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File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ************************************************************************* FCC 96-454 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) Policy and Rules Concerning ) CC Docket No. 87-313 Rates for Dominant Carriers ) ) Revisions to Price Cap Rules ) CC Docket No. 93-197 for AT&T ) ORDER Adopted: November 21, 1996; Released: November 26, 1996 By the Commission: I. INTRODUCTION 1. In this order, we terminate as moot proceedings concerning the treatment of AT&T Corp.'s (AT&T) offerings of promotions and optional calling plans (OCPs) under price cap regulation in light of our determination that AT&T is non-dominant and the resultant removal of AT&T's services from price cap regulation. II. BACKGROUND 2. In 1989, the Commission replaced traditional rate of return regulation with an incentive-based system of regulation, called price caps, for most of AT&T's services. To implement the price cap system, the Commission defined three categories of AT&T services, or baskets, and defined a price cap index (PCI) for each basket. The basket structure was designed so that AT&T would not be able to raise prices for services in one basket in order to lower prices for dissimilar services in another basket. Therefore, a change in rates in one basket or in services outside of price caps would not affect either the PCI or the actual price index (API) for the other baskets. 3. The Commission was silent in the AT&T Price Cap Order as to the treatment of promotional rates under price caps. After the Commission adopted the price cap rules, AT&T filed tariffs for a significant number of promotions in which it treated the rates associated with these offerings as rate reductions for purposes of API calculations. MCI Telecommunications Corporation (MCI) and Sprint Communications Company LP (Sprint) sought reconsideration of the AT&T Price Cap Order, requesting clarification of the price cap treatment of promotions. In the AT&T Price Cap Reconsideration Order, the Commission decided to exclude promotions from the price cap index prospectively. It reasoned that including promotional rates in price caps would give AT&T a greater degree of flexibility than warranted to offset the discounted promotional rates with increases in residential and small business rates within Basket 1. 4. AT&T sought judicial review of the AT&T Price Cap Reconsideration Order. The United States Court of Appeals for the District of Columbia Circuit found that the Commission's decision to exclude promotional tariffs from the price cap index was not a reasoned decision supported by the record. The court remanded the AT&T Price Cap Reconsideration Order to the Commission with instructions either to show that its action was a clarification of the original AT&T Price Cap Order, or to "offer a reasoned explanation of why promotional rates should be treated differently from other rates." 5. In response, the Commission vacated its prior decision on this issue and issued the Promotions NPRM in Docket 87-313. In the Promotions NPRM, the Commission tentatively concluded that promotions should be excluded from price cap regulation prospectively. The Commission found that AT&T was able to insulate itself from revenue losses created by promotional discounts by raising its rates for other residential services in Basket 1. The Commission relied upon evidence that AT&T had taken advantage of any downward price flexibility generated by promotions to raise other rates in Basket 1, thereby keeping aggregate rates at the price cap maximum. According to the Commission, "[p]ermitting promotional offerings to be used as a basis for raising basic schedule rates, without limitation, would strongly encourage the proliferation of excessive promotional offerings and undercut the efficiency incentives of the price cap program." As an alternative, the Commission sought comment on whether to treat promotions as either new or restructured services. 6. In the OCP NPRM, the Commission tentatively concluded that the ReachOut category of services (i.e., most domestic MTS OCPs) should be removed from Basket 1 because there is substantial competition among providers of discounted residential services. The Commission sought comment on whether the treatment of OCPs under the AT&T price cap plan should be changed, and, if so, in what manner. Specifically, the Commission sought comment on whether it should adjust the API or the PCI for Basket 1 to reflect the removal of OCPs from Basket 1. As an alternative to removal of OCPs from price cap regulation, it asked for comment on whether OCPs should remain subject to price cap regulation, but be placed in a separate basket. 7. Because the issues presented in determining the regulatory treatment of promotions and OCPs were closely related, we consolidated these issues in a Further Notice of Proposed Rulemaking. In the Further Notice, we made several tentative conclusions. We determined that Basket 1 domestic MTS promotions, domestic MTS OCPs, and basic schedule MTS offerings exhibit significant cross-elasticities of demand and are generally offered to the same class of customers, i.e., residential customers, following the removal of AT&T's domestic commercial services from price cap regulation. If we removed domestic MTS OCPs and promotions from price caps, the result would be that some of AT&T's offerings of domestic MTS for residential customers would be streamlined while retaining price cap regulation for similar offerings to the same class of customers. We declined to take this step and determined that the issue of further streamlining of OCPs and promotions might be better considered together with AT&T's motion for non-dominant status in a separate proceeding. We did propose, however, a number of related modifications to AT&T's price cap plan. Specifically, we recommended that, because promotions and OCPs are simply different ways of pricing the same service, they should be redefined as alternative pricing plans (APPs) for domestic, residential MTS, which co-exist with the basic domestic MTS rate schedule. 8. On October 23, 1995, we released an order granting AT&T's motion to be reclassified as a non-dominant carrier. The Commission defined the relevant product and geographic market for AT&T, under the Competitive Carrier paradigm, as the interstate, domestic, interexchange market. We then decided that the appropriate standard to evaluate AT&T's reclassification request was whether AT&T possessed market power in the overall relevant market, even if AT&T has the ability to control the prices of one or more services. Applying this standard to the record, the Commission concluded that the market structure characteristics and the indicia of market conduct and performance all indicate that AT&T lacks market power in the interstate, domestic, interexchange market. 9. The Commission noted that the reclassification of AT&T as a non-dominant carrier would free AT&T from price cap regulation for its residential, operator, 800 directory assistance, and analog private line services. By subsequent order, we removed AT&T's international services from price cap regulation as well, thus completing the process of ending price cap regulation of AT&T. III. DISCUSSION 10. In the AT&T Reclassification Order, we granted AT&T's motion to be reclassified as a non-dominant carrier. The reclassification of AT&T as a non-dominant carrier resulted in the end of price cap regulation for AT&T's residential, operator, 800 directory assistance, and analog private line services. Since AT&T's domestic MTS, including promotions and OCPs, is no longer subject to price caps, the issues raised in our tentative conclusions and proposals in the Further Notice concerning whether to remove promotions and OCPs from price cap regulation are now moot. Similarly, the issues raised by the D.C. Circuit in the Remand Order in CC Docket No. 87-313 are moot. Accordingly, we will terminate as moot CC Docket Nos. 87-313 and 93-197. IV. ORDERING CLAUSE 11. Accordingly, IT IS ORDERED that CC Docket Nos. 87-313 and 93-197 ARE TERMINATED as moot. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary