[Federal Register Volume 62, Number 21 (Friday, January 31, 1997)]
[Proposed Rules]
[Pages 4670-4717]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2142]
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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Parts 61 and 69
[CC Docket Nos. 96-262, 94-1, 91-213, 96-263; FCC No. 96-488]
Access Charge Reform; Price Cap Performance Review for Local
Exchange Carriers; Transport Rate Structure and Pricing; Usage of the
Public Switched Network by Information Service and Internet Access
Providers
AGENCY: Federal Communications Commission.
ACTION: Proposed rule.
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SUMMARY: The Notice of Proposed Rulemaking (NPRM) begins a review of
the Commission's interstate access charge rules, together with its
price cap rules, to establish fair rules of competition for both the
local and long distance markets and determine the extent to which it
must revise these rules in light of the local competition and Bell
Operating Company entry provisions of the 1996 Act and state actions to
open local networks to competition, the effects of potential and actual
competition on incumbent LEC pricing for interstate access, and the
impact of the Act's mandate to preserve and enhance universal service.
The Commission outlines two possible approaches for addressing claims
that existing access charge levels are excessive, for establishing a
transition to access charges that more closely reflect economic costs,
and for deregulating incumbent LEC exchange access services as
competition develops in the local exchange and exchange access markets.
The first approach is a market-based approach under which the
Commission would rely on potential and actual competition from new
facilities-based providers and entrants purchasing unbundled network
elements to drive prices for interstate access services toward economic
cost. The second approach is a prescriptive one under which the
Commission would specify the nature and timing of the changes to the
existing rate levels.
DATES: Comments for the notice of proposed rulemaking are due January
27, 1997,\1\ and replies are due February 13, 1997. Comments for the
notice of inquiry are due no later than March 3, 1997, and replies are
due April 1, 1997.
\1\ Note: This document was received at the Office of the
Federal Register on January 24, 1997.
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FOR FURTHER INFORMATION CONTACT: Richard Lerner, Attorney, Common
Carrier Bureau, Competitive Pricing Division, (202) 418-1530. For
additional information concerning the information collections contained
in this Report and Order contact Dorothy Conway at 202-418-0217, or via
the Internet at dconway@fcc.gov.
SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Notice
of Proposed Rulemaking adopted December 23, 1996, and released December
24, 1996. The full text of this Proposed Rulemaking is available for
inspection and copying during normal business hours in the FCC
Reference Center (Room 239), 1919 M St., NW., Washington, DC. The
complete text also
[[Page 4671]]
may be obtained through the World Wide Web, at http://www.fcc.gov/
Bureaus/Common_Carrier/Notices/fcc96488.wp, or may be purchased from
the Commission's copy contractor, International Transcription Service,
Inc., (202) 857-3800, 2100 M St., NW., Suite 140, Washington, DC 20037.
Pursuant to the Telecommunications Act of 1996 and the decision by the
Circuit Court of Appeals for the District of Columbia in Competitive
Telecommunications Association v. FCC, 87 F.3d 522 (D.C. Cir. 1996)
(CompTel v. FCC), the Commission is releasing this NPRM to seek comment
on rules that would bring about cost-based access rates.
General
In passing the 1996 Act, Congress sought to establish a pro-
competitive, deregulatory national policy framework for the United
States telecommunications industry. The NPRM commences the third in a
trilogy of actions that collectively are intended to foster and
accelerate the introduction of efficient competition in all
telecommunications markets, pursuant to the mandate of the 1996 Act. In
August 1996, the Commission adopted rules to implement Sections 251 and
252 of the 1996 Act, which establish the basic obligations of carriers,
especially in the local exchange and exchange access markets. In
November 1996, pursuant to Section 254 of the 1996 Act, the Federal-
State Universal Service Joint Board issued its recommendations to the
Commission for reforming its system of universal service support so
that universal service is preserved and advanced, but in a manner that
permits the local exchange and exchange access markets to move from
monopoly to competition. The NPRM seeks comment on proposals to reform
our system of interstate access charges to make it compatible with the
competitive paradigm established by the 1996 Act and state actions to
open local networks to competition.
Scope
Depending on the individual proposal, the proposed rule revisions
considered in this NPRM apply to all LECs, only to incumbent LECs, or
only to incumbent price cap LECs. The NPRM generally proposes adopting
rules applicable only to price cap LECs, with certain limited
exceptions. Reforms in two areas would apply to all incumbent LECs: (1)
The proposals regarding reform of the transport rate structure,
including the transport interconnection charge (TIC); and (2) the
effects of the universal service changes under section 254 that the
Commission will adopt based upon the Joint Board Recommended Decision.
Federal-State Joint Board on Universal Service, CC Docket No. 96-45,
Recommended Decision, 61 FR 63778 (December 2, 1996) (Joint Board
Recommended Decision). The Commission also asks whether its common line
rate structure modifications should also apply to rate-of-return LECs.
The NPRM also seeks comment on whether terminating access services of
non-incumbent LECs should be regulated. The NPRM states that the
Commission will undertake comprehensive access reform for rate-of-
return incumbent LECs in a separate NPRM.
Part 69 Access Rate Structure
The NPRM seeks comment on a number of proposals to revise the
access rate structure rules so that they better reflect the manner in
which LECs incur costs when providing access. Following up on the Joint
Board's observation in the Universal Service Recommended Decision that
the current per-minute CCL charge is inefficient because common line
costs generally are not traffic sensitive, the NPRM seeks comment on
assessing a flat charge on IXCs on a per-presubscribed interexchange
carrier (PIC) basis, or on end users in cases where the end user has
not selected a PIC. The NPRM also seeks comment on permitting LECs to
assess flat monthly charges to recover the non-traffic-sensitive
portion of local switching costs and permitting LECs to establish a
per-message call setup charge.
The NPRM also proposes to adopt a permanent transport rate
structure, including phasing out the TIC. The NPRM seeks comment on how
the transport rate structure should be modified and addresses issues
raised in Comptel v. FCC. The NPRM seeks comment on alternative
resolutions to the TIC, including reassigning TIC costs to facility-
based access charges or to nonregulated activities; leaving some or all
of the costs in the TIC, subject to competitive market pressures; a
combination of the previous two approaches; or phasing TIC costs out
over a predetermined schedule.
Access Reform
The NPRM proposes that, regardless of the approach adopted for
access reform, the goal should be deregulation in the presence of
substantial competition. The NPRM seeks comment on how to determine
when substantial competition exists.
The NPRM seeks comment on alternative approaches for access reform:
a market-based approach, a prescriptive approach, or some combination
of the two approaches. It seeks comment on which would be the best
means to drive access rates to levels that would enable the Commission
to deregulate the interstate access market. A market-based approach to
access reform would rely on competition to move access prices toward
economic levels, and lift regulatory constraints in phases as
competition allows. The prescriptive approach would entail more
Commission involvement in moving access prices toward economic levels.
The NPRM seeks comment on whether the Commission should require
incumbent LECs to reprice their access services based on TSLRIC
studies. The NPRM also seeks comment on other methods of re-
initializing price cap indices and on increasing the X-Factor as
methods to drive access rates toward forward-looking economic costs, if
the Commission were to adopt a prescriptive approach to access reform.
Impact on Universal Service Proceeding
The NPRM observes that universal service funding may replace some
of the revenues collected by the carrier common line charge or other
interstate access charges, and tentatively concludes that a downward
exogenous cost adjustment to the LECs' price cap indices should be made
to reflect any allocation of additional universal service funds to the
interstate jurisdiction. The NPRM also invites parties to comment on
whether this downward adjustment should be across-the-board, or
targeted to a particular basket or service category.
Transition
IXCs and incumbent LECs agree that a significant ``gap'' exists
between the forward-looking, economic cost of providing unbundled
network elements and the embedded costs on which existing access
charges are based. The NPRM seeks comment on how this gap should be
calculated, and on several specific proposals for permitting LECs an
opportunity to recover some or all of that cost difference. The NPRM
also seeks comment on whether any cost difference resulting from
``under-depreciation'' warrants separate treatment from residual costs
resulting from other factors.
Terminating Access
The NPRM observes that, although the called party chooses the
terminating access provider, terminating access charges are not imposed
on the called party. As a result, competitive LECs may
[[Page 4672]]
exercise market power over terminating access. Therefore, the NPRM
seeks comment on whether there is need for any regulation of
terminating access offered by new entrants.
ESP Exemption
The NPRM and Notice of Inquiry observe that Internet usage has
increased dramatically in recent years. The Commission seeks comment on
the effects of this increased traffic on the public switched network,
and on whether the Commission should address the BOCs' request that the
Commission modify or eliminate the exemption from access charges that
enhanced service providers (ESPs) currently receive.
Regulatory Flexibility Analysis
As required by the Regulatory Flexibility Act, the NPRM contains an
Initial Regulatory Flexibility Analysis which is set forth in Section
XI.C of the NPRM.
Paperwork Reduction Act
This NPRM contains either a proposed or modified information
collection. The Commission, as part of its continuing effort to reduce
paperwork burdens, invites the general public and the Office of
Management and Budget (OMB) to comment on the information collections
contained in this NPRM, as required by the Paperwork Reduction Act of
1995, Public Law No. 104-13. Public and agency comments are due at the
same time as other comments on this NPRM; OMB notification of action is
due 60 days after publication of this summary in the Federal Register.
Comments should address: (a) whether the proposed collection of
information is necessary for the proper performance of the functions of
the Commission, including whether the information shall have practical
utility; (b) the accuracy of the Commission's burden estimates; (c)
ways to enhance the quality, utility, and clarity of the information
collected; and (d) ways to minimize the burden of the collection of
information on the respondents, including the use of automated
collection techniques or other forms of information technology.
Public reporting burden for the collection of information is
estimated as follows:
OMB Approval Number: None.
Title: Access Charge Reform.
Form No.: N/A.
Type of Review: New collection.
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No. of
Information collection respondents Annual hour burden per response Total annual burden
(approx.)
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Market-based Approach............ 13 137,986 hours.................. 1,793,818 hours.
Prescriptive Approach............ 13 400 hours...................... 5200 hours.
Transition Mechanism for access 13 220 hours...................... 2840 hours.
charges.
Regulating Terminating Access.... 3497 26 hours....................... 90,922 hours.
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Total Annual Burden: 1,895,620 hours.
Respondents: Business or other for-profit.
Estimated costs per respondent: $0.
Needs and Uses: The NPRM would use the data submission under
consideration to bring about competition in the access charge market,
and to bring about cost-based access charges.
Dates: Comments are due on or before January 27, 1997, and Reply
Comments are due on or before February 13, 1997. Written comments must
be submitted by the Office of Management and Budget (OMB) on the
proposed and/or modified information collections on or before 60 days
after publication of this summary in the Federal Register.
SYNOPSIS OF NOTICE OF PROPOSED RULEMAKING, AND NOTICE OF INQUIRY
I. Introduction
A. Overview
1. In passing the Telecommunications Act of 1996 (1996 Act),
Congress sought to establish ``a pro-competitive, de-regulatory
national policy framework'' for the United States telecommunications
industry. With this NPRM, we commence the third in a trilogy of actions
that collectively are intended to foster and accelerate the
introduction of efficient competition in all telecommunications
markets, pursuant to the mandate of the 1996 Act. In August 1996, as
required by the 1996 Act, we adopted rules to implement Sections 251
and 252 of the Act, which establish the basic obligations of carriers,
especially in the local exchange and exchange access markets. In
November 1996, pursuant to Section 254 of the Act, the Federal-State
Universal Service Joint Board issued its recommendations to the
Commission for reforming our system of universal service so that
universal service is preserved and advanced, but in a manner that
permits the local exchange and exchange access markets to move from
monopoly to competition. In this proceeding, we seek to reform our
system of interstate access charges to make it compatible with the
competitive paradigm established by the 1996 Act and with state actions
to open local networks to competition.
2. The 1996 Act seeks to develop efficient competition by opening
all telecommunications markets through a pro-competitive, deregulatory
national policy framework. To that end, the 1996 Act eliminates state
and local legal and regulatory barriers to entry, and bans state and
local governmental actions that have the effect of prohibiting any
entity from offering any telecommunications service. The Act also
requires all telecommunications carriers to interconnect directly or
indirectly with other telecommunications carriers in order to
facilitate the creation of a ``network of networks.'' In addition, the
1996 Act requires all local exchange carriers (LECs) to establish
reciprocal compensation arrangements for the transport and termination
of calls, and prohibits incumbent LECs from charging more than the
additional cost incurred to transport and terminate a call. The Act
further directs all LECs to provide number portability and dialing
parity. The 1996 Act confers three fundamental rights on potential
competitors to incumbent LECs: the right to interconnect at rates based
on cost, including a reasonable profit; the right to obtain unbundled
network elements at cost-based rates; and the right to obtain an
incumbent LEC's retail services at wholesale discounts in order to
resell those services.
3. The Act also directs the Commission, after receiving the
recommendations of a Federal-State Joint Board, to define the services
to be supported by federal universal service mechanisms, to support
such services in a manner that is ``explicit and sufficient,'' and to
ensure that ``every telecommunications carrier that provides interstate
telecommunications
[[Page 4673]]
services shall contribute, on an equitable and non-discriminatory
basis, to the specific, predictable and sufficient mechanisms * * * to
preserve and advance universal service.'' The Act further provides that
multiple carriers may seek and obtain designation as carriers eligible
to receive universal service funds for service within a particular
geographic area. As a whole, these provisions of the 1996 Act, when
fully implemented, should greatly reduce the legal, regulatory,
economic, and operational barriers to entry in the local exchange and
exchange access market.
4. The 1996 Act also ends the prohibition against provision of
interLATA services by Bell Operating Companies (BOCs) that was imposed
by the Modification of Final Judgment. United States v. AT&T, 552
F.Supp. 131 (D.D.C. 1982) (MFJ). BOCs were permitted immediately upon
enactment of the 1996 Act to begin to provide certain interLATA
services, including out-of-region and incidental interLATA services. In
order to provide interLATA services originating in-region, however, a
BOC is first required to obtain Commission approval. In order to
approve such an application, the Commission must find that the BOC has
met the requirements of the ``competitive checklist,'' that the BOC
will comply with the Act's separate affiliate requirements, and that
grant of the application is consistent with the public interest,
convenience and necessity.
5. These fundamental changes in the structure and dynamics of the
telecommunications industry wrought by the 1996 Act now necessitate
that the Commission review its existing access charge regulations to
ensure that they are compatible with the 1996 Act's far-reaching
changes. We also seek to eliminate, either now or as soon as changes in
the marketplace permit, any unnecessary regulatory requirements on
incumbent LEC exchange access services. While a broad range of
telecommunications industry participants, including both interexchange
carriers (IXCs) and incumbent LECs, have long advocated for the
Commission to commence a comprehensive review of access charges, the
Act accelerates and intensifies the need for such a review. We commence
this review of the Commission's Part 69 interstate access charge rules,
together with its Part 61 price cap rules, to determine the extent to
which we must revise these rules to take account of the local
competition and Bell entry provisions of the 1996 Act and state actions
to open local networks to competition; to reflect the effects of
potential and actual competition on incumbent LECs' pricing for
interstate access; to implement the Act's direction to end implicit
universal service subsidies in favor of a system of explicit subsidies;
and to establish fair rules of competition for both the local exchange
and interexchange markets, especially as carriers begin to offer
service packages that bundle local and interexchange offerings.
6. We adopted our Part 69 rules at approximately the same time that
AT&T divested its local exchange operations and established the seven
regional Bell companies pursuant to the MFJ. The rules were designed to
promote competition in the interstate, interexchange market by ensuring
that all IXCs would be able to originate and terminate their traffic
over incumbent LEC networks at just, reasonable, and non-discriminatory
rates. While our Part 69 rules expressly contemplated competition in
the interexchange market, they were not designed to address the
potential effects of competition in the local exchange and exchange
access market. Indeed, these rules reflected the reality of the
telecommunications marketplace in 1983--and what was mandated in some
states prior to the 1996 Act--that the incumbent LEC was the monopoly
provider of local exchange and exchange access services. In adopting
the Part 69 rules, the Commission did not seek to eliminate implicit
support flows, but in fact incorporated such flows into the Part 69
rate structure. Our Part 69 rules are designed to be consistent with
our jurisdictional separations rules that govern the allocation of
incumbent LECs' expenses and investment between the interstate and
state jurisdictions. Consequently, the Part 69 access charge system
likely reflects any jurisdictional cost misallocations mandated by our
current separations rules. As such, the Part 69 rules are fundamentally
inconsistent with the competitive market conditions that the 1996 Act
attempts to create. We will soon begin a related proceeding to examine
our jurisdictional separations rules in light of the 1996 Act.
7. Competition isolates and highlights the inefficiencies and
distortions present in the current Part 69 access charge rules. Our
present interstate access charge regime, for example, requires
incumbent LECs to maintain rate structures that have been widely
criticized as economically inefficient. In particular, even though the
costs of the local loop do not vary with the amount of traffic carried
by the loop, our current rules require incumbent LECs to recover a
portion of those costs through traffic-sensitive carrier common line
(CCL) charges imposed on IXCs. While Part 69 mandates per-minute
charges for local switching, the portion of local switching costs that
is associated with ports appears to be driven by the number of lines
connected to the switch, not by the number of minutes of traffic routed
by the switch. The transport interconnection charge (TIC) is a non-
facilities-based, per-minute charge imposed on all switched access
customers regardless of whether they use the incumbent LEC's transport
facilities. Rather than fostering efficient pricing and competition,
these mandatory rate structures inflate usage charges and reduce
charges for connection to the network, in essence overcharging high-
volume end users in order to reduce rates for low-volume end users.
8. Although these inefficient rate structures might have been
sustainable in a local monopoly environment, the introduction of
competition from providers operating their own network facilities or
leasing network facilities as unbundled network elements may undermine
these access rate structures. A competing provider of exchange access
services entering a market can use its own facilities or lease
unbundled network elements to target selectively the incumbent LEC's
high-volume end users with efficiently priced access service offerings.
This places the incumbent LEC at a regulatorily-imposed disadvantage in
competing for high-volume end users, and jeopardizes the source of
revenue that permits the incumbent LEC to cover its costs of providing
service to low-volume end users. At the same time, these inefficient
rate structures and implicit support flows also create artificial
impediments to any new entrants that might seek to serve the subsidized
end users, because they must attempt to do so without the benefit of a
subsidy. As a result, these access rate structures may inhibit the
development of competition for service to low-volume end users.
9. Competition also allows entrants to arbitrage between different
pricing systems. For example, if transport and termination rates are
lower than access charge rates, a competitor would have an incentive to
funnel interexchange terminating access traffic through transport and
termination arrangements where possible. Whether traffic originates
locally or from a distant exchange, transport and termination of
traffic by a particular LEC involves the same network functions.
Ultimately, the rates that local carriers impose for the transport and
termination of local traffic
[[Page 4674]]
and for the transport and termination of long distance should converge.
As a legal matter, however, transport and termination of local traffic
by an incumbent LEC are different services from access service provided
by that incumbent LEC for long-distance telecommunications. Transport
and termination of local traffic are governed by 251(b)(5) and
252(d)(2), while access charges for interstate long-distance traffic
are governed by sections 201 and 202 of the Act.
10. This Commission has previously examined the impact of state-led
reforms in New York and Illinois on the existing access charge rate
structures, and has concluded that some interim modifications to the
incumbent LECs' rate structures were warranted where states had
implemented market-opening measures similar to those mandated by the
1996 Act. The Commission concluded that competitive developments in the
New York City, Chicago, and Grand Rapids LATAs justified granting NYNEX
and Ameritech limited waivers of our access charge rules to allow them
to recover the TIC on a geographically deaveraged basis and to bulk
bill some of their common line costs rather than recovering them
through the per-minute CCL charge.
11. In addition to their criticisms of the access charge rate
structures, IXCs, in particular, have insisted that the rate levels of
access charges are excessive and must be reduced. AT&T asserts, for
instance, that the current average per-minute access rates of the BOCs
are nearly seven times the forward-looking economic cost of providing
that service, and that total interstate access charges collected today
from interexchange carriers exceed forward-looking economic cost by $11
billion, or 70 percent of the total. IXCs argue that, if access prices
are allowed to remain at current levels, they will face an
anticompetitive disadvantage both in the local exchange market and in
the interexchange market whenever an incumbent LEC also provides
interexchange services.
12. In the Notice of Proposed Rulemaking portion of this item, we
initiate a comprehensive review of our interstate access charge regime.
We propose a series of reforms to the existing access charge rate
structure rules that are designed to eliminate the inefficiencies
summarized above. Our goal is to end up with access charge rate
structures that a competitive market for access services would produce.
13. We also outline in this item two possible approaches for
addressing claims that existing access charge levels are excessive, for
establishing a transition to access charges that more closely reflect
economic costs, and for deregulating incumbent LEC exchange access
services as competition develops in the local exchange and exchange
access market. The first is a market-based approach under which we
would rely on potential and actual competition from new facilities-
based providers and entrants purchasing unbundled elements to drive
prices for interstate access services toward economic cost. Under this
approach, we would gradually relax and ultimately remove existing Part
69 rate structure requirements and Part 61 restrictions on rate level
changes as marketplace forces provide the discipline on incumbent LEC
access prices that our rules are currently needed to apply. The second
is a more prescriptive approach to access reform under which this
Commission would specify the nature and timing of the changes to the
existing rate levels. These approaches could be employed singly or in
combination. We emphasize, however, that under either approach, our
ultimate goal is the same--adoption of revisions to our access charge
rules that will foster competition for these services and enable
marketplace forces to eliminate the need for price regulation of these
services.
14. Under the market-based approach to access reform, we propose
two intermediate phases, each of which would require an incumbent LEC
to demonstrate that certain circumstances exist in order to obtain
greater pricing flexibility than the current rules permit. We also
propose that an incumbent LEC's access services be deregulated, that
is, removed from price cap and tariff regulation, once they are subject
to substantial competition. At the first phase, an incumbent LEC would
have to show that its local market has been opened to competition and
potential rivals are able to enter through any of the three avenues
mandated by the 1996 Act--interconnection, unbundled network elements,
and resale. We ask whether an incumbent LEC making such a showing
should be permitted to deaverage geographically its rates for
interstate access services, to offer volume and term discounts, and to
offer contract-based tariff offerings for interstate access. We also
ask whether new services should be deregulated at that phase. At the
second phase in our market-based approach, an incumbent LEC would have
to show that it faces actual competition in the local exchange
marketplace. We ask whether, at that phase, we should eliminate service
categories within baskets, permit incumbent LECs to engage in
differential pricing of access to residential, single-line business,
and multi-line business customers, and eliminate mandatory rate
structures for local switching and transport. We also seek comment on
combining the trunking and traffic-sensitive baskets at that stage.
15. A second option for access reform is a more prescriptive
approach. Marketplace forces alone may not be sufficient to drive
access rates to forward-looking economic costs. Under this approach, we
ask whether we should require incumbent LECs to move prices for
interstate access in their service areas to more economically-efficient
levels pursuant to rules adopted in this proceeding. As with a market-
based approach, we also propose under this prescriptive approach that
we remove incumbent LEC access services subject to substantial
competition from price cap and tariff regulation.
16. In Section II, below, we seek comment on issues affecting the
scope of this proceeding. In Section III, we propose changes to our
existing interstate access charge rate structures to make them more
conducive to economic efficiency. We also discuss in Section III the
reassignment of certain network facilities costs that under current
rules are allocated to the Transport Interconnection Charge for
recovery. In Section IV, we summarize our two basic approaches to
access reform and propose eliminating price cap and tariff regulation
for services subject to substantial competition. We also there seek
comment on whether and when one approach or the other is preferable, or
if a combination of these approaches should be used, and also, how such
a combined approach should be structured. In Section V, we discuss in
detail a market-based approach to access reform. In Section VI, we
outline a more prescriptive approach to access reform.
17. In Section VII, we first discuss adjustments to the current
interstate access charge regime that may be required due to actions
taken in the Federal-State Universal Service Joint Board proceeding. We
also raise in that section the issue of whether there is a significant
difference between embedded incumbent LEC costs currently allocated to
the interstate jurisdiction and recovered through access charges, and
the forward-looking economic costs of interstate access. To the extent
that implementation of access charge reform is expected to cause a
significant reduction in incumbent LEC
[[Page 4675]]
access revenues from current levels, we seek comment on whether such
LECs are entitled or should be permitted to recover some or all of that
difference through a temporary special recovery mechanism.
18. In Section VIII, we seek comment on possible additional changes
to our access charge rules that may be necessary to make them
compatible with the competitive market envisioned by the 1996 Act,
including whether there is any special need for regulating terminating
interstate access service and ``open-end'' services, whether provided
by incumbent LECs or new entrants. We also discuss possible changes to
our existing treatment of the use by interstate information service
providers, such as Internet service providers, of incumbent LEC
switched access networks to originate interstate traffic. In Section
IX, we issue a Report and Order implementing the changes to the LEC
price cap rules discussed above that were proposed in the Second
Further Notice of Proposed Rulemaking in CC Docket No. 94-1, Further
Notice of Proposed Rulemaking in CC Docket No. 93-124, and Second
Further Notice of Proposed Rulemaking in CC Docket No. 93-197, 60 FR
49539 (September 26, 1995) (Price Cap Second FNPRM).
19. Finally, in Section X, we issue a Notice of Inquiry to examine
fundamental issues about the implications of usage of the public
switched network by information service and Internet access providers.
B. Background
1. Regulation of Interstate Exchange Access Service
20. For much of this century, most telephone subscribers obtained
both local and long distance services from the same company, the pre-
divestiture, integrated Bell System, owned and operated by AT&T.
Although some telephone subscribers received local telephone service
from non-Bell independent companies, AT&T still provided long distance
service to these customers. AT&T compensated its Bell Operating Company
subsidiaries for originating and terminating interstate calls through
revenue division arrangements and compensated the independent companies
for access pursuant to settlement agreements. In the 1970s, MCI and
other IXCs (then called ``other common carriers,'' or OCCs) began to
provide switched long distance services in competition with AT&T Long
Lines by attaching their own switches to local business lines purchased
from the incumbent LECs and reselling AT&T services. In 1979, AT&T and
the OCCs, under Commission supervision, entered into a comprehensive
interim agreement, known as Exchange Network Facilities for Interstate
Access (ENFIA), to replace the local business rates with a different
set of rates AT&T would charge OCCs for originating and terminating
interstate traffic over the facilities of its local exchange
affiliates. AT&T Long Lines continued to compensate its local exchange
affiliates and the independent exchange carriers for the use of their
facilities pursuant to their division of revenues and settlements
arrangements. Following a lengthy proceeding, the Commission in 1983
adopted uniform access charge rules that govern the provision of
interstate access services by all incumbent LECs, BOCs as well as
independents.
21. The costs that incumbent LECs recover through interstate access
charges are determined by a multi-step process. Incumbent LECs first
record all their booked expenses and their cost of investment in the
accounts prescribed by the Commission's Part 32 Uniform System of
Accounts (USOA). They next divide the recorded investment and expenses
between regulated and nonregulated services, pursuant to Part 64 of our
Rules. Incumbent LECs then divide regulated expenses and investment
between state and interstate jurisdictions pursuant to the separations
procedures contained in Part 36 of the Commission's rules. Incumbent
LECs then apportion their regulated interstate costs among the
interstate access and interexchange service categories. Finally, to
recover their access costs, incumbent LECs charge IXCs and end users
for access services in accordance with the Part 69 access charge rules
and, for incumbent LECs under price cap regulation, with the provisions
of the Part 61 price cap rules.
22. Commentators have pointed out that, because each of these
divisions of costs occurs pursuant to regulation rather than through
operation of a competitive marketplace, these divisions are subject to
distortions. In particular, commentators have focused on the
separations process, which apportions costs between the intrastate and
interstate jurisdictions. These commentators suggest that separations
allocation, in particular allocation of common plant, reflects not only
economic considerations, but also public policy considerations related
to universal service and the desirability of low local rates. To the
extent these allocation decisions have resulted in greater allocations
to interstate services than would be economically justified, these
distortions flow through Parts 69 and 61 into access charges.
23. Part 69 establishes two basic categories of access services:
special access services and switched access services. Special access
services do not use the local switch; they use dedicated facilities
that run directly between the end user and the IXC's point of presence
(POP). By contrast, switched access services use the local exchange
switch to route originating and terminating interstate toll calls. The
special access category includes a wide variety of services and
facilities, such as wideband data, video, and program audio services.
The Commission does not prescribe specific rate elements for special
access services in Part 69. Part 69 does, however, establish specific
switched access elements and a mandatory switched access rate structure
for each element tailored to the nature of each service in order to
promote competition in the interexchange services market and eliminate
discrimination within or among services. In general, we have attempted
to move toward rate structures that create incentives for the most
efficient utilization of all telecommunications facilities. These
elements generally correspond to the components of switched access
service, as shown in Figure 1.
24. Interoffice transmission services, known as transport services,
carry interstate switched access traffic between an IXC's POP and the
end office that serves the end user customer. Incumbent LEC
transmission facilities that carry interstate traffic between an IXC's
POP and the incumbent LEC end office serving the POP (called the
serving wire center or SWC) are known as entrance facilities. Part 69
requires incumbent LECs to impose flat-rate charges on IXCs to recover
the costs of entrance facilities. Incumbent LECs currently offer two
types of interstate switched transport service between a SWC and an end
user's end office. Under the first service, direct-trunked transport,
calls are transported between the SWC and the end office by means of a
direct trunk that does not pass through an intervening switch. To
recover the costs of direct-trunked transport facilities, Part 69
requires incumbent LECs to impose a flat-rate charge on IXCs. The
second service, tandem-switched transport, routes calls from the SWC to
the end office through a tandem switch located between the SWC and the
end office. Traffic travels over a dedicated circuit from the SWC to
the tandem switch, and then, over a shared circuit that carries the
calls of many different IXCs, from the tandem switch to the incumbent
LEC end office. For
[[Page 4676]]
tandem-switched transport, Part 69 prescribes a per-minute tandem-
switching charge and a per-minute transmission charge assessed on IXCs.
25. Incumbent LEC end offices serving end users switch interstate
traffic between the transport trunks carrying traffic to and from the
IXC POPs and the end users' local loops. Our Part 69 rules require
incumbent LECs to recover the costs of the local switch through a per-
minute local switching charge assessed on IXCs. Part 69 also requires
incumbent LECs to impose a per-minute TIC on interstate switched access
traffic. We note that an incumbent LEC's provision of transport and
local switching for terminating interstate traffic is functionally the
same as its provision of transport and termination service under the
1996 Act.
26. Finally, incumbent LECs assess end users a flat end user common
line charge (EUCL), also known as the subscriber line charge (SLC), to
recoup part or all of the local loop costs allocated to the interstate
jurisdiction. The SLC currently may not exceed the lesser of the actual
interstate loop cost, or $6 per month for multi-line business customers
and $3.50 for residential and single-line business customers. In
addition, IXCs are assessed a per-minute CCL charge to recover the
remaining interstate allocation of loop costs that is not recovered
through SLCs. IXCs with at least .05 percent of the total common lines
presubscribed to IXCs in all study areas are also assessed Universal
Service Fund and Lifeline service charges based on each IXC's share of
presubscribed access lines. In addition, Part 69 identifies several
other charges, including those for signalling and database queries.
27. The specific access charges currently assessed on interexchange
carriers and end users under our rules vary among incumbent LECs
because their embedded costs, on which access charges (even for price
cap incumbent LECs) are based, vary from state to state. Significant
differences in factors that affect a carrier's cost of providing
service, such as the topography and population density of its service
area, are reflected in different prices for access service.
28. The total regulated revenues of Class A incumbent LECs by
service rate elements are shown in Table 1, below. As indicated there,
more than 25 percent of the incumbent LECs' total regulated revenues
are derived from interstate access services. In addition, of the $11.9
billion in interstate switched access revenues that incumbent LECs
recover from IXCs, approximately 90 percent ($10.8 billion) is
recovered through per-minute charges (i.e., CCL, TIC, and local
switching).
Table 1.-- Class A Incumbent Local Exchange Carriers' 1995 Total
Regulated Revenues
[In billions]
------------------------------------------------------------------------
------------------------------------------------------------------------
Interstate Revenues:
Subscriber Line Charge.................... ........... $7.1
Per-Minute Switched Access Charges: ........... ...........
Carrier Common Line................... ........... 3.7
Transport Interconnection Charge...... ........... 2.9
Local Switching (and other T-S)....... ........... 4.2
-------------------------
Total Per-Minute Switched Access
Charges.......................... ........... 10.8
Transport (Facilities).................... ........... 1.1
Special Access............................ ........... 3.1
Information............................... ........... 0.3
Miscellaneous............................. ........... 1.0
-------------------------
Total Interstate Access Revenues........ ........... 23.4
Intrastate Revenues:
Basic Local Exchange Service.............. ........... 32.0
Intrastate Access......................... ........... 7.3
Other Intrastate Services................. ........... 28.0
-------------------------
Total Intrastate Revenues............... ........... 67.4
=========================
Total Regulated Revenues................ ........... 90.8
------------------------------------------------------------------------
29. The Part 61 price cap rules give incumbent LECs that are
subject to price cap regulation--generally the largest incumbent LECs--
a degree of flexibility in establishing the actual levels of their
access rates. Incumbent LEC price cap regulation is designed to promote
economic efficiency by easing restrictions on overall profits while
setting price ceilings at reasonable levels. The incumbent LEC price
cap plan is designed to simulate some of the efficiency incentives
found in competitive markets and to act as a transitional regulatory
scheme until the advent of actual competition makes price cap
regulation unnecessary. 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 service offerings.
30. The price cap rules split interstate access services into three
discrete groups, called baskets. Two baskets are further grouped into
narrower service categories and subcategories. Price cap incumbent LECs
have some ability to raise and lower the charges for elements or
services that are included in the same basket as long as the actual
price index (API) for the basket does not exceed the price cap index
(PCI) for that basket. This pricing flexibility is limited by banding
rules that establish separate upper and lower pricing bands for each
service category or subcategory within a basket. The price cap for each
basket and the pricing bands for each service category and subcategory
are adjusted annually based on defined formulas. The price cap rules
place services subject to different competitive pressures into
different baskets, service categories, and service subcategories. These
measures limit the incumbent LECs' ability to offset reductions in
service prices that are subject to competition with increases in
service prices that are not subject to competition.
[[Page 4677]]
2. The 1996 Telecommunications Act
31. The 1996 Act seeks to open for all carriers the local and long
distance telecommunications markets to competition by removing
economic, regulatory, and operational impediments that have protected
monopolies in the local exchange market. The 1996 Act requires
incumbent LECs to open their networks to competition, and permits the
BOCs, upon meeting certain conditions, to enter the interLATA market
within their respective service areas. The 1996 Act also requires the
Commission to forbear from applying any regulation or any provision of
the Communications Act to telecommunications carriers or
telecommunications services, or classes thereof, if the Commission
determines that certain specified conditions are satisfied. The
Commission must forbear if the Commission determines: (1) That
enforcement of the regulation or provision is not necessary to ensure
that the charges, practices, classifications, or regulations by, for,
or in connection with that telecommunications carrier or service are
just and reasonable and are not unjustly or unreasonably
discriminatory; (2) that enforcement is not necessary for the
protection of consumers; and (3) that forbearance consistent with the
public interest. The forbearance authority applies to all provisions of
the Communications Act, except the provisions added by the 1996 Act
relating to interconnection and BOC entry into long-distance services.
a. Local Competition. 32. The local competition provisions of the
1996 Act added new sections 251, 252, and 253 to the Communications
Act. Section 251 establishes general interconnection obligations for
all telecommunications carriers, delineates further obligations for
LECs, and prescribes additional requirements for incumbent LECs.
Sections 251(c)(2) and (c)(3) require that incumbent LECs' ``rates,
terms, and conditions'' for interconnection, unbundled network elements
be ``just, reasonable, and nondiscriminatory in accordance with * * *
the requirements of sections 251 and 252.'' Section 252 generally sets
forth the procedures that state commissions, incumbent LECs, and new
entrants must follow to implement the requirements of section 251 and
establish specific interconnection arrangements. Finally, Section 253
bars state and local regulations that prohibit or have the effect of
prohibiting entities from offering telecommunications services.
33. The terms and conditions under which such facilities and
services are made available by incumbent LECs may be the subject of
negotiated agreements between an incumbent LEC and a requesting
carrier. If an incumbent LEC and requesting carrier are unable to reach
a negotiated agreement, either party may ask a state to arbitrate the
disputed issues.
34. As required by the 1996 Act, incumbent LECs must provide
interconnection and nondiscriminatory access to network elements on an
unbundled basis. In implementing the Act, we identified the following
minimum set of network elements that incumbent LECs must provide to
requesting telecommunications carriers, many of which are analogous to
interstate access rate elements: Network interface devices; local
loops; local and tandem switches (including all software features
provided by such switches); interoffice transmission facilities;
signalling and call-related database facilities; operations support
systems and information; and operator and directory assistance
facilities. States may require unbundling of additional elements.
b. Universal Service. 35. Section 254, added by the 1996 Act, for
the first time codifies the role of universal service in federal
telecommunications regulation. Section 254 directs the Commission to
commence a proceeding to implement sections 254 and 214(e) of the Act,
and to refer such proceeding to a Federal-State Joint Board. The Joint
Board was given nine months to make recommendations to the Commission,
including a definition of the services to be supported by federal
universal service support mechanisms and a timetable for the
implementation of such recommendations. We initiated the Joint Board
proceeding in March 1996, and the Joint Board issued its Recommended
Decision in November 1996.
36. The 1996 Act established several requirements for federal
universal service support mechanisms. The Commission, after receiving
the recommendations of the Joint Board, is to designate specific
services for federal universal service support. Such support is to be
available for the provision, maintenance and upgrading of facilities
and services for which the support is intended, and not for other
purposes. Such support is to be available to all eligible
telecommunications carriers. Such support is to be explicit, and, as
the Conference Report makes clear, shall not be implicit. Such support
is also to be funded on an equitable and non-discriminatory basis by
all telecommunications carriers that provide interstate
telecommunications services.
37. In its Recommended Decision, the Federal-State Joint Board
concluded that several universal service mechanisms currently
implemented through the jurisdictional separations and access charge
structures must be replaced or modified in order to meet the Act's
requirements that support mechanisms be explicit, specific, predictable
and sufficient to preserve and advance universal service. Accordingly,
the Joint Board recommended that changes be made to the high cost
assistance fund, and that the Dial Equipment Minutes (DEM) weighting
program and Long Term Support (LTS) be phased out, eliminated, and
replaced by a new explicit universal service mechanism. If the
Commission adopts the Joint Board's recommendations, our access charge
rules must be adjusted to reflect these changes, to prevent incumbent
LECs from recovering the same costs twice, and to provide the same
subsidies to non-incumbent LECs as are provided to incumbent LECs for
serving high-cost or low-income subscribers.
38. At the same time, we must also examine other features of our
access charge system to determine whether they contain implicit
universal service support, in contravention of the Act's requirement
that all universal service support be explicit and its requirements as
to funding of federal universal service support. In our Notice of
Proposed Rulemaking and Order Establishing Joint Board, 61 FR 10499
(March 19, 1996) (Universal Service NPRM), we asked whether the CCL
charge is an implicit universal service support mechanism. While the
Joint Board did not reach this question, it suggested that it would be
desirable for the CCL charge to be restructured to be collected on a
flat-rate rather than a per-minute basis because per-minute collection
is economically inefficient.
39. We continue to recognize that, because of the role that access
charges have played in funding and maintaining universal service, it is
important to implement changes in the access charge system together
with complementary changes in the universal service system. In Sections
III.B., below, we discuss whether the CCL charge must be restructured
to comply with the Act's universal service requirements.
3. Need for Access Reform
40. There is a consensus among virtually all participants in the
telecommunications industry on the need to reform our interstate access
charge rules. IXCs and incumbent LECs, for example, agree that current
per-minute interstate access charges exceed economically efficient
levels and that,
[[Page 4678]]
consequently, per-minute interstate access charges must be reduced.
They differ, however, as to the reasons why current charges exceed
forward-looking economic cost, the aggregate amount by which current
charges exceed economic cost, and the effects of particular factors
(e.g., alleged excessively-long prescribed depreciation schedules,
separations distortions, strategic investments, and operational
inefficiency). They also disagree on what portion, if any, of the
difference between forward-looking economic cost and the portion of
embedded costs allocated to the interstate jurisdiction incumbent LECs
should be permitted to recover.
41. Current access charges distort competition in the markets for
local exchange access. Our access charge rules create incentives for
IXCs to bypass the LEC switched access network for reasons that have
nothing to do with the economics of operating an access network. This
uneconomic bypass may occur for a variety of reasons; rates may be too
high, or our access charge rules may require rates for a LEC access
service to be too high in relation to the rates for an alternative LEC
service or for a comparable service offered by an alternative supplier.
Inefficient entry may occur if the price for a package of jointly-
provided services is above economic cost, even if the LEC would
actually be the most efficient provider of the service. Conversely, if
a package of jointly-provided services, including access, is priced too
low because of regulatory requirements, efficient entry by an otherwise
efficient provider may be precluded. In either case, the total cost of
telecommunications service will not be as low as it could be if all
services were priced at economic levels, thereby providing accurate
price signals to all market participants. High access charges may also
keep long-distance rates higher than they would otherwise be, which
restricts demand for service and harms long-distance consumers. We
describe more fully some of the causes of uneconomic bypass below.
42. Inefficient, mandatory rate structures are one reason that per-
minute interstate access charges exceed the economic cost of providing
service to certain customers. One example is the recovery through a
per-minute CCL charge of part of the allocated interstate costs for
incumbent LECs to provide local loops to end users. Recovering on a
per-minute basis the cost of the local loop, which is a fixed cost that
does not vary with usage, results in high-volume toll users paying
charges to their IXCs that exceed the cost of serving those customers,
while some low-volume toll users may pay rates that are below cost.
Mandatory per-minute charges for local switching, which probably has
significant fixed costs, also results in IXCs paying access charges for
high-volume toll users that exceed the cost of serving those customers.
Finally, the requirement that most rates be averaged on a ``study
area'' basis (i.e. generally, state-wide) precludes incumbent LECs from
setting rates to reflect cost differences in high-density and low-
density areas, leaving incumbents vulnerable to niche entry in high-
density areas, and precluding entry by firms that might otherwise seek
to serve low-density areas.
43. Assignment of costs to the wrong elements may also contribute
to high per-minute interstate access rates. As discussed in Section
III.E. below, the TIC currently recovers some costs that may be
appropriately included in the rates for services in the trunking
basket. This also results in higher-volume switched access toll users
paying rates that exceed cost.
44. Incumbent LECs, and to a lesser degree others such as AT&T,
argue that another reason current interstate access charges exceed
forward-looking economic cost is the over-allocation of costs to the
interstate jurisdiction in the separations process, which allocates
costs between the interstate and intrastate jurisdictions. According to
these parties, the revenues now recovered through interstate switched
access rate elements in the traffic-sensitive basket exceed the cost of
providing interstate switched access services, while intrastate rates
do not recover enough to cover the economic cost of providing
intrastate exchange and exchange access services.
45. A major focus of the IXCs, on the other hand, is the contention
that current interstate access charges exceed economic cost levels
because the incumbent LECs are inefficient. As a result, they argue,
the incumbent LECs' unseparated rate base is higher than it should be,
and all prices in both the interstate and intrastate jurisdictions
exceed economic cost-based levels that an efficient provider would
charge.
46. Several parties, including AT&T and MCI, argue that, to the
extent access services are not available to IXCs at their forward-
looking economic cost, incumbent LECs and their long-distance
affiliates will have an unfair competitive advantage in the market for
long-distance services. According to these IXCs, this is because the
incumbent LEC's affiliate's effective cost of obtaining ``in region''
access service is the incremental cost that its affiliated LEC incurs
in providing access. If an incumbent LEC that also provides long-
distance service can charge unaffiliated IXCs access prices that are
significantly higher than forward-looking economic cost, the IXCs argue
that the incumbent LEC may be able to create a ``price squeeze'' by
raising rivals' costs. Under these circumstances, the incumbent LEC
affiliate could lower its retail price to reflect its cost advantage,
and competing unaffiliated IXCs would be forced either to match the
price reduction and absorb profit margin reductions or maintain their
prices at existing levels and accept reductions in their market shares.
47. Additionally, to the extent that unbundled network elements
become available from incumbent LECs at economically efficient prices,
IXCs will have the ability to avoid paying access charges by purchasing
such elements to provide both local exchange and exchange access
service to end-user customers. IXCs may also take access service from a
competitive LEC that either provides its own facilities or takes
unbundled elements from the incumbent LEC. The availability of
unbundled network elements at their forward-looking economic cost would
appear to reduce the danger of a price squeeze insofar as IXCs can use
those elements to provide their own access to customers for whom they
are the local service provider. There may, however, be limits on the
extent to which access charges can be replaced by unbundled elements in
either the short or long-term, because an IXC may have to take access
service for those end-user customers for which it does not provide
local service.
48. Apart from any revisions to our rules that we may adopt in this
proceeding, the availability of this alternative to interstate access
service may force incumbent LECs to move their access charges to more
economically efficient levels, and may necessitate relief from
mandatory access charge rate structures that are not economically
efficient. We seek in this proceeding to explore ways in which we can
harness competitive forces to further our efforts to make our system of
interstate access charges more economically rational and compatible
with competitive local markets. We also seek to adopt rules and
policies that will facilitate a smooth transition from the current
system to one that can be sustained in competitive local markets.
II. Access Reform for Incumbent Local Exchange Carriers
A. Application of Reforms to Price Cap Carriers and Non-Price Cap
Carriers
49. Because our access charge rules apply only to dominant LECs,
the focus
[[Page 4679]]
of this proceeding is reform of our access charge regime that currently
applies to incumbent LECs. Although many of the reforms we propose in
this NPRM may be desirable changes to our regulation of non-price cap
incumbent LECs, we are limiting the scope of this proceeding to
incumbent LECs subject to price cap regulation, with limited exceptions
discussed below.
50. We note that price cap regulation governs almost 91 percent of
the interstate access charge revenues and more than 92 percent of the
total incumbent LEC access lines. Currently, all ten of the incumbent
LECs with more than two million access lines and 13 of the 17 non-NECA
incumbent LECs with more than 50,000 access lines are subject to price
cap regulation. The remaining incumbent LECs are telephone companies
subject to various forms of rate-of-return regulation. Therefore, even
though this proceeding applies only to price cap incumbent LECs, it
would nonetheless affect the vast majority of all access lines and
interstate access revenues.
51. The need for access reform is most immediate for those
incumbent LECs that may soon be subject to competition from the
availability of unbundled network elements. These are primarily the
price cap incumbent LECs. Many, if not all, non-price-cap incumbent
LECs may be exempt from, or eligible for a modification or suspension
of, the interconnection and unbundling requirements of the 1996 Act. By
contrast, all incumbent LECs that are ineligible for section 251(f)
exemptions, suspensions, or modifications are incumbent price cap LECs.
Because the latter incumbent LECs must fulfill the section 251(b) and
(c) duties to provide interconnection and unbundled elements to new
entrants, these incumbent LECs are likely to face significant
competition in the interstate exchange access market from new entrants
using unbundled network elements before the small and mid-sized rate-
of-return incumbent LECs face such competition. Although several
incumbent price cap LECs may be eligible to request suspension or
modification under section 251(f)(2) (e.g., Citizens, Frontier, Aliant,
and SNET), we note that these LECs may not receive state approval of
any such petition for suspension or modification. Thus, we conclude
that we should focus our efforts here on the immediate task of
reforming the access charge regime for price cap incumbent LECs. We
plan to initiate a separate proceeding in 1997 to undertake
comprehensive review of our regulation of rate-of-return incumbent
LECs. That inquiry will take up the issue of whether substantial
changes in our Part 69 cost allocation rules for the development of
access charges for rate-of-return carriers are needed.
52. We propose, however, limited exceptions to our decision to
confine this proceeding to price cap incumbent LECs. Specifically, we
propose to apply to all incumbent LECs the rules discussed in Section
VII.A, which addresses allocation of universal service support to the
interstate revenue requirement, and Sections III.D and E, which propose
reforms to the transport rate structure, including the TIC. Because
rate-of-return incumbent LECs will collect revenues from the new
universal service support mechanism, we need to determine in this
proceeding how these payments should alter the access charges currently
assessed by such incumbent LECs. Moreover, any changes we adopt to the
TIC pursuant to the court's remand in Competitive Telecommunications
Association v. FCC, 87 F.3d 522 (D.C. Cir. 1996) (CompTel v. FCC)
should also apply to rate-of-return incumbent LECs because their
transport rules were subject to the rates that were remanded by the
court in that decision. In Section III.B, we seek comment on whether we
should also apply our proposed changes to the common line rate
structure to rate-of-return incumbent LECs. In Section VIII.C., we seek
comment on updating the Part 69 access rules in light of various
developments. We seek comment on these tentative conclusions regarding
the scope of this proceeding. We further invite parties to comment on
the effect of these proposals and tentative conclusions on small
business entities, including small incumbent LECs and new entrants.
B. Applicability of Part 69 to Unbundled Elements
53. Pursuant to our jurisdiction over interstate access charges
under section 201 of the Act, we tentatively conclude that unbundled
network elements should be excluded from the Part 69 access charge
regime, regardless of whether the carrier that purchases unbundled
network elements uses those elements to provide local exchange services
or exchange access services. Thus, when using unbundled network
elements to originate and terminate interstate calls, requesting
carriers should not be required to pay the Part 69 access charges
corresponding to those elements. The 1996 Act permits
telecommunications carriers that purchase access to unbundled network
elements from incumbent LECs to use those elements to provide all
telecommunications services to customers, including access in order to
originate and terminate interstate calls. The 1996 Act in turn requires
requesting carriers to pay cost-based rates to compensate incumbent
LECs for all such use of the unbundled network elements. Thus, the
requesting carrier has already paid for the ability to originate and
terminate interstate calls. Nothing in the text of the 1996 Act compels
telecommunications carriers that use unbundled elements to pay
interstate access charges, nor limits these carriers' ability to use
unbundled elements to originate and terminate interstate calls. Nothing
in sections 201-205 of the Act requires a contrary result. We seek
comment on this tentative conclusion. We also note that the Part 69
interstate access charge rules do not apply to the transport and
termination of local traffic provided pursuant to section 251(b)(5).
III. Rate Structure Modifications
A. Overview
54. We tentatively conclude that several provisions in Part 69 of
our rules compel incumbent LECs to impose charges for access services
in a manner that does not accurately reflect the way those LECs incur
the costs of providing those services. For example, generally the costs
associated with the local loop are non-traffic-sensitive (NTS), but our
rules require incumbent LECs to recover a portion of those costs
through per-minute CCL charges. Similarly, at least some portion of the
costs of local switching is NTS, but our rules require incumbent LECs
to recover all local switching costs through per-minute charges. In
these and other cases, our rate structure rules do not send accurate
pricing signals to customers, and consequently, encourage inefficient
use of telecommunications services. These inaccurate pricing signals
encourage uneconomic bypass of incumbent LEC facilities and could very
well skew or limit the development of competition in the markets for
telecommunications services. Furthermore, these rates may not be
sustainable in the long run if unbundled network elements are made
available at cost-based prices and used to provide exchange access
services.
55. We propose to revise our rate structure requirements for
switched access service by eliminating some rate structure
requirements, prescribing some new requirements, or a combination of
both. We tentatively conclude that, regardless of which of the
approaches to access reform discussed in Section IV we choose,
establishing more economically rational rate
[[Page 4680]]
structure rules is a necessary first step in the new procompetitive
era. We seek through these changes to establish rate structures for
interstate access services that send more accurate pricing signals to
both consumers and competitors. Below, we invite comment on proposals
for rate structure rule changes to be applicable to all price cap
incumbent LECs. Specifically, we invite comment on rate structure rule
changes for common line, local switching, and transport. We then seek
comment on a number of proposals for phasing out the transport
interconnection charge, and on establishing rate structure rules for
SS7 signalling services. With the exception of the transport rule
revisions considered in Section III.D, and the revisions to the TIC
considered in Section III.E, we propose applying the rate structure
rule changes discussed in Section III only to incumbent price cap LECs.
As noted in Section II, rate structure revisions for non-price cap
incumbent LECs will be addressed in a separate proceeding.
B. Common Line
1. Background
56. Common line costs are the costs associated with the line
connecting the end user's premises with the local switch that have been
assigned to the interstate jurisdiction through the jurisdictional
separations process. These costs are not traffic-sensitive. A portion
of the incumbent LEC's common line costs are recovered through EUCL
charges, also called SLCs. These charges currently are limited to the
actual cost of the interstate portion of the local loop or $3.50 per
month for residential and single line business users, and $6.00 per
month for multi-line business users. The remaining common line costs,
if any, are recovered through carrier common line charges, which are
per-minute rates imposed on access customers.
57. The current common line rate structure, in which only a portion
of common line costs are recovered through flat monthly rates, does not
reflect the manner in which loop costs are incurred. As a result, the
common line rate structure forces incumbent LECs to recover costs in an
economically inefficient manner, and so may cause inefficient use of
the network and uneconomic bypass, as discussed in Section III.A,
above. Furthermore, in the original MTS and WATS Market Structure,
Third Report and Order, CC Docket No. 78-72, Phase 1, 48 FR 10319
(March 11, 1983) (Access Charge Order), the Commission found that
recovering NTS costs through flat monthly charges imposed on end users
by incumbent LECs would promote optimal utilization of
telecommunications facilities. The Commission decided at that time,
however, to place a limit on the SLC, and, consequently, required
incumbent LECs to recover the remainder of their common line costs
through per-minute CCL rates. The current CCL charge has been uniformly
criticized by both incumbent LECs and IXCs because it discourages
efficient use of the network and encourages uneconomic bypass. We
invite comment below on alternative common line rate structures.
2. Alternative Methods of Recovery of CCL Portion of Subscriber Loop
Costs
58. The Joint Board in its Recommended Decision recognized that the
current, traffic-sensitive CCL charge structure is economically
inefficient because the charge requires incumbent LECs to recover a
non-usage-sensitive cost in part through a usage-sensitive charge. The
Joint Board suggested that the Commission change the existing rate
structure so that incumbent LECs are no longer required to recover any
of the NTS cost of the local loop from IXCs on a per-minute basis. The
Joint Board noted that it would be preferable for costs related to the
loop to be recovered in a manner that is consistent with the manner in
which the costs are incurred. Because the cost of a loop generally does
not vary with the minutes of use transmitted over the loop, the Joint
Board concluded that the current CCL charge that mandates recovery of a
portion of loop costs through per-minute charges is an inefficient
cost-recovery mechanism.
59. We seek comment on possible revisions to the current CCL charge
structure so that incumbent price cap LECs are no longer required to
recover any of the NTS costs of the loop from IXCs on a traffic-
sensitive basis. One possible alternative, mentioned by the Joint
Board, involves permitting incumbent LECs to recover the costs not
recovered from SLCs through a flat, per-line charge paid by IXCs. An
administratively simple mechanism for recovery of such a flat-rate
charge would be to assess it against each customer's presubscribed
interexchange carrier (PIC). If carriers seek to pass on that charge to
end users, however, such an approach might encourage end users not to
select a PIC. To resolve this problem, the Joint Board suggested that
the Commission allow incumbent LECs to collect the flat-rate charge
that would otherwise be assessed against the PIC directly from any
customer who elects not to choose a PIC. We seek comment on this
approach and invite parties to discuss the potential problem created
when end-user customers have selected PICs but use other IXCs for
Internet, fax, interexchange or other interstate services by ``dialing-
around'' the PIC.
60. The Competition Policy Institute (CPI) has suggested several
other alternatives to the per-minute recovery of interstate NTS loop
costs. For example, interstate NTS loop costs may be recovered through
``bulk billing,'' in which carriers are assessed a charge based upon
their percentage share of interstate minutes of use or revenues. An
additional possible approach to recovering interstate NTS loop costs is
a ``capacity charge'' assessed on carriers based upon the number and
type of trunks that they purchase from the incumbent LECs.
Alternatively, LECs could assess a ``trunk port charge'' to each
carrier based upon the number of trunk-side ports, or connections it
has to the local switch. Another possibility is a ``trunk port and line
port'' charge, which would be based upon the number of trunk-side ports
and the number of line-side ports. We seek comment on these approaches
to recovery of interstate NTS local loop costs and ask parties to
propose other efficient recovery mechanisms. We invite parties to
comment on whether any changes that we adopt to the recovery of
interstate NTS local loop costs for price cap LECs should be extended
to rate-of-return LECs, and the relationship of interstate NTS loop
cost recovery under access charges to the Joint Board Recommended
Decision. Interested parties should address how such an extension to
rate-of-return LECs would affect small business entities, especially
small incumbent LECs.
61. Parties should also address whether, in the event that we
eliminate the SLC cap for lines used by multi-line business customers
and residential lines beyond the primary residential line as discussed
below, we need to adopt an alternative mechanism for recovering common
line costs currently recovered through the CCL charge imposed on such
lines. We also seek comment, in conjunction with our market-based
approach to access reform, on the circumstances under which we should
grant LECs rate structure flexibility in their recovery of interstate
common line costs from IXCs. Interested parties should also address the
extent to which any proposed alternative recovery mechanism for
recovering common line costs currently recovered through the CCL charge
will affect small business entities, including small incumbent price
cap LECs and new entrants.
62. Finally, we seek comment on whether there are any limitations
on our authority to assess flat-rated CCL
[[Page 4681]]
charges on IXCs. In particular, we note that section 254(g) also
requires IXCs to charge their subscribers in rural and high cost areas
within a state the same rates they charge to their subscribers in urban
areas in that state. Section 254(g) also requires IXCs to charge their
subscribers in each state rates no higher than the rates charged to
subscribers in any other state. Would this requirement preclude an IXC
from charging its customers the flat monthly rate assessed for that
line if the amount of that charge varied among states, or between urban
and rural areas within a state? If so, do conditions exist sufficient
to require the Commission to forbear from the application of section
254(g) to IXC recovery of flat-rate CCL charges? Parties should also
address the effect of section 254(g) if CCL charges vary among the
states, but end-user rates may not vary.
3. Alternative Methods of Recovery of SLC Portion of Subscriber Loop
Costs
63. In its Recommended Decision, the Joint Board determined that
eligible carriers should receive support for designated services
carried on the initial connection to a customer's primary residence and
single-line business customers. The Joint Board, however, recommended
that universal service support should not be provided for multi-line
business or residential connections beyond the primary residential
connection. The Joint Board further concluded that the current $3.50
SLC cap for primary residential and single-line business lines should
not be increased, but did not state that the SLC cap should be
maintained for multi-line business or residential connections beyond
the primary residential connection. Loop costs not recovered from the
current multi-line business SLCs, and SLCs for residential lines in
addition to the primary connection, are recovered through usage-
sensitive CCL charges, which in turn are recovered from toll users.
Since end user customers of multi-line business and multiple-line
residential services do not necessarily make large numbers of toll
calls, the toll payments of these end users may not cover the portion
of loop costs not recovered through the SLC. Moreover, toll rates are
higher than they otherwise would be, which discourages demand for such
services.
64. For these reasons, we propose to increase the cap on the SLC
for the second and additional lines for residential customers and for
all lines for multi-line business customers to the per-line loop costs
assigned to the interstate jurisdiction. This would allow incumbent
LECs to recover interstate common line costs for multi-line business
customers and for residential connections beyond the primary
residential connection in a manner consistent with the way costs are
incurred. Alternatively, we could eliminate the cap for multi-line
business customers and for residential connections beyond the primary
connection, especially where the incumbent LEC has entered into
interconnection agreements and taken other steps to lower barriers to
actual or potential local exchange competition. Under that approach, we
would not prohibit an incumbent LEC from charging a SLC for second and
additional lines for residential customers and for all lines for multi-
line business customers that exceeds the per-line loop costs assigned
to the interstate jurisdiction. We emphasize that this proposal would
not affect the current cap of $3.50 on the SLC that is charged to a
residential customer's primary line and to a single-line business
customer. We invite parties to comment on this proposal. We also invite
parties to comment on whether any changes that we adopt to the cap on
SLCs for price cap LECs should be extended to rate-of-return LECs, and
the relationship of any such changes to the Joint Board Recommended
Decision. Interested parties should address how applying such a cap on
SLCs to rate-of-return LECs would affect small business entities,
especially small incumbent LECs.
65. In the event we decide to increase or eliminate the cap on SLCs
for multi-line business lines and residential lines in addition to the
primary line, we also solicit comment on whether we should establish a
transition mechanism for this increase, whether such a transition could
be implemented consistent with section 254, and if so, how long this
transition period should be. We propose establishing no transition
period if the increase in the SLC is less than one dollar, and
establishing a three-year transition period if the increase is one
dollar or more, but we invite comments on other alternatives in
addition to these.
66. Finally, we seek comment on whether we should permit or require
incumbent LECs to deaverage SLCs as part of the baseline rate structure
that would be imposed on all incumbent price cap LECs. In particular,
we note that section 254(e) requires us to adopt only explicit support
subsidies for universal service support. We seek comment on whether
geographic averaging of SLCs is an implicit subsidy that is
inconsistent with the requirements of section 254(e), and thus on
whether we are required to deaverage SLCs.
4. Assessment of SLCs on Derived Channels
67. Integrated services digital network (ISDN) services permit
digital transmission over ordinary local loops through the use of
advanced hardware and software. ISDN offers data transmission at higher
speeds and with greater reliability than standard analog service. Most
incumbent LECs currently offer two types of ISDN service, Basic Rate
Interface (BRI) service and Primary Rate Interface (PRI) service. BRI
service allows a subscriber to obtain two voice-grade-equivalent
channels and a signalling/data channel over an ordinary local loop,
which generally is provided over a single twisted pair of copper wires.
PRI service allows subscribers to obtain 23 voice-grade-equivalent
channels and one data signalling channel over two pairs of twisted
copper wires. BRI service generally is used by individuals and small
businesses, and PRI service generally is used by larger businesses. LEC
services other than ISDN use derived channel technology to provide
multiple channels over a single facility. The LECs also use derived
channel technologies within their networks, for example, to provide
customers with individual local loops. In such situations, the end user
generally is not aware that the LEC is using this technology.
68. In the End User Common Line Charges, CC Docket No. 95-72,
Notice of Proposed Rulemaking, 60 FR 31274 (June 14, 1995) (ISDN SLC
NPRM), we noted that the application of SLCs under our existing rules
to ISDN services may discourage demand for these services, and we
sought comment on whether more than one subscriber line charge should
be applied to ISDN services, and if so, how many charges.
69. As shown in Table 2 below, the cost data submitted in response
to the ISDN SLC NPRM indicates that the ratio of NTS costs of BRI ISDN
to standard analog service is approximately 1.24 to 1. The ratio of NTS
costs of PRI ISDN to standard analog service, excluding NYNEX's data,
is roughly 10.5 to 1. As shown in Table 3, NYNEX's data appear to be
outliers and are therefore excluded from the calculation of the average
ratio for PRI ISDN to standard analog service because the ratios of its
outside plant and NTS costs for PRI ISDN to standard analog service are
almost twice those of other incumbent LECs. Interested parties filed
their comments in the ISDN SLC proceeding prior to the enactment of the
1996 Act. We ask for comment on the effect of the 1996 Act on
[[Page 4682]]
determining how many SLCs should be applied to ISDN services. Finally,
we solicit comment on whether mandatory rate structures or rate caps
should be prescribed for ISDN service or other derived channel
services.
Table 2.--Ratio of Costs of Standard Analog Service to BRI ISDN Service
------------------------------------------------------------------------
Outside
plant (loop All NTS
only) costs costs
------------------------------------------------------------------------
Ameritech..................................... 1:1.07 1:1.45
Bell Atlantic................................. 1:1.01 1:1.36
NYNEX......................................... 1:0.85 1:1.23
Pacific Bell.................................. 1:1.05 1:1.13
US West....................................... 1:0.80 1:1.07
Average ratio of costs........................ *1:0.96 *1:1.24
------------------------------------------------------------------------
*Averages may differ due to rounding.
Table 3.--Ratio of Costs of Standard Analog Service to PRI ISDN Service
----------------------------------------------------------------------------------------------------------------
Outside
Outside plant (loop All NTS
plant (loop only) costs All NTS costs
only) costs (excluding costs (excluding
NYNEX) NYNEX data)
----------------------------------------------------------------------------------------------------------------
Ameritech................................................... 1:5.68 1:5.68 1:8.9 1:8.9
Bell Atlantic............................................... 1:4.13 1:4.13 1:15.80 1:15.80
NYNEX....................................................... 1:10.94 excluded 1:27.74 excluded
Pacific Bell................................................ 1:4.67 1:4.67 1:8.70 1:8.70
US West..................................................... 1:5.33 1:5.33 1:10.60 1:10.60
Average ratio of costs...................................... *1:6.5 *1:4.95 *1:15.13 *1:10.5
----------------------------------------------------------------------------------------------------------------
*Averages may differ due to rounding.
C. Local Switching
70. The local switch connects a call coming in on one line or trunk
to another line or trunk connected to the switch. A local switch
consists of line and trunk cards, and an analog or digital switching
system. Line cards provide interfaces between subscriber lines and the
switch. Trunk cards or ``ports'' provide interfaces between the switch
and interoffice trunks. Because line cards, as well as trunk cards, are
deployed within the central office, they are accounted for in the
switching accounts of the USOA. These costs are therefore included in
the switching category for separations and cost allocation purposes.
The central processing portion of the switch performs the routing
function based on the telephone numbers dialed by the end user placing
the call.
1. Non-Traffic-Sensitive Charges
71. Currently, Section 69.106 of our rules requires incumbent LECs
to charge per-minute rates for local switching. A significant portion
of local switching costs, however, likely do not vary with usage. For
example, the costs associated with line cards or line-side ports appear
to vary with the number of loops connected to the switch, not with the
level of traffic over the loops. We tentatively conclude that it is
more reasonable and economically efficient to recover dedicated line
card costs through flat charges. We solicit comment on establishing a
flat rate element for NTS local switching costs. We also invite
commenters to recommend methods of identifying line card costs and
other NTS local switching costs.
72. The central processing portion of the switch, and many trunk-
side ports, are shared local switching facilities because they are used
to carry the traffic of several access customers, and so should be
priced on a usage-sensitive basis. By contrast, because trunks for
dedicated transport service are dedicated to individual IXCs, ports for
dedicated transport service also appear dedicated to individual
customers, and, consequently, the charges for such facilities should be
flat-rated. While flat rates appear reasonable for recovering costs
associated with dedicated ports and line cards, it is not clear what
rate structure would best reflect the manner in which incumbent LECs
incur costs associated with shared local switching facilities. If all
shared local switching costs are driven by the number of lines and
trunks served by the switch, flat rates would appear appropriate. On
the other hand, usage-sensitive charges might better reflect the way
incumbent LECs incur costs for shared local switching facilities.
Finally, a combination of flat-rate and usage-sensitive charges may
best reflect cost causation principles. AT&T and MCI have argued that a
substantial portion of local switching costs are non-usage-sensitive,
and the local switching rate structure, therefore, should include both
usage-sensitive and non-usage-sensitive rate elements. Ameritech has
stated that, for a majority of the switches in its network, more than
40 percent of switching costs are NTS. We seek comment generally on
this analysis, and on how we should establish an appropriate, efficient
rate structure for switching. We note that states may be considering
this same issue in the context of establishing rates for unbundled
local switching, and we seek comment on, and analysis of how, states
are addressing these issues under Section 252.a
2. Traffic-Sensitive Charges
73. In the following paragraphs, we seek comment on a number of
specific proposals for rate structures governing rates designed to
recover usage-sensitive local switching costs. Interested parties
should discuss which of these rate structure proposals most accurately
reflect traffic-sensitive local switching costs, and whether we should
permit or require incumbent LECs to assess these traffic-sensitive
charges. Parties advocating a particular rate structure should address
all the issues raised by that approach. We also invite parties to
propose other rate structures.
[[Page 4683]]
a. Call-Setup Charges. 74. Call setup is the process of
establishing a transmission path over which a phone call will be
routed. We could permit or require incumbent LECs to develop call-setup
charges if we find that usage-sensitive charges might better reflect
the way they incur certain costs for shared local switching facilities.
The per-minute rate structure prescribed by Part 69 for local switching
does not separately address costs that incumbent LECs may incur for
call setup and takedown. Call-setup costs would be incurred for each
call regardless of its duration or whether it is completed. Because no
separate charge exists for call setup, incumbent LECs must recover
these costs through the per-minute local switching charges, or possibly
through other rate elements. It is possible that some SS7 call-setup
costs are currently recovered through the TIC. Thus, longer-duration
calls recover a greater portion of call-setup costs than shorter calls
even if they do not impose greater call-setup costs. A per-call rate
element for call setup would more rationally reflect these costs.
75. In the past, the Commission has rejected incumbent LEC
petitions for waiver of Part 69 for purposes of imposing a call-setup
charge, on the grounds that such proposals should be considered in a
broader rulemaking. Accordingly, we now seek comment on whether we
should permit or require incumbent LECs to include a call-setup charge
in their local switching rate structures. We also request comment on
the extent to which the current local switching rate element recovers
costs that vary with the number of calls, rather than their duration.
Should a call-setup charge apply to all call attempts, or only to
completed calls? We seek comment on whether incumbent LECs incur
different call-setup costs depending on whether a call is delivered via
direct-trunked or tandem-switched transport service, and on the
different costs incurred when multifrequency (MF) and SS7 signalling
are used for call setup. Finally, we invite comment on whether any of
these cost differences should be reflected by establishing different
charges for different kinds of call setup. To the extent that parties
support a separate charge for SS7 call setup, those parties should
explain how such a charge would be consistent with the rate structure
for other SS7 services we discuss below.
b. Peak and Off-Peak Pricing. 76. We could direct or allow
incumbent LECs to develop peak and off-peak pricing for shared local
switching facilities. When incumbent LECs select the types of switches
that they will deploy in their networks, they base their decisions on
the anticipated peak demand. Thus, incumbent LECs arguably should be
permitted to establish separate rate elements for local switching
provided during peak periods and off-peak periods. The peak prices
would be per-minute rates, and designed to recover the costs of
additional capacity that an incumbent LEC must install to meet the peak
demand. Because off-peak traffic requires no additional capacity, the
costs of this traffic are lower, and accordingly, the access charges
for that traffic should be lower as well.
77. We previously sought comment on peak and off-peak pricing in
the Interconnection Between Local Exchange Carriers and Commercial
Mobile Radio Service Providers, CC Docket No. 95-185, Notice of
Proposed Rulemaking, 61 FR 3644 (February 10, 1996) (LEC/CMRS NPRM),
and addressed those comments in the Implementation of the Local
Competition Provisions of the Telecommunications Act of 1996, CC Docket
No. 96-98, First Report and Order, 61 FR 45476 (Aug. 29, 1996) (Local
Competition Order). We recognized in the Local Competition Order that
there might be practical problems with a rate structure that had
different peak and off-peak pricing. Therefore, we did not mandate a
peak-sensitive rate structure for unbundled network elements, although
we also did not preclude use of peak/off-peak pricing. Parties
supporting requiring rather than merely permitting peak and off-peak
pricing for local switching should explain why this rate structure is
more suitable for access rates than it is for unbundled network
elements.
c. Current Rate Structure. 78. As another alternative, we could
retain the existing per-minute local switching rate structure. Because
a significant portion of local switching costs may not vary with
minutes of use, however, the existing rate structure may be less
desirable than the other options discussed above. We invite parties
supporting the current rate structure to explain why they believe that
it adequately reflects the manner in which traffic-sensitive local
switching costs are incurred.
D. Transport
1. Background
79. Transport service is the component of interstate switched
access service corresponding to the transmission and switching of
traffic between incumbent LEC end offices and IXC POPs. Part 69 of our
rules requires incumbent LECs to develop charges for transport service
that may not reflect in some cases the manner in which they incur the
costs of providing these services. Thus, as we discussed with respect
to local switching charges above, it may be necessary to revise our
Part 69 rate structure requirements for transport services.
80. Since December 1993, transport has been provided pursuant to
interim rules that replaced the ``equal charge per unit of traffic''
requirement of the MFJ. We required incumbent LECs to establish flat
rates for: (1) ``Entrance facilities,'' transport service from the IXC
POP to the SWC, and (2) ``direct-trunked transport,'' transport service
from a SWC to an end office on dedicated facilities without switching
at a tandem switch. In addition, incumbent LECs were directed to
establish usage-based charges for ``tandem-switched transport,'' a
transport service from the SWC to the end office that provides
switching at a tandem switch. The tandem-switched transport service
charge includes an interoffice transmission charge, and a charge for
the tandem switch.
81. The initial rate levels for direct-trunked transport were
generally presumed reasonable if they were based on rates for
comparable special access services. The per-minute tandem-switched
transport transmission charge was based on assumptions about average
monthly DS1 and DS3 usage. The charge for the tandem switch was
initially set to recover 20 percent of the Part 69 tandem revenue
requirement. Finally, to make the restructure revenue neutral
initially, we required incumbent LECs to establish a non-cost-based
transport interconnection charge (TIC), to recover the revenue
difference between what the LECs would have realized under the equal
charge rate structure and what they would realize from the interim
facility-based transport rates, including the remaining 80 percent of
the tandem revenue requirement.
82. Subsequently, in the Transport Rate Structure and Pricing, CC
Docket No. 91-213, First Memorandum Opinion and Order on
Reconsideration, 58 FR 41184 (August 3, 1993) (First Transport
Reconsideration Order), the Commission required incumbent LECs to offer
two pricing options for tandem-switched transport service. First, an
IXC may purchase tandem-switched transport at usage-sensitive rates
with any mileage component computed on the basis of the distance
between the SWC and the end office, regardless of the actual physical
routing. Second, an
[[Page 4684]]
IXC may purchase direct-trunked transport between the SWC and the
tandem office and usage-rated tandem-switched transport between the
tandem office and the end office, with any tandem-switched transport
mileage component computed on the basis of the distance between the
tandem office and the end office.
83. In this section, we seek comment on whether to revise the
facility-based components of the transport rate structure. In the
following section, we seek comment on phasing out the TIC. Unlike the
other rate structure rules we consider in Section III, we contemplate
imposing any rules adopted relating to the transport rate structure or
the TIC on all incumbent LECs. We propose, for reasons articulated in
the Transport Rate Structure and Pricing, CC Docket No. 91-213, Report
and Order and Further Notice of Proposed Rulemaking, 57 FR 54717
(November 20, 1992) (First Transport Order), that the transport rate
structure be divided into three parts: (1) Charges for entrance
facilities; (2) charges for direct-trunked transport service; and (3)
charges for tandem-switched transport service. We seek comment on
adopting this basic framework for the transport rate structure rules.
In commenting on the transport issues in this section, parties should
bear in mind the interrelationship of these issues with those relating
to the TIC, which is discussed in Section III.E, below.
84. We also seek comment here and in Section III.E on the issues
remanded in CompTel v. FCC, in which the court remanded the Orders in
which we established the transport rate structure rules. The court held
that we did not adequately explain our decision to require incumbent
LECs to charge a non-cost-based TIC. The court remanded our decision to
set the tandem-based transport rate element to recover 20 percent of
the Part 69 tandem revenue requirement and to allocate the remaining
revenue requirement to the TIC, because the Commission did not
adequately explain why 20 percent would be more equitable than some
other allocation. The court also found that we did not explain our
decision to require incumbent LECs to allocate a greater proportion of
overhead costs to the tandem-switched transport switching charge than
to direct-trunked transport service rates. We address the TIC issue in
Section III.E below, and the other two remand issues in this section.
2. Entrance Facilities and Direct-Trunked Transport Services
85. For entrance facilities and direct-trunked transport service,
we tentatively conclude that the transport rate structure rules should
mandate flat-rated charges. These transport facilities appear to be
dedicated to individual customers, and we believe that flat rates
reflect the way incumbent LECs incur costs for dedicated facilities. We
invite comment on this tentative conclusion. We also seek comment on
whether incumbent LECs should be permitted to offer transport services
differentiated by whether the LEC or the IXC is responsible for channel
facility assignments. In the past, Ameritech and Bell Atlantic have
sought waivers of our Part 69 rules to offer such a switched access
service, alleging that it would permit them to utilize the access
network more efficiently. We seek comment on whether any rules beyond
those included in the interim rules are necessary to govern rate levels
for these services.
3. Tandem-Switched Transport Services
a. Rate Structure. 86. We present several options for the rate
structure associated with tandem-switched transport service facilities.
The first option would maintain the interim rate structure's treatment
of the tandem-switched transport charge, which gives IXCs a choice of
two pricing alternatives for purchase of tandem-switched transport
service. IXCs may elect to pay a single usage-sensitive charge, with
distance measured in airline miles from the SWC to the end office, if
applicable. Alternatively, IXCs may choose a flat-rated charge for a
dedicated facility from the SWC to the tandem office, and a usage-
sensitive charge for tandem-switched transport service from the tandem
office to the end office, with mileage computed separately for the two
segments, if applicable.
87. The second option would eliminate an IXC's ability to select
the first choice and require incumbent LECs to assess flat-rated
charges for the circuit between the SWC and the tandem, which typically
is a dedicated circuit, and to apply usage-based rates to the tandem-
to-end office link. This was the original transport rate structure the
Commission established in 1983 in the Access Charge Order.
88. In conjunction with either of the two options for pricing
tandem-switched transport service transmission facilities, we could
treat tandem switching similarly to one of our proposals for the local
switching rate structure, discussed in Section III.C above. As with the
end-office switch, the tandem switch may include equipment dedicated to
particular customers, such as the network ports through which a
particular IXC's traffic enters and leaves the tandem switch. Thus, we
could require incumbent LECs to develop usage-sensitive charges for
shared facilities (the tandem switching functions and the ports on the
end office side of the tandem switch), and a flat-rated charge for the
dedicated ports on the SWC side of the tandem switch. Alternatively,
shared tandem switching costs may be driven by the number of trunks on
the end-office side and the SWC side of the tandem switch, just as
shared local switching costs may be driven by the number of lines and
trunks connected to the switch. If this is the case, then flat monthly
rates may better reflect shared tandem switching costs. Parties are
invited to comment on whether tandem switches differ in any fundamental
way from end office switches with respect to the division of costs
associated with shared and dedicated facilities.
89. In addition to any of the tandem-switched transport service
options discussed above, we could permit or require incumbent LECs to
develop peak load pricing for tandem-switched transport service. Most
small IXCs use tandem-switched transport service for all or most of
their access traffic, while larger IXCs may use tandem-switched
transport service on relatively fewer routes, or may use it only to
handle their overflow traffic during peak hours. Thus, some portion of
tandem costs may be attributable to the need to accommodate this
overflow traffic from direct-trunked transport facilities. We invite
comment on whether to permit or require incumbent LECs to develop peak
and off-peak pricing for tandem switching. We also invite comment on
whether some portion of tandem switching costs should be recovered from
direct-trunked transport service customers, if in fact a portion of
tandem switching capacity is necessary to meet demand from direct-
trunked transport customers during peak period. Parties advocating peak
pricing should propose a method to determine the peak period. Because
some access customers may use some SWC-side trunks and ports to carry
overflow traffic, and the costs of those ports are not traffic-
sensitive, flat rates may better recover the tandem-switched transport
costs generated by that overflow traffic. We invite comment on this
analysis.
90. We seek comment on the benefits and detriments of each of the
above options for reforming the tandem-switched transport rate
structure. Parties are specifically asked to discuss whether any of
these options accurately reflect the way incumbent LECs incur tandem
switching costs. For example, we seek comment on the extent to
[[Page 4685]]
which tandem-switched and direct-trunked transport use the same or
different physical routing, and in light of this, on whether the
distance component of setting tandem-switched transport rates is most
appropriately measured between the SWC and the end office, or in two
charges, one for the SWC-to-tandem circuit and one for the tandem-to-
end office circuit. We invite parties to identify and quantify the
specific NTS costs associated with the tandem switch that they believe
are currently recovered through the usage-sensitive tandem charge. We
also invite parties to suggest additional options for the tandem-
switched transport charge.
b. Rate Levels. 91. We seek comment on how to establish a
reasonable tandem switching charge in light of the court's remand. The
interim transport restructure rules, which the court remanded, required
incumbent LECs to base their initial tandem switching charge on 20
percent of the interstate revenue requirement for tandem switching,
with the remaining 80 percent to be recovered through the TIC. Thus,
both the tandem charge and some portion of the TIC were designed to
recover the costs included in the tandem-switched transport revenue
requirement. The Commission found in the First Transport Order that
this revenue requirement included some SS7 signalling cost, in addition
to tandem switching costs. In Section III.E, below, we propose to
reassign costs included in the TIC to those rate elements to which they
are related, including the different transport rate elements. We seek
comment on what costs are appropriately associated with the tandem
switching function. Parties commenting on this issue should address how
their proposals are consistent with the court's remand directives. We
also ask parties to comment on whether, if we permit direct-trunked
transport or entrance facility rate structure options based on whether
the channel facility assignment is done by the IXC or the LEC, a
similar option should be available for tandem-switched transport. We
ask parties to comment on the interrelationship of the rate level issue
and how any decision on transport rate levels affects the options for
phasing out the TIC that are discussed in the following section.
92. The court in CompTel v. FCC also directed us to explain why we
permitted incumbent LECs to load a relatively large portion of their
transport overhead costs to tandem-switched transport rates, and to
base their direct-trunked transport overhead loadings on the lower
overhead loading factors used for special access. Our resolution of the
transport overhead loadings issue remanded by the court is also
affected by our treatment of the TIC. If we decide to reallocate costs
currently recovered through the TIC to other rate elements, this could
change the amount of overhead costs allocated to both direct-trunked
transport and tandem-switched transport. It is possible that
reallocating costs from the TIC to direct-trunked transport and tandem-
switched transport charges would result in cost-based direct-trunked
transport and tandem-switched transport charges, that is, direct-
trunked transport and tandem-switched transport charges that recover a
proportionate amount of overhead costs. Thus, reallocating costs from
the TIC could contribute to correcting any imbalance in overhead cost
allocations between transport rate elements. We invite parties to
discuss what other regulatory requirements are necessary to comply with
the court's mandate on transport service overhead loadings.
93. Furthermore, initial tandem-switched transport transmission
rates were presumed reasonable if set as a weighted average of the per-
minute cost of DS3 and DS1 rates calculated using 9000 minutes of use
per month. We note that USTA has alleged that the number of actual
minutes traversing tandem circuits is significantly below 9000 minutes
per month. We solicit comment on whether we should revise any transport
rate structure requirement, either as a result of CompTel v. FCC, or
for any other reason.
94. Finally, we solicit comment on the relationship between our
transport rate structure rules and the market-based access reform
proposals we discuss in Section IV, and on the relationship between the
transport rate structure rules and the prescriptive access reform
proposals we discuss in Section V. Is our goal of driving interstate
access rates to forward-looking economic cost consistent with retaining
rules governing transport rate level relationships? Is it possible to
comply with the court's mandate with regard to the tandem switching
charge and transport overhead cost allocations without retaining some
rules governing transport rate level relationships?
E. Transport Interconnection Charge
1. Background
95. Under our Part 36 separations rules, certain costs of the
incumbent LEC network are assigned to the interstate jurisdiction. The
Part 69 cost allocation rules allocate these costs among the various
access and interexchange services, including transport. In the First
Transport Order, we restructured interstate transport rates for
incumbent LECs. The restructure created facility-based rates for
dedicated transport services based on comparable special access rates
as of September 1, 1991, derived per minute tandem-switched transport
transmission rates from those dedicated rates, established a tandem
switching rate, and established a TIC that initially recovered the
difference between the revenues from the new facility-based rates and
the revenues that would have been realized under the preexisting
``equal charge rule.'' The TIC was intended as a transitional measure
that initially made the transport rate restructure revenue neutral for
incumbent LECs and reduced any harmful interim effects on small IXCs
caused by the restructuring of transport rates. Approximately 70
percent of incumbent LEC transport revenues are generated through TIC
charges, or approximately $2.9 billion out of $4.0 billion in transport
revenues.
96. The TIC is a per-minute charge assessed on all switched access
minutes, including those of competitors that interconnect with the LEC
switched access network through expanded interconnection. The usage-
rated TIC increases the per-minute access charges paid by IXCs and
long-distance consumers, thus artificially suppressing demand for such
services and encouraging customers to bypass the LEC switched access
network, particularly through the use of switched facilities of
providers other than the incumbent LEC. In addition, to the extent that
any portion of the TIC should properly be included in LEC transport
rates, other than the TIC, the TIC provides the LECs with a competitive
advantage for their interstate transport services because incumbent LEC
transport rates are priced below cost while the LECs' competitors using
expanded interconnection must pay a share of incumbent LEC transport
costs through the TIC.
97. Our goal in this proceeding is to establish a mechanism to
phase out the TIC in a manner that fosters competition and responds to
the court's remand. The resolution of the TIC issues is also related to
the resolution of three other issues. First, the Universal Service
Joint Board recently recommended establishing a universal service
support mechanism. In Section VII.A, below, we seek comment on how any
support amounts should be allocated to reduce interstate rates. Some of
those support amounts may reduce the amount that would otherwise be
recovered through the TIC. Second, the adoption of either the market-
based or prescriptive
[[Page 4686]]
approach to access reform will establish the extent to which incumbent
LEC costs will be recovered through facility-based access charges.
Third, if we conclude that incumbent LECs should be permitted to
recover some embedded access costs for some period in a competitively
neutral manner, as discussed in Section VII.B, below, some of those
costs may be costs that are currently included in the TIC.
Consequently, resolution of these issues may reduce the costs currently
included in the TIC.
98. As we discuss more fully below, the costs now recovered in the
TIC could be addressed in several different ways. Some incumbent LECs
have urged us to give them significant pricing flexibility and allow
market forces to discipline the recovery of the TIC, either alone, or
in conjunction with a phase-out of the TIC. A second method of
eliminating the TIC would be to quantify and correct all identifiable
cost misallocations and other practices that result in costs being
recovered through the TIC. A third approach would be a combination of
these approaches. For example, we could address directly the most
significant and readily-corrected misallocations, and then rely on a
market-based approach to reducing what remains of the TIC. Finally, we
could provide for the termination of the TIC over a specified time
period, such as three years.
99. We address below some explanations for the amounts in the TIC,
and then seek comment on possible means of reducing or eliminating the
TIC.
2. Possible Sources of Costs in the TIC
100. In the NPRM included in the First Transport Order, the
Commission sought comment on the nature of the costs included in the
TIC so that those costs could be reallocated. Parties in the Transport
proceeding and in more recent ex parte filings have offered various
explanations of the composition of the costs included in the TIC. We
summarize below several of the more significant explanations presented
by the parties. Our discussion of these comments is divided into two
parts. One group of comments describes the costs included in the TIC as
the result of transport rate setting choices. The other group of
comments describes the costs as related to potential cost
misallocations.
a. Transport Rate Setting. 101. Tandem Switching and SS7 Costs. In
the First Transport Order, we concluded that the interim transport rate
structure should include a tandem element that would initially recover
20 percent of the interstate revenue requirement associated with the
tandem switch, while the remaining 80 percent of the interstate revenue
requirement would be assigned to the TIC. We took this action because
of our uncertainty about the specific sources of the costs that were in
the tandem switching revenue requirement and because of our concern
about possible adverse impacts on small and medium IXCs as the new rate
structure was introduced.
102. USTA submits that the portion of the tandem interstate revenue
requirement that is included in the TIC includes some costs incurred in
the provision of SS7 signalling, line information database (LIDB), and
other related signalling services. These costs bear no particular
relationship to the operation of the tandem switch. As discussed below,
under the interim transport rate structure, LECs recover a portion of
their SS7 costs through a flat-rated dedicated signalling transport
charge assessed on a per-line basis and a flat-rated STP port
termination charge. The costs associated with other signalling
functions, such as transporting SS7 messages within the signalling
network, are not recovered through any facility-based rate element,
having generally been incorporated in the transport function, and thus
are presumably embedded in the TIC. These SS7 costs relate to services
used by all LEC transport customers, and, in the future, potentially to
users who are not LEC transport customers. The costs associated with
the provision of signalling services are related to the new signalling
rate elements discussed below, and if we establish such signalling rate
elements, they would not need to be recovered through the TIC.
103. Tandem-Switched Transport Rate Setting. The Commission
employed several assumptions in setting tandem-switched transport
rates, which USTA alleges understate the rates for tandem-switched
transport. First, under the interim transport rules, per minute tandem-
switched transport transmission rates between the SWC and the end
office were presumed reasonable if they were based on a weighted mix of
DS1 and DS3 special access rates and assumed 9000 minutes of use per
voice grade circuit per month. USTA argues that the Commission's
assumption of 9000 minutes of use per circuit per month for tandem-
switched transport circuits resulted in tandem-switched transport rates
that were too low. It contends that the actual usage on tandem circuits
can be measured and often is far less than the 9000 minutes assumed by
the Commission. Second, USTA contends that the use of a per minute
tandem-switched transport transmission rate from the SWC to the end
office ignores that the SWC-to-tandem segment of tandem-switched
transport is provided over a circuit that is dedicated to an IXC. It
argues that the failure to price the SWC-to-tandem segment of tandem-
switched transport on a flat-rated basis led to some of those costs
being included in the TIC. Third, USTA also alleges that tandem-
switched transport uses low-density routes between small end offices
and tandem switches and thus does not use DS3 circuits to the same
extent that DS3 circuits are used for direct-trunked transport service.
Thus, according to USTA, the tandem-switched transport rate applicable
to these low-density routes is too low. Finally, USTA asserts that
distance-sensitive tandem-switched transport rates are too low because
the rules used airline miles from the SWC to the end office rather than
measuring distance through the tandem office. Each of these assumptions
has been said to result in tandem-switched transport rates that produce
revenues that are less than costs, with the difference being assigned
to the TIC.
104. Host-Remote Trunking Rate. The interim transport rules require
incumbent LECs to assess tandem-switched transport rates for the
carriage of traffic between a host switch and its remote. As with the
tandem-switched transport rate itself, USTA argues that the 9000
minutes of use per circuit reflects more usage than actually transits a
circuit, and that the trunks do not exhibit the ratio of DS3-DS1
relationship that was employed in setting the tandem-switched transport
rate. USTA contends that the rate therefore does not recover all the
costs of host-remote trunking.
105. Multiplexing Costs. USTA asserts that the existing transport
rates for transmission facilities do not account for all multiplexing
costs in two instances, and that this results in costs being recovered
through the TIC rather than in appropriate facility-based rates. First,
it alleges that none of the transmission rates reflects the cost of the
DS1/DS0 multiplexing needed to access those end office switches that
cannot handle DS1 interfacing, such as analog electronic switches. Such
switches constitute approximately 25 percent of the BOC switches.
Second, USTA contends that the TIC also includes the two additional
multiplexers needed in order to multiplex a DS3 circuit down to a DS1
level before being switched at the tandem, and then back up to DS3
afterward for transmission to an end office. To the extent that analog
tandem switches exist, two additional DS1/DS0
[[Page 4687]]
multiplexers are needed to achieve the voice-grade interface with the
tandem switch.
106. Direct-Trunked Transport Rate. In the First Transport Order we
established initial direct-trunked transport rates that generally were
presumed reasonable if set at the LECs' September 1, 1992, rates for
comparable special access services. USTA and other incumbent LECs argue
that this resulted in costs being included in the TIC because
facilities-based transport rates are too low outside high-volume, low-
cost areas. These LECs argue that high-capacity special access is
provided primarily in high-volume, low-cost areas, making special
access rates a good surrogate for transport rates only in such areas.
They assert that transport in low-volume areas has significantly higher
costs that are not recovered by rates for transport facilities because
those rates were based on rates for special access service, which is
more heavily concentrated in low-cost urban areas than is transport.
SBC, for example, contends that a study of its interoffice facilities
indicates that transport may cost over five times more in low-density
areas than in high-density areas. These parties submit that these
higher costs are included in the TIC.
b. Possible Cost Misallocations. 107. As we noted above, the
Commission's Part 36 separations and Part 69 cost allocation rules
assign costs to access categories, including transport. Some of these
costs were included in the TIC when it was established in 1993. Some
LECs have indicated that some of the costs included in the TIC result
from cost misallocations in these processes, as described below.
108. Central Office Equipment (COE) Maintenance Expenses. USTA
alleges that the TIC includes costs allocated to transport by current
separations and cost allocation procedures that are properly excluded
from facility-based transport rates. For instance, the separations
rules allocate all expenses for maintaining central office equipment
(including circuit equipment, switches, and operator services
equipment) among the separations categories for circuit equipment,
switching, and operator service on the basis of the apportionment of
total COE investment that is allocated to each of those three
categories. The separations expense allocations are then carried over
into Part 69 and allocated among the interexchange and access
categories. These parties contend that a more cost-causative approach
would allocate each of these three types of expense based on the
allocation of the investment associated with that type of expense. For
example, they would allocate circuit equipment maintenance expenses
between the jurisdictions and among the Part 69 elements based on the
allocation of circuit equipment investment. The LECs allege that this
change would move costs primarily from the TIC to the local switching
category.
109. Use of Circuit Terminations in Separating Costs Between
Private Line and Message Services. Some parties contend that costs are
included in the TIC because the separations procedures do not allocate
costs to special access and transport categories in the same way, even
though, as we concluded in the First Transport Order, the two
categories of service use similar facilities. Specifically, these
parties argue that the use of circuit termination counts in allocating
trunking facilities under-allocates costs to the private line
separations category. This occurs because a DS1 circuit (which
generally carries 24 voice-grade circuits) used for private line
service is counted as having only two terminations, while a similar
circuit used for switched message services is counted as having 48
terminations (two per voice-grade circuit). Because the Commission used
special access rates to establish the initial facility-based transport
rate levels, and the TIC was derived from those rates, any under-
allocation of costs to special access could result in the TIC
containing costs that may be more appropriately recovered through
facility-based special access rates.
110. Over-allocation of costs to the interstate jurisdiction. Some
parties also allege that the TIC recovers costs allocated to the
interstate jurisdiction that should properly be allocated to the
intrastate jurisdiction. These parties contend that such costs were not
included in the special access rates that were the basis for the
initial transport rates, and that these costs therefore were included
in the TIC.
3. Possible Revisions to the TIC
111. As we have noted earlier, our goals are to move towards
significantly more cost-based access rates and competition in the
access and interexchange markets. The development of a competitive
access market will be distorted by the assessment of the TIC as a
surcharge on local switching. The TIC therefore will be unsustainable.
In this section we describe several approaches for revising the TIC and
raise specific questions concerning the various approaches.
112. As discussed further below, one approach to revising the TIC
that has been suggested by some incumbent LECs would be to give them
significant pricing flexibility, thereby permitting them to address the
TIC problem in a manner consistent with the dictates of the market.
These LECs argue that the presence of unbundled elements makes it
possible for competitors to reach all customers immediately and
warrants significant pricing flexibility. They request various types of
pricing flexibility now, including deaveraged rates, consolidation of
price cap baskets, contract carriage, and access rates based on end-
user customer class distinctions.
113. Ameritech and NYNEX have made such proposals. Ameritech favors
phasing the TIC down over a short transition period of three to five
years. Under this plan, the TIC reductions would not affect the basket
PCI and thus rate increases for other services would be possible within
the current bounds of the price cap rules. NYNEX claims that, if given
sufficient pricing flexibility for facility-based rates and the TIC, it
will be able to manage access pricing in a way that permits it a
reasonable opportunity to recover its costs, while minimizing the
effect on the competitive marketplace. For example, NYNEX would
deaverage its rates downward in high-density areas to permit it to
respond to competition, while leaving its other rates unchanged in
order to permit it to continue recovering the existing contribution
included in those rates. NYNEX does not propose any specific phase out
of the TIC, because it asserts that the market will discipline its
pricing practices.
114. We ask parties to comment on the need for some transitional
mechanisms given that approximately seventy percent of interstate
transport revenues are currently generated from TIC charges. We seek
comment on what would constitute a sufficient reason to use a
transition mechanism. For example, should any transition consider the
extent to which IXCs must make significant adjustments to their network
configurations in response to any revised TIC recovery methods? We also
seek comment on the duration of any transition period.
115. Alternatively, we could revise the TIC by quantifying and
correcting all identifiable cost misallocations and other practices
that cause costs to be included in the TIC. This approach would require
difficult, detailed analysis of individual LEC cost data and probably
would not provide an explanation for all the costs in the TIC.
Furthermore, it would undoubtedly identify cost allocation problems
that we could not remedy in this proceeding because of the need to
refer jurisdictional costs allocation issues to a
[[Page 4688]]
Federal-State Joint Board. Once identified and quantified, the costs
comprising the TIC could be: (1) left in the TIC subject to market
pressures; (2) reassigned to various access services (including
transport facility-based elements) and to nonregulated activities, as
appropriate; (3) recovered in a competitively-neutral manner as a
matter of public policy; or (4) removed from the regulated books of
account. In evaluating these options, we would bear in mind that the
incumbent LECs are in the best position to identify and quantify the
reasons costs are in the TIC, and we would therefore place the burden
on them to justify particular treatment of TIC costs. As with the
preceding approach, we seek comment on the need for, and the duration
of, any transition period.
116. As a third method, we could combine the forgoing alternatives.
That is, we could reassign some costs to facility-based elements when
warranted by forward-looking cost indicia and address the remaining
costs in the TIC through a phase-out methodology. Under this approach,
we could, for example, reassign those costs that were readily
identifiable and quantifiable, or necessary to respond to the court's
remand directives, and phase out the remainder of the TIC under either
the market-based or prescriptive approach to access reform. We
tentatively conclude that this approach better serves the public
interest than would an attempt to determine exhaustively the sources of
the costs included in the TIC because it is administratively simpler,
and it is likely that we could not establish the causes for all the
costs included in the TIC. We seek comment on the relationship of this
method to whether we select a market-based or prescriptive approach to
rate levels, as discussed further below. As with the preceding two
approaches, we seek comment on the need for, and the duration of, any
transition period.
117. Finally, as a fourth option, we could establish a schedule
under which the costs included in the TIC are phased out. Under this
option, we would establish a fixed time period during which incumbent
LECs could in succeeding years recover a declining portion of the
amounts included in the TIC. At the conclusion of the period, LECs
could no longer recover any TIC revenues. In conjunction with the
option of phasing out of the TIC, a LEC's PCIs, or SBIs, could be
adjusted to reflect the phase-out of the TIC, or they could be left
unchanged. Again, we seek comment on the relationship of this method to
whether we select a market-based or prescriptive approach to rate
levels, as discussed further below.
118. We seek comment on the extent to which the above approaches to
revising the TIC will achieve the goals of this proceeding. Parties
should address the relative merits of each, or of other approaches that
they may suggest. In particular, they should address how each plan
would accommodate any universal service or residual cost amounts that
might be allocated to the TIC. We also seek comment on how each of the
above approaches affects small business entities, including small LECs
and new entrants. Below, we inquire about specific issues concerning
these approaches.
119. In evaluating possible approaches to recovery of the TIC,
parties should address the possible explanations set out above for the
sums in the TIC, including the reasonableness and significance of each
of the explanations. We invite incumbent LECs to quantify the amounts
attributable to each explanation. Parties presenting data to quantify
amounts in the TIC should include sufficient detail to permit the
Commission and interested parties to evaluate the procedures used and
to adjust the results, if necessary, to address concerns raised in the
record. Parties are also asked whether there are any additional
explanations for the amounts included in the TIC. Parties should
quantify their explanations to the extent possible. Finally, we ask
parties to comment on whether any interstate costs are included in the
TIC that the LECs should be required to write off their regulated books
of account as not prudently invested, no longer used and useful, or for
some other reason. Any party believing that such costs exist should
explain why they should be written off, and provide the legal basis and
methodology for doing so. In this connection, they should comment on
the approaches discussed in Section VII.B.3, below regarding possible
disallowances.
120. In Section V, below, we discuss giving incumbent LECs
additional pricing flexibility as certain triggers are satisfied. We
ask parties to comment on the relationship of those pricing flexibility
approaches to the need for pricing flexibility in conjunction with
revising the TIC under any of the methods discussed above, or suggested
by any party. For example, because some of the costs in the TIC may
result from facility-based rates not reflecting the full costs of
serving rural or low-density areas, we ask parties to comment on
whether deaveraged pricing is essential to the achievement of our goals
with respect to the TIC. We also seek comment on whether other forms of
pricing flexibility are essential to reform of the TIC. We invite
parties to comment on how any pricing flexibility needed for this
purpose would affect the competitive development of the broader access
market. We invite parties to comment on whether any public policy
reasons would support retaining some costs in the TIC.
121. Any reallocations that may be necessary to implement the
elimination or revision of the TIC will give rise to exogenous cost
adjustments for price cap LECs under our price cap rules. Parties
therefore are asked to comment on whether any special exogenous cost
adjustment procedures are necessary to adjust the affected PCIs, APIs,
or SBIs. Parties are asked to comment on whether any downward exogenous
cost adjustments resulting from access reform should be targeted to the
TIC. We also ask parties to comment on what modifications to our access
charge rules for rate-of-return LECs are necessary to address any
revisions to the TIC that may be adopted. Finally, we ask whether any
modifications to the rules applicable to special access services are
necessary to accommodate any of the modifications discussed in this
section of the NPRM.
F. SS7 Signalling
1. Background
122. SS7 is the international standard network protocol currently
used to transmit signalling information over common channel signalling
(CCS) networks, and consequently those networks are often described as
``SS7 networks.'' The Part 69 rate structure for SS7 services or
facilities may not currently reflect the manner in which incumbent LECs
incur SS7 costs, and so may skew the development of competition for SS7
services. Therefore, we seek comment in this section on whether and how
to revise the rate structure for SS7 services.
123. SS7 networks consist of high-speed packet switches and
dedicated circuits that are separate from, but interconnected with, the
telecommunications networks over which telephone calls are carried.
Incumbent LECs typically use SS7 networks for three purposes: (1) For
call setup; (2) to obtain information from remote databases, such as
billing information that must be obtained from the line information
database (LIDB) to determine whether a calling card is valid, or
information identifying the designated carrier of a toll-free 800
[[Page 4689]]
service subscriber; and (3) to transmit the information and
instructions necessary to provide custom local area signaling services
(CLASS features), such as automatic call back and caller ID. The SS7
signalling networks will also play an important role in the
implementation of intelligent network (IN) functionality in incumbent
LEC networks.
124. As illustrated in Figure 2 above, incumbent LEC CCS networks
generally include the following basic components. Dedicated network
access lines (DNALs) are dedicated circuits that transmit queries
between incumbent LECs' signalling networks and the signalling networks
of other carriers, such as IXCs. The DNAL can be provided by the
incumbent LEC or by the other carrier, although incumbent LECs
generally provide the DNAL under their current SS7 tariffs. The DNAL is
connected to a port on an incumbent LEC's signal transfer point (STP),
a specialized packet switch that performs screening and security
functions, and switches SS7 messages within the incumbent LEC
signalling network. Messages within the incumbent LEC signalling
network travel over signal transport links, which are typically
dedicated DS1 circuits. SS7 messages are formulated within the
incumbent LEC signalling network at service switching points (SSPs),
which are generally end office and tandem switches with the necessary
software. Finally, service control points (SCPs) are computer databases
that respond to network signalling queries and perform related
functions. An additional term that is often used in describing SS7
networks is a signalling point (SP), which refers to any point on an
SS7 network that formulates or switches signalling queries.
125. Under the interim transport rate structure, incumbent LECs
charge IXCs and other access customers a flat-rated charge (called
``dedicated signalling transport'' in Part 69 of the rules) for the use
of dedicated facilities to connect to the incumbent LECs' signalling
networks. This rate element is composed of two subelements: a flat-
rated signalling link charge for the DNAL, and a flat-rated STP port
termination charge. Most other SS7 signalling costs, including those
for switching messages at the local STP, for transmitting messages
between an STP and the incumbent LEC end office switch or tandem
switch, and for processing and formulating signal information at an end
office or tandem switch, are not recovered through facility-based
charges, and thus most, if not all, of these costs are presumably
embedded in the TIC and the local switching charge. At SCPs, such as
the 800 and LIDB databases, incumbent LECs typically assess a per-query
charge for the retrieval of information and the transmission of the
query to and from the database. Incumbent LECs also recover costs
associated with the provision of certain signalling information
necessary for third-parties to offer tandem switching through the
``signalling for tandem switching'' rate element.
2. Ameritech's SS7 Rate Structure
126. On March 27, 1996, the Common Carrier Bureau granted Ameritech
a waiver to restructure the manner in which it recovers its SS7 costs.
The rate structure established by Ameritech pursuant to that waiver
recovers costs associated with the provision of SS7 signalling services
through four unbundled charges for the various functions performed by
incumbent LEC CCS networks: (1) Signal link; (2) STP port termination;
(3) signal transport; and (4) signal switching. We invite comment on
using the waiver granted to Ameritech as a model for a revised SS7 rate
structure for the industry as a whole.
127. Signal Link. We seek comment on whether costs associated with
the DNAL--the dedicated facility connecting an SS7 customer's network
to a dedicated port on the incumbent LEC's STP--should continue to be
recovered through a flat-rated distance-sensitive signal link charge.
Flat-rated cost recovery appears reasonable because the DNAL is a
dedicated circuit serving a single SS7 customer, similar to those
circuits used to provide special access or direct-trunked transport.
Incumbent LECs' SS7 customers could provide their own DNAL, or purchase
a DNAL from the incumbent LEC by paying the signal link charge. We also
seek comment on whether the signal link should remain in the transport
service categories in the trunking basket.
128. STP Port Termination. We seek comment on whether the costs
associated with the dedicated port on the incumbent LEC's local STP
that connects to a customer's DNAL should be recovered through a flat-
rated charge. This charge would include the portion of costs currently
recovered through the STP port termination subelement associated with
the STP port, but not the costs recovered through that subelement today
associated with the screening and switching functions of the STP, which
we understand are not performed by the port. Because the STP port
termination costs are dedicated to a particular SS7 customer, we ask
whether they should be recovered on a flat-rated basis.
129. We also seek comment on whether the STP port termination
element should be placed in a new service category in the traffic-
sensitive basket. Although STP port termination rates today are in the
same service category as the signalling link, these two services are
subject to different competitive conditions. Specifically, although
interconnectors can provide their own signal link, the STP port is part
of the incumbent LEC's STP and therefore must be purchased from the
incumbent LEC. Consequently, incumbent LECs could offset reductions in
their charges for the signal link with increases in the STP port
charges if STP port termination and the signal link remained in the
same service category. The STP port termination element appears
analogous to the dedicated line cards and trunk cards discussed in the
local switching rate structure discussion above, and therefore we seek
comment on whether it should be placed in a new ``signalling'' service
category in the traffic-sensitive basket. Recognizing that STP port
costs may be relatively small compared to signal link costs, we seek
comment on whether the benefits we have identified outweigh the
administrative burdens of implementing such a system and creating a new
price cap service category. Another alternative would be to remove the
STP port termination element, and other non-competitive SS7 elements
essential for interconnection, from price caps entirely, as we have
done for expanded interconnection. We seek comment on this option.
130. Signal Transport. The circuits that carry SS7 queries between
STPs, switches, and SCPs within incumbent LEC signalling networks are
comparable to the shared circuits incumbent LECs use to provide
transport between end office and tandem switches. SS7 queries
associated with many different calls traverse the same signal transport
links simultaneously, and so a usage-sensitive charge for these shared
facilities appears appropriate. As with signal switching, discussed
below, the costs of signal transport appear most closely related to the
number of queries, and therefore we seek comment on whether this charge
should be assessed on a per-query basis. We also seek comment on
whether incumbent LECs should be permitted to charge distance sensitive
rates for signal transport, and the appropriate level of distance
sensitivity that should be allowed.
131. It appears that signal transport is a form of transport, and
therefore we invite comment on placing this service
[[Page 4690]]
in the trunking basket. We also invite comment on placing signal
transport in the existing ``signalling for tandem switching'' service
category. In addition, interested parties may discuss whether to place
this service in a separate service category from the signal link,
because the signal link may be provided by other carriers while signal
transport generally must be performed by the incumbent LEC.
132. Signal Switching. We seek comment on whether costs related to
processing and switching by the STP should be recovered on a per-query,
usage-sensitive basis. These costs are similar to the costs incurred in
switching telephone calls at end office and tandem switches. Unlike end
office and tandem switches, however, STPs switch only data, and a
single call may involve multiple instances of signal switching. Because
the costs associated with signal switching relate more to the number of
SS7 queries switched than to the number or duration of calls, we ask
whether the signal switching charge should be assessed based on the
number of SS7 messages switched. For the reasons we have identified
above in the context of central office and tandem switching, we seek
comment on whether peak load pricing would be appropriate for signal
switching.
133. We propose to place this service in the traffic-sensitive
basket. We further seek comment on whether to place this service in the
same service category as the STP port termination charge, or whether to
create a new service category for signal switching.
3. Other SS7 Issues
134. We also invite parties to suggest alternative rate structures
for SS7 signalling. For example, we permitted Ameritech to implement
rate elements for signal tandem switching, signal formulation, and
optional parameters. We also seek comment on whether incumbent LECs
should be permitted to impose separate charges for ISDN User Part
(ISUP) messages, which are used in setting up and taking down calls,
and Transaction Capabilities Application Part (TCAP) messages, which
are used primarily for database queries and CLASS services such as
enhanced caller ID, or whether some other differentiation should be
made between charges for different types of SS7 messages. Although such
differentiation could be economically justified on the basis of the
different average lengths of ISUP and TCAP queries (and therefore the
differential load they tend to place on the SS7 network), we question
whether we should do so in the interests of rate structure simplicity.
To the extent that parties contend that differentiated charges for TCAP
and ISUP messages should be adopted, we ask those parties to provide
specific information and data to support such a claim. Parties that
favor an alternate structure are asked to provide details of any such
alternatives, and to explain how such alternatives would be consistent
with the goals of this proceeding. In particular, we ask parties to
discuss ways in which the SS7 rate structure we have proposed could be
simplified. The desire for rate structure simplicity may conflict with
the goal of economic cost-causation, and we seek comment on the
appropriate manner in which we should strike this balance for SS7
signalling.
135. We seek comment on whether the pricing for facility-based
signalling rate elements should be determined under the price caps new
services test. As we discussed in the Ameritech Operating Companies
Petition for Waiver of Part 69 of the Commission's Rules to Establish
Unbundled Rate Elements for SS7 Signalling, although the proposed SS7
rate elements would probably be considered restructured services under
our price cap rules, we tentatively conclude a requirement of revenue
neutrality and the cost showing specified under the new services test
would serve the public interest in this context. The different SS7
elements are likely to be subject to different competitive pressures,
and the current rate structure does not provide a sufficient basis,
absent a cost showing by incumbent LECs, on which to base the rates for
these new charges.
136. Incumbent LECs may need to install additional monitoring
equipment in order to bill properly for unbundled SS7 services. Some
incumbent LECs may not currently have the capacity to meter any SS7
traffic, and some incumbent LECs may only have such metering capacity
at STPs, not at signalling points in tandem offices. We seek comment on
the feasibility and cost of mandating a rate structure for SS7 services
that would require incumbent price cap LECs to install equipment for
metering SS7 traffic in their networks. We also invite comment on
whether and the extent to which the costs of any equipment needed to
comply with our proposed rules warrant exogenous cost treatment under
our price cap rules. In the 800 Database proceeding, Provision of
Access for 800 Service, CC Docket No. 86-10, Second Report and Order,
58 FR 7867 (February 10, 1993), the Commission permitted incumbent LECs
exogenous treatment of the reasonable costs they incurred specifically
to provide basic 800 database service. Unlike the rules we adopted in
the 800 Database proceeding, however, the SS7 rules we are
contemplating here would not require incumbent LECs to provide any
service they are not currently providing. The rules instead would
require incumbent LECs to recover the costs of any SS7 service they
choose to provide in a fashion that reflects the way they incur those
costs. Thus, the costs of SS7 metering equipment may not warrant
exogenous cost treatment.
137. We tentatively conclude that, under the proposal described
above, the existing charge incumbent LECs assess on third party tandem
switching providers (TSPs) for the provision of signalling codes
necessary for those TSPs to interconnect their tandem switches with
incumbent LEC transport networks should be eliminated and replaced by
charges for the specific SS7 functions associated with providing this
signalling information. Although this charge serves a particular
purpose, this service appears to use the same basic SS7 functions as
other signalling services. Thus, although the ``signalling for tandem
switching'' service category would remain in the trunking basket, that
category would include only the newly-created signal transport element,
and would be renamed as the ``signalling transport'' service category.
We seek comment on this analysis. Even if we do not eliminate the
existing signalling for tandem switching charge, we have proposed to
place several new rate elements into the existing signalling for tandem
switching service category that recover some costs not related to
tandem switching. Signal transport, for example, recovers costs for
signalling associated both with tandem-switched and with direct-trunked
calls. In order to avoid confusion, we tentatively conclude that the
signalling for tandem switching service category in the trunking basket
should be renamed as the ``signalling'' service category.
G. New Technologies
138. Developments in switching and transmission technology are
producing new telecommunications capabilities that offer the potential
for new services and lower prices in the future. These include
synchronous optical networks (SONET), Asynchronous Transfer Mode (ATM)
switching, and advanced intelligent networks (AIN). We seek comment on
whether, and how, we should take these new technologies into account in
adopting access charge rules. We also invite parties to recommend
specific rate structure rules that would reflect the manner in which
incumbent LECs incur costs when providing services using these
technologies. We
[[Page 4691]]
also seek comment on whether we should adopt access charge rules to
govern rate structures for services employing any other new
technologies.
IV. Approaches To Access Rate Reform and Deregulation
A. Different Approaches to Access Reform
139. Our overriding goal in this proceeding is to adopt revisions
to our access charge rules that will foster competition for these
services and eventually enable marketplace forces to eliminate the need
for price regulation of these services. In addition to the rate
structure changes discussed above, we suggest in this NPRM two
different approaches to access reform--a market-based approach and a
more prescriptive approach. We could adopt a market-based approach to
access reform under which we would let marketplace pressure move
interstate access prices to competitive levels. This approach could be
implemented incrementally, first eliminating certain regulatory
constraints as incumbent price cap LECs demonstrate through credible,
verifiable evidence that the conditions necessary for efficient local
competition to develop in their service areas exist. Then, as incumbent
LECs show that competition has emerged, additional regulatory
constraints, including mandatory rate structures, would be eliminated
to allow those LECs to adjust their interstate access rates. Finally,
when substantial competition has developed, price regulation would be
eliminated.
140. Some parties, however, may contend that a market-based
approach will allow incumbent LECs to continue indefinitely to assess
inflated prices for some or most access services in some or most
geographic areas. These parties would urge us to adopt a prescriptive
approach to access reform. Under this approach, we would require
incumbent LECs to move their prices to specified levels and allow such
LECs limited pricing flexibility until they can demonstrate they face
actual competition for access.
141. A market-based approach has a number of advantages. It creates
incentives for incumbent LECs to act quickly to open the local exchange
and exchange access market to competition, by making that a condition
for having additional flexibility to respond to competition from
facilities-based competitors. It allows marketplace forces, rather than
regulation, to determine how quickly prices move to cost-based levels.
A market-based approach also has some disadvantages. Marketplace forces
may not require incumbent LECs to assess cost-based prices for access
prices as quickly as a prescriptive approach. It may also be difficult
to develop reliable, administratively simple criteria for assessing
evidence of competitive entry and determining the existing regulatory
constraints that should be relaxed based on such a showing.
142. Conversely, the advantages to a prescriptive approach are that
the Commission can move prices to cost-based levels quickly and avoid
the need to develop criteria for determining whether competition is
sufficient to allow incumbent LECs additional pricing flexibility. The
principal disadvantage to a prescriptive approach is that it requires
the Commission to make detailed determinations of appropriate price
levels for multiple services throughout the country. Another
disadvantage is that, in the event an incumbent LEC can show its
embedded costs are significantly higher than its forward-looking costs,
the Commission would be required to determine how much of the
difference incumbent LECs should be given a reasonable opportunity to
recover and the method for that recovery.
143. We set forth below both a market-based approach and a more
prescriptive approach. We seek comment on whether we should: Select one
of the two approaches as our exclusive method of reforming access
charges in a manner that is most likely to lead to the conditions that
will enable us to deregulate access charges; adopt both approaches as
alternatives; or merge the two approaches in some fashion. For example,
if barriers to competition are not eliminated, a market-based approach
to access reform likely would not work. If a market-based approach were
adopted, we might nonetheless seek to ensure that prices move toward
economic cost even though barriers to competition are not eliminated
within a reasonable time for certain services or in some geographic
areas, by adopting an alternative prescriptive approach for those
services or geographic areas.
144. Commenters advocating a merger of both a market-based approach
and a prescriptive approach should describe how the two approaches can
be melded. For example, what criteria should be used for determining
whether to impose prescriptive access reform and at what time? How
would a combination of the two approaches work if barriers to
competition were eliminated, but later reinstituted?
145. Commenters proposing a melding of both approaches should also
discuss any regulatory safeguards that may be needed. For example, an
incumbent LEC might face different regulatory regimes in different
parts of its service region, or for different access services. This may
create an incentive for incumbent LECs to increase costs artificially
for the services or areas that are subject to prescriptive regulation
or less competition. Incumbent LEC incentives to misallocate costs in
this manner would depend on whether such cost changes would affect
incumbent LEC rates under prescriptive regulation, and on the magnitude
of any such effect.
146. We have previously faced issues that arise when an incumbent
LEC is subject to different regulatory regimes for different access
services, in the context of the BOCs' provision of enhanced services.
Specifically, the Commission decided not to regulate enhanced services
because the market for such services is competitive. The Commission
currently employs accounting safeguards designed to prevent common
carriers from shifting costs from nonregulated to regulated services,
without precluding them from taking advantage of any economies of
scope. We adopted the ``all or nothing'' rule in the Policy and Rules
Concerning Rates for Dominant Carriers, Second Report and Order, CC
Docket No. 87-313, 55 FR 42375 (October 19, 1990) (LEC Price Cap Order)
to address similar concerns about incumbent LECs shifting costs from
affiliates governed by price cap regulation to affiliates governed by
rate-of-return regulation. Should similar safeguards be adopted if a
combination of market-based access reform and prescriptive access
reform is adopted? We also invite comment on whether there are any
other issues raised by applying different regulations to different
services or areas.
147. We also seek comment generally on how incumbent LEC provision
of in-region interLATA services--either by independent incumbent LECs
or potentially by BOCs upon FCC approval under section 271--should
affect our choice of a market-based or prescriptive approach, or the
phases for implementing each approach. Conversely, we seek comment on
how our selection of a market-based or prescriptive approach should
affect, if at all, our consideration, of BOC applications, for in-
region provision of interLATA services. As discussed earlier in Section
I.B, IXCs argue that, to the extent access services are not available
to IXCs at their forward-looking economic cost, incumbent LECs and
their long-distance affiliates will have an artificial competitive
advantage in the market for long-distance services
[[Page 4692]]
that may distort the effects of competition and result in inflated
retail prices. We ask parties concerned about a possible ``price
squeeze'' to identify the conditions under which we should be
concerned. We ask parties to comment on whether the availability of
unbundled network elements at their forward-looking economic cost would
reduce the danger of a price squeeze insofar as IXCs might use those
elements to provide their own access to customers for whom they are the
local service provider.
B. The Goal--Deregulation in the Presence of Substantial Competition
1. Objectives
148. Regardless of the specific approach that we adopt in this
proceeding--market-based, prescriptive, or some combination of the
two--our goal is to foster the development of substantial competition
for interstate access services. Once substantial competition is present
for a particular service in a particular area, we propose to remove
that service from price cap and tariff regulation for that area.
149. Our plan to remove from price cap regulation interstate access
services that are subject to substantial competition is consistent with
prior decisions in which the FCC gradually removed AT&T's services from
price cap regulation. Our analysis of whether AT&T's services were
subject to substantial competition rested on considerations of market
share, demand responsiveness, supply responsiveness, and AT&T's pricing
behavior. We recognize, that unlike AT&T, incumbent LECs control
bottleneck facilities, particularly the loop. Nevertheless, the 1996
Act seeks to erode this source of market power by requiring incumbent
LECs to make unbundled network elements and resale available. In view
of the similarities between the structure of and purposes behind the
AT&T and the LEC price cap plans, the analytical framework that we used
to streamline AT&T's services would appear to be an appropriate method
for effectively deregulating incumbent LEC services. We also propose to
eliminate tariff filing requirements for services subject to
substantial competition. We seek comment on whether these actions are
appropriate under these conditions, and whether we should adopt any
other deregulatory measures when an incumbent LEC service is subject to
substantial competition. Below, we seek comment on the factors used in
examining AT&T's pricing behavior. We invite comment on which of these,
alone or in conjunction with these or other factors, could be used to
determine when to remove incumbent LEC access services from price cap
regulation.
150. We propose that the substantial competition analysis should be
considered on a service-by-service basis so that, for example,
directory assistance could be removed from price cap regulation where
substantial competition exists for directory assistance, even if not
for local switching. Such an approach is consistent with our approach
to removing AT&T's services from price cap regulation, and would allow
incumbent LECs to price competitively where competition has developed,
while not permitting incumbent LECs to raise prices for services for
which competition has not developed sufficiently.
151. We ask commenters to address whether, instead of requiring the
presence of substantial competition, we should remove from price cap
regulation services for which the incumbent LEC cannot influence price
movements. There may be circumstances in which incumbent LECs cannot
affect price changes in the market, even in the absence of substantial
competition. Our public interest concern is whether incumbent LECs can
adversely affect price movements. Using such an approach may remove an
incumbent LEC's services from price cap regulation even if no
competitors enter the market, but the incumbent LEC has complied with
the requirements of the 1996 Act.
152. We further ask whether high-capacity special access services,
e.g., those special access services offered at speeds of DS1 or higher,
should be removed immediately from price cap regulation. Many incumbent
LECs contend that for certain geographic markets these special access
services are already subject to intense competitive pressures that
today discipline incumbent LEC pricing of such services. If these
allegations are correct, our pro-competitive goals could be served by
removing these services from price caps. We ask parties to address the
degree of competition that exists for such services, including any
quantification that may be available. We invite parties to comment on
whether any other incumbent LEC services in particular geographic areas
are already subject to substantial competition and therefore should be
removed from price cap regulation.
153. We solicit comment on the procedures that an incumbent LEC
should follow to demonstrate that one or more services are subject to
substantial competition. Parties should discuss whether an incumbent
LEC should file a petition for waiver, a petition for declaratory
ruling, or some other filing, and how the incumbent LEC should satisfy
its burden of proof. In addition, we tentatively conclude that we
should adopt rules governing the recalculation of the price cap indices
when one or more services in a basket are removed. Such rules would
speed the review of the tariffs that incorporate the recalculated
indices. We invite parties to comment on this tentative conclusion, and
to propose particular rules that we should adopt.
154. We also seek comment on what geographic area should be used in
examining whether a service is subject to substantial competition. The
level of competition for different services likely will vary by
geographic area, even within the same state. Thus, we propose not to
rely on a statewide analysis of competition. We seek comment on whether
the relevant geographic areas should conform to the areas implemented
by the relevant state in making unbundled network elements available to
competitors. Because the costs of competitors using unbundled network
elements will be affected by these geographic areas, it may be
appropriate that incumbent LEC access prices vary according to them. We
acknowledge that it is possible that competition can vary significantly
even within such a zone. Alternatively, should we require that the
geographic areas coincide with the zones adopted in the Universal
Service proceeding to determine high cost areas? A third approach would
be to use the same geographic areas that we might select for geographic
deaveraging if we were to adopt the market-based approach set out in
Section V, below. We seek comment on these options.
2. Competitive Factors
a. Demand Responsiveness. 155. Incumbent LECs may seek to
demonstrate that the market for particular interstate access services
is competitive through evidence indicating that, where comparable
access services are available to the incumbent LECs' customers, a
significant number of those customers have the ability to evaluate the
full range of market options available to them, and the customers do in
fact exercise these options. We therefore propose that the demand
responsiveness of the incumbent LECs' customers should be an important
factor in assessing the level of competition for incumbent LEC services
for purposes of determining whether a service should be removed from
price cap regulation.
[[Page 4693]]
We seek comment on this proposal. Parties should identify the relevant
factors that should be used in determining whether an incumbent LEC's
customers are demand-responsive; the data and information that would be
necessary and relevant in determining whether an incumbent LEC's
customers are demand-responsive; and whether the fact that incumbent
LECs have relatively few customers that account for most of their
interstate access demand affects the usefulness of demand-
responsiveness as a factor in determining the level of competition.
Alternatively, we seek comment on the proposal that a LEC need only
provide evidence that comparable access services are available from
other carriers and need not provide evidence specifically on demand
responsiveness.
b. Supply Responsiveness. 156. We invite comment on whether supply
responsiveness should be a factor in determining the level of
competition for purposes of determining whether specific interstate
access services should be removed from price cap regulation. If so, we
ask parties to identify the factors that are relevant in determining
whether an incumbent LEC's competitors have enough readily-available
supply capacity to constrain the incumbent LEC's market behavior and
inhibit it from charging excessive rates; and the data and information
that would be necessary and relevant in determining whether an
incumbent LEC's competitors are supply-responsive. Supply elasticities
of an incumbent LEC's competitors may be important in assessing the
level of competition for incumbent LEC services. However, we
tentatively conclude that the ready availability of unbundled network
elements at forward-looking economic cost decreases the cost of entry
for access services. Their ready availability would indicate a high
supply elasticity in the access market.
c. Market Share. 157. As we observed in the Price Cap Second FNPRM,
at the time we considered giving AT&T streamlined regulation for
certain long-distance services, we determined that a high market share
does not necessarily confer market power. A company that enjoys a very
high market share will be constrained from raising its prices above
cost if the market is characterized by high supply and demand
elasticities at prices even slightly above competitive levels. An
analysis of the level of competition for incumbent LEC services based
solely on an incumbent LEC's market share at a given time may not
provide sufficient evidence for us to conclude that substantial
competition truly exists. While we do not propose to ignore market
share data in assessing the level of competition for incumbent LEC
services, we propose to consider market share in conjunction with other
factors, including, but not necessarily limited to, supply and demand
elasticities and pricing trends. We ask parties whether market share
should be a factor in determining the level of competition for purposes
of determining whether services should be removed from price cap
regulation. If so, we ask parties to discuss how market share should be
measured.
d. Pricing of Services Under Price Cap Regulation. 158. Evidence
that a price cap LEC is pricing services below the price cap ceiling
over a sustained period may indicate that such services are subject to
competitive pressures, particularly in markets with high supply and
demand elasticities. An incumbent LEC's below-cap pricing of services,
however, is not necessarily a reliable measure of competition. While
below-cap pricing may indicate a market with high supply and demand
elasticities, it could also occur because the incumbent LEC is behaving
strategically in order to be relieved of regulation. Pricing at the cap
may be evidence of a lack of competition, or that the cap is close to
the forward-looking economic cost of the service. How much significance
should we give to evidence that a price cap LEC is pricing services
below the price cap ceiling over a sustained period?
e. Other Factors. 159. We invite comment and discussion on whether
there are other factors in addition to those discussed above that we
should consider in an evaluation of the competition faced by an
incumbent LEC, for example elimination of barriers to entry in the
event it is not otherwise required. Parties that suggest other factors
to assess the level of competition for incumbent LEC services should
discuss what data and information would be necessary to assess the
relative importance of these factors.
V. Market-based Approach To Access Reform
A. Introduction
160. In this section, we seek comment on an approach to access
reform that relies on marketplace forces to move interstate access
prices to more economically efficient levels. Under this approach, our
primary role would be to remove regulatory requirements that inhibit
the operation of market forces. In Section III, above, we propose rate
structure changes designed to make the baseline regulatory scheme more
efficient. In this section, we propose a plan for reducing regulation
in two phases as competitive benchmarks are achieved short of
substantial competition.
161. Using a competitive paradigm, the issue becomes one of
identifying the market conditions that should trigger the removal of
existing regulatory constraints. Under the procedure we propose in this
section, we would implement regulatory reforms as incumbent LECs
demonstrate that their local markets have achieved pre-defined,
specific transition points, or ``competitive triggers.'' We are seeking
comment on removing uneconomic regulatory constraints in two
preliminary phases before a finding of substantial competition for
access services in specific areas permits the detariffing of access
services.
162. We seek comment on whether Phase 1, potential competition,
would be achieved when an incumbent LEC has opened its network by
removing the most immediate barriers to competitive entry. At this
stage, we are seeking comment on targeted reforms that remove
uneconomic regulatory requirements that inhibit incumbent LECs from
charging access prices that reflect the cost differentials in serving
different geographic areas, from lowering access prices non-
predatorily, and from pricing optional new services based on market
considerations. We are seeking comment on whether an incumbent LEC
should be required to show that some or all of the following conditions
exist to trigger Phase 1: (1) Unbundled network element prices are
based on geographically deaveraged, forward-looking economic costs in a
manner that reflects the way costs are incurred; (2) transport and
termination charges are based on the additional cost of transporting
and terminating another carrier's traffic; (3) wholesale prices for
retail services are based on reasonably avoidable costs; (4) network
elements and services are capable of being provisioned rapidly and
consistent with a significant level of demand; (5) dialing parity is
provided by the incumbent LEC to competitors; (6) number portability is
provided by the incumbent LEC to competitors; (7) access to incumbent
LEC rights-of-way is provided to competitors; and (8) open and non-
discriminatory network standards and protocols are put into effect. We
anticipate that at least some incumbent LECs reasonably should be able
to satisfy these conditions during 1997. We also invite comment on
whether the first three possible conditions, which relate to the
pricing of uses of the incumbent LECs' networks
[[Page 4694]]
other than access, might be sufficient to permit certain of the access
pricing reforms about which we are seeking comment.
163. We invite comment on whether Phase 2 would be met when an
actual competitive presence has developed in the marketplace. For an
incumbent LEC to demonstrate that Phase 2 has been achieved for a
particular service or within a given area, we invite parties to comment
on the following tests: (1) Demonstrated presence of competition; (2)
full implementation of competitively neutral universal service support
mechanisms; and (3) credible and timely enforcement of pro-competitive
rules. We also seek comment on whether an incumbent LEC should instead
be eligible for Phase 2 treatment if it has made its facilities and
services available in a reasonable and nondiscriminatory fashion, but
no competitors have entered to serve the incumbent LEC's service area.
Would this be sufficient to address the public interest considerations
involved in implementing the Phase 2 reforms?
164. We invite comment on this general approach to access reform,
and on the specific regulatory reforms proposed and their respective
competitive benchmarks. We also seek comment on whether these or other
regulatory reforms should be implemented without the achievement of any
competitive benchmarks, or upon the achievement of benchmarks different
from those proposed.
165. The 1996 Act became law after we issued the Price Cap Second
FNPRM. Because many of the issues raised in that NPRM are closely
related to issues central to this proceeding, we here re-notice many of
the proposed provisions to remove regulatory burdens contained in the
Price Cap Second FNPRM. In developing this NPRM we have considered the
comments we received in response to the Price Cap Second FNPRM. Because
of the intervening passage of the 1996 Act, however, we will limit the
record in this proceeding to the comments received in response to this
NPRM. Parties who filed in response to the Price Cap Second FNPRM
should not rely on those comments, but instead should file anew.
Parties may attach their Price Cap Second FNPRM comments as appendices
and incorporate them by reference.
166. As discussed in Section II.A, above, the removal of regulatory
constraints considered in this section is applicable to incumbent LECs
subject to price cap regulation. Arguably, small incumbent LECs are
affected in the sense that regulatory constraints are not being removed
for them as are some of the constraints for price cap incumbent LECs.
Small incumbent LECs will not be otherwise affected by the proposals
contained herein. While these proposals may indirectly affect small
entities, especially competitive LECs and access customers, we
anticipate that they will not have an impact on small entity reporting,
record keeping, or other compliance requirements. We invite parties to
comment on this analysis.
B. Phase 1--Potential Competition
167. We propose to eliminate four significant regulatory
constraints when an incumbent LEC can demonstrate that it faces
potential competition for interstate access services in specific
geographic areas: The prohibition against geographic deaveraging within
a study area; the ban on volume and term discounts for interstate
access services; the current prohibition against contract tariffs and
individual request for proposals (RFP) responses; and various
restraints on the ability of incumbent LECs to offer new, innovative
access services. We note that Ameritech has proposed conditioning
simplification of price cap regulation upon the achievement of certain
competitive triggers. We propose these changes because, once a LEC
satisfies the triggers we have identified, competitive forces should
come most quickly to bear on the provision of interstate access in low-
cost geographic areas and to large customers. Removing these restraints
should permit LECs greater ability to price economically and therefore
bring more competitive pressures, including lower prices, in areas and
for services where we expect competitive forces initially to be
strongest. Such reforms would have the goal of fostering efficient and
effective competition, to the benefit of customers, wherever possible.
Without such reform, continuing uneconomic regulation may serve
primarily to permit inefficient new entrants to gain market share among
the most attractive customers rapidly. We seek comment generally on
this analysis and specifically on the conditions and pricing reforms
set out below. We also seek comment on whether we should modify any
other of our regulatory pricing constraints at the time the Phase 1
competitive triggers have been met.
1. Trigger and Geographic Scope
168. We propose that the Phase 1 rule changes take effect when an
incumbent LEC's network has been successfully opened to competition.
The proposed Phase 1 rule changes remove restrictions that limit the
ability of incumbent LECs to re-price access services in ways that
respond to competitive pressure, but do not impede competitive entry.
We seek comment on whether some or all of the tests described below
provide the necessary and sufficient criteria for us to determine, for
this purpose, whether an incumbent LEC's network has been opened to
competition. We also seek comment on whether we should use any other
test instead of, or in conjunction with, those we propose.
169. Unbundled Network Elements. The first condition we propose is
that unbundled network elements be available at forward-looking
economic cost, i.e., on the basis of the TELRIC of the network element
(also known as Total Element Long Run Incremental Cost), plus a
reasonable allocation of common cost. Unbundled elements provide a
ubiquitous substitute for access service. Where access charges exceed
forward-looking economic cost (due to the structure or level of access
being inefficient), IXCs have an artificial incentive to ``win'' the
customer and provide both local and toll service using unbundled
elements. We expect that availability of unbundled elements at TELRIC
prices as a substitute for access charges will ultimately require the
LEC to set its charges in an economically efficient manner so as to
give customers the most economic value consistent with covering costs.
Will the availability of unbundled network elements at forward-looking
economic costs drive LECs' access charges to efficient levels and
structures? Or will it only tend to constrain the overall level of
charges, and give incumbent LECs incentives to choose inefficiently
high or inefficiently structured access charges, thus disadvantaging
IXCs that are not effectively integrated into local service, and thus
driving the market, possibly inefficiently, towards one-stop shopping?
Commenters are asked to outline the specific mechanism by which such
competition will affect access rates. Those who believe competition
from unbundled network elements will not affect access rates should
explain why.
170. In order for unbundled elements to promote ubiquitous
competition effectively, prices for unbundled network elements must be
geographically deaveraged. Costs may vary across geographic areas based
on the density of the area served, topography, or other characteristics
of the area. When the prices of elements that vary materially in cost
are averaged, the ability to substitute unbundled elements for access
will not drive access rates to their efficient level, because such
prices will understate the cost of providing services over the elements
in
[[Page 4695]]
high-cost areas and overstate the cost of providing services over the
elements in low-cost areas. When element prices have been deaveraged to
reflect cost differences, any divergence between element prices and
access charges required by regulation creates an artificial incentive
to substitute unbundled elements for access.
171. We seek comment on whether, for purposes of implementing
market-based access reform, an incumbent LEC should not be deemed to
have satisfied the Phase 1 competitive triggers unless and until rates
for unbundled network elements are available at geographically
deaveraged, forward-looking economic costs in a manner that reflects
the way costs are incurred. For the purpose of determining whether
deaveraging has occurred, we tentatively conclude that there should
must be at least three geographic zones.
172. Transport and Termination. The next condition we propose for
Phase 1 is that transport and termination be available for local
traffic at cost-based rates. Because unbundled network elements only
act as an effective substitute for switched access where the requesting
carrier can provide both local and interexchange service to the end
user, a carrier must be able to offer ubiquitous local service at
competitive rates. This requires transport and termination on the LEC
network to be available at the incumbent LEC's additional cost. Even
assuming rates are reciprocal, transport and termination rates that
exceed cost impede efficient entry and limit the extent to which
competitive LECs will compete for customers in local exchange and
exchange access markets. Where a customer makes more calls than he
receives, inflated transport and termination rates will impede
competition for that customer. We seek comment on whether we should
begin to implement market-based access reform for an incumbent LEC
before that incumbent LEC has complied with the statutory requirement
to provide transport and termination at cost-based rates.
173. Resale. We also propose that, in order to gain Phase 1
treatment, an incumbent LEC must offer its retail services to resellers
at a wholesale price, which is equal to the retail price minus the
reasonably avoidable cost of providing wholesale rather than retail
service. Congress provided that incumbent LECs should make their retail
services available to new entrants at the retail rate less costs that
will be avoided. Although resellers do not compete with incumbent LECs
in the provision of access, this requirement is a ``stepping stone'' in
the provision of other forms of competition. Resale should provide new
entrants with a vehicle for rapid entry into the local exchange retail
marketplace and with the ability to compete throughout an incumbent
LEC's service area. We seek comment on this proposal.
174. Availability of Elements and Services. Fourth, we propose that
incumbent LECs be required to demonstrate that competitors are able
actually to order and receive elements and services in a commercially
reasonable manner and in necessary quantities. Provisioning limits and
provisioning delays must not materially limit the flow of customers
from the incumbent LEC to its rivals. Incumbent LECs must create well-
functioning and adequately sized provisioning systems, both for resale
and for unbundled elements. We invite parties to comment on this
proposal.
175. Other Factors. We propose several other factors for
determining whether a LEC has made its network available to
competitors; namely, whether an incumbent LEC provides dialing parity
and number portability, whether an incumbent LEC gives competitors
access to its rights-of-way, and whether network standards are open and
non-discriminatory. For example, without the provision of dialing
parity, competitors' customers must dial additional digits. Without
number portability, a customer's desire to keep his phone number
becomes a barrier to new entrants. We seek comment on these factors,
and invite parties to comment on the availability of any factor that
should be taken into account in determining whether the Phase 1 trigger
has been met.
176. We tentatively conclude that it is important to use
objectively measurable criteria for determining whether an incumbent
LEC has achieved the Phase 1 trigger, so as to avoid delay caused by
protracted proceedings and to minimize administrative burdens for all
parties. In determining whether an incumbent LEC meets the Phase 1
criteria, we tentatively conclude that the incumbent LEC seeking Phase
1 treatment offer us objective evidence of the existence of these
conditions. After receiving the incumbent LEC's filing, we propose to
allow for public comment. We propose that we would then issue our
decision within 90 days after the comment period has ended. We seek
comment on this proposed review mechanism.
177. We solicit comment on the procedures that an incumbent LEC
should follow to demonstrate that it has met the Phase 1 competitive
trigger. Petitioners should discuss whether an incumbent LEC should
file a petition for waiver, a petition for declaratory ruling, or some
other filing, and how the incumbent LEC should satisfy its burden of
proof. Because incumbent LECs are required to open their networks
throughout each state in which they offer service, we propose to
require that incumbent LECs meet this competitive trigger on a state-
by-state basis in order to qualify for this relief. We ask, however,
whether incumbent LECs should be able to seek Phase 1 treatment by
geographic area, as discussed in Section IV.B., above, even though
these areas would be smaller than study areas. We seek comment on this
proposal.
178. We also invite parties to comment on what actions the
Commission should take in the event that it is shown that a LEC that
has received approval for Phase 1 or Phase 2 relief, or has
demonstrated that substantial competition exists for a particular
service, no longer satisfies the applicable criteria. We particularly
invite comment on whether the Commission's complaint process is the
appropriate vehicle for parties to demonstrate the necessary changed
circumstances and the specific remedies the Commission should employ in
the event that an incumbent LEC no longer meets the applicable Phase 1
or Phase 2 criteria, or can no longer demonstrate the existence of
substantial competition for a particular service.
2. Reforms
a. Geographic Deaveraging. 179. Our Part 69 rules generally require
that an incumbent LEC's charges for access elements be averaged within
each of its study areas. We have developed, however, a system of
density pricing zones, which may be used by an incumbent LEC to
deaverage geographically its rates for special access and switched
transport services if that incumbent LEC meets certain threshold
interconnection requirements. We instituted this density zone pricing
in response to the emergence of competition in markets for those
services. In this NPRM, we propose allowing incumbent LECs that have
met the Phase 1 trigger to deaverage rates geographically for all
access charge elements other than the SLC. We ask generally whether
incumbent LECs should also be able to deaverage the SLC geographically.
In the case of first residential lines and single-line business lines,
should incumbent LECs be permitted only to make geographically-
deaveraged reductions in the SLC, in light of the Joint Board's
[[Page 4696]]
recommended decision that there be no increases in the SLC for those
lines?
180. In this NPRM, we propose to permit price cap incumbent LECs
that satisfy the Phase 1 eligibility requirements to deaverage
geographically their access charge elements. We note that the
availability of geographically deaveraged unbundled network elements is
proposed as a prerequisite for Phase 1 relief. Where unbundled network
elements are deaveraged, continuing to require access rates to be
averaged across the study area would foreclose the incumbent LEC from
meeting competition from unbundled network elements in low-cost areas,
while still requiring the incumbent LEC to charge below-cost access
rates in high-cost areas. As discussed in Section III.B, above, we seek
comment on whether section 254(e) requires geographic deaveraging. We
also seek comment on the relationship between geographic deaveraging of
access charges and section 254(g).
181. Moreover, such discrepancies between price and cost distort
competition by creating incentives for entry in low-cost areas by
carriers whose cost of providing service is actually higher than the
incumbent LEC's cost of serving that area. Similarly, geographic
averaging across large geographic areas distorts the operation of
markets in high-cost areas when we require incumbent LECs to continue
offering services in those areas at prices substantially lower than
their costs of providing those services. Prices that are below cost
reduce the incentives for entry by firms that could provide the
services as efficiently, or more efficiently, than the incumbent LEC.
Therefore, we propose that once the requirements under Phase 1 have
been met, incumbent LECs should be permitted to deaverage
geographically rates for access elements.
182. We note that, pursuant to the Expanded Interconnection with
Local Telephone Company Facilities, CC Docket No. 91-141, Report and
Order and Notice of Proposed Rulemaking, 57 FR 54323 (November 18,
1992) (Special Access Expanded Interconnection Order) and the Transport
Phase 1, Second Report and Order and Third Notice of Proposed
Rulemaking, 58 FR 48756 (September 17, 1993) (Switched Transport
Expanded Interconnection Order), incumbent LECs currently may deaverage
access charges for special access and switched transport services when
one cross-connect has been taken within the study area. Phase 1
deaveraging would be broader--extending to all access elements other
than the SLC, not just special access and switched transport--and
complementary to deaveraging under our Expanded Interconnection orders.
Thus, for any incumbent price cap LECs that have not already met the
one cross-connect threshold for transport deaveraging, we propose to
permit geographic deaveraging for special access and switched transport
when one cross-connect has been taken in the study area or when Phase 1
has been met, whichever is earlier.
183. We seek comment on the variability of the costs of providing
access charge elements. In particular, we ask parties to submit
evidence indicating whether per-line and/or per-minute costs of local
switching services vary geographically. We also seek comment on the
number and size of zones that should be required or allowed. One
possible method is to permit or require that the geographic areas for
access deaveraging match those implemented by each state pursuant to
the 1996 Act. Because the prices for competitors using incumbent LEC
unbundled network elements will differ among these density zones, it
would seem necessary to permit incumbent LECs to price their own access
services using the same areas. If the states deaverage network elements
and the Commission does not deaverage access, IXCs would only purchase
network elements in low-cost areas, and would only take access in high-
cost areas. We seek comment on alternative approaches for ensuring that
geographic zones generally reflect cost differences and that the zones
for unbundled network elements, universal service, and access charges
are compatible. We also ask whether any other geographic areas would be
more appropriate than either of these options. Further, we seek comment
on whether incumbent LECs should be permitted or required to change the
density zones established for special access and switched transport to
coincide with the zones we ultimately adopt in this proceeding. In
considering how best to deaverage geographically the remaining access
elements, we seek to minimize administrative burdens for incumbent LECs
and the Commission.
184. Finally, we note that section 254(g) requires IXCs' rates to
subscribers in rural and high cost areas to be no higher than the rates
for subscribers in urban areas. We therefore invite parties to comment
on how IXCs would be affected by incumbent LECs geographically
deaveraging their rates for access elements.
b. Volume and Term Discounts. 185. In this section, we consider
permitting incumbent LECs to offer volume and term discounts for all of
their access charge elements upon achievement of the Phase 1
competitive conditions. Volume and term discounts are permitted for
special access services without any competitive showing or waiver of
Part 69 of the Commission's rules. We currently permit volume and term
discounts on certain transport services when incumbent LECs can show a
certain level of competition, as evidenced by a specified demand for
their expanded interconnection services. In the Switched Transport
Expanded Interconnection Order, we permitted incumbent LECs, once a
specified threshold of interconnection was met, to offer reasonable
volume and term discounts on entrance facilities and interoffice
facilities and tandem-switched transport, including pricing that
reflects speeds greater than DS3. We noted that, as a general matter,
such discounts should be permitted if they are justified by underlying
costs, and are not otherwise unlawful, because they encourage
efficiency and full competition. Term discounts recognize cost savings
that result from the certainty of longer-term arrangements, and volume
discounts reflect the lower per-unit cost of providing higher traffic
volumes on high capacity facilities. We have previously concluded that
volume and term discounts can reasonably recognize certain efficiencies
that flow from volume or term commitments made by purchasers.
186. The Commission currently allows an incumbent LEC to offer
volume and term discounts on switched transport when one of the
following conditions has been met: (1) 100 DS1-equivalent cross-
connects for switched transport service were taken by an interconnector
in the incumbent LEC's zone 1 offices in a study area, or (2) an
average of 25 DS1-equivalent switched transport cross-connects per zone
1 office have been taken. These thresholds were designed to balance the
incumbent LECs' need for flexibility in light of growing competition
with the need to give incumbent LECs incentive to act cooperatively in
implementing expanded interconnection. We found that discounted
switched transport service constituted a new service under the price
cap rules, thereby necessitating the filing of cost justification by
the incumbent LEC. We also required that discounted switched transport
tariff filings be made 120 days in advance of their effective date,
rather than 45 days in advance, as required for other new services.
187. Because of our current inefficient rate structures, incumbent
LECs face pressure from high-volume customers
[[Page 4697]]
due to the availability of bypass facilities. The condition that
incumbent LECs make available unbundled network elements at forward-
looking economic costs, including substantial scale and scope
economies, will place additional pressure on access prices that do not
also reflect forward-looking economic costs. We recognize the
significant benefits that may result from volume and term discounts,
including the possibility that volume and term discounts may enable an
incumbent LEC to reflect its actual costs more accurately. However, we
do not propose permitting incumbent LECs to offer volume and term
discounts without first meeting a competitive condition because we
remain concerned that such discounts may serve to inhibit competition
if employed by incumbent LECs before competitors can offer volume and
term discounts of their own. By ``locking in'' customers with
substantial discounts for long-term contracts and volume commitments
before a new entrant that could become more efficient than the
incumbent can offer comparable volume and term discounts, it is
possible that even a relatively inefficient incumbent LEC may be able
to forestall the day when the more efficient entrant is able to provide
customers with better prices.
188. Because of this concern, we therefore propose that incumbent
LECs be permitted to offer volume and term discounts only if they have
met the Phase 1 conditions. The existence of competition from the
availability of unbundled elements makes it less likely that an
incumbent LEC could lock in particularly desirable customers with long-
term plans before competitors can respond. Instead, it seems more
likely that the competitors will be able to use unbundled network
elements to offer services at significant, pro-competitive volume and
term discounts. Precluding volume and term discounts for access service
rates would require the incumbent LEC to offer local switching services
purchased in high volume or for long terms at prices greater than the
incumbent LEC's costs for providing those services, which would impede
the full development of effective competition. We seek comment on this
proposal to give incumbent LECs the authority to provide volume and
term discounts, and on the extent to which it might affect the
emergence of competition in markets for exchange access services. We
seek comment on whether these discounts need to be cost justified.
189. On the other hand, we tentatively conclude that it would not
be in the public interest to permit incumbent LECs to offer ``growth
discounts'' for particular access services at Phase 1. Growth discounts
refer to pricing plans under which incumbent LECs offer reduced per-
unit access service prices for customers that commit to purchase a
certain percentage above their past usage, or reduced prices based on
growth in traffic placed over an incumbent LEC's network. We are
concerned that because BOC affiliates will begin with existing
relationships with end users, name recognition, and no subscribers,
they will grow much more quickly than existing IXCs and other new
entrants. Thus, incumbent LECs could circumvent the nondiscrimination
provisions of section 272 by offering growth discounts for which, as a
practical matter, only their affiliates would qualify. Some incumbent
LECs argued in comments filed in response to our Price Cap Second
FNPRM, that growth discounts could benefit smaller IXCs that do not
qualify for volume discounts. These incumbent LECs, however, failed to
provide evidence that growth discounts would be cost-justified. We
invite parties to provide evidence that growth discounts would not
circumvent the safeguards of section 272, and are, in fact, justified
by reduced costs of providing service. We also seek comment on whether
the development of competitive access markets would be enhanced if
incumbent LECs were permitted to offer growth discounts.
c. Contract Tariffs and Individual RFP Responses. 190. In the
Competition in the Interstate Interexchange Marketplace, CC Docket No.
90-132, Report and Order, 56 FR 55235 (October 25, 1991) (Interexchange
Order), the Commission adopted rules permitting IXCs to offer common
carrier services pursuant to individually negotiated contract tariffs.
AT&T, then deemed as a dominant carrier, was permitted to offer
services under contract tariff rates only for those services that we
had found to be subject to substantial competition. We required AT&T to
file a tariff setting forth the terms of each negotiated contract, and
to make the same terms and conditions generally available to similarly
situated customers under substantially similar circumstances so as to
comply with the nondiscrimination provisions of the Communications Act.
191. In the Price Cap Second FNPRM, we proposed to apply similar
contract carriage rules to access services that the Commission finds to
be subject to substantial competition, provided the contract rates were
made generally available to similarly situated customers under
substantially similar circumstances.
192. We propose to permit incumbent LECs to offer contract tariffs
when Phase 1 has been met. Incumbent LECs would be required to make
each contract tariff both publicly available through a tariff filing
setting forth the contract's terms, and generally available to
similarly-situated customers on the same terms and conditions. The
availability of contract carriage should lead to lower prices for those
customers using contract tariffs. Under our price cap rules, contract
tariffs at reduced prices could allow incumbent LECs to raise prices
for those customers not taking service subject to these contract
tariffs due to the way the actual price indices (APIs) are calculated.
At Phase 1, the entry barriers to competition will have been removed,
but competition may not yet be sufficient to constrain the incumbent
LECs from raising prices unreasonably for those customers not under
contract tariffs. Thus, as suggested by Pacific Bell, we also propose
to remove contract carriage service when calculating incumbent LECs'
APIs in our price cap system. We note that parties will be negotiating,
or obtaining arbitration of individual arrangements before the states,
under section 252, and that certain interconnection arrangements may be
substitutable for access services. This may well place greater
competitive pressure on prices for incumbent LEC access services at an
earlier phase in the development of competition than existed for AT&T.
Parties advocating that we should delay contract carriage until Phase 2
or until substantial competition has been reached should identify and
quantify their concerns with implementing this reform at Phase 1.
193. We also propose to remove the prohibition against incumbent
LECs offering competitive response tariffs when the requirements of
Phase 1 have been met. A competitive response tariff is a contract
tariff that a LEC initiates when it responds to a competitor's offer to
an end user, or in response to a request for proposal. By requiring
that a competitor be present, competitive response tariffs by
definition provide an additional justification for being made available
at this phase. To the extent that parties disagree with our proposed
treatment of contract tariffs offered in response to requests for
proposals, we invite comments demonstrating why different conclusions
would be in the public interest.
d. Deregulating New Services. 194. We also seek comment on whether
to permit incumbent LECs to offer certain access
[[Page 4698]]
services outside price cap regulation upon achievement of the Phase 1
trigger. Such treatment might be possible because a baseline access
offering exists that ensures continued provision of a core service at
reasonable rates. The ability of incumbent LECs to offer some access
services outside price caps could create incentives for incumbent LECs
to introduce services using the capabilities of new technologies.
Modifications to our regulatory regime along these lines for such
services could increase customer choice, streamline regulation, and
increase consumer welfare by increasing incentives for innovation.
195. As BOCs are permitted to enter the long-distance market,
however, their long-distance affiliates may well be purchasing many of
these new services, as long-distance carriers with LEC affiliates may
well today. We seek comment on whether this may give rise to
circumstances in which the LEC could reduce the effects of competition
if it offered certain new services outside price cap regulation. If so,
when? We also ask whether the section 202 prohibition against
discrimination and, with respect to the BOCs, the section 271(c)
checklist and the section 272(e)(3) requirement that a BOC charge its
long-distance affiliate an amount for access that is no less than the
amount charged to any unaffiliated interexchange carriers, provide
sufficient protection against possible anticompetitive conduct that we
need not make special exceptions to our proposal. We also seek comment
on the relationship of this proposal to the requirement to unbundle
network elements under the 1996 Act.
196. We also seek comment on whether we could deregulate new
services. We now seek comment on whether we should eliminate all
requirements that an incumbent LEC obtain any regulatory approval
before a tariff introducing a new service can take effect. Many new
services take advantage of new technical capabilities, and the delay
entailed in obtaining regulatory approval may harm consumer welfare.
Because the underlying core access service offerings, as well as
unbundled network elements, would still be available, there may be
little benefit from requiring an incumbent LEC to obtain regulatory
approval before introducing a new service. We ask whether, if the new
service is far superior to the existing service, the availability of
the old service may not provide sufficient safeguards. The availability
of the core service also raises the question of whether price
regulation of new services is still needed or warranted. If not, these
services could be removed from price cap regulation. Alternatively, if
such services are not removed from price cap regulation altogether, we
seek comment on whether we should eliminate the new services test. We
seek comment on these alternatives. Parties are invited to comment on
whether relaxed regulation is more appropriate for some types of new
services than it is for other new services.
197. Finally, we seek comment on whether, if we adopt the proposal
in the preceding paragraph, we should also remove from price cap
regulation some services that have required waivers in the past for
their introduction. This would equate the treatment of existing
services that were introduced following a waiver request to that for
future new services. One example of such a service is 500 access
service, which allows IXCs to offer their customers a service by which
a call to one number is routed to a different telephone number at
different times, or in different sequencing arrangements (a ``follow-
me'' service). This service offers specialized features for which
continued regulation may not be necessary if competing carriers can
develop substitute services to respond to customer needs. We seek
comment on this example, and seek comment on whether other similar
services exist for which continued price cap regulation may not be
necessary.
C. Phase 2--Actual Competition
198. In this subsection, we seek comment on the removal of
additional regulatory constraints from incumbent price cap LECs upon
the establishment of an actual competitive presence for an exchange
access service in a relevant geographic area. A competitive presence
short of substantial competition would help to ensure that the opening
of the network has happened in fact, not just in theory, and would
allow for further reforms under conditions short of the substantial
competition necessary for full deregulation and detariffing. At Phase
2, we are seeking comment broadly on: (1) Eliminating price cap service
categories within baskets; (2) removing the ban on differential pricing
for access among different classes of customers; (3) ending mandatory
rate structure rules for transport and local switching; and (4)
consolidating traffic-sensitive and trunking baskets. We are also
seeking comment on whether and how to implement these reforms, or
equivalent reforms, if the development of competition comes at
significantly different rates for different switched access services in
different areas. These reforms would appear appropriate because the
competition present at Phase 2, together with the availability of
unbundled network elements and the continuing price cap limits on price
increases, should restrain incumbent LECs from overcharging their
customers. We seek comment as well on how to define competitive
presence for these purposes, including whether we should define the
term differently for certain of the above reforms than for others.
Finally, we seek comment on various alternatives--including whether we
should remove any of these regulatory constraints at Phase 1; whether
we should remove additional regulatory constraints at Phase 2; and
whether we should wait until substantial competition has developed, as
described above, before eliminating some or all these constraints.
1. Trigger and Relevant Markets
199. We invite comment on three possible factors for determining
whether an incumbent LEC has met the trigger for Phase 2: (1)
Demonstrated presence of competition; (2) full implementation of
competitively neutral universal service support mechanisms; and (3)
credible and timely enforcement of pro-competitive rules. We also ask
whether the proposals for deregulating new services we seek comment on
in subsection V.B.2.d, above, would be better suited for Phase 2. We
seek comment on whether we should adopt any or all of these factors for
the Phase 2 trigger point, and whether there are other competitive
factors that we should consider.
200. First, we seek comment on how to determine when competition is
sufficient to end mandatory rate structure rules for transport and
local switching, remove the ban on differential pricing for access
among different classes of customers, eliminate price cap service
categories within baskets, and consolidate the traffic-sensitive and
trunking baskets. We could measure market share as one factor, among
others, in determining whether competition exists in a given market for
purposes of removing the regulatory constraints we have identified. As
we observed in the Price Cap Second FNPRM, we previously have used
market share as one factor in measuring the presence of competition.
Nevertheless, there are drawbacks to using market share. An analysis of
the level of competition for incumbent LEC services based solely on an
incumbent LEC's market share at one time may not provide an adequate
basis for us to conclude that a competitive presence truly exists.
Further, we lack data on the relative market shares of incumbent
[[Page 4699]]
LECs and their rivals, and thus would need to develop reasonable and
nonburdensome ways to gather that information if we were to rely on it.
If the Commission considers the relative market shares of the incumbent
LECs and their competitors as one factor in assessing the level of
competition for incumbent LEC services, what data and information about
incumbent LECs and their competitors would be necessary to assess their
relative market shares? Also, we would have to determine the
appropriate market to be measured and the unit of measurement, such as
customer lines, revenues, or access minutes. We seek comment on whether
using a market share trigger could affect how the market develops. We
seek comment on whether, notwithstanding an absence of competitive
entry, the incumbent could be adequately restrained from raising its
prices such that it could obtain Phase 2 treatment. If we were to adopt
any new reporting requirements for purposes of calculating market
share, we invite comment on what effect this requirement would have on
incumbent LECs considered ``small businesses'' for purposes of the
Regulatory Flexibility Act.
201. In addition to measuring market share as a percentage, we seek
comment on the possible use of absolute measures of competitors'
presence for services in an area. For instance, we ask parties to
discuss whether a competitive presence should be measured in terms of
an absolute number of customer lines, residential lines, or access
minutes. Are there other factors that could be measured that could
support a finding of competitive presence, e.g., a specified number of
competitive switches; or a certain number of customers receiving
service from unbundled network elements or competitive facilities? What
should be the relative importance of a measurement of competition in
light of other factors that we propose to incorporate into our analysis
and on any other factors that may be proposed? On one hand, a simple
measurable test would be easier to administer than most other potential
tests; on the other hand, the real significance of any particular
competitive presence in the marketplace often only becomes clear after
analyzing several different variables that measure competition.
202. We propose to apply any market-presence test we might adopt on
a service-by-service basis. For example, we propose to allow an
incumbent LEC to establish differential rates for transport when that
incumbent LEC has satisfied the Phase 2 trigger for transport, even if
there is no demonstrated presence of competitors for local switching.
Such an approach would allow the incumbent LEC to respond to
competitive alternatives for specific services, which should result in
lower prices and more efficient utilization of the network, without
permitting incumbent LECs to raise rates unreasonably for less
competitive services. Also, this approach would be consistent with our
proposal to remove services from price cap regulation when they are
subject to substantial competition. Certain Phase 2 proposals, such as
elimination of service categories and consolidation of price cap
baskets, may not be amenable to implementation on a service-by-service
basis. We seek comment on how any such elements of Phase 2 regulatory
relief should be implemented.
203. A second possible factor to consider in determining whether
the Phase 2 trigger has been met is whether the universal service
programs available to incumbent LECs and other eligible
telecommunications carriers are competitively neutral. The Universal
Service Joint Board recommended that both the collection mechanism and
the disbursement mechanism for universal service programs be
competitively neutral. We ask whether some consumers will not see the
benefits of competition if the state universal service programs are not
competitively neutral. If in practice only incumbent LECs can receive
universal service support, then the disbursement mechanism is not
competitively neutral. Customers should be able to choose their
provider based on who best serves their needs, not on which provider
specifically qualifies for a subsidy payment. We seek comment on this
proposed factor.
204. We ask to what extent and how enforcement of pro-competitive
rules should be a factor in determining whether Phase 2 has been
achieved. Any state or federal rules or rights must be enforced
vigorously and swiftly so that consumers enjoy the benefits of the
promised competition. States and the FCC have a duty to create forums
for fast, fair and efficient dispute resolution. We seek comment on
whether enforcement should be used as a Phase 2 condition, and if so,
on what the specific criteria should be for determining whether
enforcement is adequate.
205. We also seek comment here on whether additional or different
conditions should apply before implementing Phase 2 reforms. For
instance, we seek comment on whether our definition of actual
competitive presence should differ for implementing various of the
reforms discussed here. Should we require greater competitive pressures
on incumbent LEC access charges before we implement certain of the
reforms discussed below? If so, which ones, and why? We also seek
comment on the extent to which an actual competitive presence, from
entrants purchasing unbundled elements, using their own constructed
facilities, or a combination of the two as a substitute for current
access service, would provide incumbent LECs incentives to reduce
access charges. If it develops that carriers are competing for end-user
customers primarily by providing bundles of local and long distance
service, to what extent would incumbent LECs decide not to lower access
charges charged to IXCs, but instead to raise them as high as possible
as long as possible? If this occurs for certain groups of customers, or
in certain areas, should this affect how we implement reforms at Phase
2, and, if so, how? To what extent is this competitive dynamic affected
by the absence of a legal requirement under the 1996 Act that a
requesting carrier provide local exchange service to an end user in
order to purchase unbundled network elements and use them as a
substitute for access service? To what extent would the continued
constraints of price cap regulation for certain access services,
perhaps as modified according to certain of the methods discussed in
the prescriptive approach to access reform, provide sufficient
protection during the transition to substantial competition?
206. We solicit comment on the procedures that an incumbent LEC
should follow to demonstrate that it has met the Phase 2 triggers for
one or more services. Petitioners should discuss whether an incumbent
LEC should file a petition for waiver, a petition for declaratory
ruling, or some other filing, and how the incumbent LEC should satisfy
its burden of proof.
207. We also seek comment on the relevant geographic area that
should be considered in determining whether an incumbent LEC has met
the Phase 2 competitive trigger. As discussed in Section II.D.1 above,
there are several possible ways of specifying geographic areas. We
tentatively conclude that any geographic area used in considering the
presence of substantial competition would be appropriate for purposes
of Phase 2. Moreover, by not requiring parties to maintain data on
multiple geographic areas, such an approach would keep administrative
burdens on all parties to a minimum. We seek comment on this tentative
conclusion.
[[Page 4700]]
2. Reforms
a. Service Categories Within Baskets. 208. The price cap service
categories were developed both to protect ratepayers from precipitous
changes in the prices for incumbent LEC services, and to prevent
incumbent LECs from disadvantaging one class of ratepayers to the
benefit of another class. We tentatively conclude that, given
competition in Phase 2, the current service categories in the trunking
and traffic-sensitive baskets would no longer be necessary. We invite
comment on how we should eliminate service categories, because doing so
on a service-by-service basis appears infeasible. While the upper
service band indices (SBIs) prevent incumbent LECs from offsetting
price reductions in one service category with increases for less
competitive services, the development of a competitive presence will
provide IXCs with the alternatives of obtaining service from
competitive LECs or using unbundled network elements instead. We seek
comment on eliminating the current service categories at Phase 2.
Parties should address whether there will be a need for any service
categories at that point, to describe those categories, and to explain
why it would be in the public interest to retain them.
b. Differential Pricing for Access to Different Classes of End-
Users. 209. While we generally have not considered differential pricing
for access services to different classes of customers in prior
proceedings (except for the Subscriber Line Charge), we seek comment on
whether we should permit such flexibility at Phase 2. As used in this
NPRM, we define differential pricing as permitting incumbent LECs to
charge different rates for access to different classes of customers.
There are at least three classes for which differential pricing may be
appropriate: Residential, single-line business, and multi-line
business. We invite parties to suggest additional classes, and to
analyze why rates for access to such classes should be afforded
differential treatment. We seek comment on whether, for incumbent LECs
that use differential pricing for their access rates, we should adopt
some safeguards to protect the classes of customers not subject to
competition, e.g., residential and single-line business, and if so,
what those safeguards should be.
210. Differential pricing for access could pose the same
substantial risks to competition that accompany contract carriage and
RFPs, but, because differential pricing would enable an incumbent LEC
to adjust all prices for access to a class of customers within a zone
at the same time, the risks would be on a greater scale. We seek
comment on whether we should permit incumbent LECs to offer
differential pricing for access once the requirements of Phase 2 have
been met.
c. Rate Structure Rules for Transport and Local Switching. 211. We
seek comment on eliminating the rate structure rules for the transport
and local switching rate elements at Phase 2. We would also eliminate
the mandatory rate structure modifications for transport and local
switching that we propose in Section III, above. At Phase 2, if an
incumbent LEC attempted to establish an inefficient rate structure, an
IXC would be able to avoid paying above-cost rates by using cost-based
unbundled network elements to originate and terminate toll traffic, or
by acquiring access from a competitive provider. We will be able to
rely on the presence of competitors to oblige the incumbent LECs to
establish rate structures that reflect the manner in which costs are
incurred. We do not propose to introduce this reform at Phase 1, even
though unbundled network elements can act as an effective substitute
for switched access at that point. We tentatively conclude that we
should allow the Phase 1 reforms to take their effect prior to
eliminating our mandatory rate structure rules, because it is not clear
that the mere existence of efficient rate structure rules for unbundled
network elements will cause incumbent LECs to adopt efficient access
rate structures. For example, incumbent LECs may have an incentive to
set per-minute access charges to raise the cost for interexchange
resellers, who may have difficulty vertically integrating. This pricing
would raise the marginal costs of those IXCs, distorting competition
and raising prices and the profits of a LEC or its interexchange
affiliate. We seek comment on this reform, and on when our mandatory
rate structure rules should no longer apply. We also seek comment on
whether we should keep our rate structure rules for terminating access
even after we have removed them for originating access.
212. In conjunction with elimination of transport and switching
rate structure rules, we also ask parties to comment on whether
carriers satisfying Phase 2 requirements should be permitted to
apportion access charges between carrier and end user according to
marketplace pressures. In this regard, incumbent LECs would be treated
in the same manner as competitive LECs, with neither a requirement nor
a prohibition against adopting the most commercially appropriate rate
structure. Commenters should discuss whether we should permit LECs to
collect charges from end users for originating access, terminating
access, or both, and whether such charges should be imposed on the
party placing a call or the party receiving the call. Commenters should
also address whether providing this flexibility might violate section
254(g), which prohibits interexchange rates in rural or high cost areas
from exceeding rates in urban areas. Alternatively, we seek comment on
any steps we should take to ensure that an IXC can recover access
charges from its customers in an efficient manner.
d. Consolidation of the Traffic-Sensitive and Trunking Baskets.
213. When we created the price cap baskets for incumbent LECs, each
with separate price cap indices and bands, we balanced two competing
concerns. First, we limited the number of baskets to ensure that the
company-wide productivity offset would be appropriate for each basket.
Second, we sought to limit the incumbent LECs' ability to subsidize
price decreases for competitive services with price increases for
services in a less competitive basket. We expect that competition in
trunking and switching will develop at approximately the same rate.
Thus, the need to separate the traffic-sensitive and trunking baskets
is reduced. We do not seek comment on consolidating the common line
basket, because the common line possesses different bottleneck
characteristics than do local switching and transport. These
differences are likely to cause competition for common line services to
develop differently than and probably generally lag somewhat behind
competitive developments in the traffic-sensitive and trunking baskets.
We do not seek comment on consolidating the interexchange basket
because services within the interexchange basket are more competitive,
and so are likely to be subject to substantial competition more quickly
than traffic-sensitive or trunking services. At this point, we invite
comment on consolidating the traffic-sensitive and trunking baskets,
enabling incumbent LECs to price their services more efficiently in
response to the competitive market. Consolidating the traffic-sensitive
and trunking baskets also reduces the administrative burdens placed on
incumbent LECs.
214. We have considered modifying price cap baskets in the past,
but declined to do so in the absence of information about the state of
competition in the local telephone markets. We suggest two possible
points at which to remove this constraint: Phase 2 or in conjunction
with the phase-out of the TIC, discussed below.
[[Page 4701]]
Our Phase 2 triggers should assess competition adequately for the
purpose of determining whether incumbent LECs should be able to
consolidate the traffic-sensitive and trunking baskets. Until the
incumbent LEC reaches Phase 2 for each basket, it continues to face
less competition for the services in one of the baskets relative to the
services in the other. During this time, an incumbent LEC that can
consolidate these baskets may still have an incentive and the ability
to engage in anticompetitive behavior. We believe that in order to
reduce this incentive, incumbent LECs would have to reach Phase 2 for
each of the services within these baskets. Nevertheless, it may be
better to permit consolidation of the traffic-sensitive and trunking
baskets as part of the incumbent LECs' phasing out of the TIC. Removing
this constraint at the time of the TIC phase-out would provide a method
for incumbent LECs to reassign costs from the TIC. We seek comment on
consolidating the traffic-sensitive and trunking baskets, particularly
on when the consolidation should take place. We ask parties that favor
consolidating the traffic-sensitive and trunking baskets as part of the
incumbent LECs' phasing out of the TIC address what would ensure that
incumbent LECs would not engage in anticompetitive behavior with
respect to the services within these baskets.
VI. Prescriptive Approach to Access Reform
A. Introduction
215. In Section V above, we have set forth a framework under which
we would reduce or eliminate, in phases tied to the potential for and
growth of competition, access charge requirements that constrain rate
structures and price levels. Some parties, such as MCI, may contend
that a market-based approach is inadequate to the task of reforming
access. Such parties might argue that, at best, competition will emerge
unevenly among geographic areas, services, and customer classes, and
argue that a second option for access reform, a prescriptive approach,
should be followed. Although a prescriptive approach would move access
rates to forward-looking economic costs in a more predictable and
uniform manner than a market-based approach, such an approach would
also require that the Commission play a greater role in the
telecommunications marketplace. In Section IV.A above, we invite
comment generally on whether a market-based approach, prescriptive
approach, or some combination of the two approaches provides the best
path for access reform.
216. In this Section, we seek comment on the specific requirements
we should apply to incumbent LECs if we adopt an alternative, more
prescriptive approach to access reform. First, we invite comment on the
goal of a prescriptive approach. Next, we invite comment on a number of
proposals, many of which have been suggested by industry participants,
for specific requirements that could be incorporated into the
prescriptive approach. Many proposals discussed below are designed to
reduce access rates generally, because reducing access rates should in
most, if not all, cases result in rates that are closer to cost. One of
our proposals is to prescribe TSLRIC-based access rates, which would
force rates to cost more effectively than our other proposals, but
would also be more administratively burdensome. Finally, we address
establishing phases for prescriptive access reform, to avoid the market
disruptions that might occur if we required incumbent LECs to move
interstate access rates to cost on a ``flash-cut'' basis.
B. Goal of Prescriptive Access Reform
217. In both the prescriptive approach to access reform discussed
in this Section and the market-based approach discussed in Section V,
we seek to develop competition for interstate access services, which
will ultimately result in the deregulation of these services. As we
have emphasized elsewhere in this NPRM and in other proceedings, the
1996 Act commands us to foster efficient competition in all
telecommunications markets and to remove regulation when marketplace
forces will drive competing providers to lower their costs and prices
and offer services that are responsive to the demands of consumers. An
intermediate goal of the market-based approach is to permit market
forces to drive interstate access rates to economically efficient
levels. We propose adopting a similar intermediate goal for
prescriptive access reform; i.e., we propose to adopt rules that would
drive access rates to economically efficient levels. MCI and AT&T have
argued that interstate access rates, as well as prices for unbundled
network elements offered pursuant to the 1996 Act, should be based on
the forward-looking economic costs of those services or elements. Those
IXCs have also submitted computer models designed to calculate forward-
looking economic cost. Specifically, in the case of access services,
the model calculates ``Total Service Long Run Incremental Cost''
(TSLRIC) of the access service, and in the case of unbundled network
elements, the model calculates the TSLRIC of network elements, also
known as Total Element Long Run Incremental Cost (TELRIC).
218. An incumbent LEC's TSLRIC for a given service or facility,
such as exchange access service, should include all incremental costs
directly attributable, or dedicated, to the delivery of the service or
facility in question. Carriers also should be allowed to recover a
reasonable allocation of their forward-looking common costs, defined as
those costs that are incurred in connection with the production of
multiple products or services that remain unchanged as the relative
proportion of those products or services varies. We note that when
calculating the forward-looking economic cost of exchange access
services, because these services share common network facilities with
other incumbent LEC-provided services, such as local exchange service
and intraLATA toll, fewer costs will be directly attributable or
dedicated totally to exchange access services. Consequently, the
incumbent LEC may need to recover significant common costs in addition
to the TSLRIC of exchange access. These common costs should be
recovered in a manner that is economically efficient and consistent
with the pro-competitive goals of the 1996 Act. By contrast, the TELRIC
of a specific facility, such the loop or the switch, would directly
attribute to that facility all costs caused by that facility,
regardless of the services provided by that facility. Consequently, the
forward-looking common costs that the incumbent LEC must recover in
addition to the TELRIC of that facility in order to recover forward-
looking economic costs are lower than the forward-looking common costs
that need to be recovered for a service. Additionally, the forward-
looking costs of unbundled network elements should not include the
costs of billing and marketing to end users, because unbundled network
elements are intermediate products offered to competing carriers.
219. Under both TSLRIC and TELRIC-based pricing methodologies,
prices should be based on forward-looking economic costs, including a
reasonable allocation of forward-looking joint and common costs, and
allow incumbent LECs to earn a fair, risk-adjusted rate of return on
their investments. Such pricing should encourage efficient and
effective entry into the local telecommunications marketplace.
Commission staff will soon be releasing for comment an analysis of the
use of
[[Page 4702]]
computer models in estimating forward-looking economic costs. In the
event we determine that a market-based approach will not result in the
development of efficient competition, we tentatively conclude that our
goal for prescriptive access reform should focus on interstate access
rates based on some form of a TSLRIC pricing method. We seek comment on
this tentative conclusion. Below, we seek comment on several proposals
for rules that would drive interstate access rates to TSLRIC levels.
C. Specific Regulatory Requirements
1. Readjustment of Rates to Economic Cost Levels
220. In the Price Cap Performance Review for Local Exchange
Carriers, CC Docket No. 94-1, First Report and Order, 60 FR 19526
(April 19, 1995) (LEC Price Cap Performance Review), we required
incumbent price cap LECs to adjust their price cap indices (PCIs)
downward to reflect our decision to revise, in light of our past
experience with price cap regulation, one of the economic studies on
which we based the X-Factor in the LEC Price Cap Order. In this
Section, we seek comment on whether we should require a similar
reinitialization in this proceeding. Specifically, we seek comment on
the feasibility of readjusting the PCIs applicable to an incumbent
LEC's baskets on the basis of a TSLRIC-based study. This would be one
means of implementing the proposals of AT&T and MCI that access rates
should be set at forward-looking economic costs. Under this approach,
we would determine the forward-looking incremental costs of providing
all the access services in a price cap basket, and then add a suitable
allocation of forward-looking common costs. Finally, we would require
incumbent LECs to reduce their PCIs by an amount equivalent to the
difference between their current PCIs and the TSLRIC revenues of
providing the services in each basket. One benefit of requiring such a
reinitialization is that it would enable us to avoid the administrative
burdens associated with determining the proper allocation of common
costs to each service within a basket. On the other hand, the
reinitialization of PCIs we consider in this Section would simply lower
rate levels. It would not guarantee that the incumbent LECs' rate
structures would be reasonable. We seek comment on whether rate
structure concerns should outweigh our concerns regarding the
administrative burdens of allocating common costs. In Section VI.C.4
below, we seek comment on prescribing rate levels and rate structures
based on TSLRIC studies, which would help ensure that incumbent LECs'
rate structures are reasonable, but would also require us to determine
how to allocate common costs.
221. In order to reinitialize PCIs to levels that are consistent
with the TSLRIC of incumbent LECs' access services, the Commission
could evaluate incumbent LECs' TSLRIC studies for each price cap
basket. This approach, however, could impose significant and
potentially costly burdens on the FCC, incumbent LECs, and interested
parties. Alternatively, state commissions might be better suited to
evaluate TSLRIC-based studies because state commissions generally have
more experience with cost studies. Under this approach, which we could
implement under section 410(a) of the Act, we would rely on the state
commissions' results to determine the difference between current
interstate access rates and forward-looking economic cost-based access
rates, and reinitialize interstate PCIs based on this difference. This
approach ensures coordinated treatment between jurisdictions. We seek
comment on this alternative and invite parties to comment on what, if
any, federal guidelines should be established for the conduct of these
state studies. Commenters should also suggest alternative proposals for
reinitializing PCIs at forward-looking, economic cost, in the event we
determine that a market-based approach will not result in economically
efficient rates.
222. We seek comment on whether TSLRIC calculations for the
services in some price cap baskets could be based in part on or derived
from the TELRIC of certain unbundled network elements. TSLRIC and
TELRIC are different versions of the same pricing methodology. To the
extent that states reviewing arbitration agreements governing the
prices of unbundled network elements rely on TELRIC studies, those
studies might also provide data useful for determining TSLRIC rates for
access prices. We seek comment generally on the feasibility of using
prices derived from individual network element costs to establish
prices for interstate access service. In particular, are there access
services that employ dedicated facilities that are equivalent to an
unbundled network element, and in those cases, would there be any
difference between the TSLRIC of the access service and the TELRIC of
the unbundled network element? For instance, it is not clear that the
TSLRIC price of dedicated transport service, as opposed to tandem-
switched transport service, should significantly differ from the TELRIC
of a dedicated transport element. We also seek comment on what costs,
if any, should be included in the price of interstate access that are
not included in the price of unbundled elements. For example, we ask
commenters to address the nature of marketing and other customer
operations costs that are involved with the provision of access
services, and ask that they identify any costs that are incurred in the
sale of access services that are not incurred in the sale of unbundled
elements.
223. In addition, we solicit comment on whether it is possible to
reduce the administrative burdens associated with this approach by
deriving estimates for TSLRIC-based prices in some study areas from
TSLRIC or TELRIC studies conducted previously in other study areas. Is
there a generic cost model that could be used to determine TSLRIC-based
interstate access prices?
224. Some parties that advocate readjusting access rates to the
TSLRIC level maintain that TSLRIC rates would, in most cases, result in
access rate reductions. In Section VII.A below, we seek comment on
whether this is the case, the reasons therefore, and the magnitude of
any differential. TSLRIC-based rates by definition would not be based
on the level of embedded costs, regardless of whether embedded costs
exceed TSLRIC-based rates or TSLRIC-based rates exceed embedded costs.
We note that the presence of competitive LECs might increase
incumbents' cost of capital, and might warrant increasing depreciation
rates. These effects might decrease to some extent any difference
between TSLRIC-based rates and current rates. In Section VII.B, below,
we seek comment on whether and to what extent incumbent LECs should be
permitted an opportunity to recover any difference between TSLRIC-based
rates and current rates.
2. Reinitialization of Rates on Some Other Basis
225. In the event we determine that a market-based approach to
interstate access charge reform will not move rates closer to their
economic cost, and reinitialization of PCIs based on TSLRIC studies or
TELRIC cost models is not feasible, we could reinitialize PCIs on some
other basis. For example, we could reduce PCIs to a level that would
result in rates targeted to yield a rate of return of no more than
11.25 percent. A second basis for reinitialization could be to
prescribe a new rate of return and then reinitialize access rates based
on that rate of return as urged by MCI, AT&T, and GSA in the LEC Price
Cap Performance Review proceeding.
[[Page 4703]]
Developing a new starting point for incumbent LEC PCIs under either of
these two approaches might be reasonable for several reasons. First, to
the extent that current price cap rates include a cost of capital
greater than that necessary to enable carriers to attract investors,
these rates may not represent the most reasonable balance between
ratepayer and stockholder interests. Second, although we found in the
LEC Price Cap Performance Review Order that there was not sufficient
reason for reducing access rates in the 1995-96 access period for
changes in the cost of capital, the incumbent LECs' cost of capital may
now be less than 11.25 percent. Specifically, in the Amendment of Parts
65 and 69 of the Commission's Rules to Reform the Interstate Rate of
Return Represcription and Enforcement Processes, CC Docket No. 92-133,
Report and Order, 60 FR 28542 (June 1, 1995) (Represcription Reform
Order), we found that the rate of return prescription may warrant
revision if the monthly average on ten-year U.S. Treasury securities
changes by more than 150 basis points, and the change continues for six
months or more. In February 1996, the Common Carrier Bureau invited
comment on whether to initiate a proceeding to represcribe the
authorized rate of return for incumbent LECs subject to rate-of-return
regulation, pursuant to the trigger mechanism we established in the
Represcription Reform Order. If that proceeding reveals that the rate-
of-return LECs' cost of capital has decreased since we prescribed the
current authorized rate of return in 1990, then the price cap LECs'
cost of capital may possibly be lower as well. On the other hand,
incumbent LECs face potential competition as a result of the Act that
they did not face previously. This potential competition could increase
the risks facing the incumbent LECs, and thus increase their cost of
capital, thus mitigating to some extent the factors suggesting that
incumbent LECs' cost of capital has decreased since 1990. We also note
that evolving competition may make it appropriate to assign different
costs of capital to different services, reflecting differences in
competition and higher risks in transport, switching, and loop services
respectively.
226. We invite parties to discuss whether our prescriptive
regulatory requirements should include reinitialization of price cap
indices on any of the above-mentioned bases in this Section or Section
VI.C.1. We seek comment on how, if we were to proceed with this
approach, to reinitialize price cap indices. We also invite parties to
provide estimates of what effect these reinitializations would have on
the incumbent LECs' PCIs. In Section III.E above, we solicit comment on
whether we should target the effects of any reinitialization to the TIC
as a means of phasing out that rate element.
227. While reducing PCIs would clearly reduce access rates,
reinitializing indices based on earnings could have a negative effect
on the productivity incentives of the LEC price cap plan. Represcribing
a rate of return would also be administratively burdensome. We invite
commenters to discuss whether any such negative effects are likely to
outweigh the benefits of moving rates closer to their economic cost,
and whether this approach is consistent with the development of
efficient competition.
3. Revision of LEC Price Cap Plan
228. In 1990, the Commission adopted mandatory price cap regulation
for the BOCs and GTE. Other incumbent LECs may elect to be governed by
price cap regulation. In simple terms, price cap regulation permits
rates to increase no more than a measure of inflation minus an ``X-
Factor,'' that largely reflects a reasonable productivity target. Thus,
the higher the X-Factor, the more downward pressure price cap
regulation applies to access rates.
229. The X-Factor represents in large part the amount by which
carrier productivity has historically exceeded productivity in the
economy generally. The X-Factor also includes a 0.5 percent consumer
productivity dividend (CPD). The CPD was intended to serve the policy
goal of assuring that the first benefits of the incumbent LECs'
productivity growth induced by price cap regulation would flow to
access customers in the form of reduced rates. A policy-based mechanism
similar to the CPD could be used to force price cap incumbent LECs to
reduce their rates further. For example, if we can rely on TELRIC
studies to estimate the economic costs of access services, as we
discuss in Section VI.C.1 above, then we could set this policy-based
mechanism at some fraction of the percentage difference between current
access rates and rates based on economic costs. Therefore, in this
example, setting the policy-based mechanism at 20 percent of the
initial difference between current rates and economic cost-based rates
should then cause the price cap formula to drive access rates to cost
over a five-year period, assuming that costs do not change during that
period. We invite comment on the use of such a policy-based mechanism,
and on the derivation of such a mechanism.
230. In 1995, we adopted the Price Cap Performance Review for Local
Exchange Carriers, CC Docket No. 94-1, Fourth Further Notice of
Proposed Rulemaking, 60 FR 52362 (October 6, 1995) (Price Cap Fourth
FNPRM), in which we sought comment on various proposals for revising
the productivity offset component of the X-Factor, and for eliminating
sharing obligations and the low end adjustment mechanism. Subsequently,
the Customers for Access Rate Equity (CARE) Coalition has filed several
ex parte statements urging that we complete expeditiously the
rulemaking proceeding initiated in the Price Cap Fourth FNPRM and adopt
a higher X-Factor or set of X-Factor options. AT&T and MCI have also
urged us to adopt a higher X-Factor. We solicit comment on whether
there is any justification for increasing the productivity offset,
either on the basis of the record developed pursuant to the Price Cap
Fourth FNPRM, or on more recent economic studies. We specifically
invite parties to discuss the effects of a forward-looking cost of
capital and economic depreciation on TFP measurement. Parties relying
on more recent economic studies must comply with the ``general
criteria'' we established for economic studies in the Price Cap Fourth
FNPRM.
231. We also seek comment on whether we should change the rules
governing justification of tariff filings that cause the API for a
basket to exceed the PCI. The price cap plan does not prohibit above-
cap rate filings, but does subject such filings to stringent review
standards. An incumbent LEC making an above-cap filing must submit an
extensive cost showing that explains all cost allocations down to the
lowest possible level of disaggregation. It must also give a detailed
explanation of the reasons for the prices of all rate elements to which
costs are not assigned. We have stated that we will find such filings
lawful only if the incumbent LEC can demonstrate that compliance with
the price cap rules would have the effect of denying the LEC the
opportunity to attract capital and continue to operate. A LEC that is
permitted to charge above-cap rates becomes subject to traditional
rate-of-return regulation with respect to those rates.
232. The cost showing contemplated by the price cap rules is, in
essence, a traditional, embedded-cost rate case. We seek comment on
whether the rules should be changed to require that above-cap filings
be justified based on the
[[Page 4704]]
forward-looking economic cost of providing access service.
4. Rate Prescription
233. The proposals we discuss above, reinitializing price cap
indices and increasing the X-Factor, are designed to reduce access
rates. None of those proposals would necessarily compel price cap
incumbent LECs to adopt efficient rate structures, nor ensure that
price cap incumbent LECs allocate common costs in a reasonable manner.
In Section III above, we invite comment on revisions to the rate
structure rules to require price cap LECs to develop access rates that
reasonably reflect the manner in which they incur costs. Here, we seek
comment on whether those rules are sufficient to ensure that access
rates reflect costs in areas subject to prescriptive access reform. We
also seek comment on prescribing forward-looking incremental cost-based
access rates as part of our prescriptive approach to access reform.
234. Basing the prices of discrete unbundled network elements, such
as loops and switching, on a forward-looking economic cost methodology
may be more economically rational than using the same methodology to
price conventional services, such as interstate access. Separate
services are typically provided over shared network facilities, the
costs of which may be joint and common. For example, interstate access
is typically provided using the same loops and line cards that are used
to provide local service. The costs of these elements are, therefore,
common to the provision of both local and long-distance services.
Conversely, certain unbundled elements, such as loops and line cards,
can be priced individually using a TELRIC methodology, and in those
cases the allocation of common costs is less problematic than when
pricing services.
235. We invite comment on whether, if we adopt a prescriptive
approach to access reform, we should require incumbent LECs to conduct
TSLRIC studies, and create new prices for individual interstate access
services on the basis of those studies. Under this proposal, we would
reset access prices once, and then rely on price cap regulation to keep
rates just and reasonable. We also seek comment on how to allocate
common costs if we were to adopt this approach, and whether problems
raised by allocating a large amount of common costs relative to direct
costs outweigh the benefits of this approach.
D. Phases for Prescriptive Approach
236. We are unable at this time to quantify the magnitude of the
difference, if any, between current interstate access rates and rates
based on forward-looking economic costs. We seek comment on the amount
of that difference in Section VII.B below, and the extent to which
incumbent LECs should be permitted an opportunity to recover that
amount. In this Section of the NPRM, we observe only that there may be
a substantial cost difference relative to interstate access revenues as
a whole. If so, we tentatively conclude that we should include some
sort of transition mechanism in the prescriptive access reform plan,
comparable to the phases of the market-based access reform plan we
discuss in Section V above.
237. One possible transition mechanism could be to establish phases
for any reinitialization of price cap indices that we may adopt. In
other words, we would implement the reduction in price cap indices
through a series of reinitializations rather than a single
reinitialization. A second option could be to adopt a policy-based
increase to the X-Factor for a number of years, to reduce interstate
access gradually, and then reinitialize price cap indices to TSLRIC
levels as discussed in Section VI.C.1 above. We could also adopt a
policy-based increase to the X-Factor for a number of years, and then
prescribe TSLRIC-based access rates. Parties are invited to comment on
all these options, and to make suggestions of their own.
VII. Transition Issues
238. In this proceeding, we must address a variety of issues
relating to the transition from the regulatory structure that existed
before the passage of the 1996 Act to that which will exist after the
three proceedings have been completed. In Section VII.A, below, we seek
comment on the manner in which the universal service support amounts
attributable to the interstate jurisdiction should reduce interstate
access rates. In Section VII.B., we address issues relating to the
potential difference between the revenues that incumbent LECs generate
from current interstate access charges and the revenues that revised
access charges are likely to generate. We seek comment on both the
estimated magnitude of that difference and the extent to which
alternative methods of recovery of that difference should be permitted.
A. Universal Service Joint Board Recommended Decision
239. The 1996 Act states that any federal universal service support
provided to eligible carriers ``should be explicit'' and recovered on
an ``equitable and nondiscriminatory basis'' from all
telecommunications carriers providing interstate telecommunications
service. In the Joint Board Recommended Decision, the Joint Board
recommended that the Commission establish a nationwide benchmark to use
in calculating the amount of universal service support eligible
telecommunications providers will receive. Each eligible carrier would
receive revenues from the federal universal service support mechanism
based on the amount its forward-looking costs of serving a subscriber,
as calculated using a proxy model, exceed the benchmark. The Joint
Board advised that the benchmark be based on the nationwide average
revenue-per-line, i.e., the sum of the revenue generated by local,
discretionary, access services, and others as found appropriate,
divided by the number of loops served. Final determination of this
issue, however, must also take into consideration the revenue base for
universal service contributions. The Joint Board further advised the
Commission to construct two benchmarks, one for residential service and
a second for single line business service. The Joint Board recommended
that costs in excess of the benchmark be funded through an assessment
based either on the interstate revenues of all interstate
telecommunications carriers less interstate payments to other carriers,
or interstate and intrastate revenues of all interstate
telecommunications carriers less payments to other carriers.
240. In its Recommended Decision, the Joint Board affirmed the
Commission's tentative conclusion that LTS payments constitute a
universal service support mechanism that serve to equalize LECs' access
charges by raising some carriers' charges and lowering others. The
Joint Board concluded that the LTS mechanism is inconsistent with the
1996 Act's requirement that support be collected from all providers of
interstate telecommunications services on a non-discriminatory basis.
Accordingly, the Joint Board recommended that the LTS system no longer
be supported via the access charge regime, and that rural incumbent
LECs continue to receive payments comparable to LTS from the new
universal service support mechanism. In the event the Commission
implements a rule assessing carriers' universal service
[[Page 4705]]
support contributions based on both interstate and intrastate
telecommunications revenues, the Joint Board recommended that there
should be a downward adjustment in the residential and single-line
business SLC cap and CCL charges to reflect the recovery of LTS from
other sources.
241. We recognize that, because of the role that access charges
have played in funding and maintaining universal service, it is
critical to implement changes in the access charge system together with
complementary changes in the universal service system. Regardless of
whether features of our access charge system, such as the per-minute
CCL charge and geographically-averaged rates, contravene section 254 as
discussed in Section III.B., above, we seek comment on whether
retaining such features in light of the possible changes in universal
service could, in essence, compensate incumbent LECs twice for
providing universal service. We ask commenters addressing this issue to
identify the circumstances, including assumed structure of the high-
cost area support mechanisms, under which any ``double recovery'' may
exist. We further seek comment on how we could best address any
potential double recovery.
242. We propose that a downward exogenous cost adjustment should be
made for price cap incumbent LECs to reflect revenues received from any
new universal service support mechanism. We note that the Commission,
after receiving recommendation from a joint board, must determine the
extent to which universal service support revenues are apportioned to
the interstate jurisdiction. In the event the Commission concludes that
high cost universal service support should be allocated to the
interstate jurisdiction, how should we adjust the price cap indices to
reflect new explicit universal service support? Parties should also
comment on whether a downward adjustment to the incumbent LECs' PCIs
should be across-the-board, or targeted to a particular basket or
service category, e.g., the trunking basket or the TIC, or to the CCL
charge or any new mechanism that may replace it. We seek comment on the
manner in which we must adjust incumbent LECs' price cap indices to
account for the removal of LTS from incumbent LECs' access charges. We
tentatively conclude that a downward exogenous cost adjustment should
be made to the CCL charge, or to any new mechanism that may replace it,
to the extent that the recovery of LTS from other sources is not offset
by a SLC cap reduction, and seek comment on this tentative conclusion.
243. For rate-of-return incumbent LECs, interstate costs must be
reduced to reflect revenues received from any new universal service
support mechanism to the extent allocated to the interstate
jurisdiction. We seek comment on how such reductions should be treated
in Part 69 for non-price cap incumbent LECs. Finally, we seek comment
on how our proposed interstate ratemaking treatment of the new
universal service support mechanism affects small business entities,
including small incumbent LECs and new entrants.
B. Treatment of Any Remaining Embedded Costs Allocated to the
Interstate Jurisdiction
244. A number of IXCs assert that a significant difference exists
between the revenues generated by access charges based on embedded
costs allocated to the interstate jurisdiction by Part 36, and the
revenues that would be produced by access rates based on the forward-
looking economic cost of providing access services. For example, as of
November 1996, AT&T estimated that total interstate access charges
collected today from interexchange carriers exceed the forward-looking
economic cost of providing access by about $11.0 billion, or nearly 70
percent of that total. Similarly, in October 1996, AT&T asserted that
it pays incumbent LECs an average (interstate/intrastate) per-minute
access rate of 3.06 cents, and that this rate is more than 7.5 times
greater than the TELRIC per-minute access rate of .40 cents. AT&T
labels $7.0 billion of the $11 billion as ``pure uneconomic subsidy to
monopoly incumbent local exchange carriers'' caused by overallocation
of costs to the interstate jurisdiction, the inclusion of retail and
other costs unrelated to the provision of access, the understatement of
incumbent LEC productivity, and other historical inefficiencies. AT&T
asserts that $4.0 billion of the current access revenues are universal
service support amounts and should be recovered through mechanisms
under section 254 and not through access charges. In March 1996, MCI
estimated that approximately $46 billion (or more than 55 percent) out
of $82 billion total network revenues for Tier 1 local telephone
companies is the difference between the accounting costs and the
economic costs of providing those networks as network elements. MCI
attributed this gap largely to the inclusion of over-built plant ($17
billion), excess customer operations expenses ($15 billion), excess
corporate operations expenses ($8.3 billion), and inefficiencies ($3.8
billion) in network charges. According to MCI, very little of the gap
results from under-depreciation ($0.85 billion).
245. Current interstate access service revenues permit recovery of
the interstate portion of embedded costs, subject since 1991 to the
constraints of price cap regulation. The revenues that would be
generated if all access services were priced at forward-looking,
economic cost may be much smaller. We generally ask parties to discuss,
in light of the other reforms discussed in this proceeding and other
developments pursuant to the 1996 Act, the following issues: the amount
and make-up of the difference between these amounts, whether recovery
of the remaining interstate-allocated costs should be permitted, the
lawfulness of a denial of such recovery, and possible recovery
mechanisms. We also invite parties to comment on the impact of the
following proposals on small business entities, including small
incumbent LECs and new entrants. In addition to seeking comment on the
nature and magnitude of the difference, which could include a portion
of the revenues that would remain in the TIC after the steps discussed
in Section III.E. above, we seek comment on whether the identification
and ratemaking treatment of remaining interstate-allocated costs should
vary depending on whether an incumbent LEC is under a market-based or
prescriptive approach to access reform.
1. Nature and Magnitude of Any Remaining Interstate-Allocated Costs
246. Some of the difference between the incumbent LECs' interstate-
allocated embedded costs and forward-looking costs may be traced to
past regulatory practices. For example, interstate access rates may
exceed forward-looking economic cost, and thus produce some difference,
because of misallocation of costs to the interstate jurisdiction.
Historically, some separations rules were designed to shift some costs
from the intrastate to the interstate jurisdiction, in order to further
universal service goals. For example, in 1987 the Commission agreed
with a Federal-State Joint Board's recommendation to exclude interstate
access revenues from the allocation factor used to apportion marketing
expenses between the interstate and intrastate jurisdictions. The
Commission reconsidered its decision, however, and reinstated
separations procedures that allocate marketing expenses in accordance
with revenues in order to avoid shifting significant amounts of revenue
requirement to the intrastate jurisdiction. We note further that, to
the
[[Page 4706]]
extent that unbundled network element revenues are unseparated, a
difference between the interstate-allocated embedded and forward-
looking costs of providing access service may result when these
revenues are removed from the interstate jurisdiction.
247. Another possible regulatory cause of any difference between
interstate-allocated embedded or accounting costs and forward-looking
costs may be under-depreciation of incumbent LEC assets. Our
depreciation procedures provide for incumbent LECs to depreciate the
total investment in assets over the estimated useful life of the assets
at rates we prescribe for each class of assets. Under rate-of-return
regulation, the incumbent LECs set rates for their access services that
incorporated these depreciation charges; those rates were the
foundation for the initial price cap rates. Many incumbent LECs contend
that this Commission prescribed depreciation schedules based on
relatively long asset lives in order to spread recovery of investment
over an extended period and prevent large rate increases. In a monopoly
environment, there were no competitive providers that might prevent an
incumbent LEC from eventually recovering its entire investment at the
end of the prescribed period.
248. Under-depreciation of incumbent LEC capital assets can occur
in two ways. First, facilities may be under-depreciated if the useful
lives prescribed for regulated facilities exceed the economic lives of
those facilities. This under-depreciation often occurs when new
technologies are introduced that reduce the remaining economic lives of
embedded plant. In that event, the existing depreciation rate will not
produce an adequate depreciation charge to account for the shorter
remaining lives of the old equipment. In other words, if a new
technology shortens the economic life of existing incumbent LEC plant
from 25 to 15 years, a prescribed depreciation schedule of 25 years for
that plant will not enable the incumbent LEC to recover its investment
during the useful economic life of the plant. However, under the
remaining life techniques a LEC has the ability to request revised
depreciation rates and recover its investment over the expected
remaining life.
249. We note that, in response to the Price Cap Fourth FNPRM, MCI
submitted a study analyzing the depreciation reserve deficiency. The
study concludes that changes in the Commission's depreciation practices
during the 1980s reduced the reserve deficit from $21 billion in 1983
to only $3 billion in 1994. Incumbent LECs, on the other hand, have
claimed that unreasonably low depreciation rates (resulting from life
estimates that are too long) have created a large overvaluation of
their rate bases and a $40 billion depreciation reserve deficiency. We
note that traditional depreciation reserve studies, such as that
employed by MCI, do not address the effects of a decline in replacement
value during an asset's life, as discussed below.
250. Under-depreciation also can occur if the depreciation
procedures do not recognize the decline in the economic value of plant
already in service that occurs when the replacement cost is less than
the cost of the older equipment. The annual charge to depreciation
expense for incumbent LEC assets of different vintages or different
technologies of comparable capacity will vary in an industry where the
cost of assets is declining over time such as telecommunications. A
price based on forward-looking economic cost would be based on the
annual economic depreciation expense of the newer facility. Thus, a
market characterized by developing competition may no longer support a
price designed to recover depreciation expenses based on the
Commission's currently prescribed depreciation rates for deployed
equipment. In the emerging competitive marketplace that finds incumbent
LECs facing competitors using newer, less expensive equipment, some
portion of the deployed equipment is arguably under-depreciated by an
amount equal to the difference between the current net book value and
the forward-looking replacement cost of the depreciable plant.
251. We invite parties to explain in detail the magnitude of any
difference between existing interstate-allocated embedded costs and
interstate access revenues, on the one hand, and the revenues that
would be generated if all interstate access services were offered at
forward-looking, economic cost, on the other. We invite parties to
submit data quantifying any difference, and explaining in detail to
what extent the underlying difference between embedded and forward-
looking costs results from the Part 36 allocation rules, under-
depreciation, or other factors. Parties should also specify the
methodology used to calculate the amount, and define and show the
calculation of economic lives, economic obsolescence, economic
depreciation, and actual lives. We seek comment on what effect the
significant under-utilization of equipment because of a transition to
newer equipment, or because of reduced demand, should have on the
calculation of any under-depreciation.
252. We also seek comment on whether the amount of any difference
should be determined and fixed as of a date certain, such as the
enactment of the 1996 Act. Under such an approach, some or all of
unrecovered embedded costs incurred before that date might be eligible
for special recovery mechanisms, but all costs incurred after that date
would be regarded as incurred under the new competitive paradigm
established by the Act and thus entitled to no special treatment. We
invite comment as well on whether any special mechanisms would be
necessary to ensure that the jurisdictional separations process does
not allocate additional residual embedded costs to the interstate
jurisdiction during any transitional recovery period. In addition, LECs
may be permitted to recover some portion of the difference through
explicit universal service support mechanisms adopted in the universal
service proceeding. Accordingly, we ask parties, when identifying any
difference between interstate-allocated embedded costs and the forward-
looking economic costs of access, to take into account the amount of
interstate costs that are likely to be recovered through such universal
service support flows.
2. Recovery of Remaining Interstate-Allocated Embedded Costs
253. We invite parties to comment on whether, as a matter of law or
equity, incumbent LECs are entitled, should be permitted an
opportunity, or have already been permitted an opportunity, to recover
some or all of the difference between interstate-allocated embedded
costs and forward-looking economic costs that might be created by the
access reform proposals discussed above in Sections V and VI. We
specifically request that parties comment on whether the legal basis
for permitting or denying such recovery varies depending on whether an
incumbent LEC is under a market-based approach to access reform, as
described in Section V, a prescriptive approach to access reform, as
described in Section VI, or some combination of these approaches. NARUC
has suggested that new sources of revenue from incumbent LEC in-region
interLATA market entry may constitute a mitigating factor that should
be reflected in the evaluation of any difference between embedded and
forward-looking economic costs. We seek comment on whether and how
entry into the in-region, interLATA long-distance market or any other
additional revenue flows should affect
[[Page 4707]]
the amount of any remaining interstate-allocated embedded costs that
incumbent LECs should have a special opportunity to recover.
254. Some parties have suggested that we should limit recovery to
those remaining embedded costs arising from certain sources, e.g.,
under-depreciation, and deny recovery of remaining embedded costs
resulting from over-investment and other inefficiencies. We seek
comment on this approach and ask commenting parties to specify those
costs that incumbent LECs should be permitted an opportunity to recover
and those that should be disallowed. Should incumbent LECs be required
to demonstrate the specific costs they seek to recover and satisfy a
burden or standard in order to recover some or all of such costs?
Should we establish a rebuttable presumption that certain costs are
recoverable? We invite parties to comment on this issue and specify any
appropriate standard that should be applied and which party should bear
the burden of proof. For example, should incumbent LECs seeking such
recovery be required to show that their investment in
telecommunications plant was prudent at the time it was made and does
not reflect over-investment? Or should other parties bear the burden of
showing that certain investments are no longer used and useful? If so,
how should we determine whether any particular investment was prudent?
Are there any legal constraints on where we place the burden? Parties
should be specific in addressing these questions.
255. One option is to refer issues relating to the difference
between revenues generated by rates based on embedded costs and
revenues produced by rates based on forward-looking costs to state
commissions to conduct the necessary rate cases and to make
recommendations to the Commission on possible disallowances of
imprudently incurred investments or excessive expenditures. Once the
state commission reported back, we would determine the manner of
recovery of the interstate portion of any difference. This approach,
which we could implement under section 410(a) of the Act, permits
coordinated treatment between the federal and state jurisdictions and
assigns the responsibility of conducting such rate cases to state
commissions, which have substantial experience with the carriers
operating in their respective states. This approach also conserves
industry resources, because each state will have to address the issue
of embedded cost recovery if it decides to set prices for intrastate
services based on forward-looking costs or some basis other than
embedded costs. We seek comment on this alternative and invite parties
to comment on what, if any, federal guidelines should be established
for the conduct of the prudence aspects of any rate cases referred to
state commissions under section 410(a).
256. We also invite interested parties to comment on whether the
incumbent LECs should be required to mitigate the magnitude of this
potential problem by reducing their costs, and if so, how they might do
so. We first discuss possible general mechanisms under the market-based
and prescriptive approaches to access reform, and then address whether
any recovery due to under-depreciation should be treated separately.
Interested parties should also comment on how a decision to permit
incumbent LECs to recover some or all of the difference between
embedded and forward-looking costs would affect small business
entities, including small incumbent LECs and new entrants.
3. Recovery Mechanisms
257. In the event we determine that incumbent LECs should be
permitted a special opportunity to recover some or all of the
difference between revenues generated by access charges based on
embedded and forward-looking costs, we invite parties to comment on the
various recovery mechanisms discussed below and to propose
alternatives. We seek comment on the impact of any particular recovery
mechanism on small business entities, including small incumbent LECs
and new entrants.
a. Market-Based Recovery. 258. As new entrants succeed in
attracting incumbent LEC customers, we expect competition gradually to
drive access rates to more economically efficient levels. With a
gradual transition, our removal of economic regulatory constraints may
well give the incumbent LECs ample opportunity to recover any of the
difference between embedded and forward-looking costs and therefore
obviate any need for a formal recovery mechanism. Price cap incumbent
LECs could use pricing and rate structure flexibility to reduce the
revenue difference during a transitional period. Incumbent LECs would
also have an opportunity, while competition is still developing, to
reduce their costs of service to levels consistent with the revenues
available to them in a competitive market. We seek comment on this
approach. Specifically, does the timing of the proposed stages and the
flexibility proposed permit incumbent LECs a reasonable opportunity to
recover any of the revenue differential and adjust to a competitive
market? On the other hand, we ask parties to comment on whether, to the
extent that our separations rules over-allocate costs to the interstate
jurisdiction, this market-based approach may not give incumbent price
cap LECs a reasonable opportunity to recover some portion of the
difference between embedded and forward-looking costs and, if so, what
measures would be appropriate.
b. Regulated Recovery. 259. We seek comment on two situations under
which it might be necessary to establish a separate regulatory
mechanism for recovery of some portion of the interstate-allocated
embedded costs that might remain unrecovered if access service were
priced based on forward-looking cost. First, in the event we determine
that the market-based approach discussed above fails to provide
incumbent LECs a fair opportunity to recover some or all remaining
embedded costs, we invite parties to comment on whether we should
implement a recovery mechanism to operate in lieu of, or in conjunction
with, the market-based approach. Second, as we discussed in Section
VI., above, a separate regulatory recovery mechanism may be necessary
to the extent an incumbent price cap LEC is subject to prescriptive
access reform. We seek comment on whether, and the degree to which, a
separate recovery mechanism is required.
260. If we conclude that a recovery mechanism is necessary, we
could design a mechanism to recover a specific, fixed, dollar amount of
remaining embedded costs, over a fixed period. We seek comment on this
proposal and invite parties to offer possible recovery mechanisms of
limited duration. For example, one possible recovery mechanism might be
to permit incumbent LECs to ``amortize'' their recovery of the
difference, i.e., to permit incumbent LECs to include in their rates a
certain fraction of the difference each year for a certain number of
years. The period could be designed to coincide with a gradual phase-
out of the TIC, as discussed in Section III.E., above. We discuss
issues raised by amortization of remaining embedded costs in more
detail below, in conjunction with recovery of costs related to under-
depreciation.
261. Another option would be to establish a competitively-neutral
recovery mechanism that is separate and distinct from access charges.
For example, should we permit incumbent LECs to impose a surcharge,
either on all access customers, or on all providers or users of
telecommunications services, in order to recover some portion of any
remaining interstate-allocated costs? This mechanism could be similar
to the mechanism for collecting universal
[[Page 4708]]
service funds, except that this recovery fund would not be permanent,
nor would payments be portable to other eligible telecommunications
carriers. We seek comment on when and how such a fund should be
terminated. We seek comment on this option and our legal authority to
adopt such an option. We ask parties to address, in particular, how to
structure any such surcharge so that it is collected in a
competitively-neutral manner, such as on the basis of
telecommunications revenues, net of payments to other carriers, whether
such surcharges should be levied on telecommunications carriers
purchasing unbundled network elements, and, if so, how. Parties should
also comment on how any surcharge imposed only on access customers
could be structured so as not to burden unduly access customers and
offer as little impediment as possible to our long-term goal of having
access charges consistent with a competitive exchange access market. We
invite parties to comment on the impact of this option on investment,
innovation, and competition.
262. In the event we adopt one of the special regulatory mechanisms
described above or an alternative mechanism advocated by parties in
this proceeding, as part of a transition to a competitive environment,
we seek comment on whether some limitation on incumbent LECs' earnings
is warranted. For example, we invite parties to comment on whether, if
we set up a special mechanism that permitted incumbent LECs a
reasonable opportunity to recover certain costs, it would be
appropriate to limit to a certain prescribed rate of return the
incumbent LEC earnings on the investment portion of the costs
designated for recovery, or to increase the incumbent LEC's price cap
sharing obligations, given the limited risk of non-recovery under such
a mechanism. Alternatively, we could permit incumbent LECs to select
from two recovery options--cost recovery through market-based prices to
the extent they are able in a competitive market; or cost recovery
through a regulatory mechanism, with a greater sharing obligation under
the price cap plan. In the event we determine that incumbent LECs
should be permitted to select the manner of recovery, we seek comment
on whether we should limit the ability to choose only to incumbent LECs
that can make a competitive showing, as discussed in Section V., above.
We invite parties to comment on this approach and other possible
adjustments to the price cap plan that would be appropriate in the
event we adopt a regulatory recovery mechanism.
c. Recovery of Difference Caused by Under-Depreciation. 263. The
portion of the difference between embedded costs and forward-looking
costs that is attributable to under-depreciation may warrant separate
treatment. Specifically, we must consider the appropriate balance
between customer and shareholder risk as telecommunications markets
become more competitive. In a competitive market, a firm's ability to
raise its rates to recover higher depreciation costs is constrained by
the pricing practices of other competitors, some of which may well have
cost advantages through use of newer, more efficient equipment. A
competitive firm is able to establish its depreciation charges and its
prices free of any regulatory constraints, but its shareholders bear
the risk of loss if the resulting prices are too high and,
consequently, fail to generate revenues sufficient to cover the
depreciation charges. The incumbent LEC's ability to recover its
investment in a competitive market is dependent in part on depreciation
practices that accurately reflect the decline in economic value of the
LEC investment. The issue then is whether to permit incumbent LECs any
relief with respect to the depreciation of equipment on their books at
the time that the regulatory approach changes, whether the depreciation
process should proceed unaffected by the shift in regulatory policies,
or whether to modify our depreciation procedures. If, for example, the
Commission concluded that incumbent LECs have not incurred significant
depreciation reserve deficiencies to date, it could continue the
current depreciation policies, or reflect small changes through
increased depreciation rates in the future.
264. If, on the other hand, we conclude that the public interest
would be served by adjusting the customer/shareholder risk levels
because of regulatory changes, we could permit the incumbent LECs to
adjust their accounts to establish an amortization of plant to reflect
some or all of the change in economic value of the equipment installed
under the earlier regulatory regime. We invite parties to comment on
whether the local competition provisions of the 1996 Act and the
competition expected to result from the implementation of those
provisions constitute such an unexpected and dramatic regulatory shift
that incumbent LECs should be permitted to adjust their accounts to
reflect some or all of the change in economic value of their embedded
investment. Parties should also address the appropriate balance between
customer and shareholder risk entailed in the shift to a more
competitive regulatory policy.
265. If we permit incumbent LECs to adjust their accounts in such a
way, the depreciation adjustment would presumably take the form of an
amortization of these amounts over a prescribed period. An amortization
plan would increase access rates in the short term, but, all other
things being equal, would lead to lower access rates after the
amortization was completed. We invite parties to comment on the
desirability of establishing an amortization plan, under which
incumbent LECs could recover more rapidly some or all of any
demonstrated under-depreciation costs resulting from economic
obsolescence. We also ask whether any such amortization should be
recovered in a competitively-neutral manner.
266. If we decide to take some action, we will need to determine
the period over which to calculate the amount of the depreciation
reserve deficiency. For example, we might measure under-depreciation
for a period ending with the enactment of the 1996 Act. In addition,
parties should comment on the period over which any amortization should
take place. We invite any incumbent LEC, believing that it has
facilities that are under-depreciated due to economic obsolescence, to
submit a study demonstrating the extent of such under-depreciation and
proposing the appropriate time period over which to amortize such
amounts. Any incumbent LEC submitting such a study should provide
complete details on original cost, salvage value, economic lives, and
other relevant factors, for both old and new technologies that are
necessary to permit us to make an informed decision. We invite parties
to address whether a different rate of economic obsolescence might
occur in low-density areas than in high density areas.
267. Price cap incumbent LECs would account for this amortization
through an upward exogenous adjustment to the price cap indices.
Parties are also invited to suggest procedures for adjusting the PCIs,
APIs, and SBIs to reflect the exogenous treatment of any amortization,
if we permit incumbent LECs to adopt an amortization plan.
VIII. Other Issues
A. Regulation of Terminating Access
268. Some analysts have contended that an access provider's market
power differs between originating and terminating access service. With
originating access, the calling party has the choice of service
provider, the
[[Page 4709]]
decision to place a call, and the ultimate obligation to pay for the
call. The calling party is also the customer of the IXC that is
purchasing the originating access service. As long as IXCs can
influence the choice of the access provider, a LEC's ability to charge
excessive originating access rates is limited, as IXCs will shift their
traffic from that carrier to a competing access provider. This is
particularly true for multi-line customers, who may select one carrier
with lower access rates for their out-going interexchange calls and a
different carrier with a lower flat monthly rate for local service. For
terminating access, the choice of service provider is made by the
called party. The decision to place the call and payment for the call
lies, however, with the calling party. The calling party, or its long-
distance service provider, has little or no ability to influence the
called party's choice of service provider. Thus, it appears that even
with a competitive presence in the market, terminating access may
remain a bottleneck controlled by whichever LEC provides access for a
particular customer. As such, the presence of unbundled network
elements or facilities-based competition may not affect terminating
access charges.
269. On the other hand, high terminating access rates may create an
incentive for IXCs to win the local customer. It is true that winning
the end user as customer will allow the IXC to save only a fraction of
the total terminating access charges generated by the end user, because
the IXC will carry only a fraction of the calls received by the end
user. Nevertheless, serving the local customer using unbundled elements
will also allow the IXC to collect terminating access charges on calls
received by the end user. Thus, in this analysis, it would appear that
high terminating access charges may give an IXC an incentive to win an
end user as a local customer similar to the incentive created by high
originating access rates. In this section, we seek comment on whether
and to what extent we should regulate the terminating access services
of price cap incumbent LECs and non-incumbent LECs and whether
competition will have the same effect on terminating access rates as on
originating access rates.
1. Price Cap Incumbent LECs
270. We seek comment on the implications of the above analysis for
regulating the terminating access service of price cap LECs and ask
parties to address the necessity of continued regulatory oversight of
access prices for the termination of interstate calls by price cap LECs
in markets where we find originating access services are subject to
substantial competition.
271. One possible method of regulating price cap incumbent LECs'
terminating access service is to establish a rate ceiling that prevents
incumbent LECs from charging more for terminating access than the
forward-looking, economic cost of providing the service. We seek
comment on whether and how we should require incumbent price cap LECs
to price terminating access service at forward-looking, economic costs.
Whether an incumbent price cap LEC is offering terminating access at
forward-looking economic cost could be measured by the prices in
reciprocal compensation arrangements for the transport and termination
charges of telecommunications pursuant to sections 251(b)(5) and
252(d)(2). Arbitrated reciprocal compensation rates may not include the
NTS costs of either local switching or the subscriber line. Therefore,
these NTS costs, which are now recovered in part from terminating
access, would have to be recovered solely from originating access or a
flat charge. Alternatively, we could ensure that terminating access is
priced at its forward-looking economic cost by requiring such prices to
be based on a TSLRIC study or other acceptable forward-looking, cost-
based model. We invite parties to comment on these and alternative
measures of forward-looking, economic costs to be used for terminating
access rates.
272. Some observers have suggested that another possible method of
regulating incumbent price cap LECs' terminating access service is to
require the incumbent price cap LEC to charge the end user for the
service. If called parties paid for terminating access, the individual
who paid for the service would be the same individual who selected the
provider. We seek comment on whether requiring called parties to pay
for terminating access might encourage competition for terminating
access. We note that wireless companies already charge the called
parties for receiving calls. Would charging the called party for
terminating access result in an increase of uncompleted calls, due to a
reluctance by called parties to accept the charges? We invite parties
to address how charging the customer receiving the call for terminating
access could be accomplished, and whether this approach would be
superior to using forward-looking economic cost. BellSouth argues that
the availability of transport and termination under Section 251 for
local traffic makes unnecessary any special regulation for terminating
access that is different from originating access. BellSouth argues that
terminating interstate traffic would be disguised as terminating local
traffic, resulting in less expensive terminating access. We seek
comment on BellSouth's analysis.
273. Alternatively, we could require incumbent price cap LECs to
charge nothing for terminating access service and permit them to
recover all such costs from originating access charges. We invite
parties to comment on the merits of this approach and whether incumbent
price cap LECs should be permitted to choose between this approach and
some other form of regulation of their terminating access services.
Parties should also suggest other possible methods of regulating
incumbent price cap LECs' terminating access service not discussed
above. We seek comment on whether we should adopt different regulatory
mechanisms for terminating access for those incumbent price cap LECs
that are subject to the alternative regulatory regime discussed in
Section VI, above. Finally, we invite parties to address whether we
should keep our rate structure rules for terminating access for
incumbent LECs even after we have eliminated such rate structure rules
for originating access.
2. Non-Incumbent LECs
274. Between 1979 and 1985, the Commission conducted the
Competitive Carrier proceeding, in which it examined how its
regulations should be adapted to reflect and promote increasing
competition in telecommunications markets. Policy and Rules Concerning
Rates for Competitive Common Carrier Services and Facilities
Authorizations Therefor, CC Docket No. 79-252, Notice of Inquiry and
Proposed Rulemaking, 44 FR 67445 (November 26, 1979); First Report and
Order, 45 FR 76148 (November 18, 1980); Further Notice of Proposed
Rulemaking, 46 FR 10924 (February 5, 1981); Second Further Notice of
Proposed Rulemaking, FCC 82-187, 47 FR 17308 (April 22, 1982); Second
Report and Order, 47 FR 37889 (August 27, 1982); Order on
Reconsideration, 93 FCC 2d 54 (1983); Third Further Notice of Proposed
Rulemaking, 48 FR 28292 (June 21, 1983); Third Report and Order, 48 FR
46791 (October 14, 1983); Fourth Report and Order, 48 FR 52452
(November 18, 1983), vacated, AT&T v. FCC, 978 F.2d 727 (D.C. Cir.
1992), cert. denied, MCI Telecommunications Corp. v. AT&T, 113 S.Ct.
3020 (1993); Fourth Further Notice of Proposed Rulemaking, 49 FR 11856
(March 28, 1984); Fifth Report and Order, 49 FR 34824 (September 2,
1984); Sixth Report and Order, 50 FR 1215 (January 1, 1985), vacated
MCI
[[Page 4710]]
Telecommunications Corp. v. FCC, 765 F.2d 1186 (D.C. Cir. 1985)
(collectively referred to as Competitive Carrier). In a series of
orders, the Commission distinguished between two kinds of carriers:
Those with market power (i.e., the power to control prices) are deemed
dominant carriers, and those without market power are deemed non-
dominant carriers. The Commission has regulated incumbent LECs as
dominant carriers in their provision of interstate access service. The
Commission's policy since Competitive Carrier has consistently been
that a carrier is non-dominant unless the Commission makes or has made
a finding that it is dominant.
275. Competitors have begun to provide exchange access services,
aided in significant part by our expanded interconnection policies. The
pro-competitive policies of the 1996 Act are expected to result in
increased entry into the exchange and exchange access markets. To date,
the Commission has only applied the interstate access charge rules to
incumbent LECs. New entrants into the exchange access market, such as
competitive access providers (CAPs), have been presumptively classified
as non-dominant because they have been deemed not to have the ability
to exercise market power in particular service areas. NYNEX has
suggested that there is a need for regulation of certain access
services, particularly terminating access, offered by all LECs,
including new entrants. In this section, we consider and invite comment
on whether, and the extent to which, we should establish any rules for
the provision of access services by non-incumbent LECs, or competitive
LECs, most particularly terminating access service. We note that we are
extremely reluctant to impose price regulation on non-dominant carrier
services without a strong showing that such regulation is necessary.
276. The factors that warrant continued regulation of incumbent
LECs' terminating access service appear to apply to all access
providers, including competitive LECs, because these new entrants
appear to possess market power over IXCs needing to terminate calls. As
previously discussed, the recipient of a call, the called party,
selects the carrier that provides the terminating access for the calls
destined for that party. The decision to place the call, however, lies
with the calling party, who currently pays for the call. In those
cases, the calling party's long-distance service provider appears to
have little or no influence on the called party's choice of service
provider. Because the paying parties do not choose the carrier that
terminates their interstate calls, competitive LECs potentially could
charge excessive prices for terminating access. We therefore seek
comment on whether there are some aspects of the competitive situation
facing non-dominant LECs with respect to terminating access that
distinguishes non-dominant from dominant carriers.
277. In the event we conclude that non-dominant carriers have
market power with regard to terminating access charges or that market
failure would preclude the marketplace from ensuring that terminating
access rates are just and reasonable, we also invite parties to comment
on whether competitive LECs' terminating access service should be
subject to different limits than incumbent price cap LECs' terminating
access service, or to similar limits on rate structure or rate level.
Parties should address whether the incumbent LECs' terminating access
charges should serve as a benchmark to evaluate competitive LECs'
terminating rates. For example, we could find a competitive LEC's
terminating access charge to be presumptively just and reasonable if
the charge is less than or equal to the terminating access charge of
the incumbent LEC with which the competitive LEC is competing. If, on
the other hand, the competitive LEC's terminating access charge is
greater than the incumbent LEC's charge, the competitive LEC could be
required to provide cost support for its charge or it could collect the
difference from its end users. We seek comment on these proposals, as
well as on other less intrusive methods of ensuring a competitive LEC's
terminating access charges are just and reasonable. We further invite
parties to comment how small business entities, including small
incumbent LECs and new entrants will be affected by this tentative
conclusion and proposals to regulate terminating access.
3. ``Open End'' Services
278. In some instances, an IXC may not be able to influence the
choice of the originating access provider, and, consequently,
marketplace forces may be less effective in limiting a competing LEC's
ability to charge higher originating access rates. For example, for
``open end'' originating minutes, such as originating access for 800
service, it is the called party that pays for the call. Thus, while the
calling party, who selects the local carrier/access provider, decides
to place an individual call, that party pays nothing for the call. For
these reasons, the Commission has long treated incumbent LECs'
originating ``open end'' minutes as terminating minutes for access
charge purposes. We seek comment on whether this analysis should
continue to apply to incumbent LECs' originating access for 800 service
and other similar ``open end'' services for which terminating access
rates serve as originating access rates, and whether such regulation
should be extended to apply to competitive LECs.
B. Treatment of Interstate Information Services
279. Usage of interstate information services, and in particular
the Internet and other interactive computer networks, has increased
dramatically in recent years. Such new services create significant
benefits for the economy and the American people. The 1996 Act states
that it is the policy of the United States ``to preserve the vibrant
and competitive free market that presently exists for the Internet and
other interactive computer services, unfettered by Federal or State
regulation,'' and we have long sought to avoid unnecessary regulation
of information services. As usage continues to grow, such services may
have an increasingly significant effect on the public switched network.
280. Therefore, as part of this comprehensive proceeding, we must
consider how our rules can provide incentives for investment and
innovation in the underlying networks that support the Internet and
other information services. We consider in this section the narrow
question of whether to permit incumbent LECs to assess interstate
access charges on information service providers. We make no specific
proposals, and we tentatively conclude that the existing pricing
structure for information services should remain in place at this time.
In Section X, we issue a Notice of Inquiry to examine various
fundamental issues about the implications of usage of the public
switched network by information service and Internet access providers.
281. Beginning with the Amendment of Section 64.702 of the
Commission's Rules and Regulations (Second Computer Inquiry), Docket
No. 20828, Final Decision, 45 FR 31319 (May 13, 1980) proceeding in the
1970s, we have distinguished between basic and enhanced communications
services. The category of enhanced services, which includes access to
the Internet and other interactive computer networks, as well as
telemessaging, alarm monitoring, and other services, appears to be
quite similar to the term ``information services'' in the 1996 Act. In
the MTS
[[Page 4711]]
and WATS Market Structure, Memorandum Opinion and Order, Docket No. 78-
72, 48 FR 42984 (September 21, 1983) (Access Charge Reconsideration
Order), we decided that, although enhanced service providers (ESPs) may
use incumbent LEC facilities to originate and terminate interstate
calls, ESPs should not be required to pay interstate access charges.
282. As a result of these decisions, ESPs may purchase services
from incumbent LECs under the same intrastate tariffs available to end
users, by paying business line rates and the appropriate subscriber
line charge, rather than interstate access rates. Those business line
rates are significantly lower than the equivalent interstate access
charges, in part because of separations allocations and the access
charge per-minute rate structure, and in part because the business
lines that ESPs now purchase generally do not include usage-sensitive
charges for receiving local calls. ESPs, consequently, typically pay
incumbent LECs a flat monthly rate for their connections regardless of
the amount of usage they generate. Pacific Bell estimates that calls to
Internet-provided services could comprise up to 25 percent of its
traffic by the end of the decade. US West projects that 30 percent of
all local exchange traffic will be for access to the Internet by the
year 2000. The Internet access market is also highly competitive and
dynamic, with over 2,000 companies offering Internet access as of mid-
1996. It is extremely likely that, had per-minute interstate access
rates applied to ESPs over the past 13 years, the Internet and other
information services would not have developed to the extent they have
today--and indeed may not have developed commercially at all.
283. For some time, however, incumbent LECs and others have argued
that ESPs impose costs on the network that are similar to those imposed
by providers of interstate voice telephony, and that ESPs should
therefore pay interstate access charges. Several parties made this
argument in their comments in response to a petition filed by America's
Carriers Telecommunications Association (ACTA) earlier this year. In
addition, four BOCs have filed studies in recent months purporting to
show that the current pricing structure for Internet access contributes
to the congestion of incumbent LEC networks. The BOCs claim that
Internet users typically stay on the line far longer than voice users,
but that the flat monthly rates Internet service providers pay to
incumbent LECs do not cover the additional cost of network upgrades
that are required to support such traffic.
284. In response, information service providers argue that the
rates they pay to incumbent LECs, combined with the additional revenues
from sources such as second lines installed for Internet usage, more
than cover the costs they impose on the network. These parties also
argue that the imposition of access charges would stifle growth,
investment, and innovation in information services, causing detrimental
effects for the economy and U.S. competitiveness. The Network
Reliability and Interoperability Council (NRIC), an advisory committee
of industry representatives organized to advise the FCC, is also
looking into the effects of Internet usage on the public switched
telephone network.
285. We tentatively conclude that information service providers
should not be required to pay interstate access charges as currently
constituted. As we have explained throughout this NPRM, the existing
access charge system includes non-cost-based rates and inefficient rate
structures. We see no reason to extend this regime to an additional
class of users, especially given the potentially detrimental effects on
the growth of the still-evolving information services industry.
Although our original decision in the Access Charge Reconsideration
Order to treat ESPs as end users rather than carriers was explained as
a temporary exemption, we tentatively conclude that the current pricing
structure should not be changed so long as the existing access charge
system remains in place. The mere fact that providers of information
services use incumbent LEC networks to receive calls from their
customers does not mean that such providers should be subject to an
interstate regulatory system designed for circuit-switched
interexchange voice telephony. We seek comment on this tentative
conclusion.
286. We recognize that this issue is of special interest to users
of the Internet and online services. Therefore, we have established an
electronic mailbox at isp@fcc.gov> for submission of informal comments
on the treatment of Internet and other information services. Additional
information on this issue is available through our World Wide Web site
at http://www.fcc.gov/isp.html>. We are inviting all parties that file
formal paper comments in this proceeding to submit copies of their
comments in electronic form, and we intend to make those electronic
submissions available for review on the World Wide Web.
287. We invite interested parties to discuss the number of ESPs and
Internet service providers, if any, that can be considered ``small
entities'' within the meaning of the Regulatory Flexibility Act, and
whether there is any reason to establish different requirements for
small ESPs and information service providers.
C. Other Part 69 Revisions
1. Equal Access Network Reconfiguration Costs
288. The court in the MFJ required all Bell Operating Companies to
provide access service that would enable subscribers to reach their
interexchange carrier of choice without dialing additional digits, or
in other words, ``1+ dialing.'' GTE was later required by court order
to provide to all IXCs, upon bona fide request, exchange access that is
equal in type and quality to that provided to AT&T. The Commission
later imposed similar ``equal access'' obligations on independent
telephone companies other than GTE.
289. In 1986, the Commission prohibited incumbent LECs from
recovering all the costs incurred in converting their networks to equal
access at the time they incurred those costs. Instead, LECs were
required to amortize those costs over an eight-year period ending on
December 31, 1993. Prior to the termination of this amortization
period, the Commission adopted price cap regulation for incumbent LECs,
and based the initial price cap rates on the access rates in effect as
of July 1, 1990, as adjusted for the represcription of the authorized
rate of return we adopted in 1990. In the LEC Price Cap Reconsideration
Order, the Commission declined to extend exogenous treatment to equal
access reconfiguration costs because it might give incumbent LECs an
artificial incentive to increase their investment in equal access
facilities at a time when conversion to equal access was substantially
complete. In petitions to reject or suspend the price cap incumbent
LECs' 1994 annual access tariffs, AT&T and MCI argued that the
incumbent LECs' PCIs should be reduced to reflect the completion of the
amortization of equal access costs. The Common Carrier Bureau did not
suspend any tariffs for this reason, in part because the Commission
decided not to require exogenous cost treatment in the LEC Price Cap
Reconsideration Order, and in part because the completion of the equal
access cost amortization is not listed in section 61.45(d)(1) of our
rules as warranting exogenous cost treatment. Later, in the LEC Price
Cap Performance Review, the Commission considered requiring
[[Page 4712]]
incumbent LECs to make an exogenous cost decrease to account for the
completion of the equal access cost amortization, but found that the
record was not adequate in that proceeding to require such an
adjustment.
290. We invite comment on whether to require incumbent price cap
LECs to make an exogenous cost decrease to one or more of their PCIs to
account for the completion of the amortization of equal access network
reconfiguration costs on December 31, 1993. Parties supporting an
exogenous cost reduction should explain in detail how such an
adjustment should be calculated, and to which basket or baskets should
the exogenous reduction apply. In addition, we invite interested
parties to discuss whether it would be fair to require exogenous cost
decreases to account for the completion of the amortization of equal
access network reconfiguration costs in light of the fact that the
Commission did not permit exogenous cost increases for equal access
network reconfiguration costs.
2. Part 69 Allocation Rules
291. We invite comment on relieving incumbent price cap LECs from
the application of Part 69, Subparts D and E of our rules, in certain
instances. Subparts D and E allocate incumbent LECs' investments and
expenses to all the access rate elements. If we adopt a market-based
approach to access reform as we discuss in Section V above, and decide
to eliminate the rate structure rules, this would appear to eliminate
the need for the Part 69 cost allocation rules. Alternatively, if we
adopt a more prescriptive approach to access reform as we discuss in
Section VI above, and decide to base some or all their access rates on
TSLRIC costs, then it may not be necessary to retain rules for fully
distributing costs to different rate elements. We solicit comment on
whether there might be any other reason to relieve any price cap LEC
from the requirements of Subparts D and E, and if so, what the timing
of that relief should be.
3. Other Proposed Part 69 Changes
292. Regardless of whether we adopt any of the proposals discussed
in this NPRM, we tentatively conclude that a number of provisions in
Part 69 warrant revision. These revisions are necessary to conform Part
69 to the 1996 Act, or to update the rules for other reasons. We seek
comment below on what these conforming or updating amendments should
be. Also, over the years, several incumbent LECs have established
access rate elements or subelements pursuant to waiver. We seek comment
below on incorporating these rate elements into Part 69.
293. First, we discuss rule revisions necessary to conform Part 69
to the 1996 Act. Section 69.2(hh) of the Commission's rules defines
``Telephone Company'' in terms of section 3(r) of the 1934 Act. We
propose to change this reference to ``incumbent LEC'' as it is defined
in the 1996 Act. Sections 69.4(f) and 69.122, providing for a
``contribution charge'' that may be assessed on special access and
expanded interconnection, appear to be inconsistent with the
requirement in section 254 that such carrier contributions be equitable
and nondiscriminatory. Accordingly, we propose to delete these two rule
sections. We also seek comment on what effect, if any, adoption of this
proposal might have on small incumbent LECs or other small businesses.
In addition, we invite parties to identify other rules which may be
inconsistent with the Act.
294. Second, we seek comment on eliminating Part 69 rules that are
no longer effective. For example, in the mid-1980s, we permitted
incumbent LECs to recover their equal access conversion costs through a
separate rate element. We also required carriers to eliminate any
separate equal access charge by January 1, 1994. Therefore, we propose
deleting section 69.107, permitting carriers to establish an equal
access element, and sections 69.308 and 69.410, which allocate costs to
the equal access rate element. We also propose removing section
69.4(d), and in its place creating a new section 69.3(e)(12) to read as
follows: ``Such a tariff shall not contain any separate carrier's
carrier tariff charges for an Equal Access element.'' Finally, we would
remove the reference to section 69.308 in section 69.309, and the
reference to section 69.410 in section 69.411. Similarly, the
transitions in section 69.205 have been completed, and so we propose
deleting that section. We invite comment on whether there are any other
similar rules in Part 69 that are no longer effective, or duplicate
other rules, and so could be deleted without changing any current Part
69 requirements. Finally, we invite comment on our tentative conclusion
that eliminating such rules would not affect any requirements currently
placed on small telecommunications providers or any other small
businesses.
295. Similarly, section 69.103 of our rules requires incumbent LECs
to establish a separate rate element for costs associated with lines
terminating at ``limited pay telephones,'' which are pay telephones
designed to provide access to only one interexchange carrier. Section
276 of the Act provides statutory requirements governing pay telephones
that we recently implemented. In light of the new payphone compensation
procedures, we seek comment on whether section 69.103 of our rules
serves any ongoing purpose, or whether we should eliminate section
69.103, and the rules allocating costs to this rate element, from our
rules.
296. Lastly, several incumbent LECs provide service using rate
elements created pursuant to waiver, and we seek comment on
incorporating those waivers into Part 69. For example, in 1994, the
Common Carrier Bureau granted several waivers of Part 69 to permit
incumbent LECs to establish rate elements for 500 access service. In
1990, the Bureau granted several incumbent LECs waivers of Part 69 to
establish rate elements for electronic white pages service. Also, in
1985, the Bureau granted incumbent LECs waivers of section 69.109 to
create a subelement within the Information rate element to recover
costs they could show were not incurred in the provision of interstate
directory assistance. In this NPRM, we seek comment on codifying these
waivers as access rate elements or subelements in Part 69. We also seek
comment on whether to incorporate any other rate elements created
pursuant to waiver into the Commission's rules. Commenters supporting
these rule revisions should also specify any revisions to Part 69,
Subparts D and E, needed to allocate the proper costs to these rate
elements.
IX. Notice of Inquiry on Implications of Information Service and
Internet Usage
297. In Section VIII.B, above, we tentatively concluded that
information service providers should not be subject to interstate
access charges as currently constituted. However, the development of
the Internet and other information services raise many critical
questions that go beyond the interstate access charge system that is
the subject of this proceeding. Ultimately, these questions concern no
less than the future of the public switched telephone network in a
world of digitalization and growing importance of data technologies.
Our existing rules have been designed for traditional circuit-switched
voice networks, and thus may hinder the development of emerging packet-
switched data networks. To avoid this result, we must identify what FCC
policies would best facilitate the development of the high-bandwidth
data networks of the future, while preserving efficient incentives for
[[Page 4713]]
investment and innovation in the underlying voice network. In
particular, better empirical data are needed before we can make
informed judgments in this area.
298. We ask whether, after we complete reform of access charges as
contemplated in this proceeding, we should consider any additional
actions relating to interstate information services and the Internet.
We therefore initiate this Notice of Inquiry, with a separate pleading
cycle, to address these issues. Based on the record in response to this
Notice of Inquiry, and the decisions we make in the Access Reform
Report and Order, we will determine whether to make proposals in this
area in a subsequent Notice of Proposed Rulemaking.
299. Many of the concerns now being raised about switch congestion
caused by Internet usage arise because virtually all residential users
today connect to the Internet--a packet-switched data network--through
incumbent LEC switching facilities designed for circuit-switched voice
calls. The end-to-end dedicated channels created by circuit switches
are unnecessary and even inefficient when used to connect an end user
to an ISP. We seek comment on how our rules can most effectively create
incentives for the deployment of services and facilities to allow more
efficient transport of data traffic to and from end users. We invite
parties to identify means of addressing the congestion concerns raised
by incumbent LECs, for example by deploying hardware to route data
traffic around incumbent LEC switches, or by installing new high-
bandwidth access technologies such as asymmetric digital subscriber
line (ADSL) or wireless solutions.
300. We seek comment on what regulatory barriers--at either the
state or federal level--might prevent provision of alternate network
access arrangements for information service providers, or might create
artificial disincentives against use of such arrangements when they
become available. Should we consider using our forbearance or
preemption authority to avoid results that would hamper the deployment
of new technologies? We also seek comment on how the matters before us
in our Local Competition and Universal Service proceedings affect
information service providers and raise issues that we need to address
in this proceeding.
301. We seek comment on the effects of the current system on
network usage, incumbent LEC cost-recovery, and the development of the
information services marketplace. We are disinclined to take actions
that would stifle, rather than enhance, the development of the
Internet, or similar packet-switched networks. We encourage commenters
to provide data on the characteristics of information service usage and
its effects on the network. We are also particularly interested in data
on the incumbent LECs' costs directly related to ESPs' use of the PSTN,
on incumbent LECs' revenues attributable to ESP traffic (including
second phone line revenue), and in a comparison of what PSTN services
ESPs desire, as opposed to what they currently have access to. We seek
comment on administrative and technical issues that may arise either
under continued operation of the current system or as modified by this
proceeding. In particular, we seek comment on jurisdictional, metering,
and billing questions, given the difficulty of applying jurisdictional
divisions or time-sensitive rates to packet-switched networks such as
the Internet.
302. The current division in our rules between basic and enhanced
services may not accurately capture the types of companies that provide
information services today, and the manner in which these companies use
incumbent LEC facilities. There are many kinds of information services,
with different usage patterns and effects on the network. For example,
arguments about network congestion caused by long hold-time calls would
not seem to apply to information services such as telemessaging or
credit card validation. We seek comment on whether we should
distinguish between different categories of information or enhanced
services. In addition, several companies now provide software that
allows a voice conversation to be conducted over the Internet. Such
``Internet telephony'' allows what appears to be a basic service--voice
transmission--to take place over a packet-switched interactive data
network that we have traditionally considered to be an enhanced
service. We seek comment on how new services such as Internet
telephony, as well as real-time streaming audio and video services over
the Internet, should affect our analysis.
303. We seek comment as to whether the issues raised in this Notice
of Inquiry should be addressed in any existing proceeding, or a new
proceeding. As discussed in Section VIII, above, the Network
Reliability and Interoperability Council (NRIC) is also currently
evaluating the effects of Internet usage on the voice network. We do
not intend for this proceeding to in any way supersede the NRIC's
efforts, and we believe that the NRIC's recommendations will complement
the record we develop here. Ultimately, a full and open debate about
the relationship of information services to the public switched network
will benefit all parties. We also strongly encourage interested parties
among incumbent LECs and ESPs to work together to identify which
technological solutions hold the greatest promise in carrying Internet
traffic most efficiently and with the least adverse price impact on
consumers.
304. As discussed in Section VIII, above, we have established an
electronic mailbox at isp@fcc.gov> for submission of informal comments
on the treatment of Internet and other information services, and we
have made additional information available through our World Wide Web
site at http://www.fcc.gov/isp.html>.
X. Procedural Issues
A. Ex Parte Presentations
305. This is a non-restricted notice-and-comment rulemaking
proceeding. Ex parte presentations are permitted, except during the
Sunshine Agenda period, provided that they are disclosed as provided in
the Commission's rules. See generally 47 CFR 1.1202, 1.1203, 1.1206.
B. Paperwork Reduction Act
306. This NPRM contains either a proposed or modified information
collection. As part of its continuing effort to reduce paperwork
burdens, we invite the general public and the Office of Management and
Budget (OMB) to take this opportunity to comment on the information
collections contained in this NPRM, as required by the Paperwork
Reduction Act of 1995, Public Law No. 104-13. Public and agency
comments are due at the same time as other comments on this NPRM; OMB
comments are due 60 days from date of publication of this NPRM in the
Federal Register. Comments should address: (a) Whether the proposed
collection of information is necessary for the proper performance of
the functions of the Commission, including whether the information
shall have practical utility; (b) the accuracy of the Commission's
burden estimates; (c) ways to enhance the quality, utility, and clarity
of the information collected; and (d) ways to minimize the burden of
the collection of information on the respondents, including the use of
automated collection techniques or other forms of information
technology.
[[Page 4714]]
C. Initial Regulatory Flexibility Act Analysis
307. Pursuant to Section 603 of the Regulatory Flexibility Act, the
Commission has prepared the following initial regulatory flexibility
analysis (IRFA) of the expected impact of these proposed policies and
rules on small entities. Written public comments are requested on the
IRFA. These comments must be filed in accordance with the same filing
deadlines as comments on the rest of the NPRM, but they must have a
separate and distinct heading designating them as responses to the
regulatory flexibility analysis. The Secretary shall cause a copy of
the NPRM, including the initial regulatory flexibility analysis, to be
sent to the Chief Counsel for Advocacy of the Small Business
Administration in accordance with Section 603(a) of the Regulatory
Flexibility Act, Public Law 96-354, 94 Stat. 1164, 5 U.S.C. Section 601
et seq. (1981).
308. Reason for action. The Telecommunications Act of 1996 requires
incumbent LECs to offer interconnection and unbundled elements on an
unbundled basis, and imposes a duty to establish reciprocal
compensation arrangements for the transport and termination of calls.
The Commission's access charge rules were adopted at a time when
interstate access and local exchange services were offered on a
monopoly basis, and in many cases are inconsistent with the competitive
market envisioned by the 1996 Act.
309. Objectives. To revise the Commission's access charge rules to
make them consistent with the Telecommunications Act of 1996.
310. Legal Basis. The proposed action is supported by Sections
4(i), 4(j), 201-205, 251, 252, 253, and 403 of the Communications Act
of 1934, as amended, 47 U.S.C. 154(i), 154(j), 201-205, 251, 252, 253,
403.
311. Description, potential impact and number of small entities
affected. For purposes of this NPRM, the Regulatory Flexibility Act
defines a ``small business'' to be the same as a ``small business
concern'' under the Small Business Act (SBA), 15 U.S.C. 632, unless the
Commission has developed one or more definitions that are appropriate
to its activities. Under the SBA, a ``small business concern'' is one
that: (1) is independently owned and operated; (2) is not dominant in
its field of operation; and (3) meets any additional criteria
established by the SBA. The Small Business Administration has defined a
small business for Standard Industrial Classification (SIC) category
4813 (Telephone Communications, Except Radiotelephone) to be small
entities when they have fewer than 1500 employees.
312. Total Number of Telephone Companies Affected. With the
exceptions of the proposals under consideration in Sections III.D,
III.E, VII.A, and VIII.C of this NPRM, the proposals in this NPRM, if
adopted, would affect all LECs that are regulated by the Commission's
price cap rules. Currently, 13 incumbent LECs are subject to price cap
regulation. We tentatively conclude that all price cap carriers have
more than 1500 employees and therefore are not small entities.
313. The proposals under consideration in Sections III.B, III.D,
III.E, VII.A., and VIII.C of this NPRM, if adopted, would affect all
incumbent LECs regulated by the Commission. The United States Bureau of
the Census (Census Bureau) reports that, at the end of 1992, there were
3497 firms engaged in providing telephone service, as defined therein,
for at least one year. This number contains a variety of different
categories of carriers, including incumbent LECs, IXCs, competitive
access providers, cellular carriers, mobile service carriers, operator
service providers, pay telephone operators, PCS providers, covered SMR
providers, and resellers. It seems certain that some of those 3497
telephone service firms may not qualify as small entities or small
incumbent LECs because they are not independently owned or operated.
314. Because the small incumbent LECs that would be subject to
these rules are either dominant in their field of operations or are not
independently owned and operated, consistent with our prior practice,
they are excluded from the definition of ``small entity'' and ``small
business concerns.'' Accordingly, our use of the terms ``small
entities'' and ``small businesses'' does not encompass small incumbent
LECs. Out of an abundance of caution, however, for regulatory
flexibility analysis purposes, we will consider small incumbent LECs
within this analysis and use the term ``small incumbent LECs'' to refer
to any incumbent LECs that arguably might be defined by SBA as ``small
business concerns.''
315. Local Exchange Carriers. Neither the Commission nor the Small
Business Administration has developed a definition of small providers
of local exchange service. The closest applicable definition under
Small Business Administration rules is for telephone telecommunications
companies other than radiotelephone (wireless) companies. The most
reliable source of information regarding the number of incumbent LECs
nationwide appears to be the data that we collect annually in the
provision of Telecommunications Relay Service (TRS). According to our
most recent data, 1347 companies reported that they were engaged in the
provision of local exchange service. Although it seems certain that
some of these carriers are not independently owned or operated, or have
fewer than 1500 employees, we are unable at this time to estimate with
greater precision the number of incumbent LECs that would qualify as
small business concerns under the Small Business Administration's
definition. Consequently, we estimate that there are fewer than 1347
small incumbent LECs that may be affected by the proposals in this
NPRM. We seek comment on this estimate.
316. Under the new competitive provisions of the 1996 Act, however,
there could be a number of new LECs entering the local exchange market
that would be considered small businesses. In Section VIII.A of this
NPRM, we seek comment on whether to apply certain of the regulations
applicable to incumbent LECs to new entrant LECs. Thus, it is possible
that new entrants will be affected by our actions in this proceeding.
317. Enhanced Service Providers. In Section VIII.B of this NPRM, we
seek comment on whether to continue to exempt enhanced service
providers (ESPs) from any requirement to pay access charges. Because we
are not contemplating imposing any new regulatory requirement on ESPs,
we conclude that the Regulatory Flexibility Act does not require us to
consider the effects of these proposed rules on ESPs that would fit the
definition of small entity. If we modify the ``ESP Exemption,'' we will
consider the effect on small ESPs at that time. We seek comment on this
tentative conclusion.
318. Reporting, recordkeeping and other compliance requirements. It
is not clear whether, on balance, all proposals in this NPRM would
increase or decrease incumbent LECs' administrative burdens.
319. With respect to all incumbent LECs, we believe that the
reforms to rate structure that we propose in Section III would require
at least one, and possibly several additional filings, but otherwise
should not affect their administrative burdens. We expect that the
proposal we make in Section VII relating to the allocation of universal
service support to the interstate revenue requirement could increase
their administrative burdens. We expect that some of the
[[Page 4715]]
Part 69 revisions that we propose in Section VIII would reduce, others
increase, and the remainder have no effect on their administrative
burdens.
320. With regard to incumbent price cap LECs, we expect the changes
to the existing local switching rate structure that we propose in
Section III would require an initial additional filing, but otherwise
would have no effect on their administrative burdens. As to the
proposals in Section V, to the extent that a carrier chooses to avail
itself of the additional reforms, it will need to file a petition
demonstrating that it has met the trigger, and make an initial tariff
filing. Otherwise, most of the proposed reforms in Section V would
reduce or have no effect on its administrative burdens. We expect that
some of our proposals in Section VI of this NPRM, if adopted, would
increase the administrative burdens placed on incumbent LECs. We expect
that the other proposals in Section VI of this NPRM would have no
effect on their administrative burdens. We expect that the proposal to
continue regulating terminating access charges in Section VIII would
have no effect on the administrative burden placed on incumbent price
cap LECs.
321. In Section II, we address the likelihood that many, if not
all, new entrants would be considered ``domestic nondominant
carriers,'' whose tariff filings would be governed by Secs. 61.20
through 61.23 of our rules, 47 CFR 61.20-23, unless they are exempted
from some or all of those requirements. We are unable to estimate the
number of times these incumbent LECs would file tariffs annually, but
it could vary from none to 20 or more. Nor are we able to estimate how
extensive each tariff filing, on average, would be. If these new
entrants are not exempted from any tariff filing requirements, then we
estimate that, on average, it would take approximately two hours per
page for the incumbent LEC to prepare each tariff filing, at a cost of
$80 per hour in professional level and support staff salaries. If these
carriers are exempted from some or all the regulations applicable to
incumbent LECs, then the administrative burdens imposed on such
carriers would be less. In Section V, we ask whether a market share
test to measure the level of competition may impose a reporting
requirement on new entrants. We expect that the proposal in Section
VIII to regulate terminating access charges for new entrants would
increase the administrative burden placed on incumbent price cap LECs.
Compliance with these requests may require the use of engineering,
technical, operational, accounting, billing, and legal skills.
322. Federal rules which overlap, duplicate or conflict with this
proposal. None.
323. Any significant alternatives minimizing impact on small
entities and consistent with stated objectives. In Section II of this
NPRM, we seek comment on whether to exempt new entrant LECs from some
or all of the regulations applicable to incumbent LECs. Thus, new
entrants that may also be small entities may or may not become subject
to any new requirements. In any case, new entrants will become subject
to no more requirements than those imposed on incumbent LECs. However,
we recognize that new entrants may have different business or
operational concerns compared to incumbent LECs. In Sections II.A,
III.B, III.E, V.A, V.C, VII.A, and VII.B, we have sought comment on how
a number of proposals would affect small entities. These proposals
could have varying positive or negative impacts on small entities. We
are unable to ascertain, at this time, what the significant economic
impact would be on small entities as defined by the SBA. We seek
comment on these proposals and urge that parties support their comments
with specific evidence and analysis.
D. Notice of Proposed Rulemaking Comment Filing Dates
324. Pursuant to applicable procedures set forth in Secs. 1.399 and
1.411 et seq. of the Commission's Rules, 47 CFR 1.399, 1.411 et seq.,
interested parties may file comments with the Secretary, Federal
Communications Commission, Washington, D.C. 20554 no later than January
27, 1997. Interested parties may file replies no later than February
13, 1997. To file formally in this proceeding, participants must file
an original and twelve copies of all comments, reply comments, and
supporting comments. If participants want each Commissioner to receive
a personal copy of their comments, an original plus 16 copies must be
filed. In addition, parties should file two copies of any such pleading
with the Competitive Pricing Division, Common Carrier Bureau, Room 518,
1919 M Street, N.W., Washington, D.C. 20554. Comments and reply
comments will be available for public inspection during regular
business hours in the FCC Reference Center, Room 239, 1919 M Street,
N.W., Washington, D.C. 20554.
325. Parties submitting diskettes should submit them along with
their formal filings to the Office of the Secretary. Submissions should
be on a 3.5 inch diskette formatted in an DOS PC compatible form. The
document should be saved into WordPerfect 5.1 for Windows format. The
diskette should be submitted in ``read only'' mode. The diskette should
be clearly labelled with the party's name, proceeding, type of pleading
(comment or reply comment), Docket number, and date of submission.
326. You may also file informal comments electronically via e-mail
access@fcc.gov>. Only one copy of electronically-filed comments must
be submitted. You must put the docket number of this proceeding in the
subject line (see the caption at the beginning of this NPRM, or in the
body of the text if by Internet). You must note whether an electronic
submission is an exact copy of formal comments on the subject line. You
also must include your full name and Postal Service mailing address in
your submission.
327. In order to facilitate review of comments and replies, by both
parties and Commission staff, we require that comments be no longer
than 100 pages, and that replies be no longer than 50 pages. Comments
and replies must also comply with Sec. 1.49 and all other applicable
sections of the Commission's Rules. We also direct all interested
parties to include the name of the filing party and the date of the
filing on each page of their comments and replies. Comments and replies
must also clearly identify the specific portion of this Notice of
Proposed Rulemaking to which a particular comment or set of comments is
responsive. If a portion of a party's comments does not fall under a
particular topic listed in the Table of Contents of this NPRM, such
comments must be included in a clearly labelled section at the
beginning or end of the filing. Parties may not file more than a total
of ten pages of ex parte submissions, excluding cover letters. This ten
page limit does not include the following: (1) Written ex parte
statements made solely to disclose an oral ex parte contact; (2)
written material submitted at the time of an oral presentation that
provides a brief outline of the presentation; (3) written material
filed in response to direct requests from Commission staff; or (4) any
proposed rule language. Ex parte filings in excess of this limit will
not be considered part of the record in this proceeding.
328. Written comments by the public on the proposed and/or modified
information collections are due January 27, 1997. Written comments must
be submitted by the Office of Management and Budget (OMB) on the
proposed and/or modified information collections on
[[Page 4716]]
or before 60 days after date of publication in the Federal Register. In
addition to filing comments with the Secretary, a copy of any comments
on the information collections contained herein should be submitted to
Dorothy Conway, Federal Communications Commission, Room 234, 1919 M
Street, N.W., Washington, DC 20554, or via the Internet to
dconway@fcc.gov and to Timothy Fain, OMB Desk Officer, 10236 NEOB,
725--17th Street, N.W., Washington, DC 20503 or via the Internet to
fain__t@al.eop.gov.
E. Notice of Inquiry Comment Filing Dates
329. Pursuant to applicable procedures set forth in Secs. 1.399 and
1.411 et seq. of the Commission's Rules, 47 CFR 1.399, 1.411 et seq.,
interested parties may file comments with the Secretary, Federal
Communications Commission, Washington, D.C. 20554 no later than
February 21, 1997. Interested parties may file replies no later than
March 24, 1997. Comments and replies must comply with Sec. 1.49 and all
other applicable sections of the Commission's Rules. To file formally
in this proceeding, participants must file an original and twelve
copies of all comments, reply comments, and supporting comments. If
participants want each Commissioner to receive a personal copy of their
comments, an original plus 16 copies must be filed. In addition,
parties should file two copies of any such pleading with the
Competitive Pricing Division, Common Carrier Bureau, Room 518, 1919 M
Street, N.W., Washington, D.C. 20554. We also direct all interested
parties to include the name of the filing party and the date of the
filing on each page of their comments and replies. Comments and reply
comments will be available for public inspection during regular
business hours in the FCC Reference Center, Room 239, 1919 M Street,
N.W., Washington, D.C. 20554.
330. Parties submitting diskettes should submit them along with
their formal filings to the Office of the Secretary. Submissions should
be on a 3.5 inch diskette formatted in an DOS PC compatible form. The
document should be saved into WordPerfect 5.1 for Windows format. The
diskette should be submitted in ``read only'' mode. The diskette should
be clearly labelled with the party's name, proceeding, type of pleading
(comment or reply comment), Docket number, and date of submission.
331. You may also file informal comments electronically via e-mail
isp@fcc.gov>, or via the World Wide Web. Information on how to file
electronically is available at http://www.fcc.gov/isp.html>. Only one
copy of electronically-filed comments must be submitted. If you are
using e-mail, you must put the docket number of this proceeding in the
subject line (see the caption at the beginning of this Notice), and you
also must note in the subject line if an electronic submission is an
exact copy of formal comments. You also must include your full name and
Postal Service mailing address in your submission.
XI. Ordering Clauses
332. Accordingly, it is ordered, pursuant to Sections 1-4, 10, 201-
205, 251, 254, 303(r), and 410(a) of the Communications Act of 1934, as
amended, and Section 601 of the Telecommunications Act of 1996, 47
U.S.C. 10, 151-154, 201-205, 224, 251, 254, 303(r), 410(a), and 601,
that notice is hereby given of the rulemaking described above and that
comment is sought on these issues.
333. It is further ordered, pursuant to Sections 1-4, 10, 201-205,
251, 254, and 303(r) of the Communications Act of 1934, as amended, and
Section 601 of the Telecommunications Act of 1996, 47 U.S.C. 10, 151-
154, 201-205, 224, 251, 254, 303(r), and 601, that notice is hereby
given of the inquiry described above and that comment is sought on
these issues.
Federal Communications Commission
William F. Caton,
Acting Secretary.
List of Subjects
47 CFR Part 61
Communications common carriers, Tariffs.
47 CFR Part 69
Communications common carriers, Access charges.
Attachment--Parties Filing Pleadings
I. Pleadings in CC Docket No. 95-72 (ISDN SLC NPRM)
Comments
America Online Incorporated; CompuServe Incorporated; GE Information
Services, Inc.; Prodigy Services Company (America Online)
American Petroleum Institute
Ameritech
AT&T Corp. (AT&T)
Bell Atlantic Telephone Companies (Bell Atlantic)
BellSouth Telecommunications, Inc. (BellSouth)
Cable & Wireless, Inc. (Cable & Wireless)
California Bankers' Clearing House Association, MasterCard
International Incorporated, the New York Clearing House Association,
and Securities Industry Association (California Bankers' Clearing
House)
Center for Democracy and Technology
Cincinnati Bell Telephone (Cincinnati Bell)
Commercial Internet eXchange Association (CIX)
Communications Managers Association (CMA)
Consumer Project on Technology
GTE Service Corporation (GTE)
Information Technology Industry Council (ITIC)
MCI Telecommunications Corporation (MCI)
Microsoft Corporation (Microsoft)
National Information Infrastructure Working Group
National Public Radio, Inc. (National Public Radio)
National Telephone Cooperative Association (NTCA)
Northern Arkansas Telephone Company, Inc. (Northern Arkansas Telephone
Company)
NYNEX Telephone Companies (NYNEX)
Pacific Bell and Nevada Bell (Pacific Bell)
Public Utility Commission of Texas
Rochester Telephone Corp.
Roseville Telephone Company (Roseville)
Rural Telephone Coalition
Southwestern Bell Telephone Company (Southwestern Bell)
Sprint Corporation (Sprint)
Tele-Communications Association (TCA)
Tennessee Public Service Commission
Time Warner Communications Holdings, Inc. (Time Warner Communications)
United States Telephone Association (USTA)
U S WEST Communications, Inc. (US West)
West Virginia University
Replies
America Online
Ameritech
AT&T
Bell Atlantic
BellSouth
Cable & Wireless
Cincinnati Bell
CIX
CMA
GTE
ITIC
Information Technology Industry Council, United States Telephone
Association, California ISDN Users Group, Center for Democracy and
Technology, Consumer Federation of America, Information Industry
[[Page 4717]]
Association, California Bankers' Clearing House Association, US.
Chamber of Commerce, Independent Data Communications Manufacturers
Association, Information Technology Association of America,
Telecommunications Industry Association (Joint Parties)
Interactive Services Association
MCI
Microsoft
Northern Telecom Inc. (Northern Telecom)
NYNEX
Pacific Bell
Roseville
Sprint
Southwestern Bell
3Com Corporation
USTA
Comments on Bell Operating Companies' Cost Data
Comments
GTE Operating Company (GTE)
MCI Telecommunications Corporation (MCI)
Replies
America Online
NYNEX
Pacific Bell
Southwestern Bell
US West
II. Pleadings in CC Docket No. 94-1 (Price Cap Second FNPRM)
Comments
Ad Hoc Telecommunications Users Group (Ad Hoc)
Ameritech
ALTS
AT&T
Association for Local Telephone Services (ALTS)
Bell Atlantic
BellSouth
California Cable Television Association (CCTA)
Cincinnati Bell
Competitive Telecommmunications Association (CompTel)
Comcast Corp. (Comcast)
Cox Enterprises, Inc. (Cox)
General Services Administration (GSA)
GTE
ICG Access Services, Inc. (ICG)
Information Industry Association (IIA)
LCI International, Inc. (LCI)
LDDS Worldcom (LDDS)
Lincoln Telephone and Telegraph Co. (Lincoln)
MCI
MFS
NCTA
NYNEX
Organization for the Protection and Advancement of Small Telephone
Companies (Opastco)
Pacific Bell and Nevada Bell
Southern New England Telephone Co. (SNET)
Southwestern Bell
Sprint
Sprint Telecommunications Venture
TCA
Teleport
Telecommunciations Resellers Association
Time Warner Communications Holdings, Inc., (Time Warner)
USTA
US West
Replies
Ad Hoc
Ameritech
ALTS
AT&T
Bell Atlantic
BellSouth
Cincinnati Bell
Competitive Telecommmunications Association (CompTel)
Comcast
Cox
Frontier
GSA
GTE
LDDS
MCI
MFS
NCTA
NYNEX
Pacific Bell and Nevada Bell
Southwestern Bell
Sprint
Sprint Telecommunications Venture
Teleport
TRA
Time Warner
USTA
US West
[FR Doc. 97-2142 Filed 1-29-97; 8:45 am]
BILLING CODE 6712-01-P
