[Federal Register Volume 67, Number 122 (Tuesday, June 25, 2002)]
[Rules and Regulations]
[Pages 42735-42738]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-15949]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 69

[CC Docket Nos. 96-262, 94-1; FCC 02-161]


Cost Review Proceeding for Residential and Single-Line Business 
Subscriber Line Charge (SLC) Caps

AGENCY: Federal Communications Commission.

ACTION: Interpretation.

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SUMMARY: This document concludes the cost review proceeding to verify 
that increases to the subscriber line charge (SLC) cap above $5.00 are 
appropriate. The SLC is a flat-rated charge imposed by local telephone 
service providers on end users to recover the interstate-allocated 
portion of local loop costs. In 2000, the Commission adopted a schedule 
to reduce the implicit subsidies in access rates while gradually 
increasing the cap on the SLC. The Commission stated that it would 
conduct a cost review proceeding prior to the scheduled cap increases 
above $5.00. Based on the record before us, we conclude that the 
increases are appropriate--and indeed necessary--to fulfill the 
Commission's access charge reform objectives. Therefore, the SLC cap 
will increase as scheduled in the Commission's rules, to $6.00 on July 
1, 2002, and to $6.50 on July 1, 2003.

FOR FURTHER INFORMATION CONTACT: Jennifer McKee, Wireline Competition 
Bureau, Pricing Policy Division, (202) 418-1530, or via the Internet at 
[email protected].

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Order 
in CC Docket Nos. 96-262 and 94-1 released on June 5, 2002. The full 
text of this document is available on the Commission's website in the 
Electronic Comment Filing System and for public inspection during 
regular business hours in the FCC Reference Center, Room CY-A257, 445 
Twelfth Street, SW., Washington, DC 20554.

Background

    In the May 2000 CALLS Order, the Commission adopted comprehensive 
interstate access charge and universal service reforms for incumbent 
local exchange carriers (LECs) subject to price cap regulation. 
Consistent with the goals and principles of the Communications Act, the 
purpose of these reforms is to promote competition by removing implicit 
subsidies from access charges, while ensuring affordable and reasonably 
comparable rates through explicit universal service support. Among 
other things, the Commission adopted a schedule to reduce the implicit 
subsidies in access rates while gradually increasing the cap on the 
subscriber line charge (SLC), a flat-rated charge imposed by LECs on 
end users to recover the interstate-allocated portion of local loop 
costs. Under the rules adopted in the CALLS Order, the SLC cap for 
residential and single-line business lines will increase to $6.00 on 
July 1, 2002, and to $6.50 on July 1, 2003. To verify that the 
increases above the current $5.00 cap are appropriate, the Commission 
stated that it would conduct a cost review proceeding prior to any 
scheduled increases above this cap to examine forward-looking cost 
information associated with the provision of retail voice-grade access 
to the public switched telephone network. The Commission subsequently 
concluded that, if the cost review proceeding verified that increases 
were appropriate for price cap carriers, then the same increases were 
appropriate for carriers subject to rate-of-return regulation because 
these carriers generally have higher costs than price cap carriers.
    Under the Communications Act, the Commission has a statutory duty 
to regulate the interstate rates of common carriers, including the 
interstate access rates charged by incumbent LECs. In performing that 
duty, the Commission is required to balance the Communications Act's 
goals of promoting competition and preserving and advancing universal 
service. More specifically, the Communications Act directs us to 
convert implicit subsidies, such as those found in access charges, into 
explicit support, while simultaneously promoting the goals of 
affordability and reasonable comparability of rates throughout the 
nation. To promote economically efficient competition and to avoid 
cross-subsidization, the Commission has recognized that, to the extent 
possible, LECs should recover costs of interstate access in the same 
way that they are incurred. Thus, traffic-sensitive costs should be 
recovered through corresponding per-minute access rates. Similarly, 
non-traffic-sensitive costs, such as loop costs, should be recovered 
through fixed, flat-rated fees.
    To address the affordability concerns of universal service, 
however, the Commission has limited the amount of interstate costs that 
LECs can recover directly from residential and business customers 
through the flat-rated SLC. Specifically, the SLC is subject to a cap 
that, particularly for residential customers, is often too low to 
enable the LECs to recover the entire interstate-allocated cost of the 
local loop. The remaining loop costs that LECs cannot recover from the 
SLC are recovered through charges imposed on interexchange carriers 
(IXCs), which pass these charges on to their customers. Thus, long-
distance customers subsidize the rates that LECs charge to residential 
and single-line business end users. In addition to the inefficient 
implicit subsidies in the rate structure, LECs historically have 
averaged their SLCs over relatively large geographic areas. Geographic 
rate averaging means that customers in low-cost areas are subsidizing 
the rates of customers in high-cost areas. To the extent the SLC cap is 
set below cost, it inhibits a LEC's ability to deaverage its SLC rates, 
thus maintaining implicit subsidies running from low-cost areas to 
high-cost areas.

[[Page 42736]]

    To reduce the inefficient implicit subsidies caused by the 
residential and single-line business SLC cap, the Commission in the 
CALLS Order implemented a schedule of increases to this cap, with 
corresponding decreases to the charges imposed on IXCs. The cap was 
$3.50 prior to the CALLS Order, and was raised to $4.35 on July 1, 
2000, and to $5.00 on July 1, 2001. The cap is scheduled to increase to 
$6.00 on July 1, 2002 and to $6.50 on July 1, 2003. In setting these 
SLC caps, the Commission balanced the goals of removing implicit 
subsidies and ensuring the affordability of basic telephone service for 
residential and single-line business customers, and concluded that 
gradual increases in the SLC could bring substantial benefits that 
outweigh any affordability concerns. Specifically, the Commission found 
that increasing the SLC cap would:
     Remove inefficient implicit subsidies in the access charge 
rate structure by more closely aligning cost recovery with cost 
causation;
     Remove inefficient implicit subsidies inherent in 
geographic rate averaging by allowing LECs greater flexibility to 
deaverage SLCs;
     Promote competition by sending appropriate pricing signals 
through deaveraged SLCs that more closely reflect the actual costs of 
providing service; and
     Not jeopardize affordable local telephone rates for 
qualifying low-income consumers, due to additional Lifeline support 
available to cover any SLC rate increases resulting from the increased 
cap.
    As stated in the CALLS Order, the Commission initiated the current 
proceeding to verify that it is appropriate to increase the residential 
and single-line business SLC caps above $5.00. By Public Notice issued 
on September 17, 2001, the Commission initiated a proceeding to verify 
that increases to the residential and single-line business SLC cap 
above $5.00 are appropriate. Price cap carriers submitted their cost 
studies on November 16, 2001. Specifically, Aliant, Cincinnati Bell, 
Iowa Telecom, and Sprint based their cost studies on the Synthesis 
Model used by the Commission to determine costs for universal service 
support purposes. The remaining price cap LECs, BellSouth, Citizens, 
Qwest, SBC, Valor, and Verizon, used other cost models, some of which 
are proprietary. Parties submitted comments on these studies on January 
24, 2002. In addition to filing comments opposing the SLC cap 
increases, the National Association of State Utility Consumer Advocates 
(NASUCA) filed a cost study of its own. Parties submitted reply 
comments on February 14, 2002.

Discussion

    The purpose of the instant proceeding is to verify that increases 
to the SLC cap above $5.00 are warranted. Specifically, pursuant to the 
Commission's plan for allowing SLCs to increase gradually, the SLC cap 
for residential and single-line business lines is scheduled to increase 
to $6.00 on July 1, 2002, and to $6.50 on July 1, 2003, provided that 
``such increases are appropriate and reflect higher costs where they 
are to be applied.'' CALLS Order, 65 FR 38684 (June 21, 2000).
    To verify that the scheduled SLC cap increases are appropriate, the 
Commission stated that it would examine the price cap carriers' 
forward-looking costs of providing retail voice grade access to the 
public switched telephone network. Forward-looking costs are the costs 
that an efficient carrier would incur to provide service in a 
competitive market. Most markets today are not yet competitive and the 
incumbent LEC is the dominant provider of service for residential and 
single-line business customers. Even in a fully competitive 
environment, however, there may be a continued need for a SLC cap 
because the cost of providing service in certain rural and insular 
regions is high and will likely continue to be high for the foreseeable 
future. By examining forward-looking costs in this proceeding, the 
Commission can verify that increases to the SLC cap would be 
appropriate if the market were, in fact, competitive. Thus, by 
evaluating the SLC cap in light of forward-looking costs, we can ensure 
that the upper limit placed on consumer rates reflects competitive 
market conditions even though full competition has not yet arrived.
    Applying this analysis, we conclude that the scheduled SLC cap 
increases are appropriate if the record demonstrates that efficient 
carriers in a competitive market would have a substantial number of 
lines with forward-looking costs that exceed the current $5.00 SLC cap 
and the ultimate $6.50 SLC cap. A substantial number of lines with 
costs that exceed the current $5.00 cap shows that, at a level where 
affordability is not yet a paramount concern, the current cap is 
impeding the efficient recovery of costs in a meaningful way. A 
substantial number of lines with costs that exceed the ultimate $6.50 
cap shows that, at a level where affordability becomes a paramount 
concern, the ultimate cap serves a legitimate purpose by protecting 
consumers from potentially unaffordable rates. Determining what 
constitutes a ``substantial'' number of lines, however, is not an exact 
science. In making this determination we rely on our expertise in 
regulating interstate access charges, as well as our discretion in 
balancing the removal of implicit subsidies with ensuring 
affordability. We conclude on the record before us--where the most 
conservative estimate shows at least 27 million non-rural/33 million 
total residential and single-line business price cap lines with costs 
above $5.00, and at least 14 million non-rural/20 million total 
residential and single-line business price cap lines with costs above 
$6.50--that raising the cap is necessary to enable SLC deaveraging as 
discussed below. Therefore, we need not determine precisely what figure 
might require us to override the planned increase of the SLC cap.
    As a result of the Commission's prior decisions, there is currently 
one primary residential and single-line business SLC cap that applies 
to all carriers. We determine that it is appropriate to retain a single 
national cap to apply to all incumbent LECs. One cap, as opposed to 
multiple caps for carriers or regions, promotes reasonable 
comparability of rates in different geographic areas, and is simpler to 
administer. In addition, although the SLC cap will increase, SLCs will 
be constrained by price cap carriers' CMT (common line, marketing and 
transport interconnection charge) revenues, and by rate-of-return 
carriers' costs. We therefore decline to adopt the Florida Commission's 
suggestion that ``the SLC be made state-specific for each company'' so 
carriers cannot average rates across their regions. Maintaining one 
national SLC cap preserves carriers' existing flexibility to average 
rates across their regions. Eliminating this flexibility would force 
carriers to recover more of their common line costs through the 
inefficient subsidy of PICC and CCL charges. Moreover, as discussed 
above, the Commission in the CALLS Order has provided LECs the 
flexibility to deaverage their SLCs within study areas once certain 
conditions are met. Raising the SLC cap will provide LECs with a 
greater ability to take advantage of study area deaveraging. To the 
extent carriers do not avail themselves of the opportunity to deaverage 
their SLCs after the cap reaches $6.50, however, the Commission will 
have the opportunity to revisit this issue if necessary.
    Our decision in this proceeding affects both the price cap carriers 
regulated under our rules adopted in the CALLS Order, and rate-of-
return carriers. Although the access charge reforms, including the SLC 
cap

[[Page 42737]]

increases, adopted in the CALLS Order applied only to price cap 
carriers, in 2001 the Commission implemented a separate access charge 
reform plan for rate-of-return carriers, which serve roughly 10.9 
million lines. Pursuant to the Commission's decision in the Rate-of-
Return Access Charge Reform Order, the residential and single-line 
business SLC cap for rate-of-return carriers is synchronized with the 
CALLS Order schedule for increases above $5.00, pending the findings of 
the Commission in the price cap carrier SLC review proceeding. In the 
Rate-of-Return Access Charge Reform Order, the Commission stated that, 
if SLC cap increases are justified for price cap carriers, then SLC cap 
increases also are justified for rate-of-return carriers because rate-
of-return carriers generally have higher common line costs than price 
cap carriers. The Rural Task Force has documented these higher costs, 
finding that rate-of-return carriers in rural areas have high loop 
costs because of a lack of economies of scale and density, and total 
investment in plant per loop is substantially higher for rural carriers 
than for non-rural carriers. Furthermore, parity in SLC cap levels 
among price cap and rate-of-return carriers is appropriate to ensure 
reasonable comparability of rates in urban and rural areas.
    After considering the various submissions on the record, we find 
that the record demonstrates that a substantial number of lines have 
forward-looking costs above the current $5.00 cap and the ultimate 
$6.50 cap. The cost studies of the price cap LECs provide results 
showing the greatest number of lines with costs above $5.00 and $6.50 
respectively, but we are disinclined to use those results because of 
the criticisms of these studies raised by commenters in this 
proceeding. Proceeding cautiously, and assuming for the sake of 
argument that these criticisms are valid, we find that NASUCA's more 
conservative cost study still shows that there are a substantial number 
of lines above the SLC caps. Commission staff were able to verify 
NASUCA's results using the cost model and NASUCA's assumptions. In 
addition, we observe that certain parties that support raising the SLC 
cap also relied on the Synthesis Model. Although some of these parties 
modified various parameters of the model, they generally agreed that 
the model provided a reasonable estimate of forward-looking costs for 
the limited purpose of this proceeding. The Commission has cautioned 
parties against using the results of the Synthesis Model to set rates, 
however, and we emphasize that we are not doing so in this proceeding. 
Instead, we are relying on NASUCA's cost study because it is the most 
conservative one in our record addressing the question of whether the 
proposed SLC cap increases, applicable to all carriers on a national 
basis, are appropriate.
    NASUCA's cost study, although conservative, still amply 
demonstrates that a substantial number of residential and single-line 
business lines have forward-looking costs above the current $5.00 SLC 
cap, and above the fully phased-in $6.50 SLC cap. Specifically, 
NASUCA's analysis shows that at least 27 million non-rural price cap 
lines have forward-looking costs above $5.00, and at least 14 million 
non-rural price cap lines have forward-looking costs above $6.50. The 
actual number of lines with forward-looking costs above the $5.00 and 
$6.50 caps presumably is even higher because NASUCA examined the 
results of only 80 study areas in the Synthesis Model, including only 
non-rural study areas served by price cap carriers. NASUCA did not 
include approximately 6 million lines from price cap carriers' rural 
study areas, which are likely to have relatively high costs. Thus, 
NASUCA's study is conservative not only as a result of its reliance on 
the Synthesis Model, which was not intended to be used for ratemaking 
purposes, but also as a result of its exclusion of high-cost study 
areas, which introduces a downward bias to its cost estimates. NASUCA's 
analysis shows that lines with forward-looking costs above the caps are 
geographically dispersed and exist in every state. Given the 
substantial number of geographically-dispersed lines above the caps, we 
find that the scheduled increases in the SLC cap are appropriate.
    In the CALLS Order, the Commission rejected commenters' request to 
combine the multi-line business SLC and the multi-line business PICC, 
but agreed to revisit the issue during the residential and single-line 
business SLC cap cost review proceeding. After weighing the competing 
goals of removing implicit subsidies and maintaining affordable rates 
for consumers, we determine that it is not appropriate to combine the 
multi-line business SLC and PICC charged by price cap LECs at this 
time.
    In declining commenters' suggestions to combine the multi-line 
business SLC and PICC, we observe that the multi-line business PICC 
will be reduced or eliminated for most carriers when the residential 
and single-line business SLC cap reaches $6.50. If necessary, we will 
examine ways to eliminate the multi-line business PICC, as well as 
another charge containing implicit subsidies, the CCL charge, after the 
residential and single-line business SLC reaches the cap of $6.50 in 
July 2003.
    In addition, we are concerned with the affordability issues raised 
by increasing the multi-line business SLC above the current $9.20 cap. 
Some carriers that operate in high-cost areas still recover their loop 
costs by charging IXCs up to the full amount of the multi-line business 
PICC cap of $4.31. The IXCs, in turn, recover the PICC from all of 
their multi-line business customers, effectively spreading the PICC 
across a much larger group and thereby lowering the amount recovered 
from each customer. If we were to combine the charges at this time, 
some multi-line business customers in high-cost areas would be subject 
to SLCs at or near $13.51 per line per month. Increasing to this level 
the SLCs of these customers, who are not eligible for Lifeline support, 
would raise affordability concerns. Additionally, we are disinclined to 
recover the subsidy represented by the multi-line business PICC 
entirely from the narrow class of high-cost multi-line business 
customers, rather than spreading its effect more broadly by continuing 
to recover it from IXCs, which have considerable flexibility in how 
they recover this cost.
    At paragraph 154 of the CALLS Order, the Commission adopted an 
option that allows rural price cap LECs some relief from achieving the 
required switched access usage charge reductions solely through rate 
decreases. Specifically, non-Bell Operating Company price cap carriers 
that have at least 20 percent of total holding company lines operated 
by rural telephone companies may elect to shift to the common line 
basket the switched access usage charges necessary to yield those 
filing entities' proportionate share of the total reduction in switched 
access usage charge rates. These carriers would include these amounts 
in the CMT revenue requirement, and, to the extent they cannot recover 
all of the revenue requirement within a filing entity, they may 
increase their multi-line business PICCs and multi-line business SLCs 
in other filing entities within the same holding company, up to the 
amount of the applicable SLC and PICC cap. The Commission stated that 
this mechanism was to be reviewed in the instant cost proceeding to 
determine whether retaining this exception or transferring the 
additional switched access reduction amounts to the CMT basket is 
warranted.

[[Page 42738]]

    We note that no party has raised any objection to retaining the 
rural price cap exception and we are not aware of any problems created 
by the exception. We believe that the rationale for adopting it in the 
CALLS Order remains, i.e., it is in the public interest to allow rural 
price cap LECs some ability to recover the switched access usage charge 
reductions through shifting them to the CMT basket. We therefore retain 
the exception.
    Accordingly, it is ordered that, pursuant to sections 1, 4(i) and 
(j), 201-205, 218-222, 254, 303(r), and 403 of the Communications Act, 
as amended, 47 U.S.C. 151, 154(i), 154(j), 201-205, 218-222, 254, 
303(r), and 403, this Order is hereby adopted.

Federal Communications Commission.

Marlene H. Dortch,
Secretary.
[FR Doc. 02-15949 Filed 6-24-02; 8:45 am]
BILLING CODE 6712-01-P