[Federal Register Volume 62, Number 112 (Wednesday, June 11, 1997)]
[Rules and Regulations]
[Pages 31939-31941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-14746]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 61

[CC Docket Nos. 94-1 and 96-262; FCC 97-159]


Price Cap Performance Review for Local Exchange Carriers; Access 
Charge Reform

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: On May 7, 1997, the Federal Communications Commission adopted 
the Fourth Report and Order in CC Docket No. 94-1, Second Report and 
Order in CC Docket No. 96-262, revising its price cap regulations 
applicable to incumbent local exchange carriers (incumbent LECs). 
Specifically, the Commission replaced the choice of three X-Factors in 
the current price cap plan with a single X-Factor of 6.5 percent. The 
Commission also eliminated sharing obligations, but retained the low-
end adjustment mechanism. The Commission adopts a fixed X-Factor to 
remain in effect until the next performance review, rather than 
updating the X-Factor annually on the basis of a five-year industry-
wide moving average. In the Fourth Further Notice in CC Docket No. 94-
1, the Commission sought comment on revising the common line PCI 
formula and the price cap exogenous cost rules. The Commission adopted 
revisions to the common line PCI formula in its Access Reform First 
Report and Order adopted concurrently with this Order, and so does not 
need to adopt any further revisions here. Also, as a result of its 
decision to adopt a fixed X-Factor, the Commission does not need to 
address issues regarding the price cap exogenous cost rules. The 
Commission requires price cap LECs to reset their price cap indices as 
of July 1, 1997, to be at the levels that would have been in effect had 
the 6.5 percent X-Factor taken effect concurrently with the 1996 annual 
access tariffs.

EFFECTIVE DATE: June 16, 1997.

FOR FURTHER INFORMATION CONTACT: Steven Spaeth, Competitive Pricing 
Division, Common Carrier Bureau, (202) 418-1530.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Order 
adopted May 7, 1997, and released May 21, 1997. The full text of this 
Commission decision is available for inspection and copying during 
normal business hours in the FCC Public Reference Room 230, 1919 M St., 
N.W., Washington, D.C. The complete text of this decision may also be 
purchased from the Commission's copy contractor, International 
Transcription Service, Suite 140, 2100 M Street, N.W., Washington, D.C. 
20037.

Regulatory Flexibility Analysis

    In the Fourth Further Notice in CC Docket No. 94-1, 60 FR 52362 
(October 6, 1995), we certified that the Regulatory Flexibility Act 
(RFA), 5 U.S.C. 601 et seq., did not apply to this rulemaking 
proceeding because none of the rule amendments under consideration 
would have a significant economic impact on a substantial number of 
small entities. (The RFA was amended by the Contract With America 
Advancement Act of 1996, Public Law 104-121, 110 Stat. 847 (1996) 
(CWAAA).) Title II of the CWAAA is the Small Business Regulatory 
Enforcement Fairness Act of 1996 (SBREFA). Carriers subject to price 
cap regulation for local exchange access affected by the rule 
amendments

[[Page 31940]]

adopted in this Order are generally large corporations or the 
affiliates of such corporations. No party commented specifically in 
response to the analysis in our certification.
    In passing the Telecommunications Act of 1996 (1996 Act), Congress 
sought to establish ``a pro-competitive, deregulatory national policy 
framework'' for the United States telecommunications industry. See 
Telecommunications Act of 1996, Public Law 104-104, 110 Stat. 56 
(1996). These fundamental changes in the structure and dynamics of the 
telecommunications industry wrought by the 1996 Act now necessitate 
that the Commission review its existing access charge regulations to 
ensure that they are consistent and compatible with the 1996 Act's far-
reaching changes. The rule revisions we adopt based on the record 
developed in the Fourth Further Notice in CC Docket No. 94-1, and the 
Notice in CC Docket No. 96-262, will facilitate the deregulatory policy 
established in the 1996 Act. In particular, our elimination of sharing 
obligations removes a major impediment to deregulating individual 
interstate access services at the time competitive conditions for a 
particular service warrant deregulation.
    The rules we adopt in this Order are applicable only to LECs 
subject to price cap regulation. Currently, 13 incumbent LECs are 
subject to price cap regulation. We tentatively concluded in the Fourth 
Further Notice in CC Docket No. 94-1 that the price cap LECs are not 
``small business concerns'' because they are generally large 
corporations or affiliates of such corporations. We hereby affirm this 
analysis.
    The Commission will send a copy of this final certification, along 
with this Order, in a report to Congress pursuant to the Small Business 
Regulatory Enforcement Fairness Act of 1996, 5 U.S.C. 801(a)(1)(A), and 
to the Chief Counsel for Advocacy of the Small Business Administration, 
5 U.S.C. 605(b).

Summary of Report and Order

    In conjunction with the Access Reform First Report and Order and 
the Universal Service Order, adopted concurrently with this Order, the 
Commission adopts reforms needed to set the stage for the progressive 
deregulation of incumbent LECs with the development of competition.
    Under price cap regulation, LEC interstate access services have 
been placed in one of four groups of access services, called baskets. A 
price cap index (PCI) limits the weighted average of rate increases for 
each basket to the rate of inflation, the Gross Domestic Product Price 
Deflator (GDP-PI), minus an ``X-Factor.'' The X-Factor is intended to 
measure the amount by which LECs are more productive than the economy 
as a whole.
    Under our prior price cap rules, the baseline X-Factor was based on 
the average of the short-term and long-term trends in rate reductions 
prior to our adoption of the original price cap plan in 1990, plus a 
consumer productivity dividend (CPD) of 0.5 percent. We designed the X-
Factor and the consumer productivity dividend so that, at minimum, 
rates would decline more quickly than they had declined before 1990, 
and so would assure that the first benefits of price cap regulation 
would flow to access customers in the form of lower rates. In the First 
Report and Order in CC Docket No. 94-1, 60 FR 19526 (April 19, 1995), 
we tentatively concluded that an analysis that directly measured the 
growth of LEC productivity and input prices would provide a better 
basis for prescribing an X-Factor than the methodology the Commission 
used in previous Orders. In the Fourth Further Notice in CC Docket No. 
94-1, 60 FR 52362 (October 6, 1995), the Commission invited comment on 
the total factor productivity (TFP) methodology and other alternatives 
for calculating the X-Factor. The Commission invited parties to 
supplement the record in the Notice of Proposed Rulemaking in CC Docket 
No. 96-262, 62 FR 4670 (January 31, 1997). We find that the record 
supports prescribing a single X-Factor of 6.5 percent, based on our 
conclusions regarding a reasonable method of calculating LEC TFP and 
input prices, and our decision to retain the 0.5 percent CPD. This X-
Factor is reasonable and challenging, and falls within a range of 
reasonable X-Factors.
    Under our current price cap rules, incumbent price cap LECs are 
permitted to choose among three X-Factors, two of which include 
obligations to share certain earnings. Sharing requires incumbent LECs 
to ``share'' half or all earnings above specified rates of return with 
their access customers in the form of lower access rates during the 
next year. We adopt a system of pure price caps, without sharing, 
because sharing tends to blunt the efficiency incentives that we sought 
to create with price cap regulation. We conclude that, under the price 
cap rules we adopt today, any benefits of retaining sharing are 
outweighed by the benefits of eliminating sharing. We consider the X-
Factor we adopt today to be a much more reliable measure of incumbent 
LEC potential productivity gains. Therefore, we have substantially more 
confidence that this X-Factor will flow through a reasonable portion of 
LEC productivity gains to access customers. We also find that, because 
we establish a price cap plan with only one X-Factor, a matching 
mechanism is no longer necessary. To guard against our new X-Factor 
requiring individual LECs to charge unreasonably low rates, we will 
retain our current low-end adjustment mechanism, which permits LECs, 
after earning less than 10.25 percent in a calendar year, to make a one 
time upward adjustment their rates in the next tariff year, equal to 
the amount that would have allowed them to earn 10.25 percent in the 
calendar year.
    This Order adopts a single X-Factor. The Commission adopted 
multiple X-Factor options in prior orders because of concerns that 
differences in LEC service areas might affect their abilities to 
increase their productivity growth. The Order observes that most of the 
price cap companies have selected the highest, no-sharing X-Factor 
option in our current rules, and concludes that the heterogeneity among 
LECs subject to price cap regulation does not affect their productivity 
growth as much as the Commission thought previously.
    We sought comment on whether to keep the X-Factor up to date by 
basing it on an industry-wide moving average of TFP, or to continue to 
update the X-Factor in occasional performance reviews. We decide, in 
light of the fundamental changes to the marketplace resulting from the 
new competitive paradigm of the 1996 Act, that the better course is to 
select a new generally applicable X-Factor, based on the current 
record, that will remain in place until we change it in a new 
performance review.
    We also sought comment on whether it is necessary to eliminate the 
``g/2'' term from the common line PCI formula to conform to a TFP-based 
X-Factor. In the Access Reform First Report and Order adopted 
concurrently with this Order, we decide to eliminate the ``g/2'' term 
after a short transition period. In this Order, we conclude that no 
further revisions to the common line PCI formula are warranted.
    The Commission sought comment on fashioning an X-Factor that would 
routinely incorporate cost changes currently considered exogenous into 
the PCI formula, which would eliminate the need for separate exogenous 
cost rules. Because the Commission adopts a fixed X-Factor in this 
Order, the X-Factor will not routinely incorporate exogenous cost 
changes into the PCI formula, and so no changes to the exogenous cost 
rules are warranted at this time.

[[Page 31941]]

    The Order directs LECs to recalculate their price cap ceilings for 
July 1, 1997, to be at the levels they would have been had the 6.5 
percent X-Factor had taken effect concurrently with their 1996 annual 
access filings. The Order finds that this adjustment is necessary 
because the interim price cap plan was intended to remain for a short 
time, and that the local companies should not be permitted to benefit 
indefinitely because the more accurate 6.5 percent X-Factor was not 
adopted sooner. The Commission's repeated emphasis that the X-Factor 
adopted in the LEC Price Cap Performance Review was ``interim'' should 
reasonably have put carriers on notice that another adjustment of the 
type we had adopted in that order would be possible--perhaps beginning 
with the 1995 tariff year, the first year under the interim X-Factor. 
This adjustment affects only future rate levels; it does not have any 
retroactive effect on past prices or earnings.
    In the Third Further Notice of Proposed Rulemaking in CC Docket No. 
94-1, 60 FR 52345 (September 26, 1995), the Commission sought comment 
on establishing rules governing the price cap treatment of video 
dialtone services. The Order concludes that one of the provisions of 
the 1996 Act makes those issues moot.
    Finally, the Order directs price cap LECs to file tariffs making 
adjustments to their rates to reflect these revisions to the price cap 
rules no later than June 25, 1997, to take effect July 1, 1997. Those 
LECs wishing to raise any rates in these filings must file no later 
than June 16, 1997. We also direct price cap LECs to file revised 
tariff review plans (TRPs) containing adjustments to their PCIs, APIs, 
and SBIs no later than June 2, 1997.

Ordering Clauses

    Accordingly, it is ordered, pursuant to authority contained in 
Secs. 4(i), 4(j), 201-205, 303(r), and 403 of the Communications Act of 
1934, as amended, 47 U.S.C. 154(i), 154(j), 201-205, 303(r), 403, and 
Sec. 553 of Title 5, United States Code, that Part 61 of the 
Commission's Rules, 47 CFR Part 61, is amended as set forth below.
    It is further ordered that the provisions in this Order will be 
effective June 16, 1997. We find good cause under 5 U.S.C. 
Sec. 553(d)(3) to make the rules 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 Sec. 69.3 of the Commission's 
rules, 47 CFR 69.3. In addition, to ensure that the local exchange 
carriers subject to price cap regulation have actual notice of these 
rules immediately following their release, we are serving those 
entities by certified, first class mail.
    It is further ordered that local exchange carriers subject to price 
cap regulation shall file tariffs and revised tariff review plans in 
accordance with the requirements set forth above. These requirements 
are subject to review by the Office of Management and Budget, and will 
be effective upon that approval.
    It is further ordered that the motion filed by Ad Hoc 
Telecommunications Users Committee on February 23, 1996, is dismissed.

List of Subjects in 47 CFR Part 61

    Communications Common Carriers, Tariffs.

Federal Communications Commission.
Shirley S. Suggs,
Chief, Publications Branch.

Rule Changes

    Part 61 of title 47 of the Code of Federal Regulations is amended 
as follows:

PART 61--TARIFFS

    1. The authority citation continues to read as follows:

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

    2. Section 61.45 is amended by revising paragraphs (b)(1), (b)(2), 
revising the definition for X in (c)(1), revising the last sentence of 
paragraph (c)(2), redesignating paragraph (d)(2) as (d)(2)(i), adding 
new paragraph (d)(2)(ii), and removing and reserving paragraph (h) to 
read as follows:


Sec. 61.45  Adjustments to the PCI for Local Exchange Carriers

* * * * *
    (b) * * *
    (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 6.5%.
    (2) For the basket specified in Sec. 61.42(d)(4), the value of X, 
for all local exchange carriers subject to price cap regulation, shall 
be 3.0%.
* * * * *
    (c)(1) * * *

X=productivity factor of 6.5%,
* * * * *
    (c)(2) * * * For the purposes of this paragraph, and 
notwithstanding the value of X defined in Sec. 61.44(b), the X value 
applicable to the basket specified in Sec. 61.42(d)(1), shall be 6.5%.
* * * * *
    (d) * * *
    (2) (i) * * *
    (ii) Local exchange carriers specified in Sec. 61.41(a)(2) or 
(a)(3) shall not be subject to the sharing mechanism set forth in the 
Commission's Second Report and Order in Common Carrier Docket No. 87-
313, FCC 90-314, adopted September 19, 1990, with respect to earnings 
accruing on or after July 1, 1997. This paragraph has no effect on any 
sharing obligation of any local exchange carrier relating to earnings 
accrued before July 1, 1997.
* * * * *
[FR Doc. 97-14746 Filed 6-10-97; 8:45 am]
BILLING CODE 6712-01-P