[Federal Register Volume 69, Number 88 (Thursday, May 6, 2004)]
[Rules and Regulations]
[Pages 25325-25337]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-10334]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 54, 61, and 69

[CC Docket Nos. 00-256 and 96-45; FCC 04-31]


Multi-Association Group (MAG) Plan for Regulation of Interstate 
Services of Non-Price Cap Incumbent Local Exchange Carriers and 
Interexchange Carriers; Federal-State Joint Board on Universal Service

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: By this document, the Commission takes additional steps to 
provide rate-of-return carriers greater flexibility to respond to 
changing marketplace conditions. In particular, the Commission modifies 
the ``all-or-nothing'' rule to permit rate-of-return carriers to bring 
recently acquired price cap lines back to rate-of-return regulation 
without requiring a waiver of the all-or-nothing rule. In this way, the 
Commission reduces the administrative costs and uncertainties of such 
acquisitions for rate-of-return carriers. The Commission also grants 
rate-of-return carriers the authority immediately to provide 
geographically deaveraged transport and special access rates, subject 
to certain limitations. With this additional pricing flexibility, rate-
of-return carriers will be able to set more economically efficient 
rates and respond to competitive entry. Finally, the Commission merges 
Long Term Support with Interstate Common Line Support. This will make 
the Commission's universal service mechanisms simpler and more 
transparent, while ensuring that rate-of-return carriers maintain 
existing levels of universal service support.

DATES: Effective June 7, 2004; except for Sec.  61.38(b)(4), Sec. Sec.  
61.41(c), (d), and (e), and Sec.  69.123(a)(1), (a)(2), (c), and (d), 
which contain information collection requirements that have not been 
approved by OMB. The Federal Communications Commission will publish a 
document in the Federal Register announcing the effective date.

ADDRESSES: All filings must be sent to the Commission's Secretary, 
Marlene H. Dortch, Office of the Secretary, Federal Communications 
Commission, Room TW-A325, 445 Twelfth Street, SW., Washington, DC 
20554. In addition to filing comments with the Secretary, a copy of any 
comments on the information collections contained herein must be 
submitted to Judith Boley Herman, Federal Communications Commission, 
Room 1-C804, 445 Twelfth Street, SW., Washington, DC 20554, or via the 
Internet to [email protected], and to Kim A. Johnson, OMB Desk 
Officer, Room 10236 NEOB, 725 17th Street, NW., Washington, DC 20503, 
or via the Internet to [email protected].

FOR FURTHER INFORMATION CONTACT: Douglas Slotten, Wireline Competition 
Bureau, Pricing Policy Division, 202-418-1572, or Ted Burmeister, 
Wireline Competition Bureau, Telecommunications Access Policy Division, 
202-418-7389.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Report 
and Order (Order) in CC Docket Nos. 00-256 and 96-45, adopted on 
February 12, 2004, and released on February 26,

[[Page 25326]]

2004, and the Errata, adopted and released on April 14, 2004. The 
complete text of these Orders are available for public inspection 
Monday through Thursday from 8 a.m. to 4:30 p.m. and Friday from 8 a.m. 
to 11:30 a.m. in the Commission's Consumer and Governmental Affairs 
Bureau, Reference Information Center, Room CY-A257, 445 Twelfth Street, 
SW., Washington, DC 20554. The complete text is available also on the 
Commission's Internet site at http://www.fcc.gov. Alternative formats 
are available to persons with disabilities by contacting Brian Millin 
at (202) 418-7426 or TTY (202) 418-7365. The complete text of the Order 
may be purchased from the Commission's duplicating contractor, Qualex 
International, Room CY-B402, 445 Twelfth Street, SW., Washington, DC 
20554, telephone 202-863-2893, facsimile 202-863-2898, or e-mail at 
[email protected].

Synopsis of Report and Order and Errata

    1. The Commission takes additional steps to provide rate-of-return 
carriers greater flexibility to respond to changing marketplace 
conditions in response to comment sought in Multi-Association Group 
(MAG) Plan for Regulation of Interstate Services of Non-Price Cap 
Incumbent Local Exchange Carriers and Interexchange Carriers, CC Docket 
No. 00-256, Second Report and Order and Further Notice of Proposed 
Rulemaking in CC Docket No. 00-256, Fifteenth Report and Order in CC 
Docket No. 96-45, and Report and Order in CC Docket Nos. 98-77 and 98-
166, 66 FR 59719 (Nov. 30, 2001). In particular, the Commission 
modifies the all-or-nothing rule to permit rate-of-return carriers to 
bring recently acquired price cap lines back to rate-of-return 
regulation. In this way, the Commission reduces the administrative 
costs and uncertainties of such acquisitions for rate-of-return 
carriers. The Commission also grants rate-of-return carriers the 
authority immediately to provide geographically deaveraged transport 
and special access rates, subject to certain limitations. With this 
additional pricing flexibility, rate-of-return carriers will be able to 
set more economically efficient rates and respond to competitive entry. 
Finally, the Commission merges Long Term Support (LTS) with Interstate 
Common Line Support (ICLS). This will make the Commission's universal 
service mechanisms simpler and more transparent, while ensuring that 
rate-of-return carriers maintain existing levels of universal service 
support.

All-or-Nothing Rule

    2. Section 61.41 of the Commission's rules, 47 CFR 61.41, provides 
that if a price cap carrier is in a merger, acquisition, or similar 
transaction, it must continue to operate under price cap regulation 
after the transaction. In addition, when rate-of-return and price cap 
carriers merge or acquire one another, the rate-of-return carrier must 
convert to price cap regulation within one year. Furthermore, if an 
individual rate-of-return carrier or study area converts to price cap 
regulation, all of its affiliates or study areas must also convert to 
price cap regulation, except for its average schedule affiliates. 
Finally, LECs that become subject to price cap regulation are not 
permitted to withdraw from such regulation or participate in NECA 
tariffs. These regulatory requirements collectively are referred to as 
the all-or-nothing rule.
    3. The Commission modifies the all-or-nothing rule to permit a 
limited exception when a rate-of-return carrier acquires lines from a 
price cap carrier and elects to bring the acquired lines into rate-of-
return regulation. The rule, as amended, will permit the acquiring 
carrier to convert the price cap lines back to rate-of-return 
regulation. The Commission defers further action on the all-or-nothing 
rule until it has reviewed the record compiled in response to the 
Second Further Notice that we also issue today.
    4. The Commission adopted the all-or-nothing rule in order to avoid 
two specific problems that it envisioned. First, the Commission sought 
to prevent a carrier from shifting costs from its price cap affiliate 
to its rate-of-return affiliate, recovering those costs through the 
higher, cost-based rates of the non-price cap affiliate and increasing 
the profits of the price cap affiliate because of its reduced costs. 
Second, the Commission intended to prevent carriers from gaming the 
system by switching back and forth between the two different regulatory 
regimes. At a minimum, the record currently supports reform of the all-
or-nothing rule when a rate-of-return carrier acquires price cap lines 
but intends to operate all of its lines, including the newly acquired 
price cap lines, under rate-of-return regulation.
    5. When a rate-of-return carrier seeks to return acquired price cap 
lines to rate-of-return regulation, the problems that the all-or-
nothing rule sought to prevent do not exist, or can be addressed in a 
less burdensome way. Because the carrier wishes to have all of its 
lines be subject to rate-of-return regulation, there can be no danger 
of cost shifting between price cap and non-price cap affiliates. 
Similarly, a rate-of-return carrier in this position is not necessarily 
seeking to game the system by moving back and forth between different 
regulatory regimes. However, recognizing the possibility that the 
acquiring rate-of-return carrier could later seek to return to price 
cap regulation, thereby potentially gaming the system, the Commission 
concludes that once a rate-of-return carrier brings acquired price cap 
lines into rate-of-return regulation, it may not for five years elect 
price cap regulation for itself, or by any means cause the acquired 
lines to become subject to price cap regulation, without first 
obtaining a waiver. The Commission believes that this restriction 
responds to the concerns underlying the adoption of the all-or-nothing 
rule, while not requiring that the election be unnecessarily 
irreversible. The Commission does not restrict the number of lines that 
may be acquired by a rate-of-return carrier and returned to rate-of-
return regulation because the risks of abuse are very small and the 
administrative benefits are significant.
    6. The Commission notes that the carriers involved in a merger or 
acquisition must coordinate to ensure that, as of the effective date of 
the transaction, their respective tariffs reflect the services being 
offered after the merger or acquisition. The Commission also notes that 
price cap carriers are required to adjust their price cap indices to 
reflect the removal of the transferred access lines.

Pricing Flexibility

Geographic Deaveraging of Transport and Special Access Services

    7. The Commission amends Sec.  69.123 of the Commission's rules to 
permit rate-of-return carriers immediately to deaverage geographically 
their rates for transport and special access services. The Commission 
will permit rate-of-return carriers to define both the scope and number 
of zones, provided that each zone, except the highest-cost zone, 
accounts for at least 15 percent of its revenues from those services in 
the study area. The Commission will require, however, that the zones 
established for transport and special access deaveraging are consistent 
with any unbundled network element (UNE) zones adopted pursuant to the 
requirements of section 251 and will require rate-of-return carriers to 
demonstrate that rates reflect cost characteristics associated with the 
selected zones. Granting rate-of-return carriers more flexibility to 
deaverage

[[Page 25327]]

these rates enhances the efficiency of the market for those services by 
allowing prices to be tailored more easily and accurately to reflect 
costs and, therefore, facilitates competition in both higher and lower 
cost areas.
    8. The Commission's action here represents a measured modification 
of the current rule. That rule permitted rate-of-return carriers to 
deaverage these rates when a single entrant has established a cross-
connect in one central office in the rate-of-return carrier's study 
area. Thus, rather than filing deaveraged rates only when a competitor 
has entered the market via collocation, the rate-of-return carrier may 
now, immediately upon the effective date of this order, file deaveraged 
rates that may become effective in fifteen days. The greater 
flexibility afforded by the ability to deaverage transport and special 
access rates will benefit access customers through more efficient 
pricing of access services.
    9. The Commission is not persuaded that geographic deaveraging will 
lead to unreasonable, monopolistic rates in areas not served by a 
competitor. Thus, deaveraging of transport and special access rates 
should not permit rate-of-return carriers to erect barriers to entry. 
Any deaveraged rates will be subject to the tariff review and complaint 
processes. Continuing to require averaged rates could result in 
preclusion or uneconomic entry. The Commission has observed that 
averaging across large geographic areas distorts the operation of 
markets in high-cost areas because it requires incumbent LECs to offer 
services in those areas at prices substantially lower than their costs 
of providing those services. Prices that are below cost reduce the 
incentives for entry by firms that could provide the services as 
efficiently, or more efficiently, than the incumbent LEC. Similarly, 
discrepancies between price and cost may create incentives for carriers 
to enter low-cost areas even if their cost of providing service is 
actually higher than that of the incumbent LEC.
    10. The Commission simplifies its rules by allowing the rate-of-
return carrier to establish its own zones. The Commission concludes 
that granting rate-of-return carriers the flexibility to choose the 
number of zones and the criteria for establishing zone boundaries is 
more likely to result in reasonable and efficient pricing zones than if 
their flexibility is more constrained. Therefore, the Commission 
eliminates all competitive prerequisites for the deaveraging of 
transport and special access rates and permits rate-of-return carriers 
to define pricing zones as they wish, so long as each zone, except the 
highest-cost zone, accounts for at least 15 percent of the rate-of-
return carrier's transport and special access revenues in the study 
area. This ensures that any lower rates resulting from deaveraging are 
enjoyed by a range of customers, rather than being focused on only a 
few customers in a way that might evade the Commission's prohibition on 
contract pricing by rate-of-return carriers for individual customers.
    11. The permissive geographic deaveraging the Commission discusses 
here applies to rates for all services in the transport and special 
access categories to which density zone pricing currently applies. The 
Commission requires that the same zones be used for all transport and 
special access elements. The Commission retains the constraints on 
annual price increases within zones that are contained in Sec.  
69.123(e)(1) of the Commission's rules. Although such constraints limit 
rate-of-return carriers' ability immediately to rebalance rates in a 
manner that reflects the actual costs of providing the services at 
issue, the Commission remains concerned with preventing the disruptive 
effects of rapid and unexpected price increases. The Commission also 
retains the requirement that transport and special access services 
offered between telephone company locations be priced at the rates for 
the higher zone.
    12. The Commission is not persuaded that greater geographic 
deaveraging flexibility will lead to predatory pricing by incumbent 
LECs, or by arguments that any further deaveraging should result only 
in price decreases, i.e., that it be ``downward only.'' The Commission 
will no longer require rate-of-return carriers to file zone pricing 
plans in advance of tariff filings. Parties wishing to challenge the 
reasonableness of rate-of-return carrier zones may do so as part of the 
tariff review process, or in a formal complaint under section 208 of 
the Act.
    13. Under the present rules governing geographic deaveraging, rate-
of-return carriers may not deaverage transport or special access rates 
until at least one cross-connect is operational in the study area. 
Thus, a rate-of-return carrier today would have to have established a 
cross-connect charge before it could offer the allowed services at 
deaveraged rates. The cross-connect subelement recovers costs 
associated with the cross-connect cable and associated facilities 
connecting the equipment owned by or dedicated to the use of the 
interconnector with the telephone company's equipment and facilities 
used to provide interstate special or switched access services. The 
Commission concludes that a rate-of-return carrier wishing to 
geographically deaverage transport or special access rates must 
establish a cross-connect element providing for interconnection and may 
not charge collocated providers for entrance facilities or channel 
terminations when the entrant provides its own transmission facilities. 
This merely brings forward the requirement that would apply today if a 
rate-of-return carrier qualified and elected to geographically 
deaverage rates. A rate-of-return carrier that could assess such a 
charge for the combined facilities would clearly still possess some 
degree of market power, and would be attempting to use that power in an 
anticompetitive manner. Finally, the requirement that rate-of-return 
carriers must tariff a cross-connect element in order to geographically 
deaverage rates ensures that transport competitors can interconnect 
with the rate-of-return carrier's access network, whether or not rate-
of-return carriers claim exemption under either section 251(f)(1) or 
(f)(2). Thus, competition will not be foreclosed if a carrier claims 
its exemption.

Volume and Term Discounts for Transport Services

    14. Under the current rules, rate-of-return carriers are permitted 
to offer volume and term discounts for special access services. After a 
certain number of DS1 equivalent cross-connects are operational in the 
study area, they may offer such discounts for transport services. After 
reviewing the record, the Commission concludes that no relaxation of 
the requirements for offering volume and term discounts for transport 
services is warranted at the present time. The Commission retains the 
existing cross-connect-based standards as the trigger for when a rate-
of-return carrier may offer volume and term discounts for transport 
services, rather than adopting any alternative suggested in the record. 
To date, no party has taken advantage of the existing ability to offer 
volume and term discounts for transport services--whether this is 
because they cannot meet the threshold, or for some other reason, is 
not apparent from the record before us.
    15. The record indicates that there is limited competition in rate-
of-return carrier service areas that would serve to discipline the 
provision of volume and term discounted transport services offered by 
rate-of-return carriers. The Commission agrees with those parties that 
argue that wireless generally is not a substitute for transport, and 
thus

[[Page 25328]]

wireless competition is unlikely to restrain rate-of-return carrier 
pricing of transport services.
    16. The Commission is also skeptical that cable and satellite 
providers offer competition to transport services of rate-of-return 
carriers. These competitors largely bypass the rate-of-return carriers' 
switched access networks and thus do not restrain transport prices. To 
the extent that cable may, in certain instances, provide dedicated 
transmission offerings that bypass the rate-of-return carrier network, 
rate-of-return carriers today are allowed to offer volume and term 
discounts for special access services, which would be the service with 
which the entrant would be competing. Thus, the competition faced by 
rate-of-return carriers for transport services is limited and is 
significantly less than that in price cap carrier service areas.
    17. The Commission concludes that further volume and term discount 
pricing flexibility for transport services should be available only if 
there is evidence of significant competition. Volume and term discount 
pricing flexibility must be structured to prevent exclusionary pricing 
behavior to safeguard the development of competition in rate-of-return 
carrier service areas.
    18. The Commission finds that the various alternative triggers 
suggested in the record fail to address the concern with a rate-of-
return carrier's ability to erect barriers to entry and engage in price 
discrimination. While the market opening events that commenters 
identify would facilitate the development of competition, they do not, 
in and of themselves, indicate that any particular level of competition 
exists. Therefore, there would be no assurance that rate-of-return 
carriers could not erect barriers to entry, or engage in unreasonable 
price discrimination. On the other hand, competition can develop 
without an entrant with eligible telecommunications carrier (ETC) 
status being present because significant competition could exist in 
part of a rate-of-return carrier's service area before an entrant 
sought ETC status. The argument that UNEs should be available 
throughout the service area before pricing flexibility should be 
granted also fails to address the level of competition that might exist 
because an entrant might enter without using UNEs. The Commission also 
declines to adopt an approach modeled on that for price cap carriers 
because the Commission believes that the diversity among rate-of-return 
carriers and the markets they serve make those triggers an unreliable 
predictor of the competitive effects in any of the rate-of-return 
carriers' markets. The Commission believes that the actual competition 
reflected in a cross-connect standard is a better judge of when volume 
and term discounts for transport services are appropriate because it 
indicates that the rate-of-return carrier is facing actual competition 
for those services. It is also administratively easy to administer.
    19. The Commission declines to condition additional pricing 
flexibility on rate-of-return carriers being required to establish a 
ceiling rate for the associated non-discounted access service offering. 
The Commission also retains the study area as the basis to measure 
competitiveness in determining whether pricing flexibility is warranted 
for rate-of-return carriers.
    20. In addition, the Commission declines to limit the length of any 
term contract to three years. Finally, the Commission concludes that 
the record is inadequate to permit it to reach any conclusions 
regarding Phase II pricing flexibility, non-dominant treatment of any 
services, or shortened filing periods for some services.

Contract Carriage

    21. Under the current rules, rate-of-return carriers are prohibited 
from offering interstate access services pursuant to individual 
customer contracts. After reviewing the record in this proceeding, the 
Commission declines to permit rate-of-return carriers to offer contract 
carriage at this time. Contract carriage would permit a rate-of-return 
carrier to combine various elements, or parts of elements, in 
presenting an offering to a customer. This would present rate-of-return 
carriers with an opportunity to set non-cost-based prices in order to 
prevent entrants from providing service to the largest customers in 
their service areas, thereby precluding further competition for smaller 
customers in their service areas as well. The principal check on rate-
of-return carrier rates is the authorized rate of return the Commission 
has prescribed. A rate-of-return carrier is permitted to set rates that 
provide the opportunity to earn this return on the entire portion of 
their rate base that is assigned to interstate access services. 
Therefore, any predation on the part of a rate-of-return carrier in its 
contract offerings could be recovered through higher rates for other 
customers, absent some check on the rate-of-return carrier's ability to 
accomplish this result. Because any predatory pricing would restrict 
entry, there would likely be no competitor to provide an alternative to 
those customers to whom the rate-of-return carrier was charging higher 
rates. Rate-of-return carriers have not demonstrated in the record how 
such behavior can be detected and prevented within the rate-of-return 
regulatory process. The pooling process would make detection even more 
difficult. The immediate geographic deaveraging of transport and 
special access services the Commission extends to rate-of-return 
carriers, along with the volume and term pricing already available to 
rate-of-return carriers, provide them with meaningful ways to respond 
to competition. Therefore, balancing the risks of undetectable 
anticompetitive behavior against the limited competition that presently 
exists in rate-of-return carrier service areas that could be considered 
a substitute for access services, the commission believes the better 
course is the conservative one of precluding contract carriage for 
rate-of-return carriers.

Other Issues

    22. The Commission finds that the pricing flexibility permitted by 
this order can be accommodated within the pool by modifying its 
settlement and rate-setting mechanisms so they apply on a more targeted 
basis to narrower groups of customers. The Commission's current rules 
would permit such pooling to occur. Many of the rate-of-return carriers 
most likely to exercise this option--ALLTEL, CenturyTel, ACS of 
Anchorage, TDS--already file their own traffic-sensitive access tariffs 
for some or all of their study areas. Therefore, by this decision, 
smaller rate-of-return carriers may be able to offer pricing 
flexibility through the NECA traffic-sensitive pool that they would not 
be able to do if required to do so through their own tariffs. The 
tariffing costs will increase some for those carriers that elect to 
offer pricing flexibility, whether done on their own or through NECA. 
The increased administrative burdens on NECA will likely be less than 
those that would result if the Commission were to require rate-of-
return carriers to file their own tariffs proposing flexible pricing 
arrangements.
    23. The Commission declines to require rate-of-return carriers to 
leave the NECA pool and file their own tariffs in order to offer 
pricing flexibility. The Commission is not persuaded that pooling is 
inconsistent with pricing flexibility. While pooling involves a degree 
of averaging and risk sharing that would not exist if carriers filed 
their own tariffs, this is the case whether pricing flexibility is 
involved or not. Rate-of-return carriers subject to section 61.38 of 
the Commission's rules must

[[Page 25329]]

file cost support with their tariffs, and those subject to section 
61.39 must be prepared to submit cost support upon request. This 
supporting material will include a clear delineation of the 
geographically deaveraged pricing zones. It will also describe the 
process used to establish rates, whether on an individual carrier basis 
or through the use of some aggregation approach, such as the banding 
NECA currently uses for some rate elements, along with the actual cost 
support for the services for which pricing flexibility is being 
offered. While the cost support may not include individual carrier cost 
data, the NECA tariff filings offering pricing flexibility will include 
supporting material associated with the rates in question that the 
Commission and interested parties may utilize to detect efforts to 
erect barriers to entry or to establish discriminatory pricing 
practices. This is also consistent with allowing rate-of-return 
carriers to offer deaveraged SLCs within the NECA common line pool, as 
the Commission did in the MAG Order. Parties wishing to challenge the 
reasonableness of NECA's pool rates or rate development procedures may 
do so as part of the tariff review process, or in a formal complaint 
under section 208 of the Act.
    24. The Commission declines to adopt other proposed limits. It does 
not restrict the availability of pricing flexibility with respect to 
transport elements that cannot be avoided because of network design 
configuration. The Commission also declines to revise the standard 
applicable to volume and term discounts for channel terminations. 
Finally, the Commission will not limit the availability of pricing 
flexibility to rate-of-return carriers participating in an incentive 
regulation plan.

Consolidation of Long Term Support and Interstate Common Line Support

    25. The Commission merges LTS into the ICLS mechanism. First, 
merging LTS into ICLS promotes administrative simplicity. LTS and ICLS 
duplicatively provide support directed to the rate-of-return carriers' 
interstate common line costs. ICLS is narrowly tailored to individual 
carriers' support requirements under the current interstate access rate 
structure, acting as the residual source of revenue for rate-of-return 
carriers and ensuring that they can recover their common line revenue 
requirements while providing service at an affordable rate. LTS, on the 
other hand, normally provides each carrier with a fixed level of 
support grown annually by inflation and may bear little relevance to a 
particular carrier's support requirements. In most cases, LTS will not 
be sufficient to ensure that a carrier will recover its common line 
revenue requirement under the current rate structure. Although LTS 
effectively served the purposes it was designed to serve, it was not 
designed to meet the requirements of the rate-of-return access charge 
rate structure in place after the MAG Order. Eliminating LTS will make 
the interstate access rate structure and universal service mechanisms 
simpler and more transparent.
    26. The Commission's elimination of the Carrier Common Line (CCL) 
charge obviates LTS's primary historical purpose. Having outlived its 
primary purpose as of July 1, 2003, when the CCL charge was completely 
phased out, the Commission concludes that LTS should be discontinued in 
the interest of administrative simplicity.
    27. LTS's secondary role as an incentive for continued 
participation in the NECA common line pool also is no longer a valid 
reason to maintain LTS as a discrete support mechanism. LTS is only 
available to carriers that participate in the common line pool. 
Removing LTS as an artificial incentive for pool participation will 
give each carrier the freedom to choose to set rates outside of the 
NECA pool without sacrificing the universal service support that 
ensures affordable service for its customers. The Commission recognizes 
that NECA has made great strides in providing common line pool 
participants with increased flexibility in setting individual end user 
rates and that it anticipates further innovation in this respect. 
Carriers will undoubtedly regard such flexibility as a tremendous value 
in making their determinations whether to continue participating in the 
pool. Nonetheless, the Commission finds that each individual carrier is 
in the best position to decide whether pool participation promotes its 
particular best interests. The Commission concludes that the decision 
whether to participate in the pool should be left to each individual 
carrier based on the pool's inherent administrative benefits for that 
carrier without additional regulatory inducements.
    28. We do not believe that eliminating LTS as an incentive for pool 
membership will risk or undermine the important benefits for carriers 
that elect to remain in the NECA common line pool. The Commission 
recognizes the continued benefits of pooling identified by NECA and 
other commenters, including the reduction of administrative burdens 
associated with tariff-filing and protection against the effects of 
short-term revenue fluctuations. The Commission anticipates that many, 
if not most, carriers will continue participating in the common line 
pool because of such benefits. In this regard, the Commission notes 
that the NECA traffic-sensitive pool remains viable despite no 
comparable regulatory incentive for participation. Based on examination 
of the record, however, the Commission cannot conclude that the 
benefits of pooling warrant continued use of universal service support 
to induce carriers to participate in the pool if they are not otherwise 
inclined to do so.
    29. The regulatory concerns which justified the use of LTS to 
induce pool participation no longer hold. In the past, a non-pooling 
carrier might not recover its common line revenue requirement if it 
underprojected its costs or overprojected its demand in developing its 
access charge tariffs. The NECA common line pool spread that risk among 
all carriers, reducing the likelihood that any one carrier would suffer 
a major shortfall in revenue. Eliminating the CCL charge renders 
irrelevant this primary risk-pooling benefit of the common line pool. 
While the pool formerly ensured that an individual carrier would not 
suffer if CCL charge revenues were insufficient to recover its common 
line revenue requirements, the ICLS mechanism now ensures that no 
individual carrier will fail to recover its common line revenue 
requirement.
    30. In order to effectuate this decision, the Commission amends its 
rules to provide that LTS shall not be provided to any carrier 
beginning July 1, 2004. Overall support will not be reduced because the 
Commission's existing rules will operate to automatically increase ICLS 
by an amount to match any LTS reduction. For that reason, no further 
action by the Commission is necessary to implement the merger of LTS 
into ICLS.

Procedural Matters

Paperwork Reduction Act Analysis

    31. The Report and Order has been analyzed with respect to the 
Paperwork Reduction Act of 1995 and found to impose new or modified 
reporting and recordkeeping requirements or burdens on the public. 
Implementation of these new or modified reporting and recordkeeping 
requirements contained in Sec.  61.38(b)(4), Sec. Sec.  61.41(c), (d), 
and (e), and Sec.  69.123(a)(1), (a)(2), (c), and (d) will be subject 
to approval by the Office of Management and Budget (OMB) as prescribed 
by the Act, and will go into effect upon announcement in the Federal 
Register of OMB approval.

[[Page 25330]]

Final Regulatory Flexibility Act Analysis

    32. The Regulatory Flexibility Act of 1980, as amended (RFA), 
requires that a regulatory flexibility analysis be prepared for notice-
and-comment rule making proceedings, unless the agency certifies that 
``the rule will not, if promulgated, have a significant economic impact 
on a substantial number of small entities.'' The RFA generally defines 
the term ``small entity'' as having the same meaning as the terms 
``small business,'' ``small organization,'' and ``small governmental 
jurisdiction.'' In addition, the term ``small business'' has the same 
meaning as the term ``small business concern'' under the Small Business 
Act. 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).
    As required by the RFA, an Initial Regulatory Flexibility Analysis 
(IRFA) was incorporated into the MAG Further Notice. The Commission 
sought written public comment on the proposals in the MAG Further 
Notice, including comment on the IRFA. This present Final Regulatory 
Flexibility Analysis (FRFA) conforms to the RFA, as amended. To the 
extent that any statement in this FRFA is perceived as creating 
ambiguity with respect to the Commission's rules or statements made in 
the preceding sections of this Order, the rules and statements set 
forth in those preceding sections shall be controlling.

Need for, and Objectives of, the Rules

    33. In this Order, the Commission modifies its interstate access 
charge and universal service rules for LECs subject to rate-of-return 
regulation. The Order carefully considers the needs of small and mid-
sized local telephone companies serving rural and high-cost areas, in 
order to help provide certainty and stability for such carriers, 
encourage investment in rural America, and provide important consumer 
benefits.
    34. This Order addresses three of the issues raised in the MAG 
Further Notice. First, the Commission modifies the ``all-or-nothing'' 
rule to permit rate-of-return LECs to bring recently acquired price cap 
lines back to rate-of-return regulation. This will reduce the 
administrative burdens on small rate-of-return carriers of seeking a 
waiver of the all-or-nothing rule because it will permit acquired lines 
to be returned to rate-of-return regulation, and thereby will reduce 
the uncertainty associated with such acquisitions. Second, the 
Commission grants rate-of-return carriers the authority immediately to 
provide geographically deaveraged transport and special access rates, 
subject to certain limitations. This action increases the efficiency of 
the interstate access charge rate structure by moving rates towards 
cost. Finally, the Commission merges Long Term Support (LTS) into the 
ICLS mechanism. This will promote administrative simplicity by 
eliminating an unnecessarily duplicative support mechanism without 
affecting the total support received by rate-of-return carriers, and 
without negatively affecting carriers that choose to participate in the 
NECA common line pool. Because LTS, but not ICLS, is conditioned on 
participation in the common line pool, the merger will permit each 
rate-of-return carrier the freedom to choose whether to set its own 
rates without sacrificing universal service support.

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

    35. No comments were filed in response to the IRFA. However, 
certain comments filed in response to the MAG Further Notice included 
concerns that would relate to small entities. Several commenters argued 
that by eliminating the all-or-nothing rule, small, typically rural 
carriers would experience reductions in both transaction costs and 
uncertainty. Some commenters also argued that relaxing the rules on 
volume and term discounts for transport services, together with 
allowing carriers to offer services pursuant to customer contracts, 
would cause harm to small entities by foreclosing competition. Finally, 
commenters argued that merging LTS into ICLS would diminish the 
viability of the common line pool, which provides benefits to the 
small, rural carriers that participate in it.

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

    36. 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 rules adopted. In this section, the Commission further 
describes and estimates the number of small entity licensees and 
regulatees that may also be directly affected by rules adopted in this 
order. The most reliable source of information regarding the total 
numbers of certain common carrier and related providers nationwide, as 
well as the number of commercial wireless entities, appears to be the 
data that the Commission publishes in its Trends in Telephone Service 
report. The SBA has developed small business size standards for 
wireline and wireless small businesses within the three commercial 
census categories of Wired Telecommunications Carriers, Paging, and 
Cellular and Other Wireless Telecommunications. Under these categories, 
a business is small if it has 1,500 or fewer employees. Below, using 
the above size standards and others, the Commission discusses the total 
estimated numbers of small businesses that might be affected by the 
Commission's actions.
    37. The Commission has included small incumbent LECs in this 
present 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 wired telecommunications carrier having 1,500 or 
fewer employees), and ``is not dominant in its field of operation.'' 
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. The Commission has 
therefore included small incumbent LECs in this RFA analysis, although 
the Commission emphasizes that this RFA action has no effect on 
Commission analyses and determinations in other, non-RFA contexts.
    38. Wired Telecommunications Carriers. The SBA has developed a 
small business size standard for Wired Telecommunications Carriers, 
which consists of all such companies having 1,500 or fewer employees. 
According to Census Bureau data for 1997, there were 2,225 firms in 
this category, total, that operated for the entire year. Of this total, 
2,201 firms had employment of 999 or fewer employees, and an additional 
24 firms had employment of 1,000 employees or more. Thus, under this 
size standard, the majority of firms can be considered small.
    39. Incumbent Local Exchange Carriers (LECs). Neither the 
Commission nor the SBA has developed a size standard for small 
businesses specifically applicable to incumbent local exchange 
services. The closest applicable size standard under SBA rules is for 
Wired Telecommunications Carriers. Under that size standard, such a 
business is small if it has 1,500 or fewer employees. According to 
Commission data, 1,337 carriers reported that they were engaged in the 
provision of local exchange services. Of these 1,337 carriers, an 
estimated 1,032 have 1,500 or fewer employees and 305 have more than 
1,500 employees. Consequently, the Commission

[[Page 25331]]

estimates that most providers of incumbent local exchange service are 
small businesses that may be affected by the revised rules and 
policies.
    40. Competitive Local Exchange Carriers (CLECs), Competitive Access 
Providers (CAPs), and ``Other Local Exchange Carriers.'' Neither the 
Commission nor the SBA has developed a size standard for small 
businesses specifically applicable to providers of competitive exchange 
services or to competitive access providers or to ``Other Local 
Exchange Carriers,'' all of which are discrete categories under which 
TRS data are collected. The closest applicable size standard under SBA 
rules is for Wired Telecommunications Carriers. Under that size 
standard, such a business is small if it has 1,500 or fewer employees. 
According to Commission data, 609 companies reported that they were 
engaged in the provision of either competitive access provider services 
or competitive local exchange carrier services. Of these 609 companies, 
an estimated 458 have 1,500 or fewer employees and 151 have more than 
1,500 employees. In addition, 35 carriers reported that they were 
``Other Local Service Providers.'' Of the 35 ``Other Local Service 
Providers,'' an estimated 34 have 1,500 or fewer employees and one has 
more than 1,500 employees. Consequently, the Commission estimates that 
most providers of competitive local exchange service, competitive 
access providers, and ``Other Local Exchange Carriers'' are small 
entities that may be affected by the revised rules and policies.
    41. Interexchange Carriers (IXCs). Neither the Commission nor the 
SBA has developed a size standard for small businesses specifically 
applicable to interexchange services. The closest applicable size 
standard under SBA rules is for Wired Telecommunications Carriers. 
Under that size standard, such a business is small if it has 1,500 or 
fewer employees. According to Commission data, 261 companies reported 
that their primary telecommunications service activity was the 
provision of interexchange services. Of these 261 companies, an 
estimated 223 have 1,500 or fewer employees and 38 have more than 1,500 
employees. Consequently, the Commission estimates that the majority of 
interexchange service providers are small entities that may be affected 
by the revised rules and policies.
    42. Operator Service Providers (OSPs). Neither the Commission nor 
the SBA has developed a size standard for small businesses specifically 
applicable to operator service providers. The closest applicable size 
standard under SBA rules is for Wired Telecommunications Carriers. 
Under that size standard, such a business is small if it has 1,500 or 
fewer employees. According to Commission data, 23 companies reported 
that they were engaged in the provision of operator services. Of these 
23 companies, an estimated 22 have 1,500 or fewer employees and one has 
more than 1,500 employees. Consequently, the Commission estimates that 
the majority of operator service providers are small entities that may 
be affected by the revised rules and policies.
    43. Payphone Service Providers (PSPs). Neither the Commission nor 
the SBA has developed a size standard for small businesses specifically 
applicable to payphone service providers. The closest applicable size 
standard under SBA rules is for Wired Telecommunications Carriers. 
Under that size standard, such a business is small if it has 1,500 or 
fewer employees. According to Commission data, 761 companies reported 
that they were engaged in the provision of payphone services. Of these 
761 companies, an estimated 757 have 1,500 or fewer employees and four 
have more than 1,500 employees. Consequently, the Commission estimates 
that the majority of payphone service providers are small entities that 
may be affected by the revised rules and policies.
    44. Prepaid Calling Card Providers. The SBA has developed a size 
standard for a small business within the category of Telecommunications 
Resellers. Under that SBA size standard, such a business is small if it 
has 1,500 or fewer employees. According to Commission data, 37 
companies reported that they were engaged in the provision of prepaid 
calling cards. Of these 37 companies, an estimated 36 have 1,500 or 
fewer employees and one has more than 1,500 employees. Consequently, 
the Commission estimates that the majority of prepaid calling card 
providers are small entities that may be affected by the revised rules 
and policies.
    45. Other Toll Carriers. Neither the Commission nor the SBA has 
developed a size standard for small businesses specifically applicable 
to ``Other Toll Carriers.'' This category includes toll carriers that 
do not fall within the categories of interexchange carriers, operator 
service providers, prepaid calling card providers, satellite service 
carriers, or toll resellers. The closest applicable size standard under 
SBA rules is for Wired Telecommunications Carriers. Under that size 
standard, such a business is small if it has 1,500 or fewer employees. 
According to Commission's data, 92 companies reported that their 
primary telecommunications service activity was the provision of other 
toll carriage. Of these 92 companies, an estimated 82 have 1,500 or 
fewer employees and ten have more than 1,500 employees. Consequently, 
the Commission estimates that most ``Other Toll Carriers'' are small 
entities that may be affected by the revised rules and policies.
    46. Paging. The SBA has developed a small business size standard 
for Paging, which consists of all such firms having 1,500 or fewer 
employees. According to Census Bureau data for 1997, in this category 
there was a total of 1,320 firms that operated for the entire year. Of 
this total, 1,303 firms had employment of 999 or fewer employees, and 
an additional seventeen firms had employment of 1,000 employees or 
more. Thus, under this size standard, the majority of firms can be 
considered small.
    47. Cellular and Other Wireless Telecommunications. The SBA has 
developed a small business size standard for Cellular and Other 
Wireless Telecommunication, which consists of all such firms having 
1,500 or fewer employees. According to Census Bureau data for 1997, in 
this category there was a total of 977 firms that operated for the 
entire year. Of this total, 965 firms had employment of 999 or fewer 
employees, and an additional twelve firms had employment of 1,000 
employees or more. Thus, under this size standard, the majority of 
firms can be considered small.
    48. Broadband Personal Communications Service. The broadband 
Personal Communications Service (PCS) spectrum is divided into six 
frequency blocks designated A through F, and the Commission has held 
auctions for each block. The Commission defined ``small entity'' for 
Blocks C and F as an entity that has average gross revenues of $40 
million or less in the three previous calendar years. For Block F, an 
additional classification for ``very small business'' was added and is 
defined as an entity that, together with its affiliates, has average 
gross revenues of not more than $15 million for the preceding three 
calendar years.'' These standards defining ``small entity'' in the 
context of broadband PCS auctions have been approved by the SBA. No 
small businesses, within the SBA-approved small business size standards 
bid successfully for licenses in Blocks A and B. There were 90 winning 
bidders that qualified as small entities in the

[[Page 25332]]

Block C auctions. A total of 93 small and very small business bidders 
won approximately 40 percent of the 1,479 licenses for Blocks D, E, and 
F. On March 23, 1999, the Commission re-auctioned 347 C, D, E, and F 
Block licenses. There were 48 small business winning bidders. On 
January 26, 2001, the Commission completed the auction of 422 C and F 
Broadband PCS licenses in Auction No. 35. Of the 35 winning bidders in 
this auction, 29 qualified as ``small'' or ``very small'' businesses. 
Based on this information, the Commission concludes that the number of 
small broadband PCS licenses will include the 90 winning C Block 
bidders, the 93 qualifying bidders in the D, E, and F Block auctions, 
the 48 winning bidders in the 1999 re-auction, and the 29 winning 
bidders in the 2001 re-auction, for a total of 260 small entity 
broadband PCS providers, as defined by the SBA small business size 
standards and the Commission's auction rules. The Commission notes 
that, as a general matter, the number of winning bidders that qualify 
as small businesses at the close of an auction does not necessarily 
represent the number of small businesses currently in service. Also, 
the Commission does not generally track subsequent business size 
unless, in the context of assignments or transfers, unjust enrichment 
issues are implicated.
    49. Narrowband Personal Communications Services. To date, two 
auctions of narrowband personal communications services (PCS) licenses 
have been conducted. For purposes of the two auctions that have already 
been held, ``small businesses'' were entities with average gross 
revenues for the prior three calendar years of $40 million or less. 
Through these auctions, the Commission has awarded a total of 41 
licenses, out of which 11 were obtained by small businesses. To ensure 
meaningful participation of small business entities in future auctions, 
the Commission has adopted a two-tiered small business size standard in 
the Narrowband PCS Second Report and Order. A ``small business'' is an 
entity that, together with affiliates and controlling interests, has 
average gross revenues for the three preceding years of not more than 
$40 million. A ``very small business'' is an entity that, together with 
affiliates and controlling interests, has average gross revenues for 
the three preceding years of not more than $15 million. The SBA has 
approved these small business size standards. In the future, the 
Commission will auction 459 licenses to serve Metropolitan Trading 
Areas (MTAs) and 408 response channel licenses. There is also one 
megahertz of narrowband PCS spectrum that has been held in reserve and 
that the Commission has not yet decided to release for licensing. The 
Commission cannot predict accurately the number of licenses that will 
be awarded to small entities in future actions. However, four of the 16 
winning bidders in the two previous narrowband PCS auctions were small 
businesses, as that term was defined under the Commission's Rules. The 
Commission assumes, for purposes of this analysis, that a large portion 
of the remaining narrowband PCS licenses will be awarded to small 
entities. The Commission also assumes that at least some small 
businesses will acquire narrowband PCS licenses by means of the 
Commission's partitioning and disaggregation rules.
    50. 220 MHz Radio Service--Phase I Licensees. The 220 MHz service 
has both Phase I and Phase II licenses. Phase I licensing was conducted 
by lotteries in 1992 and 1993. There are approximately 1,515 such non-
nationwide licensees and four nationwide licensees currently authorized 
to operate in the 220 MHz band. The Commission has not developed a 
small business size standard for small entities specifically applicable 
to such incumbent 220 MHz Phase I licensees. To estimate the number of 
such licensees that are small businesses, the Commission applies the 
small business size standard under the SBA rules applicable to 
``Cellular and Other Wireless Telecommunications'' companies. This 
standard provides that such a company is small if it employs no more 
than 1,500 persons. According to Census Bureau data for 1997, there 
were 977 firms in this category, that operated for the entire year. Of 
this total, 965 firms had employment of 999 or fewer employees, and an 
additional 12 firms had employment of 1,000 employees or more. If this 
general ratio continues in the context of Phase I 220 MHz licensees, 
the Commission estimates that nearly all such licensees are small 
businesses under the SBA's small business size standard.
    51. 220 MHz Radio Service--Phase II Licensees. The 220 MHz service 
has both Phase I and Phase II licenses. The Phase II 220 MHz service is 
a new service, and is subject to spectrum auctions. In the 220 MHz 
Third Report and Order, the Commission adopted a small business size 
standard for ``small'' and ``very small'' businesses for purposes of 
determining their eligibility for special provisions such as bidding 
credits and installment payments. This small business size standard 
indicates that a ``small business'' is an entity that, together with 
its affiliates and controlling principals, has average gross revenues 
not exceeding $15 million for the preceding three years. A ``very small 
business'' is an entity that, together with its affiliates and 
controlling principals, has average gross revenues that do not exceed 
$3 million for the preceding three years. The SBA has approved these 
small business size standards. Auctions of Phase II licenses commenced 
on September 15, 1998, and closed on October 22, 1998. In the first 
auction, 908 licenses were auctioned in three different-sized 
geographic areas: three nationwide licenses, 30 Regional Economic Area 
Group (EAG) Licenses, and 875 Economic Area (EA) Licenses. Of the 908 
licenses auctioned, 693 were sold. Thirty-nine small businesses won 
licenses in the first 220 MHz auction. The second auction included 225 
licenses: 216 EA licenses and 9 EAG licenses. Fourteen companies 
claiming small business status won 158 licenses.
    52. 800 MHz and 900 MHz Specialized Mobile Radio Licenses. The 
Commission awards ``small entity'' and ``very small entity'' bidding 
credits in auctions for Specialized Mobile Radio (SMR) geographic area 
licenses in the 900 MHz bands to firms that had revenues of no more 
than $15 million in each of the three previous calendar years, or that 
had revenues of no more than $3 million in each of the previous 
calendar years. The SBA has approved these size standards. The 
Commission awards ``small entity'' and ``very small entity'' bidding 
credits in auctions for Specialized Mobile Radio (SMR) geographic area 
licenses in the 800 MHz bands to firms that had revenues of no more 
than $40 million in each of the three previous calendar years, or that 
had revenues of no more than $15 million in each of the previous 
calendar years. These bidding credits apply to SMR providers in the 800 
MHz and 900 MHz bands that either hold geographic area licenses or have 
obtained extended implementation authorizations. The Commission does 
not know how many firms provide 800 MHz or 900 MHz geographic area SMR 
service pursuant to extended implementation authorizations, nor how 
many of these providers have annual revenues of no more than $15 
million. One firm has over $15 million in revenues. The Commission 
assumes, for purposes here, that all of the remaining existing extended 
implementation authorizations are held by small entities, as that term 
is defined by the SBA. The Commission has held auctions for geographic 
area licenses in the 800 MHz and 900 MHz SMR bands. There were 60 
winning bidders that

[[Page 25333]]

qualified as small or very small entities in the 900 MHz SMR auctions. 
Of the 1,020 licenses won in the 900 MHz auction, bidders qualifying as 
small or very small entities won 263 licenses. In the 800 MHz auction, 
38 of the 524 licenses won were won by small and very small entities. 
The Commission notes that, as a general matter, the number of winning 
bidders that qualify as small businesses at the close of an auction 
does not necessarily represent the number of small businesses currently 
in service. Also, the Commission does not generally track subsequent 
business size unless, in the context of assignments or transfers, 
unjust enrichment issues are implicated.
    53. Private and Common Carrier Paging. In the Paging Third Report 
and Order, the Commission developed a small business size standard for 
``small businesses'' and ``very small businesses'' for purposes of 
determining their eligibility for special provisions such as bidding 
credits and installment payments. A ``small business'' is an entity 
that, together with its affiliates and controlling principals, has 
average gross revenues not exceeding $15 million for the preceding 
three years. Additionally, a ``very small business'' is an entity that, 
together with its affiliates and controlling principals, has average 
gross revenues that are not more than $3 million for the preceding 
three years. The SBA has approved these size standards. An auction of 
Metropolitan Economic Area licenses commenced on February 24, 2000, and 
closed on March 2, 2000. Of the 985 licenses auctioned, 440 were sold. 
Fifty-seven companies claiming small business status won. At present, 
there are approximately 24,000 Private-Paging site-specific licenses 
and 74,000 Common Carrier Paging licenses. According to the most recent 
Trends in Telephone Service, 471 carriers reported that they were 
engaged in the provision of either paging and messaging services or 
other mobile services. Of those, the Commission estimates that 450 are 
small, under the SBA business size standard specifying that firms are 
small if they have 1,500 or fewer employees.
    54. 700 MHz Guard Band Licensees. In the 700 MHz Guard Band Order, 
the Commission adopted a small business size standard for ``small 
businesses'' and ``very small businesses'' for purposes of determining 
their eligibility for special provisions such as bidding credits and 
installment payments. A ``small business'' as an entity that, together 
with its affiliates and controlling principals, has average gross 
revenues not exceeding $15 million for the preceding three years. 
Additionally, a ``very small business'' is an entity that, together 
with its affiliates and controlling principals, has average gross 
revenues that are not more than $3 million for the preceding three 
years. An auction of 52 Major Economic Area (MEA) licenses commenced on 
September 6, 2000, and closed on September 21, 2000. Of the 104 
licenses auctioned, 96 licenses were sold to nine bidders. Five of 
these bidders were small businesses that won a total of 26 licenses. A 
second auction of 700 MHz Guard Band licenses commenced on February 13, 
2001 and closed on February 21, 2001. All eight of the licenses 
auctioned were sold to three bidders. One of these bidders was a small 
business that won a total of two licenses.
    55. Rural Radiotelephone Service. The Commission has not adopted a 
size standard for small businesses specific to the Rural Radiotelephone 
Service. A significant subset of the Rural Radiotelephone Service is 
the Basic Exchange Telephone Radio System (BETRS). The Commission uses 
the SBA's small business size standard applicable to ``Cellular and 
Other Wireless Telecommunications,'' i.e., an entity employing no more 
than 1,500 persons. There are approximately 1,000 licensees in the 
Rural Radiotelephone Service, and the Commission estimates that there 
are 1,000 or fewer small entity licensees in the Rural Radiotelephone 
Service that may be affected by the revised rules and policies.
    56. Air-Ground Radiotelephone Service. The Commission has not 
adopted a small business size standard specific to the Air-Ground 
Radiotelephone Service. The Commission will use SBA's small business 
size standard applicable to ``Cellular and Other Wireless 
Telecommunications,'' i.e., an entity employing no more than 1,500 
persons. There are approximately 100 licensees in the Air-Ground 
Radiotelephone Service, and the Commission estimates that almost all of 
them qualify as small under the SBA small business size standard.
    57. Aviation and Marine Radio Services. Small businesses in the 
aviation and marine radio services use a very high frequency (VHF) 
marine or aircraft radio and, as appropriate, an emergency position-
indicating radio beacon (and/or radar) or an emergency locator 
transmitter. The Commission has not developed a small business size 
standard specifically applicable to these small businesses. For 
purposes of this analysis, the Commission uses the SBA small business 
size standard for the category ``Cellular and Other 
Telecommunications,'' which is 1,500 or fewer employees. Most 
applicants for recreational licenses are individuals. Approximately 
581,000 ship station licensees and 131,000 aircraft station licensees 
operate domestically and are not subject to the radio carriage 
requirements of any statute or treaty. For purposes of its evaluations 
in this analysis, the Commission estimates that there are up to 
approximately 712,000 licensees that are small businesses (or 
individuals) under the SBA standard. In addition, between December 3, 
1998 and December 14, 1998, the Commission held an auction of 42 VHF 
Public Coast licenses in the 157.1875-157.4500 MHz (ship transmit) and 
161.775-162.0125 MHz (coast transmit) bands. For purposes of the 
auction, the Commission defined a ``small'' business as an entity that, 
together with controlling interests and affiliates, has average gross 
revenues for the preceding three years not to exceed $15 million. In 
addition, a ``very small'' business is one that, together with 
controlling interests and affiliates, has average gross revenues for 
the preceding three years not to exceed $3 million. There are 
approximately 10,672 licensees in the Marine Coast Service, and the 
Commission estimates that almost all of them qualify as ``small'' 
businesses under the above special small business size standards.
    58. Fixed Microwave Services. Fixed microwave services include 
common carrier, private operational-fixed and broadcast auxiliary radio 
services. At present, there are approximately 22,015 common carrier 
fixed licensees and 61,670 private operational-fixed licensees and 
broadcast auxiliary radio licensees in the microwave services. The 
Commission has not created a size standard for a small business 
specifically with respect to fixed microwave services. For purposes of 
this analysis, the Commission uses the SBA small business size standard 
for the category ``Cellular and Other Telecommunications,'' which is 
1,500 or fewer employees. The Commission does not have data specifying 
the number of these licensees that have more than 1,500 employees, and 
thus is unable at this time to estimate with greater precision the 
number of fixed microwave service licensees that would qualify as small 
business concerns under the SBA's small business size standard. 
Consequently, the Commission estimates that there are up to 22,015 
common carrier fixed licensees and up to 61,670 private operational-
fixed licensees and broadcast auxiliary radio licensees in the 
microwave services that may be

[[Page 25334]]

small and may be affected by the revised rules and policies. The 
Commission notes, however, that the common carrier microwave fixed 
licensee category includes some large entities.
    59. Offshore Radiotelephone Service. This service operates on 
several UHF television broadcast channels that are not used for 
television broadcasting in the coastal areas of states bordering the 
Gulf of Mexico. There are presently approximately 55 licensees in this 
service. The Commission is unable to estimate at this time the number 
of licensees that would qualify as small under the SBA's small business 
size standard for ``Cellular and Other Wireless Telecommunications'' 
services. Under that SBA small business size standard, a business is 
small if it has 1,500 or fewer employees.
    60. Wireless Communications Services. This service can be used for 
fixed, mobile, radiolocation, and digital audio broadcasting satellite 
uses. The Commission established small business size standards for the 
wireless communications services (WCS) auction. A ``small business'' is 
an entity with average gross revenues of $40 million for each of the 
three preceding years, and a ``very small business'' is an entity with 
average gross revenues of $15 million for each of the three preceding 
years. The SBA has approved these small business size standards. The 
Commission auctioned geographic area licenses in the WCS service. In 
the auction, there were seven winning bidders that qualified as ``very 
small business'' entities, and one that qualified as a ``small 
business'' entity. The Commission concludes that the number of 
geographic area WCS licensees affected by this analysis includes these 
eight entities.
    61. 39 GHz Service. The Commission created a special small business 
size standard for 39 GHz licenses--an entity that has average gross 
revenues of $40 million or less in the three previous calendar years. 
An additional size standard for ``very small business'' is: an entity 
that, together with affiliates, has average gross revenues of not more 
than $15 million for the preceding three calendar years. The SBA has 
approved these small business size standards. The auction of the 2,173 
39 GHz licenses began on April 12, 2000 and closed on May 8, 2000. The 
18 bidders who claimed small business status won 849 licenses. 
Consequently, the Commission estimates that 18 or fewer 39 GHz 
licensees are small entities that may be affected by the revised rules 
and policies.
    62. Multipoint Distribution Service, Multichannel Multipoint 
Distribution Service, and ITFS. Multichannel Multipoint Distribution 
Service (MMDS) systems, often referred to as ``wireless cable,'' 
transmit video programming to subscribers using the microwave 
frequencies of the Multipoint Distribution Service (MDS) and 
Instructional Television Fixed Service (ITFS). In connection with the 
1996 MDS auction, the Commission established a small business size 
standard as an entity that had annual average gross revenues of less 
than $40 million in the previous three calendar years. The MDS auctions 
resulted in 67 successful bidders obtaining licensing opportunities for 
493 Basic Trading Areas (BTAs). Of the 67 auction winners, 61 met the 
definition of a small business. MDS also includes licensees of stations 
authorized prior to the auction. In addition, the SBA has developed a 
small business size standard for Cable and Other Program Distribution, 
which includes all such companies generating $12.5 million or less in 
annual receipts. According to Census Bureau data for 1997, there were a 
total of 1,311 firms in this category, total, that had operated for the 
entire year. Of this total, 1,180 firms had annual receipts of under 
$10 million and an additional 52 firms had receipts of $10 million or 
more but less than $25 million. Consequently, the Commission estimates 
that the majority of providers in this service category are small 
businesses that may be affected by the revised rules and policies. This 
SBA small business size standard also appears applicable to ITFS. There 
are presently 2,032 ITFS licensees. All but 100 of these licenses are 
held by educational institutions. Educational institutions are included 
in this analysis as small entities. Thus, the Commission tentatively 
concludes that at least 1,932 licensees are small businesses.
    63. Local Multipoint Distribution Service. Local Multipoint 
Distribution Service (LMDS) is a fixed broadband point-to-multipoint 
microwave service that provides for two-way video telecommunications. 
The auction of the 1,030 Local Multipoint Distribution Service (LMDS) 
licenses began on February 18, 1998 and closed on March 25, 1998. The 
Commission established a small business size standard for LMDS licenses 
as an entity that has average gross revenues of less than $40 million 
in the three previous calendar years. An additional small business size 
standard for ``very small business'' was added as an entity that, 
together with its affiliates, has average gross revenues of not more 
than $15 million for the preceding three calendar years. The SBA has 
approved these small business size standards in the context of LMDS 
auctions. There were 93 winning bidders that qualified as small 
entities in the LMDS auctions. A total of 93 small and very small 
business bidders won approximately 277 A Block licenses and 387 B Block 
licenses. On March 27, 1999, the Commission re-auctioned 161 licenses; 
there were 40 winning bidders. Based on this information, the 
Commission concludes that the number of small LMDS licenses consists of 
the 93 winning bidders in the first auction and the 40 winning bidders 
in the re-auction, for a total of 133 small entity LMDS providers.
    64. 218-219 MHz Service. The first auction of 218-219 MHz spectrum 
resulted in 170 entities winning licenses for 594 Metropolitan 
Statistical Area licenses. Of the 594 licenses, 557 were won by 
entities qualifying as a small business. For that auction, the small 
business size standard was an entity that, together with its 
affiliates, has no more than a $6 million net worth and, after federal 
income taxes (excluding any carry over losses), has no more than $2 
million in annual profits each year for the previous two years. In the 
218-219 MHz Report and Order and Memorandum Opinion and Order, the 
Commission established a small business size standard for a ``small 
business'' as an entity that, together with its affiliates and persons 
or entities that hold interests in such an entity and their affiliates, 
has average annual gross revenues not to exceed $15 million for the 
preceding three years. A ``very small business'' is defined as an 
entity that, together with its affiliates and persons or entities that 
hold interests in such an entity and its affiliates, has average annual 
gross revenues not to exceed $3 million for the preceding three years. 
The SBA has approved these size standards. The Commission cannot 
estimate, however, the number of licenses that will be won by entities 
qualifying as small or very small businesses under the Commission's 
rules in future auctions of 218-219 MHz spectrum.
    65. 24 GHz--Incumbent Licensees. This analysis may affect incumbent 
licensees who were relocated to the 24 GHz band from the 18 GHz band, 
and applicants who wish to provide services in the 24 GHz band. The 
applicable SBA small business size standard is that of ``Cellular and 
Other Wireless Telecommunications'' companies. This category provides 
that such a company is small if it employs no more than 1,500 persons. 
According to Census Bureau data for 1997, there were 977 firms in this 
category that operated for

[[Page 25335]]

the entire year. Of this total, 965 firms had employment of 999 or 
fewer employees, and an additional 12 firms had employment of 1,000 
employees or more. Thus, under this size standard, the great majority 
of firms can be considered small. These broader census data 
notwithstanding, the Commission believes that there are only two 
licensees in the 24 GHz band that were relocated from the 18 GHz band, 
Teligent and TRW, Inc. It is the Commission's understanding that 
Teligent and its related companies have less than 1,500 employees, 
though this may change in the future. TRW is not a small entity. Thus, 
only one incumbent licensee in the 24 GHz band is a small business 
entity.
    66. 24 GHz--Future Licensees. With respect to new applicants in the 
24 GHz band, the small business size standard for ``small business'' is 
an entity that, together with controlling interests and affiliates, has 
average annual gross revenues for the three preceding years not in 
excess of $15 million. ``Very small business'' in the 24 GHz band is an 
entity that, together with controlling interests and affiliates, has 
average gross revenues not exceeding $3 million for the preceding three 
years. The SBA has approved these small business size standards. These 
size standards will apply to the future auction, if held.

Description of Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    67. The Order permits rate-of-return carriers acquiring price cap 
lines to return those lines to rate-of-return regulation without 
seeking a waiver. As a result, the administrative costs of seeking a 
waiver are avoided.
    68. The Order also permits rate-of-return carriers to deaverage 
geographically their rates for transport and special access services 
within a study area. While rate-of-return carriers must define the 
scope of zones, the requirement that they be approved in advance is 
eliminated. The carrier is now required to demonstrate that each zone, 
except the highest-cost zone, accounts for at least 15 percent of its 
revenues from services in the study area, and must demonstrate that 
rates reflect cost characteristics associated with the selected zones.
    69. Merging LTS into ICLS will promote administrative simplicity by 
eliminating a duplicative support mechanism without affecting the 
amount of universal service support received by small entities or 
negatively affecting carriers that choose to participate in the NECA 
common line pool.

Steps Taken To Minimize Significant Economic Impact on Small Entities, 
and Significant Alternatives Considered

    70. The Commission has sought to minimize significant economic 
impacts on small entities, including small telephone companies, in 
revising the access and universal service rules in the Order. The 
Commission's approach is tailored to the specific challenges faced by 
small local telephone companies, many of which serve rural and high-
cost areas.
    71. The Commission considered whether to eliminate completely the 
``all-or-nothing'' rule, but decided only to carve out an exception for 
rate-of-return carriers that wish to return the acquired price cap 
lines to rate-of-return regulation. This eliminates the need for a 
waiver before such acquisitions can be returned to rate-of-return 
regulation, thereby reducing transaction costs and uncertainty for 
small, typically rural carriers seeking to acquire lines from price cap 
carriers. The Commission continues to explore further modifications to 
the all-or-nothing rule within the larger context of incentive 
regulation for rate-of-return carriers in a Second Further Notice.
    72. The Order permits rate-of-return carriers to geographically 
deaverage their rates for special access and transport services. The 
Commission gives rate-of-return carriers significant latitude to define 
pricing zones as they wish, subject to the limitation that each zone, 
except the highest-cost zone, must account for at least 15 percent of 
the rate-of-return carrier's transport and special access revenues in 
the study area. This requirement ensures that any lower rates resulting 
from deaveraging are enjoyed by a range of customers, rather than being 
focused on only a few customers in a way that might evade the 
Commission's prohibition on contract pricing by rate-of-return 
carriers. The Order continues to require rate-of-return carriers to 
have a tariffed cross-connect element in order to geographically 
deaverage rates, thereby ensuring that transport competitors, including 
small entities, can interconnect with the rate-of-return carrier's 
access network when it deaverages its special access and transport 
rates. In reaching this decision, the Commission considered and 
rejected claims by IXCs that immediate geographic deaveraging would 
lead to predatory pricing by rate-of-return carriers and that further 
deaveraging should result only in price decreases. The Order determines 
that permitting rate-of-return carriers to deaverage the rates for 
special access and transport services enhances the efficiency of the 
market for those services by allowing prices to be tailored more easily 
and accurately to reflect costs and, therefore, facilitates competition 
in both higher and lower cost areas. Rate-of-return carriers must 
provide cost support establishing that the deaveraged rates are cost-
based, thereby ensuring that smaller, more vulnerable carriers are 
safeguarded from any such predatory pricing.
    73. The Order also permits geographic deaveraging of rates for 
special access and transport services within the NECA pooling process. 
As a result, smaller rate-of-return carriers may be able to realize 
increased pricing flexibility through the NECA traffic-sensitive pool. 
Such increased pricing flexibility might not have been possible if they 
were required to file their own tariffs.
    74. The Order declines to relax the existing competitive triggers 
for volume and term discounts for transport services, as many rate-of-
return carriers urged. The Commission was concerned that the premature 
grant of such discount authority would permit a rate-of-return carrier 
to lock up large customers by offering them volume and term discounts 
at or below cost. Such discounts would potentially foreclose 
competition for smaller customers because large customers may create 
the inducement for potential competitors to invest in facilities which, 
once put into service, can be used to serve adjacent smaller customers. 
Accordingly, the Commission refuses to adopt less restrictive 
competitive triggers that would have more readily facilitated volume 
and term discounts, because such new triggers would not have ensured 
the presence of a competitor that would operate to prevent harm to 
smaller entities.
    75. The Order also declines to permit rate-of-return carriers to 
offer services pursuant to individual customer contracts, as many rate-
of-return carriers urged. Such an ability to combine various elements 
or parts of elements, the Commission notes, would allow rate-of-return 
carriers to set non-cost-based prices in order to prevent entrants from 
providing service to the largest customers in their service areas, 
thereby precluding further competition for smaller customers in their 
service areas as well.
    76. The Order merges LTS into the ICLS mechanism. This will 
simplify the administration of common line support measures, while 
ensuring both that no individual carrier will fail to recover its 
common line revenue requirement, and that overall support will not be 
reduced as existing rules operate to automatically increase ICLS by an

[[Page 25336]]

amount to match any LTS reduction. Accordingly, the concerns of small 
entities over the elimination of LTS are fully addressed by the new 
ICLS mechanism. In reaching this conclusion, the Commission considered 
and rejected NECA's argument that the elimination of LTS will 
destabilize the NECA pool. The Order concludes that although many, if 
not most, carriers will continue participating in the common line pool, 
the benefits of pooling do not warrant the continued use of universal 
service support as a way to induce carriers to participate in the pool 
if they are not otherwise inclined to do so.

Report to Congress

    77. The Commission will send a copy of the Order, including the 
FRFA, in a report to be sent to Congress pursuant to the Congressional 
Review Act. In addition, the Commission will send a copy of the Order, 
including the FRFA, to the Chief Counsel for Advocacy of the Small 
Business Administration. A copy of the Order and FRFA (or summaries 
thereof) will also be published in the Federal Register.

Ordering Clauses

    78. 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 Report and Order is 
adopted.
    79. Parts 54, 61, and 69 of the Commission's rules, 47 CFR Parts 
54, 61, and 69, are amended as set forth in the rule changes hereto, 
effective 30 days after their publication in the Federal Register, 
except that Sec.  61.38(b)(4), Sec. Sec.  61.41(c), (d), and (e), and 
Sec.  69.123(a)(1), (a)(2), (c), and (d), which contain collections of 
information, are contingent upon approval by the Office of Management 
and Budget.
    80. The Commission's Consumer and Governmental Affairs Bureau, 
Reference Information Center, shall send a copy of this Order, 
including the Final Regulatory Flexibility Analysis, to the Chief 
Counsel for Advocacy of the Small Business Administration.

List of Subjects

47 CFR Part 54

    Communications common carriers, Telecommunications, Telephone.

47 CFR Parts 61 and 69

    Communications common carriers, Telephone.

Federal Communications Commission.
Marlene H. Dortch,
Secretary.

Rule Changes

0
For the reasons discussed in the preamble, the Federal Communications 
Commission amends 47 CFR parts 54, 61, and 69 of the Code of Federal 
Regulations as follows:

PART 54--UNIVERSAL SERVICE

0
1. The authority citation continues to read as follows:

    Authority: 47 U.S.C. 1, 4(i), 201, 205, 214, and 254 unless 
otherwise noted.


0
2. Section 54.303(a) is revised by adding a second sentence to read as 
follows:


Sec.  54.303  Long term support.

    (a) * * * Beginning July 1, 2004, no carrier shall receive Long 
Term Support.
* * * * *

PART 61--TARIFFS

0
3. The authority citation continues to read as follows:

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


Sec.  61.38  [Amended]


0
4. Section 61.38 is amended by removing and reserving paragraph (b)(4).

0
5. Section 61.41 is amended by revising paragraphs (c) introductory 
text and (d) and adding a new paragraph (e) to read as follows:


Sec.  61.41  Price cap requirements generally.

* * * * *
    (c) Except as provided in paragraph (e) of this section, the 
following rules in this paragraph (c) apply to telephone companies 
subject to price cap regulation, as that term is defined in Sec.  
61.3(ee), which are involved in mergers, acquisitions, or similar 
transactions.
* * * * *
    (d) Except as provided in paragraph (e) of this section, local 
exchange carriers that become subject to price cap regulation as that 
term is defined in Sec.  61.3(ee) shall not be eligible to withdraw 
from such regulation.
    (e) Notwithstanding the requirements of paragraphs (c) and (d) of 
this section, a telephone company subject to rate-of-return regulation 
may return lines acquired from a telephone company subject to price cap 
regulation to rate-of-return regulation, provided that the acquired 
lines will not be subject to average schedule settlements, and provided 
further that the telephone company subject to rate-of-return regulation 
may not for five years elect price cap regulation for itself, or by any 
means cause the acquired lines to become subject to price cap 
regulation.

PART 69--ACCESS CHARGES

0
6. The authority citation continues to read as follows:

    Authority: 47 U.S.C. 154, 201, 202, 203, 205, 218, 220, 254, 
403.


0
7. Section 69.123 is amended by revising paragraphs (a)(1), (c), and 
(d) introductory text and by removing and reserving paragraph (a)(2) to 
read as follows:


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

    (a)(1) Incumbent local exchange carriers not subject to price cap 
regulation may establish any number of density zones within a study 
area that is used for purposes of jurisdictional separations, provided 
that each zone, except the highest-cost zone, accounts for at least 15 
percent of that carrier's special access and transport revenues within 
that study area, calculated pursuant to the methodology set forth in 
Sec.  69.725.
* * * * *
    (c) Notwithstanding Sec.  69.3(e)(7), in study areas in which a 
telephone company offers a cross-connect, as described in Sec.  
69.121(a)(1), for the transmission of interstate special access 
traffic, telephone companies may charge rates for special access sub-
elements of DS1, DS3, and such other special access services as the 
Commission may designate, that differ depending on the zone in which 
the service is offered, provided that the charges for any such service 
shall not be deaveraged within any such zone.
* * * * *
    (d) Notwithstanding Sec.  69.3(e)(7), in study areas in which a 
telephone company offers a cross-connect, as described in Sec.  
69.121(a)(1), for the transmission of interstate switched traffic, or 
is using collocated facilities to interconnect with telephone company 
interstate switched transport services, telephone companies may charge 
rates for sub-elements of direct-trunked transport, tandem-switched 
transport, entrance facilities, and dedicated signaling transport that 
differ depending on the zone in which the service is offered, provided 
that the charge for any

[[Page 25337]]

such service shall not be deaveraged within any such zone.
* * * * *

[FR Doc. 04-10334 Filed 5-5-04; 8:45 am]
BILLING CODE 6712-01-P