[Federal Register Volume 70, Number 70 (Wednesday, April 13, 2005)]
[Proposed Rules]
[Pages 19381-19396]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-7350]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 69

[WC Docket No. 05-25; RM-10593; FCC 05-18]


Special Access Rates for Price Cap Local Exchange Carriers

AGENCY: Federal Communications Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: In this document, the Commission initiates a rulemaking 
proceeding to determine the regulatory framework to apply to price cap 
local exchange carriers' (LECs) interstate special access services 
after June 30, 2005, including whether to maintain, modify, or repeal 
the pricing flexibility rules. Bell Operating Company (BOC) interstate 
special access services have assumed increasing significance as a key 
input for business customers, commercial mobile radio service (CMRS) 
providers, interexchange carriers (IXCs), and competitive LECs, and BOC 
revenues from these services have increased significantly since price 
cap regulation began.

DATES: Comments are due on or before June 13, 2005 and reply comments 
are due on or before July 12, 2005.

ADDRESSES: All filings must be sent to the Commission's Secretary, 
Marlene H. Dortch, 445 12th Street, SW., TW-B204, Washington, D.C. 
20554. Parties should also send a copy of their paper filings to 
Margaret Dailey, Pricing Policy Division, Wireline Competition Bureau, 
Federal Communications Commission, Room 5-A232, 445 12th Street, SW., 
Washington, DC 20554. Parties shall also serve one copy with the 
Commission's copy contractor, Best

[[Page 19382]]

Copy and Printing, Inc. (BCPI), Portals II, 445 12th Street, SW., Room 
CY-B402, Washington, DC 20554.

FOR FURTHER INFORMATION CONTACT: Margaret Dailey, Wireline Competition 
Bureau, Pricing Policy Division (202) 418-1520, 
[email protected].

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Notice 
of Proposed Rulemaking (NPRM) in WC Docket No. 05-25, RM-10593, FCC 05-
18, adopted on January 19, 2005, and released on January 31, 2005. The 
full text of this document is available on the Commission's Internet 
site at http://www.fcc.gov and 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 FCC's Reference Information Center, Room CY-A257, 445 12th 
Street, SW., Washington, DC 20554. Alternative formats are available to 
persons with disabilities by contacting Brian Millin at (202) 418-7426 
or TTY (202) 418-7365. The full text of the NPRM may also be purchased 
from the Commission's duplicating contractor, Best Copy and Printing, 
Inc., Portals II, 445 12th Street, SW., Washington, DC 20554, telephone 
(202) 488-5300, facsimile (202) 488-5563, e-mail at [email protected], or 
via its Web site at http://www.bcpiweb.com.

Initial Paperwork Reduction Act of 1995 Analysis

    This document does not contain proposed information collection 
requirements subject to the Paperwork Reduction Act of 1995, Public Law 
104-13. In addition, therefore, it does not contain any proposed 
information collection burden ``for small business concerns with fewer 
than 25 employees,'' pursuant to the Small Business Paperwork Relief 
Act of 2002, Public Law 107-198. 44 U.S.C. 3506(c)(4).

Introduction

    This NPRM, adopted January 19, 2005 and released January 31, 2005 
in WC Docket No. 05-25, RM-10593, FCC 05-18, initiates a proceeding to 
determine the regulatory framework to apply to incumbent price cap LECs 
interstate special access services after June 30, 2005, including 
whether to maintain, modify, or repeal the pricing flexibility rules.

Background

    Price cap LECs charge IXCs, competitive LECs, CMRS providers, and 
end users for access services in accordance with parts 61 and 69 of the 
Commission's rules, 47 CFR parts 61 and 69. There are two types of 
access service: (1) Special access, which does not use local switches, 
instead employing dedicated facilities that run directly between end 
users and IXCs or between two end users; and (2) switched access, which 
uses local switches. Charges for special access are divided into 
channel termination charges and channel mileage charges. The special 
access rates for incumbent price cap LECs currently are subject to two 
pricing regimes--price caps and pricing flexibility.

Price Cap Regulation

    Prior to 1991 the Commission determined the appropriate charges for 
access service through rate-of-return regulation, pursuant to which 
LECs were limited to recovering their costs plus a prescribed return on 
investment. In 1991, in the LEC Price Cap Order, 55 FR 42375, Oct. 19, 
1990, the Commission implemented price cap regulation, which, in 
contrast to rate-of-return regulation, limits the profits a LEC may 
earn by focusing on the prices that a LEC may charge and the revenues 
it may generate from interstate access services. Price cap carriers 
whose interstate access charges are set by price cap rules are 
permitted to earn returns significantly higher, or potentially lower, 
than the prescribed rate of return that incumbent LECs are allowed to 
earn under rate-of-return rules. Price cap regulation encourages 
incumbent LECs to improve their efficiency by harnessing profit-making 
incentives to reduce costs, invest efficiently in new plant and 
facilities and develop and deploy innovative services, while setting 
price ceilings at reasonable levels. Price cap regulations also give 
incumbent LECs greater flexibility in determining the amount of 
revenues that may be recovered from a given access service. The price 
cap rules group services together into different baskets, service 
categories, and service subcategories, and then identify the total 
permitted revenues for each basket or category of services. Within 
these baskets or categories, incumbent LECs are given some discretion 
to determine the portion of revenue that may be recovered from specific 
services, and thus to alter the rate levels associated with a given 
service. In the short run, the behavior of individual companies has no 
effect on the prices they are permitted to charge, and they are able to 
keep any additional profits resulting from reduced costs. This creates 
an incentive to cut costs and to produce efficiently. In this way, 
price caps act as a transitional regulatory scheme until the advent of 
actual competition makes price cap regulation unnecessary.
    With passage of the Telecommunications Act of 1996, Pub. Law 104-
104, 110 Stat. 56, the Commission began reforming access charges, 
stating in the Access Charge Reform Order, 62 FR 31939, June 11, 1997, 
that it would rely on competition as the primary method for bringing 
about cost-based access charges and anticipating that it would lessen, 
and eventually eliminate, rate regulation as competition developed. To 
assist in this effort, the Commission said it would require price cap 
LECs to start forward-looking cost studies no later than February 8, 
2001, for all services then remaining under price caps.
    Subsequently, in 2000, in the CALLS Order, 65 FR 38684, June 21, 
2000, the Commission adopted the industry-proposed CALLS plan, which 
represents a five-year interim regime designed to phase out implicit 
subsidies in access charges and move towards a more market-based 
approach to rate setting. In adopting the CALLS plan, the Commission 
offered price cap LECs the choice of completing the forward-looking 
cost studies required by the Access Charge Reform Order or voluntarily 
making the rate reductions required under the five-year CALLS plan. All 
price cap carriers opted for the CALLS plan.
    The CALLS plan separated special access services into their own 
basket and applied a separate X-factor to the special access basket. 
The X-factor under the CALLS plan, unlike under prior price cap 
regimes, is not a productivity factor, but represents a transitional 
mechanism to lower special access rates for a specified period of time. 
The special access X-factor was 3.0 percent in 2000 and 6.5 percent in 
2001, 2002, and 2003. In addition to the X-factor, access charges under 
the CALLS plan are adjusted for inflation as measured by the Gross 
Domestic Product-Price Index (GDP-PI). For the final year of the CALLS 
plan (July 1, 2004--June 30, 2005), the special access X-factor is set 
equal to inflation, thereby freezing rate levels. Thus, absent the 
implementation of a new price cap regime when the CALLS plan expires, 
price cap LECs' special access rates will remain frozen at 2003 levels 
unless the Commission makes regulatory changes requiring adjustments in 
PCIs. In adopting the CALLS plan, the Commission hoped that, by the end 
of the five-year interim period, competition would exist to such a 
degree that deregulation of access charges for price cap LECs would be 
the next logical step.

[[Page 19383]]

Pricing Flexibility

    In addition to general access charge reform, the Commission began 
exploring whether and how to remove price cap LECs' access services 
from regulation once they became subject to substantial competition. In 
1999, it adopted the Pricing Flexibility Order, 64 FR 51258, Sept. 22, 
1999, which established triggers to measure the extent to which 
competitors had made irreversible, sunk investment in collocation and 
transport facilities. A price cap LEC that satisfies these triggers may 
obtain pricing flexibility to offer special access services at 
unregulated rates through generally available and individually 
negotiated tariffs (i.e., contract tariffs). A price cap LEC may obtain 
pricing flexibility in two phases, each on a Metropolitan Statistical 
Area (MSA) basis. Under Phase I, a price cap LEC may offer volume and 
term discounts and contract tariffs for interstate special access 
services unconstrained by the Commission's part 61 and part 69 rules. 
The price cap LEC, however, must continue to offer its generally 
available, price cap constrained (i.e., subject to parts 61 and 69) 
tariff rates for these services. Under Phase II, a price cap LEC may 
file individualized special access contract tariffs, subject only to 
continuing to make available generalized special access tariff 
offerings. Neither the contract tariffs nor the general offerings are 
constrained by parts 61 or 69.

AT&T's Petition for Rulemaking

    On October 15, 2002, AT&T filed a Petition for Rulemaking 
requesting that the Commission revoke the pricing flexibility rules and 
revisit the CALLS plan as it pertains to the rates that price cap LECs, 
and the BOCs in particular, charge for special access services. AT&T 
claims that the Pricing Flexibility Order's triggers fail to predict 
price-constraining competitive entry and such entry has not occurred. 
It further contends that, based on ARMIS date, the BOCs' interstate 
special access revenues more than tripled between 1996 and 2001, and 
that their returns on special access services were between 21 and 49 
percent in 2001, but that for every MSA for which pricing flexibility 
was granted, BOC special access rates either remained flat or 
increased. Thus, AT&T claims that BOC special access rates are unjust 
and unreasonable in violation of section 201 of the Communications Act, 
47 U.S.C. 201, and the Commission must initiate a rulemaking to revisit 
its pricing flexibility rules. During the pendency of this rulemaking, 
AT&T requests that the Commission grant interim relief by: (1) Reducing 
the rates for all special access services subject to Phase II pricing 
flexibility to the rates that would generate an 11.25 percent rate of 
return, and (2) imposing a moratorium on granting the BOCs further 
pricing flexibility.
    Price cap LECs generally oppose the AT&T Petition for Rulemaking. 
They claim that their special access rates are reasonable and lawful, 
that there is robust competition in the market for special access 
services, that the collocation-based triggers of the Pricing 
Flexibility Order accurately measure competition, and that the data 
relied upon by AT&T are unreliable. The BOCs also contend that their 
special access revenues per line declined between 1996 and 2001.

Notice of Proposed Rulemaking

    The Commission commences this rulemaking to seek comment on the 
interstate special access regime that it should put in place post-
CALLS. We also seek comment on whether, as part of a special access 
regulatory regime, we should maintain, modify, or repeal the 
Commission's pricing flexibility rules. Thus we grant AT&T's petition 
inasmuch as we initiate a rulemaking proceeding.
    As a separate issue we seek comment on what interim relief, if any, 
is necessary to ensure that special access rates remain reasonable 
while we consider what regulatory regime will follow the CALLS plan. 
Given the complexities discussed in the following NPRM, there is a 
strong likelihood that we will not complete the rulemaking proceeding 
before expiration of the CALLS plan on June 30, 2005. The record here 
contains substantial evidence suggesting that productivity in the 
provision of special access services has increased and continues to 
increase. Currently, however, the CALLS plan contains no productivity 
factor to require price cap LECs to share any of their productivity 
gains with end users. 47 CFR 61.45(b)(1)(iv). Accordingly, we 
anticipate adopting an order prior to June 30, 2005, that will 
establish an interim plan to ensure special access price cap rates 
remain just and reasonable while the Commission considers the record in 
the rulemaking proceeding. One interim option would be to impose the 
last productivity factor adopted by the Commission and upheld upon 
judicial review, 5.3 percent. We seek comment on this option and other 
reasonable interim alternatives. The Commission requests that any party 
that comments on the appropriate post-CALLS special access regulatory 
regime and/or proposes that the Commission alter in any way the 
existing pricing flexibility rules include in its comments specific 
language that would codify its proposed special access regulatory 
regime and/or its proposed pricing flexibility rule change(s).

Price Cap LEC Interstate Special Access Rates Post CALLS

    First, we must determine the type of rate regulation, if any, that 
should apply. We tentatively conclude that we should continue to 
regulate special access rates under a price cap regime and that the 
price cap regime should continue to include pricing flexibility rules 
that apply where competitive market forces constrain special access 
rates. Such a regime, we tentatively conclude, would result in just and 
reasonable rates as required by section 201 of the Communications Act, 
47 U.S.C. 201. We seek comment on these tentative conclusions. We also 
seek comment on how to resolve the major issues involved in 
implementing a price cap regime for special access services, as 
outlined below.

Changes in the Special Access Market

    Automated Reporting Management Information System (ARMIS) data show 
that, in the 2001-2003 period, BOC special access operating revenues, 
operating expenses, accounting rates of return, and the number of 
special access lines increased annually (i.e., compound annual growth 
rates over the period) by approximately 12, 7, 17, and 18 percent, 
respectively. BOC special access average investment decreased at a 
compounded annual rate of less than one percent over the same period. 
The overall (i.e., not compounded annually) BOC interstate special 
access accounting rates of return were approximately 38, 40, and 44 
percent in 2001, 2002, and 2003, respectively. In the period 1992-2000, 
a period that precedes the CALLS plan and significant pricing 
flexibility, BOC interstate special access operating revenues, 
operating expenses, average investment, accounting rates of return, and 
special access lines increased at a compounded annual rate of 
approximately 16, 12, 11, 11, and 32 percent, respectively. The overall 
(non-compounded) BOC special access accounting rates of return varied 
over this period from a low of approximately 7 percent in 1995 to a 
high of approximately 28 percent in 2000.
    These accounting data suggest that the BOCs have realized special 
access scale economies throughout the entire period of price cap 
regulation, including before and after the Commission adopted pricing 
flexibility and the CALLS plan. Special access line demand increased at

[[Page 19384]]

a significantly higher rate than operating expenses and investment 
throughout both periods, suggesting that the BOCs realized scale 
economies in both periods. Although, some parties contend that the 
accounting rates of return derived from ARMIS data are meaningless, we 
use ARMIS data here for the limited purpose of examining the 
relationship between demand growth and growth in expenses and 
investment. To the extent the accounting rules have remained the same 
over the period analyzed, the analysis of growth rates and scale 
economies should not be significantly affected by the cost allocation 
issues these parties raise. We invite parties to comment on the 
relevance of these data and the relationship between demand growth and 
growth in expenses and investment in the special access market. To 
demonstrate the possible impact of cost allocations during the price 
cap period of regulation, including before and after the Commission 
adopted pricing flexibility and the CALLS plan, we invite parties: (1) 
To remove from the BOCs' interstate special access operating expenses 
and average investment data reported in ARMIS any expenses and 
investments that are not directly assignable; and (2) to calculate the 
compound annual growth rates for BOC interstate special access 
operating expenses and average investment using these adjusted data.

Developing a Special Access Price Cap Regime

    The PCI, the core component of price cap regulation, has three 
basic components: (1) A measure of inflation, i.e., the Gross Domestic 
Product (chain weighted) Price Index (GDP-PI); (2) a productivity 
factor or ``X-Factor,'' that represents the amount by which price cap 
LECs can be expected to outperform economy-wide productivity gains; and 
(3) adjustments to account for ``exogenous'' cost changes that are 
outside the LEC's control and not otherwise reflected in the PCI. While 
we seek comment on whether and, if so, how to develop a new special 
access price cap, we focus our inquiry below on productivity and growth 
issues and on developing service categories and subcategories. Parties 
may comment on whether we should include inflation and exogenous cost 
adjustments in a new special access price cap regime. We tentatively 
conclude, however, that, except as otherwise discussed herein, we 
should retain the same method of revising the PCI to reflect inflation 
and exogenous cost adjustments that presently apply to special access 
services.
    Productivity Factor or X-Factor. The productivity or X-factor 
contained in the PCI has varied over the course of price cap 
regulation. Most recently, in the CALLS Order, 65 FR 38684, June 21, 
2000, the Commission changed the X-factor from a productivity-based 
factor to a transitional mechanism to reduce special access rates for a 
specified period, setting the special access X-factor at 3.0 percent in 
2000, 6.5 percent for the next three years, and equal to the GDP-PI 
thereafter, essentially freezing the special access PCI (after 
accounting for exogenous cost adjustments). In recent years, the BOCs 
have earned special access accounting rates of return substantially in 
excess of the prescribed 11.25 rate of return that applies to rate of 
return LECs. The BOCs' collective average special access accounting 
rates of return over the last six years (1998-2003) have been 18, 23, 
28, 38, 40, and 44 percent, respectively. We seek comment on whether a 
rate of return in excess of the Commission's prescribed rate of return 
for rate-of-return LECs is a valid benchmark for determining the need 
for an X-factor, or an X-factor that is higher than the factor under 
the CALLS plan or the pre-CALLS price cap regime. If it is appropriate 
for us to examine an X-factor in light of these rates of return, we 
seek comment on whether we should re-impose a productivity-based X-
factor as a method of reducing the special access PCI.
    We ask parties to submit studies quantifying an appropriate X-
factor for special access services. In the Phase I Accounting 
Streamlining Order, 65 FR 16328, March 28, 2000, the Commission sought 
to reduce incumbent LEC accounting and reporting requirements by, among 
other things, eliminating the requirement that LECs report the expense 
matrix data used in calculating the X-factor, but expected LECs to 
provide such data upon request. We now request that price cap LECs 
submit their expense matrix data from 1994 to 2004 (or 2003, if 2004 
data are not yet available). These data should correspond exactly to 
the expense matrix data required in 1999 under part 32 of the 
Commission's rules, 47 CFR 32.5999(f).
    Given that we propose to address special access services 
independent of switched access services, we seek comment on whether it 
is necessary to estimate and apply to special access services an X-
factor that is unique to these services. Assuming that this is 
necessary, we seek comment on whether it is possible to calculate 
accurately such an X-factor. If it is only possible to measure 
productivity accurately for the entire firm, or for some broader 
category of services than special access services, we invite commenters 
to address the reasonableness of applying this broader X-factor to 
special access services alone. We seek comment on the consequences of 
using in the special access PCI a productivity factor that is based on 
a broad-based productivity study such as the total factor productivity 
growth rate (TFP) study prepared by Commission staff in support of the 
6.5 percent X-factor adopted in the 1997 Price Cap Review Order, 62 FR 
31939, June 11, 1997.
    Growth Factor. In the LEC Price Cap Order, 55 FR 42375, Oct. 19, 
1990, the Commission adopted a price cap formula for the common line 
basket that included a growth or ``g'' factor to account for price cap 
LEC average cost decreases attributable to demand growth. While the 
Commission has applied a uniform X-factor for a multi-year period to 
all price cap carriers and price cap services, the ``g'' factor, in 
contrast, varies by LEC, year, and service because it relies on each 
individual LEC's prior year's demand growth rate for a specific service 
element or basket. In the LEC Price Cap Order, because per-minute 
traffic growth was not directly indicative of per-line cost increases, 
the Commission developed ``g'' to represent per-minute growth per 
access line. The Commission found that including ``g'' would give all 
of the benefits of MOU demand growth to IXCs, while excluding ``g'' 
would give all of the benefits of MOU demand growth to LECs. The 
Commission therefore incorporated g/2 into the PCI formula because it 
found that both IXCs and LECs contribute to demand growth.
    If we adopt new special access price cap regulation for price cap 
LECs, it may also be appropriate to include a factor in the special 
access PCI formula similar to the ``g'' factor currently in the common 
line formula. ARMIS data suggest that special access line demand growth 
does not produce a proportional increase in special access costs. In 
such a circumstance, use of a special access PCI formula that does not 
include a growth factor may produce unreasonable rates. We therefore 
invite parties to comment on whether a special access PCI formula 
should include a growth factor similar to the ``g'' factor in the 
common line PCI formula. We also seek comment on how to define a 
special access line growth factor. For example, should this factor be 
based on the change in DS-1 equivalent capacity, changes in DS-3 
equivalent capacity, or some basis other than capacity equivalents? We 
seek comment on whether the demand growth benefits reflected in a ``g'' 
factor should be

[[Page 19385]]

shared between the LECs and the special access customers. Finally, 
parties advocating for a ``g'' factor should comment on how to avoid 
including demand growth-related efficiencies in both the ``g'' factor 
and the X-factor.
    Sharing and Low End Adjustment. In establishing the initial price 
cap regime in 1990, in the LEC Price Cap Order, 55 FR 42375, Oct. 19, 
1990, the Commission required price cap LECs to share with their 
customers 50 percent of their earnings above a rate of return of 12.25 
or 13.25 percent, depending on whether an individual price cap LEC 
selected a productivity factor of 3.3 or 4.3 percent. Price cap LECs 
with rates of return above 16.25 or 17.25 percent had to share 100 
percent of their excess earnings, depending on the productivity factor 
selected. The Commission also allowed price cap LECs with rates of 
return less than 10.25 percent to make a ``low end adjustment,'' or to 
increase their PCIs in the following year to a level that would allow 
them to earn at least a 10.25 percent rate of return. The Commission 
adjusted the sharing and low end adjustment rules in the 1995 Price Cap 
Review Order, 60 FR 19526, April 19, 1995, and, in the 1997 Price Cap 
Review Order, 62 FR 31939, June 11, 1997, it eliminated the sharing 
requirements altogether, finding that sharing severely blunts the 
incentives of price cap regulation by reducing the rewards for LEC 
efficiency gains. The Commission also found that eliminating sharing 
requirements removed the last vestige of rate-of-return regulation that 
had created incentives to shift costs between services to evade sharing 
in the interstate jurisdiction. We tentatively conclude, for the same 
reasons that the Commission eliminated sharing, that we should not now 
require LECs to share earnings if we decide to adopt a price cap plan 
for special access services. We seek comment on this tentative 
conclusion.
    In the Pricing Flexibility Order, 64 FR 51258, Sept. 22, 1999, the 
Commission eliminated the low end adjustment mechanism for price cap 
LECs that qualify for and elect to exercise either Phase I or Phase II 
pricing flexibility. The Commission retained the low-end adjustment for 
price cap LECs that have not qualified for and elected to exercise 
either Phase I or Phase II pricing flexibility to protect these LECs 
from events beyond their control that would affect earnings to an 
extraordinary degree. For the same reason, we tentatively conclude 
that, if we adopt a price cap plan for special access services, we 
should retain a low-end adjustment mechanism for price cap LECs that 
have not implemented pricing flexibility. We seek comment on this 
tentative conclusion. We further seek comment on the nature of a low-
end adjustment for special access services only. We request that 
parties identify the relationship between the low-end adjustment level 
and any new authorized rate of return we develop in this proceeding. 
For example, should the low-end adjustment continue to be 100 basis 
points below the authorized rate of return?

Rate Structure--Interstate Special Access Baskets and Bands

    Within the special access service price cap basket, services 
currently are grouped into service categories and subcategories. 47 CFR 
61.42(e)(3). Similar services are grouped together into service 
categories within a single basket to act as a substantial bar on the 
LEC's ability to engage in anticompetitive behavior, including cost 
shifting. The Commission in the LEC Price Cap Order, 55 FR 42375, Oct. 
19, 1990, established upper and lower pricing bands for each separate 
category or subcategory, initially setting pricing bans for most 
service categories at five percent above and below the Service Band 
Index (SBI). Subsequently, it eliminated the lower service band 
indices, finding that the PCI and upper pricing bands adequately 
control predatory pricing and that greater downward pricing flexibility 
would benefit consumers both directly through lower prices and 
indirectly by encouraging only efficient entry. The Commission seeks 
comment on what categories and subcategories we should establish in a 
special access service basket if we adopt a price cap method to 
regulate special access prices. Should the Commission retain without 
modification the existing special access categories and subcategories? 
If not, parties should identify the specific categories and 
subcategories of special access service that they contend we should 
adopt. We also ask parties to discuss the advantages and disadvantages 
of having a special access basket with relatively few categories or 
subcategories compared to one with many.
    We seek comment on whether to place competitive services and non-
competitive services in separate and distinct categories and/or 
subcategories. Arguably, this would minimize the opportunity for a LEC 
to offset rate decreases for services for which there are competitive 
alternatives with rate increases for services for which there are no 
competitive alternatives. AT&T alleges that such competitive imbalances 
occur for DS1 and DS3 channel termination services between the LEC end 
office and the customer premises, where often there is little or no 
competition. It also claims that competition might not be quite so 
limited for DS1 and DS3 channel terminations between the IXC POP and 
the LEC serving wire center, and DS1 and DS3 channel mileage facilities 
between the LEC end office and the LEC serving wire center. We seek 
comment on whether we should establish separate categories for DS1 and/
or DS3 special access services and subcategories for (1) special access 
channel terminations between the LEC end office and the customer 
premises, (2) special access channel terminations between the IXC POP 
and the LEC serving wire center, or (3) any other special access 
product market. Should any special access services be combined into a 
single category or subcategory? We also seek comment on whether we 
should take the same approach with regard to high capacity services 
above the DS-3 level (e.g., OCn), or whether these higher capacity 
services should be placed in a high capacity category without sub-
categories for special access channel terminations to customer 
premises, special access channel terminations to the IXC POP, and other 
special access facilities.
    Some price cap LECs assert that broadband service such as DSL 
services account for a significant and growing portion of their special 
access revenues. These services may be subject to competition from 
high-speed cable modem services or wireless broadband offerings. We 
seek comment on whether to establish a separate category or subcategory 
for broadband services that are subject to some competition or are 
likely to be subject to competition in the near future. We note that, 
in the LEC Price Cap Order, 55 FR 42375, Oct. 19, 1990, the Commission 
excluded packet-switched services from price cap regulation because 
they were not included in its study of LEC productivity. We seek 
comment on whether such services should be included in price caps 
today. If not, what is the proper regulatory treatment of these 
services?
    We seek comment on whether to establish separate subcategories for 
wholesale services and retail services. Arguably, this approach would 
minimize the extent to which a price cap LEC could manipulate headroom 
by offsetting rate decreases that apply to services purchased by a 
wholesale customer (e.g., a rate decrease for a DS3 channel termination 
service purchased by an IXC) with rate increases that apply

[[Page 19386]]

to services purchased by an end-user customer (e.g., a rate increase 
for a retail DSL service purchased by a small business or residential 
customer.) We seek comment on whether this objective is desirable.
    We also seek comment on what criteria and data we should examine to 
determine which services to place in which categories or subcategories. 
We ask parties to propose categories or subcategories, to explain in 
detail the bases for their proposed categories or subcategories, and to 
support their proposals with data and studies. Do competitive or non-
competitive services placed in the same subcategory need to have 
similar demand or supply elasticities? Should we establish separate 
categories or subcategories based on special access line densities? For 
example, channel termination services extending between a LEC end 
office and customer premises in areas where there are more than 10,000 
special access lines per square mile could be placed in a particular 
subcategory. We also seek comment on whether to use a single basket or 
multiple baskets and the advantages and disadvantages of each approach.
    For the same reasons that the Commission eliminated the lower 
pricing bands, we tentatively conclude that there should be no lower 
band for service categories or subcategories to restrict the price cap 
LECs' downward pricing flexibility. We seek comment on this tentative 
conclusion. We seek comment on the upper band value to limit the price 
cap LECs' upward pricing flexibility for the categories or 
subcategories. Should we retain five percent as the value? Should we 
use different values for different categories or subcategories? What 
criteria and data should we use to determine these values?

Initial Special Access Price Cap Rates Post-CALLS

    We must ensure that the initial rates under a new price cap plan 
will be just and reasonable. 47 U.S.C. 201(b). In this proceeding AT&T 
asserts that current special access rates are too high based on BOC 
special access rates of return, and that current rates for special 
access under price caps are lower than rates established after a grant 
of pricing flexibility. The BOCs respond that accounting rates of 
return are meaningless and the Commission expected that rates in some 
instances would increase when a carrier is granted pricing flexibility. 
They also present evidence purporting to show that overall special 
access revenues per line have decreased. As a preliminary matter, 
therefore, we solicit comment as to whether it is necessary for us to 
reinitialize rates to ensure that they are just and reasonable. To the 
extent we decide to reinitialize rates, we solicit comment as to 
several alternative approaches.
    Rate-of-Return Benchmark. We seek comment on whether the 11.25 
percent rate of return that the Commission prescribed for LECs in 1991 
is a valid benchmark for determining that a price cap LECs' special 
access rates are just and reasonable. The costs of debt and equity 
financing that are supposed to be reflected in the rate of return 
likely have changed significantly since 1991. If parties believe that 
we should use rate of return as a benchmark for determining the 
reasonableness of price cap LEC special access rates, is there a rate 
of return other than 11.25 percent that we should use to make that 
determination? We invite parties to submit studies supporting an 
alternative rate of return.
    The aim of price cap regulation is rates that approximate the rates 
a competitive firm would charge, and competitive firms make business 
decisions based on economic, not accounting, rates of return. Thus the 
BOCs contend that accounting rates of return do not represent a valid 
basis for evaluating price cap rates in general, and that our cost 
allocation rules and the current separations freeze may undermine the 
usefulness of an examination of rates of return derived from ARMIS 
data. Accordingly, we seek comment generally on whether accounting 
rates of return are meaningful statistics for evaluating the 
reasonableness of price cap rates. What factors may affect the 
relevance of ARMIS data to our examination of special access rates? 
Even if the overall accounting rate of return has evidentiary value, we 
also seek comment on whether an accounting rate of return for a subset 
of services, i.e., the special access basket, is meaningful to this 
inquiry. The allocation of common costs to multiple services according 
to our accounting rules necessarily reflects policy judgments that may 
not reflect how price cap LECs would allocate common costs if they 
operated in fully competitive markets. Thus we seek comment on the need 
to evaluate the special access rate of return in the context of the 
price cap LECs' overall rates of return. We note that the Commission 
has never examined accounting rates of return for specific categories 
of services to determine whether a price cap LEC must share over-
earnings or can make a low-end adjustment to compensate for 
underearnings, but instead has determined whether such adjustments 
should be made based on the price cap LEC's overall interstate access 
rate of return. We therefore seek comment on what measures or 
indicators we may use in addition to, or in lieu of, rate of return to 
determine whether current special access rates are just and reasonable. 
We invite parties to submit any such measures or indicators they deem 
appropriate.
    The recent significant growth in BOC DSL subscribers and revenues 
creates a unique issue in using the accounting rate of return solely 
for the special access basket. Some BOCs may book the full amount for 
DSL revenues as special access revenues, while at the same time, the 
incremental cost booked to the special access category for DSL service 
may not be nearly as large as these DSL revenues. Generally, there are 
no incremental DSL-related loop-side structure costs (e.g., for 
trenching, poles, manholes, or conduit) booked to the special access 
category. These otherwise account for a large majority of a typical 
price cap LEC's total network costs. We seek comment on the extent to 
which the accounting treatment of DSL revenues, expenses, and 
investment under the Commission's rules accounts for the BOCs' recent 
high special access rates of return. If DSL growth is a significant 
factor in the high accounting special access rates of return, rather 
than growth in traditional DS1 or DS3 services, for example, how should 
we interpret these rates of return?
    We seek comment on the need for a comprehensive review of detailed 
cost studies to establish initial rate levels for each special access 
service. Alternatively, is there a simpler, less burdensome method of 
setting initial rate levels without having to rely on cost studies? To 
develop initial rates based on an 11.25 percent rate of return, we 
would: (1) Calculate, for the most recent calendar year, a price cap 
LEC's special access rate of return, based on ARMIS data; (2) calculate 
the percentage by which revenues would have had to have been lower to 
earn an 11.25 percent rate of return; (3) reduce that price cap LEC's 
current special access rates across the board by that percentage; and 
(4) use these reduced rates as the initial rates under a new price cap 
plan. We seek comment on this approach to establishing just and 
reasonable initial rates, on variants of this approach, and on other 
approaches that avoid use of cost studies.
    Cost Studies. Parties commenting that we should use detailed cost 
studies to set initial special access rates under a new price cap plan 
should also

[[Page 19387]]

comment on whether such studies should be based on historical 
accounting costs, i.e., embedded costs, or forward-looking economic 
costs. Generally, forward-looking costs are viewed as more relevant, 
and embedded costs as less relevant, to setting prices in a competitive 
market. Further, the Commission stated its goal in the Access Charge 
Reform Order, 62 FR 31868, June 11, 1997, that interstate access 
charges reflect forward-looking costs, and envisioned in the CALLS 
Order, 65 FR 38684, June 21, 2000, a proceeding near the expiration of 
the CALLS plan to determine whether and to what degree it could 
deregulate price cap LECs due to the existence of competition. We seek 
comment on whether setting rates based on forward-looking costs, as 
suggested in these orders, should guide us in selecting a method to set 
initial rates under a new special access price cap plan. Parties that 
support the use of historical costs rather than forward-looking costs 
should comment on and submit calculations showing the magnitude of any 
difference between the implied depreciation expense in LECs' special 
access actual realized revenues and regulatory accounting deprecation 
expense calculated pursuant to the Commission's rules during the price 
cap years. By implied depreciation, we mean total booked revenues less 
total booked expenses (excluding accounting depreciation expense) less 
an 11.25 percent rate of return on the rate base, expressed in dollars. 
If the implied depreciation expense significantly exceeds the 
regulatory accounting depreciation expense, in setting the initial 
rates would we need to adjust downward the rate base to avoid the 
eventual over-recovery of the original cost of the LECs' assets? 
Further, any party that supports the use of a cost study, forward-
looking or historical, to set rates should submit such a study and 
support its use.
    Use of Comparable Services. Some special access services are 
comparable to switched access transport services. For example, a 
special access channel termination service extending between an IXC POP 
and a LEC serving wire center is comparable to a switched access 
entrance facility. We therefore seek comment on whether setting initial 
special access prices under a new price cap plan at levels equal to 
current prices for comparable switched access transport would result in 
just and reasonable rates. Parties should address whether this approach 
is improperly circular, given that some transport rates, e.g., direct 
trunked transport rates, were presumed reasonable by the Commission in 
the First Transport Order, 57 FR 54717, Nov. 20, 1992, if they were set 
based on rates for comparable special access services. Such an approach 
may be feasible for some services, e.g., DS1 or DS3 special access 
services, but not necessarily for all special access services. Assuming 
that this approach is reasonable for some subset of special access 
services, we ask for comment on how to establish initial just and 
reasonable rates for the remaining special access services. For 
example, is it reasonable to establish rates for the remaining services 
by adding to the rate for the comparable switched access transport 
service the percentage difference or the dollar differences between the 
current rate for comparable special access service and the current rate 
for the non-comparable special access service? We request that parties 
that believe that initial rates, in whole or in part, should be based 
on rates for comparable switched access transport services submit such 
studies.
    Incentives. We seek comment on whether, in determining whether 
special access rates will be just and reasonable, we should consider as 
a significant factor the risk of reducing price cap LECs' incentives to 
operate at minimum cost and to innovate under future price cap plans. 
Specifically, we question the effect of reallocating benefits resulting 
from price cap LEC efforts to minimize costs and innovate under the 
existing price cap plan on LEC expectations of future regulatory 
action. We seek comment on the potential effect of reducing current 
rates in the first year of a new price cap plan on price cap LEC 
incentives to operate efficiently and to innovate.
    Periodic Adjustment. We further seek comment on whether a new price 
cap plan should include a requirement that rates be adjusted up or down 
at fixed intervals (e.g., every three or five years) based on the 
prescribed rate of return, or some other measure of price cap LEC 
performance. For example, under one variant of such a price cap plan, 
LECs would not be required to share any earnings in excess of the 
prescribed rate of return, and generally the core elements of the plan 
(e.g., the productivity factor) would remain constant throughout the 
specified interval. If a price cap LEC's achieved rate of return (or 
other performance measure) were greater or lesser than the prescribed 
rate of return (or other performance benchmark) by a predetermined 
amount during the interval, then rates would be adjusted down or up at 
the beginning of the next interval. At the beginning of the latter 
interval, the adjusted rates would reflect the prescribed rate of 
return or other performance benchmark. We seek comment on whether to 
adopt such an adjustment mechanism in a price cap plan. We also seek 
comment on how such a plan would affect price cap LEC incentives to 
operate efficiently and to innovate. How would price cap LEC incentives 
under such a plan differ from the incentive effects of a plan that 
included an earnings sharing requirement (i.e. required price cap LECs 
to share earnings in excess of the prescribed rate of return by 
adjusting rates downward in the year immediately following the year in 
which they over-earned)? Parties supporting this type of adjustment 
should provide the operational details of their proposed plan, 
including specifying the length of the interval that should be used 
under any such plan. We also seek comment on other variants of an 
approach that would require rate adjustments at fixed intervals to 
target the prescribed rate of return, or other performance benchmark.

Pricing Flexibility

    In the Pricing Flexibility Order, 64 FR 51258, Sept. 22, 1999, the 
Commission essentially determined that irreversible, sunk investment by 
competitive carriers in the special access market, as evidenced by the 
satisfaction of certain collocation and competitive transport 
facilities deployment triggers, demonstrates sufficient competitive 
market entry in specific geographic markets to constrain monopoly 
behavior, including exclusionary conduct, by incumbent price cap LECs. 
The Commission acknowledged that incumbent price cap LECs might enjoy 
high market shares at the time pricing flexibility was granted, but 
concluded that they could not exercise market power where they faced 
competition from entrants using their own facilities. It relied on the 
collocation-based triggers rather than performing an unduly burdensome 
market power analysis. Pricing flexibility provided incumbent price cap 
LECs with the ability to lower rates in specific markets (MSAs) in 
response to competitive pressure.
    In this proceeding, parties have introduced evidence that, in MSAs 
where incumbent price cap LECs have received Phase II pricing 
flexibility, they have not lowered special access rates, but instead 
have either maintained or raised them. Therefore, as part of our 
examination of the proper price cap special access regulatory regime to 
adopt post-CALLS, we also examine whether the Commission's pricing 
flexibility rules have worked as

[[Page 19388]]

intended and, if not, whether they should be modified or repealed. This 
inquiry is consistent with our ongoing commitment to ensure that our 
rules, particularly those based on predictive judgments, remain 
consistent with the public interest, as evidenced by empirical data. 
Our questions below are focused on Phase II, not Phase I, pricing 
flexibility because, once Phase II flexibility is granted, incumbent 
price cap LECs no longer need to offer their generally available price 
cap tariffs.
    As a threshold matter, parties providing information regarding the 
rates they are charging or paying for special access services should 
identify whether the rates they identify are from the LEC's price cap 
tariff, a contract tariff, or a Phase II pricing flexibility tariff. 
Parties also should identify the percentage of special access services 
(by market) that are provided or obtained, as the case may be, from 
each of these three types of tariffs. We further request that parties 
identify whether the rates are the month-to-month rates or volume and 
term rates from the relevant tariff. Finally, we note that the Pricing 
Flexibility Order treats dedicated transport services (i.e., entrance 
facilities, direct-trunked transport, and the flat-rated portion of 
tandem-switched transport) in the same manner as non-channel 
termination special access services. We, therefore, tentatively 
conclude that any changes we make to the pricing flexibility rules for 
non-channel termination special access services shall apply equally to 
the pricing flexibility rules for dedicated transport. We seek comment 
on this tentative conclusion.

Assessing Competition in the Marketplace

    Whether or not we perform a full market power analysis, two issues 
are relevant to assessing the state of competition in a market. First, 
if a market is or is presumed to be competitive, the level of 
competition can be assessed by determining whether there have been 
substantial and sustained price increases. Second, because the 
characteristics of different markets vary, an analysis of the level of 
competition should also include an examination of the cost functions of 
the industry at issue. In analyzing each issue, both the product or 
service market (e.g., interstate special access services) and the 
relevant geographic market (e.g., MSAs) should be well-defined.
    Substantial and Sustained Price Increases. To measure competition, 
we first must determine whether there are substantial and sustained 
price increases for interstate special access services in well-defined 
markets. A substantial price increase need not be a large increase. For 
example, the United States Department of Justice and Federal Trade 
Commission Horizontal Merger Guidelines (DOJ Merger Guidelines) are 
designed to determine if a merger will result in a small but 
significant non-transitory price increase in the relevant produce 
market. AT&T claims in its petition that price cap LECs have increased 
interstate special access rates in some of the MSAs in which they have 
obtained Phase II pricing flexibility. We ask parties to provide data 
more recent data than the 2001 data in AT&T's petition that demonstrate 
whether or not substantial and sustained special access price increases 
have occurred in MSAs where price cap LECs have received Phase II 
pricing flexibility. Parties submitting such data should show the price 
changes that occurred after Phase II pricing flexibility and whether 
the changes were substantial (i.e., did or did not result in rates 
above just and reasonable levels). We ask parties to establish an 
objective benchmark against which to measure the most recent rate 
levels, and to justify and explain, not merely assert, the usefulness 
of that benchmark. Parties that critique data purporting to show 
substantial rate increases (for example, in reply comments) should 
explain in detail why the rate increases should not be considered 
substantial. Parties that critique the benchmark proposed by other 
parties should propose an alternative benchmark.
    If a price cap LEC is unable to maintain a substantial rate 
increase, i.e., if another entity enters the market and offers the 
service at a lower rate, then the rate increase is not sustainable, and 
the original price cap LEC does not possess market power. Parties 
should therefore provide a measurement of the sustainability of any 
rate increases.
    The BOCs claim that recent special access revenue increases result 
from high special access demand growth, rather than high and sustained 
special access rates, and that special access revenues per line are 
declining. We seek information to validate these claims, including: (1) 
Calculations of an Average Price Index (API) for all special access 
services (both those under price caps and those under pricing 
flexibility), (2) an SBI for each special access service category and 
subcategory, and (3) the revenues associated with the API and SBIs. In 
the Commission's annual access tariff review process, price cap LECs 
file an API, SBIs, and associated revenues for the special access 
basket. The LECs exclude from their calculations revenues for special 
access services provided in MSAs where they exercise pricing 
flexibility. In providing the information we request here, price cap 
LECs should recalculate the API, SBIs, and associated revenues for all 
special access services, including the services removed from price caps 
due to pricing flexibility, beginning in the year 2000, using the 
Tariff Review Plan RTE-1 and IND-1 electronic formats.
    We invite parties to proffer evidence regarding whether the 
predictive judgments on which Phase II pricing flexibility was granted 
are supported by subsequent marketplace developments. We also invite 
parties to support claims of substantial and sustained price increases 
by identifying the product market (e.g., channel terminations between 
LEC end offices and customer premises), the customer segment (e.g., 
businesses in large or medium-sized buildings; large companies or small 
companies), or any other more detailed demarcation of the special 
access market in which these price increases occur.
    Determination of Level of Market Competitiveness. Next, our 
analysis of the existence of substantial competition must analyze the 
cost functions in the industry. This analysis may include evaluation of 
the relevant product market, geographic market, demand responsiveness, 
supply responsiveness, market share, entry barriers, and other pricing 
behavior in well-specified markets. In the Pricing Flexibility Order, 
64 FR 51258, Sept. 22, 1999, for example, the Commission relied on 
entry barrier and supply responsiveness analyses to develop the 
competitive triggers. The Commission determined that, if price cap LECs 
receive pricing flexibility and raise rates excessively, competitors 
will enter the market, thus providing additional supply of special 
access services at (presumably) lower prices than the incumbent. The 
Commission also determined that, if competitors make a significant 
amount of irreversible, sunk investment (specifically in collocation 
and transport facilities), this investment would signify that entry 
barriers in that market have been overcome. The Commission found it 
unnecessary to perform additional forms of market competitive analysis, 
concluding generally that such analyses would be unduly burdensome.
    We seek comment on whether our pricing flexibility rules reflect a 
sufficiently robust assessment of the level of interstate special 
access competition. Parties should address whether actual market place 
developments have validated the supply

[[Page 19389]]

responsiveness and entry barrier predictive judgments made in the 
Pricing Flexibility Order, and, if not, whether different supply 
responsiveness and entry barrier assessments are necessary. Parties 
should also address whether, in assessing our pricing flexibility 
regime, we should consider additional measures of competition, such as 
demand responsiveness and the other analytic methods discussed below.
    Relevant Product Market. In the Pricing Flexibility Order, 64 FR 
51258, Sept. 22, 1999, the Commission identified three categories of 
product markets for special access services: (1) Special access channel 
terminations between a LEC end office and the customer premises, (2) 
special access channel terminations between an IXC POP and a LEC 
serving wire center, and (3) other special access facilities. We seek 
comment on whether these are the relevant product markets. In the 
Pricing Flexibility Order, the Commission acknowledged the greater cost 
of entry into the product market for channel terminations between the 
LEC end office and the customer premises, and, therefore, adopted 
higher triggers that incumbent price cap LECs must satisfy in order to 
obtain Phase II pricing flexibility for this product market. Commenters 
should specifically address, therefore, whether channel terminations 
from the LEC end office to the customer premises constitute a separate 
and distinct product market.
    Parties argue that a price cap LEC that has obtained Phase II 
pricing flexibility in an MSA may, in fact, be the only provider of 
special access channel terminations in that MSA, but can theoretically 
be free from all rate regulation of these channel terminations. We ask 
parties to refresh the record and address whether there have been 
substantial and sustained rate increases for channel terminations 
between LEC end offices and customer premises since the Commission 
began granting Phase II pricing flexibility. We also ask parties to 
address the degree of existing competition for special access channel 
termination services, including any available quantifications of market 
developments after the grant of Phase II pricing flexibility. Because 
Phase II pricing flexibility is a statistically significant variable in 
explaining any substantial and sustained special access rate increases, 
parties should show that pricing behavior changed significantly when 
and where price cap LECs obtained Phase II pricing flexibility.
    We seek comment on whether product markets should be further 
subdivided by transmission capacity. For example, parties should 
comment (and provide data supporting their positions) on whether DS-1 
special access channel terminations between the LEC end office and the 
customer premises are in the same product market(s) as DS-3 and OCn 
channel terminations.
    Although we have not previously classified special access customers 
by factors such as annual revenue per building or required capacity, 
such differentiation may be important for a thorough analysis of the 
level of competition. Is the question of whether CMRS providers, IXCs, 
or enterprise business customers, for example, constitute one or 
multiple customer classes relevant to this analysis? Parties should 
support any proposed customer classes with reliable empirical data, 
including econometric estimates of cross elasticity of demand or 
marketing studies showing consumer substitutability of demand for 
competing services.
    In discussing the relevant product markets, we ask parties to 
consider not only special access services provided over incumbent price 
cap LEC networks, but also whether services provided over other 
platforms, e.g., cable, wireless, and satellite, as well as over 
competitive LEC, self-provisioned wireline facilities, could provide 
the equivalent of price cap LEC special access services. We seek 
comment on the willingness and ability of users to purchase equivalent 
special access services as substitutes for an incumbent price cap LEC's 
special access services. We ask parties to discuss whether significant, 
intermodal special access service price and quality differentials exist 
and, if so, whether the presence of such differentials implies that 
equivalent special access services and special access services provided 
by incumbent price cap LECs are in different product markets.
    Geographic Market. To define the relevant market, we typically 
determine not only the relevant product market, but also the relevant 
geographic market(s). We ask parties to provide their analyses 
consistent with their proposed geographic market. In the Pricing 
Flexibility Order, 64 FR 51258, Sept. 22, 1999, the Commission 
identified the relevant geographic market for granting pricing 
flexibility for special access services as the MSA. We seek comment on 
whether the MSA remains the appropriate geographic market for each of 
the special access product markets identified above or by commenting 
parties.
    Some parties claim that competition is concentrated in a small 
number of areas within MSAs and that, therefore, the MSA is too large 
to be the relevant geographic market. They allege that a pricing 
flexibility trigger based on collocation coupled with competitive 
transport does not consider the ubiquity of competitive transport 
facilities throughout an MSA. The collocation trigger, they contend, 
may demonstrate that numerous carriers have provisioned transport from 
their switches to collocation arrangements in a single wire center, 
such as a LEC serving wire center, but does not demonstrate the 
existence of competitive transport to interconnect the collocation 
arrangements to similar arrangements in any other price cap LEC wire 
centers. If, for example, a collocated competitor uses its own 
transport to carry traffic from a price cap LEC serving wire center to 
an IXC POP, this alternative transport may establish competition for 
this facility, but it is not sufficient to establish competition for 
other special access services. These parties conclude that the 
collocation trigger does not reveal the geographic extent of 
``irreversible sunk investments'' by competitors throughout the MSA for 
which the incumbent price cap LEC has obtained pricing flexibility. 
Thus, they argue, incumbent price cap LECs may be able to exercise 
monopoly power through the use of exclusionary pricing strategies in 
some portions of the MSA. We seek comment on these contentions.
    In the Pricing Flexibility Order , 64 FR 51258, Sept. 22, 1999, the 
Commission established two alternative collocation triggers: percentage 
of revenue associated with wire center collocation, or percentage of 
wire centers with collocation. We note that all price cap LEC pricing 
flexibility petitions to date have relied on the percentage of revenue 
trigger rather than the percentage of wire centers with collocation 
trigger. Because the percentage of revenue trigger requires 
collocation, and hence facilities deployment, in fewer wire centers in 
the MSA, we invite commenters to address whether the MSA remains a 
reasonable geographic market in which to measure irreversible sunk 
investment in the relevant special access product markets, particularly 
for channel terminations between the LEC end office and the customer 
premises.
    One reason that competition may not develop throughout an entire 
MSA is that the difference between the expected per unit costs of any 
potential competitor versus that of an incumbent price cap LEC may be 
considerably greater in some areas of an MSA than others. Any such cost 
disadvantages may be smaller in areas of relatively high special access 
line density, e.g., downtown Boston, than in areas of

[[Page 19390]]

relatively low density, e.g., suburban Boston. We seek comment on the 
degree to which special access line density affects the cost 
disadvantage a potential entrant would face relative to an incumbent 
price cap LEC, and the reasons for any such disadvantage. We also seek 
comment on whether special access line density should be used to re-
define the relevant geographic market, and, specifically, whether line 
density might be used to subdivide, not supplant, the MSA as the 
relevant geographic market, or whether line density might replace the 
MSA.
    We request comment on how to establish line density zones, were we 
to use line density to define the relevant geographic market. We note 
that Commission rules generally require states to de-average state-wide 
UNE rates into at least three zones to reflect cost differences within 
the state. 47 CFR 51.507(f). Most states set rate zones for voice grade 
loops and DS1 loops, and some states also set rate zones for UNE loops 
with capacities higher than DS1 and for dedicated transport and 
entrance facility UNEs with various capacities. Would it be appropriate 
to use the rate zones already established by the states for comparable 
UNEs as the density zones for interstate special access services? Are 
UNEs and special access services comparable? For example, if a state 
does not de-average the rate for DS3 UNE loops, should the Commission 
use zones that the state established for DS1 loops for DS3 special 
access services? If a state does not de-average rates for dedicated 
transport or entrance facility UNEs, should the Commission use the 
zones that the state established for DS1 loops as the density zones for 
interoffice special access services? More generally, is it necessary to 
establish different sets of density zones for special access channel 
termination services extending between the LEC end office and the 
customer premises, for channel termination service extending between 
the LEC serving wire center and the IXC POP, and for interoffice 
facilities?
    We also seek comment on alternative methods to develop line density 
zones for special access rates. What is the appropriate measure of 
special access line density? Should we measure line density based on 
incumbent price cap LEC DS0-equivalent special access lines per square 
mile, DS1 lines per square mile, DS3 lines per square mile, or on some 
other basis? How should we group line densities: (1) 10,000 DS0-
equivalent special access lines and above? (2) 1,000 DS0-equivalent 
lines and below? We ask parties to propose line density zones for 
special access services, and to demonstrate why these zones would 
reflect varying degrees of special access competition.
    If we adopt line density zones to define geographic markets for 
special access services, how should we apply any triggers that we adopt 
for pricing flexibility? If we retain collocation as a trigger, is 
there some special access line density level that is so high, e.g., 
10,000 lines or greater per square mile, that we can conclude that 
examination of the presence of collocation facilities is unnecessary? 
If we use density zones to define geographic markets and presence of 
collocation as a trigger, should the amount of collocation required 
vary inversely with special access line density within a zone? For 
example, could we grant pricing flexibility where there is a relatively 
low amount of collocation in a relatively high density zone or where 
there is a relatively high amount of collocation in a relatively low 
density zone?
    Demand Responsiveness. Economists traditionally measure demand 
responsiveness by identifying other special access service options, 
relevant to a particular market, that are close substitutes, and 
determining whether consumers are impeded from switching to these 
substitutes. Although the Pricing Flexibility Order did not address 
demand responsiveness, it may be an important factor in assessing the 
level of competition for an incumbent price cap LEC's special access 
services. Parties may demonstrate that the market for a particular 
special access service is not competitive by showing that a significant 
number of an incumbent price cap LEC's customers cannot purchase a 
comparable special access service from another carrier. Parties are 
invited to provide a demand responsiveness analysis that shows whether 
demand responsiveness before grant of pricing flexibility differed 
significantly from demand responsiveness after grant of pricing 
flexibility. Parties should also show whether this response is 
significantly different between an MSA in which Phase II pricing 
flexibility has not been granted and an MSA in which it has. Because an 
MSA-by-MSA, service-by-service, customer-class-by-customer-class demand 
responsiveness analysis may be unduly burdensome, parties may aggregate 
demand responsiveness data, statistics, and analyses. Too much 
aggregation, however, may lead to inconclusive results. Because we have 
emphasized distinctions between product markets, (e.g., special access 
channel terminations between the LEC end office and the customer 
premises, special access channel terminations between the IXC POP and 
the LEC serving wire center, and other special access services), we ask 
parties not to aggregate data from these markets. Also, we ask parties 
to provide disaggregated customer class data, regardless of how they 
choose to identify the relevant customer class(es) (e.g., the occupancy 
of buildings, the distribution of revenues either by building or 
enterprise).
    Supply Responsiveness. Supply responsiveness measures the ability 
of carriers, other than the incumbent price cap LEC, to supply enough 
capacity to respond to demand migrating from the incumbent price cap 
LEC's network if it increases prices for its special access services. 
Supply elasticities of a LEC's competitors may be important in 
assessing the level of competition for an incumbent price cap LEC's 
special access services after Phase II pricing flexibility is granted. 
Parties may demonstrate that the market for a particular special access 
service is not competitive by showing that, for each product market, 
competitors do not have enough readily-available supply capacity to 
constrain the incumbent price cap LEC's market behavior.
    In the Pricing Flexibility Order, 64 FR 51258, Sept. 22, 1999, the 
Commission predicted that unreasonably high incumbent price cap LEC 
rates for special access to an area that lacked a competitive 
alternative would induce competitive entry that would in turn drive 
rates down. The Commission reasoned that substantial rate increases 
would not be sustainable because they would attract entry, increase 
competition, and ultimately result in lower rates. We seek comment on 
whether these predictions and the collocation triggers adopted in 1999 
in the Pricing Flexibility Order remain reasonable in light of 
marketplace data generated since the grant and exercise of Phase II 
pricing flexibility.
    We invite parties to provide detailed analyses of supply 
responsiveness, including the data necessary to determine whether an 
incumbent price cap LEC's competitors are supply-responsive. Parties 
providing this data should demonstrate the presence or lack of entry 
and/or increased competitive supply so that we may assess whether it is 
reasonable to continue to rely on our prior conclusions. We also ask 
commenters to show whether there is a statistically significant 
relationship between higher special access rates and high levels of 
competitive LEC entry, and to quantify the relationship. One way to 
quantify the relationship is to demonstrate a statistically significant 
relationship between increased

[[Page 19391]]

competitive LEC entry and investment and the relative levels of special 
access rates and/or special access profit margins in MSAs where Phase 
II pricing flexibility has been granted. We are particularly interested 
in data that would show whether the incumbent price cap LEC responded 
to the competitive threat on a narrowly targeted basis (e.g., by 
offering new lower contract tariff rates to the customer or customer 
location or specific building served by the competitor) or on a broader 
basis (e.g., MSA-wide).
    We ask parties to provide detailed information about their existing 
supply of special access facilities, including their ability or 
inability to self-deploy transport facilities, and/or to gain access to 
third-party alternatives. In providing such information, parties should 
disaggregate data among, at least, special access channel terminations 
between the LEC end office and the customer premises, and special 
access channel terminations between the IXC POP and the LEC serving 
wire center, and other special access facilities. We invite each 
commenter, for its company, to provide information about the supply of 
special access facilities at the MSA level for each MSA in which that 
company is present. If a party contends that the relevant geographic 
market is something other than the MSA, it should also provide 
information about the supply of special access facilities for that 
level of geographic market, for each market. We seek data for the 
following time periods: deployment before and up to the grant of Phase 
II pricing flexibility, deployment from the time pricing flexibility 
was granted until the present, and planned future deployment. Further, 
now that price cap LECs have obtained Phase II pricing flexibility in 
many MSAs, we ask parties to demonstrate the strength of any 
correlation between collocation and the provision of competitive 
transport facilities.
    We encourage competitive LECs and other parties that have deployed 
their own special access transport facilities to provide their actual 
deployment cost information instead of relying on theoretical, 
estimated, or modeled costs of price cap LEC special access transport 
facilities. We note that some deployment costs are location specific, 
and ask that parties compare their costs to the costs of price cap LEC 
transport facilities across facilities that are as similar as possible. 
Finally, we note that, in certain industries, a short-term supply 
response may be ameliorated by other long-term supply responsiveness 
factors. For example, in an industry where assets can be deployed only 
in large increments, fixed costs are high, and there are substantial 
transaction costs to adding supply, we expect lags between changes in 
prices and a supply response. We therefore ask parties to demonstrate 
that supply responsiveness trends are stable by providing evidence of 
long-term trends.
    Market Share. According to the DOJ Merger Guidelines, a high market 
share does not necessarily confer market power, but it is generally a 
condition precedent to a finding of market power. Although, in the 
Pricing Flexibility Order, the Commission did not rely on a market 
share analysis, we now invite parties to provide data and analysis of 
price cap LECs' market shares for special access services, by MSA where 
the LEC has obtained Phase II pricing flexibility, before and after the 
LEC implemented that pricing flexibility. Parties should supply market 
share data and analysis based on revenues and/or volumes on an 
annualized basis. If parties choose one measure of market share over 
others, they should identify their proposed measure with specificity 
and provide a thorough justification of their choice of that measure 
over other possible measures. We note that there are many ways of 
defining market share, such as volume of traffic, revenues, or network 
capacity. We ask parties to be specific in defining both the numerator 
and the denominator in the ratio that determines market share. For 
example, while parties should identify the size of the actual and 
potential market, they should not assume, without providing supporting 
evidence, that every building in an MSA is a potential customer for 
special access services. We also ask parties to disaggregate, as much 
as possible, any market share data provided by the special access 
product market (e.g., special access channel terminations between the 
LEC end office and customer premises), and by customer classes. We 
invite parties to provide market share information at the MSA level and 
any other geographic market level they deem appropriate.
    A company that enjoys a very high market share will be constrained 
from raising its prices substantially above cost if the market has high 
supply and demand elasticities. Thus, an analysis of the level of 
competition for special access services based solely on a price cap 
LEC's market share at a given time may not provide sufficient evidence 
for us to determine whether or not substantial competition exists. 
Therefore, we propose to consider market share in conjunction with 
other factors, including, but not limited to, supply and demand 
responsiveness, growth in demand, market shares before implementation 
of Phase II flexibility, and pricing trends. Parties providing market 
share analyses should take these factors into consideration, in 
particular, using market share analysis and supply responsiveness 
jointly to assess market power. Parties should ensure that the data and 
analyses they provide on supply responsiveness are consistent with 
their market share analyses and data. Parties need not provide 
estimates of supply elasticities separately from the data and analyses 
they include in their analyses of supply responsiveness. We expect that 
parties submitting this information will submit market share data and 
analyses that can be used in conjunction with supply responsiveness 
data and analyses.
    Where price cap LECs provide wholesale special access services to 
intermediate customers (e.g., IXCs, CMRS providers) that ultimately 
supply the retail market, we invite parties to provide wholesale market 
share analyses and data, excluding retail market analyses and data. If 
parties would like to include market share analysis and data for the 
special access retail market, they may do so. Finally, we ask parties 
to identify whether and, if so, how UNEs are included in their 
analysis.
    Barriers to Entry. An entry barrier may be defined as a cost of 
production that must be borne by competitors entering a market that is 
not borne by an incumbent already operating in the market. Cost 
advantages derived solely from the efficiency of the incumbent are not 
considered a barrier to entry. Access to important assets or resources 
that are not accessible to the potential entrant bestows an absolute 
advantage on the incumbent. The ease with which competitors can enter 
the special access market influences the level of competition in that 
market. For example, an incumbent price cap LEC might have a market 
share of over 50 percent, but no market power, if there are no 
significant barriers impeding entry into that market. In such a 
situation, the threat that an increase in price could eventually 
attract new entrants might be real enough to discourage the incumbent 
price cap LEC from increasing its price. Similarly, high rates of 
return may attract competitors to that market if entry barriers are 
relatively low.
    In the Pricing Flexibility Order, 64 FR 51258, Sept. 22, 1999, the 
Commission predicted that substantial, irreversible or sunk investment 
in facilities used to provide competitive services would be sufficient 
to constrain the incumbent price cap LECs' pricing behavior. The

[[Page 19392]]

Commission reasoned that collocation represented a financial investment 
by a competitor to establish facilities within a wire center and that 
the investment in transmission facilities associated with collocation 
arrangements was largely location-specific, e.g., the competitive LEC's 
facilities could not easily be removed and used elsewhere if entry 
failed. Because investment was location-specific, the entrant incurred 
sunk costs, making exclusionary strategies by the incumbent to drive 
the entrant from the market less likely to succeed. Parties in this 
proceeding contend that the economic reasoning in the Pricing 
Flexibility Order is incomplete. They claim that market entry by some 
carriers does not fully ameliorate the effect of sunk costs as a 
continuing and substantial barrier to entry. We seek comment on whether 
the assessment in the Pricing Flexibility Order of the relationship 
between entry barriers and irreversible, sunk investment by competitive 
carriers remains sufficiently robust. We also seek comment on whether 
this assessment has been validated by actual marketplace developments 
since adoption of the Pricing Flexibility Order in 1999.
    We seek comment on the effect of the exit of numerous competitors 
from the market on the Pricing Flexibility Order's predictive judgment 
that collocation is evidence of irreversible market entry. 
Specifically, the Pricing Flexibility Order predicted that collocation 
equipment would remain available and capable of providing service in 
competition with the incumbent, even if the incumbent succeeded in 
driving a competitor from the market. In light of the numerous 
competitors that have exited the market (in whole or in part) since 
1999, we seek comment on whether their collocation facilities (space 
and equipment) continue to be used by other competitive LECs or are 
available for use by competitive LECs without their first having to 
incur significant additional sunk costs. We note that incumbent price 
cap LECs retain data on which competitive carriers are collocated in 
their offices (and on the equipment located in the collocation spaces), 
and believe such information is particularly relevant here. We invite 
these incumbent price cap LECs to provide data (disaggregated on an MSA 
basis) that identifies whether and how the collocation spaces and 
equipment of competitive carriers that have exited the market are used 
by, or available to, other competitive carriers. We seek comment on 
what changes, if any, we should make to our pricing flexibility rules 
if the data show that collocation has not proven to be as accurate a 
proxy for irreversible competitive market entry as we expected.
    Other Factors. We invite interested parties to provide discussion, 
supply data, and present analysis of other factors in addition to those 
discussed above that would be helpful in evaluating the level of 
competition for special access services in the MSAs where price cap 
LECs have obtained Phase II pricing flexibility. The discussion and 
analysis of these additional factors should include an assessment of 
the importance of these factors in making a final determination 
regarding the level of competition in the special access market.

Relationship Between Market Power and Impairment Standards

    At the same time that the Commission established its pricing 
flexibility rules for special access services, it was implementing 
section 251 of the 1996 Act that require incumbent LECs to offer 
unbundled network elements. In implementing unbundling, the Commission 
repeatedly confronted the issue of whether to unbundle network elements 
or combinations of network elements comprising essentially the same 
facilities as those used to provide special access services. For 
example, at one time, the Commission imposed temporary use restrictions 
on combinations of unbundled loops and unbundled dedicated transport 
(known as enhanced extended links, or EELs) to prevent the unbundling 
requirements from causing a significant reduction of the incumbent 
LECs' special access revenues due to the possibility of mass migration 
of special access services to cost-based UNEs. More recently, in the 
Triennial Review Order, 68 FR 52307, Sept. 2, 2003, however, the 
Commission adopted new EELs eligibility criteria that were not based on 
the preservation of special access revenues. Some parties in these 
unbundling proceedings advocated variations on the pricing flexibility 
standard for determining when certain network elements should be 
unbundled. Further, the Commission recently modified its unbundling 
analysis in the Triennial Remand Order, 70 FR 8940, Feb. 24, 2005, in 
response to the USTA II decision, in which the Court of Appeals for the 
District of Columbia Circuit instructed the Commission to consider 
tariffed special access services when conducting an impairment analysis 
to determine what network elements should be unbundled. Therefore, we 
seek comment on the relationship, if any, between the market power 
threshold that underscores the pricing flexibility rules and the 
impairment standard for unbundling.

Tariff Terms and Conditions

    Background. Although traditional market power analysis focuses on 
whether a firm can impose a substantial and sustained price increase 
within, and examines the cost characteristics of, the relevant 
geographic and product/service market, market power can also be 
exercised through exclusionary conduct. Evidence of such conduct may be 
found in the terms and conditions in a carrier's tariff. The Commission 
has long been concerned that dominant carriers could offer their 
services on terms and conditions that weaken or harm the competitive 
process sufficiently to reduce consumer welfare. With regard to special 
access services, the Commission has taken care to prevent exclusionary 
conduct while the market transitions from monopoly to competition. For 
example, in the Expanded Interconnection Order, 57 FR 54205, Nov. 17, 
1992, the Commission permitted price cap LECs to offer volume and term 
discounts for special access services without any competitive showing, 
but it found that some large discounts might be anticompetitive or 
raise questions of discrimination. Moreover, in the Transport Rate 
Structure and Pricing Order, 60 FR 50120, Sept. 28, 1995, the 
Commission prohibited price cap LECs from including growth discounts in 
their tariffs, and, in the Expanded Interconnection Order, it limited 
the termination liabilities that they may tariff.
    In this proceeding, parties complain that the terms and conditions 
for special access services in the tariff offerings of price cap LECs 
represent exclusionary conduct designed to deter market entry or induce 
market exit. They claim that, as dominant firms, price cap LECs can and 
have tariffed pricing structures through terms and conditions that 
negate the price breaks a competitor can offer a customer because the 
customer would then lose its discounts from the incumbent on other 
services or in other markets. They contend that dominant firms are 
likely to engage in this form of exclusionary conduct because, unlike 
classic exclusionary pricing, this conduct does not require the 
dominant firm to set any price below cost.
    The BOCs respond that they have not engaged in exclusionary 
conduct, and that such allegations of strategic anticompetitive pricing 
are mere theoretical arguments. They point out that special deals to 
attract or retain customers may injure individual competitors but 
result in a net increase

[[Page 19393]]

in overall consumer welfare. They also claim that a general prohibition 
on any discriminatory conduct would restrict competitive behavior, 
reduce competition, and harm consumers by denying them the direct 
benefit of any tariff terms, including volume and term price 
reductions. The BOCs contend that the pricing flexibility triggers, 
which serve as a proxy for irreversible market entry, ensure that any 
anticompetitive strategy to frustrate entry through the use of pricing 
flexibility tariffs or contract tariffs will be too late to be 
effective. The BOCs further claim that precluding volume and term 
discounts would place them at a competitive disadvantage, arguing that 
long-term contracts assure recovery of direct facility costs and allow 
amortization of up-front sunk costs. The BOCs argue that all carriers 
offer volume and term discounts and that customers willingly agree to 
them to obtain discounts. They contend that the parties complaining 
about such terms and conditions have extensive networks of their own 
and can self-provision any service they choose not to purchase from a 
BOC.
    Discussion. A provider dominant in the market for one product may 
seek to influence the purchase of other products by imposing terms and 
conditions that bundle the products together. In this proceeding we are 
concerned with the question of whether a firm bundles the purchase of 
one product with the purchase of another product that the customer 
might not have bought. As with the market power analysis described 
above, in evaluating the terms and conditions associated with a price 
cap LEC tariff, parties should identify the special access product and 
geographic markets. Special access services involve facilities 
dedicated to connecting two locations. We seek comment on whether this 
connection is a single product or whether it represents several 
products. As stated above, we also ask whether the three categories of 
product markets for special access services identified in the Pricing 
Flexibility Order--(1) special access channel terminations between a 
price cap LEC's end office and the customer premises, (2) special 
access channel terminations between an IXC POP and a LEC serving wire 
center, and (3) other special access facilities--continue to be the 
relevant product markets. Also as stated above, we seek comment on 
whether the MSA remains the logical geographical market.
    In conjunction with these product and geographic market analyses 
for special access services, we seek comment on the reasonableness of 
various levels of aggregation that a carrier may require of a customer 
to qualify for a discount. For example, are there cost justifications 
for bundling discounts with aggregations of services (e.g., DS-1, DS-3, 
OCn) and/or geographic regions (e.g., routes, wire centers, zones, 
LATAs, LEC footprints)? Is it reasonable for LECs to require that 
customers aggregate purchases across equivalent transport and special 
access products (e.g., channel terminations and entrance facilities)? 
When price cap LECs base discounts on aggregations of products, do they 
offer equivalent non-bundled, product-by-product discounts?
    Where a customer must make a volume commitment to obtain a 
discount, is it reasonable to condition the discount to the customer's 
previous purchase level? Does the manner of specifying volume levels 
affect the quality of competition? Do the discounts offered in price 
cap LEC tariffs vary with the volume of service purchased, and, if so, 
how? Is there a trade-off between the amount of aggregation allowed and 
the restrictiveness of the discount terms? Finally, parties should 
comment on whether they believe that conditioning discounts on prior 
volumes and future volume commitments violates the prohibition on 
growth discounts established in the Pricing Flexibility Order.
    Where discounts are based on the length of the term commitment, we 
seek comment on the relationship between up-front, non-recurring 
charges and termination penalties. Prior to the advent of competition, 
the trade-off between an up-front charge and amortization over the 
lease period, or term of the agreement, was the cost of money. With 
competition, non-recurring charges and termination penalties raise 
issues concerning barriers to entry, risk bearing, and retail versus 
wholesale churn. We seek comment on whether we should allow or require 
up-front, non-recurring charges to recover the costs associated with 
initiating service for a specific customer. Should we require 
amortization over the life of the facility of the cost of activities 
that benefit all customers using the facility? Additionally, we seek 
comment on whether it is reasonable for a price cap LEC to bundle a 
tariff discount with the condition that the customer terminate service 
with a competitor. Is such bundling for the same service on the same 
route reasonable? Finally, is it reasonable for a price cap LEC to 
bundle a tariff discount with restrictions on the use or reuse of a 
facility?

Relationship Between New Pricing Flexibility Rules and New Special 
Access Price Cap Rules

    If we modify the pricing flexibility rules, we seek comment on 
whether and how to adjust the price cap rules to incorporate the 
effects of changes in the pricing flexibility rules. In the event that 
a price cap LEC currently has pricing flexibility for services for 
which it will not have flexibility under any new rules we adopt, we 
tentatively conclude that rates for these services should be regulated 
no differently from rates for services for which a LEC never had 
pricing flexibility and for which it would have none under any new 
criteria. We may, for example, adopt a single price cap special access 
basket that includes separate service categories for special access DS1 
channel terminations extending between a price cap LEC end office and a 
customer premises, for DS1 channel termination services extending 
between a price cap LEC serving wire center and an IXC POP, and for DS1 
interoffice facilities. If a price cap LEC either never had pricing 
flexibility for DS1 special access services, or currently has pricing 
flexibility but will no longer have it for these services under any new 
criteria, it would have to establish separate rates in a tariff and 
categories within the basket for each of the three service categories. 
Going forward, under the new price cap rules, the rate levels for the 
DS1 channel termination and interoffice facility services would be 
subject to the upper SBI limit for each category. These rate levels 
also would be constrained, as would those for any other special access 
service subject to price caps, because they are reflected in the API 
for the special access services basket that, in turn, must not exceed 
the PCI for the basket. We tentatively conclude that services subject 
to a new price cap plan going forward should be treated the same 
regardless of whether they never had or currently have pricing 
flexibility because, under the new criteria, there presumably is no 
distinction between the two services. We seek comment on this tentative 
conclusion. We also invite comment on other options under a new price 
cap plan for regulating rates for services that currently have pricing 
flexibility, but would have none under any new rules we might adopt.
    We tentatively conclude that we should use the same approach to 
establish initial rates under a new price cap plan for services for 
which a LEC currently has pricing flexibility, but will have none going 
forward under any new criteria we adopt in this proceeding, and for 
services for which a LEC never had

[[Page 19394]]

pricing flexibility and for which it would have none under any new 
pricing flexibility criteria. For example, if we find that initial 
rates should be based on a forward-looking cost study, rates for both 
of these categories of services would be set based on a forward-looking 
cost study, even though previously they were regulated differently. 
Again, there presumably is no distinction between the two services 
under any new pricing flexibility criteria that we adopt. There is 
therefore no obvious reason to establish initial rates for these 
services using different methods. We seek comment on this tentative 
conclusion. We also invite comment on other options under a new price 
cap plan for setting initial rates for services that currently have 
pricing flexibility, but would have none under any new criteria we 
adopt.

Procedural Matters

Initial Regulatory Flexibility Act Analysis

    As required by the Regulatory Flexibility Act of 1980, as amended 
(RFA) the Commission has prepared this present Initial Regulatory 
Flexibility Analysis (IRFA) of the possible significant economic impact 
on a substantial number of small entities by the policies and rules 
proposed in this NPRM. Written public comments are requested on this 
IRFA. Comments must be identified as responses to the IRFA and must be 
filed by the deadlines for comments on the NPRM provided in paragraph 
62 of the item. The Commission will send a copy of the NPRM, including 
this IRFA, to the Chief Counsel for Advocacy of the Small Business 
Administration (SBA). In addition, the NPRM and IRFA (or summaries 
thereof) will be published in the Federal Register.

Need for, and Objectives of, the Proposed Rules

    In this NPRM, the Commission explores the appropriate regulatory 
regime to establish for price cap LEC interstate special access 
services after June 30, 2005. The Commission tentatively concludes that 
a price cap regime should continue to apply and seeks comment on this 
tentative conclusion. The Commission also seeks comment on the 
appropriate rate structure and levels under any such price cap regime, 
including seeking comment on: a productivity factor, a growth factor, 
earnings sharing, a low-end adjustment, rate baskets and bands, and the 
initial rates. As part of our examination, we also seek comment on 
whether to maintain, modify, or repeal the pricing flexibility rules.

Legal Basis

    This rulemaking action is supported by sections 1, 2, 4(i), 4(j), 
201-205, and 303 of the Communications Act of 1934, as amended, 47 
U.S.C. 151, 152, 154(i), (j), 201-205, and 303.

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

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 603, directs 
agencies to provide a description of, and, where feasible, an estimate 
of the number of small entities that may be affected by the proposed 
rules. 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).
    In this section, we further describe and estimate the number of 
small entity licensees and regulatees that may also be directly 
affected by rules adopted in this proceeding. 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 (TRS) 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, we discuss the total estimated numbers of small businesses that 
might be affected by our actions.
    We have 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. We have therefore included small incumbent LECs 
in this RFA analysis, although we emphasize that this RFA action has no 
effect on Commission analyses and determinations in other, non-RFA 
contexts.
    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 1,000 employees or more. Thus, under this size standard, 
the majority of firms can be considered small.
    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 estimates that most providers of incumbent 
local exchange service are small businesses that may be affected by the 
rules and policies adopted herein.
    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

[[Page 19395]]

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 rules and policies adopted herein.

Description of Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    The NPRM explores the appropriate post-June 30, 2005 interstate 
special access regime for price cap carriers. The NPRM considers the 
varying options on setting rate structures and rate levels, as well as 
whether to maintain, modify, or repeal the pricing flexibility rules. 
If we determine to retain without modification the pricing flexibility 
rules and permit the existing price cap interstate special access 
regime to continue unchanged, there will be no additional reporting or 
recordkeeping burden on price cap LECs with respect to interstate 
special access rate structures or rate levels. If we adopt new or 
modified interstate special access charge rules, including without 
limitation the pricing flexibility rules, such rule changes may require 
additional or modified recordkeeping. For example, price cap LECs may 
have to file amendments to certain aspects of their interstate special 
access tariffs.

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

    The RFA requires an agency to describe any significant alternatives 
that it has considered in reaching its proposed approach, which may 
include the following four alternatives (among others): (1) The 
establishment of differing compliance or reporting requirements or 
timetables that take into account the resources available to small 
entities; (2) the clarification, consolidation, or simplification of 
compliance or reporting requirements under the rule for small entities; 
(3) the use of performance, rather than design, standards; and (4) an 
exemption from coverage of the rule, or any part thereof, for small 
entities. See 5 U.S.C. 603.
    The overall objective of this proceeding is to determine the 
appropriate interstate access charge regime for price cap LECs. As part 
of our examination, we seek comment on the appropriate price cap 
interstate special access rate structures and levels, including seeking 
comment on: a productivity factor, a growth factor, earnings sharing, a 
low-end adjustment, rate baskets and bands, and the initial rates. We 
also seek comment on whether to maintain, modify, or repeal the pricing 
flexibility rules. We have invited commenters to provide economic 
analysis and data. We will consider any proposals made to minimize 
significant economic impact on small entities.

Federal Rules That May Duplicate, Overlap, or Conflict With the 
Proposed Rules

    None.

Ex Parte Presentations

    This proceeding will continue to be governed by ``permit-but-
disclose'' ex parte procedures that are applicable to non-restricted 
proceedings under 47 CFR 1.1206. Parties making oral ex parte 
presentations are reminded that memoranda summarizing the presentation 
must contain a summary of the substance of the presentation and not 
merely a listing of the subjects discussed. More than a one-or two-
sentence description of the views and arguments presented generally is 
required. Other rules pertaining to oral and written presentations are 
set forth at 47 CFR 1.1206(b). Interested parties are to file any 
written ex parte presentations in this proceeding with the Commission's 
Secretary, Marlene H. Dortch, 445 12th Street, SW., TW-B204, 
Washington, DC 20554, and serve with one copy: Pricing Policy Division, 
Wireline Competition Bureau, 445 12th Street, SW., Room 5-A452, 
Washington, DC 20554, Attn: Margaret Dailey. Parties shall also serve 
with one copy: Best Copy and Printing, Inc., Portals II, 445 12th 
Street, SW., Room CY-B402, Washington, DC, 20554, telephone (202) 488-
5300, facsimile (202) 488-5563, e-mail [email protected], or via its Web 
site http://www.bcpiweb.com.

Comment Filing Procedures

    Pursuant to the Commission's rules, interested parties may file 
comments on or before June 13, 2005 and reply comments on or before 
July 12, 2005. 47 CFR 1.415, 1.419. All pleadings must reference WC 
Docket No. 05-25 and RM-10593. Comments may be filed using the 
Commission's Electronic Comment Filing System (ECFS) or by filing paper 
copies. Comments filed through the ECFS can be sent as an electronic 
file via the Internet to http://www.fcc.gov/cgb/ecfs. Generally, only 
one copy of an electronic submission must be filed. If multiple docket 
or rulemaking numbers appear in the caption of this proceeding, 
however, commenters must transmit one electronic copy of the comments 
to each docket or rulemaking number referenced in the caption. In 
completing the transmittal screen, commenters should include their full 
name, U.S. Postal Service mailing address, and the applicable docket or 
rulemaking number. Parties may also submit an electronic comment by 
Internet e-mail. To get filing instructions for e-mail comments, 
commenters should send an e-mail to [email protected], and should include 
the following words in the body of the message: ``get form your e-mail 
address.'' A sample form and directions will be sent in reply. 
Commenters also may obtain a copy of the ASCII Electronic Transmittal 
Form (FORM-ET) at http://www.fcc.gov/e-file/email.html.
    Parties who choose to file by paper must file an original and four 
copies of each filing. If more than one docket or rulemaking number 
appear in the caption of this proceeding, commenters must submit two 
additional copies for each additional docket or rulemaking number.
    Filings can be sent by hand or messenger delivery, by commercial 
overnight courier, or by first-class or overnight U.S. Postal Service 
mail (although we continue to experience delays in receiving U.S. 
Postal Service mail). The Commission's contractor, Natek, Inc., will 
receive hand-delivered or messenger-delivered paper filings for the 
Commission's Secretary at 236 Massachusetts Avenue, NE., Suite 110, 
Washington, DC 20002. The filing hours at this location are 8 a.m. to 7 
p.m. All hand deliveries must be held together with rubber bands or 
fasteners. Any envelopes must be disposed of before entering the 
building. Commercial overnight mail (other than U.S. Postal Service 
Express Mail and Priority Mail) must be sent to 9300 East Hampton 
Drive, Capitol Heights, MD 20743. All filings must be addressed to the 
Commission's Secretary, Office of the Secretary, Federal Communications 
Commission.
    Regardless of whether parties choose to file electronically or by 
paper, parties should also file one copy of any documents filed in this 
docket with the Commission's copy contractor, Best Copy and Printing, 
Inc., Portals II, 445 12th Street, SW., Washington, DC 20554, telephone 
(202) 488-5300, facsimile (202) 488-5563, e-mail [email protected], or 
via its Web site at http://www.bcpiweb.com. In addition, one copy of 
each submission must be filed with the Chief, Pricing Policy Division, 
445 12th Street, SW., Washington, DC 20554. Documents filed

[[Page 19396]]

in this proceeding will be available for public inspection during 
regular business hours in the Commission's Reference Information 
Center, 445 12th Street, SW., Washington, DC 20554, and will be placed 
on the Commission's Internet site. For further information, contact 
Margaret Dailey at (202) 418-1520.
    Accessible formats (computer diskettes, large print, audio 
recording and Braille) are available to persons with disabilities by 
contacting the Consumer & Governmental Affairs Bureau at (202) 418-
0531, TTY (202) 418-7365, or at [email protected].

Ordering Clauses

    Accordingly, it is ordered that, pursuant to the authority 
contained in sections 1, 2, 4(i), 4(j), 201-205, and 303 of the 
Communications Act of 1934, as amended, 47 U.S.C. 151, 152, 154(i), 
154(j), 201-205, and 303, Notice is hereby given of the rulemaking 
described above and Comment is sought on those issues.
    It is further ordered that the Commission's Consumer and 
Governmental Affairs Bureau, Reference Information Center, shall send a 
copy of this Notice of Proposed Rulemaking, including the Initial 
Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of 
the Small Business Administration.

Federal Communications Commission.
Marlene H. Dortch,
Secretary.
[FR Doc. 05-7350 Filed 4-12-05; 8:45 am]
BILLING CODE 6712-01-P