[Federal Register Volume 60, Number 75 (Wednesday, April 19, 1995)]
[Rules and Regulations]
[Pages 19526-19528]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-9571]



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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 61

[CC Docket No. 94-1; FCC 95-132]


Price Cap Performance Review for Local Exchange Carriers

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: On March 30, 1995, the Federal Communications Commission 
adopted a First Report and Order revising its price cap regulations 
applicable to local exchange carriers (LECs). The Commission adopted 
these Rule revisions as a result of a performance review of LEC price 
cap regulation, which the Commission scheduled when it originally 
adopted LEC price cap regulation in 1990, to evaluate the price cap 
system as implemented and LEC performance under that system. The 
Commission's rule revisions increase value of the productivity offset 
factor in the price cap formula, provide three options for the 
productivity offset factor, revise the rules governing sharing 
obligations, and require a one-time reduction in the LECs' price cap 
indexes. The Commission also limits the number of cost changes 
resulting from changes in accounting rules that are eligible for 
exogenous cost treatment, and extends exogenous cost treatment to cost 
changes resulting from the sales or swaps of exchanges. In addition, 
the Commission states its intention to issue a further notice of 
proposed rulemaking in the near future, to consider adopting other rule 
changes on a long-term basis. Finally, the Commission delegates 
authority to the Common Carrier Bureau to determine appropriate 
adjustments for LECs to make appropriate adjustments to their price cap 
indexes, to account for these effects caused by rescheduling their 1995 
annual access filings.

EFFECTIVE DATE: May 19, 1995.

FOR FURTHER INFORMATION CONTACT: Joanne F. Wall or Steven Spaeth, 
Tariff Division, Common Carrier Bureau, (202) 418-1530.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's First 
Report and Order adopted March 30, 1995, and released April 7, 1995. 
The full text of this Commission decision is available for inspection 
and copying during normal business hours in the FCC Public Reference 
Room (Room 230), 1919 M. St., N.W., Washington, D.C. The complete text 
of this decision may also be purchased from the Commission's copy 
contractor, International Transcription Service, Suite 140, 2100 M 
Street, N.W., Washington, D.C. 20037.

Regulatory Flexibility Analysis

    We have determined that Section 605(b) of the Regulatory 
Flexibility Act of 1980, 5 U.S.C. Sec. 605(b), does not apply to these 
rules because they do not have a significant economic impact on a 
substantial number of small entities. The definition of a ``small 
entity'' in Section 3 of the Small Business Act excludes any business 
that is dominant in its field operation. Local exchange carriers do not 
qualify as small entities because they have a nationwide monopolicy on 
ubiquitous access to the subscribers in their service area. The 
Commission also has found all exchange carriers to be dominant in its 
competitive carrier proceeding. See 85 FCC 2d 1, 23-24 (1980).
    To the extent that small telephone companies will be affected by 
these rules, we hereby certify that these rules will have a significant 
effect on a substantial number of ``small entities.''

Summary of Report and Order

    In this Order, we adopted revisions to the productivity offset 
factor, or ``X-Factor,'' of the price cap index formula. In the 
formula, the X-Factor, which represents the amount by which local 
exchange carriers have been more productive than the economy as a 
whole, is subtracted from the Gross National Product Price Index (GNP-
PI), a measure of inflation. In general, LEC prices are not permitted 
to increase more than the rate established by the [[Page 19527]] cap. 
Three X-Factor options are provided: 4.0, 4.7 and 5.3 percent.
    We also adopt revisions to the LECs' sharing obligations, which are 
treated as downward adjustments of the price cap. Specifically, the 50-
50 sharing zone for the 4.0 percent X-Factor option ranges from 12.25 
to 13.25 percent rate return; the 100 percent sharing zone for this 
option begins at 13.25 percent. The sharing obligations for the 4.7 
percent X-Factor requires 50-50 sharing for LECs with rates of return 
between 12.25 and 16.25 percent, and 100 percent sharing for LECs with 
rates of return above 16.25 percent. We have eliminated sharing 
obligations for LECs electing the high-options X-Factor, 5.3 percent.
    We also conclude that the current 3.3 percent X-Factor was 0.7 
percent too low during the first four years of price cap regulations. 
Accordingly, we require LECs to adjust their price cap indexes downward 
by 0.7 percent for each year from 1990 to 1994 that they elected the 
3.3 percent productivity offset factor.
    We also revise our rules governing exogenous costs in two ways. 
Exogenous costs are treated as either downward or upward adjustments to 
the price cap. First, we will allow exogenous cost adjustments for 
accounting changes only to the extent those accounting revisions result 
in economic cost changes, e.g., they affect the discounted cash flow of 
the carrier. We consider accounting rule changes as economic cost 
changes only to the extent those changes affect the discounted cash 
flow of the carrier. Second, we establish procedures for LECs to follow 
when seeking exogenous treatment for cost changes. Parties will be 
required to raise the issue of whether to treat any cost change 
exogenously in a petition for rulemaking, petition for declaratory 
ruling, or petition for waiver.
    Finally, we adopt a number of minor revisions to the LEC price cap 
plan. We find that there is sufficient evidence to allow carriers 
greater flexibility to lower prices within service bands without 
risking predation or cross-subsidization. Therefore, we expand the 
lower pricing bands that apply to the service categories within the 
traffic sensitive and trunking baskets and to density pricing zones by 
5 percent. We also will require LECs to treat cost reductions resulting 
from sales or swaps of exchanges to be treated exogenously as a 
condition placed on the grant of any waiver of the study area boundary 
rules. Finally, we change the inflation measure in the price cap index 
formula from Gross National Product Price Index (GNP-PI) to Gross 
Domestic Product Price Index (GDP-PI).

Ordering Clauses

    Accordingly, it is ordered, pursuant to authority contained in 
Sections 4(i), 4(j), 201-205, 303(r), and 403 of the Communications Act 
of 1934, as amended, 47 U.S.C. 154(i), 154(j), 201-205, 303(r), 403, 
and Section 553 of Title 5, United States Code, that Part 61 of the 
Commission's Rules, 47 C.F.R. Part 61 is amended as set forth below.
    It is further ordered that authority is delegated to the Chief, 
Common Carrier Bureau, to determine that adjustments are necessary to 
the price cap indexes, actual price indexes, and service band indexes 
of local exchange carriers, to account for the effects of the revised 
effective date of the 1995 annual access filings of local exchange 
carriers under price cap regulation, and to establish a pleading cycle 
for review of those tariffs.
    It is further ordered that the provisions in this Report and Order 
will be effective 30 days after Federal Register publication.

List of Subjects in 47 CFR Part 61

    Communications common carriers, Tariffs.

Federal Communications Commission.
William F. Caton,
Acting Secretary.

    Part 61 of Title 47 of the CFR is amended as follows:

PART 61--TARIFFS

    1. The authority citation continues to read as follows:

    Authority: Secs. 1, 4(i), 4(j), 201-205, and 403 of the 
Communications Act of 1934, as amended; 47 U.S.C. 151, 154(i), 
154(j), 201-205, and 403, unless otherwise noted.

    2. Section 61.3 is amended by redesignating paragraphs (p) through 
(ll) as (q) through (mm), and by adding a new paragraph (p) to read as 
follows:


Sec. 61.3  Definitions.

* * * * *
    (p) GDP Price Index (GDP-PI). The estimate of the ``Fixed Weight 
Price Index for Gross Domestic Product, 1987 Weights'' published by the 
United States Department of Commerce, which the Commission designates 
by Order.
* * * * *
    3. Section 61.45 is amended by revising paragraphs (b) and (c), the 
introductory text of paragraphs (d) and (d)(1) and paragraphs 
(d)(1)(ii), (d)(1) (vi) and (e) to read as follows:


Sec. 61.45  Adjustments to the PCI for Local Exchange Carriers.

* * * * *
    (b) Adjustments to local exchange carrier PCIs for the baskets 
designated in Sec. 61.42(d) (2), (3) and (4) shall be made pursuant to 
the formula set forth in Sec. 61.44(b), and as further explained in 
Secs. 61.44 (e), (f), (g), and (h).
    (1) Notwithstanding the value of X defined in Sec. 61.44(b), the X 
value applicable to the baskets specified in Sec. 61.42(d) (2) and (3) 
shall be 4.0%, or 4.7%, or 5.3%, as the carrier elects.
    (2) For the basket specified in Sec. 61.42(d)(4), the value of X 
shall be 3.0%, or 3.7%, or 4.3%, as the carrier elects.
    (c) Subject to paragraph (e) of this section, adjustments to local 
exchange carrier PCIs for the basket designated in Sec. 61.42(d)(1) 
shall be made pursuant to the following formula:

PCI1=PCIt-1[1+w[(GDP-PI-X-(g/2))/(1+(g/2))]+Z/R]
where
GDP-PI=the percentage change in the GDP-PI between the quarter ending 
six months prior to the effective date of the new annual tariff and the 
corresponding quarter of the previous year,
X=productivity factor of 4.0%, or 4.7%, or 5.3% if the carrier so 
elects,
g=the ratio of minutes of use per access line during the base period, 
to minutes of use per access line during the previous base period, 
minus 1,
Z=the dollar effect of current regulatory changes when 
compared to the regulations in effect at the time the PCI was updated 
to PCIt-1, measured at base period level of operations,
R=base period quantities for each rate element ``i'', multiplied by the 
price for each rate element ``i'' at the time the PCI was updated to 
PCIt-1,
w=R+Z, all divided by R,
PCIt=the new PCI value, and
PCIt-1=the immediately preceding PCI value.

    (d) The exogenous cost changes represented by the term 
``Z'' in the formula detailed in paragraphs (b) and (c) of 
this section shall be limited to those cost changes that the Commission 
shall permit or require by rule, rule waiver, or declaratory ruling.
    (1) Subject to further order of the Commission, those exogenous 
changes shall include cost changes caused by:
* * * * *
    (ii) Such changes in the Uniform System of Accounts, including 
changes in the Uniform System of Accounts requirements made pursuant to 
Sec. 32.16 [[Page 19528]] of this chapter, as the Commission shall 
permit or require be treated as exogenous by rule, rule waiver, or 
declaratory ruling.
* * * * *
    (vi) Such tax law changes and other extraordinary cost changes as 
the Commission shall permit or require be treated as exogenous by rule, 
rule waiver, or declaratory ruling.
* * * * *
    (e) The ``w[(GDP-PI-X-[g/2))/(1+(g/2))]'' component of the PCI 
formula contained in paragraph (c) of this section shall be employed 
only in the adjustment made in connection with the annual price cap 
filing.
* * * * *
    7. Section 61.47 is amended by revising paragraphs (e), (g)(1), 
(g)(2), (g)(4), and (h)(2) to read as follows:


Sec. 61.47  Adjustments to the SBI; pricing bands.

* * * * *
    (e) Pricing bands shall be established each tariff year for each 
service category and subcategory within a basket. Except as provided in 
paragraphs (f), (g), and (h) of this section, each band shall limit the 
pricing flexibility of the service category or subcategory, as 
reflected in the SBI, to an annual increase of five percent or an 
annual decrease of ten percent, relative to the percentage change in 
the PCI for that basket, measured from the levels in effect on the last 
day of the preceding tariff year.
* * * * *
    (g) (1) Local Exchange Carriers--Service categories and 
subcategories. Local exchange carriers subject to price cap regulation 
as that term is defined in Sec. 61.3(w) shall use the methodology set 
forth in paragraphs (a) through (d) of this section to calculate two 
separate subindexes: One for the DS1 services offered by such carriers 
and the other for the DS3 services offered by such carriers. The annual 
pricing flexibility for each of these two subindexes shall be limited 
to an annual increase of five percent or an annual decrease of ten 
percent, relative to the percentage change in the PCI for the special 
access services basket, measured from the last day of the preceding 
tariff year.
    (2) The upper pricing band for the tandem-switched transport 
service category shall limit the annual upward pricing flexibility for 
this service category, as reflected in its SBI, to two percent, 
relative to the percentage change in the PCI for the trunking basket, 
measured from the levels in effect on the last day of the preceding 
tariff year. The lower pricing band for the tandem-switched transport 
service category shall limit the annual downward pricing flexibility 
for this service category, as reflected in its SBI, to ten percent, 
relative to the percentage change in the PCI for the trunking basket, 
measured from the levels in effect on the last day of the preceding 
tariff year.
* * * * *
    (4) Local exchange carriers subject to price cap regulation as that 
term is defined in Sec. 61.3(v) shall use the methodology set forth in 
paragraphs (a) through (d) of this section to calculate a separate 
subindex for the 800 data base vertical features offered by such 
carriers. The annual pricing flexibility for this subindex shall be 
limited to an annual increase of five percent or an annual decrease of 
ten percent, relative to the percentage change in the PCI for the 
traffic sensitive basket, measured from the last day of the preceding 
tariff year.
* * * * *
    (h) * * *
    (2) The annual pricing flexibility for each of the subindexes 
specified in paragraph (h)(1) of this section shall be limited to an 
annual increase of five percent or an annual decrease of fifteen 
percent, relative to the percentage change in the PCI for the trunking 
basket, measured from the levels in effect on the last day of the 
proceeding tariff year.
    12. Section 61.48 is amended by revising paragraphs (h)(3)(ii)(B), 
(h)(5)(i), (i)(3)(ii)(B), and (i)(4)(ii) to read as follows:


Sec. 61.48  Transition rules for price cap formula calculations.

* * * * *
    (h) * * *
    (3) * * *
    (ii) * * *
    (B) 0.90 times the SBI value for the special access services 
included in the category or subcategory on the day preceding the 
transport restructure date, weighted by the revenue weight of the 
transport services included in the category or subcategory.
* * * * *
    (5) * * *
    (i) The upper pricing band for the tandem-switched transport 
service category shall limit the upward pricing flexibility for this 
service category, as reflected in its SBI, to two percent, measured 
from the initial restructured rates for tandem-switched transport. The 
lower pricing band for the tandem-switched transport service category 
shall limit the downward pricing flexibility for this service category, 
as reflected in its SBI, to ten percent, measured from the initial 
restructured rates for tandem-switched transport.
* * * * *
    (i) * * *
    (3) * * *
    (ii) * * *
    (B) 0.85 times the SBI value for the services included in the zone 
category on the day preceding the later date, weighted by the revenue 
weight of the later services included in the zone category.
* * * * *
    (4) * * *
    (ii) From the later date through the end of the following tariff 
year, the annual pricing flexibility for each of the subindexes 
specified in paragraph (i)(4)(i) of this section shall be limited to an 
annual increase of five percent or an annual decrease of fifteen 
percent, relative to the percentage change in the PCI for the trunking 
basket, measured from the levels in effect on the last day of the 
tariff year preceding the tariff year in which the later date occurs.
* * * * *
[FR Doc. 95-9571 Filed 4-18-95; 8:45 am]
BILLING CODE 6712-01-M