[Federal Register Volume 62, Number 112 (Wednesday, June 11, 1997)]
[Rules and Regulations]
[Pages 31868-31939]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-14628]



[[Page 31867]]

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Part II





Federal Communications Commission





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47 CFR Parts 61 and 69



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 Providers; Rules

  Federal Register / Vol. 62, No. 112 / Wednesday, June 11, 1997 / 
Rules and Regulations  

[[Page 31868]]


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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 97-158]


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: Final rule.

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SUMMARY: On December 23, 1996, the Commission adopted a Notice of 
Proposed Rulemaking in this docket, seeking comment on how the 
interstate access charge regime should be revised in light of the local 
competition and Bell Operating Company entry provisions of the 
Telecommunications Act of 1996 and state actions to open local markets 
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. In this Report 
and Order, the Commission adopts many of the rules it proposed. These 
rule revisions are intended to foster competition, move access charges 
over time to more economically efficient levels and rate structures, 
preserve universal service, and lower rates.

DATES: The following rules or amendments thereto, shall become 
effective July 11, 1997 47 CFR 69.103, 69.107, 69.122, 69.303, 69.304, 
69.307, 69.308, and 69.406. The following rules or amendments thereto, 
which impose new or modified information or collection requirements, 
shall become effective upon approval by the Office of Management and 
Budget (OMB), but no sooner than June 15, 1997: 47 CFR 61.45, 61.47, 
69.104, 69.126, 69.151, 69.152, and 69.410. The following rules, or 
amendments thereto, in this Report and Order shall be effective January 
1, 1998: 47 CFR 61.3, 61.46, 69.1, 69.2, 69.105, 69.123, 69.124, 
69.125, 69.154, 69.155, 69.157, 69.305, 69.306, 69.309, 69.401, 69.411, 
69.501, 69.502, and 69.611. The following rules, which impose new or 
modified information or collection requirements, shall become effective 
upon approval by the Office of Management and Budget (OMB), but no 
sooner than January 1, 1998: 47 CFR 61.42, 61.48, 69.4, 69.106, 69.111, 
69.153, and 69.156. The Commission will publish a document in the 
Federal Register at a later date announcing the effective date for the 
sections containing information collection requirements.

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 Judy Boley at 202-418-0214, or via the 
Internet at [email protected].

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Report 
and Order adopted May 7, 1997, and released May 16, 1997. The full text 
of this Report and Order is available for inspection and copying during 
normal business hours in the FCC Reference Center (Room 239), 1919 M 
St., N.W., Washington, DC. The complete text also may be obtained 
through the World Wide Web, http://www.fcc.gov/Bureaus/Common__Carrier/
Orders/1997/fcc97158.wp, or may be purchased from the Commission's copy 
contractor, International Transcription Service, Inc., (202) 857-3800, 
2100 M St., N.W., Suite 140, Washington, DC 20037. To seek comment on 
the rules adopted in this Report and Order, the Commission released 
Access Charge Reform, CC Docket No. 96-262, Notice of Proposed 
Rulemaking, 62 FR 4670 (January 31, 1997); Price Cap Performance Review 
for Local Exchange Carriers, CC Docket No. 94-1, Second Further Notice 
of Proposed Rulemaking, 60 FR 49539 (September 25, 1995); and Price Cap 
Performance Review for Local Exchange Carriers, CC Docket 94-1, Fourth 
Further Notice of Proposed Rulemaking, 60 FR 52362 (October 6, 1995). 
This Report and Order contains proposed or modified information 
collections subject to the Paperwork Reduction Act of 1995 (PRA). It 
has been submitted to the Office of Management and Budget (OMB) for 
review under the PRA. OMB, the general public, and other Federal 
agencies are invited to comment on the proposed or modified information 
collections contained in this proceeding. Please note that the 
Commission has requested emergency review and approval of this 
collection by June 10, 1997 under the provisions of 5 CFR 1320.13.

Paperwork Reduction Act

    This Report and Order 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 Report and Order, as required 
by the Paperwork Reduction Act of 1995, Public Law 104-13. Please note 
that the Commission has requested emergency review and approval of this 
collection by June 10, 1997 under the provisions of 5 CFR 1320.13. OMB 
notification of action is due June 10, 1997. 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.
    OMB Approval Number: 3060-0760.
    Title: Access Charge Reform Report and Order.
    Form No.: N/A.
    Type of Review: Revised Collection.
    Respondents: Business and other for profit.
    Number of Respondents: 13.
    Estimated Time Per Response: 138,714 hours.
    Total Annual Burden: 1,803,282 hours.
    Estimated costs per respondent: $2,400.
    Total Annual Estimated Costs: $31,200.
    Needs and Uses: In the Access Charge Reform First Report and Order, 
the Commission adopts, that, consistent with principles of cost-
causation and economic efficiency, non-traffic sensitive (NTS) costs 
associated with local switching should be recovered on an NTS basis, 
through flat-rated, per month charges. The information collections 
resulting from this Report and Order are as follows:
    a. Cost Study of Local Switching Costs: The FCC does not establish 
a fixed percentage of local switching costs that incumbent LECs must 
reassign to the Common Line basket or newly created Trunk Cards and 
Ports service category as NTS costs. In light of the widely varying 
estimates in the record, we conclude that the portion of costs that is 
NTS costs likely varies among LEC switches. Accordingly, we require 
each price cap LEC to conduct a cost study to determine the 
geographically-averaged portion of local switching costs that is 
attributable to the line-side ports, as defined above, and to dedicated 
trunk side cards and ports. These amounts, including cost support, 
should be reflected in the access charge

[[Page 31869]]

elements filed in the LEC's access tariff effective January 1, 1998.
    b. Cost Study of Interstate Access Service That Remain Subject to 
Price Cap Regulation: The 1996 Act has created an unprecedented 
opportunity for competition to develop in local telephone markets. We 
recognize, however, that competition is unlikely to develop at the same 
rate in different locations, and that some services will be subject to 
increasing competition more rapidly than others. We also recognize, 
however, that there will be areas and services for which competition 
may not develop. We will adopt a prescriptive ``backstop'' to our 
market-based approach that will serve to ensure that all interstate 
access customers receive the benefits of more efficient prices, even in 
those places and for those services where competition does not develop 
quickly. To implement our backstop to market-based access charge 
reform, we require each incumbent price cap LEC to file a cost study no 
later than February 8, 2001, demonstrating the cost of providing those 
interstate access services that remain subject to price cap regulation 
because they do not face substantial competition.
    c. Tariff Filings. The Commission also suggests several information 
collections relating to tariff filings. Specifically, the Commission 
adopts its proposals to require the filing of various tariffs, with 
modifications. For example, the FCC directs incumbent LECs to establish 
separate rate elements for the multiplexing equipment on each side of 
the tandem switch. LECs must establish a flat-rated charge for the 
multiplexers on the SWC side of the tandem, imposed pro-rata on the 
purchasers of the dedicated trunks on the SWC side of the tandem. 
Multiplexing equipment on the EO side of the tandem shall be charged to 
users of common EO-to-tandem transport on a per-minute of use basis. 
These multiplexer rate elements must be included in the LEC access 
tariff filings to be effective January 1, 1998.

Synopsis of Report and Order

I. Introduction

    1. In passing the Telecommunications Act of 1996, Public Law 104-
104, 110 Stat. 56 (codified at 47 U.S.C. secs. 151 et seq.) (1996 Act), 
Congress sought to establish ``a pro-competitive, deregulatory national 
policy framework'' for the United States' telecommunications industry. 
With this Order, we begin the third part in a trilogy of actions 
collectively intended to foster and accelerate the introduction of 
competition into all telecommunications markets, pursuant to the 
mandate of the 1996 Act.
    2. In the Local Competition Order, we set forth rules to implement 
section 251 and section 252 of the Communications Act of 1934, as 
amended. Implementation of the Local Competition Provisions of the 
Telecommunications Act of 1996, CC Docket No. 96-98, First Report and 
Order, 61 FR 45476 (August 29, 1996) (Local Competition Order), Order 
on Reconsideration, CC Docket No. 96-98, 61 FR 52706 (October 8, 1996), 
petition for review pending and partial stay granted, sub nom. Iowa 
Utils. Bd. v. FCC, 109 F.3d 418 (8th Cir. 1996). As with all of Part II 
of Title II of the Communications Act, those sections, and the rules 
implementing them, seek to remove the legal, regulatory, economic, and 
operational barriers to telecommunications competition. Among other 
things, sections 251 and 252 provide entrants with the opportunity to 
compete for consumers in local markets by either constructing new 
facilities, leasing unbundled network elements, or reselling 
telecommunication services.
    3. In the Universal Service Order, which we adopt in a companion 
order today, we take steps to ensure that support mechanisms that are 
necessary to maintain local rates at affordable levels are protected 
and advanced as local telecommunication markets become subject to the 
competitive pressures unleashed by the 1996 Act. Federal-State Board on 
Universal Service, CC Docket No. 96-45, First Report and Order, FCC 97-
157, ______ FR ______ (released May 8, 1997) (Universal Service Order). 
When it enacted section 254 of the Communications Act, Congress 
detailed the principles that must guide this effort. It placed on the 
Commission and the states the duty to implement these principles in a 
manner consistent with the pro-competition purposes of the Act, as 
embodied in, for instance, the interconnection provisions of the Act. 
It stated that ``[t]here should be specific, predictable and sufficient 
Federal and State mechanisms to preserve and advance universal 
service.''
    4. Congress also specified that universal service support ``should 
be explicit,'' and that, with respect to federal universal service 
support, ``[e]very telecommunications carrier that provides interstate 
telecommunications services shall contribute, on an equitable and non-
discriminatory basis, to the specific, predictable, and sufficient 
mechanisms established by the Commission to preserve and advance 
universal service.'' As explained further in the Joint Explanatory 
Statement of the Committee of the Conference, Congress intended that, 
``[t]o the extent possible, * * * any support mechanisms continued or 
created under new section 254 should be explicit, rather than implicit 
as many support mechanisms are today.'' Congress directed the 
Commission, by May 8, 1997, to complete a universal service proceeding 
that ``include[s] a definition of the services that are supported by 
Federal universal service support mechanisms and a specific timetable 
for implementation.''
    5. Through our accompanying Universal Service Order, we establish 
the definition of services to be supported by federal universal service 
support mechanisms and the specific timetable for implementation. 
Further, through this First Report and Order in our access reform 
docket and our Universal Service Order, we set in place rules that will 
identify and convert existing federal universal service support in the 
interstate high cost fund, the dial equipment minutes (DEM) weighting 
program, Long Term Support, Lifeline, Link-up, and interstate access 
charges to explicit federal universal service support mechanisms. As 
detailed below, we will identify the implicit federal universal service 
support currently contained in interstate access charges through three 
methods.
    6. First, we will reduce usage-sensitive interstate access charges 
by phasing out local loop and other non-traffic-sensitive (NTS) costs 
from those charges and directing incumbent local exchange carriers 
(LECs) to recover those NTS costs through more economically efficient, 
flat-rated charges. Because NTS costs, by definition, do not vary with 
usage, the recovery of NTS costs on a usage basis pursuant to our 
current access charge rules amounts to an implicit subsidy from high-
volume users of interstate toll services to low-volume users of 
interstate long-distance services.
    7. Second, we will rely in part on emerging competition in local 
telecommunications markets, spurred by the adoption of the 1996 Act, to 
help identify the differences between the rates for interstate access 
services established by incumbent LECs under price cap regulation and 
those that competition would set. The prices for interstate access 
services offered by competing providers presumably will not contain any 
implicit universal service support such as that embedded in the 
incumbent LECs' access charges. Consequently, the introduction of 
competition inevitably will help to

[[Page 31870]]

remove implicit support from the incumbent LECs' access charges where 
competition develops and also will help to identify the extent of 
implicit support in other areas.
    8. Third, we will engage in further deliberations on a forward-
looking economic cost-based mechanism that we will use to distribute 
federal support to rural, insular, and high cost areas, beginning in 
1999. Based on cost studies the states will conduct during the coming 
year (or, at a state's election, based upon Commission-developed proxy 
methods), an estimate of the forward-looking economic cost of providing 
service to a customer in a particular rural, insular, or high cost area 
will be calculated. We will distribute federal universal service 
support based on the interstate portion of the difference between 
forward-looking economic cost and a nationwide revenue benchmark. The 
amount of the support will be explicitly calculable and identifiable by 
competing carriers, and the support will be portable among competing 
carriers, i.e., distributed to the eligible telecommunications carrier 
chosen by the customer. It will be funded by equitable and non-
discriminatory contributions from all carriers that provide interstate 
telecommunications services. Through this First Report and Order, we 
direct that federal universal service support received by incumbent 
LECs be used to reduce or satisfy the interstate revenue requirement 
otherwise collected through interstate access charges. Accordingly, 
through both our Universal Service Order and this First Report and 
Order on access reform, interstate implicit support for universal 
service will be identified and removed from interstate access charges, 
and support will be provided through the explicit interstate universal 
service support mechanisms.
    9. Although these three steps will set in motion a process that 
will remove implicit universal service support from access charges, it 
will not remove all implicit support from all access charges 
immediately. This result is fully in accord with Congress's directives. 
Although Congress said in the Act that ``support should be explicit'', 
it did not provide that ``support shall be explicit.'' Congress's 
decision to say ``should'' instead of ``shall'' is especially pertinent 
in light of Congress's repeated use of ``shall'' in the 1996 Act. 
Moreover, in the Act's legislative history, Congress qualified its 
intention that ``support mechanisms should be explicit, rather than 
implicit,'' with the phrase ``[t]o the extent possible.'' Thus, 
Congress recognized that the conversion of the existing web of implicit 
subsidies to a system of explicit support would be a difficult task 
that probably could not be accomplished immediately. As explained 
below, we conclude that a process that eliminates implicit subsidies 
from access charges over time is warranted primarily for three reasons. 
First, we simply do not have the tools to identify the existing 
subsidies precisely at this time. Second, we prefer to rely on the 
market rather than regulation to identify implicit support because we 
are more confident of the market's ability to do so accurately. Third, 
even if we were more confident of our ability to identify all of the 
existing implicit support mechanisms at this time, eliminating them all 
at once might have an inequitable impact on the incumbent local 
exchange carriers.
    10. Nor, by our orders today, do we attempt to identify or 
eliminate the implicit universal service support mechanisms established 
by state commissions. We recognize that states are initially 
responsible for identifying implicit intrastate subsidies. For the 
reasons stated above, we believe the Commission has discretion under 
the statute to employ pro-competitive, deregulatory policies to aid in 
the reform of the existing, complex system of universal service. Where 
pro-competition policies, such as those set forth in sections 251, 252 
and 253, can force prices for telecommunications services to 
competitive levels, and, as a result, eliminate or, at least, 
substantially eliminate implicit support, the Act grants us the 
authority to rely on such policies over a period of time. We find that 
the Act does not require, nor did Congress intend, that we immediately 
institute a vast set of wide-ranging pricing rules applicable to 
interstate and intrastate services provided by incumbent LECs that 
would have enormously disruptive effects on both ratepayers as well as 
the affected LECs. Indeed, the congressional mandate that we implement 
pro-competitive, deregulatory policies is a continuing reminder that, 
wherever feasible, we should select competition instead of regulation 
as our means of accomplishing the stated statutory goals. Reliance on 
competition is the keystone that unifies our universal service and 
access reform orders.
    11. Nevertheless, implicit intrastate universal service support is 
substantial. States have maintained low residential basic service rates 
through, among other things, a combination of: geographic rate 
averaging, high rates for business customers, high intrastate access 
rates, high rates for intrastate toll service, and high rates for 
vertical features and services such as call waiting and call 
forwarding. By not mandating immediate Commission action to eliminate 
these policies and instead by ordering that the Commission and the 
states together achieve universal service goals, Congress intended that 
states, acting pursuant to section 254(f) of the Communications Act, 
must in the first instance be responsible for identifying intrastate 
implicit universal service support. Indeed, by our decisions in this 
Order and in our companion Universal Service Order, we strongly 
encourage states to take such steps.
    12. To achieve the vital, historic, and congressionally-mandated 
purposes of universal service in every state in an era in which 
competition replaces monopoly, it is necessary that the states and the 
Commission develop new and effective mechanisms of complementing the 
activities of each other. Therefore, as states implement their 
universal service plans, we will be able to assess whether additional 
federal universal service support is necessary to ensure that quality 
services remain ``available at just, reasonable, and affordable 
rates.'' Our decisions in this Order are meant in part to provide some 
elements of the plan and time sufficient to discharge responsibly an 
aspect of the federal role in this federal-state universal service 
partnership.
    13. In this First Report and Order, we also take the actions 
necessary to permit the market, in the first instance, to expose any 
implicit universal service support that we may fail to identify as we 
implement our federal mechanisms for supporting universal service in 
insular, rural, and high cost areas and to drive access rates toward 
levels that competition would be expected to produce. Our decision also 
fulfills the congressional intent that we eliminate the rules that have 
helped to sustain de facto or de jure monopolies in access markets and 
instead create the conditions for competitive entry on a sustainable, 
long-term basis. That requires, among other things, that we phase out 
opportunities for inefficient entry that are created primarily by 
anomalies in the current, monopoly-oriented regime. Consequently, this 
Order sets forth a plan for removing distortions and inefficiencies in 
both the current ``rate structures'' (the term used to describe the 
manner in which a particular charge is assessed, such as through a per-
minute-of-use fee or a flat-rated fee) and ``rate levels'' (the term 
used to describe the aggregate size of a particular access charge). By 
rationalizing the access charge rate structure, we ensure that charges 
more accurately reflect the manner in which

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the costs are incurred, thereby facilitating the movement to a 
competitive market. We also establish, in this First Report and Order, 
a prescriptive mechanism to ensure that, through the operation of price 
caps and by other means, interstate access charges in areas where 
competition does not develop will also be driven toward the levels that 
competition would be expected to produce. The Price Cap Fourth Report 
and Order, which is also the Second Report and Order in this docket and 
which is also adopted today, modifies the X-Factor in accordance with 
this plan. Price Cap Performance Review for Local Exchange Carriers, 
Fourth Report and Order in CC Docket No. 94-1, and Access Charge 
Reform, Second Report and Order in CC Docket No. 96-262, FCC 97-159, 
______ FR ______ (adopted May 7, 1997) (Price Cap Fourth Report and 
Order).
    14. In a subsequent order in the present docket, we will provide 
detailed rules for implementing the market-based approach that we adopt 
in today's Order. That process will give carriers progressively greater 
flexibility in setting rates as competition develops, gradually 
replacing regulation with competition as the primary means of setting 
prices and facilitating investment decisions. A separate order in this 
docket will also address ``historical cost'' recovery: whether and to 
what extent carriers should receive compensation for the recovery of 
the allocated costs of past investments if competitive market 
conditions prevent them from recovering such costs in their charges for 
interstate access services.
    15. By our orders today, we reject the arguments made by some 
parties that section 254 compels us immediately to remove all universal 
service costs from interstate access charges. Making ``implicit'' 
universal service subsidies ``explicit'' ``to the extent possible'' 
means that we have authority at our discretion to craft a phased-in 
plan that relies in part on prescription and in part on competition to 
eliminate subsidies in the prices for various products sold in the 
market for telecommunications services. Moreover, we have met section 
254's clear command that we identify the services to be supported by 
federal universal service support mechanisms and that we establish a 
specific timetable for implementation. Under that timetable, we will 
over the next year identify implicit interstate universal support and 
make that support explicit, as further provided by section 254(e). As 
with any implicit support mechanism, universal service costs are 
presently intermingled with all other costs, including the forward-
looking economic costs of interstate access and any historic costs 
associated with the provision of interstate access services. We cannot 
remove universal service costs from interstate access charges until we 
can identify those costs, which we will not be able to do even for non-
rural LECs before January 1, 1999.
    16. Coupled with the modifications implemented in our Universal 
Service Order, the changes we put in place today will provide far-
reaching benefits to the American people. This Order will restructure 
access charges, resulting in lower long-distance rates for many 
consumers, while substantially increasing the volume of long-distance 
calling. It will promote the spread of competition by replacing 
significant implicit subsidies with an explicit and secure universal 
service support system. It will foster competition and economic 
prosperity by creating an access charge system that is both efficient 
and fair. We believe that the changes implemented by this Order are 
necessary to meet the goal set forth in the 1996 Act--``opening all 
telecommunications markets to competition.''

A. Background

1. The Existing Rate System
    17. For much of this century, most telephone subscribers obtained 
both local and long-distance services from the same company, the pre-
divestiture Bell System, owned and operated by AT&T. Its provision of 
local and intrastate long-distance services through its wholly-owned 
operating companies was regulated by state commissions. The Commission 
regulated AT&T's provision of interstate long-distance service. Much of 
the telephone plant that is used to provide local telephone service 
(such as the local loop, the line that connects a subscriber's 
telephone to the telephone company's switch) is also needed to 
originate and terminate interstate long-distance calls. Consequently, a 
portion of the costs of this common plant historically was assigned to 
the interstate jurisdiction and recovered through the rates that AT&T 
charged for interstate long-distance calls. The balance of the costs of 
the common plant was assigned to the intrastate jurisdiction and 
recovered through the charges administered by the state commissions for 
intrastate services. The system of allocating costs between the 
interstate and intrastate jurisdictions is known as the separations 
process. The difficulties inherent in allocating the costs of 
facilities that are used for multiple services between the two 
jurisdictions are discussed below.
    18. At first, there was no formal system of tariffed charges to 
determine how the BOCs and the hundreds of unaffiliated, independent 
LECs would recover the costs allocated to the interstate jurisdiction 
by the separations rules. Instead, AT&T remitted to these companies the 
amounts necessary to recover their allocated interstate costs, 
including a return on allocated capital investment.
    19. In the 1970s, MCI and other interexchange carriers (IXCs) began 
to provide switched long-distance service in competition with AT&T. 
However, AT&T still maintained monopolies in the local markets served 
by its local subsidiaries, the Bell Operating Companies (BOCs). The 
BOCs owned and operated the telephone wires that connected the 
customers in their local markets. Other independent (non-Bell) LECs 
held similar monopoly franchises in their local service areas. MCI and 
the other IXCs were dependent on the BOCs and the independent LECs to 
complete the long-distance calls to the end user.
    20. For much of the 1970s, MCI and AT&T fought over the fees--the 
access charges--that MCI should pay the BOCs for originating and 
terminating interstate calls placed by or to end users on the BOCs' 
local networks. That battle took place before federal regulators, as 
well as in the federal courts. In December 1978, under Commission 
supervision, AT&T, MCI, and the other long-distance competitors entered 
into a comprehensive interim agreement, known as Exchange Network 
Facilities for Interstate Access (ENFIA), that set rates that AT&T 
would charge long-distance competitors for originating and terminating 
interstate traffic over the facilities of its local exchange 
affiliates. Several years afterwards, AT&T's divestiture was completed, 
separating the local exchange operations of the BOCs from the rest of 
AT&T's operations, including AT&T's long distance business. The BOCs 
maintained monopoly franchises in their local market, but by splitting 
them off from AT&T's long-distance business, the federal courts removed 
an incentive for the BOCs to favor AT&T's long distance business over 
its competitors. Now AT&T competed directly with MCI and the other 
competitors to provide interstate service, and all of the competitors 
paid the BOCs for the service of providing the necessary access to end 
users.
    21. In 1978, the Commission commenced a wide-ranging review of the 
system by which LECs were compensated for originating and

[[Page 31872]]

terminating interstate traffic. In 1983, following the decision to 
break-up AT&T, the Commission adopted uniform access charge rules in 
lieu of earlier agreements. MTS and WATS Market Structure, Third Report 
and Order, CC Docket No. 78-72, Phase 1, 48 FR 10319 (March 11, 1983) 
(MTS and WATS Market Structure Third Report and Order), recon., 48 FR 
42984 (September 21, 1983), second recon., 49 FR 7810 (March 2, 1984). 
These rules governed the provision of interstate access services by all 
incumbent LECs, BOCs as well as independents. The access charge rules 
provide for the recovery of the incumbent LECs' costs assigned to the 
interstate jurisdiction by the separations rules.
    22. The Commission uses a multi-step process to identify the cost 
of providing access service. First, the rules require an incumbent LEC 
to record all of its expenses, investments, and revenues in accordance 
with accounting rules set forth in our regulations. Second, the rules 
divide these costs between those associated with regulated 
telecommunications services and those associated with nonregulated 
activities. Third, the separations rules determine the fraction of the 
incumbent LEC's regulated expenses and investment that should be 
allocated to the interstate jurisdiction. After the total amount of 
interstate cost is identified, the access charge rules translate these 
interstate costs into charges for the specific interstate access 
services and rate elements. Part 69 specifies in detail the rate 
structure for recovering those costs. That is, the rules tell the 
incumbent LECs the precise manner in which they may assess charges on 
interexchange carriers and end users.
    23. Determining the costs that an incumbent LEC incurs to provide 
interstate access services and that, consequently, should be recovered 
from those services, is relatively straightforward in some cases and 
problematic in others. Some facilities, such as private lines, can be 
used exclusively for interstate services and, in such cases, the entire 
cost of those facilities is assigned to the interstate jurisdiction by 
the separations rules. Most facilities, however, are used for both 
intrastate and interstate services. The costs of some of these 
facilities vary depending on the amount of telecommunications traffic 
that they handle. The separations rules typically assign these traffic-
sensitive (TS) costs on the basis of the relative interstate and 
intrastate usage of the facilities, as measured, for example, by the 
relative minutes of interstate and intrastate traffic carried by such 
facilities. By contrast, the costs of other facilities used for both 
interstate and intrastate traffic do not vary with the amount of 
traffic carried over the facilities, i.e., the costs are non-traffic-
sensitive. These costs pose particularly difficult problems for the 
separations process: The costs of such facilities cannot be allocated 
on the basis of cost-causation principles because all of the facilities 
would be required even if they were used only to provide local service 
or only to provide interstate access services. A significant 
illustration of this problem is allocating the cost of the local loop, 
which is needed both to provide local telephone service as well as to 
originate and terminate long-distance calls. The current separations 
rules allocate 25 percent of the cost of the local loop to the 
interstate jurisdiction for recovery through interstate charges. The 
general process of separating these costs between the interstate and 
intrastate jurisdictions is discussed by the Supreme Court in Smith v. 
Illinois Bell Tel. Co., 282 U.S. 133 (1930).
    24. The Commission has recognized in prior rulemaking proceedings 
that, to the extent possible, costs of interstate access should be 
recovered in the same way that they are incurred, consistent with 
principles of cost-causation. Thus, the cost of traffic-sensitive 
access services should be recovered through corresponding per-minute 
access rates. Similarly, NTS costs should be recovered through fixed, 
flat-rated fees. The Commission, however, has not always adopted rules 
that are consistent with this goal. In particular, the Commission 
limited the amount of the allocated interstate cost of a local loop 
that is assessed to residential and business customers as a flat 
monthly charge, because of concerns that allowing the flat charges to 
rise above the specified limits might cause customers to disconnect 
their telephone service. The residual cost of the loop not recovered 
from end users through the flat charge is recovered through a per-
minute-of-use charge assessed to long-distance carriers.
    25. Through the end of 1990, the vast majority of access revenues 
were governed by ``cost-of-service'' regulation. Under cost-of-service 
regulation, incumbent LECs calculate the specific access charge rates 
using projected costs and projected demand for access services. Thus, 
for example, if an incumbent LEC projects that it will provide 10,000 
total minutes of switching for interstate calls and estimates that it 
must generate $1,000 dollars in revenue in order to recover the costs 
of switching that are allocated to the interstate jurisdiction by the 
separations rules, the access charge for local switching would be set 
at $0.10 per minute ($1,000/10,000 minutes). In 1991, however, we 
implemented a system of price cap regulation that altered the manner in 
which the largest incumbent LECs established their interstate access 
charges. While most rural and small LECs remained subject to all of the 
Part 69 cost-of-service rules, generally the largest incumbent LECs are 
now subject to price cap regulations set forth in Part 61 of our rules.
    26. Price cap regulation fundamentally alters the process by which 
incumbent LECs determine the revenues they are permitted to obtain from 
interstate access charges for access services. Briefly stated, cost-of-
service regulation is designed to limit the profits an incumbent LEC 
may earn from interstate access service, whereas price cap regulation 
focuses primarily on the prices that an incumbent LEC may charge and 
the revenues it may generate from interstate access services. Under the 
Part 69 cost-of-service rules, revenue requirements are based on 
embedded or accounting costs allocated to individual services. 
Incumbent LECs are limited to earning a prescribed return on investment 
and are potentially obligated to provide refunds if their interstate 
rate of return exceeds the authorized level. By contrast, although the 
access charges of price cap LECs originally were set at the cost-of-
service levels that existed at the time they entered price caps, their 
prices have been limited ever since by price indices that have been 
adjusted annually pursuant to formulae set forth in our Part 61 rules. 
Price cap carriers whose interstate access charges are set by these 
pricing rules are permitted to earn returns significantly higher than 
the prescribed rate of return that incumbent LECs are allowed to earn 
under cost-of-service rules. Price cap regulation encourages incumbent 
LECs to improve their efficiency by harnessing profit-making incentives 
to reduce costs, invest efficiently in new plant and facilities, and 
develop and deploy innovative service offerings, while setting price 
ceilings at reasonable levels. In this way, price caps act as a 
transitional regulatory scheme until the advent of actual competition 
makes price cap regulation unnecessary. Price Cap Performance Review 
for Local Exchange Carriers, Second 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

[[Page 31873]]

(September 26, 1995) (Price Cap Second Further NPRM).
    27. Although price cap regulation eliminates the direct link 
between changes in allocated accounting costs and change in prices, it 
does not sever the connection between accounting costs and prices 
entirely. The overall interstate revenue levels still generally reflect 
the accounting and cost allocation rules used to develop access rates 
to which the price cap formulae were originally applied. Price cap 
indices are adjusted upwards if a price cap carrier earns returns below 
a specified level in a given year. Moreover, a price cap LEC may 
petition the Commission to set its rates above the levels permitted by 
the price cap indices based on a showing that the authorized rate 
levels will produce earnings that are so low as to be confiscatory. In 
the past, all or some price cap LECs were required to ``share,'' or 
return to ratepayers, earnings above specified levels. The new rules 
adopted in the companion Price Cap Fourth Report and Order remove this 
limit on the maximum returns that can be earned by price cap incumbent 
LECs.
2. Implicit Subsidies in the Existing System
    28. Both our price cap and cost-of-service rules contain 
requirements that inevitably result in charges to certain end users 
that exceed the cost of the service they receive. To the extent these 
rates do not reflect the underlying cost of providing access service, 
they could be said to embody an implicit subsidy. Some of these 
subsidies are due to the rate structures prescribed by our rules, which 
in some cases prevent incumbent LECs from recovering their access costs 
in the same way they have been incurred. For example, although the cost 
of the local loop that connects an end user to the telephone company's 
switch does not vary with usage, the current rate structure rules 
require incumbent LECs to recover a large portion of these non-traffic-
sensitive costs through traffic-sensitive, per-minute charges. These 
mandatory recovery rules inflate traffic-sensitive usage charges and 
reduce charges for connection to the network, in essence creating an 
implicit support flow from end users that make many interstate long-
distance calls to end users that make few or no interstate long-
distance calls.
    29. Several Federal-State Joint Boards have observed that 
additional subsidies and distortions may be due, not only to the rate 
structure, but to the separations rules that divide costs between the 
interstate and intrastate jurisdictions. For example, the current 
separations rules require larger incumbent LECs to allocate the costs 
of their switching facilities between the interstate and intrastate 
jurisdictions on the basis of relative use (i.e., if 30 percent of the 
minutes of use handled by the LEC's switching facilities are interstate 
long-distance calls, 30 percent of the LEC's switching costs are 
allocated to the interstate jurisdiction and recovered through 
interstate access charges). Our rules, however, permit smaller 
incumbent LECs to allocate a greater share of their switching costs to 
interstate access services than would result from the relative use 
allocator. These smaller incumbent LECs multiply the interstate use 
ratio by a factor (as high as 3) specified in the separations rules. In 
its Recommended Decision, the Joint Board on Universal Service observed 
that these separations rules ``shift what would otherwise be intrastate 
costs to the interstate jurisdiction,'' thereby allowing such LECs to 
charge lower prices for intrastate services. 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 Joint 
Board found that this allocation structure, known as DEM (dial 
equipment minute) weighting, is ``an implicit support mechanism that is 
recovered through the switched access rates charged to interexchange 
carriers by those carriers serving less than 50,000 lines.'' Joint 
Board Recommended Decision. Similarly, in the Marketing Expense 
Recommended Decision, another Federal-State Joint Board observed that 
the separations rules allocate a share of the incumbent LECs' retail 
marketing expenses to the interstate jurisdiction that is unreasonably 
high, given that the interstate access services consist primarily of 
wholesale service offerings. Amendment of Part 67 (New Part 36) of the 
Commission's Rules and Establishment of a Federal-State Joint Board, CC 
Docket No. 86-297, Recommended Decision and Order, 52 FR 15355 (April 
28, 1987) (Marketing Expense Recommended Decision). To the extent these 
and other separation rules do not apportion costs between the 
jurisdictions in a manner that reflects the costs incurred to provide 
service in each jurisdiction, they might be viewed as generating 
subsidies from the interstate to the intrastate jurisdiction. These 
subsidies effectively require incumbent LECs to charge higher rates for 
interstate services and lower rates for intrastate services than would 
otherwise occur if the subsidies were eliminated.
    30. This ``patchwork quilt of implicit and explicit subsidies'' 
generates inefficient and undesirable economic behavior. For example, a 
rate structure that requires the use of per-minute access charges where 
flat-rated fees would be more appropriate increases the per-minute 
rates paid by IXCs and long-distance consumers, thus artificially 
suppressing demand for interstate long-distance services. Similarly, 
the possible overallocation of costs to the interstate jurisdiction 
may, for some consumers, increase long-distance rates substantially, 
suppressing their demand for interstate interexchange services. 
Implicit subsidies also have a disruptive effect on competition, 
impeding the efficient development of competition in both the local and 
long-distance markets. For example, where rates are significantly above 
cost, consumers may choose to bypass the incumbent LEC's switched 
access network, even if the LEC is the most efficient provider. 
Conversely, where rates are subsidized (as in the case of consumers in 
high-cost areas), rates will be set too low and an otherwise efficient 
provider would have no incentive to enter the market. In either case, 
the total cost of telecommunications services will not be as low as it 
would otherwise be in a competitive market. Because of the growing 
importance of the telecommunications industry to the economy as a 
whole, this inefficient system of access charges retards job creation 
and economic growth in the nation.
    31. Despite the existence of distortions and inefficiencies, the 
current system of cross-subsidies has persisted for over a decade. The 
structure has been justified on policy grounds, principally as a means 
to serve universal service goals. By providing incumbent LECs with a 
stream of subsidized revenues from certain customers, the system allows 
regulators to demand below-cost rates for other customers, such as 
those in high-cost areas.
3. The Telecommunications Act of 1996
    32. The existing system of implicit subsidies and support flows is 
sustainable only in a monopoly environment in which incumbent LECs are 
guaranteed an opportunity to earn returns from certain services and 
customers that are sufficient to support the high cost of providing 
other services to other customers. The new competitive environment 
envisioned by the 1996 Act threatens to undermine this structure over 
the long run. The 1996 Act removes barriers to entry in

[[Page 31874]]

the local market, generating competitive pressures that make it 
difficult for incumbent LECs to maintain access charges above economic 
cost. For example, by giving competitors the right to lease an 
incumbent LEC's unbundled network elements at cost, Congress provided 
IXCs an alternative avenue to connect to and share the local network. 
Thus, where existing rules require an incumbent LEC to set access 
charges above cost for a high-volume user, a competing provider of 
exchange access services entering into a market can lease unbundled 
network elements at cost, or construct new facilities, to circumvent 
the access charge. In Section VI.A of this Order, we conclude that 
access charges may not be assessed on unbundled network elements since 
they are not part of the ``cost'' of providing those elements, as 
defined in 47 U.S.C. sec. 252(d)(1)(A)(i). In this way, a new entrant 
might target an incumbent LEC's high-volume access customers, for whom 
access charges are now set at levels significantly above economic cost. 
As competition develops, incumbent LECs may be forced to lower their 
access charges or lose market share, in either case jeopardizing the 
source of revenue that, in the past, has permitted the incumbent LEC to 
offer service to other customers, particularly those in high-cost 
areas, at below-cost prices. Incumbent LECs have for some time been 
claiming that this process has already made more than trivial inroads 
on their high-volume customer base.
    33. Recognizing the vulnerability of implicit subsidies to 
competition, Congress directed the Commission and the states to take 
the necessary steps to create permanent universal service mechanisms 
that would be secure in a competitive environment. To achieve this end, 
Congress directed the Commission to strive to replace the system of 
implicit subsidies with ``explicit and sufficient'' support mechanisms. 
In calling for explicit mechanisms, Congress did not intend simply to 
require carriers to identify and disclose the implicit subsidies that 
currently exist in the industry. Rather, as we determine in the 
Universal Service Order adopted today, Congress intended to establish 
subsidies that were both ``measurable'' and ``portable''--
``measurable'' in a way that allows competitors to assess the 
profitability of serving subsidized end users; and ``portable'' in a 
way that ensures that competitors who succeed in winning a customer 
also win the corresponding subsidy. A system of portable and measurable 
subsidies will permit carriers to compete for the subsidies associated 
with high-cost or low-income consumers. In the long run, this approach 
may even allow us to set subsidy levels through competitive bidding 
rather than through regulation. By contrast, under the current system 
of implicit subsidies, the only carriers that will serve high-cost 
consumers are those that are required to do so by regulation and that 
are able (because of their protected monopoly positions) to charge 
above-cost rates to other end users.
    34. In the Universal Service Order, we establish ``explicit and 
sufficient'' support mechanisms to assist users in high-cost areas, 
low-income consumers, schools, and health care providers. By creating 
explicit support mechanisms, we establish a system to advance the 
universal service goals of the 1996 Act that is compatible with the 
development of competition in the local exchange and exchange access 
markets. By creating a portable and measurable system of subsidies, we 
utilize the power of the market to serve universal service goals more 
efficiently. That order, in short, guarantees that Congress's universal 
service goals are met in a way that conforms with the pro-competitive 
and deregulatory goals of the 1996 Act.

B. Access Charge Reform

    35. In light of Congress's command to create secure and explicit 
mechanisms to achieve universal service goals, we conclude that 
implicit subsidies embodied in the existing system of interstate access 
charges cannot be indefinitely maintained in their current form. In 
this Order, therefore, we take two steps with respect to the rules 
governing the interstate access charges of price cap incumbent LECs. 
First, we reform the current rate structure to bring it into line with 
cost-causation principles, phasing out significant implicit subsidies. 
Second, we set in place a process to move the baseline rate level 
toward competitive levels. Together with the Universal Service Order, 
these adjustments will promote the public welfare by encouraging 
investment and efficient competition, while establishing a secure 
structure for achieving the universal service goals established by law. 
Further, the process we set in place to achieve these goals avoids the 
destabilizing effects of sudden radical change, facilitating the 
transformation from a regulated to a competitive marketplace. With the 
limited exceptions identified in Section V, the scope of this 
proceeding is limited to price cap incumbent LECs. As we explain in 
that section, the need for access reform is most immediate for these 
carriers, since they are most vulnerable to competition from 
interconnection and the availability of unbundled network elements. 
This proceeding will affect the vast majority of all access lines and 
revenues, because price cap regulation governs more than 90 percent of 
all incumbent LEC access lines. We will initiate a separate proceeding 
later this year to examine the special circumstances of small and rural 
rate-of-return LECs.
1. Rationalizing the Rate Structure
    36. In this Order, we reshape the existing rate structure in order 
to eliminate significant implicit subsidies in the access charge 
system. To achieve that end, we make several modifications to ensure 
that costs are recovered in the same way that they are incurred. In 
general, NTS costs incurred to serve a particular customer should be 
recovered through flat fees, while traffic-sensitive costs should be 
recovered through usage-based rates. The present structure violates 
this basic principle of cost causation by requiring incumbent LECs to 
recover many fixed costs through variable, per-minute access rates. An 
important goal of this Order is to increase the amount of fixed costs 
recovered through flat charges and decrease the amount recovered 
through variable rates.
    37. Common Line Costs. Because the costs of using the incumbent 
LEC's common line (or ``local loop'') do not increase with usage, these 
costs should be recovered through flat, non-traffic-sensitive fees. The 
current rate structure, however, generally allows an incumbent LEC to 
recover no more than a portion of its interstate common line revenues 
through a flat-rated Subscriber Line Charge (SLC), which is capped at 
$3.50 per month for residential and single-line business users, and 
$6.00 per month for multi-line users. The remaining common line 
revenues must be recovered through a per-minute Common Carrier Line 
(CCL) charge assessed on IXCs (which, in turn, may recover these 
charges through their prices to long-distance customers). In order to 
align the rate structure more closely with the manner in which costs 
are incurred, we adjust access rates over time until the common line 
revenues of all price cap LECs are recovered through flat-rated 
charges.
    38. For primary residential and single-line business lines, 
however, we decline to implement this goal by increasing the SLC 
ceiling above its existing $3.50 level as urged by many companies, 
including price cap LECs and IXCs. We do not wish to see increases in 
the price of basic dial tone charged by local exchange carriers to 
their end users for

[[Page 31875]]

fear that such increases might cause some consumers to discontinue 
service, a result that would be contrary to our mandate to ensure 
universal service. We agree with the Joint Board's finding that 
increasing the SLC ceiling may make telecommunications service 
unaffordable for some consumers. Consequently, to the extent that 
common line revenues are not recovered through the customer's SLC, we 
conclude that LECs should recover these revenues through a flat, per-
line charge assessed on the IXC to whom the access line is 
presubscribed--the presubscribed interexchange carrier charge, or PICC. 
Where an end user does not select a presubscribed interexchange 
carrier, we allow an incumbent LEC to collect this charge directly from 
the end user. Further, in order to provide IXCs with the opportunity to 
incorporate these changes into their business plans, we set the PICC 
for primary residential and single-line business lines at not more than 
the existing flat-rated line charges for the first year, and we 
gradually increase the ceiling thereafter until it reaches a level that 
permits full recovery of the common line revenues from flat charges 
assessed to both end users and IXCs. To the extent that the PICC 
ceiling prevents full recovery of average per-line common line revenues 
for primary residential and single-line business lines, the residual 
amount will be recovered through the PICC imposed upon non-primary 
residential and multi-line business lines. As described in Section 
III.A below, as the PICC associated with primary residential and 
single-line business lines increases, the amount of common line 
revenues associated with those lines that is recovered through the PICC 
imposed upon non-primary residential and multi-line business lines will 
fall to zero.
    39. For non-primary residential and multi-line business lines, we 
conclude that affordability concerns do not require us to retain the 
current ceiling on the monthly SLC. Consequently, we raise the SLC 
ceiling for these lines to the level that permits incumbent LECs full 
recovery for their common line revenues, but never more than $3.00 
above the current SLC ceiling for multi-line business lines today, 
adjusted for inflation. The $3.00 increase in the SLC cap for these 
lines is measured on a per-month basis. Almost all subscribers will pay 
SLCs below, and often substantially below, the ceiling. The increase in 
the SLC ceiling for multi-line businesses will be implemented in the 
first year. To ameliorate the impact that a dramatic increase in the 
SLC ceiling might have on residential customers, however, the increase 
for non-primary residential lines will be phased in over time. The data 
indicate that raising the SLC ceiling to this level will permit 
incumbent price cap LECs to recover their average common line revenues 
from 99 percent of their non-primary residential and multi-line 
business lines. For the remaining lines, many of which are located in 
rural areas, the SLC ceiling for non-primary residential and multi-line 
business lines will ensure that end-user charges are not prohibitive or 
significantly above the national average, thereby advancing universal 
service goals of affordability and access. We have also taken account 
of concerns raised by rural carriers and consumers groups that the 
increase in the SLC for non-primary residential lines and multi-lines 
could lead to substantial price increases in rural areas. Consequently, 
we are adopting these changes only for price cap incumbent LECs and 
will review rate structure modifications affecting small, rural 
carriers in a separate proceeding.
    40. In summary, the plan we adopt here phases out significant 
implicit subsidies in the access charge rate structure, while taking 
into account universal service concerns of affordability and access. 
The resulting rate structure is more closely aligned with cost 
principles. Under this plan, most price cap incumbent LECs will recover 
their interstate common line revenues through flat-rated SLCs and 
PICCs.
    41. Switching and Transport Charges. Following the same pricing 
principle that flat charges should recover fixed costs and variable 
charges should recover variable costs, we make several modifications to 
the rate structure for switching and transport services. Among other 
things, we move the cost of line-side ports to the common line and 
require their recovery through flat-rated charges. To the extent 
permitted by the record, we also direct incumbent LECs to reassign 
costs in the Transport Interconnection Charge (TIC) in order to comply 
with principles of cost causation and the D.C. Circuit's recent 
decision in CompTel v. FCC, 87 F.3d 522 (D.C. Cir. 1996).
2. Baseline Rate Level Reductions
    42. The rate structure changes that we implement in this Order 
eliminate some of the distortions that have characterized the access 
charge system for over a decade. These changes, however, are not alone 
sufficient to create a system that accurately reflects the true cost of 
service in all respects. To fulfill Congress's pro-competitive mandate, 
access charges should ultimately reflect rates that would exist in a 
competitive market. We recognize that competitive markets are far 
better than regulatory agencies at allocating resources and services 
efficiently for the maximum benefit of consumers. We conclude, 
consequently, that competition or, in the event that competition fails 
to develop, rates that approximate the prices that a competitive market 
would produce, best serve the public interest.
    43. The rate restructuring we implement in this Order results in 
substantial reductions in the charges for usage-rated interstate access 
services. These reductions move these access charges a long way towards 
their forward-looking cost levels. Furthermore, in addition to these 
rate structure adjustments, we also take several steps in this Order to 
address specific cost misallocations that cause access charges to be 
set above economic costs. For example, we require incumbent LECs to 
make an exogenous cost adjustment to reflect the full amortization of 
certain equal access costs. We also issue a Further Notice of Proposed 
Rulemaking to consider our tentative conclusion that certain General 
Support Facility (GSF) costs should be reallocated to detariffed 
services.
    44. We recognize that the prescriptive measures that we implement 
today represent the first step toward our goal of removing implicit 
universal service subsidies from interstate access charges and moving 
such charges toward economically efficient levels. In the NPRM, we 
identified two separate ways to continue this process in the future--a 
prescriptive approach in which we actively set rates at economic cost 
levels, and a market-based approach that relies on competition itself 
to drive access charges down to forward-looking costs. We conclude in 
this Order, based on our experience in exchange access and other 
telecommunications markets and the record in this proceeding, that a 
market-based approach to reducing interstate access charges will, in 
most cases, better serve the public interest. Although the Commission 
has considerable expertise in regulating telecommunications providers 
and services efficiently for the maximum benefit of consumers, we 
believe that emerging competition will provide a more accurate means of 
identifying implicit subsidies and moving access prices to economically 
sustainable levels. Further, as discussed above, we believe that this 
approach is most consistent with the pro-competitive, deregulatory 
policy contemplated by the 1996 Act. Accordingly, where

[[Page 31876]]

competition is developing, it should be relied upon in the first 
instance to protect consumers and the public interest.
    45. We acknowledge that a market-based approach under this scenario 
may take several years to drive costs to competitive levels. We also 
recognize that several commenters have urged us to move immediately to 
forward-looking rates by prescriptive measures utilizing forward-
looking cost models. We decline to follow that suggestion for several 
reasons. First, as a practical matter, accurate forward-looking cost 
models are not available at the present time to determine the economic 
cost of providing access service. Because of the existence of 
significant joint and common costs, the development of reliable cost 
models may take a year or more to complete. This situation might be 
contrasted with that addressed in our Local Competition Order, where we 
endorsed the use of cost models to estimate the cost of providing 
unbundled network elements. There, we observed that unbundled elements 
have few joint and common costs, so that devising accurate cost models 
for unbundled network elements is more straightforward.
    46. In addition, even assuming that accurate forward-looking cost 
models were available, we are concerned that any attempt to move 
immediately to competitive prices for the remaining services would 
require dramatic cuts in access charges for some carriers. Such an 
action could result in a substantial decrease in revenue for incumbent 
LECs, which could prove highly disruptive to business operations, even 
when new explicit universal support mechanisms are taken into account. 
Moreover, lacking the tools for making accurate prescriptions, 
precipitous action could lead to significant errors in the level of 
access charge reductions necessary to reach competitive levels. That 
would further impede the development of competition in the local 
markets and disrupt existing services. Consequently, we strongly prefer 
to rely on the competitive pressures unleashed by the 1996 Act to make 
the necessary reductions.
    47. To the extent that some commenters contend that the immediate 
elimination of all implicit subsidies is mandated by the 1996 Act, we 
disagree. Neither in the 1996 Act nor its legislative history did 
Congress state that all forms of implicit universal service support 
shall be made explicit by May 8, 1997. To the contrary, Congress stated 
that the conversion of implicit subsidies to explicit support is a goal 
that ``should be'' pursued ``[t]o the extent possible.'' Congress most 
certainly did not state that we must reach that goal by May 8, 1997. 
Rather, it directed that, by that date, we issue rules that ``shall 
include a definition of the services that are supported by Federal 
universal service support mechanisms and a specific timetable for 
implementation.'' Our companion order satisfies that timetable, and 
this Order establishes a process that will eliminate some implicit 
subsidies quickly and more gradually eliminate others.
    48. We are confident that the pro-competitive regime created by the 
Act and implemented in the Local Competition Order and numerous state 
decisions will generate workable competition over the next several 
years in many cases, and we would then expect that access price levels 
to be driven to competitive levels. We also recognize, however, that 
competition may develop at different rates in different places and that 
some services may prove resistant to competition. Where competition has 
not emerged, we reserve the right to adjust rates in the future to 
bring them into line with forward-looking costs. To assist us in that 
effort, we will require price cap LECs to submit forward-looking cost 
studies of their services no later than February 8, 2001, and sooner if 
we determine that competition is not developing sufficiently for the 
market-based approach to work. We anticipate that the tools needed to 
complete these cost studies will be available soon, well before this 
deadline. Indeed, our Universal Service Order requires comparable cost 
models to be ready by 1998. We will then review competitive conditions 
and the submitted cost studies.
    49. As we acknowledged in the NPRM, a market-based approach will 
permit and, indeed, require us progressively to deregulate the access 
charge regime as competition develops. In a subsequent order, we will 
examine specific issues concerning the timing and degrees of pricing 
flexibility. That order will identify the competitive triggers that 
must be met to justify relaxation of specific regulatory constraints. 
We also recognize the need to examine whether incumbent LECs should be 
compensated for any historical costs that they have no reasonable 
opportunity to recover as a result of the transformation from a 
regulated to competitive marketplace. We recognize that this issue may 
raise difficult questions of both law and equity, and we intend to 
respond fully to concerns about historical cost recovery in a 
subsequent order to be issued this year.
    50. Finally, we adopt in this Order our earlier tentative 
conclusion that incumbent LECs may not assess interstate access charges 
on information service providers (ISPs). We find that our existing 
policy promotes the development of the information services industry, 
advances the goals of the 1996 Act, and creates significant benefits 
for the economy and the American people. With respect to second and 
additional residential lines, which are often used by consumers to 
access ISPs, our goal is to move towards price levels and structures 
that reflect underlying costs, and thereby to create a neutral market 
environment in which these lines neither give nor receive subsidies. We 
will address fundamental questions concerning ISP usage of the public 
switched network as part of a broader set of issues under review in a 
related Notice of Inquiry. See Usage of the Public Switched Network by 
Information Service and Internet Access Providers, CC Docket No. 96-
263, Notice of Inquiry, 62 FR 4670 (January 31, 1997).
    51. Section II of this Order provides an overview of the rate 
structure adjustments adopted today. Section III offers detailed 
explanations of these changes, which include adjustments to the rate 
structure for the common line, local switching, transport, SS7, and 
switching, and modifications to the TIC. In Section IV, we adopt a 
market-based approach to reducing access charges and address several 
specific rate level adjustments. In Section V, we determine which of 
the changes adopted in this Order should apply to rate-of-return LECs.
    52. Section VI touches upon several additional issues, including 
the applicability of access charges to unbundled network elements, our 
treatment of terminating access, and ISPs. We also discuss 
modifications that may be needed to reconcile our access charge rules 
with the Universal Service Order released today. In Section VII, we 
issue an FNPRM to seek comment on proposals to alter the current 
allocation of GSF costs and to allow incumbent LECs to impose a PICC on 
special access lines.

II. Summary of Rate Structure Changes and Transitions

    53. In rationalizing the switched access rate structure in this 
Order, our primary goal is to ensure that traffic-sensitive costs are 
recovered through traffic-sensitive charges and NTS costs are recovered 
through flat-rated charges, wherever appropriate. Because many NTS 
costs are currently recovered through per-minute charges, the

[[Page 31877]]

principal effect of our Order is to reduce the amount recovered through 
per-minute interstate access charges and increase the amounts recovered 
through flat-rated charges. We phase in these changes over time to 
ameliorate any disruptions these adjustments might cause end users.

A. Common Line Rate Structure Changes

    54. Because the cost of using the incumbent LEC's common line does 
not increase with usage, the costs should be recovered through flat 
non-traffic-sensitive fees. In this Order we increase the amount of 
common line revenues recovered through flat-rated charges over time 
until incumbent LECs can recover all of their interstate common lines 
revenues through NTS fees.
    55. Primary Residential and Single-Line Business Lines. We agree 
with the Federal-State Joint Board on Universal Service that the SLC 
ceiling for primary residential and single-line business lines should 
not be increased, because a higher SLC could make telecommunications 
service unaffordable for some consumers. To the extent common line 
revenues cannot be recovered through the customer's existing SLC, we 
conclude that LECs should recover these revenues through a flat, per-
line charge (the ``primary interexchange carrier charge'' or ``PICC'') 
assessed, not on the end user, but on the end user's presubscribed 
interexchange carrier. Where an end user does not select a 
presubscribed interexchange carrier, we allow a price cap LEC to 
collect this charge directly from the end user. We set a ceiling on the 
PICC at the level of existing per-line charges for the first year.
    56. In order to give IXCs an opportunity to adjust to the new 
charge, we gradually increase the PICC ceiling over the next several 
years until it reaches a level that permits full recovery of common 
line revenues--plus a portion of ``residual TIC'' revenues. To the 
extent that the ceiling on the primary residential and single-line 
business PICC does not allow for full recovery of these common line 
revenues immediately, the remaining revenues will be recovered through 
a PICC imposed upon non-primary residential and multi-line business 
lines, and through per-minute charges.
    57. As the PICC ceiling for primary residential and single-line 
business lines increases, the amount of common line revenues 
transferred to non-primary residential and multi-line business lines 
will fall to zero. At that point, all common line costs for primary 
residential and single-line business lines will be recovered through 
flat-charges on those lines.
    58. Non-Primary Residential and Multi-Line Business Lines. Because 
affordability concerns are not as significant for these lines, we 
permit a modest increase in the SLC to permit recovery of the price cap 
LEC's average per-line common line revenues, but never to more than 
$3.00 above the SLC ceiling for multi-line business lines today, 
adjusted for inflation. To ameliorate the impact that an increase in 
the SLC might have on residential customers, the increase in the SLC 
ceiling will be phased in for non-primary residential lines over 
several years.
    59. We also establish a flat-rated PICC on non-primary residential 
and multi-line business lines. This PICC will cover common line 
revenues that exceed the ceilings on SLCs and primary residential 
PICCs. It may also recover some residual TIC revenues and certain 
marketing expenses, as discussed below. We set a ceiling on this PICC 
in the first year of $1.50 for non-primary residential lines and $2.75 
for multi-line business lines, and permit those ceilings to increase 
gradually thereafter. We anticipate that the actual PICC imposed upon 
multi-line business lines will, on average, decrease from 1998 to 1999, 
and for every year thereafter, and will fall to less than $1.00 by 
2001.
    60. To the extent that the ceilings on SLCs and PICCs do not allow 
recovery through flat charges of all common line revenues, LECs shall 
be permitted to impose a per-minute CCL charge assessed on originating 
minutes. To the extent that the sum of a LEC's originating local 
switching charge and any residual per-minute CCL, TIC, and marketing 
expense charges exceeds the sum of its originating local switching, 
CCL, and TIC charges on December 31, 1997, the excess shall be 
collected through a per-minute charge on terminating access. We expect 
that this will only apply to a few LECs, and to none beyond 1998. As 
the PICC cap for non-primary residential and multi-line business lines 
increases--and as revenues transferred from primary residential and 
single-line businesses fall to zero--the per-minute CCL charge will 
fall to zero, too. Eventually, we anticipate that most, if not all, 
price cap LECs will be able to recover the full per-line revenues 
associated with non-primary residential and multi-line business lines 
through the SLC, after taking into account the assistance provided 
through the explicit high-cost universal service support mechanisms. In 
addition, residual TIC revenues will also be recovered through the PICC 
on non-primary residential and multi-line business lines. As described 
more fully below, to the extent that the PICC ceilings prevent full 
recovery of the residual TIC, the remaining amount will be recovered 
through a per-minute residual TIC.

B. Other Rate Structure Changes

    61. Switching. The traffic-sensitive costs of local switching will 
continue to be recovered through per-minute local switching charges.
    62. For price cap LECs, the NTS costs associated with line ports 
will no longer be included in the local switching charge, and instead 
will be recovered through the flat-rated common line charges discussed 
above. Price cap LECs will also assess a monthly flat-rated charge 
directly on end users that are subscribing to integrated services 
digital network services, digital subscriber line, or other services 
that have higher line port costs than basic, analog service. This 
charge recovers the amount by which the cost of the line port exceeds 
the cost of a line port for basic, analog service. Costs of local 
switching attributable to trunk ports are moved to a separate service 
category within the traffic-sensitive basket. These costs will be 
recovered through flat-rated monthly charges collected from users of 
dedicated trunk ports and per-minute, traffic-sensitive charges 
assessed on users of shared trunk ports. The new rate structure also 
includes an optional call set-up charge.
    63. Transport. Effective July 1, 1998, the unitary rate structure 
option for tandem-switched transmission is eliminated and the costs of 
tandem-switched transmission must be recovered through the existing 
three-part rate structure. For price cap LECs, a new flat-rated monthly 
charge recovers the NTS costs of tandem switching attributable to 
dedicated ports. A new per-minute rate element recovers the costs of 
multiplexers used between tandem switch DS-1 port interfaces and the 
DS-3 circuits used to transport traffic from tandem to end offices. For 
all incumbent LECs, the formula used to compute the tandem-switched 
transport rate is based on actual usage of the circuit, rather than an 
assumed 9000 minutes of use per month.
    64. For all incumbent LECs, certain costs currently recovered 
through the TIC are reassigned to specified facilities charges, 
including tandem-switching rates. For price cap LECs, those costs of 
the TIC that remain (the ``residual TIC'') are recovered through the 
PICC. To the extent that the PICC ceiling prevents recovery of the 
entire residual TIC

[[Page 31878]]

through the flat-rated PICC, the remaining portion will be collected 
through a per-minute residual TIC. As the ceilings on the PICCs 
increase, a larger percentage of the residual TIC will be recovered 
through the PICC. Beginning in July 1997, price cap reductions will be 
targeted to the per-minute residual TIC until it is eliminated. We 
expect that the per-minute TIC charge will be eliminated in two to 
three years. Residual per-minute TICs shall be assessed only on 
incumbent LEC transport customers, and therefore shall no longer be 
assessed on competitive access providers (CAPs) that interconnect with 
the LEC switched network at the end office.
    65. SS7 Signalling. Price cap LECs may, but are not required to, 
adopt a rate structure for SS7 signalling that unbundles SS7 signalling 
functions, as was permitted in the Ameritech SS7 Waiver Order. 
Ameritech Operating Companies Petition for Waiver of Part 69 of the 
Commission's Rules to Establish Unbundled Rate Elements for SS7 
Signalling, Order, DA 96-446 (1996) (Ameritech SS7 Waiver Order).
    66. Retail Marketing Expense. Price cap LECs may no longer recover 
certain marketing expenses through per-minute access charges assessed 
on IXCs. These expenses are recovered from end users through per-line 
charges on second and additional residential lines and multi-line 
business lines, subject to ceilings on SLCs. Any residual shall be 
recovered through the PICCs on these lines and then through per-minute 
charges on originating access, subject to the exception described in 
Section III.A, below.

III. Rate Structure Modifications

A. Common Line

1. Overview
    67. In the 1983 MTS and WATS Market Structure Third Report and 
Order, the Commission established a comprehensive mechanism for 
incumbent LECs to recover the costs associated with their provision of 
access service required to complete interstate and foreign 
telecommunications. The access plan distinguished between traffic 
sensitive costs and NTS costs incurred by an incumbent LEC to provide 
interstate access service An incumbent LEC's NTS costs of providing 
interstate access, or costs that do not vary with the amount of usage, 
include the common line, or ``local loop,'' which connects an end 
user's home or business to a LEC central office.
    68. In the MTS and WATS Market Structure Third Report and Order, 
the Commission emphasized that its long range goal was to have 
incumbent LECs recover a large share of the NTS common line costs from 
end users instead of carriers, and to recover these costs on a flat-
rated, rather than on a usage-sensitive, basis. The Commission 
recognized, however, that a sudden increase in the flat rates imposed 
by LECs on end users could have a detrimental effect on universal 
service. For this reason, the rules adopted in 1983 apportioned charges 
for common line costs between a monthly flat-rated end-user SLC and a 
per-minute CCL charge assessed to the IXCs. The SLC is based on average 
interstate-allocated common line costs, which the incumbent LEC may 
average over an entire region or over a study area, depending on how it 
files its interstate tariff. These charges currently are the lesser of 
the per-line average common line costs allocated to the interstate 
jurisdiction or $3.50 per month for residential and single-line 
business users, and $6.00 per month for multi-line business users. Any 
remaining common line revenues permitted under our price cap rules are 
recovered by incumbent price cap LECs through per-minute CCL charges 
assessed on the IXCs, and are ultimately recovered by IXCs from end-
users through long distance toll charges.
    69. Because common line and other NTS costs do not increase with 
each additional minute of use transmitted over the loop, the current 
per-minute CCL charge that recovers loop costs represents an 
economically inefficient cost-recovery mechanism and implicit subsidy. 
A rate structure that recovers NTS costs through per-minute charges 
creates an incentive for customers to underutilize the loop by 
requiring them to pay usage rates that significantly exceed the 
incremental cost of using the loop. Additionally, a rate structure that 
forces high-volume customers to pay significantly more than the cost of 
the facilities used to service them is not sustainable in a competitive 
environment because high-volume customers can migrate to a competitive 
LEC able to offer an efficient combination of flat and per-minute 
charges, even if the competitive LEC has the same or higher costs than 
the incumbent LEC.
    70. The Federal-State Universal Service Joint Board stated, in its 
Recommended Decision, that primary residential and single-line business 
lines are essential to the provision of universal service, and that 
current rates for local services are generally affordable based on 
subscribership levels. The Joint Board also concluded that the SLC, as 
a charge assessed directly on local telephone subscribers, has an 
impact on universal service concerns such as affordability, and 
recommended that the Commission leave the current SLC ceilings in place 
for primary residential and single-line business lines. In our 
companion Universal Service Order, consistent with that recommendation, 
we conclude that we should not raise the current $3.50 SLC ceiling on 
primary residential and single-line business lines.
    71. We adjust the SLC ceilings for multi-line business lines and 
residential lines beyond the primary connection. Adjusting the SLC 
ceilings for multi-line business lines and non-primary residential 
lines will permit incumbent LECs to recover directly from end users 
more of the common line revenues permitted under our price cap rules 
for those lines and will reduce the amount of NTS costs related to 
these lines that are currently recovered through CCL charges. Where the 
SLC ceilings do not allow the incumbent LEC to recover its price cap 
common line revenues through end-user charges, the remaining, or 
``residual'' amount will be recovered through flat, per-line charges 
assessed to each customer's presubscribed interexchange carrier. This 
presubscribed interexchange carrier charge, or ``PICC'', will increase 
gradually until the incumbent price cap LECs'' full interstate-
allocated common line revenues permitted under our price cap rules are 
recovered through a combination of flat-rated SLCs and PICCs. To the 
extent that the flat-rated charges do not recover, during the initial 
phase, the full interstate-allocated common line revenues permitted 
under our price cap rules, incumbent LECs may continue to assess the 
IXCs a per-minute CCL charge based on the costs not recovered through 
flat-rated charges. This per-minute charge, however, will be generally 
much lower than today's CCL charge and will be eliminated once all 
common line revenues are recovered through a combination of SLCs and 
PICCs.
2. Subscriber Line Charge
a. Background
    72. In the NPRM we proposed to increase the ceiling on the SLC for 
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. Access Charge Reform Notice of 
Proposed Rulemaking in CC Docket No. 96-262, Price Cap Performance 
Review for Local Exchange Carriers and Transport Rate Structure

[[Page 31879]]

and Pricing, Third Report and Order, in CC Docket Nos. 94-1 and 91-213 
(Price Cap Third Report and Order), and Usage of the Public Switched 
Network by Information Service and Internet Access Providers, Notice of 
Inquiry in CC Docket No. 96-263, 62 FR 4670 (December 24, 1996) (NPRM) 
Alternatively, we proposed to eliminate the ceiling 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 competition. We sought comment on these 
proposals. We also invited parties to comment on whether any changes 
that we adopt to the ceiling on SLCs for incumbent price cap LECs 
should be extended to incumbent rate-of-return LECs, and on the 
relationship of any such changes to the Joint Board Recommended 
Decision. We sought comment on whether to establish a transition 
mechanism for this increase if the ceilings on SLCs for multi-line 
business lines and residential lines beyond the primary connection are 
increased and whether such a transition could be implemented consistent 
with section 254, the Act's universal service provision. We sought 
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.
b. Discussion
    73. The Commission has had the longstanding goal of ensuring that 
all consumers have affordable access to telecommunications services. In 
its Recommended Decision, the Joint Board stated that current rates for 
local telephone services are generally affordable and that the SLC, as 
a charge assessed directly on local telephone subscribers, has an 
impact on universal service concerns such as affordability. The Joint 
Board further recommended that the Commission maintain the current SLC 
ceilings for primary residential and single-line business lines, and we 
adopt that recommendation in our companion Universal Service Order. 
Numerous parties in this proceeding argue that we should raise or 
eliminate the SLC ceiling on all lines to permit LECs to recover the 
full interstate allocated costs of the local loop from end-users. This 
would increase the average SLC for all residential and single-line 
business lines from $3.50 per month to $6.10 per month. We conclude 
that it would be inappropriate to make significant changes to the SLC 
cap for primary residential and single-line business lines. Primary 
residential and single-line business lines are central to the provision 
of universal service. Because of concerns about affordability, and in 
light of the significant changes that are still underway in this 
proceeding, in the federal universal service support proceeding, and 
possible future changes to the separations process, we conclude that 
the current SLC for these lines should not be raised. Consistent with 
the Joint Board's recommendation and our conclusion in the Universal 
Service Order, therefore, the ceiling on the SLC for primary 
residential and single-line business lines will remain at $3.50 or the 
permitted price cap common line revenues per line, whichever is less.
    74. With regard to multi-line users, the Joint Board suggested in 
its Recommended Decision that universal service support should not be 
extended to non-primary residential lines and multi-line business lines 
because it found that cost of service is unlikely to be a factor that 
would cause multi-line users not to subscribe to telephone service. 
Subsequently, the state members of the Joint Board filed a report with 
the Commission in which they proposed that we retain high cost support 
for all lines served in high cost study areas during a transition to a 
forward-looking cost methodology. Consistent with that proposal, we 
adopt, in our Universal Service Order, a modified version of the 
existing high-cost support system and continue support for all 
residential and business connections in areas currently receiving high 
cost support until at least January 1, 1999. We therefore continue to 
provide high cost support for non-primary residential and multi-line 
business lines at this time, by allocating a lower portion of these 
costs to the intrastate jurisdiction than would otherwise be the case. 
In that order, we also express our concern, however, that providing 
universal service support for non-primary residential and multi-line 
business lines in high-cost areas may be inconsistent with our long-
term universal service goals, and that overly expansive universal 
service support mechanisms potentially could harm all consumers by 
increasing the expense of telecommunications services for all. We state 
that we will continue to evaluate the Joint Board's recommendation to 
limit universal service support to primary residential connections and 
businesses with single connections.
    75. We conclude here that it is necessary to adjust the ceilings on 
the interstate SLCs on both non-primary residential and multi-line 
business lines in order to create a rate structure that supports our 
long-term universal service goals, is pro-competitive, and is 
sustainable in a competitive local exchange market. Section 254 of the 
Act requires that all consumers have access to basic telephone service 
at just, reasonable, and affordable rates that are comparable among 
different regions of the nation. This section of the Act also requires 
that universal service support be achieved through support mechanisms 
that are ``specific, predictable, and sufficient.'' Because universal 
service concerns about ensuring affordable access to basic telephone 
services are not as great for non-primary residential and multi-line 
business lines as they are for primary residential and single-line 
business lines, we must take action to remove the implicit subsidies 
contained in our current interstate access charges. Thus, we are 
adopting a rate structure that will permit LECs to recover greater 
amounts of their costs on a flat-rated basis from end users and to 
reduce the amount of revenues they must recover through per-minute 
access charges. Our initial implementation improves upon the current 
rate structure because it reduces subsidies by recovering more costs 
from the cost causer. It also creates a rate structure that is more 
pro-competitive than the existing one by providing for greater flat-
rated recovery of NTS costs. Without these modifications, new entrants, 
which are not subject to the non-cost-causative rate structure 
requirements, would be in a position to target the incumbent LECs' most 
profitable, high-volume customers based on regulatory requirements. A 
loss of profitable customers would increase the incumbent LECs' costs 
of providing service to the rest of their customers, especially to 
those in high-cost areas. Consistent with our universal service goal of 
ensuring that all consumers receive affordable rates that are 
comparable in different parts of the nation, however, the SLC 
adjustments will be subject to ceilings to prevent end-user customers 
in high-cost areas from paying SLCs that are significantly higher than 
in other parts of the country.
    76. In virtually all cases, current SLC ceilings do not permit 
incumbent LECs to recover their average per-line interstate-allocated 
common line costs. As a result of the existing SLC ceilings, which have 
been in place for the past decade, incumbent LECs must recover the 
shortfall through usage-sensitive CCL charges assessed on IXCs. The 
IXCs in turn recover most or all of these costs from toll users in the 
form of per-minute

[[Page 31880]]

charges, keeping toll rates artificially high and discouraging demand 
for interstate long distance services. The high per-minute toll charges 
also create support flows between different classes of customers. For 
example, because end-user customers vary widely in their use of 
interstate long distance services, low-volume toll users do not pay the 
full cost of their loops while high-volume toll users contribute far 
more than the total cost of their loops. In addition high-volume toll 
users, who include significant numbers of low-income customers, 
effectively support non-primary residential and multi-line business 
customers.
    77. In order to create a rate structure that supports our long-term 
universal service goals, is pro-competitive, and is sustainable in a 
competitive market, we modify our rate structure requirements to permit 
incumbent LECs to recover costs in a manner that more accurately 
reflects the way those costs are incurred. Because common line costs do 
not vary with usage, these costs should be recovered on a flat-rated 
instead of on a per-minute basis. In addition, these costs should be 
assigned, where possible, to those customers who benefit from the 
services provided by the local loop. Accordingly, the SLC ceilings for 
non-primary residential and multi-line business lines will be adjusted 
generally to a level that permits incumbent LECs to recover, directly 
from the end user, their average per-line interstate common line 
revenues.
    78. For multi-line business lines, the SLC will be adjusted to 
recover the average per-line interstate-allocated common line costs 
beginning July 1, 1997. To the extent incumbent price cap LECs, mostly 
in rural areas, have common line costs that significantly exceed the 
national average, we establish a ceiling on SLCs for multi-line 
business lines of $9.00, adjusted annually for inflation. To ameliorate 
any possible adverse impact of adjustments in SLC ceilings for non-
primary residential lines, we adopt an approach that will gradually 
phase in adjustments in the SLC ceilings for these lines. The SLC for 
non-primary residential lines will be adjusted initially beginning 
January 1, 1998. For the first year, beginning January 1, 1998, the SLC 
ceiling for non-primary residential lines will be adjusted to the 
incumbent LEC's average per-line interstate-allocated costs, but may 
not exceed $1.50 more than the current SLC ceiling. Beginning January 
1, 1999, the monthly SLC ceiling for these lines will be adjusted for 
inflation and will increase annually by $1.00 per-line, until the SLC 
ceiling for non-primary residential lines is equal to the ceiling 
permitted for multi-line business lines.
    79. The data indicate that the long term ceilings we are 
establishing will permit incumbent price cap LECs to recover their 
average per-line common line revenues from 99 percent of their non-
primary residential and multi-line business lines. For the few 
incumbent price cap LECs that have common line costs in certain study 
areas that exceed the ceiling, the ceiling will serve as an economic 
safeguard for those customers who would otherwise pay significantly 
higher SLCs. We conclude that maintaining a ceiling for non-primary 
residential and multi-line business customers in high-cost areas is a 
reasonable response to a legitimate universal service concern because, 
consistent with section 254(b)(3), it ensures that these customers have 
access to telecommunication services at rates that are comparable to 
rates charged for similar services in urban areas.
    80. We believe that the approach we adopt should prevent widespread 
discontinuance of lines by multi-line customers. The record indicates 
that nationwide, the average interstate allocation of common line costs 
is only $6.10 per line, and that for more than half of multi-line 
business lines, the interstate common line costs are below the existing 
$6.00 ceiling. Therefore, when the SLC ceiling is adjusted July 1, 
1997, more than half of multi-line business lines will see no immediate 
increase in their SLC. The $5.00 SLC ceiling for non-primary 
residential lines for the first year is a net increase of $1.50 per 
month, and the gradual increase, if any, in subsequent years, is 
designed to allow these customers time to adjust to the new rate 
structure. Moreover, we expect the rate structure modifications we 
adopt in this order to benefit the majority of multi-line customers 
through reductions in per-minute long distance rates. Thus, for many 
customers, the access restructuring will lead to an overall reduction 
in their telephone bill. We also note that, because we are adjusting 
the SLC on non-primary residential lines only to a level that recovers 
the average interstate allocated costs attributable to the line, to the 
extent that a customer chooses not to purchase an additional line 
because of the SLC increase, it is because the benefits of the second 
line to that customer are less than the average cost of the line.
    81. Many parties contend that adjusting the SLC ceiling for non-
primary residential lines and multi-line business lines will affect 
economic development in rural areas. To respond to this concern, with 
the limited exception of cost allocation to new elements, discussed in 
Section V, below, we are limiting application of the rate structure 
modifications we adopt in this Order to incumbent price cap LECs only. 
Most consumers in rural areas are served by small rate-of-return LECs 
that are not affected by the SLC adjustment we are adopting. We will 
review rate structure modifications affecting small, rural carriers in 
a separate proceeding when we address access charge reform for those 
carriers. To the extent there are incumbent price cap LECs that serve 
high-cost areas of the country and have common line costs that exceed 
the national average, we are maintaining a ceiling on the SLCs for 
these lines to ensure that subscribers do not pay rates that greatly 
exceed the national average.
    82. We are not persuaded by arguments that an upward adjustment to 
a SLC ceiling that was set over a decade ago, and that has never been 
adjusted for inflation, would violate section 254(b)'s requirement that 
consumers in all regions of the nation have affordable access to 
telecommunications and information services at rates that are 
reasonably comparable to those services provided in urban areas. The 
data indicate that if the SLC ceilings for business and residential 
lines had been adjusted annually for inflation since they became 
effective in 1984 and 1989, respectively, the $6.00 business SLC 
ceiling would have increased by 1996 to $9.00 per line, and the $3.50 
residential and single-line business SLC ceiling would have increased 
to $4.39 per line. Thus, for multi-line business customers, the SLC 
ceiling we adopt today is not significantly different from what it 
would have been, if it had been adjusted for inflation annually. 
Moreover, to adopt a ceiling lower than $9.00 would effectively create 
an additional impermissible subsidy for a class of customers not 
enumerated by Congress in section 254 of the 1996 Act as beneficiaries 
of fundamental universal service goals. We find that the $9.00 ceiling 
we adopt today strikes a reasonable balance between our desire to 
establish a more efficient interstate access charge rate structure 
consistent with our long-term universal service goals in a competitive 
local exchange environment, and the need to avoid precipitous rate 
increases to consumers in high cost areas. Although SLCs in some areas 
may ultimately be lower than SLCs in high-cost areas, we conclude that 
$9.00 SLCs remain ``reasonably comparable'' to those in urban areas.
    83. We are also not persuaded that we should maintain the current 
SLC ceiling

[[Page 31881]]

for non-primary residential lines because of claims that incumbent LECs 
will be unable to identify second lines for purposes of billing 
different SLCs to these lines. Additional telephone lines are a well-
established telecommunications product marketed by LECs. This product 
is supported by a marketing and billing infrastructure that will enable 
LECs to distinguish non-primary residential lines for purposes of 
billing different SLCs. We note that we are not defining ``primary'' or 
``non-primary'' lines in this Order. In a further notice of proposed 
rulemaking in the Universal Service proceeding, we will address this 
issue, and release an order defining ``primary''and ``non-primary'' 
residential lines by the end of the year.
    84. We are unpersuaded by arguments that we should forgo these 
changes on the grounds that increasing the SLC ceilings for non-primary 
residential lines will create undue incentives for subscribers to order 
their primary lines from the incumbent LEC and their additional lines 
from competitors. The changes we adopt in this Order are intended to 
permit incumbent LECs to move their prices for non-primary residential 
and multi-line business lines toward more economically efficient levels 
by substantially reducing implicit subsidies flowing between different 
classes of customers. Once these subsidies are eliminated and the new 
universal service regime is fully implemented, incumbent LECs will be 
able to recover their common line costs from customers through a rate 
structure that accurately reflects the manner in which these costs are 
incurred, and through a targeted, portable universal service 
contribution where necessary. At that point, both incumbent LECs and 
new entrants should be able to compete efficiently in the local 
exchange market. Subscribers, therefore, should not have an incentive 
to use other carriers for their additional lines unless a competitor is 
operating more efficiently and can offer local exchange service at a 
lower rate than the incumbent LEC is able to offer. Indeed, the ability 
of a competitive local exchange carrier to offer local exchange service 
at a lower rate is precisely the type of competition envisioned by the 
1996 Act: it will encourage the incumbent LEC to reduce its costs of 
providing service in order to meet or beat the prices of its 
competition.
    85. To address the concerns of some commenters that charging a 
higher SLC for second and additional residential lines will encourage 
subscribers to order their additional line from competitors, we will 
permit LECs to charge competitors the higher SLC when the competitor 
provides a customer with a second line through resale of an incumbent 
LEC offering. If prior to the development of full competition, we find 
that disparity between SLC charges on primary and additional 
residential lines becomes a significant problem, we will reexamine this 
issue in conjunction with further reforms we adopt in an upcoming 
order.
    86. Certain incumbent LECs have requested that any rule that 
increases the SLC ceiling for non-primary residential lines should be 
optional for LECs. We adopt this proposal in part and will not require 
LECs to charge a higher SLC for non-primary residential lines. Thus, if 
an incumbent LEC finds that charging higher SLCs leads to a large 
number of disconnections, it is free to charge less. To the extent 
price cap LECs choose to charge a SLC that is less than the maximum 
allowed, however, they may not recover these foregone revenues through 
the PICC or CCL charges. This restriction is consistent with our 
current price cap rules, which prevent LECs from transferring SLC costs 
to the CCL charge.
    87. Several incumbent price cap LECs argue in favor of deaveraging 
SLCs, stating that an averaged SLC creates cross-subsidies between 
high-cost and low-cost areas, in violation of section 254 of the Act. 
We will resolve this issue, along with issues concerning the timing and 
degrees of geographic deaveraging, pricing flexibility, and ultimate 
deregulation in an upcoming order.
3. Carrier Common Line Charge
a. Background
    88. Because we are retaining the $3.50 ceiling on SLCs for primary 
residential and single-line business customers, virtually all price cap 
LECs will be unable to recover, through the SLC, all of their common 
line revenues permitted under our price cap rules. In the NPRM, we 
sought comment on possible revisions to the current CCL charge 
structure that would allow incumbent price cap LECs to recover these 
NTS common line costs in a way that reflects the way costs are 
incurred. We proposed a recovery mechanism suggested by the Joint Board 
in its Recommended Decision that would permit incumbent LECs to recover 
common line costs not recovered from SLCs through a flat, per-line 
charge assessed against each end-user's presubscribed interexchange 
carrier. The Joint Board suggested that the Commission allow incumbent 
LECs to collect the flat-rated charge directly from end users who have 
not selected a primary interexchange carrier (``PIC''). We sought 
comments on this approach and also invited parties to discuss any 
potential problems 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.
    89. We also sought comment on several alternative approaches to the 
per-minute recovery of interstate NTS loop costs proposed by the 
Competition Policy Institute (CPI), including a ``bulk billing'' method 
that would assess a charge against the IXC based upon its percentage 
share of interstate minutes of use or revenues, a ``capacity charge,'' 
a ``trunk port charge,'' and a ``trunk port and line port'' charge. We 
invited 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 on the relationship of 
interstate NTS loop cost recovery to the universal service mechanisms 
proposed in the Joint Board Recommended Decision. We asked parties to 
address how such an extension to rate-of-return LECs would affect small 
business entities, especially small incumbent LECs.
    90. Additionally, we asked parties to address whether an 
alternative mechanism for recovering common line costs currently 
recovered through the CCL charge would be necessary if we were to 
eliminate the SLC ceiling for certain lines. We asked interested 
parties to address the extent to which any proposed alternative 
recovery mechanism for recovering common line costs currently recovered 
through the CCL charge would affect small business entities, including 
small incumbent price cap LECs and new entrants. We also sought comment 
on whether section 254(g) precludes an IXC from charging its customers 
the flat, per-line monthly rate assessed on that line if the amount of 
that charge varied among customers in different areas within a state or 
among customers in different states, and if so, whether conditions 
exist sufficient to require us to forbear from the application of 
section 254(g) to IXC recovery of flat-rate CCL charges.
b. Discussion
    91. The $3.50 SLC ceiling for primary residential and single-line 
business customers prevents most incumbent price cap LECs from 
recovering, through end-user charges, all of the common line revenues 
permitted under our price cap rules. To the extent that common line 
revenues are not recovered through

[[Page 31882]]

SLCs, incumbent LECs will be allowed to recover these revenues through 
a PICC, a flat, per-line charge assessed on the end-user's 
presubscribed interexchange carrier.
    92. We adopt the Joint Board's recommendation that incumbent LECs 
may collect directly, from any customer who does not select a 
presubscribed carrier, the PICC that could otherwise be assessed 
against the presubscribed interexchange carrier. Assessing the PICC 
directly against end users that do not presubscribe to a long distance 
carrier should eliminate the incentive for customers to access long-
distance services solely through ``dial-around'' carriers in order to 
avoid paying long-distance rates that reflect the PICC. Several parties 
argue that this type of billing arrangement will create administrative 
difficulties because it will require LECs to prorate charges for both 
the end user and the IXC when a customer leaves an IXC in the middle of 
the billing cycle. To avoid any potential administrative difficulties 
resulting from customers leaving their presubscribed interexchange 
carriers in the middle of a billing cycle, we will permit LECs to 
assess the full PICC at the beginning of each billing cycle.
    93. We recognize that this flat, per-line PICC will not prevent 
customers from ``dialing around'' their presubscribed long distance 
carrier to obtain interstate service. Collecting a PICC from a 
customer, however, in and of itself, creates no incentive for a 
customer to presubscribe to one carrier and use ``dial-around'' service 
of another. If the presubscribed carrier is an efficient competitor, it 
should be able to offer usage-based rates comparable to the prices of a 
competitor, thus eliminating any artificial benefits of ``dial-around'' 
capability. A combination of lower per-minute long distance rates and 
attractive long-distance pricing packages that reward customers for 
increasing their usage of the presubscribed interexchange carrier's 
services should also help deter customers from using separate long-
distance carriers for various services solely because of regulation. 
There is customer contact value in being a customer's presubscribed 
interexchange carrier. Regulators have long concluded that the 
convenience of making a long-distance call by simply dialing ``1+'' 
conveys certain advantages. And the advantages of ``1+'' dialing will 
only increase if, as many predict, we move to a world in which ``one-
stop shopping'' for a multiplicity of services becomes the primary 
paradigm for provision of telecommunication services. We conclude that 
the record does not support a finding that assessing a charge on the 
presubscribed carrier will artificially encourage ``dial-around'' 
traffic to such a degree that we should not adopt access charge 
modifications that will move substantially toward efficient pricing for 
common line elements and lower usage charges for long-distance service. 
If evidence appears to us that our rules do substantially contribute to 
undue use of ``dial-around'' capabilities to circumvent presubscribed 
interexchange services, we stand ready to revisit this issue at a later 
time.
    94. The rate structure we are adopting calls for the single-line 
PICC ultimately to recover the difference between revenues collected 
through the SLC and the per-line common line revenues for primary 
residential lines and single-line business lines permitted under our 
price cap rules. In order to provide incumbent LECs and IXCs with 
adequate time to adjust to this rate structure change, we cap the PICC 
for primary residential and single-line business lines at $0.53 per 
month for the first year, beginning January 1, 1998, and establish 
ceilings on increases thereafter. We note that the monthly $0.53 PICC 
is approximately equal to the current presubscribed per-line charges 
that are assessed to IXCs for the Universal Service Fund and Lifeline 
Assistance plan, which are being eliminated in our Universal Service 
Order. Beginning January 1, 1999, the ceiling on the monthly PICC on 
primary residential and single-line business lines will be adjusted for 
inflation and will increase by $0.50 per year until the sum of the SLC 
plus the flat-rated PICC is equal to the price cap LEC's permitted 
common line revenues per line. In no event shall the sum of the single-
line SLC and PICC exceed the sum of the maximum allowable multi-line 
SLC and multi-line PICC.
    95. Sprint asserts that if LECs recover NTS common line costs 
through deaveraged rates assessed on IXCs, we must forbear from 
applying section 254(g) to the extent it requires an IXC to average 
geographically any flat charges an IXC passes on to its customers. 
WorldCom asserts that IXCs should be permitted to recover their costs 
in any manner the market will allow, and that unless the Commission 
forbears with respect to the application of section 254(g) to these 
costs, IXCs that operate nationally will be forced to average together 
numerous subscribers' loop costs, and thus use long-distance rates as a 
vehicle for cross-subsidies that run counter to the overall policies of 
section 254 (b) and (c). We conclude that the information in the record 
before us does not demonstrate that we are required, by section 10(a) 
of the Act, to forbear from enforcing section 254(g) as it relates to 
the manner in which IXCs recover their costs.
    96. Section 10(a) of the 1934 Act requires the Commission to 
forbear from applying any regulation or provision of the Communications 
Act of 1934 if: (1) enforcement of that provision is unnecessary to 
ensure that the relevant charges and practices are just and reasonable 
and not unjustly or unreasonably discriminatory; (2) enforcement of 
that provision is unnecessary to protect consumers; and (3) forbearance 
from applying such provision or regulation is consistent with the 
public interest. We conclude that, on the basis of the current record, 
IXCs have not demonstrated that forbearance of section 254(g) is 
warranted at this time.
    97. We find that establishing a broad exception to section 254(g) 
to permit IXCs to pass through flat-rated charges on a deaveraged basis 
may create a substantial risk that many subscribers in rural and high-
cost areas may be charged significantly more than subscribers in other 
areas. Accordingly, we cannot conclude that enforcing our rate 
averaging requirement is unnecessary to ensure that charges are just 
and reasonable. In addition, because assessing subscribers flat-rated 
charges on a deaveraged basis could lead to significantly higher rates 
for subscribers in high-cost areas, we find no basis in this record to 
conclude that it is unnecessary to enforce section 254(g) to ensure 
protection of consumers or to protect the public interest. In contrast, 
IXCs cite no countervailing public interest considerations but merely 
make broad, unsupported assertions of the need to deaverage rates in 
light of the varying PICC amounts expected to be assessed by incumbent 
LECs. We also note that IXCs now pay access charges that often vary 
from location to location and from incumbent LEC to incumbent LEC, and 
still maintain geographically averaged rates. We therefore conclude 
that, based on the record before us, the IXCs have not met the test set 
forth in section 10(a) of the Act, and forbearance of section 254(g) is 
not warranted.
    98. We note that we will continue to examine the issue of whether 
conditions exist that require us to forbear from application of section 
254(g) as it relates to recovery of the PICC costs from subscribers. We 
will resolve this and other specific issues concerning the timing and 
degrees of pricing flexibility and ultimate deregulation in an upcoming 
order.
    99. To the extent that the SLC ceilings on all lines and the PICC 
ceilings on

[[Page 31883]]

primary residential and single-line business lines prevent recovery of 
the full common line revenues permitted by our price cap rules, 
incumbent price cap LECs may recover the shortfall through a flat-
rated, per-line PICC on non-primary residential and multi-line business 
lines. The incumbent LECs will calculate this additional charge by 
dividing residual permitted common line revenues by the number of non-
primary residential and multi-line business lines served by the LEC. 
For the first year, the ceiling on the PICC will be $1.50 per month for 
non-primary residential lines and $2.75 per month for multi-line 
business lines. To the extent that these PICCs do not recover an 
incumbent LEC's remaining permitted CCL revenues, incumbent LECs will 
be allowed to recover any such residual common line revenues through 
per-minute CCL charges assessed on originating access minutes. The per-
minute charges shall be calculated based on forecasts of originating 
access minutes as currently provided in our rules.
    100. We generally will not permit incumbent LECs to recover 
residual common line revenues through per-minute CCL charges assessed 
on terminating access minutes, because terminating minutes are not 
likely to be subject to as much competitive pressure as originating 
access minutes. As discussed in Section III.D, below, we are similarly 
adopting a rule that requires that incumbent LECs be allowed to recover 
certain residual transport interconnection charge costs through access 
charges assessed on originating minutes. In placing these various 
residual costs on originating minutes only, however, we do not want to 
destroy the salutary effects of our access charge reforms by creating 
higher prices for originating minutes than exist under our current 
access charge rules. To the extent, therefore, that the sum of local 
switching charges, the per-minute CCL charge, the per-minute residual 
TIC, and any per-minute charges related to marketing expenses exceed 
the current sum of local switching charges and the per-minute CCL 
charge and TIC assessed on originating minutes, the excess may be 
recovered through charges assessed on terminating minutes. We emphasize 
that any such amounts recovered through charges assessed on terminating 
minutes would be temporary and would be phased out as the non-primary 
residential SLC ceilings and the PICC ceilings are adjusted, and in any 
event, no later than July 1, 2000.
    101. Beginning January 1, 1999, the PICC will be adjusted for 
inflation and will increase by a maximum of $1.00 per year for non-
primary residential lines and $1.50 per year for multi-line business 
lines, until incumbent LECs recover all their permitted common line 
revenues through a combination of flat-rated SLC and PICCs. These 
increases will cease as the PICCs on primary residential and single-
line business lines recover more of the common line revenues permitted 
under price cap rules. In addition, as the incumbent price cap LECs 
increase their PICCs for primary residential and single-line business 
lines, they shall reduce the amount recovered from the residual per-
minute CCL charges and reduce their PICCs on non-primary residential 
and multi-line business lines by a corresponding amount in accordance 
with the procedures described below. While the plan we adopt today does 
not eliminate, even on a flat-rated basis, transitional higher rates 
for business users, it redistributes collection from a very few high-
volume users to business users generally. This will permit the charges 
to be sustainable while we finish refining access charges and implement 
a forward-looking cost-based universal service mechanism for rural, 
insular, and high cost areas. We also acknowledge that our plan will 
require customers with multiple telephone lines to contribute, for a 
limited period, to the recovery of common line costs that incumbent 
LECs incur to serve single-line customers. We conclude that this aspect 
of the plan is a reasonable measure to avoid an adverse impact on 
residential customers.
    102. As the PICC ceilings on primary residential and single-line 
business lines increase, the residual per-minute CCL charge will 
decrease until it is eliminated. After the residual per-minute CCL is 
eliminated, incumbent LECs shall make further reductions due to the 
increase in the PICC ceilings for primary residential and single-line 
business lines, first to the PICCs on multi-line business lines until 
the flat-rated PICCs for those lines are equal to the flat-rated PICCs 
for non-primary residential lines. Thereafter, incumbent LECs shall 
apply the annual reductions to both classes of customers equally until 
the combined SLC and PICCs for primary residential and single-line 
business lines recover the full average per-line common line revenues 
permitted under our price cap rules, and the additional flat-rated 
PICCs on non-primary residential and multi-line business lines no 
longer recover common line revenues. As discussed in Sections III.D and 
IV.D, below, the PICC will recover TIC revenues and certain marketing 
expenses in addition to common line revenues. Therefore, multi-line 
PICCs may continue to recover non-common line revenues, even though 
SLCs and PICCs for primary residential and single-line business lines 
recover the average per-line common line revenues permitted under our 
price cap rules. If the incumbent LEC's per-line common line revenues 
permitted by our price cap rules exceed the SLC ceiling for non-primary 
residential lines and multi-line businesses, the flat-rated charges 
will continue to apply to those lines so that the sum of the SLCs and 
flat-rated charges is equal to the permitted common line revenues. Once 
the multi-line PICC no longer recovers any common line revenues, the 
calculation of the SLC will be changed from the average per-line 
interstate allocation of revenue requirement to the average per-line 
common line revenues permitted by our current price cap rules. With 
this change, the LEC will not be able to recover more than the average 
per-line common line revenues permitted under our price cap rules from 
any access line. We note that at least one party contends that under 
our current rules, certain price cap carriers could be required to 
charge negative carrier common line charges, if the revenues recovered 
through the SLC, which continues to be developed on a cost-of-service 
basis, exceed the PCI for the common line basket. This adjustment to 
the calculation of the SLC will solve any such problem.
    103. We are concerned that assessing PICCs on multi-line business 
lines may create an artificial and undue incentive for some multi-line 
customers to convert from switched access to special access to avoid 
the multi-line PICC charges. A migration of multi-line customers to 
special access could significantly reduce the amount of revenue that 
could be recovered through per-minute charges, and would result in 
higher PICCs for the non-primary residential and multi-line business 
lines remaining on the switched network. We tentatively conclude that 
we should therefore apply PICCs to purchasers of special access lines 
as well. The NPRM, however, may not have provided sufficient notice to 
interested parties that we might apply certain rate structure 
modifications to special access lines. We therefore seek comment on 
this issue in Section VII.A, below.
    104. We reject claims that a flat-rated, per-line recovery 
mechanism assessed on IXCs would be inconsistent with section 254(b) 
which requires ``equitable and nondiscriminatory contribution to 
universal service'' by all

[[Page 31884]]

telecommunications providers. The PICC is not a universal service 
mechanism, but rather a flat-rated charge that recovers local loop 
costs in a cost-causative manner. Numerous commenters responding to the 
NPRM support a flat-rated cost recovery mechanism, and we conclude that 
the PICC is preferable to the other proposals made in the NPRM. We 
agree with MCI and the Minnesota Independent Coalition that proposals 
based on the number of trunks or ports that an IXC purchases from the 
incumbent LEC may encourage IXCs to use fewer trunks or ports than are 
needed and thereby have an adverse effect on service quality. We 
decline to adopt the bulk billing approach set out in the NPRM, as well 
as Ameritech's proposed Loop/Port Recovery charge and the approach 
proposed by the Competition Policy Institute, because these mechanisms 
are substantially affected by usage and do not reflect the NTS manner 
in which common line costs are incurred. The Alliance for Public 
Technology's proposed ``facilities charge,'' which is a hybrid system 
that accounts both for level of use and intensity of use by all 
telecommunication carriers that use the local network, is flawed 
because it is based partly on usage and is complex and administratively 
burdensome. A cost-recovery mechanism that recovers common line costs 
through flat-rated charges imposed on end-user customers and IXCs is an 
administratively simple mechanism. Further, under our plan, interstate 
common line access charges will become more closely aligned with 
allocated interstate costs than they would be under any of the 
alternative proposals.
    105. The plan we describe above should move us from the pricing 
scheme that has been in place for more than a decade to a flat-rated 
pricing scheme that seeks to promote competition, while balancing 
universal service considerations. We recognize that the modifications 
we adopt in this Order do not eliminate all the existing support flows. 
The modifications, however, do move to eliminate subsidies built into 
the current rate structure, to an extent that is compatible with 
preserving the universal service goals of providing support to primary 
residential and single-line business and to customers in high-cost 
areas pursuant to the mandate of section 254. As we set final support 
levels for universal service, address any legal issues related to the 
transition from embedded to forward-looking economic costs, and factor 
in the development of competition, we will identify and deal with any 
remaining legal issues relating to the recovery of these revenues. In 
addition, the plan we are adopting allows incumbent price cap LECs to 
recover costs in the manner that reflects the way in which they are 
incurred. We believe that this realignment of rates with costs will 
reduce the per-minute access charges assessed on IXCs and benefit 
consumers through lower long-distance rates, as well as create a pro-
competitive local exchange market in which LECs will be able to compete 
more efficiently.
4. Common Line PCI Formula
a. Background
    106. When we adopted price cap regulation in 1990, we established a 
separate common line basket in order to balance the price cap goal of 
economically efficient prices with important goals, such as universal 
service, that were reflected in common line rates prior to the adoption 
of price caps. Because common line costs are non-traffic sensitive, 
growth in demand leads to a reduction in average per-minute common line 
charges. Therefore, in the LEC Price Cap Order, we established a price 
cap index (``PCI'') formula for the price cap basket that differed from 
the PCI formula we established for the other three baskets, to ensure 
that carrier common line charges declined as common line demand 
increased. Policy and Rules Concerning Rates for Dominant Carriers, CC 
Docket No. 87-313, Second Report and Order, 55 FR 42375 (October 19, 
1990) (LEC Price Cap Order). Specifically, we added a term, ``g/2,'' to 
the common line PCI formula, to represent half the growth in demand per 
line in the prior year. This adjustment was made because we originally 
concluded that both LECs and IXCs have the ability to influence common 
line growth, and that both LECs and IXCs should benefit from increases 
in demand.
    107. In the LEC Price Cap Performance Review, we found that 
incumbent LECs in fact have little influence over per-minute common 
line demand, and tentatively concluded that we should remove the ``g'' 
term from the common line formula, because including an industry-wide 
moving average X-Factor in the common line formula might tend to 
double-count demand growth. 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 sought 
comment, in the Price Cap Fourth Further NPRM, whether to apply the 
same PCI formula to the common line basket that we use for the other 
baskets if we were to adopt a TFP-based X-Factor. Price Cap Performance 
Review for Local Exchange Carriers, CC Docket No. 94-1, Further Notice 
of Proposed Rulemaking, 60 FR 52362 (October 6, 1995) (Price Cap Fourth 
Further NPRM). We also invited comment on whether we could eliminate g/
2 from the common line formula if we retain a separate common line 
formula. In this Order, we adopt a plan that should quickly convert the 
CCL charge from a per-minute charge to a flat-rated per-line charge 
assessed on interexchange carriers. We also revise the common line 
formula to reflect the phase out of the CCL charge.
b. Discussion
    108. We conclude that the separate common line PCI formula should 
be eliminated, and that the PCI formula for the traffic-sensitive and 
trunking baskets should be used for the common line basket, once 
traffic-sensitive CCL charges have been eliminated. In this Order, we 
have reduced substantially traffic-sensitive CCL charges, and replaced 
them with the per-line PICC. The remaining traffic-sensitive CCL 
charges imposed by incumbent price cap LECs will be reduced and then 
eliminated over the next two or three years. Once common line costs are 
recovered solely through per-line charges, increased minutes will not 
affect common line recovery. Therefore, when the traffic-sensitive CCL 
charges have been eliminated, it will no longer be necessary to ensure 
that CCL rates decline as per-minute demand increases. Incumbent price 
cap LECs that no longer assess per-minute CCL charges will use the same 
PCI formula for the common line basket as they use for the traffic-
sensitive and trunking baskets.
    109. In the LEC Price Cap Order, we established ``g/2'' as the 
common line PCI formula because we believed that because both LECs and 
IXCs contributed to encouraging common line demand growth, both LECs 
and IXCs should share in the benefits of common line demand growth. In 
the LEC Price Cap Performance Review, we tentatively concluded that 
IXCs contributed more to common line demand growth, but declined to 
revise the common line formula at that time because we were 
contemplating eliminating the common line PCI formula completely, and 
because we did not wish to create unnecessary rate churn. To avoid 
unnecessary rate churn here, we decide to retain ``g/2'' while carriers 
continue to charge per-minute CCL charges.

[[Page 31885]]

    110. We revise sections 61.45(c) and 61.46(d), which govern the 
common line PCI and API, respectively, to reflect our revisions to the 
common line rate structure in the common line PCI formula. First, we 
redesignate section 61.45(c) as 61.45(c)(1) and adopt a new section 
61.45(c)(2) that requires price cap LECs to use the separate common 
line formula only while they continue to charge per-minute CCL charges. 
Section 61.45(c)(2) also states that the common line PCI will be 
governed by the same PCI formula LECs use for the traffic-sensitive and 
trunking baskets. Second, we redesignate section 61.46(d) as 
61.46(d)(1), and amend section 61.46(d)(1) to recognize that LECs now 
impose PICC charges as well as CCL charges on IXCs. We also adopt a new 
section 61.46(d)(2) to govern PICC charges once per-minute CCL charges 
have been phased out. These revisions are set forth in Appendix C of 
this Order.
5. Assessment of SLCs and PICCs on Derived Channels
a. Background
    111. 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 
has not generally requested derived channel service and thus most 
likely is not aware that the LEC is using this technology.
    112. On May 30, 1995, we released a Notice of Proposed Rulemaking 
seeking comment on the application of SLCs to ISDN and other derived 
channel services. End User common Line Charges, CC Docket No. 95-72, 
Notice of Proposed Rulemaking, 60 FR 31274 (June 14, 1995) (ISDN SLC 
NPRM). In the ISDN SLC NPRM, we noted that our current rules, which 
assess one SLC per derived channel, may discourage efficient use of 
ISDN services, and we sought comment on several options, ranging from 
continuation of the current rules applying one SLC to each derived 
channel to requiring LECs to assess one SLC per each pair of copper 
wires or each physical facility. Other options presented in the ISDN 
SLC NPRM included: (1) basing the application of SLCs on a ratio of the 
average LEC cost of providing a derived channel service, including the 
trunk or line card costs, to the average cost of providing an ordinary 
local loop or T-1 facility; (2) applying one SLC for every two derived 
channels; (3) reducing the number of SLCs applied to derived channel 
services while increasing slightly the SLC rates; or (4) giving LECs 
flexibility concerning the number of SLCs they assess for derived 
channel services, at the same time adjusting the price cap rules to 
prevent an increase in CCL charges.
    113. In addition to the comments filed in response to the ISDN SLC 
NPRM, several BOCs provided data on the relative NTS costs of single 
and derived channel services. The cost data included information about 
all NTS cost components, including components located in the central 
office, such as line cards. As shown in Table 1 below, the cost data 
indicates that the ratio of NTS loop costs of BRI ISDN to standard 
analog service is approximately 1 to 1. The ratio of NTS loop costs of 
PRI ISDN to standard analog service, excluding NYNEX's data, is 
approximately 5 to 1. As shown in Table 2, NYNEX's data appear to be 
outliers 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. NYNEX's data, therefore, are excluded from the 
calculation of the average ratio for PRI ISDN to standard analog 
service.

 Table 1.--Ratio of Costs of Standard Analog Service to BRI ISDN Service
------------------------------------------------------------------------
                                           Outside plant                
                                            (loop only)    All NTS 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 2.--Ratio of Costs of Standard Analog Service to PRI ISDN Service                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                           Outside plant (loop       Outside plant (loop only) costs                                  All NTS costs     
                                               only) costs               (excluding NYNEX data)              All NTS costs        (excluding 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.               

[[Page 31886]]

                                                                                                                                                        
Average ratio of costs.................                 * 1:6.5   1:4.95 *............................                * 1:15.13  1:10.5 *.              
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Averages may differ due to rounding.                                                                                                                  

    114. We incorporated by reference, in the current proceeding, all 
pleadings filed in response to the 1995 ISDN SLC NPRM, as listed in 
Appendix A of that order. In the NPRM for the current proceeding, we 
invited comments on the effect of the 1996 Act on determining how many 
SLCs should be applied to ISDN services. We also sought comment on 
whether mandatory rate structures or rate caps should be prescribed for 
ISDN service or other derived channel services.
b. Discussion
    115. Consistent with the goal of this Order of realigning cost 
recovery in a manner that more closely reflects the manner in which 
those costs are incurred, we conclude that we should establish separate 
SLC rates for ISDN service based on the NTS loop costs of BRI and PRI 
ISDN service. We agree with the majority of commenters that a SLC for 
ISDN service equal to a SLC for single-channel analog service 
multiplied by the number of derived channels exceeds the NTS costs of 
ISDN service and therefore artificially discourages efficient use of 
ISDN. We find that basing ISDN SLCs on relative costs is most likely to 
assign costs of ISDN service to customers who subscribe to, and benefit 
from, that service. Further, we find that the current SLC-per-derived 
channel rule requires LECs to assess charges that are not related to 
the NTS costs of the service provided.
    116. As set out above, the record indicates that the NTS loop costs 
of PRI ISDN service, excluding switching costs, reflect a cost ratio of 
approximately 5:1 compared to the NTS loop costs of single-channel 
analog service. We therefore conclude that we should amend our rules to 
establish, effective July 1, 1997, a SLC rate for PRI ISDN service 
equal to five times the incumbent LEC's average per-line interstate-
allocated common line costs, subject to a ceiling of five times $9.00, 
adjusted annually for inflation. Similarly, the record shows that the 
NTS loop costs of BRI ISDN service, excluding NTS switching costs, when 
rounded to the nearest half SLC, reflect a 1:1 cost ratio relative to 
the NTS loop costs of single-channel analog service. Therefore, we here 
amend our rules to provide for a SLC rate for BRI ISDN service equal to 
the incumbent LEC's average per-line interstate-allocated common line 
costs, subject to the same ceilings otherwise applicable to non-primary 
residential lines. Thus, beginning January 1, 1998, the SLC ceiling for 
BRI ISDN service will be set at the lesser of the incumbent LEC's 
average per-line interstate-allocated costs, or $5.00. Each subsequent 
year, beginning January 1, 1999, the SLC ceiling will be adjusted for 
inflation and increased by $1.00 per line, until the ceiling equals 
that permitted for multi-line business lines.
    117. The cost data submitted by the BOCs in response to our request 
for information includes information about all NTS cost components, 
including components located in the central office, such as line cards 
and trunk cards. The data confirm that line cards and trunk cards for 
PRI ISDN service in particular constitute a significant portion of the 
total NTS costs that are dedicated to the provision of service to the 
subscriber, and that ISDN line cards and trunk cards are many times 
more expensive than the cards used for standard analog service. As 
discussed in Section III.B, below, LECs will be required to recover the 
difference between the cost of an ISDN line card and the cost of a line 
card used for basic, analog service through a separate charge assessed 
directly on ISDN end users. For purposes of determining the rate levels 
for ISDN SLCs, therefore, we considered only the NTS loop costs 
associated with providing ISDN service.
    118. As with other non-primary residential and multi-line business 
lines, incumbent price cap LECs may assess flat-rated PICCs on ISDN 
service to the extent necessary to recover the shortfall of common line 
revenues caused by SLC ceilings. Incumbent price cap LECs are permitted 
to assess one PICC for BRI ISDN service and five PICCs for PRI ISDN 
service. It is necessary for incumbent LECs to be able to assess up to 
five PICCs on PRI ISDN service because, as discussed above, the record 
indicates that the NTS loop costs of providing PRI ISDN service, 
excluding switching costs, reflect a cost ratio of approximately 5:1 
compared to NTS loop costs of single-channel analog service. Because 
the PICC recovers NTS common line costs not recovered through the SLC, 
prohibiting incumbent LECs from charging as many as five PICCs for PRI 
ISDN service could prevent them from recovering the common line costs 
associated with providing PRI ISDN service in cases where the common 
line costs exceed the SLC ceiling.
    119. Incumbent LECs shall assess PICCs on BRI and PRI ISDN services 
in conjunction with those on the non-primary residential and multi-line 
business lines. For the first year, the BRI ISDN PICC will be capped at 
$1.50 per month, and the PRI ISDN PICC will be capped at $2.75 per 
month. Each subsequent year these two PICCs shall increase by no more 
than an inflation adjustment, plus $1.00 and $1.50, respectively.
    120. The record does not contain sufficient information to enable 
us to determine the relative NTS costs of derived channel services 
other than ISDN. We therefore limit our decision to BRI and PRI ISDN 
service. We agree with NYNEX that we should not apply the rules we 
adopt here regarding SLCs when the LEC uses derived channel technology 
but the end user has not requested derived channel service. Unless a 
subscriber orders ISDN or another service that requires derived channel 
technology, we see no reason to vary from our general rule that the 
incumbent LEC should charge one SLC for each channel regardless of how 
it is provisioned.
    121. We are not persuaded by PacTel's argument that ISDN service is 
not an interstate service and should not, therefore, be regulated by 
the Commission. ISDN lines are not directly assigned to the intrastate 
jurisdiction, but are treated as common lines. The Commission's 
jurisdiction thus includes the interstate-allocated portion of the 
costs of the ISDN lines. The rules we adopt in this order govern only 
the manner in which LECs recover the

[[Page 31887]]

interstate-allocated common line costs associated with providing ISDN 
service.
    122. Before the Commission initiated CC Docket No. 95-72, Bell 
Atlantic, Pacific Bell, GTE, Cincinnati Bell, U S West, and Bellsouth 
sought waivers of Section 69.104 of the Commission's rules as it 
applies to ISDN service. In their petitions, these LECs urged the 
Commission to amend its rules regarding the application of SLCs to ISDN 
service. We have amended our rules regarding the application of SLCs to 
ISDN service. We therefore dismiss the waiver petitions of Bell 
Atlantic, Pacific Bell, GTE, Cincinnati Bell, U S West, and Bellsouth 
on the grounds that they are moot.

B. Local Switching

1. Non-Traffic Sensitive Charges
a. Background
    123. The local switch connects subscriber lines both with other 
local subscriber lines and with interoffice dedicated and common 
trunks. A local switch consists of (1) an analog or digital switching 
system; and (2) line and trunk cards, which connect subscriber lines 
and interoffice trunks, respectively, to the switch. Because all of 
this equipment is deployed within the central office, all of its costs 
are assigned to the central office switching accounts of the 
Commission's Uniform System of Accounts and to the local switching 
category of central office expenses for jurisdictional separations 
purposes. 47 CFR Secs. 32.2001(j), 36.125. The interstate portion of 
these costs is currently recovered through per-minute local switching 
charges levied on IXCs. 47 CFR Sec. 69.106.
    124. In the NPRM, we observed that a significant portion of local 
switching costs may not vary with usage. For example, the cost of line 
cards or line-side ports appears to vary with the number of loops 
connected to the switch, not with the level of traffic over the loops. 
We tentatively concluded that LECs should not recover these costs 
through per-minute charges. Instead, we tentatively concluded that it 
is more reasonable and economically efficient to recover costs of 
equipment dedicated to individual customers, such as line-side ports 
and trunk ports associated with dedicated transport, through flat-rated 
charges. Trunk-side ports not associated with dedicated transport and 
the central processing portion of the switch, on the other hand, are 
shared among multiple carriers. We asked if these costs are driven by 
usage or by the number of lines and trunks served by the switch. We 
sought comment on whether rate structures for shared local switching 
facilities should consist of usage-sensitive, flat-rated, or a 
combination of both flat-rated and usage-sensitive rate elements. We 
asked commenters to recommend methods of identifying non-traffic-
sensitive (NTS) local switching costs.
b. Discussion
    125. We conclude that, consistent with principles of cost-causation 
and economic efficiency, NTS costs associated with local switching 
should be recovered on a flat-rated, rather than usage sensitive, 
basis. The record before us indicates clearly that the costs of the 
line side port (including the line card, protector, and main 
distribution frame) are NTS. We conclude, therefore, that these costs 
should be recovered through flat-rated charges. Accordingly, for price-
cap LECs, we reassign all line-side port costs from the Local Switching 
rate element to the Common Line rate elements. For price cap companies, 
these costs will be recovered through the common line rate elements, 
including the SLC and flat-rated PICC, described above.
    126. LECs incur differing costs for line ports used in the 
provision of different services. The SLC and PICC cost recovery 
mechanisms will recover only the cost of a line port used to provide 
basic, analog service, whether the end user has basic, analog service, 
or another form of service. As discussed above, data submitted in 
response to the ISDN SLC NPRM show that ISDN line cards cost 
significantly more than line cards associated with a basic, analog, 
subscriber line. To the extent that the costs of ISDN line ports, and 
line ports associated with other services, exceed the costs of a port 
used for basic, analog service, price cap LECs will recover this excess 
amount through a separate end-user charge.
    127. We conclude that the costs of a dedicated trunk port 
(including the trunk card and DS1/voice-grade multiplexers, if needed) 
should be recovered on a flat-rated basis because these costs are also 
NTS in nature. These costs should be recovered from the carrier 
purchasing the dedicated trunk terminated by that port. Similarly, we 
conclude that the costs of shared trunk ports should be recovered on a 
per-minute of use basis from the users of common transport trunks. We 
therefore establish two separate rate elements for recovery of these 
costs. Price cap LECs may recover the costs of each dedicated trunk 
port on a flat-rated basis from the purchaser of the dedicated trunk 
terminating at the port. In order to ensure that these purchasers of 
dedicated trunks do not pay the costs of shared trunk ports that they 
do not use, price cap LECs must also establish a usage-sensitive rate 
element for recovery of the costs of shared trunk ports. The costs of 
these shared trunk ports will be recovered on a per minute-of-use basis 
from users of common transport trunks terminating at these ports. We 
therefore add a separate category for all trunk port costs within the 
traffic sensitive basket, 47 CFR Sec. 61.42(e)(1). As with the other 
categories within this basket, the ``trunk ports'' category will have 
an upper service band index of +5 percent and no lower service band 
index.
    128. We do not establish a fixed percentage of local switching 
costs that incumbent LECs must reassign to the Common Line basket or 
newly created Trunk Cards and Ports service category as NTS costs. In 
light of the widely varying estimates in the record, we conclude that 
the NTS portion of local switching costs likely varies among LEC 
switches. Accordingly, we require each price cap LEC to conduct a cost 
study to determine the geographically-averaged portion of local 
switching costs that is attributable to the line-side ports, as defined 
above, and to dedicated trunk side ports. These amounts, including cost 
support, should be reflected in the access charge elements filed in the 
LEC's access tariff effective January 1, 1998. Once established, this 
service category, like all others in the traffic sensitive basket, 
shall be subject to price cap adjustments for inflation and 
productivity. Although some LECs have obtained authority to 
geographically deaverage transport rates under a zone density pricing 
plan, because the costs of trunk ports will remain within the Traffic 
Sensitive basket, we conclude that trunk port costs should remain 
geographically averaged for now. We will consider deaveraging of these 
costs in connection with our assessment of other forms of pricing 
flexibility in a subsequent Order in this proceeding.
    129. We direct all price cap LECs to include in their tariff 
filings implementing this Order an exogenous downward adjustment to the 
Traffic Sensitive basket, 47 CFR Sec. 61.42(d)(2), and corresponding 
exogenous upward adjustment to the Common Line Interstate Access 
Elements basket, 47 CFR Sec. 61.42(d)(1) to reflect the recovery of the 
interstate NTS costs of line-side ports from the Common Line rate 
elements.
    130. USTA, SNET, and BA/NYNEX argue that we should not codify any 
specific local switching rate elements. We disagree. In the NPRM, we 
proposed to eliminate local switching rate

[[Page 31888]]

elements only when an actual competitive presence is established for an 
exchange access service in a relevant geographic area, as measured by 
(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 
tentatively concluded in the NPRM that, in the absence of actual 
competition, the mere availability of unbundled network elements under 
efficient rate structures would not provide incumbent LECs with 
sufficient incentive to adopt efficient, cost-causative access rate 
elements or structures. The record before us indicates that flat-rated 
pricing for line ports and dedicated trunk ports is efficient, and 
reflective of cost causation. We will first amend the baseline switched 
access rate structure to reflect this determination. Then, in a 
subsequent Report and Order in this docket, we will determine when and 
under what circumstances we will allow incumbent LECs greater 
flexibility in designing interstate access rate structures.
    131. In addition, despite arguments from BA/NYNEX to the contrary, 
we find that the benefits to be gained from a more efficient, cost-
causative rate structure outweigh the burden of establishing these 
flat-rate elements. Independent estimates from Cable & Wireless and 
USTA, both using NYNEX data, indicate that as much as, or even more 
than, half of local switching costs may be NTS. Since the current, per-
minute rate structure for the local switch was established, digital 
switches have become increasingly predominant in the network. Given 
USTA's estimate that six percent of the costs of an analog switch and 
51 percent of the costs of a digital switch are NTS, we find that local 
switching costs have become increasingly NTS and now warrant the 
creation of a NTS recovery mechanism. Including NTS local switching 
costs in per-minute access charges contributes significantly toward 
unnecessarily high per-minute long distance rates for all customers. 
Restructuring rates to reflect more accurately cost-causation will 
promote competition, reduce per-minute charges, stimulate long-distance 
usage, and improve the overall efficiency of the rate structure.
    132. We also reject proposals to recover the entire NTS portion of 
local switching costs from the new universal service support 
mechanisms. In the Universal Service Order, we agreed with the Joint 
Board that we should establish a ``nationwide benchmark based on 
average revenues per line for local, discretionary, interstate and 
intrastate access services, and other telecommunications revenues that 
will be used with either a cost model or a cost study to determine the 
level of support carriers will receive for lines in a particular 
geographic area.'' We find that it would be inconsistent with the Joint 
Board's recommendation if we were to mandate recovery of NTS local 
switching costs directly from universal service support mechanisms, 
independent of the revenue benchmark, and the percentage of high cost 
support recoverable from the federal universal service mechanisms at 
this time.
    133. In allocating costs between the intrastate and interstate 
jurisdictions, the Commission consults with the states through the 
operation of the Joint Board on Separations. See 47 U.S.C. sec. 410(c); 
Amendment of Part 67 of the Commission's Rules and Establishment of a 
Joint Board, CC Docket No. 80-286, Notice of Proposed Rulemaking and 
Order Establishing a Joint Board, 45 FR 41459 (June 19, 1980). It is 
not necessary to await action by the Joint Board on Separations before 
revising the recovery mechanisms applicable to the interstate portion 
of the costs attributed to line ports and dedicated trunk ports. Our 
revision of the mechanisms used to recover the interstate portion of 
the costs in Part 32 local switching accounts that the jurisdictional 
separations process allocates to the interstate jurisdiction will have 
no direct effect on that allocation because these costs will continue 
to be separated in Part 36 based on relative dial-equipment-minutes of 
use. The fact that local switching costs are apportioned between 
jurisdictions based on a relative interstate and state usage is 
irrelevant to the choice of pricing structure for recovering those 
costs, however. Economic efficiency does not require the jurisdictional 
separation of NTS costs be based on an NTS (flat) factor. The 
jurisdictional separations process only determines whether the billed 
charges (flat or variable) are characterized as intrastate or 
interstate. Economic efficiency does require that NTS costs, regardless 
of how they are separated, be recovered in each jurisdiction through 
flat charges. Thus, there was no loss of economic efficiency when the 
Commission, agreeing with the recommendation of the Joint Board, 
simplified the separation of local switching by eliminating the former 
distinction between NTS and traffic-sensitive costs and creating a 
single switching category that is assigned to the jurisdictions based 
on dial equipment minutes. MTS and WATS Market Structure, CC Docket No. 
78-72, Report and Order, 52 FR 17228 (May 6, 1987).
    134. On the other hand, economic efficiency will be increased if 
local switching costs (regardless of the jurisdiction to which they are 
assigned) are recovered through a combination of flat charges for NTS 
costs and traffic sensitive charges for the remainder. Because, at the 
time that the Commission established the current jurisdictional 
separations process, it did not consider the distinction between the 
switch and the port that we address today, the current jurisdictional 
separations process does not distinguish port costs from the costs of 
the local switch itself. 47 CFR 36.125(b). We have the authority and 
obligation, independent from the Joint Board, to establish appropriate 
rate structures for recovering the costs the jurisdictional separations 
process allocates to the interstate jurisdiction. E.g., 47 U.S.C. secs. 
151, 152, 154(i-j). We take steps today to address the fact that the 
costs of line ports and dedicated trunk ports are more properly 
recovered for Part 69 purposes from the Common Line and Direct-Trunked 
Transport rate elements as NTS charges, instead of from the traffic 
sensitive Local Switching element. We will, however, examine any 
jurisdictional separations issues presented by NTS switching costs in 
our upcoming separations Notice of Proposed Rulemaking.
    135. Costs may vary for shared local switching facilities according 
to the number of lines connected, or the traffic over those lines. In 
the former case, the costs of the shared facility may be recovered in 
the most cost-causative manner by imposing a proportionate share of the 
costs on each line while, in the latter case, usage-sensitive charges 
may better reflect cost causation. With respect to such shared local 
switching facilities, including the switching matrix and shared trunk 
ports, we gave states flexibility in our interconnection proceeding to 
establish either per-minute usage charges, or flat-rated charges, as 
appropriate. Local Competition Order. In the access context, however, 
we will continue to require price cap incumbent LECs to recover the 
costs of shared local switching facilities, including the central 
processor, switching matrix, and shared trunk ports, on a per-minute 
basis. On the basis of the information in the record before us, it 
would be difficult to identify the NTS and traffic-sensitive portions 
of the costs of shared switching facilities and to verify the accuracy 
of LEC studies attempting to do so. Therefore, until we gain more

[[Page 31889]]

experience with rate structures for unbundled network elements that are 
implemented pursuant to Sections 251 and 252 and that segregate these 
costs into traffic-sensitive and NTS components, we will continue to 
adhere to the current, per-minute rate structure for shared switching 
facilities.
2. Traffic Sensitive Charges
    136. In the NPRM, we sought comment on several alternative rate 
structures for recovery of usage-sensitive local switching costs. 
Specifically, we sought comment on whether the Commission should 
require or permit LECs to establish a separate charge for call setup, 
and if so, whether the charge should be levied on all call attempts, or 
only completed calls. We also sought comment on whether the Commission 
should require or permit incumbent LECs to establish peak and off-peak 
pricing structures for shared local switching facilities, and whether 
the existing per-minute rate structure adequately reflects the manner 
in which traffic-sensitive local switching costs are incurred.
a. Call Setup Charges
    137. Among price cap carriers today, most call setup is performed 
with out-of-band signalling, generally using the SS7 signalling 
network. In light of the widely varying estimates of the costs of call 
setup in the record, we conclude that these costs may be more than a de 
minimis portion of the costs of local switching. The record indicates 
that these call setup charges are incurred primarily on a per-call 
rather than a per-minute basis. By requiring recovery the costs of call 
setup on a per-minute basis, our current rate structure mandates an 
implicit subsidy running from customers that make lengthy calls to 
those that make many short-duration calls. Therefore, we find that we 
should not continue to require the price cap LECs to recover costs of 
call setup from per-minute local switching charges.
    138. Accordingly, we will revise Section 69.106 of our rules, 47 
CFR Sec. 69.106, to permit, but not to require, price cap LECs to 
establish a separate per-call setup charge assessed on IXCs for all 
calls handed off to the IXC's point of presence (POP). As noted 
earlier, because an incumbent LEC originating an interstate call incurs 
call setup costs even if the call is not completed at the called 
location, we permit these LECs to recover call setup charges on all 
originating interstate calls that are handed off to the IXC's POP, and 
on all terminating calls that are received from an IXC's POP. With 
respect to originating call attempts, we agree with the California 
Commission that, when the call is handed off to the IXC's POP, the 
incumbent LEC's switches and signalling network have performed their 
functions and the incumbent LEC has incurred the full cost of call 
setup. We also permit incumbent LECs to impose a setup charge for 
terminating calls received from an IXC's POP, whether or not that call 
is completed at the called location, because the incumbent LEC 
signalling network in either case must perform its setup function.
    139. We conclude that the call setup charge should not be mandatory 
because some incumbent LECs may determine that call setup costs either 
are in fact de minimis or are otherwise outweighed by the costs of the 
network and operations support systems (OSS) upgrades necessary to 
install measurement and billing systems. In such cases, it would be 
economically inefficient to mandate a separate call-setup charge 
because the costs of collecting the charge might exceed the revenue 
collected from the charge itself. We are aware that, by making the 
call-setup charge permissive only, we may allow certain incumbent LECs' 
rate structures to continue to subsidize short-duration calls. We 
nevertheless conclude that we should not mandate separate collection of 
a call-setup charge in cases where the LEC determines that the costs of 
eliminating this subsidy exceed the benefits to be gained. In contrast, 
we find that those incumbent LECs that either have or obtain the 
ability to implement a call-setup charge should have the flexibility to 
adopt this cost-causative rate structure.
    140. No party disputes the fact that incumbent LECs incur costs of 
call setup for call attempts, in addition to completed calls. Some 
parties, however, argue that call setup charges should be assessed only 
on completed calls in order to reduce customer confusion. We anticipate 
that consumer confusion will be minimal, however, because the call 
setup charge we permit will be imposed on IXCs, not end users. We find 
it unlikely that IXCs would choose to pass this charge along to their 
customers in the form of a separate charge per call attempt. For 
instance, IXCs today generally charge their customers for completed 
long distance calls even though they incur access charges for many 
uncompleted calls as well.
    141. Other commenters state that setup charges imposed on call 
attempts will result in charges being imposed on a caller that has not 
received service. LCI asserts that ``customers do not expect to pay for 
uncompleted call attempts, and the carriers are not entitled to recover 
their costs of uncompleted call attempts,'' citing the Commission's 
decision in VIA USA, Ltd, 10 FCC Rcd 9540, 9545 (1995). The text cited 
from that order, however, addresses only customer expectations that 
have arisen because our current rules make no explicit provision for 
the recovery of costs of an uncompleted call. We now find that a call 
setup charge, assessed to an IXC, should not be prohibited because a 
rate structure that recovers some switching costs through a per-call 
setup charge on all call attempts is more cost-causative than one 
limited to the recovery of costs only from completed calls.
    142. Still other commenters argue that, if we permit call setup 
charges to be imposed for call attempts, we will, at best, open the 
door to unauditable billing errors or, at worst, facilitate incumbent 
LEC fraud and duplicity. These commenters argue that the incumbent LEC 
will be able to generate additional revenue, or degrade the service of 
IXC competitors, by blocking calls at its own switch. Based on this 
record, we conclude that these concerns are not well-founded. By 
permitting a setup charge only for originating call attempts that are 
handed off to the IXC's POP, we minimize the originating incumbent 
LEC's incentive to engage in this type of activity because the 
incumbent LEC will receive no compensation for calls blocked at its own 
switch. In addition, incumbent LECs have compelling incentives to 
deliver interstate calls to an IXC's POP. As competition develops for 
local service, it appears doubtful that an incumbent LEC would find it 
advantageous to block deliberately interstate calls placed by their end 
user customers. Such practices would encourage entry by new competitors 
and increase the interest of affected end users in finding a more 
reliable service provider. We also find it unlikely that either 
originating or terminating incumbent LECs would intentionally risk the 
collection of often significant per-minute access charge revenues on a 
completed long-distance call in order to collect additional, much 
smaller per-call setup charges. Finally, we know of no significant 
allegations of degraded service quality attributable to the very 
similar current regime, under which incumbent LECs collect at least a 
full minute of originating access revenues on uncompleted calls 
delivered to the IXC's POP. We are prepared, however, to investigate 
claims that an incumbent LEC is blocking calls in an intentional or 
discriminatory manner.
    143. Several large business customers that make substantial numbers 
of short-duration calls, such as those associated

[[Page 31890]]

with credit card authorization, automatic teller machine operation, or 
other transaction-oriented data transfers, argue that imposing a call 
setup charge will be disruptive to their businesses and may force them 
to use alternatives to the public switched network. These commenters 
are the primary beneficiaries of the subsidy that is implicit in the 
current recovery of call setup costs on a per-minute basis, running 
from customers that make lengthy calls to those that make many short-
duration calls. The existing rate structure may well have encouraged 
users who make many short duration calls to use the public-switched 
network in inefficient ways. Rate structures that are aligned with cost 
causation, on the other hand, should encourage economically-efficient 
use of the telecommunications network. Transaction-oriented users of 
the network may be motivated to develop more economically efficient 
processing methods, with resulting economic benefits. Because this 
group of IXC customers may need time to adjust to the new rate 
structure, however, incumbent LECs choosing to impose a per-call setup 
charge on IXCs may do so, at the earliest, in their access tariff 
filings effective July 1, 1998. This gives a customer over one year to 
make any necessary adjustments. This time should be sufficient to 
mitigate any potential disruptive effects of this rate structure 
change.
    144. MCI asserts that there may be costs of call setup in addition 
to those associated with signalling, such as a portion of the switch 
central processor costs. We limit the costs that an incumbent LEC may 
recover through call setup charges, however, to those associated with 
signalling because we agree with MCI that it would be extremely 
difficult to separate the costs of the switch CPU and other traffic-
sensitive costs into per-message and per-minute portions and to verify 
that the allocation has been done properly.
    145. Several commenters caution that, if we permit a call setup 
charge, we should also ensure that the charge does not overlap with any 
SS7-related charges now permitted or developed in this proceeding. 
Because call setup is one function of the SS7 network, some of these 
costs may already be recovered through the current Part 69 SS7 rate 
elements. 47 CFR Sec. 125. Currently, Section 69.125 of our rules 
permits LECs to recover from IXCs only (1) a flat-rated signalling link 
charge for the Dedicated Network Access Line (DNAL); and (2) a flat 
rated Signal Transfer Point (STP) port termination charge. 47 CFR 
Sec. 69.125. While these elements recover the costs of some dedicated 
SS7 facilities, they do not include the usage-based signalling costs of 
call setup, including the costs incurred to switch messages at the 
local STP, to transmit messages between an STP and the incumbent LEC's 
end office or tandem switch, and to process or formulate signal 
information at an end office or tandem switch.
    146. Currently, the setup costs of certain calls may be recovered 
through database query charges, either for the line information 
database (LIDB), 47 CFR Sec. 69.120, or the 800 database, 47 CFR 
Sec. 69.118. In addition, incumbent LECs recover some 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, 47 CFR Sec. 129.
    147. Imposing a call setup charge for interexchange calls should 
not overlap with any of these existing rate elements. Nevertheless, we 
clarify that an incumbent LEC choosing to impose a call setup charge 
may not include in that charge any costs that it continues to recover 
either through other local switching charges, through charges for 
dedicated SS7 facilities, or through other signalling charges. In this 
Order, we also permit incumbent LECs to adopt a more detailed SS7 rate 
structure, modeled on that currently used by Ameritech under waiver. 
Ameritech SS7 Waiver Order. This SS7 rate structure may permit LECs to 
recover a significant portion of their call setup costs without an 
additional call setup charge. Given estimates in the record that SS7 is 
used to provide signalling for more than 95 percent of the large LECs' 
customers, we conclude that, in the ordinary case, a price cap LEC will 
not need to use both the optional SS7 rate structure and a separate 
call setup charge to recover the costs of call setup. We recognize, 
however, that some call setup is still performed using in-band, 
multifrequency (MF) signalling, rather than out-of-band signalling 
systems. Because SS7 charges will not recover costs of call setup using 
MF signalling, we do not prohibit the use of both SS7 and call setup 
charges. We caution LECs adopting both the optional SS7 rate structure 
and an additional call setup charge, however, that cost support filed 
with access tariffs must clearly indicate the allocation of individual 
costs of call setup between these two recovery mechanisms; the same 
costs cannot be double-recovered using both mechanisms.
b. Peak and Off-Peak Pricing
    148. We conclude that we should not now mandate a peak-rate pricing 
structure for local switching. The record reflects significant 
practical difficulties that may make it difficult or impossible to 
establish and enforce a rational, efficient, and fair peak-rate 
structure as a matter of regulation. For example, the record outlines a 
variety of difficulties that incumbent LECs will confront in 
determining peak and off-peak hours with any degree of certainty, based 
on geographic, user-type, service, and other variations. Moreover, peak 
usage periods may shift over time as usage patterns change, and as 
competitors enter the market. Based on these difficulties, some 
incumbent LECs may find it too costly or too difficult to develop, 
implement, and maintain a peak-rate structure that will allow them to 
capture all or most of the benefits this structure could offer.
    149. We do recognize the possible efficiency of a peak-rate 
structure. Local Competition Order. Accordingly, we will consider 
whether LECs should have the flexibility to develop such peak and off-
peak rate structures for local switching on a permissive basis when we 
consider other issues of rate structure flexibility in a subsequent 
Report and Order that we will adopt in this proceeding.

C. Transport

    150. Transport service is the component of interstate switched 
access consisting of transmission between the IXC's point of presence 
(POP) and LEC end offices. Transport Rate Structure and Pricing, CC 
Docket No. 91-213, Third Memorandum Opinion and Order on 
Reconsideration and Supplemental Notice of Proposed Rulemaking, 60 FR 
2068, (January 6, 1995) (Third Transport Reconsideration Order). 
Currently, incumbent LECs offer two basic types of interoffice 
transport services. The first, direct-trunked transport, uses dedicated 
circuits for transport between a LEC end office and the LEC serving 
wire center, or between any other two points the direct-trunked 
transport customer requests. The second, tandem switched transport, 
uses common transport facilities to connect the end office to a tandem 
switch. Common transport circuits may be used to transmit the 
individual calls of many IXCs and even the incumbent LEC itself. 
Transport circuits dedicated to a particular access customer connect 
the tandem switch to the serving wire center. Dedicated entrance 
circuits carry traffic between the IXC POP and the serving wire center, 
whether the IXC uses direct-

[[Page 31891]]

trunked transport or tandem-switched transport.
    151. In the NPRM, we expressed concern that some of our current 
Part 69 rules, see, e.g., 47 CFR Secs. 69.110, 69,111, 69.112, 69.124, 
may require LECs to recover transport costs through rate structures 
that do not reflect accurately the way these costs are incurred. We 
sought comment on possible revisions to many of these rate elements.
1. Entrance Facilities and Direct-Trunked Transport
a. Background
    152. Entrance facilities are dedicated circuits that connect an 
access customer's POP with the LEC's serving wire center. Direct-
trunked transport facilities are dedicated trunks that carry an access 
customer's traffic from the LEC end office to the serving wire center 
without switching at the tandem switch. In the First Transport Order, 
we mandated an interim rate structure under which entrance facilities 
and direct trunked transport are priced on a flat-rated basis, which 
may be distance sensitive. 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); 
see also 47 CFR Sec. 69.110. Initial rate levels for direct-trunked 
transport and entrance facilities were presumed reasonable if they were 
set equal to the rates for corresponding special access service 
components (special access service and special access channel 
termination, respectively). 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). In the NPRM, we tentatively concluded that, 
because direct-trunked transport and entrance facilities appear to be 
dedicated to individual customers, a flat-rated pricing structure 
accurately reflected the way LECs incur the costs of these facilities. 
We sought comment on this tentative conclusion and 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 (CFAs). A channel facility assignment is the actual 
designation of the routing that a circuit takes within the incumbent 
LEC network. This assignment may be made either by an IXC purchasing a 
dedicated circuit, or the incumbent LEC itself. We also sought comment 
on whether any rules in addition to the interim rules are necessary to 
govern rate levels for these services.
b. Discussion
    153. We conclude that both entrance facilities and direct-trunked 
transport services should continue to be priced on a flat-rated basis 
and that charges for these services may be distance-sensitive. In the 
First Transport Order, we found that such a flat charge would 
facilitate competition in the direct-trunked transport market and 
encourage incumbent LECs to make efficient network decisions. For the 
same reasons, and because this pricing structure is reflective of the 
manner in which incumbent LECs incur the costs of provisioning these 
facilities, we confirm that the interim rate structure the Commission 
adopted for these facilities should be made final.
    154. US West and Sprint make a persuasive showing that, as carriers 
expand their use of fiber-optic ring architecture and other modern 
network designs, transport costs should become less distance sensitive 
because LECs may transport a call along any one of many paths to its 
destination based on transient network traffic levels. We conclude, 
however, that we need not amend our Part 69 rules now to reflect the 
decreasing sensitivity of transport costs to distance. Our rules 
permit, but do not mandate, the use of distance sensitive transport 
charges. Therefore, if an incumbent LEC determines that its transport 
costs have become less distance sensitive, it may reduce or eliminate 
the distance-sensitivity of its direct-trunked transport rates. For two 
reasons, we expect that incumbent LECs will adjust their rates to 
reflect any change in the distance sensitivity of transport costs. 
First, as US West states, ring architecture will be most prevalent, and 
therefore, will reduce the distance sensitivity of rates most 
dramatically, in densely populated areas. When an incumbent LEC obtains 
authority to deaverage access rates geographically, therefore, it may 
choose to offer a less distance-sensitive pricing structure in more 
densely populated areas than it does in less densely populated areas. 
Such a structure would properly reflect the reduced distance 
sensitivity of the incumbent LEC's costs in more densely populated 
areas. Second, as competition develops, incumbent LECs will come under 
increasing market pressures to maintain rates that reflect the nature 
of the costs underlying the service. If they choose not to do so, we 
expect that new market entrants will develop competitive service 
offerings at prices more reflective of underlying costs.
    155. We decline Ameritech's request in its comments for immediate 
flexibility to offer new technologies to switched access customers 
without obtaining a Part 69 waiver or passing a public interest test. 
In our Price Cap Performance Review for Local Exchange Carriers, CC 
Docket No. 94-1, Third Report and Order, 62 FR 4657 (January 1, 1997) 
(Price Cap Performance Review Third Report and Order), adopted along 
with the NPRM in this proceeding, we eliminated the need for a Part 69 
waiver for new services, and instead required incumbent LECs to file a 
petition demonstrating that introduction of the new service would be 
consistent with the public interest. Such petitions will give LECs that 
desire to do so the opportunity to make their cases and receive the 
requested flexibility. See 47 CFR Sec. 69.4(g). This procedure 
significantly streamlined the prior waiver process, and we conclude 
that the public interest will not suffer if we do not grant incumbent 
LECs additional immediate flexibility in this area as part of our basic 
rate structure modifications. We will give further consideration to 
Ameritech's request for additional flexibility to offer new 
technologies to switched access customers as part of our assessment of 
other aspects of pricing flexibility in a subsequent Report and Order 
in this proceeding.
    156. We also will consider whether LECs should be permitted to 
offer direct-trunked transport services that are differentiated by 
whether the incumbent LEC or the transport customer is responsible for 
performing channel facility assignments in connection with our 
evaluation of other forms of pricing flexibility in a subsequent Report 
and Order in this proceeding. As MCI argues in its comments, it is 
unclear whether rates for direct-trunked transport where the LEC 
controls the CFA should be higher or lower than the rates that apply 
where the IXC controls the CFA. Although the LEC may be able to make 
more efficient use of its network facilities when it controls the CFAs 
itself, this efficiency benefit may be offset by the additional costs 
the LEC incurs in performing the CFA function. We agree with MCI that 
an incumbent LEC may be able to increase its network efficiency by 
retaining or assuming control of CFAs, particularly if an IXC orders a 
relatively large amount of transport capacity. In those cases, however, 
rate differentiation based on CFA control appears to be the functional 
equivalent of a volume discount. As a result, we will consider this 
issue, along with other pricing flexibility issues, in a

[[Page 31892]]

subsequent Report and Order planned in this docket.
    157. In its comments, USTA requests that we forbear under Section 
10 of the Communications Act, 47 U.S.C. sec. 160, from regulating 
services in the interexchange basket, special access, collocated 
direct-trunked transport, and directory assistance. We will address 
USTA's request along with other pricing flexibility issues, in a 
subsequent Report and Order planned in this docket.
2. Tandem-Switched Transport
a. Background
    158. Tandem-switched transport uses trunks that are shared among 
many IXCs and the LEC itself to carry traffic between the end office 
and a tandem switch. The tandem switch routes IXC traffic onto an 
appropriate dedicated trunk that runs between the tandem switch and the 
serving wire center. An IXC may use tandem-switched transport either as 
its primary form of transport in lieu of direct-trunked transport, or 
to carry traffic that overflows from its direct-trunked transport 
facilities at peak periods. In 1982, the Modification of Final Judgment 
(MFJ) established an interim rule that required, until September 1, 
1991, BOC charges to IXCs to be ``equal, per unit of traffic'' of a 
given type transported between end offices and facilities of the IXCs 
within an exchange area or within reasonable subzones of an exchange 
area. United States v. American Tel. and Tel. Co., 552 F. Supp. 131, 
233-34 (AT&T Consent Decree, Appendix B, Section B(3)), aff'd sub nom. 
Maryland v. United States, 460 U.S. 1001 (1983).
    159. The Commission replaced the ``equal charge'' rule in 1993 with 
an interim rate structure for tandem-switched transport. This interim 
structure allows IXCs to choose between two rate structures for the 
purchase of tandem-switched transport. Both options provide for a per-
minute tandem switching charge. Under the first option, an IXC may 
elect to pay ``unitary'' per-minute charge for transmission of traffic 
from the end office, through the tandem switching office, to the 
serving wire center. This charge may be distance sensitive, with 
distance measured in airline miles from the end office to the serving 
wire center. Under the second option, the ``three-part rate 
structure,'' in addition to the charge for the tandem switch, an IXC 
may elect to purchase transmission on a bifurcated basis, with the end 
office-to-tandem portion charged on a per-minute basis, and the tandem-
to-serving wire center portion charged as direct-trunked transport 
facilities, i.e., on a flat-rated basis. Under the three-part rate 
structure, both portions of the transmission charge may be distance 
sensitive based on the airline mileage to the tandem office.
    160. In adopting the interim rate structure, the Commission stated 
that initial direct-trunked and tandem-switched transport rates would 
be presumed reasonable if set based on special access rates in effect 
on September 1, 1992, using a DS3 to DS1 rate ratio of at least 9.6 to 
1. First Transport Order. Special access customers use a dedicated 
trunk running between the customer's premises and the IXC's POP, 
thereby bypassing the LEC's switched network facilities altogether. 
This service is primarily used by large volume users in densely 
populated areas. Per-minute tandem-switched transport rates were 
presumed reasonable if set using a weighted average of DS1 and DS3 
rates reflecting the relative numbers of circuits of each type in use 
in the tandem-to-end office link, and assuming circuit loading of 9000 
minutes of use per month per voice-grade circuit. Id.
    161. Under the interim rate structure, whether a tandem-switched 
transport customer elects to purchase tandem-switched transport under 
the unitary or the three-part rate structure, the LEC imposes a 
separate, per-minute charge on the tandem-switched transport customer 
for use of the tandem switch. The Commission set this charge initially 
to recover only twenty percent of the tandem revenue requirement, in 
order to: (1) protect small IXCs that use tandem-switched transport as 
their primary transport mechanism from substantial increases in tandem-
switched transport rates, see Competitive Telecommunications Ass'n v. 
FCC, 87 F.3d 522, 526-27 (D.C. Cir. 1996) (CompTel); (2) ensure that 
the interim rate structure did not ``endanger the availability of 
pluralistic supply in the interexchange market'' that had developed 
under the equal charge rule, First Transport Order; and (3) allow IXCs 
a transitional period to reconfigure their networks to eliminate 
inefficiencies that had developed under the equal charge rule and to 
prepare for a fully cost-based rate structure, id. Unlike the direct-
trunked and tandem-switched transport rates, which are set using 
overhead loadings based on special access, the tandem switching rates 
used higher overhead loadings applicable to switched access.
    162. As part of the interim rate structure, the Commission also 
created the TIC to recover on a per-minute basis from all switched 
access customers the difference between the Part 69 transport revenue 
requirement and the revenues projected to be recovered under the 
interim rate structure. Id. The TIC was explicitly intended to make the 
transition to the interim rate structure revenue neutral. Id. Among 
other possible costs, the TIC recovers the remaining 80 percent of the 
tandem-switching revenue requirement.
    163. Portions of the interim transport rate structure were recently 
remanded to the Commission by the United States Court of Appeals for 
the District of Columbia Circuit, CompTel, 87 F.3d 522. With respect to 
tandem-switching rates and the TIC, the Court ordered us either to 
implement a cost-based rate structure or offer a ``rational and non-
conclusory analysis in support of [our] determination that an 
alternative structure is preferable.'' Id. at 736. With respect to 
overhead loadings, the Court ordered us either to substantiate that our 
current method of allocating overhead is cost-based, choose a method 
that is, or provide a reasoned explanation of our decision to pursue a 
non-cost-based system. Id.
    164. In the NPRM, we sought comment on several alternative rate 
structures for tandem-switched transport service facilities, including: 
(a) maintaining the interim rate structure, which permits the IXCs to 
choose between the two pricing alternatives above; (b) eliminating the 
unitary rate option and requiring the IXCs to purchase tandem-switched 
transport under the three-part rate structure; or (c) developing 
another, different rate structure. We also sought comment on whether, 
in conjunction with any of these pricing options, we should apply to 
tandem switching any of the options for local switching discussed 
above, including whether we should establish separate flat-rated 
charges for the dedicated ports on the serving wire center side of the 
tandem or other NTS components of the tandem switch, and whether usage-
based or flat rates more accurately reflect shared tandem-switching 
costs. We also sought comment on whether, in conjunction with any of 
these options, we should permit or require peak load pricing for usage-
based charges for tandem-switched transport service, and on whether any 
portion of tandem-switched transport costs should be recovered from 
direct-trunked transport customers.
b. Overview of Rate Structure and Rate Level Changes
    165. In this section, we summarize the changes we make to the 
tandem-switched transport rate structure and rate levels below. We 
conclude that we

[[Page 31893]]

should require incumbent LECs to implement a cost-based rate structure 
for tandem-switched transport in four stages over a two year transition 
period. Unlike our previous transition plans, however, we set forth 
today, for the first time, the details of a final, cost-based transport 
rate structure. We have long recognized that non-cost based rate 
structures can, among other dangers, (1) threaten the long-term 
viability of the nations's telephone systems; (2) distort the decision 
whether to use alternative telecommunications technologies; and (3) 
encourage ``uneconomic bypass'' of the public switched 
telecommunications network, raising rates for all. MTS and WATS Market 
Structure Third Report and Order.
    166. Until today, however, we have limited ourselves to interim 
transport rate structure plans, such as the equal charge rule and the 
interim rate structure described above. While the interim rate 
structure increased the cost-based nature of our transport rate 
structure, it also included significant non-cost-based elements. We 
have not, until today, laid out a clear transition plan that describes 
all the steps necessary to achieve cost-based transport rates. As a 
result, although all carriers have no doubt been aware of our intention 
to move to a cost-based rate structure, they have been able only to 
react to our transitional steps, announced piecemeal. Because we have 
not announced a definite and detailed end state--a final, cost-based 
rate structure--we have afforded carriers little opportunity to plan, 
adjust, and develop their networks in preparation for such a rate 
structure, despite our lengthy period of ``transition.'' Accordingly, 
because of the potential magnitude of the rate impact of these changes, 
we conclude that a four-step implementation over a two-year period will 
minimize the risk of rate shock and allow transport customers to adjust 
while we move as expeditiously as possible to cost-based transport 
rates as required by the CompTel decision.
    167. The first step will occur in incumbent LEC access tariffs to 
become effective on January 1, 1998. In those tariffs, incumbent price 
cap LECs must establish new rate elements for recovery of the costs of 
DS3/DS1 and DS1/voice-grade multiplexers used in conjunction with the 
tandem switch. The rate element for the dedicated multiplexers on the 
serving wire center side of the tandem will recover these costs on a 
flat-rated basis, while the rate element for the multiplexers on the 
end office side of the tandem will be assessed per minute of use. In 
addition, incumbent price cap LECs must establish in those tariffs a 
flat-rated charge to recover the costs of dedicated trunk ports on the 
serving wire center side of the tandem. None of our existing rate 
elements currently recovers the costs of either these multiplexers or 
these dedicated trunk ports. Accordingly, we conclude that those costs 
are currently recovered through the TIC, and that incumbent price cap 
LECs must reduce the TIC to reflect the recovery of these costs through 
the new rate elements. Also on January 1, 1998, all incumbent LECs must 
take the first of three annual steps to reallocate to the tandem-
switching rate element tandem switching revenues currently being 
recovered through the TIC. In tariffs filed to be effective on that 
date, we require incumbent LECs to reallocate one third of the portion 
of the tandem switching revenue requirement that they currently recover 
through the TIC, excluding signalling and dedicated port costs that we 
reallocate elsewhere, to the tandem switching rate element.
    168. The second step will occur in incumbent LEC tariffs to become 
effective July 1, 1998. At that time, all incumbent LECs must eliminate 
the unitary pricing option for tandem switched transport. Instead, 
incumbent LECs will be required to provide tandem-switched transport 
under a three-part rate structure as follows: (1) a per-minute charge 
for transport of traffic over common transport facilities between the 
LEC end office and the tandem office; (2) a per-minute tandem switching 
charge; and (3) a flat-rated charge for transport of traffic over 
dedicated transport facilities between the serving wire center and the 
tandem switching office. Incumbent LECs will continue to impose 
separate multiplexing and port charges established on January 1, 1998, 
as complementary to the three-part rate structure.
    169. The third and fourth steps will consist of the reallocation of 
the remaining portion of the tandem-switching revenue requirement 
currently recovered through the TIC to the tandem-switching rate 
element. All incumbent LECs are to reallocate one half of the remaining 
portion of tandem-switching revenue requirement recovered through the 
TIC to the tandem-switching rate element in access tariffs to become 
effective January 1, 1999, and the final portion of the tandem-
switching revenue requirement to the tandem-switching rate element in 
access tariffs to become effective on January 1, 2000. Before 
performing this reallocation, price cap incumbent LECs must account for 
X-factor reductions to the tandem-switching revenues permitted under 
price caps that have occurred since the TIC was created, as described 
in Section III.C.2.d, below.
c. Rate Structure
    170. Multiplexing Costs. As discussed above, we direct incumbent 
LECs to establish separate rate elements for the multiplexing equipment 
on each side of the tandem switch. LECs must establish a flat-rated 
charge for DS1/DS3 multiplexers on the serving wire center side of the 
tandem, imposed pro-rata on the purchasers of dedicated DS3 trunks on 
the serving wire center side of the tandem, in proportion to the amount 
of DS3 trunking capacity purchased by each customer. Unlike DS3 rates, 
rates for DS1 dedicated trunks already include a portion of the DS1/DS3 
multiplexer needed for transport. First Transport Order. Multiplexing 
equipment on the end office side of the tandem shall be charged to 
users of common end office-to-tandem transport on a per-minute of use 
basis. These multiplexer rate elements must be included in the LEC 
access tariff filings to be effective January 1, 1998.
    171. We sought comment in the NPRM on the claim that:

    The TIC * * * includes the two additional multiplexers needed in 
order to multiplex a DS3 circuit down to a DS1 level before 
switching 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/[voice-grade] multiplexers are 
needed to achieve the voice-grade interface with the tandem switch.

None of our existing rate elements explicitly recovers the costs of 
these multiplexers, and we conclude that these costs are currently 
recovered as part of the TIC. Accordingly, we establish two rate 
elements for multiplexers used on the serving wire center side of the 
tandem switch. The first will recover the costs of DS3/DS1 multiplexers 
used by purchasers of dedicated DS3 transport trunks from the serving 
wire center to the tandem switch, and may be levied only on purchasers 
of such DS3 transport. The second will recover the costs of DS1/voice-
grade multiplexers used on the serving wire center side of analog 
tandem switches, and should be levied on purchasers of DS1 or greater 
capacity dedicated transport from the tandem switch to the serving wire 
center in proportion to the transport capacity purchased on that route. 
Like serving wire center-side trunks and trunk ports, both DS3/DS1 and 
DS1/voice-grade multiplexers on the serving wire center side of the 
tandem switch are dedicated to individual customers. Accordingly, flat-
rated NTS charges for these multiplexers are appropriate.

[[Page 31894]]

    172. On the end office side of the tandem switch, we establish two 
additional rate elements. The first will recover the costs of DS3/DS1 
multiplexers used on the end office side of the tandem switch. This 
rate element will be a per-minute charge imposed on each IXC purchasing 
common transport on the end office-to-tandem link. This charge will be 
calculated based on actual minutes of use of the common transport 
circuits and will be assessed on IXCs in a 1:1 ratio with minutes of 
use of common transport. As with common transport trunks, because these 
multiplexers are shared among all users of common transport, traffic-
sensitive, per-minute charges are appropriate. The second rate element 
should be assessed only at analog tandems, to recover in a similar 
manner the costs of DS1/voice-grade multiplexers needed at these analog 
tandems.
    173. Price cap LECs must reallocate revenues currently being 
recovered through the TIC to these rate elements and begin recovery of 
multiplexing costs using these rate elements in their access tariffs to 
become effective January 1, 1998.
    174. Dedicated Tandem Switch Trunk Port Costs. Price cap incumbent 
LECs must establish a separate rate element for dedicated trunk ports 
used to terminate dedicated trunks on the serving wire center side of 
the tandem switch. LECs incur the costs of these ports on an NTS basis, 
but currently must recover their costs through per-minute charges for 
the tandem switch. Because we have allocated 80 percent of tandem-
switching costs to the TIC, these port costs may currently be recovered 
through either per-minute tandem-switching charges, or the per-minute 
TIC. We now take this opportunity to establish a separate rate element 
for these costs. Price cap LECs must establish a flat-rated element for 
dedicated trunk ports on the serving wire center side of the tandem, 
assessed on the purchaser of the dedicated trunk terminated at that 
port. This rate element shall be a flat-rated charge assessed on the 
carrier purchasing the dedicated trunk terminated at that port, and 
must also be included in tariff filings to become effective January 1, 
1998.
    175. Three-Part Rate Structure. We also direct all incumbent LECs 
to discontinue the unitary rate structure option for the transmission 
component of tandem-switched transport, effective July 1, 1998. In 
their access tariffs that take effect on July 1, 1998, incumbent LECs 
will be required to provide tandem-switched transport under a three-
part rate structure as follows: (1) a per-minute charge for transport 
of traffic over common transport facilities between the LEC end office 
and the tandem office; (2) a per-minute tandem switching charge; and 
(3) a flat-rated charge for transport of traffic over dedicated 
transport facilities between the serving wire center and the tandem 
switching office. This three part rate structure reflects the manner in 
which the incumbent LEC incurs the costs of providing each component of 
tandem-switched transport. By establishing a per-minute, traffic-
sensitive rate for the shared common transport trunks and the tandem 
switch, incumbent LECs will recover these costs from each IXC in 
proportion to its use. The incumbent LEC, in contrast, incurs the costs 
of the dedicated serving wire center-to-tandem trunk on an NTS basis 
because, like other dedicated trunks, the LEC must provision the trunk 
for the exclusive use of one IXC. Once this capacity is dedicated, the 
cost of the trunk does not vary with the amount of traffic transmitted 
by the IXC.
    176. The three-part rate structure may cause some tandem-switched 
transport customers to increase their use of direct-trunked transport 
relative to tandem-switched transport. As discussed above, making this 
rate structure change effective on July 1, 1998, will provide tandem-
switched transport customers that currently take service under the 
unitary rate structure with notice of this change sufficient to enable 
them to adjust their networks to provide service in the most efficient 
way possible, and to mitigate any sudden effect on rates such a change 
could have if implemented on shorter notice. In order to encourage 
transport customers to increase the efficiency of their transport 
networks quickly, we will require incumbent LECs to waive certain 
nonrecurring charges until six months after the three-part rate 
structure becomes mandatory. Therefore, from the effective date of this 
Order until six months after the effective date of tariffs eliminating 
the unitary pricing option for tandem-switched transport, the incumbent 
LECs shall not assess any nonrecurring charges for service connection 
when a transport customer converts trunks from tandem-switched to 
direct-trunked transport or orders the disconnection of overprovisioned 
trunks.
    177. When we replaced the equal charge rule in 1991, we stated 
three principles that would guide our efforts to develop the transport 
rate structure: (1) to encourage efficient use of transport facilities 
by allowing pricing that reflects the way costs are incurred; (2) to 
avoid interference with the development of interstate access 
competition; and (3) to facilitate full and fair interexchange 
competition. First Transport Order. In 1991, we stated that the interim 
rate structure was a reasonable first step toward achieving these 
goals, because it was more cost-based than the equal charge rule. First 
Transport Order. Even from its inception, however, we have recognized 
that the interim rate structure represents significant compromises that 
cause it to fall substantially short of these goals in many ways. See 
First Transport Order; Third Transport Reconsideration Order.
    178. First, the unitary rate option does not accurately reflect the 
manner in which LECs incur costs in providing tandem-switched transport 
and, therefore, does not provide maximum incentive for IXCs to use 
transport facilities efficiently. IXCs may order, and LECs must 
provide, dedicated transport links with NTS costs on the serving wire 
center-to-tandem route with no assurance that the traffic-sensitive, 
per-minute revenues collected will cover the NTS costs of the link. As 
we stated at the time, the unitary rate structure was intended as an 
interim measure to allow IXCs time to prepare for a fully cost-based 
transport rate structure. Third Transport Reconsideration Order. IXCs 
have now had well over a decade since divestiture to so prepare. We 
agree with the CompTel decision that it is time to bring this period of 
preparation to a close as expeditiously as possible without causing 
severe disruption to carriers. CompTel, 87 F.3d at 530.
    179. Second, by bundling the dedicated and common portions of the 
transmission component of tandem-switched transport into a single, end-
to-end per-minute charge, the unitary rate structure inhibits the 
development of competitive alternatives to incumbent LEC tandem-
switched transport. While we have required incumbent LECs to provide 
the collocation, signalling, and unbundled network elements necessary 
for new entrants to compete with incumbent LECs without having to 
replicate the incumbent LEC's interoffice transport network, see Local 
Competition Order; Expanded Interconnection with Local Telephone 
Company Facilities, CC Docket No. 91-141, Memorandum Opinion and Order, 
59 FR 38922 (August 1, 1994); Expanded Interconnection with Local 
Telephone Company Facilities, CC Docket No. 91-141, Transport Phase II, 
Third Report and Order, 59 FR 32925 (June 27, 1994), we have not 
corrected the non-cost based aspects of our tandem-switched transport 
rate structure that reduce incumbent LEC

[[Page 31895]]

rates for tandem-switched transport services. Several commenters have 
noted that the tandem-switched transport market, despite our efforts, 
is subject only to limited competition. Moreover, several competitive 
entrants have stated that they have the capability and desire to offer 
some or all of the components of tandem-switched transport on a 
competitive basis, but that the present, unitary rate structure 
inhibits the development of competition in this area. In addition, each 
component of tandem-switched transport is not equally susceptible to 
competitive entry; it is relatively easier for a new entrant to compete 
to provide the dedicated serving wire center-to-tandem link than it 
would be to compete to provide either the tandem switch itself or the 
myriad common transport end office-to-tandem links. Thus, in order to 
permit the fullest development of competitive alternatives to incumbent 
LEC networks, we need to unbundle reasonably segregable components of 
incumbent LEC transport services and price them in the manner in which 
costs are incurred.
    180. Third, the interim rate structure does not best promote ``full 
and fair'' interexchange competition. The unitary rate structure has 
facilitated the growth of small IXCs to compete with larger carriers. 
It has achieved this, however, by requiring incumbent LECs to price 
facilities with NTS costs on a per-minute, traffic sensitive basis, in 
order to allow small IXCs to offer interexchange services at rates 
comparable to those offered by larger carriers without regard to 
whether the charges paid by the small IXCs cover the costs of the 
facilities that they use. While this structure has protected 
``pluralistic supply in the interexchange market,'' see First Transport 
Order, our rules should promote competition, not protect certain 
competitors. We have recently concluded that no carrier is dominant 
with respect to domestic, interexchange services, Motion of AT&T to be 
Reclassified as a Non-Dominant Carrier, Order, 11 FCC Rcd 3271 (1995). 
Therefore, to the extent that we designed the interim rate structure to 
facilitate the growth of small IXCs in competition with AT&T, we find 
that such protective rules are no longer necessary. In a competitive 
market, we believe that we should strive to make our rate structure 
rules consistent with cost-causation principles, so long as those 
principles do not conflict with other statutory obligations, such as 
universal service. As the CompTel decision stated, ``attempt[ing] to 
recover costs from IXCs that did not cause those costs to be incurred 
would impart the wrong incentives to both actual and potential 
providers of local transport, thereby inducing them to offer an 
inefficient mix of dedicated, [direct-trunked transport], and tandem-
switched service.'' CompTel, 87 F.3d at 530-531. Because rules that do 
not reflect cost-causation may cause IXCs to order an inefficient mix 
of transport services, such rules artificially raise the costs of 
providing interexchange services. Rules properly reflecting cost-
causation, in contrast, will benefit LECs, IXCs, and consumers alike by 
encouraging competitors to provide service using facilities 
efficiently. In adopting the interim rate structure, we cited AT&T's 
estimate that the efficiency benefit to consumers of cost-based pricing 
and competition could reach $1 billion annually. First Transport Order. 
Our adoption of the three-part rate structure is intended to permit 
consumers the benefits of even greater service efficiency.
    181. We therefore adopt the three-part structure as the final 
tandem-switched transport rate structure because this structure most 
closely reflects the manner in which LECs incur the costs of each 
component of the overall tandem-switched transport service. When 
combined with our actions with respect to the TIC, our adoption of 
actual minutes of use as the appropriate factor for determining per-
minute rates for common transport circuits, and our allocation of the 
full cost of the tandem-switch to the tandem-switching rate elements, 
we expect that this structure will benefit LECs, IXCs, competitive 
providers of access services, and consumers. Tandem-switched transport 
facilities are sized to accommodate peak traffic loads, including 
overflow traffic from IXCs using direct-trunked transport facilities. 
Several commenters have stated that, until now, these overflow 
customers have not borne the full costs of these facilities because 
overflow customers pay only the same per-minute transmission charges 
applicable to other IXCs. The three-part rate structure will require 
the IXC purchasing tandem-switched transmission facilities to pay the 
full NTS costs of the dedicated serving wire center-to-tandem link, 
without regard for the amount of traffic transported. This benefit, in 
turn, will substantially increase IXC incentives to use tandem-switched 
transport efficiently for overflow traffic.
    182. Some commenters argue that we should retain the unitary rate 
structure because tandem-switched transport, as a service, has 
traditionally been offered on an end-to-end basis. We agree that the 
transmission component of tandem-switched transport has in fact been 
offered on an end-to-end basis, but only pursuant to the requirements 
of the MFJ and our interim rate structure rules as part of a transition 
to cost-based rates. We find, however, that the transmission component 
of tandem-switched transport is not, in fact, provisioned by the 
incumbent LEC on an end-to-end basis. Purchasers of direct-trunked 
transport purchase an end-to-end service; they purchase from the 
incumbent LEC transport capacity between two end points. Tandem-
switched transport customers, in contrast, purchase use of the tandem 
switch to route traffic to their POP. By virtue of their decision to 
choose tandem-switched transport, these customers specifically obligate 
the LEC to transport their traffic between the serving wire center and 
the tandem serving a particular end office or group of end offices and 
to perform the tandem switching function. Because they cause the 
incumbent LEC to incur the costs of transmitting their traffic between 
the serving wire center and the tandem, tandem-switched transport 
customers should, as a matter of cost-causation, pay the costs of 
reaching the tandem. In providing tandem-switched service, incumbent 
LECs must provision two separate circuits with distinctly different 
cost characteristics--one dedicated, and one shared. Tandem-switched 
service, therefore, is not provisioned on an end-to-end basis between 
the end office and serving wire center, but in three parts: (1) 
transmission from one ``end,'' the end office, to the tandem; (2) the 
tandem switching function itself; and (3) transmission from the tandem 
to the other ``end,'' the serving wire center. Just as the tandem-
switched transport customer pays a separate charge for the tandem 
switch, the tandem-switched transport customer should pay separately 
for the two distinct transmission components.
    183. Other commenters argue that the three-part rate structure will 
create LEC incentives to engage in inefficient network reconfiguration, 
placing tandems far from end offices and serving wire centers simply to 
increase tandem-switched transport revenues. These commenters further 
argue that, if we adopt the three-part rate structure, we need to 
control this incentive by establishing a process for review of the 
incumbent LECs' tandem deployment decisions. Based on this record, we 
conclude that these commenters' fears are not well founded. An 
incumbent LEC would likely incur substantial costs

[[Page 31896]]

to reconfigure placement of its tandem switches specifically to 
disadvantage IXC users of tandem switched transport. Because we expect 
the three part rate structure to catalyze the development of 
competition, we conclude that the incumbent LEC would not be likely to 
incur such costs. Although the incumbent LEC might be able to increase 
its tandem-switched transmission revenues in the short term to reflect 
inefficient routing, as more efficiently configured competitors enter 
the market, the LEC would not be able to sustain such artificially 
inflated rates and would then need to incur additional costs to 
reconfigure its network efficiently. Because, under our new competitive 
paradigm, a multitude of investment opportunities, including wireless 
services, video, and interLATA toll, may emerge for incumbent LECs, we 
agree with Ameritech that ``[s]uch misspent capital outlays and 
inefficient network configuration simply would not make good business 
sense.''
    184. Moreover, the redeployment of tandem switches affects network 
efficiency with respect to both the incumbent LEC's own local and toll 
traffic, as well as intrastate and interstate access. Therefore, 
inefficient network reconfiguration would cause harm both to tandem-
switched transport customers and to the incumbent LEC itself. Any 
additional transport revenues that the incumbent LEC generated through 
inefficient network reconfiguration would be at least partially offset 
by the additional costs of transporting the LEC's own traffic in 
similarly inefficient ways. As discussed above, as competition develops 
in the local market, we expect that an LEC would be reluctant to take 
steps to decrease its own efficiency.
    185. Some commenters argue that we should retain the unitary rate 
structure because direct-trunked transport and tandem-switched 
transport circuits often travel along the same routes using the same 
physical facilities. These commenters argue, therefore, that it would 
be unfair or discriminatory to require tandem-switched transport users 
to purchase transmission based on airline mileage from the end office 
to the tandem to the serving wire center, while users of direct-trunked 
transport are permitted to purchase the same route on the basis of 
airline mileage from end office to the serving wire center directly. 
Other commenters argue that we should require the LECs to offer both 
types of transport based on actual route miles, revealing actual LEC 
network efficiencies and inefficiencies.
    186. We disagree with both of these proposed modifications. An IXC 
purchasing direct-trunked transport requires the incumbent LEC to 
provide transport service between the end office and the serving wire 
center. Because the LEC must route direct-trunked transport traffic 
between only these two points, our rate structure requires the IXC to 
pay only for the airline mileage between those two points, reflecting 
the direct mileage route between the locations in the incumbent LEC 
network designated by the access customer. In contrast, an IXC 
purchasing tandem-switched transport purchases use of the access tandem 
switch and therefore requires the incumbent LEC to provide service 
between the serving wire center and the tandem, and between the tandem 
and the end office. Under the three part rate structure, the tandem-
switched transport customer, like the direct-trunked transport 
customer, pays for the direct mileage between the locations in the 
incumbent LEC network designated by the customer--for tandem-switched 
transport, the serving wire center to tandem, and the tandem to the end 
office. Because the IXC has chosen to make use of the LEC tandem 
switching facilities, it should pay explicitly for the transport 
necessary to reach the tandem. The direct-trunked transport customer, 
in contrast, does not make use of the tandem switching facilities; even 
if the LEC routes direct-trunked transport traffic through the tandem 
office, this traffic is not switched at the tandem. While the incumbent 
LEC may choose to route direct-trunked traffic through the tandem 
office based on its own assessment of whether it is economically 
efficient to do so, the direct-trunked transport customer pays only for 
direct mileage between the locations it designated in the network.
    187. We are not persuaded by arguments that we should retain the 
unitary pricing structure because the incumbent LEC, and not the 
tandem-switched transport customer, has selected the tandem location 
and, consequently, the tandem-switched transport customer should not 
pay for the direct mileage to and from the tandem location. The 
incumbent LEC equally chooses the locations of the serving wire center 
and end office, and yet access customers routinely pay mileage charges 
to and from those locations, rather than between the end points of the 
access service--the POP and the end user location. Similarly, we find 
that the three-part rate structure does not discriminate against IXCs 
using tandem-switched transport. As discussed above, the tandem-
switched transport customer, unlike the direct-trunked transport 
customer, requires the incumbent LEC to route its traffic to the 
tandem, and so should pay the costs of reaching the tandem. In 
addition, an IXC operating efficiently often may choose to locate its 
POP at or close to the tandem, if the tandem-switching office also can 
function as the serving wire center, thus eliminating virtually all of 
the dedicated transport costs of the tandem-to-serving wire center 
link. While such an arrangement may be the most efficient transport 
architecture for tandem-switched transport, our current unitary pricing 
structure does not reflect the underlying costs of tandem-switched 
transport transmission facilities and so does not encourage efficient 
transport architectures.
    188. The introduction of more modern network architectures, such as 
Synchronous Optical Network (SONET) rings, does not alter our 
conclusion that the three-part rate structure most closely approximates 
the nature of costs associated with each component of tandem-switched 
transport. WorldCom, for instance, asserts that the ``pyramid'' diagram 
included in the NPRM as Figure 1 is outdated and submits a diagram 
illustrating interoffice tandem-switched transport in a ring-based 
network. WorldCom states that the multiple routing options and the 
reduced distance sensitivity of transport costs in a SONET environment 
compel retention of the unitary rate structure. We conclude, however, 
that the differences WorldCom identifies do not support retention of 
the unitary rate structure because, even in a ring-based network, the 
three-part rate structure treats direct-trunked and tandem-switched 
transport consistently. In a fiber-optic or ring-based network, 
dedicated, direct-trunked transport circuits are given a constant, and 
exclusive, time slot assignment on a large, time-division multiplexed 
fiber-optic cable. The incumbent LEC routes traffic for the IXC 
purchasing the direct trunk into the dedicated circuit or time slot, 
where it is received elsewhere on the ring or in the network at the 
serving wire center. The direction or precise routing of the signal 
around the ring is irrelevant for purposes of the rate structure 
because the transport is priced on an airline-mileage basis between the 
two end points. Capacity dedicated to a particular IXC, however, is not 
available to the LEC for other purposes.
    189. SONET ring architecture offers the LEC the capability to 
transport large traffic volumes with redundant routing options, but it 
does not alter the fundamental nature of tandem-switched transport. 
Tandem-switched transport is functionally very different from direct-
trunked transport because, by

[[Page 31897]]

definition, the incumbent LEC must route an IXC's tandem-switched 
traffic through the tandem switch serving a particular end office. 
Whether using a SONET ring or not, the LEC must route its tandem-
switched traffic into one of many shared common transport circuits or 
time slots allocated for transport between the end office and the 
tandem switch, and onto a second dedicated circuit or time slot for 
transport between the serving wire center and the tandem. Despite 
parties' arguments to the contrary, the precise routing of the traffic 
to the tandem, including the direction it may take around a SONET ring, 
is irrelevant to the rate structure because IXCs purchase transport 
under the three-part rate structure based on airline mileage to the 
tandem.
    190. As discussed in connection with direct-trunked transport, 
above, ring network architectures may cause incumbent LECs transport 
costs to become less distance sensitive. Because our rate structure 
permits, but does not require, transport rates to be distance 
sensitive, LECs remain free to establish less distance sensitive 
transport rates to reflect the changing nature of these costs.
    191. We also decline Teleport's suggestion to establish a flat-
rated charge for the tandem switch, tied to the amount of dedicated 
capacity each IXC's serving wire center-side trunk ports provide. While 
the costs of these dedicated trunk ports are NTS, the record before us 
does not reflect that all of tandem-switching costs are similarly NTS. 
Rather, we conclude at this time that the costs of tandem switching 
likely vary, as do those of local switching, on a traffic-sensitive 
basis. In light of this conclusion, we find that it would be 
unreasonable to permit the incumbent LEC to recover all of its tandem-
switching costs through flat-rated charges. As with the local switch, 
until we gain more experience with rate structures for unbundled 
network elements that are implemented pursuant to Sections 251 and 252 
and that segregate switching costs into traffic-sensitive and NTS 
components, we will continue to adhere to the current, per-minute rate 
structure for shared switching facilities.
    192. We also decline to adopt in full suggestions that we (1) 
retain the unitary pricing structure for tandem-switched transport, 
while (2) exempting IXCs and competing LECs that do not use the 
transport facilities supplied by the incumbent LEC from paying the TIC 
and (3) preventing the incumbent LEC from deaveraging the TIC within a 
state during a five year transition period. We are modifying our rules 
to prohibit incumbent LECs from assessing any per-minute residual TIC 
charge on any switched minutes of CAPs that interconnect with the 
incumbent LEC switched access network at the end office. In doing so, 
we adopt a position substantially similar to the second enumerated 
point, above, which Teleport and CompTel characterize as the ``most 
important'' feature of this proposal. In addition, we are also taking 
other measures that will reduce substantially or eliminate the TIC in 
an expeditious manner. We decline, however, to adopt the other two 
suggestions. As explained in more detail above, the unitary rate 
structure is not cost-based in that it requires incumbent LECs to 
recover costs incurred on an NTS basis through per-minute charges and 
inhibits the development of competition by bundling reasonably 
segregable components of tandem-switched transport together and pricing 
them in a manner that does not reflect cost causation. We conclude that 
our new paradigm of promoting efficient competition requires that 
incumbent LECs adopt a cost-based transport rate structure and that 
entrants providing transport facilities in competition with the 
incumbent LEC not pay the TIC.
    193. Although in their comments in this proceeding the incumbent 
LECs virtually unanimously favor the three-part rate structure as most 
consistent with principles of cost-causation, we recognize that 
incumbent LECs may face competition from competitors that are not 
limited to the three-part rate structure we adopt for incumbent LECs 
today. As such competition develops, the incumbent LEC may wish to 
respond by offering tandem-switched transport on a unitary pricing 
basis. We will address issues relating to when incumbent LECs should 
have the flexibility to offer a unitary tandem-switched transport rate 
structure in connection with our discussion of other pricing 
flexibility issues in a subsequent Report and Order that we will adopt 
in this proceeding.
    194. Peak and Off-Peak Pricing. As with the local switch, we 
conclude that we should not mandate a peak-rate pricing structure for 
the tandem switch or common transport at this time. Many of the same 
practical difficulties with establishing, verifying, and enforcing a 
rational, efficient, and fair peak-rate structure exist in the context 
of the tandem switch. We will consider whether incumbent LECs should 
have the flexibility to develop such peak and off-peak rate structures 
for local switching on a permissive basis when we consider other issues 
of rate structure flexibility in a subsequent Report and Order that we 
will adopt in this proceeding.
d. Rate Levels
    195. Allocation of 80 Percent of the Tandem Switching Revenue 
Requirement to the TIC. In establishing the interim transport rate 
structure, we required incumbent LECs to base their initial tandem 
switching charge on 20 percent of the interstate tandem-switching 
revenue requirement. In remanding this portion of the interim rate 
structure to us, the D.C. Circuit directed us either to implement a 
cost-based tandem switching rate or offer a rational and non-conclusory 
analysis in support of our determination that an alternative structure 
is preferable.
    196. Based on the record in this proceeding, we reallocate much of 
the remaining 80 percent of the tandem switch revenue requirement back 
to the tandem switching rate elements in three steps. We conclude that 
this action is most consistent with cost-causation, and with the 
general approach we are taking in this Order regarding pricing issues. 
We do not require all of the 80 percent to be reallocated to tandem 
switching rates because the tandem-switching revenue requirement 
includes, not only the costs of the tandem switch, but other costs, 
such as SS7 signalling costs and tandem port costs, which we are 
requiring to be reallocated elsewhere.
    197. Furthermore, if we required the price cap LECs to reallocate, 
dollar-for-dollar, the entire portion of the tandem switching revenue 
requirement that we reallocated to the original TIC in the First 
Transport Order, we would deny tandem-switched transport customers the 
continuing benefits of past X-factor reductions in the revenues 
permitted under price caps. Therefore, in order to preclude recovery of 
tandem switching costs in excess of the current revenues permitted 
under price caps, we direct price cap incumbent LECs first to account 
in the following manner for the effects of ``GDP-PI minus X-factor'' 
reductions to the original portion of the tandem switching revenue 
requirement allocated to the TIC in the First Transport Order. Each 
price cap LEC first should calculate the percentage of its total 
original TIC that represented the 80 percent reallocation of its tandem 
switching costs when the TIC was created. It should then calculate this 
percentage of its current TIC, which represents the extant portion of 
the reallocated tandem switching costs. It is this extant portion that 
the price cap LECs should reallocate to tandem switching as described 
in the next paragraph.

[[Page 31898]]

    198. In access tariff filings to become effective on January 1, 
1998, incumbent LECs must identify the portion of the tandem-switching 
revenue requirement currently in the TIC that they reallocate to each 
rate element, including, as applicable, SS7 signalling, tandem port 
costs, or other rate elements. They must then reallocate one third of 
the tandem switching revenue requirement remaining in the TIC to the 
tandem switching rate element. Effective January 1, 1999, incumbent 
LECs shall reallocate approximately one half of the remaining amount of 
the tandem switching revenue requirement in the TIC to the tandem 
switching rate elements. Effective January 1, 2000, incumbent LECs 
shall reallocate any portion of the tandem switching revenue 
requirement remaining in the TIC to the tandem switching rate element. 
This three-step implementation of this change permits IXCs time to 
adjust their use of various incumbent LEC transport services, but sets 
a definite end date in the near future, thus responding to the CompTel 
decision's concerns regarding the length of the transition to a cost-
based transport rate structure.
    199. Some commenters argue that, rather than reallocating revenues 
from the TIC to other rate elements, we should reinitialize tandem-
switched transport rates to levels reflecting long run incremental 
costs, making reallocation of TIC revenues to other transport rate 
elements unnecessary. We have decided in this Order, however, not to 
reinitialize access rates based on forward-looking cost principles. We 
have instead determined that the first step in access reform is to make 
the current system as economically efficient as is possible within the 
limits of current ratemaking practices. Thus, the focus of this portion 
of this proceeding is on the development of cost-causative rate 
structure rules. While we are taking several prescriptive steps using 
existing ratemaking methods to reduce initial baseline rates, we are 
generally adopting a market-based approach, with a prescriptive 
backdrop, to move rates over time to levels reflecting forward-looking 
economic costs. We disagree with those commenters that argue that the 
Local Competition Order requires us immediately to prescribe rate 
levels for access elements based on long-run incremental costs. The 
Local Competition Order addressed, inter alia, the pricing of unbundled 
network elements. While unbundled network elements may be used to 
provide interstate access services, their availability at TELRIC-based 
prices does not compel adoption of similar rates for access services. 
We intend instead to rely on the availability of unbundled network 
elements to place market-based downward pressures on access rates, 
subject to a prescriptive backstop. We will further address questions 
related to reinitialization to TELRIC rate levels in connection with 
our discussion of the prescriptive approach to access reform.
    200. Use of Switched Access Overhead Loadings for Initial Tandem 
Switching Rates. In setting rates, the interim transport rate structure 
derived both direct-trunked transport rates and tandem-switched 
transmission rates using relatively low overhead loadings applicable to 
special access. Tandem switching rates, in contrast, were set using 
relatively higher switched access overhead loadings. As a result, the 
tandem switching revenue requirement became relatively high, in 
comparison to other transport rate elements.
    201. Several commenters in this proceeding contend that our use of 
special access overheads in setting direct trunked transport rates was 
inappropriate because, while special access is used almost exclusively 
in high density, generally urban areas, direct-trunked transport and, 
to an even greater extent, tandem-switched transport are used in less 
dense areas. In these less dense areas, overhead costs associated with 
transport may be higher than those associated with special access in 
urban areas. Some commenters have argued that we should either (1) 
equalize the overhead loading factors for all transport options by 
directing that the difference in transport rates is equal to the 
difference in the long run incremental cost of each transport option 
(DS3, DS1, and tandem-switched transport); or (2) otherwise ensure that 
transport customers pay an equal dollar amount of overhead per unit of 
traffic transported.
    202. We conclude that we need to make no change to the overheads 
attributed to tandem switching. As discussed above, we have decided not 
to base access prices directly at this time on incremental cost 
studies, but instead to make significant changes in existing ratemaking 
practices as the first step in access reform. Our current methods 
allocate overhead in a reasonable, cost-based manner. In consultation 
with the Joint Board on Jurisdictional Separations, the Commission 
established procedures for allocating overhead expenses between the 
state and interstate jurisdictions. See, e.g., 47 CFR Sec. 36.192, 
separating Corporate Operations Expenses, USOA Accounts 6710 and 6720, 
on the basis of the separation of the Big Three Expenses: Plant 
Specific Expenses, Plant Non-Specific Expenses, and Customer Operations 
Expenses. Our Part 69 cost allocation rules in turn allocated 
interstate direct investment to broad categories, including Central 
Office Equipment (with respect to both local switching and tandem 
switching) and Carrier Cable and Wire Facilities (with respect to 
special access, direct-trunked transport, and tandem-switched transport 
transmission facilities). 47 CFR Secs. 69.305-69.306. Other investment, 
including overhead, was allocated among these categories in proportion 
to the dollar amounts of net direct investment allocated to these 
categories. 47 CFR Sec. 69.309. Similarly, direct expenses, where 
possible, were allocated to the category to which the expenses are 
related. E.g., 47 CFR Sec. 69.401. Other expenses, including overheads, 
are allocated on the same basis as other investment, according to 
relative dollar amounts allocated to the various categories. 47 CFR 
Sec. 69.411. The Commission has stated that initial allocation of 
overheads based on relative costs closely approximates an economically 
efficient method assuming that the elasticity of demands for the 
various outputs is not too dissimilar. See, e.g., First Transport 
Order.
    203. Our Part 69 cost allocation rules, therefore, established 
category revenue requirements that included overheads allocated 
generally based on relative costs. Once these initial revenue 
requirements were established, our Part 69 rules permitted incumbent 
LECs to recover all costs assigned to each category through the rate 
elements established for that category. The incumbent LECs were 
permitted to assign overhead costs among the category rate elements in 
any way that is just and reasonable and not unreasonably 
discriminatory. 47 U.S.C. secs. 201-202. We find that it is reasonable 
to have set overhead loadings for tandem switching consistently with 
the overhead loadings for local switching, and disagree with those 
parties that argue that there is no cost justification for the current 
allocation of overheads to the tandem switch. The direct costs of both 
kinds of switching are fundamentally the same in that both types of 
switches are comprised of ports and a switching matrix. By contrast, 
the direct costs of transmission consist of outside plant and circuit 
equipment and certain central office equipment. So long as consistent 
overhead loading methodologies were used across switching functions, 
and across transmission functions, we find that a

[[Page 31899]]

reasonable cross-over is established for access customers between 
direct-trunked transport and tandem-switched transport. As competition 
develops, we can also rely on market forces to pressure incumbent LECs 
to allocate overheads among rate elements in economically efficient 
ways. We address issues concerning the use of special access prices to 
initialize direct-trunked transport rates in the interim rate 
restructure below in our discussion of the TIC.
    204. We also decline to adopt a requirement for equalized overhead 
loadings. Overhead loadings are used to assign costs that do not 
qualify as the direct costs of a particular service. Reasonable 
definitions of direct costs often leave in the overhead category costs 
that might reasonably be deemed attributable to a given service. Thus, 
if all of a carrier's costs are classified as either ``direct costs'' 
or ``overheads,'' the overhead category will likely include costs that 
should not necessarily apply uniformly to all services. As a result, we 
think it desirable not to adopt a policy that is too specific and too 
rigid, and that might not permit recognition of legitimate differences 
in costing definitions. Furthermore, in a competitive market, it would 
be mere happenstance if different products or services of a single 
company recovered uniform amounts of overhead. If we were to require 
equalized overhead loadings, we would be interfering with the market 
discipline on which we are primarily relying. We might, for example, 
prevent an entrant from realizing a reasonable profit opportunity based 
on a rigid overhead loading requirement.
    205. In determining that our existing cost allocation rules 
reasonably allocated overhead to the initial tandem switching rate 
element and that we thus need not change the overheads currently 
attributed to tandem switching, we recognize that the D.C. Circuit in 
CompTel remanded the overhead issue to the Commission for further 
explanation and stated that the ``cost allocation to the tandem 
switch'' under the existing allocation rules ``is, by the Commission's 
own estimation, grossly excessive.'' CompTel, 87 F.3d at 533. The court 
did not provide a cite for its characterization of the Commission's 
``estimation,'' but the court may have been referring to the agency's 
finding in the First Transport Order that ``most, but not all, of the 
interstate tandem revenue requirement is attributable to tandem-
switched transport'' (emphasis added). The Commission in that order 
also identified only one category of costs--having to do with SS7 
technology--that appeared to be misallocated to tandem switching. Id. 
Elsewhere in this Order, we have taken steps to address that 
misallocation of SS7 costs. That correction having been made, we find 
that our existing rules reasonably allocate overhead to tandem 
switching for the reasons discussed above.
    206. Use of actual minutes of use rather than an assumed 9000 
minutes of use. For tandem-switched transport rates to be presumed 
reasonable, the interim rate structure requires incumbent LECs to set 
per-minute tandem-switched transport rates using a weighted average of 
DS1 and DS3 rates reflecting the relative numbers of circuits of each 
type in use in the tandem-to-end office link, and assuming circuit 
loading of 9000 minutes of use per month per voice-grade circuit. First 
Transport Order. Based on the record before us, we find that continued 
use of this 9000 minutes of use assumption is no longer reasonable. 
Many commenters state that their actual traffic levels are 
substantially lower than 9000 minutes of use per month. Some incumbent 
LECs, particularly smaller LECs in rural areas, indicate that their 
actual traffic levels may be as low as 4000 minutes of use per month 
per voice-grade circuit. Accordingly, we conclude that rates for the 
common transport portion of tandem-switched transport must be set using 
a weighted average of DS1 and DS3 rates reflecting the relative numbers 
of DS1 and DS3 circuits in use in the tandem-to-end office link, and 
using the actual voice-grade switched access common transport circuit 
loadings, measured as total actual minutes of use, geographically 
averaged on a study-area-wide basis, that the incumbent LEC experiences 
based on the prior year's annual use. Incumbent LECs that deaverage 
their transport rates under our existing zone-based deaveraging rules, 
see 47 CFR Sec. 69.123, may similarly deaverage the actual minutes of 
use figures that they use to calculate per-minute common transport 
rates.
    207. Our assumption that voice-grade common transport circuits 
experience uniform loadings of 9000 minutes of use was initially based 
on 1983 data submitted in the original MTS and WATS Market Structure 
proceeding. MTS and WATS Market Structure, CC Docket No. 78-72, Phase 
I, Memorandum Opinion and Order, 48 FR 42984 (September 21, 1983). In 
using this assumption as part of the interim rate structure, we stated 
that, ``[t]he 9000 minutes per circuit per month standard serves as a 
convenient starting point in the context of a short-term, interim rate 
structure.'' First Transport Reconsideration Order. We rejected at that 
time requests to develop a loading factor for small LECs that would 
reflect their actual, substantially lower circuit loading levels, 
stating that, ``the benefits to be obtained from use of more 
individualized loading factors are outweighed by the benefits of the 
administrative convenience of a uniform loading factor and of avoiding 
verification difficulties.'' Id. Given the new competitive paradigm 
embodied in the 1996 Act, we conclude that this assumption must give 
way to charges based on actual usage levels. The same conversion factor 
is not appropriate for each incumbent LEC. Because the 9000 minute 
assumption appears to have substantially overstated the actual traffic 
levels on many circuits, we now conclude that the current rate 
structure is unlikely to recover the full costs of common transport. 
Costs that properly should be recovered from common transport rate 
elements may currently be recovered through TIC revenues. Because the 
9000 minutes of use loading factor has contributed, possibly 
significantly, to the level of the non-cost-based TIC, we find that 
continued use of this factor is no longer reasonable.
    208. We therefore direct incumbent LECs to develop common transport 
rates based on the relative numbers of DS1 and DS3 circuits in use in 
the tandem-to-end office link, and using actual voice-grade circuit 
loadings, geographically averaged on a study-area-wide basis, that the 
incumbent LEC experiences based on the prior year's annual use. As 
discussed above, incumbent LECs that deaverage their transport rates 
under our existing zone-based deaveraging rules may similarly deaverage 
the actual minutes of use figures that they use to calculate per-minute 
common transport rates. As they develop transport rates based on actual 
minutes of use, we require incumbent LECs to use any increase in common 
transport revenues to decrease the TIC. These rates must be included in 
the LEC access tariff filings effective January 1, 1998.
    209. We disagree with commenters arguing that the actual number of 
minutes a circuit is in use is irrelevant in a rate-setting context. 
These commenters argue that rates should be set based on forward-
looking cost studies using Commission-determined ``efficient'' traffic 
levels, which they argue may be far higher than either the actual 
traffic levels, or the 9000 minutes of use assumption. As explained 
elsewhere, we are not taking the general approach of prescribing rates 
at forward looking economic costs, and we decline

[[Page 31900]]

to make an exception in this instance. We are instead reforming access 
charges so that they more closely reflect the costs imposed by 
individual access customers. We also do not find it necessary to employ 
different principles here to ensure that incumbent LECs face sufficient 
incentives to design their networks to achieve efficient usage levels. 
LECs subject to price cap regulation already have only limited ability 
to raise rates to cover the costs of inefficient network designs, and 
are able to benefit from increased profits as their efficiency 
improves. In addition, as competition develops for local service, all 
incumbent LECs will face increasing pressure to provide service as 
efficiently as possible.

C. Transport Interconnection Charge (TIC)

1. Background
    210. 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.'' Under the equal charge rule, which arose from 
the AT&T divestiture of the BOCs, the BOCs were required to charge a 
per-minute, distance-sensitive rate for their transport offerings, 
regardless of how the underlying costs were incurred. 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 $3.1 
billion, according to USTA.
    211. 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. In the NPRM, 
we sought comment on how to reduce and eliminate the TIC in a manner 
that fosters competition and responds to the D.C. Circuit's CompTel 
remand. We sought comment on different methods of recovering the costs 
currently recovered by the TIC, including: (1) Giving the incumbent 
LECs significant pricing flexibility and allowing market forces to 
discipline the recovery of the TIC, either alone or in conjunction with 
a phase-out of the TIC; (2) quantifying and correcting all identifiable 
cost misallocations and other practices that result in costs being 
recovered through the TIC; (3) combining the above approaches, for 
example, by addressing directly the most significant and readily-
corrected misallocations, and then relying on a market-based approach 
to reduce what remains of the TIC; (4) providing for the termination of 
the TIC over a specified time, such as three years. We specifically 
sought comment on the possible reassignment of costs based on several 
explanations for the amounts in the TIC. The NPRM also sought comment 
on how the resolution of the issues surrounding the TIC would be 
affected by decisions on universal service, by the level of any 
residual costs, and by the adoption of either the market-based or 
prescriptive approach to access reform.
2. Discussion
    212. As a per-minute charge assessed on all switched access 
minutes, including those of competing providers of transport service 
that interconnect with the LEC switched access network through expanded 
interconnection, the TIC adversely affects the development of 
competition in the interstate access market. First, as discussed more 
fully below, some of the revenues recovered through the TIC should be 
recovered through other switched access elements, including transport 
rates other than the TIC. The TIC, as currently structured, provides 
the incumbent LECs with a competitive advantage for some of their 
interstate switched access services because the charges for those 
services do not recover their full costs. At the same time, the 
incumbent LECs' competitors using expanded interconnection must pay a 
share of incumbent LEC transport costs through the TIC. Under our 
expanded interconnection rules and policies, competitors may 
interconnect with the incumbent LEC's facilities at the end office and 
supply their own transport. For a more detailed discussion of expanded 
interconnection, see Expanded Interconnection with Local Telephone 
Company Facilities, CC Docket No. 91-141, Memorandum Opinion and Order, 
59 FR 38922 (August 1, 1994). Second, all other things being equal, the 
usage-rated TIC increases the per-minute access charges paid by IXCs 
and long-distance consumers, thus artificially suppressing usage of 
such services and encouraging customers to explore ways to bypass the 
LEC switched access network, particularly through the use of switched 
facilities of providers other than the incumbent LEC that may be less 
economically efficient than incumbent LECs.
    213. As we noted in the NPRM, our goal is to establish a mechanism 
to reduce and eliminate the TIC in a manner that fosters competition 
and responds to the D.C. Circuit's remand. To that end, we below 
identify several costs included in the TIC that should be reallocated 
to other access elements. We conclude, however, that on the present 
record, we cannot immediately eliminate the TIC entirely through these 
reassignments. We establish a mechanism that should substantially 
reduce the remaining TIC over a short, but reasonable period. In 
addition, we will in the near future refer a broad range of separations 
issues to a Joint Board for purposes of determining whether certain 
costs currently allocated to the interstate jurisdiction and recovered 
through the TIC more properly should be allocated to the intrastate 
jurisdiction. Finally, we establish the means by which the remaining 
TIC amounts are to be recovered.
a. Reallocation of Costs in the TIC
    214. The record in response to the NPRM clearly establishes that 
some costs in the TIC should be reallocated to other access elements. 
USTA, in conjunction with the incumbent LECs, submitted extensive 
comments setting forth an incumbent LEC consensus explanation of the 
causes for the sums in the TIC and estimates of the amounts associated 
with each explanation. While the current rulemaking record will not 
permit us to prescribe specific amounts that individual incumbent LECs 
must shift from the TIC to specific access rate elements, it does 
permit us to direct incumbent LECs to make certain cost reallocations 
and to require them to calculate the appropriate level of the 
reallocation in the supporting materials filed with the tariffs 
implementing the changes. Below, we discuss each of the identified 
causes of costs being included in the TIC and the extent to which costs 
should be reallocated to other access elements or categories.

[[Page 31901]]

    215. In this Order, we do not address certain rate structure issues 
relating to incumbent LECs subject to rate-of-return regulation. These 
LECs account for relatively few access lines. In some instances we 
direct price cap LECs to allocate costs to new rate elements that do 
not currently exist for rate-of-return LECs. We anticipate that we will 
propose similar rate elements in the forthcoming notice of proposed 
rulemaking addressing rate structure issues for incumbent LECs subject 
to rate-of-return regulation. Recognizing the expense and difficulties 
of modifying billing systems, we conclude that, until the rate 
structure issues are resolved for rate-of-return companies, the costs 
allocated to new elements and any residual TIC revenues may continue to 
be recovered by the incumbent LECs that are not subject to price cap 
regulation through per-minute TIC rates assessed on both originating 
and terminating access.
    216. As their primary challenge to the incumbent LEC proposals to 
reallocate costs from the TIC, several parties argue that we should use 
forward-looking cost principles, or TELRIC, in determining how much to 
shift from the TIC to other access categories. Some parties advocating 
the use of such forward-looking cost standards assert that any costs 
not meeting these forward-looking cost standards should be eliminated 
from the TIC, and the incumbent LECs should not be permitted to recover 
those amounts. One group of consumer advocates proposes that we need 
not complete TELRIC studies before substantially reducing the TIC 
because BA/NYNEX has already proposed, as part of their access charge 
reform compromise plan, to eliminate up to 80 percent of the TIC 
pending a determination of ``service related'' costs by the Commission. 
We conclude, however, that immediate, widespread, prescriptive action 
is not necessary to pressure access rates toward market-based levels. 
Instead, we have determined that the most appropriate first step 
towards access reform is to make the current rate structure as 
economically efficient as possible within the limits of past ratemaking 
practices. These practices include setting rates based on interstate-
allocated costs, subject to price cap constraints for most large 
carriers. As we discuss more fully in Section IV, below, we intend in 
the future to rely primarily on market forces, with a prescriptive 
backdrop, to move rates toward forward-looking economic cost. 
Therefore, because we currently are not prescribing a forward-looking 
cost method for access reform, we will require reassignment of certain 
TIC revenues based on an analysis of the separated, booked costs 
already recovered through the TIC.
    217. SS7 costs. Based on the record before us, we conclude that SS7 
costs that are recovered by the TIC should be removed from the TIC and 
allocated to the traffic-sensitive basket. The record demonstrates that 
these costs are related to the signalling function and should be 
recovered through local switching or signalling rate elements. The 
costs to be removed are the costs of signal transfer points (STPs) that 
were included in the tandem-switching category for jurisdictional 
separations purposes and the cost of the link between the end office 
and the STP that is used only for SS7 signalling. The incumbent LECs 
shall distribute the STP costs reallocated from the TIC to local 
switching or, if the incumbent LEC has established an unbundled 
signalling rate structure, to appropriate SS7 elements, in tariffs 
filed to be effective January 1, 1998. The incumbent LEC shall 
distribute the costs of the link between the local switch and the STP 
that are included in the TIC to local switching or, if provided, to the 
call-setup charge. This change means that the incumbent LECs' SS7 
prices will reflect the full cost of providing SS7 signalling and 
provide the proper price signals to developers of new services 
utilizing SS7. We decline to adopt the suggestion of US West that we 
reallocate SS7 costs to services in the trunking basket. As we conclude 
below in conjunction with our consideration of the SS7 rate structure, 
the costs being reallocated are appropriately included in the traffic-
sensitive basket.
    218. Tandem switching costs. Several parties argue that the tandem 
switching rate must be set to reflect the cost of providing the 
service. In the preceding section, we modified the existing tandem-
switched transport rate structure and revised certain of the pricing 
rules applicable to elements of tandem-switched transport to establish 
a cost-based structure and to respond to the court remand in CompTel v. 
FCC. The revised pricing rules applicable to tandem switching include 
two separate elements--a flat-rated port charge to be assessed when a 
port is dedicated to a single customer and a per minute charge to be 
assessed for the traffic-sensitive portion of the tandem switch. In 
three approximately equal annual steps, beginning January 1, 1998, we 
require reallocation of all tandem-switching revenues currently 
allocated to the TIC to the tandem-switching rate element. As a result 
of this modification, the total revenues recovered through the tandem 
switching rates will, subject to price cap limits, increase to the 
level of costs assigned to the interstate jurisdiction by the 
separations process at the end of our plan. Equivalent changes to the 
amounts recovered through the TIC must be made to ensure that over-
recovery does not occur. After this adjustment, in accordance with the 
CompTel remand, and to facilitate the development of economically-
efficient competition for tandem-switching services, the TIC will not 
recover any costs that are attributable to tandem switching.
    219. DS1/voice-grade multiplexer costs. We conclude that the costs 
of DS1/voice-grade multiplexing associated with analog local switches 
should be reassigned to the newly created trunk ports category within 
the traffic sensitive basket. Analog switches require a voice-grade 
interface on the trunk-side of the end office switch. Our separations 
rules assign the costs of DS1/voice-grade multiplexers to the cable and 
wire category. The costs of these multiplexers associated with switched 
access were originally included in the Part 69 transport revenue 
requirement. The revised transport rules adopted in 1992 established 
transport rates based on DS1 switch interfaces, and thus the rates did 
not include the costs of DS1/voice-grade multiplexers. The costs of the 
DS1/voice-grade multiplexers are, therefore, included in the TIC. 
Therefore, the costs associated with DS1/voice-grade multiplexing 
associated with analog local switches should be reassigned to the trunk 
ports category within the traffic sensitive basket, to be considered in 
conjunction with the development of appropriate rates for trunk ports, 
in tariffs filed to become effective January 1, 1998. This will make 
recovery of the costs necessary to use an analog switch port equivalent 
to the recovery of digital switch port costs, in which the multiplexing 
function is included in the port itself.
    220. Host/remote trunking costs. We agree with the parties that 
allege that the costs of host/remote links not recovered by the current 
tandem-switched transport rates should be included in the tandem-
switched transport category. The record reflects that the rates for 
carrying traffic between the host and a remote switch, for which the 
tandem-switched transport rates, both fixed and per mile, are assessed, 
do not recover the full costs of this transmission service. These 
charges for host/remote service are in addition to charges that an IXC 
is assessed for either direct-trunked transport, or tandem-switched 
transport, between the serving wire center and the

[[Page 31902]]

host end office. This reassignment will ensure that these transmission 
costs will be recovered from those using the transmission facilities, 
and must be included in tariff filings to become effective January 1, 
1998. We reject NECA's suggestion that we include these costs in local 
switching on the theory that remote facilities are installed when it is 
more cost effective to do that than it is to install a new switch at 
the remote location. That would require all users of local switching to 
pay for these host/remote transmission facilities. Imposing the host/
remote transmission cost on the users of host/remote facilities is more 
cost causative and will facilitate the development of access 
competition.
    221. Additional multiplexers associated with tandem switching. 
Based on the record before us, we conclude that an IXC's decision to 
utilize tandem-switched transport imposes the need for additional 
multiplexing on each side of the tandem switch. The revised tandem-
switched transport rate structure provides for these multiplexers. For 
price cap LECs, recovery of the costs associated with the multiplexers 
should, therefore, be shifted from the TIC to the tandem-switched 
transport category as of January 1, 1998, as explained in Section 
III.C. This realignment of costs helps ensure that tandem-switched 
transport rates are cost based, as required by the CompTel decision, 
and facilitates competitive entry for those services.
    222. Use of actual minutes of use rather than an assumed 9000 
minutes of use. The data in the record provided by USTA and other 
incumbent LECs support a finding that for many incumbent LECs, 
especially those serving less densely populated areas, the assumed 9000 
minutes of use per circuit is far higher than actual minutes of use. A 
tandem-switched transport rate derived by dividing the cost of a 
circuit by an assumed usage level does not recover the costs of the 
circuit when the actual usage is below that level. The costs not 
recovered through tandem-switched transport rates based on our current 
9000 minutes of use assumption are being recovered through the TIC. In 
the preceding section, we conclude that the pricing of tandem-switched 
transport transmission should be based on the actual average minutes of 
use on the shared circuits and that such pricing would produce a cost-
based rate. Accordingly, costs should be removed from the TIC equal to 
the additional revenues realized from the new tandem-switched transport 
rates when it is implemented in accordance with the rate structure 
established in Section III.C.
    223. Central Office Equipment (COE) Maintenance Expenses. The 
record in this proceeding demonstrates that allocating COE maintenance 
expenses on the basis of combined COE investment produces 
misallocations of these expenses among access services. USTA correctly 
traces this problem to the Part 36 separations rules; the problem is 
then tracked in our Part 69 cost allocation rules. Under our current 
rules, COE maintenance expenses are allocated among separations 
categories, and then access services, based on the combined investment 
in the three categories of the COE plant being maintained--Central 
Office Switching, Operator Systems, and Central Office-Transmission--
rather than on the individual investment in each of those categories. 
As a result, a portion of the expense of maintaining local switches and 
operator systems is recovered in rates for common line, transport, and 
special access even though those do not utilize any local switching or 
operator systems. Correcting this misallocation through changes to Part 
36 would require referral to a Federal-State Joint Board and therefore 
could not be done in this proceeding. The misallocation can, however, 
be corrected by modifying section 69.401 of our rules, 47 CFR 
Sec. 69.401, to provide that the COE expenses assigned to the 
interstate jurisdiction should be allocated on the basis of the 
allocation of the specific type of COE investment being maintained, and 
we make the correction here. This will shift some costs to local 
switching from common line and transport, and result in more cost-based 
rates. This shift must be reflected in tariff filings to be effective 
January 1, 1998. We also plan to refer the underlying separations issue 
to a Joint Board for its recommendation.
    224. Separations-related causes. Several incumbent LECs argue that 
a substantial portion of the TIC can be traced to decisions separating 
costs between the interstate and intrastate jurisdictions. As explained 
by USTA and incumbent LECs, the largest portion of the amounts 
recovered by the TIC results from the differences in the jurisdictional 
separations allocation procedures for message (i.e., switched) services 
and special access services, and from the consequent effects of the 
Commission's decision to use special access rates to establish 
transport transmission rates when the Commission restructured transport 
rates. The current jurisdictional separations process separates the 
costs of message services based on average cost factors; costs of DS1 
and DS3 special access services, in contrast, are separated using unit 
costing methods. Because of the differences in these separations 
methodologies, special access-derived rates reflect the costs of 
transport in areas in which special access services are most often 
offered (urban, higher density areas), and do not reflect the costs of 
transport in rural, less dense areas. Another alleged separations-
related cause of the amounts in the TIC is the use of circuit 
termination counts in the separations process to allocate costs between 
special access and switched services before they are allocated between 
federal and state jurisdictions. This practice appears to allocate 
costs disproportionately to switched services. The incumbent LECs 
assert that the use of direct costing methods would assign many of 
these costs to local and intrastate services and to interstate services 
other than transport. If the Joint Board on Jurisdictional Separations 
takes action to address this issue, we will then consider what 
corresponding reallocations should be made.
    225. We find that some of the remaining costs recovered by the TIC 
result from at least two different causes: (1) the separations process 
assigned costs differently to private line and message (i.e., switched) 
services, resulting in costs allocated to special access being lower 
than those allocated to the message category, even though the two 
services use comparable facilities--rates for direct-trunked transport 
and the transmission component of tandem-switched transport, which are 
switched services, therefore, do not recover the full amount of 
separated costs; and (2) the cost of providing transport services in 
less densely populated areas is higher than that reflected by transport 
rates derived from those special access rates. The existing record is 
inadequate to permit us to identify more costs that could clearly be 
reallocated to interstate services. Furthermore, the record indicates 
that some residual TIC costs may be appropriately allocated to 
intrastate services. Because we will soon be considering a NPRM of 
Proposed Rulemaking to refer to a Joint Board questions regarding 
separations, we will leave the determination of the ultimate allocation 
of the remaining costs recovered by the TIC until the conclusion of 
that proceeding.
    226. Incumbent LEC parties generally contend that special access 
rates provided an acceptable initializing pricing level for transport 
transmission services in geographic areas where significant amounts of 
special access

[[Page 31903]]

services are provided, but do not reflect the cost of providing 
transport service in low-density areas in which special access services 
are not as widespread. We recognize that rates for direct-trunked 
transport and for the transmission component of tandem-switched 
transport, because they were established based on special access rates, 
do not reflect the full cost of providing transport services in higher-
cost, rural areas. Because none of our other facilities-based rate 
elements recover costs reflecting this differential, we conclude that 
the additional costs of rural transport currently are recovered through 
the TIC. On the basis of the current record, however, we are unable to 
quantify these cost differentials. Moreover, based on differences in 
network architectures, population density variations, topography, and 
other factors that vary among LECs, we find that transport cost 
differentials are also likely to vary greatly among incumbent LECs and 
among study areas served by the same incumbent LEC. We do not believe, 
however, that we need to quantify these differences in this Order to 
ameliorate this distortion caused by the current rate structure, 
because the requirements set forth in the next paragraph will address 
this issue.
    227. If an incumbent LEC deaverages its transport rates, either by 
implementing zone-density pricing under our rules, 47 CFR Sec. 69.123, 
or by waiver, the underlying predicate is that the costs in low-density 
areas are higher than those in higher-density areas. The rates it sets 
for the different areas should reveal a cost differential of at least 
that magnitude between low-density and high-density areas served by 
that LEC. When an incumbent LEC deaverages transport rates, therefore, 
we require it to reallocate additional TIC amounts to facilities-based 
transport rates, reflecting the higher costs of serving lower-density 
areas. The reallocation we require here will permit incumbent LECs, in 
deaveraging their transport rates, to achieve cost-based transport 
rates while ensuring that a significant portion of costs reflecting the 
geographic cost difference are removed from the TIC. Each incumbent LEC 
must reallocate costs from the TIC each time it increases the 
deaveraging differential. We find that any incumbent LEC that has 
already deaveraged its rates must move an equivalent amount from the 
TIC to its transport services. Under any of these scenarios, the costs 
shall be reassigned to direct-trunked transport and tandem-switched 
transport categories or subcategories in a manner that reflects the way 
deaveraging is being implemented by the incumbent LEC. We do not 
require incumbent LECs that average their transport rates to make a 
similar reallocation at this time, because of the difficulty in 
determining the amount to be reallocated.
    228. Price Cap Implementation issues. For purposes of phasing out 
the TIC, we are keeping the TIC in its own service category in the 
trunking basket. The reallocation of costs from the TIC to other access 
elements will require price cap LECs to adjust their price cap indices 
(PCIs) and service band indices (SBIs) to reflect the new revenue 
streams. To accomplish these reallocations, price cap LECs shall make 
exogenous adjustments to their PCIs and SBIs that are targeted to the 
indices in question, rather than applying the exogenous adjustment 
proportionately across all categories in the affected price cap basket. 
Thus, when a reallocation occurs within a price cap basket, only the 
affected SBIs will be adjusted. When the reallocation affects service 
categories in more than one basket, however, the affected PCIs and SBIs 
must be adjusted. The upward or downward adjustment to the PCIs and 
upper SBIs shall be calculated as the percentage of the revenues being 
added or subtracted from a basket or category, divided by the total 
revenues recovered through the basket or category at the time of the 
adjustment. For example, if ten percent of the revenues are being 
reallocated from a service category, the category upper SBI will be 
reduced by ten percent. If that revenue amount is only three percent of 
the PCI for the basket, the PCI is reduced by three percent.
b. Treatment of Remaining Costs Recovered by the TIC
    229. Residual TIC reduction plan. After the costs identified above 
have been reallocated to other access services, some costs will 
continue to be recovered by the TIC. While it is desirable to eliminate 
the TIC as soon as possible by shifting the costs recovered by the TIC 
to facilities-based rates, referring separations questions to a Joint 
Board is the best means of reaching that ultimate objective, as we 
noted earlier. Even as we make this referral, we will require incumbent 
LECs to target to the TIC price cap reductions arising in any price cap 
basket as a result of the application of the ``GDP-PI minus X-factor'' 
formula until the per-minute TIC is eliminated, as many parties have 
suggested. These parties submit that this targeting will permit 
incumbent LECs to manage the reduction in revenues recovered by the 
TIC, while reducing the amount at issue in the TIC. Sprint states that, 
using a targeting approach, we would not need to address the cost 
allocation issues raised by Part 36 and Part 69. Targeting these price 
cap reductions to the TIC reduces the TIC over a reasonable period, 
thereby ultimately substantially reducing what is widely recognized to 
be an inefficient aspect of the access rate structure. We require 
price-cap LECs to begin these targeted X-factor reductions to the TIC 
in tariff filings to become effective July 1, 1997.
    230. Targeting PCI reductions to the per-minute TIC will not change 
the overall revenue levels that our price cap mechanisms permit 
incumbent LECs to receive. We have reallocated those costs that the 
record shows are clearly related to other facilities-based elements. 
The upcoming separations proceeding may provide additional data that 
will permit us to reallocate more costs to facilities-based rate 
elements, or to the intrastate jurisdiction. The approach we take is a 
reasonable response to the D.C. Circuit's remand directive, and 
establishes a plan that should substantially reduce the TIC within a 
reasonable period, pending review of the jurisdictional separations 
process.
    231. We reject ALTS' allegation that targeting the productivity 
factor to the TIC undercuts the rationale for the ``just and 
reasonable'' status of all price-cap rates, which ALTS contends is 
dependant on the widespread application of the X-factor. The targeting 
approach that we adopt will eliminate anticompetitive aspects of the 
TIC, which promotes inefficient entry into the transport market by 
imposing some transport costs on IXCs that do not cause the costs to be 
incurred. In addition, by spreading current TIC revenues across all 
price cap PCIs and SBIs, our targeting method does not offer TIC 
revenues special insulation against the pressures of the competitive 
marketplace, as would some proposals to bulk-bill the TIC to IXCs. We 
also decline to adopt the approach of spreading the remaining costs 
recovered by the TIC proportionately among all transport services, as 
proposed by State Consumer Advocates. That approach might, because of 
the unknown nature of the costs that will remain in the TIC, result in 
an excessive reallocation to transport.
    232. The D.C. Circuit instructed us to revise our transport rate 
structure rules to be more consistent with cost-causation principles. 
There is conflicting evidence in the record concerning the nature of 
the costs contained within the residual TIC; these costs may be traffic 
sensitive or NTS and may be associated with common

[[Page 31904]]

line, transport or switching services. BA/NYNEX states, without 
explanation, that the costs in the TIC are NTS in nature. To the extent 
that some portion of the residual TIC has its origin in the methods 
used to separate cable and wire facilities between the regulatory 
jurisdictions, it seems likely that BA/NYNEX is partially correct in 
this assertion. The evidence, however, does not clearly resolve this 
issue.
    233. If the costs remaining in the residual TIC are NTS, as BA/
NYNEX suggests, then traffic-sensitive recovery could artificially 
raise per-minute rates for interstate access. These higher per-minute 
access rates could distort the market for interstate toll services by 
artificially suppressing demand for interstate toll services and by 
encouraging users that efficiently could make use of the network to 
instead seek other alternatives. Conversely, if costs remaining in the 
residual TIC are usage-sensitive, flat-rating may also create a 
distortion by encouraging inefficient overuse of interstate toll 
services. Because the limited evidence in the record suggests that at 
least some amount of the residual TIC represents NTS costs, and because 
we wish to see that consumers enjoy the benefits of usage of the 
network to the greatest extent possible, we find that we should err, if 
at all, on the side of NTS recovery of these costs. For elements not 
demonstrably reflecting usage-sensitive costs, therefore, we find, on 
balance, compelling policy arguments in favor of flat-rated pricing 
because usage-sensitive recovery of any NTS costs artificially 
suppresses demand for interexchange calling by inflating per-minute 
rates. In the absence of definitive evidence as to the nature of the 
residual TIC amounts, we conclude that the public interest would be 
better served by imposing these costs on IXCs on a flat per-line basis, 
rather than on a per-minute basis.
    234. Accordingly, we seek to migrate the current usage-based 
charges into flat-rated charges as quickly as possible consistent with 
avoiding short-term market distortions. We do that by: (1) On July 1, 
1997, drawing down the per-minute-of-use residual TIC charge by 
targeting the price cap productivity (X-factor) adjustment to the 
trunking PCI and, specifically, the TIC SBI, thus effectively spreading 
those residual TIC revenues, which otherwise would be recovered 
exclusively on a minute of use basis, among the universe of (both 
traffic-sensitive and NTS) access services and moving TIC recovery 
closer to flat-rated recovery; (2) starting in January 1998, recovering 
remaining residual TIC revenues through PICC charges each year, subject 
to the PICC cap; and (3) drawing down any remaining residual per-minute 
TIC revenues each July by targeting the annual X-Factor adjustments to 
those revenues.
    235. The targeting of price cap productivity reductions to the TIC 
will be accomplished in the following manner. Because the price cap 
LECs will not have reallocated facilities-based costs contained in the 
TIC before they file tariffs to be effective July 1, 1997, we first 
direct the price cap LECs to compute their anticipated ``residual'' TIC 
amount by excluding revenues that are expected to be reassigned on a 
cost-causative basis to facilities-based charges in the future, 
pursuant to the transition plan described in this Order. To determine 
TIC amounts so excluded, NYNEX, BellSouth, U S West, and Bell Atlantic 
shall use the residual TIC percentage estimates contained in USTA's ex 
parte letter filed May 2, 1997, to compute their respective anticipated 
residual TICs. These percentages are as follows: NYNEX, 77.63 percent; 
BellSouth, 56.93 percent; U S West, 59.14 percent; and Bell Atlantic, 
63.96 percent. SBC Communications shall use the cost data for SWBT, 
Pacific Bell, and Nevada Bell contained in its ex parte letter filed 
April 24, 1997 to estimate its residual TICs. These percentages, 
calculated from TIC data supplied, are: SWBT, 69.11 percent; Pacific 
Bell and Nevada Bell combined, 53.52 percent. Each remaining price cap 
LEC shall estimate a ``residual'' TIC in an amount equal to 55 percent 
of its current TIC revenues. For these remaining price cap LECs, we 
find that this 55 percent level represents a reasonable, but 
conservative estimate. The 55 percent level corresponds approximately 
to the lowest residual TIC percentage identified in the record, and 
three of the price cap LECs that submitted data on the record are 
within a few percentage points of this level. We therefore find that 
residual TIC estimates at the 55 percent level for companies that have 
not developed actual percentage estimates on the record will be 
reasonable, but will also minimize the risk that we will eliminate 
facilities-based TIC costs with targeted X-factor price cap reductions.
    236. The ``GDP-PI minus X'' adjustments LECs ordinarily would apply 
to each of their price cap indices (i.e., revenues) for the July 1, 
1997, annual filing shall be applied by LECs to reduce their calculated 
anticipated ``residual'' TIC revenues. For tariffs to become effective 
July 1, 1997, the price cap LECs shall calculate the annual price cap 
reduction resulting from the application of the productivity adjustment 
to each basket other than the interexchange basket, and shall sum the 
dollar effects of the adjustment. If the effect is to reduce PCIs, the 
dollar amount shall be targeted completely to the trunking basket PCI 
and the TIC SBI, without changing the PCIs or SBIs for any other basket 
or service category. The percentage reduction in the PCI and SBI shall 
equal the ratio of the total dollar effect of the price cap annual 
adjustment to the dollar value of the PCI and SBI, respectively. If the 
effect of the productivity adjustment would increase the PCIs, the PCIs 
shall be adjusted in their usual fashion, and no targeting to the TIC 
shall occur. This avoids exacerbating an already inefficient aspect of 
the access rate structure.
    237. Price cap LECs will begin reallocation of facilities-based TIC 
components on January 1, 1998. At that time, the price cap LECs should 
all have actual cost data reflecting the facilities-based components of 
the TIC. If, at that time, any price cap incumbent LEC determines that 
its use of the applicable residual TIC estimate, above, resulted in 
more PCI reductions being targeted to the interconnection charge in its 
tariff filing to become effective on July 1, 1997, than were required 
to eliminate the per-minute interconnection charge, then that price cap 
LEC shall make necessary exogenous adjustments to its PCIs and SBIs to 
reverse the effects of the excess targeting.
    238. For tariff filings to become effective July 1, 1998, and 
annually in July thereafter, all price cap LECs will have actual cost 
data reflecting the facilities-based components of the TIC and will be 
able to target reductions to actual anticipated residual per-minute TIC 
amounts without resort to the percentage estimates prescribed above. 
For these filings, ``GDP-PI minus X'' adjustments similar to those 
described above shall be targeted to the trunking basket PCI and the 
TIC SBI to reduce residual per-minute TIC amounts recovered through 
per-minute originating and terminating access charges.
    239. To avoid the adverse effects of per-minute pricing of costs 
that may be NTS, we require price cap LECs to recover residual TIC 
amounts not otherwise eliminated by targeted X-factor reductions, 
described above, through the flat-rated PICC to the extent the PICC is 
below its ceiling. In order to ensure that primary residential and 
single line business subscribers do not pay more than their fair share 
of the residual TIC, however, we prohibit price cap LECs from charging 
a PICC on primary residential or single-line

[[Page 31905]]

business lines that recovers TIC revenues that exceed residual TIC 
revenues permitted under our price cap rules divided by the total 
number of access lines. As the PICC caps increase each year, more of 
the residual TIC charge can be included in the flat-rated PICC. Any 
residual TIC amounts that cannot be recovered through the PICC shall be 
recovered on a per-minute basis from originating traffic, subject to a 
cap on per-minute originating access charges, as explained in Section 
III.A, above. If this cap is exceeded, the residual TIC shall be 
recovered through per-minute terminating switched access rates. 
Although a portion of the residual TIC will be recovered through PICC 
charges, the TIC will remain in the trunking basket. Therefore, to 
ensure that excess headroom is not created in the trunking basket, 
price cap LECs shall include the TIC revenues received from the flat-
rated PICC in calculating the API for the trunking basket and the SBI 
for the TIC.
    240. The policies adopted when the TIC was created require 
incumbent LECs to assess the TIC on all minutes that interconnect with 
the incumbent LEC switched access network, including minutes that 
transit a CAP's transport network without using any incumbent LEC 
transport facilities. As we noted in the NPRM, and as some commenters 
assert, if the incumbent LEC's transport rates are kept artificially 
low and the difference is recovered through the TIC, competitors of the 
incumbent LEC pay some of the incumbent LEC's transport costs. In a 
recent arbitration between Teleport and US West, the Colorado 
Commission has precluded US West from imposing the TIC on competitors 
for the portion of transport that US West does not provide. See TCG 
Colorado Petition for Arbitration Pursuant to sec. 252(b) of the 
Telecommunications Act of 1996 to Establish an Interconnection 
Agreement with US West, Docket No. 96A-329T, Decision Regarding 
Petition for Arbitration, Decision No. C96-1186 (adopted November 5, 
1996); TCG Colorado Petition for Arbitration Pursuant to sec. 252(b) of 
the Telecommunications Act of 1996 to Establish an Interconnection 
Agreement with US West, Docket No. 96A-329T, Order Denying Applications 
for Rehearing, Reargument, or Reconsideration, Decision No. C96-1344 
(adopted December 18, 1996), at para. I.B.1.4. We find that our current 
policy, which requires competitive entrants to pay the TIC even in 
cases where it provides its own transport, is inconsistent with the 
procompetitive goals of the 1996 Act. We therefore modify our rules to 
permit incumbent LECs to assess any per-minute residual TIC charge only 
on minutes that utilize incumbent LEC transport facilities, and not on 
any switched minutes of CAPs that interconnect with the incumbent LEC 
switched access network at the end office.
    241. Other Approaches. We reject alternative methods for recovering 
the TIC that were proposed in the record. The majority of the incumbent 
LEC parties supported recovering any remaining costs in the TIC by bulk 
billing such amounts to IXCs based on each IXC's share of revenues, or 
presubscribed lines. Other incumbent LECs proposed establishing 
``public policy'' elements to recover the residual TIC. These 
approaches would insulate TIC costs from the pressures of the 
competitive market and guarantee incumbent LECs the recovery of these 
amounts, even where such costs have resulted from inefficiencies that 
the competitive market--but not regulators--detected and otherwise 
would eliminate. This would be inconsistent with the development of an 
efficient competitive market. Our resolution of the TIC will allow LECs 
a reasonable opportunity to recover their costs, without providing a 
guarantee. We also reject the idea of spreading the remaining costs 
recovered by the TIC proportionately over all transport services, as 
suggested by AARP, et al. As we noted earlier, some of the remaining 
costs in the TIC may implicate certain Commission decisions separating 
costs between the federal and state jurisdictions and thus may be 
related to services other than transport. We, therefore, believe that 
awaiting further consideration by a Joint Board is a more practical 
means of ultimately resolving the TIC issue.
    242. Some parties have requested that a portion of the costs 
recovered by the TIC should be considered to be universal service 
costs. We do not find this argument persuasive. Elsewhere in this 
Order, we have reallocated the TIC's identifiable cost components. On 
the basis of the record before us, we cannot clearly associate the 
remaining TIC revenues with any particular facilities or services. The 
parties arguing that these costs are related to universal service have 
not made any clear showing as to the source of these costs or 
demonstrated why they believe that these TIC revenues are either costs 
of universal service that should be recovered from the universal 
service fund or constituent costs of supported services.
    243. We have analyzed the effect of the reallocation of TIC costs 
and the new recovery procedures on small business entities, including 
small LECs and new entrants, and find that the changes will facilitate 
the development of a competitive marketplace by moving incumbent LEC 
rates toward cost-based levels and by eliminating the ability of 
incumbent LECs to assess the TIC on switched access minutes that do not 
use incumbent LEC transport facilities. These pricing revisions may 
create new opportunities for small entities wishing to enter the 
telecommunications market.

E. SS7 Signalling

1. Background
    244. SS7 is a network protocol used to transmit signalling 
information over common channel signalling networks. As described in 
greater detail in the NPRM, signalling networks like SS7 establish and 
close transmission paths over which telephone calls are carried. 
Signalling networks are also used to retrieve information from remote 
data bases to enable credit card and collect calling. SS7 systems are 
also used to transmit information needed to provide custom local area 
signalling services like automatic call back.
    245. An SS7 network consists of several primary components--
signalling points, signal transport links, and dedicated lines used for 
access to an incumbent LEC's signalling network (signal links). 
Signalling points are nodes in an SS7 network that originate, transmit, 
or route signalling messages. There are three principal types of 
signalling points: service switching points (SSPs), service control 
points (SCPs), and signalling transfer points (STPs). An SSP is a 
switch that can originate, transmit, and receive messages for call 
setup and database transactions. An SCP serves as a database that 
stores and provides information used in the routing of calls, such as 
the line information database (LIDB) used to validate calling cards or 
the database that identifies the designated long-distance carrier for 
toll-free service. An STP is a specialized packet switch that performs 
screening and security functions and switches SS7 messages within the 
signalling network.
    246. Signal transport links are facilities dedicated to the 
transport of SS7 messages within the incumbent LEC's signalling 
network. Finally, dedicated network access lines (DNALs) consist of 
dedicated circuits that transmit queries between the incumbent LEC's 
signalling network and the signalling networks of other individual 
carriers, such as IXCs. A carrier's DNAL is connected to an incumbent 
LEC's

[[Page 31906]]

signalling network through a port on an incumbent LEC's STP.
    247. Under the interim transport rate structure, incumbent LECs 
charge IXCs and other access customers a flat-rated charge (dedicated 
signalling transport) under Part 69 for the use of dedicated facilities 
used to connect to the incumbent LEC's signalling network. This rate 
element has two subelements--a flat-rated signalling link charge for 
the dedicated network access line (dedicated signalling line) and a 
flat-rated STP port termination charge. Most other signalling costs, 
such as costs for switching messages at the STP and transmitting 
messages within the signalling network, are not recovered through 
facility-based charges and thus most, if not all, of these costs are 
embedded in the TIC or in the local switching charge and recovered 
through per-minute-of-use charges. Retrieval of information from 
databases for toll-free calls and LIDB databases, however, is charged 
on a per-query basis.
    248. In the NPRM, we solicited comment on whether the Commission 
should revise its rate structure for SS7 services to reflect the SS7 
rate structure implemented by Ameritech. In March, 1996, the Commission 
granted a waiver to Ameritech, allowing it to restructure its recovery 
of SS7 costs through four unbundled charges. These charges correspond 
to various functions performed by signalling networks: signal link, STP 
port termination, signal transport, and signal switching.
    249. The Ameritech waiver was granted to allow Ameritech to realign 
its charges for SS7 services more closely with the manner in which such 
costs are incurred. Unbundling of SS7 services from transport and local 
switching ensures that transport and local switching customers do not 
pay for SS7 services they do not use. Unbundling also enables Ameritech 
to offer SS7 services to competing providers of local exchange and 
exchange access services without requiring the purchase of other 
elements that the competitors do not need. In support of its waiver 
petition, Ameritech noted that it had received numerous customer 
requests for such unbundling. It also explained that it had deployed 
equipment necessary for measuring third-party usage of its SS7 
networks, enabling the company to bill its SS7 services separately from 
its switched access services.
    250. The NPRM also requested comment on whether incumbent LECs 
should be allowed to impose separate charges for ISDN User Part (ISUP) 
messages and Transaction Capabilities Application Part (TCAP) messages. 
ISUP messages are used to set up and take down calls. For example, ISUP 
messages include the initial address message used to establish and 
close the transmission path used to carry a telephone call. TCAP 
messages, on the other hand, are used to carry information between SSPs 
that support particular services, such as toll free services, LIDB 
services and certain custom local area signalling services (CLASS) like 
automatic call back. We noted that differentiation between charges for 
ISUP and TCAP messages may be economically justified because TCAP 
messages tend to be shorter in average length and place lower demands 
on the signalling network that ISUP messages.
    251. The NPRM also requested comment regarding the appropriate 
placement of SS7 signalling elements in price cap baskets. Currently, 
STP port termination rates and charges for the signalling link, or 
DNAL, are placed in the trunking basket. Because both services are 
dedicated to particular SS7 customers, rates for these elements are 
flat-rated. We requested comment on whether the STP port termination 
charge should be placed in its own service category in the traffic-
sensitive basket. We noted that interconnectors can provide their own 
signalling link, exposing that service element to some measure of 
competition. The STP port termination, on the other hand, is relatively 
insulated from competitive pressures because it is part of the 
incumbent LEC's STP and must be purchased from the incumbent LEC under 
existing network architecture.
2. Discussion
    252. As we noted in the Ameritech SS7 Waiver Order, the removal of 
SS7 costs from the local switching and transport interconnection charge 
rate elements would benefit access customers that pay for these 
services but do not actually use an incumbent LEC's signalling 
services. It would also benefit alternative local service providers by 
enabling them to purchase separate SS7 services from incumbent LECs to 
support their provision of competing local exchange or exchange access 
services. Unbundling the individual SS7 components into separate 
charges would further promote efficiency by ensuring that signalling 
charges more accurately reflect the costs of providing such services. 
Competitive service providers could limit their signalling costs by 
purchasing only the signalling elements they need. Despite these 
benefits, however, we are reluctant to impose on incumbent LECs the 
cost burden of installing metering or other equipment needed to measure 
third party usage of signalling facilities. In granting Ameritech a 
waiver to implement its unbundled SS7 rate structure, we noted that 
Ameritech had previously installed the equipment and other facilities 
needed to meter independent signalling usage. Although we encourage 
actions that would promote disaggregation and unbundling of SS7 
services, we will not require incumbent LECs to implement such an 
approach and incur the associated equipment costs of doing so. The 
record indicates that, as a general matter, the costs of mandating the 
installation of metering equipment may well exceed the benefits of 
doing so.
    253. Instead, we will permit incumbent LECs to adopt unbundled 
signalling rate structures at their discretion and acquire the 
appropriate measuring equipment as needed to implement such a plan. 
Specifically, incumbent LECs may implement the same unbundled rate 
structure for SS7 services that we approved in the Ameritech SS7 Waiver 
Order. We recognize, however, that other signalling rate structures may 
achieve the same benefits that are available under the Ameritech rate 
structure. Hence, an incumbent LEC may implement an unbundled 
signalling rate structure that varies from the approach implemented in 
the Ameritech SS7 Waiver Order by filing a petition demonstrating that 
the establishment of new rate elements implementing such a service is 
consistent with the public interest. We note, however, that variations 
in signalling rate structures among incumbent LECs could impose burdens 
on IXCs if IXCs must adapt to a diverse range of unbundled signalling 
rate structures. We anticipate that, if incumbent LECs choose to adopt 
unbundled rate structures for their SS7 network services, they will 
evaluate how the implementation of these plans will affect their 
prospective customers.
    254. With respect to rate differentiation between ISUP and TCAP 
messages, the NPRM expressed the concern that imposing rate 
differentiation may be inconsistent with rate structure simplicity. 
Several commenters indicate that the costs of implementing rate 
differentiation would exceed the benefits of such an approach. We 
further note that commenters offered little, if any, general support 
for the adoption of rate differentiation. Accordingly, to avoid 
unnecessary complexity and to avoid the imposition of unnecessary 
regulatory costs, we will not impose a rate differential between ISUP 
and TCAP messages.
    255. With respect to the placement of SS7 rate elements in price 
cap baskets, we have previously recognized that the

[[Page 31907]]

signalling link and the STP port termination are not subject to the 
same level of competition. As noted in the Ameritech SS7 Waiver Order, 
STP port termination is provided only by incumbents while the 
signalling link can be provided by SS7 customers themselves or by other 
alternative providers. Comments filed in this proceeding also 
acknowledge this competitive disparity. Although Ameritech discounts 
the risk that STP port termination charges would be used to offset 
price reductions for the signal link, it nevertheless acknowledges the 
existence of the competitive differential we suggested in the NPRM. 
Other commenters argue that the competitive disparity is sufficient to 
justify concerns that price cap LECs would adjust their rates to 
account for the competitive differential. Accordingly, we will 
establish a new STP port termination rate element in the traffic-
sensitive basket. Placing these SS7 services in different price cap 
baskets will ensure consistency with the Commission's general approach 
of maintaining elements with similar competitive characteristics in the 
same service baskets.

F. Impact of New Technologies

    256. The NPRM requested comment regarding the rate structure 
treatment of new technologies that enable new telecommunications 
services and, by enhancing the productivity of telecommunications 
facilities, lower prices for services in the future. These 
technologies, which we describe in greater detail in the NPRM, include 
synchronous optical networks (SONET), Asynchronous Transfer Mode (ATM) 
switching, and advanced intelligent networks (AIN). We invited 
commenters to recommend specific rate structure rules that would 
reflect the manner in which incumbent LECs incur costs when providing 
services utilizing such new technologies.
    257. As a general matter, the Commission is reluctant to adopt 
detailed rules governing rate structures for recovering the cost of 
deploying advanced technologies. We note that, in the Price Cap Third 
Report and Order, we adopted rules that permit price cap LECs to 
petition the Commission for the establishment of one or more switched 
access rate elements to accommodate new services. Under these rules, 
petitioners must demonstrate either of the following: (1) that the new 
rate elements would be in the public interest; or (2) that another LEC 
has previously obtained approval to establish identical rate elements 
and that the original petition did not rely upon a competitive showing 
as part of its public interest justification. Because technological 
advancements emerge rapidly, the adoption of uniform rate structures 
corresponding to particular technologies may slow investment in the 
development of newer technologies or improvements in current 
technologies. Indeed, as a general matter, incumbent LECs oppose the 
adoption of uniform rate structures for new technologies, suggesting 
that strict uniform rules in this regard could inhibit development of 
such technologies. Accordingly, we will refrain from adopting in this 
Order specific rate structures with respect to SONET, AIN, or other new 
technologies. As noted above, however, our rules already accommodate 
rate element adjustments that may be needed on an ad hoc basis when 
technological advancements justify such modifications. As particular 
new technologies become used on a widespread basis, we can always 
consider whether there is a need for a uniform rate structure at that 
point.

IV. Baseline Rate Levels

A. Primary Reliance on a Market-Based Approach With a Prescriptive 
Backdrop and the Adoption of Several Initial Prescriptive Measures

1. Background
    258. In the NPRM, we established a goal of encouraging efficient 
competitors to enter local exchange access markets so that incumbent 
LECs would face substantial competition for the entire array of 
interstate access services. As a particular service becomes subject to 
substantial competition from new providers, we proposed to remove that 
service from price cap and tariff regulation. We sought comment on two 
general approaches for a transition to reliance on substantial 
competition to ensure that interstate access charges are closely 
related to forward-looking economic costs: a ``market-based'' approach 
and a ``prescriptive'' approach. Under a market-based approach, we 
would permit market forces to operate as competition emerges, allowing 
an incumbent to change its prices in response to competitive entry. To 
that end, we proposed a two-phase approach in which incumbent LECs 
would be permitted certain pricing flexibility upon a showing that 
meaningful competitive entry is possible within a particular local 
exchange and exchange access market, followed by a further relaxation 
of price cap regulation when meaningful actual competition developed 
within the market. We did not propose, however, to abandon the 
possibility of using the prescriptive tools at our disposal in the 
event that competition does not develop in some places.
    259. As an alternative to the proposed market-based approach, we 
also sought comment on a prescriptive approach, under which incumbent 
LECs would be required to change their prices for some or all exchange 
access services using specific measures adopted by the Commission to 
more accurately ensure that access charges are closely related to the 
economic costs of providing interstate access services. We also invited 
comment on whether the two approaches could be merged in some fashion. 
We emphasized that our ultimate goal under any approach, whether 
market-based, prescriptive or combined, is to remove from price cap 
regulation LEC services that are subject to substantial competition. 
Instead of price cap regulation, we expect eventually to rely on the 
operation of competitive local markets to prevent incumbent LECs from 
exercising market power, and thereby to protect consumers.
    260. In this section, we endorse the use of a market-based approach 
generally. Our market-based approach will retain the protection 
afforded by price cap regulation, while relaxing particular 
restrictions on incumbent LEC pricing as competition emerges, thereby 
permitting the development and operation of competitive markets, which 
will maximize the efficient allocation of telecommunications services 
and promote consumer welfare. This section also explains how, if 
competition fails to emerge over time for certain access services in 
particular geographic areas, we will ensure that the rates for those 
services reflect the forward-looking economic costs of providing the 
services. In the NPRM, we sought comment on a number of specific issues 
concerning the timing and degrees of pricing flexibility and ultimate 
deregulation. We recognize that we must attend carefully to this task 
of granting incumbent LECs increased pricing flexibility commensurate 
with competitive developments, and we will resolve these issues of 
timing and degree in detail in a subsequent report and order in this 
docket, where we can more fully discuss these matters.
    261. Elsewhere in this Order, we adopt or propose several measures 
that work within our current price cap structure to lower baseline 
access charge rate levels consistent with evidence that the revised 
rate levels better reflect the underlying costs of providing interstate 
access services. In Section IV.C below,

[[Page 31908]]

we order an exogenous cost reduction to reflect the completion of the 
amortization of equal access costs. In Section IV.D, we order 
reallocation of certain marketing and retail expenses and discuss the 
reallocation of GSF costs. We issue a further notice on GSF costs in 
Section VII. In the companion Price Cap Performance Review for Local 
Exchange Carriers and Transport Rate Structure and Pricing, Fourth 
Report and Order, CC Docket Nos. 94-1 and 91-213, FCC 97-159, ______ FR 
______ (released May 8, 1997) (Price Cap Fourth Report and Order), 
which we also adopt today, we modify our current price cap plan by 
adopting a single productivity offset (X-Factor) of 6.5 percent and 
eliminating sharing while maintaining the low-end adjustment.
2. Discussion
    262. The Commission's objective is the one set forth in the 1996 
Act--``opening all telecommunications markets to competition.'' 
Therefore, we must ensure that our own regulations do not unduly 
interfere with the development and operation of these markets as 
competition develops. If we successfully reform our access charge rules 
to promote the operation of competitive markets, interstate access 
charges will ultimately reflect the forward-looking economic costs of 
providing interstate access services. This is so, in part, because 
Congress established in the 1996 Act a cost-based pricing requirement 
for incumbent LECs' rates for interconnection and unbundled network 
elements, which are sold by carriers to other carriers. As we have 
recognized, interstate access services can be replaced with some 
interconnection services or with functionality offered by unbundled 
elements. Because these policies will greatly facilitate competitive 
entry into the provision of all telecommunications services, we expect 
that interstate access services will ultimately be priced at 
competitive levels even without direct regulation of those service 
prices.
    263. We decide that adopting a primarily market-based approach to 
reforming access charges will better serve the public interest than 
attempting immediately to prescribe new rates for all interstate access 
services based on the long-run incremental cost or forward-looking 
economic cost of interstate access services. Competitive markets are 
superior mechanisms for protecting consumers by ensuring that goods and 
services are provided to consumers in the most efficient manner 
possible and at prices that reflect the cost of production. 
Accordingly, where competition develops, it should be relied upon as 
much as possible to protect consumers and the public interest. In 
addition, using a market-based approach should minimize the potential 
that regulation will create and maintain distortions in the investment 
decisions of competitors as they enter local telecommunications 
markets. Finally, under section 254 of the 1996 Act, implicit universal 
service subsidies, wherever possible, are to be made explicit and 
supported by all carriers on an equitable and non-discriminatory basis. 
To the extent that any implicit subsidies remain in interstate access 
charges because it was not feasible to identify them or make them 
explicit, our market-based approach will have the effect of making 
those implicit subsidies subject to being competed away as competitors 
offer comparable services at prices that do not include the subsidies. 
In addition, we note that the rate structure changes we adopt today go 
a long way towards achieving such ends because the inefficiency 
produced by distortions in markets ``rises as a quadratic function of 
the relative price distortion [Scherer & Ross, supra., at 662].'' 
Therefore, the first steps made toward removing distortions caused by 
our regulations will produce the greatest benefits.
    264. The market-based approach to access charge reform that we 
adopt will not, as some parties assert, expose customers of interstate 
access services to the unfettered exercise of market power. We will 
continue to maintain the current mechanisms upon which we rely to 
ensure that rates for these services are ``just and reasonable [as 
required by section 201 of the Communications Act],'' and not unjustly 
or unreasonably discriminatory [as required by section 202 of the 
Communications Act]. Instead of exposing customers to harm, we expect 
that permitting incumbent LECs certain kinds of pricing flexibility in 
response to the development of competition will allow prices for 
interstate access services to adjust in ways that reflect the 
underlying economic costs of providing those services without moving 
outside the range of rates that are just and reasonable. This process 
of relaxing regulation as competition develops, and ultimately 
deregulating services subject to effective competition, is well 
established. For example, many of the types of pricing flexibility 
discussed in the NPRM are similar to forms of pricing flexibility we 
have in the past accorded incumbent LECs and IXCs facing increased 
competition in markets for particular services.
    265. Economic teaching also leads to the conclusion that rates for 
interstate access services will generally move toward the forward-
looking economic cost of providing such services in response to 
increased competition in local exchange and exchange access markets. In 
addition, competition will do a better job of determining the true 
economic cost of providing such services. As competitive entry becomes 
increasingly possible, IXCs that now purchase interstate switched 
access services from incumbent LECs will be able to bypass those 
services where the prices (interstate access charges) do not reflect 
the economic costs of providing the underlying services. Those IXCs can 
do this by entering the local markets themselves as local exchange 
service providers, thereby self-providing interstate access services 
for their new local exchange service customers. They can also seek out 
competitive providers of comparable services. As customers choose 
providers other than incumbent LECs as their local providers, 
interstate access services will come to be priced competitively. 
Incumbent LECs will have to respond to competitors' offerings with 
lower-priced access services of their own in order to retain customers 
that would otherwise switch to competitors' networks, further 
increasing the effect of competition on overall access charge payments.
    266. The 1996 Act has created an unprecedented opportunity for 
competition to develop in local telephone markets. It also has provided 
this Commission with tools for opening markets to competition, and for 
implementing our market-based relaxation of regulation so that 
interstate access charges reflect forward-looking economic costs. We 
recognize, however, that competition is unlikely to develop at the same 
rate in different locations, and that some services will be subject to 
increasing competition more rapidly than others. The observation that 
competitive entry will occur in some places, and for some services, 
more rapidly than others is a corollary to the rule that firms in 
competitive markets seek to maximize their profits. To maximize 
profits, firms naturally seek out those customers and services on which 
they can generate the most profits. Therefore, some customers are 
naturally more desirable than others at any given point in time. As 
competitors attempt to gain the patronage of the customers offering the 
greatest profit opportunities, they offer lower-priced or more 
desirable services. These actions have the effect of reducing over time 
the profitability of serving those particular customers and, as this 
occurs, the relative profitability of serving other

[[Page 31909]]

customers or offering other services increases. Therefore, competitors 
begin seeking to serve these other customers, and entry occurs in new 
places, or for new services. Accordingly, we anticipate that 
competition will drive rates for some interstate access services toward 
more economically efficient levels more rapidly in some areas than 
rates for other services or in other areas. Where competition develops, 
we will provide incumbent LECs with additional flexibility, culminating 
in the removal of incumbent LECs' interstate access services from price 
regulation where they are subject to sufficient competition to ensure 
that the rates for those services are just and reasonable, and are not 
unjustly or unreasonably discriminatory.
    267. We also recognize, however, that there will be areas and 
services for which competition may not develop. Therefore, we shall 
retain many of the existing safeguards afforded by our price cap 
regulation, including the productivity offset (X-Factor), which 
requires incumbent LECs to adjust their access charges to reflect 
changes in the economic cost of providing service. In addition, we also 
adopt a prescriptive ``backstop'' to our market-based approach that 
will serve to ensure that all interstate access customers receive the 
benefits of more efficient prices, even in those places and for those 
services where competition does not develop quickly. To implement our 
backstop to market-based access charge reform, we require each 
incumbent price cap LEC to file a cost study no later than February 8, 
2001, demonstrating the cost of providing those interstate access 
services that remain subject to price cap regulation because they do 
not face substantial competition. The Commission will require 
submission of such studies before that date if competition is not 
developing sufficiently for our market-based approach to work. Studies 
should identify and quantify forward-looking costs, short-run and long-
run, that are incremental to providing each such service, and also 
costs that are common as between various services. These studies are 
required only for non-competitive services; as stated above, we do not 
intend to regulate prices of services that are subject to substantial 
competition.
    268. We have chosen this date in order to give competition 
sufficient time to develop substantially in the various markets for 
interstate exchange access services. We have also chosen this date to 
permit us and all interested parties to take into account the effects 
of implementing the substantial changes that we adopt in this Order and 
that we will be adopting elsewhere to satisfy the universal service 
goals in section 254. By this date, we also expect to have additional 
regulatory tools by which to assess the reasonableness of access 
charges. We may, for example, be able to establish benchmarks based on 
prices for the interstate access services for which competition has 
emerged, and use the prices actually charged in competitive markets to 
set rates for non-competitive services and markets. Carriers could be 
required either to set their rates in accordance with the benchmarks or 
to justify their rates using their cost studies.
    269. We anticipate that the pro-competitive regime created by the 
1996 Act, and implemented in the Local Competition Order and numerous 
state commission decisions, will generate competition over the next few 
years. Further, it would be imprudent to prejudge the effectiveness of 
those measures at creating competitive local markets. Rather than 
ignore or interfere with the effects of this developing competition on 
prices for interstate access services, we find that the public interest 
is best served by permitting emerging competition to affect access 
charge rate levels. In addition, the experience we gain from observing 
the effects of emerging competition on interstate access services will 
permit us more effectively and efficiently to implement any 
prescriptive measures that may be needed in the future to ensure that 
interstate access services remaining subject to regulation are priced 
in accordance with the forward-looking economic cost of providing those 
services.
    270. Economic logic holds that giving incumbent LECs increased 
pricing flexibility will permit them to respond to competitive entry, 
which will allow prices to move in a way that they would not have moved 
were the pricing restrictions maintained. This can lead to better 
operating markets and produce more efficient outcomes. Deregulation 
before competition has established itself, however, can expose 
consumers to the unfettered exercise of monopoly power and, in some 
cases, even stifle the development of competition, leaving a 
monopolistic environment that adversely affects the interests of 
consumers. Therefore, it is important that we design our market-based 
approach carefully. We must, among other things, decide which, if any, 
of the rules setting forth specific competitive triggers and 
corresponding flexibility as proposed in the NPRM we should adopt. We 
will resolve these issues in the subsequent report and order in this 
docket.
    271. As set forth in the summary of comments appended to this 
order, AT&T cites to Farmers Union Central Exchange, Inc. v. FERC, 734 
F.2d 1486, 1508 (D.C. Cir.) (Farmers Union), cert. denied, Williams 
Pipe Line Co. v. Farmers Union Central Exchange, Inc., 469 U.S. 1034 
(1984), for the proposition that ``[r]eliance on competitive forces to 
constrain exchange access rates, particularly in the presence of strong 
indications that market forces will not produce the intended results, 
would be arbitrary and capricious and contravene the Commission's 
statutory duty to ensure just, reasonable, and nondiscriminatory 
rates.'' We disagree with AT&T's assertion. In Farmers Union, FERC had 
stated in its relevant order that ratemaking for oil pipelines should 
be used solely to prevent price gouging, and had interpreted the 
Congressional mandate of ``just and reasonable'' rates as requiring 
that rates be kept within the zone of commercial reasonableness, not 
public utility reasonableness. Under this interpretation, FERC had 
concluded that it would rely primarily on market forces to keep rates 
reasonable.
    272. The court in Farmers Union recognized that ``[m]oving from 
heavy to lighthanded regulation * * * can be justified by a showing 
that * * * the goals and purposes of the statute will be accomplished 
through substantially less regulatory oversight,'' but objected to 
FERC's failure to establish that its new approach would satisfy the 
``just and reasonable'' standard. The court rejected FERC's position 
that oil pipeline ratemaking should protect only against ``egregious 
exploitation and gross abuse'' as being inconsistent with the mandate 
that Congress had established for FERC. The court concluded that FERC 
had not shown that market forces were sufficient to rely upon in 
setting reasonable rates.
    273. We reject AT&T's argument that our market-based approach to 
access charge reform is analogous to FERC's conduct at issue in 
Farmer's Union. Our access charge and price cap rules are designed to 
ensure that access charges remain within the ``zone of reasonableness'' 
defining rates that are ``just and reasonable,'' and our market-based 
approach will also be designed to implement this statutory requirement. 
It will not remove incumbent LECs from regulation immediately, but will 
implement deregulation in steps, as competitive conditions warrant. 
Throughout the transition to deregulation in the face of substantial 
competition, we will maintain many

[[Page 31910]]

safeguards against unjust or unreasonable rates, such as the price cap 
indices. We will deregulate incumbent LEC services only when it is 
reasonable to conclude that competition has developed to such an extent 
that the market will ensure just and reasonable rates.
    274. Second, our market-based approach is an eminently reasonable 
method for pursuing our goal of promoting competition and ensuring the 
economically efficient pricing of interstate access services. As 
competition emerges, the market-based approach will permit access 
charges to move towards the levels that will prevail in competitive 
markets. During the transition to competitive markets, access services 
not subject to competition will remain subject to price cap regulation, 
and we will eventually prescribe rates for those services at forward-
looking economic cost levels, to ensure that all consumers reap the 
benefits of economically-efficient prices. Unlike the FERC regulation 
at issue in Farmers Union, our market-based approach to promoting the 
development of competitive markets and economically-efficient pricing 
will not be based on ``largely undocumented reliance on market forces * 
* *.'' Instead, we will design our approach so that deregulation occurs 
only when the reliability of market forces can be fully determined with 
respect to a particular service. Finally, we observe that FERC's 
mandate in Farmers Union was one of rate regulation due to market 
failure and concern over monopoly power. In light of the 1996 Act, our 
mandate is no longer strictly or solely one of rate regulation. 
Congress has stated its desire to establish ``a pro-competitive, 
deregulatory national policy framework.'' Our market-based approach 
will be designed to coincide with and promote this objective.
    275. Price Squeeze Concerns Are Adequately Addressed. Several 
parties have argued that current access charge rate levels create the 
conditions for an anticompetitive price squeeze when a LEC affiliate 
offers interexchange services in competition with IXCs. A price 
squeeze, as the term is used by these parties, refers to a particular, 
well-defined strategy of predation that would involve the incumbent LEC 
setting ``high'' prices for interstate exchange access services, over 
which the LEC has monopoly power (albeit constrained by regulation), 
while its affiliate is offering ``low'' prices for long-distance 
services in competition with the other long-distance carriers. Because 
interstate exchange access services are a necessary input for long-
distance services, these parties argue that an incumbent LEC can create 
a situation where the relationship between the LEC's ``high'' exchange 
access prices and its affiliate's ``low'' prices for long-distance 
services forces competing long-distance carriers either to lose money 
or to lose customers even if they are more efficient than the LEC's 
affiliate at providing long-distance services. It is this 
nonremunerative relationship between the input prices and the 
affiliate's prices, and not the absolute levels of those prices, that 
defines a price squeeze. In the most extreme case, a price squeeze 
involves a monopolist setting input prices that are actually higher 
than its prices in the output market.
    276. Price cap regulation of access prices limits the ability of 
LECs to raise the prices of the input services. Commenters raising 
price squeeze concerns argue, however, that a LEC's interexchange 
affiliate will still be in a position to implement a price squeeze by 
setting long-distance rates close to the rates for access services, 
thereby forcing IXCs to charge below-cost rates to retain customers. 
They argue that LECs' interexchange affiliates have lower costs of 
providing interexchange services because of their affiliation with 
monopoly providers of interstate access services, and not as a result 
of being more efficient. According to these commenters, the relevant 
economic costs of providing interstate interexchange services will be 
lower for the LEC affiliate offering interexchange services than for 
competing IXCs because it only has to recover the true economic cost of 
providing the interstate access services (since the owners of the LEC 
and its interexchange affiliate will want the two entities to maximize 
their joint profits), whereas the IXCs will be forced to pay interstate 
access charges that are above the true economic cost of providing the 
underlying services.
    277. Absent appropriate regulation, an incumbent LEC and its 
interexchange affiliate could potentially implement a price squeeze 
once the incumbent LEC began offering in-region, interexchange toll 
services. Although no BOC affiliate may offer such services at this 
time, GTE, SNET, Sprint and other incumbent LECs do have affiliates 
offering such services. The incumbent LEC could do this by raising the 
price of interstate access services to all interexchange carriers, 
which would cause competing in-region carriers to either raise their 
retail rates to maintain their profit margins or to attempt to maintain 
their market share by not raising their prices to reflect the increase 
in access charges, thereby reducing their profit margins. If the 
competing in-region, interexchange providers raised their prices to 
recover the increased access charges, the incumbent LEC's interexchange 
affiliate could seek to expand its market share by not matching the 
price increase. The incumbent LEC affiliate could also set its in-
region, interexchange prices at or below its access prices. Its 
competitors would then be faced with the choice of lowering their 
retail rates for interexchange services, thereby reducing their profit 
margins, or maintaining their retail rates at the higher price and risk 
losing market share.
    278. We conclude that, although an incumbent LEC's control of 
exchange and exchange access facilities may give it the incentive and 
ability to engage in a price squeeze, we have in place adequate 
safeguards against such conduct. The Policy and Rules Concerning Rates 
for Competitive Common Carrier Services and Facilities Authorizations 
Therefor, CC Docket No. 79-252, Fifth Report & Order, 49 FR 34824 
(September 4, 1984) (Fifth Competitive Carrier Report and Order), 
requirements aid in the prevention and detection of such 
anticompetitive conduct. In our recent Regulatory Treatment of LEC 
Provision of Interexchange Services Originating in the LEC's Local 
Exchange Area and Policy and Rules Concerning the Interstate, 
Interexchange Marketplace, Second Report and Order in CC Docket No. 96-
149 and Third Report and Order in CC Docket No. 96-61, 62 FR ______ 
(released April 18, 1997) (Dom/Nondom R&O), we decided to retain the 
Fifth Competitive Carrier Report and Order separation requirements for 
incumbent LEC provision of in-region interLATA services. These 
requirements apply both to BOCs and to other incumbent LECs. In 
addition, as discussed in that order, BOC interexchange affiliates are 
subject to the safeguards set forth in section 272 of the Act.
    279. The Fifth Competitive Carrier Report and Order separation 
requirements have been in place for over ten years, and independent 
(non-BOC) incumbent LECs have been providing in-region, interexchange 
services on a separated basis with no substantiated complaints of a 
price squeeze. Under these separation requirements, incumbent LECs are 
required to maintain separate books of account, permitting us to trace 
and document improper allocation of costs and/or assets between a LEC 
and its long-distance affiliate, as well as to detect discriminatory 
conduct. In addition, we prohibit joint ownership of facilities, which 
further reduces the risk

[[Page 31911]]

of improper allocations of the costs of common facilities between the 
incumbent LEC and its interexchange affiliate, as discussed at length 
in the Dom/Nondom R&O and the Implementation of the Non-Accounting 
Safeguards of Sections 271 and 272 of the Communications Act of 1934, 
as amended, First Report and Order and Further NPRM, FCC 96-489 Paras.  
159-62 (December 24, 1996) (Non-Accounting Safeguards Order), on 
recon., FCC 97-52 (February 19, 1997), recon. pending, CC Docket No. 
96-149, petition for summary review in part denied and motion for 
voluntary remand granted sub nom., Bell Atlantic v. FCC, No. 97-1067 
(D.C. Cir. filed March 31, 1997), petition for review pending sub nom., 
SBC Communications v. FCC, No. 97-1118 (D.C. Cir. filed March 6, 1997) 
(held in abeyance pursuant to court order filed May 7, 1997), 62 FR 
2991 (January 21, 1997) (addressing the Act's prohibition of BOC joint 
ownership with its interexchange affiliate pursuant to section 272). As 
we also discussed at length in those orders, the prohibition on 
jointly-owned facilities also helps to deter any discrimination in 
access to the LEC's transmission and switching facilities by requiring 
the affiliates to follow the same procedures as competing interexchange 
carriers to obtain access to those facilities. Finally, our requirement 
that incumbent LECs offer services at tariffed rates, or on the same 
basis as requesting carriers that have negotiated interconnection 
agreements pursuant to section 251 reduces the risk of a price squeeze 
to the extent that an affiliate's long-distance prices would have to 
exceed their costs for tariffed services.
    280. Current conditions in markets for interexchange services give 
us comfort that an anticompetitive price squeeze is unlikely to occur 
as a result of our decision not to prescribe immediately access charge 
rates at forward-looking economic cost levels. If an incumbent LEC does 
attempt to engage in an anticompetitive price squeeze against rival 
long-distance providers, the provisions of the Act should permit new 
entrants or other competitors to seek out or provide competitive 
alternatives to tariffed incumbent LEC access services. For example, 
under the provisions of section 251, a competitor will be able to 
purchase unbundled network elements to compete with the incumbent LEC's 
offering of local exchange access. Therefore, so long as an incumbent 
LEC is required to provide unbundled network elements quickly, at 
economic cost, and in adequate quantities, an attempted price squeeze 
seems likely to induce substantial additional entry in local markets. 
Accordingly, there should be a reduced likelihood that an incumbent LEC 
could successfully employ such a strategy to obtain the power to raise 
long-distance prices to the detriment of consumers.
    281. Furthermore, even if a LEC were able to allocate improperly 
the costs of its affiliate's interexchange services, we conclude that 
it is unlikely that the LEC's interexchange affiliate could engage 
successfully in predation. At least four interexchange carriers--AT&T, 
MCI, Sprint, and LDDS WorldCom--have nationwide, or near-nationwide, 
network facilities that cover every LEC's region. These are large, 
well-established companies with millions of customers throughout the 
nation. It is unlikely, therefore, that one or more of these national 
companies can be driven from the market with a price squeeze, even if 
effectuated by several LECs simultaneously, whether acting together or 
independently. Even if it could be done, it is doubtful that the LECs' 
interexchange affiliates would later be able to raise, and profitably 
sustain, prices above competitive levels. As Professor Spulber has 
observed, ``[e]ven in the unlikely event that [LECs'' interexchange 
affiliates] could drive one of the three large interexchange carriers 
into bankruptcy, the fiber-optic transmission capacity of that carrier 
would remain intact, ready for another firm to buy the capacity at 
distress sale and immediately undercut the [affiliates'] noncompetitive 
prices.'' Daniel F. Spulber, Deregulating Telecommunications, 12 Yale 
J. Reg. 25, 60 (1995).
    282. Finally, in addition to our regulations and the provisions of 
section 251 of the Act, the antitrust laws also offer a measure of 
protection against a possible price squeeze. Beginning with Judge 
Learned Hand's opinion in United States v. Aluminum Co. of America 
(Alcoa), 148 F.2d 416, 437-38 (2d Cir. 1945), a specific body of 
precedent has developed under federal antitrust law defining situations 
where a price squeeze can be actionable as a form of monopolization or 
attempted monopolization under Section 2 of the Sherman Act. 15 U.S.C. 
sec. 2. Under this precedent, a price squeeze can violate the antitrust 
laws where (1) a firm has monopoly power with respect to an 
``upstream'' product; (2) it sells that product at ``higher than a 
`fair price,' ''; (3) the product is a necessary input for the product 
being sold by other firms in competition with the monopoly or its 
affiliate in a ``downstream'' market; and (4) the monopolist offers the 
``downstream'' product at a price so low that (equally-efficient) 
competitors cannot match the price and still earn a ``living profit.'' 
Alcoa, 148 F.2d at 437-38. Over time, courts have developed several 
tests for determining when the relationship between the two prices is 
sufficiently adverse to competitors that it constitutes an 
anticompetitive price squeeze. Although we believe it would not serve 
the public interest for us knowingly to permit a price squeeze to 
occur, and to rely entirely on the adequacy of antitrust law remedies 
to protect the public, we take comfort in the fact that such remedies 
exist should an anticompetitive price squeeze occur in spite of the 
safeguards we have adopted. In particular, although a price squeeze 
engaged in by several LECs, particularly if it involved more than one 
of the BOCs or GTE, could have a significant impact on interexchange 
competitors, we believe that the antitrust laws will act as a strong 
backstop to our own enforcement process so that the risk of such 
concerted activity is sufficiently limited. Because the rates charged 
by LEC interexchange affiliates will not be regulated, we do not 
believe that a court would reject a price squeeze claim under the 
antitrust laws on the grounds that `` `normally' a price squeeze will 
not constitute an exclusionary practice in the context of a fully 
regulated monopoly.'' Town of Concord v. Boston Edison Co., 915 F.2d 17 
(1st Cir. 1990) (J. Breyer), cert. denied, ______ U.S. ______, 111 S. 
Ct. 1337 (1991). Indeed, the court in that case explicitly declined to 
address the ``special problem'' posed by a price squeeze allegation 
against a firm regulated in the input market and undercutting rivals' 
prices in the unregulated market where inputs are used.
    283. Other Concerns Raised by Commenters. Several commenters raised 
concerns that our market-based approach to access charge reform might 
permit incumbent LECs to engage in cross subsidization, either between 
competitive and non-competitive services, or between interstate access 
services and other services such as video distribution. No evidence has 
been presented, however, indicating any likelihood that current price 
cap regulation, which is designed, in part, to prevent cross 
subsidization, might become less effective under a market-based 
approach to access charge reform. Those price cap regulations will 
remain in place until there is sufficient competition to prevent an 
incumbent LEC from charging rates that are not just and reasonable. 
Therefore, we find that the record does not contain substantial

[[Page 31912]]

evidence that a market-based approach to access charge reform is any 
less likely than current regulation to permit incumbent LECs to engage 
in unreasonable cross subsidization with their interstate access 
charges.
    284. Finally, several commenters based their support for a market-
based approach, in part, on arguments that it would reduce, or 
minimize, administrative burdens. Other commenters, on the other hand, 
opposed a market-based approach on the grounds that it would increase 
administrative burdens. Based on the record before us, however, we 
cannot reach a conclusion as to the relative administrative burdens of 
the two approaches. Some parts of our proposed market-based approach, 
such as grants of increased pricing flexibility as competitive 
conditions warranted, were modeled on waivers that we have granted 
within the context of our current price cap plan and would likely be 
necessary even if we had adopted a primarily prescriptive approach to 
access charge rate level reform. Similarly, some parts of a 
prescriptive approach, such as annual changes in price cap 
calculations, will necessarily be a part of our market-based approach. 
Accordingly, we can see no basis in this record for concluding that a 
market-based approach to access charge reform will be any more or less 
burdensome than any other alternative.

B. Prescriptive Approaches

1. Prescription of a New X-Factor
a. Background
    285. In the NPRM, we observed that the Commission had initiated a 
rulemaking proceeding in the Price Cap Fourth Further NPRM to examine a 
number of proposals for revising the productivity offset component of 
the X-Factor, and to consider related issues such as eliminating 
sharing obligations and the low-end adjustment mechanism. We invited 
parties to discuss in this proceeding whether the record developed 
pursuant to the Price Cap Fourth Further NPRM justified increasing the 
productivity offset, and specifically invited comment on the effects of 
a forward-looking cost of capital and economic depreciation on total 
factor productivity (TFP) measurement.
b. Discussion
    286. The commenters generally repeat arguments made in the Price 
Cap Fourth Further NPRM proceeding. For reasons explained in detail in 
our companion Price Cap Fourth Report and Order, we conclude that we 
should prescribe an X-Factor on the basis of total factor productivity 
studies, the difference between LEC input price changes and input price 
changes in the economy as a whole, and the 0.5 percent consumer 
productivity dividend (CPD). In the companion order we find that this 
results in an X-Factor prescription of 6.5 percent.
2. Other Prescriptive Approaches
a. Background
    287. In the NPRM, we sought comment on four options for a 
prescriptive approach: reinitializing price cap indices (PCIs) to 
economic cost-based levels; reinitializing PCIs to levels targeted to 
yield no more than an 11.25 percent rate of return, or some other rate 
of return; adding a policy-based mechanism similar to the CPD to the X-
Factor; or prescribing economic cost-based rates. We have decided above 
to rely primarily on a market-based approach, and impose prescriptive 
requirements only when market forces are inadequate to ensure just and 
reasonable rates for particular services or areas. We will determine 
the details of our market-based approach in a future Order. In that 
Order, we will also discuss in more detail what prescriptive 
requirements we will use as a backstop to our market-based access 
charge reform. In this section, we explain why we have decided not to 
adopt any specific prescriptive mechanism in this Order.
b. Rate Prescription
    288. Background. We sought comment on prescribing new interstate 
access rates because simply reinitializing PCIs would not necessarily 
compel incumbent LECs to establish reasonable rate structures. We also 
noted, however, that prescribing access rates on a TSLRIC basis could 
raise common cost allocation issues to a much greater extent than did 
TELRIC pricing for unbundled network elements.
    289. Discussion. In Section IV.A, above, we explain why we can and 
should rely primarily on market forces to cause interstate access rates 
to move toward economic cost levels over the next several years. 
Prescribing TSLRIC-based access rates would be the most direct, uniform 
way of moving those rates to cost. But, precisely because of its 
directness and uniformity, rate regulation can only be, at best, an 
imperfect substitute for market forces. Regulation cannot replicate the 
complex and dynamic ways in which competition will affect the prices, 
service offerings, and investment decisions of both incumbent LECs and 
their competitors. A market-based approach to rate regulation should 
produce, for consumers of telecommunications services, a better 
combination of prices, choices, and innovation than can be achieved 
through rate prescription. A market-based approach, with continued 
price cap regulation of services not subject to substantial competition 
and with the prescriptive backstop described in Section IV.A, is thus 
consistent both with the pro-competitive, deregulatory goals of the 
1996 Act and with our responsibility under Title II, Part I of the 
Communications Act to ensure just and reasonable rates.
    290. Furthermore, immediate prescription of TSLRIC-based rates 
would not necessarily move rates to those levels faster than the 
market-based approach and prescriptive backstop developed in Section 
IV.A. Some parties that favor a prescriptive approach have asserted 
that setting access rates immediately at TSLRIC levels would reduce 
incumbent LEC revenues by $10 billion or more. Were we to make such a 
rate prescription, we would consider phasing in rate reductions of that 
magnitude over a period of years, in order to avoid the rate shock that 
would accompany such a great rate reduction at one time. Finally, 
because we have adopted a more efficient rate structure for interstate 
switched access services, it is not necessary to prescribe new rates in 
order to achieve efficient rate structures, as TRA and TCI recommend. 
Accordingly, we will not prescribe TSLRIC-based access rates at this 
time.
c. Reinitialization of PCIs on a Rate-of-Return Basis
    291. Discussion. We reject reinitialization on the basis of any 
rate of return at this time. As a general matter, the parties 
advocating a rate-of-return based reinitialization do not provide any 
persuasive reason for adopting that particular approach. They favor 
reinitialization largely because they believe interstate access charges 
should be lower than they are now. As explained above, however, we are 
adopting a primarily market-based approach to rate level adjustments. 
The prescriptive backstop to that approach will be based on TSLRIC cost 
studies and, most likely, applied to geographically deaveraged rates. 
That approach is more likely to result in rates that are aligned with 
economic costs than would reinitialization to a particular rate of 
return on an embedded cost rate base.
    292. Moreover, because the basic theory of our existing price cap 
regime

[[Page 31913]]

is that the prospect of retaining higher earnings gives carriers an 
incentive to become more efficient, we believe that rate of return-
based reinitialization would have substantial pernicious effects on the 
efficiency objectives of our current policies. In this regard, we have 
often expressed concern in past price cap orders that maintaining links 
between rate levels and a carrier's achieved rate of return would 
undercut the efficiency incentives price cap regulation was designed to 
encourage. In the LEC Price Cap Order, we rejected a so-called 
``automatic stabilizer'' adjustment to the price cap index that--like 
reinitialization--would have permanently adjusted index levels downward 
in the event that carriers achieved earnings above a certain rate of 
return. Similarly, in our 1995 LEC Price Cap Performance Review Order, 
we cited as a disadvantage of AT&T's ``Direct Model'' method of 
determining the PCI formula's ``X-Factor'' the fact that ``a target 
rate of return is a critical factor in measuring productivity.'' And 
although we sought comment in the Access Reform NPRM on the question of 
rate of return-based reinitialization of the price cap indices, we once 
again expressed concern that such action ``could have a negative effect 
on the productivity incentives of the LEC price cap plan.'' We, of 
course, have authority to change our methods and theories of regulating 
LEC rates when we believe the purposes of the Communications Act would 
be better served by doing so. However, we find that, given our 
consistently critical past statements about rate of return-based 
adjustments to price caps, a decision now to reinitialize PCIs to any 
specified rate of return would further undermine future efficiency 
incentives by making carriers less confident in the constancy of our 
regulatory policies.
    293. In declining to reinitialize PCIs on the basis of carriers' 
rates of return, we reject GSA/DOD's suggestion that access rates have 
been excessive merely because the earnings of most price cap carriers 
have exceeded 11.25 percent, and, in some cases, by substantial 
amounts. When the Commission adopted price cap regulation, it 
specifically permitted price cap carriers to earn in excess of 11.25 
percent in order to encourage them to become more productive. The 
Commission also concluded that complaints alleging excessive earnings 
relative to costs will not lie as long as the carrier is in compliance 
with the sharing mechanism. In addition, we found in the LEC Price Cap 
Performance Review Order that access rates declined substantially under 
price cap regulation from 1991 to 1994, in spite of the increases in 
earnings to which GSA/DOD alluded. Furthermore, the vastly different 
results among companies show that the incentive plan we have for cost 
reduction (price caps) largely is working as predicted, whereas a rate-
of-return-based scheme would have cost much in terms of inefficiency.
d. Reinitialization of PCIs on a TSLRIC Basis
i. Background
    294. In the NPRM, we sought comment on reducing price cap PCIs by 
an amount equal to the difference between the incumbent LECs' PCIs and 
the revenues that would be produced by rates set at TSLRIC levels. We 
noted that a TSLRIC-based PCI reinitialization might be preferable to a 
TSLRIC-based rate prescription because it would not require us to 
prescribe common cost allocations. We also sought comment on whether or 
to what extent we could rely on TELRIC studies developed for pricing 
unbundled network elements, and whether we should initiate joint board 
proceedings to rely on state commissions to evaluate the incumbent 
LECs' TELRIC studies.
ii. Discussion
    295. We have decided not to require incumbent LECs to reinitialize 
PCIs on a TSLRIC basis at this time. As we discuss in Section IV.A 
above, we expect market forces to develop as a result of the 1996 Act 
and to drive access rate levels to forward-looking economic costs. 
Furthermore, the record in this proceeding is unclear on whether there 
is an accurate and convenient method for determining TSLRIC for 
purposes of reinitializing PCIs at this time. Specifically, it is 
unclear whether the TELRIC studies used to develop unbundled network 
element prices can be used for access services.
e. Policy-Based X-Factor Increase
    296. Background. In the NPRM, we observed that we adopted a 
consumer productivity dividend (CPD) to assure that some portion of the 
benefits of the incumbent LECs' increased productivity growth under 
price cap regulation would flow to ratepayers in the form of reduced 
rates. We sought comment on establishing a policy-based mechanism 
similar to the CPD to force access rates to cost-based levels.
    297. Discussion. We do not require a policy-based X-Factor increase 
at this time for the same reason we do not require a TSLRIC-based PCI 
reinitialization; we expect market forces to control access charges 
effectively in a less intrusive manner.
    298. BellSouth and GTE oppose increasing the CPD as an arbitrary 
and confiscatory measure. SNET claims that increasing the X-Factor 
merely because the price cap LECs have earned too much, or simply to 
drive rates down, is essentially an abandonment of price cap 
regulation, because it would punish incumbent LECs for their efficiency 
gains made under the price cap regime. BA/NYNEX and GTE contend that 
the X-Factor should be chosen to reflect reasonably expected incumbent 
LEC productivity growth rather than to achieve a specific rate 
reduction. We emphasize that we have done nothing in this Order to 
increase the X-Factor. In our companion Price Cap Fourth Report and 
Order, we prescribe a new X-Factor of 6.5 percent, but this 
prescription is based on detailed studies of LEC productivity growth 
and input price changes. We decline to increase the CPD, and we reject 
a proposal to set the X-Factor to target an industry average rate of 
return of 11.25 percent. Thus, none of our actions in either this Order 
or our companion Order can properly be characterized as an abandonment 
of price cap regulation, or as motivated merely by a desire to drive 
rates down.

C. Equal Access Costs

1. Background
    299. In the NPRM, we solicited 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 costs on December 31, 1993. We note that through the 
years, this issue has been referred to as ``equal access network 
reconfiguration'' or EANR costs. This is a misnomer, which we correct 
today. ``Equal access'' is the provision of exchange access to all 
interexchange carriers on an unbundled, tariffed basis that is equal in 
type, quality, and price to that provided to AT&T and its affiliates. 
Equal Access and Network Reconfiguration Costs, Memorandum Opinion and 
Order, 50 FR 50910 ( December 9, 1985) at para. 18 (Equal Access Cost 
Order). ``Network Reconfiguration'' costs are those investments and 
expenses incurred in connection with structurally conforming the pre-
divestiture AT&T network with the LATA boundaries mandated by the MFJ. 
Issues underlying network reconfiguration costs were resolved in the 
Equal Access Cost Order and have not been raised since.
    300. Under court order, the BOCs and GTE were required to provide 
equal

[[Page 31914]]

access. See United States v. AT&T, 552 F. Supp. 131, 233 (D.D.C. 1982); 
United States v. GTE Corp., 603 F. Supp. 730, 745 (D.D.C. 1984). This 
conversion, estimated at more than $2.6 billion, was largely completed 
by 1990, and involved both capital and non-capital expenditures. Under 
the Equal Access Cost Order, incumbent LECs were required to identify 
separately the incremental capital investments and the incremental non-
capital-related expenses associated with the implementation of equal 
access. The Equal Access Cost Order directed that the capital 
investments, which it estimated to comprise approximately 55 percent of 
the $2.6 billion, be treated pursuant to ordinary accounting and 
ratemaking principles. The Commission determined that the remaining 45 
percent of the expenditures--which were non-capitalized equal access 
expenses--required special treatment:

    [W]e are concerned that these expenditures will cause irregular 
and substantial fluctuations in revenue requirements associated with 
equal access. Because they are extraordinary, are for the greatest 
part expected to be incurred over the next few years, and, 
therefore, are likely to be distortive of financial results and rate 
requirements, we find that these equal access expenses should be 
deferred and amortized.

Equal Access Cost Order, 50 FR at 50914-15, para. 33. The Commission 
ordered that these equal access expenses be separately identified and 
recorded, and that they be written off over a period of eight years, 
ending December 31, 1993. See Equal Access and Network Reconfiguration 
Costs, Reconsideration, FCC No. 86-470 (released November 5, 1986) at 
para. 25 (Equal Access Cost Reconsideration Order). In the 
reconsideration of the Equal Access Cost Order, the Commission found 
that the specific termination date of the eight year amortization of 
these expenses would ``shorten the period during which the unamortized 
balances are entitled to earn a rate of return.'' Id. It is clear that 
the LECs' rate-of-return (ROR) rates included revenue recovery for both 
capitalized expenditures (recovered through the ordinary depreciation 
process) and non-capitalized expenses (recovered through the special 
amortization process). It is also clear that at the time the 
amortization was imposed, the Commission envisioned an end to the 
recovery for the amortized expenses and a subsequent decrease in ROR 
rates.
    301. In converting to price cap regulation, the Commission found 
that equal access conversion was, in large part, completed and that the 
associated costs, which included both the capitalized expenditures and 
the amortized expenses, were embedded in the existing rates. As such, 
the Commission refused to grant LECs an exogenous increase for equal 
access costs, finding that these costs were already accounted for in 
the existing rates. The Commission also based its decision to deny an 
exogenous increase on its concern that exogenous treatment of equal 
access expenditures would create inappropriate incentives for the LECs 
to inflate the amounts spent on equal access. The Commission noted the 
difficulty of reviewing equal access costs, as well as the risk that 
incumbent LECs might willfully or inadvertently shift switched access 
costs into the proposed equal access category in order to benefit from 
the requested exogenous increase.
2. Discussion
    302. We find that an exogenous cost decrease to account for 
completion of the amortization of equal access non-capitalized expenses 
is necessary and appropriate. Although we have addressed this issue in 
the past and declined to act, we now find that an exogenous decrease is 
merited. We recognize our decision departs from our past decisions that 
have declined to impose an exogenous decrease for the completed 
recovery of these costs. As discussed below, our decision today 
reverses those decisions and is based on an extensive record from this, 
and prior proceedings. Our decision today aligns our treatment of the 
completion of the amortization of equal access costs with two other 
similar amortizations that were ordered under ROR regulation and 
carried over into price cap regulation, namely, the exogenous decrease 
imposed for the completion of the amortization of depreciation reserve 
deficiencies, and the exogenous decrease imposed for the completion of 
the amortization of inside wire costs. We are convinced that this 
treatment is the proper method to ensure that ratepayers are not paying 
for costs that have already been completely recovered.
    303. The need for an exogenous adjustment to account for the 
expiration of the equal access expense amortization stems from the 
different ways in which rates are established under ROR regulation, on 
the one hand, and price cap regulation, on the other hand, and from the 
Commission's decision to establish initial price cap levels at the 
outset of price cap regulation on the basis of existing ROR-derived 
rates. When converting from ROR regulation to price cap on regulation 
January 1, 1991, the Commission needed to select a set of ``baseline'' 
rate levels to which the price cap index of incremental cost changes 
would be tied. For that purpose, we chose the ROR-developed rates that 
were in effect on July 1, 1990. The Commission found that, in general, 
those rates served as an appropriate starting point for measuring 
subsequent incremental cost changes under price cap regulation, because 
they ``reflect[ed] the reasonable operation of ROR regulation.''
    304. In two respects, however, the Commission recognized that 
existing rates did not reflect equilibrium ROR-derived rates, but 
rather reflected special corrective adjustments that we had ordered 
previously. In particular, the Commission noted that existing rates had 
embedded within them costs associated with Commission-ordered ``one-
time'' amortizations of depreciation reserve deficiencies and inside 
wiring costs. Had ROR regulation continued, the rates subject to these 
amortizations would have been reduced when the amortizations were 
completed. To ensure that ratepayers under price caps would not be 
required permanently to bear these temporary Commission-ordered, ROR-
derived rate adjustments, we directed LECs to make downward exogenous 
cost adjustments to their price cap indices upon the expiration of 
those amortizations.
    305. Similarly, the Commission ordered amortization of equal access 
expenses, which also were reflected in baseline rates at the outset of 
price cap regulation. Under normal ROR ratemaking principles, those 
expenses--which, for the most part, already had been incurred before 
price cap regulation was initiated--would have been recovered in the 
BOCs' rates the same year they were incurred and would no longer have 
been reflected in rates at the time price caps were instituted. 
However, as explained supra, the Commission required the carriers to 
amortize these extraordinary expenses over eight years because of the 
potential fluctuations in revenue requirements associated with equal 
access. Thus these expenses remained embedded within BOC rates at the 
outset of price caps even though, for the most part, the extraordinary 
expenses themselves were no longer being incurred.
    306. The specific question of whether the completely amortized 
equal access expenses should be treated exogenously has been presented 
to the Commission on a number of occasions. In the past, procedural 
impediments arising from our rules, as well as the lack of an adequate 
record, convinced us to decline to impose such treatment at that time. 
For example, when AT&T raised

[[Page 31915]]

the issue of downward adjustment for completed amortization of equal 
access expenses in an annual access charge tariff proceeding, the 
Common Carrier Bureau found that the issue was beyond the scope of the 
proceeding because it would require a substantive change to the price 
cap rules. Similarly, in response to AT&T's and MCI's revisiting the 
question in both the First 1994 Annual Access Charge Order and the 
Second 1994 Annual Access Charge Order, the Commission found that 
exogenous treatment would require a rule change to section 61.45(d) of 
the Commission's rules. Because no LEC had filed for a waiver of 
section 61.45(d), the Common Carrier Bureau found that the issue was 
not properly presented for investigation.
    307. In denying the requests for procedural reasons, the Commission 
supported its decisions with various rationales. In some instances, 
these rationales appear now not to have been considered to a sufficient 
degree. In addressing equal access costs in the orders adopting price 
cap regulation, the Commission focused primarily on the question of 
whether future equal access investments and expenses should be treated 
exogenously because equal access had been compelled by regulatory (or 
judicial) order. We concluded, subject to consideration of waiver 
requests, that we should not accord exogenous cost treatment to such 
future equal access conversion costs, because of concerns that 
exogenous cost treatment would create disincentives to implement equal 
access in an efficient manner. We did not focus in detail on the 
logically distinct question of whether equal access expenses that were 
already embedded within baseline BOC rates pursuant to the temporary 
``one-time'' amortizations (and thus raised no question with respect to 
future incentives) should be removed through exogenous adjustments when 
the amortizations expired. Instead, we relegated that issue to a 
footnote, which denied exogenous cost treatment on the basis of a 
skeletal analysis that makes no reference to our treatment of the 
depreciation reserve deficiency and inside wiring amortizations. In the 
footnote, it is clear that the Commission was not distinguishing 
between capitalized costs, which were properly treated as depreciated 
expenses, and non-capitalized expenses, which were actually amortized 
per the Commission's own requirement. The Commission framed the issue 
of a downward adjustment in terms of whether the completion of 
depreciation required a downward adjustment, querying ``whether the 
BOCs will experience any cost change in 1994 [at the completion of the 
amortization] that stems from factors beyond their control.'' In 
support of its implicitly negative answer, the Commission analogized to 
the absence of a price cap index change when a piece of equipment is 
fully depreciated, or when a carrier increased or decreased the speed 
with which it recovered investments. The Commission found that, 
``[b]ased on a meager factual record presented on the issue of equal 
access expense, we are reluctant to depart from our practice of not 
adjusting PCI levels to reflect levels of cost recovery.''
    308. The Commission's analysis at that time was incomplete. The 
Equal Access Cost Order and the Equal Access Cost Reconsideration Order 
explicitly recognized two components of equal access costs--
capitalized, which were to be depreciated, and non-capitalized, which 
were extraordinary and were to be amortized over a set period. The 
Commission established different treatment for these two sets of costs 
based on policy reasons, and ordered an amortization schedule for the 
non-capitalized costs. The Commission's establishment of this schedule 
was beyond the incumbent LECs' control. The Commission's analogy to the 
lack of exogenous treatment for equipment depreciation and changes in 
the tempo of recovery should have only applied to the capitalized 
portion of the equal access costs.
    309. The Commission explicitly stated in the LEC Price Cap Order 
that completed amortizations of depreciation reserve deficiencies 
require an exogenous downward adjustment. The Commission found that 
such an adjustment was necessary to ensure that ratepayers were not 
paying for a cost that no longer existed. Analytically, the amortized 
portion of equal access expenses should have been treated in the same 
fashion as the amortized depreciation reserve deficiency costs. The 
Commission's imposition of a downward exogenous adjustment for the 
completion of inside wire amortizations further supports our finding 
today that an exogenous decrease is appropriate and necessary for the 
completion of the amortization of equal access non-capitalized 
expenses.
    310. We reject our prior analysis of amortized equal access costs 
and accord the expiration of equal access cost amortizations the same 
exogenous cost treatment given to the amortizations of the depreciation 
reserve deficiencies and inside wiring costs. Both of those 
amortizations were given exogenous cost treatment when they expired 
because they reflected temporary, one-time treatment of costs under ROR 
regulation that, due to the mid-stream switch to price cap regulation, 
would have become permanent (even though the costs already had been 
recovered) absent an exogenous cost adjustment. The same is true for 
equal access cost amortizations.
    311. Because this is a rulemaking, we do not face the same 
procedural impediments as in some of our prior decisions, as explained 
supra. We determine that the record from this proceeding allows us to 
make a reasoned decision on this issue. We find that an exogenous 
decrease is necessary in order to adjust the price caps for the 
completed recovery of the specified equal access non-capitalized 
expenses that we required be amortized over an eight-year period. 
Because the current price cap index includes an expense that has now 
been completely recovered, the price cap should be adjusted downward to 
account its recovery. Simply stated, we find that ratepayers should not 
be forced to pay for a cost that, were it not for the way price cap 
regulation occurred in this instance, they would no longer be paying. 
By imposing a downward exogenous adjustment to adjust the PCI for the 
complete recovery of specific equal access expenses through 
amortization, we will avoid unfairly imposing a subsidy burden on 
ratepayers. Our decision in this matter will align charges more closely 
to costs.
    312. Several commenters have argued that they continue to incur 
costs as a part of the provision of equal access. These ongoing costs 
are not at issue in the present proceeding. As explained above, the 
costs at issue were a set of costs that the Commission determined 
should be amortized for policy reasons. These costs were extraordinary 
and, if allowed to be imposed in the normal fashion, would have 
resulted in huge rate fluctuations. We consider the ongoing costs of 
providing equal access as part of the normal costs of providing 
telephone service. Exogenous treatment of these costs is unnecessary. 
In response to BellSouth's contention that the record is inadequate for 
us to make a decision about an exogenous decrease, we find that the 
current record provides a sufficient basis for our decision. 
Furthermore, we note that in the past, the record may have been 
sufficient, but, as explained above, the Commission's analysis was 
incorrect.
    313. TCA and GCI are concerned about how the Commission will treat 
cost recovery for LECs that convert to equal access in the future. As 
we stated in the very first LEC Price Cap report

[[Page 31916]]

and order, LECs that have not received a bona fide request for equal 
access at the time they become subject to price cap regulation may 
request a waiver for special treatment of those special conversion 
costs when the time arises. See Policies and Rules Concerning Rates for 
Dominant Carriers, CC Docket No. 87-313, First Report and Order, 54 FR 
19836 (May 8, 1989).
    314. We hereby direct price cap LECs to make a downward exogenous 
adjustment to the traffic sensitive basket in the Annual Access Tariff 
filing that takes effect on July 1, 1997 to account for the completed 
amortization of equal access expenses.

D. Correction of Improper Cost Allocations

1. Marketing Expenses
a. Background
    315. Prior to 1987, incumbent LEC marketing expenses were allocated 
between the interstate and intrastate jurisdictions on the basis of 
local and toll revenues. In 1987, a Federal-State Joint Board 
recommended that interstate access revenues be excluded from the 
allocation factor used to apportion marketing expenses between the 
interstate and intrastate jurisdictions because marketing expenses are 
not incurred in the provision of interstate access services. Amendment 
of Part 67 (New Part 36) of the Commission's Rules and Establishment of 
a Federal-State Joint Board, CC Docket No. 86-297, Recommended Decision 
and Order, 52 FR 15355 (April 28, 1987) (Marketing Expense Recommended 
Decision). The Commission agreed with the Joint Board's recommendation 
and adopted new procedures that allocated marketing expenses in Account 
6610 on the basis of revenues excluding access revenues. MTS and WATS 
Market Structure, Amendment of Part 67 (New Part 36) of the 
Commission's Rules and Establishment of a Federal-State Joint Board, CC 
Docket Nos. 78-72, 80-286, and 86-297, Report and Order, 52 FR 17228 
(May 6, 1987). In petitions for reconsideration of the Commission's 
order, several incumbent LECs argued that the revised separations 
treatment of marketing expenses would result in a significant, 
nationwide shift of $475 million in revenue requirements to the 
intrastate jurisdiction. MTS and WATS Market Structure, Amendment of 
Part 67 (New Part 36) of the Commission's Rules and Establishment of a 
Joint Board, CC Docket No. 78-72, 80-286, and 86-297, Memorandum 
Opinion and Order on Reconsideration and Supplemental Notice of 
Proposed Rulemaking, 52 FR 32922 (September 1, 1987) (Marketing Expense 
Reconsideration Order). On reconsideration, the Commission adopted for 
marketing expenses an interim allocation factor that includes access 
revenues, pending the outcome of a further inquiry by the Joint Board.
    316. In the NPRM, we stated that some of the difference between the 
price cap LECs' interstate allocated costs and forward-looking costs 
may be traced to past regulatory practices that were designed to shift 
some costs from the intrastate jurisdiction to the interstate 
jurisdiction in order to further universal service goals. We observed 
that the Commission's decision in the Marketing Expense Reconsideration 
Order to allocate intrastate marketing costs to the interstate 
jurisdiction was an example of such past regulatory practices. We asked 
parties to comment on the extent to which the difference between price 
cap LECs' interstate allocated costs and forward-looking costs is a 
result of such decisions.
b. Discussion
    317. Under current separations procedures, approximately 25 percent 
of price cap LECs' total marketing expenses are allocated to the 
interstate jurisdiction. We agree with parties that contend that, 
because marketing expenses generally are incurred in connection with 
promoting the sale of retail services, those expenses for the most part 
should be recovered from incumbent LEC retail services, which are found 
predominantly in the intrastate jurisdiction. Pursuant to section 
410(c) of the Act, however, the Commission must refer any rulemaking 
proceeding regarding the jurisdictional separation of common carrier 
property and expenses between interstate and intrastate operations to a 
Federal-State Joint Board. We intend to initiate a proceeding to review 
comprehensively our Part 36 jurisdictional separations procedures in 
the near future. We will refer this issue to the Federal-State Joint 
Board in CC Docket No. 80-286 for resolution as part of that 
comprehensive review. We therefore do not reallocate these costs 
between the interstate and intrastate jurisdictions at this time.
    318. In the Marketing Expense Recommended Decision, the Joint Board 
stated that the inclusion of access revenues in the allocation factor 
for marketing expenses is unreasonable because incumbent LECs do not 
actively market or advertise access services. Although parties 
contested the accuracy of this statement on reconsideration, the 
Commission did not assess incumbent LEC claims that the decision to 
exclude access revenues in the allocator for marketing expenses was 
based on an inaccurate perception of the extent to which LECs actively 
market or advertise exchange access services. The Commission instead 
referred marketing expense issues back to the Joint Board, with 
specific instruction to the parties to identify any Account 6610 
marketing activities that are related to access services and any such 
activities that are related to a specific jurisdiction. We continue to 
recognize that some expenses recorded in Account 6610 may indeed be 
incurred in the provision of interstate access service, and that this 
is an issue that must be addressed by the Joint Board when it examines 
the appropriate allocation factor for marketing expenses. We note, 
however, that the Commission did not find in the Marketing Expense 
Reconsideration Order that the Joint Board's initial conclusion in the 
Marketing Expense Recommended Decision that incumbent LECs do not 
market or advertise access services to be inaccurate.
    319. We conclude that price cap LECs' marketing costs that are not 
related to the sale or advertising of interstate switched access 
services are not appropriately recovered from IXCs through per-minute 
interstate switched access charges. Pending a recommendation by the 
Joint Board on a new method of apportioning marketing costs between the 
intrastate and interstate jurisdictions, we direct price cap LECs to 
recover marketing expenses allocated to the interstate jurisdiction 
from end users on a per-line basis, for the reasons we discuss below.
    320. Recovering these expenses from end users instead of from IXCs 
is consistent with principles of cost-causation to the extent that 
price cap LEC sales and advertising activities are aimed at selling 
retail services to end users, and not at selling switched access 
services to IXCs. Recovery on a per-line basis, while perhaps not 
precisely reflective of the manner in which marketing costs are 
incurred, is preferable to the current rule requiring price cap LECs to 
recover their marketing expenses through per-minute access charges. A 
price cap LEC's retail marketing costs are not caused by usage of 
switched access services, and its efforts to sell additional lines, 
vertical features, and other retail services would only indirectly 
cause an increase in switched access usage. Per-minute recovery of 
retail marketing costs thus distorts prices in the long distance and 
local markets in the same way as does per-minute recovery of other NTS 
costs.
    321. In the past, price cap LEC retail marketing may have focused 
on the sale of optional vertical features such as call

[[Page 31917]]

waiting and caller ID, and on features and services designed for 
business customers. As local competition develops, we would expect that 
sales expenses would be driven by the price cap LEC's need to respond 
to competition. In any case, it is beyond our jurisdiction to reassign 
retail marketing costs to retail services on a truly cost-causative 
basis. There is probably a relationship, however, between the number of 
lines purchased by an end user, particularly a business user, and the 
amount of effort a price cap LEC expends to sell services and features 
to that end user. Furthermore, as parties have observed in the record 
in this proceeding, price cap LECs actively market second lines to 
residential customers. We conclude, therefore, that the most efficient 
and cost-causative method legally available to this Commission at this 
time for recovery of price cap LEC retail marketing costs allocated to 
the interstate jurisdiction is to charge those end users to whom the 
price cap LECs' marketing is directed--multi-line business and non-
primary residential line end users. We further note that by not 
permitting price cap LECs to recover these costs from primary 
residential and single-line business customers, we avoid potential 
universal service concerns that weigh against increasing charges on 
these end users.
    322. Moreover, continued recovery of interstate-allocated marketing 
expenses in per-minute switched access charges would raise competitive 
concerns. Increasingly, IXCs will be competing with incumbent, price 
cap LECs in the provision of local exchange and exchange access 
services. By permitting incumbent, price cap LECs to recover from IXCs 
through interstate switched access charges their costs of marketing 
retail services, these potential competitors are forced to bear the 
incumbent, price cap LECs' costs of competing with the IXCs. Assigning 
recovery of marketing costs to end users, on the other hand, subjects 
these costs to the competitive pressures of the market.
    323. Marketing expenses are currently recovered through all 
interstate access rate elements and the interexchange category in 
proportion to the investment originally assigned to these elements and 
categories by the Part 69 cost allocation rules. Special access and 
interexchange services are purchased by, and marketed to, retail 
customers. It is therefore appropriate to allow rates for those 
services to continue to include recovery of marketing expenses. 
Marketing expenses must be removed from all other rate elements by 
means of downward exogenous adjustments to the PCIs for the common 
line, traffic sensitive, and trunking baskets. With respect to the 
trunking basket, the exogenous adjustment shall not reflect the amount 
of any Account 6610 marketing expenses allocated to special access 
services. The service band indices (SBIs) within the trunking basket 
shall be decreased based on the amount of Account 6610 marketing 
expenses allocated to switched services included in each service 
category to reflect the exogenous adjustment to the PCI for the 
trunking basket.
    324. After performing the appropriate downward exogenous 
adjustments described above to the PCIs in the common line, traffic 
sensitive, and trunking baskets, price cap LECs may recover the 
revenues related to the Account 6610 marketing expenses removed from 
these baskets by increasing the SLCs for multi-line business and non-
primary residential lines. To prevent end-user charges from exceeding 
levels we have established earlier in this Order, the amount of 
marketing expenses to be recovered from multi-line business and non-
primary residential lines in their SLCs shall be limited by the 
ceilings we establish for these SLCs in this Order. To the extent these 
ceilings prevent full recovery of these amounts, price cap LECs may 
recover these costs by increasing equally both the non-primary 
residential line PICC and the multi-line business PICC, not to exceed 
the ceilings on the PICC for non-primary residential and multi-line 
business lines. In the event the PICC ceilings prevent full recovery of 
these expenses, any residual may be recovered through per-minute 
charges on originating access service, subject to its ceiling. Finally, 
to the extent price cap LECs cannot recover their remaining marketing 
expenses through per-minute charges on originating access, any residual 
may be recovered through per-minute charges on terminating access 
service. Although these marketing expenses will be recovered through 
the SLC, they shall not be included in the base factor or considered 
common line revenues. To prevent price cap LECs from recovering these 
expenses from access services, we are establishing a separate basket 
for these marketing expenses.
    325. We reject, however, AT&T's assertion that recovery of 
interstate-allocated marketing expenses through interstate access 
charges violates the wholesale pricing provisions contained in section 
252(d)(3) of the Act. AT&T identifies and quantifies inappropriate 
retail expenses embedded in current interstate switched access rates 
based on the requirements of section 252(d)(3) and the criteria for 
wholesale rate cost studies outlined in the Local Competition Order. 
Section 252(d)(3) establishes a pricing standard for the wholesale 
provision of retail offerings to other carriers that resell the LEC 
retail services. Section 252(d)(3) does not apply to the pricing of 
interstate access, which is not a retail service.
2. General Support Facilities
a. Background
    326. In the NPRM, we sought comment on other possible cost 
misallocations that may contribute to the difference between embedded 
costs and forward-looking costs allocated to the interstate 
jurisdiction. AT&T suggests that the allocation of embedded general 
support facilities (GSF) costs, including general purpose computer 
expenses, among access categories is one such misallocation. This 
allocation, AT&T contends, results in the inappropriate support of 
LECs' billing and collection service, which is a nonregulated, 
interstate service, through regulated access charges. AT&T estimates 
that $124 million of expenses recovered in interstate access support 
the nonregulated billing and collection category. Of the $124 million, 
$60.1 million is included in interstate switched carrier access, and 
$20.5 million is in interstate special access, with the remainder 
recovered by the SLC.
    327. The GSF investment category in Part 36 includes assets that 
support other operations, such as land, buildings, vehicles, as well as 
general purpose computer investment accounted for in USOA Account 2124. 
Some incumbent LECs use general purpose computers to provide 
nonregulated billing and collection services to IXCs. Part 69 allocates 
GSF investment among the billing and collection category, interexchange 
category, and the access elements based on the amount of Central Office 
Equipment (COE), Cable and Wire Facilities (CWF), and Information 
Origination/Termination Equipment (IO/T) investment allocated to each 
Part 69 category. Because no COE, CWF, or IO/T investment is allocated 
to the billing and collection category, no investment in general 
support facilities, and thus no portion of general purpose computer 
investment, is allocated to the billing and collection category. 
Likewise, because expenses related to GSF investment are allocated in 
the same manner as GSF investment, no GSF expenses, including expenses

[[Page 31918]]

related to general purpose computers, are allocated to the billing and 
collection category. To the extent that costs are underallocated to the 
billing and collection category, incumbent LECs' regulated services 
recover through interstate access charges costs associated with 
nonregulated provision of billing and collection services.
b. Discussion
    328. We agree with AT&T and WorldCom that the current allocation of 
GSF costs enables incumbent LECs to recover through regulated 
interstate access charges costs caused by the LECs' nonregulated 
billing and collection functions. By shifting some costs from 
interstate access services to the nonregulated billing and collection 
category, we would move interstate access rates closer to cost. The 
NPRM, however, may not have provided sufficient notice to interested 
parties that we would change in the allocation of LEC interstate costs 
between regulated interstate services and nonregulated billing and 
collection activities. We therefore seek comment on this issue in 
Section VII.B below.

V. Access Reform for Incumbent Rate-of-Return Local Exchange 
Carriers

A. Background

    329. In the NPRM we concluded that, with limited exceptions, the 
scope of this proceeding should be limited to incumbent price cap LECs 
because these carriers face the potential of significant competition in 
the interstate exchange access market due to the new duties and 
obligations imposed upon them by the 1996 Act. We proposed limited 
exceptions that would subject all incumbent LECs to the rules 
addressing allocation of universal service support to the interstate 
revenue requirement, discussed in Section VI.D, below, and to the 
reforms to the transport rate structure, including the TIC, discussed 
in sections III.D., above. We invited comment on these tentative 
conclusions on the scope of this proceeding. We also sought comment on 
whether we should apply our proposed changes to the common line rate 
structure to rate-of-return incumbent LECs and whether we should update 
Part 69 access rules in light of various developments. We further 
invited comment on the effect of these proposals and tentative 
conclusions on small business entities, including small incumbent LECs 
and new entrants. We also noted that we would address access reform for 
rate-of-return carriers in a separate proceeding in 1997.

B. Discussion

    330. We conclude that, with the limited exceptions discussed in 
Sections III.D and VI.D, the scope of this proceeding should be limited 
to price cap incumbent LECs. Price cap regulation governs almost 91 
percent of interstate access charge revenues and more than 92 percent 
of 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. Therefore, even though this proceeding applies 
only to price cap incumbent LECs, it will nonetheless affect the vast 
majority of all access lines and interstate access revenues.
    331. Small and rural LECs will most likely not experience 
competition as fast as incumbent price cap LECs. We do not expect small 
and rural LECs generally to face significant competition in the 
immediate future because, for the most part, the high cost/low-margin 
areas served by these LECs are unlikely to be the immediate targets of 
new entrants or competitors. Moreover, as we noted in the NPRM, 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) exemption, 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, they are likely to face 
significant competition in the interstate exchange access market before 
the small and mid-sized rate-of-return incumbent LECs face such 
competition.
    332. We recognize that small and rural rate-of-return LECs face 
unique circumstances and that a few of these carriers may now have, or 
may soon receive, bona fide requests for interconnection. Although all 
rate-of-return carriers may not be completely insulated from 
competitive pressures, we are not persuaded by arguments that delaying 
the initiation of an access reform proceeding for these carriers until 
later this year will have a detrimental impact on their viability. A 
separate proceeding for small and rural rate-of-return LECs will 
provide us with the opportunity to conduct a comprehensive review of 
the circumstances and issues unique to these carriers.
    333. We do not agree that Citizens Utilities should be exempt from 
some of the rules we adopt in this order for price cap companies. The 
decisions we reach here accommodate many of the concerns that Citizens 
Utilities, as well as a number of other price cap LECs that serve rural 
areas, voices in its pleadings. Although Citizens Utilities arguably 
may face different circumstances than other price cap LECs that serve 
larger urban and suburban populations, Citizens has indicated, by 
electing price cap regulation, that it believes it can achieve a higher 
rate of productivity than smaller rate-of-return LECs and that price 
cap regulation is more beneficial to it than rate-of-return regulation. 
Citizens Utilities has not demonstrated that the modifications we are 
adopting in this proceeding would necessarily affect it differently 
than other price cap LECs. If Citizens Utilities believes that it 
cannot remain financially viable as a price cap carrier under the 
revised access charge regime, it may petition for a waiver of the rule 
that makes its decision to elect price cap regulation irreversible.
    334. We reject Centennial's suggestion that we adopt access reform 
modifications for all incumbent LECs but then grant waivers for small, 
rural LECs whose special circumstances warrant different 
accommodations. For the most part, rate-of-return LECs face a common 
set of complex issues, different than those faced by price cap LECs, 
that are better addressed in a separate proceeding. In that proceeding, 
we will address any differences that may exist between large and small 
rate-of-return carriers.
    335. We therefore limit application of the rules we adopt in this 
proceeding to the incumbent price cap LECs, with limited exceptions. 
Because rate-of-return LECs will collect revenues from the new 
universal service support mechanisms, we address allocation of 
universal service support to the interstate revenue requirement for all 
incumbent LECs in Section VI.D. In addition, because rate-of-return 
incumbent LECs' transport rates were subject to the rules that were 
remanded by the court in CompTel v. FCC, the changes to the TIC that we 
adopt in Section III.D. pursuant to the court's remand, except for 
changes that require reallocation of costs to newly-created rate 
elements, will also apply to rate-of-return incumbent LECs. Finally, in 
order to prevent double recovery of the costs associated with providing 
access services to new entrants through the sale of unbundled network 
elements, we conclude in Section VI.A, below, that our exclusion of 
unbundled network elements from Part 69 access charges applies to all 
incumbent LECs.

[[Page 31919]]

VI. Other Issues

A. Applicability of Part 69 to Unbundled Elements

1. Background
    336. In the NPRM, we requested comment regarding the potential 
application of Part 69 access charges to unbundled network elements 
purchased by carriers to provide local exchange services or exchange 
access services. We tentatively concluded that unbundled network 
elements should be excluded from such access charges. We noted that the 
1996 Act allows telecommunications carriers to purchase access to 
unbundled network elements and to use those elements to provide all 
telecommunications services, including originating and terminating 
access of interstate calls. We further noted that the 1996 Act requires 
purchasing carriers to pay cost-based rates to incumbent LECs to 
compensate them for use of the unbundled network elements. Accordingly, 
we tentatively concluded that the requesting carrier paying cost-based 
rates to the incumbent LEC would have already compensated the incumbent 
LEC for the ability to deploy unbundled network elements to provide 
originating and terminating access.
2. Discussion
    337. We will adhere to our tentative conclusion to exclude 
unbundled network elements from Part 69 access charges. This conclusion 
applies to all incumbent LECs. As we noted in the Local Competition 
Order, payment of cost-based rates represents full compensation to the 
incumbent LEC for use of the network elements that carriers purchase. 
We further noted that sections 251(c)(3) and 252(d)(1), the statutory 
provisions establishing the unbundling obligation and the determination 
of network element charges, do not compel telecommunications carriers 
using unbundled network elements to pay access charges. Moreover, these 
provisions do not restrict the ability of carriers to use network 
elements to provide originating and terminating access. Allowing 
incumbent LECs to recover access charges in addition to the reasonable 
cost of such facilities would constitute double recovery because the 
ability to provide access services is already included in the cost of 
the access facilities themselves. Excluding access charges from 
unbundled elements ensures that unbundled elements can be used to 
provide services at competitive levels, promoting the underlying 
purpose of the 1996 Act. If incumbent LECs added access charges to the 
sale of unbundled elements, the added cost to competitive LECs would 
impair, if not foreclose, their ability to offer competitive access 
services. The availability of access services at competitive levels is 
vital to the general approach we adopt in this Order, which relies on 
the growth of competition, including from competitors using unbundled 
network elements, to move overall access rate levels toward forward-
looking economic cost. In addition, we note that excluding unbundled 
network elements from access charges benefits small entities seeking to 
enter the local service market by ensuring that they can acquire 
unbundled elements at competitive prices.
    338. We disagree with suggestions offered by some commenters that 
access charges should be imposed on unbundled elements because cost-
based rates for such elements would not recover universal service 
support subsidies built into the access charge regime. Although our 
plan to implement comprehensive universal service reform is not fully 
implemented, we believe excluding access charges from the sale of 
unbundled elements will not dramatically affect the ability of price 
cap LECs to fulfill their universal service obligations. First, 
competitors using unbundled network elements to provide interstate 
services will contribute to universal service requirements pursuant to 
section 254. Carriers receive no exemption from their obligation to 
contribute to universal service by using unbundled network elements. 
Second, rate structure modifications adopted in this Order--including 
reallocation of TIC costs, adoption of a mechanism to phase out the 
TIC, and raising multi-line SLCs--should reduce the impact on price cap 
LECs of excluding the recovery of TIC costs in the sale of unbundled 
network elements. Third, if unbundled network element prices are 
geographically deaveraged, LECs will receive higher prices when they 
sell unbundled network elements that embody higher costs. Fourth, 
because the difference between the level of access charges and the 
forward-looking economic costs of network elements may include more 
than universal service support, imposing access charges on the sale of 
unbundled network elements could recover from market entrants 
substantially more than amounts used to support universal service. 
Accordingly, we are not persuaded by suggestions that the universal 
service obligations of price cap LECs compel the imposition of access 
charges on the purchase of unbundled network elements by requesting 
carriers.
    339. Although, in the Local Competition Order, we allowed 
application of certain non-cost-based access charges (the CCLC and a 
portion of the TIC) to unbundled elements, we limited the duration of 
such application to a transition period ending June 30, 1997 even if 
access and universal service reform were not completed by the end of 
the transition period. The transition period was limited in order to 
minimize the burden on competitive local service providers seeking to 
use unbundled network elements to offer the competitive services that 
the 1996 Act sought to promote. The interim application of certain 
access charges was also limited to non-cost-based charges because such 
charges, unlike facilities-based charges, were more likely to include 
subsidies for universal service. All facilities-based charges were 
completely excluded from unbundled network elements to prevent double 
recovery by incumbent LECs of the costs of these facilities when they 
are purchased by competitive carriers.
    340. We are also unpersuaded by suggestions that access charges 
should be imposed on unbundled elements because provision of 
competitive service by rebundling the same network elements used by the 
incumbent LEC to provide access is equivalent to resale of a retail 
service. First, in the Local Competition Order, we recognized major 
differences between competition through the use of unbundled network 
elements and competition through resale of an existing retail service 
offered by an incumbent LEC. We explained, for example, that an entrant 
relying on unbundled elements rather than resale has the flexibility to 
offer all telecommunications services made possible by using network 
elements but also assumes the risk that end users will not generate 
sufficient demand to justify the investment. The entrant using a resale 
strategy, however, is limited to offering the retail service itself 
without the attendant investment risk. Thus, we reject the notion that 
the rebundling of network elements is equivalent to resale. Second, 
although we concluded in the Local Competition Order that IXCs must 
continue to pay access charges to incumbent LECs for access services 
when the end user is served by a competitive carrier reselling the 
incumbent LEC's retail services, our conclusion was based on the resale 
provisions of the 1996 Act which limit resale to retail services 
offered to subscribers or other customers who are not 
telecommunications carriers. The resale provision does not apply to 
non-

[[Page 31920]]

retail services, including access services, that may be offered using 
the same facilities. Unlike the provision of local exchange services, 
access services are not services that LECs provide directly to end 
users on a retail basis. To impose access charges on the sale of 
unbundled elements would contravene the terms of the resale provision 
by effectively treating exchange access as a service provided on a 
retail basis.

B. Treatment of Interstate Information Services

1. Background
    341. In the 1983 Access Charge Reconsideration Order, the 
Commission decided that, although information service providers (ISPs) 
may use incumbent LEC facilities to originate and terminate interstate 
calls, ISPs should not be required to pay interstate access charges. 
(For purposes of this Order, providers of enhanced services and 
providers of information services are referred to as ISPs.) MTS and 
WATS Market Structure, CC Docket No. 78-72, Memorandum Opinion and 
Order, 48 FR 42984 (September 21, 1983) (Access Charge Reconsideration 
Order). In recent years, usage of interstate information services, and 
in particular the Internet and other interactive computer networks, has 
increased significantly. Although the United States has the greatest 
amount of Internet users and Internet traffic, more than 175 countries 
are now connected to the Internet. Network Wizards Internet Domain 
Survey, January 1997, available on the World Wide Web at <http://
www.nw.com/zoneWWW/top.html>. As usage continues to grow, information 
services may have an increasingly significant effect on the public 
switched network.
    342. As a result of the decisions the Commission made in the Access 
Charge Reconsideration Order, ISPs may purchase services from incumbent 
LECs under the same intrastate tariffs available to end users. ISPs may 
pay business line rates and the appropriate subscriber line charge, 
rather than interstate access rates, even for calls that appear to 
traverse state boundaries. The business line rates are significantly 
lower than the equivalent interstate access charges, given the ISPs' 
high volumes of usage. ISPs typically pay incumbent LECs a flat monthly 
rate for their connections regardless of the amount of usage they 
generate, because business line rates typically include usage charges 
only for outgoing traffic.
    343. In the NPRM, we tentatively concluded that ISPs should not be 
required to pay interstate access charges as currently constituted. We 
explained that the existing access charge system includes non-cost-
based rates and inefficient rate structures. We stated that there is no 
reason to extend such a system to an additional class of customers, 
especially considering the potentially detrimental effects on the 
growth of the still-evolving information services industry. We 
explained that ISPs should not be subjected to an interstate regulatory 
system designed for circuit-switched interexchange voice telephony 
solely because ISPs use incumbent LEC networks to receive calls from 
their customers. We solicited comment on the narrow issue of whether to 
permit incumbent LECs to assess interstate access charges on ISPs. In 
the companion Notice of Inquiry (NOI), we sought comment on broader 
issues concerning the development of information services and Internet 
access. See In the Matter of Usage of the Public Switched Network by 
Information Service and Internet Access Providers, CC Docket No. 96-
263, Notice of Inquiry, 62 FR 4657 (January 31, 1997) (NOI).
2. Discussion
    344. We conclude that the existing pricing structure for ISPs 
should remain in place, and incumbent LECs will not be permitted to 
assess interstate per-minute access charges on ISPs. We think it 
possible that had access rates applied to ISPs over the last 14 years, 
the pace of development of the Internet and other services may not have 
been so rapid. Maintaining the existing pricing structure for these 
services avoids disrupting the still-evolving information services 
industry and advances the goals of the 1996 Act 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.'' 47 U.S.C. sec. 230(b)(2).
    345. We decide here that ISPs should not be subject to interstate 
access charges. The access charge system contains non-cost-based rates 
and inefficient rate structures, and this Order goes only part of the 
way to remove rate inefficiencies. Moreover, given the evolution in ISP 
technologies and markets since we first established access charges in 
the early 1980s, it is not clear that ISPs use the public switched 
network in a manner analogous to IXCs. Commercial Internet access, for 
example, did not even exist when access charges were established. As 
commenters point out, many of the characteristics of ISP traffic (such 
as large numbers of incoming calls to Internet service providers) may 
be shared by other classes of business customers.
    346. We also are not convinced that the nonassessment of access 
charges results in ISPs imposing uncompensated costs on incumbent LECs. 
ISPs do pay for their connections to incumbent LEC networks by 
purchasing services under state tariffs. Incumbent LECs also receive 
incremental revenue from Internet usage through higher demand for 
second lines by consumers, usage of dedicated data lines by ISPs, and 
subscriptions to incumbent LEC Internet access services. To the extent 
that some intrastate rate structures fail to compensate incumbent LECs 
adequately for providing service to customers with high volumes of 
incoming calls, incumbent LECs may address their concerns to state 
regulators.
    347. Finally, we do not believe that incumbent LEC allegations 
about network congestion warrant imposition of interstate access 
charges on ISPs. The Network Reliability and Interoperability Council 
has not identified any service outages above its reporting threshold 
attributable to Internet usage, and even incumbent LEC commenters 
acknowledge that they can respond to instances of congestion to 
maintain service quality standards. Internet access does generate 
different usage patterns and longer call holding times than average 
voice usage. However, the extent to which this usage creates congestion 
depends on the ways in which incumbent LECs provision their networks, 
and ISPs use those networks. Incumbent LECs and ISPs agree that 
technologies exist to reduce or eliminate whatever congestion exists; 
they disagree on what pricing structure would provide incentives for 
deployment of the most efficient technologies. The public interest 
would best be served by policies that foster such technological 
evolution of the network. The access charge system was designed for 
basic voice telephony provided over a circuit-switched network, and 
even when stripped of its current inefficiencies it may not be the most 
appropriate pricing structure for Internet access and other information 
services.
    348. Thus, in our review of the record filed in response to the 
NOI, we will consider solutions to network congestion arguments other 
than the incumbent LECs' recommendation that we apply access charges to 
ISPs' use of circuit-switched network technology. We intend rather to 
focus on new approaches to encourage the efficient offering of services 
based on new network configurations and technologies, resulting in more

[[Page 31921]]

innovative and dynamic services than exist today. In the NOI, we will 
address a range of fundamental issues about the Internet and other 
information services, including ISP usage of the public switched 
network. The NOI will give us an opportunity to consider the 
implications of information services more broadly, and to craft 
proposals for a subsequent NPRM that are sensitive to the complex 
economic, technical, and legal questions raised in this area. We 
therefore conclude that ISPs should remain classified as end users for 
purposes of the access charge system.

C. Terminating Access

    349. In the NPRM, we requested comment regarding the regulation of 
terminating access. We noted that, unlike originating access, the 
choice of an access provider for terminating access is made by the 
recipient of the call. The call recipient generally does not pay for 
the call and, therefore, is not likely to be concerned about the rates 
charged for terminating access. We suggested that neither the 
originating caller nor its long-distance service provider can exert 
substantial influence over the called party's choice of terminating 
access provider. Thus, even if competitive pressures develop at the 
originating end as new entrants offer alternatives, the terminating end 
of a long-distance call may remain a bottleneck, controlled by the LEC 
providing access for a particular customer. We also recognized, 
however, that excessive terminating access charges could furnish an 
incentive for IXCs to enter the access market in order to avoid paying 
excessive terminating access charges.
1. Price Cap Incumbent LECs
a. Background
    350. We requested comment on various alternative special methods 
for regulating the terminating access rates of price cap LECs. For 
instance, we sought comment on whether to establish a ceiling on the 
terminating access rates of price cap LECs equal to the forward-looking 
economic cost of providing the service. We suggested alternative 
methods for measuring forward-looking economic cost, including 
reference to prices in reciprocal compensation arrangements for the 
transport and termination charges of telecommunications under sections 
251(b)(5) and 252(d)(2) or a requirement that terminating rates be 
based on a TSLRIC study or other acceptable forward-looking cost-based 
model.
b. Discussion
    351. We believe that new entrants, by purchasing unbundled network 
elements or providing facilities-based competition, will eventually 
exert downward pressure on originating access rates assessed by 
incumbent LECs. We agree that excessive terminating access rates could 
encourage long-distance companies to avoid the payment of such charges 
by seeking to become the local exchange and exchange access provider 
for end user customers. These market developments, however, would not 
fully address the concerns expressed in the NPRM and reflected in 
comments with respect to the ability of incumbent LECs to charge 
unreasonable rates for terminating access.
    352. We are also not convinced that a significant competitive 
impact would result from changes in calling patterns between pairs of 
callers. Commenters have not described any realistic way that users, by 
changing their calling patterns, could experience savings attributable 
to differing levels of terminating access charges paid by IXCs. 
Although one commenter points to high termination charges in foreign 
countries as affecting the market for overseas calls originating in the 
United States, such results are less likely to occur for domestic 
calls, which are much less expensive than international calls and are 
subject to geographic rate averaging and rate integration requirements. 
Thus, we are reluctant to base our approach on the expectation that a 
significant proportion of callers will implement such a strategy.
    353. Accordingly, we are establishing regulatory requirements that 
will address the potential that incumbent LECs could charge 
unreasonable rates for terminating access. Specifically, we are 
adopting rules in this Order that, for price cap LECs, will limit 
recovery of TIC and common line costs from terminating access rates for 
a limited period, and then eliminate any recovery of common line and 
TIC costs from terminating access. Under this approach, beginning 
January 1, 1998, price cap LECs will recover common line and residual 
TIC revenues through a new flat charge, subject to a ceiling. Remaining 
common line and residual TIC revenues will then be first recovered 
through originating access rates, subject to a ceiling. Any remaining 
common line and residual TIC revenues may then be recovered through 
terminating rates. As the caps on SLCs applicable to non-primary 
residential lines and the PICC are raised, none of these residual 
revenues will be recovered through terminating access charges. When the 
increased SLCs and PICCs are fully implemented, recovery of these costs 
will be more susceptible to competitive forces because IXCs could seek 
to influence the end user's choice of its provider of local service, 
and the end user's choice of service provider will determine whether 
the incumbent LEC is able to recover these costs from the end user.
    354. In addition, pending full recovery of all common line and 
residual TIC costs in flat rate SLCs and PICCs, this approach will put 
downward pressure on terminating access rates by lowering the overall 
service revenues derived from terminating access charges. Because 
competitive pressure is more likely to develop on the originating end 
of a long-distance call, we can rely to a greater extent on competitive 
forces to ensure just and reasonable rates under this approach by 
moving recovery of certain revenues from terminating access to 
originating access. By stripping terminating access rates of CCL and 
residual TIC charges and, pending full implementation of the new flat 
charges, placing more of the burden of TIC recovery on originating 
access rates, we reduce potential excesses in terminating access 
charges while exposing the CCL and residual TIC recovery to competitive 
pressures in the originating access market.
    355. The NPRM described proposals linking terminating rates to 
originating rate levels or shifting costs from terminating to 
originating access charges. Some commenters support limiting price cap 
LEC terminating access rates to the level of the LEC originating access 
rates. If originating access charges are lowered because of 
competition, the ceiling on terminating access rates would be lowered 
as well, placing downward pressure on terminating rates. This approach, 
however, would not substantially affect terminating access rates where 
originating access rates have not responded to competitive inroads. 
Moreover, linking an incumbent LEC's terminating access rate to its own 
originating rate could reduce the incumbent LEC's incentive to lower 
its originating access rates. Thus, we decline to adopt this method of 
regulating terminating access rates.
    356. The NPRM requested comment on the possibility of eliminating 
all charges for terminating access by shifting the burden of recovering 
all costs currently recovered in terminating access rates to 
originating access charges. We decline to adopt this approach because a 
complete shift of

[[Page 31922]]

terminating access costs to originating access conflicts with one of 
the basic objectives of this proceeding--to ensure that charges for 
access services reflect the manner in which the costs of providing 
those services are incurred. Switching costs, for example, should 
continue to be recovered in part from terminating access charges 
because those costs are traffic sensitive and are related to the 
volumes of both originating and terminating traffic. Moreover, we 
emphasize that, as discussed in Section III.A, the rate structure we 
are adopting, which will replace per-minute recovery of the CCL charge 
and the TIC with flat rate charges, helps to achieve our goal of 
ensuring that charges for access services reflect the manner in which 
costs are incurred. Our requirement that incumbent LECs recover a 
greater portion of common line and TIC costs in originating access 
rates pending full implementation of flat-rated charges will address 
concerns about the reasonableness of terminating access charges while 
providing price cap LECs sufficient latitude to recover the reasonable 
costs of deploying their facilities to provide terminating access 
services.
    357. The NPRM also discussed the alternative of requiring price cap 
LECs to establish end user charges for terminating access. This 
approach would place direct responsibility for the cost of terminating 
access on the recipient of terminating access services and would expose 
terminating access to competitive pressures. We noted that wireless 
companies already charge called parties for receiving calls and 
requested comment on how we might implement a system of end user 
charges in the context of access reform and whether its implementation 
would increase the number of uncompleted calls due to a reluctance by 
called parties to accept the charges. We agree with commenters that 
such a change could prove disruptive to consumers of wireline services. 
After review of the record, which produced few, if any, advocates of 
such an approach, we conclude that we should not mandate at this time 
this change in current pricing practices for wireline service.
2. Non-Incumbent LECs
a. Background
    358. In the NPRM, we requested comment about whether to impose 
ceilings on the terminating access rates of non-incumbent LECs. We 
stated in the NPRM that our policy since the Competitive Carrier 
Proceeding has consistently been that a carrier is non-dominant unless 
the Commission makes or has made a finding that it is dominant. We 
noted that, since the Competitive Carrier Proceeding, new entrants into 
the exchange access market have been presumptively classified as non-
dominant because they have not been shown to exercise significant 
market power in their service areas. Policy and Rules Concerning Rates 
for Competitive Common Carrier Services and Facilities Authorizations 
Therefor, CC Docket No. 79-252, 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, 47 FR 
17308 (April 22, 1982), Second Report and Order, 47 FR 37889 (August 
27, 1982). At the same time, we stated that competitive LECs may 
possess market power over IXCs needing to terminate calls because the 
LEC controlling the terminating local loop is the only access provider 
available to the IXC seeking to terminate a long-distance call on that 
particular loop. We solicited comment on several alternatives, 
including whether we should use incumbent LEC terminating access rates 
as a benchmark to determine the reasonableness of competitive LEC 
terminating rates. We invited commenters to offer other approaches 
including, for example, whether we should establish a presumption of 
reasonableness if the competitive LEC's terminating access rate is no 
higher than the incumbent LEC's rate in the same geographic market.
b. Discussion
    359. We recently noted that the test in deciding whether to apply 
dominant carrier regulation to a class of carriers is whether those 
carriers have market power. Regulatory Treatment of LEC Provision of 
Interexchange Services Originating in the LEC's Local Exchange Area and 
Policy and Rules Concerning the Interstate, Interexchange Marketplace, 
CC Docket Nos. 96-149 and 96-61, Second Report and Order in CC Docket 
No. 96-149 and Third Report and Order in CC Docket No. 96-61, FCC 97-
142 (April 18, 1997) (Dominant-Non-Dominant Order). As we discussed in 
the Dominant/Nondominant Order, in determining whether a firm possesses 
market power, the Commission has previously focused on certain well-
established market features, including market share, supply and demand 
substitutability, the cost structure, size or resources of the firm, 
and control of bottleneck facilities. Competitive LECs currently have a 
relatively small market share in the provision of local exchange and 
exchange access service. Nonetheless, at first blush, there is a 
concern that a competitive LEC may have market power over an IXC that 
needs to terminate a long-distance call to a customer of that 
particular competitive LEC. Therefore, we sought comment on whether and 
to what extent we should regulate the terminating access charges of 
competitive LECs.
    360. We conclude, based on the record before us, that non-incumbent 
LECs should be treated as nondominant in the provision of terminating 
access. Although an IXC must use the competitive LEC serving an end 
user to terminate a call, the record does not indicate that competitive 
LECs have previously charged excessive terminating access rates. Nor 
have commenters provided evidence demonstrating that competitive LECs 
are, in fact, charging excessive terminating rates. Indeed, the record 
suggests that the terminating rates of competitive LECs are equal to or 
below the tariffed rates of incumbent LECs. In addition, the record 
does not show that competitive LECs distinguish between originating and 
terminating access in their offers of service. Therefore, it does not 
appear that competitive LECs have structured their service offerings in 
ways designed to exercise any market power over terminating access. 
Accordingly, the concerns expressed in the NPRM about the ability of 
competitive LECs to exercise market power in the provision of 
terminating access are not substantiated in the record.
    361. Further, as competitive LECs, which have a small share of the 
interstate access market, attempt to expand their market presence, the 
rates of incumbent LECs or other potential competitors will constrain 
the terminating access rates of competitive LECs. Specifically, 
competitive LECs compete with incumbent LECs whose rates are regulated. 
The record indicates that long-distance carriers have established 
relationships with incumbent LECs for the provision of access services, 
and new market entrants are not likely to risk damaging their 
developing relationships with IXCs by charging unreasonable terminating 
access rates. This is especially true with respect to competitive 
access providers seeking to maintain or expand their access transport, 
special access, or other services apart from switched access.
    362. In addition, we believe that overcharges for terminating 
access could encourage access customers to take competitive steps to 
avoid paying unreasonable terminating access charges. If, for example, 
a competitive

[[Page 31923]]

LEC consistently overcharged an IXC for terminating access, the IXC 
would have an incentive to enter a marketing alliance with another 
competitive LEC in the same market or in other geographic markets where 
the overcharging competitive LEC seeks to expand. Although high 
terminating access charges may not create a disincentive for the call 
recipient to retain its local carrier (because the call recipient does 
not pay the long distance charge), the call recipient may nevertheless 
respond to incentives offered by an IXC with an economic interest in 
encouraging the end user to switch to another local carrier. Such an 
approach could have particular impact when the IXC has significant 
brand recognition among consumers. Moreover, as noted in the NPRM, 
excessive terminating access charges could encourage IXCs to enter the 
access market in an effort to win the local customer. We believe that 
the possibility of competitive responses by IXCs will have a 
constraining effect on non-incumbent LEC pricing.
    363. Thus, we will not adopt at this time any regulations governing 
the provision of terminating access provided by competitive LECs. 
Because competitive LECs have not charged unreasonable terminating 
access rates, and because they are not likely to do so in the future, 
competitive LECs do not appear to possess market power. Thus, the 
imposition of regulatory requirements with respect to competitive LEC 
terminating access is unnecessary. We similarly find no reason to adopt 
a presumption of reasonableness where a competitive LEC's terminating 
access rates are less than its rates for originating access or less 
than the incumbent LEC's terminating access rates. Instead, if we need 
to examine the reasonableness of competitive LEC terminating access 
rates in an individual instance, we can do so taking into account all 
relevant factors including relationships to other rates. Thus, if an 
access provider's service offerings violate section 201 or section 202 
of the Act, we can address any issue of unlawful rates through the 
exercise of our authority to investigate and adjudicate complaints 
under section 208. On the basis of the current record, we conclude that 
reliance on the complaint process will be sufficient to assure that 
non-incumbent LEC rates are reasonable. We emphasize that we will not 
hesitate to use our authority under section 208 to take corrective 
action where appropriate.
    364. We will be sensitive to indications that the terminating 
access rates of competitive LECs are unreasonable. The charging of 
terminating access rates above originating rates in the same market, 
for example, may suggest the need to revisit our regulatory approach. 
Similarly, terminating rates that exceed those charged by the incumbent 
LEC serving the same market may suggest that a competitive LEC's 
terminating access rates are excessive. If there is sufficient 
indication that competitive LECs are imposing unreasonable terminating 
access charges, we will revisit the issue of whether to adopt 
regulations governing competitive LEC rates for terminating access.
3. ``Open End'' Services
    365. In some cases, an IXC is unable to influence the end user's 
choice of access provider for originating access services because the 
end user on the terminating end is paying for the call. For example, 
charges for the ``open end'' originating access minutes for 800 or 888 
services are paid by the recipient of the call. Consequently, the 
Commission has treated incumbent LEC originating ``open end'' minutes 
as terminating minutes for access charge purposes. The NPRM solicited 
comment on whether such regulatory treatment should be retained for 
``open end'' services under which terminating access rates serve as 
originating access rates, and whether this approach should be extended 
to competitive LECs.
    366. We continue to believe that ``open end'' originating minutes 
should be treated as terminating minutes for access charge purposes. 
Although few comments were filed regarding this issue, commenters 
addressing this matter advocate retention of the current regulatory 
approach. By continuing to treat ``open end'' originating minutes as 
terminating minutes for access charge purposes, we recognize that 
access customers have limited ability to influence the calling party's 
choice of access provider. Accordingly, access charges for these ``open 
end'' minutes will be governed by the requirements we adopt in this 
Order applicable to terminating access provided by incumbent LECs. 
Thus, residual common line charges and the per-minute TIC will not be 
recovered through ``open end'' originating minutes except to the extent 
such recovery is permitted under the rules described in Section III.A 
of this Order.

D. Universal Service-Related Part 69 Changes

    367. In the NPRM, we recognized 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. In this section, we address the manner in which incumbent LECs 
must adjust their interstate access charges to reflect the universal 
service support mechanisms adopted in the Universal Service Order.
1. Background
    368. 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 our Universal Service Order, we are 
adopting most of the Joint Board's recommendations relating to the 
support of rural and high cost areas.
    369. Section 254 of the Act requires that any federal universal 
service support provided to eligible carriers be ``explicit'' and 
recovered on an ``equitable and nondiscriminatory basis'' from all 
telecommunications carriers providing interstate telecommunications 
service. In our companion Universal Service Order, we agree with the 
Joint Board that these programs must be replaced with universal service 
support mechanisms that satisfy section 254.
    370. Currently, there are three mechanisms designed expressly to 
provide support for high cost and small telephone companies: the 
Universal Service Fund (high cost assistance fund), the Dial Equipment 
Minutes (DEM) weighting program, and Long Term Support (LTS). An 
incumbent LEC is eligible for high cost assistance from the current 
Universal Service Fund if its embedded loop costs exceed 115 percent of 
the national average loop cost. This program is funded entirely by 
IXCs. DEM weighting assistance is an implicit support mechanism that 
permits LECs with fewer than 50,000 access lines to apportion a greater 
proportion of these local switching costs to the interstate 
jurisdiction than larger LECs may allocate. Finally, the existing LTS 
program supports carriers with higher-than average subscriber line 
costs by providing carriers that are members of the NECA pool with 
enough support to enable them to charge IXCs only a nationwide average 
CCL interstate access rate. LTS payments reduce the access charges of 
smaller, rural incumbent LECs participating in the loop-cost pool by 
raising the access

[[Page 31924]]

charges of non-participating incumbent LECs.
    371. In the NPRM, we sought comment on whether incumbent LECs' 
access charges must be adjusted to reflect elimination of LTS 
contribution requirements and receipt of explicit universal service 
funds in order to prevent incumbent LECs from being compensated twice 
for providing universal service. We proposed a downward exogenous cost 
adjustment for price cap incumbent LECs to reflect elimination of LTS 
contribution requirements and any revenues received from any new 
universal service support mechanisms, and sought comment on how 
interstate costs must also be reduced to account for explicit universal 
service support.
2. Discussion
    372. In our companion Universal Service Order, we conclude that a 
carrier will continue to receive universal service support based upon 
the existing LTS, high cost, DEM weighting mechanisms, until the 
carrier begins to receive support based upon forward-looking economic 
cost. In the following sections, we will discuss the manner in which 
incumbent LECs must reduce their interstate access charges to reflect 
the elimination of the obligation to contribute to LTS, increase their 
interstate access charges to permit recovery of the new universal 
service obligation, and, to the extent necessary, adjust their 
interstate access charges to account for any additional universal 
service funds received under the modified universal service mechanisms.
a. Removal of LTS Obligation From Interstate Access Rates
    373. In our companion Universal Service Order, we agree with the 
Joint Board that LTS payments constitute a universal service support 
mechanism that is inconsistent with the Act's requirement that support 
be collected from all providers of interstate telecommunications 
services on an equitable and non-discriminatory basis and be available 
to all eligible telecommunications carriers. In that order, we conclude 
that LTS should be removed from the interstate access charge system. We 
provide, instead, for recovery of comparable payments from the new 
federal universal service support mechanisms.
    374. Currently, only incumbent LECs that do not participate in the 
NECA CCL tariff (non-pooling incumbent LECs) make LTS payments and only 
incumbent LECs participating in the NECA CCL tariff receive LTS 
support. Non-pooling incumbent LECs' contributions to the common line 
pool are set annually based on the total projected amount of LTS, 
converted to a monthly payment amount. Non-pooling incumbent LECs 
recover the revenue necessary for their LTS contributions through their 
CCL charges. We agree with commenters that argue that, to the extent we 
do not reduce interstate access revenues by the amount of LTS 
contribution currently recovered in the rates, incumbent LECs will 
double recover. We therefore conclude that incumbent LEC interstate 
access charges must be reduced to reflect elimination of the obligation 
to contribute to LTS.
    375. Because payments from the existing LTS mechanism will cease on 
January 1, 1998, incumbent LECs should no longer contribute to the 
existing LTS fund after that date. For price cap LECs, which were 
requested to stop participating in the NECA Common Line tariff before 
coming under price cap regulation, LTS contributions were included in 
the common line revenue requirement when the PCI for the common line 
basket was established. We conclude that price cap LECs must make a 
one-time downward exogenous adjustment to the PCI for the common line 
basket to account fully for the elimination of their LTS obligations. 
This exogenous adjustment shall be made in a manner consistent with 
section 61.45 and other relevant provisions of the Commission's rules.
    376. Non-pooling, rate-of-return LECs recover their LTS 
contributions in the common line revenue requirement. Because current 
LTS contributors will no longer be making such contributions after 
January 1, 1998, their CCL charges should be adjusted to account for 
this change. Rate-of-return LECs that formerly made LTS contributions 
should recompute their common line revenue requirements based on the 
elimination of their LTS obligations, and adjust their CCL charges 
accordingly.
    377. We note that the replacement of LTS with comparable support 
from the new universal service support mechanisms requires us to amend 
the NECA Common Line tariff rules, which establish the CCL for pooling 
members at the average of price cap LECs' CCL charges. Under the 
current LTS support system, NECA annually projects the common line 
revenue requirement, including an 11.25 percent return on investment, 
for incumbent LECs that participate in the common line pool. NECA then 
computes the total amount of LTS support needed by subtracting the 
amount pooling carriers will receive in CCL revenues and SLCs from the 
pool's projected revenue requirement, after removing pay telephone 
costs and revenues. Our rules currently provide that the NECA CCL 
tariff be set to recover the average of price cap LECs' CCL charges. If 
we were to retain this rule, our decision eliminating LTS obligations 
for price cap LECs and requiring them to reduce their CCL charges 
accordingly would automatically reduce the CCL revenues of NECA pool 
members. Further, reductions would occur as price cap LECs implemented 
our decisions in Section III of this Order, which restructures the 
common line rate structure for price cap LECs to recover common line 
costs through flat-rated charges instead of the per-minute CCL charge. 
Because we have deferred consideration of access reform for non-price 
cap LECs and did not seek comment on this issue in the NPRM, we must 
address this issue in a future proceeding that undertakes access reform 
for small, non-price cap LECs.
b. Recovery of New Universal Service Obligations
    378. In the Universal Service Order, we conclude that assessment of 
contributions for the interstate portion of the high cost and low-
income support mechanisms shall be based solely on end-user interstate 
revenues, and that assessment of universal support for eligible 
schools, libraries, and rural health care providers shall be based on 
interstate and intrastate total end-user revenues. As to the manner in 
which carriers may recover their contributions to the universal service 
fund, in our Universal Service Order we conclude that carriers may 
recover universal service contributions via interstate mechanisms. In 
this Section, we address the manner in which incumbent price cap LECs 
may recover their universal service contributions. We address non-price 
cap LECs' recovery of universal service contributions in Section XIII.F 
of the Universal Service Order.
    379. Price cap LECs may treat their contributions to the new 
universal service mechanisms, including high cost and low-income 
support and support for eligible schools, libraries, and health care, 
as exogenous changes to their price cap indices (PCIs). Because the 
only interstate revenues that will serve as the basis for assessing 
universal service contributions in 1998 will be end-user revenues, we 
find that price cap LECs recovering their universal service obligation 
through interstate access charges must recover those contributions in 
the baskets for services that generate end-user interstate revenues. 
Because price cap LECs do

[[Page 31925]]

not recover revenues from end users of services in all baskets, the 
exogenous adjustment should not be across-the-board. The baskets 
containing end-user interstate services are the common line, 
interexchange, and trunking baskets. The end-user charges assessed on 
services in the common line basket are recovered through the SLC; in 
the interexchange basket, end-user charges are recovered through per-
minute toll charges; and in the trunking basket, end user charges are 
recovered through special access service provided directly to end 
users. Price cap LECs electing to recover their universal service 
obligation through interstate access charges must therefore apply the 
full amount of the exogenous adjustment among these three baskets on 
the basis of relative size of end-user revenues. We note, however, that 
the tandem-switched transport, interconnection charge, and tandem 
switch signalling service categories in the trunking basket do not 
recover end-user interstate revenues. In order to prevent recovery from 
customers of these services, the service band indices (SBI) for these 
service categories should not be increased to reflect the exogenous 
adjustment to the PCI for the trunking basket. To reflect the exogenous 
adjustment to the trunking basket PCI, price cap LECs should, instead, 
increase the SBIs for the remaining service categories in the trunking 
basket based on the relative end-user interstate revenues generated in 
each service category. The four remaining service categories in the 
trunking basket are as follows: (1) voice grade entrance facilities, 
voice grade direct-trunked transport, voice grade dedicated signalling 
transport, voice grade special access, WATS special access, metallic 
special access, and telegraph special access services; (2) audio and 
video service; (3) high capacity flat-rated transport, high capacity 
special access, and DDS services; and (4) wideband data and wideband 
analog services.
    380. In 1999, the percentage of price cap LECs' revenues that will 
be assessed for universal service support may increase as a result of 
the anticipated increases in high cost, low-income support and support 
for schools, libraries, and health care in 1999. Price cap LECs shall 
therefore perform an upward exogenous adjustment to the PCIs for the 
common line, interexchange, and trunking baskets in the same manner as 
the exogenous adjustment performed in 1998, to reflect any change in 
the assessment rate in 1999.
c. Adjustments to Interstate Access Charges to Reflect Additional 
Support From the Modified Universal Service Mechanisms
    381. In our Universal Service Order, we conclude that the federal 
universal service mechanism should support 25 percent of the difference 
between the forward-looking economic cost of serving the customer and 
the appropriate revenue benchmark. We further conclude in that order 
that 25 percent approximates the portion of the cost of providing the 
supported network facilities that would be assigned to the interstate 
jurisdiction, and that, by funding these interstate costs, we will 
ensure that federal implicit universal service support is made 
explicit. Consistent with our decision in the Universal Service Order 
to fund only interstate costs through the federal universal service 
fund, we direct incumbent LECs to use any universal service support 
received from the new universal service mechanisms to reduce or satisfy 
the interstate revenue requirement otherwise collected through 
interstate access charges.
    382. Non-Rural Carriers. In our Universal Service Order, we 
conclude that, until a forward-looking economic cost methodology takes 
effect on January 1, 1999, non-rural carriers will continue to receive 
high cost assistance and LTS amounts based on the existing universal 
service mechanisms. As there will be no change until January 1, 1999 to 
the support non-rural incumbent LECs currently receive as high cost and 
LTS support, we conclude that it is not necessary at this time to 
determine the manner in which non-rural carriers should adjust their 
interstate access charges to reflect a difference in universal service 
support. We will address this issue prior to the January 1, 1999, 
effective date of the forward-looking cost mechanisms for non-rural 
carriers.
    383. Rural Carriers. In our Universal Service Order, we conclude 
that rural carriers, as defined in section 153(37) of the Act, shall 
continue to receive support based on embedded costs for at least three 
years. Beginning on January 1, 1998, rural carriers shall receive high 
cost loop support, DEM weighting assistance, and LTS benefits on the 
basis of the modified support mechanisms.
    384. In our Universal Service Order, we adopt modified per-line 
support mechanisms for providing support comparable to the LTS support 
received under the existing mechanisms. Beginning on January 1, 1998, 
we will allow a rural carrier's annual LTS support to increase from its 
support for the preceding calendar year based on the percentage of 
increase of the nationwide average loop cost. Rural, non-price cap LECs 
should continue to apply any revenues received from the modified 
universal service support mechanisms that replace current LTS amounts 
to the accounts to which they are currently applying LTS support.
    385. We also decide in the Universal Service Order that, from 
January 1, 1998 through December 31, 1999, rural carriers shall 
calculate their high cost support using the current high cost formulas. 
We conclude that no adjustment to rural incumbent LECs' interstate 
access charges is necessary at this time because incumbent LECs will 
continue to use the existing high cost formulas to determine high cost 
support. As we determine in that order, however, beginning January 1, 
2000, rural carriers shall receive high cost loop support for their 
average loop costs that exceed 115 percent of an inflation-adjusted 
nationwide average loop cost. The inflation adjusted nationwide average 
cost per loop shall be calculated by multiplying the 1997 nationwide 
average cost per loop by the percentage in change in Gross Domestic 
Product Chained Price Index (GDP-CPI) from 1997-1998. We conclude that 
rural, non-price cap LECs should continue to apply any revenues 
received from the modified universal service support mechanism that 
replace amounts received under the current high cost support system to 
the accounts to which they are currently applying high cost support.
    386. Finally, in our Universal Service Order, we adopt the Joint 
Board's recommendation that a subsidy corresponding in amount to that 
generated formerly by DEM weighting be recovered from the new universal 
service support mechanisms. Beginning on January 1, 1998 and continuing 
until permanent mechanisms for them become effective, rural carriers 
will receive DEM weighting assistance calculated as follows: assistance 
will equal the difference between the 1996 weighted DEM factor and the 
unweighted DEM factor multiplied by the annual unseparated local 
switching revenue requirement. As with comparable LTS and high cost 
support, rural, non-price cap LECs should continue to apply any support 
received from the modified universal service support mechanisms that 
replaces existing DEM weighting amounts to the accounts to which they 
are currently applying DEM weighting assistance.
    387. Currently, the high cost and DEM weighting support mechanisms 
shift a portion of the intrastate revenue

[[Page 31926]]

requirement to the interstate jurisdiction in order to permit LECs to 
recover a greater percentage of their costs from the interstate 
jurisdiction. Some non-price cap LECs are concerned that, to the extent 
that support from the modified universal service mechanisms is not 
applied to the intrastate jurisdiction, an intrastate revenue shortfall 
will occur. In the Universal Service Order, we conclude that, until 
universal service support is based on forward-looking economic cost, 
carriers should continue to receive amounts from the new universal 
service mechanisms comparable to existing high cost and DEM weighting 
support. In that order, we do not alter the existing revenue-shifting 
mechanisms in place for the current high cost support and DEM weighting 
at this time. Thus, no intrastate revenue shortfall will occur, because 
no revenue requirement is being shifted back to the intrastate 
jurisdiction.

E. Part 69 Allocation Rules

1. Background
    388. In the NPRM, we solicited comment on whether it would be 
appropriate for incumbent price cap LECs to be relieved of complying 
with subparts D and E of part 69 of our rules, which address the 
allocation of investments and expenses to the access rate elements.
2. Discussion
    389. We conclude that at this time we should maintain our part 69 
cost allocation rules. In this Report and Order, we have instituted a 
phasing out of the CCL charge. Until the per-minute CCL charge is 
phased out completely and multi-line PICCs do not recover any common 
line revenues, price cap LECs will need to use these rules to calculate 
the SLC. Therefore, we decline to eliminate the cost allocation rules 
at this time. We note that we may revisit this issue when these rules 
are no longer needed to calculate the SLC.

F. Other Proposed Part 69 Changes

1. Background
    390. In the NPRM, we sought comment on revisions necessary to 
update part 69 and conform it to the 1996 Act. In the NPRM, we made 
several proposals that we thought necessary to bring Part 69 current, 
including: eliminating the rules that provide for a ``contribution 
charge'' that may be assessed on special access and expanded 
interconnection; removing the rule and sections referencing the rule 
that establishes the equal access rate element; and removing the rule 
and sections referencing the rule that establishes a rate element for 
costs associated with lines terminating at ``limited pay telephones''; 
and changing the definition of ``Telephone Company'' to mean incumbent 
LEC. We also sought comment on whether rate elements and subelements 
established pursuant to waiver should be incorporated into Part 69.
2. Discussion
    391. The passage of the 1996 Act and the subsequent enactment of 
implementing regulations requires that we update and revise various 
sections of Part 69. Sections 69.4(f) and 69.122 of our rules provide 
for a ``contribution charge'' that may be assessed on special access 
and expanded interconnection. These sections are inconsistent with 
section 254 as amended by the 1996 Act, which requires, inter alia, 
that such carrier contributions be equitable and nondiscriminatory. 
Furthermore, our rules governing the contribution charge merely allow a 
LEC to try to justify this charge in the expanded interconnection 
context. No party has even attempted to justify such a charge in more 
than four years. Given this and the relevant amendments in the 1996 
Act, we find that there is no need for this rate element. We conclude 
that Secs. 69.4(f) and 69.122 of our rules, which provide for a 
``contribution charge'' that may be assessed on special access and 
expanded interconnection, should be deleted.
    392. Under Sec. 69.4(d), we required carriers to eliminate any 
separate equal access charge by January 1, 1994. We conclude, 
therefore, that Sec. 69.4(d), which established the equal access rate 
element for a limited duration, should be deleted because of the 
expiration of the designated time period. Similarly, we conclude that 
Sec. 69.107, which governs the computation of the equal access rate 
element charges, and Secs. 69.308 and 69.410, which concern allocation 
of costs to that rate element, should be deleted because the designated 
time period for separate equal access rate elements has expired. We 
conclude that references to these deleted sections should also be 
removed from part 69. Section 69.309 refers to Sec. 69.308 and 
Sec. 69.411 refers to Sec. 69.410. To ensure consistency, a new 
section, designated as Sec. 69.3(3)(12), should be added and should 
read as follows: ``Such a tariff shall not contain any separate 
carrier's carrier tariff charges for an Equal Access element.'' 
Similarly, we conclude that Sec. 69.205, which concerns transitional 
premium charges for IXCs and others should be deleted because the 
designated transition period for these charges has expired.
    393. Section 69.103 requires incumbent LECs to establish a separate 
rate element for costs associated with lines terminating at ``limited 
pay telephones.'' We note that few, if any, payphone service providers 
offer this type of service today. Sections 69.303(a), 69.304(c), 
69.307(c), and 69.406(a)(9) concern the allocation of costs to this 
rate element. Section 276 of the Act and the implementing regulations 
require a new per call compensation plan, which requires, inter alia, 
that incumbent LECs remove all payphone costs from access charges. 
Implementation of the Pay Telephone Reclassification and Compensation 
Provisions of the Telecommunications Act of 1996, Report and Order, CC 
Docket No. 96-128, FCC 96-388, 61 FR 39397 (July 29, 1996) (Payphone 
Order), recon., FCC 96-439, 61 FR 65341 (December 12, 1996) (Payphone 
Reconsideration Order), appeal docketed sub nom., Illinois Public 
Telecommunications Ass'n v. FCC and United States, Case No. 96-1394 
(D.C. Cir., filed October 17, 1996). This new compensation plan, as 
well as the payphone dialing parity requirements, have eliminated the 
need for Secs. 69.103, 69.303(a), 69.304(c), 69.307(c), and 
69.406(a)(9). We conclude that these sections should be deleted.
    394. We conclude that codifying previously-granted Part 69 waivers 
is not necessary at this time. Under the Price Cap Performance Review 
Third Report and Order, a party seeking to introduce a new service may 
do so by filing a petition showing that the new service is in the 
public interest. Once that petition for a new service has been granted, 
carriers seeking to introduce the same service with the same rate 
structure may do so under expedited procedures. This streamlined 
alternative for introducing new services should resolve past 
difficulties encountered with the Part 69 waiver process. The proposed 
codification of previously-granted waivers is thus unnecessary. We 
therefore decline to codify previously-granted Part 69 waivers into our 
rules.
    395. NECA and TCA have requested that the Commission extend to all 
rate-of-return companies, the right to offer new services based on an 
expedited process, which requires, inter alia, a showing that the new 
service is in the public interest. In the Third Report and Order, we 
granted to incumbent price cap LECs the right to introduce new services 
under a streamlined procedure. We will address the request of NECA and 
TCA when we take up access

[[Page 31927]]

reform for rate-of-return companies in the near future.
    396. In the NPRM, we solicited comment on whether we should adopt 
regulatory requirements to govern rates for terminating access offered 
by competitive LECs. In Section VI.C., supra, we conclude that we will 
not adopt such regulatory requirement at this time. For the same 
reasons, we find it unnecessary to apply any of our Part 69 regulations 
to competitive LECs. We therefore conclude that Sec. 69.2(hh), which 
currently defines ``Telephone Company'' by reference to Section 3(r) of 
the 1934 Act, should be changed to read as follows: `` `Telephone 
Company' or `local exchange carrier' as used in this Part means an 
incumbent local exchange carrier as defined in section 251(h)(1) of the 
1934 Act as amended by the 1996 Act.'' There is no indication in the 
record that competitive LECs have exercised any degree of market power 
in provision of terminating access or other access services. By 
definition, non-dominant carriers do not exercise market power. 
Further, non-dominant carriers possess a negligible share of the 
current access market and they will be competing with incumbent LECs 
whose rates are subject to regulation. As a practical matter, the rates 
of the incumbent LECs will serve as a constraint to some degree on the 
pricing and practices of non-dominant LECs. We therefore find on this 
record that it is sufficient to rely on the Section 208 complaint 
process to assure compliance with the Act by competitive LECs, and that 
we should not apply Part 69 to them. To the extent that our definitions 
or our application of Part 69 needs in the future to be expanded to 
encompass LECs other than incumbent LECs, we can revisit this issue.

VIII. Final Regulatory Flexibility Analysis

    397. As required by the Regulatory Flexibility Act (RFA), an 
Initial Regulatory Flexibility Analysis (IRFA) was incorporated in the 
NPRM in this proceeding. The Commission sought written public comments 
on the proposals in the NPRM, including the IRFA. The Commission's 
Final Regulatory Flexibility Analysis (FRFA) in this Order (the First 
Report and Order in this Access Charge Reform proceeding) conforms to 
the RFA, as amended. We provide this summary analysis to provide 
context for our analysis in this FRFA. To the extent that any statement 
contained in this FRFA is perceived as creating ambiguity with respect 
to our rules or statements made in preceding sections of this Order, 
the rules and statements set forth in those preceding sections shall be 
controlling.

A. Need for and Objectives of This First Report and Order

    398. 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. 
This proceeding is being conducted to revise the Commission's access 
charge rules to make them consistent with the Telecommunications Act of 
1996.

B. Summary of Significant Issues Raised by the Public Comments in 
Response to the IRFA

    399. Only one party, Rural Tel. Coalition, commented on the IRFA 
contained in the NPRM. Rural Tel. Coalition disagrees with our 
conclusion that rules applying only to price cap LECs will not affect 
non-price cap LECs in a way that requires analysis under the RFA. 
According to Rural Tel. Coalition, the decisions made in this Order 
will ``prejudge and prejudice'' a later rulemaking addressing access 
charge reform for non-price cap LECs. In addition, Rural Tel. Coalition 
argues that non-price cap LECs, which include small incumbent LECs, 
will be injured if the access reform issues addressed in this Order are 
not implemented for them as well as price-cap LECs. Finally, Rural Tel. 
Coalition argues that the Commission impermissibly determined that 
small incumbent LECs are not small businesses within the meaning of the 
RFA.
    400. Rather than attempt to enact ``one size fits all'' access 
charge reform that would risk not fully accounting for the special 
circumstances of rate-of-return and other non-price cap LECs, we have 
chosen to address those LECs separately in a proceeding in which we may 
better focus on their needs. We do not agree with Rural Tel. Coalition 
that our decisions in this Order will ``prejudge and prejudice'' our 
consideration of the issues in a subsequent rulemaking. Although we may 
often find that the public interest concerns are similar for large and 
small carriers, our analysis will begin anew, and will address all 
relevant factors. Moreover, where the special circumstances faced by 
small incumbent LECs justify different treatment than is accorded price 
cap LECs in this Order, we will be better able to explain and address 
those concerns in a separate proceeding. For the reasons set forth in 
Section V above, we also disagree with Rural Tel. Coalition that small 
incumbent LECs may be injured by the delay involved in conducting 
separate rulemakings. Finally, although we are not persuaded on the 
basis of this record that our prior practice of finding incumbent LECs 
not subject to regulatory flexibility analysis (because they are not 
small businesses) has been incorrect, we have fully performed an RFA 
analysis for small incumbent LECs in this Order, including 
consideration of any adverse impact of the rules we adopt and 
consideration of alternatives that may reduce adverse impacts on such 
entities.

C. Description and Estimate of the Number of Small Entities to Which 
the Rules Will Apply

    401. The RFA generally defines ``small entity'' as having the same 
meaning as the terms ``small business,'' ``small organization,'' and 
``small governmental jurisdiction.'' In addition, the term ``small 
business'' has the same meaning as the term ``small business concern'' 
under the Small Business Act unless the Commission has developed one or 
more definitions that are appropriate for its activities. A small 
business concern is one which: (1) Is independently owned and operated; 
(2) is not dominant in its field of operation; and (3) satisfies any 
additional criteria established by the Small Business Administration 
(SBA).
    402. Pursuant to 5 U.S.C. sec. 601(3), the statutory definition of 
a small business applies ``unless an agency after consultation with the 
Office of Advocacy of the Small Business Administration and after 
opportunity for public comment, establishes one or more definitions of 
such term which are appropriate to the activities of the agency and 
publishes such definition(s) in the Federal Register.'' SBA has 
developed a definition of small business for Standard Industrial 
Classification (SIC) category 4813 (Telephone Communications, Except 
Radiotelephone). We first discuss the number of small businesses 
falling within this category, and then we attempt to refine further our 
estimate to correspond with the categories of telephone companies that 
are commonly used under our rules.
    403. Consistent with our prior practice, our use of the terms 
``small entities'' and ``small businesses'' does not encompass ``small 
incumbent

[[Page 31928]]

LECs.'' We use the term ``small incumbent LECs'' to refer to any 
incumbent LECs that arguably might be defined by SBA as ``small 
business concerns.'' Because the small incumbent LECs subject to these 
rules are either dominant in their field of operations or are not 
independently owned and operated, they are, consistent with our prior 
practice, excluded from the definition of ``small entity'' and ``small 
business concerns.'' 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 
the SBA as ``small business concerns.''
1. Telephone Companies, Except Radiotelephone Companies (SIC 4813)
    404. Total Number of Telephone Companies Affected. The United 
States Bureau of the Census (``the Census Bureau'') reports that, at 
the end of 1992, there were 3,497 firms engaged in providing telephone 
services, as defined therein, for at least one year. This number 
contains a variety of different categories of carriers, including local 
exchange carriers, interexchange carriers, competitive access 
providers, cellular carriers, mobile service carriers, operator service 
providers, pay telephone operators, personal communications services 
providers, covered specialized mobile radio providers, and resellers. 
It seems certain that some of those 3,497 telephone service firms may 
not qualify as small entities or small incumbent LECs because they are 
not ``independently owned and operated.'' For example, a PCS provider 
that is affiliated with an interexchange carrier having more than 1,500 
employees would not meet the definition of a small business. It seems 
reasonable to conclude that fewer than 3,497 telephone service firms 
are small entity telephone service firms or small incumbent local 
exchange carriers.
    405. According to the Telecommunications Industry Revenue: 
Telecommunications Relay Service Fund Worksheet Data (TRS Worksheet), 
there are 2,847 interstate carriers. These carriers include, inter 
alia, local exchange carriers, wireline carriers and service providers, 
interexchange carriers, competitive access providers, operator service 
providers, pay telephone operators, providers of telephone toll 
service, providers of telephone exchange service, and resellers.
    406. Wireline Carriers and Service Providers. The SBA has developed 
a definition of small entities for telephone communications companies 
other than radiotelephone (wireless) companies. According to the SBA's 
definition, a small business telephone company other than a 
radiotelephone company is one employing no more than 1,500 persons. The 
Census Bureau reports that, there were 2,321 such telephone companies 
in operation for at least one year at the end of 1992. All but 26 of 
the 2,321 non-radiotelephone companies listed by the Census Bureau were 
reported to have fewer than 1,000 employees. Thus, even if all 26 of 
those companies had more than 1,500 employees, there would still be 
2,295 nonradiotelephone companies that might qualify as small entities 
or small incumbent LECs. We do not have information on the number of 
carriers that are not independently owned and operated, and thus are 
unable at this time to estimate with greater precision the number of 
wireline carriers and service providers that would qualify as small 
business concerns under the SBA's definition. Consequently, we estimate 
that there are fewer than 2,295 small telephone communications 
companies other than radiotelephone companies.
    407. Incumbent Local Exchange Carriers. Neither the Commission nor 
the SBA has developed a definition for small incumbent providers of 
local exchange services (LECs). The closest applicable definition under 
the SBA rules is for telephone communications companies other than 
radiotelephone (wireless) companies. The most reliable source of 
information regarding the number of LECs nationwide is the data that we 
collect annually in connection with the TRS Worksheet. According to our 
most recent data, 1,347 companies reported that they were engaged in 
the provision of local exchange services. We do not have information on 
the number of carriers that are not independently owned and operated, 
nor what carriers have more than 1,500 employees, and thus are unable 
at this time to estimate with greater precision the number of incumbent 
LECs that would qualify as small business concerns under SBA's 
definition. Consequently, we estimate that there are fewer than 1,347 
small incumbent LECs.
2. Information Service Providers and Competitive LECs Are Not Affected
    408. In Section VIII.B of the NPRM, we sought comment on whether to 
continue to exempt enhanced service providers (which we now refer to as 
information service providers, or ISPs) from any requirement to pay 
access charges. Because we decide to retain the ISP exemption, and do 
not permit LECs to impose access charges on ISPs at this time, we 
conclude that the RFA does not require us to consider the effects of 
any proposed rules on ISPs that fall within the definition of a small 
entity. Instead, as set forth in Section VI.B above, we find that the 
proceeding commenced with the Notice of Inquiry issued 
contemporaneously with the NPRM is the appropriate forum to address the 
fundamental questions about ISP usage of the public switched network. 
In the Notice of Inquiry, we sought comment on broader issues 
concerning the development of information services and Internet access. 
The information provided will give us the data we need to make further 
reasonable and informed decisions regarding Internet access and other 
information services, and, if necessary, to craft proposals for a 
subsequent Notice of Proposed Rulemaking that are sensitive to the 
complex economic, technical, and legal questions raised in this area. 
Similarly, we sought comment in Section VIII.A of the NPRM on whether 
the public interest would be served by regulating interstate 
terminating access services offered by competitive (non-incumbent) 
LECs. Because we conclude that the public interest would not be served 
by imposing any regulations on competitive LECs' interstate terminating 
access offerings at this time, we conclude that the RFA does not 
require us to consider the effects of any proposed rules on competitive 
LECs that fall within the definition of a small entity.

D. Summary Analysis of the Projected Reporting, Recordkeeping, and 
Other Compliance Requirements

    409. In Section V.A above, we adopt changes to transport 
interconnection charge (TIC) rate structures and transport rate 
structures to comply with the court order in CompTel v. FCC. These 
changes will affect all incumbent LECs, including small incumbent LECs, 
and will require small incumbent LECs to make one or more tariff 
filings reflecting the new rate structures, which will involve the use 
of legal skills, and possibly accounting, economic, and financial 
skills.
    410. As set forth in Section VI.D above, incumbent LECs, including 
small incumbent LECs, must reduce their interstate access charges to 
reflect the elimination of those former universal service obligations 
that are being replaced with new universal service obligations, 
increase their interstate access charges to reflect their new universal 
service obligations, and, to the

[[Page 31929]]

extent necessary, adjust their interstate access charges to account for 
any additional universal service funds received under the modified 
universal service mechanisms. This will require small incumbent LECs to 
make one or more tariff filings, which will involve the use of legal 
skills.

E. Burdens on Small Entities, and Significant Alternatives Considered 
and Rejected

    411. Sections III.C-D: Transport/TIC Rate Structure Changes. As set 
forth in Sections III.C-D above, we adopt a new tandem-switched 
transport rate structure and rate levels that replace the interim rate 
structure in place prior to today. In addition, we adjust the TIC to 
reflect the changes made by the new tandem-switched transport rate 
structure and rate levels. Unlike before, we adopt for the first time a 
final, cost-based rate structure, which should reduce and minimize 
uncertainty for those small businesses and small incumbent LECs whose 
businesses involve these services. Moreover, the new rate structure and 
rate levels are more closely related to the costs of providing the 
underlying services, which should minimize the economic impact of these 
rules on small businesses and small incumbent LECs by minimizing the 
adverse impacts that can accompany non-cost based regulation.
    412. We also adopt a transition plan that will have the effect of 
giving small businesses and small incumbent LECs the opportunity to 
plan, adjust, and develop their networks with a minimum of disruption 
for them and their customers. Finally, as set forth in Section III.C-D 
above, we find that the reallocation of TIC costs and the new recovery 
procedures will facilitate the development of competitive markets. This 
is because incumbent LEC rates will move toward cost-based levels and 
incumbent LECs will no longer have the ability to assess TICs on 
switched access minutes that do not use their transport facilities. 
These pricing revisions may create new opportunities for small 
entities, including small business and small incumbent LECs wishing to 
enter local telecommunications markets.
    413. Section V: Access Reform for Incumbent Rate-of-Return Local 
Exchange Carriers. Our decision to limit access charge reform, with 
certain specified exceptions, to price cap LECs, which do not include 
small businesses or small incumbent LECs, should mitigate the potential 
that access charge reform could have a significant economic impact on 
any small incumbent LECs. This is because the Commission will address 
in a separate proceeding the common set of complex issues faced by non-
price cap LECs, which are different than those faced by price cap LECs. 
Moreover, as discussed above in Section V, we find that small incumbent 
LECs are unlikely to face imminent harm as a result of the continued 
application of our current access charge rules because 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.
    414. Section VI.A: Applicability of Part 69 to Unbundled Elements. 
As a result of the exclusion of unbundled elements from Part 69 access 
charges, described in Section VI.A above, incumbent LECs, including 
small incumbent LECs, may receive reduced overall levels of interstate 
access charges as competitors enter local markets using unbundled 
network elements. They will, however, receive payment for those 
unbundled network elements pursuant to interconnection agreements under 
Section 251 of the Act. Moreover, to the extent that small incumbent 
LECs receive universal service support through interstate access 
charges, such funding will continue to be received without regard to 
any loss of revenue from interstate access charges. This is because all 
universal service support received by small incumbent LECs will be 
received from the new Universal Service Fund, established in a separate 
order released today. Finally, we note that section 251 of the Act 
contains provisions expressly designed to take into account the special 
circumstances of small incumbent LECs, including those that qualify as 
rural LECs, with respect to interconnection obligations.
    415. Our decisions in Section VI.A above to exclude unbundled 
elements from the application of Part 69 access charges is likely to 
facilitate the development of competitive markets. This is because 
prices for unbundled elements will reflect the costs of those elements, 
and will not impose on competitors additional charges unrelated to the 
costs of elements being purchased. Accordingly, as set forth in Section 
VI.A above, competitors using unbundled elements will contribute to 
universal service on an equitable and non discriminatory basis instead 
of paying implicit subsidies to incumbent LECs (whether in addition to, 
or in place of, explicit universal service mechanisms). These decisions 
may create new opportunities for small entities, including small 
businesses and small incumbent LECs, wishing to enter local 
telecommunications markets.
    416. Section VI.C: Terminating Access Services Offered by Non-
Incumbent LECs. As set forth in Section VI.C above, we find that 
treating new entrants as dominant carriers subject to regulation of 
their terminating access services until we find otherwise would impose 
unnecessary regulation, including potentially increased regulatory 
burdens on small businesses. Instead of imposing such burdens, we find 
that the imposition of regulatory requirements with respect to 
competitive LEC terminating access is unnecessary in the absence of 
some stronger record evidence that competitive LECs have in the past 
charged unreasonable terminating access rates, or are likely to do so 
in the future. If there is sufficient indication that competitive LECs 
are imposing unreasonable terminating access charges, we will revisit 
this issue.
    417. Section VI.D: Universal Service Related Part 69 Changes. As 
set forth in Section VI.D.2.a above, we require that LECs that 
contribute to the Long Term Support (LTS) program and LECs that receive 
LTS payments revise their tariffs to reflect the fact that the LTS 
program is being replaced with explicit support from the new Universal 
Service Fund implemented pursuant to the Universal Service Order 
adopted today. This will require small incumbent LECs to make one or 
more tariff filings. The new Universal Service Fund will facilitate the 
transition to competitive markets while maintaining specific, 
predictable and sufficient support for universal service as required 
under section 254 of the Act. Accordingly, the required changes in 
LECs' tariff filings, including those in tariffs filed by small 
incumbent LECs, are part of an overall mechanism designed to minimize 
the economic impact of the 1996 Act on small businesses and small 
incumbent LECs. The other universal service related changes that we 
adopt in this Order affect only price-cap LECs, which do not include 
any small businesses or small incumbent LECs.

F. Report to Congress

    418. The Commission shall include a copy of this FRFA, along with 
this Order, in a report to be sent to Congress pursuant to SBREFA.

X. Ordering Clauses

    419. 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. secs. 151-154, 160, 201-205, 251,

[[Page 31930]]

254, 303(r), 410(a), and 601, that the order is adopted.
    420. It is further ordered that the provisions in this Order will 
be effective June 15, 1997. We anticipate this date will be at least 
thirty days after publication of the rules in the Federal Register. If 
publication of this Order is delayed, however, we find good cause under 
5 U.S.C. sec. 553(d)(3) to make this Order effective less than thirty 
days after publication, because the local exchange carriers subject to 
price cap regulation must file tariffs by June 16, in order for them to 
be effective on July 1, 1997, as required by Section 69.3 of the 
Commission's rules, 47 CFR Sec. 69.3. In addition, to ensure that the 
local exchange carriers subject to price cap regulation have actual 
notice of this Order immediately following its release, we are serving 
those entities by certified first class mail. The collections of 
information contained within are contingent upon approval by the Office 
of Management and Budget.
    421. It is further ordered that the following rules or amendments 
thereto, which impose new or modified information or collection 
requirements, shall become effective upon approval by the Office of 
Management and Budget (OMB), but no sooner than June 15, 1997: 47 CFR 
Secs. 61.45, 61.47, 69.104, 69.126, 69.151, and 69.152. The following 
rules, or amendments thereto, in this Report and Order shall be 
effective January 1, 1998: 47 CFR Secs. 61.3, 61.46, 69.1, 69.2, 
69.105, 69.123, 69.124, 69.125, 69.154, 69.155, 69.157, 69.305, 69.306, 
69.309, 69.401, 69.411, and 69.502. The following rules, which impose 
new or modified information or collection requirements, shall become 
effective upon approval by the Office of Management and Budget (OMB), 
but no sooner than January 1, 1998: 47 CFR Secs. 61.42, 61.48, 69.4, 
69.106, 69.111, 69.153, 69.156. Unless otherwise stated herein, all 
remaining provisions of this Order are effective June 15, 1997.
    422. It is further ordered that the waiver petitions of Bell 
Atlantic, Pacific Bell, GTE, Cincinnati Bell, U S West, and BellSouth 
discussed in Section III.A.5., regarding Section 69.104 as applied to 
ISDN service are dismissed.
    423. It is further ordered that the rulemaking proceeding in CC 
Docket No. 95-72 is terminated.
    424. It is further ordered, pursuant to Sections 1-4, 10, 201-205, 
251, 254, 303(r), and 701 of the Communications Act of 1934, as 
amended, 47 U.S.C. secs. 151-154, 160, 201-205, 251, 254, 303(r), and 
601, that notice is hereby given of the rulemaking described above and 
that comment is sought on these issues.

List of Subjects

47 CFR Part 61

    Communications common carriers, Tariffs.

47 CFR Part 69

    Access charges, Communications common carriers.

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

Rule Changes

    Parts 61 and 69 of title 47 of the Code of Federal Regulations are 
amended as follows:

PART 61--TARIFFS

    1. The authority citation for Part 61 continues to read as follows:

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

    2. Section 61.3 is amended by revising the introductory text of 
paragraph (f) to read as follows:


Sec. 61.3  Definitions

* * * * *
    (f) Basket. Any class or category of tariffed service or charge:
* * * * *
    3. Section 61.42 is amended by revising paragraphs (d)(1), (d)(2), 
and (d)(3), adding paragraph (d)(6), and revising paragraphs (e)(1) and 
(e)(2)(vi) to read as follows:


Sec. 61.42  Price cap baskets and service categories.

* * * * *
    (d) * * *
    (1) A basket for the common line interstate access elements as 
described in Secs. 69.115, 69.152, 69.154, and 69.157 of this chapter, 
and that portion of the interstate access element described in 
Sec. 69.153 of this chapter that recovers common line interstate access 
revenues;
    (2) A basket for traffic sensitive switched interstate access 
elements;
    (3) A basket for trunking services as described in Secs. 69.110, 
69.111, 69.112, 69.114, 69.125(b), and 69.155 of this chapter, and that 
portion of the interstate access element described in Sec. 69.153 of 
this chapter that recovers residual interconnection charge revenues;
* * * * *
    (6) A basket for the marketing expenses described in Sec. 69.156 of 
this chapter, including those recovered through End User Common Line 
charges and Presubscribed Interexchange Carrier charges.
    (e)(1) The traffic sensitive switched interstate access basket 
shall contain such services as the Commission shall permit or require, 
including the following service categories:
    (i) Local switching as described in Sec. 69.106(f) of this chapter;
    (ii) Information, as described in Sec. 69.109 of this chapter;
    (iii) Data base access services;
    (iv) Billing name and address, as described in Sec. 69.128 of this 
chapter;
    (v) Local switching trunk ports, as described in Sec. 69.106(f)(1) 
of this chapter; and
    (vi) Signalling transfer point port termination, as described in 
Sec. 69.125(c) of this chapter.
    (2) * * *
    (vi) Interconnection charge, as recovered in Secs. 69.153 and 
69.155 of this chapter.
* * * * *
    4. Section 61.45 is amended by revising the introductory text of 
paragraph (b) and (b)(1), redesignating the introductory text of 
paragraph (c) as the introductory text of paragraph (c)(1) and revising 
it, and adding new paragraphs (c)(2), (d)(1)(ix), (i), (j), (k), and 
(l) to read as follows:


Sec. 61.45  Adjustments to the PCI for local exchange carriers.

* * * * *
    (b) Adjustments to local exchange carrier PCIs for the baskets 
designated in Sec. 61.42(d) (2), (3), (4), (5), and (6) shall be made 
pursuant to the formula set forth in Sec. 61.44(b), and as further 
explained in Secs. 61.44 (e), (f), (g), and (h).
    (1) Notwithstanding the value of X defined in Sec. 61.44(b), the X 
value applicable to the baskets specified in Sec. 61.42(d) (2), (3), 
and (6) shall be 4.0%, or 4.7%, or 5.3%, as the carrier elects.
* * * * *
    (c)(1) Subject to paragraphs (c)(2) and (e) of this section, 
adjustments to local exchange carrier PCIs for the basket designated in 
Sec. 61.42(d)(1) shall be made pursuant to the following formula:
* * * * *
    (2) The formula set forth in paragraph (c)(1) of this section shall 
be used by a local exchange carrier subject to price cap regulation 
only if that carrier is imposing a carrier common line charge pursuant 
to Sec. 69.154 of this chapter. Otherwise, adjustments to local 
exchange carrier PCIs for the basket designated in Sec. 61.42(d)(1) 
shall be made pursuant to the formula set forth in Sec. 61.44(b), and 
paragraphs (i) and (j) of this section, and as further explained in 
Sec. 61.44 (e), (f), (g), and (h). For the purposes of this paragraph, 
and notwithstanding the value of X defined

[[Page 31931]]

in Sec. 61.44(b), the X value applicable to the basket specified in 
Sec. 61.42(d)(1) shall be 4.0%, or 4.7%, or 5.3%, as the carrier 
elects.
    (d) * * *
    (1) * * *
    (ix) The completion of amortization of equal access expenses.
* * * * *
    (i)(1) Notwithstanding the provisions of paragraphs (b) and (c) of 
this section, and subject to the limitations of paragraph (j) of this 
section, price cap local exchange carriers that are recovering 
interconnection charge revenues through per-minute rates pursuant to 
Sec. 69.124 or Sec. 69.155 of this chapter shall target, to the extent 
necessary to eliminate the recovery of any residual interconnection 
charge revenues through per-minute rates, any PCI reductions associated 
with the baskets designated in Sec. 61.42(d) (1) and (2) that result 
from the application of the formula in Sec. 61.44(b), as further 
explained in Sec. 61.44 (e), (f), (g), and (h), to the PCI for the 
basket designated in Sec. 61.42(d)(3), with no adjustment being made to 
the PCIs for the baskets designated in Sec. 61.42(d) (1) and (2) as a 
result of the application of the formula in Sec. 61.44(b). These 
reductions are to be made after the adjustment is made to the PCI for 
the basket designated in Sec. 61.42(d)(3) resulting from the 
application of the formula in Sec. 61.44(b), as further explained in 
Sec. 61.44 (e), (f), (g), and (h).
    (2) Notwithstanding the provisions of paragraphs (b) and (c) of 
this section, and subject to the limitations of paragraph (j) of this 
section, price cap local exchange carriers that are recovering 
interconnection charge revenues through per-minute rates pursuant to 
Sec. 69.155 of this chapter shall target, to the extent necessary to 
eliminate the recovery of any residual interconnection charge revenues 
through per-minute rates, any PCI reductions associated with the basket 
designated in Sec. 61.42(d)(6) that result from the application of the 
formula in Sec. 61.44(b), as further explained in Sec. 61.44 (e), (f), 
(g), and (h), to the PCI for the basket designated in Sec. 61.42(d)(3), 
with no adjustment being made to the PCIs for the basket designated in 
Sec. 61.42(d)(6) as a result of the application of the formula in 
Sec. 61.44(b). This reduction is to be made after any adjustment made 
pursuant to paragraph (i)(1) of this section.
    (3) Through December 31, 1997, the reduction in the PCI for the 
basket designated in Sec. 61.42(d)(3) that results from paragraph 
(i)(1) of this section shall be determined by dividing the sum of the 
dollar effects of the PCI reductions that would have applied to the 
baskets designated in Sec. 61.42(d)(1) and (d)(2) except for the 
provisions of paragraph (i)(1) of this section by the dollar amount 
associated with the PCI for the basket designated in Sec. 61.42(d)(3), 
and multiplying the PCI for the basket designated in Sec. 61.42(d)(3) 
by one minus the resulting ratio.
    (4) Effective January 1, 1998, the reduction in the PCI for the 
basket designated in Sec. 61.42(d)(3) that results from paragraphs 
(i)(1) and (i)(2) of this section shall be determined by dividing the 
sum of the dollar effects of the PCI reductions that would have applied 
to the baskets designated in Sec. 61.42(d)(1), (d)(2), and (d)(6), 
except for the provisions of paragraphs (i)(1) and (i)(2) of this 
section, by the dollar amount associated with the PCI for the basket 
designated in Sec. 61.42(d)(3), and multiplying the PCI for the basket 
designated in Sec. 61.42(d)(3) by one minus the resulting ratio.
    (j) In determining the extent of the targeting that shall occur 
pursuant to paragraphs (i)(1) and (i)(2) of this section, local 
exchange carriers shall compute their anticipated residual 
interconnection charge amount by excluding revenues that are expected 
to be reallocated to cost-causative facilities-based charges in the 
future. To determine interconnection charge amounts so excluded in 
connection with the July 1, 1997 tariff filings, the following local 
exchange carriers shall use as an estimate of the residual 
interconnection charge revenues the specified residual interconnection 
charge percentage: NYNEX, 77.63 percent; BellSouth, 56.93 percent; U S 
West, 59.14 percent; Bell Atlantic, 63.96 percent; Southwestern Bell 
Telephone, 69.11 percent; and Pacific Bell and Nevada Bell, 53.52 
percent. Each remaining price cap local exchange carrier shall estimate 
a residual interconnection charge in an amount equal to 55 percent of 
its current interconnection charge revenues. For subsequent tariff 
filings in which the PCI reductions are to be targeted to the 
interconnection charge, these initial estimates shall be adjusted to 
reflect the actual amounts that have or will be reallocated. If the use 
of these estimates results in more PCI reductions being targeted to the 
interconnection charge than required to eliminate the per-minute 
interconnection charge, the local exchange carrier shall make the 
necessary exogenous adjustments to reverse the effects of the excess 
targeting.
    (k) The calculation of the PCI for the basket designated in 
Sec. 61.42(d)(3) shall include any residual interconnection charge 
revenues recovered pursuant to Secs. 69.153 and 69.155 of this chapter.
    (l) The calculation of the PCI for the basket designated in 
Sec. 61.42(d)(6) shall include any marketing expense revenues recovered 
pursuant to Secs. 69.153 and 69.156 of this chapter.
    5. Section 61.46 is amended by revising paragraphs (d) and (e) and 
adding new paragraphs (g) and (h) to read as follows:


Sec. 61.46  Adjustments to the API.

* * * * *
    (d)(1) Subject to paragraph (d)(2) of this section, and in 
connection with any price cap tariff proposing changes to rates for 
services in the basket designated in Sec. 61.42(d)(1), the maximum 
allowable carrier common line (CCL) charges shall be computed pursuant 
to the following methodology:

CCLMOU=CLMOU * (1+% change in CL 
PCI)-(EUCLMOU+PICCMOU)* 1/(1+(g/2))

Where:

CCLMOU=the sum of each of the proposed Carrier Common Line 
rates multiplied by its corresponding base period Carrier Common Line 
minutes of use, divided by the sum of all types of base period Carrier 
Common Line minutes of use,
CLMOU=the sum of each of the existing maximum allowable 
Carrier Common Line rates multiplied by its corresponding base period 
Carrier Common Line minutes of use, plus each existing maximum 
allowable End User Common Line (EUCL) rate multiplied by its 
corresponding base period lines, plus the common line portion of each 
existing maximum allowable Presubscribed Interexchange Carrier Charge 
(PICC) multiplied by its corresponding base period lines, divided by 
the sum of all types of base period Carrier Common Line minutes of use,
EUCLMOU=maximum allowable End User Common Line rates 
multiplied by base period lines, and divided by the sum of all types of 
base period Carrier Common Line minutes of use,
PICCMOU=the common line portion of maximum allowable 
Presubscribed Interexchange Carrier charge rates multiplied by base 
period lines, and divided by the sum of all types of base period 
Carrier Common Line minutes of use, and
g=the ratio of minutes of use per access line during the base period to 
minutes of use per access line

[[Page 31932]]

during the previous base period, minus 1.

    (2) The formula set forth in paragraph (d)(1) of this section shall 
be used by a local exchange carrier subject to price cap regulation 
only if that carrier is imposing a per-minute carrier common line 
charge pursuant to Sec. 69.154 of this chapter. Otherwise, adjustments 
to local exchange carrier APIs for the basket designated in 
Sec. 61.42(d)(1) shall be made pursuant to the formula set forth in 
paragraph (a) of this section.
    (e)(1) In addition, for the purposes of paragraph (d) of this 
section, ``Existing Carrier Common Line Rates'' shall include existing 
originating premium, originating non-premium, terminating premium and 
terminating non-premium rates; and ``End User Common Line Rates'' used 
to calculate the CLMOU and the EUCLMOU factors 
shall include, but not be limited to, Residential and Single Line 
Business rates, Centrex rates, and the Special Access surcharge.
    (2) For purposes of paragraph (d) of this section, ``each existing 
Presubscribed Interexchange Carrier Charge'' shall include all the 
charges specified in Sec. 69.153 of this chapter.
* * * * *
    (g) The calculation of the API for the basket designated in 
Sec. 61.42(d)(3) shall include any residual interconnection charge 
revenues recovered pursuant to Secs. 69.153 and 69.155 of this chapter.
    (h) The calculation of the API for the basket designated in 
Sec. 61.42(d)(6) shall include any marketing expense revenues recovered 
pursuant to Secs. 69.153 and 69.156 of this chapter.
    6. Section 61.47 is amended by adding paragraphs (g)(7), (i) and 
(j) to read as follows:


Sec. 61.47  Adjustments to the SBI; pricing bands.

* * * * *
    (g)(1) * * *
    (7) The initial level of the local switch trunk ports service 
category designated in Sec. 61.42(e)(1)(v) shall be established to 
include those costs identified pursuant to Sec. 69.106(f)(1) of this 
chapter. This level shall be assigned a value of 100, and thereafter 
must be adjusted as provided in paragraph (a) of this section, subject 
to the banding restrictions of paragraph (e) of this section.
* * * * *
    (i)(1) Through December 31, 1997, notwithstanding the requirements 
of paragraph (a) of this section, if a local exchange carrier is 
recovering interconnection charge revenues through per-minute rates 
pursuant to Sec. 69.124 or Sec. 69.155 of this chapter, any reductions 
to the PCI for the basket designated in Sec. 61.42(d)(3) resulting from 
the application of the provisions of Sec. 61.45 (b) and (i)(1) shall be 
directed to the SBI of the service category designated in 
Sec. 61.42(e)(2)(vi).
    (2) Effective January 1, 1998, notwithstanding the requirements of 
paragraph (a) of this section, if a local exchange carrier is 
recovering interconnection charge revenues through per-minute rates 
pursuant to Sec. 69.155 of this chapter, any reductions to the PCI for 
the basket designated in Sec. 61.42(d)(3) resulting from the 
application of the provisions of Sec. 61.45(b), (i)(1), and (i)(2) 
shall be directed to the SBI of the service category designated in 
Sec. 61.42(e)(2)(vi).
    (3) Through December 31, 1997, the SBI reduction required by 
paragraph (i)(1) of this section shall be determined by dividing the 
sum of the dollar amount of any PCI reduction required by 
Sec. 61.45(i)(1) and from the application of Sec. 61.45(b) to the 
basket described in Sec. 61.42(d)(3) by the dollar amount associated 
with the SBI for the service category designated in 
Sec. 61.42(e)(2)(vi), and multiplying the SBI for the service category 
designated in Sec. 61.42(e)(2)(vi) by one minus the resulting ratio.
    (4) Effective January 1, 1998, the SBI reduction required by 
paragraph (i)(2) of this section shall be determined by dividing the 
sum of the dollar amount of any PCI reduction required by Sec. 61.45 
(i)(1) and (i)(2), and from the application of Sec. 61.45(b) to the 
basket described in Sec. 61.42(d)(3) by the dollar amount associated 
with the SBI for the service category designated in 
Sec. 61.42(e)(2)(vi), and multiplying the SBI for the service category 
designated in Sec. 61.42(e)(2)(vi) by one minus the resulting ratio.
    (j) The calculation of the SBI for the service category designated 
in Sec. 61.42(e)(2)(vi) shall include any residual interconnection 
charge revenues recovered pursuant to Secs. 69.153 and 69.155 of this 
chapter.
    7. Section 61.48 is amended by adding paragraph (k) to read as 
follows:


Sec. 61.48  Transition rules for price cap formula calculations.

* * * * *
    (k) Marketing expenses. In the January 1, 1998 price cap tariff 
filing, local exchange carriers shall establish the marketing expense 
basket designated in Sec. 61.42(d)(6) with an initial PCI and API level 
of 100. The initial value of 100 for the PCI and API for marketing 
expenses shall correspond to the marketing expenses described in 
Sec. 69.156(a) of this chapter.

PART 69--ACCESS CHARGES

    8. The authority citation for part 69 continues to read as follows:

    Authority: 47 U.S.C. 154 (i) and (j), 201, 202, 203, 205, 218, 
254, and 403.

    9. Section 69.1(c) is revised to read as follows:


Sec. 69.1  Application of access charges.

* * * * *
    (c) The following provisions of this part shall apply to telephone 
companies subject to price cap regulation only to the extent that 
application of such provisions is necessary to develop the nationwide 
average carrier common line charge, for purposes of reporting pursuant 
to Secs. 43.21 and 43.22 of this chapter, and for computing initial 
charges for new rate elements: Secs. 69.3(f), 69.106(b), 69.106(f), 
69.106(g), 69.109(b), 69.110(d), 69.111(c), 69.111(g)(1), 69.111(l), 
69.112(d), 69.114(b), 69.114(d), 69.125(b)(2), 69.301 through 69.310, 
and 69.401 through 69.412. The computation of rates pursuant to these 
provisions by telephone companies subject to price cap regulation shall 
be governed by the price cap rules set forth in part 61 of this chapter 
and other applicable Commission Rules and orders.
    10. Section 69.2 is amended by revising paragraph (hh) to read as 
follows:


Sec. 69.2  Definitions.

* * * * *
    (hh) ``Telephone company'' or ``local exchange carrier'' as used in 
this part means an incumbent local exchange carrier as defined in 
section 251(h)(1) of the 1934 Act as amended by the 1996 Act.
* * * * *
    11. Section 69.4 is amended by removing and reserving paragraphs 
(b)(1), (d) and (f), revising the introductory text of paragraph (b), 
and adding paragraph (h) to read as follows:


Sec. 69.4  Charges to be filed.

* * * * *
    (b) Except as provided in paragraphs (c), (e), and (h) of this 
section, and in Sec. 69.118, the carrier's carrier charges for access 
service filed with this Commission shall include charges for each of 
the following elements:
* * * * *
    (h) In addition to the charges specified in paragraph (b) of this 
section, the carrier's carrier charges for access service filed with 
this Commission by price cap local exchange carriers shall include 
charges for each of the following elements:

[[Page 31933]]

    (1) Presubscribed interexchange carrier;
    (2) Per-minute residual interconnection;
    (3) Dedicated local switching trunk port;
    (4) Shared local switching trunk port;
    (5) Dedicated tandem switching trunk port;
    (6) Line port costs in excess of basic, analog service; and
    (7) Multiplexers associated with tandem switching.


Sec. 69.103  [Removed]

    12. Section 69.103 is removed.
    13. Section 69.104 is amended by revising the section heading and 
paragraphs (a) and (e) to read as follows:


Sec. 69.104  End user common line for non-price cap incumbent local 
exchange carriers.

    (a) This section is applicable only to incumbent local exchange 
carriers that are not subject to price cap regulation as that term is 
defined in Sec. 61.3(x) of this chapter. A charge that is expressed in 
dollars and cents per line per month shall be assessed upon end users 
that subscribe to local exchange telephone service or Centrex service 
to the extent they do not pay carrier common line charges. A charge 
that is expressed in dollars and cents per line per month shall be 
assessed upon providers of public telephones. Such charge shall be 
assessed for each line between the premises of an end user, or public 
telephone location, and a Class 5 office that is or may be used for 
local exchange service transmissions.
* * * * *
    (e) The monthly charge for each residential and single line 
business local exchange service subscriber shall be the charge computed 
in accordance with paragraph (c) of this section, or $3.50, whichever 
is lower.
* * * * *
    14. Section 69.105 is amended by revising the section heading and 
paragraph (a), and removing paragraphs (b)(7) and (b)(8), to read as 
follows:


Sec. 69.105  Carrier common line for non-price cap local exchange 
carriers.

    (a) This section is applicable only to local exchange carriers that 
are not subject to price cap regulation as that term is defined in 
Sec. 61.3(x) of this chapter. A charge that is expressed in dollars and 
cents per line per access minute of use shall be assessed upon all 
interexchange carriers that use local exchange common line facilities 
for the provision of interstate or foreign telecommunications services, 
except that the charge shall not be assessed upon interexchange 
carriers to the extent they resell MTS or MTS-type services of other 
common carriers (OCCs).
* * * * *
    15. Section 69.106 is amended by revising paragraphs (a) and (b), 
and by adding paragraphs (f) and (g) to read as follows:


Sec. 69.106  Local switching.

    (a) Except as provided in Sec. 69.118, charges that are expressed 
in dollars and cents per access minute of use shall be assessed by 
local exchange carriers that are not subject to price cap regulation 
upon all interexchange carriers that use local exchange switching 
facilities for the provision of interstate or foreign services.
    (b) The per minute charge described in paragraph (a) of this 
section shall be computed by dividing the projected annual revenue 
requirement for the Local Switching element by the projected annual 
access minutes of use for all interstate or foreign services that use 
local exchange switching facilities.
* * * * *
    (f) Except as provided in Sec. 69.118, price cap local exchange 
carriers shall establish rate elements for local switching as follows:
    (1) Price cap local exchange carriers shall separate from the 
projected annual revenues for the Local Switching element those costs 
projected to be incurred for ports (including cards and DS1/voice-grade 
multiplexers required to access end offices equipped with analog 
switches) on the trunk side of the local switch. Price cap local 
exchange carriers shall further identify costs incurred for dedicated 
trunk ports separately from costs incurred for shared trunk ports.
    (i) Price cap local exchange carriers shall recover dedicated trunk 
port costs identified pursuant to paragraph (f)(1) of this section 
through flat-rated charges expressed in dollars and cents per trunk 
port and assessed upon the purchaser of the dedicated trunk terminating 
at the port.
    (ii) Price cap local exchange carriers shall recover shared trunk 
port costs identified pursuant to paragraph (f)(1) of this section 
through charges assessed upon purchasers of shared transport. This 
charge shall be expressed in dollars and cents per access minute of 
use. The charge shall be computed by dividing the projected costs of 
the shared ports by the historical annual access minutes of use 
calculated for purposes of recovery of common transport costs in 
Sec. 69.111(c).
    (2) Price cap local exchange carriers shall recover the projected 
annual revenues for the Local Switching element that are not recovered 
in paragraph (f)(1) of this section through charges that are expressed 
in dollars and cents per access minute of use and assessed upon all 
interexchange carriers that use local exchange switching facilities for 
the provision of interstate or foreign services. The maximum charge 
shall be computed by dividing the projected remainder of the annual 
revenues for the Local Switching element by the historical annual 
access minutes of use for all interstate or foreign services that use 
local exchange switching facilities.
    (g) On or after July 1, 1998, a price cap local exchange carrier 
may recover signalling costs associated with call setup through a call 
setup charge imposed upon all interstate interexchange carriers that 
use that local exchange carrier's facilities to originate or terminate 
interstate interexchange or foreign services. This charge must be 
expressed as dollars and cents per call attempt and may be assessed on 
originating calls handed off to the interexchange carrier's point of 
presence and on terminating calls received from an interexchange 
carrier's point of presence, whether or not that call is completed at 
the called location. Price cap local exchange carriers may not recover 
through this charge any costs recovered through other rate elements.


Sec. 69.107  [Removed]

    16. Section 69.107 is removed.
    17. Section 69.111 is amended by removing and reserving paragraphs 
(b) and (f), revising paragraphs (a), (c), (d), (e), and (g), and 
adding paragraph (l) to read as follows:


Sec. 69.111  Tandem-switched transport and tandem charge.

    (a)(1) Through June 30, 1998, except as provided in paragraph (l) 
of this section, tandem-switched transport shall consist of two rate 
elements, a transmission charge and a tandem switching charge.
    (2) Beginning July 1, 1998, except as provided in paragraph (l) of 
this section, tandem-switched transport shall consist of three rate 
elements as follows:
    (i) A per-minute charge for transport of traffic over common 
transport facilities between the incumbent local exchange carrier's end 
office and the tandem switching office. This charge shall be expressed 
in dollars and cents per access minute of use and shall be assessed 
upon all purchasers of common transport facilities between the local 
exchange carrier's end office and the tandem switching office.
    (ii) A per-minute tandem switching charge. This tandem switching 
charge shall be set in accordance with

[[Page 31934]]

paragraph (g) of this section, excluding multiplexer and dedicated port 
costs recovered in accordance with paragraph (l) of this section, and 
shall be assessed upon all interexchange carriers and other persons 
that use incumbent local exchange carrier tandem switching facilities.
    (iii) A flat-rated charge for transport of traffic over dedicated 
transport facilities between the serving wire center and the tandem 
switching office. This charge shall be assessed as a charge for 
dedicated transport facilities provisioned between the serving wire 
center and the tandem switching office in accordance with Sec. 69.112.
    (b) [Reserved]
    (c)(1) Through June 30, 1998, tandem-switched transport 
transmission charges generally shall be presumed reasonable if the 
telephone company bases the charges on a weighted per-minute equivalent 
of direct-trunked transport DS1 and DS3 rates that reflects the 
relative number of DS1 and DS3 circuits used in the tandem to end 
office links (or a surrogate based on the proportion of copper and 
fiber facilities in the interoffice network), calculated using the 
total actual voice-grade minutes of use, geographically averaged on a 
study-area-wide basis, that the incumbent local exchange carrier 
experiences based on the prior year's annual use. Tandem-switched 
transport transmission charges that are not presumed reasonable 
generally shall be suspended and investigated absent a substantial 
cause showing by the telephone company.
    (2) Beginning July 1, 1998:
    (i) Except in study areas where the incumbent local exchange 
carrier has implemented density pricing zones as described in section 
69.124, per-minute common transport charges described in paragraph 
(a)(2)(i) of this section shall be presumed reasonable if the incumbent 
local exchange carrier bases the charges on a weighted per-minute 
equivalent of direct-trunked transport DS1 and DS3 rates that reflects 
the relative number of DS1 and DS3 circuits used in the tandem to end 
office links (or a surrogate based on the proportion of copper and 
fiber facilities in the interoffice network), calculated using the 
total actual voice-grade minutes of use, geographically averaged on a 
study-area-wide basis, that the incumbent local exchange carrier 
experiences based on the prior year's annual use. Tandem-switched 
transport transmission charges that are not presumed reasonable shall 
be suspended and investigated absent a substantial cause showing by the 
incumbent local exchange carrier.
    (ii) In study areas where the incumbent local exchange carrier has 
implemented density pricing zones as described in Sec. 69.124, per-
minute common transport charges described in paragraph (a)(2)(i) of 
this section shall be presumed reasonable if the incumbent local 
exchange carrier bases the charges on a weighted per-minute equivalent 
of direct-trunked transport DS1 and DS3 rates that reflects the 
relative number of DS1 and DS3 circuits used in the tandem to end 
office links (or a surrogate based on the proportion of copper and 
fiber facilities in the interoffice network), calculated using the 
total actual voice-grade minutes of use, averaged on a zone-wide basis, 
that the incumbent local exchange carrier experiences based on the 
prior year's annual use. Tandem-switched transport transmission charges 
that are not presumed reasonable shall be suspended and investigated 
absent a substantial cause showing by the incumbent local exchange 
carrier.
    (d)(1) Through June 30, 1998, the tandem-switched transport 
transmission charges may be distance-sensitive. Distance shall be 
measured as airline distance between the serving wire center and the 
end office, unless the customer has ordered tandem-switched transport 
between the tandem office and the end office, in which case distance 
shall be measured as airline distance between the tandem office and the 
end office.
    (2) Beginning July 1, 1998, the per-minute charge for transport of 
traffic over common transport facilities described in paragraph 
(a)(2)(i) of this section may be distance-sensitive. Distance shall be 
measured as airline distance between the tandem switching office and 
the end office.
    (e)(1) Through June 30, 1998, if the telephone company employs 
distance-sensitive rates:
    (i) A distance-sensitive component shall be assessed for use of the 
transmission facilities, including intermediate transmission circuit 
equipment between the end points of the interoffice circuit; and
    (ii) A non-distance-sensitive component shall be assessed for use 
of the circuit equipment at the ends of the interoffice transmission 
links.
    (2) Beginning July 1, 1998, if the telephone company employs 
distance-sensitive rates for transport of traffic over common transport 
facilities, as described in paragraph (a)(2)(i) of this section:
    (i) A distance-sensitive component shall be assessed for use of the 
common transport facilities, including intermediate transmission 
circuit equipment between the end office and tandem switching office; 
and
    (ii) A non-distance-sensitive component shall be assessed for use 
of the circuit equipment at the ends of the interoffice transmission 
links.
    (f) [Reserved]
    (g)(1) The tandem switching charge imposed pursuant to paragraphs 
(a)(1) or (a)(2)(ii) of this section, as applicable, shall be set to 
recover twenty percent of the annual part 69 interstate tandem revenue 
requirement plus one third of the portion of the tandem switching 
revenue requirement being recovered through the interconnection charge 
recovered by Secs. 69.124, 69.153, and 69.155, excluding multiplexer 
and dedicated port costs recovered in accordance with paragraph (l) of 
this section.
    (2) Beginning January 1, 1999, the tandem switching charge imposed 
pursuant to paragraph (a)(2)(ii) of this section shall be set to 
recover the amount prescribed in paragraph (g)(1) of this section plus 
one half of the remaining portion of the tandem switching revenue 
requirement then being recovered through the interconnection charge 
recovered by Secs. 69.124, 69.153, and 69.155, excluding multiplexer 
and dedicated port costs recovered in accordance with paragraph (l) of 
this section.
    (3) Beginning January 1, 2000, the tandem switching charge imposed 
pursuant to paragraph (a)(2)(ii) of this section shall be set to 
recover the entire interstate tandem switching revenue requirement, 
including that portion formerly recovered through the interconnection 
charge recovered in Secs. 69.124, 69.153, and 69.155, and excluding 
multiplexer and dedicated port costs recovered in accordance with 
paragraph (l) of this section.
    (4) A local exchange carrier that is subject to price cap 
regulation as that term is defined in Sec. 61.3(x) of this chapter 
shall calculate its tandem switching revenue requirement as used in 
this paragraph by dividing the tandem switching revenue requirement 
that was included in the original interconnection charge by the 
original interconnection charge, and then multiplying this result by 
the annual revenues recovered through the interconnection charge, 
described in Sec. 69.124, as of June 30, 1997.
* * * * *
    (l) In addition to the charges described in this section, price cap 
local exchange carriers shall establish separate charges for 
multiplexers and dedicated trunk ports used in conjunction with the 
tandem switch as follows:
    (1) Local exchange carriers must establish a traffic-sensitive 
charge for

[[Page 31935]]

DS3/DS1 multiplexers used on the end office side of the tandem switch, 
assessed on purchasers of common transport to the tandem switch. This 
charge must be expressed in dollars and cents per access minute of use. 
The maximum charge shall be calculated by dividing the total costs of 
the multiplexers on the end office-side of the tandem switch by the 
serving wire center side of the tandem switch by the projected annual 
access minutes of use calculated for purposes of recovery of common 
transport costs in paragraph (c) of this section. A similar charge 
shall be assessed for DS1/voice-grade multiplexing provided on the end-
office side of analog tandem switches.
    (2)(i) Local exchange carriers must establish a flat-rated charge 
for dedicated DS3/DS1 multiplexing on the serving wire center side of 
the tandem switch provided in conjunction with dedicated DS3 transport 
service from the serving wire center to the tandem switch. This charge 
shall be assessed on interexchange carriers purchasing tandem-switched 
transport in proportion to the number of DS3 trunks provisioned for 
that interexchange carrier between the serving wire center and the 
tandem-switch.
    (ii) Local exchange carriers must establish a flat-rated charge for 
dedicated DS1/voice-grade multiplexing provided on the serving wire 
center side of analog tandem switches. This charge may be assessed on 
interexchange carriers purchasing tandem-switched transport in 
proportion to the interexchange carrier's transport capacity on the 
serving wire center side of the tandem.
    (3) Price cap local exchange carriers may recover the costs of 
dedicated trunk ports on the serving wire center side of the tandem 
switch only through flat-rated charges expressed in dollars and cents 
per trunk port and assessed upon the purchaser of the dedicated trunk 
terminating at the port.


Sec. 69.122   [Removed]

    18. Section 69.122 is removed.
    19. Section 69.123 is amended by adding paragraph (f) to read as 
follows:


Sec. 69.123  Density pricing zones for special access and switched 
transport.

* * * * *
    (f)(1) An incumbent local exchange carrier that establishes density 
pricing zones under this section must reallocate additional amounts 
recovered under the interconnection charge prescribed in Sec. 69.124 to 
facilities-based transport rates, reflecting the higher costs of 
serving lower-density areas. Each incumbent local exchange carrier must 
reallocate costs from the interconnection charge each time it increases 
the differential between prices in density zones two and one or between 
three and one.
    (2) Any incumbent local exchange carrier that has already 
deaveraged its rates on January 1, 1998 must reallocate an amount 
equivalent to that described in paragraph (f)(1) of this section from 
the interconnection charge prescribed in Sec. 69.124 to its transport 
services.
    (3) Price cap local exchange carriers shall reassign to direct-
trunked transport and tandem-switched transport categories or 
subcategories interconnection charge amounts reallocated under 
paragraph (f)(1) or (f)(2) of this section in a manner that reflects 
the way density pricing zones are being implemented by the incumbent 
local exchange carrier.
    20. Section 69.124 is revised to read as follows:


Sec. 69.124  Interconnection charge.

    (a) For telephone companies not subject to price cap regulation, an 
interconnection charge expressed in dollars and cents per access minute 
shall be assessed upon all interexchange carriers and upon all other 
persons using the telephone company local transport network.
    (b) For telephone companies not subject to price cap regulation, 
the interconnection charge shall be computed by subtracting entrance 
facilities, tandem-switched transport, direct-trunked transport, and 
dedicated signalling transport revenues from the part 69 transport 
revenue requirement, and dividing by the total interstate local 
transport minutes.
    21. Section 69.125 is amended by revising paragraph (a) to read as 
follows:


Sec. 69.125  Dedicated signalling transport.

    (a) Dedicated signalling transport shall consist of two elements, a 
signalling link charge and a signalling transfer point (STP) port 
termination charge.
* * * * *
    22. Section 69.126 is revised to read as follows:


Sec. 69.126  Nonrecurring charges.

    Incumbent local exchange carriers shall not assess any nonrecurring 
charges for service connection when an interexchange carrier converts 
trunks from tandem-switched transport to direct-trunked transport or 
when an interexchange carrier orders the disconnection of 
overprovisioned trunks, until six months after the effective date of 
the tariffs eliminating the unitary pricing option for tandem-switched 
transport.
    23. Subpart C is revised to read as follows:

Subpart C--Computation of Charges for Price Cap Local Exchange Carriers

Sec.
69.151  Applicability.
69.152  End user common line for price cap local exchange carriers.
69.153  Presubscribed interexchange carrier charge (PICC).
69.154  Per-minute carrier common line charge.
69.155  Per-minute residual interconnection charge.
69.156  Marketing expenses.
69.157  Line port costs in excess of basic, analog service.

Subpart C--Computation of Charges for Price Cap Local Exchange 
Carriers


Sec. 69.151  Applicability.

    This subpart shall apply only to telephone companies subject to the 
price cap regulations set forth in part 61 of this chapter.


Sec. 69.152  End user common line for price cap local exchange 
carriers.

    (a) A charge that is expressed in dollars and cents per line per 
month shall be assessed upon end users that subscribe to local exchange 
telephone service or Centrex service to the extent they do not pay 
carrier common line charges. A charge that is expressed in dollars and 
cents per line per month shall be assessed upon providers of public 
telephones. Such charge shall be assessed for each line between the 
premises of an end user, or public telephone location, and a Class 5 
office that is or may be used for local exchange service transmissions.
    (b) Except as provided in paragraphs (d) through (i) of this 
section, the maximum single line rate or charge shall be computed:
    (1) By dividing one-twelfth of the projected annual revenue 
requirement for the End User Common Line element by the projected 
average number of local exchange service subscriber lines in use during 
such annual period, only so long as a per-minute carrier common line 
charge is assessed or the multi-line PICC defined in Sec. 69.153 
recovers common line revenues.
    (2) By dividing one-twelfth of the projected annual revenues 
permitted for the common line basket under the Commission's price cap 
rules, as set forth in part 61 of this chapter, by the projected 
average number of local exchange service subscriber lines in use during 
such annual period, if no per-minute carrier common line charge is 
assessed and the multi-line PICC

[[Page 31936]]

defined in Sec. 69.153 does not recover any common line revenues.
    (3) Provided, however, that the charge for each local exchange 
service subscriber line shall not exceed $9.00 as adjusted by the 
inflation factor computed under paragraph (k) of this section.
    (c) The charge for each subscriber line associated with a public 
telephone shall be equal to the monthly charge computed in accordance 
with paragraph (b) of this section.
    (d)(1) Through December 31, 1997, the monthly charge for each 
primary residential or single line business local exchange service 
subscriber line shall be the charge computed in accordance with 
paragraph (b) of this section, or $3.50, whichever is lower.
    (2) Beginning January 1, 1998, the maximum monthly charge for each 
primary residential or single line business local exchange service 
subscriber line shall be the charge computed in accordance with 
paragraph (b) of this section, or $3.50, whichever is lower.
    (e)(1) Through December 31, 1997, the monthly charge for each non-
primary residential local exchange service subscriber line shall be the 
charge computed in accordance with paragraph (b) of this section, or 
$3.50, whichever is lower.
    (2) Beginning January 1, 1998, the maximum monthly charge for each 
non-primary residential local exchange service subscriber line shall be 
the lower of:
    (i) The maximum charge computed in accordance with paragraph (b) of 
this section; or
    (ii) $5.00. On January 1, 1999, this amount shall be adjusted by 
the inflation factor computed under paragraph (k) of this section, and 
increased by $1.00. On July 1, 2000, and in each subsequent year, this 
amount shall be adjusted by the inflation factor computed under 
paragraph (k) of this section, and increased by $1.00.
    (3) Where the local exchange carrier provides a residential line to 
another carrier so that the other carrier may resell that residential 
line to a residence that already receives a primary residential line, 
the local exchange carrier may collect the non-primary residential 
charge described in paragraph (e) of this section from the other 
carrier.
    (f) Except as provided in paragraphs (n) and (o) of this section, 
the charge for each primary residential local exchange service 
subscriber line shall be the same as the charge for each single line 
business local exchange service subscriber line.
    (g) A line shall be deemed to be a residential subscriber line if 
the subscriber pays a rate for such line that is described as a 
residential rate in the local exchange service tariff.
    (h) [Reserved]
    (i) A line shall be deemed to be a single line business subscriber 
line if the subscriber pays a rate that is not described as a 
residential rate in the local exchange service tariff and does not 
obtain more than one such line from a particular telephone company.
    (j) No charge shall be assessed for any WATS access line.
    (k)(1) On January 1, 1999:
    (i) The ceiling for multi-line business subscriber lines under 
paragraph (b)(3) of this section will be adjusted to reflect inflation 
as measured by the change in GDP-PI for the 18 months ending September 
30, 1998.
    (ii) The ceiling for non-primary residential subscriber lines under 
paragraph (e)(2)(ii) of this section will be adjusted to reflect 
inflation as measured by the change in GDP-PI for the 12 months ending 
September 30, 1998.
    (2) On July 1, 2000, the ceiling for multi-line business subscriber 
lines and non-primary residential subscriber lines will be adjusted to 
reflect inflation as measured by the change in GDP-PI for the 18 months 
ending on March 31, 2000.
    (3) On July 1 of each subsequent year, the ceiling for multi-line 
business subscriber lines and non-primary residential subscriber lines 
will be adjusted to reflect inflation as measured by the change in GDP-
PI for the 12 months ending on March 31 of the year the adjustment is 
made.
    (l)(1) Beginning January 1, 1998, local exchange carriers shall 
assess no more than one end user common line charge as calculated under 
the applicable method under paragraph (e) of this section for Basic 
Rate Interface integrated services digital network (ISDN) service.
    (2) Local exchange carriers shall assess no more than five end user 
common line charges as calculated under paragraph (b) of this section 
for Primary Rate Interface ISDN service.
    (m) In the event the local exchange carrier charges less than the 
maximum end user common line charge for any subscriber lines, the local 
exchange carrier may not recover the difference between the amount 
collected and the maximum from carrier common line charges or PICCs.
    (n) Through December 31, 1997, the End User Common Line charge for 
a residential subscriber shall be 50% of the charge specified in 
paragraphs (b) and (d) of this section if the residential local 
exchange service rate for such subscribers is reduced by an equivalent 
amount, provided that such local exchange service rate reduction is 
based upon a means test that is subject to verification.
    (o) Paragraphs (o)(1) and (o)(2) of this section are effective 
through December 31, 1997.
    (1) The End User Common Line charge for residential subscribers 
shall be reduced to the extent of the state assistance as calculated in 
paragraph (o)(2) of this section, or waived in full if the state 
assistance equals or exceeds the residential End User Common Line 
charge under the circumstances described in this paragraph. In order to 
qualify for this waiver, the subscriber must be eligible for and 
receive assistance or benefits provided pursuant to a narrowly targeted 
telephone company lifeline assistance program, requiring verification 
of eligibility, implemented by the state or local telephone company. A 
state or local telephone company wishing to implement this End User 
Common Line reduction or waiver for its subscribers shall file 
information with the Commission Secretary demonstrating that its plan 
meets the criteria set out in this section and showing the amount of 
state assistance per subscriber as described in paragraph (o)(2) of 
this section. The reduction or waiver of the End User Common Line 
charge shall be available as soon as the Commission certifies that the 
state or local telephone plan satisfies the criteria set out in this 
paragraph and the relevant tariff provisions become effective.
    (2)(i) The state assistance per subscriber shall be equal to the 
difference between the charges to be paid by the participating 
subscribers and those to be paid by other subscribers for comparable 
monthly local exchange service, service connections and customer 
deposits, except that benefits or assistance for connection charges and 
deposit requirements may only be counted once annually. In order to be 
included in calculating the state assistance, such benefits must be a 
single telephone line to the household's principal residence.
    (ii) The monthly state assistance per participating subscriber 
shall be calculated by adding the amounts calculated in paragraphs 
(o)(2)(ii)(A) and (o)(2)(ii)(B) of this section.
    (A) The amount of the monthly state assistance per participating 
subscriber for local exchange service shall be calculated by dividing 
the annual difference between charges paid by all participating 
subscribers for residential

[[Page 31937]]

local exchange service and the amount which would have been charged to 
non-qualifying subscribers for comparable service by twelve times the 
number of subscribers participating in the state assistance program. 
Estimates may be used when historic data are not available.
    (B) The amount of the monthly state assistance for service 
connections and customer deposits per participating subscriber shall be 
calculated by determining the annual amount of the reductions in these 
charges for participating subscribers each year and dividing this 
amount by twelve times the number of participating subscribers. 
Estimates may be used when historic data are not available.
    (p) Through December 31, 1997, in connection with the filing of 
access tariffs pursuant to Sec. 69.3(a), telephone companies shall 
calculate for the association their projected revenue requirement 
attributable to the operation of Sec. 69.104 (n) through (o). The 
projected amount will be adjusted by the association to reflect the 
actual lifeline assistance benefits paid in the previous period. If the 
actual benefits exceeded the projected amount for that period, the 
differential will be added to the projection for the ensuing period. If 
the actual benefits were less than the projected amount for that 
period, the differential will be subtracted from the projection for the 
ensuing period. Through December 31, 1997, the association shall so 
adjust amounts to the Lifeline Assistance revenue requirement, bill and 
collect such amounts from interexchange carriers pursuant to 
Sec. 69.117 and distribute the funds to qualifying telephone companies 
pursuant to Sec. 69.603(d).


Sec. 69.153  Presubscribed interexchange carrier charge (PICC).

    (a) A charge expressed in dollars and cents per line may be 
assessed upon the subscriber's presubscribed interexchange carrier to 
recover the common line revenues permitted under the price cap rules in 
part 61 of this chapter that cannot be recovered through the end user 
common line charge established under Sec. 69.152, residual 
interconnection charge revenues, and certain marketing expenses 
described in Sec. 69.156(a). In the event the ceilings on the PICC 
prevent the PICC from recovering all the residual common line, residual 
interconnection charge revenues, and marketing expenses, the PICC shall 
recover all residual common line revenues before it recovers residual 
interconnection charge revenues, and all residual interconnection 
charge revenues before it recovers marketing expenses.
    (b) If an end-user customer does not have a presubscribed 
interexchange carrier, the local exchange carrier may collect the PICC 
directly from the end user.
    (c) The maximum monthly PICC for primary residential subscriber 
lines and single-line business subscriber lines shall be the lower of:
    (1) One twelfth of the sum of annual common line revenues and 
residual interconnection charge revenues permitted under our price cap 
rules divided by the projected average number of local exchange service 
subscriber lines in use during such annual period, minus $3.50; or
    (2) $0.53. On January 1, 1999, this amount shall be adjusted by the 
inflation factor computed under paragraph (e) of this section, and 
increased by $0.50. On July 1, 2000, and in each subsequent year, this 
amount shall be adjusted by the inflation factor computed under 
paragraph (e) of this section, and increased by $0.50.
    (d) To the extent that a local exchange carrier cannot recover its 
full common line revenues, residual interconnection charge revenues, 
and those marketing expense revenues described in Sec. 69.156(a) 
permitted under price cap regulation through the recovery mechanisms 
established in Sec. 69.152, paragraph (c) of this section, and 
Sec. 69.156 (b) and (c), the local exchange carrier may assess a PICC 
on multi-line business subscriber lines and non-primary residential 
subscriber lines.
    (1) The maximum monthly PICC for non-primary residential subscriber 
lines shall be the lower of:
    (i) One twelfth of the annual common line, residual interconnection 
charge, and Sec. 69.156(a) marketing expense revenues permitted under 
the price cap rules set forth in part 61 of this chapter, less the 
maximum amounts permitted to be recovered through the recovery 
mechanisms under Sec. 69.152, paragraph (c) of this section, and 
Sec. 69.156 (b) and (c), divided by the total number of projected non-
primary residential and multi-line business subscriber lines in use 
during such annual period; or
    (ii) $1.50. On January 1, 1999, this amount shall be adjusted by 
the inflation factor computed under paragraph (e) of this section, and 
increased by $1.00. On July 1, 2000, and in each subsequent year, this 
amount shall be adjusted by the inflation factor computed under 
paragraph (e) of this section, and increased by $1.00.
    (2) If the maximum monthly PICC for non-primary residential 
subscriber lines is determined using paragraph (d)(1)(i) of this 
section, the maximum monthly PICC for multi-line business subscriber 
lines shall equal the maximum monthly PICC of non-primary residential 
subscriber lines. Otherwise, the maximum monthly PICC for multi-line 
business lines shall be the lower of:
    (i) One twelfth of the annual common line, residual interconnection 
charge, and Sec. 69.156(a) marketing expense revenues permitted under 
this part and part 61 of this chapter, less the maximum amounts 
permitted to be recovered through the recovery mechanisms under 
Sec. 69.152, paragraphs (c) and (d)(1)(i) of this section, and 
Sec. 69.156 (b) and (c), divided by the total number of projected 
multi-line business subscriber lines in use during such annual period; 
or
    (ii) $2.75. On January 1, 1999, this amount shall be adjusted by 
the inflation factor computed under paragraph (e) of this section, and 
increased by $1.50. On July 1, 2000, and in each subsequent year, this 
amount shall be adjusted by the inflation factor computed under 
paragraph (e) of this section, and increased by $1.50.
    (e) For the PICC ceiling for primary residential subscriber lines 
and single-line business subscriber lines under paragraph (c)(2) of 
this section, non-primary residential subscriber lines under paragraph 
(d)(1)(ii) of this section, and multi-line business subscriber lines 
under paragraph (d)(2)(ii) of this section:
    (1) On January 1, 1999, the ceiling will be adjusted to reflect 
inflation as measured by the change in GDP-PI for the 12 months ending 
September 30, 1998.
    (2) On July 1, 2000, the ceiling will be adjusted to reflect 
inflation as measured by the change in GDP-PI for the 18 months ending 
on March 31, 2000.
    (3) On July 1 of each subsequent year, the ceiling will be adjusted 
to reflect inflation as measured by the change in GDP-PI for the 12 
months ending on March 31 of the year the adjustment is made.
    (f)(1) Local exchange carriers shall assess no more than one PICC 
as calculated under the applicable method under paragraph (d)(1) of 
this section for Basic Rate Interface integrated services digital 
network (ISDN) service.
    (2) Local exchange carriers shall assess no more than five PICCs as 
calculated under paragraph (d)(2) of this section for Primary Rate 
Interface ISDN service.


Sec. 69.154  Per-minute carrier common line charge.

    (a) Local exchange carriers may recover a per-minute carrier common

[[Page 31938]]

line charge from interexchange carriers, collected on originating 
access minutes and calculated using the weighting method set forth in 
paragraph (c) of this section. The maximum such charge shall be the 
lower of:
    (1) The per-minute rate that would recover annual common line 
revenues permitted less the maximum amounts allowed to be recovered 
under Secs. 69.152 and 69.153; or
    (2) The sum of the local switching, carrier common line and 
interconnection charge charges assessed on originating minutes on 
December 31, 1997, minus the local switching charges assessed on 
originating minutes.
    (b) To the extent that paragraph (a) of this section does not 
recover from interexchange carriers all permitted carrier common line 
revenue, the excess may be collected through a per-minute charge on 
terminating access calculated using the weighting method set forth in 
paragraph (c) of this section.
    (c) For each Carrier Common Line access element tariff, the premium 
originating Carrier Common Line charge shall be set at a level that 
recovers revenues allowed under paragraphs (a) and (b) of this section. 
The non-premium charges shall be equal to .45 multiplied by the premium 
charges.


Sec. 69.155  Per-minute residual interconnection charge.

    (a) Local exchange carriers may recover a per-minute residual 
interconnection charge on originating access. The maximum such charge 
shall be the lower of:
    (1) The per-minute rate that would recover the total annual 
residual interconnection charge revenues permitted less the portion of 
the residual interconnection charge allowed to be recovered under 
Sec. 69.153; or
    (2) The sum of the local switching, carrier common line and 
residual interconnection charges assessed on originating minutes on 
December 31, 1997, minus the local switching charges assessed on 
originating minutes, less the maximum amount allowed to be recovered 
under Sec. 69.154(a).
    (b) To the extent that paragraph (a) of this section prohibits a 
local exchange carrier from recovering all of the residual 
interconnection charge revenues permitted, the residual may be 
collected through a per-minute charge on terminating access.
    (c) Any charge assessed pursuant to paragraph (a) or (b) of this 
section shall be assessed only upon minutes utilizing the local 
exchange carrier's local transport service.


Sec. 69.156  Marketing expenses.

    (a) Local exchange carriers shall recover marketing expenses that 
are allocated to the common line and traffic sensitive baskets, and the 
switched services within the trunking basket pursuant to Secs. 32.6610 
of this chapter and 69.403.
    (b) The expenses described in paragraph (a) of this section may be 
recovered from non-primary residential subscriber lines, by increasing 
the end user common line charge described in Sec. 69.152(e). The amount 
of marketing expenses permitted to be recovered in this manner shall be 
the total marketing expenses described in paragraph (a) of this section 
divided by the sum of non-primary residential lines and multi-line 
business lines. In no event shall the end user common line charge for 
these lines exceed the lower of the ceilings established in Sec. 69.152 
(b)(3) and (e)(2)(ii).
    (c) The expenses described in paragraph (a) of this section may be 
recovered from multi-line business subscriber lines, by increasing the 
end user common line charge described in Sec. 69.152(b). The amount 
permitted to be recovered in this manner shall be the total marketing 
expenses described in paragraph (a) of this section divided by the sum 
of non-primary residential lines and multi-line business lines. In no 
event shall the end user common line charge for these lines exceed the 
ceiling established in Sec. 69.152(b)(3).
    (d) In the event that the ceilings set forth in paragraphs (b) and 
(c) of this section, and Sec. 69.153(d) prevent a local exchange 
carrier from recovering fully the marketing expenses described in 
paragraph (a) of this section, the local exchange carrier may recover 
the remainder through a per-minute assessment on originating access 
minutes, so long as the charge for originating access does not exceed 
the amount defined in Sec. 69.155(a)(2) less the maximum permitted to 
be recovered under Sec. 69.155(a).
    (e) In the event that the ceilings set forth in paragraphs (b), (c) 
and (d) of this section, and Sec. 69.153(d) prevent a local exchange 
carrier from recovering fully the marketing expenses described in 
paragraph (a) of this section, the local exchange carrier may recover 
the remainder through a per-minute assessment on terminating access 
minutes.
    (f) The amount of marketing expenses that may be recovered each 
year shall be adjusted in accordance with the price cap rules set forth 
in part 61 of this chapter.


Sec. 69.157  Line port costs in excess of basic, analog service.

    To the extent that the costs of ISDN line ports, and line ports 
associated with other services, exceed the costs of a line port used 
for basic, analog service, local exchange carriers may recover the 
difference through a separate monthly end user charge.


Sec. 69.303  [Amended]

    24. Section 69.303 is amended by removing paragraph (a) and the 
paragraph designation ``(b)''.


Sec. 69.304  [Amended]

    25. Section 69.304 is amended by removing paragraph (c).
    26. Section 69.305 is amended by revising paragraphs (b) and (d), 
and adding paragraph (e) to read as follows:


Sec. 69.305  Carrier cable and wire facilities (C&WF).

* * * * *
    (b) Carrier C&WF, other than WATS access lines, not assigned 
pursuant to paragraph (a), (c), or (e) of this section that is used for 
interexchange services that use switching facilities for origination 
and termination that are also used for local exchange telephone service 
shall be apportioned to the local Transport elements.
* * * * *
    (d) All Carrier C&WF that is not apportioned pursuant to paragraphs 
(a), (b), (c), and (e) of this section shall be assigned to the Special 
Access element.
    (e) Carrier C&WF that is used to provide transmission between the 
local exchange carrier's signalling transfer point and the local switch 
shall be assigned to the local switching category.
    27-28. Section 69.306 is amended by revising paragraphs (c), (d), 
and (e) to read as follows:


Sec. 69.306  Central office equipment (COE).

* * * * *
    (c) COE Category 2 (Tandem Switching Equipment) that is deemed to 
be exchange equipment for purposes of the Modification of Final 
Judgment in United States v. Western Electric Co. shall be assigned to 
the tandem switching charge subelement and the interconnection charge 
element. COE Category 2 which is associated with the signal transfer 
point function shall be assigned to the local switching category. COE 
Category 2 which is used to provide transmission facilities between the 
local exchange carrier's signalling transfer point and the database 
shall be assigned to the Line Information Database subelement at 
Sec. 69.120(a). All other COE Category 2 shall be assigned to the 
interexchange category.
    (d) COE Category 3 (Local Switching Equipment) shall be assigned to 
the Local Switching element except as provided in paragraph (a) of this

[[Page 31939]]

section; and that, for telephone companies subject to price cap 
regulation set forth in part 61 of this chapter, line-side port costs 
shall be assigned to the Common Line rate element.
    (e) COE Category 4 (Circuit Equipment) shall be apportioned among 
the interexchange category and the Common Line, Transport, and Special 
Access elements. COE Category 4 shall be apportioned in the same 
proportions as the associated Cable and Wireless Facilities; except 
that any DS1/voice-grade multiplexer investment associated with analog 
local switches and assigned to the local transport category by this 
section shall be reallocated to the local switching category.


Sec. 69.307  [Amended]

    29. Section 69.307 is amended by removing paragraph (c).


Sec. 69.308  [Removed]

    30. Section 69.308 is removed.
    31. Section 69.309 is revised to read as follows:


Sec. 69.309  Other investment.

    Investment that is not apportioned pursuant to Secs. 69.302 through 
69.307 shall be apportioned among the interexchange category, the 
billing and collection category and access elements in the same 
proportions as the combined investment that is apportioned pursuant to 
Secs. 69.303 through 69.307.
    32. Section 69.401 is amended by revising paragraph (b) to read as 
follows:


Sec. 69.401  Direct expenses.

* * * * *
    (b) Plant Specific Operations Expenses in Accounts 6210, 6220, and 
6230, shall be apportioned among the interexchange category and access 
elements on the basis of the apportionment of the investment in 
Accounts 2210, 2220, and 2230, respectively; provided that any expenses 
associated with DS1/voice-grade multiplexers, to the extent that they 
are not associated with an analog tandem switch, assigned to the local 
transport category by this paragraph shall be reallocated to the local 
switching category; provided further that any expenses associated with 
common channel signalling included in Account 6210 shall be assigned to 
the local transport category.
* * * * *


Sec. 69.406  [Amended]

    33. Section 69.406 is amended by removing paragraph (a)(9).


Sec. 69.410  [Removed]

    34. Section 69.410 is removed.
    35. Section 69.411 is revised to read as follows:


Sec. 69.411  Other expenses.

    Except as provided in Secs. 69.412, 69.413, and 69.414, expenses 
that are not apportioned pursuant to Secs. 69.401 through 69.409 shall 
be apportioned among the interexchange category and all access elements 
in the same manner as Sec. 69.309 Other investment.


Sec. 69.501  [Amended]

    36. Section 69.501 is amended by removing and reserving paragraph 
(a).
    37. Section 69.502 is revised to read as follows:


Sec. 69.502  Base factor allocation.

    Projected revenues from the following shall be deducted from the 
base factor portion to determine the amount that is assigned to the 
Carrier Common Line element:
    (a) End User Common Line charges, less any marketing expense 
revenues recovered through end user common line charges pursuant to 
Sec. 69.156;
    (b) Special Access surcharges; and
    (c) The portion of frozen per-line support that carriers receive 
pursuant to Sec. 54.303 that is attributable to LTS payments received 
prior to January 1, 1998.


Sec. 69.611  [Removed]

    38. Section 69.611 is removed.

[FR Doc. 97-14628 Filed 6-10-97; 8:45 am]
BILLING CODE 6712-01-P