[Federal Register Volume 62, Number 21 (Friday, January 31, 1997)]
[Proposed Rules]
[Pages 4670-4717]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2142]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 61 and 69

[CC Docket Nos. 96-262, 94-1, 91-213, 96-263; FCC No. 96-488]


Access Charge Reform; Price Cap Performance Review for Local 
Exchange Carriers; Transport Rate Structure and Pricing; Usage of the 
Public Switched Network by Information Service and Internet Access 
Providers

AGENCY: Federal Communications Commission.

ACTION: Proposed rule.

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SUMMARY: The Notice of Proposed Rulemaking (NPRM) begins a review of 
the Commission's interstate access charge rules, together with its 
price cap rules, to establish fair rules of competition for both the 
local and long distance markets and determine the extent to which it 
must revise these rules in light of the local competition and Bell 
Operating Company entry provisions of the 1996 Act and state actions to 
open local networks to competition, the effects of potential and actual 
competition on incumbent LEC pricing for interstate access, and the 
impact of the Act's mandate to preserve and enhance universal service. 
The Commission outlines two possible approaches for addressing claims 
that existing access charge levels are excessive, for establishing a 
transition to access charges that more closely reflect economic costs, 
and for deregulating incumbent LEC exchange access services as 
competition develops in the local exchange and exchange access markets. 
The first approach is a market-based approach under which the 
Commission would rely on potential and actual competition from new 
facilities-based providers and entrants purchasing unbundled network 
elements to drive prices for interstate access services toward economic 
cost. The second approach is a prescriptive one under which the 
Commission would specify the nature and timing of the changes to the 
existing rate levels.

DATES: Comments for the notice of proposed rulemaking are due January 
27, 1997,\1\ and replies are due February 13, 1997. Comments for the 
notice of inquiry are due no later than March 3, 1997, and replies are 
due April 1, 1997.

    \1\ Note: This document was received at the Office of the 
Federal Register on January 24, 1997.
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FOR FURTHER INFORMATION CONTACT: Richard Lerner, Attorney, Common 
Carrier Bureau, Competitive Pricing Division, (202) 418-1530. For 
additional information concerning the information collections contained 
in this Report and Order contact Dorothy Conway at 202-418-0217, or via 
the Internet at [email protected].

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Notice 
of Proposed Rulemaking adopted December 23, 1996, and released December 
24, 1996. The full text of this Proposed Rulemaking is available for 
inspection and copying during normal business hours in the FCC 
Reference Center (Room 239), 1919 M St., NW., Washington, DC. The 
complete text also

[[Page 4671]]

may be obtained through the World Wide Web, at http://www.fcc.gov/
Bureaus/Common_Carrier/Notices/fcc96488.wp, or may be purchased from 
the Commission's copy contractor, International Transcription Service, 
Inc., (202) 857-3800, 2100 M St., NW., Suite 140, Washington, DC 20037. 
Pursuant to the Telecommunications Act of 1996 and the decision by the 
Circuit Court of Appeals for the District of Columbia in Competitive 
Telecommunications Association v. FCC, 87 F.3d 522 (D.C. Cir. 1996) 
(CompTel v. FCC), the Commission is releasing this NPRM to seek comment 
on rules that would bring about cost-based access rates.

General

    In passing the 1996 Act, Congress sought to establish a pro-
competitive, deregulatory national policy framework for the United 
States telecommunications industry. The NPRM commences the third in a 
trilogy of actions that collectively are intended to foster and 
accelerate the introduction of efficient competition in all 
telecommunications markets, pursuant to the mandate of the 1996 Act. In 
August 1996, the Commission adopted rules to implement Sections 251 and 
252 of the 1996 Act, which establish the basic obligations of carriers, 
especially in the local exchange and exchange access markets. In 
November 1996, pursuant to Section 254 of the 1996 Act, the Federal-
State Universal Service Joint Board issued its recommendations to the 
Commission for reforming its system of universal service support so 
that universal service is preserved and advanced, but in a manner that 
permits the local exchange and exchange access markets to move from 
monopoly to competition. The NPRM seeks comment on proposals to reform 
our system of interstate access charges to make it compatible with the 
competitive paradigm established by the 1996 Act and state actions to 
open local networks to competition.

Scope

    Depending on the individual proposal, the proposed rule revisions 
considered in this NPRM apply to all LECs, only to incumbent LECs, or 
only to incumbent price cap LECs. The NPRM generally proposes adopting 
rules applicable only to price cap LECs, with certain limited 
exceptions. Reforms in two areas would apply to all incumbent LECs: (1) 
The proposals regarding reform of the transport rate structure, 
including the transport interconnection charge (TIC); and (2) the 
effects of the universal service changes under section 254 that the 
Commission will adopt based upon the Joint Board Recommended Decision. 
Federal-State Joint Board on Universal Service, CC Docket No. 96-45, 
Recommended Decision, 61 FR 63778 (December 2, 1996) (Joint Board 
Recommended Decision). The Commission also asks whether its common line 
rate structure modifications should also apply to rate-of-return LECs. 
The NPRM also seeks comment on whether terminating access services of 
non-incumbent LECs should be regulated. The NPRM states that the 
Commission will undertake comprehensive access reform for rate-of-
return incumbent LECs in a separate NPRM.

Part 69 Access Rate Structure

    The NPRM seeks comment on a number of proposals to revise the 
access rate structure rules so that they better reflect the manner in 
which LECs incur costs when providing access. Following up on the Joint 
Board's observation in the Universal Service Recommended Decision that 
the current per-minute CCL charge is inefficient because common line 
costs generally are not traffic sensitive, the NPRM seeks comment on 
assessing a flat charge on IXCs on a per-presubscribed interexchange 
carrier (PIC) basis, or on end users in cases where the end user has 
not selected a PIC. The NPRM also seeks comment on permitting LECs to 
assess flat monthly charges to recover the non-traffic-sensitive 
portion of local switching costs and permitting LECs to establish a 
per-message call setup charge.
    The NPRM also proposes to adopt a permanent transport rate 
structure, including phasing out the TIC. The NPRM seeks comment on how 
the transport rate structure should be modified and addresses issues 
raised in Comptel v. FCC. The NPRM seeks comment on alternative 
resolutions to the TIC, including reassigning TIC costs to facility-
based access charges or to nonregulated activities; leaving some or all 
of the costs in the TIC, subject to competitive market pressures; a 
combination of the previous two approaches; or phasing TIC costs out 
over a predetermined schedule.

Access Reform

    The NPRM proposes that, regardless of the approach adopted for 
access reform, the goal should be deregulation in the presence of 
substantial competition. The NPRM seeks comment on how to determine 
when substantial competition exists.
    The NPRM seeks comment on alternative approaches for access reform: 
a market-based approach, a prescriptive approach, or some combination 
of the two approaches. It seeks comment on which would be the best 
means to drive access rates to levels that would enable the Commission 
to deregulate the interstate access market. A market-based approach to 
access reform would rely on competition to move access prices toward 
economic levels, and lift regulatory constraints in phases as 
competition allows. The prescriptive approach would entail more 
Commission involvement in moving access prices toward economic levels. 
The NPRM seeks comment on whether the Commission should require 
incumbent LECs to reprice their access services based on TSLRIC 
studies. The NPRM also seeks comment on other methods of re-
initializing price cap indices and on increasing the X-Factor as 
methods to drive access rates toward forward-looking economic costs, if 
the Commission were to adopt a prescriptive approach to access reform.

Impact on Universal Service Proceeding

    The NPRM observes that universal service funding may replace some 
of the revenues collected by the carrier common line charge or other 
interstate access charges, and tentatively concludes that a downward 
exogenous cost adjustment to the LECs' price cap indices should be made 
to reflect any allocation of additional universal service funds to the 
interstate jurisdiction. The NPRM also invites parties to comment on 
whether this downward adjustment should be across-the-board, or 
targeted to a particular basket or service category.

Transition

    IXCs and incumbent LECs agree that a significant ``gap'' exists 
between the forward-looking, economic cost of providing unbundled 
network elements and the embedded costs on which existing access 
charges are based. The NPRM seeks comment on how this gap should be 
calculated, and on several specific proposals for permitting LECs an 
opportunity to recover some or all of that cost difference. The NPRM 
also seeks comment on whether any cost difference resulting from 
``under-depreciation'' warrants separate treatment from residual costs 
resulting from other factors.

Terminating Access

    The NPRM observes that, although the called party chooses the 
terminating access provider, terminating access charges are not imposed 
on the called party. As a result, competitive LECs may

[[Page 4672]]

exercise market power over terminating access. Therefore, the NPRM 
seeks comment on whether there is need for any regulation of 
terminating access offered by new entrants.

ESP Exemption

    The NPRM and Notice of Inquiry observe that Internet usage has 
increased dramatically in recent years. The Commission seeks comment on 
the effects of this increased traffic on the public switched network, 
and on whether the Commission should address the BOCs' request that the 
Commission modify or eliminate the exemption from access charges that 
enhanced service providers (ESPs) currently receive.

Regulatory Flexibility Analysis

    As required by the Regulatory Flexibility Act, the NPRM contains an 
Initial Regulatory Flexibility Analysis which is set forth in Section 
XI.C of the NPRM.

Paperwork Reduction Act

    This NPRM contains either a proposed or modified information 
collection. The Commission, as part of its continuing effort to reduce 
paperwork burdens, invites the general public and the Office of 
Management and Budget (OMB) to comment on the information collections 
contained in this NPRM, as required by the Paperwork Reduction Act of 
1995, Public Law No. 104-13. Public and agency comments are due at the 
same time as other comments on this NPRM; OMB notification of action is 
due 60 days after publication of this summary in the Federal Register. 
Comments should address: (a) whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the Commission, including whether the information shall have practical 
utility; (b) the accuracy of the Commission's burden estimates; (c) 
ways to enhance the quality, utility, and clarity of the information 
collected; and (d) ways to minimize the burden of the collection of 
information on the respondents, including the use of automated 
collection techniques or other forms of information technology.
    Public reporting burden for the collection of information is 
estimated as follows:
    OMB Approval Number: None.
    Title: Access Charge Reform.
    Form No.: N/A.
    Type of Review: New collection.

----------------------------------------------------------------------------------------------------------------
                                      No. of                                                                    
      Information collection       respondents  Annual hour burden per response        Total annual burden      
                                    (approx.)                                                                   
----------------------------------------------------------------------------------------------------------------
Market-based Approach............           13  137,986 hours..................  1,793,818 hours.               
Prescriptive Approach............           13  400 hours......................  5200 hours.                    
Transition Mechanism for access             13  220 hours......................  2840 hours.                    
 charges.                                                                                                       
Regulating Terminating Access....         3497  26 hours.......................  90,922 hours.                  
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    Total Annual Burden: 1,895,620 hours.
    Respondents: Business or other for-profit.
    Estimated costs per respondent: $0.
    Needs and Uses: The NPRM would use the data submission under 
consideration to bring about competition in the access charge market, 
and to bring about cost-based access charges.
    Dates: Comments are due on or before January 27, 1997, and Reply 
Comments are due on or before February 13, 1997. Written comments must 
be submitted by the Office of Management and Budget (OMB) on the 
proposed and/or modified information collections on or before 60 days 
after publication of this summary in the Federal Register.

SYNOPSIS OF NOTICE OF PROPOSED RULEMAKING, AND NOTICE OF INQUIRY

I. Introduction

A. Overview

    1. In passing the Telecommunications Act of 1996 (1996 Act), 
Congress sought to establish ``a pro-competitive, de-regulatory 
national policy framework'' for the United States telecommunications 
industry. With this NPRM, we commence the third in a trilogy of actions 
that collectively are intended to foster and accelerate the 
introduction of efficient competition in all telecommunications 
markets, pursuant to the mandate of the 1996 Act. In August 1996, as 
required by the 1996 Act, we adopted rules to implement Sections 251 
and 252 of the Act, which establish the basic obligations of carriers, 
especially in the local exchange and exchange access markets. In 
November 1996, pursuant to Section 254 of the Act, the Federal-State 
Universal Service Joint Board issued its recommendations to the 
Commission for reforming our system of universal service so that 
universal service is preserved and advanced, but in a manner that 
permits the local exchange and exchange access markets to move from 
monopoly to competition. In this proceeding, we seek to reform our 
system of interstate access charges to make it compatible with the 
competitive paradigm established by the 1996 Act and with state actions 
to open local networks to competition.
    2. The 1996 Act seeks to develop efficient competition by opening 
all telecommunications markets through a pro-competitive, deregulatory 
national policy framework. To that end, the 1996 Act eliminates state 
and local legal and regulatory barriers to entry, and bans state and 
local governmental actions that have the effect of prohibiting any 
entity from offering any telecommunications service. The Act also 
requires all telecommunications carriers to interconnect directly or 
indirectly with other telecommunications carriers in order to 
facilitate the creation of a ``network of networks.'' In addition, the 
1996 Act requires all local exchange carriers (LECs) to establish 
reciprocal compensation arrangements for the transport and termination 
of calls, and prohibits incumbent LECs from charging more than the 
additional cost incurred to transport and terminate a call. The Act 
further directs all LECs to provide number portability and dialing 
parity. The 1996 Act confers three fundamental rights on potential 
competitors to incumbent LECs: the right to interconnect at rates based 
on cost, including a reasonable profit; the right to obtain unbundled 
network elements at cost-based rates; and the right to obtain an 
incumbent LEC's retail services at wholesale discounts in order to 
resell those services.
    3. The Act also directs the Commission, after receiving the 
recommendations of a Federal-State Joint Board, to define the services 
to be supported by federal universal service mechanisms, to support 
such services in a manner that is ``explicit and sufficient,'' and to 
ensure that ``every telecommunications carrier that provides interstate 
telecommunications

[[Page 4673]]

services shall contribute, on an equitable and non-discriminatory 
basis, to the specific, predictable and sufficient mechanisms * * * to 
preserve and advance universal service.'' The Act further provides that 
multiple carriers may seek and obtain designation as carriers eligible 
to receive universal service funds for service within a particular 
geographic area. As a whole, these provisions of the 1996 Act, when 
fully implemented, should greatly reduce the legal, regulatory, 
economic, and operational barriers to entry in the local exchange and 
exchange access market.
    4. The 1996 Act also ends the prohibition against provision of 
interLATA services by Bell Operating Companies (BOCs) that was imposed 
by the Modification of Final Judgment. United States v. AT&T, 552 
F.Supp. 131 (D.D.C. 1982) (MFJ). BOCs were permitted immediately upon 
enactment of the 1996 Act to begin to provide certain interLATA 
services, including out-of-region and incidental interLATA services. In 
order to provide interLATA services originating in-region, however, a 
BOC is first required to obtain Commission approval. In order to 
approve such an application, the Commission must find that the BOC has 
met the requirements of the ``competitive checklist,'' that the BOC 
will comply with the Act's separate affiliate requirements, and that 
grant of the application is consistent with the public interest, 
convenience and necessity.
    5. These fundamental changes in the structure and dynamics of the 
telecommunications industry wrought by the 1996 Act now necessitate 
that the Commission review its existing access charge regulations to 
ensure that they are compatible with the 1996 Act's far-reaching 
changes. We also seek to eliminate, either now or as soon as changes in 
the marketplace permit, any unnecessary regulatory requirements on 
incumbent LEC exchange access services. While a broad range of 
telecommunications industry participants, including both interexchange 
carriers (IXCs) and incumbent LECs, have long advocated for the 
Commission to commence a comprehensive review of access charges, the 
Act accelerates and intensifies the need for such a review. We commence 
this review of the Commission's Part 69 interstate access charge rules, 
together with its Part 61 price cap rules, to determine the extent to 
which we must revise these rules to take account of the local 
competition and Bell entry provisions of the 1996 Act and state actions 
to open local networks to competition; to reflect the effects of 
potential and actual competition on incumbent LECs' pricing for 
interstate access; to implement the Act's direction to end implicit 
universal service subsidies in favor of a system of explicit subsidies; 
and to establish fair rules of competition for both the local exchange 
and interexchange markets, especially as carriers begin to offer 
service packages that bundle local and interexchange offerings.
    6. We adopted our Part 69 rules at approximately the same time that 
AT&T divested its local exchange operations and established the seven 
regional Bell companies pursuant to the MFJ. The rules were designed to 
promote competition in the interstate, interexchange market by ensuring 
that all IXCs would be able to originate and terminate their traffic 
over incumbent LEC networks at just, reasonable, and non-discriminatory 
rates. While our Part 69 rules expressly contemplated competition in 
the interexchange market, they were not designed to address the 
potential effects of competition in the local exchange and exchange 
access market. Indeed, these rules reflected the reality of the 
telecommunications marketplace in 1983--and what was mandated in some 
states prior to the 1996 Act--that the incumbent LEC was the monopoly 
provider of local exchange and exchange access services. In adopting 
the Part 69 rules, the Commission did not seek to eliminate implicit 
support flows, but in fact incorporated such flows into the Part 69 
rate structure. Our Part 69 rules are designed to be consistent with 
our jurisdictional separations rules that govern the allocation of 
incumbent LECs' expenses and investment between the interstate and 
state jurisdictions. Consequently, the Part 69 access charge system 
likely reflects any jurisdictional cost misallocations mandated by our 
current separations rules. As such, the Part 69 rules are fundamentally 
inconsistent with the competitive market conditions that the 1996 Act 
attempts to create. We will soon begin a related proceeding to examine 
our jurisdictional separations rules in light of the 1996 Act.
    7. Competition isolates and highlights the inefficiencies and 
distortions present in the current Part 69 access charge rules. Our 
present interstate access charge regime, for example, requires 
incumbent LECs to maintain rate structures that have been widely 
criticized as economically inefficient. In particular, even though the 
costs of the local loop do not vary with the amount of traffic carried 
by the loop, our current rules require incumbent LECs to recover a 
portion of those costs through traffic-sensitive carrier common line 
(CCL) charges imposed on IXCs. While Part 69 mandates per-minute 
charges for local switching, the portion of local switching costs that 
is associated with ports appears to be driven by the number of lines 
connected to the switch, not by the number of minutes of traffic routed 
by the switch. The transport interconnection charge (TIC) is a non-
facilities-based, per-minute charge imposed on all switched access 
customers regardless of whether they use the incumbent LEC's transport 
facilities. Rather than fostering efficient pricing and competition, 
these mandatory rate structures inflate usage charges and reduce 
charges for connection to the network, in essence overcharging high-
volume end users in order to reduce rates for low-volume end users.
    8. Although these inefficient rate structures might have been 
sustainable in a local monopoly environment, the introduction of 
competition from providers operating their own network facilities or 
leasing network facilities as unbundled network elements may undermine 
these access rate structures. A competing provider of exchange access 
services entering a market can use its own facilities or lease 
unbundled network elements to target selectively the incumbent LEC's 
high-volume end users with efficiently priced access service offerings. 
This places the incumbent LEC at a regulatorily-imposed disadvantage in 
competing for high-volume end users, and jeopardizes the source of 
revenue that permits the incumbent LEC to cover its costs of providing 
service to low-volume end users. At the same time, these inefficient 
rate structures and implicit support flows also create artificial 
impediments to any new entrants that might seek to serve the subsidized 
end users, because they must attempt to do so without the benefit of a 
subsidy. As a result, these access rate structures may inhibit the 
development of competition for service to low-volume end users.
    9. Competition also allows entrants to arbitrage between different 
pricing systems. For example, if transport and termination rates are 
lower than access charge rates, a competitor would have an incentive to 
funnel interexchange terminating access traffic through transport and 
termination arrangements where possible. Whether traffic originates 
locally or from a distant exchange, transport and termination of 
traffic by a particular LEC involves the same network functions. 
Ultimately, the rates that local carriers impose for the transport and 
termination of local traffic

[[Page 4674]]

and for the transport and termination of long distance should converge. 
As a legal matter, however, transport and termination of local traffic 
by an incumbent LEC are different services from access service provided 
by that incumbent LEC for long-distance telecommunications. Transport 
and termination of local traffic are governed by 251(b)(5) and 
252(d)(2), while access charges for interstate long-distance traffic 
are governed by sections 201 and 202 of the Act.
    10. This Commission has previously examined the impact of state-led 
reforms in New York and Illinois on the existing access charge rate 
structures, and has concluded that some interim modifications to the 
incumbent LECs' rate structures were warranted where states had 
implemented market-opening measures similar to those mandated by the 
1996 Act. The Commission concluded that competitive developments in the 
New York City, Chicago, and Grand Rapids LATAs justified granting NYNEX 
and Ameritech limited waivers of our access charge rules to allow them 
to recover the TIC on a geographically deaveraged basis and to bulk 
bill some of their common line costs rather than recovering them 
through the per-minute CCL charge.
    11. In addition to their criticisms of the access charge rate 
structures, IXCs, in particular, have insisted that the rate levels of 
access charges are excessive and must be reduced. AT&T asserts, for 
instance, that the current average per-minute access rates of the BOCs 
are nearly seven times the forward-looking economic cost of providing 
that service, and that total interstate access charges collected today 
from interexchange carriers exceed forward-looking economic cost by $11 
billion, or 70 percent of the total. IXCs argue that, if access prices 
are allowed to remain at current levels, they will face an 
anticompetitive disadvantage both in the local exchange market and in 
the interexchange market whenever an incumbent LEC also provides 
interexchange services.
    12. In the Notice of Proposed Rulemaking portion of this item, we 
initiate a comprehensive review of our interstate access charge regime. 
We propose a series of reforms to the existing access charge rate 
structure rules that are designed to eliminate the inefficiencies 
summarized above. Our goal is to end up with access charge rate 
structures that a competitive market for access services would produce.
    13. We also outline in this item two possible approaches for 
addressing claims that existing access charge levels are excessive, for 
establishing a transition to access charges that more closely reflect 
economic costs, and for deregulating incumbent LEC exchange access 
services as competition develops in the local exchange and exchange 
access market. The first is a market-based approach under which we 
would rely on potential and actual competition from new facilities-
based providers and entrants purchasing unbundled elements to drive 
prices for interstate access services toward economic cost. Under this 
approach, we would gradually relax and ultimately remove existing Part 
69 rate structure requirements and Part 61 restrictions on rate level 
changes as marketplace forces provide the discipline on incumbent LEC 
access prices that our rules are currently needed to apply. The second 
is a more prescriptive approach to access reform under which this 
Commission would specify the nature and timing of the changes to the 
existing rate levels. These approaches could be employed singly or in 
combination. We emphasize, however, that under either approach, our 
ultimate goal is the same--adoption of revisions to our access charge 
rules that will foster competition for these services and enable 
marketplace forces to eliminate the need for price regulation of these 
services.
    14. Under the market-based approach to access reform, we propose 
two intermediate phases, each of which would require an incumbent LEC 
to demonstrate that certain circumstances exist in order to obtain 
greater pricing flexibility than the current rules permit. We also 
propose that an incumbent LEC's access services be deregulated, that 
is, removed from price cap and tariff regulation, once they are subject 
to substantial competition. At the first phase, an incumbent LEC would 
have to show that its local market has been opened to competition and 
potential rivals are able to enter through any of the three avenues 
mandated by the 1996 Act--interconnection, unbundled network elements, 
and resale. We ask whether an incumbent LEC making such a showing 
should be permitted to deaverage geographically its rates for 
interstate access services, to offer volume and term discounts, and to 
offer contract-based tariff offerings for interstate access. We also 
ask whether new services should be deregulated at that phase. At the 
second phase in our market-based approach, an incumbent LEC would have 
to show that it faces actual competition in the local exchange 
marketplace. We ask whether, at that phase, we should eliminate service 
categories within baskets, permit incumbent LECs to engage in 
differential pricing of access to residential, single-line business, 
and multi-line business customers, and eliminate mandatory rate 
structures for local switching and transport. We also seek comment on 
combining the trunking and traffic-sensitive baskets at that stage.
    15. A second option for access reform is a more prescriptive 
approach. Marketplace forces alone may not be sufficient to drive 
access rates to forward-looking economic costs. Under this approach, we 
ask whether we should require incumbent LECs to move prices for 
interstate access in their service areas to more economically-efficient 
levels pursuant to rules adopted in this proceeding. As with a market-
based approach, we also propose under this prescriptive approach that 
we remove incumbent LEC access services subject to substantial 
competition from price cap and tariff regulation.
    16. In Section II, below, we seek comment on issues affecting the 
scope of this proceeding. In Section III, we propose changes to our 
existing interstate access charge rate structures to make them more 
conducive to economic efficiency. We also discuss in Section III the 
reassignment of certain network facilities costs that under current 
rules are allocated to the Transport Interconnection Charge for 
recovery. In Section IV, we summarize our two basic approaches to 
access reform and propose eliminating price cap and tariff regulation 
for services subject to substantial competition. We also there seek 
comment on whether and when one approach or the other is preferable, or 
if a combination of these approaches should be used, and also, how such 
a combined approach should be structured. In Section V, we discuss in 
detail a market-based approach to access reform. In Section VI, we 
outline a more prescriptive approach to access reform.
    17. In Section VII, we first discuss adjustments to the current 
interstate access charge regime that may be required due to actions 
taken in the Federal-State Universal Service Joint Board proceeding. We 
also raise in that section the issue of whether there is a significant 
difference between embedded incumbent LEC costs currently allocated to 
the interstate jurisdiction and recovered through access charges, and 
the forward-looking economic costs of interstate access. To the extent 
that implementation of access charge reform is expected to cause a 
significant reduction in incumbent LEC

[[Page 4675]]

access revenues from current levels, we seek comment on whether such 
LECs are entitled or should be permitted to recover some or all of that 
difference through a temporary special recovery mechanism.
    18. In Section VIII, we seek comment on possible additional changes 
to our access charge rules that may be necessary to make them 
compatible with the competitive market envisioned by the 1996 Act, 
including whether there is any special need for regulating terminating 
interstate access service and ``open-end'' services, whether provided 
by incumbent LECs or new entrants. We also discuss possible changes to 
our existing treatment of the use by interstate information service 
providers, such as Internet service providers, of incumbent LEC 
switched access networks to originate interstate traffic. In Section 
IX, we issue a Report and Order implementing the changes to the LEC 
price cap rules discussed above that were proposed in the Second 
Further Notice of Proposed Rulemaking in CC Docket No. 94-1, Further 
Notice of Proposed Rulemaking in CC Docket No. 93-124, and Second 
Further Notice of Proposed Rulemaking in CC Docket No. 93-197, 60 FR 
49539 (September 26, 1995) (Price Cap Second FNPRM).
    19. Finally, in Section X, we issue a Notice of Inquiry to examine 
fundamental issues about the implications of usage of the public 
switched network by information service and Internet access providers.

B. Background

1. Regulation of Interstate Exchange Access Service
    20. For much of this century, most telephone subscribers obtained 
both local and long distance services from the same company, the pre-
divestiture, integrated Bell System, owned and operated by AT&T. 
Although some telephone subscribers received local telephone service 
from non-Bell independent companies, AT&T still provided long distance 
service to these customers. AT&T compensated its Bell Operating Company 
subsidiaries for originating and terminating interstate calls through 
revenue division arrangements and compensated the independent companies 
for access pursuant to settlement agreements. In the 1970s, MCI and 
other IXCs (then called ``other common carriers,'' or OCCs) began to 
provide switched long distance services in competition with AT&T Long 
Lines by attaching their own switches to local business lines purchased 
from the incumbent LECs and reselling AT&T services. In 1979, AT&T and 
the OCCs, under Commission supervision, entered into a comprehensive 
interim agreement, known as Exchange Network Facilities for Interstate 
Access (ENFIA), to replace the local business rates with a different 
set of rates AT&T would charge OCCs for originating and terminating 
interstate traffic over the facilities of its local exchange 
affiliates. AT&T Long Lines continued to compensate its local exchange 
affiliates and the independent exchange carriers for the use of their 
facilities pursuant to their division of revenues and settlements 
arrangements. Following a lengthy proceeding, the Commission in 1983 
adopted uniform access charge rules that govern the provision of 
interstate access services by all incumbent LECs, BOCs as well as 
independents.
    21. The costs that incumbent LECs recover through interstate access 
charges are determined by a multi-step process. Incumbent LECs first 
record all their booked expenses and their cost of investment in the 
accounts prescribed by the Commission's Part 32 Uniform System of 
Accounts (USOA). They next divide the recorded investment and expenses 
between regulated and nonregulated services, pursuant to Part 64 of our 
Rules. Incumbent LECs then divide regulated expenses and investment 
between state and interstate jurisdictions pursuant to the separations 
procedures contained in Part 36 of the Commission's rules. Incumbent 
LECs then apportion their regulated interstate costs among the 
interstate access and interexchange service categories. Finally, to 
recover their access costs, incumbent LECs charge IXCs and end users 
for access services in accordance with the Part 69 access charge rules 
and, for incumbent LECs under price cap regulation, with the provisions 
of the Part 61 price cap rules.
    22. Commentators have pointed out that, because each of these 
divisions of costs occurs pursuant to regulation rather than through 
operation of a competitive marketplace, these divisions are subject to 
distortions. In particular, commentators have focused on the 
separations process, which apportions costs between the intrastate and 
interstate jurisdictions. These commentators suggest that separations 
allocation, in particular allocation of common plant, reflects not only 
economic considerations, but also public policy considerations related 
to universal service and the desirability of low local rates. To the 
extent these allocation decisions have resulted in greater allocations 
to interstate services than would be economically justified, these 
distortions flow through Parts 69 and 61 into access charges.
    23. Part 69 establishes two basic categories of access services: 
special access services and switched access services. Special access 
services do not use the local switch; they use dedicated facilities 
that run directly between the end user and the IXC's point of presence 
(POP). By contrast, switched access services use the local exchange 
switch to route originating and terminating interstate toll calls. The 
special access category includes a wide variety of services and 
facilities, such as wideband data, video, and program audio services. 
The Commission does not prescribe specific rate elements for special 
access services in Part 69. Part 69 does, however, establish specific 
switched access elements and a mandatory switched access rate structure 
for each element tailored to the nature of each service in order to 
promote competition in the interexchange services market and eliminate 
discrimination within or among services. In general, we have attempted 
to move toward rate structures that create incentives for the most 
efficient utilization of all telecommunications facilities. These 
elements generally correspond to the components of switched access 
service, as shown in Figure 1.
    24. Interoffice transmission services, known as transport services, 
carry interstate switched access traffic between an IXC's POP and the 
end office that serves the end user customer. Incumbent LEC 
transmission facilities that carry interstate traffic between an IXC's 
POP and the incumbent LEC end office serving the POP (called the 
serving wire center or SWC) are known as entrance facilities. Part 69 
requires incumbent LECs to impose flat-rate charges on IXCs to recover 
the costs of entrance facilities. Incumbent LECs currently offer two 
types of interstate switched transport service between a SWC and an end 
user's end office. Under the first service, direct-trunked transport, 
calls are transported between the SWC and the end office by means of a 
direct trunk that does not pass through an intervening switch. To 
recover the costs of direct-trunked transport facilities, Part 69 
requires incumbent LECs to impose a flat-rate charge on IXCs. The 
second service, tandem-switched transport, routes calls from the SWC to 
the end office through a tandem switch located between the SWC and the 
end office. Traffic travels over a dedicated circuit from the SWC to 
the tandem switch, and then, over a shared circuit that carries the 
calls of many different IXCs, from the tandem switch to the incumbent 
LEC end office. For

[[Page 4676]]

tandem-switched transport, Part 69 prescribes a per-minute tandem-
switching charge and a per-minute transmission charge assessed on IXCs.
    25. Incumbent LEC end offices serving end users switch interstate 
traffic between the transport trunks carrying traffic to and from the 
IXC POPs and the end users' local loops. Our Part 69 rules require 
incumbent LECs to recover the costs of the local switch through a per-
minute local switching charge assessed on IXCs. Part 69 also requires 
incumbent LECs to impose a per-minute TIC on interstate switched access 
traffic. We note that an incumbent LEC's provision of transport and 
local switching for terminating interstate traffic is functionally the 
same as its provision of transport and termination service under the 
1996 Act.
    26. Finally, incumbent LECs assess end users a flat end user common 
line charge (EUCL), also known as the subscriber line charge (SLC), to 
recoup part or all of the local loop costs allocated to the interstate 
jurisdiction. The SLC currently may not exceed the lesser of the actual 
interstate loop cost, or $6 per month for multi-line business customers 
and $3.50 for residential and single-line business customers. In 
addition, IXCs are assessed a per-minute CCL charge to recover the 
remaining interstate allocation of loop costs that is not recovered 
through SLCs. IXCs with at least .05 percent of the total common lines 
presubscribed to IXCs in all study areas are also assessed Universal 
Service Fund and Lifeline service charges based on each IXC's share of 
presubscribed access lines. In addition, Part 69 identifies several 
other charges, including those for signalling and database queries.
    27. The specific access charges currently assessed on interexchange 
carriers and end users under our rules vary among incumbent LECs 
because their embedded costs, on which access charges (even for price 
cap incumbent LECs) are based, vary from state to state. Significant 
differences in factors that affect a carrier's cost of providing 
service, such as the topography and population density of its service 
area, are reflected in different prices for access service.
    28. The total regulated revenues of Class A incumbent LECs by 
service rate elements are shown in Table 1, below. As indicated there, 
more than 25 percent of the incumbent LECs' total regulated revenues 
are derived from interstate access services. In addition, of the $11.9 
billion in interstate switched access revenues that incumbent LECs 
recover from IXCs, approximately 90 percent ($10.8 billion) is 
recovered through per-minute charges (i.e., CCL, TIC, and local 
switching).

    Table 1.-- Class A Incumbent Local Exchange Carriers' 1995 Total    
                           Regulated Revenues                           
                              [In billions]                             
------------------------------------------------------------------------
                                                                        
------------------------------------------------------------------------
Interstate Revenues:                                                    
    Subscriber Line Charge....................  ...........         $7.1
    Per-Minute Switched Access Charges:         ...........  ...........
        Carrier Common Line...................  ...........          3.7
        Transport Interconnection Charge......  ...........          2.9
        Local Switching (and other T-S).......  ...........          4.2
                                               -------------------------
            Total Per-Minute Switched Access                            
             Charges..........................  ...........         10.8
    Transport (Facilities)....................  ...........          1.1
    Special Access............................  ...........          3.1
    Information...............................  ...........          0.3
    Miscellaneous.............................  ...........          1.0
                                               -------------------------
      Total Interstate Access Revenues........  ...........         23.4
Intrastate Revenues:                                                    
    Basic Local Exchange Service..............  ...........         32.0
    Intrastate Access.........................  ...........          7.3
    Other Intrastate Services.................  ...........         28.0
                                               -------------------------
      Total Intrastate Revenues...............  ...........         67.4
                                               =========================
      Total Regulated Revenues................  ...........         90.8
------------------------------------------------------------------------

    29. The Part 61 price cap rules give incumbent LECs that are 
subject to price cap regulation--generally the largest incumbent LECs--
a degree of flexibility in establishing the actual levels of their 
access rates. Incumbent LEC price cap regulation is designed to promote 
economic efficiency by easing restrictions on overall profits while 
setting price ceilings at reasonable levels. The incumbent LEC price 
cap plan is designed to simulate some of the efficiency incentives 
found in competitive markets and to act as a transitional regulatory 
scheme until the advent of actual competition makes price cap 
regulation unnecessary. 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.
    30. The price cap rules split interstate access services into three 
discrete groups, called baskets. Two baskets are further grouped into 
narrower service categories and subcategories. Price cap incumbent LECs 
have some ability to raise and lower the charges for elements or 
services that are included in the same basket as long as the actual 
price index (API) for the basket does not exceed the price cap index 
(PCI) for that basket. This pricing flexibility is limited by banding 
rules that establish separate upper and lower pricing bands for each 
service category or subcategory within a basket. The price cap for each 
basket and the pricing bands for each service category and subcategory 
are adjusted annually based on defined formulas. The price cap rules 
place services subject to different competitive pressures into 
different baskets, service categories, and service subcategories. These 
measures limit the incumbent LECs' ability to offset reductions in 
service prices that are subject to competition with increases in 
service prices that are not subject to competition.

[[Page 4677]]

2. The 1996 Telecommunications Act
    31. The 1996 Act seeks to open for all carriers the local and long 
distance telecommunications markets to competition by removing 
economic, regulatory, and operational impediments that have protected 
monopolies in the local exchange market. The 1996 Act requires 
incumbent LECs to open their networks to competition, and permits the 
BOCs, upon meeting certain conditions, to enter the interLATA market 
within their respective service areas. The 1996 Act also requires the 
Commission to forbear from applying any regulation or any provision of 
the Communications Act to telecommunications carriers or 
telecommunications services, or classes thereof, if the Commission 
determines that certain specified conditions are satisfied. The 
Commission must forbear if the Commission determines: (1) That 
enforcement of the regulation or provision is not necessary to ensure 
that the charges, practices, classifications, or regulations by, for, 
or in connection with that telecommunications carrier or service are 
just and reasonable and are not unjustly or unreasonably 
discriminatory; (2) that enforcement is not necessary for the 
protection of consumers; and (3) that forbearance consistent with the 
public interest. The forbearance authority applies to all provisions of 
the Communications Act, except the provisions added by the 1996 Act 
relating to interconnection and BOC entry into long-distance services.
    a. Local Competition. 32. The local competition provisions of the 
1996 Act added new sections 251, 252, and 253 to the Communications 
Act. Section 251 establishes general interconnection obligations for 
all telecommunications carriers, delineates further obligations for 
LECs, and prescribes additional requirements for incumbent LECs. 
Sections 251(c)(2) and (c)(3) require that incumbent LECs' ``rates, 
terms, and conditions'' for interconnection, unbundled network elements 
be ``just, reasonable, and nondiscriminatory in accordance with * * * 
the requirements of sections 251 and 252.'' Section 252 generally sets 
forth the procedures that state commissions, incumbent LECs, and new 
entrants must follow to implement the requirements of section 251 and 
establish specific interconnection arrangements. Finally, Section 253 
bars state and local regulations that prohibit or have the effect of 
prohibiting entities from offering telecommunications services.
    33. The terms and conditions under which such facilities and 
services are made available by incumbent LECs may be the subject of 
negotiated agreements between an incumbent LEC and a requesting 
carrier. If an incumbent LEC and requesting carrier are unable to reach 
a negotiated agreement, either party may ask a state to arbitrate the 
disputed issues.
    34. As required by the 1996 Act, incumbent LECs must provide 
interconnection and nondiscriminatory access to network elements on an 
unbundled basis. In implementing the Act, we identified the following 
minimum set of network elements that incumbent LECs must provide to 
requesting telecommunications carriers, many of which are analogous to 
interstate access rate elements: Network interface devices; local 
loops; local and tandem switches (including all software features 
provided by such switches); interoffice transmission facilities; 
signalling and call-related database facilities; operations support 
systems and information; and operator and directory assistance 
facilities. States may require unbundling of additional elements.
    b. Universal Service. 35. Section 254, added by the 1996 Act, for 
the first time codifies the role of universal service in federal 
telecommunications regulation. Section 254 directs the Commission to 
commence a proceeding to implement sections 254 and 214(e) of the Act, 
and to refer such proceeding to a Federal-State Joint Board. The Joint 
Board was given nine months to make recommendations to the Commission, 
including a definition of the services to be supported by federal 
universal service support mechanisms and a timetable for the 
implementation of such recommendations. We initiated the Joint Board 
proceeding in March 1996, and the Joint Board issued its Recommended 
Decision in November 1996.
    36. The 1996 Act established several requirements for federal 
universal service support mechanisms. The Commission, after receiving 
the recommendations of the Joint Board, is to designate specific 
services for federal universal service support. Such support is to be 
available for the provision, maintenance and upgrading of facilities 
and services for which the support is intended, and not for other 
purposes. Such support is to be available to all eligible 
telecommunications carriers. Such support is to be explicit, and, as 
the Conference Report makes clear, shall not be implicit. Such support 
is also to be funded on an equitable and non-discriminatory basis by 
all telecommunications carriers that provide interstate 
telecommunications services.
    37. In its Recommended Decision, the Federal-State Joint Board 
concluded that several universal service mechanisms currently 
implemented through the jurisdictional separations and access charge 
structures must be replaced or modified in order to meet the Act's 
requirements that support mechanisms be explicit, specific, predictable 
and sufficient to preserve and advance universal service. Accordingly, 
the Joint Board recommended that changes be made to the high cost 
assistance fund, and that the Dial Equipment Minutes (DEM) weighting 
program and Long Term Support (LTS) be phased out, eliminated, and 
replaced by a new explicit universal service mechanism. If the 
Commission adopts the Joint Board's recommendations, our access charge 
rules must be adjusted to reflect these changes, to prevent incumbent 
LECs from recovering the same costs twice, and to provide the same 
subsidies to non-incumbent LECs as are provided to incumbent LECs for 
serving high-cost or low-income subscribers.
    38. At the same time, we must also examine other features of our 
access charge system to determine whether they contain implicit 
universal service support, in contravention of the Act's requirement 
that all universal service support be explicit and its requirements as 
to funding of federal universal service support. In our Notice of 
Proposed Rulemaking and Order Establishing Joint Board, 61 FR 10499 
(March 19, 1996) (Universal Service NPRM), we asked whether the CCL 
charge is an implicit universal service support mechanism. While the 
Joint Board did not reach this question, it suggested that it would be 
desirable for the CCL charge to be restructured to be collected on a 
flat-rate rather than a per-minute basis because per-minute collection 
is economically inefficient.
    39. We continue to recognize that, because of the role that access 
charges have played in funding and maintaining universal service, it is 
important to implement changes in the access charge system together 
with complementary changes in the universal service system. In Sections 
III.B., below, we discuss whether the CCL charge must be restructured 
to comply with the Act's universal service requirements.
3. Need for Access Reform
    40. There is a consensus among virtually all participants in the 
telecommunications industry on the need to reform our interstate access 
charge rules. IXCs and incumbent LECs, for example, agree that current 
per-minute interstate access charges exceed economically efficient 
levels and that,

[[Page 4678]]

consequently, per-minute interstate access charges must be reduced. 
They differ, however, as to the reasons why current charges exceed 
forward-looking economic cost, the aggregate amount by which current 
charges exceed economic cost, and the effects of particular factors 
(e.g., alleged excessively-long prescribed depreciation schedules, 
separations distortions, strategic investments, and operational 
inefficiency). They also disagree on what portion, if any, of the 
difference between forward-looking economic cost and the portion of 
embedded costs allocated to the interstate jurisdiction incumbent LECs 
should be permitted to recover.
    41. Current access charges distort competition in the markets for 
local exchange access. Our access charge rules create incentives for 
IXCs to bypass the LEC switched access network for reasons that have 
nothing to do with the economics of operating an access network. This 
uneconomic bypass may occur for a variety of reasons; rates may be too 
high, or our access charge rules may require rates for a LEC access 
service to be too high in relation to the rates for an alternative LEC 
service or for a comparable service offered by an alternative supplier. 
Inefficient entry may occur if the price for a package of jointly-
provided services is above economic cost, even if the LEC would 
actually be the most efficient provider of the service. Conversely, if 
a package of jointly-provided services, including access, is priced too 
low because of regulatory requirements, efficient entry by an otherwise 
efficient provider may be precluded. In either case, the total cost of 
telecommunications service will not be as low as it could be if all 
services were priced at economic levels, thereby providing accurate 
price signals to all market participants. High access charges may also 
keep long-distance rates higher than they would otherwise be, which 
restricts demand for service and harms long-distance consumers. We 
describe more fully some of the causes of uneconomic bypass below.
    42. Inefficient, mandatory rate structures are one reason that per-
minute interstate access charges exceed the economic cost of providing 
service to certain customers. One example is the recovery through a 
per-minute CCL charge of part of the allocated interstate costs for 
incumbent LECs to provide local loops to end users. Recovering on a 
per-minute basis the cost of the local loop, which is a fixed cost that 
does not vary with usage, results in high-volume toll users paying 
charges to their IXCs that exceed the cost of serving those customers, 
while some low-volume toll users may pay rates that are below cost. 
Mandatory per-minute charges for local switching, which probably has 
significant fixed costs, also results in IXCs paying access charges for 
high-volume toll users that exceed the cost of serving those customers. 
Finally, the requirement that most rates be averaged on a ``study 
area'' basis (i.e. generally, state-wide) precludes incumbent LECs from 
setting rates to reflect cost differences in high-density and low-
density areas, leaving incumbents vulnerable to niche entry in high-
density areas, and precluding entry by firms that might otherwise seek 
to serve low-density areas.
    43. Assignment of costs to the wrong elements may also contribute 
to high per-minute interstate access rates. As discussed in Section 
III.E. below, the TIC currently recovers some costs that may be 
appropriately included in the rates for services in the trunking 
basket. This also results in higher-volume switched access toll users 
paying rates that exceed cost.
    44. Incumbent LECs, and to a lesser degree others such as AT&T, 
argue that another reason current interstate access charges exceed 
forward-looking economic cost is the over-allocation of costs to the 
interstate jurisdiction in the separations process, which allocates 
costs between the interstate and intrastate jurisdictions. According to 
these parties, the revenues now recovered through interstate switched 
access rate elements in the traffic-sensitive basket exceed the cost of 
providing interstate switched access services, while intrastate rates 
do not recover enough to cover the economic cost of providing 
intrastate exchange and exchange access services.
    45. A major focus of the IXCs, on the other hand, is the contention 
that current interstate access charges exceed economic cost levels 
because the incumbent LECs are inefficient. As a result, they argue, 
the incumbent LECs' unseparated rate base is higher than it should be, 
and all prices in both the interstate and intrastate jurisdictions 
exceed economic cost-based levels that an efficient provider would 
charge.
    46. Several parties, including AT&T and MCI, argue that, to the 
extent access services are not available to IXCs at their forward-
looking economic cost, incumbent LECs and their long-distance 
affiliates will have an unfair competitive advantage in the market for 
long-distance services. According to these IXCs, this is because the 
incumbent LEC's affiliate's effective cost of obtaining ``in region'' 
access service is the incremental cost that its affiliated LEC incurs 
in providing access. If an incumbent LEC that also provides long-
distance service can charge unaffiliated IXCs access prices that are 
significantly higher than forward-looking economic cost, the IXCs argue 
that the incumbent LEC may be able to create a ``price squeeze'' by 
raising rivals' costs. Under these circumstances, the incumbent LEC 
affiliate could lower its retail price to reflect its cost advantage, 
and competing unaffiliated IXCs would be forced either to match the 
price reduction and absorb profit margin reductions or maintain their 
prices at existing levels and accept reductions in their market shares.
    47. Additionally, to the extent that unbundled network elements 
become available from incumbent LECs at economically efficient prices, 
IXCs will have the ability to avoid paying access charges by purchasing 
such elements to provide both local exchange and exchange access 
service to end-user customers. IXCs may also take access service from a 
competitive LEC that either provides its own facilities or takes 
unbundled elements from the incumbent LEC. The availability of 
unbundled network elements at their forward-looking economic cost would 
appear to reduce the danger of a price squeeze insofar as IXCs can use 
those elements to provide their own access to customers for whom they 
are the local service provider. There may, however, be limits on the 
extent to which access charges can be replaced by unbundled elements in 
either the short or long-term, because an IXC may have to take access 
service for those end-user customers for which it does not provide 
local service.
    48. Apart from any revisions to our rules that we may adopt in this 
proceeding, the availability of this alternative to interstate access 
service may force incumbent LECs to move their access charges to more 
economically efficient levels, and may necessitate relief from 
mandatory access charge rate structures that are not economically 
efficient. We seek in this proceeding to explore ways in which we can 
harness competitive forces to further our efforts to make our system of 
interstate access charges more economically rational and compatible 
with competitive local markets. We also seek to adopt rules and 
policies that will facilitate a smooth transition from the current 
system to one that can be sustained in competitive local markets.

II. Access Reform for Incumbent Local Exchange Carriers

A. Application of Reforms to Price Cap Carriers and Non-Price Cap 
Carriers

    49. Because our access charge rules apply only to dominant LECs, 
the focus

[[Page 4679]]

of this proceeding is reform of our access charge regime that currently 
applies to incumbent LECs. Although many of the reforms we propose in 
this NPRM may be desirable changes to our regulation of non-price cap 
incumbent LECs, we are limiting the scope of this proceeding to 
incumbent LECs subject to price cap regulation, with limited exceptions 
discussed below.
    50. We note that price cap regulation governs almost 91 percent of 
the interstate access charge revenues and more than 92 percent of the 
total incumbent LEC access lines. Currently, all ten of the incumbent 
LECs with more than two million access lines and 13 of the 17 non-NECA 
incumbent LECs with more than 50,000 access lines are subject to price 
cap regulation. The remaining incumbent LECs are telephone companies 
subject to various forms of rate-of-return regulation. Therefore, even 
though this proceeding applies only to price cap incumbent LECs, it 
would nonetheless affect the vast majority of all access lines and 
interstate access revenues.
    51. The need for access reform is most immediate for those 
incumbent LECs that may soon be subject to competition from the 
availability of unbundled network elements. These are primarily the 
price cap incumbent LECs. Many, if not all, non-price-cap incumbent 
LECs may be exempt from, or eligible for a modification or suspension 
of, the interconnection and unbundling requirements of the 1996 Act. By 
contrast, all incumbent LECs that are ineligible for section 251(f) 
exemptions, suspensions, or modifications are incumbent price cap LECs. 
Because the latter incumbent LECs must fulfill the section 251(b) and 
(c) duties to provide interconnection and unbundled elements to new 
entrants, these incumbent LECs are likely to face significant 
competition in the interstate exchange access market from new entrants 
using unbundled network elements before the small and mid-sized rate-
of-return incumbent LECs face such competition. Although several 
incumbent price cap LECs may be eligible to request suspension or 
modification under section 251(f)(2) (e.g., Citizens, Frontier, Aliant, 
and SNET), we note that these LECs may not receive state approval of 
any such petition for suspension or modification. Thus, we conclude 
that we should focus our efforts here on the immediate task of 
reforming the access charge regime for price cap incumbent LECs. We 
plan to initiate a separate proceeding in 1997 to undertake 
comprehensive review of our regulation of rate-of-return incumbent 
LECs. That inquiry will take up the issue of whether substantial 
changes in our Part 69 cost allocation rules for the development of 
access charges for rate-of-return carriers are needed.
    52. We propose, however, limited exceptions to our decision to 
confine this proceeding to price cap incumbent LECs. Specifically, we 
propose to apply to all incumbent LECs the rules discussed in Section 
VII.A, which addresses allocation of universal service support to the 
interstate revenue requirement, and Sections III.D and E, which propose 
reforms to the transport rate structure, including the TIC. Because 
rate-of-return incumbent LECs will collect revenues from the new 
universal service support mechanism, we need to determine in this 
proceeding how these payments should alter the access charges currently 
assessed by such incumbent LECs. Moreover, any changes we adopt to the 
TIC pursuant to the court's remand in Competitive Telecommunications 
Association v. FCC, 87 F.3d 522 (D.C. Cir. 1996) (CompTel v. FCC) 
should also apply to rate-of-return incumbent LECs because their 
transport rules were subject to the rates that were remanded by the 
court in that decision. In Section III.B, we seek comment on whether we 
should also apply our proposed changes to the common line rate 
structure to rate-of-return incumbent LECs. In Section VIII.C., we seek 
comment on updating the Part 69 access rules in light of various 
developments. We seek comment on these tentative conclusions regarding 
the scope of this proceeding. We further invite parties to comment on 
the effect of these proposals and tentative conclusions on small 
business entities, including small incumbent LECs and new entrants.

B. Applicability of Part 69 to Unbundled Elements

    53. Pursuant to our jurisdiction over interstate access charges 
under section 201 of the Act, we tentatively conclude that unbundled 
network elements should be excluded from the Part 69 access charge 
regime, regardless of whether the carrier that purchases unbundled 
network elements uses those elements to provide local exchange services 
or exchange access services. Thus, when using unbundled network 
elements to originate and terminate interstate calls, requesting 
carriers should not be required to pay the Part 69 access charges 
corresponding to those elements. The 1996 Act permits 
telecommunications carriers that purchase access to unbundled network 
elements from incumbent LECs to use those elements to provide all 
telecommunications services to customers, including access in order to 
originate and terminate interstate calls. The 1996 Act in turn requires 
requesting carriers to pay cost-based rates to compensate incumbent 
LECs for all such use of the unbundled network elements. Thus, the 
requesting carrier has already paid for the ability to originate and 
terminate interstate calls. Nothing in the text of the 1996 Act compels 
telecommunications carriers that use unbundled elements to pay 
interstate access charges, nor limits these carriers' ability to use 
unbundled elements to originate and terminate interstate calls. Nothing 
in sections 201-205 of the Act requires a contrary result. We seek 
comment on this tentative conclusion. We also note that the Part 69 
interstate access charge rules do not apply to the transport and 
termination of local traffic provided pursuant to section 251(b)(5).

III. Rate Structure Modifications

A. Overview

    54. We tentatively conclude that several provisions in Part 69 of 
our rules compel incumbent LECs to impose charges for access services 
in a manner that does not accurately reflect the way those LECs incur 
the costs of providing those services. For example, generally the costs 
associated with the local loop are non-traffic-sensitive (NTS), but our 
rules require incumbent LECs to recover a portion of those costs 
through per-minute CCL charges. Similarly, at least some portion of the 
costs of local switching is NTS, but our rules require incumbent LECs 
to recover all local switching costs through per-minute charges. In 
these and other cases, our rate structure rules do not send accurate 
pricing signals to customers, and consequently, encourage inefficient 
use of telecommunications services. These inaccurate pricing signals 
encourage uneconomic bypass of incumbent LEC facilities and could very 
well skew or limit the development of competition in the markets for 
telecommunications services. Furthermore, these rates may not be 
sustainable in the long run if unbundled network elements are made 
available at cost-based prices and used to provide exchange access 
services.
    55. We propose to revise our rate structure requirements for 
switched access service by eliminating some rate structure 
requirements, prescribing some new requirements, or a combination of 
both. We tentatively conclude that, regardless of which of the 
approaches to access reform discussed in Section IV we choose, 
establishing more economically rational rate

[[Page 4680]]

structure rules is a necessary first step in the new procompetitive 
era. We seek through these changes to establish rate structures for 
interstate access services that send more accurate pricing signals to 
both consumers and competitors. Below, we invite comment on proposals 
for rate structure rule changes to be applicable to all price cap 
incumbent LECs. Specifically, we invite comment on rate structure rule 
changes for common line, local switching, and transport. We then seek 
comment on a number of proposals for phasing out the transport 
interconnection charge, and on establishing rate structure rules for 
SS7 signalling services. With the exception of the transport rule 
revisions considered in Section III.D, and the revisions to the TIC 
considered in Section III.E, we propose applying the rate structure 
rule changes discussed in Section III only to incumbent price cap LECs. 
As noted in Section II, rate structure revisions for non-price cap 
incumbent LECs will be addressed in a separate proceeding.

B. Common Line

1. Background
    56. Common line costs are the costs associated with the line 
connecting the end user's premises with the local switch that have been 
assigned to the interstate jurisdiction through the jurisdictional 
separations process. These costs are not traffic-sensitive. A portion 
of the incumbent LEC's common line costs are recovered through EUCL 
charges, also called SLCs. These charges currently are limited to the 
actual cost of the interstate portion of the local loop or $3.50 per 
month for residential and single line business users, and $6.00 per 
month for multi-line business users. The remaining common line costs, 
if any, are recovered through carrier common line charges, which are 
per-minute rates imposed on access customers.
    57. The current common line rate structure, in which only a portion 
of common line costs are recovered through flat monthly rates, does not 
reflect the manner in which loop costs are incurred. As a result, the 
common line rate structure forces incumbent LECs to recover costs in an 
economically inefficient manner, and so may cause inefficient use of 
the network and uneconomic bypass, as discussed in Section III.A, 
above. Furthermore, in the original MTS and WATS Market Structure, 
Third Report and Order, CC Docket No. 78-72, Phase 1, 48 FR 10319 
(March 11, 1983) (Access Charge Order), the Commission found that 
recovering NTS costs through flat monthly charges imposed on end users 
by incumbent LECs would promote optimal utilization of 
telecommunications facilities. The Commission decided at that time, 
however, to place a limit on the SLC, and, consequently, required 
incumbent LECs to recover the remainder of their common line costs 
through per-minute CCL rates. The current CCL charge has been uniformly 
criticized by both incumbent LECs and IXCs because it discourages 
efficient use of the network and encourages uneconomic bypass. We 
invite comment below on alternative common line rate structures.
2. Alternative Methods of Recovery of CCL Portion of Subscriber Loop 
Costs
    58. The Joint Board in its Recommended Decision recognized that the 
current, traffic-sensitive CCL charge structure is economically 
inefficient because the charge requires incumbent LECs to recover a 
non-usage-sensitive cost in part through a usage-sensitive charge. The 
Joint Board suggested that the Commission change the existing rate 
structure so that incumbent LECs are no longer required to recover any 
of the NTS cost of the local loop from IXCs on a per-minute basis. The 
Joint Board noted that it would be preferable for costs related to the 
loop to be recovered in a manner that is consistent with the manner in 
which the costs are incurred. Because the cost of a loop generally does 
not vary with the minutes of use transmitted over the loop, the Joint 
Board concluded that the current CCL charge that mandates recovery of a 
portion of loop costs through per-minute charges is an inefficient 
cost-recovery mechanism.
    59. We seek comment on possible revisions to the current CCL charge 
structure so that incumbent price cap LECs are no longer required to 
recover any of the NTS costs of the loop from IXCs on a traffic-
sensitive basis. One possible alternative, mentioned by the Joint 
Board, involves permitting incumbent LECs to recover the costs not 
recovered from SLCs through a flat, per-line charge paid by IXCs. An 
administratively simple mechanism for recovery of such a flat-rate 
charge would be to assess it against each customer's presubscribed 
interexchange carrier (PIC). If carriers seek to pass on that charge to 
end users, however, such an approach might encourage end users not to 
select a PIC. To resolve this problem, the Joint Board suggested that 
the Commission allow incumbent LECs to collect the flat-rate charge 
that would otherwise be assessed against the PIC directly from any 
customer who elects not to choose a PIC. We seek comment on this 
approach and invite parties to discuss the potential problem created 
when end-user customers have selected PICs but use other IXCs for 
Internet, fax, interexchange or other interstate services by ``dialing-
around'' the PIC.
    60. The Competition Policy Institute (CPI) has suggested several 
other alternatives to the per-minute recovery of interstate NTS loop 
costs. For example, interstate NTS loop costs may be recovered through 
``bulk billing,'' in which carriers are assessed a charge based upon 
their percentage share of interstate minutes of use or revenues. An 
additional possible approach to recovering interstate NTS loop costs is 
a ``capacity charge'' assessed on carriers based upon the number and 
type of trunks that they purchase from the incumbent LECs. 
Alternatively, LECs could assess a ``trunk port charge'' to each 
carrier based upon the number of trunk-side ports, or connections it 
has to the local switch. Another possibility is a ``trunk port and line 
port'' charge, which would be based upon the number of trunk-side ports 
and the number of line-side ports. We seek comment on these approaches 
to recovery of interstate NTS local loop costs and ask parties to 
propose other efficient recovery mechanisms. We invite parties to 
comment on whether any changes that we adopt to the recovery of 
interstate NTS local loop costs for price cap LECs should be extended 
to rate-of-return LECs, and the relationship of interstate NTS loop 
cost recovery under access charges to the Joint Board Recommended 
Decision. Interested parties should address how such an extension to 
rate-of-return LECs would affect small business entities, especially 
small incumbent LECs.
    61. Parties should also address whether, in the event that we 
eliminate the SLC cap for lines used by multi-line business customers 
and residential lines beyond the primary residential line as discussed 
below, we need to adopt an alternative mechanism for recovering common 
line costs currently recovered through the CCL charge imposed on such 
lines. We also seek comment, in conjunction with our market-based 
approach to access reform, on the circumstances under which we should 
grant LECs rate structure flexibility in their recovery of interstate 
common line costs from IXCs. Interested parties should also address the 
extent to which any proposed alternative recovery mechanism for 
recovering common line costs currently recovered through the CCL charge 
will affect small business entities, including small incumbent price 
cap LECs and new entrants.
    62. Finally, we seek comment on whether there are any limitations 
on our authority to assess flat-rated CCL

[[Page 4681]]

charges on IXCs. In particular, we note that section 254(g) also 
requires IXCs to charge their subscribers in rural and high cost areas 
within a state the same rates they charge to their subscribers in urban 
areas in that state. Section 254(g) also requires IXCs to charge their 
subscribers in each state rates no higher than the rates charged to 
subscribers in any other state. Would this requirement preclude an IXC 
from charging its customers the flat monthly rate assessed for that 
line if the amount of that charge varied among states, or between urban 
and rural areas within a state? If so, do conditions exist sufficient 
to require the Commission to forbear from the application of section 
254(g) to IXC recovery of flat-rate CCL charges? Parties should also 
address the effect of section 254(g) if CCL charges vary among the 
states, but end-user rates may not vary.
3. Alternative Methods of Recovery of SLC Portion of Subscriber Loop 
Costs
    63. In its Recommended Decision, the Joint Board determined that 
eligible carriers should receive support for designated services 
carried on the initial connection to a customer's primary residence and 
single-line business customers. The Joint Board, however, recommended 
that universal service support should not be provided for multi-line 
business or residential connections beyond the primary residential 
connection. The Joint Board further concluded that the current $3.50 
SLC cap for primary residential and single-line business lines should 
not be increased, but did not state that the SLC cap should be 
maintained for multi-line business or residential connections beyond 
the primary residential connection. Loop costs not recovered from the 
current multi-line business SLCs, and SLCs for residential lines in 
addition to the primary connection, are recovered through usage-
sensitive CCL charges, which in turn are recovered from toll users. 
Since end user customers of multi-line business and multiple-line 
residential services do not necessarily make large numbers of toll 
calls, the toll payments of these end users may not cover the portion 
of loop costs not recovered through the SLC. Moreover, toll rates are 
higher than they otherwise would be, which discourages demand for such 
services.
    64. For these reasons, we propose to increase the cap on the SLC 
for the second and additional lines for residential customers and for 
all lines for multi-line business customers to the per-line loop costs 
assigned to the interstate jurisdiction. This would allow incumbent 
LECs to recover interstate common line costs for multi-line business 
customers and for residential connections beyond the primary 
residential connection in a manner consistent with the way costs are 
incurred. Alternatively, we could eliminate the cap for multi-line 
business customers and for residential connections beyond the primary 
connection, especially where the incumbent LEC has entered into 
interconnection agreements and taken other steps to lower barriers to 
actual or potential local exchange competition. Under that approach, we 
would not prohibit an incumbent LEC from charging a SLC for second and 
additional lines for residential customers and for all lines for multi-
line business customers that exceeds the per-line loop costs assigned 
to the interstate jurisdiction. We emphasize that this proposal would 
not affect the current cap of $3.50 on the SLC that is charged to a 
residential customer's primary line and to a single-line business 
customer. We invite parties to comment on this proposal. We also invite 
parties to comment on whether any changes that we adopt to the cap on 
SLCs for price cap LECs should be extended to rate-of-return LECs, and 
the relationship of any such changes to the Joint Board Recommended 
Decision. Interested parties should address how applying such a cap on 
SLCs to rate-of-return LECs would affect small business entities, 
especially small incumbent LECs.
    65. In the event we decide to increase or eliminate the cap on SLCs 
for multi-line business lines and residential lines in addition to the 
primary line, we also solicit comment on whether we should establish a 
transition mechanism for this increase, whether such a transition could 
be implemented consistent with section 254, and if so, how long this 
transition period should be. We propose establishing no transition 
period if the increase in the SLC is less than one dollar, and 
establishing a three-year transition period if the increase is one 
dollar or more, but we invite comments on other alternatives in 
addition to these.
    66. Finally, we seek comment on whether we should permit or require 
incumbent LECs to deaverage SLCs as part of the baseline rate structure 
that would be imposed on all incumbent price cap LECs. In particular, 
we note that section 254(e) requires us to adopt only explicit support 
subsidies for universal service support. We seek comment on whether 
geographic averaging of SLCs is an implicit subsidy that is 
inconsistent with the requirements of section 254(e), and thus on 
whether we are required to deaverage SLCs.
4. Assessment of SLCs on Derived Channels
    67. Integrated services digital network (ISDN) services permit 
digital transmission over ordinary local loops through the use of 
advanced hardware and software. ISDN offers data transmission at higher 
speeds and with greater reliability than standard analog service. Most 
incumbent LECs currently offer two types of ISDN service, Basic Rate 
Interface (BRI) service and Primary Rate Interface (PRI) service. BRI 
service allows a subscriber to obtain two voice-grade-equivalent 
channels and a signalling/data channel over an ordinary local loop, 
which generally is provided over a single twisted pair of copper wires. 
PRI service allows subscribers to obtain 23 voice-grade-equivalent 
channels and one data signalling channel over two pairs of twisted 
copper wires. BRI service generally is used by individuals and small 
businesses, and PRI service generally is used by larger businesses. LEC 
services other than ISDN use derived channel technology to provide 
multiple channels over a single facility. The LECs also use derived 
channel technologies within their networks, for example, to provide 
customers with individual local loops. In such situations, the end user 
generally is not aware that the LEC is using this technology.
    68. In the End User Common Line Charges, CC Docket No. 95-72, 
Notice of Proposed Rulemaking, 60 FR 31274 (June 14, 1995) (ISDN SLC 
NPRM), we noted that the application of SLCs under our existing rules 
to ISDN services may discourage demand for these services, and we 
sought comment on whether more than one subscriber line charge should 
be applied to ISDN services, and if so, how many charges.
    69. As shown in Table 2 below, the cost data submitted in response 
to the ISDN SLC NPRM indicates that the ratio of NTS costs of BRI ISDN 
to standard analog service is approximately 1.24 to 1. The ratio of NTS 
costs of PRI ISDN to standard analog service, excluding NYNEX's data, 
is roughly 10.5 to 1. As shown in Table 3, NYNEX's data appear to be 
outliers and are therefore excluded from the calculation of the average 
ratio for PRI ISDN to standard analog service because the ratios of its 
outside plant and NTS costs for PRI ISDN to standard analog service are 
almost twice those of other incumbent LECs. Interested parties filed 
their comments in the ISDN SLC proceeding prior to the enactment of the 
1996 Act. We ask for comment on the effect of the 1996 Act on

[[Page 4682]]

determining how many SLCs should be applied to ISDN services. Finally, 
we solicit comment on whether mandatory rate structures or rate caps 
should be prescribed for ISDN service or other derived channel 
services.

 Table 2.--Ratio of Costs of Standard Analog Service to BRI ISDN Service
------------------------------------------------------------------------
                                                  Outside               
                                                plant (loop    All NTS  
                                                only) costs     costs   
------------------------------------------------------------------------
Ameritech.....................................       1:1.07       1:1.45
Bell Atlantic.................................       1:1.01       1:1.36
NYNEX.........................................       1:0.85       1:1.23
Pacific Bell..................................       1:1.05       1:1.13
US West.......................................       1:0.80       1:1.07
Average ratio of costs........................      *1:0.96     *1:1.24 
------------------------------------------------------------------------
*Averages may differ due to rounding.                                   


                     Table 3.--Ratio of Costs of Standard Analog Service to PRI ISDN Service                    
----------------------------------------------------------------------------------------------------------------
                                                                             Outside                            
                                                                Outside    plant (loop                 All NTS  
                                                              plant (loop  only) costs    All NTS       costs   
                                                              only) costs   (excluding     costs      (excluding
                                                                              NYNEX)                 NYNEX data)
----------------------------------------------------------------------------------------------------------------
Ameritech...................................................       1:5.68       1:5.68        1:8.9        1:8.9
Bell Atlantic...............................................       1:4.13       1:4.13      1:15.80      1:15.80
NYNEX.......................................................      1:10.94     excluded      1:27.74     excluded
Pacific Bell................................................       1:4.67       1:4.67       1:8.70       1:8.70
US West.....................................................       1:5.33       1:5.33      1:10.60      1:10.60
Average ratio of costs......................................       *1:6.5      *1:4.95     *1:15.13     *1:10.5 
----------------------------------------------------------------------------------------------------------------
*Averages may differ due to rounding.                                                                           

C. Local Switching

    70. The local switch connects a call coming in on one line or trunk 
to another line or trunk connected to the switch. A local switch 
consists of line and trunk cards, and an analog or digital switching 
system. Line cards provide interfaces between subscriber lines and the 
switch. Trunk cards or ``ports'' provide interfaces between the switch 
and interoffice trunks. Because line cards, as well as trunk cards, are 
deployed within the central office, they are accounted for in the 
switching accounts of the USOA. These costs are therefore included in 
the switching category for separations and cost allocation purposes. 
The central processing portion of the switch performs the routing 
function based on the telephone numbers dialed by the end user placing 
the call.
1. Non-Traffic-Sensitive Charges
    71. Currently, Section 69.106 of our rules requires incumbent LECs 
to charge per-minute rates for local switching. A significant portion 
of local switching costs, however, likely do not vary with usage. For 
example, the costs associated with line cards or line-side ports appear 
to vary with the number of loops connected to the switch, not with the 
level of traffic over the loops. We tentatively conclude that it is 
more reasonable and economically efficient to recover dedicated line 
card costs through flat charges. We solicit comment on establishing a 
flat rate element for NTS local switching costs. We also invite 
commenters to recommend methods of identifying line card costs and 
other NTS local switching costs.
    72. The central processing portion of the switch, and many trunk-
side ports, are shared local switching facilities because they are used 
to carry the traffic of several access customers, and so should be 
priced on a usage-sensitive basis. By contrast, because trunks for 
dedicated transport service are dedicated to individual IXCs, ports for 
dedicated transport service also appear dedicated to individual 
customers, and, consequently, the charges for such facilities should be 
flat-rated. While flat rates appear reasonable for recovering costs 
associated with dedicated ports and line cards, it is not clear what 
rate structure would best reflect the manner in which incumbent LECs 
incur costs associated with shared local switching facilities. If all 
shared local switching costs are driven by the number of lines and 
trunks served by the switch, flat rates would appear appropriate. On 
the other hand, usage-sensitive charges might better reflect the way 
incumbent LECs incur costs for shared local switching facilities. 
Finally, a combination of flat-rate and usage-sensitive charges may 
best reflect cost causation principles. AT&T and MCI have argued that a 
substantial portion of local switching costs are non-usage-sensitive, 
and the local switching rate structure, therefore, should include both 
usage-sensitive and non-usage-sensitive rate elements. Ameritech has 
stated that, for a majority of the switches in its network, more than 
40 percent of switching costs are NTS. We seek comment generally on 
this analysis, and on how we should establish an appropriate, efficient 
rate structure for switching. We note that states may be considering 
this same issue in the context of establishing rates for unbundled 
local switching, and we seek comment on, and analysis of how, states 
are addressing these issues under Section 252.a
2. Traffic-Sensitive Charges
    73. In the following paragraphs, we seek comment on a number of 
specific proposals for rate structures governing rates designed to 
recover usage-sensitive local switching costs. Interested parties 
should discuss which of these rate structure proposals most accurately 
reflect traffic-sensitive local switching costs, and whether we should 
permit or require incumbent LECs to assess these traffic-sensitive 
charges. Parties advocating a particular rate structure should address 
all the issues raised by that approach. We also invite parties to 
propose other rate structures.

[[Page 4683]]

    a. Call-Setup Charges. 74. Call setup is the process of 
establishing a transmission path over which a phone call will be 
routed. We could permit or require incumbent LECs to develop call-setup 
charges if we find that usage-sensitive charges might better reflect 
the way they incur certain costs for shared local switching facilities. 
The per-minute rate structure prescribed by Part 69 for local switching 
does not separately address costs that incumbent LECs may incur for 
call setup and takedown. Call-setup costs would be incurred for each 
call regardless of its duration or whether it is completed. Because no 
separate charge exists for call setup, incumbent LECs must recover 
these costs through the per-minute local switching charges, or possibly 
through other rate elements. It is possible that some SS7 call-setup 
costs are currently recovered through the TIC. Thus, longer-duration 
calls recover a greater portion of call-setup costs than shorter calls 
even if they do not impose greater call-setup costs. A per-call rate 
element for call setup would more rationally reflect these costs.
    75. In the past, the Commission has rejected incumbent LEC 
petitions for waiver of Part 69 for purposes of imposing a call-setup 
charge, on the grounds that such proposals should be considered in a 
broader rulemaking. Accordingly, we now seek comment on whether we 
should permit or require incumbent LECs to include a call-setup charge 
in their local switching rate structures. We also request comment on 
the extent to which the current local switching rate element recovers 
costs that vary with the number of calls, rather than their duration. 
Should a call-setup charge apply to all call attempts, or only to 
completed calls? We seek comment on whether incumbent LECs incur 
different call-setup costs depending on whether a call is delivered via 
direct-trunked or tandem-switched transport service, and on the 
different costs incurred when multifrequency (MF) and SS7 signalling 
are used for call setup. Finally, we invite comment on whether any of 
these cost differences should be reflected by establishing different 
charges for different kinds of call setup. To the extent that parties 
support a separate charge for SS7 call setup, those parties should 
explain how such a charge would be consistent with the rate structure 
for other SS7 services we discuss below.
    b. Peak and Off-Peak Pricing. 76. We could direct or allow 
incumbent LECs to develop peak and off-peak pricing for shared local 
switching facilities. When incumbent LECs select the types of switches 
that they will deploy in their networks, they base their decisions on 
the anticipated peak demand. Thus, incumbent LECs arguably should be 
permitted to establish separate rate elements for local switching 
provided during peak periods and off-peak periods. The peak prices 
would be per-minute rates, and designed to recover the costs of 
additional capacity that an incumbent LEC must install to meet the peak 
demand. Because off-peak traffic requires no additional capacity, the 
costs of this traffic are lower, and accordingly, the access charges 
for that traffic should be lower as well.
    77. We previously sought comment on peak and off-peak pricing in 
the Interconnection Between Local Exchange Carriers and Commercial 
Mobile Radio Service Providers, CC Docket No. 95-185, Notice of 
Proposed Rulemaking, 61 FR 3644 (February 10, 1996) (LEC/CMRS NPRM), 
and addressed those comments in the Implementation of the Local 
Competition Provisions of the Telecommunications Act of 1996, CC Docket 
No. 96-98, First Report and Order, 61 FR 45476 (Aug. 29, 1996) (Local 
Competition Order). We recognized in the Local Competition Order that 
there might be practical problems with a rate structure that had 
different peak and off-peak pricing. Therefore, we did not mandate a 
peak-sensitive rate structure for unbundled network elements, although 
we also did not preclude use of peak/off-peak pricing. Parties 
supporting requiring rather than merely permitting peak and off-peak 
pricing for local switching should explain why this rate structure is 
more suitable for access rates than it is for unbundled network 
elements.
    c. Current Rate Structure. 78. As another alternative, we could 
retain the existing per-minute local switching rate structure. Because 
a significant portion of local switching costs may not vary with 
minutes of use, however, the existing rate structure may be less 
desirable than the other options discussed above. We invite parties 
supporting the current rate structure to explain why they believe that 
it adequately reflects the manner in which traffic-sensitive local 
switching costs are incurred.

D. Transport

1. Background
    79. Transport service is the component of interstate switched 
access service corresponding to the transmission and switching of 
traffic between incumbent LEC end offices and IXC POPs. Part 69 of our 
rules requires incumbent LECs to develop charges for transport service 
that may not reflect in some cases the manner in which they incur the 
costs of providing these services. Thus, as we discussed with respect 
to local switching charges above, it may be necessary to revise our 
Part 69 rate structure requirements for transport services.
    80. Since December 1993, transport has been provided pursuant to 
interim rules that replaced the ``equal charge per unit of traffic'' 
requirement of the MFJ. We required incumbent LECs to establish flat 
rates for: (1) ``Entrance facilities,'' transport service from the IXC 
POP to the SWC, and (2) ``direct-trunked transport,'' transport service 
from a SWC to an end office on dedicated facilities without switching 
at a tandem switch. In addition, incumbent LECs were directed to 
establish usage-based charges for ``tandem-switched transport,'' a 
transport service from the SWC to the end office that provides 
switching at a tandem switch. The tandem-switched transport service 
charge includes an interoffice transmission charge, and a charge for 
the tandem switch.
    81. The initial rate levels for direct-trunked transport were 
generally presumed reasonable if they were based on rates for 
comparable special access services. The per-minute tandem-switched 
transport transmission charge was based on assumptions about average 
monthly DS1 and DS3 usage. The charge for the tandem switch was 
initially set to recover 20 percent of the Part 69 tandem revenue 
requirement. Finally, to make the restructure revenue neutral 
initially, we required incumbent LECs to establish a non-cost-based 
transport interconnection charge (TIC), to recover the revenue 
difference between what the LECs would have realized under the equal 
charge rate structure and what they would realize from the interim 
facility-based transport rates, including the remaining 80 percent of 
the tandem revenue requirement.
    82. Subsequently, in the Transport Rate Structure and Pricing, CC 
Docket No. 91-213, First Memorandum Opinion and Order on 
Reconsideration, 58 FR 41184 (August 3, 1993) (First Transport 
Reconsideration Order), the Commission required incumbent LECs to offer 
two pricing options for tandem-switched transport service. First, an 
IXC may purchase tandem-switched transport at usage-sensitive rates 
with any mileage component computed on the basis of the distance 
between the SWC and the end office, regardless of the actual physical 
routing. Second, an

[[Page 4684]]

IXC may purchase direct-trunked transport between the SWC and the 
tandem office and usage-rated tandem-switched transport between the 
tandem office and the end office, with any tandem-switched transport 
mileage component computed on the basis of the distance between the 
tandem office and the end office.
    83. In this section, we seek comment on whether to revise the 
facility-based components of the transport rate structure. In the 
following section, we seek comment on phasing out the TIC. Unlike the 
other rate structure rules we consider in Section III, we contemplate 
imposing any rules adopted relating to the transport rate structure or 
the TIC on all incumbent LECs. We propose, for reasons articulated in 
the Transport Rate Structure and Pricing, CC Docket No. 91-213, Report 
and Order and Further Notice of Proposed Rulemaking, 57 FR 54717 
(November 20, 1992) (First Transport Order), that the transport rate 
structure be divided into three parts: (1) Charges for entrance 
facilities; (2) charges for direct-trunked transport service; and (3) 
charges for tandem-switched transport service. We seek comment on 
adopting this basic framework for the transport rate structure rules. 
In commenting on the transport issues in this section, parties should 
bear in mind the interrelationship of these issues with those relating 
to the TIC, which is discussed in Section III.E, below.
    84. We also seek comment here and in Section III.E on the issues 
remanded in CompTel v. FCC, in which the court remanded the Orders in 
which we established the transport rate structure rules. The court held 
that we did not adequately explain our decision to require incumbent 
LECs to charge a non-cost-based TIC. The court remanded our decision to 
set the tandem-based transport rate element to recover 20 percent of 
the Part 69 tandem revenue requirement and to allocate the remaining 
revenue requirement to the TIC, because the Commission did not 
adequately explain why 20 percent would be more equitable than some 
other allocation. The court also found that we did not explain our 
decision to require incumbent LECs to allocate a greater proportion of 
overhead costs to the tandem-switched transport switching charge than 
to direct-trunked transport service rates. We address the TIC issue in 
Section III.E below, and the other two remand issues in this section.
2. Entrance Facilities and Direct-Trunked Transport Services
    85. For entrance facilities and direct-trunked transport service, 
we tentatively conclude that the transport rate structure rules should 
mandate flat-rated charges. These transport facilities appear to be 
dedicated to individual customers, and we believe that flat rates 
reflect the way incumbent LECs incur costs for dedicated facilities. We 
invite comment on this tentative conclusion. We also seek comment on 
whether incumbent LECs should be permitted to offer transport services 
differentiated by whether the LEC or the IXC is responsible for channel 
facility assignments. In the past, Ameritech and Bell Atlantic have 
sought waivers of our Part 69 rules to offer such a switched access 
service, alleging that it would permit them to utilize the access 
network more efficiently. We seek comment on whether any rules beyond 
those included in the interim rules are necessary to govern rate levels 
for these services.
3. Tandem-Switched Transport Services
    a. Rate Structure. 86. We present several options for the rate 
structure associated with tandem-switched transport service facilities. 
The first option would maintain the interim rate structure's treatment 
of the tandem-switched transport charge, which gives IXCs a choice of 
two pricing alternatives for purchase of tandem-switched transport 
service. IXCs may elect to pay a single usage-sensitive charge, with 
distance measured in airline miles from the SWC to the end office, if 
applicable. Alternatively, IXCs may choose a flat-rated charge for a 
dedicated facility from the SWC to the tandem office, and a usage-
sensitive charge for tandem-switched transport service from the tandem 
office to the end office, with mileage computed separately for the two 
segments, if applicable.
    87. The second option would eliminate an IXC's ability to select 
the first choice and require incumbent LECs to assess flat-rated 
charges for the circuit between the SWC and the tandem, which typically 
is a dedicated circuit, and to apply usage-based rates to the tandem-
to-end office link. This was the original transport rate structure the 
Commission established in 1983 in the Access Charge Order.
    88. In conjunction with either of the two options for pricing 
tandem-switched transport service transmission facilities, we could 
treat tandem switching similarly to one of our proposals for the local 
switching rate structure, discussed in Section III.C above. As with the 
end-office switch, the tandem switch may include equipment dedicated to 
particular customers, such as the network ports through which a 
particular IXC's traffic enters and leaves the tandem switch. Thus, we 
could require incumbent LECs to develop usage-sensitive charges for 
shared facilities (the tandem switching functions and the ports on the 
end office side of the tandem switch), and a flat-rated charge for the 
dedicated ports on the SWC side of the tandem switch. Alternatively, 
shared tandem switching costs may be driven by the number of trunks on 
the end-office side and the SWC side of the tandem switch, just as 
shared local switching costs may be driven by the number of lines and 
trunks connected to the switch. If this is the case, then flat monthly 
rates may better reflect shared tandem switching costs. Parties are 
invited to comment on whether tandem switches differ in any fundamental 
way from end office switches with respect to the division of costs 
associated with shared and dedicated facilities.
    89. In addition to any of the tandem-switched transport service 
options discussed above, we could permit or require incumbent LECs to 
develop peak load pricing for tandem-switched transport service. Most 
small IXCs use tandem-switched transport service for all or most of 
their access traffic, while larger IXCs may use tandem-switched 
transport service on relatively fewer routes, or may use it only to 
handle their overflow traffic during peak hours. Thus, some portion of 
tandem costs may be attributable to the need to accommodate this 
overflow traffic from direct-trunked transport facilities. We invite 
comment on whether to permit or require incumbent LECs to develop peak 
and off-peak pricing for tandem switching. We also invite comment on 
whether some portion of tandem switching costs should be recovered from 
direct-trunked transport service customers, if in fact a portion of 
tandem switching capacity is necessary to meet demand from direct-
trunked transport customers during peak period. Parties advocating peak 
pricing should propose a method to determine the peak period. Because 
some access customers may use some SWC-side trunks and ports to carry 
overflow traffic, and the costs of those ports are not traffic-
sensitive, flat rates may better recover the tandem-switched transport 
costs generated by that overflow traffic. We invite comment on this 
analysis.
    90. We seek comment on the benefits and detriments of each of the 
above options for reforming the tandem-switched transport rate 
structure. Parties are specifically asked to discuss whether any of 
these options accurately reflect the way incumbent LECs incur tandem 
switching costs. For example, we seek comment on the extent to

[[Page 4685]]

which tandem-switched and direct-trunked transport use the same or 
different physical routing, and in light of this, on whether the 
distance component of setting tandem-switched transport rates is most 
appropriately measured between the SWC and the end office, or in two 
charges, one for the SWC-to-tandem circuit and one for the tandem-to-
end office circuit. We invite parties to identify and quantify the 
specific NTS costs associated with the tandem switch that they believe 
are currently recovered through the usage-sensitive tandem charge. We 
also invite parties to suggest additional options for the tandem-
switched transport charge.
    b. Rate Levels. 91. We seek comment on how to establish a 
reasonable tandem switching charge in light of the court's remand. The 
interim transport restructure rules, which the court remanded, required 
incumbent LECs to base their initial tandem switching charge on 20 
percent of the interstate revenue requirement for tandem switching, 
with the remaining 80 percent to be recovered through the TIC. Thus, 
both the tandem charge and some portion of the TIC were designed to 
recover the costs included in the tandem-switched transport revenue 
requirement. The Commission found in the First Transport Order that 
this revenue requirement included some SS7 signalling cost, in addition 
to tandem switching costs. In Section III.E, below, we propose to 
reassign costs included in the TIC to those rate elements to which they 
are related, including the different transport rate elements. We seek 
comment on what costs are appropriately associated with the tandem 
switching function. Parties commenting on this issue should address how 
their proposals are consistent with the court's remand directives. We 
also ask parties to comment on whether, if we permit direct-trunked 
transport or entrance facility rate structure options based on whether 
the channel facility assignment is done by the IXC or the LEC, a 
similar option should be available for tandem-switched transport. We 
ask parties to comment on the interrelationship of the rate level issue 
and how any decision on transport rate levels affects the options for 
phasing out the TIC that are discussed in the following section.
    92. The court in CompTel v. FCC also directed us to explain why we 
permitted incumbent LECs to load a relatively large portion of their 
transport overhead costs to tandem-switched transport rates, and to 
base their direct-trunked transport overhead loadings on the lower 
overhead loading factors used for special access. Our resolution of the 
transport overhead loadings issue remanded by the court is also 
affected by our treatment of the TIC. If we decide to reallocate costs 
currently recovered through the TIC to other rate elements, this could 
change the amount of overhead costs allocated to both direct-trunked 
transport and tandem-switched transport. It is possible that 
reallocating costs from the TIC to direct-trunked transport and tandem-
switched transport charges would result in cost-based direct-trunked 
transport and tandem-switched transport charges, that is, direct-
trunked transport and tandem-switched transport charges that recover a 
proportionate amount of overhead costs. Thus, reallocating costs from 
the TIC could contribute to correcting any imbalance in overhead cost 
allocations between transport rate elements. We invite parties to 
discuss what other regulatory requirements are necessary to comply with 
the court's mandate on transport service overhead loadings.
    93. Furthermore, initial tandem-switched transport transmission 
rates were presumed reasonable if set as a weighted average of the per-
minute cost of DS3 and DS1 rates calculated using 9000 minutes of use 
per month. We note that USTA has alleged that the number of actual 
minutes traversing tandem circuits is significantly below 9000 minutes 
per month. We solicit comment on whether we should revise any transport 
rate structure requirement, either as a result of CompTel v. FCC, or 
for any other reason.
    94. Finally, we solicit comment on the relationship between our 
transport rate structure rules and the market-based access reform 
proposals we discuss in Section IV, and on the relationship between the 
transport rate structure rules and the prescriptive access reform 
proposals we discuss in Section V. Is our goal of driving interstate 
access rates to forward-looking economic cost consistent with retaining 
rules governing transport rate level relationships? Is it possible to 
comply with the court's mandate with regard to the tandem switching 
charge and transport overhead cost allocations without retaining some 
rules governing transport rate level relationships?

E. Transport Interconnection Charge

1. Background
    95. Under our Part 36 separations rules, certain costs of the 
incumbent LEC network are assigned to the interstate jurisdiction. The 
Part 69 cost allocation rules allocate these costs among the various 
access and interexchange services, including transport. In the First 
Transport Order, we restructured interstate transport rates for 
incumbent LECs. The restructure created facility-based rates for 
dedicated transport services based on comparable special access rates 
as of September 1, 1991, derived per minute tandem-switched transport 
transmission rates from those dedicated rates, established a tandem 
switching rate, and established a TIC that initially recovered the 
difference between the revenues from the new facility-based rates and 
the revenues that would have been realized under the preexisting 
``equal charge rule.'' The TIC was intended as a transitional measure 
that initially made the transport rate restructure revenue neutral for 
incumbent LECs and reduced any harmful interim effects on small IXCs 
caused by the restructuring of transport rates. Approximately 70 
percent of incumbent LEC transport revenues are generated through TIC 
charges, or approximately $2.9 billion out of $4.0 billion in transport 
revenues.
    96. The TIC is a per-minute charge assessed on all switched access 
minutes, including those of competitors that interconnect with the LEC 
switched access network through expanded interconnection. The usage-
rated TIC increases the per-minute access charges paid by IXCs and 
long-distance consumers, thus artificially suppressing demand for such 
services and encouraging customers to bypass the LEC switched access 
network, particularly through the use of switched facilities of 
providers other than the incumbent LEC. In addition, to the extent that 
any portion of the TIC should properly be included in LEC transport 
rates, other than the TIC, the TIC provides the LECs with a competitive 
advantage for their interstate transport services because incumbent LEC 
transport rates are priced below cost while the LECs' competitors using 
expanded interconnection must pay a share of incumbent LEC transport 
costs through the TIC.
    97. Our goal in this proceeding is to establish a mechanism to 
phase out the TIC in a manner that fosters competition and responds to 
the court's remand. The resolution of the TIC issues is also related to 
the resolution of three other issues. First, the Universal Service 
Joint Board recently recommended establishing a universal service 
support mechanism. In Section VII.A, below, we seek comment on how any 
support amounts should be allocated to reduce interstate rates. Some of 
those support amounts may reduce the amount that would otherwise be 
recovered through the TIC. Second, the adoption of either the market-
based or prescriptive

[[Page 4686]]

approach to access reform will establish the extent to which incumbent 
LEC costs will be recovered through facility-based access charges. 
Third, if we conclude that incumbent LECs should be permitted to 
recover some embedded access costs for some period in a competitively 
neutral manner, as discussed in Section VII.B, below, some of those 
costs may be costs that are currently included in the TIC. 
Consequently, resolution of these issues may reduce the costs currently 
included in the TIC.
    98. As we discuss more fully below, the costs now recovered in the 
TIC could be addressed in several different ways. Some incumbent LECs 
have urged us to give them significant pricing flexibility and allow 
market forces to discipline the recovery of the TIC, either alone, or 
in conjunction with a phase-out of the TIC. A second method of 
eliminating the TIC would be to quantify and correct all identifiable 
cost misallocations and other practices that result in costs being 
recovered through the TIC. A third approach would be a combination of 
these approaches. For example, we could address directly the most 
significant and readily-corrected misallocations, and then rely on a 
market-based approach to reducing what remains of the TIC. Finally, we 
could provide for the termination of the TIC over a specified time 
period, such as three years.
    99. We address below some explanations for the amounts in the TIC, 
and then seek comment on possible means of reducing or eliminating the 
TIC.
2. Possible Sources of Costs in the TIC
    100. In the NPRM included in the First Transport Order, the 
Commission sought comment on the nature of the costs included in the 
TIC so that those costs could be reallocated. Parties in the Transport 
proceeding and in more recent ex parte filings have offered various 
explanations of the composition of the costs included in the TIC. We 
summarize below several of the more significant explanations presented 
by the parties. Our discussion of these comments is divided into two 
parts. One group of comments describes the costs included in the TIC as 
the result of transport rate setting choices. The other group of 
comments describes the costs as related to potential cost 
misallocations.
    a. Transport Rate Setting. 101. Tandem Switching and SS7 Costs. In 
the First Transport Order, we concluded that the interim transport rate 
structure should include a tandem element that would initially recover 
20 percent of the interstate revenue requirement associated with the 
tandem switch, while the remaining 80 percent of the interstate revenue 
requirement would be assigned to the TIC. We took this action because 
of our uncertainty about the specific sources of the costs that were in 
the tandem switching revenue requirement and because of our concern 
about possible adverse impacts on small and medium IXCs as the new rate 
structure was introduced.
    102. USTA submits that the portion of the tandem interstate revenue 
requirement that is included in the TIC includes some costs incurred in 
the provision of SS7 signalling, line information database (LIDB), and 
other related signalling services. These costs bear no particular 
relationship to the operation of the tandem switch. As discussed below, 
under the interim transport rate structure, LECs recover a portion of 
their SS7 costs through a flat-rated dedicated signalling transport 
charge assessed on a per-line basis and a flat-rated STP port 
termination charge. The costs associated with other signalling 
functions, such as transporting SS7 messages within the signalling 
network, are not recovered through any facility-based rate element, 
having generally been incorporated in the transport function, and thus 
are presumably embedded in the TIC. These SS7 costs relate to services 
used by all LEC transport customers, and, in the future, potentially to 
users who are not LEC transport customers. The costs associated with 
the provision of signalling services are related to the new signalling 
rate elements discussed below, and if we establish such signalling rate 
elements, they would not need to be recovered through the TIC.
    103. Tandem-Switched Transport Rate Setting. The Commission 
employed several assumptions in setting tandem-switched transport 
rates, which USTA alleges understate the rates for tandem-switched 
transport. First, under the interim transport rules, per minute tandem-
switched transport transmission rates between the SWC and the end 
office were presumed reasonable if they were based on a weighted mix of 
DS1 and DS3 special access rates and assumed 9000 minutes of use per 
voice grade circuit per month. USTA argues that the Commission's 
assumption of 9000 minutes of use per circuit per month for tandem-
switched transport circuits resulted in tandem-switched transport rates 
that were too low. It contends that the actual usage on tandem circuits 
can be measured and often is far less than the 9000 minutes assumed by 
the Commission. Second, USTA contends that the use of a per minute 
tandem-switched transport transmission rate from the SWC to the end 
office ignores that the SWC-to-tandem segment of tandem-switched 
transport is provided over a circuit that is dedicated to an IXC. It 
argues that the failure to price the SWC-to-tandem segment of tandem-
switched transport on a flat-rated basis led to some of those costs 
being included in the TIC. Third, USTA also alleges that tandem-
switched transport uses low-density routes between small end offices 
and tandem switches and thus does not use DS3 circuits to the same 
extent that DS3 circuits are used for direct-trunked transport service. 
Thus, according to USTA, the tandem-switched transport rate applicable 
to these low-density routes is too low. Finally, USTA asserts that 
distance-sensitive tandem-switched transport rates are too low because 
the rules used airline miles from the SWC to the end office rather than 
measuring distance through the tandem office. Each of these assumptions 
has been said to result in tandem-switched transport rates that produce 
revenues that are less than costs, with the difference being assigned 
to the TIC.
    104. Host-Remote Trunking Rate. The interim transport rules require 
incumbent LECs to assess tandem-switched transport rates for the 
carriage of traffic between a host switch and its remote. As with the 
tandem-switched transport rate itself, USTA argues that the 9000 
minutes of use per circuit reflects more usage than actually transits a 
circuit, and that the trunks do not exhibit the ratio of DS3-DS1 
relationship that was employed in setting the tandem-switched transport 
rate. USTA contends that the rate therefore does not recover all the 
costs of host-remote trunking.
    105. Multiplexing Costs. USTA asserts that the existing transport 
rates for transmission facilities do not account for all multiplexing 
costs in two instances, and that this results in costs being recovered 
through the TIC rather than in appropriate facility-based rates. First, 
it alleges that none of the transmission rates reflects the cost of the 
DS1/DS0 multiplexing needed to access those end office switches that 
cannot handle DS1 interfacing, such as analog electronic switches. Such 
switches constitute approximately 25 percent of the BOC switches. 
Second, USTA contends that the TIC also includes the two additional 
multiplexers needed in order to multiplex a DS3 circuit down to a DS1 
level before being switched at the tandem, and then back up to DS3 
afterward for transmission to an end office. To the extent that analog 
tandem switches exist, two additional DS1/DS0

[[Page 4687]]

multiplexers are needed to achieve the voice-grade interface with the 
tandem switch.
    106. Direct-Trunked Transport Rate. In the First Transport Order we 
established initial direct-trunked transport rates that generally were 
presumed reasonable if set at the LECs' September 1, 1992, rates for 
comparable special access services. USTA and other incumbent LECs argue 
that this resulted in costs being included in the TIC because 
facilities-based transport rates are too low outside high-volume, low-
cost areas. These LECs argue that high-capacity special access is 
provided primarily in high-volume, low-cost areas, making special 
access rates a good surrogate for transport rates only in such areas. 
They assert that transport in low-volume areas has significantly higher 
costs that are not recovered by rates for transport facilities because 
those rates were based on rates for special access service, which is 
more heavily concentrated in low-cost urban areas than is transport. 
SBC, for example, contends that a study of its interoffice facilities 
indicates that transport may cost over five times more in low-density 
areas than in high-density areas. These parties submit that these 
higher costs are included in the TIC.
    b. Possible Cost Misallocations. 107. As we noted above, the 
Commission's Part 36 separations and Part 69 cost allocation rules 
assign costs to access categories, including transport. Some of these 
costs were included in the TIC when it was established in 1993. Some 
LECs have indicated that some of the costs included in the TIC result 
from cost misallocations in these processes, as described below.
    108. Central Office Equipment (COE) Maintenance Expenses. USTA 
alleges that the TIC includes costs allocated to transport by current 
separations and cost allocation procedures that are properly excluded 
from facility-based transport rates. For instance, the separations 
rules allocate all expenses for maintaining central office equipment 
(including circuit equipment, switches, and operator services 
equipment) among the separations categories for circuit equipment, 
switching, and operator service on the basis of the apportionment of 
total COE investment that is allocated to each of those three 
categories. The separations expense allocations are then carried over 
into Part 69 and allocated among the interexchange and access 
categories. These parties contend that a more cost-causative approach 
would allocate each of these three types of expense based on the 
allocation of the investment associated with that type of expense. For 
example, they would allocate circuit equipment maintenance expenses 
between the jurisdictions and among the Part 69 elements based on the 
allocation of circuit equipment investment. The LECs allege that this 
change would move costs primarily from the TIC to the local switching 
category.
    109. Use of Circuit Terminations in Separating Costs Between 
Private Line and Message Services. Some parties contend that costs are 
included in the TIC because the separations procedures do not allocate 
costs to special access and transport categories in the same way, even 
though, as we concluded in the First Transport Order, the two 
categories of service use similar facilities. Specifically, these 
parties argue that the use of circuit termination counts in allocating 
trunking facilities under-allocates costs to the private line 
separations category. This occurs because a DS1 circuit (which 
generally carries 24 voice-grade circuits) used for private line 
service is counted as having only two terminations, while a similar 
circuit used for switched message services is counted as having 48 
terminations (two per voice-grade circuit). Because the Commission used 
special access rates to establish the initial facility-based transport 
rate levels, and the TIC was derived from those rates, any under-
allocation of costs to special access could result in the TIC 
containing costs that may be more appropriately recovered through 
facility-based special access rates.
    110. Over-allocation of costs to the interstate jurisdiction. Some 
parties also allege that the TIC recovers costs allocated to the 
interstate jurisdiction that should properly be allocated to the 
intrastate jurisdiction. These parties contend that such costs were not 
included in the special access rates that were the basis for the 
initial transport rates, and that these costs therefore were included 
in the TIC.
3. Possible Revisions to the TIC
    111. As we have noted earlier, our goals are to move towards 
significantly more cost-based access rates and competition in the 
access and interexchange markets. The development of a competitive 
access market will be distorted by the assessment of the TIC as a 
surcharge on local switching. The TIC therefore will be unsustainable. 
In this section we describe several approaches for revising the TIC and 
raise specific questions concerning the various approaches.
    112. As discussed further below, one approach to revising the TIC 
that has been suggested by some incumbent LECs would be to give them 
significant pricing flexibility, thereby permitting them to address the 
TIC problem in a manner consistent with the dictates of the market. 
These LECs argue that the presence of unbundled elements makes it 
possible for competitors to reach all customers immediately and 
warrants significant pricing flexibility. They request various types of 
pricing flexibility now, including deaveraged rates, consolidation of 
price cap baskets, contract carriage, and access rates based on end-
user customer class distinctions.
    113. Ameritech and NYNEX have made such proposals. Ameritech favors 
phasing the TIC down over a short transition period of three to five 
years. Under this plan, the TIC reductions would not affect the basket 
PCI and thus rate increases for other services would be possible within 
the current bounds of the price cap rules. NYNEX claims that, if given 
sufficient pricing flexibility for facility-based rates and the TIC, it 
will be able to manage access pricing in a way that permits it a 
reasonable opportunity to recover its costs, while minimizing the 
effect on the competitive marketplace. For example, NYNEX would 
deaverage its rates downward in high-density areas to permit it to 
respond to competition, while leaving its other rates unchanged in 
order to permit it to continue recovering the existing contribution 
included in those rates. NYNEX does not propose any specific phase out 
of the TIC, because it asserts that the market will discipline its 
pricing practices.
    114. We ask parties to comment on the need for some transitional 
mechanisms given that approximately seventy percent of interstate 
transport revenues are currently generated from TIC charges. We seek 
comment on what would constitute a sufficient reason to use a 
transition mechanism. For example, should any transition consider the 
extent to which IXCs must make significant adjustments to their network 
configurations in response to any revised TIC recovery methods? We also 
seek comment on the duration of any transition period.
    115. Alternatively, we could revise the TIC by quantifying and 
correcting all identifiable cost misallocations and other practices 
that cause costs to be included in the TIC. This approach would require 
difficult, detailed analysis of individual LEC cost data and probably 
would not provide an explanation for all the costs in the TIC. 
Furthermore, it would undoubtedly identify cost allocation problems 
that we could not remedy in this proceeding because of the need to 
refer jurisdictional costs allocation issues to a

[[Page 4688]]

Federal-State Joint Board. Once identified and quantified, the costs 
comprising the TIC could be: (1) left in the TIC subject to market 
pressures; (2) reassigned to various access services (including 
transport facility-based elements) and to nonregulated activities, as 
appropriate; (3) recovered in a competitively-neutral manner as a 
matter of public policy; or (4) removed from the regulated books of 
account. In evaluating these options, we would bear in mind that the 
incumbent LECs are in the best position to identify and quantify the 
reasons costs are in the TIC, and we would therefore place the burden 
on them to justify particular treatment of TIC costs. As with the 
preceding approach, we seek comment on the need for, and the duration 
of, any transition period.
    116. As a third method, we could combine the forgoing alternatives. 
That is, we could reassign some costs to facility-based elements when 
warranted by forward-looking cost indicia and address the remaining 
costs in the TIC through a phase-out methodology. Under this approach, 
we could, for example, reassign those costs that were readily 
identifiable and quantifiable, or necessary to respond to the court's 
remand directives, and phase out the remainder of the TIC under either 
the market-based or prescriptive approach to access reform. We 
tentatively conclude that this approach better serves the public 
interest than would an attempt to determine exhaustively the sources of 
the costs included in the TIC because it is administratively simpler, 
and it is likely that we could not establish the causes for all the 
costs included in the TIC. We seek comment on the relationship of this 
method to whether we select a market-based or prescriptive approach to 
rate levels, as discussed further below. As with the preceding two 
approaches, we seek comment on the need for, and the duration of, any 
transition period.
    117. Finally, as a fourth option, we could establish a schedule 
under which the costs included in the TIC are phased out. Under this 
option, we would establish a fixed time period during which incumbent 
LECs could in succeeding years recover a declining portion of the 
amounts included in the TIC. At the conclusion of the period, LECs 
could no longer recover any TIC revenues. In conjunction with the 
option of phasing out of the TIC, a LEC's PCIs, or SBIs, could be 
adjusted to reflect the phase-out of the TIC, or they could be left 
unchanged. Again, we seek comment on the relationship of this method to 
whether we select a market-based or prescriptive approach to rate 
levels, as discussed further below.
    118. We seek comment on the extent to which the above approaches to 
revising the TIC will achieve the goals of this proceeding. Parties 
should address the relative merits of each, or of other approaches that 
they may suggest. In particular, they should address how each plan 
would accommodate any universal service or residual cost amounts that 
might be allocated to the TIC. We also seek comment on how each of the 
above approaches affects small business entities, including small LECs 
and new entrants. Below, we inquire about specific issues concerning 
these approaches.
    119. In evaluating possible approaches to recovery of the TIC, 
parties should address the possible explanations set out above for the 
sums in the TIC, including the reasonableness and significance of each 
of the explanations. We invite incumbent LECs to quantify the amounts 
attributable to each explanation. Parties presenting data to quantify 
amounts in the TIC should include sufficient detail to permit the 
Commission and interested parties to evaluate the procedures used and 
to adjust the results, if necessary, to address concerns raised in the 
record. Parties are also asked whether there are any additional 
explanations for the amounts included in the TIC. Parties should 
quantify their explanations to the extent possible. Finally, we ask 
parties to comment on whether any interstate costs are included in the 
TIC that the LECs should be required to write off their regulated books 
of account as not prudently invested, no longer used and useful, or for 
some other reason. Any party believing that such costs exist should 
explain why they should be written off, and provide the legal basis and 
methodology for doing so. In this connection, they should comment on 
the approaches discussed in Section VII.B.3, below regarding possible 
disallowances.
    120. In Section V, below, we discuss giving incumbent LECs 
additional pricing flexibility as certain triggers are satisfied. We 
ask parties to comment on the relationship of those pricing flexibility 
approaches to the need for pricing flexibility in conjunction with 
revising the TIC under any of the methods discussed above, or suggested 
by any party. For example, because some of the costs in the TIC may 
result from facility-based rates not reflecting the full costs of 
serving rural or low-density areas, we ask parties to comment on 
whether deaveraged pricing is essential to the achievement of our goals 
with respect to the TIC. We also seek comment on whether other forms of 
pricing flexibility are essential to reform of the TIC. We invite 
parties to comment on how any pricing flexibility needed for this 
purpose would affect the competitive development of the broader access 
market. We invite parties to comment on whether any public policy 
reasons would support retaining some costs in the TIC.
    121. Any reallocations that may be necessary to implement the 
elimination or revision of the TIC will give rise to exogenous cost 
adjustments for price cap LECs under our price cap rules. Parties 
therefore are asked to comment on whether any special exogenous cost 
adjustment procedures are necessary to adjust the affected PCIs, APIs, 
or SBIs. Parties are asked to comment on whether any downward exogenous 
cost adjustments resulting from access reform should be targeted to the 
TIC. We also ask parties to comment on what modifications to our access 
charge rules for rate-of-return LECs are necessary to address any 
revisions to the TIC that may be adopted. Finally, we ask whether any 
modifications to the rules applicable to special access services are 
necessary to accommodate any of the modifications discussed in this 
section of the NPRM.

F. SS7 Signalling

1. Background
    122. SS7 is the international standard network protocol currently 
used to transmit signalling information over common channel signalling 
(CCS) networks, and consequently those networks are often described as 
``SS7 networks.'' The Part 69 rate structure for SS7 services or 
facilities may not currently reflect the manner in which incumbent LECs 
incur SS7 costs, and so may skew the development of competition for SS7 
services. Therefore, we seek comment in this section on whether and how 
to revise the rate structure for SS7 services.
    123. SS7 networks consist of high-speed packet switches and 
dedicated circuits that are separate from, but interconnected with, the 
telecommunications networks over which telephone calls are carried. 
Incumbent LECs typically use SS7 networks for three purposes: (1) For 
call setup; (2) to obtain information from remote databases, such as 
billing information that must be obtained from the line information 
database (LIDB) to determine whether a calling card is valid, or 
information identifying the designated carrier of a toll-free 800

[[Page 4689]]

service subscriber; and (3) to transmit the information and 
instructions necessary to provide custom local area signaling services 
(CLASS features), such as automatic call back and caller ID. The SS7 
signalling networks will also play an important role in the 
implementation of intelligent network (IN) functionality in incumbent 
LEC networks.
    124. As illustrated in Figure 2 above, incumbent LEC CCS networks 
generally include the following basic components. Dedicated network 
access lines (DNALs) are dedicated circuits that transmit queries 
between incumbent LECs' signalling networks and the signalling networks 
of other carriers, such as IXCs. The DNAL can be provided by the 
incumbent LEC or by the other carrier, although incumbent LECs 
generally provide the DNAL under their current SS7 tariffs. The DNAL is 
connected to a port on an incumbent LEC's signal transfer point (STP), 
a specialized packet switch that performs screening and security 
functions, and switches SS7 messages within the incumbent LEC 
signalling network. Messages within the incumbent LEC signalling 
network travel over signal transport links, which are typically 
dedicated DS1 circuits. SS7 messages are formulated within the 
incumbent LEC signalling network at service switching points (SSPs), 
which are generally end office and tandem switches with the necessary 
software. Finally, service control points (SCPs) are computer databases 
that respond to network signalling queries and perform related 
functions. An additional term that is often used in describing SS7 
networks is a signalling point (SP), which refers to any point on an 
SS7 network that formulates or switches signalling queries.
    125. Under the interim transport rate structure, incumbent LECs 
charge IXCs and other access customers a flat-rated charge (called 
``dedicated signalling transport'' in Part 69 of the rules) for the use 
of dedicated facilities to connect to the incumbent LECs' signalling 
networks. This rate element is composed of two subelements: a flat-
rated signalling link charge for the DNAL, and a flat-rated STP port 
termination charge. Most other SS7 signalling costs, including those 
for switching messages at the local STP, for transmitting messages 
between an STP and the incumbent LEC end office switch or tandem 
switch, and for processing and formulating signal information at an end 
office or tandem switch, are not recovered through facility-based 
charges, and thus most, if not all, of these costs are presumably 
embedded in the TIC and the local switching charge. At SCPs, such as 
the 800 and LIDB databases, incumbent LECs typically assess a per-query 
charge for the retrieval of information and the transmission of the 
query to and from the database. Incumbent LECs also recover costs 
associated with the provision of certain signalling information 
necessary for third-parties to offer tandem switching through the 
``signalling for tandem switching'' rate element.
2. Ameritech's SS7 Rate Structure
    126. On March 27, 1996, the Common Carrier Bureau granted Ameritech 
a waiver to restructure the manner in which it recovers its SS7 costs. 
The rate structure established by Ameritech pursuant to that waiver 
recovers costs associated with the provision of SS7 signalling services 
through four unbundled charges for the various functions performed by 
incumbent LEC CCS networks: (1) Signal link; (2) STP port termination; 
(3) signal transport; and (4) signal switching. We invite comment on 
using the waiver granted to Ameritech as a model for a revised SS7 rate 
structure for the industry as a whole.
    127. Signal Link. We seek comment on whether costs associated with 
the DNAL--the dedicated facility connecting an SS7 customer's network 
to a dedicated port on the incumbent LEC's STP--should continue to be 
recovered through a flat-rated distance-sensitive signal link charge. 
Flat-rated cost recovery appears reasonable because the DNAL is a 
dedicated circuit serving a single SS7 customer, similar to those 
circuits used to provide special access or direct-trunked transport. 
Incumbent LECs' SS7 customers could provide their own DNAL, or purchase 
a DNAL from the incumbent LEC by paying the signal link charge. We also 
seek comment on whether the signal link should remain in the transport 
service categories in the trunking basket.
    128. STP Port Termination. We seek comment on whether the costs 
associated with the dedicated port on the incumbent LEC's local STP 
that connects to a customer's DNAL should be recovered through a flat-
rated charge. This charge would include the portion of costs currently 
recovered through the STP port termination subelement associated with 
the STP port, but not the costs recovered through that subelement today 
associated with the screening and switching functions of the STP, which 
we understand are not performed by the port. Because the STP port 
termination costs are dedicated to a particular SS7 customer, we ask 
whether they should be recovered on a flat-rated basis.
    129. We also seek comment on whether the STP port termination 
element should be placed in a new service category in the traffic-
sensitive basket. Although STP port termination rates today are in the 
same service category as the signalling link, these two services are 
subject to different competitive conditions. Specifically, although 
interconnectors can provide their own signal link, the STP port is part 
of the incumbent LEC's STP and therefore must be purchased from the 
incumbent LEC. Consequently, incumbent LECs could offset reductions in 
their charges for the signal link with increases in the STP port 
charges if STP port termination and the signal link remained in the 
same service category. The STP port termination element appears 
analogous to the dedicated line cards and trunk cards discussed in the 
local switching rate structure discussion above, and therefore we seek 
comment on whether it should be placed in a new ``signalling'' service 
category in the traffic-sensitive basket. Recognizing that STP port 
costs may be relatively small compared to signal link costs, we seek 
comment on whether the benefits we have identified outweigh the 
administrative burdens of implementing such a system and creating a new 
price cap service category. Another alternative would be to remove the 
STP port termination element, and other non-competitive SS7 elements 
essential for interconnection, from price caps entirely, as we have 
done for expanded interconnection. We seek comment on this option.
    130. Signal Transport. The circuits that carry SS7 queries between 
STPs, switches, and SCPs within incumbent LEC signalling networks are 
comparable to the shared circuits incumbent LECs use to provide 
transport between end office and tandem switches. SS7 queries 
associated with many different calls traverse the same signal transport 
links simultaneously, and so a usage-sensitive charge for these shared 
facilities appears appropriate. As with signal switching, discussed 
below, the costs of signal transport appear most closely related to the 
number of queries, and therefore we seek comment on whether this charge 
should be assessed on a per-query basis. We also seek comment on 
whether incumbent LECs should be permitted to charge distance sensitive 
rates for signal transport, and the appropriate level of distance 
sensitivity that should be allowed.
    131. It appears that signal transport is a form of transport, and 
therefore we invite comment on placing this service

[[Page 4690]]

in the trunking basket. We also invite comment on placing signal 
transport in the existing ``signalling for tandem switching'' service 
category. In addition, interested parties may discuss whether to place 
this service in a separate service category from the signal link, 
because the signal link may be provided by other carriers while signal 
transport generally must be performed by the incumbent LEC.
    132. Signal Switching. We seek comment on whether costs related to 
processing and switching by the STP should be recovered on a per-query, 
usage-sensitive basis. These costs are similar to the costs incurred in 
switching telephone calls at end office and tandem switches. Unlike end 
office and tandem switches, however, STPs switch only data, and a 
single call may involve multiple instances of signal switching. Because 
the costs associated with signal switching relate more to the number of 
SS7 queries switched than to the number or duration of calls, we ask 
whether the signal switching charge should be assessed based on the 
number of SS7 messages switched. For the reasons we have identified 
above in the context of central office and tandem switching, we seek 
comment on whether peak load pricing would be appropriate for signal 
switching.
    133. We propose to place this service in the traffic-sensitive 
basket. We further seek comment on whether to place this service in the 
same service category as the STP port termination charge, or whether to 
create a new service category for signal switching.
3. Other SS7 Issues
    134. We also invite parties to suggest alternative rate structures 
for SS7 signalling. For example, we permitted Ameritech to implement 
rate elements for signal tandem switching, signal formulation, and 
optional parameters. We also seek comment on whether incumbent LECs 
should be permitted to impose separate charges for ISDN User Part 
(ISUP) messages, which are used in setting up and taking down calls, 
and Transaction Capabilities Application Part (TCAP) messages, which 
are used primarily for database queries and CLASS services such as 
enhanced caller ID, or whether some other differentiation should be 
made between charges for different types of SS7 messages. Although such 
differentiation could be economically justified on the basis of the 
different average lengths of ISUP and TCAP queries (and therefore the 
differential load they tend to place on the SS7 network), we question 
whether we should do so in the interests of rate structure simplicity. 
To the extent that parties contend that differentiated charges for TCAP 
and ISUP messages should be adopted, we ask those parties to provide 
specific information and data to support such a claim. Parties that 
favor an alternate structure are asked to provide details of any such 
alternatives, and to explain how such alternatives would be consistent 
with the goals of this proceeding. In particular, we ask parties to 
discuss ways in which the SS7 rate structure we have proposed could be 
simplified. The desire for rate structure simplicity may conflict with 
the goal of economic cost-causation, and we seek comment on the 
appropriate manner in which we should strike this balance for SS7 
signalling.
    135. We seek comment on whether the pricing for facility-based 
signalling rate elements should be determined under the price caps new 
services test. As we discussed in the Ameritech Operating Companies 
Petition for Waiver of Part 69 of the Commission's Rules to Establish 
Unbundled Rate Elements for SS7 Signalling, although the proposed SS7 
rate elements would probably be considered restructured services under 
our price cap rules, we tentatively conclude a requirement of revenue 
neutrality and the cost showing specified under the new services test 
would serve the public interest in this context. The different SS7 
elements are likely to be subject to different competitive pressures, 
and the current rate structure does not provide a sufficient basis, 
absent a cost showing by incumbent LECs, on which to base the rates for 
these new charges.
    136. Incumbent LECs may need to install additional monitoring 
equipment in order to bill properly for unbundled SS7 services. Some 
incumbent LECs may not currently have the capacity to meter any SS7 
traffic, and some incumbent LECs may only have such metering capacity 
at STPs, not at signalling points in tandem offices. We seek comment on 
the feasibility and cost of mandating a rate structure for SS7 services 
that would require incumbent price cap LECs to install equipment for 
metering SS7 traffic in their networks. We also invite comment on 
whether and the extent to which the costs of any equipment needed to 
comply with our proposed rules warrant exogenous cost treatment under 
our price cap rules. In the 800 Database proceeding, Provision of 
Access for 800 Service, CC Docket No. 86-10, Second Report and Order, 
58 FR 7867 (February 10, 1993), the Commission permitted incumbent LECs 
exogenous treatment of the reasonable costs they incurred specifically 
to provide basic 800 database service. Unlike the rules we adopted in 
the 800 Database proceeding, however, the SS7 rules we are 
contemplating here would not require incumbent LECs to provide any 
service they are not currently providing. The rules instead would 
require incumbent LECs to recover the costs of any SS7 service they 
choose to provide in a fashion that reflects the way they incur those 
costs. Thus, the costs of SS7 metering equipment may not warrant 
exogenous cost treatment.
    137. We tentatively conclude that, under the proposal described 
above, the existing charge incumbent LECs assess on third party tandem 
switching providers (TSPs) for the provision of signalling codes 
necessary for those TSPs to interconnect their tandem switches with 
incumbent LEC transport networks should be eliminated and replaced by 
charges for the specific SS7 functions associated with providing this 
signalling information. Although this charge serves a particular 
purpose, this service appears to use the same basic SS7 functions as 
other signalling services. Thus, although the ``signalling for tandem 
switching'' service category would remain in the trunking basket, that 
category would include only the newly-created signal transport element, 
and would be renamed as the ``signalling transport'' service category. 
We seek comment on this analysis. Even if we do not eliminate the 
existing signalling for tandem switching charge, we have proposed to 
place several new rate elements into the existing signalling for tandem 
switching service category that recover some costs not related to 
tandem switching. Signal transport, for example, recovers costs for 
signalling associated both with tandem-switched and with direct-trunked 
calls. In order to avoid confusion, we tentatively conclude that the 
signalling for tandem switching service category in the trunking basket 
should be renamed as the ``signalling'' service category.

G. New Technologies

    138. Developments in switching and transmission technology are 
producing new telecommunications capabilities that offer the potential 
for new services and lower prices in the future. These include 
synchronous optical networks (SONET), Asynchronous Transfer Mode (ATM) 
switching, and advanced intelligent networks (AIN). We seek comment on 
whether, and how, we should take these new technologies into account in 
adopting access charge rules. We also invite parties to recommend 
specific rate structure rules that would reflect the manner in which 
incumbent LECs incur costs when providing services using these 
technologies. We

[[Page 4691]]

also seek comment on whether we should adopt access charge rules to 
govern rate structures for services employing any other new 
technologies.

IV. Approaches To Access Rate Reform and Deregulation

A. Different Approaches to Access Reform

    139. Our overriding goal in this proceeding is to adopt revisions 
to our access charge rules that will foster competition for these 
services and eventually enable marketplace forces to eliminate the need 
for price regulation of these services. In addition to the rate 
structure changes discussed above, we suggest in this NPRM two 
different approaches to access reform--a market-based approach and a 
more prescriptive approach. We could adopt a market-based approach to 
access reform under which we would let marketplace pressure move 
interstate access prices to competitive levels. This approach could be 
implemented incrementally, first eliminating certain regulatory 
constraints as incumbent price cap LECs demonstrate through credible, 
verifiable evidence that the conditions necessary for efficient local 
competition to develop in their service areas exist. Then, as incumbent 
LECs show that competition has emerged, additional regulatory 
constraints, including mandatory rate structures, would be eliminated 
to allow those LECs to adjust their interstate access rates. Finally, 
when substantial competition has developed, price regulation would be 
eliminated.
    140. Some parties, however, may contend that a market-based 
approach will allow incumbent LECs to continue indefinitely to assess 
inflated prices for some or most access services in some or most 
geographic areas. These parties would urge us to adopt a prescriptive 
approach to access reform. Under this approach, we would require 
incumbent LECs to move their prices to specified levels and allow such 
LECs limited pricing flexibility until they can demonstrate they face 
actual competition for access.
    141. A market-based approach has a number of advantages. It creates 
incentives for incumbent LECs to act quickly to open the local exchange 
and exchange access market to competition, by making that a condition 
for having additional flexibility to respond to competition from 
facilities-based competitors. It allows marketplace forces, rather than 
regulation, to determine how quickly prices move to cost-based levels. 
A market-based approach also has some disadvantages. Marketplace forces 
may not require incumbent LECs to assess cost-based prices for access 
prices as quickly as a prescriptive approach. It may also be difficult 
to develop reliable, administratively simple criteria for assessing 
evidence of competitive entry and determining the existing regulatory 
constraints that should be relaxed based on such a showing.
    142. Conversely, the advantages to a prescriptive approach are that 
the Commission can move prices to cost-based levels quickly and avoid 
the need to develop criteria for determining whether competition is 
sufficient to allow incumbent LECs additional pricing flexibility. The 
principal disadvantage to a prescriptive approach is that it requires 
the Commission to make detailed determinations of appropriate price 
levels for multiple services throughout the country. Another 
disadvantage is that, in the event an incumbent LEC can show its 
embedded costs are significantly higher than its forward-looking costs, 
the Commission would be required to determine how much of the 
difference incumbent LECs should be given a reasonable opportunity to 
recover and the method for that recovery.
    143. We set forth below both a market-based approach and a more 
prescriptive approach. We seek comment on whether we should: Select one 
of the two approaches as our exclusive method of reforming access 
charges in a manner that is most likely to lead to the conditions that 
will enable us to deregulate access charges; adopt both approaches as 
alternatives; or merge the two approaches in some fashion. For example, 
if barriers to competition are not eliminated, a market-based approach 
to access reform likely would not work. If a market-based approach were 
adopted, we might nonetheless seek to ensure that prices move toward 
economic cost even though barriers to competition are not eliminated 
within a reasonable time for certain services or in some geographic 
areas, by adopting an alternative prescriptive approach for those 
services or geographic areas.
    144. Commenters advocating a merger of both a market-based approach 
and a prescriptive approach should describe how the two approaches can 
be melded. For example, what criteria should be used for determining 
whether to impose prescriptive access reform and at what time? How 
would a combination of the two approaches work if barriers to 
competition were eliminated, but later reinstituted?
    145. Commenters proposing a melding of both approaches should also 
discuss any regulatory safeguards that may be needed. For example, an 
incumbent LEC might face different regulatory regimes in different 
parts of its service region, or for different access services. This may 
create an incentive for incumbent LECs to increase costs artificially 
for the services or areas that are subject to prescriptive regulation 
or less competition. Incumbent LEC incentives to misallocate costs in 
this manner would depend on whether such cost changes would affect 
incumbent LEC rates under prescriptive regulation, and on the magnitude 
of any such effect.
    146. We have previously faced issues that arise when an incumbent 
LEC is subject to different regulatory regimes for different access 
services, in the context of the BOCs' provision of enhanced services. 
Specifically, the Commission decided not to regulate enhanced services 
because the market for such services is competitive. The Commission 
currently employs accounting safeguards designed to prevent common 
carriers from shifting costs from nonregulated to regulated services, 
without precluding them from taking advantage of any economies of 
scope. We adopted the ``all or nothing'' rule in the Policy and Rules 
Concerning Rates for Dominant Carriers, Second Report and Order, CC 
Docket No. 87-313, 55 FR 42375 (October 19, 1990) (LEC Price Cap Order) 
to address similar concerns about incumbent LECs shifting costs from 
affiliates governed by price cap regulation to affiliates governed by 
rate-of-return regulation. Should similar safeguards be adopted if a 
combination of market-based access reform and prescriptive access 
reform is adopted? We also invite comment on whether there are any 
other issues raised by applying different regulations to different 
services or areas.
    147. We also seek comment generally on how incumbent LEC provision 
of in-region interLATA services--either by independent incumbent LECs 
or potentially by BOCs upon FCC approval under section 271--should 
affect our choice of a market-based or prescriptive approach, or the 
phases for implementing each approach. Conversely, we seek comment on 
how our selection of a market-based or prescriptive approach should 
affect, if at all, our consideration, of BOC applications, for in-
region provision of interLATA services. As discussed earlier in Section 
I.B, IXCs argue that, to the extent access services are not available 
to IXCs at their forward-looking economic cost, incumbent LECs and 
their long-distance affiliates will have an artificial competitive 
advantage in the market for long-distance services

[[Page 4692]]

that may distort the effects of competition and result in inflated 
retail prices. We ask parties concerned about a possible ``price 
squeeze'' to identify the conditions under which we should be 
concerned. We ask parties to comment on whether the availability of 
unbundled network elements at their forward-looking economic cost would 
reduce the danger of a price squeeze insofar as IXCs might use those 
elements to provide their own access to customers for whom they are the 
local service provider.

B. The Goal--Deregulation in the Presence of Substantial Competition

1. Objectives
    148. Regardless of the specific approach that we adopt in this 
proceeding--market-based, prescriptive, or some combination of the 
two--our goal is to foster the development of substantial competition 
for interstate access services. Once substantial competition is present 
for a particular service in a particular area, we propose to remove 
that service from price cap and tariff regulation for that area.
    149. Our plan to remove from price cap regulation interstate access 
services that are subject to substantial competition is consistent with 
prior decisions in which the FCC gradually removed AT&T's services from 
price cap regulation. Our analysis of whether AT&T's services were 
subject to substantial competition rested on considerations of market 
share, demand responsiveness, supply responsiveness, and AT&T's pricing 
behavior. We recognize, that unlike AT&T, incumbent LECs control 
bottleneck facilities, particularly the loop. Nevertheless, the 1996 
Act seeks to erode this source of market power by requiring incumbent 
LECs to make unbundled network elements and resale available. In view 
of the similarities between the structure of and purposes behind the 
AT&T and the LEC price cap plans, the analytical framework that we used 
to streamline AT&T's services would appear to be an appropriate method 
for effectively deregulating incumbent LEC services. We also propose to 
eliminate tariff filing requirements for services subject to 
substantial competition. We seek comment on whether these actions are 
appropriate under these conditions, and whether we should adopt any 
other deregulatory measures when an incumbent LEC service is subject to 
substantial competition. Below, we seek comment on the factors used in 
examining AT&T's pricing behavior. We invite comment on which of these, 
alone or in conjunction with these or other factors, could be used to 
determine when to remove incumbent LEC access services from price cap 
regulation.
    150. We propose that the substantial competition analysis should be 
considered on a service-by-service basis so that, for example, 
directory assistance could be removed from price cap regulation where 
substantial competition exists for directory assistance, even if not 
for local switching. Such an approach is consistent with our approach 
to removing AT&T's services from price cap regulation, and would allow 
incumbent LECs to price competitively where competition has developed, 
while not permitting incumbent LECs to raise prices for services for 
which competition has not developed sufficiently.
    151. We ask commenters to address whether, instead of requiring the 
presence of substantial competition, we should remove from price cap 
regulation services for which the incumbent LEC cannot influence price 
movements. There may be circumstances in which incumbent LECs cannot 
affect price changes in the market, even in the absence of substantial 
competition. Our public interest concern is whether incumbent LECs can 
adversely affect price movements. Using such an approach may remove an 
incumbent LEC's services from price cap regulation even if no 
competitors enter the market, but the incumbent LEC has complied with 
the requirements of the 1996 Act.
    152. We further ask whether high-capacity special access services, 
e.g., those special access services offered at speeds of DS1 or higher, 
should be removed immediately from price cap regulation. Many incumbent 
LECs contend that for certain geographic markets these special access 
services are already subject to intense competitive pressures that 
today discipline incumbent LEC pricing of such services. If these 
allegations are correct, our pro-competitive goals could be served by 
removing these services from price caps. We ask parties to address the 
degree of competition that exists for such services, including any 
quantification that may be available. We invite parties to comment on 
whether any other incumbent LEC services in particular geographic areas 
are already subject to substantial competition and therefore should be 
removed from price cap regulation.
    153. We solicit comment on the procedures that an incumbent LEC 
should follow to demonstrate that one or more services are subject to 
substantial competition. Parties should discuss whether an incumbent 
LEC should file a petition for waiver, a petition for declaratory 
ruling, or some other filing, and how the incumbent LEC should satisfy 
its burden of proof. In addition, we tentatively conclude that we 
should adopt rules governing the recalculation of the price cap indices 
when one or more services in a basket are removed. Such rules would 
speed the review of the tariffs that incorporate the recalculated 
indices. We invite parties to comment on this tentative conclusion, and 
to propose particular rules that we should adopt.
    154. We also seek comment on what geographic area should be used in 
examining whether a service is subject to substantial competition. The 
level of competition for different services likely will vary by 
geographic area, even within the same state. Thus, we propose not to 
rely on a statewide analysis of competition. We seek comment on whether 
the relevant geographic areas should conform to the areas implemented 
by the relevant state in making unbundled network elements available to 
competitors. Because the costs of competitors using unbundled network 
elements will be affected by these geographic areas, it may be 
appropriate that incumbent LEC access prices vary according to them. We 
acknowledge that it is possible that competition can vary significantly 
even within such a zone. Alternatively, should we require that the 
geographic areas coincide with the zones adopted in the Universal 
Service proceeding to determine high cost areas? A third approach would 
be to use the same geographic areas that we might select for geographic 
deaveraging if we were to adopt the market-based approach set out in 
Section V, below. We seek comment on these options.
2. Competitive Factors
    a. Demand Responsiveness. 155. Incumbent LECs may seek to 
demonstrate that the market for particular interstate access services 
is competitive through evidence indicating that, where comparable 
access services are available to the incumbent LECs' customers, a 
significant number of those customers have the ability to evaluate the 
full range of market options available to them, and the customers do in 
fact exercise these options. We therefore propose that the demand 
responsiveness of the incumbent LECs' customers should be an important 
factor in assessing the level of competition for incumbent LEC services 
for purposes of determining whether a service should be removed from 
price cap regulation.

[[Page 4693]]

We seek comment on this proposal. Parties should identify the relevant 
factors that should be used in determining whether an incumbent LEC's 
customers are demand-responsive; the data and information that would be 
necessary and relevant in determining whether an incumbent LEC's 
customers are demand-responsive; and whether the fact that incumbent 
LECs have relatively few customers that account for most of their 
interstate access demand affects the usefulness of demand-
responsiveness as a factor in determining the level of competition. 
Alternatively, we seek comment on the proposal that a LEC need only 
provide evidence that comparable access services are available from 
other carriers and need not provide evidence specifically on demand 
responsiveness.
    b. Supply Responsiveness. 156. We invite comment on whether supply 
responsiveness should be a factor in determining the level of 
competition for purposes of determining whether specific interstate 
access services should be removed from price cap regulation. If so, we 
ask parties to identify the factors that are relevant in determining 
whether an incumbent LEC's competitors have enough readily-available 
supply capacity to constrain the incumbent LEC's market behavior and 
inhibit it from charging excessive rates; and the data and information 
that would be necessary and relevant in determining whether an 
incumbent LEC's competitors are supply-responsive. Supply elasticities 
of an incumbent LEC's competitors may be important in assessing the 
level of competition for incumbent LEC services. However, we 
tentatively conclude that the ready availability of unbundled network 
elements at forward-looking economic cost decreases the cost of entry 
for access services. Their ready availability would indicate a high 
supply elasticity in the access market.
    c. Market Share. 157. As we observed in the Price Cap Second FNPRM, 
at the time we considered giving AT&T streamlined regulation for 
certain long-distance services, we determined that a high market share 
does not necessarily confer market power. A company that enjoys a very 
high market share will be constrained from raising its prices above 
cost if the market is characterized by high supply and demand 
elasticities at prices even slightly above competitive levels. An 
analysis of the level of competition for incumbent LEC services based 
solely on an incumbent LEC's market share at a given time may not 
provide sufficient evidence for us to conclude that substantial 
competition truly exists. While we do not propose to ignore market 
share data in assessing the level of competition for incumbent LEC 
services, we propose to consider market share in conjunction with other 
factors, including, but not necessarily limited to, supply and demand 
elasticities and pricing trends. We ask parties whether market share 
should be a factor in determining the level of competition for purposes 
of determining whether services should be removed from price cap 
regulation. If so, we ask parties to discuss how market share should be 
measured.
    d. Pricing of Services Under Price Cap Regulation. 158. Evidence 
that a price cap LEC is pricing services below the price cap ceiling 
over a sustained period may indicate that such services are subject to 
competitive pressures, particularly in markets with high supply and 
demand elasticities. An incumbent LEC's below-cap pricing of services, 
however, is not necessarily a reliable measure of competition. While 
below-cap pricing may indicate a market with high supply and demand 
elasticities, it could also occur because the incumbent LEC is behaving 
strategically in order to be relieved of regulation. Pricing at the cap 
may be evidence of a lack of competition, or that the cap is close to 
the forward-looking economic cost of the service. How much significance 
should we give to evidence that a price cap LEC is pricing services 
below the price cap ceiling over a sustained period?
    e. Other Factors. 159. We invite comment and discussion on whether 
there are other factors in addition to those discussed above that we 
should consider in an evaluation of the competition faced by an 
incumbent LEC, for example elimination of barriers to entry in the 
event it is not otherwise required. Parties that suggest other factors 
to assess the level of competition for incumbent LEC services should 
discuss what data and information would be necessary to assess the 
relative importance of these factors.

V. Market-based Approach To Access Reform

A. Introduction

    160. In this section, we seek comment on an approach to access 
reform that relies on marketplace forces to move interstate access 
prices to more economically efficient levels. Under this approach, our 
primary role would be to remove regulatory requirements that inhibit 
the operation of market forces. In Section III, above, we propose rate 
structure changes designed to make the baseline regulatory scheme more 
efficient. In this section, we propose a plan for reducing regulation 
in two phases as competitive benchmarks are achieved short of 
substantial competition.
    161. Using a competitive paradigm, the issue becomes one of 
identifying the market conditions that should trigger the removal of 
existing regulatory constraints. Under the procedure we propose in this 
section, we would implement regulatory reforms as incumbent LECs 
demonstrate that their local markets have achieved pre-defined, 
specific transition points, or ``competitive triggers.'' We are seeking 
comment on removing uneconomic regulatory constraints in two 
preliminary phases before a finding of substantial competition for 
access services in specific areas permits the detariffing of access 
services.
    162. We seek comment on whether Phase 1, potential competition, 
would be achieved when an incumbent LEC has opened its network by 
removing the most immediate barriers to competitive entry. At this 
stage, we are seeking comment on targeted reforms that remove 
uneconomic regulatory requirements that inhibit incumbent LECs from 
charging access prices that reflect the cost differentials in serving 
different geographic areas, from lowering access prices non-
predatorily, and from pricing optional new services based on market 
considerations. We are seeking comment on whether an incumbent LEC 
should be required to show that some or all of the following conditions 
exist to trigger Phase 1: (1) Unbundled network element prices are 
based on geographically deaveraged, forward-looking economic costs in a 
manner that reflects the way costs are incurred; (2) transport and 
termination charges are based on the additional cost of transporting 
and terminating another carrier's traffic; (3) wholesale prices for 
retail services are based on reasonably avoidable costs; (4) network 
elements and services are capable of being provisioned rapidly and 
consistent with a significant level of demand; (5) dialing parity is 
provided by the incumbent LEC to competitors; (6) number portability is 
provided by the incumbent LEC to competitors; (7) access to incumbent 
LEC rights-of-way is provided to competitors; and (8) open and non-
discriminatory network standards and protocols are put into effect. We 
anticipate that at least some incumbent LECs reasonably should be able 
to satisfy these conditions during 1997. We also invite comment on 
whether the first three possible conditions, which relate to the 
pricing of uses of the incumbent LECs' networks

[[Page 4694]]

other than access, might be sufficient to permit certain of the access 
pricing reforms about which we are seeking comment.
    163. We invite comment on whether Phase 2 would be met when an 
actual competitive presence has developed in the marketplace. For an 
incumbent LEC to demonstrate that Phase 2 has been achieved for a 
particular service or within a given area, we invite parties to comment 
on the following tests: (1) Demonstrated presence of competition; (2) 
full implementation of competitively neutral universal service support 
mechanisms; and (3) credible and timely enforcement of pro-competitive 
rules. We also seek comment on whether an incumbent LEC should instead 
be eligible for Phase 2 treatment if it has made its facilities and 
services available in a reasonable and nondiscriminatory fashion, but 
no competitors have entered to serve the incumbent LEC's service area. 
Would this be sufficient to address the public interest considerations 
involved in implementing the Phase 2 reforms?
    164. We invite comment on this general approach to access reform, 
and on the specific regulatory reforms proposed and their respective 
competitive benchmarks. We also seek comment on whether these or other 
regulatory reforms should be implemented without the achievement of any 
competitive benchmarks, or upon the achievement of benchmarks different 
from those proposed.
    165. The 1996 Act became law after we issued the Price Cap Second 
FNPRM. Because many of the issues raised in that NPRM are closely 
related to issues central to this proceeding, we here re-notice many of 
the proposed provisions to remove regulatory burdens contained in the 
Price Cap Second FNPRM. In developing this NPRM we have considered the 
comments we received in response to the Price Cap Second FNPRM. Because 
of the intervening passage of the 1996 Act, however, we will limit the 
record in this proceeding to the comments received in response to this 
NPRM. Parties who filed in response to the Price Cap Second FNPRM 
should not rely on those comments, but instead should file anew. 
Parties may attach their Price Cap Second FNPRM comments as appendices 
and incorporate them by reference.
    166. As discussed in Section II.A, above, the removal of regulatory 
constraints considered in this section is applicable to incumbent LECs 
subject to price cap regulation. Arguably, small incumbent LECs are 
affected in the sense that regulatory constraints are not being removed 
for them as are some of the constraints for price cap incumbent LECs. 
Small incumbent LECs will not be otherwise affected by the proposals 
contained herein. While these proposals may indirectly affect small 
entities, especially competitive LECs and access customers, we 
anticipate that they will not have an impact on small entity reporting, 
record keeping, or other compliance requirements. We invite parties to 
comment on this analysis.

B. Phase 1--Potential Competition

    167. We propose to eliminate four significant regulatory 
constraints when an incumbent LEC can demonstrate that it faces 
potential competition for interstate access services in specific 
geographic areas: The prohibition against geographic deaveraging within 
a study area; the ban on volume and term discounts for interstate 
access services; the current prohibition against contract tariffs and 
individual request for proposals (RFP) responses; and various 
restraints on the ability of incumbent LECs to offer new, innovative 
access services. We note that Ameritech has proposed conditioning 
simplification of price cap regulation upon the achievement of certain 
competitive triggers. We propose these changes because, once a LEC 
satisfies the triggers we have identified, competitive forces should 
come most quickly to bear on the provision of interstate access in low-
cost geographic areas and to large customers. Removing these restraints 
should permit LECs greater ability to price economically and therefore 
bring more competitive pressures, including lower prices, in areas and 
for services where we expect competitive forces initially to be 
strongest. Such reforms would have the goal of fostering efficient and 
effective competition, to the benefit of customers, wherever possible. 
Without such reform, continuing uneconomic regulation may serve 
primarily to permit inefficient new entrants to gain market share among 
the most attractive customers rapidly. We seek comment generally on 
this analysis and specifically on the conditions and pricing reforms 
set out below. We also seek comment on whether we should modify any 
other of our regulatory pricing constraints at the time the Phase 1 
competitive triggers have been met.
1. Trigger and Geographic Scope
    168. We propose that the Phase 1 rule changes take effect when an 
incumbent LEC's network has been successfully opened to competition. 
The proposed Phase 1 rule changes remove restrictions that limit the 
ability of incumbent LECs to re-price access services in ways that 
respond to competitive pressure, but do not impede competitive entry. 
We seek comment on whether some or all of the tests described below 
provide the necessary and sufficient criteria for us to determine, for 
this purpose, whether an incumbent LEC's network has been opened to 
competition. We also seek comment on whether we should use any other 
test instead of, or in conjunction with, those we propose.
    169. Unbundled Network Elements. The first condition we propose is 
that unbundled network elements be available at forward-looking 
economic cost, i.e., on the basis of the TELRIC of the network element 
(also known as Total Element Long Run Incremental Cost), plus a 
reasonable allocation of common cost. Unbundled elements provide a 
ubiquitous substitute for access service. Where access charges exceed 
forward-looking economic cost (due to the structure or level of access 
being inefficient), IXCs have an artificial incentive to ``win'' the 
customer and provide both local and toll service using unbundled 
elements. We expect that availability of unbundled elements at TELRIC 
prices as a substitute for access charges will ultimately require the 
LEC to set its charges in an economically efficient manner so as to 
give customers the most economic value consistent with covering costs. 
Will the availability of unbundled network elements at forward-looking 
economic costs drive LECs' access charges to efficient levels and 
structures? Or will it only tend to constrain the overall level of 
charges, and give incumbent LECs incentives to choose inefficiently 
high or inefficiently structured access charges, thus disadvantaging 
IXCs that are not effectively integrated into local service, and thus 
driving the market, possibly inefficiently, towards one-stop shopping? 
Commenters are asked to outline the specific mechanism by which such 
competition will affect access rates. Those who believe competition 
from unbundled network elements will not affect access rates should 
explain why.
    170. In order for unbundled elements to promote ubiquitous 
competition effectively, prices for unbundled network elements must be 
geographically deaveraged. Costs may vary across geographic areas based 
on the density of the area served, topography, or other characteristics 
of the area. When the prices of elements that vary materially in cost 
are averaged, the ability to substitute unbundled elements for access 
will not drive access rates to their efficient level, because such 
prices will understate the cost of providing services over the elements 
in

[[Page 4695]]

high-cost areas and overstate the cost of providing services over the 
elements in low-cost areas. When element prices have been deaveraged to 
reflect cost differences, any divergence between element prices and 
access charges required by regulation creates an artificial incentive 
to substitute unbundled elements for access.
    171. We seek comment on whether, for purposes of implementing 
market-based access reform, an incumbent LEC should not be deemed to 
have satisfied the Phase 1 competitive triggers unless and until rates 
for unbundled network elements are available at geographically 
deaveraged, forward-looking economic costs in a manner that reflects 
the way costs are incurred. For the purpose of determining whether 
deaveraging has occurred, we tentatively conclude that there should 
must be at least three geographic zones.
    172. Transport and Termination. The next condition we propose for 
Phase 1 is that transport and termination be available for local 
traffic at cost-based rates. Because unbundled network elements only 
act as an effective substitute for switched access where the requesting 
carrier can provide both local and interexchange service to the end 
user, a carrier must be able to offer ubiquitous local service at 
competitive rates. This requires transport and termination on the LEC 
network to be available at the incumbent LEC's additional cost. Even 
assuming rates are reciprocal, transport and termination rates that 
exceed cost impede efficient entry and limit the extent to which 
competitive LECs will compete for customers in local exchange and 
exchange access markets. Where a customer makes more calls than he 
receives, inflated transport and termination rates will impede 
competition for that customer. We seek comment on whether we should 
begin to implement market-based access reform for an incumbent LEC 
before that incumbent LEC has complied with the statutory requirement 
to provide transport and termination at cost-based rates.
    173. Resale. We also propose that, in order to gain Phase 1 
treatment, an incumbent LEC must offer its retail services to resellers 
at a wholesale price, which is equal to the retail price minus the 
reasonably avoidable cost of providing wholesale rather than retail 
service. Congress provided that incumbent LECs should make their retail 
services available to new entrants at the retail rate less costs that 
will be avoided. Although resellers do not compete with incumbent LECs 
in the provision of access, this requirement is a ``stepping stone'' in 
the provision of other forms of competition. Resale should provide new 
entrants with a vehicle for rapid entry into the local exchange retail 
marketplace and with the ability to compete throughout an incumbent 
LEC's service area. We seek comment on this proposal.
    174. Availability of Elements and Services. Fourth, we propose that 
incumbent LECs be required to demonstrate that competitors are able 
actually to order and receive elements and services in a commercially 
reasonable manner and in necessary quantities. Provisioning limits and 
provisioning delays must not materially limit the flow of customers 
from the incumbent LEC to its rivals. Incumbent LECs must create well-
functioning and adequately sized provisioning systems, both for resale 
and for unbundled elements. We invite parties to comment on this 
proposal.
    175. Other Factors. We propose several other factors for 
determining whether a LEC has made its network available to 
competitors; namely, whether an incumbent LEC provides dialing parity 
and number portability, whether an incumbent LEC gives competitors 
access to its rights-of-way, and whether network standards are open and 
non-discriminatory. For example, without the provision of dialing 
parity, competitors' customers must dial additional digits. Without 
number portability, a customer's desire to keep his phone number 
becomes a barrier to new entrants. We seek comment on these factors, 
and invite parties to comment on the availability of any factor that 
should be taken into account in determining whether the Phase 1 trigger 
has been met.
    176. We tentatively conclude that it is important to use 
objectively measurable criteria for determining whether an incumbent 
LEC has achieved the Phase 1 trigger, so as to avoid delay caused by 
protracted proceedings and to minimize administrative burdens for all 
parties. In determining whether an incumbent LEC meets the Phase 1 
criteria, we tentatively conclude that the incumbent LEC seeking Phase 
1 treatment offer us objective evidence of the existence of these 
conditions. After receiving the incumbent LEC's filing, we propose to 
allow for public comment. We propose that we would then issue our 
decision within 90 days after the comment period has ended. We seek 
comment on this proposed review mechanism.
    177. We solicit comment on the procedures that an incumbent LEC 
should follow to demonstrate that it has met the Phase 1 competitive 
trigger. Petitioners should discuss whether an incumbent LEC should 
file a petition for waiver, a petition for declaratory ruling, or some 
other filing, and how the incumbent LEC should satisfy its burden of 
proof. Because incumbent LECs are required to open their networks 
throughout each state in which they offer service, we propose to 
require that incumbent LECs meet this competitive trigger on a state-
by-state basis in order to qualify for this relief. We ask, however, 
whether incumbent LECs should be able to seek Phase 1 treatment by 
geographic area, as discussed in Section IV.B., above, even though 
these areas would be smaller than study areas. We seek comment on this 
proposal.
    178. We also invite parties to comment on what actions the 
Commission should take in the event that it is shown that a LEC that 
has received approval for Phase 1 or Phase 2 relief, or has 
demonstrated that substantial competition exists for a particular 
service, no longer satisfies the applicable criteria. We particularly 
invite comment on whether the Commission's complaint process is the 
appropriate vehicle for parties to demonstrate the necessary changed 
circumstances and the specific remedies the Commission should employ in 
the event that an incumbent LEC no longer meets the applicable Phase 1 
or Phase 2 criteria, or can no longer demonstrate the existence of 
substantial competition for a particular service.
2. Reforms
    a. Geographic Deaveraging. 179. Our Part 69 rules generally require 
that an incumbent LEC's charges for access elements be averaged within 
each of its study areas. We have developed, however, a system of 
density pricing zones, which may be used by an incumbent LEC to 
deaverage geographically its rates for special access and switched 
transport services if that incumbent LEC meets certain threshold 
interconnection requirements. We instituted this density zone pricing 
in response to the emergence of competition in markets for those 
services. In this NPRM, we propose allowing incumbent LECs that have 
met the Phase 1 trigger to deaverage rates geographically for all 
access charge elements other than the SLC. We ask generally whether 
incumbent LECs should also be able to deaverage the SLC geographically. 
In the case of first residential lines and single-line business lines, 
should incumbent LECs be permitted only to make geographically-
deaveraged reductions in the SLC, in light of the Joint Board's

[[Page 4696]]

recommended decision that there be no increases in the SLC for those 
lines?
    180. In this NPRM, we propose to permit price cap incumbent LECs 
that satisfy the Phase 1 eligibility requirements to deaverage 
geographically their access charge elements. We note that the 
availability of geographically deaveraged unbundled network elements is 
proposed as a prerequisite for Phase 1 relief. Where unbundled network 
elements are deaveraged, continuing to require access rates to be 
averaged across the study area would foreclose the incumbent LEC from 
meeting competition from unbundled network elements in low-cost areas, 
while still requiring the incumbent LEC to charge below-cost access 
rates in high-cost areas. As discussed in Section III.B, above, we seek 
comment on whether section 254(e) requires geographic deaveraging. We 
also seek comment on the relationship between geographic deaveraging of 
access charges and section 254(g).
    181. Moreover, such discrepancies between price and cost distort 
competition by creating incentives for entry in low-cost areas by 
carriers whose cost of providing service is actually higher than the 
incumbent LEC's cost of serving that area. Similarly, geographic 
averaging across large geographic areas distorts the operation of 
markets in high-cost areas when we require incumbent LECs to continue 
offering services in those areas at prices substantially lower than 
their costs of providing those services. Prices that are below cost 
reduce the incentives for entry by firms that could provide the 
services as efficiently, or more efficiently, than the incumbent LEC. 
Therefore, we propose that once the requirements under Phase 1 have 
been met, incumbent LECs should be permitted to deaverage 
geographically rates for access elements.
    182. We note that, pursuant to the Expanded Interconnection with 
Local Telephone Company Facilities, CC Docket No. 91-141, Report and 
Order and Notice of Proposed Rulemaking, 57 FR 54323 (November 18, 
1992) (Special Access Expanded Interconnection Order) and the Transport 
Phase 1, Second Report and Order and Third Notice of Proposed 
Rulemaking, 58 FR 48756 (September 17, 1993) (Switched Transport 
Expanded Interconnection Order), incumbent LECs currently may deaverage 
access charges for special access and switched transport services when 
one cross-connect has been taken within the study area. Phase 1 
deaveraging would be broader--extending to all access elements other 
than the SLC, not just special access and switched transport--and 
complementary to deaveraging under our Expanded Interconnection orders. 
Thus, for any incumbent price cap LECs that have not already met the 
one cross-connect threshold for transport deaveraging, we propose to 
permit geographic deaveraging for special access and switched transport 
when one cross-connect has been taken in the study area or when Phase 1 
has been met, whichever is earlier.
    183. We seek comment on the variability of the costs of providing 
access charge elements. In particular, we ask parties to submit 
evidence indicating whether per-line and/or per-minute costs of local 
switching services vary geographically. We also seek comment on the 
number and size of zones that should be required or allowed. One 
possible method is to permit or require that the geographic areas for 
access deaveraging match those implemented by each state pursuant to 
the 1996 Act. Because the prices for competitors using incumbent LEC 
unbundled network elements will differ among these density zones, it 
would seem necessary to permit incumbent LECs to price their own access 
services using the same areas. If the states deaverage network elements 
and the Commission does not deaverage access, IXCs would only purchase 
network elements in low-cost areas, and would only take access in high-
cost areas. We seek comment on alternative approaches for ensuring that 
geographic zones generally reflect cost differences and that the zones 
for unbundled network elements, universal service, and access charges 
are compatible. We also ask whether any other geographic areas would be 
more appropriate than either of these options. Further, we seek comment 
on whether incumbent LECs should be permitted or required to change the 
density zones established for special access and switched transport to 
coincide with the zones we ultimately adopt in this proceeding. In 
considering how best to deaverage geographically the remaining access 
elements, we seek to minimize administrative burdens for incumbent LECs 
and the Commission.
    184. Finally, we note that section 254(g) requires IXCs' rates to 
subscribers in rural and high cost areas to be no higher than the rates 
for subscribers in urban areas. We therefore invite parties to comment 
on how IXCs would be affected by incumbent LECs geographically 
deaveraging their rates for access elements.
    b. Volume and Term Discounts. 185. In this section, we consider 
permitting incumbent LECs to offer volume and term discounts for all of 
their access charge elements upon achievement of the Phase 1 
competitive conditions. Volume and term discounts are permitted for 
special access services without any competitive showing or waiver of 
Part 69 of the Commission's rules. We currently permit volume and term 
discounts on certain transport services when incumbent LECs can show a 
certain level of competition, as evidenced by a specified demand for 
their expanded interconnection services. In the Switched Transport 
Expanded Interconnection Order, we permitted incumbent LECs, once a 
specified threshold of interconnection was met, to offer reasonable 
volume and term discounts on entrance facilities and interoffice 
facilities and tandem-switched transport, including pricing that 
reflects speeds greater than DS3. We noted that, as a general matter, 
such discounts should be permitted if they are justified by underlying 
costs, and are not otherwise unlawful, because they encourage 
efficiency and full competition. Term discounts recognize cost savings 
that result from the certainty of longer-term arrangements, and volume 
discounts reflect the lower per-unit cost of providing higher traffic 
volumes on high capacity facilities. We have previously concluded that 
volume and term discounts can reasonably recognize certain efficiencies 
that flow from volume or term commitments made by purchasers.
    186. The Commission currently allows an incumbent LEC to offer 
volume and term discounts on switched transport when one of the 
following conditions has been met: (1) 100 DS1-equivalent cross-
connects for switched transport service were taken by an interconnector 
in the incumbent LEC's zone 1 offices in a study area, or (2) an 
average of 25 DS1-equivalent switched transport cross-connects per zone 
1 office have been taken. These thresholds were designed to balance the 
incumbent LECs' need for flexibility in light of growing competition 
with the need to give incumbent LECs incentive to act cooperatively in 
implementing expanded interconnection. We found that discounted 
switched transport service constituted a new service under the price 
cap rules, thereby necessitating the filing of cost justification by 
the incumbent LEC. We also required that discounted switched transport 
tariff filings be made 120 days in advance of their effective date, 
rather than 45 days in advance, as required for other new services.
    187. Because of our current inefficient rate structures, incumbent 
LECs face pressure from high-volume customers

[[Page 4697]]

due to the availability of bypass facilities. The condition that 
incumbent LECs make available unbundled network elements at forward-
looking economic costs, including substantial scale and scope 
economies, will place additional pressure on access prices that do not 
also reflect forward-looking economic costs. We recognize the 
significant benefits that may result from volume and term discounts, 
including the possibility that volume and term discounts may enable an 
incumbent LEC to reflect its actual costs more accurately. However, we 
do not propose permitting incumbent LECs to offer volume and term 
discounts without first meeting a competitive condition because we 
remain concerned that such discounts may serve to inhibit competition 
if employed by incumbent LECs before competitors can offer volume and 
term discounts of their own. By ``locking in'' customers with 
substantial discounts for long-term contracts and volume commitments 
before a new entrant that could become more efficient than the 
incumbent can offer comparable volume and term discounts, it is 
possible that even a relatively inefficient incumbent LEC may be able 
to forestall the day when the more efficient entrant is able to provide 
customers with better prices.
    188. Because of this concern, we therefore propose that incumbent 
LECs be permitted to offer volume and term discounts only if they have 
met the Phase 1 conditions. The existence of competition from the 
availability of unbundled elements makes it less likely that an 
incumbent LEC could lock in particularly desirable customers with long-
term plans before competitors can respond. Instead, it seems more 
likely that the competitors will be able to use unbundled network 
elements to offer services at significant, pro-competitive volume and 
term discounts. Precluding volume and term discounts for access service 
rates would require the incumbent LEC to offer local switching services 
purchased in high volume or for long terms at prices greater than the 
incumbent LEC's costs for providing those services, which would impede 
the full development of effective competition. We seek comment on this 
proposal to give incumbent LECs the authority to provide volume and 
term discounts, and on the extent to which it might affect the 
emergence of competition in markets for exchange access services. We 
seek comment on whether these discounts need to be cost justified.
    189. On the other hand, we tentatively conclude that it would not 
be in the public interest to permit incumbent LECs to offer ``growth 
discounts'' for particular access services at Phase 1. Growth discounts 
refer to pricing plans under which incumbent LECs offer reduced per-
unit access service prices for customers that commit to purchase a 
certain percentage above their past usage, or reduced prices based on 
growth in traffic placed over an incumbent LEC's network. We are 
concerned that because BOC affiliates will begin with existing 
relationships with end users, name recognition, and no subscribers, 
they will grow much more quickly than existing IXCs and other new 
entrants. Thus, incumbent LECs could circumvent the nondiscrimination 
provisions of section 272 by offering growth discounts for which, as a 
practical matter, only their affiliates would qualify. Some incumbent 
LECs argued in comments filed in response to our Price Cap Second 
FNPRM, that growth discounts could benefit smaller IXCs that do not 
qualify for volume discounts. These incumbent LECs, however, failed to 
provide evidence that growth discounts would be cost-justified. We 
invite parties to provide evidence that growth discounts would not 
circumvent the safeguards of section 272, and are, in fact, justified 
by reduced costs of providing service. We also seek comment on whether 
the development of competitive access markets would be enhanced if 
incumbent LECs were permitted to offer growth discounts.
    c. Contract Tariffs and Individual RFP Responses. 190. In the 
Competition in the Interstate Interexchange Marketplace, CC Docket No. 
90-132, Report and Order, 56 FR 55235 (October 25, 1991) (Interexchange 
Order), the Commission adopted rules permitting IXCs to offer common 
carrier services pursuant to individually negotiated contract tariffs. 
AT&T, then deemed as a dominant carrier, was permitted to offer 
services under contract tariff rates only for those services that we 
had found to be subject to substantial competition. We required AT&T to 
file a tariff setting forth the terms of each negotiated contract, and 
to make the same terms and conditions generally available to similarly 
situated customers under substantially similar circumstances so as to 
comply with the nondiscrimination provisions of the Communications Act.
    191. In the Price Cap Second FNPRM, we proposed to apply similar 
contract carriage rules to access services that the Commission finds to 
be subject to substantial competition, provided the contract rates were 
made generally available to similarly situated customers under 
substantially similar circumstances.
    192. We propose to permit incumbent LECs to offer contract tariffs 
when Phase 1 has been met. Incumbent LECs would be required to make 
each contract tariff both publicly available through a tariff filing 
setting forth the contract's terms, and generally available to 
similarly-situated customers on the same terms and conditions. The 
availability of contract carriage should lead to lower prices for those 
customers using contract tariffs. Under our price cap rules, contract 
tariffs at reduced prices could allow incumbent LECs to raise prices 
for those customers not taking service subject to these contract 
tariffs due to the way the actual price indices (APIs) are calculated. 
At Phase 1, the entry barriers to competition will have been removed, 
but competition may not yet be sufficient to constrain the incumbent 
LECs from raising prices unreasonably for those customers not under 
contract tariffs. Thus, as suggested by Pacific Bell, we also propose 
to remove contract carriage service when calculating incumbent LECs' 
APIs in our price cap system. We note that parties will be negotiating, 
or obtaining arbitration of individual arrangements before the states, 
under section 252, and that certain interconnection arrangements may be 
substitutable for access services. This may well place greater 
competitive pressure on prices for incumbent LEC access services at an 
earlier phase in the development of competition than existed for AT&T. 
Parties advocating that we should delay contract carriage until Phase 2 
or until substantial competition has been reached should identify and 
quantify their concerns with implementing this reform at Phase 1.
    193. We also propose to remove the prohibition against incumbent 
LECs offering competitive response tariffs when the requirements of 
Phase 1 have been met. A competitive response tariff is a contract 
tariff that a LEC initiates when it responds to a competitor's offer to 
an end user, or in response to a request for proposal. By requiring 
that a competitor be present, competitive response tariffs by 
definition provide an additional justification for being made available 
at this phase. To the extent that parties disagree with our proposed 
treatment of contract tariffs offered in response to requests for 
proposals, we invite comments demonstrating why different conclusions 
would be in the public interest.
    d. Deregulating New Services. 194. We also seek comment on whether 
to permit incumbent LECs to offer certain access

[[Page 4698]]

services outside price cap regulation upon achievement of the Phase 1 
trigger. Such treatment might be possible because a baseline access 
offering exists that ensures continued provision of a core service at 
reasonable rates. The ability of incumbent LECs to offer some access 
services outside price caps could create incentives for incumbent LECs 
to introduce services using the capabilities of new technologies. 
Modifications to our regulatory regime along these lines for such 
services could increase customer choice, streamline regulation, and 
increase consumer welfare by increasing incentives for innovation.
    195. As BOCs are permitted to enter the long-distance market, 
however, their long-distance affiliates may well be purchasing many of 
these new services, as long-distance carriers with LEC affiliates may 
well today. We seek comment on whether this may give rise to 
circumstances in which the LEC could reduce the effects of competition 
if it offered certain new services outside price cap regulation. If so, 
when? We also ask whether the section 202 prohibition against 
discrimination and, with respect to the BOCs, the section 271(c) 
checklist and the section 272(e)(3) requirement that a BOC charge its 
long-distance affiliate an amount for access that is no less than the 
amount charged to any unaffiliated interexchange carriers, provide 
sufficient protection against possible anticompetitive conduct that we 
need not make special exceptions to our proposal. We also seek comment 
on the relationship of this proposal to the requirement to unbundle 
network elements under the 1996 Act.
    196. We also seek comment on whether we could deregulate new 
services. We now seek comment on whether we should eliminate all 
requirements that an incumbent LEC obtain any regulatory approval 
before a tariff introducing a new service can take effect. Many new 
services take advantage of new technical capabilities, and the delay 
entailed in obtaining regulatory approval may harm consumer welfare. 
Because the underlying core access service offerings, as well as 
unbundled network elements, would still be available, there may be 
little benefit from requiring an incumbent LEC to obtain regulatory 
approval before introducing a new service. We ask whether, if the new 
service is far superior to the existing service, the availability of 
the old service may not provide sufficient safeguards. The availability 
of the core service also raises the question of whether price 
regulation of new services is still needed or warranted. If not, these 
services could be removed from price cap regulation. Alternatively, if 
such services are not removed from price cap regulation altogether, we 
seek comment on whether we should eliminate the new services test. We 
seek comment on these alternatives. Parties are invited to comment on 
whether relaxed regulation is more appropriate for some types of new 
services than it is for other new services.
    197. Finally, we seek comment on whether, if we adopt the proposal 
in the preceding paragraph, we should also remove from price cap 
regulation some services that have required waivers in the past for 
their introduction. This would equate the treatment of existing 
services that were introduced following a waiver request to that for 
future new services. One example of such a service is 500 access 
service, which allows IXCs to offer their customers a service by which 
a call to one number is routed to a different telephone number at 
different times, or in different sequencing arrangements (a ``follow-
me'' service). This service offers specialized features for which 
continued regulation may not be necessary if competing carriers can 
develop substitute services to respond to customer needs. We seek 
comment on this example, and seek comment on whether other similar 
services exist for which continued price cap regulation may not be 
necessary.

C. Phase 2--Actual Competition

    198. In this subsection, we seek comment on the removal of 
additional regulatory constraints from incumbent price cap LECs upon 
the establishment of an actual competitive presence for an exchange 
access service in a relevant geographic area. A competitive presence 
short of substantial competition would help to ensure that the opening 
of the network has happened in fact, not just in theory, and would 
allow for further reforms under conditions short of the substantial 
competition necessary for full deregulation and detariffing. At Phase 
2, we are seeking comment broadly on: (1) Eliminating price cap service 
categories within baskets; (2) removing the ban on differential pricing 
for access among different classes of customers; (3) ending mandatory 
rate structure rules for transport and local switching; and (4) 
consolidating traffic-sensitive and trunking baskets. We are also 
seeking comment on whether and how to implement these reforms, or 
equivalent reforms, if the development of competition comes at 
significantly different rates for different switched access services in 
different areas. These reforms would appear appropriate because the 
competition present at Phase 2, together with the availability of 
unbundled network elements and the continuing price cap limits on price 
increases, should restrain incumbent LECs from overcharging their 
customers. We seek comment as well on how to define competitive 
presence for these purposes, including whether we should define the 
term differently for certain of the above reforms than for others. 
Finally, we seek comment on various alternatives--including whether we 
should remove any of these regulatory constraints at Phase 1; whether 
we should remove additional regulatory constraints at Phase 2; and 
whether we should wait until substantial competition has developed, as 
described above, before eliminating some or all these constraints.
1. Trigger and Relevant Markets
    199. We invite comment on three possible factors for determining 
whether an incumbent LEC has met the trigger for Phase 2: (1) 
Demonstrated presence of competition; (2) full implementation of 
competitively neutral universal service support mechanisms; and (3) 
credible and timely enforcement of pro-competitive rules. We also ask 
whether the proposals for deregulating new services we seek comment on 
in subsection V.B.2.d, above, would be better suited for Phase 2. We 
seek comment on whether we should adopt any or all of these factors for 
the Phase 2 trigger point, and whether there are other competitive 
factors that we should consider.
    200. First, we seek comment on how to determine when competition is 
sufficient to end mandatory rate structure rules for transport and 
local switching, remove the ban on differential pricing for access 
among different classes of customers, eliminate price cap service 
categories within baskets, and consolidate the traffic-sensitive and 
trunking baskets. We could measure market share as one factor, among 
others, in determining whether competition exists in a given market for 
purposes of removing the regulatory constraints we have identified. As 
we observed in the Price Cap Second FNPRM, we previously have used 
market share as one factor in measuring the presence of competition. 
Nevertheless, there are drawbacks to using market share. An analysis of 
the level of competition for incumbent LEC services based solely on an 
incumbent LEC's market share at one time may not provide an adequate 
basis for us to conclude that a competitive presence truly exists. 
Further, we lack data on the relative market shares of incumbent

[[Page 4699]]

LECs and their rivals, and thus would need to develop reasonable and 
nonburdensome ways to gather that information if we were to rely on it. 
If the Commission considers the relative market shares of the incumbent 
LECs and their competitors as one factor in assessing the level of 
competition for incumbent LEC services, what data and information about 
incumbent LECs and their competitors would be necessary to assess their 
relative market shares? Also, we would have to determine the 
appropriate market to be measured and the unit of measurement, such as 
customer lines, revenues, or access minutes. We seek comment on whether 
using a market share trigger could affect how the market develops. We 
seek comment on whether, notwithstanding an absence of competitive 
entry, the incumbent could be adequately restrained from raising its 
prices such that it could obtain Phase 2 treatment. If we were to adopt 
any new reporting requirements for purposes of calculating market 
share, we invite comment on what effect this requirement would have on 
incumbent LECs considered ``small businesses'' for purposes of the 
Regulatory Flexibility Act.
    201. In addition to measuring market share as a percentage, we seek 
comment on the possible use of absolute measures of competitors' 
presence for services in an area. For instance, we ask parties to 
discuss whether a competitive presence should be measured in terms of 
an absolute number of customer lines, residential lines, or access 
minutes. Are there other factors that could be measured that could 
support a finding of competitive presence, e.g., a specified number of 
competitive switches; or a certain number of customers receiving 
service from unbundled network elements or competitive facilities? What 
should be the relative importance of a measurement of competition in 
light of other factors that we propose to incorporate into our analysis 
and on any other factors that may be proposed? On one hand, a simple 
measurable test would be easier to administer than most other potential 
tests; on the other hand, the real significance of any particular 
competitive presence in the marketplace often only becomes clear after 
analyzing several different variables that measure competition.
    202. We propose to apply any market-presence test we might adopt on 
a service-by-service basis. For example, we propose to allow an 
incumbent LEC to establish differential rates for transport when that 
incumbent LEC has satisfied the Phase 2 trigger for transport, even if 
there is no demonstrated presence of competitors for local switching. 
Such an approach would allow the incumbent LEC to respond to 
competitive alternatives for specific services, which should result in 
lower prices and more efficient utilization of the network, without 
permitting incumbent LECs to raise rates unreasonably for less 
competitive services. Also, this approach would be consistent with our 
proposal to remove services from price cap regulation when they are 
subject to substantial competition. Certain Phase 2 proposals, such as 
elimination of service categories and consolidation of price cap 
baskets, may not be amenable to implementation on a service-by-service 
basis. We seek comment on how any such elements of Phase 2 regulatory 
relief should be implemented.
    203. A second possible factor to consider in determining whether 
the Phase 2 trigger has been met is whether the universal service 
programs available to incumbent LECs and other eligible 
telecommunications carriers are competitively neutral. The Universal 
Service Joint Board recommended that both the collection mechanism and 
the disbursement mechanism for universal service programs be 
competitively neutral. We ask whether some consumers will not see the 
benefits of competition if the state universal service programs are not 
competitively neutral. If in practice only incumbent LECs can receive 
universal service support, then the disbursement mechanism is not 
competitively neutral. Customers should be able to choose their 
provider based on who best serves their needs, not on which provider 
specifically qualifies for a subsidy payment. We seek comment on this 
proposed factor.
    204. We ask to what extent and how enforcement of pro-competitive 
rules should be a factor in determining whether Phase 2 has been 
achieved. Any state or federal rules or rights must be enforced 
vigorously and swiftly so that consumers enjoy the benefits of the 
promised competition. States and the FCC have a duty to create forums 
for fast, fair and efficient dispute resolution. We seek comment on 
whether enforcement should be used as a Phase 2 condition, and if so, 
on what the specific criteria should be for determining whether 
enforcement is adequate.
    205. We also seek comment here on whether additional or different 
conditions should apply before implementing Phase 2 reforms. For 
instance, we seek comment on whether our definition of actual 
competitive presence should differ for implementing various of the 
reforms discussed here. Should we require greater competitive pressures 
on incumbent LEC access charges before we implement certain of the 
reforms discussed below? If so, which ones, and why? We also seek 
comment on the extent to which an actual competitive presence, from 
entrants purchasing unbundled elements, using their own constructed 
facilities, or a combination of the two as a substitute for current 
access service, would provide incumbent LECs incentives to reduce 
access charges. If it develops that carriers are competing for end-user 
customers primarily by providing bundles of local and long distance 
service, to what extent would incumbent LECs decide not to lower access 
charges charged to IXCs, but instead to raise them as high as possible 
as long as possible? If this occurs for certain groups of customers, or 
in certain areas, should this affect how we implement reforms at Phase 
2, and, if so, how? To what extent is this competitive dynamic affected 
by the absence of a legal requirement under the 1996 Act that a 
requesting carrier provide local exchange service to an end user in 
order to purchase unbundled network elements and use them as a 
substitute for access service? To what extent would the continued 
constraints of price cap regulation for certain access services, 
perhaps as modified according to certain of the methods discussed in 
the prescriptive approach to access reform, provide sufficient 
protection during the transition to substantial competition?
    206. We solicit comment on the procedures that an incumbent LEC 
should follow to demonstrate that it has met the Phase 2 triggers for 
one or more services. Petitioners should discuss whether an incumbent 
LEC should file a petition for waiver, a petition for declaratory 
ruling, or some other filing, and how the incumbent LEC should satisfy 
its burden of proof.
    207. We also seek comment on the relevant geographic area that 
should be considered in determining whether an incumbent LEC has met 
the Phase 2 competitive trigger. As discussed in Section II.D.1 above, 
there are several possible ways of specifying geographic areas. We 
tentatively conclude that any geographic area used in considering the 
presence of substantial competition would be appropriate for purposes 
of Phase 2. Moreover, by not requiring parties to maintain data on 
multiple geographic areas, such an approach would keep administrative 
burdens on all parties to a minimum. We seek comment on this tentative 
conclusion.

[[Page 4700]]

2. Reforms
    a. Service Categories Within Baskets. 208. The price cap service 
categories were developed both to protect ratepayers from precipitous 
changes in the prices for incumbent LEC services, and to prevent 
incumbent LECs from disadvantaging one class of ratepayers to the 
benefit of another class. We tentatively conclude that, given 
competition in Phase 2, the current service categories in the trunking 
and traffic-sensitive baskets would no longer be necessary. We invite 
comment on how we should eliminate service categories, because doing so 
on a service-by-service basis appears infeasible. While the upper 
service band indices (SBIs) prevent incumbent LECs from offsetting 
price reductions in one service category with increases for less 
competitive services, the development of a competitive presence will 
provide IXCs with the alternatives of obtaining service from 
competitive LECs or using unbundled network elements instead. We seek 
comment on eliminating the current service categories at Phase 2. 
Parties should address whether there will be a need for any service 
categories at that point, to describe those categories, and to explain 
why it would be in the public interest to retain them.
    b. Differential Pricing for Access to Different Classes of End-
Users. 209. While we generally have not considered differential pricing 
for access services to different classes of customers in prior 
proceedings (except for the Subscriber Line Charge), we seek comment on 
whether we should permit such flexibility at Phase 2. As used in this 
NPRM, we define differential pricing as permitting incumbent LECs to 
charge different rates for access to different classes of customers. 
There are at least three classes for which differential pricing may be 
appropriate: Residential, single-line business, and multi-line 
business. We invite parties to suggest additional classes, and to 
analyze why rates for access to such classes should be afforded 
differential treatment. We seek comment on whether, for incumbent LECs 
that use differential pricing for their access rates, we should adopt 
some safeguards to protect the classes of customers not subject to 
competition, e.g., residential and single-line business, and if so, 
what those safeguards should be.
    210. Differential pricing for access could pose the same 
substantial risks to competition that accompany contract carriage and 
RFPs, but, because differential pricing would enable an incumbent LEC 
to adjust all prices for access to a class of customers within a zone 
at the same time, the risks would be on a greater scale. We seek 
comment on whether we should permit incumbent LECs to offer 
differential pricing for access once the requirements of Phase 2 have 
been met.
    c. Rate Structure Rules for Transport and Local Switching. 211. We 
seek comment on eliminating the rate structure rules for the transport 
and local switching rate elements at Phase 2. We would also eliminate 
the mandatory rate structure modifications for transport and local 
switching that we propose in Section III, above. At Phase 2, if an 
incumbent LEC attempted to establish an inefficient rate structure, an 
IXC would be able to avoid paying above-cost rates by using cost-based 
unbundled network elements to originate and terminate toll traffic, or 
by acquiring access from a competitive provider. We will be able to 
rely on the presence of competitors to oblige the incumbent LECs to 
establish rate structures that reflect the manner in which costs are 
incurred. We do not propose to introduce this reform at Phase 1, even 
though unbundled network elements can act as an effective substitute 
for switched access at that point. We tentatively conclude that we 
should allow the Phase 1 reforms to take their effect prior to 
eliminating our mandatory rate structure rules, because it is not clear 
that the mere existence of efficient rate structure rules for unbundled 
network elements will cause incumbent LECs to adopt efficient access 
rate structures. For example, incumbent LECs may have an incentive to 
set per-minute access charges to raise the cost for interexchange 
resellers, who may have difficulty vertically integrating. This pricing 
would raise the marginal costs of those IXCs, distorting competition 
and raising prices and the profits of a LEC or its interexchange 
affiliate. We seek comment on this reform, and on when our mandatory 
rate structure rules should no longer apply. We also seek comment on 
whether we should keep our rate structure rules for terminating access 
even after we have removed them for originating access.
    212. In conjunction with elimination of transport and switching 
rate structure rules, we also ask parties to comment on whether 
carriers satisfying Phase 2 requirements should be permitted to 
apportion access charges between carrier and end user according to 
marketplace pressures. In this regard, incumbent LECs would be treated 
in the same manner as competitive LECs, with neither a requirement nor 
a prohibition against adopting the most commercially appropriate rate 
structure. Commenters should discuss whether we should permit LECs to 
collect charges from end users for originating access, terminating 
access, or both, and whether such charges should be imposed on the 
party placing a call or the party receiving the call. Commenters should 
also address whether providing this flexibility might violate section 
254(g), which prohibits interexchange rates in rural or high cost areas 
from exceeding rates in urban areas. Alternatively, we seek comment on 
any steps we should take to ensure that an IXC can recover access 
charges from its customers in an efficient manner.
    d. Consolidation of the Traffic-Sensitive and Trunking Baskets. 
213. When we created the price cap baskets for incumbent LECs, each 
with separate price cap indices and bands, we balanced two competing 
concerns. First, we limited the number of baskets to ensure that the 
company-wide productivity offset would be appropriate for each basket. 
Second, we sought to limit the incumbent LECs' ability to subsidize 
price decreases for competitive services with price increases for 
services in a less competitive basket. We expect that competition in 
trunking and switching will develop at approximately the same rate. 
Thus, the need to separate the traffic-sensitive and trunking baskets 
is reduced. We do not seek comment on consolidating the common line 
basket, because the common line possesses different bottleneck 
characteristics than do local switching and transport. These 
differences are likely to cause competition for common line services to 
develop differently than and probably generally lag somewhat behind 
competitive developments in the traffic-sensitive and trunking baskets. 
We do not seek comment on consolidating the interexchange basket 
because services within the interexchange basket are more competitive, 
and so are likely to be subject to substantial competition more quickly 
than traffic-sensitive or trunking services. At this point, we invite 
comment on consolidating the traffic-sensitive and trunking baskets, 
enabling incumbent LECs to price their services more efficiently in 
response to the competitive market. Consolidating the traffic-sensitive 
and trunking baskets also reduces the administrative burdens placed on 
incumbent LECs.
    214. We have considered modifying price cap baskets in the past, 
but declined to do so in the absence of information about the state of 
competition in the local telephone markets. We suggest two possible 
points at which to remove this constraint: Phase 2 or in conjunction 
with the phase-out of the TIC, discussed below.

[[Page 4701]]

Our Phase 2 triggers should assess competition adequately for the 
purpose of determining whether incumbent LECs should be able to 
consolidate the traffic-sensitive and trunking baskets. Until the 
incumbent LEC reaches Phase 2 for each basket, it continues to face 
less competition for the services in one of the baskets relative to the 
services in the other. During this time, an incumbent LEC that can 
consolidate these baskets may still have an incentive and the ability 
to engage in anticompetitive behavior. We believe that in order to 
reduce this incentive, incumbent LECs would have to reach Phase 2 for 
each of the services within these baskets. Nevertheless, it may be 
better to permit consolidation of the traffic-sensitive and trunking 
baskets as part of the incumbent LECs' phasing out of the TIC. Removing 
this constraint at the time of the TIC phase-out would provide a method 
for incumbent LECs to reassign costs from the TIC. We seek comment on 
consolidating the traffic-sensitive and trunking baskets, particularly 
on when the consolidation should take place. We ask parties that favor 
consolidating the traffic-sensitive and trunking baskets as part of the 
incumbent LECs' phasing out of the TIC address what would ensure that 
incumbent LECs would not engage in anticompetitive behavior with 
respect to the services within these baskets.

VI. Prescriptive Approach to Access Reform

A. Introduction

    215. In Section V above, we have set forth a framework under which 
we would reduce or eliminate, in phases tied to the potential for and 
growth of competition, access charge requirements that constrain rate 
structures and price levels. Some parties, such as MCI, may contend 
that a market-based approach is inadequate to the task of reforming 
access. Such parties might argue that, at best, competition will emerge 
unevenly among geographic areas, services, and customer classes, and 
argue that a second option for access reform, a prescriptive approach, 
should be followed. Although a prescriptive approach would move access 
rates to forward-looking economic costs in a more predictable and 
uniform manner than a market-based approach, such an approach would 
also require that the Commission play a greater role in the 
telecommunications marketplace. In Section IV.A above, we invite 
comment generally on whether a market-based approach, prescriptive 
approach, or some combination of the two approaches provides the best 
path for access reform.
    216. In this Section, we seek comment on the specific requirements 
we should apply to incumbent LECs if we adopt an alternative, more 
prescriptive approach to access reform. First, we invite comment on the 
goal of a prescriptive approach. Next, we invite comment on a number of 
proposals, many of which have been suggested by industry participants, 
for specific requirements that could be incorporated into the 
prescriptive approach. Many proposals discussed below are designed to 
reduce access rates generally, because reducing access rates should in 
most, if not all, cases result in rates that are closer to cost. One of 
our proposals is to prescribe TSLRIC-based access rates, which would 
force rates to cost more effectively than our other proposals, but 
would also be more administratively burdensome. Finally, we address 
establishing phases for prescriptive access reform, to avoid the market 
disruptions that might occur if we required incumbent LECs to move 
interstate access rates to cost on a ``flash-cut'' basis.

B. Goal of Prescriptive Access Reform

    217. In both the prescriptive approach to access reform discussed 
in this Section and the market-based approach discussed in Section V, 
we seek to develop competition for interstate access services, which 
will ultimately result in the deregulation of these services. As we 
have emphasized elsewhere in this NPRM and in other proceedings, the 
1996 Act commands us to foster efficient competition in all 
telecommunications markets and to remove regulation when marketplace 
forces will drive competing providers to lower their costs and prices 
and offer services that are responsive to the demands of consumers. An 
intermediate goal of the market-based approach is to permit market 
forces to drive interstate access rates to economically efficient 
levels. We propose adopting a similar intermediate goal for 
prescriptive access reform; i.e., we propose to adopt rules that would 
drive access rates to economically efficient levels. MCI and AT&T have 
argued that interstate access rates, as well as prices for unbundled 
network elements offered pursuant to the 1996 Act, should be based on 
the forward-looking economic costs of those services or elements. Those 
IXCs have also submitted computer models designed to calculate forward-
looking economic cost. Specifically, in the case of access services, 
the model calculates ``Total Service Long Run Incremental Cost'' 
(TSLRIC) of the access service, and in the case of unbundled network 
elements, the model calculates the TSLRIC of network elements, also 
known as Total Element Long Run Incremental Cost (TELRIC).
    218. An incumbent LEC's TSLRIC for a given service or facility, 
such as exchange access service, should include all incremental costs 
directly attributable, or dedicated, to the delivery of the service or 
facility in question. Carriers also should be allowed to recover a 
reasonable allocation of their forward-looking common costs, defined as 
those costs that are incurred in connection with the production of 
multiple products or services that remain unchanged as the relative 
proportion of those products or services varies. We note that when 
calculating the forward-looking economic cost of exchange access 
services, because these services share common network facilities with 
other incumbent LEC-provided services, such as local exchange service 
and intraLATA toll, fewer costs will be directly attributable or 
dedicated totally to exchange access services. Consequently, the 
incumbent LEC may need to recover significant common costs in addition 
to the TSLRIC of exchange access. These common costs should be 
recovered in a manner that is economically efficient and consistent 
with the pro-competitive goals of the 1996 Act. By contrast, the TELRIC 
of a specific facility, such the loop or the switch, would directly 
attribute to that facility all costs caused by that facility, 
regardless of the services provided by that facility. Consequently, the 
forward-looking common costs that the incumbent LEC must recover in 
addition to the TELRIC of that facility in order to recover forward-
looking economic costs are lower than the forward-looking common costs 
that need to be recovered for a service. Additionally, the forward-
looking costs of unbundled network elements should not include the 
costs of billing and marketing to end users, because unbundled network 
elements are intermediate products offered to competing carriers.
    219. Under both TSLRIC and TELRIC-based pricing methodologies, 
prices should be based on forward-looking economic costs, including a 
reasonable allocation of forward-looking joint and common costs, and 
allow incumbent LECs to earn a fair, risk-adjusted rate of return on 
their investments. Such pricing should encourage efficient and 
effective entry into the local telecommunications marketplace. 
Commission staff will soon be releasing for comment an analysis of the 
use of

[[Page 4702]]

computer models in estimating forward-looking economic costs. In the 
event we determine that a market-based approach will not result in the 
development of efficient competition, we tentatively conclude that our 
goal for prescriptive access reform should focus on interstate access 
rates based on some form of a TSLRIC pricing method. We seek comment on 
this tentative conclusion. Below, we seek comment on several proposals 
for rules that would drive interstate access rates to TSLRIC levels.

C. Specific Regulatory Requirements

1. Readjustment of Rates to Economic Cost Levels
    220. In the Price Cap Performance Review for Local Exchange 
Carriers, CC Docket No. 94-1, First Report and Order, 60 FR 19526 
(April 19, 1995) (LEC Price Cap Performance Review), we required 
incumbent price cap LECs to adjust their price cap indices (PCIs) 
downward to reflect our decision to revise, in light of our past 
experience with price cap regulation, one of the economic studies on 
which we based the X-Factor in the LEC Price Cap Order. In this 
Section, we seek comment on whether we should require a similar 
reinitialization in this proceeding. Specifically, we seek comment on 
the feasibility of readjusting the PCIs applicable to an incumbent 
LEC's baskets on the basis of a TSLRIC-based study. This would be one 
means of implementing the proposals of AT&T and MCI that access rates 
should be set at forward-looking economic costs. Under this approach, 
we would determine the forward-looking incremental costs of providing 
all the access services in a price cap basket, and then add a suitable 
allocation of forward-looking common costs. Finally, we would require 
incumbent LECs to reduce their PCIs by an amount equivalent to the 
difference between their current PCIs and the TSLRIC revenues of 
providing the services in each basket. One benefit of requiring such a 
reinitialization is that it would enable us to avoid the administrative 
burdens associated with determining the proper allocation of common 
costs to each service within a basket. On the other hand, the 
reinitialization of PCIs we consider in this Section would simply lower 
rate levels. It would not guarantee that the incumbent LECs' rate 
structures would be reasonable. We seek comment on whether rate 
structure concerns should outweigh our concerns regarding the 
administrative burdens of allocating common costs. In Section VI.C.4 
below, we seek comment on prescribing rate levels and rate structures 
based on TSLRIC studies, which would help ensure that incumbent LECs' 
rate structures are reasonable, but would also require us to determine 
how to allocate common costs.
    221. In order to reinitialize PCIs to levels that are consistent 
with the TSLRIC of incumbent LECs' access services, the Commission 
could evaluate incumbent LECs' TSLRIC studies for each price cap 
basket. This approach, however, could impose significant and 
potentially costly burdens on the FCC, incumbent LECs, and interested 
parties. Alternatively, state commissions might be better suited to 
evaluate TSLRIC-based studies because state commissions generally have 
more experience with cost studies. Under this approach, which we could 
implement under section 410(a) of the Act, we would rely on the state 
commissions' results to determine the difference between current 
interstate access rates and forward-looking economic cost-based access 
rates, and reinitialize interstate PCIs based on this difference. This 
approach ensures coordinated treatment between jurisdictions. We seek 
comment on this alternative and invite parties to comment on what, if 
any, federal guidelines should be established for the conduct of these 
state studies. Commenters should also suggest alternative proposals for 
reinitializing PCIs at forward-looking, economic cost, in the event we 
determine that a market-based approach will not result in economically 
efficient rates.
    222. We seek comment on whether TSLRIC calculations for the 
services in some price cap baskets could be based in part on or derived 
from the TELRIC of certain unbundled network elements. TSLRIC and 
TELRIC are different versions of the same pricing methodology. To the 
extent that states reviewing arbitration agreements governing the 
prices of unbundled network elements rely on TELRIC studies, those 
studies might also provide data useful for determining TSLRIC rates for 
access prices. We seek comment generally on the feasibility of using 
prices derived from individual network element costs to establish 
prices for interstate access service. In particular, are there access 
services that employ dedicated facilities that are equivalent to an 
unbundled network element, and in those cases, would there be any 
difference between the TSLRIC of the access service and the TELRIC of 
the unbundled network element? For instance, it is not clear that the 
TSLRIC price of dedicated transport service, as opposed to tandem-
switched transport service, should significantly differ from the TELRIC 
of a dedicated transport element. We also seek comment on what costs, 
if any, should be included in the price of interstate access that are 
not included in the price of unbundled elements. For example, we ask 
commenters to address the nature of marketing and other customer 
operations costs that are involved with the provision of access 
services, and ask that they identify any costs that are incurred in the 
sale of access services that are not incurred in the sale of unbundled 
elements.
    223. In addition, we solicit comment on whether it is possible to 
reduce the administrative burdens associated with this approach by 
deriving estimates for TSLRIC-based prices in some study areas from 
TSLRIC or TELRIC studies conducted previously in other study areas. Is 
there a generic cost model that could be used to determine TSLRIC-based 
interstate access prices?
    224. Some parties that advocate readjusting access rates to the 
TSLRIC level maintain that TSLRIC rates would, in most cases, result in 
access rate reductions. In Section VII.A below, we seek comment on 
whether this is the case, the reasons therefore, and the magnitude of 
any differential. TSLRIC-based rates by definition would not be based 
on the level of embedded costs, regardless of whether embedded costs 
exceed TSLRIC-based rates or TSLRIC-based rates exceed embedded costs. 
We note that the presence of competitive LECs might increase 
incumbents' cost of capital, and might warrant increasing depreciation 
rates. These effects might decrease to some extent any difference 
between TSLRIC-based rates and current rates. In Section VII.B, below, 
we seek comment on whether and to what extent incumbent LECs should be 
permitted an opportunity to recover any difference between TSLRIC-based 
rates and current rates.
2. Reinitialization of Rates on Some Other Basis
    225. In the event we determine that a market-based approach to 
interstate access charge reform will not move rates closer to their 
economic cost, and reinitialization of PCIs based on TSLRIC studies or 
TELRIC cost models is not feasible, we could reinitialize PCIs on some 
other basis. For example, we could reduce PCIs to a level that would 
result in rates targeted to yield a rate of return of no more than 
11.25 percent. A second basis for reinitialization could be to 
prescribe a new rate of return and then reinitialize access rates based 
on that rate of return as urged by MCI, AT&T, and GSA in the LEC Price 
Cap Performance Review proceeding.

[[Page 4703]]

Developing a new starting point for incumbent LEC PCIs under either of 
these two approaches might be reasonable for several reasons. First, to 
the extent that current price cap rates include a cost of capital 
greater than that necessary to enable carriers to attract investors, 
these rates may not represent the most reasonable balance between 
ratepayer and stockholder interests. Second, although we found in the 
LEC Price Cap Performance Review Order that there was not sufficient 
reason for reducing access rates in the 1995-96 access period for 
changes in the cost of capital, the incumbent LECs' cost of capital may 
now be less than 11.25 percent. Specifically, in the Amendment of Parts 
65 and 69 of the Commission's Rules to Reform the Interstate Rate of 
Return Represcription and Enforcement Processes, CC Docket No. 92-133, 
Report and Order, 60 FR 28542 (June 1, 1995) (Represcription Reform 
Order), we found that the rate of return prescription may warrant 
revision if the monthly average on ten-year U.S. Treasury securities 
changes by more than 150 basis points, and the change continues for six 
months or more. In February 1996, the Common Carrier Bureau invited 
comment on whether to initiate a proceeding to represcribe the 
authorized rate of return for incumbent LECs subject to rate-of-return 
regulation, pursuant to the trigger mechanism we established in the 
Represcription Reform Order. If that proceeding reveals that the rate-
of-return LECs' cost of capital has decreased since we prescribed the 
current authorized rate of return in 1990, then the price cap LECs' 
cost of capital may possibly be lower as well. On the other hand, 
incumbent LECs face potential competition as a result of the Act that 
they did not face previously. This potential competition could increase 
the risks facing the incumbent LECs, and thus increase their cost of 
capital, thus mitigating to some extent the factors suggesting that 
incumbent LECs' cost of capital has decreased since 1990. We also note 
that evolving competition may make it appropriate to assign different 
costs of capital to different services, reflecting differences in 
competition and higher risks in transport, switching, and loop services 
respectively.
    226. We invite parties to discuss whether our prescriptive 
regulatory requirements should include reinitialization of price cap 
indices on any of the above-mentioned bases in this Section or Section 
VI.C.1. We seek comment on how, if we were to proceed with this 
approach, to reinitialize price cap indices. We also invite parties to 
provide estimates of what effect these reinitializations would have on 
the incumbent LECs' PCIs. In Section III.E above, we solicit comment on 
whether we should target the effects of any reinitialization to the TIC 
as a means of phasing out that rate element.
    227. While reducing PCIs would clearly reduce access rates, 
reinitializing indices based on earnings could have a negative effect 
on the productivity incentives of the LEC price cap plan. Represcribing 
a rate of return would also be administratively burdensome. We invite 
commenters to discuss whether any such negative effects are likely to 
outweigh the benefits of moving rates closer to their economic cost, 
and whether this approach is consistent with the development of 
efficient competition.
3. Revision of LEC Price Cap Plan
    228. In 1990, the Commission adopted mandatory price cap regulation 
for the BOCs and GTE. Other incumbent LECs may elect to be governed by 
price cap regulation. In simple terms, price cap regulation permits 
rates to increase no more than a measure of inflation minus an ``X-
Factor,'' that largely reflects a reasonable productivity target. Thus, 
the higher the X-Factor, the more downward pressure price cap 
regulation applies to access rates.
    229. The X-Factor represents in large part the amount by which 
carrier productivity has historically exceeded productivity in the 
economy generally. The X-Factor also includes a 0.5 percent consumer 
productivity dividend (CPD). The CPD was intended to serve the policy 
goal of assuring that the first benefits of the incumbent LECs' 
productivity growth induced by price cap regulation would flow to 
access customers in the form of reduced rates. A policy-based mechanism 
similar to the CPD could be used to force price cap incumbent LECs to 
reduce their rates further. For example, if we can rely on TELRIC 
studies to estimate the economic costs of access services, as we 
discuss in Section VI.C.1 above, then we could set this policy-based 
mechanism at some fraction of the percentage difference between current 
access rates and rates based on economic costs. Therefore, in this 
example, setting the policy-based mechanism at 20 percent of the 
initial difference between current rates and economic cost-based rates 
should then cause the price cap formula to drive access rates to cost 
over a five-year period, assuming that costs do not change during that 
period. We invite comment on the use of such a policy-based mechanism, 
and on the derivation of such a mechanism.
    230. In 1995, we adopted the Price Cap Performance Review for Local 
Exchange Carriers, CC Docket No. 94-1, Fourth Further Notice of 
Proposed Rulemaking, 60 FR 52362 (October 6, 1995) (Price Cap Fourth 
FNPRM), in which we sought comment on various proposals for revising 
the productivity offset component of the X-Factor, and for eliminating 
sharing obligations and the low end adjustment mechanism. Subsequently, 
the Customers for Access Rate Equity (CARE) Coalition has filed several 
ex parte statements urging that we complete expeditiously the 
rulemaking proceeding initiated in the Price Cap Fourth FNPRM and adopt 
a higher X-Factor or set of X-Factor options. AT&T and MCI have also 
urged us to adopt a higher X-Factor. We solicit comment on whether 
there is any justification for increasing the productivity offset, 
either on the basis of the record developed pursuant to the Price Cap 
Fourth FNPRM, or on more recent economic studies. We specifically 
invite parties to discuss the effects of a forward-looking cost of 
capital and economic depreciation on TFP measurement. Parties relying 
on more recent economic studies must comply with the ``general 
criteria'' we established for economic studies in the Price Cap Fourth 
FNPRM.
    231. We also seek comment on whether we should change the rules 
governing justification of tariff filings that cause the API for a 
basket to exceed the PCI. The price cap plan does not prohibit above-
cap rate filings, but does subject such filings to stringent review 
standards. An incumbent LEC making an above-cap filing must submit an 
extensive cost showing that explains all cost allocations down to the 
lowest possible level of disaggregation. It must also give a detailed 
explanation of the reasons for the prices of all rate elements to which 
costs are not assigned. We have stated that we will find such filings 
lawful only if the incumbent LEC can demonstrate that compliance with 
the price cap rules would have the effect of denying the LEC the 
opportunity to attract capital and continue to operate. A LEC that is 
permitted to charge above-cap rates becomes subject to traditional 
rate-of-return regulation with respect to those rates.
    232. The cost showing contemplated by the price cap rules is, in 
essence, a traditional, embedded-cost rate case. We seek comment on 
whether the rules should be changed to require that above-cap filings 
be justified based on the

[[Page 4704]]

forward-looking economic cost of providing access service.
4. Rate Prescription
    233. The proposals we discuss above, reinitializing price cap 
indices and increasing the X-Factor, are designed to reduce access 
rates. None of those proposals would necessarily compel price cap 
incumbent LECs to adopt efficient rate structures, nor ensure that 
price cap incumbent LECs allocate common costs in a reasonable manner. 
In Section III above, we invite comment on revisions to the rate 
structure rules to require price cap LECs to develop access rates that 
reasonably reflect the manner in which they incur costs. Here, we seek 
comment on whether those rules are sufficient to ensure that access 
rates reflect costs in areas subject to prescriptive access reform. We 
also seek comment on prescribing forward-looking incremental cost-based 
access rates as part of our prescriptive approach to access reform.
    234. Basing the prices of discrete unbundled network elements, such 
as loops and switching, on a forward-looking economic cost methodology 
may be more economically rational than using the same methodology to 
price conventional services, such as interstate access. Separate 
services are typically provided over shared network facilities, the 
costs of which may be joint and common. For example, interstate access 
is typically provided using the same loops and line cards that are used 
to provide local service. The costs of these elements are, therefore, 
common to the provision of both local and long-distance services. 
Conversely, certain unbundled elements, such as loops and line cards, 
can be priced individually using a TELRIC methodology, and in those 
cases the allocation of common costs is less problematic than when 
pricing services.
    235. We invite comment on whether, if we adopt a prescriptive 
approach to access reform, we should require incumbent LECs to conduct 
TSLRIC studies, and create new prices for individual interstate access 
services on the basis of those studies. Under this proposal, we would 
reset access prices once, and then rely on price cap regulation to keep 
rates just and reasonable. We also seek comment on how to allocate 
common costs if we were to adopt this approach, and whether problems 
raised by allocating a large amount of common costs relative to direct 
costs outweigh the benefits of this approach.

D. Phases for Prescriptive Approach

    236. We are unable at this time to quantify the magnitude of the 
difference, if any, between current interstate access rates and rates 
based on forward-looking economic costs. We seek comment on the amount 
of that difference in Section VII.B below, and the extent to which 
incumbent LECs should be permitted an opportunity to recover that 
amount. In this Section of the NPRM, we observe only that there may be 
a substantial cost difference relative to interstate access revenues as 
a whole. If so, we tentatively conclude that we should include some 
sort of transition mechanism in the prescriptive access reform plan, 
comparable to the phases of the market-based access reform plan we 
discuss in Section V above.
    237. One possible transition mechanism could be to establish phases 
for any reinitialization of price cap indices that we may adopt. In 
other words, we would implement the reduction in price cap indices 
through a series of reinitializations rather than a single 
reinitialization. A second option could be to adopt a policy-based 
increase to the X-Factor for a number of years, to reduce interstate 
access gradually, and then reinitialize price cap indices to TSLRIC 
levels as discussed in Section VI.C.1 above. We could also adopt a 
policy-based increase to the X-Factor for a number of years, and then 
prescribe TSLRIC-based access rates. Parties are invited to comment on 
all these options, and to make suggestions of their own.

VII. Transition Issues

    238. In this proceeding, we must address a variety of issues 
relating to the transition from the regulatory structure that existed 
before the passage of the 1996 Act to that which will exist after the 
three proceedings have been completed. In Section VII.A, below, we seek 
comment on the manner in which the universal service support amounts 
attributable to the interstate jurisdiction should reduce interstate 
access rates. In Section VII.B., we address issues relating to the 
potential difference between the revenues that incumbent LECs generate 
from current interstate access charges and the revenues that revised 
access charges are likely to generate. We seek comment on both the 
estimated magnitude of that difference and the extent to which 
alternative methods of recovery of that difference should be permitted.

A. Universal Service Joint Board Recommended Decision

    239. The 1996 Act states that any federal universal service support 
provided to eligible carriers ``should be explicit'' and recovered on 
an ``equitable and nondiscriminatory basis'' from all 
telecommunications carriers providing interstate telecommunications 
service. In the Joint Board Recommended Decision, the Joint Board 
recommended that the Commission establish a nationwide benchmark to use 
in calculating the amount of universal service support eligible 
telecommunications providers will receive. Each eligible carrier would 
receive revenues from the federal universal service support mechanism 
based on the amount its forward-looking costs of serving a subscriber, 
as calculated using a proxy model, exceed the benchmark. The Joint 
Board advised that the benchmark be based on the nationwide average 
revenue-per-line, i.e., the sum of the revenue generated by local, 
discretionary, access services, and others as found appropriate, 
divided by the number of loops served. Final determination of this 
issue, however, must also take into consideration the revenue base for 
universal service contributions. The Joint Board further advised the 
Commission to construct two benchmarks, one for residential service and 
a second for single line business service. The Joint Board recommended 
that costs in excess of the benchmark be funded through an assessment 
based either on the interstate revenues of all interstate 
telecommunications carriers less interstate payments to other carriers, 
or interstate and intrastate revenues of all interstate 
telecommunications carriers less payments to other carriers.
    240. In its Recommended Decision, the Joint Board affirmed the 
Commission's tentative conclusion that LTS payments constitute a 
universal service support mechanism that serve to equalize LECs' access 
charges by raising some carriers' charges and lowering others. The 
Joint Board concluded that the LTS mechanism is inconsistent with the 
1996 Act's requirement that support be collected from all providers of 
interstate telecommunications services on a non-discriminatory basis. 
Accordingly, the Joint Board recommended that the LTS system no longer 
be supported via the access charge regime, and that rural incumbent 
LECs continue to receive payments comparable to LTS from the new 
universal service support mechanism. In the event the Commission 
implements a rule assessing carriers' universal service

[[Page 4705]]

support contributions based on both interstate and intrastate 
telecommunications revenues, the Joint Board recommended that there 
should be a downward adjustment in the residential and single-line 
business SLC cap and CCL charges to reflect the recovery of LTS from 
other sources.
    241. We recognize that, because of the role that access charges 
have played in funding and maintaining universal service, it is 
critical to implement changes in the access charge system together with 
complementary changes in the universal service system. Regardless of 
whether features of our access charge system, such as the per-minute 
CCL charge and geographically-averaged rates, contravene section 254 as 
discussed in Section III.B., above, we seek comment on whether 
retaining such features in light of the possible changes in universal 
service could, in essence, compensate incumbent LECs twice for 
providing universal service. We ask commenters addressing this issue to 
identify the circumstances, including assumed structure of the high-
cost area support mechanisms, under which any ``double recovery'' may 
exist. We further seek comment on how we could best address any 
potential double recovery.
    242. We propose that a downward exogenous cost adjustment should be 
made for price cap incumbent LECs to reflect revenues received from any 
new universal service support mechanism. We note that the Commission, 
after receiving recommendation from a joint board, must determine the 
extent to which universal service support revenues are apportioned to 
the interstate jurisdiction. In the event the Commission concludes that 
high cost universal service support should be allocated to the 
interstate jurisdiction, how should we adjust the price cap indices to 
reflect new explicit universal service support? Parties should also 
comment on whether a downward adjustment to the incumbent LECs' PCIs 
should be across-the-board, or targeted to a particular basket or 
service category, e.g., the trunking basket or the TIC, or to the CCL 
charge or any new mechanism that may replace it. We seek comment on the 
manner in which we must adjust incumbent LECs' price cap indices to 
account for the removal of LTS from incumbent LECs' access charges. We 
tentatively conclude that a downward exogenous cost adjustment should 
be made to the CCL charge, or to any new mechanism that may replace it, 
to the extent that the recovery of LTS from other sources is not offset 
by a SLC cap reduction, and seek comment on this tentative conclusion.
    243. For rate-of-return incumbent LECs, interstate costs must be 
reduced to reflect revenues received from any new universal service 
support mechanism to the extent allocated to the interstate 
jurisdiction. We seek comment on how such reductions should be treated 
in Part 69 for non-price cap incumbent LECs. Finally, we seek comment 
on how our proposed interstate ratemaking treatment of the new 
universal service support mechanism affects small business entities, 
including small incumbent LECs and new entrants.

B. Treatment of Any Remaining Embedded Costs Allocated to the 
Interstate Jurisdiction

    244. A number of IXCs assert that a significant difference exists 
between the revenues generated by access charges based on embedded 
costs allocated to the interstate jurisdiction by Part 36, and the 
revenues that would be produced by access rates based on the forward-
looking economic cost of providing access services. For example, as of 
November 1996, AT&T estimated that total interstate access charges 
collected today from interexchange carriers exceed the forward-looking 
economic cost of providing access by about $11.0 billion, or nearly 70 
percent of that total. Similarly, in October 1996, AT&T asserted that 
it pays incumbent LECs an average (interstate/intrastate) per-minute 
access rate of 3.06 cents, and that this rate is more than 7.5 times 
greater than the TELRIC per-minute access rate of .40 cents. AT&T 
labels $7.0 billion of the $11 billion as ``pure uneconomic subsidy to 
monopoly incumbent local exchange carriers'' caused by overallocation 
of costs to the interstate jurisdiction, the inclusion of retail and 
other costs unrelated to the provision of access, the understatement of 
incumbent LEC productivity, and other historical inefficiencies. AT&T 
asserts that $4.0 billion of the current access revenues are universal 
service support amounts and should be recovered through mechanisms 
under section 254 and not through access charges. In March 1996, MCI 
estimated that approximately $46 billion (or more than 55 percent) out 
of $82 billion total network revenues for Tier 1 local telephone 
companies is the difference between the accounting costs and the 
economic costs of providing those networks as network elements. MCI 
attributed this gap largely to the inclusion of over-built plant ($17 
billion), excess customer operations expenses ($15 billion), excess 
corporate operations expenses ($8.3 billion), and inefficiencies ($3.8 
billion) in network charges. According to MCI, very little of the gap 
results from under-depreciation ($0.85 billion).
    245. Current interstate access service revenues permit recovery of 
the interstate portion of embedded costs, subject since 1991 to the 
constraints of price cap regulation. The revenues that would be 
generated if all access services were priced at forward-looking, 
economic cost may be much smaller. We generally ask parties to discuss, 
in light of the other reforms discussed in this proceeding and other 
developments pursuant to the 1996 Act, the following issues: the amount 
and make-up of the difference between these amounts, whether recovery 
of the remaining interstate-allocated costs should be permitted, the 
lawfulness of a denial of such recovery, and possible recovery 
mechanisms. We also invite parties to comment on the impact of the 
following proposals on small business entities, including small 
incumbent LECs and new entrants. In addition to seeking comment on the 
nature and magnitude of the difference, which could include a portion 
of the revenues that would remain in the TIC after the steps discussed 
in Section III.E. above, we seek comment on whether the identification 
and ratemaking treatment of remaining interstate-allocated costs should 
vary depending on whether an incumbent LEC is under a market-based or 
prescriptive approach to access reform.
1. Nature and Magnitude of Any Remaining Interstate-Allocated Costs
    246. Some of the difference between the incumbent LECs' interstate-
allocated embedded costs and forward-looking costs may be traced to 
past regulatory practices. For example, interstate access rates may 
exceed forward-looking economic cost, and thus produce some difference, 
because of misallocation of costs to the interstate jurisdiction. 
Historically, some separations rules were designed to shift some costs 
from the intrastate to the interstate jurisdiction, in order to further 
universal service goals. For example, in 1987 the Commission agreed 
with a Federal-State Joint Board's recommendation to exclude interstate 
access revenues from the allocation factor used to apportion marketing 
expenses between the interstate and intrastate jurisdictions. The 
Commission reconsidered its decision, however, and reinstated 
separations procedures that allocate marketing expenses in accordance 
with revenues in order to avoid shifting significant amounts of revenue 
requirement to the intrastate jurisdiction. We note further that, to 
the

[[Page 4706]]

extent that unbundled network element revenues are unseparated, a 
difference between the interstate-allocated embedded and forward-
looking costs of providing access service may result when these 
revenues are removed from the interstate jurisdiction.
    247. Another possible regulatory cause of any difference between 
interstate-allocated embedded or accounting costs and forward-looking 
costs may be under-depreciation of incumbent LEC assets. Our 
depreciation procedures provide for incumbent LECs to depreciate the 
total investment in assets over the estimated useful life of the assets 
at rates we prescribe for each class of assets. Under rate-of-return 
regulation, the incumbent LECs set rates for their access services that 
incorporated these depreciation charges; those rates were the 
foundation for the initial price cap rates. Many incumbent LECs contend 
that this Commission prescribed depreciation schedules based on 
relatively long asset lives in order to spread recovery of investment 
over an extended period and prevent large rate increases. In a monopoly 
environment, there were no competitive providers that might prevent an 
incumbent LEC from eventually recovering its entire investment at the 
end of the prescribed period.
    248. Under-depreciation of incumbent LEC capital assets can occur 
in two ways. First, facilities may be under-depreciated if the useful 
lives prescribed for regulated facilities exceed the economic lives of 
those facilities. This under-depreciation often occurs when new 
technologies are introduced that reduce the remaining economic lives of 
embedded plant. In that event, the existing depreciation rate will not 
produce an adequate depreciation charge to account for the shorter 
remaining lives of the old equipment. In other words, if a new 
technology shortens the economic life of existing incumbent LEC plant 
from 25 to 15 years, a prescribed depreciation schedule of 25 years for 
that plant will not enable the incumbent LEC to recover its investment 
during the useful economic life of the plant. However, under the 
remaining life techniques a LEC has the ability to request revised 
depreciation rates and recover its investment over the expected 
remaining life.
    249. We note that, in response to the Price Cap Fourth FNPRM, MCI 
submitted a study analyzing the depreciation reserve deficiency. The 
study concludes that changes in the Commission's depreciation practices 
during the 1980s reduced the reserve deficit from $21 billion in 1983 
to only $3 billion in 1994. Incumbent LECs, on the other hand, have 
claimed that unreasonably low depreciation rates (resulting from life 
estimates that are too long) have created a large overvaluation of 
their rate bases and a $40 billion depreciation reserve deficiency. We 
note that traditional depreciation reserve studies, such as that 
employed by MCI, do not address the effects of a decline in replacement 
value during an asset's life, as discussed below.
    250. Under-depreciation also can occur if the depreciation 
procedures do not recognize the decline in the economic value of plant 
already in service that occurs when the replacement cost is less than 
the cost of the older equipment. The annual charge to depreciation 
expense for incumbent LEC assets of different vintages or different 
technologies of comparable capacity will vary in an industry where the 
cost of assets is declining over time such as telecommunications. A 
price based on forward-looking economic cost would be based on the 
annual economic depreciation expense of the newer facility. Thus, a 
market characterized by developing competition may no longer support a 
price designed to recover depreciation expenses based on the 
Commission's currently prescribed depreciation rates for deployed 
equipment. In the emerging competitive marketplace that finds incumbent 
LECs facing competitors using newer, less expensive equipment, some 
portion of the deployed equipment is arguably under-depreciated by an 
amount equal to the difference between the current net book value and 
the forward-looking replacement cost of the depreciable plant.
    251. We invite parties to explain in detail the magnitude of any 
difference between existing interstate-allocated embedded costs and 
interstate access revenues, on the one hand, and the revenues that 
would be generated if all interstate access services were offered at 
forward-looking, economic cost, on the other. We invite parties to 
submit data quantifying any difference, and explaining in detail to 
what extent the underlying difference between embedded and forward-
looking costs results from the Part 36 allocation rules, under-
depreciation, or other factors. Parties should also specify the 
methodology used to calculate the amount, and define and show the 
calculation of economic lives, economic obsolescence, economic 
depreciation, and actual lives. We seek comment on what effect the 
significant under-utilization of equipment because of a transition to 
newer equipment, or because of reduced demand, should have on the 
calculation of any under-depreciation.
    252. We also seek comment on whether the amount of any difference 
should be determined and fixed as of a date certain, such as the 
enactment of the 1996 Act. Under such an approach, some or all of 
unrecovered embedded costs incurred before that date might be eligible 
for special recovery mechanisms, but all costs incurred after that date 
would be regarded as incurred under the new competitive paradigm 
established by the Act and thus entitled to no special treatment. We 
invite comment as well on whether any special mechanisms would be 
necessary to ensure that the jurisdictional separations process does 
not allocate additional residual embedded costs to the interstate 
jurisdiction during any transitional recovery period. In addition, LECs 
may be permitted to recover some portion of the difference through 
explicit universal service support mechanisms adopted in the universal 
service proceeding. Accordingly, we ask parties, when identifying any 
difference between interstate-allocated embedded costs and the forward-
looking economic costs of access, to take into account the amount of 
interstate costs that are likely to be recovered through such universal 
service support flows.
2. Recovery of Remaining Interstate-Allocated Embedded Costs
    253. We invite parties to comment on whether, as a matter of law or 
equity, incumbent LECs are entitled, should be permitted an 
opportunity, or have already been permitted an opportunity, to recover 
some or all of the difference between interstate-allocated embedded 
costs and forward-looking economic costs that might be created by the 
access reform proposals discussed above in Sections V and VI. We 
specifically request that parties comment on whether the legal basis 
for permitting or denying such recovery varies depending on whether an 
incumbent LEC is under a market-based approach to access reform, as 
described in Section V, a prescriptive approach to access reform, as 
described in Section VI, or some combination of these approaches. NARUC 
has suggested that new sources of revenue from incumbent LEC in-region 
interLATA market entry may constitute a mitigating factor that should 
be reflected in the evaluation of any difference between embedded and 
forward-looking economic costs. We seek comment on whether and how 
entry into the in-region, interLATA long-distance market or any other 
additional revenue flows should affect

[[Page 4707]]

the amount of any remaining interstate-allocated embedded costs that 
incumbent LECs should have a special opportunity to recover.
    254. Some parties have suggested that we should limit recovery to 
those remaining embedded costs arising from certain sources, e.g., 
under-depreciation, and deny recovery of remaining embedded costs 
resulting from over-investment and other inefficiencies. We seek 
comment on this approach and ask commenting parties to specify those 
costs that incumbent LECs should be permitted an opportunity to recover 
and those that should be disallowed. Should incumbent LECs be required 
to demonstrate the specific costs they seek to recover and satisfy a 
burden or standard in order to recover some or all of such costs? 
Should we establish a rebuttable presumption that certain costs are 
recoverable? We invite parties to comment on this issue and specify any 
appropriate standard that should be applied and which party should bear 
the burden of proof. For example, should incumbent LECs seeking such 
recovery be required to show that their investment in 
telecommunications plant was prudent at the time it was made and does 
not reflect over-investment? Or should other parties bear the burden of 
showing that certain investments are no longer used and useful? If so, 
how should we determine whether any particular investment was prudent? 
Are there any legal constraints on where we place the burden? Parties 
should be specific in addressing these questions.
    255. One option is to refer issues relating to the difference 
between revenues generated by rates based on embedded costs and 
revenues produced by rates based on forward-looking costs to state 
commissions to conduct the necessary rate cases and to make 
recommendations to the Commission on possible disallowances of 
imprudently incurred investments or excessive expenditures. Once the 
state commission reported back, we would determine the manner of 
recovery of the interstate portion of any difference. This approach, 
which we could implement under section 410(a) of the Act, permits 
coordinated treatment between the federal and state jurisdictions and 
assigns the responsibility of conducting such rate cases to state 
commissions, which have substantial experience with the carriers 
operating in their respective states. This approach also conserves 
industry resources, because each state will have to address the issue 
of embedded cost recovery if it decides to set prices for intrastate 
services based on forward-looking costs or some basis other than 
embedded costs. We seek comment on this alternative and invite parties 
to comment on what, if any, federal guidelines should be established 
for the conduct of the prudence aspects of any rate cases referred to 
state commissions under section 410(a).
    256. We also invite interested parties to comment on whether the 
incumbent LECs should be required to mitigate the magnitude of this 
potential problem by reducing their costs, and if so, how they might do 
so. We first discuss possible general mechanisms under the market-based 
and prescriptive approaches to access reform, and then address whether 
any recovery due to under-depreciation should be treated separately. 
Interested parties should also comment on how a decision to permit 
incumbent LECs to recover some or all of the difference between 
embedded and forward-looking costs would affect small business 
entities, including small incumbent LECs and new entrants.
3. Recovery Mechanisms
    257. In the event we determine that incumbent LECs should be 
permitted a special opportunity to recover some or all of the 
difference between revenues generated by access charges based on 
embedded and forward-looking costs, we invite parties to comment on the 
various recovery mechanisms discussed below and to propose 
alternatives. We seek comment on the impact of any particular recovery 
mechanism on small business entities, including small incumbent LECs 
and new entrants.
    a. Market-Based Recovery. 258. As new entrants succeed in 
attracting incumbent LEC customers, we expect competition gradually to 
drive access rates to more economically efficient levels. With a 
gradual transition, our removal of economic regulatory constraints may 
well give the incumbent LECs ample opportunity to recover any of the 
difference between embedded and forward-looking costs and therefore 
obviate any need for a formal recovery mechanism. Price cap incumbent 
LECs could use pricing and rate structure flexibility to reduce the 
revenue difference during a transitional period. Incumbent LECs would 
also have an opportunity, while competition is still developing, to 
reduce their costs of service to levels consistent with the revenues 
available to them in a competitive market. We seek comment on this 
approach. Specifically, does the timing of the proposed stages and the 
flexibility proposed permit incumbent LECs a reasonable opportunity to 
recover any of the revenue differential and adjust to a competitive 
market? On the other hand, we ask parties to comment on whether, to the 
extent that our separations rules over-allocate costs to the interstate 
jurisdiction, this market-based approach may not give incumbent price 
cap LECs a reasonable opportunity to recover some portion of the 
difference between embedded and forward-looking costs and, if so, what 
measures would be appropriate.
    b. Regulated Recovery. 259. We seek comment on two situations under 
which it might be necessary to establish a separate regulatory 
mechanism for recovery of some portion of the interstate-allocated 
embedded costs that might remain unrecovered if access service were 
priced based on forward-looking cost. First, in the event we determine 
that the market-based approach discussed above fails to provide 
incumbent LECs a fair opportunity to recover some or all remaining 
embedded costs, we invite parties to comment on whether we should 
implement a recovery mechanism to operate in lieu of, or in conjunction 
with, the market-based approach. Second, as we discussed in Section 
VI., above, a separate regulatory recovery mechanism may be necessary 
to the extent an incumbent price cap LEC is subject to prescriptive 
access reform. We seek comment on whether, and the degree to which, a 
separate recovery mechanism is required.
    260. If we conclude that a recovery mechanism is necessary, we 
could design a mechanism to recover a specific, fixed, dollar amount of 
remaining embedded costs, over a fixed period. We seek comment on this 
proposal and invite parties to offer possible recovery mechanisms of 
limited duration. For example, one possible recovery mechanism might be 
to permit incumbent LECs to ``amortize'' their recovery of the 
difference, i.e., to permit incumbent LECs to include in their rates a 
certain fraction of the difference each year for a certain number of 
years. The period could be designed to coincide with a gradual phase-
out of the TIC, as discussed in Section III.E., above. We discuss 
issues raised by amortization of remaining embedded costs in more 
detail below, in conjunction with recovery of costs related to under-
depreciation.
    261. Another option would be to establish a competitively-neutral 
recovery mechanism that is separate and distinct from access charges. 
For example, should we permit incumbent LECs to impose a surcharge, 
either on all access customers, or on all providers or users of 
telecommunications services, in order to recover some portion of any 
remaining interstate-allocated costs? This mechanism could be similar 
to the mechanism for collecting universal

[[Page 4708]]

service funds, except that this recovery fund would not be permanent, 
nor would payments be portable to other eligible telecommunications 
carriers. We seek comment on when and how such a fund should be 
terminated. We seek comment on this option and our legal authority to 
adopt such an option. We ask parties to address, in particular, how to 
structure any such surcharge so that it is collected in a 
competitively-neutral manner, such as on the basis of 
telecommunications revenues, net of payments to other carriers, whether 
such surcharges should be levied on telecommunications carriers 
purchasing unbundled network elements, and, if so, how. Parties should 
also comment on how any surcharge imposed only on access customers 
could be structured so as not to burden unduly access customers and 
offer as little impediment as possible to our long-term goal of having 
access charges consistent with a competitive exchange access market. We 
invite parties to comment on the impact of this option on investment, 
innovation, and competition.
    262. In the event we adopt one of the special regulatory mechanisms 
described above or an alternative mechanism advocated by parties in 
this proceeding, as part of a transition to a competitive environment, 
we seek comment on whether some limitation on incumbent LECs' earnings 
is warranted. For example, we invite parties to comment on whether, if 
we set up a special mechanism that permitted incumbent LECs a 
reasonable opportunity to recover certain costs, it would be 
appropriate to limit to a certain prescribed rate of return the 
incumbent LEC earnings on the investment portion of the costs 
designated for recovery, or to increase the incumbent LEC's price cap 
sharing obligations, given the limited risk of non-recovery under such 
a mechanism. Alternatively, we could permit incumbent LECs to select 
from two recovery options--cost recovery through market-based prices to 
the extent they are able in a competitive market; or cost recovery 
through a regulatory mechanism, with a greater sharing obligation under 
the price cap plan. In the event we determine that incumbent LECs 
should be permitted to select the manner of recovery, we seek comment 
on whether we should limit the ability to choose only to incumbent LECs 
that can make a competitive showing, as discussed in Section V., above. 
We invite parties to comment on this approach and other possible 
adjustments to the price cap plan that would be appropriate in the 
event we adopt a regulatory recovery mechanism.
    c. Recovery of Difference Caused by Under-Depreciation. 263. The 
portion of the difference between embedded costs and forward-looking 
costs that is attributable to under-depreciation may warrant separate 
treatment. Specifically, we must consider the appropriate balance 
between customer and shareholder risk as telecommunications markets 
become more competitive. In a competitive market, a firm's ability to 
raise its rates to recover higher depreciation costs is constrained by 
the pricing practices of other competitors, some of which may well have 
cost advantages through use of newer, more efficient equipment. A 
competitive firm is able to establish its depreciation charges and its 
prices free of any regulatory constraints, but its shareholders bear 
the risk of loss if the resulting prices are too high and, 
consequently, fail to generate revenues sufficient to cover the 
depreciation charges. The incumbent LEC's ability to recover its 
investment in a competitive market is dependent in part on depreciation 
practices that accurately reflect the decline in economic value of the 
LEC investment. The issue then is whether to permit incumbent LECs any 
relief with respect to the depreciation of equipment on their books at 
the time that the regulatory approach changes, whether the depreciation 
process should proceed unaffected by the shift in regulatory policies, 
or whether to modify our depreciation procedures. If, for example, the 
Commission concluded that incumbent LECs have not incurred significant 
depreciation reserve deficiencies to date, it could continue the 
current depreciation policies, or reflect small changes through 
increased depreciation rates in the future.
    264. If, on the other hand, we conclude that the public interest 
would be served by adjusting the customer/shareholder risk levels 
because of regulatory changes, we could permit the incumbent LECs to 
adjust their accounts to establish an amortization of plant to reflect 
some or all of the change in economic value of the equipment installed 
under the earlier regulatory regime. We invite parties to comment on 
whether the local competition provisions of the 1996 Act and the 
competition expected to result from the implementation of those 
provisions constitute such an unexpected and dramatic regulatory shift 
that incumbent LECs should be permitted to adjust their accounts to 
reflect some or all of the change in economic value of their embedded 
investment. Parties should also address the appropriate balance between 
customer and shareholder risk entailed in the shift to a more 
competitive regulatory policy.
    265. If we permit incumbent LECs to adjust their accounts in such a 
way, the depreciation adjustment would presumably take the form of an 
amortization of these amounts over a prescribed period. An amortization 
plan would increase access rates in the short term, but, all other 
things being equal, would lead to lower access rates after the 
amortization was completed. We invite parties to comment on the 
desirability of establishing an amortization plan, under which 
incumbent LECs could recover more rapidly some or all of any 
demonstrated under-depreciation costs resulting from economic 
obsolescence. We also ask whether any such amortization should be 
recovered in a competitively-neutral manner.
    266. If we decide to take some action, we will need to determine 
the period over which to calculate the amount of the depreciation 
reserve deficiency. For example, we might measure under-depreciation 
for a period ending with the enactment of the 1996 Act. In addition, 
parties should comment on the period over which any amortization should 
take place. We invite any incumbent LEC, believing that it has 
facilities that are under-depreciated due to economic obsolescence, to 
submit a study demonstrating the extent of such under-depreciation and 
proposing the appropriate time period over which to amortize such 
amounts. Any incumbent LEC submitting such a study should provide 
complete details on original cost, salvage value, economic lives, and 
other relevant factors, for both old and new technologies that are 
necessary to permit us to make an informed decision. We invite parties 
to address whether a different rate of economic obsolescence might 
occur in low-density areas than in high density areas.
    267. Price cap incumbent LECs would account for this amortization 
through an upward exogenous adjustment to the price cap indices. 
Parties are also invited to suggest procedures for adjusting the PCIs, 
APIs, and SBIs to reflect the exogenous treatment of any amortization, 
if we permit incumbent LECs to adopt an amortization plan.

VIII. Other Issues

A. Regulation of Terminating Access

    268. Some analysts have contended that an access provider's market 
power differs between originating and terminating access service. With 
originating access, the calling party has the choice of service 
provider, the

[[Page 4709]]

decision to place a call, and the ultimate obligation to pay for the 
call. The calling party is also the customer of the IXC that is 
purchasing the originating access service. As long as IXCs can 
influence the choice of the access provider, a LEC's ability to charge 
excessive originating access rates is limited, as IXCs will shift their 
traffic from that carrier to a competing access provider. This is 
particularly true for multi-line customers, who may select one carrier 
with lower access rates for their out-going interexchange calls and a 
different carrier with a lower flat monthly rate for local service. For 
terminating access, the choice of service provider is made by the 
called party. The decision to place the call and payment for the call 
lies, however, with the calling party. The calling party, or its long-
distance service provider, has little or no ability to influence the 
called party's choice of service provider. Thus, it appears that even 
with a competitive presence in the market, terminating access may 
remain a bottleneck controlled by whichever LEC provides access for a 
particular customer. As such, the presence of unbundled network 
elements or facilities-based competition may not affect terminating 
access charges.
    269. On the other hand, high terminating access rates may create an 
incentive for IXCs to win the local customer. It is true that winning 
the end user as customer will allow the IXC to save only a fraction of 
the total terminating access charges generated by the end user, because 
the IXC will carry only a fraction of the calls received by the end 
user. Nevertheless, serving the local customer using unbundled elements 
will also allow the IXC to collect terminating access charges on calls 
received by the end user. Thus, in this analysis, it would appear that 
high terminating access charges may give an IXC an incentive to win an 
end user as a local customer similar to the incentive created by high 
originating access rates. In this section, we seek comment on whether 
and to what extent we should regulate the terminating access services 
of price cap incumbent LECs and non-incumbent LECs and whether 
competition will have the same effect on terminating access rates as on 
originating access rates.
1. Price Cap Incumbent LECs
    270. We seek comment on the implications of the above analysis for 
regulating the terminating access service of price cap LECs and ask 
parties to address the necessity of continued regulatory oversight of 
access prices for the termination of interstate calls by price cap LECs 
in markets where we find originating access services are subject to 
substantial competition.
    271. One possible method of regulating price cap incumbent LECs' 
terminating access service is to establish a rate ceiling that prevents 
incumbent LECs from charging more for terminating access than the 
forward-looking, economic cost of providing the service. We seek 
comment on whether and how we should require incumbent price cap LECs 
to price terminating access service at forward-looking, economic costs. 
Whether an incumbent price cap LEC is offering terminating access at 
forward-looking economic cost could be measured by the prices in 
reciprocal compensation arrangements for the transport and termination 
charges of telecommunications pursuant to sections 251(b)(5) and 
252(d)(2). Arbitrated reciprocal compensation rates may not include the 
NTS costs of either local switching or the subscriber line. Therefore, 
these NTS costs, which are now recovered in part from terminating 
access, would have to be recovered solely from originating access or a 
flat charge. Alternatively, we could ensure that terminating access is 
priced at its forward-looking economic cost by requiring such prices to 
be based on a TSLRIC study or other acceptable forward-looking, cost-
based model. We invite parties to comment on these and alternative 
measures of forward-looking, economic costs to be used for terminating 
access rates.
    272. Some observers have suggested that another possible method of 
regulating incumbent price cap LECs' terminating access service is to 
require the incumbent price cap LEC to charge the end user for the 
service. If called parties paid for terminating access, the individual 
who paid for the service would be the same individual who selected the 
provider. We seek comment on whether requiring called parties to pay 
for terminating access might encourage competition for terminating 
access. We note that wireless companies already charge the called 
parties for receiving calls. Would charging the called party for 
terminating access result in an increase of uncompleted calls, due to a 
reluctance by called parties to accept the charges? We invite parties 
to address how charging the customer receiving the call for terminating 
access could be accomplished, and whether this approach would be 
superior to using forward-looking economic cost. BellSouth argues that 
the availability of transport and termination under Section 251 for 
local traffic makes unnecessary any special regulation for terminating 
access that is different from originating access. BellSouth argues that 
terminating interstate traffic would be disguised as terminating local 
traffic, resulting in less expensive terminating access. We seek 
comment on BellSouth's analysis.
    273. Alternatively, we could require incumbent price cap LECs to 
charge nothing for terminating access service and permit them to 
recover all such costs from originating access charges. We invite 
parties to comment on the merits of this approach and whether incumbent 
price cap LECs should be permitted to choose between this approach and 
some other form of regulation of their terminating access services. 
Parties should also suggest other possible methods of regulating 
incumbent price cap LECs' terminating access service not discussed 
above. We seek comment on whether we should adopt different regulatory 
mechanisms for terminating access for those incumbent price cap LECs 
that are subject to the alternative regulatory regime discussed in 
Section VI, above. Finally, we invite parties to address whether we 
should keep our rate structure rules for terminating access for 
incumbent LECs even after we have eliminated such rate structure rules 
for originating access.
2. Non-Incumbent LECs
    274. Between 1979 and 1985, the Commission conducted the 
Competitive Carrier proceeding, in which it examined how its 
regulations should be adapted to reflect and promote increasing 
competition in telecommunications markets. Policy and Rules Concerning 
Rates for Competitive Common Carrier Services and Facilities 
Authorizations Therefor, CC Docket No. 79-252, Notice of Inquiry and 
Proposed Rulemaking, 44 FR 67445 (November 26, 1979); First Report and 
Order, 45 FR 76148 (November 18, 1980); Further Notice of Proposed 
Rulemaking, 46 FR 10924 (February 5, 1981); Second Further Notice of 
Proposed Rulemaking, FCC 82-187, 47 FR 17308 (April 22, 1982); Second 
Report and Order, 47 FR 37889 (August 27, 1982); Order on 
Reconsideration, 93 FCC 2d 54 (1983); Third Further Notice of Proposed 
Rulemaking, 48 FR 28292 (June 21, 1983); Third Report and Order, 48 FR 
46791 (October 14, 1983); Fourth Report and Order, 48 FR 52452 
(November 18, 1983), vacated, AT&T v. FCC, 978 F.2d 727 (D.C. Cir. 
1992), cert. denied, MCI Telecommunications Corp. v. AT&T, 113 S.Ct. 
3020 (1993); Fourth Further Notice of Proposed Rulemaking, 49 FR 11856 
(March 28, 1984); Fifth Report and Order, 49 FR 34824 (September 2, 
1984); Sixth Report and Order, 50 FR 1215 (January 1, 1985), vacated 
MCI

[[Page 4710]]

Telecommunications Corp. v. FCC, 765 F.2d 1186 (D.C. Cir. 1985) 
(collectively referred to as Competitive Carrier). In a series of 
orders, the Commission distinguished between two kinds of carriers: 
Those with market power (i.e., the power to control prices) are deemed 
dominant carriers, and those without market power are deemed non-
dominant carriers. The Commission has regulated incumbent LECs as 
dominant carriers in their provision of interstate access service. The 
Commission's policy since Competitive Carrier has consistently been 
that a carrier is non-dominant unless the Commission makes or has made 
a finding that it is dominant.
    275. Competitors have begun to provide exchange access services, 
aided in significant part by our expanded interconnection policies. The 
pro-competitive policies of the 1996 Act are expected to result in 
increased entry into the exchange and exchange access markets. To date, 
the Commission has only applied the interstate access charge rules to 
incumbent LECs. New entrants into the exchange access market, such as 
competitive access providers (CAPs), have been presumptively classified 
as non-dominant because they have been deemed not to have the ability 
to exercise market power in particular service areas. NYNEX has 
suggested that there is a need for regulation of certain access 
services, particularly terminating access, offered by all LECs, 
including new entrants. In this section, we consider and invite comment 
on whether, and the extent to which, we should establish any rules for 
the provision of access services by non-incumbent LECs, or competitive 
LECs, most particularly terminating access service. We note that we are 
extremely reluctant to impose price regulation on non-dominant carrier 
services without a strong showing that such regulation is necessary.
    276. The factors that warrant continued regulation of incumbent 
LECs' terminating access service appear to apply to all access 
providers, including competitive LECs, because these new entrants 
appear to possess market power over IXCs needing to terminate calls. As 
previously discussed, the recipient of a call, the called party, 
selects the carrier that provides the terminating access for the calls 
destined for that party. The decision to place the call, however, lies 
with the calling party, who currently pays for the call. In those 
cases, the calling party's long-distance service provider appears to 
have little or no influence on the called party's choice of service 
provider. Because the paying parties do not choose the carrier that 
terminates their interstate calls, competitive LECs potentially could 
charge excessive prices for terminating access. We therefore seek 
comment on whether there are some aspects of the competitive situation 
facing non-dominant LECs with respect to terminating access that 
distinguishes non-dominant from dominant carriers.
    277. In the event we conclude that non-dominant carriers have 
market power with regard to terminating access charges or that market 
failure would preclude the marketplace from ensuring that terminating 
access rates are just and reasonable, we also invite parties to comment 
on whether competitive LECs' terminating access service should be 
subject to different limits than incumbent price cap LECs' terminating 
access service, or to similar limits on rate structure or rate level. 
Parties should address whether the incumbent LECs' terminating access 
charges should serve as a benchmark to evaluate competitive LECs' 
terminating rates. For example, we could find a competitive LEC's 
terminating access charge to be presumptively just and reasonable if 
the charge is less than or equal to the terminating access charge of 
the incumbent LEC with which the competitive LEC is competing. If, on 
the other hand, the competitive LEC's terminating access charge is 
greater than the incumbent LEC's charge, the competitive LEC could be 
required to provide cost support for its charge or it could collect the 
difference from its end users. We seek comment on these proposals, as 
well as on other less intrusive methods of ensuring a competitive LEC's 
terminating access charges are just and reasonable. We further invite 
parties to comment how small business entities, including small 
incumbent LECs and new entrants will be affected by this tentative 
conclusion and proposals to regulate terminating access.
3. ``Open End'' Services
    278. In some instances, an IXC may not be able to influence the 
choice of the originating access provider, and, consequently, 
marketplace forces may be less effective in limiting a competing LEC's 
ability to charge higher originating access rates. For example, for 
``open end'' originating minutes, such as originating access for 800 
service, it is the called party that pays for the call. Thus, while the 
calling party, who selects the local carrier/access provider, decides 
to place an individual call, that party pays nothing for the call. For 
these reasons, the Commission has long treated incumbent LECs' 
originating ``open end'' minutes as terminating minutes for access 
charge purposes. We seek comment on whether this analysis should 
continue to apply to incumbent LECs' originating access for 800 service 
and other similar ``open end'' services for which terminating access 
rates serve as originating access rates, and whether such regulation 
should be extended to apply to competitive LECs.

B. Treatment of Interstate Information Services

    279. Usage of interstate information services, and in particular 
the Internet and other interactive computer networks, has increased 
dramatically in recent years. Such new services create significant 
benefits for the economy and the American people. The 1996 Act states 
that it is the policy of the United States ``to preserve the vibrant 
and competitive free market that presently exists for the Internet and 
other interactive computer services, unfettered by Federal or State 
regulation,'' and we have long sought to avoid unnecessary regulation 
of information services. As usage continues to grow, such services may 
have an increasingly significant effect on the public switched network.
    280. Therefore, as part of this comprehensive proceeding, we must 
consider how our rules can provide incentives for investment and 
innovation in the underlying networks that support the Internet and 
other information services. We consider in this section the narrow 
question of whether to permit incumbent LECs to assess interstate 
access charges on information service providers. We make no specific 
proposals, and we tentatively conclude that the existing pricing 
structure for information services should remain in place at this time. 
In Section X, we issue a Notice of Inquiry to examine various 
fundamental issues about the implications of usage of the public 
switched network by information service and Internet access providers.
    281. Beginning with the Amendment of Section 64.702 of the 
Commission's Rules and Regulations (Second Computer Inquiry), Docket 
No. 20828, Final Decision, 45 FR 31319 (May 13, 1980) proceeding in the 
1970s, we have distinguished between basic and enhanced communications 
services. The category of enhanced services, which includes access to 
the Internet and other interactive computer networks, as well as 
telemessaging, alarm monitoring, and other services, appears to be 
quite similar to the term ``information services'' in the 1996 Act. In 
the MTS

[[Page 4711]]

and WATS Market Structure, Memorandum Opinion and Order, Docket No. 78-
72, 48 FR 42984 (September 21, 1983) (Access Charge Reconsideration 
Order), we decided that, although enhanced service providers (ESPs) may 
use incumbent LEC facilities to originate and terminate interstate 
calls, ESPs should not be required to pay interstate access charges.
    282. As a result of these decisions, ESPs may purchase services 
from incumbent LECs under the same intrastate tariffs available to end 
users, by paying business line rates and the appropriate subscriber 
line charge, rather than interstate access rates. Those business line 
rates are significantly lower than the equivalent interstate access 
charges, in part because of separations allocations and the access 
charge per-minute rate structure, and in part because the business 
lines that ESPs now purchase generally do not include usage-sensitive 
charges for receiving local calls. ESPs, consequently, typically pay 
incumbent LECs a flat monthly rate for their connections regardless of 
the amount of usage they generate. Pacific Bell estimates that calls to 
Internet-provided services could comprise up to 25 percent of its 
traffic by the end of the decade. US West projects that 30 percent of 
all local exchange traffic will be for access to the Internet by the 
year 2000. The Internet access market is also highly competitive and 
dynamic, with over 2,000 companies offering Internet access as of mid-
1996. It is extremely likely that, had per-minute interstate access 
rates applied to ESPs over the past 13 years, the Internet and other 
information services would not have developed to the extent they have 
today--and indeed may not have developed commercially at all.
    283. For some time, however, incumbent LECs and others have argued 
that ESPs impose costs on the network that are similar to those imposed 
by providers of interstate voice telephony, and that ESPs should 
therefore pay interstate access charges. Several parties made this 
argument in their comments in response to a petition filed by America's 
Carriers Telecommunications Association (ACTA) earlier this year. In 
addition, four BOCs have filed studies in recent months purporting to 
show that the current pricing structure for Internet access contributes 
to the congestion of incumbent LEC networks. The BOCs claim that 
Internet users typically stay on the line far longer than voice users, 
but that the flat monthly rates Internet service providers pay to 
incumbent LECs do not cover the additional cost of network upgrades 
that are required to support such traffic.
    284. In response, information service providers argue that the 
rates they pay to incumbent LECs, combined with the additional revenues 
from sources such as second lines installed for Internet usage, more 
than cover the costs they impose on the network. These parties also 
argue that the imposition of access charges would stifle growth, 
investment, and innovation in information services, causing detrimental 
effects for the economy and U.S. competitiveness. The Network 
Reliability and Interoperability Council (NRIC), an advisory committee 
of industry representatives organized to advise the FCC, is also 
looking into the effects of Internet usage on the public switched 
telephone network.
    285. We tentatively conclude that information service providers 
should not be required to pay interstate access charges as currently 
constituted. As we have explained throughout this NPRM, the existing 
access charge system includes non-cost-based rates and inefficient rate 
structures. We see no reason to extend this regime to an additional 
class of users, especially given the potentially detrimental effects on 
the growth of the still-evolving information services industry. 
Although our original decision in the Access Charge Reconsideration 
Order to treat ESPs as end users rather than carriers was explained as 
a temporary exemption, we tentatively conclude that the current pricing 
structure should not be changed so long as the existing access charge 
system remains in place. The mere fact that providers of information 
services use incumbent LEC networks to receive calls from their 
customers does not mean that such providers should be subject to an 
interstate regulatory system designed for circuit-switched 
interexchange voice telephony. We seek comment on this tentative 
conclusion.
    286. We recognize that this issue is of special interest to users 
of the Internet and online services. Therefore, we have established an 
electronic mailbox at <[email protected]> for submission of informal comments 
on the treatment of Internet and other information services. Additional 
information on this issue is available through our World Wide Web site 
at <http://www.fcc.gov/isp.html>. We are inviting all parties that file 
formal paper comments in this proceeding to submit copies of their 
comments in electronic form, and we intend to make those electronic 
submissions available for review on the World Wide Web.
    287. We invite interested parties to discuss the number of ESPs and 
Internet service providers, if any, that can be considered ``small 
entities'' within the meaning of the Regulatory Flexibility Act, and 
whether there is any reason to establish different requirements for 
small ESPs and information service providers.

C. Other Part 69 Revisions

1. Equal Access Network Reconfiguration Costs
    288. The court in the MFJ required all Bell Operating Companies to 
provide access service that would enable subscribers to reach their 
interexchange carrier of choice without dialing additional digits, or 
in other words, ``1+ dialing.'' GTE was later required by court order 
to provide to all IXCs, upon bona fide request, exchange access that is 
equal in type and quality to that provided to AT&T. The Commission 
later imposed similar ``equal access'' obligations on independent 
telephone companies other than GTE.
    289. In 1986, the Commission prohibited incumbent LECs from 
recovering all the costs incurred in converting their networks to equal 
access at the time they incurred those costs. Instead, LECs were 
required to amortize those costs over an eight-year period ending on 
December 31, 1993. Prior to the termination of this amortization 
period, the Commission adopted price cap regulation for incumbent LECs, 
and based the initial price cap rates on the access rates in effect as 
of July 1, 1990, as adjusted for the represcription of the authorized 
rate of return we adopted in 1990. In the LEC Price Cap Reconsideration 
Order, the Commission declined to extend exogenous treatment to equal 
access reconfiguration costs because it might give incumbent LECs an 
artificial incentive to increase their investment in equal access 
facilities at a time when conversion to equal access was substantially 
complete. In petitions to reject or suspend the price cap incumbent 
LECs' 1994 annual access tariffs, AT&T and MCI argued that the 
incumbent LECs' PCIs should be reduced to reflect the completion of the 
amortization of equal access costs. The Common Carrier Bureau did not 
suspend any tariffs for this reason, in part because the Commission 
decided not to require exogenous cost treatment in the LEC Price Cap 
Reconsideration Order, and in part because the completion of the equal 
access cost amortization is not listed in section 61.45(d)(1) of our 
rules as warranting exogenous cost treatment. Later, in the LEC Price 
Cap Performance Review, the Commission considered requiring

[[Page 4712]]

incumbent LECs to make an exogenous cost decrease to account for the 
completion of the equal access cost amortization, but found that the 
record was not adequate in that proceeding to require such an 
adjustment.
    290. We invite comment on whether to require incumbent price cap 
LECs to make an exogenous cost decrease to one or more of their PCIs to 
account for the completion of the amortization of equal access network 
reconfiguration costs on December 31, 1993. Parties supporting an 
exogenous cost reduction should explain in detail how such an 
adjustment should be calculated, and to which basket or baskets should 
the exogenous reduction apply. In addition, we invite interested 
parties to discuss whether it would be fair to require exogenous cost 
decreases to account for the completion of the amortization of equal 
access network reconfiguration costs in light of the fact that the 
Commission did not permit exogenous cost increases for equal access 
network reconfiguration costs.
2. Part 69 Allocation Rules
    291. We invite comment on relieving incumbent price cap LECs from 
the application of Part 69, Subparts D and E of our rules, in certain 
instances. Subparts D and E allocate incumbent LECs' investments and 
expenses to all the access rate elements. If we adopt a market-based 
approach to access reform as we discuss in Section V above, and decide 
to eliminate the rate structure rules, this would appear to eliminate 
the need for the Part 69 cost allocation rules. Alternatively, if we 
adopt a more prescriptive approach to access reform as we discuss in 
Section VI above, and decide to base some or all their access rates on 
TSLRIC costs, then it may not be necessary to retain rules for fully 
distributing costs to different rate elements. We solicit comment on 
whether there might be any other reason to relieve any price cap LEC 
from the requirements of Subparts D and E, and if so, what the timing 
of that relief should be.
3. Other Proposed Part 69 Changes
    292. Regardless of whether we adopt any of the proposals discussed 
in this NPRM, we tentatively conclude that a number of provisions in 
Part 69 warrant revision. These revisions are necessary to conform Part 
69 to the 1996 Act, or to update the rules for other reasons. We seek 
comment below on what these conforming or updating amendments should 
be. Also, over the years, several incumbent LECs have established 
access rate elements or subelements pursuant to waiver. We seek comment 
below on incorporating these rate elements into Part 69.
    293. First, we discuss rule revisions necessary to conform Part 69 
to the 1996 Act. Section 69.2(hh) of the Commission's rules defines 
``Telephone Company'' in terms of section 3(r) of the 1934 Act. We 
propose to change this reference to ``incumbent LEC'' as it is defined 
in the 1996 Act. Sections 69.4(f) and 69.122, providing for a 
``contribution charge'' that may be assessed on special access and 
expanded interconnection, appear to be inconsistent with the 
requirement in section 254 that such carrier contributions be equitable 
and nondiscriminatory. Accordingly, we propose to delete these two rule 
sections. We also seek comment on what effect, if any, adoption of this 
proposal might have on small incumbent LECs or other small businesses. 
In addition, we invite parties to identify other rules which may be 
inconsistent with the Act.
    294. Second, we seek comment on eliminating Part 69 rules that are 
no longer effective. For example, in the mid-1980s, we permitted 
incumbent LECs to recover their equal access conversion costs through a 
separate rate element. We also required carriers to eliminate any 
separate equal access charge by January 1, 1994. Therefore, we propose 
deleting section 69.107, permitting carriers to establish an equal 
access element, and sections 69.308 and 69.410, which allocate costs to 
the equal access rate element. We also propose removing section 
69.4(d), and in its place creating a new section 69.3(e)(12) to read as 
follows: ``Such a tariff shall not contain any separate carrier's 
carrier tariff charges for an Equal Access element.'' Finally, we would 
remove the reference to section 69.308 in section 69.309, and the 
reference to section 69.410 in section 69.411. Similarly, the 
transitions in section 69.205 have been completed, and so we propose 
deleting that section. We invite comment on whether there are any other 
similar rules in Part 69 that are no longer effective, or duplicate 
other rules, and so could be deleted without changing any current Part 
69 requirements. Finally, we invite comment on our tentative conclusion 
that eliminating such rules would not affect any requirements currently 
placed on small telecommunications providers or any other small 
businesses.
    295. Similarly, section 69.103 of our rules requires incumbent LECs 
to establish a separate rate element for costs associated with lines 
terminating at ``limited pay telephones,'' which are pay telephones 
designed to provide access to only one interexchange carrier. Section 
276 of the Act provides statutory requirements governing pay telephones 
that we recently implemented. In light of the new payphone compensation 
procedures, we seek comment on whether section 69.103 of our rules 
serves any ongoing purpose, or whether we should eliminate section 
69.103, and the rules allocating costs to this rate element, from our 
rules.
    296. Lastly, several incumbent LECs provide service using rate 
elements created pursuant to waiver, and we seek comment on 
incorporating those waivers into Part 69. For example, in 1994, the 
Common Carrier Bureau granted several waivers of Part 69 to permit 
incumbent LECs to establish rate elements for 500 access service. In 
1990, the Bureau granted several incumbent LECs waivers of Part 69 to 
establish rate elements for electronic white pages service. Also, in 
1985, the Bureau granted incumbent LECs waivers of section 69.109 to 
create a subelement within the Information rate element to recover 
costs they could show were not incurred in the provision of interstate 
directory assistance. In this NPRM, we seek comment on codifying these 
waivers as access rate elements or subelements in Part 69. We also seek 
comment on whether to incorporate any other rate elements created 
pursuant to waiver into the Commission's rules. Commenters supporting 
these rule revisions should also specify any revisions to Part 69, 
Subparts D and E, needed to allocate the proper costs to these rate 
elements.

IX. Notice of Inquiry on Implications of Information Service and 
Internet Usage

    297. In Section VIII.B, above, we tentatively concluded that 
information service providers should not be subject to interstate 
access charges as currently constituted. However, the development of 
the Internet and other information services raise many critical 
questions that go beyond the interstate access charge system that is 
the subject of this proceeding. Ultimately, these questions concern no 
less than the future of the public switched telephone network in a 
world of digitalization and growing importance of data technologies. 
Our existing rules have been designed for traditional circuit-switched 
voice networks, and thus may hinder the development of emerging packet-
switched data networks. To avoid this result, we must identify what FCC 
policies would best facilitate the development of the high-bandwidth 
data networks of the future, while preserving efficient incentives for

[[Page 4713]]

investment and innovation in the underlying voice network. In 
particular, better empirical data are needed before we can make 
informed judgments in this area.
    298. We ask whether, after we complete reform of access charges as 
contemplated in this proceeding, we should consider any additional 
actions relating to interstate information services and the Internet. 
We therefore initiate this Notice of Inquiry, with a separate pleading 
cycle, to address these issues. Based on the record in response to this 
Notice of Inquiry, and the decisions we make in the Access Reform 
Report and Order, we will determine whether to make proposals in this 
area in a subsequent Notice of Proposed Rulemaking.
    299. Many of the concerns now being raised about switch congestion 
caused by Internet usage arise because virtually all residential users 
today connect to the Internet--a packet-switched data network--through 
incumbent LEC switching facilities designed for circuit-switched voice 
calls. The end-to-end dedicated channels created by circuit switches 
are unnecessary and even inefficient when used to connect an end user 
to an ISP. We seek comment on how our rules can most effectively create 
incentives for the deployment of services and facilities to allow more 
efficient transport of data traffic to and from end users. We invite 
parties to identify means of addressing the congestion concerns raised 
by incumbent LECs, for example by deploying hardware to route data 
traffic around incumbent LEC switches, or by installing new high-
bandwidth access technologies such as asymmetric digital subscriber 
line (ADSL) or wireless solutions.
    300. We seek comment on what regulatory barriers--at either the 
state or federal level--might prevent provision of alternate network 
access arrangements for information service providers, or might create 
artificial disincentives against use of such arrangements when they 
become available. Should we consider using our forbearance or 
preemption authority to avoid results that would hamper the deployment 
of new technologies? We also seek comment on how the matters before us 
in our Local Competition and Universal Service proceedings affect 
information service providers and raise issues that we need to address 
in this proceeding.
    301. We seek comment on the effects of the current system on 
network usage, incumbent LEC cost-recovery, and the development of the 
information services marketplace. We are disinclined to take actions 
that would stifle, rather than enhance, the development of the 
Internet, or similar packet-switched networks. We encourage commenters 
to provide data on the characteristics of information service usage and 
its effects on the network. We are also particularly interested in data 
on the incumbent LECs' costs directly related to ESPs' use of the PSTN, 
on incumbent LECs' revenues attributable to ESP traffic (including 
second phone line revenue), and in a comparison of what PSTN services 
ESPs desire, as opposed to what they currently have access to. We seek 
comment on administrative and technical issues that may arise either 
under continued operation of the current system or as modified by this 
proceeding. In particular, we seek comment on jurisdictional, metering, 
and billing questions, given the difficulty of applying jurisdictional 
divisions or time-sensitive rates to packet-switched networks such as 
the Internet.
    302. The current division in our rules between basic and enhanced 
services may not accurately capture the types of companies that provide 
information services today, and the manner in which these companies use 
incumbent LEC facilities. There are many kinds of information services, 
with different usage patterns and effects on the network. For example, 
arguments about network congestion caused by long hold-time calls would 
not seem to apply to information services such as telemessaging or 
credit card validation. We seek comment on whether we should 
distinguish between different categories of information or enhanced 
services. In addition, several companies now provide software that 
allows a voice conversation to be conducted over the Internet. Such 
``Internet telephony'' allows what appears to be a basic service--voice 
transmission--to take place over a packet-switched interactive data 
network that we have traditionally considered to be an enhanced 
service. We seek comment on how new services such as Internet 
telephony, as well as real-time streaming audio and video services over 
the Internet, should affect our analysis.
    303. We seek comment as to whether the issues raised in this Notice 
of Inquiry should be addressed in any existing proceeding, or a new 
proceeding. As discussed in Section VIII, above, the Network 
Reliability and Interoperability Council (NRIC) is also currently 
evaluating the effects of Internet usage on the voice network. We do 
not intend for this proceeding to in any way supersede the NRIC's 
efforts, and we believe that the NRIC's recommendations will complement 
the record we develop here. Ultimately, a full and open debate about 
the relationship of information services to the public switched network 
will benefit all parties. We also strongly encourage interested parties 
among incumbent LECs and ESPs to work together to identify which 
technological solutions hold the greatest promise in carrying Internet 
traffic most efficiently and with the least adverse price impact on 
consumers.
    304. As discussed in Section VIII, above, we have established an 
electronic mailbox at <[email protected]> for submission of informal comments 
on the treatment of Internet and other information services, and we 
have made additional information available through our World Wide Web 
site at <http://www.fcc.gov/isp.html>.

X. Procedural Issues

A. Ex Parte Presentations

    305. This is a non-restricted notice-and-comment rulemaking 
proceeding. Ex parte presentations are permitted, except during the 
Sunshine Agenda period, provided that they are disclosed as provided in 
the Commission's rules. See generally 47 CFR 1.1202, 1.1203, 1.1206.

B. Paperwork Reduction Act

    306. This NPRM contains either a proposed or modified information 
collection. As part of its continuing effort to reduce paperwork 
burdens, we invite the general public and the Office of Management and 
Budget (OMB) to take this opportunity to comment on the information 
collections contained in this NPRM, as required by the Paperwork 
Reduction Act of 1995, Public Law No. 104-13. Public and agency 
comments are due at the same time as other comments on this NPRM; OMB 
comments are due 60 days from date of publication of this NPRM in the 
Federal Register. Comments should address: (a) Whether the proposed 
collection of information is necessary for the proper performance of 
the functions of the Commission, including whether the information 
shall have practical utility; (b) the accuracy of the Commission's 
burden estimates; (c) ways to enhance the quality, utility, and clarity 
of the information collected; and (d) ways to minimize the burden of 
the collection of information on the respondents, including the use of 
automated collection techniques or other forms of information 
technology.

[[Page 4714]]

C. Initial Regulatory Flexibility Act Analysis

    307. Pursuant to Section 603 of the Regulatory Flexibility Act, the 
Commission has prepared the following initial regulatory flexibility 
analysis (IRFA) of the expected impact of these proposed policies and 
rules on small entities. Written public comments are requested on the 
IRFA. These comments must be filed in accordance with the same filing 
deadlines as comments on the rest of the NPRM, but they must have a 
separate and distinct heading designating them as responses to the 
regulatory flexibility analysis. The Secretary shall cause a copy of 
the NPRM, including the initial regulatory flexibility analysis, to be 
sent to the Chief Counsel for Advocacy of the Small Business 
Administration in accordance with Section 603(a) of the Regulatory 
Flexibility Act, Public Law 96-354, 94 Stat. 1164, 5 U.S.C. Section 601 
et seq. (1981).
    308. Reason for action. The Telecommunications Act of 1996 requires 
incumbent LECs to offer interconnection and unbundled elements on an 
unbundled basis, and imposes a duty to establish reciprocal 
compensation arrangements for the transport and termination of calls. 
The Commission's access charge rules were adopted at a time when 
interstate access and local exchange services were offered on a 
monopoly basis, and in many cases are inconsistent with the competitive 
market envisioned by the 1996 Act.
    309. Objectives. To revise the Commission's access charge rules to 
make them consistent with the Telecommunications Act of 1996.
    310. Legal Basis. The proposed action is supported by Sections 
4(i), 4(j), 201-205, 251, 252, 253, and 403 of the Communications Act 
of 1934, as amended, 47 U.S.C. 154(i), 154(j), 201-205, 251, 252, 253, 
403.
    311. Description, potential impact and number of small entities 
affected. For purposes of this NPRM, the Regulatory Flexibility Act 
defines a ``small business'' to be the same as a ``small business 
concern'' under the Small Business Act (SBA), 15 U.S.C. 632, unless the 
Commission has developed one or more definitions that are appropriate 
to its activities. Under the SBA, a ``small business concern'' is one 
that: (1) is independently owned and operated; (2) is not dominant in 
its field of operation; and (3) meets any additional criteria 
established by the SBA. The Small Business Administration has defined a 
small business for Standard Industrial Classification (SIC) category 
4813 (Telephone Communications, Except Radiotelephone) to be small 
entities when they have fewer than 1500 employees.
    312. Total Number of Telephone Companies Affected. With the 
exceptions of the proposals under consideration in Sections III.D, 
III.E, VII.A, and VIII.C of this NPRM, the proposals in this NPRM, if 
adopted, would affect all LECs that are regulated by the Commission's 
price cap rules. Currently, 13 incumbent LECs are subject to price cap 
regulation. We tentatively conclude that all price cap carriers have 
more than 1500 employees and therefore are not small entities.
    313. The proposals under consideration in Sections III.B, III.D, 
III.E, VII.A., and VIII.C of this NPRM, if adopted, would affect all 
incumbent LECs regulated by the Commission. The United States Bureau of 
the Census (Census Bureau) reports that, at the end of 1992, there were 
3497 firms engaged in providing telephone service, as defined therein, 
for at least one year. This number contains a variety of different 
categories of carriers, including incumbent LECs, IXCs, competitive 
access providers, cellular carriers, mobile service carriers, operator 
service providers, pay telephone operators, PCS providers, covered SMR 
providers, and resellers. It seems certain that some of those 3497 
telephone service firms may not qualify as small entities or small 
incumbent LECs because they are not independently owned or operated.
    314. Because the small incumbent LECs that would be subject to 
these rules are either dominant in their field of operations or are not 
independently owned and operated, consistent with our prior practice, 
they are excluded from the definition of ``small entity'' and ``small 
business concerns.'' Accordingly, our use of the terms ``small 
entities'' and ``small businesses'' does not encompass small incumbent 
LECs. Out of an abundance of caution, however, for regulatory 
flexibility analysis purposes, we will consider small incumbent LECs 
within this analysis and use the term ``small incumbent LECs'' to refer 
to any incumbent LECs that arguably might be defined by SBA as ``small 
business concerns.''
    315. Local Exchange Carriers. Neither the Commission nor the Small 
Business Administration has developed a definition of small providers 
of local exchange service. The closest applicable definition under 
Small Business Administration rules is for telephone telecommunications 
companies other than radiotelephone (wireless) companies. The most 
reliable source of information regarding the number of incumbent LECs 
nationwide appears to be the data that we collect annually in the 
provision of Telecommunications Relay Service (TRS). According to our 
most recent data, 1347 companies reported that they were engaged in the 
provision of local exchange service. Although it seems certain that 
some of these carriers are not independently owned or operated, or have 
fewer than 1500 employees, we are unable at this time to estimate with 
greater precision the number of incumbent LECs that would qualify as 
small business concerns under the Small Business Administration's 
definition. Consequently, we estimate that there are fewer than 1347 
small incumbent LECs that may be affected by the proposals in this 
NPRM. We seek comment on this estimate.
    316. Under the new competitive provisions of the 1996 Act, however, 
there could be a number of new LECs entering the local exchange market 
that would be considered small businesses. In Section VIII.A of this 
NPRM, we seek comment on whether to apply certain of the regulations 
applicable to incumbent LECs to new entrant LECs. Thus, it is possible 
that new entrants will be affected by our actions in this proceeding.
    317. Enhanced Service Providers. In Section VIII.B of this NPRM, we 
seek comment on whether to continue to exempt enhanced service 
providers (ESPs) from any requirement to pay access charges. Because we 
are not contemplating imposing any new regulatory requirement on ESPs, 
we conclude that the Regulatory Flexibility Act does not require us to 
consider the effects of these proposed rules on ESPs that would fit the 
definition of small entity. If we modify the ``ESP Exemption,'' we will 
consider the effect on small ESPs at that time. We seek comment on this 
tentative conclusion.
    318. Reporting, recordkeeping and other compliance requirements. It 
is not clear whether, on balance, all proposals in this NPRM would 
increase or decrease incumbent LECs' administrative burdens.
    319. With respect to all incumbent LECs, we believe that the 
reforms to rate structure that we propose in Section III would require 
at least one, and possibly several additional filings, but otherwise 
should not affect their administrative burdens. We expect that the 
proposal we make in Section VII relating to the allocation of universal 
service support to the interstate revenue requirement could increase 
their administrative burdens. We expect that some of the

[[Page 4715]]

Part 69 revisions that we propose in Section VIII would reduce, others 
increase, and the remainder have no effect on their administrative 
burdens.
    320. With regard to incumbent price cap LECs, we expect the changes 
to the existing local switching rate structure that we propose in 
Section III would require an initial additional filing, but otherwise 
would have no effect on their administrative burdens. As to the 
proposals in Section V, to the extent that a carrier chooses to avail 
itself of the additional reforms, it will need to file a petition 
demonstrating that it has met the trigger, and make an initial tariff 
filing. Otherwise, most of the proposed reforms in Section V would 
reduce or have no effect on its administrative burdens. We expect that 
some of our proposals in Section VI of this NPRM, if adopted, would 
increase the administrative burdens placed on incumbent LECs. We expect 
that the other proposals in Section VI of this NPRM would have no 
effect on their administrative burdens. We expect that the proposal to 
continue regulating terminating access charges in Section VIII would 
have no effect on the administrative burden placed on incumbent price 
cap LECs.
    321. In Section II, we address the likelihood that many, if not 
all, new entrants would be considered ``domestic nondominant 
carriers,'' whose tariff filings would be governed by Secs. 61.20 
through 61.23 of our rules, 47 CFR 61.20-23, unless they are exempted 
from some or all of those requirements. We are unable to estimate the 
number of times these incumbent LECs would file tariffs annually, but 
it could vary from none to 20 or more. Nor are we able to estimate how 
extensive each tariff filing, on average, would be. If these new 
entrants are not exempted from any tariff filing requirements, then we 
estimate that, on average, it would take approximately two hours per 
page for the incumbent LEC to prepare each tariff filing, at a cost of 
$80 per hour in professional level and support staff salaries. If these 
carriers are exempted from some or all the regulations applicable to 
incumbent LECs, then the administrative burdens imposed on such 
carriers would be less. In Section V, we ask whether a market share 
test to measure the level of competition may impose a reporting 
requirement on new entrants. We expect that the proposal in Section 
VIII to regulate terminating access charges for new entrants would 
increase the administrative burden placed on incumbent price cap LECs. 
Compliance with these requests may require the use of engineering, 
technical, operational, accounting, billing, and legal skills.
    322. Federal rules which overlap, duplicate or conflict with this 
proposal. None.
    323. Any significant alternatives minimizing impact on small 
entities and consistent with stated objectives. In Section II of this 
NPRM, we seek comment on whether to exempt new entrant LECs from some 
or all of the regulations applicable to incumbent LECs. Thus, new 
entrants that may also be small entities may or may not become subject 
to any new requirements. In any case, new entrants will become subject 
to no more requirements than those imposed on incumbent LECs. However, 
we recognize that new entrants may have different business or 
operational concerns compared to incumbent LECs. In Sections II.A, 
III.B, III.E, V.A, V.C, VII.A, and VII.B, we have sought comment on how 
a number of proposals would affect small entities. These proposals 
could have varying positive or negative impacts on small entities. We 
are unable to ascertain, at this time, what the significant economic 
impact would be on small entities as defined by the SBA. We seek 
comment on these proposals and urge that parties support their comments 
with specific evidence and analysis.

D. Notice of Proposed Rulemaking Comment Filing Dates

    324. Pursuant to applicable procedures set forth in Secs. 1.399 and 
1.411 et seq. of the Commission's Rules, 47 CFR 1.399, 1.411 et seq., 
interested parties may file comments with the Secretary, Federal 
Communications Commission, Washington, D.C. 20554 no later than January 
27, 1997. Interested parties may file replies no later than February 
13, 1997. To file formally in this proceeding, participants must file 
an original and twelve copies of all comments, reply comments, and 
supporting comments. If participants want each Commissioner to receive 
a personal copy of their comments, an original plus 16 copies must be 
filed. In addition, parties should file two copies of any such pleading 
with the Competitive Pricing Division, Common Carrier Bureau, Room 518, 
1919 M Street, N.W., Washington, D.C. 20554. Comments and reply 
comments will be available for public inspection during regular 
business hours in the FCC Reference Center, Room 239, 1919 M Street, 
N.W., Washington, D.C. 20554.
    325. Parties submitting diskettes should submit them along with 
their formal filings to the Office of the Secretary. Submissions should 
be on a 3.5 inch diskette formatted in an DOS PC compatible form. The 
document should be saved into WordPerfect 5.1 for Windows format. The 
diskette should be submitted in ``read only'' mode. The diskette should 
be clearly labelled with the party's name, proceeding, type of pleading 
(comment or reply comment), Docket number, and date of submission.
    326. You may also file informal comments electronically via e-mail 
<[email protected]>. Only one copy of electronically-filed comments must 
be submitted. You must put the docket number of this proceeding in the 
subject line (see the caption at the beginning of this NPRM, or in the 
body of the text if by Internet). You must note whether an electronic 
submission is an exact copy of formal comments on the subject line. You 
also must include your full name and Postal Service mailing address in 
your submission.
    327. In order to facilitate review of comments and replies, by both 
parties and Commission staff, we require that comments be no longer 
than 100 pages, and that replies be no longer than 50 pages. Comments 
and replies must also comply with Sec. 1.49 and all other applicable 
sections of the Commission's Rules. We also direct all interested 
parties to include the name of the filing party and the date of the 
filing on each page of their comments and replies. Comments and replies 
must also clearly identify the specific portion of this Notice of 
Proposed Rulemaking to which a particular comment or set of comments is 
responsive. If a portion of a party's comments does not fall under a 
particular topic listed in the Table of Contents of this NPRM, such 
comments must be included in a clearly labelled section at the 
beginning or end of the filing. Parties may not file more than a total 
of ten pages of ex parte submissions, excluding cover letters. This ten 
page limit does not include the following: (1) Written ex parte 
statements made solely to disclose an oral ex parte contact; (2) 
written material submitted at the time of an oral presentation that 
provides a brief outline of the presentation; (3) written material 
filed in response to direct requests from Commission staff; or (4) any 
proposed rule language. Ex parte filings in excess of this limit will 
not be considered part of the record in this proceeding.
    328. Written comments by the public on the proposed and/or modified 
information collections are due January 27, 1997. Written comments must 
be submitted by the Office of Management and Budget (OMB) on the 
proposed and/or modified information collections on

[[Page 4716]]

or before 60 days after date of publication in the Federal Register. In 
addition to filing comments with the Secretary, a copy of any comments 
on the information collections contained herein should be submitted to 
Dorothy Conway, Federal Communications Commission, Room 234, 1919 M 
Street, N.W., Washington, DC 20554, or via the Internet to 
[email protected] and to Timothy Fain, OMB Desk Officer, 10236 NEOB, 
725--17th Street, N.W., Washington, DC 20503 or via the Internet to 
[email protected].

E. Notice of Inquiry Comment Filing Dates

    329. Pursuant to applicable procedures set forth in Secs. 1.399 and 
1.411 et seq. of the Commission's Rules, 47 CFR 1.399, 1.411 et seq., 
interested parties may file comments with the Secretary, Federal 
Communications Commission, Washington, D.C. 20554 no later than 
February 21, 1997. Interested parties may file replies no later than 
March 24, 1997. Comments and replies must comply with Sec. 1.49 and all 
other applicable sections of the Commission's Rules. To file formally 
in this proceeding, participants must file an original and twelve 
copies of all comments, reply comments, and supporting comments. If 
participants want each Commissioner to receive a personal copy of their 
comments, an original plus 16 copies must be filed. In addition, 
parties should file two copies of any such pleading with the 
Competitive Pricing Division, Common Carrier Bureau, Room 518, 1919 M 
Street, N.W., Washington, D.C. 20554. We also direct all interested 
parties to include the name of the filing party and the date of the 
filing on each page of their comments and replies. Comments and reply 
comments will be available for public inspection during regular 
business hours in the FCC Reference Center, Room 239, 1919 M Street, 
N.W., Washington, D.C. 20554.
    330. Parties submitting diskettes should submit them along with 
their formal filings to the Office of the Secretary. Submissions should 
be on a 3.5 inch diskette formatted in an DOS PC compatible form. The 
document should be saved into WordPerfect 5.1 for Windows format. The 
diskette should be submitted in ``read only'' mode. The diskette should 
be clearly labelled with the party's name, proceeding, type of pleading 
(comment or reply comment), Docket number, and date of submission.
    331. You may also file informal comments electronically via e-mail 
<[email protected]>, or via the World Wide Web. Information on how to file 
electronically is available at <http://www.fcc.gov/isp.html>. Only one 
copy of electronically-filed comments must be submitted. If you are 
using e-mail, you must put the docket number of this proceeding in the 
subject line (see the caption at the beginning of this Notice), and you 
also must note in the subject line if an electronic submission is an 
exact copy of formal comments. You also must include your full name and 
Postal Service mailing address in your submission.

XI. Ordering Clauses

    332. Accordingly, it is ordered, pursuant to Sections 1-4, 10, 201-
205, 251, 254, 303(r), and 410(a) of the Communications Act of 1934, as 
amended, and Section 601 of the Telecommunications Act of 1996, 47 
U.S.C. 10, 151-154, 201-205, 224, 251, 254, 303(r), 410(a), and 601, 
that notice is hereby given of the rulemaking described above and that 
comment is sought on these issues.
    333. It is further ordered, pursuant to Sections 1-4, 10, 201-205, 
251, 254, and 303(r) of the Communications Act of 1934, as amended, and 
Section 601 of the Telecommunications Act of 1996, 47 U.S.C. 10, 151-
154, 201-205, 224, 251, 254, 303(r), and 601, that notice is hereby 
given of the inquiry described above and that comment is sought on 
these issues.

Federal Communications Commission
William F. Caton,
Acting Secretary.

List of Subjects

47 CFR Part 61

    Communications common carriers, Tariffs.

47 CFR Part 69

    Communications common carriers, Access charges.

Attachment--Parties Filing Pleadings

I. Pleadings in CC Docket No. 95-72 (ISDN SLC NPRM)

Comments
America Online Incorporated; CompuServe Incorporated; GE Information 
Services, Inc.; Prodigy Services Company (America Online)
American Petroleum Institute
Ameritech
AT&T Corp. (AT&T)
Bell Atlantic Telephone Companies (Bell Atlantic)
BellSouth Telecommunications, Inc. (BellSouth)
Cable & Wireless, Inc. (Cable & Wireless)
California Bankers' Clearing House Association, MasterCard 
International Incorporated, the New York Clearing House Association, 
and Securities Industry Association (California Bankers' Clearing 
House)
Center for Democracy and Technology
Cincinnati Bell Telephone (Cincinnati Bell)
Commercial Internet eXchange Association (CIX)
Communications Managers Association (CMA)
Consumer Project on Technology
GTE Service Corporation (GTE)
Information Technology Industry Council (ITIC)
MCI Telecommunications Corporation (MCI)
Microsoft Corporation (Microsoft)
National Information Infrastructure Working Group
National Public Radio, Inc. (National Public Radio)
National Telephone Cooperative Association (NTCA)
Northern Arkansas Telephone Company, Inc. (Northern Arkansas Telephone 
Company)
NYNEX Telephone Companies (NYNEX)
Pacific Bell and Nevada Bell (Pacific Bell)
Public Utility Commission of Texas
Rochester Telephone Corp.
Roseville Telephone Company (Roseville)
Rural Telephone Coalition
Southwestern Bell Telephone Company (Southwestern Bell)
Sprint Corporation (Sprint)
Tele-Communications Association (TCA)
Tennessee Public Service Commission
Time Warner Communications Holdings, Inc. (Time Warner Communications)
United States Telephone Association (USTA)
U S WEST Communications, Inc. (US West)
West Virginia University
Replies
America Online
Ameritech
AT&T
Bell Atlantic
BellSouth
Cable & Wireless
Cincinnati Bell
CIX
CMA
GTE
ITIC
Information Technology Industry Council, United States Telephone 
Association, California ISDN Users Group, Center for Democracy and 
Technology, Consumer Federation of America, Information Industry

[[Page 4717]]

Association, California Bankers' Clearing House Association, US. 
Chamber of Commerce, Independent Data Communications Manufacturers 
Association, Information Technology Association of America, 
Telecommunications Industry Association (Joint Parties)
Interactive Services Association
MCI
Microsoft
Northern Telecom Inc. (Northern Telecom)
NYNEX
Pacific Bell
Roseville
Sprint
Southwestern Bell
3Com Corporation
USTA
Comments on Bell Operating Companies' Cost Data
Comments
GTE Operating Company (GTE)
MCI Telecommunications Corporation (MCI)
Replies
America Online
NYNEX
Pacific Bell
Southwestern Bell
US West

II. Pleadings in CC Docket No. 94-1 (Price Cap Second FNPRM)

Comments
Ad Hoc Telecommunications Users Group (Ad Hoc)
Ameritech
ALTS
AT&T
Association for Local Telephone Services (ALTS)
Bell Atlantic
BellSouth
California Cable Television Association (CCTA)
Cincinnati Bell
Competitive Telecommmunications Association (CompTel)
Comcast Corp. (Comcast)
Cox Enterprises, Inc. (Cox)
General Services Administration (GSA)
GTE
ICG Access Services, Inc. (ICG)
Information Industry Association (IIA)
LCI International, Inc. (LCI)
LDDS Worldcom (LDDS)
Lincoln Telephone and Telegraph Co. (Lincoln)
MCI
MFS
NCTA
NYNEX
Organization for the Protection and Advancement of Small Telephone 
Companies (Opastco)
Pacific Bell and Nevada Bell
Southern New England Telephone Co. (SNET)
Southwestern Bell
Sprint
Sprint Telecommunications Venture
TCA
Teleport
Telecommunciations Resellers Association
Time Warner Communications Holdings, Inc., (Time Warner)
USTA
US West
Replies
Ad Hoc
Ameritech
ALTS
AT&T
Bell Atlantic
BellSouth
Cincinnati Bell
Competitive Telecommmunications Association (CompTel)
Comcast
Cox
Frontier
GSA
GTE
LDDS
MCI
MFS
NCTA
NYNEX
Pacific Bell and Nevada Bell
Southwestern Bell
Sprint
Sprint Telecommunications Venture
Teleport
TRA
Time Warner
USTA
US West

[FR Doc. 97-2142 Filed 1-29-97; 8:45 am]
BILLING CODE 6712-01-P