[Federal Register Volume 64, Number 227 (Friday, November 26, 1999)]
[Proposed Rules]
[Pages 66442-66447]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-30741]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 61

[CC Docket Nos. 94-1 and 96-262; FCC 99-345]


Prescription of Local Exchange Carrier Price Cap Productivity 
Offset (``X-Factor'')

AGENCY: Federal Communications Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document seeks comment on the represcription of the 
productivity offset, or ``X-factor,'' in the local exchange carrier 
price cap formula. The X-factor of 6.5 percent prescribed by the 
Commission in the 1997 Price Cap Performance Review Order was reversed 
and remanded to the agency by the U.S. Court of Appeals for the D.C. 
Circuit. Therefore, the Commission seeks comment on the retroactive 
prescription of the X-factor for the period affected by the court's 
remand, from July 1, 1997 to June 30, 2000, and on the prospective 
prescription, from July 1, 2000 forward. The Further Notice of Proposed 
Rulemaking (``FNPRM'') identifies three studies on which the historical 
component of the X-factor prescription may be based: the 1997 staff 
total factor productivity (``TFP'') study relied upon in the 1997 
order; a new 1999 staff TFP study; or a staff Imputed X study. This 
document also seeks comment on whether a consumer productivity dividend 
(``CPD'') should be included in the X-factor.

DATES: Comments are due on or before December 30, 1999, and reply 
comments are due on or before January 14, 2000.

ADDRESSES: Federal Communications Commission, 445 12th Street, S.W., 
Washington, DC 20554.

FOR FURTHER INFORMATION CONTACT: Aaron Goldschmidt, (202) 418-1520.

SUPPLEMENTARY INFORMATION: In 1997, the Commission represcribed the 
amount by which it annually adjusts price caps for incumbent local 
exchange carriers subject to the price cap rules (``price cap LECs''). 
Price Cap Performance Review for Local Exchange Carriers, 62 FR 31939, 
June 11, 1997 (``1997 Price Cap Review Order''). The revised price cap 
adjustment required price cap LECs to reduce inflation-adjusted prices 
for interstate access services by an ``X-factor'' of 6.5 percent 
annually. Pursuant to petitions for review of the Commission's order, 
the United States Court of Appeals for the District of Columbia Circuit 
reversed and remanded the Commission's decision. USTA v. FCC, 188 F.3d 
521 (D.C. Cir. 1999). The court has stayed issuance of its mandate 
until April 1, 2000, to allow time for the Commission to conduct this 
proceeding. USTA v. FCC, Nos. 97-1469 et al., (D.C. Cir. June 21, 
1999).
    In this Further Notice of Proposed Rulemaking (``FNPRM'') we seek 
comment on how we should represcribe an X-factor. More specifically, we 
seek comment on prescribing two separate X-factors to address 
retroactively the period affected by the court remand (July 1, 1997 to 
June 30, 2000), and prospectively the period from July 1, 2000 forward, 
or a single X-factor to cover the combined period. Specifically, we 
seek comment on three possible bases for setting the historical 
component of the X-factor: (1) by relying on the results of the 1997 
staff TFP study used in the 1997 order; (2) by relying on the results 
of a new 1999 staff TFP study that makes several adjustments to the 
1997 staff study; or (3) by relying on the results of a new staff 
Imputed X study that determines the X-factor that would have produced a 
competitive level of capital compensation in the interstate 
jurisdiction during the period between price cap performance reviews.
    Further, we seek comment on resetting, on a forward-looking basis, 
price cap LEC prices to a level that is consistent with any X-factor 
prescription in order to rebalance the sharing of benefits of price 
caps between LECs and their customers. This FNPRM is limited to issues 
surrounding the setting of the X-factor, and does not include any 
broader changes to our method of price cap regulation.
    In a separate but related proceeding, the Commission is seeking 
comment on a proposal submitted by the Coalition for Affordable Local 
and Long Distance Services (``CALLS''). See Access Charge Reform, Price 
Cap Performance Review for Local Exchange Carriers, Low-Volume Long 
Distance Users, Federal-State Joint Board on Universal Service, 64 FR 
50527, September 16, 1999. The CALLS proposal would purportedly 
eliminate the necessity of retrospectively adjusting the X-factor in 
response to the court's remand. Instead, it would keep the X-factor at 
6.5 percent, but would target X-factor reductions to the traffic-
sensitive price cap basket. Once local switching rates reached a 
certain level, all price cap indices would be frozen. Adoption of the 
CALLS proposal would also eliminate the need to prescribe an X-factor 
on a going-forward basis. We seek comment in this proceeding on the 
prescription of the X-factor because, in the event that the CALLS 
proposal is not adopted, or not all price cap LECs become signatories 
to the proposal, the Commission must be prepared to prescribe a new X-
factor before April 1, 2000.

Option 1: The 1997 Staff TFP Study

    We seek comment on whether we should use only the results from the 
1997 staff TFP study in setting the historical component of the X-
factor for the remand period. We seek comment on whether, in addressing 
the court's remand, we are precluded from revising the X-factor using 
any other methodology, or from supplementing the data in the 1997 staff 
TFP study.
    The court did not find fault with the 1997 staff TFP study, and did 
not ask us to revisit it. Instead, the court limited its critique of 
TFP to our selection of a value at the upper end of the reasonableness 
range, and with the upward adjustment to the reasonable range.
    In their responses to a 1998 request to refresh the record in our 
Access Charge Reform proceeding, both USTA and AT&T used the 
methodology in the 1997 staff TFP study to extend the calculation of 
the X-factor through 1997. USTA has also calculated an X-factor for 
1998. We seek comment on the legal and logical arguments supporting 
consideration of data that have become available after the

[[Page 66443]]

close of the record for the remanded prescription. We note that USTA 
and AT&T did not agree with each other on the value of the historical 
component for 1996 and 1997. We seek comment on USTA's and AT&T's 
updates of the 1997 staff TFP study, and on their recommendations for 
prescribing an X-factor.
    If we set the X-factor by using the 1997 staff TFP study, the 
court's remand requires that we justify our selection from within the 
reasonable range. Within the reasonable range, should we use some 
measure of central tendency, e.g., the mean or median, as the best 
estimator of productivity? Could and should we consider prescribing 
above the mean? If the reasonable range includes a statistically 
meaningful trend, should this inform our choice? What other 
justifications could be made for selecting above or below some measure 
of central tendency? Should these justifications affect our selection 
from the reasonable range, or are they more relevant to the selection 
of a CPD?

Option 2: The 1999 Staff TFP Study

    In comments filed with the Commission late last year, several 
parties identified what they believe is a problem in the way in which 
the 1997 staff TFP study employed the TFP methodology commonly used in 
economic analysis to set an X-factor. The 1999 staff TFP study takes 
this potential problem as a point of departure and attempts to correct 
it. We seek comment on the 1999 staff TFP study, and on its premise 
that the 1997 staff TFP study methodology may fail to calculate an X-
factor that is consistent with the objectives of our price cap plan.
    The 1997 staff TFP study subtracts the cost of the labor and 
material inputs from revenues, and the residual revenue is assumed to 
be the cost of the capital input. The 1999 staff TFP study attempts to 
capture the gains in productivity that would have been revealed in a 
competitive marketplace by varying total capital compensation according 
to a measure of the competitive capital compensation rate.
    We seek comment on the following method for adjusting the capital 
compensation in the 1997 staff TFP study. The first step is to identify 
a competitive price index series to use as a surrogate for the annual 
change for the cost of capital in a competitive market. The second step 
is to assume LEC capital compensation in 1991, the first full year of 
LEC price cap, was at a competitive level. Because price caps were 
implemented in 1991, the 1999 staff TFP study assumes that LECs earned 
a normal return in that year. The third step is to combine the 
competitive price index and the 1991 LEC capital compensation rate to 
create a competitive LEC capital compensation rate for the historical 
period. The fourth step is to increase or decrease LEC capital 
compensation based on this competitive LEC capital compensation rate. 
The fifth step is to adjust LEC revenues, making appropriate allowance 
for taxes, for the change in capital compensation. The final step is to 
recalculate LEC historical TFP using these revised capital compensation 
and revenue data.
    In addition to updating the data for the period 1996-1998, the 1999 
staff TFP study makes three other modifications to the 1997 staff TFP 
study. First, the 1999 staff TFP study uses the recently revised Bureau 
of Labor Statistics (``BLS'') series on multifactor productivity in 
place of the antecedent series. Second, the 1999 staff TFP study uses 
the number of dial equipment minutes, rather than the number of calls, 
in calculating the local service output index. Third, the 1999 staff 
TFP study recalculates the labor input to adjust for the fact that all 
the costs, but only a fraction of the benefits, of the 1992-95 employee 
buyouts have been recognized on the accounting books. We seek comment 
on these modifications to the 1997 staff TFP study.
    Several additional aspects of the 1997 staff TFP study may warrant 
highlighting and comment. The 1999 staff TFP study does not make these 
adjustments because they either are not easily quantified, or do not 
make a significant impact on the level of the X-factor. We seek comment 
on the decision of the 1999 staff TFP study to not make any of these 
adjustments. We also seek comment on whether there are any additional 
issues that necessitate adjusting the X-factor, how any such 
adjustments would affect the X-factor, and how they should be made.
    The court's remand requires that we justify our selection from 
within a reasonable range. We seek comment on how we should determine 
the reasonable range and how we should select from within this range. 
In our determination of the reasonable range in the 1997 Price Cap 
Review Order, we gave recent years more weight than more distant years. 
Should we continue to discount more distant years? Should the period 
under price cap regulation be given more weight than the period under 
rate-of-return regulation? Given that price cap regulation may have 
been anticipated by price cap LECs for some years before its 
introduction, what years should be included in the price cap period?
    We also seek comment on whether additional years of data should be 
considered in the remand, or whether the X-factor we select should rely 
on the same years of data as used in the 1997 Price Cap Review Order. 
We seek comment on the legal and logical arguments supporting 
consideration of data that have become available after the close of the 
record for the remanded prescription. Would it be more responsive to 
the court's remand to prescribe an X-factor based on data available in 
1997 or to consider the additional data that has become available in 
the interim in setting the X-factor on a going-forward basis?

Option 3: The Staff Imputed X Study

    As an alternative to either of the TFP methodologies, the Bureau 
staff also has performed a study, the staff Imputed X study, designed 
to calculate the X factor that yields the aggregate revenues that would 
have been generated in a competitive market. While price caps provide 
incentives for cost reduction similar to those of competition, they do 
not guarantee that revenues will follow a similar path. In a 
competitive market, revenues on average will be equal to costs, 
including compensation of capital at a competitive market level. This 
method is intended to replicate the effects of a competitive market in 
apportioning the gains from successful operation between carriers and 
consumers. The approach used here differs from the TFP approach, inter 
alia, in that it measures productivity growth by looking at aggregate 
expense and revenue data rather than by weighting and aggregating 
categories of physical inputs and outputs. In contrast to both of the 
TFP approaches, this method appears to have modest data requirements 
and to be computationally simple and easily understandable. 
Nevertheless, this method should have the same incentive effects as the 
TFP approach or any other method of calculating an X-factor.
    The staff Imputed X study calculates the change in 1998 revenue and 
operating income for each price cap LEC that would result from imposing 
a hypothetical X-factor from the inception of price caps in 1991 
through 1998. The results for all price cap LECs are aggregated, and 
the X-factor required to produce revenues equal to costs, including a 
competitive level of capital compensation in the aggregate for all 
LECs, is calculated. The calculation was also performed for 1991 
through 1995 for comparison with the original TFP study. The 
calculation takes account of

[[Page 66444]]

the increase in the demand for service that would have resulted from 
the lower price. Changes in the competitive cost of capital were 
accounted for by adjusting the capital compensation found reasonable by 
the Commission at the inception of price caps by an index of bond rates 
over the period. The index is the same one used for the 1999 staff TFP 
study to measure the price of capital. Moody's Baa corporate bond rate 
was used. We noted above that, in a competitive capital market, indexes 
of bond rates will agree closely. Further, in an efficient market, 
there are no persistent arbitrage opportunities between different 
financial instruments, so that we have no reason to expect that the 
trend of bond rates would differ over time from that of the return on 
an efficient diversified portfolio. Thus, applying any of several 
published indices to the allowed rate at the beginning of the period 
will yield approximately the same estimate of the end-period rate.
    The data used for these estimates differ from those used for the 
TFP calculations in that they are purely interstate in nature. The TFP 
calculations used total company data because of the difficulty of 
separating interstate and intrastate costs for the TFP calculations, 
despite interstate data being conceptually more appropriate for 
representing the services regulated by the Commission under price caps. 
The data for the staff Imputed X study also include all price cap 
carriers, whereas the TFP studies use data for the regional Bell 
operating companies (``RBOCs'') only. The calculations assume that a 
decrease in price would result in an increase in the quantity of 
service purchased, while the TFP calculations necessarily reflect only 
experience under the prices that were actually in effect. Finally, the 
staff Imputed X study does not make an adjustment in expense data 
comparable to the adjustment made in the 1999 staff TFP study to 
compensate for the accounting treatment of employee buyouts. To provide 
a check on the revised TFP calculations, the X-factor calculations 
using the staff Imputed X study were repeated using data only for the 
RBOCs and assuming no demand growth in response to lower prices. These 
calculations were performed for both 1995 and 1998.
    We note that the approach described here is similar to the Direct 
Model proposed by AT&T, which the Commission has referred to as the 
Historical Revenue Approach in the 1997 price cap performance review 
proceeding. The staff Imputed X study differs from the approach 
proposed by AT&T primarily in that the staff calculation includes an 
adjustment to take account of likely demand stimulation resulting from 
a lower price cap, and the calculation takes account of changes over 
time in competitive return to capital. Data sources and calculations 
also differ somewhat. In the Price Cap Performance Review for Local 
Exchange Carriers, 60 FR 19526, April 19, 1995 (``1995 Price Cap Review 
Order''), the Commission noted that the Historical Revenue Approach has 
the advantage that it reflects performance in providing the interstate 
services that are subject to price caps, and includes input cost 
changes. In comments in the 1997 price cap performance review 
proceeding, GSA supported the Historical Revenue Approach and noted 
that it incorporates both TFP growth and the input price differential.
    Most criticisms of AT&T's Historical Revenue Approach dealt with 
the data and methodology used by AT&T in its calculations. Commenters 
responding to AT&T's proposal pointed out that data reported under 
Commission accounting, separations, and other rules may not accurately 
track economic costs. In its comments in the 1997 price cap performance 
review proceeding, NYNEX criticized use of the Historical Revenue 
Approach on the grounds that accounting-based rules are a poor measure 
of a firm's economic performance. We note that the Commission declined 
to adopt the Historical Revenue Approach in the 1997 Price Cap Review 
Order due to administrative concerns and incentive effects.
    We seek comment on the validity of the staff Imputed X study for 
estimating the appropriate level of the X-factor. Does the X-factor 
estimated using these data and assumptions accurately represent the 
productivity growth achievable by the price cap LECs over the period 
examined? We request comment on the theoretical appropriateness of this 
methodology. We also seek comment on the following questions: Is an 
interstate-only calculation conceptually proper, and do the data allow 
an accurate measure of interstate revenues, expenses, and investment? 
Calculations reported in the staff Imputed X study show that X-factors 
calculated on an annual basis appear to increase over time. Are there 
explanations for the trend we see other than increasing efficiency? 
Does this apparent trend suggest that an additional adjustment, such as 
the CPD, is necessary in addition to revising the calculation of the X-
factor? Alternatively, is the CPD no longer necessary because the 
approach described here sufficiently passes the benefits of increased 
efficiency to ratepayers? What is the appropriate method for 
determining the competitive cost of capital? Is applying an index of 
bond rates to the rate of return used by the Commission to initialize 
rates at the inception of price caps a reasonable approach? Would 
taking account of the mix of debt and equity held by the LECs yield a 
more accurate estimate of the trend in the cost of capital?
    We request comment on the data and calculations used in the staff 
Imputed X study. Are more appropriate data sources available, and can 
adjustments be made that would improve the accuracy of the calculations 
reported here? AT&T in its Historical Revenue Approach in 1994 used 
Price Cap Indices (``PCIs'') from the Commission's Tariff Review Plan 
data to measure actual changes in allowed rates. This approach includes 
all changes that occurred in the price caps, including exogenous 
changes not related to the operation of the X factor. Is such an 
approach conceptually appropriate? Would use of PCIs rather than the X 
factor in effect more accurately reflect price performance for purposes 
of these calculations?
    We also seek comment on whether, in responding to the remand, it is 
appropriate to use data for the period that was available to us at the 
time of the 1997 Price Cap Review Order, or whether we should make use 
of the best information available to us now, including data for 
subsequent years that have become available in the meantime. We seek 
comment on the legal and logical arguments supporting consideration of 
data that have become available after the close of the record for the 
remanded prescription. Would it be more responsive to the court's 
remand to prescribe an X-factor based on data contemporaneous with the 
prescription and to consider the additional data in setting the X-
factor on a going-forward basis? In addition, the court's remand 
requires that we justify our selection from within a reasonable range. 
How should we determine a reasonable range for setting the X-factor 
using the staff Imputed X study, and how we should select from within 
that range?

Consumer Productivity Dividend

    In Policy and Rules Concerning Rates for Dominant Carriers, 55 FR 
42375, October 19, 1990 (``LEC Price Cap Order''), the Commission 
included a CPD of 0.5 percent in the X-factor offset to ensure that 
access customers received the first benefits of price caps in the form 
of reduced rates. This CPD was also included in the X-factor in

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subsequent price cap review orders, including the 1997 Price Cap Review 
Order, in which it was intended to offset the elimination of sharing 
requirements. These requirements had compelled price cap LECs to share 
a portion of their earnings above set percentages with access 
customers. The sharing requirements were intended to protect consumers 
against the possibility of an error in the establishment of the X-
factor. Pursuant to the court's remand, the Commission seeks comment on 
whether to retain the CPD.
    In remanding this issue to the Commission, the court specifically 
questioned the quantification of the CPD. When the Commission made its 
decision to include a CPD in the 1997 X-factor, the record included a 
study by Strategic Policy Research (``SPR'') that addressed the effects 
of eliminating the sharing requirements. The SPR study found that the 
LEC price cap plan with sharing requirements produced less than 35 
percent of the efficiency incentives of unregulated competition. Those 
incentives decreased to 18 percent for price cap LECs whose earnings 
were in the 50-50 sharing category for each year of the four-year 
review cycle. The Commission discussed the SPR study in some detail in 
the 1995 Price Cap Review Order. Although the Commission did not 
determine whether the SPR study accurately quantified the effects of 
sharing on productivity growth, it concluded that the study showed that 
there ``are substantial gains in incentives that [sharing] 
suppresses.'' 1995 LEC Price Cap Review Order. The results of the SPR 
study were challenged by the Ad Hoc Telecommunications Users Committee 
(``Ad Hoc''), but Ad Hoc's own results indicated that sharing 
substantially reduced efficiency incentives. Ad Hoc's more conservative 
calculations indicated that elimination of sharing would increase 
efficiency incentives by at least 17 percent for all LECs, and by 41 
percent for LECs in the 50-50 sharing category. We seek comment on the 
CPD amount justified on the basis of these studies to ensure that the 
benefits of sharing elimination would be apportioned between LECs and 
ratepayers. We also seek comment on additional methods for quantifying 
a CPD designed to ensure that consumers get a reasonable portion of the 
benefits from the elimination of sharing.
    We also seek comment on whether a CPD should be included to reduce 
rates and correct for prior years when the X-factor may have been set 
too low. As noted above, the calculations used to set prior year X-
factors may have underestimated LEC productivity. This underestimation 
may have caused rates to be set at too high a level. A mistake in the 
X-factor may not be self-correcting, but instead may cause increasingly 
erroneous prices over time. To obtain efficient prices in the future, 
it may be necessary both to adjust the value of the X-factor and to 
reset prices. Therefore, we seek comment on whether we should include 
in the X-factor a CPD designed to reduce rates, either by a one-time 
adjustment, or over a multi-year period, if we conclude that the X-
factor historically has been set too low. If the reduction occurs over 
a multi-year period, should we account for the time value of money, 
and, if so, how should we calculate the reduction?

Prescribing the X-Factor on a Going-Forward Basis

    We seek comment on whether we should prescribe an X-factor that 
would apply as of July 1, 2000 that is different from the retrospective 
X-factor applicable to the period affected by the court's remand, or 
whether the X-factor that we prescribe for the period beginning July 1, 
1997 should continue in place until the next price cap performance 
review. We also seek comment on whether to include a prospective CPD 
adjustment in future X-factors to correct for any significant 
divergences between historic LEC productivity and prior X-factors, and 
on whether any such adjustment should be made at once or be phased in 
over several years.
    In this FNPRM we seek comment on prescribing a future X-factor 
based on the results of the 1999 staff TFP study. In the alternative, 
we could prescribe an X-factor based on the results of the staff 
Imputed X study. Finally, we invite parties to comment on other 
alternatives that could serve as a basis for a future X-factor.
    We also seek comment on how the prescription of the X-factor would 
affect smaller price cap LECs differently from other price cap LECs, 
and whether there should be a separate X-factor calculated for smaller 
price cap LECs.
    In addition, we seek comment on how the Commission's proposed 
adjustments to the price cap rate structure in Access Charge Reform, 64 
FR 51258, September 22, 1999 (``Pricing Flexibility Order'') should 
affect the annual reductions required by our price cap rules. We 
proposed in the Pricing Flexibility Order to add a ``q'' factor to the 
formulae used to adjust annually the price cap indices (``PCIs'') for 
the baskets that contain the charges for local switching and tandem 
switching. The q factor would reduce switching charges based on growth 
in demand. The q factor would operate similarly to the g factor present 
in the common line PCI formula. The g factor is used to share with IXCs 
the benefits of demand growth that LECs receive from per-minute growth 
per access line. As proposed, the affected baskets would be reduced 
annually by both the X-factor and the q factor. The staff studies 
attached herein, however, may capture in their X-factor estimates some 
or all of the effect intended to be captured by the q factor. We seek 
comment on whether a q factor is necessary if an X-factor is adopted 
that captures its effect, and on how to remove any double counting that 
might result from the application of both factors. For example, if the 
X-factor reduction was $10, and the q factor reduction was $4, then we 
could directly apply $4 to the baskets containing local and tandem 
switching, and allocate the remaining $6 amongst all the baskets 
according to our price cap rules.
    We also proposed to adjust on a prospective basis for the past 
absence of a q factor in the formulae that annually adjust the PCIs of 
the baskets containing charges for local and tandem switching. We seek 
comment on how any such adjustment should affect any proposed 
adjustment to the PCIs for all price cap baskets to offset the 
cumulative effect of past X-factors that may have been set below the 
rate of cost reduction actually achieved by LECs. Should we apply the 
logic suggested in the example of the previous paragraph? If so, should 
the shift of switching ports to common line increase the common line 
basket's share of any adjustment based on the past absence of a q 
factor?
    In addition to proposing a q factor, we proposed to increase the 
``g'' factor that applies to certain revenues in the common line basket 
from g/2 to a full g. We seek comment on whether any prospective 
adjustment to our X-factor prescription would be appropriate to account 
for this.
    Finally, we proposed to replace the existing per-minute rate 
structure for local switching and tandem switching with capacity 
charges. We seek comment on whether replacing per-minute charges with 
capacity charges affects future growth in LEC productivity. We seek 
comment on whether any prospective adjustment to our X-factor is 
required and on how we would quantify this adjustment.

Ex Parte Presentations

    This proceeding shall be treated as a ``permit-but-disclose'' 
proceeding in accordance with 47 CFR 1.1206(b). Ex parte presentations 
are permissible if disclosed in accordance with

[[Page 66446]]

Commission rules, except during the Sunshine Agenda period when 
presentations, ex parte or otherwise, are generally prohibited. Persons 
making oral ex parte presentations are reminded that memoranda 
summarizing the presentations must contain summaries of the substance 
of the presentations and not merely a listing of the subjects 
discussed. More than a one or two sentence description of the views and 
arguments presented generally is required. See 47 CFR 1.1206(b)(2). 
Additional rules pertaining to oral and written presentations are set 
forth in Sec. 1.1206(b).

Initial Regulatory Flexibility Act Analysis

    As required by the Regulatory Flexibility Act (``RFA''), 5 U.S.C. 
603, the Commission has prepared this Initial Regulatory Flexibility 
Analysis (``IRFA'') of the possible significant economic impact on 
small entities by the policies and rules proposed in this FNPRM. The 
RFA, 5 U.S.C. 601 et seq., has been 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''). Written 
public comments are requested on this IRFA. Comments must be identified 
as responses to the IRFA and must be filed by the deadlines for 
comments on the FNPRM provided below. The Office of Public Affairs will 
send a copy of the FNPRM, including this IRFA, to the Chief Counsel for 
Advocacy of the Small Business Administration. In addition, the FNPRM 
and IRFA (or summaries thereof) will be published in the Federal 
Register. 5 U.S.C. 603(a).
    Need for and Objectives of the Proposed Rules. The court has 
remanded to the Commission the selection of a 6.5 percent productivity 
offset, or X-factor, in the LEC price cap formula. In this FNPRM we 
seek comment on how we should represcribe an X-factor. We seek comment 
on prescribing one or more X-factors to address retroactively the 
period affected by the court remand (July 1, 1997 to June 30, 2000), 
and we seek comment on represcribing one or more X-factors from July 1, 
2000 forward. Further, we seek comment on resetting, on a forward-
looking basis, price cap LEC prices to a level that is consistent with 
any X-factor prescription in order to rebalance the sharing of benefits 
of price caps between LECs and their customers.
    Legal Basis. The proposed action is supported by sections 1, 4(i), 
4(j), 201-205, and 303(r) of the Communications Act of 1934, as 
amended, 47 U.S.C. 151, 154(i), (j), 201-205, and 303(r).
    Description and Estimate of the Number of Small Entities to Which 
the Proposed Rules Will Apply. The RFA directs agencies to provide a 
description of and, where feasible, an estimate of the number of small 
entities that may be affected by the proposed rules, if adopted. 5 
U.S.C. 603(b)(3). The RFA generally defines the term ``small entity'' 
as having the same meaning as the terms ``small business,'' ``small 
organization,'' and ``small governmental jurisdiction.'' 5 U.S.C. 
601(6). In addition, the term ``small business'' has the same meaning 
as the term ``small business concern'' under the Small Business Act. 15 
U.S.C. 632. 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''). 5 U.S.C. 601(3) (incorporating by reference 
the definition of ``small business concern'' in 15 U.S.C. 632). 
Pursuant to the RFA, 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.'' 5 U.S.C. 601(3). The SBA has 
defined a small business for Standard Industrial Classification 
(``SIC'') category 4813 (Telephone Communications, Except 
Radiotelephone) to be an entity that has no more than 1,500 employees. 
13 CFR 121.201.
    We have included small incumbent LECs in this RFA analysis. As 
noted above, a ``small business'' under the RFA is one that, inter 
alia, meets the pertinent small business size standard (e.g., a 
telephone communications business having 1,500 or fewer employees), and 
``is not dominant in its field of operation.'' 5 U.S.C. 601(3). The 
SBA's Office of Advocacy contends that, for RFA purposes, small 
incumbent LECs are not dominant in their field of operation because any 
such dominance is not ``national'' in scope. See Letter from Jere W. 
Glover, Chief Counsel for Advocacy, SBA, to William E. Kennard, 
Chairman, FCC (May 27, 1999). SBA regulations interpret ``small 
business concern'' to include the concept of dominance on a national 
basis. 13 CFR 121.102(b). Since 1996, out of an abundance of caution, 
the Commission has included small incumbent LECs in its regulatory 
flexibility analyses. See, e.g., Implementation of the Local 
Competition Provisions of the Telecommunications Act of 1996, 61 FR 
45476, August 29, 1996. We have therefore included small incumbent LECs 
in this RFA analysis, although we emphasize that this RFA action has no 
effect on Commission analyses and determinations in other, non-RFA 
contexts.
    The proposals in the FNPRM apply only to price cap LECs. At the 
current time, there are 13 price cap LECs. Of these companies, 11 are 
listed in the Commission's most recent Statistics of Communications 
Common Carriers (``SOCC'') report as having more than 1,500 employees. 
Consequently, we estimate that 2 or fewer providers of local exchange 
service are small price cap LECs that may be affected by these 
proposals.
    Description of Projected Reporting, Recordkeeping and Other 
Compliance Requirements. We expect that, on balance, the proposals in 
this FNPRM will not change price cap LECs' administrative burdens or 
cause price cap LECs to incur any additional costs associated with 
proposed reporting and recordkeeping requirements. The studies would 
establish new X-factors that price cap LECs would need to utilize in 
their price cap calculations, but otherwise should not affect their 
administrative burdens or costs.
    Steps Taken to Minimize Significant Economic Impact on Small 
Entities, and Significant Alternatives Considered. The RFA requires 
agencies to describe any significant alternatives that it has 
considered in reaching its proposed approach, which may include the 
following four alternatives: (1) the establishment of differing 
compliance or reporting requirements or timetables that take into 
account the resources available to small entities; (2) the 
clarification, consolidation, or simplification of compliance or 
reporting requirements under the rule for small entities; (3) the use 
of performance rather than design standards; and (4) an exemption from 
coverage of the rule, or any part thereof, for small entities. 5 U.S.C. 
603(c)(1)-(4). In the instant proceeding we are seeking comment on the 
prescription of the productivity offset, or X-factor, portion of the 
price cap formula. Therefore, only the first and last possible 
alternatives listed in section 603(c) of the RFA would be applicable. 
In the FNPRM, we seek comment on how the prescription of the X-factor 
would affect smaller price cap LECs differently from other price cap 
LECs, and whether there should be a separate X-factor calculated for 
smaller price cap LECs. We also do

[[Page 66447]]

not believe it would be appropriate to exempt small price cap LECs from 
the application of an X-factor. We seek comment on these issues and 
urge commenting parties to support their comments with specific 
evidence and analysis.
    Federal Rules that May Duplicate, Overlap, or Conflict With the 
Proposed Rules. None.

Filing of Comments and Reply Comments

    Pursuant to 47 CFR 1.415, 1.419, interested parties may file 
comments on or before December 30, 1999 and reply comments on or before 
January 14, 2000. Comments may be filed using the Commission's 
Electronic Comment Filing System (``ECFS'') or by filing paper copies.
    Comments filed through the ECFS can be sent as an electronic file 
via the Internet to <http://www.fcc.gov/e-file/ecfs.html>. In 
completing the transmittal screen, commenters should include their full 
name, Postal Service mailing address, and the applicable docket or 
rulemaking number. Parties may also submit an electronic comment by 
Internet e-mail. To get filing instructions for e-mail comments, 
commenters should send an e-mail to [email protected], and should include 
the following words in the body of the message, ``get form .'' A sample form and directions will be sent in reply. Only 
one copy of electronically-filed comments must be submitted.
    Parties who choose to file by paper must file an original and four 
copies of each filing. All filings must be sent to the Commission's 
Secretary, Magalie Roman Salas, Office of the Secretary, Federal 
Communications Commission, 445 12th Street, S.W., Room TW-B204, 
Washington, D.C. 20554.
    Parties who choose to file by paper should also submit their 
comments on diskette. The diskette should be submitted to: Wanda 
Harris, Federal Communications Commission, Common Carrier Bureau, 
Competitive Pricing Division, 445 12th Street, S.W., Fifth Floor, 
Washington, D.C. 20554. The submission should be on a 3.5 inch diskette 
formatted in an IBM compatible format using WordPerfect 5.1 for Windows 
or compatible software. The diskette should be accompanied by a cover 
letter and should be submitted in ``read only'' mode. The diskette 
should be clearly labeled with the commenter's name, proceeding 
(including the docket number in this case), type of pleading (comments 
or reply comments), date of submission, and the name of the electronic 
file on the diskette. The label should also include the following 
phrase: ``Disk Copy--Not an Original.'' Each diskette should contain 
only one party's pleadings, preferably in a single electronic file. In 
addition, commenters must send diskette copies to the Commission's copy 
contractor, International Transcription Service, Inc., 1231 20th 
Street, N.W., Washington, D.C. 20036. Comments and reply comments will 
be available for public inspection during regular business hours in the 
FCC Reference Center, 445 12th Street, S.W., Room CY-A257, Washington, 
D.C. 20554.

Ordering Clauses

    Pursuant to the authority contained in sections 1, 4(i), 4(j), 201-
205, and 303(r) of the Communications Act of 1934, as amended, 47 
U.S.C. 151, 154(i), (j), 201-205, and 303(r), Notice Is Hereby Given of 
the rulemaking described above and that Comment Is Sought on those 
issues.
    The Commission's Office of Public Affairs, Reference Operations 
Division, Shall Send a copy of this Further Notice of Proposed 
Rulemaking, including the Initial Regulatory Flexibility Analysis, to 
the Chief Counsel for Advocacy of the Small Business Administration.

List of Subjects in 47 CFR Part 61

    Communications common carriers, Tariffs.

Federal Communications Commission.
Magalie Roman Salas,
Secretary.
[FR Doc. 99-30741 Filed 11-24-99; 8:45 am]
BILLING CODE 6712-01-P