[Federal Register Volume 66, Number 231 (Friday, November 30, 2001)]
[Proposed Rules]
[Pages 59761-59769]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-29740]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 54 and 69

[CC Docket No. 00-256; FCC 01-304]


Multi-Association Group (MAG) Plan for Regulation of Interstate 
Services of Non-Price Cap Incumbent Local Exchange Carriers and 
Interexchange Carriers

AGENCY: Federal Communications Commission.

ACTION: Further notice of proposed rule.

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SUMMARY: In this document, the Commission considers methods by which to 
build on the access charge reforms adopted for rate-of-return carriers 
in the companion Report and Order. Second, the Commission will consider 
the appropriate degree and timing of pricing flexibility for rate-of-
return carriers. Third, the Commission seeks further comment on the 
MAG's proposed changes to the Commission's ``all-or-nothing'' rule. In 
these ways, the Commission seeks to improve the efficiency of the 
provision of telecommunications services in rural America by ultimately 
relying on markets to discipline prices and service quality and, 
whenever possible, to reduce regulatory oversight. Finally, the 
Commission seeks comment on merging the Long Term Support (LTS) 
mechanism into Interstate Common Line Support as of July 1, 2003, when 
the Carrier Common Line (CCL) charge will be eliminated.

DATES: Comments are due on or before December 31, 2001. Reply comments 
are due on or before January 29, 2002.

ADDRESSES: Parties who choose to file by paper must file an original 
and four copies of each filing. If more than one docket or rulemaking 
number appear in the caption of this proceeding, commenters must submit 
two additional copies for each additional docket or rulemaking number. 
All filings must be sent to the Commission's Secretary, Magalie Roman 
Salas, Office of the Secretary, Federal Communications Commission, 445 
12th Street, SW., Washington, DC 20554.

FOR FURTHER INFORMATION CONTACT: Douglas Slotten, Attorney, Common 
Carrier Bureau, Competitive Pricing Division, (202) 418-1520. Regarding 
LTS, contact William Scher, Attorney, Common Carrier Bureau, Accounting 
Policy Division, (202) 418-7400.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's 
Further Notice of Proposed Rulemaking (FNPRM) in CC Docket No. 00-256 
released on November 8, 2001. The full text of this document is 
available for public inspection during regular business hours in the 
FCC Reference Center, Room CY-A257, 445 Twelfth Street, SW., 
Washington, DC, 20554 or at http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-01-304A1.doc.>

I. Further Notice of Proposed Rulemaking

A. Alternative Regulation

    1. In this section, we critique the MAG proposal for introducing 
incentive regulation for rate-of-return carriers. This evaluation will 
form a foundation on which to discuss the development of an appropriate 
alternative regulation plan for rate-of-return carriers. We then 
explore several options for alternative regulation and seek input to 
assist in setting the parameters of any plan to be adopted.
a. Critique of MAG's Incentive Regulation Proposal
    2. Based on the present record, we are unable to conclude that the 
MAG's incentive regulation plan should be adopted. The MAG's incentive 
regulation plan does not properly balance carrier and customer 
interests given the current regulatory environment for those carriers. 
In addition to the broad concerns we identify in this section with the 
plan as proposed, other issues will be raised in the discussion 
addressing the development of an alternative regulatory structure for 
rate-of-return carriers.

[[Page 59762]]

    3. Initially, we agree with those parties asserting that the 
inflation-adjusted Revenue Per Line (RPL) component of the MAG's 
incentive plan would allow carriers to increase their revenues without 
any recognition of the productivity gains that historically have been 
realized by the telephone industry. Thus, it is not clear that rates 
under the MAG incentive plan would be just and reasonable, as required 
by section 201(b) of the Act. Under the MAG plan, all the benefits of 
productivity or efficiency improvements would accrue to the carrier in 
the form of higher returns and none of the benefits accrue to access 
customers.
    4. One possible solution would be to establish one or more 
productivity offsets or X-factors. The record, however, is not adequate 
to determine an X-factor or factors that would be appropriate for all 
rate-of-return carriers that might elect incentive regulation. This 
task is particularly difficult because of the diversity of rate-of-
return carriers. Therefore, an optional alternative regulation plan 
might be appropriate for rate-of-return carriers, as urged by a number 
of commenters. An X-factor could be needed to keep rate-of-return 
carriers' rates reasonable because competitive conditions in most rate-
of-return carrier markets cannot be relied upon to act as a check on 
rate-of-return carriers' ability to implement anti-competitive prices.
    5. We also find that the plan as structured does not insure that 
adequate investment or service quality levels will necessarily be 
maintained. Several parties have alleged that any incentive plan must 
contain controls to ensure that consumers are not harmed in this 
regard. Rate-of-return carriers electing incentive regulation, as 
proposed, might have the incentive to reduce costs by reducing 
investment (and therefore depreciation) and maintenance levels in order 
to achieve greater profits that it may then retain, without there being 
any benefit to consumers in the form of assurances of continued 
investment and maintenance of rate-of-return carrier facilities, or of 
the sharing of any efficiency gains with customers.
b. Principles
    6. An alternative regulation plan initially must ensure that rates 
remain just and reasonable, as required by section 201(b). This is the 
fundamental underpinning of all regulatory models. To ensure that rates 
remain just and reasonable and that a carrier not receive a windfall 
from the elimination of any existing inefficiencies, the benefits to be 
realized from the adoption of an alternative regulation plan should be 
shared equitably between the carrier and its customers. Under price cap 
regulation, the Commission initialized rates after reviewing the cost 
of capital and employed an X-factor productivity adjustment to ensure 
that price cap carrier rates reflected industry average productivity 
improvements, while permitting price cap carriers that could be more 
efficient to keep some or all of any increased earnings. We invite 
parties to comment on how this goal might be realized most effectively 
with regard to rate-of-return carriers, and whether something akin to 
the price cap methods should be used, or whether some other effective 
alternative exists.
    7. We seek comment on whether the rewards a rate-of-return carrier 
electing an alternative regulation plan might realize should be related 
to the risk the carrier assumes. Under such an approach, the less 
stringent the X-factor offset, the smaller the increased profits the 
carrier would be permitted to retain. We also ask parties to comment on 
whether a range of options should be offered to rate-of-return 
carriers, and whether the same set of options should be offered to all 
rate-of-return carriers. If only a limited set of options is to be 
offered to some rate-of-return carriers, what characteristics of a 
carrier or its environment should determine the set of options to be 
offered? We invite parties to comment on these considerations generally 
and on how the correct relationships might be determined to ensure that 
rates remain just and reasonable.
    8. The design of an alternative regulation plan must also address 
the incentives an alternative regulation plan gives rate-of-return 
carriers to reduce investment in plant and equipment, or to reduce 
expenditures on maintaining service quality, in order to increase 
profits at the expense of maintaining adequate investment or service 
quality. Section 254(b) identifies the availability of comparable 
services in rural areas as a criteria in assessing universal service. 
The achievement of these goals clearly requires investment in rural 
areas, which must therefore be supported by any alternative regulation 
plan we adopt.
    9. Rate-of-return regulation has worked well in extending service 
to rural America, along with our universal service program and the work 
of state commissions to support service in these areas. We seek comment 
on how to maintain quality assurance and expansion of new and advanced 
services in rural and non-rural areas served by rate-of-return carriers 
under any alternative regulatory plan we might adopt. As we develop an 
alternative regulation plan for rate-of-return carriers, are there 
state programs we can rely on as means to ensure that adequate 
investment and service quality will be maintained? Such programs could 
include various types of state programs that oversee small company 
activities and focus on investment and service quality. In addition, 
certain indicia of competition, such as the designation of an eligible 
telecommunications carrier in the rate-of-return carrier's service 
area, might also permit us to conclude that the incentives to invest 
and maintain service quality are present. We invite parties to comment 
on the extent to which regulatory and competitive conditions could be 
effective tools in developing a workable alternative regulatory 
mechanism. Parties should address how the different possible components 
of an alternative regulatory plan discussed below might be modified as 
regulatory or competitive conditions change.
    10. Finally, we believe that an alternative regulatory plan must 
minimize the administrative burdens on small carriers and regulatory 
intervention in their operations, while achieving the other principles 
noted. In this regard, an alternative regulation plan should consider 
the size of the carriers that will be subject to the plan and be no 
more restrictive than necessary to achieve the necessary public 
interest objectives. We therefore invite parties to address the impact 
any alternative regulation plan might have on small incumbent local 
telephone companies, as required by the Regulatory Flexibility Act.
    11. As we proceed, it will be with a focus on these objectives. We 
invite parties to comment on the validity of these objectives and how 
they apply to the different measures of any alternative regulation plan 
proposed. We also ask parties to identify additional principles that 
should be applied to the development of an alternative regulatory 
mechanism. In the following section we address several specific 
considerations associated with developing an alternative regulatory 
plan.
c. Issues in Developing an Alternative Regulatory Plan
    12. Optionality. The scope of an alternative regulation plan 
affects in significant ways the design of that plan. Several rate-of-
return carrier interests assert that any alternative regulation plan 
must be optional because of the diversity among rate-of-return carriers 
in their operating conditions. On the other hand, AT&T urges us to make 
an alternative regulation plan applicable to the largest rate-of-return 
carriers on a

[[Page 59763]]

mandatory basis. Given the wide variations among rate-of-return carrier 
operating conditions, we believe it would be extremely difficult to 
establish a mandatory alternative regulatory plan for all rate-of-
return carriers. We invite parties to comment on the extent to which an 
alternative regulation plan should be completely optional, or whether 
it should be mandatory for a subset of larger rate-of-return carriers. 
Parties should address what criteria should be used to determine which 
carriers would be subject to alternative regulation on a mandatory 
basis. We also seek comment on whether any optional alternative 
regulation plan should be one-way, so that, once made, a carrier could 
not return to rate-of-return regulation. Alternatively, are there 
certain conditions, such as when earnings are sufficiently low for a 
sufficiently long period of time, or simply after a specified period of 
time, or after each review period, when a carrier could be permitted to 
return to rate-of-return regulation? Parties are invited to address 
what those conditions might be and how rates should be determined upon 
return to rate-of-return regulation.
    13. Alternative regulation in a pooling context. The MAG's 
incentive regulation plan was designed to work within the National 
Exchange Carrier Association (NECA) pooling structure. Today, nearly 
all rate-of-return carriers participate in the NECA common line pool, 
and more than sixty percent of the minutes of rate-of-return carriers 
are charged at NECA rates. This offers many administrative benefits to 
carriers and to the Commission, particularly in the form of tariff 
administration. It may, however, blunt some of the benefits that may be 
realized from an alternative regulatory plan. If cost savings that a 
carrier realizes are included in the pool settlements process, rather 
than being retained by the carrier achieving the efficiency gains or 
reflected in lower rates to the customers, the carrier will have little 
incentive to pursue cost efficiencies. We invite parties to comment on 
whether an alternative regulation plan can and should be designed to 
work within the NECA pooling structure, whether there are ways for NECA 
to revise its pooling procedures to facilitate meaningful incentive 
regulation, or whether rate-of-return carriers should be required to 
leave the pool to avail themselves of any alternative regulatory plan. 
Parties should also address how an alternative regulatory plan would 
apply to those rate-of-return carriers outside the NECA pools, 
including any problems created if a rate-of-return carrier was, for 
example, in the common line pool but not the traffic sensitive pool.
    14. Use of revenue per line (RPL). The MAG proposes to use a RPL 
amount as the basis for establishing its incentive plan, adjusting the 
RPL amount annually for inflation. Thus, a rate-of-return carrier 
electing incentive regulation would settle with the NECA pool on the 
basis of its inflation-adjusted RPL amount. A rate-of-return carrier's 
costs and its settlement amount from NECA would therefore no longer be 
linked. The rate-of-return carrier would thus have the incentive to 
reduce its operating costs since it could retain the difference between 
the RPL amount and its actual costs, if lower. On the other hand, if 
its costs were higher than the RPL amount, it would not receive 
additional settlements. Several commenters oppose the use of a revenue 
cap, alleging that a rate-of-return carrier would have every incentive 
to reduce its investment and expenses since these no longer affect 
their settlements with the NECA pool. In response, the MAG argues that 
Path A incentive regulation under its plan differs from both price cap 
regulation and revenue cap regulation.
    15. We invite parties to comment on the use of an RPL amount as a 
starting point for an alternative regulatory plan. We specifically 
invite comment on whether the MAG's contention that RPL is different 
from a revenue cap is correct. We ask parties to comment on the extent 
to which the presence of competition or an external check would affect 
a carrier's incentives in an RPL system, and how such factors could be 
included in an alternative regulatory system for rate-of-return 
carriers. Parties should also address how to respond to the concern 
expressed in the record that rate-of-return carriers would have every 
incentive in the year they choose to enter an alternative regulation 
program to maximize their costs and plant investment, in order to 
maximize their initial rates.
    16. We also ask parties to address whether there are other 
approaches to establishing an alternative regulatory mechanism that 
would work better than RPL over a broader range of competitive and 
regulatory landscapes. For example, would it be possible and preferable 
to use baskets of traffic-sensitive and non-traffic-sensitive service 
revenues or prices as the baseline against which to measure rate-of-
return carrier productivity? Parties proposing alternatives should be 
specific in laying out their plan and should address how their plan is 
consistent with the principles enumerated. Parties should also address 
what an appropriate alternative regulatory plan should be if we were to 
conclude that a rate-of-return carrier must leave the NECA pool to 
participate in such a plan.
    17. In addition, we invite parties to address whether, rather than 
developing a new alternative regulatory plan for rate-of-return 
carriers, we should establish a method by which rate-of-return carriers 
would be eligible to adopt the CALLS plan. Parties should particularly 
address what modifications if any, would be necessary in the indexing 
and universal service aspects of the CALLS plan to make it appropriate 
for rate-of-return carriers, without jeopardizing the position of any 
party currently subject to the CALLS plan.
    18. Productivity and sharing considerations. The MAG incentive plan 
does not contemplate any initial rate reduction, or a recurring 
productivity offset (X-factor). Under the MAG plan, rates initially 
would be based on a rate-of-return carrier's settlements from the NECA 
pools at the time the carrier elected incentive regulation, and 
increased by inflation in future years. Several parties assert that any 
plan must have a productivity factor in order to keep rates just and 
reasonable, contending that the telephone industry traditionally has 
achieved greater productivity than that reflected in the GDP-PI. 
Several parties also contend that an incentive plan for rate-of-return 
carriers must include a sharing mechanism, as the original price cap 
plan did.
    19. We invite parties to comment on the extent to which a 
productivity offset or initial rate reduction should be part of any 
alternative regulatory plan for rate-of-return carriers. This is a 
difficult issue for rate-of-return carriers due to the variations in 
their operating conditions. Many smaller rate-of-return carriers' 
investment patterns are lumpy, with only occasional significant new 
investments, as when they replace a switch or a major trunking 
facility. Some rate-of-return carriers may not realize sufficient 
demand growth to realize any scale economies. These smaller carriers 
might not be interested in an alternative regulation plan that included 
a productivity offset. It would be helpful if parties addressed the 
means by which we should establish any productivity offset and the 
level at which it should be set. These comments should take into 
account the possibility that the alternative plan would, for some or 
all rate-of-return carriers, be optional. Thus, only those rate-of-
return carriers that thought they could exceed

[[Page 59764]]

the productivity threshold might elect the alternative regulatory plan.
    20. Several uncertainties exist in initiating an alternative 
regulatory plan if it is optional. It will be unclear how many rate-of-
return carriers may elect any plan until such time as they are required 
to exercise that option. Furthermore, calculation of a productivity 
offset will be imprecise due to lack of knowledge of which carriers 
would be participating. We therefore invite parties to comment on 
whether an alternative regulatory plan for rate-of-return carriers 
should include a sharing mechanism to account for the difficulty in the 
calculation of an appropriate X-factor. Parties should also address the 
level at which, and the extent to which, any sharing should be 
required, whether sharing requirements should be linked to service 
quality levels, and the relationship between the levels of any X-factor 
and sharing obligations.
    21. As the Commission has noted previously, sharing mechanisms have 
significant incentive-blunting characteristics caused by the reduced 
incentive to increase efficiency if the carrier can only retain a 
portion of the savings. We therefore seek comment on whether a system 
of regulation with a lag might be appropriate for rate-of-return 
carriers. Under such a plan, a productivity offset would be established 
based on an appropriate industry grouping. Rate-of-return carriers 
electing the alternative regulation plan would be permitted to keep any 
increased profits realized from increased efficiency or line growth. 
After some period of time, such as three years, the Commission would 
reexamine the productivity offset and adjust it prospectively, 
reflecting the realized experience of the previous three years. We 
invite parties to comment on the use of regulation with a lag. They 
should address the setting of the productivity offset in this context, 
as well as the length of time between reviews. We invite parties to 
comment on whether RPL is the appropriate baseline against which to 
apply the productivity offset under this scenario and whether the RPL 
level should be based on an individual carrier's revenues or on some 
grouping of carriers. Parties should also address whether a sharing or 
a lag plan introduces the fewest efficiency disincentives and is most 
likely to create proper incentives.
    22. Low-end adjustment. As with price cap regulation, the MAG 
proposes a low-end-adjustment factor. Unlike the low-end adjustment for 
price cap carriers, however, the low-end adjustment proposed by the MAG 
would ensure that rate-of-return carriers electing incentive regulation 
would not earn below the low-end adjustment. It would do this by 
providing for a prospective revenue payment from the NECA pool that 
would give it the difference between what it actually earned and the 
low-end adjustment over a twelve-month period. Price cap carriers, on 
the other hand, are only permitted to adjust their price cap indexes to 
allow them to set prospective rates at a level that would allow them to 
earn at the level of the low-end adjustment. We invite parties to 
comment on the need for a low-end adjustment and on how to establish 
the proper level. We specifically ask parties to address whether a low-
end adjustment in an alternative regulatory plan should protect against 
earnings below that level during a particular tariff period, or whether 
it should be used to retarget rates so that the carrier will have an 
opportunity to earn that level in the future tariffing period, as is 
done in the price cap context. We also invite parties to comment on 
whether there is any need for a higher low-end adjustment for smaller 
rate-of-return carriers, and if a higher low-end adjustment is 
necessary, how the higher low-end adjustment should be determined, 
which carriers should be covered, and the extent to which the low-end 
adjustment should be higher. Finally, we ask whether, if rate-of-return 
carriers are granted pricing flexibility, they should be required to 
forego the automatic low-end adjustment just as price cap carriers do.
    23. Monitoring. The adoption of an alternative regulatory plan 
would alter the incentives of carriers, and establish new parameters 
regulating those carriers electing the alternative plan. We invite 
parties to comment on whether there is any need to establish reporting 
requirements to monitor service quality and carrier investment in an 
alternative regulatory regime, or whether it will be possible to rely 
on competitive conditions or state investment and service quality 
standards to control any adverse effects of the new incentives. 
Finally, we ask parties to comment on how often we should review an 
alternative regulatory plan. Because conditions change over time, it 
may periodically be necessary to modify some of the parameters based on 
the new circumstances, or a better understanding on our part of how 
they are working with respect to the rate-of-return LECs electing the 
alternative plan. Parties are also invited to suggest precise 
methodologies for modifying the relevant parameters.
    24. Other issues. Finally, we invite parties to comment on other 
concerns they may have with the Commission's possible adoption of an 
alternative regulatory plan for rate-of-return carriers. In particular, 
parties are encouraged to address issues relating to the timing of the 
election to be governed by the alternative regulatory plan. For 
example, should the election be available only on one fixed date, or 
should carriers have the option to elect at a time of their own 
choosing?

B. Pricing Flexibility

1. Discussion
    25. With this FNPRM, we extend our consideration of pricing 
flexibility to rate-of-return carriers, as we indicated we would do in 
the 1998 FNPRM. In this section we seek comment on methods of extending 
pricing flexibility to rate-of-return carriers in addition to those 
already available to them under current rules or under the rules 
adopted in the Companion Order.
a. Types of Pricing Flexibility
    26. In this FNPRM, we focus on three types of pricing flexibility 
for rate-of-return carriers: geographic deaveraging within a study 
area; volume and term discounts; and contract pricing.
    27. These three pricing flexibility options offer incumbent local 
exchange carriers (LECs) significant ability to price their services 
closer to cost and to respond to competitive entry. Geographic 
deaveraging within a study area would permit rate-of-return carriers to 
price in a manner that reflects cost differences from one geographic 
location to another. Volume and term discounts would permit rate-of-
return carriers to reflect economies related to capacity differences 
and to the certainties offered by term contracts. Finally, contract 
pricing would permit rate-of-return carriers to respond to requests for 
proposals and to address more complex communications needs of 
customers. These pricing alternatives would, once available, make rate-
of-return carriers' pricing structures more efficient and permit them 
to respond to competition
    28. While there are clear benefits from pricing flexibility, there 
are also competitive concerns raised by their introduction. Thus, if 
introduced too soon, pricing flexibility might be used to erect a 
barrier to competitive entry. For example, a rate-of-return carrier 
could deaverage its rates so that the attractive customers received 
very low rates, or it could lock up customers before entry began 
through the use of lengthy term contracts. In addition, in offering

[[Page 59765]]

deaveraged rates or volume and term discounts, a carrier could, absent 
some restriction, increase rates excessively for remote customers or 
for low-volume customers to offset reductions resulting from the 
introduction of deaveraged rates or volume discounts for higher-volume 
customers. Such practices could inhibit competitive entry and deny 
customers in rate-of-return carrier service areas the benefits of 
competition.
    29. We invite parties to comment on our proposal to extend pricing 
flexibility to rate-of-return carriers in the forms noted. In doing so, 
parties should address how the unique characteristics of rate-of-return 
carriers may affect the benefits and risks associated with pricing 
flexibility. They should identify any differences in the benefits and 
risks that may exist in relation to common line, local switching, and 
transport and special access services separately. Parties should also 
address whether any special rules for pricing flexibility are needed to 
prevent anti-competitive behavior from inhibiting the development of 
competition in these markets. For example, should the number of zones 
rate-of-return carriers are permitted to establish be fewer than price 
cap carriers are permitted, or should the degree of deaveraging or 
volume and term discounts be limited due to the rate-of-return 
carriers' smaller size? In a recent waiver order, we conditioned the 
grant of volume and term pricing flexibility for transport and the TIC 
on the carrier calculating a rate using the requirements of 
Secs. 69.106(b) and 69.124(b) and (c) of the Commission's rules to 
establish a ceiling rate for the associated non-discounted access 
service offering. We invite parties to comment on whether such a 
restriction should be imposed on the introduction of pricing 
flexibility on rate-of-return carriers to preclude anti-competitive 
behavior.
    30. Parties should also address the impact that permitting pricing 
flexibility would have on the NECA pooling process. Would NECA need to 
establish exception rates for those rate-of-return LECs qualifying for 
pricing flexibility, and, if so, how burdensome would this be on NECA? 
Are there other ways of handling pricing flexibility within the pooling 
process that would be less burdensome? Parties also should address 
whether permitting pricing flexibility within the pooling process would 
be so burdensome on NECA, or offer anti-competitive opportunities to 
rate-of-return carriers, that rate-of-return carriers should be 
required to leave the NECA pool as a condition of obtaining pricing 
flexibility.
    31. We also invite parties to identify other forms of pricing 
flexibility that may be appropriate for the development of an 
efficient, competitive exchange access marketplace. Parties suggesting 
other forms of pricing flexibility should evaluate the benefits and 
risks of those forms of pricing flexibility, as well as the conditions 
under which such pricing flexibility might be appropriately granted to 
rate-of-return carriers.
b. Timing of Pricing Flexibility
    32. The determination of when pricing flexibility should be granted 
to rate-of-return carriers is a more difficult question than which 
types of pricing flexibility to consider granting. It is the 
opportunity to exercise pricing flexibility prematurely that presents 
the greatest anti-competitive risk to the development of competition. 
To address these concerns for price cap carriers, we granted some 
pricing flexibility immediately and designed a two-phased approach for 
determining when further pricing flexibility could be obtained by price 
cap carriers. Each phase had its own trigger to determine when a price 
cap carrier qualified for the pricing flexibility offered under each 
phase. We invite parties to comment on the extent to which pricing 
flexibility should be granted to rate-of-return carriers immediately, 
and which types of pricing flexibility should be deferred until some 
appropriate level of competition in a rate-of-return carrier service 
area has been established. Parties should comment on whether a two-
phased approach for rate-of-return carriers should be used given their 
small size.
    33. The decision to immediately permit geographic deaveraging of 
transport and special access services within a study area was premised 
in part on the fact that price cap carriers were facing some degree of 
competition in their service areas. This is not necessarily the case 
for all rate-of-return carriers. We therefore ask parties to comment on 
whether immediate geographic deaveraging of transport and special 
access services within a study area is warranted, or whether some 
degree of competition should be required before such pricing 
flexibility is permitted. We are particularly concerned about an 
incumbent LEC's ability to use pricing flexibility to preclude 
competitive entry. Parties should also address what the standard should 
be for determining when deaveraging should be permitted, if it is not 
permitted immediately.
    34. For pricing flexibility other than geographic deaveraging of 
transport and special access services, the Commission established 
competitive criteria for determining when a price cap carrier could 
qualify for such pricing flexibility. The criteria required price cap 
carriers to demonstrate that competitors have made irreversible, sunk 
investments in the facilities needed to provide the services at issue, 
or that competitors have established a significant market presence 
(i.e., that competition for a particular service within the MSA is 
sufficient to preclude the incumbent from exploiting any individual 
market power over a sustained period) for provision of the services at 
issue, for Phases 1 and 2, respectively. We believe it is necessary to 
adopt criteria to determine when rate-of-return carriers may offer 
services using pricing flexibility plans. To that end, we invite 
parties to address whether a standard similar to that used for price 
cap carriers should be used for rate-of-return carriers. To assist us 
in evaluating different criteria, it would be especially useful if 
parties would address how they anticipate competition developing in 
rate-of-return carrier service areas, given their generally small 
customer base.
    35. Parties are invited to address the appropriate competitive 
criteria that should determine when any particular pricing flexibility 
should be permitted. We recognize that the competitive levels used for 
price cap carriers may be overly restrictive for the smaller rate-of-
return carriers. We ask parties to suggest appropriate levels. Parties 
should also address other proposals that have been made in various 
contexts, including the existence of a carrier in the service area with 
eligible telecommunications status, the issuance of a request for 
proposals by a customer in the rate-of-return carrier's service area, 
the filing by a rate-of-return carrier of a tariff offering UNEs, and 
the receipt by a rate-of-return carrier of a request for UNEs.
    36. For price cap carriers, the Commission used the Metropolitan 
Statistical Area (MSA) as the geographic scope within which to measure 
competition to determine if pricing flexibility should be permitted. 
For most rate-of-return carriers, MSAs are not relevant and thus could 
not be the measurement base. Given the generally smaller size of rate-
of-return carriers, it seems appropriate to use the study area as the 
basis on which to measure competitiveness in determining whether 
pricing flexibility is warranted for rate-of-return carriers. We seek 
comment on the use of study areas as the measurement base. We also 
solicit

[[Page 59766]]

suggestions of other, more appropriate measures.
    37. We also invite parties to comment on whether any rate-of-return 
carrier services should be permitted to be filed on one day's notice 
and whether any services should be treated as non-dominant services. 
For price cap carriers, we required that services be removed from price 
cap baskets when the services were offered under contract to preclude 
cross-subsidization. A similar mechanism does not exist for rate-of-
return carriers. If we were to permit contract pricing, what measures 
would be necessary to ensure that rate-of-return carriers did not 
cross-subsidize the non-dominant services with revenues from their 
other access services?

C. All-or-Nothing Rule

1. Issues for Comment
    38. The ``all-or-nothing'' rules were created a little more than 
ten years ago, and the rationale for the rules has withstood the 
scrutiny of the United States Court of Appeals for the D.C. Circuit. We 
would like to explore more precisely whether our regulatory policy--
generally not to permit affiliated carriers to operate under different 
systems of regulation--is still serving the public interest; what, if 
any, circumstances and conditions that prompted these rules in the past 
have changed; and whether, or why, the MAG's proposed rule changes 
would be the correct and necessary solution to address any problems 
with the rules. We encourage interested parties from all industry 
segments to expand the discussion of why these rules should be 
retained, repealed or modified.
    39. Further, we invite comment on whether the ``all-or-nothing'' 
restrictions unreasonably and unfairly limit affiliated companies from 
selecting regulatory options that would enable them to operate more 
efficiently, especially in light of the highly diverse service areas of 
some carriers. In the course of this analysis, some general questions 
to consider include the following. What, if anything, is different 
today than when the Commission previously considered this issue? Would 
customers be better off and would competition be better served with or 
without the rules? Are the rules working effectively since the waiver 
process allows the Commission to grant carriers exceptions to the 
``all-or-nothing'' restrictions as a means of ``fine tuning'' our 
regulation here? What impact does an increasingly competitive 
environment have on whether these rules should be retained or 
eliminated?
    40. Some commenters argue that the ``all-or-nothing'' rules in 
mergers and acquisitions limit a carrier's ability to choose the most 
appropriate and efficient form of regulation, to the detriment of both 
the carrier and its customers. For example, when ALLTEL, a rate-of-
return carrier, merged with Aliant, a price cap carrier, the Commission 
agreed with ALLTEL's reasons for desiring to remain a rate-of-return 
carrier. But ALLTEL, ``not seeking to maintain separate affiliates 
under different systems of regulation,'' also was required to revert 
Aliant, which had elected price cap regulation, to rate-of-return 
regulation. Aliant, however, subsequently sought a waiver, contending 
price cap regulation benefited its customers, and was granted 
permission to continue operating temporarily as a price cap carrier. 
Does this example suggest that the ``all-or-nothing'' regulatory 
requirements are overly restrictive, or out of step with marketplace 
realities? Does it suggest that the purpose served by the rules may be 
overshadowed by any regulatory inefficiency that may result?
    41. Some rate-of-return carriers contend the affiliate withdrawal 
rule also works against selecting the most appropriate and efficient 
form of regulation for diverse study areas because they must all elect 
the same common line pool status as a group and move to price cap 
regulation together. Some affiliates may be ready to accept the risk 
and potential reward of incentive regulation, while other affiliates 
might not be in a position to leave rate-of-return regulation. These 
incumbent LECs also advocate repeal of this rule in combination with 
geographic deaveraging as a pricing flexibility measure to enable them 
to respond to competition from competitive carriers for high-volume 
business customers. In this way, incumbent LECs would have flexibility 
to depool and deaverage rates within study areas by filing their own 
common line tariffs based on their own costs where competition was a 
threat, and also make decisions for other study areas based on their 
particular market and service conditions. Opposing parties, however, 
contend that such pricing flexibility would be premature until local 
markets become sufficiently competitive to prevent incumbent LECs from 
engaging in cross-subsidization and predatory pricing. Furthermore, 
they object to repealing this rule because it would result in parent 
companies removing their low-cost companies from the pool and leaving 
their high-cost areas in, thus driving NECA pool rates higher. Are 
there any other considerations to note in assessing whether the 
affiliate withdrawal rule is promoting the public interest? What would 
be the impact and consequences of higher NECA pool rates resulting from 
the exit of low-cost carriers?
    42. We also seek comment on whether the ``all-or-nothing'' 
restrictions are currently necessary to prevent cost shifting and 
gaming. Commenters disagreed on this issue and on whether our present 
accounting and allocation rules provide existing and sufficient 
safeguards against cost shifting. Some parties contend these rules have 
outlived their usefulness, and are not needed to address cost shifting 
and gaming concerns because they are more speculative than real. Others 
argue that cost shifting and gaming concerns are still valid, and that 
their elimination would be anti-competitive and could result in cost 
manipulation. TDS asserts that the rules have begun to erode with no 
evidence of cost shifting or gaming, citing exceptions adopted by the 
Commission to the pooling ``all-or-nothing'' rules in mergers and 
acquisitions, common ownership of cost-based and average schedule 
companies, the ability of average schedule companies to remain in the 
pool if their depooling affiliate changes from rate-of-return 
regulation to price caps, waivers allowing price cap exchanges to 
revert to rate-of-return regulation following mergers and acquisitions, 
and common ownership of incumbent and competitive carriers. We invite 
further comment on whether these examples warrant greater relaxation, 
or elimination, of the ``all-or-nothing'' requirements. Specifically, 
is the risk of cost-shifting and gaming outweighed by regulatory 
efficiency gains that could result from eliminating the ``all-or-
nothing'' requirements? Is the Commission's policy behind the rule--to 
avoid creating cost-shifting incentives as opposed to correcting actual 
abuses--serving the public interest? Has the competitive environment 
made cost shifting or gaming concerns less or more relevant? Are there 
alternative accounting and reporting rules that could substantially 
reduce cost shifting concerns? Would it be reasonable to impose more 
stringent reporting requirements on carriers that seek waivers of the 
``all-or-nothing'' requirements?
    43. We also seek comment to resolve a related issue: how rate-of-
return carriers that are required to convert to price cap regulation in 
a merger or acquisition, or choose to convert to price cap regulation, 
will receive universal service support. Under the

[[Page 59767]]

current rules, a rate-of-return carrier upon converting to price cap 
regulation is required to withdraw from the NECA common line pool and 
is no longer eligible for LTS. Interstate access universal service 
support for price cap carriers is funded by a capped, interstate access 
support mechanism created in the Interstate Access Support Order (65 FR 
57739, September 26, 2000), but the Commission in that order ``did not 
explicitly address how entry of new carriers into price caps affects 
distribution of interstate access universal service support.'' This 
question is particularly significant for potential price cap companies 
like Puerto Rico Telephone Company that could be a large recipient of 
the support. We invite commenters to address how entry of new carriers 
into price cap regulation would affect distribution of interstate 
access universal service support for price cap carriers. As a 
transitional measure for rate-of-return carriers that convert to price 
cap regulation, should we allow retention of LTS or Interstate Common 
Line Support? Instead of receiving the same amount of support that the 
carrier received under rate-of-return regulation, should the previous 
support amount be added to the total interstate access universal 
service support available under the Interstate Access Support Order and 
then divided among all price cap carriers pursuant to the formula 
established in that order? We seek input on any other related 
considerations or ideas to resolve this question of universal service 
support for new price cap carriers on a going forward basis.

D. Consolidation of Long Term Support and Interstate Common Line 
Support

1. Discussion
    44. We tentatively conclude that LTS will be merged with Interstate 
Common Line Support as of July 1, 2003, after which participation in 
the NECA common line pool will not be required for receipt of universal 
service support. We believe that merging LTS with Interstate Common 
Line Support is warranted in the interest of administrative simplicity, 
because LTS no longer will serve an independent purpose after the CCL 
charge is phased out. Because the CCL charge will be eliminated, LTS 
will not be required to reduce the costs recovered through CCL charges. 
Moreover, carriers now receiving LTS will be eligible for Interstate 
Common Line Support to meet their common line revenue requirements not 
recovered through SLC charges. Most carriers will receive Interstate 
Common Line Support in an amount equal to or greater than the amount of 
LTS support they now receive. If retained, LTS's practical effect would 
be merely to reduce the Interstate Common Line Support received by each 
pooling carrier.
    45. We also believe that merging LTS with Interstate Common Line 
Support is warranted in the interest of promoting competition. 
Restricting eligibility for universal service support to pooling 
carriers hampers the competitiveness of incumbent LECs by forcing them 
to choose between universal service support and the freedom to set 
rates outside the NECA common line pool. The Commission previously 
maintained this restriction in part due to the risk-sharing benefits of 
pooling, but we believe that this risk-sharing function will be 
diminished substantially by conversion of the CCL charge to explicit 
universal service support. The pool's averaged CCL rates spread across 
pooling companies the risks related to recovery of residual common line 
costs through a per-minute charge. Unlike a per-minute charge, however, 
per-line universal service support is not subject to unpredictability 
and variation.
    46. We seek comment on these tentative conclusions. We recognize 
that the proposed elimination of LTS as a separate, pooling-restricted 
support mechanism may impact membership in the NECA common line pool. 
Nevertheless, we anticipate that the pool will continue to perform 
important administrative functions, such as tariff filings for many 
small carriers for whom such burdens would be excessive in the absence 
of the ability to pool, as well as risk-sharing functions related to 
the recovery of traffic sensitive costs. We invite interested parties 
to comment on these issues.

II. Procedural Issues

A. Ex Parte Presentations

    47. This is a permit but disclose rulemaking proceeding. Ex parte 
presentations are permitted, except during the Sunshine Agenda period, 
provided that they are disclosed as provided in the Commission's rules.

B. Initial Regulatory Flexibility Analysis

    48. As required by the Regulatory Flexibility Act (RFA), the 
Commission has prepared this Initial Regulatory Flexibility Analysis 
(IRFA) of the possible significant economic impact on small entities by 
the proposals in this FNPRM.
1. Need for, and Objectives of, the Proposed Rules
    49. The Commission consistently has expressed its commitment to 
providing incentives for smaller telephone companies to become more 
efficient and innovative. As proposed, however, the MAG incentive plan 
does not appear to provide incentives for cost efficiency gains that 
will benefit consumers through lower rates and improved services. The 
FNPRM seeks additional comment on the MAG incentive plan, and on other 
means of providing opportunities for rate-of-return carriers to 
increase their efficiency and competitiveness in the interstate access 
services market in a manner that would benefit both rate-of-return 
carriers and their customers. Among other things, the FNPRM seeks 
comment on the establishment of one or more X-factors, ways to insure 
that adequate investment and service quality levels are maintained, and 
whether any incentive regulation adopted by the Commission for small 
carriers should be optional.
    50. The FNPRM also seeks comment on extending additional pricing 
flexibility to rate-of-return carriers, on the continued need for the 
``all-or-nothing'' rule, which provides that if an individual rate-of-
return carrier or study area converts to price cap regulation, all of 
its affiliates or study areas must also do so, except for those using 
average schedules, and on the Commission's tentative conclusion that 
LTS should be merged with Interstate Common Line Support as of July 1, 
2003, after which participation in the NECA common line pool will not 
be required for receipt of universal service support. These proposals 
are intended to enhance the competitiveness of rate-of-return carriers 
and to ensure that the Commission's rules continue to be consistent 
with conditions in the telecommunications marketplace.
2. Legal Basis
    51. This rulemaking action is supported by sections 4(i), 4(j), 
201-205, 254, and 403 of the Communications Act of 1934, as amended.
3. Description and Estimate of the Number of Small Entities To Which 
the FNPRM will Apply
    52. In the Final Regulatory Flexibility Analysis (FRFA), the 
Commission's action in this Order affects local exchange carriers, 
competitive local exchange carriers, interexchange carriers, 
competitive access providers, cellular licensees, broadband Personal 
Communications Services, Rural Radiotelephone Service, Specialized 
Mobile Radio, fixed microwave services, and 39 GHz licensees. This 
Initial Regulatory Flexibility Act potentially will affect the same 
entities discussed in the FRFA, and we incorporate the

[[Page 59768]]

descriptions of those entities by reference.
4. Description of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements
    53. The FNPRM explores options for developing an alternative 
regulatory structure that would be available to those rate-of-return 
carriers electing it. It considers the widely varying operating 
circumstances of rate-of-return carriers, the implications of 
competitive and intrastate regulatory conditions on the options 
available, and the need to facilitate and ensure the deployment of 
advanced services in rural America. If adopted, alternative regulation 
may require additional recordkeeping. For example, carriers could be 
required to file cost studies with this Commission or other appropriate 
state agency detailing annual revenues, revenues per study area, and 
effective per-line support for each universal service zone. The FNPRM 
also addresses the continued need for the Commission's all-or-nothing 
rule, and the appropriate degree and timing of pricing flexibility for 
small rate-of-return carriers. Repeal or modification of the all-or-
nothing rule might allow carriers to depool and deaverage rates within 
study areas by filing their own common line tariffs.
5. Steps Taken To Minimize Significant Economic Impact on Small 
Entities, and Significant Alternatives Considered
    54. The RFA requires an agency to describe any significant 
alternatives that it has considered in reaching its proposed approach, 
which may include the following four alternatives (among others): (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.
    55. The proposals in the FNPRM could have varying positive or 
negative impacts on rate-of-return carriers, including any such small 
carriers. Many of the proposals involve elective options, so that a 
small entity should be able to assess the potential impacts as part of 
its decision-making process. Public comments are welcomed on 
modifications to the proposals contained in the FNPRM that would reduce 
any potential impacts on small entities. Specifically, suggestions are 
sought on different compliance or reporting requirements that would 
take into account the resources of small entities; clarification, 
consolidation, or simplification of compliance and reporting 
requirements for small entities that would be subject to the rules; and 
whether waiver or forbearance from the rules for small entities would 
be feasible or appropriate. How would the establishment of one or more 
X-factors impact small carriers? How can we insure that adequate 
investment and service quality levels are maintained? How would the 
adoption of an alternative regulation plan affect rate-of-return 
carriers, and how would a low-end adjustment affect such plan? Should 
we retain, repeal, or modify our ``all-or-nothing rule''? How would 
potential modification or repeal affect smaller carriers? Finally, what 
would be the impact on small carriers of eliminating LTS as a separate, 
pooling-restricted universal service support mechanism? Comments should 
be supported by specific economic analysis.
6. Federal Rules That May Duplicate, Overlap, or Conflict With the 
Proposed Rules
    56. None.

C. Comment Filing Procedures

    57. Pursuant to Secs. 1.415 and 1.419 of the Commission's rules, 
interested parties may file comments on or before December 31, 2001, 
and reply comments on or before January 29, 2002. Comments may be filed 
using the Commission's Electronic Comment Filing System (ECFS) or by 
filing paper copies.
    58. Comments filed through the ECFS can be sent as an electronic 
file via the Internet to http://www.fcc.gov/e-file/ecfs.html>. 
Generally, only one copy of an electronic submission must be filed. If 
multiple docket or rulemaking numbers appear in the caption of this 
proceeding, however, commenters must transmit one electronic copy of 
the comments to each docket or rulemaking number referenced in the 
caption. 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 your e-mail address.'' A sample form and directions will be sent 
in reply.
    59. Parties who choose to file by paper must file an original and 
four copies of each filing. If more than one docket or rulemaking 
number appear in the caption of this proceeding, commenters must submit 
two additional copies for each additional docket or rulemaking number. 
All filings must be sent to the Commission's Secretary, Magalie Roman 
Salas, Office of the Secretary, Federal Communications Commission, 445 
12th Street, SW., Washington, DC 20554.
    60. Parties who choose to file by paper should also submit their 
comments on diskette. These diskettes should be submitted to: 
Competitive Pricing Division, Common Carrier Bureau, Federal 
Communications Commission, 445 12th Street, SW., Washington, DC 20554. 
Such a submission should be on a 3.5-inch diskette formatted in an IBM 
compatible format using Word 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 numbers, in this 
case CC Docket Nos. 00-256 and 96-45), type of pleading (comment or 
reply comment), 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, Qualex International, Portals II, 445 12th Street, SW., 
Room CYB402, Washington, DC 20554.
    61. The full text of this document is available for public 
inspection and copying during regular business hours at the FCC 
Reference Information Center, Portals II, 445 12th Street, SW., Room 
CY-A257, Washington, DC 20554. This document also may be purchased from 
the Commission's duplicating contractor, Qualex International, Portals 
II, 445 12th Street, SW., Room CY-B402, Washington, DC, 20554, 
telephone 202-863-2893, facsimile 202-863-2898, or via e-mail 
[email protected].

III. Ordering Clauses

    62. It is further ordered that, pursuant to the authority contained 
in sections 4(i), 4(j), 201-205, 254, and 403 of the Communications Act 
of 1934, as amended, 47 U.S.C. 154(i), 154(j), 201-205, 254, and 403, 
this Further Notice of Proposed Rulemaking in CC Docket No. 00-256 is 
adopted.
    63. It is further ordered that the Commission's Consumer 
Information Bureau, Reference Information Center,

[[Page 59769]]

shall send a copy of this Further Notice of Proposed Rulemaking in CC 
Docket No. 00-256, including the Initial Regulatory Flexibility 
Analysis, to the Chief Counsel for Advocacy of the Small Business 
Administration.

List of Subjects

47 CFR Part 54

    Reporting and recordkeeping requirements, Telecommunications, 
Telephone.

47 CFR Part 69

    Communications common carriers, Reporting and recordkeeping 
requirements, Telephone.

Federal Communications Commission.
William F. Caton,
Deputy Secretary.
[FR Doc. 01-29740 Filed 11-29-01; 8:45 am]
BILLING CODE 6712-01-P