by Section 69.4. We also eliminate the new services test in Sections 61.49(f) and (g) for all new services except loop-based services. We are concerned that new services that employ local loop facilities raise cost allocation issues that the Commission has not yet addressed. In the GTE DSL Reconsideration Order, for example, we referred to the Federal-State Joint Board for consideration in Docket No. 80-286 a petition for clarification and/or reconsideration filed by NARUC. NARUC's petition sought clarification regarding the application of our Part 36 separations rules while the Joint Board considered the proper allocation of loop costs associated with special access tariffs such as the GTE DSL tariff. Noting that the separations and cost allocation issues NARUC raised were beyond the scope of the limited investigation in the tariff proceeding, we stated that we would address these important issues in conjunction with the Joint Board. Until these issues are resolved, it is not appropriate to permit price cap LECs to file tariffs for new loop-based services without satisfying the cost support requirements of the new services test. 40. Bell Atlantic argues that price cap LECs should be permitted to file tariffs for new services on one day's notice. We conclude that Bell Atlantic's request is in the public interest. The current fifteen-day notice period is no longer warranted. A primary focus of our review of new service tariffs is to determine whether the LEC complied with the new service test. By eliminating the new services test, we greatly reduce the need for reviewing LEC new service tariff filings. In addition, no customer is required to purchase the new service. Furthermore, a longer notice period would delay the introduction of new services and thus undercut the reasons for revising the price cap new service rules here. 41. We are not persuaded by the arguments advanced by parties opposing further deregulation of new services offered by price cap LECs. Some IXCs are concerned that incumbent LECs might offer new services in a manner that would make them available only to the LECs' own long distance affiliates. These IXCs do not explain why or how streamlined introduction of new services would in any way affect the Commission's ability to enforce section 202 of the Act, which prohibits unreasonable discrimination. Accordingly, we conclude that permitting LECs to offer new services on a streamlined basis does not increase the likelihood of unreasonable discrimination. IXCs may file complaints under section 208 of the Act, should they believe that such unreasonable discrimination has occurred. 42. AT&T notes that the Commission made it easier for incumbent price cap LECs to introduce new services in the Price Cap Third Report and Order, and it argues that no further deregulation is necessary to encourage LECs to introduce new services. Regardless of LECs' incentives to introduce new services, we conclude above that the benefits of our current new service rules do not justify the delay caused by those rules, and we reject AT&T's argument. Elimination of the new services rules serves the Commission's goals of streamlining our regulations, removing unnecessary regulatory barriers, and increasing consumer choice. 43. We will not, however, permit price cap LECs to offer new services outside of price cap regulation, as parties suggest. MCI argues that offering new services outside of price cap regulation will encourage incumbent LECs to create "new" services that differ little from an existing service. Specifically, MCI theorizes that, as access customers shift to the new service, the demand weight placed on the existing service in calculating the actual price index (API) would decrease, thus enabling the LEC to raise the price of the existing service. Subsequently, according to MCI, the LEC could increase the new service price and leave access customers with no lower-priced alternatives. We agree with MCI that the introduction of new services outside of price caps ultimately might enable price cap LECs to raise rates for both new services and existing services to unreasonable levels. In contrast to the conditions we adopt elsewhere in this Order for removal of services from price caps, we do not predicate the new services relief we adopt here upon any showing of competition for the services at issue, thus we are not convinced by price cap LEC arguments that rates, terms, and conditions for new services will be constrained by market forces. 44. At this time, we revise only the new service requirements applicable to price cap LECs, not rate-of-return LECs, for several reasons. First, we have recently granted a petition to forbear from enforcing Part 69 rate structure requirements with respect to new service tariffs filed by a considerable number of rate-of-return LECs, i.e., those serving more than 50,000 access lines, but less than two percent of the nation's access lines. In addition, we note that the new services test is applicable only to price cap LECs, and so is irrelevant for rate-of-return LECs. Moreover, the Commission created a separate docket to consider the access reform issues specific to rate-of-return carriers. In that proceeding, the Commission invited comment on revising the new service requirements applicable to rate-of-return LECs, and we will address those issues on the basis of the record in that docket. Finally, we relax the new service requirements for price cap LECs in part to remove a competitive disadvantage from price cap LECs, so that they can better respond to developing competition from CLECs. Because rate-of-return LECs do not face competition to the same extent as price cap LECs, there is less need to remove any competitive disadvantage they face at this time. IV. REMOVAL OF INTERSTATE INTER- AND INTRALATA TOLL SERVICES FROM PRICE CAP REGULATION A. Introduction 45. The Commission currently regulates in the interexchange basket the rates that price cap LECs charge for particular interstate interexchange services. Among the services in this basket are certain interstate interLATA toll services, called "corridor" services, and interstate intraLATA toll services. We conclude that price cap LECs' corridor and interstate intraLATA toll services will face sufficient competition upon full implementation of inter- and intraLATA toll dialing parity to preclude the price cap LECs from exploiting over a sustained period any individual market power they may have with respect to these services. Consequently, once a price cap LEC has implemented inter- and intraLATA toll dialing parity everywhere it provides local exchange services at the holding company level, we will allow the price cap LEC to remove all of its corridor and interstate intraLATA toll services from price cap regulation, and subsequently to file tariffs for these services on one day's notice and without cost support. Allowing price cap LECs to do so removes unnecessary regulatory constraints and enhances the operation of competitive forces where they provide corridor and interstate intraLATA toll services. B. Background 46. The 1982 AT&T consent decree divided the former Bell territory into geographic units called "Local Access and Transport Areas," or "LATAs." Most states have multiple LATAs, and LATA boundaries generally are contained within a single state. Some LATAs, however, cross state lines. With certain exceptions, the consent decree prohibited the BOCs from transporting telecommunications traffic between LATAs (interLATA services), but permitted them to carry traffic within a LATA (intraLATA services). Thus, at the time of divestiture, IXCs were permitted to transport interLATA traffic but BOCs generally were not. Telephone calls that do not leave customers' immediate local calling areas are intraLATA local calls and are subject only to the monthly rate that customers pay for local services. Telephone calls to destinations outside of the local calling area are toll calls subject to an additional charge. A LATA often encompasses more than one immediate local calling area, so intraLATA calls can be either local or toll calls. 47. Despite the consent decree's provisions prohibiting BOCs from providing interLATA services, it made an exception for certain interstate interLATA services, called corridor services. Corridor services are toll services that carry traffic from five counties in Northern New Jersey into New York City, from Philadelphia and its suburbs into three counties in New Jersey, and from those three counties back into the Philadelphia area. At the time of the consent decree, these areas were in the Bell Atlantic and NYNEX regions. These companies have since merged. 48. BOCs and independent incumbent LECs also provide interstate intraLATA toll services. Interstate intraLATA toll calls are calls that leave an immediate local calling area and cross state lines but remain within a single LATA, such as some calls from Chicago, Illinois, to Gary, Indiana. The BOCs and independent incumbent LECs provide corridor and interstate intraLATA toll services in competition with the long-distance services of AT&T, Sprint, MCI, and many other long-distance companies. 49. Because the Commission has treated incumbent LECs as having market power in the provision of most services within their service areas, the rates that incumbent LECs may charge for corridor and interstate intraLATA toll services currently are subject to dominant carrier regulation. Dominant carriers are subject to price cap or rate-of-return regulation, must file tariffs -- on a minimum of seven days' notice and often more -- and usually with cost support data. Non-dominant carriers, on the other hand, are not subject to rate regulation and may file tariffs on one day's notice, without cost support, that are presumed lawful. 50. To spur competition, section 251(b)(3) of the Act requires LECs "to provide dialing parity to competing providers of telephone exchange service and telephone toll service." "Dialing parity" exists when a LEC customer can route telephone calls to at least one carrier other than that LEC without having to dial an access code. Pursuant to section 251(b)(3), the Commission issued an order in August 1996 requiring LECs to implement inter- and intraLATA toll dialing parity by February 8, 1999. The Commission concluded that a LEC must meet those obligations by allowing its customers to presubscribe to at least one carrier other than the LEC for intraLATA toll services, and to at least one carrier other than the LEC for interLATA toll services. 51. On August 22, 1997, the United States Court of Appeals for the Eighth Circuit vacated, on jurisdictional grounds, the Commission's intraLATA dialing parity rules as applied to intrastate intraLATA toll and interstate intraLATA local calls. The United States Supreme Court, however, reversed the Eighth Circuit decision on January 25, 1999. Following the Supreme Court decision, the Commission issued an order on March 23, 1999, in which it observed that intraLATA toll dialing parity had been implemented in most states. Nonetheless, the Commission concluded in light of the intervening Eighth Circuit and Supreme Court decisions that a limited waiver of the intraLATA toll dialing parity deadlines and a revised implementation schedule were warranted. Under the revised schedule, almost all LECs will have implemented inter- and intraLATA toll dialing parity by September 6, 1999. 52. Ameritech and USTA filed comments in January 1997, in response to the Access Charge Reform NPRM, asking the Commission to cease price cap regulation of corridor and interstate intraLATA toll services. Specifically, Ameritech proposed that the Commission remove these services from price cap regulation once toll dialing parity becomes available because toll dialing parity will eliminate any market power BOCs might have had. Ameritech repeated its proposal regarding corridor and interstate intraLATA toll services in a 1998 ex parte letter. Bell Atlantic filed a similar letter. The Commission sought comment on the Ameritech and Bell Atlantic proposals in an October 1998 Public Notice. C. Discussion 1. Price Cap LEC Ability to Exploit Market Power 53. A dominant carrier is "[a] carrier found by the Commission to have market power (i.e., power to control prices)." "Market power" is "the ability to raise prices by restricting output," or "to raise and maintain price above the competitive level without driving away so many customers as to make the increase unprofitable." Pursuant to the framework outlined in the Dominant/Non-Dominant Order, the Commission determines whether a carrier is dominant or non-dominant by: 1) delineating the relevant product and geographic markets for examination of market power, 2) identifying firms that are current or potential suppliers in that market, and 3) determining whether the carrier under evaluation possesses individual market power in that market. As a result of the competition that has developed since the consent decree and the Telecommunications Act of 1996, price cap LECs may now be non-dominant in the provision of corridor and interstate intraLATA toll services, particularly in light of the availability of inter- and intraLATA toll dialing parity. Although the record in this proceeding is insufficient for us to conduct the analysis outlined in the Dominant/Non-Dominant Order, we do conclude that developments in the markets for interexchange services make it unlikely that price cap LECs will be able to exploit over a sustained period any individual market power in their provision of corridor and interstate intraLATA toll services. 54. First, there currently exist a number of competitive alternatives to provision of these services by price cap LECs. Non-dominant IXCs such as AT&T, MCI, and Sprint already provide long-distance services in the price cap LECs' service areas. IXCs and competitive LECs not currently providing such services could do so quickly, either over their own facilities or by reselling the services of IXCs already in the market. Most customers of domestic interexchange services are sensitive to changes in price and are willing to shift their traffic if a carrier raises its prices. Thus, non-dominant IXCs and competitive LECs can compete with price cap LEC provision of corridor and interstate intraLATA toll services. Inter- and intraLATA toll dialing parity, which is -- or shortly will be -- available throughout the country pursuant to the March 23, 1999, Dialing Parity Extension Order, will facilitate such competition. The existence of these competitive alternatives and the availability of toll dialing parity will limit the ability of price cap LECs to exploit over a sustained period any individual market power in their provision of corridor and interstate intraLATA toll services. 55. Second, some of the larger IXCs have nationwide brand identification in connection with long-distance services. This brand identification, and an IXC's ability to offer customers long-distance services that span the nation, rather than just in discrete geographies, should help offset any advantages a price cap LEC might enjoy based on its brand identification and possible integration efficiencies in the provision of local services. Moreover, as the Commission has noted in the past: [a]n incumbent firm in virtually any market will have certain advantages -- including, perhaps, resource advantages, scale economies, established relationships with suppliers, ready access to capital, etc. Such advantages do not, however mean that these markets are not competitive, nor do they mean that it is appropriate for government regulators to deny the incumbent the efficiencies its size confers in order to make it easier for others to compete. Indeed, the competitive process itself is largely about trying to develop one's own advantages, and all firms need not be equal in all respects for this process to work. The IXCs' nationwide brand identification and larger service areas will limit the ability of price cap LECs to exploit over a sustained period any individual market power in their provision of corridor and interstate intraLATA toll services. 2. Removal of Services from Price Caps and Relaxation of Tariff Requirements 56. In light of our determination that price cap LECs will be unable to exploit any individual market power over a sustained period in their provision of corridor and interstate intraLATA toll services, we will allow a price cap LEC to remove those services from price cap regulation on fifteen days notice, and subsequently to file tariffs for those services on one day's notice without cost support and with a presumption of lawfulness, once it has implemented inter- and intraLATA toll dialing parity everywhere it provides local exchange services at the holding company level. The Commission retains, however, the ability to reimpose some or all of these regulations on one or more of the price cap LECs should this prove necessary in the future. The price cap LECs' provision of these services is also subject to Title II of the Act, enabling the Commission to continue to ensure that the rates are just, reasonable, and nondiscriminatory. 57. Because price cap LECs will be unable to exploit any individual market power over a sustained period in their provision of corridor and interstate intraLATA toll services, we find that the burdens imposed by price cap regulation of those services outweigh the little benefit such regulation might provide, especially considering the relatively de minimis nature of corridor and interstate intraLATA toll traffic. We also find that the operation of market forces should make it unlikely that they will file unlawful tariffs. Thus, upon careful consideration of the benefits and burdens of our present regulations, we conclude that more limited advance review of price cap LECs' corridor and interstate intraLATA toll service filings, when combined with mechanisms such as the complaint process and our investigation authority, is in the public interest. We will, therefore, allow price cap LECs to file tariffs for those services on one day's notice and without cost support. We do so under the authority of section 203(b)(2), which allows the Commission, "in its discretion and for good cause shown, [to] modify any requirement made by or under the authority of this section either in particular instances or by general order applicable to special circumstances or conditions." The growth in competition for long-distance services, and the availability of toll dialing parity, present just such special circumstances with regard to price cap LEC provision of corridor and interstate intraLATA toll services. V. GEOGRAPHIC DEAVERAGING OF RATES FOR TRUNKING BASKET SERVICES A. Background 58. Our Part 69 rules generally require that an incumbent LEC charge rates for access elements that are geographically averaged across each of its study areas. The Commission has developed a system of density pricing zones, however, that permits an incumbent LEC to deaverage geographically its rates for special access and switched transport services if that LEC meets certain threshold interconnection requirements. The density zone pricing rules permit incumbent LECs to establish a "reasonable" number of zones, but the Commission has noted in the past that "LECs seeking to establish more than three zones shall be subject to increased scrutiny and must carefully justify the number of zones proposed in their density pricing zone plan." In addition, incumbent LECs must show that density zones reflect cost characteristics such as traffic density or other measures of traffic passing through particular central offices. The Commission sought comment in the Access Reform NPRM on whether to grant incumbent LECs greater flexibility to deaverage access charges. B. Discussion 59. In this Order, we amend Section 69.123 of the Commission's rules to permit incumbent LECs to deaverage geographically their rates for access services in the trunking basket. We will permit price cap incumbent LECs to define both the scope and number of zones, provided that each zone, except the highest-cost zone, accounts for at least 15 percent of the incumbent's trunking basket revenues in the study area, and we no longer require LECs to demonstrate that the zones reflect cost characteristics. Granting incumbent LECs more flexibility to deaverage these rates enhances the efficiency of the market for those services by allowing prices to be tailored more easily and accurately to reflect costs and, therefore, promotes competition in both urban and rural areas. 60. Since 1992, the Commission has permitted LECs to deaverage certain rates by geographic zone because of the concern that averaged rates might create a pricing umbrella for competitors that would deprive customers of the benefits of more vigorous competition. Adoption of this policy reflected the conclusion that non-cost-based, geographically-averaged access rates could not be maintained in a market subject to increasing competition. Deaveraged rates promote efficiency by allowing an incumbent LEC to compete for customers when it is, in fact, the lowest cost service provider and by removing support flows to the incumbent LEC's higher-cost services. Incumbent LECs argue, however, that our current rules fail to achieve these goals for a variety of reasons. First, they argue that the "increased scrutiny" applicable to the creation of more than three pricing zones per study area discourages LECs from offering such plans. As a result, incumbent LECs argue, the zones in most zone density pricing plans are too large to be of practical value. Finally, incumbent LECs argue that traffic density is not the most accurate means of determining appropriate geographic boundaries for deaveraging. 61. We agree with incumbent LECs that traffic density is not the optimal, or even an accurate, method of determining cost-based pricing zones and that LEC-designed zones are more likely to lead to efficient pricing that reflects underlying cost characteristics. As the Commission observed in the Access Reform NPRM, averaging across large geographic areas distorts the operation of markets in high-cost areas because it requires incumbent LECs to offer services in those areas at prices substantially lower than their costs of providing those services. Prices that are below cost reduce the incentives for entry by firms that could provide the services as efficiently, or more efficiently, than the incumbent LEC. Similarly, discrepancies between price and cost may create incentives for carriers to enter low-cost areas even if their cost of providing service is actually higher than that of the incumbent LEC. 62. Given these observations, if we grant incumbent LECs practical flexibility to choose the number of zones and the criteria for establishing zone boundaries, they are more likely to establish reasonable and efficient pricing zones than if their flexibility is more constrained. Therefore, in this Order, we amend our rules to eliminate all competitive prerequisites for the deaveraging of trunking basket service rates and to permit price cap incumbent LECs to define zone pricing plans in any manner they wish, so long as each zone, except the highest-cost zone, accounts for at least 15 percent of the incumbent LEC's trunking basket revenues in the study area. This limitation ensures that incumbent LECs cannot define zones that are, for all practical purposes, specific to particular customers. As we explain in Section VI, below, we will not permit incumbent LECs to offer customer-specific contract tariffs until they satisfy certain triggers related to the development of competition, and we are concerned that, absent a rule establishing the minimum size of a zone, incumbents might circumvent this requirement by using zone pricing as a substitute for contract tariffs. At the same time, the limit we adopt permits a maximum of seven zones, which we believe should provide the ability to adjust to any likely variation in cost conditions. We note that no incumbent LEC has requested more than five zones. Our requirement that a zone, except the highest-cost zone, account for at least 15 percent of trunking revenues within a study area ensures that any lower rates resulting from deaveraging are enjoyed by a range of customers. Section 69.123(c)(2) of our rules, which requires transport between points located in two different zones to be priced in accordance with the higher-priced zone, also limits incumbent LECs' ability to draw pricing zones too narrowly. 63. The permissive geographic deaveraging we discuss here applies to rates for all services in the trunking basket to which density zone pricing currently applies, i.e., rates for all services except for the transport interconnection charge (TIC), so long as the same zones are used for all transport elements. We will continue to prohibit geographic deaveraging of the TIC so as not to disrupt the scheduled phase-out of that charge. In addition, we relax the constraints on annual price increases within zones that are contained in Sections 69.123(e)(2) and 61.47(e) of our rules by raising the limit on permitted price increases within zones from five percent to 15 percent. Although such constraints limit price cap incumbent LECs' ability to implement deaveraging and rebalance rates in a manner that reflects the actual costs of providing the services at issue, some limit on the rate of price increases within zones remains desirable in order to prevent the disruptive effects of rapid and unexpected price increases. Under our price cap rules, however, deaveraging permits LECs to increase rates in one geographic zone only to the extent that they decrease rates in other geographic zones in the study area. As Sprint points out, particularly where demand has grown faster in high-density zones than in low-density zones, the five-percent limit on price increases sharply constrains the ability of incumbent LECs to make revenue-neutral price cuts in high-density zones. Increasing to 15 percent the limit on price increases should allow more rapid movement to cost-based rates without subjecting customers in high-cost areas to rate shock. The requirement we adopt that each zone, except the highest-cost zone, account for at least 15 percent of the incumbent's trunking basket revenues in a study area should deter incumbent LECs from establishing rates for low-cost zones that are so low as to enable them to raise rates to unreasonably high levels in high-cost zones. Thus, we are not persuaded by AT&T's claims that greater geographic deaveraging flexibility will lead to predatory pricing by incumbent LECs or arguments by CPI and the Washington Commission that any further deaveraging should result only in price decreases, i.e., that it be "downward only." 64. We reject the Washington Commission's argument that more liberal geographic deaveraging rules might lead to IXC violations of sections 254(b)(3) and 254(k) of the Act. Section 254(b)(3) of the Act requires the Joint Board and the Commission to ensure that consumers in rural, insular, and high cost areas have access to telecommunications services that are available at rates that are reasonably comparable to rates charged for similar services in urban areas. We conclude that further geographic deaveraging of trunking services that may result from this Order is unlikely to place significantly greater pressures on IXCs (purchasers of trunking services) to deaverage their rates, in part because deaveraging implies price decreases as well as increases. Section 254(k) prohibits a telecommunications carrier from using services that are not competitive to subsidize services that are subject to competition. As we discuss above, however, changes in incumbent LEC pricing zones resulting from this Order are likely to increase the degree to which trunking service prices reflect cost and thus would decrease the likelihood of cross-subsidization. 65. We will no longer require incumbent LECs to file zone pricing plans in advance of tariff filings, as the Commission has in the past, because we presume that market forces, along with the limitation we adopt regarding the size of zones, will result in plans that reflect cost characteristics. Parties wishing to challenge the reasonableness of incumbent LEC zone pricing plans may do so as part of the tariff approval process, pursuant to which incumbent LECs must file any tariffs that include both a rate increase and rate decrease upon fifteen days' notice, or in a formal complaint under section 208 of the Act. 66. We are not persuaded by arguments made by MCI that the failure of incumbent LECs to take full advantage of the geographic deaveraging currently available under our rules is sufficient grounds for not granting incumbent LECs greater flexibility to deaverage transport services. As we discuss above, lack of flexibility in our density zone pricing rules may be responsible for incumbent LECs' current failures to take full advantage of such opportunities. We conclude above that market forces are more likely to result in efficient pricing than is regulation, and, for this reason, the greater flexibility we grant here will benefit access customers through more efficient pricing of access services. VI. PRICING FLEXIBILITY BASED ON A COMPETITIVE SHOWING A. Background 67. The Commission has long recognized that it should allow incumbent LECs progressively greater pricing flexibility as they face increasing competition. In the Access Reform First Report and Order, the Commission adopted a market-based approach to access charge reform, pursuant to which it would relax restrictions on incumbent LEC pricing as competition emerges, thereby ensuring that "our own regulations do not unduly interfere with the development and operation of these markets as competition develops." At that time, the Commission deferred resolution of the specific timing and degree of pricing flexibility to a future Order. 68. In the previous two sections, we adopt forms of regulatory relief for price cap LECs that can be granted under current market conditions and do not require a further competitive showing. Below, we consider forms of regulatory relief which, if granted prematurely, might enable price cap LECs to (1) exclude new entrants from their markets, or (2) increase rates to unreasonable levels. Accordingly, as a condition for granting further pricing flexibility, we require incumbent LECs to show that markets are sufficiently competitive both to warrant pricing flexibility to enable incumbent LECs to respond to competition and to discourage incumbents from either excluding new entrants or raising rates to unreasonable levels. In other words, we adopt requirements that price cap LECs make "competitive showings," or satisfy "triggers," to demonstrate that market conditions in a particular area warrant the relief at issue. 69. The pricing flexibility framework we adopt consists of two phases. To obtain Phase I regulatory relief, the incumbent must show that competitors have made irreversible investments in the facilities needed to provide the services at issue, thus discouraging incumbent LECs from successfully pursuing exclusionary strategies. Phase I permits LECs to offer contract tariffs and volume and term discounts, while requiring them to maintain their generally available price cap- constrained tariffed rates, thus protecting those customers that lack competitive alternatives. To obtain Phase II relief, which allows LECs to raise and lower rates, the incumbent must demonstrate that competitors have established a significant market presence in the provision of the services at issue. Under those market conditions, the availability of alternative providers will ensure that rates are just and reasonable. The triggers we adopt below should permit incumbent LECs to make the required showings, with a minimum of administrative burden for the industry and the Commission. 70. In Section VI.B, we define the geographic areas within which we will grant pricing flexibility. In Section VI.C.2, we establish Phase I competitive showings for (1) dedicated transport, (i.e., entrance facilities, direct-trunked transport, and the dedicated component of tandem-switched transport service) and special access services other than channel terminations; and (2) channel terminations. In Section VI.C.3, we adopt Phase I competitive showings for common line and traffic-sensitive services, and the traffic-sensitive components of tandem- switched transport service. We specify the regulatory relief to be afforded for all these services at Phase I in Section VI.C.4, and, in Section VI.C.5, we adopt Phase II competitive showings for dedicated transport and special access services and specify the relief that is available upon satisfaction of these showings. In the Notice accompanying this Order, we seek comment on appropriate Phase II triggers for the traffic-sensitive components of tandem-switched transport service, and for services in the traffic-sensitive and common line baskets. In Section VI.D, we revise our price cap low-end adjustment rules with respect to those price cap LECs that qualify for and elect to exercise any of the pricing flexibilities we grant in this section. We set forth the procedural requirements governing requests for pricing flexibility in Section VI.E. We base our conclusions in this section on the record developed in response to the Price Cap Second FNPRM and the Access Reform NPRM, supplemented by pleadings filed in response to the October 5 Public Notice and the pending forbearance petitions. Finally, in Section VI.F, we extend by ninety days the statutory deadline applicable to U S West's pending petition for forbearance from dominant carrier regulation in Phoenix, Arizona. B. Geographic Scope of Relief 71. Background. In the Price Cap Second FNPRM, the Commission invited comment on the geographic area that it should use for purposes of reviewing requests for pricing flexibility. The Commission sought to define these geographic areas narrowly enough so that the competitive conditions within each area are reasonably similar, yet broadly enough to be administratively workable. Specifically, the Commission invited comment on whether individual wire centers, zone density pricing zones, metropolitan statistical areas (MSAs), or local access and transport areas (LATAs) are the most appropriate geographic areas within which to grant pricing flexibility. Later, in the Access Reform NPRM, the Commission solicited comment on using the geographic zones adopted by state public service commissions for pricing of unbundled network elements (UNEs), or the zones adopted in the Universal Service proceeding for determining high cost areas. 72. Discussion. We will grant pricing flexibility relief for both Phase I and Phase II on an MSA basis. We agree with those commenters that maintain that MSAs best reflect the scope of competitive entry, and therefore are a logical basis for measuring the extent of competition. Because competitive LECs generally do not enter new markets on a state-wide basis, we reject proposals to define the geographic scope of pricing flexibility on the basis of states or study areas. Granting pricing flexibility over such a large geographic area would increase the likelihood of exclusionary behavior by incumbent LECs by giving them flexibility in areas where competitors have not yet made irreversible investment in facilities. 73. We also decline to grant pricing flexibility on the basis of LATAs. Many LATAs include an entire state, and in those cases, LATAs would be inappropriate for the same reasons we reject states and study areas as relevant markets. Of course, other states contain many LATAs, in which cases LATAs are similar to MSAs. In those cases, relying upon MSAs rather than LATAs should make little difference in determining whether to grant pricing flexibility. 74. We also reject proposals to grant pricing flexibility on the basis of wire centers or central offices. CTSI and KMC suggest that competition may exist in only a small part of an MSA, but we believe that the triggers we establish below are sufficient to ensure that competitors have made sufficient sunk investment within an MSA. In addition, defining geographic areas smaller than MSAs would force incumbents to file additional pricing flexibility petitions, and, although these petitions might produce a more finely-tuned picture of competitive conditions, the record does not suggest that this level of detail justifies the increased expenses and administrative burdens associated with these proposals. 75. In addition, we reject proposals to permit incumbent LECs themselves to select the geographic area for which they seek pricing flexibility. Determining whether the incumbent has chosen an appropriate area is likely to generate controversy, thus undermining our desire to create a framework for granting pricing flexibility, where warranted, without delay and without imposing undue burden on the industry or on Commission staff. 76. Commenters supporting MSAs have provided little if any guidance for pricing flexibility in non-MSA areas. We will grant price cap LECs pricing flexibility within the non- MSA parts of a study area if they satisfy the triggers we adopt below throughout that area. We decline to mandate individual showings for each rural service area (RSA), as we do for MSAs, because we expect competitors to enter MSA markets first and then to extend their networks into less densely populated areas. Because rural areas by definition do not have large concentrations of population comparable to urban areas, we expect that competitive entry into rural areas will be less concentrated than in urban areas. Therefore, we do not expect that pricing flexibility will enable an incumbent to engage successfully in exclusionary pricing behavior with respect to one RSA because competitive entry is limited to another RSA. Because the danger of exclusionary pricing behavior is lessened, we place more weight on our goal of administrative ease, and permit incumbent LECs to file a single pricing flexibility petition for all the RSAs in a study area. In addition, price cap LECs report some service quality information on a non-MSA basis, and so it should be easy for price cap LECs to collect collocation information for pricing flexibility requests in those areas. C. Phase I and Phase II Pricing Flexibility 1. General Approach 77. We will grant Phase I pricing flexibility to a price cap incumbent LEC for special access and dedicated transport services when it demonstrates either that (1) competitors unaffiliated with the incumbent LEC have established operational collocation arrangements in a certain percentage of the incumbent LEC's wire centers in an MSA, or (2) unaffiliated competitors have established operational collocation arrangements in wire centers accounting for a certain percentage of the incumbent LEC's revenues from the services in question in that MSA. In both cases, the incumbent also must show, with respect to each wire center, that at least one collocator is relying on transport facilities provided by a transport provider other than the incumbent LEC. As explained above, Phase I of our pricing flexibility framework provides incumbent LECs with regulatory relief when competitors have made irreversible investments in facilities within a given MSA. At that point, we no longer need to protect competition from exclusionary pricing behavior by incumbent LECs, because efforts to exclude competitors are unlikely to succeed. In order to protect access customers that may lack competitive alternatives, we limit the extent to which Phase I flexibility permits incumbents to raise rates, because competitors that are sufficiently entrenched to survive attempts by incumbents to exclude them from the market may not yet have a sufficient market presence to constrain prices throughout the MSA. 78. For the reasons discussed below, and based on the record before us, we conclude that a collocation-based trigger for granting pricing flexibility for special access and dedicated transport reasonably balances our two goals: (1) having a clear picture of competitive conditions in the MSA, so that we can be certain that there is irreversible investment sufficient to discourage exclusionary pricing behavior; and (2) adopting an easily verifiable, bright-line test to avoid excessive administrative burdens. In Section VI.C.2, we adopt specific triggers for (1) dedicated transport and special access services other than channel terminations; and (2) channel terminations. As we explain in Section VI.C.3 below, however, we adopt a different approach to granting pricing flexibility for traffic-sensitive and common line services, by requiring price cap LECs to demonstrate the extent to which competitors offer these services over their own facilities. 79. Irreversible Investment. In the Access Reform NPRM, the Commission explained that the initial phase of pricing flexibility should enable incumbent LECs to "re-price access services in ways that respond to competitive pressure, but do not impede competitive entry." We conclude that irreversible, or "sunk," investment in facilities used to provide competitive services is the appropriate standard for determining when pricing flexibility is warranted. Phase I regulatory relief will increase the efficiency of the interstate access market and reduce prices to end-user customers; therefore, we should delay granting this relief no longer than necessary to protect the development of a competitive market. Although Phase I relief permits incumbent LECs to offer contract tariffs and expands their authority to offer volume and term discounts, it also requires LECs to maintain their existing price cap tariffed rates, thus precluding price cap LECs from abusing their market power by charging dramatically higher rates to customers that lack competitive alternatives. We are concerned, however, about the possibility that price cap LECs could use Phase I relief, which enables them to offer contract tariffs to individual customers, to engage in exclusionary pricing behavior and thereby thwart the development of competition. Economists have long noted the incentives that monopolists have to reduce prices in the short run and forgo current profits in order to prevent the entry of rivals or to drive them from the market. The monopolist then would be able to raise prices above competitive levels and earn higher profits than would have been possible if the exclusionary pricing behavior had not occurred and competitors had not exited or been deterred from entering the market. Joskow and Klevorick note the conditions that increase the likelihood, and the social cost, of exclusionary pricing behavior. Several of these conditions, including short-run monopoly power, low elasticity of demand, and high profits in the absence of regulatory or competitive constraints, appear to characterize the interstate access market. An incumbent can forestall the entry of potential competitors by "locking up" large customers by offering them volume and term discounts at or below cost. Specifically, large customers may create the inducement for potential competitors to invest in sunk facilities which, once sunk, can be used to serve adjacent smaller customers. To the extent the incumbent can lock in the larger business customers whose traffic would economically justify the construction of new facilities, the incumbent can foreclose competition for the smaller customers as well. Consequently, we believe that pricing flexibility must be structured to prevent exclusionary pricing behavior so as to safeguard the development of competition. 80. An incumbent monopolist will engage in exclusionary pricing behavior only if it believes that it will succeed in driving rivals from the market or deterring their entry altogether. Otherwise, the reduced profits caused by exclusionary pricing behavior will not be recouped by other sales under the resulting conditions of reduced competition, and the incumbent will be worse off than if it had not engaged in exclusionary pricing behavior. Once multiple rivals have entered the market and cannot be driven out, rules to prevent exclusionary pricing behavior are no longer necessary. Investment in facilities, particularly those that cannot be used for another purpose, is an important indicator of such irreversible entry. If a competitive LEC has made a substantial sunk investment in equipment, that equipment remains available and capable of providing service in competition with the incumbent, even if the incumbent succeeds in driving that competitor from the market. Another firm can buy the facilities at a price that reflects expected future earnings and, as long as it can charge a price that covers average variable cost, will be able to compete with the incumbent LEC. In telecommunications, where variable costs are a small fraction of total costs, the presence of facilities-based competition with significant sunk investment makes exclusionary pricing behavior costly and highly unlikely to succeed. We conclude, therefore, that our Phase I triggers should measure the extent to which competitors have made sunk investments in facilities used to compete with the incumbent LEC. 2. Phase I Triggers for Special Access and Dedicated Transport Services a. Collocation by Competitors 81. As we explain below, collocation by competitors in incumbent LEC wire centers is a reliable indication of sunk investment by competitors. In the Expanded Interconnection Orders, the Commission adopted rules requiring incumbent LECs to permit competitors to collocate equipment at incumbent LEC wire centers and other LEC locations, in order to enable competitors to terminate their transmission facilities at those locations. The Commission adopted these collocation rules, with only minor modifications, to implement the collocation requirements of section 251(c)(6) of the Act. More recently, the Commission expanded its collocation rules to facilitate the development of competition in the advanced services market, while promoting competition in the traditional circuit-switched voice market. In particular, incumbent LECs must make available shared caged and cageless collocation arrangements, and must permit competitors to collocate all equipment used for interconnection and/or access to UNEs, even if it includes a switching or enhanced service function. In many cases, a collocation arrangement indicates the existence of a competitor's transmission facilities terminating at that collocated equipment. Thus collocation usually represents a financial investment by a competitor to establish facilities within a wire center. We also note that competitors incur considerable expense to establish an operational collocation arrangement. The cost to a competitor of a single collocation arrangement can exceed $300,000. Commenters also point out that negotiating all the terms of a collocation agreement can require considerable time and effort. For example, MCI states that negotiations lasted an average of six to nine months during the period from mid-1994 to mid-1996. It also seems likely that, when a competitor initially enters a market, most of these transmission facilities will be "trunk-side" facilities, i.e., facilities leading from the collocated equipment to the IXC POP rather than to the customer premises. This is because competitors can use those facilities to carry highly concentrated traffic between, for example, serving wire centers and POPs, and so can use that investment to serve a number of customers. For the same reason, competitors will probably wait to invest in line-side facilities until they have all or most of their trunk-side facilities in place. In either case, the investment in transmission facilities associated with collocation arrangements is largely specific to a location; the competitive LEC's facilities cannot, for the most part, easily be removed and used elsewhere if entry does not succeed. 82. For all these reasons, we are confident that, in the past, the presence of an operational collocation arrangement in a wire center almost always implied that a competitor has installed transmission facilities to compete with the incumbent. This correlation between operational collocation arrangements and competitive transport facilities is somewhat attenuated, however, by the advent of services such as digital subscriber line (DSL) services. Competitors providing these services usually collocate in order to gain access to the incumbent's copper loops, a necessary input for DSL service, not to compete with the incumbent for the provision of transport services. DSL services often are marketed as broad-based offerings to small business and residential customers, thus requiring competitors to collocate in many, if not all, of the wire centers in an MSA, many of which may lack competitive transport facilities. In this case, therefore, they rely on the incumbent's transport facilities. Therefore, to ensure that our triggers continue to provide a clear picture of competitive conditions on a going-forward basis, we require incumbent LECs to show that at least one competitor relies on transport facilities provided by a transport provider other than the incumbent at each wire center listed in the incumbent's pricing flexibility petition as the site of an operational collocation arrangement. 83. We acknowledge that, because we will evaluate pricing flexibility requests on an MSA basis and do not require the presence of competitive facilities in every wire center in an MSA, there remains a theoretical possibility that an incumbent LEC could use pricing flexibility in a predatory manner to deter investment in competitive facilities in those wire centers where it as yet faces no competition. For the reasons given above, however, we believe the costs, particularly the administrative costs, of granting pricing flexibility on a wire center-by-wire center basis outweigh the benefits of protecting against such theoretical harms. To the extent that an incumbent LEC attempts to use pricing flexibility in a predatory manner, aggrieved parties may pursue remedies under the antitrust laws or before this Commission pursuant to section 208 of the Act. 84. Administrative Burdens. The Commission has tentatively concluded that it is important to base our triggers on "objectively measurable criteria . . . so as to avoid delay caused by protracted proceedings and to minimize administrative burdens." We conclude here that a collocation-based trigger provides an administratively simple and readily verifiable mechanism for determining whether competitive conditions warrant the grant of pricing flexibility. In the Price Cap Second FNPRM, the Commission invited comment on establishing a "competitive checklist" as a test for Phase I pricing flexibility. Specifically, the Commission sought comment on eight checklist items, seven of which were taken from legislation pending before Congress which led to the Telecommunications Act of 1996. The 1996 Act incorporated those seven criteria into the test for determining whether a Bell Operating Company (BOC) should be permitted into the market for in-region interLATA services. As a result of our review of several BOC 271 applications, the Commission has found that ascertaining whether the BOC adequately has demonstrated that it is providing these checklist items on a nondiscriminatory basis is not administratively simple or easily verifiable. These applications produce voluminous records in which the parties hotly contest BOC compliance with the checklist, and resolution of these disputes within the ninety days permitted by the statute imposes considerable burdens on both industry and the Commission. 85. In order to avoid these burdensome and costly proceedings, we will rely instead on the eighth criterion -- collocation in wire centers that account for a significant portion of the incumbent LEC's business lines or interstate access revenues. This approach has widespread support from diverse segments of the industry. MCI argues that, if we permit any pricing flexibility at all, we should do so only upon a showing that competitors have collocated in wire centers serving a certain percentage of the incumbent LECs' demand. Bell Atlantic and Ameritech also advocate granting regulatory relief when competitors have collocated in a certain percentage of wire centers in a market area, or in wire centers serving a certain percentage of the demand in a market area. We further conclude that such a collocation-based standard is administratively simple because several BOCs have provided data of this type in support of pending forbearance petitions. 86. Finally, we have determined that it is not burdensome to require incumbent LECs to demonstrate that at least one competitor relies on transport facilities provided by a transport provider other than the incumbent at each wire center listed in the incumbent's pricing flexibility petition as the site of an operational collocation arrangement. Competitors typically must hire the incumbent to install cable from the competitors' networks to their collocated equipment. Thus, incumbent LECs should be able to identify those collocators providing their own transmission facilities on the basis of their billing records. Furthermore, we do not require incumbent LECs to identify all the competitors collocated at each wire center and providing their own transport facilities, but rather merely to identify at least one competitor providing its own transport facilities at each wire center. 87. Other Triggers. We conclude that none of the other triggers proposed in this record is preferable to collocation with competitive transport. Ameritech advocates granting pricing flexibility when competitors have collocated in wire centers from which they can provide service to a certain percentage of the demand for a service in the market area, measured on the basis of DS1-equivalents. MCI argues, however, that a "DS1 equivalent" measure overstates competitive inroads in a market by placing disproportionate weight on entrance facilities (which are usually DS3 circuits) where competitive entry has been greatest. Because the price of one DS3 circuit is less than the price of 28 DS1 circuits, even though they provide equal capacity, MCI argues that measuring competitors' market presence on the basis of revenues gives a better indication of the extent to which competitors have made significant inroads into the market in question. We agree with MCI. Because competitors are drawn to new markets by the prospect of earning revenues, rather than merely opportunities to provide capacity, we find that revenue is a more relevant measure of market entry. Moreover, we want to adopt Phase I triggers that ensure that incumbent LECs can no longer successfully drive new entrants from the market. If we adopted a trigger based on percentage of demand measured in terms of DS1 equivalents, then an incumbent LEC might receive Phase I pricing flexibility for all dedicated transport services and all special access services other than channel terminations, even though competitive alternatives may exist only for entrance facilities. 88. In the Access Reform NPRM, the Commission sought comment on adopting triggers related to the degree to which local markets are open to competition, such as availability of UNEs at forward-looking economic cost, transport and termination at cost-based rates, and resale of retail services at a wholesale price. We find that collocation-based standards provide a better basis for Phase I triggers than standards based on availability of UNEs and resale, because availability does not indicate whether they actually have been purchased. Further, a competitor's use of UNEs or resale does not indicate that it has sunk investments in facilities in the MSA, because services provided over UNEs or through resale make use of the incumbent's facilities. Purchase of UNEs by a competitor does not, by itself, constitute the type of investment in facilities that warrants pricing flexibility for special access and dedicated transport services. UNEs, by definition, comprise incumbent LEC facilities that are leased to competitors. Because competitors have few "sunk costs" associated with UNEs, if an incumbent drives a UNE-based competitor from the market, that competitor does not leave facilities in place that another firm then can buy at a discount. Instead, a subsequent competitor would have to negotiate with the incumbent for use of those UNE facilities. As a result, such a competitor may be susceptible to an exclusionary pricing scheme. Similarly, the presence of a state-approved interconnection agreement or Statement of Generally Available Terms and Conditions, proposed as a trigger by USTA, does not by itself indicate that new market entrants have made sufficient sunk investments in facilities to resist exclusionary pricing behavior. Finally, although a transport and termination agreement between an incumbent and a competitor may imply that the competitor is carrying traffic over its own network, that may not provide evidence of investment in facilities used to compete with an incumbent LEC. For example, the competitor may carry wireless traffic, which may or may not be a competitive substitute for wireline connections, or the competitor may provide service over UNEs. Accordingly, we conclude that collocation arrangements are more likely than transport and termination agreements to demonstrate that competitors have invested in facilities sufficiently to resist exclusionary pricing behavior. 89. We also reject CFA's proposal to grant pricing flexibility only upon a showing of compliance with the section 271 criteria, among other things. Section 271 compliance demonstrates that a BOC has opened its local markets to competition, but it may not show the extent of competitive alternatives in the market for interstate access services. Competition may have developed to such a degree as to warrant granting pricing flexibility to such a BOC in part of a state, even if the incumbent has not satisfied the checklist, either because it is not interested in section 271 relief, or because, for example, it is working to bring its operations support systems (OSS) into compliance. Delaying pricing flexibility under these circumstances denies access customers the benefits of increased efficiency in the interstate access market. Furthermore, we determine above not to grant pricing flexibility on a state-by-state basis because competitors generally do not enter new markets on that basis. Because section 271 requires the Commission to make state-wide determinations, granting pricing flexibility upon compliance with the 14- point checklist raises the same concerns. 90. Furthermore, we will not require incumbent LECs to demonstrate that they no longer possess market power in the provision of any access services to receive pricing flexibility, for two reasons. First, as we explain in more detail below, regulation imposes costs on carriers and the public, and the costs of delaying regulatory relief outweigh any costs associated with granting that relief before competitive alternatives have developed to the point that the incumbent lacks market power. Second, non-dominance showings are neither administratively simple nor easily verifiable. As several BOCs note in their forbearance petitions, the Commission previously has based non-dominance findings on several complex criteria, including market share and supply elasticity. Market share analyses require considerable time and expense, and they generate considerable controversy that is difficult to resolve. For example, in response to U S West's Phoenix forbearance petition, several commenters assert that U S West overstates its market share losses by treating re-sold services as services provided by competitors, even though U S West continues to provide the underlying facilities. Sprint claims that we cannot rely on U S West's market share analysis without reviewing the underlying data. Measuring supply elasticity also can be controversial; a number of commenters claim, for example, that U S West underestimates its competitors' costs of extending their networks. ALTS argues, moreover, that excess capacity in competitors' networks is generally limited to particular routes, and incumbent LECs should not, therefore, rely on that existing excess capacity to support claims regarding the elasticity of supply in the interstate access market. 91. We do not address in this Order whether any BOC has adequately supported its market share or supply elasticity claims in its forbearance petition. Rather, we conclude here that it would be administratively burdensome to require incumbent LECs to perform and the Commission to evaluate market share or supply elasticity analyses before the LECs may obtain any regulatory relief, and so we decline to adopt such a requirement here. 92. Finally, we disagree with commenters opposing any additional pricing flexibility for price cap LECs at this time. These commenters either argue generally that price cap LECs have sufficient pricing flexibility to respond to competition under the current price cap rules, or that price cap LECs must not face meaningful competition because rates in the trunking basket are generally at the maximum permitted under the price cap rules. First, the existing rules clearly limit price cap LECs' ability to respond to competition. Price cap LECs are subject to both our Part 61 rules regarding rate levels and the mandatory rate structure rules set forth in Part 69 of our rules. Our rules precluding LECs from offering contract tariffs and limiting volume and term discount offerings may create a price umbrella for competitors. Second, as mentioned above, delaying regulatory relief imposes costs on carriers and the public, the latter of which is deprived of the benefits of more vigorous competition. We see no public benefit in any further delay in regulatory relief, once an incumbent LEC has satisfied the triggers we adopt below. Finally, price cap LECs were required to eliminate at least some of the headroom in the trunking basket as a result of the X-Factor increase adopted in Price Cap Fourth Report and Order. Observing that there is no headroom in the trunking basket does not necessarily mean, therefore, that price cap LECs face no competition, because we cannot know the extent to which the X-Factor puts downward pressure on rates that the price cap LECs otherwise might have lowered in response to competition. b. Dedicated Transport and Special Access Services, Other than Channel Terminations 93. We conclude that incumbent price cap LECs are entitled to Phase I pricing flexibility for dedicated transport services (entrance facilities, direct-trunked transport, and the flat-rated portion of tandem-switched transport) and special access services other than channel terminations upon demonstrating that competitors have collocated in 15 percent of an incumbent LEC's wire centers in the MSA, or in wire centers accounting for 30 percent of the incumbent LEC's revenues from these services. The relief granted upon satisfaction of this Phase I trigger, together with the relief we grant immediately in Sections III and V above, is comparable to much of the relief proposed by Bell Atlantic and Ameritech in their 1998 ex parte statements. We rely in part on the record developed in response to Bell Atlantic's and Ameritech's proposals in developing our Phase I triggers. Bell Atlantic proposes granting relief when competitors have collocated facilities, purchased UNEs, or installed their own facilities in 25 percent of the wire centers in the market area. Ameritech recommends granting relief when competitors have collocated in wire centers serving 25 percent of the demand in a market area, measured on a DS1-equivalent basis. MCI, however, recommends deferring relief until competitors account for at least 50 percent of the revenue in a market or 50 percent of the channel terminations between end offices and customer premises. 94. As we explain above, we conclude that it is appropriate to give incumbent LECs pricing flexibility when competitors have made irreversible, sunk investment in facilities. For the reasons discussed above, UNEs do not represent sunk investment in facilities used to compete with incumbent LECs in the provision of special access and dedicated transport services, and so we reject Bell Atlantic's proposal that we include purchase of UNEs as a measure of competitive presence within a wire center. We also reject Bell Atlantic's proposal that we grant flexibility when competitors have collocated facilities or installed their own facilities in 25 percent of the wire centers in the market area. Although the presence of competitive facilities within a wire center may well be the best evidence of irreversible investment, this type of trigger is neither simple to administer nor easily verifiable. Our review of the records developed in response to the pending forbearance petitions indicates widespread disagreement among the parties as to the scope and reach of competitive facilities within a particular geographic area. A competitor has "installed its own facilities" within a wire center if, for example, it has laid fiber anywhere within the area served by the wire center, but a separate analysis is required to determine what proportion of the incumbent's customers the competitor can serve with those facilities. Our desire to avoid these administratively burdensome proceedings compels us to adopt collocation as a measure of competitive presence. 95. We recognize, however, that evidence of collocation may underestimate the extent of competitive facilities within a wire center, because it fails to account for the presence of competitors that do not use collocation and have wholly bypassed incumbent LEC facilities. For this reason, and because the Phase I relief we are granting is not as extensive as that sought by the incumbent LECs, we find that a threshold lower than 25 percent is warranted. Based on the information submitted in support of several pending petitions for forbearance, it appears that collocation in 15 percent of an incumbent's wire centers in an MSA represents significant investment in competitors' facilities. For example, Bell Atlantic reports that competitors have collocated in 17.9 percent of its wire centers in the Norfolk LATA, and that competitors have installed about 2200 miles of fiber in that LATA. In three SBC MSAs in which competitors have collocated in slightly more than 15 percent of SBC's wire centers, SBC reports that competitors' networks average at least 736 miles. This figure seems conservative because SBC reports figures for only a few of its competitors within these MSAs. Because a competitor must devote significant time and expense to establish each collocation arrangement, the extent of collocation in those three SBC MSAs indicates that competitors have made considerable investment in these MSAs. We conclude, therefore, that collocation by competitors in 15 percent of the incumbent LEC's wire centers in an MSA is the appropriate trigger for Phase I relief with respect to dedicated transport services and special access services other than channel terminations. 96. Our selection of this 15 percent threshold and the other thresholds we adopt below, like ratemaking issues, is not an exact science. Rather, the thresholds are policy determinations based on our agency expertise, our interpretation of the record before us in this proceeding, and our desire to provide a bright-line rule to guide the industry. This latter factor counsels against adoption of triggers that may provide more comprehensive measures of competition but impose heavy burdens on both industry and the Commission. Our effort to select triggers that precisely measure competition for particular services also is hampered by the lack of verifiable data concerning competitors' revenues and facilities. Unlike incumbent LECs, competitors are not subject to Commission reporting requirements, and they often are unwilling to provide this information voluntarily. Given these constraints, we adopt triggers that, in our reasoned judgment, balance both the desires for precision and simplicity and the costs to carriers and customers alike of delaying the grant of pricing flexibility. 97. In some cases, a few wire centers may account for a disproportionate share of revenues for a particular service. For instance, Bell Atlantic claims that 93 percent of its special access demand measured on a DS-1 equivalent basis is concentrated in 20 percent of its wire centers. Although, as we explained above, measuring demand on a DS-1 equivalent basis overstates competitors' presence, we nevertheless find that Bell Atlantic has shown that demand is often concentrated in particular areas. We find that collocation in wire centers representing a significant percentage of incumbent LEC revenues from a particular service also indicates meaningful investment by competitors. Accordingly, we will permit price cap LECs to satisfy the Phase I trigger on a revenue basis, as well as by showing that competitors have collocated in a percentage of incumbent LEC wire centers in an MSA. 98. We conclude that the revenue-based trigger should be higher than the trigger based on percentage of wire centers in the MSA in which competitors have collocated. If certain wire centers account for a disproportionate share of revenues, then we need to establish revenue-based thresholds higher than the percentage-based threshold to ensure that competitors have extended their networks beyond a few revenue-intensive wire centers. Ameritech recommends granting relief if competitors have collocated in wire centers providing service to 25 percent of the demand for transport services measured on the basis of DS1-equivalents. MCI advocates conditioning relief on competitors achieving a 50 percent market share in revenue terms. Based on these pleadings, we conclude that incumbents will qualify for Phase I relief upon demonstrating that competitors have collocated in wire centers accounting for 30 percent of the incumbent's revenues for special access (other than channel terminations) and dedicated transport services. 99. Bell Atlantic asserts that a revenue-based trigger is unworkable because the proper allocation of revenues among offices for a special access or dedicated transport services routed through multiple offices might be open to dispute. Bell Atlantic's argument is unpersuasive with respect to channel terminations because those services are not routed through intermediate offices. With respect to other special access and dedicated transport services, however, we agree that there is a revenue allocation issue. Access customers order special access and dedicated transport services to provide a transmission path between two customer-designated locations. We therefore direct any LEC seeking pricing flexibility to allocate 50 percent of the revenue from a dedicated service routed through multiple offices to the office at each end of the transmission path, unless it can make a convincing case in its petition that some other allocation would better represent the extent of competitive entry in the MSA at issue. Although a 50 percent allocation rule seems reasonable, we cannot conclude that other allocation schemes might not also be reasonable under the circumstances. Although this is not a bright-line test like we have adopted elsewhere in this Order, determining whether a petitioner has made a convincing showing on this allocation issue should not be difficult. c. Channel Terminations 100. We conclude that pricing flexibility for channel terminations requires separate consideration of the degree of competition for channel terminations between an IXC POP and LEC serving wire center and channel terminations between a LEC end office and customer premises. Accordingly, incumbent LECs qualify for Phase I pricing flexibility with respect to channel terminations between an IXC POP and a LEC serving wire center by showing that competitors have collocated in 15 percent of the wire centers in an MSA, or in wire centers accounting for 30 percent of incumbent LEC revenues from these services. With respect to channel terminations between a LEC end office and a customer premises, incumbent LECs qualify for Phase I pricing flexibility by showing that competitors have collocated in 50 percent of incumbent LEC wire centers in the MSA, or in wire centers accounting for 65 percent of incumbent LEC revenues from these services. 101. We find that channel terminations between a LEC end office and a customer premises warrant different treatment than other special access and dedicated transport services. ALTS recommends treating channel terminations separately from other special access and dedicated transport services because channel terminations are not substitutes for those services. MCI recommends granting relief in the transport market only upon a showing that competitors have captured a 50 percent market share in revenue terms, or 50 percent of the channel terminations between end offices and customer premises. 102. We agree that pricing flexibility for channel terminations between a LEC end office and a customer premises requires a higher threshold than flexibility for other dedicated transport and special access services. Entrance facilities, direct-trunked transport, channel mileage, and the flat-rated portion of tandem-switched transport all involve carrying traffic from one point of traffic concentration to another. Thus, entering the market for these services requires less investment per unit of traffic than is required, for example, for channel terminations between an end office and customer premises. Furthermore, investment in entrance facilities enables competitors to provide service to several end users, while channel terminations between an end office and customer premises serve only a single end user. Accordingly, competitors are likely to enter the market for entrance facilities, direct-trunked transport, channel mileage, and the flat- rated portion of tandem-switched transport before they enter the market for channel terminations between a LEC end office and a customer premises. We therefore adopt a higher threshold for granting flexibility for these channel terminations than for other special access and dedicated transport services. 103. This higher threshold is warranted for another reason. As a number of parties indicate, a competitor collocating in a LEC end office continues to rely on the LEC's facilities for the channel termination between the end office and the customer premises, at least initially, and thus is susceptible to exclusionary pricing behavior by the LEC, and so collocation by competitors does not provide direct evidence of sunk investment by competitors in channel terminations between the end office and the customer premises. We recognize, therefore, the shortcomings of collocation as a measure of competition for channel terminations between end offices and customer premises, but it appears to be the best option available to us at this time. MCI's suggestion that LECs show that competitors have captured 50 percent of the market for these services is problematic because market share determinations are unreliable in the absence of verifiable data regarding competitors' revenues. The Commission has, to date, engaged only in voluntary data collection with respect to competitive providers of telecommunications services, and those efforts are not satisfactory for providing a comprehensive picture of the degree of competition in the marketplace. AT&T's most recent proposal to measure competition for channel terminations by comparing revenue represented by competitive facilities to revenue represented by incumbent LEC facilities suffers from the same deficiency. AT&T acknowledges that data used to support the revenue measure is not now available, either to the Commission or to the incumbents that would be required to satisfy any such trigger; it states that the data "would be developed by and drawn from the industry as necessary, subject to appropriate certification and verification procedures." Although we welcome suggestions from AT&T and others about the desirability of formal reporting requirements, we are not prepared to defer pricing flexibility to seek comment on those proposals. 104. Despite the shortcomings of using collocation to measure competition for channel terminations, moreover, it seems likely that a new market entrant would provide channel terminations through collocation and leased LEC facilities only on a transitional basis and will eventually extend its own facilities to reach its customers. It also seems likely, therefore, that the extent to which competitors have collocation arrangements in an MSA is probative of the degree of sunk investment by competitors in channel terminations between the end office and the customer premises throughout the MSA. In addition, as we discuss above, collocation is a conservative measure of competition in that it does not measure competition from competitors that bypass LEC facilities altogether. Given the lack of other data in the record, therefore, we conclude that it is reasonable to rely on collocation as a proxy for irreversible, sunk investment in channel terminations between the end office and the customer premises and to set the applicable thresholds high enough to account for the limitations inherent in this trigger. Based on this reasoning, we reach two conclusions: (1) we must require incumbent LECs to make separate showings for each kind of channel termination; and (2) the thresholds for channel terminations between the end office and the customer premises must be higher than the thresholds for channel terminations between the IXC POP and the serving wire center. 105. Thus, we reject incumbent LEC recommendations to the extent that they advocate adoption of the same triggers for all channel terminations as for other dedicated transport and special access services. Instead, we adopt a trigger for channel terminations between a LEC end office and a customer premises based in part on MCI's recommendation that incumbent LECs must demonstrate that competitors have gained a 50 percent market share in revenue terms, or 50 percent of the channel terminations between end offices and customer premises. In order to avoid administratively burdensome market share determinations, however, we adopt collocation rather than market share as a measure of competitive presence. Specifically, we will permit Phase I pricing flexibility for channel terminations between an incumbent LEC's end office and customer premises when competitors have collocated in 50 percent of incumbent LEC wire centers in the MSA. Bell Atlantic reports that competitors have collocated in 50 percent of its wire centers in two LATAs, New York Metro and Philadelphia. Furthermore, Bell Atlantic states that its competitors in Philadelphia include AT&T, with a 300-mile network, and MCI, with a 100-mile network. Bell Atlantic also lists five other competitors providing service in Philadelphia. It seems likely that some of that investment is in channel terminations, suggesting that collocation in 50 percent of the wire centers in a geographic area correlates to sunk investment in channel terminations. Accordingly, we conclude that collocation in 50 percent of an incumbent LEC's wire centers within an MSA is an appropriate threshold for channel terminations between that LEC's end office and customer premises. 106. As we found above with respect to dedicated transport and other special access services, demand for these channel terminations may be fairly concentrated. Therefore, we also permit incumbent LECs to demonstrate that competitors have collocated in wire centers accounting for 65 percent of incumbent LEC revenues from these services. This 65 percent threshold is 15 percent higher than the trigger based on percentage of the wire centers in an MSA where competitors have collocated. This 15 percent difference is consistent with the difference in the triggers we adopted for dedicated transport and other special access services, i.e., wire centers accounting for 30 percent of the incumbent LEC's revenues for those services, or collocation at 15 percent of the wire centers in the MSA. 107. We also find, however, that a lower threshold is warranted for channel terminations between a LEC serving wire center and an IXC POP. As explained above, competition is likely to develop first for those services that carry traffic between points of high traffic concentration. Moreover, a competitor collocated at a LEC serving wire center provides the channel termination to an IXC POP over its own facilities. We conclude that incumbent LECs may demonstrate sunk investment by competitors with respect to these channel terminations if competitors have collocated in 15 percent of the wire centers in an MSA, or in wire centers accounting for 30 percent of the demand, measured by revenues, for these channel terminations in the MSA. Because these channel terminations carry traffic between points of concentration similar to the points connected by entrance facilities, we conclude that they should have the same trigger. 3. Phase I Triggers for Other Switched Access Services 108. We conclude that an incumbent price cap LEC should be allowed Phase I pricing flexibility for common line and traffic-sensitive services, and the traffic-sensitive components of tandem-switched transport service, when it demonstrates that competitors, in aggregate, offer service over their own facilities to at least 15 percent of incumbent LEC customer locations in the MSA. 109. We conclude above that Phase I relief for a particular service is warranted when an incumbent LEC demonstrates that competitors have made irreversible investment in facilities used to compete with the incumbent LEC in the provision of that service. For special access and dedicated transport services, we adopt a trigger based on collocation by competitors because competitors historically have collocated in incumbent LEC wire centers in order to provide transport and special access services. Thus collocation furnishes evidence of irreversible investment in facilities in part because it indicates competitive transmission facilities terminating at the collocation site. Although we acknowledge that some competitors provide these services exclusively over their own facilities (total facilities bypass), the extent of such competition is difficult to measure. Because collocation traditionally has served as the building block for competitive transport services, we conclude that it constitutes a sufficient measure of the degree to which competitors have invested in facilities to provide these services. 110. Competition for common line and traffic-sensitive services, however, is a much more recent phenomenon, and it may not develop in this same manner. For this reason, a different approach to granting pricing flexibility for these services is warranted. For traffic-sensitive and common line services, we adopt a Phase I trigger that takes into account competitors that have wholly bypassed incumbent LEC facilities, as well as competitors that collocate in incumbents' wire centers so as to provide service over unbundled loops. 111. The 1996 Act opened the local exchange market and, hence, the market for switched access services, to competition. The Act envisions three alternatives that competitors might employ, either singly or in combination, to enter this market: total service resale, service using unbundled network elements, and service provided over the competitor's own facilities. Not all of these entry strategies, however, indicate that competitors have made irreversible investment in facilities used to compete with incumbents in the provision of switched access services. As we explain above, resold services employ only incumbent LEC facilities and thus do not indicate any irreversible investment by competitors whatsoever. Similarly, a competitor providing service solely over unbundled network elements leased from the incumbent (the so-called "UNE platform") has little, if any, sunk investment in facilities used to compete with the incumbent LEC. For these reasons we do not allow an incumbent LEC to qualify for Phase I relief as a result of competition solely from resale or unbundled network elements. 112. If, however, competitors offer switched access services either entirely over their own facilities or by combining unbundled loops with their own switching and transport, this indicates the type of irreversible investment in facilities that warrants Phase I pricing flexibility for these services. In the first case, the competitor bypasses incumbent facilities altogether; in the latter case, a competitor must collocate in an incumbent's wire center to connect the leased loops to its transport facilities. Although a trigger based solely on collocation is administratively simpler and more easily verified, we decline in this case to adopt such a trigger because we lack sufficient experience with competition in the local exchange and switched access markets to know the extent to which competitors might rely on either of these entry strategies. We note, for example, that the time and expense required to establish collocation arrangements and the difficulties associated provisioning of UNEs by incumbent LECs may encourage competition through total bypass. Because it is unclear, therefore, the extent to which competitors are pursuing UNE-based entry strategies, we conclude that data concerning total bypass may be particularly important in assessing the degree of competitive entry in the markets for switched services. 113. Rather than looking solely at collocation, therefore, we adopt a Phase I trigger for switched services that measures the extent to which competitors offer these services either exclusively or largely over their own facilities. We will grant Phase I pricing flexibility for common line and traffic-sensitive services to an incumbent LEC in an MSA if that LEC demonstrates that competitors offer service over their own facilities to 15 percent of the incumbent's customer locations in the MSA. As we explain above, a competitor provides service over its own facilities if it leases unbundled loops but