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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Corrected Copy Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of Access Charge Reform Price Cap Performance Review for Local Exchange Carriers Low-Volume Long-Distance Users Federal-State Joint Board On Universal Service ) ) ) ) ) ) ) ) ) ) ) ) ) CC Docket No. 96-262 CC Docket No. 94-1 CC Docket No. 99-249 CC Docket No. 96-45 SIXTH REPORT AND ORDER IN CC DOCKET NOS. 96-262 AND 94-1 REPORT AND ORDER IN CC DOCKET NO. 99-249 ELEVENTH REPORT AND ORDER IN CC DOCKET NO. 96-45 Adopted: May 31, 2000 Released: May 31, 2000 By the Commission: Commissioner Furchtgott-Roth concurring in part, dissenting in part, and issuing a statement. TABLE OF CONTENTS I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. BACKGROUND . . . . . . . 4 A. Access Charges . . . . . . . . . . . . . . . . . . . . . . . . . . .5 B. Universal Service. . . . . . . . . . . . . . . . . . . . . . . . . 21 C. The Current Situation. . . . . . . . . . . . . . . . . . . . . . . 26 III. EXECUTIVE SUMMARY. . . . . . 29 IV. DISCUSSION . . . . . . . . . 36 A. Common Line Charges. . . . . . . . . . . . . . . . . . . . . . . . 64 1. Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 2. CALLS Proposal. . . . . . . . . . . . . . . . . . . . . . . . . . 70 3. Discussion. . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 a. Residential and Single-Line Business SLCs and PICCs . . . . . . 76 b. Multi-line Business SLC and PICC. . . . . .105 c. SLC Deaveraging . . . . . . 113 B. Local Switching, Trunking, and Special Access Baskets. . . . . . .129 1. Background. . . . . . . . . . . . . . . . . . . . . . . . . . . .129 a. Rate Structure. . . . . . . 129 b. The X-Factor. . . . . .135 c. The CALLS Proposal. . . . . 140 2. Discussion. . . . . . . . . . . . . . . . . . . . . . . . . . . .150 a. Reductions in Switched Access Usage Charges . . . . .151 b. X-Factor. . . . . 160 c. Measure of Inflation. . . . . . .183 C. Universal Service. . . . . . . . . . . . . . . . . . . . . . . . .185 1. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . .185 2. Background. . . . . . . . . . . . . . . . . . . . . . . . . . . .188 3. The Calls Proposal: Interstate Access Universal Service Support . . . . . . 195 a. Overview. . . . . 195 b. Size of the Interstate Access Universal Service Support Mechanism . . . . . . 198 c. Distribution of Interstate Access Support . . . . . .206 d. Lifeline. . . . . 214 e. LEC Recovery of Universal Service Contributions . . . . . 218 f. Implementation. . . . . . . 222 4. Consultation with Joint Board . . . . . . . . . . . . . . . . . .233 D. Low-Volume Long-Distance Proceeding. . . . . . . . . . . . . . . .234 1. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . .234 2. Notice of Inquiry . . . . . . . . . . . . . . . . . . . . . . . .236 3. Discussion. . . . . . . . . . . . . . . . . . . . . . . . . . . .242 V. PROCEDURAL ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . 251 A. Final Regulatory Flexibility Analysis. . . . . . . . . . . . . . .251 1. Need for and Objectives of this Order . . . . . . . . . . . . . .252 2. Summary of Significant Issues Raised by the Public Comments in Response to the IRFA . . . . . . . . . . . . . . . . . . . . . . . .254 3. Description and Estimate of the Number of Small Entities to Which the Rules Will Apply . . . . . . . . . . . . . . . . . . . . . . . .255 4. Description of the Projected Reporting, Recordkeeping, and Other Compliance Requirements. . . . . . . . . . . . . . . . . . . . . . .259 5. Steps Taken to Minimize Significant Economic Impact on Small Entities, and Significant Alternatives Considered. . . . . . . . . .260 6. Report to Congress. . . . . . . . . . . . . . . . . . . . . . . .263 B. Paperwork Reduction Act. . . . . . . . . . . . . . . . . . . . . .264 VI. ORDERING CLAUSES . . . . . .265 Appendix A Parties Filing Pleadings Appendix B Amendments to the Code of Federal Regulations Appendix C Graphs and Chart Appendix D IXC Commitment Letters Appendix E CALLS Ex Parte Filings Modifying the Proposal INTRODUCTION 1. In this Order, we adopt an integrated interstate access reform and universal service proposal put forth by the members of the Coalition for Affordable Local and Long Distance Service (CALLS). This action provides many benefits. It will bring lower rates and less confusion to consumers; and create a more rational interstate rate structure. This, in turn, will support more efficient competition, more certainty for the industry, and permit more rational investment decisions. 2. This Order resolves historically vexing issues, some going back nearly two decades, in a manner that benefits consumers. Consumers that make no or few long-distance calls and consumers that make many long-distance calls will both enjoy meaningful savings. The savings from the elimination of the Presubscribed Interexchange Carrier Charge (PICC) and the long- distance companies' pass-through of that charge exceed the modest increases to the Subscriber Line Charge (SLC) that this plan allows. In addition, the commitments by AT&T and Sprint to offer reasonably priced long-distance plans without any Minimum Usage Charge (MUC) ensures that low-volume users will enjoy substantially lower overall rates. At the same time, significant and immediate reductions to per-minute carrier access charges will bring those rates closer to cost and translate into lower per-minute long-distance rates, benefiting high-volume consumers. 3. By simultaneously removing implicit subsidies from the interstate access charge system and replacing them with a new interstate access universal service support mechanism that supplies portable support to competitors, this Order allows us to provide more equal footing for competitors in both the local and long-distance markets, while still keeping rates in higher cost areas affordable and reasonably comparable with those in lower cost areas. IV. BACKGROUND 5. In passing the Telecommunications Act of 1996 (1996 Act), Congress sought to establish "a pro-competitive, deregulatory national policy framework" for the United States telecommunications industry. In the 1996 Act, Congress also directed that universal service support "should be explicit and sufficient to achieve the purposes" of section 254, which include the purpose that all Americans should have access to telecommunications services at affordable and reasonably comparable rates. Therefore, with this Order, we take action designed to further accelerate the development of competition in the local and long-distance telecommunications markets, and to establish an explicit interstate access universal service support mechanism that will be sustainable in an increasingly competitive marketplace. A. Access Charges 6. For much of this century, most telephone subscribers obtained both local and long- distance services from the same company, the pre-divestiture Bell System, owned and operated by AT&T. Its provision of local and intrastate long-distance services through its wholly-owned operating companies, the Bell Operating Companies (BOCs), was regulated by state commissions. The Commission regulated AT&T's provision of interstate long-distance service. Much of the telephone plant that is used to provide local telephone service, such as the local loop, is also needed to originate and terminate interstate long-distance calls. Consequently, a portion of the costs of this common plant historically was assigned to the interstate jurisdiction and recovered through the rates that AT&T charged for interstate long-distance calls. The balance of the costs of the common plant was assigned to the intrastate jurisdiction and recovered through the charges for intrastate services regulated by the state commissions. The system of allocating costs between the interstate and intrastate jurisdictions is known as the separations process. The difficulties inherent in allocating the costs of facilities that are used for multiple services between the two jurisdictions are discussed below. 7. At first, there was no formal system of tariffed charges to determine how the BOCs and the hundreds of unaffiliated, independent local exchange carriers (LECs) would recover the costs allocated to the interstate jurisdiction by the separations rules. Instead, AT&T remitted to these companies the amounts necessary to recover their allocated interstate costs, including a return on allocated capital investment. 8. In the 1970s, MCI and other interexchange carriers (IXCs) began to provide switched long-distance service in competition with AT&T. AT&T, however, still maintained monopolies in the local markets served by its local subsidiaries, the BOCs. The BOCs owned and operated the telephone wires that connected the customers in their local markets. Other independent (non- BOC) LECs held similar monopoly franchises in their local service areas. MCI and the other IXCs were dependent on the BOCs and the independent LECs to complete the long-distance calls to the end user. 9. For much of the 1970s, MCI and AT&T fought over the fees -- the access charges -- that MCI should pay the BOCs for originating and terminating interstate calls placed by or to end users on the BOCs' local networks. That battle took place before federal regulators, as well as in the federal courts. In December 1978, under Commission supervision, AT&T, MCI, and the other long-distance competitors entered into a comprehensive interim agreement, known as Exchange Network Facilities for Interstate Access (ENFIA), that set rates that AT&T would charge long-distance competitors for originating and terminating interstate traffic over the facilities of its local exchange affiliates. Several years afterwards, AT&T's divestiture was completed, separating the local exchange operations of the BOCs from the rest of AT&T's operations, including AT&T's long-distance business. The BOCs maintained monopoly franchises in their local market, but by splitting them off from AT&T's long-distance business, the federal courts removed an incentive for the BOCs to favor AT&T's long-distance business over its competitors. Now AT&T competed directly with MCI and the other competitors to provide interstate service, and all of the competitors, including AT&T, paid the BOCs for the service of providing the necessary access to end users. 10. In 1978, the Commission commenced a wide-ranging review of the system by which LECs were compensated for originating and terminating interstate traffic. In 1983, following the decision to break-up AT&T, the Commission adopted uniform access charge rules in lieu of earlier agreements. These rules governed the provision of interstate access services by all incumbent LECs, BOCs as well as independents. The access charge rules provide for the recovery of the incumbent LECs' costs assigned to the interstate jurisdiction by the separations rules. 11. The Commission uses a multi-step process to identify the cost of providing access service. First, the rules require an incumbent LEC to record all of its expenses, investments, and revenues in accordance with accounting rules set forth in our regulations. Second, the rules divide these costs between those associated with regulated telecommunications services and those associated with nonregulated activities. Third, the separations rules determine the fraction of the incumbent LEC's regulated expenses and investment that should be allocated to the interstate jurisdiction. After the total amount of interstate cost is identified, the access charge rules translate these interstate costs into charges for the specific interstate access services and rate elements. Part 69 of our rules specifies in detail the rate structure for recovering those costs. That is, the rules tell the incumbent LECs the precise manner in which they may assess charges on interexchange carriers and end users. 12. Determining the costs that an incumbent LEC incurs to provide interstate access services and that, consequently, should be recovered from those services, is relatively straightforward in some cases and problematic in others. Some facilities, such as private lines, can be used exclusively for interstate services and, in such cases, the entire cost of those facilities is assigned to the interstate jurisdiction by the separations rules. Most facilities, however, are used for both intrastate and interstate services. The costs of some of these facilities vary depending on the amount of telecommunications traffic that they handle. The separations rules typically assign these traffic sensitive costs on the basis of the relative interstate and intrastate usage of the facilities, as measured, for example, by the relative minutes of interstate and intrastate traffic carried by such facilities. By contrast, the costs of other facilities used for both interstate and intrastate traffic do not vary with the amount of traffic carried over the facilities, i.e., the costs are non-traffic sensitive. These costs pose particularly difficult problems for the separations process: the costs of such facilities cannot be allocated on the basis of cost-causation principles because all of the facilities would be required even if they were used only to provide local service or only to provide interstate access services. A significant illustration of this problem is allocating the cost of the local loop, which is needed both to provide local telephone service as well as to originate and terminate long-distance calls. The current separations rules allocate 25 percent of the cost of the local loop to the interstate jurisdiction for recovery through interstate charges. 13. In promulgating its access charge rules, the Commission has recognized that, to the extent possible, costs of interstate access should be recovered in the same way that they are incurred. This approach is consistent with principles of cost-causation and promotes economic efficiency. Thus, non-traffic sensitive costs should be recovered through fixed, flat-rated fees. Similarly, traffic sensitive costs should be recovered through corresponding per-minute access rates. The Commission's rules, however, are not fully consistent with this goal. In particular, because the Commission has taken a cautious approach in addressing affordability concerns, it has taken measured steps toward this goal by limiting the amount of the allocated interstate cost of a local loop that is assessed directly on residential and business customers as a flat monthly charge. 14. Through the end of 1990, access revenues were governed by "rate-of-return" regulation. Under rate-of-return regulation, incumbent LECs calculate the specific access charge rates using projected costs and projected demand for access services. An incumbent LEC is limited to recovering its costs plus a prescribed return on investment, and is potentially obligated to provide refunds if its interstate rate of return exceeds the authorized level. Regulatory structures that base a firm's allowable rates directly on the reported costs of the individual firm can create perverse incentives, because reimbursing the firm's costs removes the incentive to reduce costs and improve productive efficiency. 15. Consequently, in 1991 we implemented a system of price cap regulation that altered the manner in which the largest incumbent LECs establish their interstate access charges. While most rural and small LECs remained subject to rate-of-return rules, generally the largest incumbent LECs are now subject to price cap regulations. The Commission's price cap plan for LECs was intended to avoid the perverse incentives of rate-of-return regulation in part by divorcing the annual rate adjustments from the performance of each individual LEC, and in part by adjusting the cap based on actual experience, only with a considerable lag. 16. Briefly stated, rate-of-return regulation is designed to limit the profits an incumbent LEC may earn from interstate access service, whereas price cap regulation focuses primarily on the prices that an incumbent LEC may charge and the revenues it may generate from interstate access services. Under the Part 69 cost-of-service rules, revenue requirements are based on embedded or accounting costs allocated to individual services. Incumbent LECs are limited to earning a prescribed return on investment and are potentially obligated to provide refunds if their interstate rate of return exceeds the authorized level. 17. By contrast, although the access charges of price cap LECs originally were set at the levels that existed at the time they entered price caps, their prices have been limited ever since by price indices that have been adjusted annually pursuant to formulae set forth in our Part 61 rules. Price cap carriers whose interstate access charges are set by these pricing rules are permitted to earn returns significantly higher, or potentially lower, than the prescribed rate of return that incumbent LECs are allowed to earn under rate-of-return rules. Price cap regulation encourages incumbent LECs to improve their efficiency by harnessing profit-making incentives to reduce costs, invest efficiently in new plant and facilities, and develop and deploy innovative service offerings, while setting price ceilings at reasonable levels. Individual companies retain an incentive to cut costs and to produce efficiently, because in the short run their behavior has no effect on the prices they are permitted to charge, and they are able to keep any additional profits resulting from reduced costs. In this way, price caps act as a transitional regulatory scheme until the advent of actual competition makes price cap regulation unnecessary. 18. Although price cap regulation eliminates the direct link between changes in allocated accounting costs and change in prices, it does not sever the connection between accounting costs and prices entirely. The overall interstate revenue levels still generally reflect the accounting and cost allocation rules used to develop access rates to which the price cap formulae were originally applied. Price cap indices are adjusted upwards if a price cap carrier earns returns below a specified level in a given year. Moreover, a price cap LEC may petition the Commission to set its rates above the levels permitted by the price cap indices based on a showing that the authorized rate levels will produce earnings that are so low as to be confiscatory. In the past, all or some price cap LECs were required to "share," or return to ratepayers, earnings above specified levels. This sharing requirement was eliminated in 1997. 19. With the passage of the 1996 Act, the Commission determined that it was necessary to make substantial revisions to access charges. In the Access Charge Reform Order, the Commission instituted reforms that changed the manner in which price cap LECs recover access costs by aligning the rate structure more closely with the manner in which costs are incurred. Prior to such reform, some costs that did not vary with usage, in particular the local loop, were not wholly recovered through flat charges. The SLC, which is a flat charge that recovers the interstate portion of local loop costs from an end user, is subject to a cap that, particularly for residential customers, is often below the level that would enable the LEC to recover the entire interstate cost of the local loop. Prior to the Access Charge Reform Order, a price cap LEC recovered the shortfall created by the SLC caps wholly through the carrier common line (CCL) charge, which is a per-minute charge assessed on the end user's IXC whenever the end user placed an interstate long-distance call. The IXC, in turn, passed this charge on to its customers in the form of higher rates. By making the end-user rate for long-distance calls more expensive, the CCL charge artificially suppresses demand for interstate long-distance services. 20. The Access Charge Reform Order also created the PICC, a flat per-line charge imposed by a price cap LEC on an end user's IXC, in order to phase out CCL charges. The Commission sought to establish economically efficient rate structures to encourage the development of efficient competition, thereby enhancing consumer welfare. PICCs have markedly reduced the per-minute recovery of local loop costs and raised flat recovery of non-traffic sensitive costs. Unfortunately, the advent of PICCs has also created market inefficiencies. Because IXCs have recovered the residential PICCs on a per-account basis, residential customers with only one line pay the same as those with two or more lines, and so pay more than the costs IXCs have incurred for providing them service. In addition, because PICCs are not assessed directly on consumers, but instead are subjected to averaging and mark-ups by the IXCs, consumers are prevented from making head-to-head comparisons among local service providers. 21. In the Access Charge Reform Order, the Commission also stated that its primary method for bringing about cost-based access charges was by letting competition establish efficient rates. The Commission anticipated creating, in a later stage of access reform, a mechanism whereby rate regulation of services would be lessened, and eventually eliminated, as competition developed. To the extent that competition did not fully achieve the goal of moving access rates toward costs, the Commission reserved the right to adjust rates in the future to bring them into line with forward-looking costs. To assist in that effort, the Commission said it would require price cap LECs to start forward-looking cost studies by no later than February 8, 2001 for all services then remaining under price caps. A. Universal Service 22. One of the primary purposes of universal service support is to allow LECs and other eligible telecommunications carriers to provide certain basic services to customers in high-cost areas without having to charge these customers unaffordable rates. Historically, in the interest of meeting the goal of universal service, LEC services have been subsidized or "supported" to enable high-cost consumers to be served at rates that are reasonably comparable to those in lower cost areas. This universal service support has been both explicit and implicit. 23. Explicit Support. Several federal programs have provided explicit universal service support in the form of direct monetary payments to carriers. This support has been provided for both intrastate and interstate services. For example, the Commission's high-cost support mechanism provides support for the costs of the intrastate portion of the local loop that significantly exceed the national average. By providing this federal support for intrastate costs, the Commission assists the states in ensuring that rates for intrastate rates remain affordable and reasonably comparable. Several state universal service programs also provide carriers with explicit support for their intrastate rates so that those carriers can serve customers in high-cost areas without having to charge prohibitively high rates. Carriers have also received explicit federal support for their interstate costs. For example, the Commission's Long Term Support (LTS) mechanism provides certain small carriers with support for the interstate portion of the local loop. This support allows such carriers to reduce the amount of the interstate costs that they would otherwise recover through access charges. 24. Implicit Support. In addition to receiving explicit universal service support, LECs also received implicit universal service support from a variety of sources. Some state rate structures have permitted LECs to charge rates for certain services that significantly exceeded the costs of providing those services, thereby enabling those LECs to charge below-cost rates for other services. For example, by charging above-cost rates for vertical services (e.g., caller identification, call waiting), carriers can support the rates for basic local service. The Commission's interstate access charge structure also provided LECs with implicit universal service support. For example, LECs charge business customers interstate access rates that generally exceed those charged to residential customers, even though the costs of providing access to these groups of customers does not differ significantly. In particular, the multi-line business PICC creates a subsidy running from multi-line business subscribers to residential and single-line business subscribers to help LECs recover revenues that they would not otherwise recover from residential and single-line business subscribers due to the lower SLC caps on those lines. In addition, by allowing LECs to recover non-traffic sensitive (flat) costs through traffic sensitive (per minute) rates, high-volume users bear a greater share of the non-traffic sensitive costs than low-volume users, thus creating an implicit support flow from high-volume users to low-volume users. Furthermore, the practice of averaging rates over large geographic areas, for both intrastate and interstate services, results in subscribers in low-cost areas subsidizing the rates of subscribers in higher cost areas. 25. Universal Service in a Competitive Environment. This "patchwork quilt" of implicit support helped keep rates largely affordable in a monopoly environment where incumbent LECs could be guaranteed an opportunity to earn returns from certain services and customers that are sufficient to support the high cost of providing other services to other customers. The new competitive environment envisioned by the 1996 Act, however, threatens to undermine this implicit support structure over the long run. The 1996 Act removed barriers to entry in the local market, generating competitive pressures that may make it difficult for incumbent LECs to maintain access charges above economic cost. Thus, where existing rules require an incumbent LEC to set access charges above cost for a high-volume user, a competing provider of local service can lease unbundled network elements at cost, or construct new facilities, thereby undercutting the incumbent's access charges. As competition develops, incumbent LECs may be forced to lower their access charges or lose market share, in either case jeopardizing the source of revenue that, in the past, has permitted the incumbent LEC to offer service to other customers, particularly those in high-cost areas, at below-cost prices. Incumbent LECs have been claiming that this process has already made more than trivial inroads on their high-volume customer base. 26. Recognizing the disruptive effects that competition would have on universal service support mechanisms developed in a monopoly environment, Congress instructed the Commission, after consultation with the Federal-State Joint Board on Universal Service (Joint Board), to establish specific, predictable, and sufficient mechanisms to preserve and advance universal service. Congress concluded that the support provided by these mechanisms "should be explicit and sufficient to achieve the purposes" of section 254, which include the purpose that all Americans should have access to telecommunications services at affordable and reasonably comparable rates. In response to this directive, the Commission has taken several actions to put in place universal service support mechanisms that will be sustainable in an increasingly competitive marketplace. These actions fall into three general categories: (1) reforming our existing universal service support mechanisms; (2) reforming our interstate access charge regime to identify implicit universal service support and to remove such implicit support from our interstate access charges, and (3) establishing new universal service mechanisms. In this Order, we focus our efforts in these last two categories. A. The Current Situation 27. Undoing the Gordian knot of determining the appropriate level of interstate access charges and converting implicit subsidies in interstate access charges into explicit, portable, and sufficient universal service support cannot be accomplished with one stroke of the sword. Determining the cost of providing service in every area of the country is a difficult, time- consuming task that regulators cannot perform with exactitude. The particular method that should be used for determining the cost of providing service is itself a contentious issue as are the results achieved from various proposed methods. The incumbent LECs have traditionally argued that they must maintain their current revenue streams to support universal service, while IXCs and consumer groups have argued that access charges should be reduced by amounts in excess of the amount that is converted into explicit universal service support. The subsidies implicit in geographic averaging must be reduced if competition is to develop outside of urban areas; but these subsidies can never be entirely eliminated, without pricing service on a line-by-line-by-line basis. Affordability concerns deter us from allowing end-user charges in higher cost areas to increase to the point where they recover the cost of providing service in those areas, whether cost is determined on a forward-looking or historic basis. These disputes and concerns have dragged on for years and could do so indefinitely. 28. As we devise a transition to a more economically rational approach to access charges and universal service, we need to balance various and sometimes conflicting interests including promotion of competition, deregulation, maintaining affordability for all, and avoiding rate shock to consumers. It is important, however, that the Commission not permit itself to be gridlocked into inactivity by endeavoring to find precise solutions to each component of this complex set of problems. It is preferable and more reasonable to take several steps in the right direction, even if incomplete, than to remain frozen with indecision because a perfect, ultimate solution remains outside our grasp. 29. Against this background, certain segments of the industry have developed a comprehensive consensus approach to resolve outstanding issues concerning access charges and universal service. The Order we adopt today will result in lower rates for both low-volume and high-volume long-distance consumers, more competition, fewer line items on consumers' phone bills, greater flexibility for price cap LECs to meet competition, and an explicit, portable interstate access universal support mechanism. It is this comprehensive solution of historically contentious issues that allows us to take these actions while ensuring that consumers in high-cost areas will continue to have affordable service. EXECUTIVE SUMMARY 30. CALLS has presented us with an integrated and cohesive proposal that aims to resolve major outstanding issues concerning access charges: the pending NPRM to address implicit universal service support in access charges, the X-factor remand, the Low-Volume Long- Distance Users NOI, the pending NPRM on geographically deaveraging SLCs and the next scheduled price cap performance review. In addressing these issues, the CALLS Proposal reduces, and in most instances eliminates, implicit subsidies among end-user classes; makes implicit universal service funding in access charges explicit and portable; provides significant benefits to consumers who make few or no long-distance calls; and sets carrier charges at reasonable levels. Because we find that the CALLS Proposal resolves these issues in a way that benefits consumers and is pro-competitive and economically efficient, we adopt certain parts of the plan, largely rate structure components, as mandatory for all price cap LECs for the full five- years of the plan. As discussed in more detail below, for certain rate-level components of the plan, we adopt it as mandatory on an interim basis. Price cap LECs will be able to choose between having these interim rate-level components apply for the full five years or having their rates reinitialized based on forward-looking economic cost. 31. The proposal provides for the following: 1) Elimination of the residential PICC; 2) Increases to the primary residential and single-line business SLC caps, beginning at $4.35 on July 1, 2000, and gradually increasing to $6.50 on July 1, 2003, provided that LECs can justify any increase beyond $5.00; 3) A review of the SLC rates prior to the increase scheduled for July 1, 2002, including evaluation of forward looking cost information; 4) Targeting of an X-factor for switched access to switching and switched transport elements; 5) Creation of a separate X-factor for special access services; 6) $2.1 billion in reductions to switched access usage rates effective July 1, 2000; 7) Reduction of the switched access X-factor to the Gross Domestic Product- Price Index (GDP-PI) once specific target rate levels are achieved; 8) Removal of $650 million in implicit universal service support from access charges, and the creation of an explicit, portable interstate access universal service support mechanism at the same level; 9) Recovery of LEC universal service contributions directly from end users; 10) Elimination of MUCs by participating long-distance carriers; 11) A commitment by participating long-distance carriers to flow through reductions in access rates to residential and business customers over the life of the plan; and 12) Adjustment of the Lifeline Assistance universal service support mechanism to shield low-income customers from increases in the residential SLC. 13. As an initial point, the CALLS Proposal reduces, and in many cases eliminates, implicit subsidies among customer classes through two means. First, by permitting a greater proportion of the local loop costs of primary residential and single-line business customers to be recovered through the SLC, rather than through the CCL charge and the multi-line business PICC, the CALLS Proposal reduces, and in most instances removes, the subsidies associated with both of the latter charges. Second, by permitting participating LECs to deaverage their SLCs once the CCL charge and multi-line business PICCs are eliminated, the CALLS Proposal reduces the subsidy that subscribers in low-cost areas provide those in higher cost areas. 14. The CALLS Proposal reduces these subsidies, and keeps rates affordable in high-cost areas, by replacing the subsidies with explicit interstate access universal service support. In section 254(e), Congress stated that federal universal service support should be made explicit. The CALLS Proposal identifies and removes $650 million of implicit universal service support in interstate access charges, creates an explicit interstate access universal service support mechanism in this amount to replace the implicit support, and makes interstate access universal service support fully portable among eligible telecommunications carriers. The CALLS Proposal conforms with our tentative conclusion in the Universal Service Seventh Report and Order that price cap LECs should reduce their interstate access rates to reflect any increase in explicit high- cost support. In addition, we conclude that this interstate access universal service support mechanism is specific, predictable and sufficient. Moreover, by making universal service support explicit and portable, the interstate access universal service support mechanism should also encourage competitive entry into high-cost areas. 15. We note that even as the CALLS Proposal phases out these subsidies, it maintains several safeguards that ensure that the rates consumers pay for the SLC remain well within a zone of reasonableness. The CALLS Proposal maintains an overall cap on the SLC assessed on primary residential and single-line business lines at $6.50, and could set the cap even lower if price cap LECs cannot justify higher increases. Thus, as explained below, CALLS ensures that basic telephone service does not become too expensive. The CALLS Proposal also asks the Commission to examine the appropriateness of setting the SLC caps for primary residential and single-line business lines above $5.00 before doing so. In addition, the CALLS Proposal provides for additional Lifeline support so that low-income subscribers will not be hurt by increases to the primary residential SLC cap. The CALLS Proposal also provides that Lifeline customers will not be assessed universal service charges by price cap LECs. 16. Low-volume long-distance users also benefit from the CALLS Proposal. First, AT&T and Sprint both commit to having no monthly minimum charge on their Basic Schedule for at least three years. Second, both carriers agree to eliminate their PICC pass-through charges for residential and single-line business subscribers in light of the elimination of the PICCs for those customers. Third, in a move that benefits all subscribers, both carriers have agreed to flow through to residential and business customers the savings they realize from the CALLS-related reductions in access charges. We find that these commitments are in the public interest and adopt them as requirements of this Order. 17. Today, we adopt the CALLS Proposal because it accomplishes many objectives that the Commission to date has been unable to achieve in the absence of an industry consensus plan, while providing significant consumer benefits that we would not otherwise be able to ensure on such a wide-scale basis and in such a timely manner. We therefore find the CALLS Proposal to be in the public interest. Certainly there is no guarantee that, at the end of the CALLS Proposal's five-year term, competition will exist to such a degree that deregulation of access charges for price cap LECs is the next logical step. Nevertheless, the CALLS Proposal provides stability during its term and addresses several issues that have served as major obstacles to access charge reform and universal service. We also find the CALLS Proposal to be consistent with our market-based approach to regulation. DISCUSSION 18. We approve and adopt the CALLS Proposal because it resolves in a manner consistent with the public interest a number of complex, contentious and interrelated issues that stand as a roadblock to a competitive marketplace. The CALLS Proposal is a reasonable approach for moving toward the Commission's goals of using competition to bring about cost-based rates, and removing implicit subsidies without jeopardizing universal service. The CALLS Proposal is not designed as a permanent solution to all of the issues it addresses; instead, it is a transitional plan that moves the marketplace closer to economically rational competition, and it will enable us, once such competition develops, to adjust our rules in light of relevant market developments. Consequently, as the term of the CALLS Proposal nears its end, we envision that the Commission will conduct a proceeding to determine whether and to what degree it can deregulate price cap LECs to reflect the existence of competition. At that time, the Commission can also examine whether the interstate access universal service support mechanism remains sufficient. 19. The CALLS Proposal provides relative certainty in the marketplace during its five-year term. All parties will have a much clearer blueprint for developing their business plans and attracting capital than they would in the absence of CALLS. As the Massachusetts Department observes, "Resolving so many contentious issues . . . as the CALLS plan does, reduces this uncertainty to the point that it should not be a significant factor in capital investment." 20. The level of access rates, the amount of universal service support in access rates, and the appropriate X-factor have all been subject to contentious proceedings that heretofore have not been resolved despite years devoted to their resolution. For many years, IXCs and consumer groups have argued that access rates are significantly above cost and contain monopoly profits, the amount of which was itself subject to serious debate. Incumbent LECs, on the other hand, have contended that reducing access charges threatened universal service support. This dispute cannot be resolved with exactitude, as setting access charges is at best an imprecise process whose success can be measured only by using a zone of reasonableness. With adoption of the CALLS Proposal, we believe that we have achieved a reasonable and appropriate up-front reduction to access rates that addresses the positions of both sides. 21. The 1996 Act stated that the Commission should create explicit universal service mechanisms that would be secure in a competitive environment. The interstate access universal service support mechanism we create today to replace the implicit universal service support removed from access charges has been subject to heated debate as to the appropriateness of its size and distribution methodology. During the course of the proceeding, some parties have argued that the amount of implicit universal service support in access charges is as high as $3.9 billion, while others have argued that the figure is only $250 million. As explained below, determining the amount of implicit universal service support is an imprecise exercise at best. Consequently, it is only today, more than four years after the passage of the 1996 Act, that we issue a decision on this matter. 22. Similarly, the size of the X-factor has been subject to debate ever since the first time it was set with the creation of price caps. More recently, the current X-factor of 6.5 percent, which was set in 1997, is currently on remand with the Commission. By adopting the reasonable approach set forth in the CALLS Proposal, which treats the X-factor not as a productivity estimate but as a method to reduce rates to certain levels, we expect to end the debate over the appropriate size of the X-factor now and for the next five years for participating price cap LECs. 23. The rates proposed by CALLS are reasonable. We have compared LEC revenues over the five-year period under the modified CALLS Proposal with what their revenues would be under the status quo, and conclude that they are roughly the same. Overall LEC revenues are roughly $700 million lower than they would have been for the first year of the plan, but gradually increase in the later years so that projected revenue is higher than the status quo at the end of the plan. We note, however, that these estimates make no adjustment to account for voluntary reductions participating LECs might make in response to the development of competition in the marketplace, something that is much more likely to occur in the later years of the plan, in part due to the reduction of implicit subsidies by the CALLS Proposal. 24. We find that the CALLS Proposal provides a number of consumer benefits that are in the public interest. By eliminating the residential PICC, the CALLS Proposal provides immediate reductions to consumers' overall rates, even after taking the increase to the primary residential SLC into account. By having IXCs provide calling plans with no monthly minimum charges, CALLS also provides additional benefits to low-volume long-distance customers. In addition, by recovering a greater proportion of loop costs directly from the end user and by creating an explicit and portable interstate access universal service mechanism, the CALLS Proposal also promotes the development of greater facilities-based residential competition. 25. We reject the last-minute alternative proposed by ALTS and Time Warner. Their proposal would not be as beneficial a plan as that submitted by CALLS because, among other considerations, the smaller annual reductions to per-minute rates would result in a delay to more economically efficient rates. We note that the ALTS and Time Warner plan contains several of the same elements as does CALLS. For example, it eliminates the residential and single-line business PICCs, and increases the primary residential and single-line business SLCs to $4.35 on July 1, 2000. Nevertheless, for the reasons discussed below, we find that their plan is not well developed. To do what is necessary to flesh out their plan, including seeking comment on it and resolving internal inconsistencies, would require many more months of proceedings, thereby resulting in significant delay in implementation. 26. We reject the contention by ALTS and Time Warner that by adopting the CALLS Proposal we are abandoning the Commission's commitment to using competition to drive down access charges. By adopting the CALLS Proposal, we require price cap LECs to make a larger rate reduction than they otherwise would have on July 1, 2000. For carriers that elect CALLS, however, we defer the rate prescription scheduled to take place next year that the Commission established as a "backstop" to the market-based approach in the event competition was slow to develop. We thereby allow four additional years for competition to develop sufficiently to begin to control access rates. 27. In addition, we find that the ALTS/Time Warner plan is poorly defined. For example, ALTS and Time Warner fail to explain how a SLC cap of $4.35, together with a $300 million interstate access universal service mechanism, would be appropriate to ensure adequate recovery of interstate loop costs in rural and high cost areas. ALTS and Time Warner also fail to explain how SLCs could be deaveraged when the SLC caps are set at that level. The ALTS/Time Warner plan also lacks an overall rationale. For example, ALTS and Time Warner criticize the up-front reductions in the CALLS Proposal as unjustified, yet they propose an undefended reduction, albeit a smaller one, "as a compromise." ALTS and Time Warner also criticize the X-factor targeting employed by CALLS, even though they propose an unsupported targeting of the X- factor different from the status quo. In addition, unlike the CALLS Proposal, ALTS and Time Warner have no support from parties other than competitive LECs. 28. We conclude that adopting the ALTS and Time Warner proposal would not serve the public interest. Although they object to the initial reduction in per-minute rates, at no point do they assert that the reductions proposed by CALLS will result in below-cost access rates. We believe that despite the criticisms by ALTS and Time Warner, the CALLS Proposal creates significant business opportunities for Time Warner and the members of ALTS. By reducing and removing the subsidies that currently keep the primary residential SLC rates below the level of loop costs currently allocated to interstate service, as accomplished through the CALLS Proposal, we are encouraging facilities-based carriers such as Time Warner and the members of ALTS to compete for residential subscribers. 29. With one exception that we discuss below, we decline to make any significant modifications to the CALLS Proposal as some parties advocate, and instead agree with the CALLS signatories that we should assess the proposal as a whole. In so doing, we note that the Original Proposal, made by a group of price cap LECs and IXCs but without comment from consumer groups, did not address the interests of consumers as adequately as the Modified Proposal. In response to the various critiques of the Original Proposal, CALLS made several pro- consumer changes that resulted in a substantially more equitable proposal. These changes include lowering the primary residential and single-line business SLC caps from the Original Proposal, both at the start of the plan and throughout its term; proposing a cost review to examine the appropriateness of raising the SLC caps above $5.00; eliminating minimum usage charges for basic long-distance service by CALLS long-distance signatories; and removing a significant amount of revenues from access charges altogether, rather than shifting those permitted revenues to the common line basket. 30. We acknowledge that CALLS signatories have made compromises, both among themselves and to accommodate other interests. Having two groups representing historically opposing positions, i.e., LECs (sellers of access services) and IXCs (buyers), reach an agreement removes much of the rhetoric that has stood as an obstacle to comprehensive action. Thus, the CALLS Proposal allows us to move forward more quickly by removing certain issues from consideration that would have delayed reaching a comprehensive solution. The fact that the resolution of these issues was achieved through a joint proposal among a cross-section of LECs and IXCs provides us with some indication that the proposal is within a zone of reasonableness. We believe the parties have negotiated with each other in good faith and fashioned a reasonable compromise that both addresses their competing interests and serves the broader public interest. We also believe that the proposal, particularly after taking its modifications into account, fairly balances the interests of all parties, including those who are not part of the coalition. We are supported in this belief by the support the plan has received from other interested parties, including certain consumer groups, some state regulators, and competitors. 31. At the same time, we must exercise our own independent judgment to ensure that any proposal we adopt in this area -- even a proposal that reflects a substantial degree of consensus among historically adverse parties -- is reasonable and in the public interest. We have exercised that judgment here, and we find that CALLS falls easily within the range of reasonable solutions to the problems it addresses. CALLS is most appropriately judged as a single, cohesive proposal, because the underlying issues it addresses are themselves interrelated. We therefore focus our inquiry on the reasonableness of the proposal taken as a whole, although we also find that its essential constituent parts individually fall within the range of reasonableness. There is no one "right answer" to many of the disputes that the CALLS Proposal resolves. There are instead ranges of reasonable solutions, and the ultimate question is whether CALLS is a sensible transitional plan for accommodating the Act's universal service goals with the development of fuller, more rational competition. Moreover, while we of course have the legal authority to make substantive changes to the CALLS Proposal and impose them on the industry, we generally decline to do so. Although we might ourselves, after further delay, independently devise a different set of reasonable solutions to the problems addressed by the current proposal, the preferable course is to adopt the proposal itself, because it is reasonable in its own right, because it is ready to be implemented, and because it already commands a commendable degree of industry consensus. 32. Although we find the CALLS Proposal is reasonable for CALLS signatories and is likely to be reasonable for non-signatory price cap LECs, we recognize that it was developed with the idea that it would be voluntary for price cap LECs. At the same time, however, the benefits of the CALLS Proposal could not be fully realized if all price cap LECs did not participate. Because the CALLS Proposal is a cohesive proposal, failure to implement it fully would frustrate the consumer benefits we find appropriate for its adoption. Moreover, failure to implement CALLS completely will impede advancement toward the 1996 Act's competition and universal service goals. 33. Section 254(g) of the Act requires IXCs to average their rates. Accordingly, AT&T and Sprint cannot honor their commitments to eliminate residential PICCs and single-line business PICCs for customers of participating price cap LECs without eliminating these charges for customers of all carriers. AT&T and Sprint committed to eliminate their PICC pass-through charges for residential and single-line business customers on the condition that they would no longer be assessed PICCs for those customers. If some price cap LECs continued under the status quo, they would continue to charge PICCs on residential and single-line business lines, and one would expect that IXCs would seek to recover these costs through a flat charge. 34. If IXCs assessed a PICC pass-through charge on all residential and single-line business customers to recover the PICCs assessed on them by non-participating price cap LECs, residential and single-line business customers of participating LECs would end up paying higher overall rates than would residential and single-line business customers of non-participating LECs. The primary residential and single-line business customers of non-participating LECs would have their SLCs capped at $3.50, and would have PICCs assessed on their lines to recover additional local loop costs, which would be averaged by IXCs among all customers. Customers of participating LECs would then pay a higher SLC, yet still be paying a PICC pass-through charge that reflects the IXCs' cost of paying PICCs to any non-participating price cap LECs. This would reduce some of the significant consumer benefits of the CALLS Proposal. It would also create a new subsidy running from customers of participating LECs to those of non-participating LECs, thereby frustrating the goal of removing implicit subsidies. 35. In addition, AT&T's commitments are predicated on there being a $2.1 billion aggregate reduction to access charge usage rates. Because each CALLS LEC signatory has only committed to a proportional share of this sum based on an assumption of full participation, full participation by price cap LECs is necessary to reach the overall access charge usage rate reduction. Therefore, in the absence of full participation, neither AT&T nor Sprint would be obligated to fulfill their commitments, including those commitments regarding elimination of minimum usage charges, the flow-through of access charge reductions to residential and business customers, and consumer education efforts. 36. We also note that for price cap LECs that would not participate in CALLS, the implicit universal service subsidies contained in those LECs' access charges would remain. We would thus be required to conduct a proceeding to determine the size of that implicit universal service support, thereby delaying the creation of an explicit and portable interstate access universal service support mechanism for those areas. Until we completed that proceeding, competitive LECs in those price cap LECs' service areas would be unable to receive interstate access universal service support. 37. Similarly, without full participation by price cap LECs, the averaging requirements imposed on IXCs under section 254(g) of the Act could place IXCs at a competitive disadvantage if BOC long-distance affiliates only offer service to their in-region customers as they enter the long-distance market. A long-distance affiliate of a BOC participating in CALLS would be able to offer lower per-minute rates than would an IXC having to average its access charges across all regions, including those serving non-participating price cap LEC customers. Non-participating LECs would receive a windfall from CALLS, because the IXCs' averaged rates, which would be significantly lower due to the effects of the CALLS Proposal, would stimulate demand for interstate access in the LECs' regions, even though those LECs would not have significantly reduced their in-region per-minute rates. 38. Nevertheless, we recognize that not all price cap LECs could agree on all aspects of the CALLS Proposal. CALLS members worked among themselves to develop the mechanisms under which price cap LECs contribute toward reducing switched access usage charges by $2.1 billion, as well as the rules that determine the size and distribution of the $650 million interstate access universal service support mechanism. These decisions necessarily pit each price cap LEC's interest against the interests of all other price cap LECs. Consequently, price cap LECs that did not agree to the CALLS Proposal might not receive the same benefits or carry the same burdens as the CALLS LEC signatories. 39. Accordingly, out of an abundance of caution, we provide an opportunity for price cap LECs to choose between two options for certain rate-level, as opposed to rate structure, components of the CALLS Proposal. Specifically, price cap LECs may elect CALLS for the full five-year period. Alternatively, price cap LECs may elect to submit a cost study based on forward-looking economic cost that will be the basis for reinitializing rates to the appropriate level. Because a cost study proceeding necessarily requires data specific to the price cap LEC to be submitted and analyzed, we find it necessary to mandate the CALLS rate-level components on an interim basis, subject to true-up, in order to provide sufficient time to complete a cost study. A price cap LEC that elects the second option will be subject to the following rate-level components of the CALLS Proposal until we have completed the forward-looking economic cost review: the size of the up-front reduction; the size of the carrier's interstate access universal service support; the X-factor; and the switching target levels. Adopting these components on an interim basis will permit realization of the full consumer benefits of the CALLS Proposal and preserve the $2.1 billion reduction in switched access usage charges for the first year. 40. At the same time, we adopt the rate structure components of the CALLS Proposal as mandatory for all price cap LECs, for the five-year period envisioned by the CALLS Proposal. The rate structure components are the new SLC caps, elimination of the residential PICC, the multi-line business PICC caps, the creation of a separate basket for special access, elimination of the marketing basket and the recovery of the revenues it recovered as part of CMT revenues, recovery of universal service contributions directly from end users, SLC deaveraging, portability of the interstate access universal service mechanism, and increased Lifeline support to cover the new SLC caps. For the reasons discussed elsewhere in this order, the changes made in these components are reasonable and in the public interest and consistent with our policy of requiring, to the extent possible, that non-traffic sensitive costs be recovered through fixed rates or flat charges. In addition, these changes do not affect carriers' overall recovery of their costs and thus do not raise the same issues as the rate-level components. 41. For the rate-level components, each price cap LEC will, at the holding-company level, choose between two options. The first alternative is to subscribe to the CALLS Proposal for its full five-year term. The second alternative is to submit a cost study based on forward-looking economic costs, resulting in the LEC's rates being reinitialized to the appropriate level indicated by the study and then made subject to a price cap plan and X-factor that we would determine. 42. This cost-study proceeding is consistent with what we outlined in the Access Charge Reform Order. In the Access Charge Reform Order, the Commission stated that its goal was for interstate access charges to reflect the forward-looking economic costs of providing interstate access services. The Commission adopted a two-phased approach to reach that goal. It adopted a market-based approach that relied on competitive pressures to bring prices toward forward- looking economic cost, with incumbent LECs receiving additional pricing flexibility where competition has developed. The second phase provided, however, that the Commission would require forward-looking cost studies by no later than February 8, 2001 for access services that were not subject to competition and "eventually prescribe rates for those services at forward- looking economic cost levels." For those carriers that accept the CALLS Proposal, we are extending for five years the period during which we will allow the market-based approach to bring interstate access prices toward forward-looking economic cost. Those carriers that reject the CALLS Proposal will operate under the framework the Commission set forth in the Access Charge Reform Order to address services that are not subject to substantial competition. 43. Each price cap LEC will have 60 days from the release of this Order to make its election between the two options. This election will be binding for the five-year term of CALLS. Price cap LECs that elect to proceed with a cost study will be subject to the rules we adopt today until the completion of our cost study proceeding. We make this election binding because we believe the CALLS Proposal, coupled with a true-up mechanism discussed below, will ensure reasonable rate levels for all price cap LECs, while ensuring that the Commission does not waste its limited resources in cost proceedings performed solely for the purpose of having LECs determine under which approach they would be better off. 44. For a price cap LEC electing the cost study option, we also adopt a true-up mechanism to be applied to such price cap LEC's rates. This will enable the LEC and its customers to be treated as it would have been, had we completed the cost study in time to avoid the need for imposing the CALLS Proposal for an interim period. Should any price cap LEC elect to participate in the cost-study proceeding, the Commission will consider the sufficiency of the interstate access universal service support mechanism, including both the size and distribution of support, concurrently with the industry-wide review of the increase to the primary residential SLC cap after July 2001, to avoid duplication of effort. We reject arguments offered by parties asking that we make the CALLS Proposal wholly mandatory. CompTel's contention that we have not previously implemented opt-in regulation for incumbent LECs is wrong. Other than the BOCs and GTE, all incumbent LECs have had the choice of whether to elect rate-of-return or price cap regulation. In addition, for several years all price cap LECs were permitted to elect the level of sharing and the X-factor to which they would be bound. 45. Below, we discuss each portion of the CALLS Proposal in detail. In Section A., we address the impact of the CALLS Proposal on services in the common line and marketing baskets. In Section B., we set forth the impact of the proposal on the local switching and trunking baskets, including the modifications to the X-factor and the creation of a separate basket for special access. In Section C., we discuss the universal service components of the CALLS Proposal. In Section D., we conclude that the CALLS Proposal addresses the concerns raised in the Low- Volume Long-Distance NOI. Common Line Charges Background 46. In the 1983 Access Charge Order, the Commission established a comprehensive mechanism for LECs to recover their costs of providing access service to complete interstate and foreign telecommunications. This mechanism distinguished between traffic sensitive costs and non-traffic sensitive (NTS) costs incurred by a LEC to provide interstate access service. The Commission emphasized in the 1983 Access Charge Order that its long range goal was for LECs to recover a large share of their NTS common line costs on a flat-rated basis from end users instead of from carriers. The rules adopted in 1983 apportioned charges for common line costs between a monthly flat-rated SLC assessed on end users and a per-minute CCL charge assessed on the IXCs, which ultimately was recovered from end users through long-distance charges. 47. In the Access Charge Reform Order, in order to align the rate structure more closely with the manner in which costs are incurred, the Commission changed the manner in which price cap LECs recover their permitted common line revenues. Consistent with the goal enunciated in the 1983 Access Charge Order, because the costs of using the price cap LEC's common line (or "local loop") do not increase with usage, the Commission decided that these costs should be recoverable entirely through flat, non-traffic sensitive fees. Out of an abundance of caution for affordability and universal service concerns at that time, however, the Commission did not raise the SLC cap for primary residential and single-line business lines above the $3.50 level in effect at the time to permit the full recovery of common line revenues. Rather, to the extent that common line revenues are not recovered through the end-user's SLC, the Commission permitted LECs to recover these revenues through the PICC, a flat, per-line charge assessed on the IXC to whom the access line is presubscribed. 48. Affordability concerns were not as significant for non-primary lines and multi-line business customers. As a result, the Commission permitted increases in their SLC caps from $3.50 to $5.00 plus future increases for non-primary lines, and from $6.00 to $9.00 plus increases for inflation for multi-line business customers to permit recovery of the price cap LECs' average per-line common line revenues. The Commission also established flat-rated PICCs on non- primary residential and multi-line businesses to recover common line revenues that cannot be recovered from residential and single-line business customers due to the caps on SLCs and primary residential PICCs. 49. The PICC was designed to be phased in over a several year period. The PICC for primary residential and single-line business lines was capped at $0.53 in the first year with annual adjustments thereafter for inflation plus $0.50 until the sum of the SLC plus the PICC equals the price cap LEC's permitted common line revenues per line. Under current rules, the caps on non- primary and multi-line business PICCs also increase over time. As the primary residential and single-line business PICCs increase, however, the resulting increase in recovery of common line costs through flat charges on primary residential and single-line business lines will eliminate the subsidization of subscribers' rates for those lines by non-primary residential and multi-line business lines. At this point, non-primary residential and multi-line business lines will no longer be assessed PICCs. Some price cap LECs already have reached this point; others would not reach this point for a number of years. 50. To the extent that the caps on SLCs and PICCs do not allow recovery through flat charges of all common line revenues, LECs are still permitted to impose a per-minute CCL charge assessed on originating minutes. As the PICC caps for non-primary residential and multi-line business lines increase, and as flat-rated revenues received from primary residential and single-line businesses increase, the per-minute CCL charge will be eliminated. At present, among the price cap LECs, only BellSouth, Citizens, and certain study areas of GTE, Frontier, and Sprint continue to collect CCL charges. 51. In the Further Notice of Proposed Rulemaking adopted in August, 1999, the Commission sought comment on whether to permit price cap LECs to geographically deaverage common line access and traffic sensitive elements without a competitive showing and whether to condition such authority on certain regulatory developments. The Commission also sought comment on whether it should grant pricing flexibility for switched access and common line services. That proceeding remains pending. CALLS Proposal 52. The CALLS signatories propose reforming and simplifying common line charges by combining the SLC, PICC and CCL charges into a single end-user charge that can be deaveraged under limited circumstances. Under the CALLS Proposal, the PICC for residential and single-line businesses would be eliminated beginning July 1, 2000. The SLC for primary residential and single-line business lines would be capped at $4.35 upon implementation of the proposal beginning July 1, 2000, $5.00 as of July 1, 2001, $6.00 as of July 1, 2002, and $6.50 as of July 1, 2003. The proposal also calls for the Commission to initiate a proceeding after the SLC cap reaches $5.00 to examine whether increases to the SLC cap for residential and single-line businesses above $5.00 are appropriate, and reflect the costs in the UNE zone or zones where they would apply. The maximum primary residential and single-line business SLC in any zone would be the average price cap common line, marketing and transport interconnection charge revenue (Price Cap CMT Revenue) per line for the highest cost unbundled network element (UNE) zone in a study area up to the nominal cap. Price Cap CMT Revenue is defined as the total revenue a filing entity is permitted to receive for SLCs, PICCs and CCL charges. Price Cap CMT Revenue also includes marketing expenses pursuant to section 69.156(a) of the Commission's current rules, and residual interconnection charge revenues collected through PICCs. 53. In addition to eliminating the PICC for non-primary residential lines, the CALLS Proposal would cap the maximum SLC for these lines at the lower of $7.00 or the greater of the current rate or average Price Cap CMT Revenue per line for the highest average revenue per line UNE zone in a study area. Once charges for primary and non-primary residential lines are equal within a zone or study area, a price cap LEC could eliminate the distinction between primary and non-primary lines within that zone or study area. Although the distinction between primary and non-primary residential lines could be eliminated in most circumstances under the proposal, it would remain for those subscribers where the average Price Cap CMT Revenue exceeds the maximum primary residential SLC cap. 54. For multi-line business customers, the SLC and PICC would not be combined. The multi-line business PICC would continue to be charged to the IXCs with a cap of $4.31 per line. It would be reduced as the residential SLCs increase until it is phased out. The SLC would be the lesser of $9.20 or the greater of (1) the rate as of June 30, 2000, less certain amounts of SLC reductions or (2) Average Price Cap CMT Revenue Per Line where SLCs have not been deaveraged. Multi-line business SLCs would be frozen until the carrier's multi-line business PICC and CCL charges are eliminated except where a carrier chooses to reduce the SLC through voluntary reductions. 55. SLCs could be deaveraged subject to certain limitations. Price cap LECs could only geographically deaverage their SLCs after a state commission establishes deaveraged UNE rates by zone and PICCs and CCL charges are eliminated. Deaveraged SLCs by customer class within each UNE zone also could not generate more revenue than that generated by geographically averaged SLCs. A price cap LEC, however, could take a voluntary reduction at any time. Price cap LECs may have up to four SLC zones, absent Commission review and approval, and price cap LECs can determine which zones to consolidate if they have more than four UNE zones. A carrier need not eliminate CCL charges and PICCs prior to deaveraging by voluntary reductions. A price cap LEC also could not reduce multi-line business SLCs below non-primary residential SLCs or non-primary residential SLCs below primary residential and single-line business SLCs in a given UNE pricing zone. SLCs of a given customer class, such as multi-line business, could not have a lower price in higher cost zones than any line in a lower cost zone. Finally, except with respect to voluntary reductions, the proposal would establish a minimum charge within the lowest cost zone, which allows consumers outside the lowest cost zone to share the benefits of SLC deaveraging. 56. Each CALLS LEC signatory also commits to reduce "switched access usage charges" by its proportional share of $2.1 billion on July 1, 2000. Most LECs would achieve these reductions solely through rate decreases. Under the proposal, however, two mutually exclusive alternatives are proposed to permit certain carriers to move some of these permitted revenues to the common line basket. Discussion 57. We adopt the common line rate structure aspects of the CALLS Proposal because it is pro-competitive and provides immediate significant consumer benefits through reduced consumer rates. Furthermore, consistent with the 1996 Act, including section 254(k), it simplifies the current rate structure and long-distance bills, reduces consumer confusion, and furthers the Commission's efforts over the past two decades to eliminate per-minute recovery of common line costs. Although support for the CALLS Proposal was not unanimous, the proposal is a major step forward from the Commission's current access charge regime, and preferable in moving access charges to cost-based levels than the current process. Residential and Single-Line Business SLCs and PICCs 58. In this Order, we eliminate residential and single-line business PICCs. We also increase the related SLC caps as proposed and modify our rules accordingly. As explained below, we find that this action is within the Commission's statutory authority to order proper recovery of the portion of common line costs that has been allocated to the interstate jurisdiction through charges imposed on telephone subscribers, and that doing so does not violate the Communications Act of 1934, as amended. 59. Our actions today are in furtherance of our goal of having price cap LECs recover a large share of their NTS common line costs from end users who cause them instead of carriers, and to recover these costs on a flat-rated, rather than a usage-sensitive, basis. As explained below, we find that modifying these charges in the proposed manner will simplify the current rate structure and consequently consumers' bills by eliminating some of the complexity involved with these charges and the billing practices that gave rise to the Truth-in-Billing Order and Low- Volume Long-Distance Users NOI. 60. By eliminating the residential and single-line business PICCs, the CALLS Proposal establishes a straightforward, economically rational pricing structure which enables consumers to make a choice among competing providers through head-to-head comparisons and better promotes competition by sending potential entrants economically correct entry incentives. Furthermore, because of the PICC billing practices of many IXCs, the new SLC caps ultimately will result in a further reduction of the overall amount many consumers currently pay for their individual SLCs and PICCs. Most IXCs currently recover PICCs from their customers through a blended PICC pass-through charge on a per-account basis. This practice results in consumers with only one line paying more than they otherwise would had the LECs simply passed onto them directly the $1.04 worth of permitted revenues that the LEC recovers through the single-line PICC. We estimate that IXCs are recovering additional amounts per account in "transaction costs" to recover their Lifeline costs, universal service contributions and bad debt associated with non-paying subscribers. Specifically, while we estimate that the average IXC blended PICC pass- through rate absent any additional amounts recovered by IXCs currently is approximately $1.23, AT&T, MCI WorldCom and Sprint currently charge their residential customers $1.51, $1.46 and $1.50, respectively, as a blended PICC pass-through charge on a per-account basis. Eliminating the PICC, therefore, will make common line billing more efficient and more closely aligned with costs. 61. Under the CALLS Proposal, the primary residential and single-line business SLC cap will be less than the combined SLC and PICC would be beginning July 1, 2000 under our existing rules. Under our existing rules, the primary residential and single-line business SLC currently is capped at $3.50 per line. The primary residential and single-line business PICC cap currently is $1.04 per line, and it is scheduled to increase on July 1, 2000 by $0.50 per line, plus an amount for inflation. The total amount of the SLC and PICC caps beginning July 1, 2000 under existing rules therefore, would be approximately $5.06. Under the CALLS Proposal, the primary residential and single-line business SLC is capped at $4.35 per line beginning July 1, 2000. Consequently, most subscribers with only one line could save more than $0.70 per line under the CALLS Proposal compared to amounts they otherwise might have paid had these caps gone into effect beginning July 1, 2000. This estimate does not reflect the additional savings that result from the elimination of the blended PICC pass-through. Given that the new SLC cap will be less than the SLC and PICC caps would be under our current rules, we have a sufficient basis to find that the rates charged primary residential and single-line business customers will not be excessive and therefore unreasonable. Furthermore, because per-line CMT revenues are below the proposed caps in some areas, the average primary residential and single-line business SLC will not be as high as the cap particularly if the caps are raised in 2002 and 2003. We estimate the average primary residential SLC will be $4.93 in July 2001, $5.63 in July 2002, $5.82 in July 2003, and $5.83 after full implementation and transition of the proposal in July 2004 if the caps are fully implemented not counting voluntary reductions due to competition or any modifications to the proposed caps which might occur as a result of the cost review proceeding prior to the SLC increasing above $5.00. It is difficult to compare these rates with the estimated primary residential SLC and PICC rates in 2004 under our current rules because of variables beyond our control. For example, the SLC under the CALLS Proposal's proposed rules is largely unaffected by inflation, whereas the projected SLCs and PICCs under our current rules would vary widely depending on what happens with inflation over the time period. In addition, further into the future, it is more difficult to estimate what IXCs would charge as a PICC pass-through to end users, and what the X-factor would be. 62. Similarly, the SLC cap for non-primary residential lines will be lower than the SLC cap that would otherwise apply beginning July 1, 2000. The non-primary residential SLC cap currently is $6.07 per line and is scheduled under our current rules to increase on July 1, 2000 by $1.00 per line, plus an amount for inflation. Additional increases to this SLC cap of $1.00 per line plus an amount for inflation also are scheduled in subsequent years. Under the CALLS Proposal, the non-primary residential SLC cap will be $7.00 beginning July 1, 2000, and remain unchanged for the five-year term of the proposal. Because the actual charges assessed on many non-primary residential lines will be below the SLC cap under either approach, these subscribers will not see additional benefits. However, the remaining subscribers will immediately benefit by saving approximately $0.24, and on average will enjoy considerable savings in subsequent years. 63. We find that this rate restructuring and rate decrease is in the public interest because it simplifies the current rate structure, moves towards cost-based rates, reduces consumers' overall rates, and simplifies long-distance bills, thereby resulting in less consumer confusion. Similarly, simplifying the current rate structure benefits price cap LECs and IXCs by eliminating some of the complexities involved in the administration of current Commission rules and providing greater opportunities for pricing flexibility. These are all goals we have sought to achieve through our access charge reform, truth-in-billing and low-volume long-distance user proceedings. 64. We recognize that although consumers will experience considerable immediate savings, they also will see an additional line item charge on their bill when price cap LECs begin recovering Universal Service Fund contributions through an end-user charge. This charge could have been assessed regardless of the CALLS Proposal as a result of the Fifth Circuit's decision in Texas Office of Public Utility Counsel v. FCC. Although the removal of the implicit subsidies from access charges to an explicit universal service support mechanism will be part of this line item charge, the increase attributed to the interstate access universal service support mechanism should be offset by the decreases in other rates and charges resulting from the implementation of the CALLS Proposal. 65. As set forth in the CALLS Proposal, we shall review any increases to residential and single-line business SLC caps above $5.00 to verify that any such increases are appropriate and reflect higher costs where they are to be applied. We will initiate and complete a cost review proceeding prior to any scheduled increases above this cap taking effect to determine the appropriate SLC cap. For this proceeding, the price cap LECs have agreed to provide, and we will examine, forward-looking cost information associated with the provision of retail voice grade access to the public switched telephone network. We will address in that proceeding whether an increase in the SLC cap above $5.00 is warranted and, if not, whether a decrease in common line charges is warranted. 66. We disagree with CALLS opponents who argue that this cost study should occur prior to the adoption of the proposal. This proposal is good for all end users because it reduces the overall rates paid by them. Initiating and completing a cost study would take a considerable amount of time, which would delay the immediate savings end users would realize from the implementation of the proposal on July 1, 2000. Scheduling the cost study prior to the SLC cap increasing above $5.00 in July 2002, will enable end users to reap the immediate benefits of this proposal without the delay that would otherwise result from conducting the study beforehand. We further disagree with CALLS opponents who want the Commission today to specifically define the scope of the cost review study as well as the specific information to be examined in it. We believe that these issues are more appropriately addressed when we initiate the cost study. 67. We are not persuaded by arguments that increasing the SLC cap would violate the principle set forth in section 254(b) that consumers in all regions of the nation should have affordable access to telecommunications and information services at rates that are reasonably comparable to those services provided in urban areas. The SLC cap was set over a decade ago and was determined to be generally affordable. It has never been adjusted for inflation. Our rate restructuring today will result in lower overall charges than consumers experience with the current SLC and PICC, and a more efficient recovery of common line revenues through flat charges. Furthermore, the data indicate that if the SLC cap for primary residential lines had been adjusted annually for inflation since it became effective in 1984, by July 2000, the $3.50 primary residential and single-line business SLC cap that was in place in 1989 and retained in the Access Charge Reform Order would have increased to $4.94 per line. Thus, for residential customers, the primary residential SLC cap we adopt today is more affordable now than what it otherwise would have been had the $3.50 cap we previously deemed affordable been adjusted for inflation annually. 68. Increasing the SLC cap and eliminating the PICC as proposed will, in most areas, enable the full recovery of common line revenues for residential and single-line business lines through a single charge. Although, in the past, the Commission was reluctant to increase the SLC cap, the CALLS Proposal mitigates our reluctance. Indeed, although we established the PICC as a charge that LECs assess IXCs instead of an end-user charge in order to minimize any impact on end users potentially resulting from a higher SLC, the reality in the marketplace is that IXCs have marked-up and passed-through the PICC to end users, thereby imposing higher flat charges for the majority of residential customers than would have occurred had we increased the SLC cap by the amount of the PICC caps. Even an end user who does not presubscribe to an IXC, and who pays the PICC directly to the LEC, could have been paying more in SLC and PICC on July 1, 2000, than the proposed SLC in the CALLS Proposal. Furthermore, subscribership has not been negatively impacted by these charges. Since the introduction of these charges, subscribership rates have remained relatively stable. We are unpersuaded by the arguments therefore, that revising the rate structure as proposed will negatively impact subscribership. Thus, in light of all of the benefits associated with the proposed restructuring of common line billing, such as the savings shown above, reductions in switched access usage rates and the interstate access universal service support mechanism of the CALLS Proposal, our prior concerns about whether increasing the SLC cap above $3.50 would render telephone service unaffordable are sufficiently mitigated to allow an increase in the SLC. 69. We acknowledge that states are concerned about the impact the CALLS Proposal may have on intrastate access charges, due to the fact that many states require that intrastate access fees mirror interstate access charges. We agree with the Joint Board in the Second Recommended Decision, that "[t]he Commission's efforts to remove implicit universal service support from interstate access charges will not affect intrastate rates directly." We believe that the states' concern over an indirect consequence of our action today is outweighed by our efforts, consistent with the 1996 Act, to remove implicit supports from access charges. For this reason, and because the 1996 Act directs that states should take action to preserve and advance universal service, we leave it to the individual states to adjust their rates as they deem necessary in response to this Order. 70. In addition, the CALLS Proposal will provide rate benefits for rural customers including those not served by price cap LECs. Most IXCs currently assess a flat-rated charge to recover the PICC on all of their subscribers, including those subscribers served by rate-of-return LECs. By eliminating the PICC, we eliminate these charges from the bills of these subscribers as well. This benefit is in addition to the savings they otherwise will experience from the reductions in long-distance charges resulting from the pass through by the long-distance signatories of the proposed lower access charges. Because long-distance providers must offer their geographically- averaged rates to all of their customers, including those served by rate-of-return carriers, rural customers also will benefit from reductions in per-minute rates. We also anticipate addressing access reform and universal service reform for rural carriers in the near future. 71. Some of the proposal's critics suggest that the more appropriate competitive route to access reform is to eliminate the SLC rather than the PICC. These parties believe that, because the long-distance market is currently more competitive than the local exchange market, these charges are more likely to be competed away if assessed on IXCs. We disagree with this proposition. Because PICCs are an external cost to the IXCs that they cannot reduce by managing it better or being more efficient, PICCs are unlikely to be competed away. Indeed, we are now into the third year of its introduction, and there is no sign that the PICC is being competed away. Rather, we believe that one of the major benefits of recovering common line costs through the SLC alone is to encourage efficient competitive entry, particularly in providing competing alternatives for loop service. The only way an IXC can reduce its PICCs is by discouraging presubscription by customers that it would prefer not to serve, such as those who make few long-distance calls. This type of behavior could raise issues regarding unjust, unreasonable and discriminatory practices under sections 201 and 202 of the 1996 Act. This is not a result that we would like to encourage. If common line costs are recovered in the SLC, a LEC can reduce its costs through efficiency gains and will have the incentive to avoid costs and reduce prices as it faces increased competition from competing local exchange carriers. Further, we find that the proposed cost recovery structure will be more apparent to the end user, whereas PICCs currently are at least partially buffered against direct comparison because of the manner in which they are processed from the LEC through the IXC to the end user. Proceeding in this manner will provide greater economic incentives to stimulate alternative sources for the loop through facilities-based competition, and thus subject loop prices to competitive pressure. 72. Opponents also argue that the CALLS Proposal violates section 254(k) of the 1996 Act for two reasons: (1) it fails to recover costs from all services that use the loop and permits the uncompensated use of the loop by IXCs; and (2) it causes services included in the definition of universal service to bear more than a reasonable share of the joint and common costs of facilities used to provide those services. 73. We find that section 254(k) is not implicated by our action today. Section 254(k) is directed at the allocation of costs between competitive and non-competitive services, both regulated and non-regulated, and prohibits subsidization of competitive services by non- competitive services. The SLC is a method of recovering loop costs; not an allocation of those costs between supported and unsupported services. Contrary to the opponents' arguments, nothing in section 254(k) precludes the Commission from permitting recovery of common line charges properly apportioned to interstate access from subscribers on a flat-rated basis. Under current rules, no PICC or CCL charges are paid by IXCs with respect to non-primary residential and multi-line business lines after the phase-in specified in the Access Charge Reform Order is completed. Similarly, for primary residential lines that are not presubscribed to an IXC, there is no common line recovery from IXCs in those places where the CCL charge has been phased out. 74. Moreover, section 254(k) addresses the concern that price cap LECs may attempt to gain an unfair market advantage in competitive markets by allocating to their less competitive services, for which subscribers have no available alternative, an excessive portion of the costs incurred by their competitive operations. Whether a LEC allocates all of its interstate loop costs to the end user or to the IXC, the LEC's competitive position as compared to other suppliers of local exchange facilities remains the same. Section 254(k) was not designed to regulate the apportionment of loop costs between end users and IXCs because this allocation does not involve improperly shifting costs from a competitive to non-competitive service. 75. Consequently, we agree with the CALLS proponents that there is no legal impediment to a federal recovery mechanism that simply requires all telephone subscribers to pay, on a per- line basis, for that portion of their necessarily-incurred local telephone plant costs that is assigned to the interstate jurisdiction. Section 254(k) does not apply to the question of whether prices should be set through SLCs alone or through a combination of SLCs and PICCs. Neither the PICC nor the CCL charge is legally compelled by section 254(k) or any other provision of law. 76. Indeed, these arguments have already been addressed and rejected by the United States Court of Appeals for the Eighth Circuit. In Southwestern Bell v. FCC, the Texas Office of Public Utility Counsel argued, among other things, that the Commission's decision in the Access Charge Reform Order to increase the SLC cap for certain lines resulted in a "'free ride by the IXCs on the common line facilities'" and that loop costs were being shifted from competitive services to basic services, contrary to the intent of section 254(k) of the 1996 Act. Texas Counsel argued that as a result of section 254(k), the recovery of joint and common costs, such as NTS loop costs, must be borne mutually both by end users and by IXCs. Texas Counsel asserted that it was improper for the Commission to shift additional NTS loop cost recovery from the access rates LECs charge IXCs for interstate access onto the rates end users pay for certain telephone lines. Texas Counsel contended that increasing the SLC cap imposed on end users allowed IXCs to evade their fair share of the common line costs. Texas Counsel maintained that this approach violated section 254(k) "in that the existing proportion of NTS loop cost recovery by the IXCs through competitive services would be reduced through increases on end users for basic services." 77. The Eighth Circuit upheld the Commission's increases to various LEC SLC caps, however, and found that "Texas Counsel's contention that increasing the SLC price ceiling violates the prohibition against using non-competitive services to subsidize competitive services [wa]s unpersuasive." In doing so, the court reaffirmed the Commission's long standing view that the subscriber "causes" local loop costs, whether the subscriber uses the service for intrastate or interstate calls. These costs are, in any event, recovered from the end user, either through direct end-user charges or indirectly through higher rates or additional charges paid to IXCs. The court further affirmed the Commission's conclusion that it was appropriate and rational for the Commission to impose these costs on the end user. The court concluded as a result that increasing SLC caps on certain lines did not result in a windfall for IXCs. 78. Similarly, the court in Southwestern Bell rejected the argument that increasing the SLC cap violates the second sentence of section 254(k) by causing services included in the definition of universal service to bear more than a reasonable share of the joint and common costs of facilities used to provide those services. The second provision of section 254(k) separates telecommunications services into those that are supported by universal service, and those that are not. This provision empowers the Commission to establish rules to prevent LECs from overallocating to supported services the costs of facilities that are used to provide services in both categories. It places a continuing obligation on the Commission to ensure that the treatment of joint and common costs, such as corporate overheads, prescribed by our accounting, cost allocation, separations, and access charge rules will safeguard the availability of universal service. Opponents argue that by eliminating the PICC and increasing the SLC cap, the Commission violates section 254(k) by allocating 100 percent of the joint and common costs to the common line elements paid by the end user. The Commission, however, has complied with the requirements of section 254(k) by allocating joint and common costs to various interstate services, including those that are supported by universal service, such as common line and switching, and those that are not, such as special access services. The Commission also has in place a comprehensive system of accounting and non-accounting safeguards designed to discourage carriers from misallocating the costs of non-regulated activities, and to ensure that ratepayers share in any efficiencies generated from joint use of the network by non-regulated activities. None of the proposal's critics challenge these safeguards as insufficient or flawed, or our allocation as improper. Because the SLC is a method of recovering properly allocated loop costs, not an allocation of those costs between supported and unsupported services, section 254(k) is not implicated. 79. Moreover, the SLC and PICC were established to recover loop costs for the same service interexchange access. Interexchange access is a supported service as defined in the Universal Service First Report and Order. Therefore, contrary to the arguments of opponents, moving the recovery of loop costs associated with interexchange access service from the PICC to the SLC is not a change in the allocation between supported and unsupported service. 80. We also reject the argument that elimination of the PICC is inconsistent with the Line Sharing Order. The Line Sharing Order concluded that states should not permit incumbent LECs to charge more to competitive LECs for access to shared local loops than the amount of loop costs the incumbent LEC allocated to ADSL services when it established its interstate retail rates for those services. To date, we are not aware of any incumbent LECs that have allocated any loop costs to ADSL services. 81. Many of the proposal's critics also erroneously argue that the consolidation of the SLC and PICC violates the requirements for reasonable recovery of shared costs as interpreted by Smith v. Illinois Bell. We find no requirement anywhere that we are required to prescribe the recovery of properly allocated common line costs from IXCs rather than in the cost causative manner that we follow. In making their arguments, the opponents misinterpret and confuse the issues in Smith v. Illinois Bell. Indeed, their arguments have already been addressed and rejected in NARUC v. FCC. Specifically, in NARUC v. FCC, the D.C. Circuit held that Smith v. Illinois Bell dealt with jurisdiction and that a portion of the costs of local subscriber plant may be recovered only under the authority of a body with interstate regulatory powers. The D.C. Circuit further held that Smith v. Illinois did not address the manner in which the Commission was to perform this task. The court specifically found that Smith v. Illinois Bell did not compel the Commission to use a particular formula to recover costs allocated to its jurisdiction. Rather, the Commission may properly order recovery, through charges imposed on telephone subscribers, of the portion of the local loop costs, that, in accordance with Smith v. Illinois, have been placed in the interstate jurisdiction. Contrary to the arguments of many opponents, therefore, Smith v. Illinois Bell does not preclude our action today as the common line costs in question have been properly allocated by the Commission. 82. In this Order, we also permit price cap LECs to eliminate over time the distinction between primary and non-primary residential lines. Under the revised proposal, this distinction can be eliminated in most circumstances, but will remain for those subscribers where the average CMT revenue exceeds the maximum proposed SLC cap for primary residential lines. This will go a long way to eliminate the consumer confusion that now exists relating to this distinction. Although the primary/non-primary line distinction has served a role during the transitional regulatory process we established, we agree that eliminating this distinction to the extent that we can will further simplify the current rate structure and eliminate the costs associated with administering this distinction, which are ultimately borne by consumers. 83. We also eliminate the Marketing Basket in this Order. We established this basket in our Access Charge Reform Order to prevent price cap LECs from recovering retail marketing expenses from carrier access services, and to ensure that the recovery of these expenses was directed at multi-line users rather than primary residential and single-line business users. Under current Commission rules, the marketing expenses allocated to the Marketing Basket are recovered through common line charges. Under the CALLS Proposal, these marketing expenses are included in the total revenue a price cap LEC is permitted to recover as Price Cap CMT Revenue. 84. We adopt the CALLS Proposal with respect to its treatment of marketing expenses. In doing so, we expand the common line elements from which these expenses can be recovered to include the primary residential and single-line business SLC. In the Access Charge Reform Order we prevented the recovery of marketing expenses from primary residential and single-line business SLCs and PICCs because we believed that price cap LEC retail marketing may have focused more on the sale of optional vertical features such as call waiting and caller ID, and on features and services designed for business customers. At the time, there was insufficient evidence in the record demonstrating that price cap LECs marketed to primary residential and single-line business subscribers. As a result, we determined that the most efficient and cost-causative method for recovering these expenses was from the end users to whom the price cap LECs' marketing was directed multi-line business and non-primary residential line end users. We therefore limited recovery of these expenses to the non-primary residential and multi-line business common line elements in the common line basket. In addition, by proceeding in this manner, we avoided potential universal service concerns relating to increasing the primary residential SLC. 85. Since the adoption of the Access Charge Reform Order, evidence has developed which demonstrates that price cap LECs incur marketing expenses relating to primary residential and single-line business services as well. Consequently, consistent with the cost-causative approach we adhered to in the Access Charge Reform Order, we now permit the recovery of these expenses from all elements in the common line basket, including the primary residential and single-line business SLC. 86. This change will have little, if any, impact on subscribers, given the existence of the SLC caps, the elimination of the primary and non-primary residential PICCs, and the distribution of these expenses across a larger subscriber base. In light of the integrated nature of the CALLS Proposal and the considerable benefits resulting from the simplification of and overall rate reductions in the common line basket, the reductions to the switched access usage charges, and the implementation of the interstate access universal service support mechanism, our prior universal service concerns relating to increasing the primary residential and single-line business SLC cap above $3.50 are allayed. The overall effect of the proposal is to lower costs for consumers. Eliminating this basket also promotes efficiency and streamlines the process by which a price cap LEC recovers its marketing expenses, while at the same time reducing the administrative costs associated with maintaining and managing this basket. Multi-line Business SLC and PICC 87. We also cap the multi-line business PICC at $4.31 and reduce it over time until it is eliminated as provided for in the CALLS Proposal. Under the CALLS Proposal, the multi-line business PICC in virtually all areas is eliminated over the next several years or can be eliminated through voluntary reductions in order to permit deaveraging. Several critics of this aspect of the proposal assert that the multi-line business PICC and SLC should be consolidated, eliminated or reduced further, and that it should be billed directly from the price cap LECs to subscribers to avoid any mark-up by IXCs. We believe for the following reasons, however, that the restructuring of the multi-line business PICC proposed in the CALLS Proposal is the better approach at this time. 88. The multi-line business PICC was established to recover revenue that would otherwise be recoverable through charges on residential and single-line business lines, and not to recover the cost of serving multi-line business lines. For most price cap LECs, a SLC of $9.00 or less fully recovers average per-line permitted revenues, and the multi-line business PICC represents a subsidy running from business long-distance users to residential users. Under current rules, this subsidy is to be phased out over time pursuant to the Access Charge Reform Order as price cap LECs are eventually able to recover their full per-line common line revenues from each line through the SLC and PICC. Under the CALLS Proposal, this subsidy also is to be phased out over time although not as quickly as it would be under our current rules. Because of rate averaging by IXCs, the overall effect of this subsidy mechanism is spread out over a large number of multi-line business subscribers which permits this subsidy to remain sustainable until we are able to reevaluate this rate structure at the end of the five-year period covered by the CALLS Proposal. At the time the multi-line business PICC was established, the Commission determined that it was a reasonable measure to avoid an adverse impact on universal service and residential customers. Maintaining this transitional mechanism continues to be a reasonable measure to avoid an adverse impact on universal service and residential customers, and is the better approach in establishing a more efficient interstate access charge rate structure consistent with our long- term universal service goals in a competitive local exchange environment. 89. We reject the opponents' arguments that the multi-line business PICC should be consolidated with the multi-line business SLC or recovered differently, because doing so would exaggerate the difference between business end-user charges in high-cost and low-cost areas and impact rate comparability between urban and rural areas. In addition, combining the multi-line business SLC and multi-line business PICC would place price cap LECs at a competitive disadvantage with competitive LECs. The multi-line business SLC is intended to recover a price cap LEC's interstate portion of local loop costs for multi-line business services, while the multi- line business PICC is intended to subsidize the price cap LEC's interstate portion of local loop costs for residential service. Competitive LECs are not regulated by the Commission and are not restricted in the same manner as price cap LECs in how they recover their costs. A combined SLC and PICC, therefore, could exceed a competitive LEC's rate that recovers its loop costs, even where the SLC alone would be less than a competitive LEC's loop cost recovery mechanism. Because the multi-line business PICC is a subsidy, this could encourage inefficient entry by competitors. 90. We also recognize, however, allegations that IXCs mark-up the multi-line business PICC well above the average rate. These commenters argue that merging the multi-line business SLC and PICC would make it subject to competitive pressures, forcing price cap LECs to lower their multi-line PICC charges to stay competitive with competitive LECs. We are troubled by these mark-up allegations and remind carriers of our statutory authority to investigate any charges that appear unreasonable or unlawful. We will not hesitate to take action on a case-by-case basis against carriers that impose unjust or unreasonable line item charges. We are hopeful, however, that the mandatory detariffing of IXC charges that recently took effect will increase the competitive pressure on IXCs to bring their multi-line business PICC pass-through closer to the average multi-line business PICC. 91. Although we will not merge the multi-line business SLC and PICC at this juncture, we will revisit this issue during the cost review proceeding scheduled to occur before the residential and single-line business SLC cap increases above $5.00. At that time, we will be better able to evaluate the long-term impact of the multi-line business PICC and competition in the IXC market. 92. In addition, the timeframe for eliminating the multi-line business PICC for most subscribers under the CALLS Proposal generally is consistent with the current timeframe under which the multi-line business PICC would be eliminated for most subscribers. For example, we estimate that by July 2004, the multi-line business PICC will be eliminated under current rules for all BOCs whereas it will be eliminated under the proposal for all BOCs except for BellSouth, which would have a multi-line business PICC at that time of approximately $0.20 per line. We also estimate that the multi-line business PICC for GTE, Sprint and some other price cap LECs will remain in some areas where it might otherwise have been eliminated under existing rules. Multi-line business PICCs also can be immediately eliminated through voluntary reductions in order to deaverage SLCs as described below. Consequently, we reject the suggestion that the proposal should be modified to accelerate the elimination of the multi-line business PICC. 93. We recognize that the continued existence of the multi-line business PICC in some areas may constitute an implicit non-portable subsidy. As the Eighth Circuit held in reviewing our Access Charge Reform Order, however, this does not violate section 254. In our Access Charge Reform Order, we created the multi-line business PICC as an interim mechanism for price cap LECs to recover permitted common line revenues they were otherwise unable to recover because of the SLC and PICC caps on primary residential and single-line business lines. Although our action today affects the cap at which the multi-line business PICC can be assessed, it does not alter the interim nature of this mechanism nor the underlying reason why we established it. The Eighth Circuit upheld this rate structure as a reasonable solution to the "implicit tension between the [Commission's] goals of moving toward cost-based rates and protecting universal service." More importantly, the CALLS Proposal phases out the multi-line business PICC for most customers until it is eliminated. At the end of the five-year term, we will examine to what extent competition and voluntary reductions have further eliminated it, and to the extent that they have not we will consider additional measures to address those areas. Although this proposal does not eliminate transitional higher rates for business users, it generally maintains the rate structure we established in our Access Charge Reform Order for the reasons stated therein, of redistributing recovery from a very few high-volume users to business users in general. The CALLS Proposal will continue to permit the charges to be sustainable during our transition to a more economically rational approach to access charges and universal service. We find that this aspect of the proposal is a reasonable measure in moving toward cost-based rates and protecting universal service. 94. We agree that freezing and eventually reducing the current combined level of multi- line business PICCs and SLCs further reduces the distortions in the current rate structure. This in turn reduces the likelihood that competitive LECs and incumbent LECs will target their investments towards urban business customers due to artificial regulatory incentives, and to a greater extent than would be required by economic efficiency. Consequently, we expect a greater proportion of competitive LEC investment in rural and residential urban areas as a result of these actions. SLC Deaveraging 95. We also modify our rules today to permit deaveraging of the SLC in the limited manner outlined in the CALLS Proposal. Granting price cap LECs more flexibility to deaverage these rates enhances the efficiency of the local telephone market by allowing prices to be tailored more easily and accurately to reflect costs and, therefore, promotes competition in both urban and rural areas. In addition, deaveraging SLCs will have the effect of reducing implicit subsidies that otherwise exist under the current rate structure. 96. Geographic deaveraging refers to charging different rates in different zones to reflect the relative costs of providing service in each zone. Since 1992, the Commission has permitted incumbent 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 subscribers of the benefits of more vigorous competition. We also have ordered the deaveraging of the rates for interconnection and unbundled elements, and permitted deaveraging of rates for trunking services as well. In doing so, we found that deaveraging reduces implicit support inherent in some rates and helps promote competition in both low-cost and high-cost areas whereas averaging across large geographic areas may distort 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 services. We found that deaveraged rates more closely reflect the actual cost of providing service, which promotes competition and efficiency by allowing a LEC to compete for subscribers when it is the lowest cost service provider, and by removing support flows to the LEC's higher-cost 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. These findings and conclusions clearly support the proposed limited deaveraging of SLCs. 97. We agree with the CALLS proponents that permitting deaveraging of the SLC under the proposed limited conditions and safeguards substantially reduces the implicit support of rural rates by urban ratepayers, and is a critical step in the development of increased competition in rural areas and the preservation of universal service. Integrating SLC deaveraging with explicit universal service support and deaveraged UNE loop rates strengthens both rural and urban competition, and ensures affordable rates. We are satisfied that by capping SLCs at affordable levels and limiting SLC deaveraging to a maximum of four zones as proposed, we satisfy the statutory principle that rates in rural, insular, and high-cost areas remain "reasonably comparable" to those in urban areas. Indeed, this action is consistent with our prior findings that three zones are presumptively sufficient to reflect geographic cost differences in setting rates for interconnection and unbundled elements. We also are satisfied that the interstate access universal service support mechanism established under CALLS is designed to ensure that subscribers in all areas of the country pay rates that are affordable and reasonably comparable. 98. Opponents of deaveraging SLCs contend that doing so complicates the administration of the SLC and potentially violates the section 254(b) principle that rates should be affordable and reasonably comparable between rural and urban areas. Opponents also argue that deaveraging makes it difficult for long-distance companies to maintain geographically averaged rates as required by section 254(g). They argue that section 254(g) is intended to incorporate the policies of geographic rate averaging and rate integration of interexchange services in order to ensure that all subscribers in rural and high-cost areas are able to continue to receive both intrastate and interstate interexchange services at rates no higher than those paid by urban subscribers. In their view, permitting SLC deaveraging evades the 1996 Act's geographic averaging mandate by shifting the interstate loop costs out of the IXCs' long-distance rates and into deaveraged SLCs to be collected from the price cap LEC's customers, rather than as averaged PICC pass-through charges imposed on the IXCs' presubscribed customers. 99. Opponents further argue that section 254(g) does not provide any exception for interstate interexchange access service provided to end users on a flat-rated basis. In their view, once the SLC is deaveraged, no rural end user in price cap LECs' service areas will be able to receive interstate interexchange services without paying more than an urban user because of the higher access costs in rural areas. In support of their position, they point out that the Commission previously recognized in the Access Charge Reform Order that letting the IXCs pass the PICCs through to their customers on a deaveraged basis might conflict with section 254(g) and "create a substantial risk that many subscribers in rural and high-cost areas may be charged significantly more than subscribers in other areas." They argue that the Commission's same analysis should prevail over any effort to achieve the deaveraging indirectly by manipulation of the cost recovery responsibility, the name of the charge, or the identity of who must pay for it. 100. We are unpersuaded by the arguments that section 254(g) applies to SLCs charged by incumbent LECs. Moreover, we disagree with the arguments that (1) the SLC, as set forth under the CALLS Proposal, represents a "rate" charged by an interexchange service provider within the meaning of section 254(g) because IXCs benefit from the SLC payment, and (2) the SLC is a "rate" of a subscriber's LEC which remains a charge for interstate interexchange service because it facilitates access to the service. The statutory rate integration requirement applies on its face only to rates charged by providers of "interexchange telecommunications services to subscribers," not to providers of interexchange access service. SLCs, which are charged by LECs, do not fall within the statutory standard. As described above, the SLC is a LEC charge designed to recover the cost of the interstate portion of facilities that subscribers use to connect to the telephone network for the purpose of making and receiving both local and interexchange calls. Therefore, the SLC is not a "rate" charged by IXCs to subscribers within the meaning of Section 254(g). 101. Moreover, we believe that interpreting this provision in the manner suggested by these commenters goes beyond what Congress intended when it incorporated geographic rate averaging and integration policies into section 254(g). These policies apply only to interexchange service, not to exchange access whether paid by the carrier or the end user. SLCs, which are charged by LECs, do not fall within the statutory standard. Indeed, our view is consistent with the current system wherein multi-line business SLCs vary from one price cap LEC to another and, even within a single LEC or LEC holding company, from study area to study area, with a low of $3.77 to a high of $9.20. More specifically, Bell Atlantic has for many years assessed a residential SLC in the District of Columbia that is lower than the residential SLCs it charges in some other states because of the lower average cost in the District of Columbia. These SLCs varied before the enactment of the 1996 Act and the adoption of the Access Charge Reform Order. Despite this occurrence, Congress did not suggest that section 254(g) was applicable to SLCs, nor has there ever been any suggestion that this variation in price cap LEC SLC rates from high-cost areas to low-cost areas violated section 254(g), or that Section 254(g) was intended to address that situation. 102. In addition, the CALLS Proposal, contrary to some arguments, does not shift IXC costs to LEC customers. Allowing the recovery of common line costs through a single end-user charge billed directly from a price cap LEC to an end user does not "evade" section 254(g) by shifting the interstate loop costs out of IXCs' long-distance rates and into deaveraged SLCs. As we have maintained, loop costs are incurred by LECs, not IXCs. The District of Columbia Circuit in NARUC v. FCC upheld our finding that "[l]ocal telephone plant costs are real; they are necessarily incurred for each subscriber by virtue of that subscriber's interconnection into the local network, and they must be recovered regardless of how many or how few interstate calls (or local calls for that matter) a subscriber makes." Therefore, requiring price cap LECs to bill their own customers for a cost they are in fact required by law to incur - because use of the loop is a mandatory component of universal service is not an end-run around the statute. The proposal does not shift IXC costs to price cap LEC customers. The fact that CCL charges and the recently created PICC have resulted in some of these costs being passed on to IXCs (and subsequently recovered through end-user pass-through charges) does not forever transform loop costs into an IXC cost. These costs are, in fact, LEC costs, regardless whether they are recovered directly from end users or recovered indirectly through IXC payments that are then passed onto end users. 103. In addition, we are unpersuaded by the arguments that our previous decision not to forbear from applying section 254(g) to the recovery of IXC costs through the PICC pass- through charges precludes us from permitting the deaveraging of SLCs by LECs. Our decision at that time was in response to some IXCs' requests for the Commission to forbear from applying section 254(g) to the recovery of their PICC costs through charges to end users. At that time, the IXCs offered nothing in support of their request other than that the action was necessary in response to LECs' recovery of NTS common line costs through deaveraged rates assessed on IXCs. We concluded that they failed to demonstrate in the record that they met the forbearance test set forth in Section 10(a) of the 1996 Act, and denied their request. That finding is irrelevant to a determination that a charge not covered by section 254(g) should be allowed to be deaveraged. 104. We also find no basis in this record to conclude that interexchange rates under the CALLS Proposal would be higher for rural than urban customers. Indeed, we believe that eliminating the geographic disparity of the PICC will make IXC costs more uniform, and thus make complying with section 254(g) less difficult for IXCs. For example, price cap LEC PICC assessments range from $0 to $4.31, resulting in geographic disparity for IXCs which recover the PICC through charges to end users on an averaged basis, even in areas where PICCs are not assessed on them. 105. We also are unpersuaded by the arguments of some opponents that the SLC deaveraging provisions of the CALLS Proposal conflict with the reasonable rate comparability principle of section 254(b)(3) of the 1996 Act. On the contrary, the CALLS Proposal's SLC deaveraging provisions are consistent with our interpretation of section 254(b)(3). As we concluded in the Universal Service Seventh Report and Order, the "reasonably comparable" rate provisions of section 254(b)(3) were intended as a national, as opposed to a state-by-state, comparison. This standard refers to "a fair range of urban/rural rates both within a state's borders, and among states nationwide." This does not mean that rate levels in all states, or in every area of every state, must be the same. As the local exchange market becomes more competitive, we believe that it would be unreasonable to expect rate levels not to vary to reflect the varying costs of serving different areas. Therefore, the goal of maintaining a "fair range" of rates means that support levels must be sufficient to prevent pressure from high costs in certain areas and the development of competition from causing unreasonable increases in rates in the high-cost areas above affordable levels. 106. Section 254(b)(3) permits the use of federal support to enable reasonable rate comparability among states. The approach for enabling rate comparability which we previously adopted relies not on a national urban rate, but rather on a methodology that ensures that no state will face per-line costs that substantially exceed the costs faced by other states, taking into account the individual state's ability to support its own universal service needs. In this way, we seek to ensure that every state has at its disposal the means to achieve reasonable comparability of rates in that state. 107. The CALLS Proposal is consistent with our interpretation of section 254(b)(3) and satisfies the requirements of the statute. It protects high-cost subscribers by providing that no SLC, whether averaged or deaveraged, may exceed the overall proposed SLC caps. Although prices will begin to reflect geographic variations in the forward-looking cost of providing service, newly explicit universal service support will protect rural subscribers against substantial rate increases. This approach is consistent with prior actions we have taken in furtherance of our universal service goals. For example, we previously capped SLC adjustments as a means of preventing end users in high-cost areas from paying SLCs that are significantly higher than in other parts of the country in order to ensure that all subscribers receive affordable rates that are comparable in different parts of the nation. The CALLS Proposal's SLC cap is consistent with this approach, and ensures that end users in high-cost areas do not pay SLCs that are significantly higher than in low-cost areas. 108. We also believe that the Lifeline and Universal Service Fund aspects of the CALLS Proposal address to some extent concerns about potential rate increases to high-cost customers as a result of the geographic deaveraging aspects of the proposal. Under the CALLS Proposal, Lifeline support will be increased so that all of the increased SLC is waived for Lifeline customers, with carriers reimbursed from the Universal Service Fund. Although Lifeline customers today pay no SLC, they must pay IXC-billed PICC charges, unless the IXC voluntarily waives that fee. The CALLS Proposal therefore benefits Lifeline customers by eliminating the PICCs and by ensuring that their fixed monthly charges do not increase in the future. 109. We disagree with the argument that deaveraged UNEs should be the sole trigger for deaveraging, and that the remaining proposed safeguards should be eliminated. As in the case of the trunking basket and the deaveraging provisions in our Pricing Flexibility Order, the proposed safeguards generally reflect minimum revenue requirements for pricing zones and limits on price increases that are simple and easily verified. These limitations also generally are consistent with the comments filed by some CALLS opponents on this issue in response to the Further Notice of Proposed Rulemaking in the Pricing Flexibility Order. We find therefore, that the public interest benefits associated with maintaining the proposed safeguards outweigh the benefits that might accrue