**Before the**

**Federal Communications Commission**

**Washington, D.C. 20554**

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| In the Matter of                 | *  | CC Docket No. 00-256         |
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| Multi-Association Group (MAG)    | ** | CC Docket No. 96-45          |
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**REPORT AND ORDER AND**

**SECOND FURTHER NOTICE OF PROPOSED RULEMAKING**

**Adopted: February 12, 2004 Released: February 26, 2004**

**Comment Date: 30 days from publication in the Federal Register**

**Reply Comment Date: 45 days from publication in the Federal Register**

By the Commission: Commissioners Copps and Adelstein issuing separate
statements.

**TABLE OF CONTENTS**

**[Para. No.]{.underline}**

[I. INTRODUCTION 1](#introduction)

[II. Background 3](#background)

[A. MAG Order 3](#mag-order)

[B. Further Notice of Proposed Rulemaking
5](#further-notice-of-proposed-rulemaking)

[III. REPORT AND ORDER ON FURTHER NOTICE OF PROPOSED RULEMAKING
6](#report-and-order-on-further-notice-of-proposed-rulemaking)

[A. All-or-Nothing Rule 6](#all-or-nothing-rule)

[*1.* *Background* 6](#background-1)

[*2.* *Discussion* 10](#discussion)

[B. Pricing Flexibility 16](#pricing-flexibility)

[*1.* *Background* 16](#background-2)

[*2.* *Discussion* 24](#discussion-1)

[C. Consolidation of Long Term Support and Interstate Common Line
Support
54](#consolidation-of-long-term-support-and-interstate-common-line-support)

[*1.* *Background* 55](#background-3)

[*2.* *Discussion* 61](#discussion-2)

[IV. SECOND further notice of proposed rulemaking
68](#second-further-notice-of-proposed-rulemaking)

[A. Alternative Regulation and the All-or-Nothing Rule
68](#alternative-regulation-and-the-all-or-nothing-rule)

[*1.* *Background* 69](#background-4)

[*2.* *Alternative Regulation Proposals*
80](#alternative-regulation-proposals)

[*3.* *Discussion* 85](#discussion-3)

[V. procedural matters 95](#procedural-matters)

[A. Ex Parte Requirements 95](#ex-parte-requirements)

[B. Paperwork Reduction Act Analysis
96](#paperwork-reduction-act-analysis)

[C. Final Regulatory Flexibility Act Analysis
98](#final-regulatory-flexibility-act-analysis)

[D. Initial Regulatory Flexibility Act Analysis
145](#initial-regulatory-flexibility-act-analysis)

[E. Filing of Comments and Reply Comments
158](#filing-of-comments-and-reply-comments)

[VI. ordering clauses 164](#ordering-clauses)

**APPENDIX A -- FINAL RULES**

**APPENDIX B -- PLEADINGS FILED IN RESPONSE TO *MAG FURTHER NOTICE***

**APPENDIX C -- CENTURYTEL, INC. ALTERNATIVE REGULATION PROPOSAL**

**APPENDIX D -- RATE OF RETURN CARRIER TARIFF OPTION PROPOSAL**

# INTRODUCTION

1.  Today, we take additional steps to provide rate-of-return carriers
    greater flexibility to respond to changing marketplace conditions.
    In the *MAG Order and Further Notice*, the Commission reformed
    interstate access charges and universal service and sought comment
    on various other issues affecting rate-of-return carriers.[^1] In
    this order, we resolve several issues on which the Commission sought
    comment in the *MAG Further Notice.*[^2] In particular, we modify
    the "all-or-nothing" rule to permit rate-of-return carriers to bring
    recently acquired price cap lines back to rate-of-return regulation.
    In this way, we reduce the administrative costs and uncertainties of
    such acquisitions for rate-of-return carriers. We also grant
    rate-of-return carriers the authority immediately to provide
    geographically deaveraged transport and special access rates,
    subject to certain limitations. With this additional pricing
    flexibility, rate-of-return carriers will be able to set more
    economically efficient rates and respond to competitive entry.
    Finally, we merge Long Term Support (LTS) with Interstate Common
    Line Support (ICLS). This will make the universal service mechanisms
    simpler and more transparent, while ensuring that rate-of-return
    carriers maintain existing levels of universal service support.

2.  We also initiate a further notice of proposed rulemaking seeking
    comment on two specific plans that propose establishing optional
    alternative regulation mechanisms for rate-of-return carriers. In
    conjunction with the consideration of those alternative regulation
    proposals, we also seek comment on modifications that would permit a
    rate-of-return carrier to adopt an alternative regulation plan for
    some study areas, while retaining rate-of-return regulation for
    other of its study areas. Consideration of these industry proposals
    furthers our commitment to investigating alternative regulatory
    methods that could benefit both rate-of-return carriers and their
    customers.

# Background

## MAG Order

3.  In implementing the provisions of the Telecommunications Act of 1996
    (1996 Act),[^3] the Commission consistently has taken into
    consideration the differences between price cap and rate-of-return
    carriers, as well as the wide diversity among rate-of-return
    carriers. Thus, in 1997, when the Commission adopted interstate
    access charge reforms for price cap carriers, it recognized the need
    for more comprehensive review of the issues and circumstances
    specific to rate-of-return carriers.[^4] In 1998, the Commission
    created a separate docket to undertake such review.[^5] While it
    proposed reforms similar to those adopted for price cap carriers,
    the Commission recognized that differences between the two groups
    might warrant a different approach in some matters, including a
    different transition to more efficient, cost-based rates.

4.  In October 2000, four incumbent local exchange carrier (LEC)
    associations submitted the Multi-Association Group (MAG) plan, a
    proposal addressing numerous issues facing rate-of-return carriers,
    including access charge reform and universal service support.[^6]
    After extensive comment,[^7] the Commission released the *MAG Order*
    on November 8, 2001, which modified the Commission's rules to reform
    the interstate access charge and universal service support system
    for incumbent local exchange carriers subject to rate-of-return
    regulation. Specifically, the *MAG Order* sought to foster efficient
    competition and efficient pricing in the market for access services
    by rationalizing the access rate structure and driving per-minute
    rates towards lower, more cost-based levels, while furthering
    universal service goals.[^8] The Commission aligned the interstate
    access rate structure more closely with the manner in which costs
    are incurred, and created a new universal service support mechanism,
    Interstate Common Line Support, to replace the implicit support in
    interstate access charges with explicit support that is portable to
    all eligible telecommunications carriers (ETCs).[^9] ICLS ensures
    that rate-of-return carriers will recover their common line revenue
    requirements, including their authorized rate of return, while
    continuing to provide their customers with quality, affordable
    service.[^10]

## Further Notice of Proposed Rulemaking

5.  In the Further Notice of Proposed Rulemaking, attached to the *MAG
    Order*, the Commission solicited further comment on the incentive
    plan proposed by rate-of-return carriers and how it might be
    modified to provide incentives for cost efficiency gains by
    rate-of-return carriers that would benefit consumers through lower
    interstate rates and improved services. The Commission also
    requested comment on additional pricing flexibility measures for
    rate-of-return carriers and on the MAG's proposed changes to the
    Commission's "all-or-nothing rule." It also solicited comment on
    merging the LTS Mechanism into ICLS.

# REPORT AND ORDER ON FURTHER NOTICE OF PROPOSED RULEMAKING

## All-or-Nothing Rule

### Background

6.  Section 61.41 of the Commission's rules provides that if a price cap
    carrier is in a merger, acquisition, or similar transaction, it must
    continue to operate under price cap regulation after the
    transaction.[^11] In addition, when rate-of-return and price cap
    carriers merge or acquire one another, the rate-of-return carrier
    must convert to price cap regulation within one year.[^12]
    Furthermore, if an individual rate-of-return carrier or study area
    converts to price cap regulation, all of its affiliates or study
    areas must also convert to price cap regulation, except for its
    average schedule affiliates.[^13] Finally, LECs that become subject
    to price cap regulation are not permitted to withdraw from such
    regulation or participate in NECA tariffs.[^14] These regulatory
    requirements collectively are referred to as the all-or-nothing
    rule, and were affirmed by the United States Court of Appeals for
    the D.C. Circuit.[^15]

7.  The all-or-nothing rule addresses two concerns about mergers and
    acquisitions involving price cap companies.[^16] First, a LEC could
    attempt to "game the system" by switching back and forth between
    rate-of-return regulation and price cap regulation.[^17] A price cap
    carrier could increase earnings by opting out of price cap
    regulation, building a larger rate base under rate-of-return
    regulation in order to raise rates, and then, after returning to
    price cap regulation, cutting costs back to an efficient level.
    The Commission reasoned that it would not serve the public interest
    to allow a carrier to "fatten up" under rate-of-return regulation
    and "slim down" under price cap regulation, because rates would not
    decrease in the manner intended under price cap regulation.[^18] The
    second concern motivating the all-or-nothing rule is that a LEC with
    affiliates under both forms of regulation could attempt to shift
    costs from its price cap affiliate to its rate-of-return
    affiliate.[^19] This would allow the rate-of-return affiliate to
    charge higher rates than otherwise possible to recover its higher
    revenue requirement (because of the increased costs), while at the
    same time, increasing profits of the price cap affiliate as a result
    of its cost savings.[^20] Despite these concerns, however, the
    Commission has waived the all-or-nothing rule where it has found
    that petitioners have established good cause and that waiver will
    serve the public interest.[^21]

8.  In the *MAG Further Notice*, the Commission deferred action on any
    reforms, including those proposed by the MAG, of the all-or-nothing
    rule, while seeking additional comment on the rule and on issues
    concerning incentive regulation and pricing flexibility.[^22] We
    sought comment generally on whether our regulatory policy, of
    preventing affiliated carriers from operating under different
    systems of regulation, is still serving the public interest; on what
    circumstances and conditions that prompted these rules in the past
    may have changed; and on why these rules should be retained,
    repealed or modified.[^23] Specifically, we asked whether customers
    would be better off, and competition better served, with or without
    the rules.[^24] We sought comment on the extent to which an
    increasingly competitive environment should affect any decision to
    retain or eliminate the rules.[^25] We also sought comment on
    whether the all-or-nothing restrictions currently are necessary to
    prevent cost shifting and gaming.[^26] Specifically, we asked
    whether the protection the rule provides against cost shifting and
    gaming is outweighed by regulatory efficiency gains that could
    result from eliminating the all-or-nothing requirements.[^27] We
    sought comment on the extent to which alternative accounting and
    reporting rules could substantially reduce cost shifting
    concerns.[^28] We further asked whether it would be reasonable to
    impose more stringent reporting requirements on carriers that seek
    waivers of the all-or-nothing requirements.[^29]

9.  Supporting the elimination of the all-or-nothing rule,
    rate-of-return LECs argue that the rule discourages LEC competition,
    innovation and expansion by complicating transactions between
    carriers.[^30] They also argue that sufficient safeguards are in
    place to protect against the abuses envisioned by the rule,[^31] and
    allege that there is no evidence of cost-shifting abuses in the
    record.[^32] Commenters also argue that the rule is routinely
    waived.[^33] NTCA and ICORE specifically advocate elimination of the
    rule for all rate-of-return carriers that seek to keep all of their
    study areas under rate-of-return regulation.[^34] On the other hand,
    major IXCs, the CUSC and the General Services Administration (GSA)
    support retention of the all-or-nothing rule, arguing that the same
    incentives for LECs to shift costs exist today as when the rule was
    adopted[^35] and that existing safeguards are insufficient to detect
    cost shifting,[^36] especially since accounting requirements are
    increasingly relaxed.[^37]

### Discussion

10. We modify the all-or-nothing rule to permit a limited exception, as
    proposed by NTCA and ICORE, [^38] when a rate-of-return carrier
    acquires lines from a price cap carrier and elects to bring the
    acquired lines into rate-of-return regulation.[^39] The rule, as
    amended, will permit the acquiring carrier to convert the price cap
    lines back to rate-of-return regulation. We defer further action on
    the all-or-nothing rule until we have reviewed the record compiled
    in response to the further notice that we also issue today.[^40]

11. The current record of this proceeding is insufficient for us to
    decide today on whether or how to adopt additional reforms of the
    all-or-nothing rule. The parties supporting the rule typically
    assert, without specific examples, that relaxation of the rule will
    result in cost-shifting, which other safeguards will be unable to
    detect.[^41] On the other hand, rate-of-return carriers assert that
    the rule raises transaction costs, and they argue that the rule is
    unnecessary because other, existing safeguards are capable of
    detecting the cost-shifting at which the rule is aimed.[^42] In
    light of the relatively uninformative record on these issues, we
    largely defer action on the all-or-nothing rule until we have
    reviewed the additional comments on this issue that we solicit today
    in our further notice. To provide immediate relief to rate-of-return
    carriers, however, we think it appropriate at this time to create a
    limited exception to the all-or-nothing rule.

12. As we note above, the Commission adopted the all-or-nothing rule in
    order to avoid two specific problems that it envisioned. First, the
    Commission sought to prevent a carrier from shifting costs from its
    price cap affiliate to its rate-of-return affiliate, recovering
    those costs through the higher, cost-based rates of the non-price
    cap affiliate and increasing the profits of the price cap affiliate
    because of its reduced costs. Second, the Commission intended to
    prevent carriers from gaming the system by switching back and forth
    between the two different regulatory regimes. At a minimum, the
    record currently supports reform of our all-or-nothing rule when a
    rate-of-return carrier acquires price cap lines but intends to
    operate all of its lines, including the newly acquired price cap
    lines, under rate-of-return regulation.

13. When a rate-of-return carrier seeks to return acquired price cap
    lines to rate-of-return regulation, the problems that the
    all-or-nothing rule sought to prevent do not exist, or can be
    addressed in a less burdensome way. Because the carrier wishes to
    have all of its lines be subject to rate-of-return regulation, there
    can be no danger of cost shifting between price cap and non-price
    cap affiliates. Similarly, a rate-of-return carrier in this position
    is not necessarily seeking to game the system by moving back and
    forth between different regulatory regimes. However, recognizing the
    possibility that the acquiring rate-of-return carrier could later
    seek to return to price cap regulation, thereby potentially gaming
    the system, we conclude that once a rate-of-return carrier brings
    acquired price cap lines into rate-of-return regulation, it may not
    for five years elect price cap regulation for itself, or by any
    means cause the acquired lines to become subject to price cap
    regulation, without first obtaining a waiver. We believe that this
    restriction responds to the concerns underlying the adoption of the
    all-or-nothing rule, consistent with our policy goals in
    administering the two separate systems of rate regulation, while not
    requiring that the election be unnecessarily irreversible, as
    proposed by commenters.[^43] We do not restrict the number of lines
    that may be acquired by a rate-of-return carrier and returned to
    rate-of-return regulation because the risks of abuse are very small
    and the administrative benefits are significant. We have granted
    waivers of the all-or-nothing rule involving as many as 285,000
    lines[^44] with no discernible adverse effects with respect to the
    consequences that the all-or-nothing rule was designed to preclude,
    and no significant impact on the Commission's universal service
    programs.[^45] We believe that most acquisitions of price cap lines
    by rate-of-return carriers will not exceed this level, and thus find
    no reason to believe that any adverse effects will result in the
    future. It is also important to note, however, that but for the
    limited exception we create above, we do not otherwise modify rule
    61.41(d), which provides that once a carrier is subject to price cap
    regulation, it may not subsequently return to rate-of-return
    regulation.

14. We note that several commenters representing small and mid-sized
    incumbent LECs advocate reform of the all-or-nothing rule, citing
    the additional transaction costs and uncertainty that the rule
    creates for small, typically rural, carriers that seek to acquire
    lines from price cap carriers.[^46] By creating an exception to the
    rule for the conditional conversion of acquired price cap lines to
    rate-of-return regulation, we also address this concern and reduce
    the cost and uncertainty imposed by our rules.[^47]

15. We note that the carriers involved in a merger or acquisition must
    coordinate to ensure that, as of the effective date of the
    transaction, their respective tariffs reflect the services being
    offered after the merger or acquisition. We also note that price cap
    carriers are required to adjust their price cap indices to reflect
    the removal of the transferred access lines.[^48]

## Pricing Flexibility

### Background

16. When it adopted the original access charge structure in 1983, the
    Commission required all incumbent LECs to offer all interstate
    special and switched access services at geographically averaged
    rates for each study area.[^49] Since that time, the Commission has
    increased incumbent LECs' pricing flexibility and ability to respond
    to the advent of competition in the interstate exchange access
    market. In the *Special Access* and *Switched Transport Expanded
    Interconnection Orders*, the Commission introduced a system of
    density pricing zones that permits a rate-of-return carrier to
    deaverage geographically its rates for special access and switched
    transport services, provided that they can demonstrate the presence
    of "operational" special access and switched transport expanded
    interconnection arrangements and that there is at least one
    competitor in the study area.[^50] The density zone pricing rules
    permit rate-of-return carriers to establish a \"reasonable\" number
    of zones, but the Commission has noted in the past that \"LECs
    seeking to establish more than three zones shall be subject to
    increased scrutiny and must carefully justify the number of zones
    proposed in their density pricing zone plan.\"[^51] In addition,
    rate-of-return LECs must show that density zones reflect cost
    characteristics such as traffic density or other measures of traffic
    passing through particular central offices.[^52]

17. The Commission also permitted incumbent LECs to offer volume and
    term discounts for switched transport services upon specific
    competitive showings. Thus, LECs may offer such discounts in a study
    area upon demonstration of one of the following conditions: (1) 100
    DS1-equivalent switched cross-connects[^53] are operational in the
    Zone 1 offices in the study area; or (2) an average of 25
    DS1-equivalent switched cross-connects per Zone 1 office
    are operational. In study areas with no Zone 1 offices, volume and
    term discounts may be implemented once five DS1-equivalent switched
    cross-connects are operational in the study area. Rate-of-return
    carriers are prohibited from offering interstate access services
    pursuant to individual customer contracts.

18. In 1999, the Commission recognized that the variety of access
    services available on a competitive basis had increased
    significantly since the adoption of the price cap rules.
    The Commission therefore granted price cap carriers immediate
    flexibility to deaverage services in the trunking basket.[^54] The
    Commission allowed price cap carriers to define the scope and number
    of zones within a study area, provided that each zone, except the
    highest-cost zone, accounts for at least 15 percent of the incumbent
    LEC\'s trunking basket revenues in the study area and that annual
    price increases within a zone do not exceed 15 percent.[^55] Price
    cap carriers were also allowed to introduce new services on a
    streamlined basis.[^56]

19. The Commission also adopted a framework for granting further
    regulatory relief upon satisfaction of certain competitive showings.
    The Commission determined that relief generally would be granted in
    two phases and on a Metropolitan Statistical Area (MSA) basis. To
    obtain Phase I relief, the Commission required price cap carriers to
    demonstrate that competitors have made irreversible, sunk
    investments in the facilities needed to provide the services at
    issue.[^57] Phase I relief permits price cap carriers to offer, on
    one day's notice, volume and term discounts and contract tariffs for
    these services, so long as the services provided pursuant to
    contract are removed from price caps. To protect those customers
    that may lack competitive alternatives, carriers receiving Phase I
    flexibility are required to maintain their generally available,
    price cap constrained tariffed rates for these services.

20. To obtain Phase II relief, the Commission required price cap
    carriers to demonstrate that competitors have established a
    significant market presence (*i.e*., that competition for a
    particular service within the MSA is sufficient to preclude the
    incumbent from exploiting any individual market power over a
    sustained period) for provision of the services at issue.[^58] Phase
    II relief permits price cap carriers to file tariffs for these
    services on one day\'s notice, free from both the Part 61 rate level
    and the Part 69 rate structure rules.[^59] The Commission eliminated
    the low-end adjustment mechanism for price cap carriers qualifying
    for and electing to exercise either Phase I or Phase II pricing
    flexibility.[^60]

21. The Commission has permitted both price cap and rate-of-return
    carriers to deaverage their subscriber line charges.[^61] LECs are
    also permitted to disaggregate their high-cost loop and ICLS
    universal service support.[^62] We also streamlined the requirements
    for rate-of-return carriers to introduce new services in the *MAG
    Order*.[^63]

22. Recognizing the importance of pricing flexibility as competition
    develops in the service areas of rate-of-return carriers, the
    Commission sought comment in the *MAG Further Notice* on the types,
    degree, and timing of pricing flexibility that should be made
    available to rate-of-return carriers in addition to the pricing
    flexibility already available to them under current rules.[^64] The
    Commission focused on three types of pricing flexibility: geographic
    deaveraging within a study area; volume and term discounts; and
    contract pricing.

23. Several parties filed comments on the pricing flexibility issues,
    representing a variety of customer and industry perspectives. Many
    of the comments address pricing flexibility and triggers in a very
    general manner, without differentiating meaningfully among the types
    of pricing flexibility and a trigger that might be associated with
    it. Rate-of-return carriers and their trade associations support
    geographic deaveraging, volume and term discounts, and contract
    pricing for rate-of-return carriers to make their pricing structures
    more efficient.[^65] On the other hand, several competitors to
    rate-of-return carriers oppose any increased pricing flexibility for
    rate-of-return carriers.[^66] Rate-of-return carrier competitors
    argue that pricing flexibility can be used to erect barriers to
    entry.[^67]

### Discussion

24. In this Order, we immediately permit rate-of-return carriers to
    deaverage geographically their rates for transport and special
    access services and to define both the scope and number of zones,
    provided that each zone, except the highest-cost zone, accounts for
    at least 15 percent of its revenues from those services in the study
    area. Such action will provide rate-of-return carriers greater
    flexibility to respond to market place conditions, thereby
    benefiting consumers in rural areas. We retain the existing triggers
    for when rate-of-return carriers may offer volume and term discounts
    for transport services to respond to competitive developments. We
    also continue the prohibition on rate-of-return carriers' ability to
    offer contract carriage. Finally, we address only the initial timing
    for the provision of geographic deaveraging of transport and special
    access services and the provision of volume and term discounts for
    transport services because the record does not address the timing of
    the subsequent evolution in pricing flexibility. We also modify the
    safeguards applicable to rate-of-return carriers that offer
    geographically deaveraged rates for transport and special access
    services.

#### Geographic Deaveraging of Transport and Special Access Services

25. In this Order, we amend section 69.123 of the Commission\'s rules to
    permit rate-of-return carriers immediately to deaverage
    geographically their rates for transport and special access
    services. As the Commission did for price cap carriers, we will
    permit rate-of-return carriers to define both the scope and number
    of zones, provided that each zone, except the highest-cost zone,
    accounts for at least 15 percent of its revenues from those services
    in the study area. We will require, however, that the zones
    established for transport and special access deaveraging are
    consistent with any UNE zones adopted pursuant to the requirements
    of section 251 and will require rate-of-return carriers to
    demonstrate that rates reflect cost characteristics associated with
    the selected zones. Granting rate-of-return carriers more
    flexibility to deaverage these rates enhances the efficiency of the
    market for those services by allowing prices to be tailored more
    easily and accurately to reflect costs and, therefore, facilitates
    competition in both higher and lower cost areas. This is another
    step in facilitating the ability of rate-of-return carriers that
    offer deaveraged UNE rates to establish access and UNE rates that
    reflect common zone boundaries.

26. Since 1992, the Commission has permitted rate-of-return carriers to
    deaverage certain rates by geographic zones because of the concern
    that averaged rates might create a pricing umbrella for competitors
    that would deprive customers of the benefits of more vigorous
    competition.[^68] Rate-of-return carriers argue that increased
    pricing flexibility is now necessary for a variety of reasons. They
    argue that immediate geographic rate deaveraging would increase the
    efficiency of the interstate rate structure by moving rates closer
    to actual costs[^69] and would offer rate-of-return carriers the
    flexibility to adjust rates in line with the capabilities of
    potential competitors.[^70] The National Rural Telecom Association,
    the Organization for the Promotion and Advancement of Small
    Telecommunications Companies, and the United States Telecom
    Association (collectively NRTA) assert that geographic deaveraging
    is no different than SLC deaveraging and universal service
    disaggregation, which the Commission has already adopted.[^71]

27. Our action here, which permits rate-of-return carriers immediately
    to deaverage the rates for transport and special access services,
    represents a measured modification of the current rule. That rule
    permitted rate-of-return carriers to deaverage these rates when a
    single entrant has established a cross-connect in one central office
    in the rate-of-return carrier's study area.[^72] Thus, rather than
    filing deaveraged rates only when a competitor has entered the
    market via collocation, the rate-of-return carrier may now,
    immediately upon the effective date of this order, file deaveraged
    rates that may become effective in fifteen days. Competitors that
    enter the rate-of-return carrier's market through means other than
    collocation will, of course, be competing against the rate-of-return
    carrier's deaveraged rates immediately. Deaveraged rate-of-return
    carrier rates may provide valuable information about the prices the
    entrant will face when it enters and may thus reduce uneconomic
    entry that could result from errors in estimating the rate-of-return
    carrier's pricing response to competitive entry. The greater
    flexibility afforded by the ability to deaverage transport and
    special access rates will benefit access customers through more
    efficient pricing of access services.[^73]

28. We are not persuaded by GCI that geographic deaveraging will lead to
    unreasonable, monopolistic rates in areas not served by a
    competitor.[^74] Thus, deaveraging of transport and special access
    rates should not permit rate-of-return carriers to erect barriers to
    entry.[^75] Any deaveraged rates will be subject to the tariff
    review and complaint processes. Continuing to require averaged rates
    could result in preclusion or uneconomic entry. The Commission has
    observed that averaging across large geographic areas distorts the
    operation of markets in high‑cost areas because it requires
    incumbent LECs to offer services in those areas at prices
    substantially lower than their costs of providing those
    services.[^76] 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.[^77] Similarly,
    discrepancies between price and cost may create incentives for
    carriers to enter low‑cost areas even if their cost of providing
    service is actually higher than that of the incumbent LEC.[^78]

29. We also simplify our rules by allowing the rate-of-return carrier to
    establish its own zones. This is consistent with the Commission's
    decision in the *Pricing Flexibility Order* that concluded that
    traffic density is not the optimal, or even an accurate, method of
    determining cost‑based pricing zones and that LEC‑designed zones are
    more likely to lead to efficient pricing that reflects underlying
    cost characteristics.[^79] We therefore conclude that granting
    rate-of-return carriers the flexibility to choose the number of
    zones and the criteria for establishing zone boundaries is more
    likely to result in reasonable and efficient pricing zones than if
    their flexibility is more constrained. Therefore, we eliminate all
    competitive prerequisites for the deaveraging of transport and
    special access rates and permit rate-of-return carriers to define
    pricing zones as they wish, so long as each zone, except the
    highest-cost zone, accounts for at least 15 percent of the
    rate-of-return carrier\'s transport and special access revenues in
    the study area. With this requirement, we ensure that any lower
    rates resulting from deaveraging are enjoyed by a range of
    customers, rather than being focused on only a few customers in a
    way that might evade our prohibition on contract pricing by
    rate-of-return carriers for individual customers. While the
    seven-zone limit that we adopt -- the product of the 15 percent
    requirement discussed above -- likely will not be used by most
    rate-of-return carriers, we find that three zones, as urged by
    WorldCom,[^80] may not be sufficient to provide rate-of-return
    carriers with the ability to adjust to any likely variation in cost
    conditions and ensure that a rate-of-return carrier will be able to
    harmonize its UNE and access zones.

30. The permissive geographic deaveraging we discuss here applies to
    rates for all services in the transport and special access
    categories to which density zone pricing currently applies. We
    require that the same zones be used for all transport and special
    access elements.[^81] We will retain the constraints on annual price
    increases within zones that are contained in section 69.123(e)(1) of
    our rules.[^82] Although such constraints limit rate-of-return
    carriers\' ability immediately to rebalance rates in a manner that
    reflects the actual costs of providing the services at issue, we
    remain concerned with preventing the disruptive effects of rapid and
    unexpected price increases. We will also retain the requirement that
    transport and special access services offered between telephone
    company locations be priced at the rates for the higher zone.[^83]
    We note that, under rate-of-return regulation, deaveraging permits
    LECs to increase rates in one geographic zone only to the extent
    that they decrease rates in other geographic zones, because a
    rate-of-return carrier's rates must be targeted to earn no more than
    the authorized rate of return. Furthermore, a rate-of-return carrier
    must provide cost support establishing that the deaveraged rates are
    cost-based. Thus, we are not persuaded by AT&T\'s claims that
    greater geographic deaveraging flexibility will lead to predatory
    pricing by incumbent LECs or arguments that any further deaveraging
    should result only in price decreases, *i.e.*, that it be \"downward
    only.\"[^84] We will no longer require rate-of-return carriers to
    file zone pricing plans in advance of tariff filings. Parties
    wishing to challenge the reasonableness of rate-of-return carrier
    zones may do so as part of the tariff review process, or in a formal
    complaint under section 208 of the Act.[^85]

31. Under the present rules governing geographic deaveraging,
    rate-of-return carriers may not deaverage transport or special
    access rates until at least one cross-connect is operational in the
    study area. Thus, a rate-of-return carrier today would have to have
    established a cross-connect charge before it could offer the allowed
    services at deaveraged rates. The cross-connect subelement recovers
    costs associated with the cross-connect cable and associated
    facilities connecting the equipment owned by or dedicated to the use
    of the interconnector with the telephone company's equipment and
    facilities used to provide interstate special or switched access
    services.[^86] We conclude, as urged by GCI, that a rate-of-return
    carrier wishing to geographically deaverage transport or special
    access rates must establish a cross-connect element providing for
    interconnection and may not charge collocated providers for entrance
    facilities or channel terminations when the entrant provides its own
    transmission facilities.[^87] This merely brings forward the
    requirement that would apply today if a rate-of-return carrier
    qualified and elected to geographically deaverage rates. A
    rate-of-return carrier that could assess such a charge for the
    combined facilities would clearly still possess some degree of
    market power, and would be attempting to use that power in an
    anticompetitive manner. Finally, the requirement that rate-of-return
    carriers must tariff a cross-connect element in order to
    geographically deaverage rates ensures that transport competitors
    can interconnect with the rate-of-return carrier's access network,
    whether or not rate-of-return carriers claim exemption under either
    section 251(f)(1) or (f)(2). Thus, competition will not be
    foreclosed if a carrier claims its exemption, as argued by GCI.[^88]

#### Volume and Term Discounts for Transport Services

32. In this section, we address the question of whether to relax our
    rules on volume and term discounts for transport services. Under the
    current rules, rate-of-return carriers are already permitted to
    offer volume and term discounts for special access services. After a
    certain number of DS1 equivalent cross-connects are operational in
    the study area, they may offer such discounts for transport
    services.[^89] After reviewing the record, we conclude that no
    relaxation of the requirements for offering volume and term
    discounts for transport services is warranted at the present time.

33. The Commission has long recognized that it should allow incumbent
    LECs progressively greater pricing flexibility as they face
    increasing competition.[^90] This has been tempered, however, with
    the understanding that pricing flexibility, if granted prematurely,
    might enable incumbent LECs to (1) exclude new entrants from their
    markets, or (2) increase rates to unreasonable levels. As the
    Commission observed in the *Pricing Flexibility Order*, monopolists
    have an incentive to reduce prices in the short run and forgo
    current profits in order to prevent the entry of rivals or to drive
    them from the market.[^91] The monopolist may then raise prices
    above competitive levels and earn higher profits than would have
    been possible if the exclusionary pricing behavior had not occurred
    and competitors had not exited or been deterred from entering the
    market.[^92] Thus, an incumbent LEC can forestall the entry of
    potential competitors by \"locking up\" large customers by offering
    them volume and term discounts at or below cost. Locking in large
    customers can foreclose competition for smaller customers as well,
    because large customers may create the inducement for potential
    competitors to invest in sunk facilities which, once sunk, can be
    used to serve adjacent smaller customers.

34. In the *MAG Further Notice*, the Commission sought comment on the
    appropriate triggers for determining when rate-of-return carriers
    should be permitted to adopt other forms of pricing flexibility. The
    Commission noted the risk that rate-of-return carriers could use
    increased pricing flexibility to engage in exclusionary pricing
    behavior and thereby thwart the development of competition.[^93]
    This built on the *Pricing Flexibility Order*, in which, as a
    condition for granting further pricing flexibility in the form of
    volume and term discounts and contract carriage, price cap carriers
    were required to show that markets are sufficiently competitive both
    to warrant pricing flexibility so that price cap carriers may
    respond to competition and to discourage price cap carriers from
    either excluding new entrants or setting rates to unreasonable
    levels.

35. After reviewing the record in the instant proceeding, we conclude
    that these concerns are equally applicable to rate-of-return carrier
    pricing flexibility, and we find no basis for expanding the
    transport volume and term discount pricing flexibility available to
    rate-of-return carriers at this time. We therefore retain the
    existing cross-connect-based standards as the trigger for when a
    rate-of-return carrier may offer volume and term discounts for
    transport services, rather than adopting any alternative suggested
    in the record. We note that, to date, no party has taken advantage
    of the existing ability to offer volume and term discounts for
    transport services---whether because they cannot meet the threshold,
    or for some other reason, is not apparent from the record before us.

36. The record indicates that there is limited competition in
    rate-of-return carrier service areas that would serve to discipline
    the provision of volume and term discounted transport services
    offered by rate-of-return carriers. Several parties argue that
    competition has increased and new technologies will permit
    increasing numbers of carriers, such as wireless providers, to enter
    rural areas.[^94] We agree, however, with those parties that argue
    that wireless generally is not a substitute for transport,[^95] and
    thus wireless competition is unlikely to restrain rate-of-return
    carrier pricing of transport services.

37. We are also skeptical that cable and satellite providers offer
    competition for transport services to rate-of-return carriers. These
    competitors largely bypass the rate-of-return carrier switched
    access network and thus do not restrain transport prices.[^96] To
    the extent that cable may, in certain instances, provide dedicated
    transmission offerings that bypass the rate-of-return carrier
    network, rate-of-return carriers today are allowed to offer volume
    and term discounts for special access services, which would be the
    service with which the entrant would be competing.

38. Thus, the competition faced by rate-of-return carriers for transport
    services is limited[^97] and is significantly less than that in
    price cap carrier service areas. Competition in rate-of-return
    carrier service areas may develop in a more targeted fashion than
    that for price cap carriers because of the smaller customer base
    generally, as well as the lower penetration of multi-line business
    customers that are attractive initial targets of new entrants.[^98]
    In evaluating various triggers for volume and term discounts for
    transport services, we therefore have considered the diversity among
    small and mid-sized carriers, as urged by many rate-of-return
    carrier interests.[^99]

39. We conclude, as urged by several commenters, that further volume and
    term discount pricing flexibility for transport services should be
    available only if there is evidence of significant competition.
    Volume and term discount pricing flexibility must be structured to
    prevent exclusionary pricing behavior to safeguard the development
    of competition in rate-of-return carrier service areas.

40. We find that the various alternative triggers suggested in the
    record fail to address the concern with rate-of-return carriers'
    ability to erect barriers to entry and engage in price
    discrimination. Several parties contend that pricing flexibility
    should be granted based on various market opening commitments.[^100]
    While the market opening events that the commenters identify would
    facilitate the development of competition, they do not, in and of
    themselves, indicate that any particular level of competition
    exists. Therefore, there would be no assurance that rate-of-return
    carriers could not erect barriers to entry, or engage in
    unreasonable price discrimination. On the other hand, competition
    can develop without an entrant with ETC status being present because
    significant competition could exist in part of a rate-of-return
    carrier's service area before an entrant sought ETC status. The
    argument that UNEs should be available throughout the service area
    before pricing flexibility should be granted also fails to address
    the level of competition that might exist because an entrant might
    enter without using UNEs. We also decline to adopt an approach
    modeled on that for price cap carriers because we believe that the
    diversity among rate-of-return carriers and the markets they serve
    make those triggers an unreliable predictor of the competitive
    effects in any of the rate-of-return carriers' markets. We believe
    the actual competition reflected in a cross-connect standard is a
    better judge of when volume and term discounts for transport
    services are appropriate because it indicates that the
    rate-of-return carrier is facing actual competition for those
    services. It is also administratively easy to administer.

41. In the *MAG Further Notice*, the Commission sought comment on
    whether any additional pricing flexibility should be conditioned on
    rate-of-return carriers being required to establish a ceiling rate
    for the associated non-discounted access service offering.[^101] GCI
    argues that if the Commission permits downward pricing flexibility,
    it must ensure that the carrier is not permitted to raise other
    rates to offset the discounts.[^102] ALLTEL Communications, Inc.,
    CenturyTel, Inc., Madison River Communications, LLC., and TDS
    Telecommunications Corporation (ALLTEL) oppose creating any such
    limitation on the use of pricing flexibility.[^103] We decline to
    adopt such a pricing restriction here. The existing rules applicable
    to volume and term discounts by rate-of-return carriers do not
    constrain pricing in the manner urged by GCI, and we are not
    modifying those rules in this order. The Commission historically has
    approached volume and term discount offerings by carriers as being
    subject to the standard that any discounts must be cost-based.[^104]
    We will not depart from this cost-based approach in the
    instant case.

42. In the *MAG Further Notice*, the Commission also sought comment on
    whether the study area should be used to measure competitiveness in
    determining whether pricing flexibility is warranted for
    rate-of-return carriers.[^105] The majority of parties that
    addressed this issue agree that the MSA would be inappropriate and
    support the use of the study area to measure competitive
    entry.[^106] TCA argues for measuring entry at the exchange level,
    or based on contiguous exchanges because the study area is too
    large.[^107] We will continue to use the study area to determine
    when volume and term discount pricing flexibility for transport
    services is warranted. Even if we were inclined to use an exchange
    standard, the record before us is inadequate to determine what an
    appropriate grouping of exchanges would be, given the diversity
    among rate-of-return carriers.

43. We decline to limit the length of any term contract to three years,
    as suggested by GCI.[^108] AT&T and GCI argue that a rate-of-return
    carrier may attempt to engage in price discrimination or in
    practices that might otherwise lock-up certain customers.[^109] We
    will not modify the existing rule, which does not limit eligible
    rate-of-return carriers ability to enter into term contracts of any
    length. We believe that customers are in the best position to
    evaluate their individual communications needs and the potential for
    competitive alternatives. We therefore believe that customers will
    not enter into excessively long term contracts if attractive
    alternatives are likely to be available in a shorter period of time.

44. We conclude that it is appropriate to maintain the current trigger
    for volume and term discounts for transport services even though we
    do not impose any limitations on special access volume and term
    discounts. As we have noted above, entrants may provide interstate
    services by bypassing the LEC's network, without needing a
    cross-connect in the rate-of-return carrier's central office.
    Rate-of-return carriers will, in some cases, be able to respond to
    these competitive offerings with their special access services. With
    respect to transport, however, competitive entry is dependant on
    interconnecting with the rate-of-return carrier's switched network.
    It is therefore appropriate to maintain the existing cross-connect
    trigger to ensure that a competitive presence exists before a
    rate-of-return carrier is allowed to offer volume and term discounts
    for transport services.

45. Finally, we conclude that the record is inadequate to permit us to
    reach any conclusions regarding Phase II pricing flexibility,
    non-dominant treatment of any services, or shortened filing periods
    for some services.[^110] Very few parties commented on these issues,
    and to the extent they did, the comments were in opposition. They
    argue that competition is inadequate to justify such relief,
    asserting that rate-of-return carriers could erect barriers to entry
    or price discriminatorily without any effective control from
    competitors in the market.[^111] As discussed above, there is
    limited competition in the provision of access services in
    rate-of-return carrier service areas today. It is not clear how
    quickly competition will develop, or the form it will take. As a
    result, we decline to adopt any rule revisions relating to these
    aspects of the *MAG Further Notice* on the present limited record.

#### Contract Carriage

46. In the *MAG Further Notice*, the Commission sought comment on
    whether rate-of-return carriers should be given authority to offer
    services pursuant to individual customer contracts. Today,
    rate-of-return carriers are prohibited from offering interstate
    access services pursuant to individual customer contracts.[^112]
    After reviewing the record in this proceeding, we decline to permit
    rate-of-return carriers to offer contract carriage at this time.

47. Rate-of-return carrier interests generally rely on the same
    arguments to support contract carriage that they presented for
    relaxed volume and term discounts for transport services: the
    improved efficiency of cost-based rates, their reliance on a few
    large customers in many cases, and the need to address
    competition.[^113] NRTA asserts that contract pricing would permit
    carriers to tailor services and rates to individual customer
    demand.[^114] On the other hand, AT&T opposes extending contract
    carriage authority to rate-of-return carriers, arguing that it could
    be used to erect a barrier to entry in the form of favorable
    contracts for attractive customers resulting in excessive rates for
    other customers.[^115]

48. After reviewing the record, we decline to permit rate-of-return
    carriers to engage in contract carriage at the present time.
    Contract carriage would permit a rate-of-return carrier to combine
    various elements, or parts of elements, in presenting an offering to
    a customer. This would present rate-of-return carriers with an
    opportunity to set non-cost-based prices in order to prevent
    entrants from providing service to the largest customers in their
    service areas, thereby precluding further competition for smaller
    customers in their service areas as well. The principal check on
    rate-of-return carrier rates is the authorized rate of return the
    Commission has prescribed. A rate-of-return carrier is permitted to
    set rates that provide the opportunity to earn this return on the
    entire portion of their rate base that is assigned to interstate
    access services. Therefore, any predation on the part of a
    rate-of-return carrier in its contract offerings could be recovered
    through higher rates for other customers, absent some check on the
    rate-of-return carrier's ability to accomplish this result.[^116]
    Because any predatory pricing would restrict entry, there would
    likely be no competitor to provide an alternative to those customers
    to whom the rate-of-return carrier was charging higher rates.
    Rate-of-return carriers have not demonstrated in the record how such
    behavior can be detected and prevented within the rate-of-return
    regulatory process. The pooling process would make detection even
    more difficult.[^117] The immediate geographic deaveraging of
    transport and special access services we extend to rate-of-return
    carriers today, along with the volume and term pricing already
    available to rate-of-return carriers, provide them with meaningful
    ways to respond to competition. Therefore, balancing the risks of
    undetectable anticompetitive behavior against the limited
    competition that presently exists in rate-of-return carrier service
    areas that could be considered a substitute for access services, we
    believe the better course is the conservative one of precluding
    contract carriage for rate-of-return carriers.

#### Other Issues

49. In the *MAG Further Notice*, the Commission sought comment on
    whether pricing flexibility should be permitted within the NECA
    pooling process.[^118] After reviewing the record, we agree with
    NECA that the pricing flexibility permitted by this order can be
    accommodated within the pool by modifying its settlement and
    rate-setting mechanisms so they apply on a more targeted basis to
    narrower groups of customers.[^119] Our current rules would permit
    such pooling to occur. We note that many of the rate-of-return
    carriers most likely to exercise this option---ALLTEL, CenturyTel,
    ACS of Anchorage, TDS---already file their own traffic-sensitive
    access tariffs for some or all of their study areas. Therefore, by
    this decision, smaller rate-of-return carriers may be able to offer
    pricing flexibility through the NECA traffic-sensitive pool that
    they would not be able to do if required to do so through their own
    tariffs.[^120] The tariffing costs will increase some for those
    carriers that elect to offer pricing flexibility, whether done on
    their own or through NECA. We agree with NECA that the increased
    administrative burdens on NECA will likely be less than those that
    would result if we were to require rate-of-return carriers to file
    their own tariffs proposing flexible pricing arrangements.[^121]

50. We decline to require rate-of-return carriers to leave the NECA pool
    and file their own tariffs in order to offer pricing flexibility. We
    are not persuaded by the arguments of AT&T and GCI that pooling is
    inconsistent with pricing flexibility.[^122] While pooling involves
    a degree of averaging and risk sharing that would not exist if
    carriers filed their own tariffs, this is the case whether pricing
    flexibility is involved or not. Rate-of-return carriers subject to
    section 61.38 of our rules must file cost support with their
    tariffs,[^123] and those subject to section 61.39 must be prepared
    to submit cost support upon request.[^124] This supporting material
    will include a clear delineation of the geographically deaveraged
    pricing zones. It will also describe the process used to establish
    rates, whether on an individual carrier basis or through the use of
    some aggregation approach, such as the banding NECA currently uses
    for some rate elements, along with the actual cost support for the
    services for which pricing flexibility is being offered. While the
    cost support may not include individual carrier cost data,[^125] the
    NECA tariff filings offering pricing flexibility will include
    supporting material associated with the rates in question that the
    Commission and interested parties may utilize to detect efforts to
    erect barriers to entry or to establish discriminatory pricing
    practices. This is also consistent with allowing rate-of-return
    carriers to offer deaveraged SLCs within the NECA common line pool,
    as we did in the *MAG Order*.[^126] Parties wishing to challenge the
    reasonableness of NECA's pool rates or rate development procedures
    may do so as part of the tariff review process, or in a formal
    complaint under section 208 of the Act.

51. We decline to restrict the availability of pricing flexibility with
    respect to transport elements that cannot be avoided because of
    network design configuration, as urged by GCI. GCI notes, for
    example, that an entrant may not be able to interconnect at a remote
    switch and must therefore purchase transport from the host switch to
    the remote switch.[^127] Rate-of-return carriers assess
    tandem-switched transport charges for the use of transmission
    between the host and remote locations in addition to charges for
    services between the host switch and the point of interconnection
    with the IXC.[^128] Because of the broader application of the
    tandem-switched transport rate, we do not find it necessary to
    introduce the limitation GCI requests. This is consistent with the
    scope of the present rules governing pricing flexibility for
    rate-of-return carriers.

52. We decline to revise the standard applicable to volume and term
    discounts for channel terminations. GCI argues that collocation does
    not indicate that channel terminations are available and urges that
    they be subject to the same rules as switched loops.[^129] The
    notice sought comment on additional pricing flexibility for
    rate-of-return carriers. We will not here restrict pricing
    flexibility that is already available to those carriers. We note
    that, for most rate-of-return carriers, DS1 and DS3 capacity
    services will address most customers' needs, and those services are
    not services subject to the volume discount provisions.

53. We will not limit the availability of pricing flexibility to
    rate-of-return carriers participating in an incentive regulation
    plan, as urged by GCI.[^130] GCI asserts that incentive regulation
    reduces a LEC's ability to engage in cost shifting and other forms
    of anti-competitive cross-subsidization. It further submits that it
    is difficult to remove both the cost and the demand from
    rate-of-return formulas, especially if a LEC participates in the
    NECA pools.[^131] While GCI is correct that the price cap mechanism
    facilitated certain pricing relaxation for price cap carriers, it
    does not follow that the cost-based standards of rate-of-return
    regulation cannot be used to accomplish the same ends.
    Rate-of-return regulation was the basis on which cost-based access
    rates were established in 1984 when the access charge structure was
    implemented, and it was the basis for all incumbent LEC tariff
    review until 1991. The tariff rates will be subject to the tariff
    review process and parties may also file complaints pursuant to
    section 208 of the Act.[^132]

## Consolidation of Long Term Support and Interstate Common Line Support

54. In this section, we adopt the Commission's tentative conclusion in
    the *MAG Further Notice* that LTS should be merged into the ICLS
    mechanism.[^133] In the *MAG Order*, the Commission retained the
    existing LTS mechanism solely to provide stability to the NECA
    common line pool during the transition to a more efficient access
    charge regime. At this time, we find that merging LTS into the ICLS
    mechanism will provide administrative simplicity by eliminating a
    duplicative and obsolete mechanism, without affecting the total
    support received by rate-of-return carriers or negatively affecting
    carriers that choose to participate in the NECA pool.

### Background

55. The LTS mechanism is a legacy of the transition to a competitive
    interstate long distance market after the breakup of AT&T. In the
    *1983 Access Charge Order*, the Commission created an access charge
    regime that included SLCs---monthly flat rate charges assessed on
    end users to recover a capped portion of interstate common line
    costs---and CCL charges, which are per-minute charges imposed on
    IXCs to recover any residual interstate common line costs.[^134] The
    NECA common line pool was developed as a means of permitting LECs to
    recover their interstate common line revenue requirements while
    maintaining a nationwide average CCL charge.[^135] The nationwide
    average CCL charge, in turn, permitted IXCs to more easily provide
    their services at nationwide deaveraged rates.[^136] The Commission
    initially prescribed mandatory pooling to achieve these goals, but
    recognized that pooling had some negative effects.[^137] In 1987,
    the Commission eliminated mandatory pooling, but created the LTS
    mechanism to permit carriers remaining in the pool to maintain their
    nationwide average CCL charges.[^138] The LTS mechanism, as
    originally designed, required LECs that had left the common line
    pool to make payments into the pool sufficient for the pool to
    charge the nationwide average CCL rate of non-pooling
    carriers.[^139]

56. In 1997, the Commission concluded that the existing LTS mechanism
    was not explicit, portable, and competitively neutral, as required
    the 1996 Act.[^140] The Commission concluded, however, that LTS
    continued to provide important benefits and should be retained in a
    modified form.[^141] Specifically, the Commission relied on the LTS
    mechanism's usefulness in reducing disparities among CCL charges
    imposed by LECs: "LTS payments serve the public interest by reducing
    the amount of loop cost that high cost \[rate-of-return carriers\]
    must recover from IXCs through CCL charges and thereby facilitating
    interexchange service in high cost areas, consistent with the
    express goals of section 254."[^142] To comply with the Act, the
    Commission concluded that LTS contributions must be removed from the
    access rate structure and recovered instead through the universal
    service fund.[^143] The Commission also modified LTS by fixing each
    carrier's LTS at its 1997 level plus growth based on nationwide
    average loop costs.[^144] As a result of these and other reforms, a
    nationwide average CCL charge was no longer possible, though LTS and
    the common line pool continued to reduce disparities among
    CCL charges.[^145]

57. In the *Universal Service Fourth Order on Reconsideration*, the
    Commission declined to eliminate the requirement that carriers
    participate in the NECA common line pool in order to be eligible for
    LTS.[^146] At that time, several petitioners argued that requiring
    pool membership as a condition of eligibility for LTS was
    unnecessary in light of the decision to remove LTS from the access
    rate structure and would hamper the ability of LTS recipients to
    pass savings from new efficiency gains on to their customers.[^147]
    The Commission concluded that maintenance of the existing LTS
    program was warranted to avoid disruption to rate-of-return carriers
    until it undertook comprehensive access charge and universal service
    reform for such carriers.[^148] In support of this conclusion, the
    Commission repeated its conclusion in the *Universal Service First
    Report and Order* that LTS reduced CCL charges and thereby
    facilitated interexchange service in high cost areas.[^149] The
    Commission also cited its desire not to "undermine the pool's
    usefulness in permitting participants to share the risk of
    substantial cost increases related to the CCL charge by pooling
    their costs and, thereby, charging an averaged CCL rate close to
    that charged by other carriers. This operation of the pool, like LTS
    payments, serves section 254's goal of facilitating interexchange
    service in high cost areas."[^150]

58. In the *MAG Order*, the Commission undertook comprehensive access
    charge and universal service reform for rate-of-return carriers. As
    noted above, the Commission created a new explicit universal service
    mechanism, ICLS, to replace implicit support provided by CCL
    charges.[^151] This support mechanism provides each incumbent
    rate-of-return carrier with its allowable common line revenues to
    the extent they cannot be recovered through end user charges and, at
    the present time, LTS.[^152] In this respect, ICLS is specifically
    designed to preserve incumbent rate-of-return carriers' ability to
    provide affordable, quality services to rural consumers while
    allowing carriers to recover their common line revenue requirements
    through a more efficient rate structure.[^153] The Commission
    concluded that ICLS should be available to all rate-of-return
    carriers that would otherwise have recovered interstate common line
    revenues through CCL charges, and not limited only to participants
    in the common line pool.[^154]

59. The Commission concluded that its action to eliminate the CCL charge
    in the *MAG Order* negated the primary reason for LTS's
    existence.[^155] The Commission considered immediately merging LTS
    into the ICLS mechanism, but concluded that LTS should be retained
    temporarily in order to ensure the stability of the NECA common line
    pool during the transition to the new access rate structure.[^156]
    Accordingly, the Commission retained the LTS mechanism and adopted
    rules providing that carriers leaving the pool and foregoing LTS
    would be ineligible for increased ICLS to make up for the lost
    LTS.[^157] The Commission also issued a notice seeking comment on
    its tentative conclusion to merge LTS into ICLS effective July 1,
    2003, after the completion of the *MAG Order*'s access charge
    reforms.[^158] The Commission explained that, during the interim,
    LTS would serve to reduce ICLS amounts for carriers but would not
    affect the total support levels or revenue recovery for
    rate-of-return carriers, provided they remained in the pool.[^159]

60. In response to the *MAG Further Notice*, the Commission received
    comments both supporting and opposing its tentative conclusion.
    AT&T, CUSC, and GCI support the Commission's tentative
    conclusion.[^160] NECA and Western Alliance argue that the merger of
    LTS into ICLS should be delayed pending "longer-term" analysis of
    the effects of the *MAG Order* reforms and other pending
    proceedings.[^161] NTCA contends without elaboration that merging
    LTS into ICLS will diminish the viability of the common line pool,
    which provides benefits to small rural carriers that participate in
    it.[^162] NRTA, OPASTCO, and USTA, the other members of MAG, have
    not adopted an official position on the issue of merging LTS into
    ICLS.[^163]

### Discussion

61. We adopt the Commission's tentative conclusion in the *MAG Order*
    that LTS should be merged into the ICLS mechanism. First, merging
    LTS into ICLS would promote administrative simplicity. LTS and ICLS
    duplicatively provide support directed to the rate-of-return
    carriers' interstate common line costs.[^164] ICLS is narrowly
    tailored to individual carriers' support requirements under the
    current interstate access rate structure, acting as the residual
    source of revenue for rate-of-return carriers and ensuring that they
    can recover their common line revenue requirements while providing
    service at an affordable rate. LTS, on the other hand, normally
    provides each carrier with a fixed level of support grown annually
    by inflation and may bear little relevance to a particular carrier's
    support requirements. In most cases, LTS will not be sufficient to
    ensure that a carrier will recover its common line revenue
    requirement under the current rate structure.[^165] Although LTS
    effectively served the purposes it was designed to serve, it was not
    designed to meet the requirements of the rate-of-return access
    charge rate structure in place after the *MAG Order*. Eliminating
    LTS will make the interstate access rate structure and universal
    service mechanisms simpler and more transparent.

62. Moreover, even proponents of retaining LTS acknowledge that the
    Commission's elimination of the CCL charge obviates LTS's primary
    historical purpose.[^166] As the history of LTS makes plain, the
    Commission's primary concern in developing and retaining LTS over
    the years has been to reduce disparities in CCL charges among LECs.
    In its original incarnation, LTS was specifically designed to
    guarantee that all carriers would charge a nationwide average CCL
    charge. [^167] When the Commission later amended its LTS rules to
    comply with the 1996 Act rather than eliminating LTS, the Commission
    continued to focus solely on the public interest served by LTS in
    reducing the disparities in CCL charges among rate-of-return
    carriers (though the mechanism no longer guaranteed the maintenance
    of a nationwide average CCL rate).[^168] Having outlived its primary
    purpose as of July 1, 2003, when the CCL charge was completely
    phased out, we conclude that LTS should be discontinued in the
    interest of administrative simplicity.

63. LTS's secondary role as an incentive for continued participation in
    the NECA common line pool also is no longer a valid reason to
    maintain LTS as a discrete support mechanism. LTS is only available
    to carriers that participate in the common line pool.[^169] Removing
    LTS as an artificial incentive for pool participation will give each
    carrier the freedom to choose to set rates outside of the NECA pool
    without sacrificing the universal service support that ensures
    affordable service for its customers. We recognize that NECA has
    made great strides in providing common line pool participants with
    increased flexibility in setting individual end user rates and that
    it anticipates further innovation in this respect.[^170] Carriers
    will undoubtedly regard such flexibility as a tremendous value in
    making their determinations whether to continue participating in the
    pool. Nonetheless, we find that each individual carrier is in the
    best position to decide whether pool participation promotes its
    particular best interests. We conclude that the decision whether to
    participate in the pool should be left to each individual carrier
    based on the pool's inherent administrative benefits for that
    carrier without additional regulatory inducements.

64. We do not believe that eliminating LTS as an incentive for pool
    membership will risk or undermine the important benefits for
    carriers that elect to remain in the NECA common line pool. We
    recognize the continued benefits of pooling identified by NECA and
    other commenters, including the reduction of administrative burdens
    associated with tariff-filing and protection against the effects of
    short-term revenue fluctuations.[^171] We anticipate that many, if
    not most, carriers will continue participating in the common line
    pool because of such benefits. In this regard, we note that the NECA
    traffic-sensitive pool remains viable despite no comparable
    regulatory incentive for participation. Based on examination of the
    record, however, we cannot conclude that the benefits of pooling
    warrant continued use of universal service support to induce
    carriers to participate in the pool if they are not otherwise
    inclined to do so.[^172]

65. Moreover, the regulatory concerns which justified the use of LTS to
    induce pool participation no longer hold. In the past, a non-pooling
    carrier might not recover its common line revenue requirement if it
    underprojected its costs or overprojected its demand in developing
    its access charge tariffs. The NECA common line pool spread that
    risk among all carriers, reducing the likelihood that any one
    carrier would suffer a major shortfall in revenue. Eliminating the
    CCL charge renders irrelevant this primary risk-pooling benefit of
    the common line pool. While the pool formerly ensured that an
    individual carrier would not suffer if CCL charge revenues were
    insufficient to recover its common line revenue requirements, the
    ICLS mechanism now ensures that no individual carrier will fail to
    recover its common line revenue requirement.

66. Finally, we note that we have taken a more measured approach by
    deferring implementation of this change for an additional year
    beyond that originally proposed by the Commission in the *MAG
    Further Notice*. The Commission adopted a cautious approach to
    access charge and universal service reform in the *MAG Order*, in
    recognition of the unique needs and broad diversity of
    rate-of-return carriers. The Commission had previously retained LTS
    pending comprehensive reform to the access rate structure. Absent
    any specific concern, we conclude that the elimination of the LTS
    mechanism should not be further deferred.[^173] The reformed access
    rate structure adopted in the *MAG Order* possesses greater inherent
    stability than the prior rate structure.[^174]

67. In order to effectuate this decision, we amend our rules to provide
    that LTS shall not be provided to any carrier beginning July
    1, 2004. We note that overall support will not be reduced because
    our existing rules will operate to automatically increase ICLS by an
    amount to match any LTS reduction. For that reason, no further
    action by the Commission is necessary to implement the merger of LTS
    into ICLS.

# SECOND further notice of proposed rulemaking

## Alternative Regulation and the All-or-Nothing Rule

68. In this further notice of proposed rulemaking, we seek additional
    comment on incentive regulation and on the all-or-nothing rule.
    CenturyTel and a group of carriers (ALLTEL, Madison River and TDS)
    filed separate alternative regulation proposals as *ex parte*
    filings in response to the 2002 notice.[^175] These two proposals
    each contain a feature that would permit a rate-of-return carrier to
    elect to move some, but not all, of its study areas to incentive
    regulation. We therefore will address the remaining all-or-nothing
    issues not resolved above in conjunction with our evaluation of the
    two incentive regulation plans before us.

### Background

#### All-or-Nothing Rule

69. Section 61.41 of the Commission's rules sets forth certain
    requirements governing elective entry into price cap regulation and
    restricting the ability of price cap carriers to leave price cap
    regulation. We describe these provisions in Section III.A, *supra.*
    That section also describes the issues raised in the *MAG Further
    Notice* concerning the modification or elimination of the
    all-or-nothing rule and the general tenor of the comments we
    received in response to the notice.

#### Alternative Regulation

70. The traditional regulatory model for incumbent LECs has long been
    rate-of-return regulation.[^176] LECs subject to rate-of-return
    regulation establish tariff rates targeted to achieve an authorized
    rate of return, today set at 11.25 percent.[^177] If the rates are
    deemed lawful when filed,[^178] LECs do not have to refund any
    overearnings.[^179] Otherwise, overall interstate earnings above
    11.25 percent for all access categories, plus a fixed increment of
    25 basis points, are subject to refund.[^180] Thus, because of the
    cost-plus nature of rate-of-return regulation, rate-of-return
    carriers are generally unable to retain permanently the benefits
    from any efficiencies that they may create during the two years in
    which a tariff is in effect. Efficiencies realized because of
    increased demand or lowered costs are used in developing rates for
    the subsequent two-year tariff period, which adjusts future rates so
    that the rate-of-return carrier's revised tariff rates will be set
    to produce an 11.25 percent rate of return for the future tariff
    period.

71. In 1991, the Commission established a price cap regulatory structure
    that applied to the BOCs and GTE on a mandatory basis. Other LECs
    could elect to participate in the price cap program, and several
    have. Under price cap regulation, carriers' access charges were
    limited by price indexes that were adjusted annually by an X-Factor,
    which, in the original price cap plan, reduced the price cap indexes
    to reflect price cap carrier productivity gains above those
    reflected in the gross domestic product - price index (GDP-PI).
    Price cap carrier customers received some of the benefits of
    increased efficiencies that the carrier achieves.[^181] Our price
    cap rules also provided for price cap indexes to be adjusted
    upwards, implementing a low-end adjustment, if a price cap carrier
    earned returns below a specified level in a given year. Moreover, a
    price cap carrier was allowed to petition the Commission to set its
    rates above the levels permitted by the price cap indexes based on a
    showing that the authorized rate levels would produce earnings that
    are so low as to be confiscatory. Until 1997, price cap carriers
    were required to \"share,\" or return to ratepayers, earnings above
    specified levels.[^182]

72. The Commission replaced the original price cap structure with the
    CALLS plan in 2000. Under the CALLS plan, carriers' access charges
    are limited by price indexes that are adjusted annually by an
    X-Factor, which now serves as a transitional mechanism for moving
    rates to target levels. The plan established three target levels for
    traffic-sensitive access rates.[^183] In addition, under the terms
    of the *Pricing Flexibility Order*, an eligible price cap carrier
    that elects to price access services using the Commission's pricing
    flexibility rules forgoes its right to an automatic low-end
    adjustment.

73. In the *MAG* *Further Notice*, we sought comment on several
    parameters that might be included in an alternative regulation plan.
    The Commission noted that a properly designed alternative regulatory
    approach will, over time, drive rates toward forward-looking costs
    and prepare regulated companies for competing in a deregulated
    market. In addition, an alternative regulatory mechanism may offer
    rate-of-return carriers a degree of pricing flexibility and the
    opportunity to share in the profits from the cost reductions they
    will make to prepare for competitive entry, while also sharing some
    of those savings with consumers. The Commission noted three
    principles: (1) rates must be just and reasonable, as required by
    section 201(b) of the Act;[^184] (2) adequate investment or service
    quality levels must be maintained;[^185] and (3) administrative
    burdens on carriers should be minimized.[^186] Finally, the
    Commission asked a variety of questions on specific issues relating
    to the development of an alternative regulatory plan. These
    inquiries included: (1) the extent to which a plan should be
    optional;[^187] (2) the appropriateness of including a carrier
    electing an alternative regulation plan in the NECA pooling
    process;[^188] (3) the baseline on which an incentive plan should be
    based, e.g., on revenue per line (RPL) or some other
    measure;[^189] (4) the extent to which a plan should provide for a
    productivity offset or contain a sharing mechanism;[^190] (5) the
    possibility of modifying the CALLS plan to permit rate-of-return
    carriers to adopt that structure;[^191] and (6) the need for
    additional reporting or other monitoring steps.[^192]

74. Several parties indicated that benefits would flow from the adoption
    of an alternative regulatory plan. For example, NRTA states that an
    optional plan will modernize regulation where incentive regulation
    can benefit consumers, as well as carriers, without jeopardizing the
    Act's commitment to comparable rural and urban services and prices
    and to the availability of evolving telecommunications capabilities
    in rural areas.[^193] ALLTEL argues that rate-of-return regulation
    limits a LEC's potential earnings (and thus the amount of capital
    available for investment) and limits a LEC's ability to respond to
    bundled and discounted competitive offerings.[^194] They submit that
    the Commission should build incentives into its regulation that
    encourage LECs to pursue the goals of investment, service quality,
    and advanced services independently.[^195] Parties differed widely,
    however, in the features that they believed a reasonable alternative
    regulatory plan should include.

75. Rate-of-return carriers generally argue that any alternative
    regulation plan should be optional and, given the operational
    variations among rate-of-return carriers, should permit a
    rate-of-return carrier to elect coverage by study area.[^196] ALLTEL
    states that because of the all-or-nothing rule, rate-of-return
    carriers serving rural areas cannot make the transition to price
    caps, even though price cap regulation might work for some study
    areas.[^197] Other parties, including IXCs, on the other hand, argue
    that any alternative regulation plan should be mandatory for larger
    rate-of-return carrier holding companies because they possess the
    size necessary to benefit from any incentives offered in an
    alternative regulation plan.[^198] These parties argue that if an
    alternative regulation plan were optional, a rate-of-return carrier
    could opt in at a cyclical cost peak or otherwise gold-plate their
    cost structure before electing an alternative plan. CUSC argues that
    all vestiges of revenue guarantees for rate-of-return carriers must
    be eliminated by expeditiously transitioning rate-of-return carriers
    to incentive regulation in order to avoid creating powerful
    incentives for inefficiency.[^199]

76. Several parties argue that a productivity factor must be part of any
    alternative regulation plan to ensure that consumers, not just the
    carriers, benefit from the plan.[^200] AT&T, GCI, and Sprint submit
    that productivity for local switching and transport will be higher
    than that for the common line category.[^201] Rate-of-return
    carriers, on the other hand, strenuously oppose the inclusion of a
    productivity factor in any plan.[^202] Some of these rate-of-return
    carrier interests also oppose any up-front productivity
    dividend.[^203] Several parties support the adoption of a sharing
    mechanism, despite its incentive-suppressing effects, and some would
    establish two productivity factors with different sharing
    requirements.[^204] Several parties support a low-end adjustment to
    preclude any confiscatory takings that might otherwise occur,[^205]
    although AT&T opposes such a provision unless sharing is
    required.[^206]

77. AT&T and GCI support the use of RPL[^207] as the baseline for
    establishing an incentive structure for common line services.[^208]
    ICORE submits that rate-of-return carriers with stable costs and
    reasonable access line growth rates may benefit from using RPL, but
    RPL will not work for small carriers with volatile costs, sporadic
    line growth, and acute sensitivity to external events.[^209] GSA
    argues that the Commission must monitor service quality performance
    and should not rely on other regulatory bodies for that
    purpose.[^210]

78. Several parties argued that a rate-of-return carrier electing an
    alternative regulation plan should be required to leave the NECA
    pools[^211] because incentive regulation, which would require
    carriers to take certain risks to obtain certain rewards, is
    inconsistent with the risk sharing effect of pooling.[^212] GCI
    asserts that a rate-of-return carrier must be required to file a
    tariff that is supported by a cost study before going into incentive
    regulation.[^213] Many rate-of-return carriers, however, argue that
    a rate-of-return carrier choosing alternative regulation should be
    allowed to continue in the NECA pools, because they believe that the
    pooling procedures can be modified to accommodate an incentive
    regulation plan.[^214] NECA states that accommodating incentive
    regulation within its existing pooling arrangements would require a
    settlement mechanism that would distribute access charge revenues to
    participating companies on a formula basis, similar to what is done
    for average schedule settlements.[^215] If targeted rates were
    included as part of an alternative regulation plan, NECA would apply
    existing rate banding methodologies to incentive companies based on
    incentive formula characteristics.[^216] AT&T argues that average
    schedule companies should not be allowed to elect an alternative
    regulation plan.[^217]

79. Subsequent to the close of the record, two alternative regulation
    plans were filed with the Commission. CenturyTel filed what is
    essentially a modified CALLS plan. ALLTEL, Madison River, and TDS
    filed a plan, called the Rate-of-Return Carrier Tariff Option, that
    would expand the availability of the tariff filing option in section
    61.39[^218] that is currently available only to carriers with 50,000
    or fewer access lines.[^219] These plans are described in the
    following section and attached in Appendices C and D.

### Alternative Regulation Proposals

80. *CenturyTel Proposal*. CenturyTel proposes a five-year plan that
    would modify the Commission's price cap rules to permit
    rate-of-return carriers to elect a modified form of price cap
    regulation on a study area basis. The plan would eliminate the
    all-or-nothing rules contained in section 61.41(c)(2) and (3) so
    that rate-of-return carriers that acquire price cap exchanges need
    not convert to price caps at the holding company level.[^220]
    CenturyTel also proposes that the Commission eliminate section
    61.41(b) so that rate-of-return carriers can elect price cap
    regulation on a study area basis.

81. Under CenturyTel's proposal, average traffic-sensitive (ATS) target
    rates would be established. These target traffic-sensitive rates in
    electing study areas would depend on line density at the holding
    company level, excluding lines acquired from mandatory price cap
    carriers. The plan would set the target rates at the lesser of: (1)
    \$0.0125 per minute, or the actual rate for carriers with a line
    density of less than 15 lines per square mile; or (2) \$0.0095 per
    minute, or the actual rate for carriers with a line density of at
    least 15, but less than 19, lines per square mile; or (3) the
    current levels up to a maximum ATS rate of \$0.0095 per minute for
    carriers with a line density higher than 19 lines per square mile
    for carriers newly electing the plan.[^221] CenturyTel would have
    the Commission set the productivity factor, or X-Factor, at GDP-PI
    for carriers electing price caps under this plan.[^222] The plan
    would contain a low-end adjustment set at 10.25 percent to ensure
    reasonable earnings opportunities. Finally, the CenturyTel plan
    would permit a rate-of-return carrier to elect price caps for some
    study areas and remove those study areas from the NECA pools, while
    leaving its other study areas in the NECA pools subject to
    rate-of-return regulation.[^223] CenturyTel proposes that
    rate-of-return carriers be able to choose alternative regulation at
    any annual or semi-annual tariff filing to be effective for the
    remainder of the five-year plan.[^224]

82. CenturyTel's plan would permit an electing rate-of-return carrier to
    move its rate to a target rate on a revenue-neutral basis by
    allowing a rate-of-return carrier to recover the difference between
    the target rate and its existing revenue requirement through an ATS
    additive to ICLS; the plan would freeze the ATS additive on a study
    area basis for the duration of the plan.[^225] The plan would also
    freeze ICLS and LTS on a per-line basis for electing carriers for
    the plan's duration,[^226] as well as freezing LSS on a study area
    basis for the plan's duration.[^227] The \$650 million fund of
    interstate CALLS support would not be available to the new price cap
    carriers.[^228] High-cost loop support would be frozen on a per-line
    basis, subject to adjustment for GDP-CPI.[^229]

83. *Rate-of-Return Carrier Tariff Option*. The Rate-of-Return Carrier
    Tariff Option would extend the current section 61.39 small carrier
    tariff option to all rate-of-return carriers, not just those serving
    50,000 or fewer lines.[^230] Under this option, electing
    rate-of-return carriers would file tariffs for a two-year period,
    with rates based on historical costs and demand. Initial
    traffic-sensitive rates would be established using costs and demand
    for the previous calendar year, while rates for succeeding tariff
    periods would be based on the actual costs and demand of the two
    preceding years. Thus, efficiencies achieved during the two-year
    tariff period would not be reflected in the form of rates until the
    next two-year tariff period.[^231] Electing rate-of-return carriers
    would develop SLCs and other end user charges based on historical
    costs, just as they do for traffic-sensitive charges.

84. The Rate-of-Return Carrier Tariff Option would initially establish
    per-line, common line support at the historical level of costs
    recovered through universal service divided by the historical level
    of access lines.[^232] Specifically, the historical interstate
    common line revenue requirement, including line port and TIC
    reallocations, would be reduced by SLC revenues, the Special Access
    Surcharge, the Line Port Costs in Excess of Basic Analog Service,
    and universal service funding assessments recovered from end
    users.[^233] The proposal would reassess the level of support every
    two years, based on the cost and demand levels during the previous
    two-year period.[^234] Finally, the proposal would not alter the
    manner in which LSS and high-cost loop support is calculated or
    obtained.

### Discussion

85. With this further notice, we are taking a more focused look at the
    issues surrounding alternative regulation plans for rate-of-return
    carriers based on the two proposals presented to the Commission. In
    conjunction with that review, we will address the issues surrounding
    the retention or modification of the all-or-nothing rule as it
    relates to the ability of rate-of-return carriers to elect to adopt
    an alternative regulation plan for only some of its study
    areas.[^235] We build upon the record of the earlier notice as we
    proceed with our evaluation of alternative regulation opportunities
    and the all-or-nothing rule.

86. The two plans are each premised on a carrier's ability to elect
    alternative regulation on a study area basis, rather than on a
    holding company level, and are thus dependent on modification of the
    all-or-nothing rule. We tentatively conclude that any alternative
    regulation plan we adopt will be optional on the part of the
    rate-of-return carrier and will permit a rate-of-return carrier to
    elect participation in the alternative plan by study area. Our
    experience over the years in attempting to develop incentive
    regulation for smaller companies has led us to the view that it
    would not be possible to devise a plan suitable for mandatory
    imposition on all rate-of-return carriers. Likewise, it appears that
    most rate-of-return holding company groups are composed of very
    diverse operating companies, and that such companies will not be
    able to elect incentive regulation if they must do it on an
    "all-or-nothing" basis. We seek comment on these tentative
    conclusions, but we also ask that parties evaluate the plans as
    though they were going to be implemented on a study-area basis.

87. We invite parties to comment on the two alternative regulation
    proposals in the record. We ask parties to indicate whether one,
    both, or neither of the plans should be available. Parties may
    propose modifications to the two proposals. In doing so, they should
    be guided by the general inquiries that the Commission made in the
    *MAG Further Notice* with respect to the evaluation of both
    alternative plans and the modification of the all-or-nothing
    rule.[^236] We highlight some of these issues below. We also ask
    parties to address the implications of CenturyTel's proposed
    five-year time frame on the resolution of long-term access issues
    raised in the intercarrier compensation proceeding.[^237]

88. The CenturyTel plan essentially freezes access rates by proposing a
    productivity factor equal to GDP-PI, while the Rate-of-Return
    Carrier Tariff Option would adjust rates every two years to reflect
    any efficiency gains. We invite parties to comment on whether these
    proposals would produce rates that would be just and reasonable, as
    required by section 201(b) of the Act,[^238] and not unreasonably
    discriminatory, as required by section 202(a) of the Act.[^239]
    Parties are asked to address whether the CenturyTel plan should
    contain a productivity factor other than GDP-PI. Parties proposing
    such productivity factors are asked to explain in detail how such
    factors can be accurately calculated for the diverse group of
    carriers currently subject to rate-of-return regulation.[^240] The
    use of GDP-PI would mean that lower traffic-sensitive rates
    resulting from traffic growth would no longer occur as they would
    under rate-of-return regulation. Parties should address whether, as
    an alternative approach to an X-Factor, a G-factor should be
    used.[^241] A G-factor would adjust the rate cap for rates of
    traffic-sensitive services based on the rate of growth of the
    relevant traffic-sensitive measure, *e.g.*, minutes. If so, should
    it be set based on historical data, or based on projections for the
    next tariff period? Alternatively, should the CenturyTel plan
    include a sharing mechanism if a productivity factor higher than
    that proposed, or a G-factor, is not adopted? Parties should address
    the need for, and level of, a low-end adjustment factor and how its
    level should be set in relation to any productivity factor,
    G-factor, or sharing requirement that might be adopted. Finally, we
    invite parties to discuss the implications for the Commission's
    goals if CenturyTel were the only carrier to elect its proposed form
    of alternative regulation.

89. Parties are also invited to comment on the effect that each plan
    will have on the incentives of electing rate-of-return carriers to
    invest in, and maintain, their exchange access facilities and to
    ensure that service quality is not degraded. We ask parties to
    evaluate the differences between the two plans on this score and to
    address what additional steps, if any, would be necessary to ensure
    that service quality does not decline in the face of any incentive
    to increase profits. We also ask parties to address the effects that
    the option to elect by study area and at a time of the
    rate-of-return carrier's choosing would have on these investment and
    service quality considerations.

90. Parties should also address the universal service aspects of the two
    plans. To what extent is either the CenturyTel plan or the
    Rate-of-Return Carrier Tariff Option likely to increase the size of
    the universal service fund, and how would support levels change over
    time? What effect, if any, would adoption of either plan have on the
    overall sustainability of universal service? What incentives would
    be created if, as CenturyTel proposes, high-cost loop support is
    fixed on a per-line basis and grows by GDP-PI, without regard to
    investment in loop facilities? With respect to either proposal,
    commenters should provide a detailed explanation as to how support
    should be calculated and the administrative burdens entailed.
    Commenters should also address how the proposal would serve the
    principles of section 254 of the Act.

91. We tentatively conclude that the opportunity to elect alternative
    regulation on a study area basis should be available only to holding
    company groups in which all non-average schedule companies file
    their own cost-based tariffs. We are especially concerned about the
    ability of any NECA internal process, or formula, to insulate the
    remaining pool members from the risk that may be introduced by a
    carrier's adoption of an alternative regulation plan. It will also
    be important to consider the extent to which pool participation
    makes cost shifting more difficult to detect. Parties should also
    address what modifications in tariff cost support rules and/or
    reporting requirements would be necessary under two scenarios: (1)
    the Commission were to require holding companies electing
    alternative regulation to remove all study areas from the NECA
    pools, and (2) the Commission were to permit some or all study areas
    of rate-of-return carriers electing alternative regulation to
    participate in the NECA pools.

92. We tentatively conclude that existing accounting and regulatory
    processes should permit parties and the Commission to detect cost
    shifting by the rate-of-return carriers that file cost-based access
    tariffs. IXCs and competitors argue that the incentive for
    rate-of-return carriers to shift costs continues to exist and that
    existing processes are inadequate to check such cost shifting. We
    note, however, that this debate has been joined in very general
    terms, with little in the way of specific detail. We ask parties to
    identify the most significant means by which a rate-of-return
    carrier could shift costs from a study area electing an alternative
    regulation plan to a study area subject to rate-of-return
    regulation. Parties should also describe why existing procedures
    will, or will not, permit the cost shift to be identified and
    quantified. To the extent parties argue existing processes are
    inadequate, we invite them to identify with specificity what
    additional reporting or regulatory procedures would allow the
    parties and the Commission to identify and quantify cost shifts.

93. The debate over incentive regulation is often clouded by uncertainty
    as to whether the CALLS plan contemplated that additional study
    areas would enter that plan during its five-year term.[^242] Three
    years have passed and no rate-of-return carrier has sought entry. To
    eliminate the uncertainty, we tentatively conclude that the CALLS
    plan was not designed to be open to new carriers or study areas. The
    CALLS plan began as a voluntarily negotiated agreement among price
    cap carriers and certain IXCs that addressed pricing and universal
    service concerns as a package, without consideration of possible
    participation by carriers that were then under rate-of-return
    regulation.[^243] That CALLS was not intended to accommodate
    additional entry is most clearly indicated by the fact that in
    adopting the plan, the Commission made no provision for how the
    universal service component of the CALLS plan would address future
    expansion to new carriers.[^244] We therefore believe the rules
    should be amended to clarify that new carriers or carrier study
    areas may not elect this plan. We invite parties to comment on this
    tentative conclusion.

94. We also tentatively conclude that, whatever final rule we adopt with
    respect to the election of alternative regulation on a study area
    basis, that rule should also apply when carriers under different
    regulatory plans come together by merger or acquisition. This would
    include those cases in which a price cap carrier acquired a
    rate-of-return study area, but could not bring it into the CALLS
    plan, if we adopt our tentative conclusion in the previous
    paragraph. Thus, if we were to permit rate-of-return carriers to
    elect alternative regulation by study area, the current
    ALLTEL/Aliant, Verizon/PRTC, and Valor/Kerrville waivers of the
    all-or-nothing rule would no longer be necessary. Under this
    tentative conclusion, affected carriers would continue to receive
    universal service support through the preexisting support
    mechanism(s). We seek comment on this tentative conclusion. Parties
    opposing this approach should indicate how they would harmonize the
    interrelated considerations arising from mergers or acquisitions
    between carriers subject to different regulatory regimes.

# procedural matters

## *Ex Parte* Requirements

95. This proceeding will continue to be governed by
    "permit-but-disclose" *ex parte* procedures that are applicable to
    non-restricted proceedings under 47 C.F.R. § 1.1206. Parties making
    oral *ex parte* presentations are reminded that memoranda
    summarizing the presentation must contain a summary of the substance
    of the presentation and not merely a listing of the subjects
    discussed. More than a one- or two-sentence description of the views
    and arguments presented generally is required. *See* 47 C.F.R. §
    1.1206(b)(2). Other rules pertaining to oral and written
    presentations are set forth in section 1.1206(b) as well. Interested
    parties are to file any written *ex parte* presentations in this
    proceeding with the Commission's Secretary, Marlene H. Dortch, 445
    12^th^ Street, S.W., TW-B204, Washington, D.C. 20554, and serve with
    one copy: Pricing Policy Division, Wireline Competition Bureau,
    445 12^th^ Street, S.W., Room 5-A452, Washington, D.C. 20554, Attn:
    Douglas Slotten. Parties shall also serve with one copy: Qualex
    International, Portals II, 445 12^th^ Street, S.W., Room CY-B402,
    Washington, D.C. 20554, (202) 863-2893, \<qualexint@aol.com\>.

## Paperwork Reduction Act Analysis

96. The *Report and Order* herein has been analyzed with respect to the
    Paperwork Reduction Act of 1995 and found to impose new or modified
    reporting and recordkeeping requirements or burdens on the public.
    Implementation of these new or modified reporting and recordkeeping
    requirements will be subject to approval by the Office of Management
    and Budget (OMB) as prescribed by the Act, and will go into effect
    upon announcement in the Federal Register of OMB approval.

97. The incorporated *Second Further Notice of Proposed Rulemaking*
    (*Second Further Notice*) contains either a proposed or modified
    information collection. As part of the continuing effort to reduce
    paperwork burdens, we invite the general public and the OMB to
    comment on the information collections contained in this *Second
    Further Notice*, as required by the Paperwork Reduction Act of 1995,
    44 U.S.C. § 3501 *et seq*. Public and agency comments are due at the
    same time as other comments on this *Second Further Notice*; OMB
    comments are due 60 days from the date of publication of this
    *Second Further Notice* in the Federal Register. Comments should
    address: (1) 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; (2) the accuracy of the Commission's burden estimates; (3)
    ways to enhance the quality, utility, and clarity of the information
    collected; and (4) 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.

## Final Regulatory Flexibility Act Analysis

98. The Regulatory Flexibility Act of 1980, as amended (RFA), [^245]
    requires that a regulatory flexibility analysis be prepared for
    notice-and-comment rule making proceedings, unless the agency
    certifies that "the rule will not, if promulgated, have a
    significant economic impact on a substantial number of small
    entities."[^246] The RFA generally defines the term "small entity"
    as having the same meaning as the terms "small business," "small
    organization," and "small governmental jurisdiction."[^247] In
    addition, the term "small business" has the same meaning as the term
    "small business concern" under the Small Business Act.[^248]
    A "small business concern" is one which: (1) is independently owned
    and operated; (2) is not dominant in its field of operation; and (3)
    satisfies any additional criteria established by the Small Business
    Administration (SBA).[^249]

99. As required by the RFA, an Initial Regulatory Flexibility Analysis
    (IRFA) was incorporated into the *MAG Further Notice*.[^250] The
    Commission sought written public comment on the proposals in the
    *MAG Further Notice*, including comment on the IRFA. This present
    Final Regulatory Flexibility Analysis (FRFA) conforms to the RFA, as
    amended.[^251] To the extent that any statement in this FRFA is
    perceived as creating ambiguity with respect to our rules or
    statements made in the preceding sections of this Order, the rules
    and statements set forth in those preceding sections shall be
    controlling.

### Need for, and Objectives of, the Rules

100. In this Order, the Commission modifies its interstate access charge
     and universal service rules for LECs subject to rate-of-return
     regulation. The Order carefully considers the needs of small and
     mid-sized local telephone companies serving rural and high-cost
     areas, in order to help provide certainty and stability for such
     carriers, encourage investment in rural America, and provide
     important consumer benefits.

101. This Order addresses three of the issues raised in the *MAG Further
     Notice.* First, we modify the "all-or-nothing" rule to permit
     rate-of-return LECs to bring recently acquired price cap lines back
     to rate-of-return regulation. This will reduce the administrative
     burdens on small rate-of-return carriers of seeking a waiver of the
     all-or-nothing rule because it will permit acquired lines to be
     returned to rate-of-return regulation, and thereby will reduce the
     uncertainty associated with such acquisitions. Second, we grant
     rate-of-return carriers the authority immediately to provide
     geographically deaveraged transport and special access rates,
     subject to certain limitations. This action increases the
     efficiency of the interstate access charge rate structure by moving
     rates towards cost. Finally, we merge Long Term Support (LTS) into
     the ICLS mechanism. This will promote administrative simplicity by
     eliminating an unnecessarily duplicative support mechanism without
     affecting the total support received by rate-of-return carriers,
     and without negatively affecting carriers that choose to
     participate in the NECA common line pool. Because LTS, but not
     ICLS, is conditioned on participation in the common line pool, the
     merger will permit each rate-of-return carrier the freedom to
     choose whether to set its own rates without sacrificing universal
     service support.

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

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

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

103. The RFA directs agencies to provide a description of, and, where
     feasible, an estimate of the number of small entities that may be
     affected by the rules adopted herein.[^252] In this section, we
     further describe and estimate the number of small entity licensees
     and regulatees that may also be directly affected by rules adopted
     in this order. The most reliable source of information regarding
     the total numbers of certain common carrier and related providers
     nationwide, as well as the number of commercial wireless entities,
     appears to be the data that the Commission publishes in its *Trends
     in Telephone Service* report.[^253] The SBA has developed small
     business size standards for wireline and wireless small businesses
     within the three commercial census categories of Wired
     Telecommunications Carriers,[^254] Paging,[^255] and Cellular and
     Other Wireless Telecommunications. [^256] Under these categories, a
     business is small if it has 1,500 or fewer employees. Below, using
     the above size standards and others, we discuss the total estimated
     numbers of small businesses that might be affected by our actions.

104. We have included small incumbent LECs in this present RFA analysis.
     As noted above, a "small business" under the RFA is one that,
     *inter alia*, meets the pertinent small business size standard
     (*e.g.*, a wired telecommunications carrier having 1,500 or fewer
     employees), and "is not dominant in its field of operation."[^257]
     The SBA's Office of Advocacy contends that, for RFA purposes, small
     incumbent LECs are not dominant in their field of operation because
     any such dominance is not "national" in scope.[^258] We have
     therefore included small incumbent LECs in this RFA analysis,
     although we emphasize that this RFA action has no effect on
     Commission analyses and determinations in other, non-RFA contexts.

105. *Wired Telecommunications Carriers*. The SBA has developed a small
     business size standard for Wired Telecommunications Carriers, which
     consists of all such companies having 1,500 or fewer
     employees.[^259] According to Census Bureau data for 1997, there
     were 2,225 firms in this category, total, that operated for the
     entire year.[^260] Of this total, 2,201 firms had employment of 999
     or fewer employees, and an additional 24 firms had employment of
     1,000 employees or more.[^261] Thus, under this size standard, the
     majority of firms can be considered small.

106. *Incumbent Local Exchange Carriers (LECs)*. Neither the Commission
     nor the SBA has developed a size standard for small businesses
     specifically applicable to incumbent local exchange services. The
     closest applicable size standard under SBA rules is for Wired
     Telecommunications Carriers. Under that size standard, such a
     business is small if it has 1,500 or fewer employees.[^262]
     According to Commission data,[^263] 1,337 carriers reported that
     they were engaged in the provision of local exchange services. Of
     these 1,337 carriers, an estimated 1,032 have 1,500 or fewer
     employees and 305 have more than 1,500 employees. Consequently, the
     Commission estimates that most providers of incumbent local
     exchange service are small businesses that may be affected by the
     rules and policies adopted herein.

107. *Competitive Local Exchange Carriers (CLECs), Competitive Access
     Providers (CAPs), and "Other Local Exchange Carriers."* Neither the
     Commission nor the SBA has developed a size standard for small
     businesses specifically applicable to providers of competitive
     exchange services or to competitive access providers or to "Other
     Local Exchange Carriers," all of which are discrete categories
     under which TRS data are collected. The closest applicable size
     standard under SBA rules is for Wired Telecommunications Carriers.
     Under that size standard, such a business is small if it has 1,500
     or fewer employees.[^264] According to Commission data,[^265] 609
     companies reported that they were engaged in the provision of
     either competitive access provider services or competitive local
     exchange carrier services. Of these 609 companies, an estimated 458
     have 1,500 or fewer employees and 151 have more than 1,500
     employees.[^266] In addition, 35 carriers reported that they were
     "Other Local Service Providers." Of the 35 "Other Local Service
     Providers," an estimated 34 have 1,500 or fewer employees and one
     has more than 1,500 employees.[^267] Consequently, the Commission
     estimates that most providers of competitive local exchange
     service, competitive access providers, and "Other Local Exchange
     Carriers" are small entities that may be affected by the rules and
     policies adopted herein.

108. *Interexchange Carriers (IXCs)*. Neither the Commission nor the SBA
     has developed a size standard for small businesses specifically
     applicable to interexchange services. The closest applicable size
     standard under SBA rules is for Wired Telecommunications Carriers.
     Under that size standard, such a business is small if it has 1,500
     or fewer employees.[^268] According to Commission data,[^269] 261
     companies reported that their primary telecommunications service
     activity was the provision of interexchange services. Of these 261
     companies, an estimated 223 have 1,500 or fewer employees and
     38 have more than 1,500 employees.[^270] Consequently, the
     Commission estimates that the majority of interexchange service
     providers are small entities that may be affected by the rules and
     policies adopted herein.

109. *Operator Service Providers (OSPs).* Neither the Commission nor the
     SBA has developed a size standard for small businesses specifically
     applicable to operator service providers. The closest applicable
     size standard under SBA rules is for Wired Telecommunications
     Carriers. Under that size standard, such a business is small if it
     has 1,500 or fewer employees.[^271] According to Commission
     data,[^272] 23 companies reported that they were engaged in the
     provision of operator services. Of these 23 companies, an estimated
     22 have 1,500 or fewer employees and one has more than 1,500
     employees.[^273] Consequently, the Commission estimates that the
     majority of operator service providers are small entities that may
     be affected by the rules and policies adopted herein.

110. *Payphone Service Providers (PSPs).* Neither the Commission nor the
     SBA has developed a size standard for small businesses specifically
     applicable to payphone service providers. The closest applicable
     size standard under SBA rules is for Wired Telecommunications
     Carriers. Under that size standard, such a business is small if it
     has 1,500 or fewer employees.[^274] According to Commission
     data,[^275] 761 companies reported that they were engaged in the
     provision of payphone services. Of these 761 companies, an
     estimated 757 have 1,500 or fewer employees and four have more than
     1,500 employees.[^276] Consequently, the Commission estimates that
     the majority of payphone service providers are small entities that
     may be affected by the rules and policies adopted herein.

111. *Prepaid Calling Card Providers.* The SBA has developed a size
     standard for a small business within the category of
     Telecommunications Resellers. Under that SBA size standard, such a
     business is small if it has 1,500 or fewer employees.[^277]
     According to Commission data,[^278] 37 companies reported that they
     were engaged in the provision of prepaid calling cards. Of these 37
     companies, an estimated 36 have 1,500 or fewer employees and one
     has more than 1,500 employees.[^279] Consequently, the Commission
     estimates that the majority of prepaid calling card providers are
     small entities that may be affected by the rules and policies
     adopted herein.

112. *Other Toll Carriers.* Neither the Commission nor the SBA has
     developed a size standard for small businesses specifically
     applicable to "Other Toll Carriers." This category includes toll
     carriers that do not fall within the categories of interexchange
     carriers, operator service providers, prepaid calling card
     providers, satellite service carriers, or toll resellers.
     The closest applicable size standard under SBA rules is for Wired
     Telecommunications Carriers. Under that size standard, such a
     business is small if it has 1,500 or fewer employees.[^280]
     According to Commission's data,[^281] 92 companies reported that
     their primary telecommunications service activity was the provision
     of other toll carriage. Of these 92 companies, an estimated 82 have
     1,500 or fewer employees and ten have more than 1,500
     employees.[^282] Consequently, the Commission estimates that most
     "Other Toll Carriers" are small entities that may be affected by
     the rules and policies adopted herein.

113. *Paging*. The SBA has developed a small business size standard for
     Paging, which consists of all such firms having 1,500 or fewer
     employees.[^283] According to Census Bureau data for 1997, in this
     category there was a total of 1,320 firms that operated for the
     entire year.[^284] Of this total, 1,303 firms had employment of 999
     or fewer employees, and an additional seventeen firms had
     employment of 1,000 employees or more.[^285] Thus, under this size
     standard, the majority of firms can be considered small.

114. *Cellular and Other Wireless Telecommunications*. The SBA has
     developed a small business size standard for Cellular and Other
     Wireless Telecommunication, which consists of all such firms having
     1,500 or fewer employees.[^286] According to Census Bureau data for
     1997, in this category there was a total of 977 firms that operated
     for the entire year.[^287] Of this total, 965 firms had employment
     of 999 or fewer employees, and an additional twelve firms had
     employment of 1,000 employees or more.[^288] Thus, under this size
     standard, the majority of firms can be considered small.

115. *Broadband Personal Communications Service.* The broadband Personal
     Communications Service (PCS) spectrum is divided into six frequency
     blocks designated A through F, and the Commission has held auctions
     for each block. The Commission defined "small entity" for Blocks C
     and F as an entity that has average gross revenues of \$40 million
     or less in the three previous calendar years.[^289] For Block F, an
     additional classification for "very small business" was added and
     is defined as an entity that, together with its affiliates, has
     average gross revenues of not more than \$15 million for the
     preceding three calendar years."[^290] These standards defining
     "small entity" in the context of broadband PCS auctions have been
     approved by the SBA.[^291] No small businesses, within the
     SBA-approved small business size standards bid successfully for
     licenses in Blocks A and B. There were 90 winning bidders that
     qualified as small entities in the Block C auctions. A total of 93
     small and very small business bidders won approximately 40 percent
     of the 1,479 licenses for Blocks D, E, and F.[^292] On March 23,
     1999, the Commission re-auctioned 347 C, D, E, and F Block
     licenses. There were 48 small business winning bidders. On January
     26, 2001, the Commission completed the auction of 422 C and F
     Broadband PCS licenses in Auction No. 35. Of the 35 winning bidders
     in this auction, 29 qualified as "small" or "very small"
     businesses. Based on this information, the Commission concludes
     that the number of small broadband PCS licenses will include the 90
     winning C Block bidders, the 93 qualifying bidders in the D, E, and
     F Block auctions, the 48 winning bidders in the 1999 re-auction,
     and the 29 winning bidders in the 2001 re-auction, for a total of
     260 small entity broadband PCS providers, as defined by the SBA
     small business size standards and the Commission's auction rules.
     We note that, as a general matter, the number of winning bidders
     that qualify as small businesses at the close of an auction does
     not necessarily represent the number of small businesses currently
     in service. Also, the Commission does not generally track
     subsequent business size unless, in the context of assignments or
     transfers, unjust enrichment issues are implicated.

116. *Narrowband Personal Communications Services.* To date, two
     auctions of narrowband personal communications services (PCS)
     licenses have been conducted. For purposes of the two auctions that
     have already been held, "small businesses" were entities with
     average gross revenues for the prior three calendar years of \$40
     million or less. Through these auctions, the Commission has awarded
     a total of 41 licenses, out of which 11 were obtained by small
     businesses. To ensure meaningful participation of small business
     entities in future auctions, the Commission has adopted a
     two-tiered small business size standard in the *Narrowband PCS
     Second Report and Order*.[^293] A "small business" is an entity
     that, together with affiliates and controlling interests, has
     average gross revenues for the three preceding years of not more
     than \$40 million. A "very small business" is an entity that,
     together with affiliates and controlling interests, has average
     gross revenues for the three preceding years of not more than \$15
     million. The SBA has approved these small business size
     standards.[^294] In the future, the Commission will auction 459
     licenses to serve Metropolitan Trading Areas (MTAs) and 408
     response channel licenses. There is also one megahertz of
     narrowband PCS spectrum that has been held in reserve and that the
     Commission has not yet decided to release for licensing. The
     Commission cannot predict accurately the number of licenses that
     will be awarded to small entities in future actions. However, four
     of the 16 winning bidders in the two previous narrowband PCS
     auctions were small businesses, as that term was defined under the
     Commission's Rules. The Commission assumes, for purposes of this
     analysis, that a large portion of the remaining narrowband PCS
     licenses will be awarded to small entities. The Commission also
     assumes that at least some small businesses will acquire narrowband
     PCS licenses by means of the Commission's partitioning and
     disaggregation rules.

117. *220 MHz Radio Service -- Phase I Licensees.* The 220 MHz service
     has both Phase I and Phase II licenses. Phase I licensing was
     conducted by lotteries in 1992 and 1993. There are approximately
     1,515 such non-nationwide licensees and four nationwide licensees
     currently authorized to operate in the 220 MHz band. The Commission
     has not developed a small business size standard for small entities
     specifically applicable to such incumbent 220 MHz Phase I
     licensees. To estimate the number of such licensees that are small
     businesses, we apply the small business size standard under the SBA
     rules applicable to "Cellular and Other Wireless
     Telecommunications" companies. This standard provides that such a
     company is small if it employs no more than 1,500 persons.[^295]
     According to Census Bureau data for 1997, there were 977 firms in
     this category, total, that operated for the entire year.[^296] Of
     this total, 965 firms had employment of 999 or fewer employees, and
     an additional 12 firms had employment of 1,000 employees or
     more.[^297] If this general ratio continues in the context of Phase
     I 220 MHz licensees, the Commission estimates that nearly all such
     licensees are small businesses under the SBA's small business size
     standard.

118. *220 MHz Radio Service -- Phase II Licensees.* The 220 MHz service
     has both Phase I and Phase II licenses. The Phase II 220 MHz
     service is a new service, and is subject to spectrum auctions. In
     the *220 MHz Third Report and Order*, we adopted a small business
     size standard for "small" and "very small" businesses for purposes
     of determining their eligibility for special provisions such as
     bidding credits and installment payments.[^298] This small business
     size standard indicates that a "small business" is an entity that,
     together with its affiliates and controlling principals, has
     average gross revenues not exceeding \$15 million for the preceding
     three years.[^299] A "very small business" is an entity that,
     together with its affiliates and controlling principals, has
     average gross revenues that do not exceed \$3 million for the
     preceding three years. The SBA has approved these small business
     size standards.[^300] Auctions of Phase II licenses commenced on
     September 15, 1998, and closed on October 22, 1998.[^301] In the
     first auction, 908 licenses were auctioned in three different-sized
     geographic areas: three nationwide licenses, 30 Regional Economic
     Area Group (EAG) Licenses, and 875 Economic Area (EA) Licenses. Of
     the 908 licenses auctioned, 693 were sold. Thirty-nine small
     businesses won licenses in the first 220 MHz auction. The second
     auction included 225 licenses: 216 EA licenses and 9 EAG licenses.
     Fourteen companies claiming small business status won 158
     licenses.[^302]

119. *800 MHz and 900 MHz Specialized Mobile Radio Licenses.* The
     Commission awards "small entity" and "very small entity" bidding
     credits in auctions for Specialized Mobile Radio (SMR) geographic
     area licenses in the 900 MHz bands to firms that had revenues of no
     more than \$15 million in each of the three previous calendar
     years, or that had revenues of no more than \$3 million in each of
     the previous calendar years.[^303] The SBA has approved these size
     standards.[^304] The Commission awards "small entity" and "very
     small entity" bidding credits in auctions for Specialized Mobile
     Radio (SMR) geographic area licenses in the 800 MHz bands to firms
     that had revenues of no more than \$40 million in each of the three
     previous calendar years, or that had revenues of no more than \$15
     million in each of the previous calendar years.[^305] These bidding
     credits apply to SMR providers in the 800 MHz and 900 MHz bands
     that either hold geographic area licenses or have obtained extended
     implementation authorizations. The Commission does not know how
     many firms provide 800 MHz or 900 MHz geographic area SMR service
     pursuant to extended implementation authorizations, nor how many of
     these providers have annual revenues of no more than \$15 million.
     One firm has over \$15 million in revenues. The Commission assumes,
     for purposes here, that all of the remaining existing extended
     implementation authorizations are held by small entities, as that
     term is defined by the SBA. The Commission has held auctions for
     geographic area licenses in the 800 MHz and 900 MHz SMR bands.
     There were 60 winning bidders that qualified as small or very small
     entities in the 900 MHz SMR auctions. Of the 1,020 licenses won in
     the 900 MHz auction, bidders qualifying as small or very small
     entities won 263 licenses. In the 800 MHz auction, 38 of the 524
     licenses won were won by small and very small entities. We note
     that, as a general matter, the number of winning bidders that
     qualify as small businesses at the close of an auction does not
     necessarily represent the number of small businesses currently in
     service. Also, the Commission does not generally track subsequent
     business size unless, in the context of assignments or transfers,
     unjust enrichment issues are implicated.

120. *Private and Common Carrier Paging.* In the Paging *Third Report
     and Order*, we developed a small business size standard for "small
     businesses" and "very small businesses" for purposes of determining
     their eligibility for special provisions such as bidding credits
     and installment payments.[^306] A "small business" is an entity
     that, together with its affiliates and controlling principals, has
     average gross revenues not exceeding \$15 million for the preceding
     three years. Additionally, a "very small business" is an entity
     that, together with its affiliates and controlling principals, has
     average gross revenues that are not more than \$3 million for the
     preceding three years. The SBA has approved these size standards.
     [^307] An auction of Metropolitan Economic Area licenses commenced
     on February 24, 2000, and closed on March 2, 2000.[^308] Of the 985
     licenses auctioned, 440 were sold. Fifty-seven companies claiming
     small business status won. At present, there are approximately
     24,000 Private-Paging site-specific licenses and 74,000 Common
     Carrier Paging licenses. According to the most recent *Trends in
     Telephone Service,* 471 carriers reported that they were engaged in
     the provision of either paging and messaging services or other
     mobile services.[^309] Of those, the Commission estimates that 450
     are small, under the SBA business size standard specifying that
     firms are small if they have 1,500 or fewer employees.[^310]

121. *700 MHz Guard Band Licensees.* In the 700 MHz Guard Band Order, we
     adopted a small business size standard for "small businesses" and
     "very small businesses" for purposes of determining their
     eligibility for special provisions such as bidding credits and
     installment payments.[^311] A "small business" as an entity that,
     together with its affiliates and controlling principals, has
     average gross revenues not exceeding \$15 million for the preceding
     three years. Additionally, a "very small business" is an entity
     that, together with its affiliates and controlling principals, has
     average gross revenues that are not more than \$3 million for the
     preceding three years. An auction of 52 Major Economic Area (MEA)
     licenses commenced on September 6, 2000, and closed on September
     21, 2000.[^312] Of the 104 licenses auctioned, 96 licenses were
     sold to nine bidders. Five of these bidders were small businesses
     that won a total of 26 licenses. A second auction of 700 MHz Guard
     Band licenses commenced on February 13, 2001 and closed on February
     21, 2001. All eight of the licenses auctioned were sold to three
     bidders. One of these bidders was a small business that won a total
     of two licenses.[^313]

122. *Rural Radiotelephone Service.* The Commission has not adopted a
     size standard for small businesses specific to the Rural
     Radiotelephone Service.[^314] A significant subset of the Rural
     Radiotelephone Service is the Basic Exchange Telephone Radio System
     (BETRS).[^315] The Commission uses the SBA's small business size
     standard applicable to "Cellular and Other Wireless
     Telecommunications," *i.e.*, an entity employing no more than 1,500
     persons.[^316] There are approximately 1,000 licensees in the Rural
     Radiotelephone Service, and the Commission estimates that there are
     1,000 or fewer small entity licensees in the Rural Radiotelephone
     Service that may be affected by the rules and policies adopted
     herein.

123. *Air-Ground Radiotelephone Service.* The Commission has not adopted
     a small business size standard specific to the Air-Ground
     Radiotelephone Service.[^317] We will use SBA's small business size
     standard applicable to "Cellular and Other Wireless
     Telecommunications," *i.e.*, an entity employing no more than 1,500
     persons.[^318] There are approximately 100 licensees in the
     Air-Ground Radiotelephone Service, and we estimate that almost all
     of them qualify as small under the SBA small business size
     standard.

124. *Aviation and Marine Radio Services.* Small businesses in the
     aviation and marine radio services use a very high frequency (VHF)
     marine or aircraft radio and, as appropriate, an emergency
     position-indicating radio beacon (and/or radar) or an emergency
     locator transmitter. The Commission has not developed a small
     business size standard specifically applicable to these small
     businesses. For purposes of this analysis, the Commission uses the
     SBA small business size standard for the category "Cellular and
     Other Telecommunications," which is 1,500 or fewer employees.[^319]
     Most applicants for recreational licenses are individuals.
     Approximately 581,000 ship station licensees and 131,000 aircraft
     station licensees operate domestically and are not subject to the
     radio carriage requirements of any statute or treaty. For purposes
     of our evaluations in this analysis, we estimate that there are up
     to approximately 712,000 licensees that are small businesses (or
     individuals) under the SBA standard. In addition, between December
     3, 1998 and December 14, 1998, the Commission held an auction of 42
     VHF Public Coast licenses in the 157.1875-157.4500 MHz (ship
     transmit) and 161.775-162.0125 MHz (coast transmit) bands. For
     purposes of the auction, the Commission defined a \"small\"
     business as an entity that, together with controlling interests and
     affiliates, has average gross revenues for the preceding three
     years not to exceed \$15 million. In addition, a \"very small\"
     business is one that, together with controlling interests and
     affiliates, has average gross revenues for the preceding three
     years not to exceed \$3 million.[^320] There are approximately
     10,672 licensees in the Marine Coast Service, and the Commission
     estimates that almost all of them qualify as \"small\" businesses
     under the above special small business size standards.

125. *Fixed Microwave Services.* Fixed microwave services include common
     carrier,[^321] private operational-fixed,[^322] and broadcast
     auxiliary radio services.[^323] At present, there are approximately
     22,015 common carrier fixed licensees and 61,670 private
     operational-fixed licensees and broadcast auxiliary radio licensees
     in the microwave services. The Commission has not created a size
     standard for a small business specifically with respect to fixed
     microwave services. For purposes of this analysis, the Commission
     uses the SBA small business size standard for the category
     "Cellular and Other Telecommunications," which is 1,500 or fewer
     employees.[^324] The Commission does not have data specifying the
     number of these licensees that have more than 1,500 employees, and
     thus is unable at this time to estimate with greater precision the
     number of fixed microwave service licensees that would qualify as
     small business concerns under the SBA's small business size
     standard. Consequently, the Commission estimates that there are up
     to 22,015 common carrier fixed licensees and up to 61,670 private
     operational-fixed licensees and broadcast auxiliary radio licensees
     in the microwave services that may be small and may be affected by
     the rules and policies adopted herein. We noted, however, that the
     common carrier microwave fixed licensee category includes some
     large entities.

126. *Offshore Radiotelephone Service.* This service operates on several
     UHF television broadcast channels that are not used for television
     broadcasting in the coastal areas of states bordering the Gulf of
     Mexico.[^325] There are presently approximately 55 licensees in
     this service. We are unable to estimate at this time the number of
     licensees that would qualify as small under the SBA's small
     business size standard for "Cellular and Other Wireless
     Telecommunications" services.[^326] Under that SBA small business
     size standard, a business is small if it has 1,500 or fewer
     employees.[^327]

127. *Wireless Communications Services*. This service can be used for
     fixed, mobile, radiolocation, and digital audio broadcasting
     satellite uses. The Commission established small business size
     standards for the wireless communications services (WCS) auction. A
     "small business" is an entity with average gross revenues of \$40
     million for each of the three preceding years, and a "very small
     business" is an entity with average gross revenues of \$15 million
     for each of the three preceding years. The SBA has approved these
     small business size standards.[^328] The Commission auctioned
     geographic area licenses in the WCS service. In the auction, there
     were seven winning bidders that qualified as "very small business"
     entities, and one that qualified as a "small business" entity. We
     conclude that the number of geographic area WCS licensees affected
     by this analysis includes these eight entities.

128. *39 GHz Service.* The Commission created a special small business
     size standard for 39 GHz licenses -- an entity that has average
     gross revenues of \$40 million or less in the three previous
     calendar years.[^329] An additional size standard for "very small
     business" is: an entity that, together with affiliates, has average
     gross revenues of not more than \$15 million for the preceding
     three calendar years.[^330] The SBA has approved these small
     business size standards.[^331] The auction of the 2,173 39 GHz
     licenses began on April 12, 2000 and closed on May 8, 2000. The 18
     bidders who claimed small business status won 849 licenses.
     Consequently, the Commission estimates that 18 or fewer 39 GHz
     licensees are small entities that may be affected by the rules and
     policies adopted herein.

129. *Multipoint Distribution Service, Multichannel Multipoint
     Distribution Service, and ITFS.* Multichannel Multipoint
     Distribution Service (MMDS) systems, often referred to as "wireless
     cable," transmit video programming to subscribers using the
     microwave frequencies of the Multipoint Distribution Service (MDS)
     and Instructional Television Fixed Service (ITFS).[^332] In
     connection with the 1996 MDS auction, the Commission established a
     small business size standard as an entity that had annual average
     gross revenues of less than \$40 million in the previous three
     calendar years.[^333] The MDS auctions resulted in 67 successful
     bidders obtaining licensing opportunities for 493 Basic Trading
     Areas (BTAs). Of the 67 auction winners, 61 met the definition of a
     small business. MDS also includes licensees of stations authorized
     prior to the auction. In addition, the SBA has developed a small
     business size standard for Cable and Other Program Distribution,
     which includes all such companies generating \$12.5 million or less
     in annual receipts.[^334] According to Census Bureau data for 1997,
     there were a total of 1,311 firms in this category, total, that had
     operated for the entire year.[^335] Of this total, 1,180 firms had
     annual receipts of under \$10 million and an additional 52 firms
     had receipts of \$10 million or more but less than \$25 million.
     Consequently, we estimate that the majority of providers in this
     service category are small businesses that may be affected by the
     rules and policies adopted herein. This SBA small business size
     standard also appears applicable to ITFS. There are presently 2,032
     ITFS licensees. All but 100 of these licenses are held by
     educational institutions. Educational institutions are included in
     this analysis as small entities.[^336] Thus, we tentatively
     conclude that at least 1,932 licensees are small businesses.

130. *Local Multipoint Distribution Service.* Local Multipoint
     Distribution Service (LMDS) is a fixed broadband
     point-to-multipoint microwave service that provides for two-way
     video telecommunications.[^337] The auction of the 1,030 Local
     Multipoint Distribution Service (LMDS) licenses began on February
     18, 1998 and closed on March 25, 1998. The Commission established a
     small business size standard for LMDS licenses as an entity that
     has average gross revenues of less than \$40 million in the three
     previous calendar years.[^338] An additional small business size
     standard for "very small business" was added as an entity that,
     together with its affiliates, has average gross revenues of not
     more than \$15 million for the preceding three calendar
     years.[^339] The SBA has approved these small business size
     standards in the context of LMDS auctions.[^340] There were 93
     winning bidders that qualified as small entities in the LMDS
     auctions. A total of 93 small and very small business bidders won
     approximately 277 A Block licenses and 387 B Block licenses. On
     March 27, 1999, the Commission re-auctioned 161 licenses; there
     were 40 winning bidders. Based on this information, we conclude
     that the number of small LMDS licenses consists of the 93 winning
     bidders in the first auction and the 40 winning bidders in the
     re-auction, for a total of 133 small entity LMDS providers.

131. *218-219 MHz Service.* The first auction of 218-219 MHz spectrum
     resulted in 170 entities winning licenses for 594 Metropolitan
     Statistical Area licenses. Of the 594 licenses, 557 were won by
     entities qualifying as a small business. For that auction, the
     small business size standard was an entity that, together with its
     affiliates, has no more than a \$6 million net worth and, after
     federal income taxes (excluding any carry over losses), has no more
     than \$2 million in annual profits each year for the previous two
     years.[^341] In the *218-219 MHz Report and Order and Memorandum
     Opinion and Order*, we established a small business size standard
     for a "small business" as an entity that, together with its
     affiliates and persons or entities that hold interests in such an
     entity and their affiliates, has average annual gross revenues not
     to exceed \$15 million for the preceding three years.[^342] A "very
     small business" is defined as an entity that, together with its
     affiliates and persons or entities that hold interests in such an
     entity and its affiliates, has average annual gross revenues not to
     exceed \$3 million for the preceding three years.[^343] The SBA has
     approved these size standards.[^344] We cannot estimate, however,
     the number of licenses that will be won by entities qualifying as
     small or very small businesses under our rules in future auctions
     of 218-219 MHz spectrum.

132. *24 GHz -- Incumbent Licensees.* This analysis may affect incumbent
     licensees who were relocated to the 24 GHz band from the 18 GHz
     band, and applicants who wish to provide services in the 24 GHz
     band. The applicable SBA small business size standard is that of
     "Cellular and Other Wireless Telecommunications" companies. This
     category provides that such a company is small if it employs no
     more than 1,500 persons.[^345] According to Census Bureau data for
     1997, there were 977 firms in this category that operated for the
     entire year.[^346] Of this total, 965 firms had employment of 999
     or fewer employees, and an additional 12 firms had employment of
     1,000 employees or more.[^347] Thus, under this size standard, the
     great majority of firms can be considered small. These broader
     census data notwithstanding, we believe that there are only two
     licensees in the 24 GHz band that were relocated from the 18 GHz
     band, Teligent[^348] and TRW, Inc. It is our understanding that
     Teligent and its related companies have less than 1,500 employees,
     though this may change in the future. TRW is not a small entity.
     Thus, only one incumbent licensee in the 24 GHz band is a small
     business entity.

133. *24 GHz -- Future Licensees.* With respect to new applicants in the
     24 GHz band, the small business size standard for "small business"
     is an entity that, together with controlling interests and
     affiliates, has average annual gross revenues for the three
     preceding years not in excess of \$15 million.[^349] "Very small
     business" in the 24 GHz band is an entity that, together with
     controlling interests and affiliates, has average gross revenues
     not exceeding \$3 million for the preceding three years.[^350] The
     SBA has approved these small business size standards.[^351] These
     size standards will apply to the future auction, if held.

### Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements

134. The Order permits rate-of-return carriers acquiring price cap lines
     to return those lines to rate-of-return regulation without seeking
     a waiver. As a result, the administrative costs of seeking a waiver
     are avoided.[^352]

135. The Order also permits rate-of-return carriers to deaverage
     geographically their rates for transport and special access
     services within a study area.[^353] While rate-of-return carriers
     must define the scope of zones, the requirement that they be
     approved in advance is eliminated.[^354] The carrier is now
     required to demonstrate that each zone, except the highest-cost
     zone, accounts for at least 15 percent of its revenues from
     services in the study area,[^355] and must demonstrate that rates
     reflect cost characteristics associated with the selected
     zones.[^356]

136. Merging LTS into ICLS will promote administrative simplicity by
     eliminating a duplicative support mechanism without affecting the
     amount of universal service support received by small entities or
     negatively affecting carriers that choose to participate in the
     NECA common line pool.[^357]

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

137. The Commission has sought to minimize significant economic impacts
     on small entities, including small telephone companies, in revising
     the access and universal service rules in this Order. The
     Commission's approach is tailored to the specific challenges faced
     by small local telephone companies, many of which serve rural and
     high-cost areas.

138. The Commission considered whether to eliminate completely the
     "all-or-nothing" rule, but decided only to carve out an exception
     for rate-of-return carriers that wish to return the acquired price
     cap lines to rate-of-return regulation. This eliminates the need
     for a waiver before such acquisitions can be returned to
     rate-of-return regulation, thereby reducing transaction costs and
     uncertainty for small, typically rural carriers seeking to acquire
     lines from price cap carriers. We continue to explore further
     modifications to the all-or-nothing rule within the larger context
     of incentive regulation for rate-of-return carriers in the *Second
     Further Notice*.

139. The Order permits rate-of-return carriers to geographically
     deaverage their rates for special access and transport services.
     The Commission gives rate-of-return carriers significant latitude
     to define pricing zones as they wish, subject to the limitation
     that each zone, except the highest-cost zone, must account for at
     least 15 percent of the rate-of-return carrier's transport and
     special access revenues in the study area. This requirement ensures
     that any lower rates resulting from deaveraging are enjoyed by a
     range of customers, rather than being focused on only a few
     customers in a way that might evade our prohibition on contract
     pricing by rate-of-return carriers. The Order continues to require
     rate-of-return carriers to have a tariffed cross-connect element in
     order to geographically deaverage rates, thereby ensuring that
     transport competitors, including small entities, can interconnect
     with the rate-of-return carrier's access network when it deaverages
     its special access and transport rates. In reaching this decision,
     the Commission considered and rejected claims by IXCs that
     immediate geographic deaveraging would lead to predatory pricing by
     rate-of-return carriers and that further deaveraging should result
     only in price decreases.[^358] The Order determines that permitting
     rate-of-return carriers to deaverage the rates for special access
     and transport services enhances the efficiency of the market for
     those services by allowing prices to be tailored more easily and
     accurately to reflect costs and, therefore, facilitates competition
     in both higher and lower cost areas. Rate-of-return carriers must
     provide cost support establishing that the deaveraged rates are
     cost-based, thereby ensuring that smaller, more vulnerable carriers
     are safeguarded from any such predatory pricing.

140. The Order also permits geographic deaveraging of rates for special
     access and transport services within the NECA pooling process. As a
     result, smaller rate-of-return carriers may be able to realize
     increased pricing flexibility through the NECA traffic-sensitive
     pool. Such increased pricing flexibility might not have been
     possible if they were required to file their own tariffs.

141. The Order declines to relax the existing competitive triggers for
     volume and term discounts for transport services, as many
     rate-of-return carriers urged. The Commission was concerned that
     the premature grant of such discount authority would permit a
     rate-of-return carrier to lock up large customers by offering them
     volume and term discounts at or below cost.[^359] Such discounts
     would potentially foreclose competition for smaller customers
     because large customers may create the inducement for potential
     competitors to invest in facilities which, once put into service,
     can be used to serve adjacent smaller customers.[^360] Accordingly,
     the Commission refuses to adopt less restrictive competitive
     triggers that would have more readily facilitated volume and term
     discounts, because such new triggers would not have ensured the
     presence of a competitor that would operate to prevent harm to
     smaller entities.

142. The Order also declines to permit rate-of-return carriers to offer
     services pursuant to individual customer contracts, as many
     rate-of-return carriers urged. Such an ability to combine various
     elements or parts of elements, the Commission notes, would allow
     rate-of-return carriers to set non-cost-based prices in order to
     prevent entrants from providing service to the largest customers in
     their service areas, thereby precluding further competition for
     smaller customers in their service areas as well.[^361]

143. The Order merges LTS into the ICLS mechanism. This will simplify
     the administration of common line support measures, while ensuring
     both that no individual carrier will fail to recover its common
     line revenue requirement,[^362] and that overall support will not
     be reduced as existing rules operate to automatically increase ICLS
     by an amount to match any LTS reduction.[^363] Accordingly, the
     concerns of small entities over the elimination of LTS are fully
     addressed by the new ICLS mechanism. In reaching this conclusion,
     the Commission considered and rejected NECA's argument that the
     elimination of LTS will destabilize the NECA pool. The Order
     concludes that although many, if not most, carriers will continue
     participating in the common line pool, the benefits of pooling do
     not warrant the continued use of universal service support as a way
     to induce carriers to participate in the pool if they are not
     otherwise inclined to do so.

### Report to Congress

144. The Commission will send a copy of this Order, including this FRFA,
     in a report to be sent to Congress pursuant to the Congressional
     Review Act.[^364] In addition, the Commission will send a copy of
     this Order, including this FRFA, to the Chief Counsel for Advocacy
     of the Small Business Administration. A copy of this Order and FRFA
     (or summaries thereof) will also be published in the Federal
     Register.[^365]

## Initial Regulatory Flexibility Act Analysis

145. The Regulatory Flexibility Act of 1980, as amended (RFA), [^366]
     requires that an initial regulatory flexibility analysis be
     prepared for notice-and-comment rule making proceedings, unless the
     agency certifies that "the rule will not, if promulgated, have a
     significant economic impact on a substantial number of small
     entities."[^367] The RFA generally defines the term "small entity"
     as having the same meaning as the terms "small business," "small
     organization," and "small governmental jurisdiction."[^368] In
     addition, the term "small business" has the same meaning as the
     term "small business concern" under the Small Business Act.[^369]
     A "small business concern" is one which: (1) is independently owned
     and operated; (2) is not dominant in its field of operation;
     and (3) satisfies any additional criteria established by
     the SBA.[^370]

146. As required by the RFA, the Commission has prepared this IRFA of
     the possible significant economic impact on a substantial number of
     small entities by the policies and rules proposed in this *Second
     Further Notice*. Written public comments are requested on this
     IRFA. Comments must be identified as responses to the IRFA and must
     be filed by the deadlines for comments on the *Second Further
     Notice* provided in paragraph 158 of the item.

### Need for, and Objectives of, the Proposed Rules

147. The Commission continues to explore means of providing incentives
     for smaller telephone companies to become more efficient and
     innovative in ways that benefit both rate-of-return carriers and
     their customers. The *Second Further Notice* seeks additional
     comment on two alternative incentive regulation proposals for all
     rate-of-return carriers, and on the closely related all-or-nothing
     rule.

148. The alternative incentive regulation plans were filed by CenturyTel
     (the CenturyTel Plan) and by ALLTEL, Madison River and TDS (the
     Rate-of-Return Carrier Tariff Option).[^371] The CenturyTel Plan
     proposes to lower traffic-sensitive charges, according to
     participation on a study area-by-study area basis, to target rates
     based on specific average traffic-sensitive target rates determined
     by line density. The CenturyTel Plan would apply an X-Factor equal
     to GDP-PI. The CenturyTel Plan would convert universal service
     support to per-line amounts, with ICLS and LSS being frozen for the
     five-year duration of the proposed plan and high-cost loop support
     being frozen subject to adjustment for GDP-CPI. Finally, CenturyTel
     proposes that carriers should be allowed to take certain study
     areas out of the NECA pools and into alternative regulation, while
     leaving other study areas in the pools, subject to rate-of-return
     regulation. The Rate-of-Return Carrier Tariff Option would allow
     all rate-of-return carriers (not just those serving 50,000 or fewer
     lines) to elect to adopt a revised section 61.39 approach under
     which they would file access tariffs every two years based on the
     previous two years' historical cost and demand data. The
     Rate-of-Return Carrier Tariff Option would provide a participating
     company with a per-line ICLS based on two years of historical data.
     Finally, both plans would make participation in the alternative
     regulation plan optional, and would allow election by study area.

149. The *Second Further Notice* tentatively concludes that any
     alternative regulation plan that the Commission may adopt should be
     optional on the part of the rate-of-return carrier, with
     participation through election on a study area basis.[^372]
     Additionally, such participation should be available only to
     holding company groups in which all non-average schedule companies
     file their own cost-based tariffs. Among the issues on which the
     *Second Further Notice* seeks comment are whether the two plans
     will produce rates that are just and reasonable and not
     unreasonably discriminatory for all entities, including small
     entities. The *Second Further Notice* also asks whether the
     CenturyTel Plan should contain a productivity factor other than
     GDP-PI, whether a G-factor should be used as an alternative
     approach to an X-factor, and whether it should be based on
     historical data or on projections for the next tariff period. In
     addition, the *Second Further Notice* asks about the effect each
     plan will have on rate-of-return carriers' investment and
     maintenance of their exchange access facilities, whether service
     quality will be degraded, and whether the universal service fund
     will be increased.

150. The *Second Further Notice* also tentatively concludes that
     existing accounting and regulatory processes should equip parties
     and the Commission to detect cost-shifting by the rate-of-return
     carriers that file cost-based access tariffs. Nonetheless, the
     Commission asks commenters to identify the ways that a
     rate-of-return carrier could shift costs from a study area electing
     an alternative regulation plan to a study area subject to
     rate-of-return regulation. The Commission also asks commenters to
     identify what additional reporting or regulatory procedures would
     help detect and prevent such cost shifting. The *Second* Further
     Notice tentatively concludes that the rules should be amended to
     indicate that new carriers or carrier study areas may not elect the
     CALLS[^373] plan because it was not designed to be open to new
     carriers or study areas. Finally, it also tentatively concludes
     that the option to elect alternative regulation on a study area
     basis, if adopted, should also be available when carriers under
     different regulatory plans come together by merger or acquisition.

### Legal Basis

151. This rulemaking action is supported by sections 4(i), 4(j),
     201-205, 254, and 403 of the Communications Act of 1934, as
     amended.[^374]

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

152. The Commission's action in this *Second Further Notice* could
     affect a wide variety of entities. This IRFA potentially will
     affect the same entities discussed above in the FRFA, and we
     incorporate the descriptions of those entities by reference.

### Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements

153. The *Second Further Notice* explores options for developing an
     alternative regulatory structure that would be available to those
     rate-of-return carriers electing it. It considers the widely
     varying operating circumstances of rate-of-return carriers, the
     implications of competitive and intrastate regulatory conditions on
     the options available, and the need to facilitate and ensure the
     deployment of advanced services in rural America. If adopted,
     alternative regulation may require additional recordkeeping. For
     example, during CenturyTel's five-year plan, line density averages
     would have to be reported in order to assess applicable ATS target
     rates.[^375] Furthermore, under the Rate-of-Return Carrier Tariff
     Option, electing rate-of-return carriers would file tariffs for a
     two-year period, with rates based on historical costs and
     demand.[^376] The *Second Further Notice* also addresses the
     continued need for the Commission's all-or-nothing rule, seeking
     comment on whether repeal or modification of the all-or-nothing
     rule could involve additional reporting or regulatory procedures to
     prevent cost shifting.[^377]

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

154. The RFA requires an agency to describe any significant alternatives
     that it has considered in reaching its proposed approach, which may
     include the following four alternatives (among others): (1) the
     establishment of differing compliance or reporting requirements or
     timetables that take into account the resources available to small
     entities; (2) the clarification, consolidation, or simplification
     of compliance or reporting requirements under the rule for small
     entities; (3) the use of performance, rather than design,
     standards; and (4) an exemption from coverage of the rule, or any
     part thereof, for small entities.[^378]

155. The two alternative incentive regulation proposals in the *Second
     Further Notice* could have varying positive or negative impacts on
     small rate-of-return carriers. The proposals involve elective
     options, so that a small entity should be able to assess the
     potential impacts as part of its decision-making process.
     Nonetheless, public comments are welcomed on any modifications to
     the proposals contained in the *Second Further Notice* that would
     reduce potential adverse impacts on small entities. Specifically,
     suggestions are sought on different compliance or reporting
     requirements that would take into account the resources of small
     entities; and clarification, consolidation, or simplification of
     compliance and reporting requirements for small entities that would
     be subject to the rules. What are the relative merits between
     applying an X-factor, based on GDP-PI or some other productivity
     factor, and a G-factor, based on growth, as they relate to small
     entities under the CenturyTel Plan? How can we ensure that adequate
     investment and service quality levels are maintained? How would the
     adoption of an incentive regulation plan affect small carriers, and
     how would a low-end adjustment affect such plan? How would the
     adoption of either alternative regulation plan affect universal
     service? If we should repeal or modify our all-or-nothing rule, how
     can we prevent the danger of cost shifting for small carriers? How
     would the proposals impact NECA pooling from the perspective of
     small carriers? Comments should be supported by specific economic
     analysis.

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

156. None.

### Report to the Small Business Administration

157. The Commission will send a copy of the *Second Further Notice*,
     including this IRFA, to the Chief Counsel for Advocacy of the Small
     Business Administration (SBA).[^379] In addition, the *Second
     Further Notice* and IRFA (or summaries thereof) will be published
     in the Federal Register.[^380]

## Filing of Comments and Reply Comments

158. Pursuant to Sections 1.415 and 1.419 of the Commission\'s rules, 47
     C.F.R. §§ 1.415, 1.419, interested parties may file comments on or
     before 30 days and reply comments on or before 45 days of
     publication of this *Second Further Notice* in the Federal
     Register. Comments may be filed using the Commission\'s Electronic
     Comment Filing System (ECFS) or by filing paper copies.[^381]
     Comments filed through the ECFS can be sent as an electronic file
     via the Internet to \<http://www.fcc.gov/cgb/ecfs\>. Generally,
     only one copy of an electronic submission must be filed. If
     multiple docket or rulemaking numbers appear in the caption of this
     proceeding, however, commenters must transmit one electronic copy
     of the comments to each docket or rulemaking number referenced in
     the caption. In completing the transmittal screen, commenters
     should include their full name, U.S. Postal Service mailing
     address, and the applicable docket or rulemaking number. Parties
     may also submit an electronic comment by Internet e-mail. To get
     filing instructions for e-mail comments, commenters should send an
     e-mail to \<ecfs@fcc.gov\>, and should include the following words
     in the body of the message: "get form \<your e-mail address\>." A
     sample form and directions will be sent in reply. Commenters also
     may obtain a copy of the ASCII Electronic Transmittal Form
     (FORM-ET) at \<http://www.fcc.gov/e-file/email.html\>.

159. Parties who choose to file by paper must file an original and four
     copies of each filing. If more than one docket or rulemaking number
     appear in the caption of this proceeding, commenters must submit
     two additional copies for each additional docket or rulemaking
     number.

160. Filings can be sent by hand or messenger delivery, by commercial
     overnight courier, or by first-class or overnight U.S. Postal
     Service mail (although we continue to experience delays in
     receiving U.S. Postal Service mail). The Commission's contractor,
     Natek, Inc., will receive hand-delivered or messenger-delivered
     paper filings for the Commission\'s Secretary at 236 Massachusetts
     Avenue, N.E., Suite 110, Washington, D.C. 20002.

-   The filing hours at this location are 8:00 a.m. to 7:00 p.m.

-   All hand deliveries must be held together with rubber bands or
    fasteners.

-   Any envelopes must be disposed of before entering the building.

-   Commercial overnight mail (other than U.S. Postal Service Express
    Mail and Priority Mail) must be sent to 9300 East Hampton Drive,
    Capitol Heights, MD 20743.

-   All filings must be addressed to the Commission's Secretary, Office
    of the Secretary, Federal Communications Commission.

161. Regardless of whether parties choose to file electronically or by
     paper, parties should also file one copy of any documents filed in
     this docket with the Commission's copy contractor, Qualex
     International, Portals II, 445 12th Street, S.W., Washington, DC
     20554 (telephone 202-863-2893; facsimile 202-863-2898) or via
     e-mail at \<qualexint@aol.com\>. In addition, one copy of each
     submission must be filed with the Chief, Pricing Policy Division,
     445 12th Street, S.W., Washington, DC 20554. Documents filed in
     this proceeding will be available for public inspection during
     regular business hours in the Commission's Reference Information
     Center, 445 12th Street, S.W., Washington, DC 20554, and will be
     placed on the Commission's Internet site. For further information,
     contact Douglas Slotten at (202) 418-1572, or Ted Burmeister
     at (202) 418-7389.

162. Written comments by the public on the proposed and/or modified
     information collections are due on the same day as comments on the
     *Second Further Notice*, *i.e.*, on or before 30 days after
     publication of the *Second Further Notice* in the Federal Register.
     Written comments must be submitted by OMB on the proposed and/or
     modified information collections on or before 60 days after
     publication of the *Second Further Notice* 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 Judith B. Herman, Federal Communications Commission,
     445 12th Street, S.W., Washington, DC 20554, or via the Internet to
     \<jbherman@fcc.gov\>, and to Jeanette Thornton, OMB Desk Officer,
     Room 10236 NEOB, 725 17th Street, N.W., Washington, DC 20503, or
     via the Internet to \<JThornto@omb.eop.gov\>.

163. Accessible formats (computer diskettes, large print, audio
     recording and Braille) are available to persons with disabilities
     by contacting the Consumer & Governmental Affairs Bureau, at (202)
     418-0531, TTY (202) 418-7365, or at \<fcc504@fcc.gov\>.

# ordering clauses

164. Accordingly, IT IS ORDERED, that, pursuant to the authority
     contained in sections 4(i), 4(j), 201-205, 254, and 403 of the
     Communications Act of 1934, as amended, 47 U.S.C. §§ 154(i),
     154(j), 201-205, 254, and 403, this Report and Order IS ADOPTED.

165. IT IS FURTHER ORDERED that Parts 54, 61, and 69 of the Commission's
     rules, 47 C.F.R. Parts 54, 61, and 69, ARE AMENDED as set forth in
     Appendix A hereto, effective 30 days after their publication in the
     Federal Register. The collections of information contained within
     are contingent upon approval by the Office of Management and
     Budget.

166. IT IS FURTHER ORDERED that the Commission's Consumer and
     Governmental Affairs Bureau, Reference Information Center, SHALL
     SEND a copy of this Order, including the Final Regulatory
     Flexibility Analysis, to the Chief Counsel for Advocacy of the
     Small Business Administration.

167. IT IS FURTHER ORDERED that, pursuant to the authority contained in
     sections 4(i), 4(j), 201-205, 254, and 403 of the Communications
     Act of 1934, as amended, 47 U.S.C. §§ 154(i), 154(j), 201-205, 254,
     and 403, this *Second Further Notice of Proposed Rulemaking*
     IS ADOPTED.

168. IT IS FURTHER ORDERED that the Commission's Consumer and
     Governmental Affairs Bureau, Reference Information Center, SHALL
     SEND a copy of this *Second Further Notice of Proposed Rulemaking*,
     including the Initial Regulatory Flexibility Analysis, to the Chief
     Counsel for Advocacy of the Small Business Administration.

> FEDERAL COMMUNICATIONS COMMISSION
>
> Marlene H. Dortch
>
> Secretary

**APPENDIX A**

**FINAL RULES**

Part 54, Part 61, and Part 69 of the Code of Federal Regulations are
amended as follows:

**PART 54 -- UNIVERSAL SERVICE**

1.  The authority citation continues to read as follows:

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

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

**§ 54.303 Long Term Support**

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

**PART 61 -- TARIFFS**

3.  The authority citation continues to read as follows:

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

4.  Section 61.41 is revised by amending paragraphs (c) and (d) and
    adding a new paragraph (e) to read as follows:

    § 61.41 Price cap requirements generally.

    \* \* \*

\(c\) Except as provided in paragraph (e), the following rules in this
paragraph (c) apply to telephone companies subject to price cap
regulation, as that term is defined in § 61.3(ee), which are involved in
mergers, acquisitions, or similar transactions.

\* \* \*

\(d\) Except as provided in paragraph (e), local exchange carriers that
become subject to price cap regulation as that term is defined in
§ 61.3(ee) shall not be eligible to withdraw from such regulation.

\(e\) Notwithstanding the requirements of paragraphs (c) and (d), a
telephone company subject to rate-of-return regulation may return lines
acquired from a telephone company subject to price cap regulation to
rate-of-return regulation, provided that the acquired lines will not be
subject to average schedule settlements, and provided further that the
telephone company subject to rate-of-return regulation may not for five
years elect price cap regulation for itself, or by any means cause the
acquired lines to become subject to price cap regulation.

**PART 69 -- ACCESS CHARGES**

5.  The authority citation continues to read as follows:

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

6.  Section 69.123 is revised by amending paragraphs (a), (c), and (d)
    to read as follows:

**§ 69.123 Density pricing zones for special access and switched
transport.**

(a)(1) Incumbent local exchange carriers not subject to price cap
regulation may establish any number of density zones within a study area
that is used for purposes of jurisdictional separations, provided that
each zone, except the highest-cost zone, accounts for at least
15 percent of that carrier's special access and transport revenues
within that study area, calculated pursuant to the methodology set forth
in § 69.725.

\(2\) \[Reserved\]

> \* \* \*

\(c\) Notwithstanding § 69.3(e)(7) of this chapter, in study areas in
which a telephone company offers a cross-connect, as described in §
69.121(a)(1) of this chapter, for the transmission of interstate special
access traffic, telephone companies may charge rates for special access
sub-elements of DS1, DS3, and such other special access services as the
Commission may designate, that differ depending on the zone in which the
service is offered, provided that the charges for any such service shall
not be deaveraged within any such zone.

> \* \* \*

\(d\) Notwithstanding § 69.3(e)(7) of this chapter, in study areas in
which a telephone company offers a cross-connect, as described in §
69.121(a)(1) of this chapter, for the transmission of interstate
switched traffic, or is using collocated facilities to interconnect with
telephone company interstate switched transport services, telephone
companies may charge rates for sub-elements of direct-trunked transport,
tandem-switched transport, entrance facilities, and dedicated signaling
transport that differ depending on the zone in which the service is
offered, provided that the charge for any such service shall not be
deaveraged within any such zone.

> \* \* \*

**APPENDIX B**

**PLEADINGS FILED IN RESPONSE TO**

***MAG FURTHER NOTICE***

**Comments on MAG FURTHER NOTICE**

1\. ALLTEL Communications, Inc., CenturyTel, Inc., Madison River
Communications, LLC, and TDS Telecommunications Corporation (ALLTEL et
al.)

2\. AT&T Corp.

3\. CUSC

4\. General Communication, Inc. (GCI)

5\. General Services Administration (GSA) (filed 12/31/01)

6\. GVNW Consulting, Inc. (GVNW)

7\. ICORE Cos. (ICORE)

8\. Independent Telephone & Telecommunications Alliance (ITTA)

9\. Innovative Telephone

10\. Nebraska Rural Independent Cos.

11\. NECA

12\. NRTA, OPASTCO and USTA

13\. NTCA

14\. PRTC

15\. Ronan Telephone Co. and Hot Springs Telephone Co.

16\. Sprint Corp.

17\. TCA, Inc.

18\. Verizon

19\. Western Alliance

20\. Worldcom

**Parties filing Reply Comments to MAG Further Notice**

1\. ALLTEL et al.

2\. AT&T Corp.

3\. GCI

4\. GSA

5\. GVNW

6\. ITTA

7\. Innovative Telephone

8\. NECA

9\. NRTA, OPASTCO and USTA

10\. NTCA

11\. Valor Telecommunications Enterprises, LLC

**APPENDIX C**

**CENTURYTEL, INC. ALTERNATIVE REGULATION PROPOSAL**

**(From Ex Parte in CC Docket No. 00-256, filed Dec. 23, 2002)**

## The FCC Should Permit Rate-of-Return Carriers to Elect Price Cap Regulation for Interstate Access Charges on a Study Area Basis and Eliminate the "All-or-Nothing" Rules {#the-fcc-should-permit-rate-of-return-carriers-to-elect-price-cap-regulation-for-interstate-access-charges-on-a-study-area-basis-and-eliminate-the-all-or-nothing-rules .unnumbered}

##  {#section .unnumbered}

## [I.]{.smallcaps} [Background -- Why CenturyTel Needs Relief From the All-or-Nothing Rules]{.underline} {#i.-background-why-centurytel-needs-relief-from-the-all-or-nothing-rules .unnumbered}

-   All-or-Nothing relief is needed for both acquisitions and legacy
    properties

-   There is no clear path for CenturyTel's operating companies to adopt
    price caps or other forms of incentive regulation under the current
    rules

-   The lack of options hinders CenturyTel' s ability to attract capital
    for investment (*e.g.,* for the deployment of new technologies and
    acquisition of new lines)

-   The need for waivers also adds to the cost, delay and uncertainty of
    acquiring rural lines from price cap carriers, despite the fact that
    waivers are routinely granted

-   CenturyTel needs options to remain a viable rural provider, to
    continue investing in rural markets, and to respond to competitive
    service offerings

-   CenturyTel could successfully operate under price caps, and access
    customers could benefit from lower traffic-sensitive rates, in some
    of CenturyTel's larger and more homogeneous markets

##  {#section-1 .unnumbered}

**II. [Specific rule changes should accomplish the
following:]{.underline}**

-   [Enable acquisitions]{.underline}: Eliminate §61.41(c)(2) so
    rate-of-return companies who acquire price capped exchanges need not
    convert to price caps at the holding company level (§61.41.(c)(3)
    also may be eliminated as it will become moot)

-   [Give flexibility for rate-of-return carriers to elect price cap
    regulation on a study area basis]{.underline}: Eliminate §61.41(b)
    so price cap tariffs may be filed for some study areas without
    necessitating that all study areas be brought under price caps

-   [Benefit access customers by lowering traffic-sensitive charges in
    electing study areas to the Target Rates]{.underline}: Most
    rate-of-return companies have cost-based interstate
    traffic-sensitive access charges above \$0.015 per minute;
    therefore, enabling the adoption of price caps will produce an
    immediate benefit to access customers by bringing down
    traffic-sensitive rates.

-   [Provide alternatives for carriers whose actual traffic-sensitive
    rates are significantly above the Target Rates for average
    traffic-sensitive (ATS) charges]{.underline}:

    -   Amend §61.3(qq) to establish the following ATS Target Rates:

        -   \$0.0125 for carriers with line density average (at the
            holding company level, excluding lines acquired from
            mandatory price cap companies) less than 15 lines per square
            mile and current ATS rates at or above this Target Rate;

        -   Freeze ATS rates at current levels for carriers with line
            density average (at the holding company level, excluding
            lines acquired from mandatory price cap companies) less than
            15 lines per square mile and current ATS rates below
            \$0.0125;

        -   \$0.0095 for carriers with line density average (at the
            holding company level, excluding lines acquired from
            mandatory price cap companies) of at least 15 but less than
            19 lines per square mile and current ATS rates at or above
            this Target Rate;

        -   Freeze ATS rates at current levels for carriers with line
            density average (at the holding company level, excluding
            lines acquired from mandatory price cap companies) of at
            least 15 but less than 19 lines per square mile and current
            ATS rates below \$0.0095;

        -   Freeze ATS rates at current levels, up to a maximum ATS rate
            of \$0.0095, for carriers with line density average (at the
            holding company level, excluding lines acquired from
            mandatory price cap companies) of 19 lines or more per
            square mile, for carriers newly electing price caps

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    -   Amend §61.45(b)(1)(ii) so *"X" = GDP-PI* effective immediately
        for carriers electing this plan

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-   [Ensure against harm to consumers by preserving federal universal
    service support]{.underline}:

    -   *Avoid "revenue shock" when ATS rates are reduced by creating a
        "TS Additive" to an electing carrier's interstate support:*
        Amend §54.901 to permit electing carriers to move their ATS
        rates to the new Target Rate (described above) on a
        revenue-neutral basis; where an electing carrier's existing ATS
        rate is above the Target Rate, allow such carrier to recover the
        difference between the Target Rate and their existing revenue
        requirement through a *"TS Additive"* to ICLS; then freeze the
        TS Additive on a study area basis for the duration of the plan

    -   *Maintain existing levels of Interstate Common Line Support
        (ICLS) and Long-Term Support (LTS) for the duration of the
        plan:* Amend §54.901(a) to include carriers electing price caps
        after the effective date of this plan in addition to
        "rate-of-return carriers"; freeze for the duration of the plan,
        on a per-line basis, both ICLS and LTS at existing levels (with
        a possible adjustment to ICLS for a non-primary residential line
        SLC increase to \$7.00 upon conversion to price caps); also
        amend §54.902 to clarify that ICLS (frozen on a per-line basis
        as described above) will follow the transferred exchanges where
        the buyer is a carrier electing price caps under this plan; in
        addition, amend §54.303(a) to clarify that LTS will continue to
        be made available to LECs who elect price caps under this plan

    -   *Maintain existing levels of Local Switching Support (LSS) for
        the duration of the plan:* Amend §54.301(a) to freeze LSS on a
        study area basis for the duration of the plan

    -   *Avoid any impact on the fixed \$650 million fund of interstate
        CALLS support*: Amend §54.800 to redefine Price Cap LEC for the
        purpose of Subpart J of Part 54 as excluding carriers that elect
        price caps under this later plan

    -   *Create predictable and stable High-Cost Loop Support (HCLS)*:
        Amend §36.631 to freeze HCLS on a per-line basis. Amend §36.603
        to adjust this frozen per-line amount only for GDP-CPI, while
        continuing to apply the Rural Growth Factor to that portion of
        the fund that supports other rural carriers. All rural carriers
        remain eligible to receive safety net and safety valve support

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-   [Retain the low-end adjustment to ensure a reasonable earnings
    opportunity]{.underline}: Retain the existing rule that price cap
    carriers who earn below 10.25% may increase their Price Cap Indices
    effective July 1 the following year to target an interstate earnings
    level of 10.25%

-   [Grant flexibility to pooling carriers]{.underline}: Amend
    §69.3(e)(9) by deleting the second sentence, so carriers may exit
    the pool to elect price caps for some study areas but keep others
    (under rate-of-return regulation) in the pool

-   [Ensure stability]{.underline} by putting the plan in place for 5
    years

##  {#section-2 .unnumbered}

**III. [Public Benefits of This All-or-Nothing Relief]{.underline}:**

-   [TS charges for interstate access will be stabilized]{.underline}:
    Pursuant to § 61.3(qq)(2), CenturyTel companies would qualify for
    the \$0.0125 Target Rate based on line density of fewer than 15
    lines per square mile at the holding company level (excluding lines
    acquired from mandatory price cap companies); CenturyTel's current
    composite ATS rate is well above \$0.015 in most study areas, and
    costs per line are increasing; thus, access customers will benefit
    from lower and stable interstate TS rates if CenturyTel is permitted
    to adopt price caps under this plan

-   [High-Cost Loop Support will be stabilized]{.underline}: A freeze
    will increase the predictability and stability of HCLS, creating a
    climate that is favorable for long-term capital planning and
    fostering new investment

-   [Investment will be encouraged]{.underline}: High-risk investment in
    new technologies in rural areas will be encouraged by the prospect
    of higher earnings; and new acquisitions will become less costly and
    disruptive to consummate because the all-or-nothing waiver process
    will have been eliminated (although consumers and the Commission
    still will have the opportunity to review study area boundary
    changes and tariff filings, and will have notice of the change in
    service provider under the Section 214 and "slamming" notification
    rules)

-   [Consumers will get the benefits of price caps without the loss in
    service quality experienced in areas served by the mandatory price
    cap carriers]{.underline}:

    -   Unlike the mandatory price cap carriers, CenturyTel serves
        relatively small study areas that are predominantly rural in
        nature; CenturyTel's reputation rests on the quality of its
        service to rural customers

    -   Unlike the mandatory price cap carriers, CenturyTel will be an
        elective price cap carrier, and will not elect price caps for
        study areas where it can only successfully operate by curtailing
        investment in high-cost areas

    -   Unlike the mandatory price cap carriers, CenturyTel would be
        electing price caps at a time when the states have had years of
        experience under their own (intrastate) price cap plans; the
        states are fully prepared to (and actively do) police LEC
        service quality and infrastructure investment -- many smaller
        ILECs, including many CenturyTel operating companies, are
        governed by incentive regulation today for their
        intrastate rates

    -   Unlike the mandatory price cap carriers, CenturyTel is as
        efficient an operator as any carrier operating comparable
        exchanges, and seeks to sustain that efficiency without
        jeopardizing service quality or reliability; while CenturyTel
        does not expect to experience the same efficiency gains under
        price caps as the larger carriers did, CenturyTel's future lies
        not in diminishing service to rural America, but in
        providing the best quality service, offering innovations that
        respond to customer needs, and providing, maintaining and
        upgrading a network capable of supporting vertical services

**IV. [All-or-Nothing Relief Does Not Require Additional
Safeguards]{.underline}:**

-   Customers are adequately protected by the existing accounting rules
    and affiliate transactions rules

-   The Commission and customers can detect cost-shifting in tariff
    filings

-   State Commissions continue to review carriers' costs as well

-   The FCC may order the production of records at any time

-   The Commission may continue to enforce its "one-way door" rules so
    carriers may not "game the system" by shifting back and forth
    between price caps and rate-of-return regulation over the life of
    the plan

**V. [The Commission Should Adopt All-or-Nothing Relief in Time for 2003
Adoption]{.underline}**

-   The Commission should adopt and release these rule changes by May
    31, 2003, to give carriers adequate opportunity to decide whether to
    elect this plan

-   The Commission should adopt a 5-year plan, under which carriers may
    elect to designate individual study areas beginning in June 2003,
    effective July 1, 2003; carriers also should be permitted to
    designate study areas for this plan at any subsequent annual or
    semi-annual tariff filing -- *e.g.,* December 2003, June 2004,
    December 2004, June 2005, etc.; finally, the Commission should make
    adoption of the plan as to any study area effective for the
    remainder of the 5-year life of the plan

**APPENDIX D**

**RATE-OF-RETURN COMPANY TARIFF OPTION PROPOSAL**

**(From Ex Parte in CC Docket No. 00-256, filed Jan. 31, 2003)**

**Proposal Developed Collectively By:**

**ALLTEL Communications, Inc.**

**Madison River Communications, LLC**

**TDS TELECOM, Inc.**

**I. [INTRODUCTION]{.underline}: The Rate-of-Return Company Tariff
Option is responsive to a need that the Commission has identified.
Implementation of the proposed option will address concerns of the
non-price cap rate of return carriers. Adoption of this proposal will
serve the interests of access users and end user customers of rate of
return carriers, and also foster the provision of universal and advanced
services in rural areas.**

-   In response to the Commission's Further Notice of Proposed
    Rulemaking set forth in the Commission's Order released November 8,
    2001 in CC Docket No. 00-256, ALLTEL Communications, Inc., Madison
    River Communications, LLC, and TDS TELECOM, Inc. (collectively, "the
    Carriers") have given both independent and collective consideration
    to the development of options available as alternative regulatory
    structures for rate-of-return carriers that currently have no
    meaningful options.

    -   Specifically, rate-of-return carriers, including the Carriers,
        have no realistic alternative or incentive option available to
        rate-of-return regulation.

        -   Given the cost characteristics of the rural geographic areas
            served by the Carriers, it is not practicable for these
            companies to elect Price Caps as currently formulated.

        -   Under existing rules, the Carriers are not permitted to
            elect the use of the incentive regulation established in §
            61.39 of the Commission's Rules to address the needs of
            their companies, their access users, and their end user
            customers.

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    -   The Commission has long recognized that the distinct
        characteristics of companies that have remained on traditional
        rate-of-return regulation; the general rural nature of their
        service areas in combination with their diversity result in the
        conclusion that it is appropriate to establish "a continuum of
        increasingly incentive-based approaches which permits a company
        to select a plan best fitting its circumstances."[^382]

    -   The Commission initially attempted to achieve this continuum by
        adopting Price Caps for larger carriers; "Optional Incentive
        Regulation" ("OIR") for all rate-of-return local exchange
        carriers as formerly set forth in § 61.50 of the Commission's
        Rules; and historic cost tariff filing rules for both the
        traffic sensitive and common line rates for companies serving
        fewer than 50,000 lines, as set forth in § 61.39 of the
        Commission's Rules.[^383]

    -   Unfortunately, the continuum envisioned and desired by the
        Commission does not exist. The OIR rules did not turn out to be
        as useful to the rural rate-of-return carriers as both the
        carriers and the Commission had hoped. The availability of OIR
        was subsequently removed from the Commission's Rules.

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-   The need for the continuum of incentive regulation choice envisioned
    by the Commission, however, remains. The Carriers have concluded
    that the Commission's existing rules and policies, with appropriate
    modification and application, contain the needed elements to provide
    the desired continuum for the Carriers and other similarly situated
    companies that have no incentive regulation choice other than the
    existing price-cap plan which the Commission has recognized and
    understands to be inapplicable to their service areas.[^384]

-   Specifically, the Carriers propose that the Commission adopt the
    "Rate-of-Return Company Tariff Option" by revising its rules to
    permit all rate-of-return telephone companies the option in each of
    their study areas of electing to utilize the § 61.39 rules to
    establish applicable access charges.

    -   The Commission has previously noted the public interest benefits
        that have been produced by utilization of the § 61.39
        rules,[^385] and recognized that the rules exist both to promote
        the public interest and to provide incentives to local exchange
        carriers.[^386]

    -   The Commission has essentially recognized in its Further Notice
        in the MAG proceeding, as it has previously determined, that it
        is appropriate and necessary to expand incentives for efficiency
        and innovation.

    -   The limitation on the application of § 61.39 Rules to carriers
        serving fewer than 50,000 access lines was established in 1987:

        -   Prior to any experience with price caps or any alternative
            forms of incentive regulation;[^387]

        -   Prior to any experience in observing the value of the §
            61.39 rules for rural rate-of-return carriers;

        -   Prior to the failure of OIR to provide a viable alternative
            for carriers similarly situated to the Carriers; and

    -   The Carriers note that the Commission has previously been asked
        to consider expanding the availability of the § 61.39 rules. A
        similar proposal was set forth by USTA in the course of the
        Commission's 1998 Biennial Review. In response, the Commission
        declined to adopt the proposal noting that this, and related
        access pricing flexibility proposals, would be better addressed
        in the *Access Reform* proceeding.

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-   Accordingly, it is appropriate for the Commission to consider and
    adopt the Carriers' proposal to expand the availability of the §
    61.39 rules to all rate-of-return telephone companies. As the
    Commission's experience with the § 61.39 rules has demonstrated, the
    adoption of the Rate-of-Return Company Tariff Option will serve the
    public interest by providing a currently unavailable option to the
    Carriers and similarly situated rate-of-return telephone companies.
    Implementation of the Rate-of-Return Company Tariff Option will
    promote:

    -   Reasonable access rates;

    -   Reduced regulatory burden;

    -   Potential for reduced end user charges.

**II. The minimal Rule changes required to implement the Rate-of-Return
Company Tariff Option are consistent with both Commission policy and the
Telecommunications Act of 1996.**

-   The availability of the § 61.39 Rules is currently limited to local
    exchange carriers serving 50,000 or fewer access line in a given
    study area that are described as subset 3 carriers in § 69.602
    (i.e., annual operating revenues under \$40 million).

-   The Rate-of-Return Company Tariff Option may be implemented by
    substituting the following at the beginning of § 61.39:

> § 61.39 Optional supporting information to be submitted with letters
> of transmittal for Access Tariff filings effective on or after April
> 1, 1989, with respect to any study area operated by a Telephone
> Company otherwise subject to § 61.38.
>
> \(a\) *Scope*. This section provides for an optional method for filing
> for any study area served by a carrier that is otherwise subject to §
> 61.38.

-   A similar revision is required in § 61.38 to replace the reference
    to the 50,000 line and subset 3 limitation with respect to the
    application of § 61.39.

**III. Additional proposed modifications to the Commission's Rules will
align the operation of § 61.39 with the implementation of the MAG
decision.**

-   The Carriers propose no changes to the Traffic Sensitive portion of
    the § 61.39 tariff option. Under existing rules, carriers filing
    Traffic Sensitive rates under § 61.39 base their rates on historical
    costs and demand. For the initial § 61.39 tariff filing, a carrier
    uses actual costs and demand for the previous calendar year. For
    subsequent filings, the carrier uses the actual costs and demand for
    the two previous calendar years. § 61.39 uses regulatory lag to
    provide an incentive to the ILEC to control costs and stimulate
    demand, while the customers benefit from the self-correcting nature
    of the plan. Efficiencies gained during the tariff period are
    reflected in subsequent tariff filings.

-   In their review of the § 61.39 rules, the Carriers noted that the
    implementation of the MAG Order affects the operation of § 61.39
    with respect to the common line option.

    -   Under the existing § 61.39 rules, end user charges are set at
        the lower of cost or subscriber line charge ("SLC") caps; and
        the remainder of the common line revenue requirement is to be
        recovered through the CCL charge. The MAG rules, however, have
        eliminated CCL charges except for the small amount remaining for
        the final SLC cap transition; ICLS has been created to recover
        the residual.

    -   Accordingly, the § 61.39 rules should be revised to enable the
        electing company to recover the residual Common Line revenue
        requirement through the ICLS, consistent with the changes in the
        MAG order.

    -   The Carriers offer a procedure below to accomplish this in a
        manner consistent with the underlying policy intent of the
        Commission when it expanded the § 61.39 option to include the
        CCL rate.

    -   In the current environment of stagnant line growth, rural
        rate-of-return carriers should be provided with expanded and
        additional incentives to control costs. The Carriers have
        developed a proposed mechanism to revise § 61.39 in a manner
        that both provides that incentive, and benefits the customers by
        resetting support every two years based on efficiency gains of
        the previous two-year period.

    -   Specifically, the Carriers propose to revise § 61.39 with
        respect to the establishment of the CCL rate (and to make
        consistent rule changes in § 54 and § 69 of the Commission's
        Rules) to provide as follows:

        -   Establish per-line Common Line support at the historical
            level of costs divided by the historical level of access
            lines.

        -   The formula would initially be established by utilizing the
            historical period interstate Common Line revenue
            requirement, as defined in the FCC Part 69 rules, which
            includes the Line Port costs transferred from Local
            Switching and TIC reallocations.

        -   The Interstate Common Line revenue requirement for the
            historical period would be reduced by end user revenues, the
            special access surcharge, the line port costs associated
            with ISDN service in excess of basic analog service,[^388]
            and payments to USAC for universal service funding
            assessments.

        -   No reduction is required to offset CCL revenue; this result
            occurs because this plan will not be implemented until after
            the CCL charge is completely eliminated on June 30, 2003.

        -   A company electing § 61.39 for Common Line would establish
            an interstate Common Line revenue requirement per access
            line, net of SLCs, special access surcharges, ISDN Port
            charges, and USAC assessments. This per line amount, times
            the actual access lines, would become the company's Common
            Line revenue requirement during the optional tariff period
            and would be used as a final total amount for all interstate
            Common Line amounts.

        -   Under this proposed mechanism for addressing the common line
            revenue requirement within the framework of § 61.39, an
            electing company would receive Common Line revenue for the
            applicable study area from the following sources for the
            duration of the tariff period:

  ----------------------------- -----------------------------------------
  ***Common Line Revenue        ***Determination of Amount***
  Source***                     

  Subscriber Line Charges       Based on historical year costs, with rate
                                development consistent with current SLC
                                rules, using SLC caps in the rules.

  Per-Line Common Line          Historic year costs, adjusted for SLCs,
  Settlement Amount             special access surcharges, and ISDN port
                                charges.

  Special Access Surcharges     Based on historical period rate
                                development.

  ISDN Line Port Charges        Based on historical period rate
                                development.

  Universal Service Charges     Recovery based on current period
  (FUSC)                        assessments from USAC.
  ----------------------------- -----------------------------------------

**IV. Public Interest Benefits Result from the Implementation of the
Rate-of-Return Company Tariff Option.**

-   The adoption of the Rate-of-Return Company Tariff Option will expand
    the availability of a proven incentive regulation alternative to
    study areas served by all current rate-of-return telephone
    companies. In their consideration of § 61.39 as an expanded option
    available as part of a continuum of incentive options, the Carriers
    offer a mechanism to ensure that Common Line revenue requirement
    recovery continues to be achieved in a manner consistent with the
    Commission's goals. The adoption of the proposal otherwise is
    limited in its impact on existing mechanisms:

    -   Local Switching Support: The Carriers' proposal does not
        contemplate or require changes to the methodology by which Local
        Switching Support (LSS) is calculated and recovered. This
        element will continue to be paid based on estimated costs for
        the year, subject to true-up. Accordingly, the proposal has no
        impact on the manner in which LSS is treated under the existing
        rules.

    -   High Cost Loop Funding: The Rate-of-Return Company proposal does
        not contemplate or require any changes to the High Cost Loop
        Funding (HCLF). The Carriers respectfully submit that any
        current or subsequent consideration by the Commission regarding
        HCLF should be separate and apart from the consideration of this
        proposal. Consideration of any issues or proposals regarding
        HCLF should not be permitted to delay the expedited adoption of
        the Rate-of-Return Company Tariff Option and the resulting
        benefits of expanding the availability of § 61.39 to all
        rural companies.

    -   NECA Pooling and Incentive Regulation: The Carriers anticipate
        that the Rate-of-Return Company Tariff Option will work well
        with the NECA pooling process.

        -   Companies electing § 61.39 incentive regulation for Traffic
            Sensitive rates would settle with the Pool based on
            per-minute or per special access line settlement ratios.

        -   No administrative burden will result for companies electing
            the Rate-of-Return Company Tariff Option for Common Line.
            Participation in the NECA Common Line pool would be
            administratively simple; these companies would simply
            settle with NECA based on the per-line settlement amounts
            (as proposed in Section III above).

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-   The adoption of the Rate-of-Return Carrier Tariff Option will not be
    disruptive to other existing policies, practices or procedures:

    -   All Rate-of-Return Telephone Companies would be able to elect to
        apply § 61.39 rules to Traffic Sensitive, Common Line, or both,
        by study area in the same manner that a more limited subset of
        rural telephone companies are able to do today.

    -   As under the existing § 61.39 rules, the resetting of rates
        every two years will provide both protection to the electing
        telephone companies and benefits to IXCs.

    -   In the MAG proceeding, the Commission acknowledged the concerns
        of rural telephone companies with respect to any prospective
        mandated incentive regulation. The Rate-of-Return Carrier
        proposal is optional for all rural non-price cap companies and
        will not impact any rural telephone company in a negative
        manner. The adoption of the Rate-of-Return Company Tariff Option
        does not and should not impose any additional regulation or
        administrative burden on rural companies currently eligible to
        utilize § 61.39.

    -   The Rate-of-Return Carrier Tariff Option provides an incentive
        tariff filing option for many Rate-of-Return Company study areas
        that currently have no viable incentive option. The proposed
        option is founded on existing rules and polices and results, as
        the Commission has contemplated, in the expansion of a continuum
        of incentives available to non-price cap carriers.

    -   The Rate-of-Return Carrier Tariff Option can be easily adopted
        and implemented without administrative burden to any party. The
        proposed rule changes to expand the application of § 61.39 are
        very straight-forward. The remainder of the rule changes
        proposed by the Carriers address changes in an efficient manner
        consistent with existing policy to align § 61.39 with the
        changes in CCL revenue requirement recovery that result from the
        implementation of the MAG Order.

**V. The Commission Can Obtain Maximum Public Interest Value from the
Rate-of-Return Company Tariff Option by Expedited Adoption that Enables
Carriers to Elect to Use the Option Effective July 1, 2003.**

-   The Carriers respectfully request that the Commission afford the
    Rate-of-Return Company Tariff Option expedient consideration in
    order to ensure that the required rule changes are effective on a
    timely basis that enables rural telephone companies the opportunity
    to elect to implement this plan concurrent with the election for
    interstate tariffs effective July 1, 2003.

**VI. CONCLUSION**

-   Adoption of the Rate-of-Return Company Tariff Option will expand the
    availability of a successful incentive plan that has proven to
    address the needs of rural telephone companies in a manner that
    advances the public interest. The expansion of the availability of §
    61.39 provides a missing element on the Commission's intended
    continuum of incentive regulation alternative designed to encourage
    efficiencies and reasonable rates for both access customers and end
    user customers.

-   For an electing company, § 61.39 provides a strong incentive to
    operate efficiently during the tariff plan. As an incentive, the
    Rate-of-Return Company is able to keep any additional revenues
    earned while under incentive regulation. As a result of the gain in
    efficiencies, the access customer benefits. Rate reductions are
    reflected at the end of the first tariff period when the carrier
    files new rates based on the two-year period since it last filed
    rates. End users will benefit from § 61.39 filings through lower SLC
    rates and/or lower universal service funding requirements.

-   When the electing company files its new rates under § 61.39, the
    company uses the two-year historical period, costs and demand, to
    establish its rates for the next tariff period. As a result, its
    operating efficiencies during the initial tariff period translate
    into lower rates to carriers during the second tariff period. This
    result provides a powerful incentive to continue to operate more
    efficiently. The Carriers respectfully submit that the public
    interest will be well served if this strong and successful incentive
    currently available to some rural telephone companies is made
    available to all incumbent local exchange carriers that are not
    required to utilize price caps by the Commission's expedient
    adoption of the Rate-of-Return Company Tariff Option.

**STATEMENT OF**

**COMMISSIONER MICHAEL J. COPPS**

Re: *Multi-Association Group (MAG) Plan for Regulation of Interstate
Services of Non-Price Cap Incumbent Local Exchange Carriers and
Interexchange Carriers*, Report and Order and Second Further Notice of
Proposed Rulemaking

I support today's decision to update and refine aspects of the MAG
access reform plan for rate-of-return carriers. The measured step we
take in adjusting the all-or-nothing rule is the right one. On the one
hand, the all-or-nothing rule reflects a legitimate concern with
improper cost shifting between rate-of-return and price cap companies.
On the other, the rule may deter small and rural carriers interested in
acquiring lines from price cap carriers and then investing in and
improving their facilities. Our approach here---permitting
rate-of-return carriers to convert acquired price cap lines back to
rate-of-return regulation---strikes the appropriate balance.

When the MAG plan was adopted, I expressed concern about the abridged
process leading to our consideration. Although we are well down the road
already, I still have concerns about the impact of this plan on rural
consumers. We have a duty to ensure that all Americans have access to
reasonably comparable services at reasonably comparable rates. I urge
the Commission to monitor the impact of this plan to ensure that it
provides the stability necessary for investment in rural America.

**STATEMENT OF**

**COMMISSIONER JONATHAN S. ADELSTEIN**

Re: *Multi-Association Group (MAG) Plan for Regulation of Interstate
Services of Non-Price Cap Incumbent Local Exchange Carriers and
Interexchange Carriers*, Report and Order and Second Further Notice of
Proposed Rulemaking

I am pleased that we are modifying the all-or-nothing rule to permit a
rate-of-return carrier that has acquired price cap lines through a
merger or acquisition to convert the acquired price cap lines back to
rate-of-return regulation without obtaining a waiver. This modification
will help reduce the administrative burdens associated with these
mergers and acquisitions, and ensure that these unnecessary costs do not
discourage participation by interested parties. Moreover, acquiring
carriers can funnel those administrative costs into their new networks,
thereby fueling network development.

Pricing flexibility is critical to incumbent companies as they face
competitive entry in their service areas. Permitting rate of return
carriers to deaverage their rates geographically for transport and
special access services and to define both the scope and number of
zones, pursuant to certain qualifications, will better equip these
carriers to compete on a more level playing field with the new entrants
that are not bound by the same regulatory requirements.

I look forward to discussion in response to the NPRM regarding the
alternative regulation proposals and that regarding further relief under
the all-or-nothing rule to build upon the decision we've made today.

[^1]: *Multi-Association Group (MAG) Plan for Regulation of Interstate
    Services of Non-Price Cap Incumbent Local Exchange Carriers and
    Interexchange Carriers*, CC Docket No. 00-256, *Federal-State Joint
    Board on Universal Service*, CC Docket No. 96-45, *Access Charge
    Reform for Incumbent Local Exchange Carriers Subject to
    Rate-of-Return Regulation*, CC Docket No. 98-77, *Prescribing the
    Authorized Rate of Return for Interstate Services of Local Exchange
    Carriers*, CC Docket No. 98-166, Second Report and Order and Further
    Notice of Proposed Rulemaking in CC Docket No. 00-256, Fifteenth
    Report and Order in CC Docket No. 96-45, and Report and Order in CC
    Docket Nos. 98-77 and 98-166, 16 FCC Rcd 19613 (2001) (*MAG Order or
    MAG Further Notice, as appropriate*) \[subsequent history omitted\].
    We defer to a later order consideration of the outstanding petitions
    for reconsideration of the *MAG Order*.

[^2]: Appendix B lists the parties filing comments and replies on the
    *MAG Further Notice*, as well as the shortened name used for each
    party.

[^3]: Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56
    (1996) (1996 Act). The 1996 Act amended the Communications Act of
    1934 (Act). 47 U.S.C. §§ 151 *et seq*.

[^4]: *See* *Access Charge Reform, Price Cap Performance Review for
    Local Exchange Carriers, Transport Rate Structure and Pricing, End
    User Common Line Charges*, CC Docket Nos. 96-262, 94-1, 91-213,
    95-72, First Report and Order, 12 FCC Rcd 15982, 16126-27, paras.
    330-332 (1997) (*Access Charge Reform Order*) (subsequent history
    omitted).

[^5]: *See Access Charge Reform for Incumbent Local Exchange Carriers
    Subject to Rate-of-Return Regulation*, CC Docket No. 98-77, Notice
    of Proposed Rulemaking, 13 FCC Rcd 14238, 14240, paras. 3-4 (1998)
    (*1998 Notice*).

[^6]: Petition for Rulemaking of the LEC Multi-Association Group, RM No.
    10011, filed Oct. 20, 2000.

[^7]: In January 2001, the Commission requested comment on whether it
    should adopt the MAG plan as an integrated package, as requested by
    the MAG, or adopt specific aspects of the plan. *Multi-Association
    Group (MAG) Plan for Regulation of Interstate Services of Non-Price
    Cap Incumbent Local Exchange Carriers and Interexchange Carriers*,
    CC Docket No. 00-256, *Federal-State Joint Board on Universal
    Service*, CC Docket No. 96-45, *Access Charge Reform for Incumbent
    Local Exchange Carriers Subject to Rate-of-Return Regulation*, CC
    Docket No. 98-77, *Prescribing the Authorized Rate of Return for
    Interstate Services of Local Exchange Carriers*, CC Docket No.
    98-166, Notice of Proposed Rulemaking, 16 FCC Rcd 460, 461, para. 3
    (2001) (*MAG Notice*).

[^8]: *See MAG Order,* 16 FCC Rcd at 19616, para. 1.

[^9]: *See id*. at 19617, para. 3.

[^10]: In implementing these general goals, the Commission took the
    following specific steps. It: (1) adopted the MAG proposal to
    increase the Subscriber Line Charge (SLC) caps for rate-of-return
    carriers to the levels established for price cap carriers; (2)
    modified the Commission's rules to allow SLC deaveraging; (3) set
    the inefficient Carrier Common Line Charge (CCL) for phase-out as of
    July 1, 2003, when SLC caps are scheduled to reach their maximum
    levels; (4) shifted the non-traffic sensitive costs of local switch
    line ports to the common line category, and reallocated the
    remaining costs contained in the Transport Interconnection Charge
    (TIC) among all the access categories; (5) declined to prescribe a
    single, target rate for per-minute charges; (6) created ICLS to
    convert implicit support in the access rate structure to explicit
    support that is available to all ETCs; (7) rejected MAG proposals to
    impose new requirements on interexchange carriers regarding optional
    calling plans, minimum monthly fees, and pass-through of savings
    from lower access rates; (8) streamlined the rules for the
    introduction of new switched access services by extending to
    rate-of-return carriers rules similar to those governing price cap
    carriers; and (9) terminated the pending proceeding for prescription
    of the authorized rate-of-return, which was set at 11.25 percent in
    1990. A detailed background on interstate access charges, universal
    service and rate-of-return regulation is set forth in the *MAG
    Order*. *MAG Order*, 16 FCC Rcd at 19622-30, paras. 16-32.

[^11]: 47 C.F.R. § 61.41(c)(1).

[^12]: 47 C.F.R. § 61.41(c)(2).

[^13]: 47 C.F.R. §§ 61.41(b), 69.605 ("\[a\] telephone company that was
    participating in average schedule settlements on December 1, 1982,
    shall be deemed to be an average schedule company except that any
    company that does not join association tariffs for all access
    elements shall not be deemed to be an average schedule company.").

[^14]: 47 C.F.R. §§ 61.41(d), 61.41(a)(3).

[^15]: *See National Rural Telecom Assoc. v. FCC*, 988 F.2d 174
    (D.C.Cir. 1993).

[^16]: *See Policy and Rules Concerning Rates for Dominant Carriers,* CC
    Docket No. 87-313, Order on Reconsideration, 6 FCC Rcd 2637, 2706,
    para. 148 (1991) (*LEC Price Cap Reconsideration Order*); *see also
    ALLTEL Corporation Petition for Waiver of Section 61.41 of the
    Commission's Rules and Applications for Transfer of Control*,
    Memorandum Opinion and Order, 14 FCC Rcd 14191, 14199, para. 18
    (1999) (*ALLTEL Order*).

[^17]: *See LEC Price Cap Reconsideration Order,* 6 FCC Rcd at 2706,
    para. 148.

[^18]: *Id.*

[^19]: *Id*.

[^20]: *Id.*

[^21]: The Commission has granted waivers in cases where rate-of-return
    carriers have acquired price cap exchanges and a price cap company,
    thus permitting them to continue operating under rate-of-return
    regulation rather than requiring them to convert to price caps. In
    these instances, the Commission concluded that concerns about cost
    shifting and gaming were not at issue. *See, e.g., ATEAC, Inc.,
    Alaska Tel. Co., Arctic Slope Tel. Assoc. Coop., Inc., Interior Tel.
    Co., Inc., Mukluk Tel. Co., Inc., and United-KUK, Inc. Petitions for
    Waiver of Sections 61.41(c) and (d) of the Commission's Rules,*
    CCB/CPD No. 00-03, Memorandum Opinion and Order, 15 FCC Rcd 23511,
    23518 para. 14 (2000); *Minburn Telecom., Inc. Petition for Waiver
    of Sections 61.41(c) and (d) of the Commission's Rules*, CCB/CPD No.
    99-16, Memorandum Opinion and Order, 14 FCC Rcd 14184, 14188, para.
    8 (1999); *ALLTEL Corp. Petition for Waiver of Section 61.41 of the
    Commission's Rules and Applications for Transfer of Control,*
    CCB/CPD 99-1, Memorandum and Order, 14 FCC Rcd 14191, 14201-02 para.
    27-28 (1999) (*ALLTEL Order*) (finding of special circumstances
    based on service to diverse areas in 22 states with varied market
    conditions, thus making the application of a single productivity
    factor under price cap regulation unsuitable for ALLTEL's entire
    operation).

[^22]: *See MAG Further Notice*, 16 FCC Rcd at 19720 para. 265.

[^23]: *Id.* at 19720 para. 266.

[^24]: *Id.* at 19720-21 para. 267.

[^25]: *Id.*

[^26]: *Id.* at 19722-24 para. 270.

[^27]: *Id.*

[^28]: *Id.*

[^29]: *Id.*

[^30]: ITTA Comments at 2-3; ICORE Comments at 14-15.

[^31]: The commenters argue that the following safeguards are sufficient
    to eliminate the all-or-nothing rule: *tariff processes* (ITTA
    Comments at 5, Verizon Comments at 5, PRTC Comments at 11, ALLTEL
    Comments at 31-32), *accounting and cost allocation rules* (Verizon
    Comments at 5, PRTC Comments at 10, NRTA Comments at 11-12, ALLTEL
    Comments at 31, ICORE Comments at 15, Valor Reply Comments at 5),
    *affiliate transaction rules* (PRTC Comments at 10, NRTA Comments at
    11-12, ALLTEL Comments at 30-31), *jurisdictional separations rules*
    (Verizon Comments at 5, PRTC Comments at 10, ALLTEL Comments at
    30-31), *reporting requirements* (Verizon Comments at 5, PRTC
    Comments at 10-11, NRTA Comments at 11-12), *nonstructural
    mechanisms including complaint processes* (NRTA Comments at 11-12,
    Valor Reply Comments at 5) and *state regulators* (NRTA Comments at
    11-12, ALLTEL Comments at 31-32).

[^32]: NRTA Comments at 10-11, Valor Reply Comments at 4. Valor contends
    that carriers receiving a waiver so far have not misbehaved. Valor
    Reply Comments at 4.

[^33]: PRTC Comments at 10, NRTA Comments at 9-10. ALLTEL adds that, as
    price cap LECs seek to divest themselves of small exchanges, waiver
    requests will increase even more. ALLTEL Comments at 28-29.

[^34]: NTCA Comments at 7-8; ICORE Comments at 13-15.

[^35]: AT&T Comments at 16.

[^36]: *Id*. at 17, GSA Comments at 8. AT&T argues that because
    separations and tariff submissions are not based on independent
    audits, but rather on LEC reporting, they are an insufficient guard
    against abuses. AT&T Reply Comments at 14. AT&T further argues that
    detection of cost-shifting abuses through examination of LEC tariff
    filings is necessarily delayed because LECs make those filings only
    on a biannual basis. AT&T Reply Comments at 14.

[^37]: WorldCom Comments at 4.

[^38]: NTCA Comments at 7-8; ICORE Comments at 13-15.

[^39]: In the alternative, and until such time as the all-or-nothing
    rule may be further revised, carriers can continue to petition for
    waiver of the all-or-nothing rule so that they may operate
    affiliates under both rate-of-return and price cap regulation.

[^40]: Additionally, all outstanding interim waivers of the
    all-or-nothing rule that depend on our decision in this proceeding
    shall continue in effect until we issue a final order on this issue.
    *See, e.g., Valor Telecommunications, LLC Petition for Waiver of
    Section 61.41 of the Commission's Rules*, Memorandum Opinion and
    Order, 17 FCC Rcd 25544 (2002); *ALLTEL Corporation Petition for
    Waiver of Section 61.41, ALLTEL Corporation Petition to Extend
    Interim Waiver of Section 61.41 of the Commission's Rules,
    CenturyTel, Inc. and CenturyTel of Alabama, LLC Petition for Waiver
    of Sections 61.41(b) and (c) of the Commission's Rules, CenturyTel,
    Inc. and CenturyTel of Missouri, LLC Petition for Waiver of Sections
    61.41(b) and (c) of the Commission's Rules, Puerto Rico Telephone
    Company Petition for Waiver of Section 61.41 of the Commission's
    Rules or, in the Alternative, Request for Waiver of Section
    54.303(a) of the Commission's Rules*, Memorandum Opinion and Order,
    17 FCC Rcd 27694 (2002).

[^41]: *See supra* note 35 and accompanying text.

[^42]: *See supra* notes 30-31 and accompanying text.

[^43]: *See* Verizon Comments at 5 (proposing acquired carrier's
    election to rate-of-return regulation be irreversible, barring
    waiver for good cause shown); *cf.* Valor Comments at 7-8 ("a
    limited ability to change regulatory mechanisms is necessary to
    ensure that future investment in rural infrastructure and deployment
    of advanced services for rural communities is not unduly impeded").

[^44]: *See ALLTEL Order*, 14 FCC Rcd at 14192, para. 2.

[^45]: The acquired lines will be included by the acquiring
    rate-of-return carrier in calculating its common line revenue
    requirement, and the rate-of-return carrier will thus be eligible to
    receive ICLS. 47 C.F.R. § 54.902. Although this may increase
    universal service support through the ICLS mechanism, our experience
    reviewing requests for study area waivers indicates that the
    migration of lines is unlikely to significantly increase universal
    service funding. We note that, in most cases, parties transferring
    lines from a price cap carrier to a rate-of-return carrier will
    still be required to demonstrate a minimal impact on universal
    service in order to obtain the necessary study area waiver. A study
    area waiver would not be required if a price cap carrier transferred
    an entire study area to a rate-of-return carrier holding company
    that did not have an existing study area in that state.

[^46]: ITTA Comments at 2-3; ICORE Comments at 14-15.

[^47]: The LECs involved in the transaction would still need to obtain
    any required study area waiver. Similarly, an average schedule
    rate-of-return LEC would need to obtain a waiver to operate the
    acquired lines as part of an average schedule company.

[^48]: *See* 47 C.F.R. § 61.45(d); *Price Cap Performance Review for
    Local Exchange Carriers*, CC Docket No. 94-1, First Report and
    Order, 10 FCC Rcd 8961, 9100-08, paras. 321-334 (1995).

[^49]: 47 C.F.R. § 69.3(e)(7). A study area is a geographical segment of
    a carrier\'s telephone operations. Generally, a study area
    corresponds to a carrier\'s entire service territory within a state.
    Thus, carriers operating in more than one state typically have one
    study area for each state, and carriers operating in a single state
    typically have a single study area. Carriers perform jurisdictional
    separations at the study area level. For jurisdictional separations
    purposes, the Commission adopted a rule freezing study area
    boundaries effective November 15, 1984. Part 36 of the Commission's
    Rules, 47 C.F.R., Part 36, Appendix‑Glossary, definition of "Study
    Area." *See* MTS and WATS Market Structure, Amendment of Part 67 of
    the Commission\'s Rules and Establishment of a Joint Board, CC
    Docket Nos. 78‑72 and 80‑286, 49 Fed. Reg. 48325 (Dec. 12, 1984),
    adopted by the Commission, 50 Fed. Reg. 939 (Jan. 8, 1985).

[^50]: ^?^ 47 C.F.R. § 69.123. *See* *also* *Expanded Interconnection
    with Local Telephone Company Facilities, Amendment of the Part 69
    Allocation of General Support Facility Costs*, CC Docket Nos. 91-141
    and 92-222, Report and Order and Notice of Proposed Rulemaking, 7
    FCC Rcd 7369, 7454‑56 (1992) (*Special Access Expanded
    Interconnection Order*). Section 69.123(a) of the Commission\'s
    rules allows rate-of-return carriers to establish traffic density
    pricing zones in study areas in which at least one interconnector
    has taken a cross-connect. *See* 47 C.F.R. § 69.123(a). \"Expanded
    interconnection\" refers to the interconnection of one carrier's
    circuits with those of a LEC at one of the LEC's wire centers so
    that the carrier can provide certain facilities-based access
    services.

[^51]: *Special Access Expanded Interconnection Order*, 7 FCC Rcd at
    7454, n.413.

[^52]: ^?^ *Id.* at 7455, para. 179.

[^53]: A cross-connect is the cabling inside the LEC central office that
    connects the LEC network to the collocated equipment dedicated to a
    competitive access provider using expanded interconnection.

[^54]: The Commission also eliminated the requirement that price cap
    carriers file their zone plans prior to filing a tariff.

[^55]: 47 C.F.R. § 69.123(b)(1); *Access Charge Reform, Price Cap
    Performance Review for Local Exchange Carriers, Interexchange
    Carrier Purchases of Switched Access Services Offered by Competitive
    Local Exchange Carriers, and Petition of U S West Communications,
    Inc. for Forbearance from Regulation as a Dominant Carrier in
    Phoenix, Arizona MSA,* Fifth Report and Order and Further Notice of
    Proposed Rulemaking, 14 FCC Rcd 14221, 14254, para. 62 (1999)
    (*Pricing Flexibility Order*).

[^56]: 47 C.F.R. § 69.4(g); *Pricing Flexibility Order*, 14 FCC Rcd at
    14239-43, paras. 37-44.

[^57]: For the specifics of the triggers required, *see generally
    Pricing Flexibility Order*, 14 FCC Rcd at 14265-87, paras. 81-121.

[^58]: For the specifics of the triggers required, *see generally id.*
    at 14296-302, paras. 141-157.

[^59]: 47 C.F.R. § 69.709(c); *Pricing Flexibility Order*, 14 FCC Rcd at
    14296-302, paras. 141-157.

[^60]: *Pricing Flexibility Order*, 14 FCC Rcd at 14303-07, paras.
    160-167.

[^61]: 47 C.F.R. § 69.152(q); 47 C.F.R. § 69.104(r).

[^62]: 47 C.F.R. § 54.315.

[^63]: *MAG Order,* 16 FCC Rcd at 19698-700, paras. 199-205.

[^64]: *MAG* *Further Notice*, 16 FCC Rcd at 19711-17, paras. 241-59.

[^65]: *See, e.g.*, ALLTEL Comments at 46-47; ICORE Comments at 16; NTCA
    Comments at 8-9; NRTA Comments at 17.

[^66]: *See, e.g.*, AT&T Comments at 19-23; CUSC Comments at 7-8;
    WorldCom Comments at 4.

[^67]: *See, e.g.*, AT&T Comments at 19-20; GCI Comments at 10-11;
    WorldCom Comments at 4.

[^68]: *See* *Special Access Expanded Interconnection Order*, 7 FCC Rcd
    at 7454, para. 178; *Expanded Interconnection with Local Telephone
    Company Facilities, Amendment of Part 36 of the Commission's Rules
    and Establishment of a Joint Board*, CC Docket Nos. 91-141 and
    80-286,Second Report and Order and Third Notice of Proposed
    Rulemaking, 8 FCC Rcd 737, 7426, para. 98 (1993) (*Switched
    Transport Expanded Interconnection Order*).

[^69]: ALLTEL Comments at 47.

[^70]: NTCA Comments at 9.

[^71]: NRTA Comments at 19.

[^72]: 47 C.F.R. § 69.123(c) and (d).

[^73]: While rate-of-return carriers have not taken full advantage of
    the geographic deaveraging currently available under our rules, we
    do not believe this is sufficient grounds for not granting
    rate-of-return carriers greater flexibility to deaverage transport
    and special access services. The lack of flexibility in our density
    zone pricing rules may be responsible for rate-of-return carriers\'
    failure to take full advantage of such opportunities.

[^74]: *See* GCI Reply at 3.

[^75]: *See* Sprint Comments at 5-6.

[^76]: *See* *Pricing Flexibility Order*, 14 FCC Rcd at 14253-54, para.
    61.

[^77]: *Id.*

[^78]: *Id.*

[^79]: *Pricing Flexibility Order*, 14 FCC Rcd at 14253-54, para. 61.

[^80]: WorldCom Comments at 2-3; *but see* Sprint Comments at 5-6
    (supporting increasing the number of zones to permit further
    deaveraging to reflect different costs in different geographic
    zones).

[^81]: The Commission previously has imposed this requirement on
    geographically‑deaveraged transport services. *See* *Switched
    Transport Expanded Interconnection Order*, 8 FCC Rcd at 7428, para.
    104. The requirement also applies to deaveraging by price cap
    carriers. *Pricing Flexibility Order*, 14 FCC Rcd at 14255, para.
    63.

[^82]: 47 C.F.R. §69.123(e)(1), which provides that:

    > Telephone companies not subject to price cap regulation may charge
    > a rate for each service in the highest price zone that exceeds the
    > rate for the same service in the lowest priced zone by no more
    > than fifteen percent of the rate for the service in the lowest
    > priced zone during the period from the date that the zones are
    > initially established through the following June 30. The
    > difference between the rates for any such service in the highest
    > price zone and the lowest priced zone in a study area, measured as
    > a percentage of the rate for the service in the lowest priced
    > zone, may increase by no more than an additional fifteen
    > percentage points in each succeeding year, measured from the rate
    > differential in effect on the last day of the preceding tariff
    > year.

[^83]: 47 C.F.R. §§ 69.123(c)(2) and (d)(2).

[^84]: *See* AT&T Comments at 19-20, *but see* Sprint Comments at 5-6
    (cost-based geographically deaveraged rates should not permit
    rate-of-return carriers to erect barriers to entry).

[^85]: 47 U.S.C. § 208. *See* NTCA Reply at 9*.*

[^86]: 47 C.F.R. § 69.123(a)(1).

[^87]: GCI Comments at 14. We note that, because we retain the
    cross-connect trigger for the offering of volume and term discounts
    for transport services, rate-of-return carriers will be subject to a
    similar requirement in offering volume or term discounts for
    transport services.

[^88]: GCI Reply at 23.

[^89]: 47 C.F.R. § 69.111(j) and (k); 47 C.F.R. §69.112(g) and (h).

[^90]: The Commission first sought comment on a \"road map\" for
    increasing pricing flexibility in response to increased competition
    in the *Price Cap Performance Review for Local Exchange Carriers*,
    CC Docket No. 94-1, Second Further Notice of Proposed Rulemaking, 11
    FCC Rcd 858 (1995).

[^91]: *Pricing Flexibility Order*, 14 FCC Rcd at 14263, para. 79.

[^92]: *See, e.g.,* P. Arena & D. Turner, *Predatory Pricing and Related
    Practices under Section 2 of the Sherman Act,* 88 [Harv. L.
    Rev.]{.smallcaps} 697 (1975); O. Williamson, *Predatory Pricing: A
    Strategic an Welfare Analysis,* 87 [Yale L.J.]{.smallcaps} 284
    (1977); J. McGee, *Predatory Pricing Revisited*, 23 [J. Law &
    Econ.]{.smallcaps} 289 (1980); [F.M. Scherer, Industrial Market
    Structure and Economic Performance]{.smallcaps} 468-479 (1990).

[^93]: *MAG Further Notice*, 16 FCC Rcd at 19715, para. 250.

[^94]: *See, e.g.*, NRTA Comments at 18-19; TCA Comments at 4-5.

[^95]: TCA Comments at 4-5; GCI Reply at 5-8.

[^96]: *See* GCI Reply at 10-11.

[^97]: *See, e.g.*, AT&T Comments at 19-20; WorldCom Comments at 4;
    Sprint Comments at 5.

[^98]: The Joint Board recently released data showing that only 12
    percent of access lines were multi-line business lines in rural
    exchanges, compared to 21 percent in price cap exchanges. Rural Task
    Force: "The Rural Difference" White Paper 2 at 35.

[^99]: *See, e.g.*, ITTA Comments at 8.

[^100]: These include triggers such as the filing of a collocation or
    interconnection tariff, or the rate-of-return carriers renunciation
    of the rural exemption under section 251(f)(1), *see generally,
    e.g.*, ITTA Reply at 10*.* NTCA argues that the Commission should
    not require the presence of a carrier with ETC status in the serving
    area, the issuance of a request for proposal (RFP) by a customer in
    the carrier's serving area, the filing of a tariff offering UNEs, or
    the receipt of a request for UNEs. NTCA Comments at 10. NTCA also
    argues that these triggers would not be competitively neutral. *Id.*
    Other parties argue that pricing flexibility should not be permitted
    unless UNEs are available in the study area, AT&T Comments at 23, or
    a rate-of-return carrier has renounced the competition-limiting
    provisions of section 251(f)(1) and (2). *See* CUSC Comments at 7-8.

[^101]: *MAG Further Notice*, 16 FCC Rcd at 19715, para. 250, citing
    *ATU Telecommunications Request for Waiver of Sections 69.106(b) and
    69.124(b)(1) of the Commission's Rules*, Order, 15 FCC Rcd 20655,
    20662, para. 22 (2001). The ATU case involved a waiver of two rules
    for services that rate-of-return carriers were not authorized to
    offer at volume and term discounts and was accompanied by a
    representation that ATU did not intend to raise any rates.

[^102]: GCI Reply at 19-20.

[^103]: ALLTEL Comments at 49.

[^104]: *See generally American Telephone and Telegraph Company
    Revisions to Tariff F.C.C. No. 259, Wide Area Telecommunications
    Service (WATS)*, CC Docket No. 80-765, Memorandum Opinion and Order,
    84 FCC.2d 158 (1980).

[^105]: *MAG Further Notice*, 16 FCC Rcd at 19717, paras. 257-58.

[^106]: *See, e.g.,* GCI Comments at 15-16; AT&T Comments at 21-22.

[^107]: TCA Comments at 5.

[^108]: GCI Comments at 16.

[^109]: AT&T Comments at 19-20; GCI Comments at 18.

[^110]: *MAG Further Notice*, 16 FCC Rcd at 19716-17, paras. 256-57,
    259.

[^111]: *See, e.g.*, AT&T Comments at 19-21; GCI Comments at 14-18.

[^112]: *See* *Special Access Expanded Interconnection Order*, 7 FCC Rcd
    at 7457-58, para. 186 (rejecting proposals to permit individual
    case-based pricing arrangements in response to competitors'
    offerings).

[^113]: *See, e.g.*, NTCA Comments at 9; NRTA Comments at 18.

[^114]: NRTA Comments at 19.

[^115]: AT&T Comments at 19-20; *accord* GCI Comments at 12-13, 16;
    WorldCom Comments at 4.

[^116]: *See* AT&T Comments at 19-20.

[^117]: *See* GCI Comments at 12.

[^118]: *MAG Further Notice*, 16 FCC Rcd at 19716, para. 252.

[^119]: NECA Comments at 9-10. It notes that it currently offers term
    discounts for high-capacity, synchronous optical channel services
    and DSL access services. *Id*. at n.16.

[^120]: NECA Reply at 4.

[^121]: *Id*. *See also* NRTA Comments at 19-20, arguing that small and
    mid-sized carriers should not have to give up the administrative and
    other benefits of pooling for the competitive benefits of pricing
    flexibility.

[^122]: AT&T Comments at 21-22; GCI Comments at 12.

[^123]: 47 C.F.R. § 61.38.

[^124]: 47 C.F.R. § 61.39.

[^125]: AT&T Comments at 21-22; GCI Comments at 12.

[^126]: *MAG Order*, 16 FCC Rcd at 19641-42, paras. 57-60.

[^127]: GCI Comments at 15.

[^128]: *Access Charge Reform Order*, 12 FCC Rcd at 16285, para. 220.

[^129]: GCI Comments at 15.

[^130]: *Id.* at 12.

[^131]: *Id.* at 11-13.

[^132]: *Id*.

[^133]: *MAG Further Notice*, 16 FCC Rcd at 19724-26, paras. 272-76. The
    Commission tentatively concluded that the merger would occur on July
    1, 2003, but in order to provide adequate notice of our action here,
    we conclude that the merger will occur on July 1, 2004.

[^134]: *MTS and WATS Market Structure,* CC Docket No. 78-72, Third
    Report and Order, Phase I*,* 93 FCC.2d 241, 243-44, paras. 3-5,
    279-97, paras. 124-96 (1983) (*1983 Access Charge Order*).

[^135]: *Id.* at 327-29, paras. 312-18, 333-36, paras. 339-49. Pooling
    carriers charge rates set by NECA, pool their interstate access
    revenues, and recover their costs from the pools, including a return
    on investment. *MAG Order*, 16 FCC Rcd at 19624, para. 20. The
    Commission concluded that a common tariff and pooling arrangement
    covering the CCL charge was necessary because LEC-specific CCL rates
    could generate significant pressures on IXCs to deaverage interstate
    toll rates. *1983 Access Charge Order*, 93 FCC 2d 241, para. 314.

[^136]: *1983 Access Charge Order*, 93 FCC 2d at 328, para. 314. Toll
    rate averaging and rate integration are longstanding Commission
    policies that Congress codified in the 1996 Act. *See* 47 U.S.C. §
    254(g).

[^137]: *See 1983 Access Charge Order*, 93 FCC 2d at 327, para. 312,
    328, para. 317. For example, pooling limited LEC flexibility in cost
    recovery, established economically inefficient cost and price
    distortions, and reduced incentives for LECs to contain costs. *See
    MTS and WATS Market Structure Amendment of Part 67 of the
    Commission's Rules and Establishment of a Joint Board*, CC Docket
    Nos. 78-72 and 80-286, Report and Order, 2 FCC Rcd 2953, 2956-58
    paras. 23, 33 (1987) (*1987 Access Charge Order*)*.* The Commission
    has also recognized that the pool provides additional benefits to
    pooling carriers, including the pooling of risk and tariff agency
    services. *See* *MAG Order*, 16 FCC Rcd at 19726, para. 276.

[^138]: *1987 Access Charge Order*, 2 FCC Rcd at 2956-58, paras. 23-26,
    32-33.

[^139]: *Id.*

[^140]: *Federal-State Joint Board on Universal Service*, CC Docket No.
    96-45, Report and Order, 12 FCC Rcd 8776, 9164-65, para. 756 (1997)
    (*Universal Service First Report and Order*).

[^141]: *Id.* at 9165 para. 757.

[^142]: *Id.*; *see Federal-State Joint Board on Universal Service*, CC
    Docket No. 96-45, *Access Charge Reform, CC Docket No. 96-262, Price
    Cap Performance Review for Local Exchange Carriers, CC Docket No.
    94-1, Transport Rate Structure and Pricing, CC Docket No. 91-213,
    End User Common Line Charge, CC Docket No. 95-72, Fourth Order on
    Reconsideration*, 13 FCC Rcd at 5361-63, paras. 74, 76 (*Universal
    Service Fourth Order on Reconsideration*).

[^143]: *Universal Service First Report and Order*, 12 FCC Rcd at
    9165-66, paras. 757-59.

[^144]: *Id.* at 8942, para. 306. Beginning in 2000, the annual growth
    was based on inflation. *See* 47 C.F.R. § 54.303(a)(4).

[^145]: In October 1997, the Commission granted a request for waiver by
    NECA, permitting the NECA pool to charge a CCL rate other than the
    average CCL rate charged by price cap carriers. *Access Charge
    Reform*, CC Docket No. 96-262, *Price Cap Performance Review for
    LECs*, CC Docket No. 94-1, *Transport Rate Structure*, CC Docket No.
    91-213, Second Order on Reconsideration and Memorandum Opinion and
    Order, 12 FCC Rcd 16606, 16334-36, paras. 86-89 (1997). Under the
    conditions of the waiver, the NECA common line pool was permitted to
    compute the CCL rate as the per-minute amount necessary to recover
    the difference between revenues from SLCs, LTS, and special access
    surcharges and the pool's common line revenue requirement. *Id.* at
    16335-36, para. 89.

[^146]: *Universal Service Fourth Order on Reconsideration*, 13 FCC Rcd
    at 5361-63, paras. 74-76.

[^147]: *Id.* at 5360, para. 69.

[^148]: *Id.*

[^149]: *Id.* at 5362, para. 74.

[^150]: *Id.*

[^151]: *MAG Order*, 16 FCC Rcd at 19667-69, paras. 128-31.

[^152]: *Id.* at 19668-69, para. 130, 19673-74, para. 142.

[^153]: *Id.* at 19667-69, paras. 128-31.

[^154]: *Id.* at 19672, para. 138.

[^155]: *Id.* at 19672-73, paras. 139-41, 19724-26, paras. 272-76.

[^156]: *Id.* at 19672-73, paras. 139-41. The Commission ordered a
    graduated phase-out of the CCL charge between January 1, 2002, and
    July 1, 2003, contemporaneous with increases to the residential and
    single-line business SLC caps. *Id.* at 19644-45, para. 65. This
    phase-out of the CCL charge prevented a spike in ICLS during the
    gradual phase-in of increased SLC caps. *Id.*

[^157]: *Id.* at 19672-73 paras. 139-40.

[^158]: *Id.* at 19724-26, paras. 139-41. In an order released on June
    13, 2002, the Commission amended its rules governing LTS.
    *Multi-Association Group (MAG) Plan for Regulation of Interstate
    Services of Non-Price Cap Incumbent LECs and IXCs*, CC Docket No.
    00-256, Federal-State Joint Board on Universal Service, CC Docket
    96-45, Order and Second Order on Reconsideration in CC Docket No.
    00-256, 17 FCC Rcd 11593, 11594-97, paras. 4-10 (rel. June 13, 2002)
    (*June 2002 MAG Reconsideration Order*). The amended rules capped
    LTS support for certain carriers that would otherwise exceed their
    common line revenue requirements due to increased SLC revenues as a
    result of the *MAG Order* reforms.

[^159]: *MAG Order*, 16 FCC Rcd at 19672-73, paras. 139-41. Because ICLS
    is reduced by the amount of LTS that a carrier receives or, for
    carriers that have left the NECA common line pool, the amount of LTS
    that they would have received had they remained in the pool, a
    pooling carrier that currently is eligible for both ICLS and LTS
    will receive less total support if it chooses to leave the pool. 47
    C.F.R. § 54.901(a). Due to caps on other revenue sources, such a
    carrier likely would not be able to recover the lost universal
    service support from other sources.

[^160]: AT&T Comments at 23 n.20; CUSC Comments at 8-9; GCI Comments at
    18.

[^161]: NECA Comments at 10-15; Western Alliance Comments at 10-12; NECA
    Reply at 8-10.

[^162]: NTCA Comments at 6; *see also* NTCA Reply at 6-7 (supporting
    NECA's comments).

[^163]: *See* Letter from Colin Sandy, Associate Attorney, NECA, to
    Marlene H. Dortch, Secretary, FCC, dated March 14, 2003, Attachment
    (memorializing ex parte presentation by NECA, NRTA, NTCA, OPASTCO,
    and USTA).

[^164]: We find that Innovative's and CUSC's concerns regarding LTS and
    ICLS are misplaced. Innovative neither opposes nor supports the
    Commission's tentative conclusion, but raises concerns, based on
    language in the *MAG Order*, that a rate-of-return carrier may
    receive less support under the ICLS mechanism than it had previously
    received under LTS. Innovative Comments at 5-6. That would only
    occur, however, if the carrier would otherwise recover higher
    revenues than permitted by its common line revenue requirement, a
    situation that has been remedied by the Commission's amendment of
    the LTS rules in June 2002. *See June 2002 MAG Reconsideration
    Order*, 17 FCC Rcd at 11596-97, para. 8. CUSC argues that the
    current coexistence of LTS and ICLS permits rate-of-return carriers
    to receive double support for the common line. CUSC Comments at 8-9.
    Although LTS and ICLS perform duplicative functions, the two
    mechanisms are complementary with respect to the amount of support
    provided. Because a carrier's ICLS is reduced by any LTS received,
    the carrier would not recover more combined support than it would
    receive if ICLS or LTS were the sole sources of support for the
    interstate common line. *See MAG Order*, 16 FCC Rcd at 19673, para.
    141.

[^165]: In other cases, LTS would have permitted some carriers to earn
    more than their common line revenue requirements had the Commission
    not amended its rules to limit support in a manner consistent with
    the ICLS rules. *See June 2002 MAG Reconsideration Order*, 17 FCC
    Rcd at 11596-97, para. 8.

[^166]: *See*, *e.g*., NECA Comments at 13 ("As the FNPRM points out,
    however, the principal rationale for providing LTS funding to NECA
    pool participants (*i.e.*, assuring nationwide comparability of NECA
    pool CCL rates) will no longer apply following elimination of the
    CCL charge."). No commenter contends that LTS serves any purpose
    other than encouraging participation in the NECA common line pool.
    *See* NECA Comments at 10-15; NTCA Comments at 6; Western Alliance
    Comments at 10-12; NTCA Reply at 6-7.

[^167]: *1987 Access Charge Reform Order*, 2 FCC Rcd at 2957, para. 33
    ("The long term support mechanism allows \[pooling\] carriers to
    maintain the nationwide averaged CCL rate that would have existed
    had the mandatory full common line pool been retained.")

[^168]: *Universal Service First Report and Order*, 12 FCC Rcd at 9165,
    para. 757.

[^169]: 47 C.F.R. § 54.303.

[^170]: NECA has introduced rate-banding and plans to allow pooling
    carriers to disaggregate their SLCs as means for carriers to set
    their prices competitively, and notes that pooling carriers may file
    their tariffs separately in any event. NECA Comments at 14.

[^171]: *See MAG Order*, 16 FCC Rcd at 19726, para. 276; *see also
    Regulatory Reform for LECs Subject to Rate of Return Regulation*, CC
    Docket No. 92-135, Notice of Proposed Rulemaking, 7 FCC Rcd 5023,
    5030 (1992); *MTS and WATS Market Structure*, CC Docket No. 78-72,
    *Amendment of Part 67 of the Commission's Rules and Establishment of
    a Joint Board*, CC Docket No. 80-286, Memorandum Opinion and Order
    on Reconsideration, 3 FCC Rcd 4543, 4560 n. 108 and accompanying
    text (1988).

[^172]: To the contrary, some commenters supporting the retention of LTS
    argue that LTS itself does not provide a significant incentive for
    pool participation. These commenters argue that, for the low-cost
    carriers most likely to leave the pool, "availability or
    non-availability of LTS is not likely to be a significant factor in
    reaching a decision as to whether to exit the pool." NECA Comments
    at 14; Western Alliance Comments at 11 ("Those carriers having
    relatively low common line costs are unlikely to be influenced to a
    significant degree by the availability or non-availability of
    LTS."); NTCA Reply at 7.

[^173]: NECA generally asserts that the *MAG Order* carried out
    "extraordinary changes in universal service support and access
    charge mechanisms," but offers no specific concerns to justify
    deferring the merger of LTS into ICLS. NECA Comments at 10-15.

[^174]: For example, an individual carrier's common line revenues will
    no longer be threatened by fluctuating minutes of use or inaccurate
    cost projections that may result in insufficient CCL charge revenues
    because each carrier will recover its precise common line revenue
    requirement from ICLS.

[^175]: *See* CenturyTel, Inc., Ex Parte in CC Docket Nos. 96-45, 98-77,
    98-166 and 00-256 (filed Dec. 23, 2002); ALLTEL Communications,
    Inc., Madison River Communications LLC and TDS Telecommunications
    Corporation, Ex Parte in CC Docket Nos. 96-45, 98-77, 98-166 and
    00-256 (filed Jan. 31, 2003); letter from Stephen Kraskin, Esq.,
    counsel for ALLTEL Communications, Inc., Madison River
    Communications LLC and TDS Telecommunications Corporation, to
    Marlene H. Dortch, Secretary, FCC, dated May 9, 2003 (Kraskin
    letter) (amending plan to reflect availability to all rate-of-return
    carriers rather than just to rural rate-of-return carriers).

[^176]: *See* *MAG Order*, 16 FCC Rcd at 19622-24, paras. 16-20.

[^177]: *Id*. at 19701-02, paras. 208-10.

[^178]: 47 U.S.C. § 204(a)(3); *See* *ACS of Anchorage, Inc. v. FCC*,
    290 F.3d 403 (D.C. Cir 2002).

[^179]: Rates are deemed lawful pursuant to section 204(a)(3) if they
    are not suspended before becoming effective. The majority of filed
    tariff rates are not suspended and therefore are deemed lawful.

[^180]: 47 C.F.R. § 65.700(b).

[^181]: The price cap regulations also give price cap carriers greater
    flexibility in determining the amount of revenues that may be
    recovered from a given access service. The price cap rules group
    services together into different baskets, service categories, and
    service subcategories. The rules then identify the total permitted
    revenues for each basket or category of services. Within these
    baskets or categories, price cap carriers are given some discretion
    to determine the portion of revenue that may be recovered from
    specific services. Subject to certain restrictions, this flexibility
    allows price cap carriers to alter the access charge rate level
    associated with a given service. For example, within the category of
    switching services, a price cap carrier may choose to recover a
    greater portion of its switching revenues through access charges
    assessed to one kind of switching service rather than through
    charges assessed to another switching service. Although the LEC must
    still observe the switched-access rate structure that is set forth
    in Part 69 of our rules (which determines what services may be
    offered and whether charges may be imposed on a per-minute or
    flat-rated basis), the rate level of the access charge will vary
    depending on the amount of revenues that the price cap carrier
    chooses to recover from a given service.

[^182]: *Price Cap Performance Review for Local Exchange Carriers*, CC
    Docket No. 94-1, Fourth Report and Order, CC Docket No. 96-262,
    Second Report and Order, 12 FCC Rcd 16642, 16700 (1997), aff\'d in
    part, rev\'d in part, *USTA v. FCC*, 188 F.3d 521 (D.C. Cir 1999).

[^183]: *See* 47 C.F.R. § 61.3(qq).

[^184]: 47 U.S.C. § 201(b); *MAG* *Further Notice,* 16 FCC Rcd at 19706,
    para. 221.

[^185]: *MAG Further Notice, 16 FCC Rcd* at 19706, para. 223.

[^186]: *Id*. at 19707, para. 225.

[^187]: *Id.* at 19707*,* para. 227*.*

[^188]: *Id.* at 19708, para. 228*.*

[^189]: *Id.* at 19708-09, paras. 229-32*.*

[^190]: *Id.* at 19709-10, paras. 234-37. The Commission also inquired
    about whether a system of regulating with a lag might be considered.
    Under such an approach, an initial productivity factor would be
    selected and, at subsequent periods, such as every three years, the
    productivity factor would be revised based on the preceding periods
    actual performance. *Id*.

[^191]: *Id.* at 19709, para. 233*.*

[^192]: *Id.* at 19711, para. 239*.*

[^193]: NRTA Comments at 7.

[^194]: ALLTEL Comments at 19-20.

[^195]: *Id.* at 39.

[^196]: *See, e.g.*, ALLTEL Comments at 5; GVNW Comments at 2-4; ICORE
    Comments at 11-13; ITTA Comments at 6-7; NRTA Comments at 4-7
    (rate-of-return carriers have less opportunity to achieve lower
    costs due to their limited size, their lumpy investment patterns,
    and the fluctuating operating expenses); NTCA Comments at 2-3;
    Nebraska Rural Carriers Comments at 2-3; Telecom Consulting Assoc.
    Comments at 2-3 (should not be tied to levels of competition, but
    should be permitted if an ETC has been designated); Ronan and Hot
    Springs Comments at 5; Western Alliance Comments at 5-6.

[^197]: ALLTEL Comments at 8.

[^198]: *See, e.g.*, AT&T Comments at 13-15 (above 50,000 lines);
    Nebraska Rural Carriers Comments at 3 (optional below 100,000
    lines); Sprint Comments at 4 (mandatory for all rate-of-return
    carriers); WorldCom Comments at 3 (above 200,000 lines); GCI Reply
    at 2 (above 50,000 lines).

[^199]: CUSC Comments at 3.

[^200]: *See, e.g.*, AT&T Comments at 8-12; GCI Comments at 4-10; GSA
    Comments at 5-7; WorldCom Comments at 3-4.

[^201]: AT&T Comments at 6; GCI Comments at 8-10; Sprint Comments at 4.

[^202]: *See, e.g.*, GVNW Comments at 4-5 (problematic to establish a
    productivity factor given the small size of rate-of-return carriers;
    special attention should be given to LECs with fewer than 50,000
    lines if a productivity factor is to be adopted); Ronan and Hot
    Springs Comments at 1-5; Western Alliance Comments at 7.

[^203]: *See, e.g.*, Ronan and Hot Springs Comments at 5.

[^204]: *See, e.g.*, AT&T Comments at 11-12; Sprint Comments at 3 (a
    higher X-Factor would return more of productivity gains to the
    consumers annually, thereby permitting a LEC to earn more before
    being required to share any increased profits); WorldCom at 3-4.

[^205]: *See, e.g.*, ALLTEL Comments at 45-46; Ronan and Hot Springs
    Comments at 5; Sprint Comments at 3.

[^206]: *See, e.g.*, AT&T Comments at 11-12.

[^207]: Under an RPL approach, a rate-of-return carrier would determine
    its total revenues from, for example, the common line category, and
    divide that by the number of lines to obtain a revenue per line
    amount. This RPL would become the base that would be used to
    establish future revenue levels. The RPL level could be adjusted by
    growth and productivity factors, depending on the terms of an
    alternative regulation plan that might be adopted.

[^208]: AT&T Comments at 4-6; GCI Comments at 10.

[^209]: ICORE Comments at 11-12.

[^210]: GSA Comments at 9-11.

[^211]: NECA operates two pools: the common line pool and the
    traffic-sensitive pool, the latter including local switching,
    transport, and special access. Pooling carriers charge rates set by
    NECA that are based on the costs of those carriers that participate
    in the pool or, in the case of banded rates, the costs of those
    carriers falling within the particular band. For a particular
    tariff, participating LECs pool their interstate access revenues
    from services offered pursuant to that tariff. Rate-of-return
    carriers recover their costs from the pools, including a return on
    investment that is equal for all participating rate-of-return
    carriers in the pool. This recovery of all costs plus an equal
    return for all rate-of-return carriers provides the risk sharing
    feature of the pooling process.

[^212]: *See, e.g.*, AT&T Comments at 6-7.

[^213]: GCI Comments at 5-7.

[^214]: *See, e.g.*, NRTA Comments at 17; NTCA Comments at 4.

[^215]: Rather than settling with the NECA pool on the basis of its own
    costs, an average schedule company receives settlements from the
    NECA pool based on a formula, called the average schedule, that is
    developed based on a study of the costs of comparable cost
    companies.

[^216]: NECA Comments at 8.

[^217]: AT&T Comments at 7.

[^218]: 47 C.F.R. § 61.39. This section allows a rate-of-return carrier
    with 50,000 lines or fewer to file tariffs every two years based on
    its demand and cost data from the previous two years to develop its
    rates for the subsequent two-year tariff period. These small
    rate-of-return carriers are not required to file the cost-support
    materials required by section 61.38 with their tariff filing, 47
    C.F.R. § 61.38.

[^219]: *See generally* Kraskin letter.

[^220]: CenturyTel Proposal at 1.

[^221]: *Id*. at 2.

[^222]: *Id*. This has the effect of freezing all rates at the target
    levels.

[^223]: *Id*. at 4.

[^224]: *Id*. at 6.

[^225]: *Id.* at 3. More specifically, CenturyTel proposes that the
    Commission amend section 54.901 so that if an electing carrier's
    existing ATS rate is above the target rate, the carrier can recover
    the difference between the target rate and its existing revenue
    requirement through a "TS Additive" to ICLS. *Id.* In addition,
    CenturyTel proposes, the "TS Additive" would be frozen on a study
    area basis for the duration of its plan. *Id.*

[^226]: *Id.* CenturyTel would clarify section 54.902 to make clear that
    ICLS support will follow transferred exchanges, and LTS will
    continue to be available when a buyer elects the new price caps.
    *Id.*

[^227]: *Id.* CenturyTel proposes this revision as an amendment to
    section 54.301(a).

[^228]: *Id.* CenturyTel proposes this revision as a redefinition of
    "price cap carrier," for the purposes of Part 54, Subpart J, in
    section 54.800.

[^229]: *Id.* CenturyTel proposes these revisions as amendments to
    sections 36.631 and 36.603. The rural growth factor would continue
    to apply to the portion of the high-cost fund that supports other
    rural LECs. All rural LECs would remain eligible to receive safety
    net and safety valve support. *Id.*

[^230]: ALLTEL Proposal at 3.

[^231]: *Id*. at 4.

[^232]: *Id.* at 5.

[^233]: *Id.*

[^234]: *Id.*

[^235]: The *MAG Further Notice* did not address whether price cap
    carriers that voluntarily elected price cap regulation should be
    allowed to remove one or more study areas from price cap regulation
    and return them to rate-of-return regulation or any alternative
    regulation plan adopted pursuant to the *MAG Further Notice*. We
    similarly limit this further notice to rate-of-return carrier
    election under the all-or-nothing rule, despite Valor's argument
    that price cap carriers in CALLS should be able to elect any
    alternative regulation plan adopted if that form of regulation is
    better suited to the needs of the carrier. Valor Reply at 8-9.

[^236]: *See generally MAG Further Notice*, 16 FCC Rcd at 19703-11,
    paras. 213-240, 19717-24, paras. 260-71.

[^237]: *See* *Developing a Unified Intercarrier Compensation Regime,*
    CC Docket No. 01-92, Notice of Proposed Rulemaking, 16 FCC Rcd 9610
    (2001).

[^238]: 47 U.S.C. § 201(b).

[^239]: 47 U.S.C. § 202(a).

[^240]: *MAG Further Notice*, 16 FCC Rcd at 19710, para. 235.

[^241]: *Pricing Flexibility Order*, 14 FCC Rcd at 14326, para. 207.

[^242]: *See* letter from Karen Brinkmann, Esq., counsel for CenturyTel,
    to Marlene H. Dortch, Secretary, FCC, dated Dec. 23, 2002,
    Attachment 1 at 1.

[^243]: *See* PRTC Comments at 2-5.

[^244]: *See* *id*. at 7-9.

[^245]: *See* 5 U.S.C. § 603. The RFA, *see* 5 U.S.C. § 601 *et seq*.,
    has been amended by the Small Business Regulatory Enforcement
    Fairness Act of 1996 (SBREFA), Pub. L. No. 104-121, Title II, 110
    Stat. 857 (1996).

[^246]: 5 U.S.C. § 605(b).

[^247]: 5 U.S.C. § 601(6).

[^248]: 5 U.S.C. § 601(3) (incorporating by reference the definition of
    "small business concern" in the Small Business Act, 5 U.S.C. § 632).
    Pursuant to 5 U.S.C. § 601(3), the statutory definition of a small
    business applies "unless an agency, after consultation with the
    Office of Advocacy of the Small Business Administration and after
    opportunity for public comment, establishes one or more definitions
    of such term which are appropriate to the activities of the agency
    and publishes such definition(s) in the Federal Register."

[^249]: 15 U.S.C. § 632.

[^250]: *MAG Further Notice*, 16 FCC Rcd at 19742-44, paras. 329-36.

[^251]: *See* 5 U.S.C. § 604.

[^252]: 5 U.S.C. § 604(a)(3).

[^253]: FCC, Wireline Competition Bureau, Industry Analysis and
    Technology Division, *Trends in Telephone Service*, Table 5.3
    (August 2003) (*Trends in Telephone Service*).

[^254]: 13 C.F.R. § 121.201, North American Industry Classification
    System (NAICS) code 513310 (changed to 517110 in October 2002).

[^255]: *Id*. § 121.201, NAICS code 513321 (changed to 517211 in October
    2002).

[^256]: *Id*. § 121.201, NAICS code 513322 (changed to 517212 in October
    2002).

[^257]: 5 U.S.C. § 601(3).

[^258]: Letter from Jere W. Glover, Chief Counsel for Advocacy, SBA, to
    William E. Kennard, Chairman, FCC (May 27, 1999). The Small Business
    Act contains a definition of "small business concern," which the RFA
    incorporates into its own definition of "small business." *See* 15
    U.S.C. § 632(a); 5 U.S.C. § 601(3). SBA regulations interpret "small
    business concern" to include the concept of dominance on a national
    basis. 13 C.F.R. § 121.102(b).

[^259]: 13 C.F.R. § 121.201, NAICS code 513310 (changed to 517110 in
    October 2002).

[^260]: U.S. Census Bureau, 1997 Economic Census, Subject Series:
    Information, "Establishment and Firm Size (Including Legal Form of
    Organization)," Table 5, NAICS code 513310 (issued October 2000).

[^261]: *Id.* The census data do not provide a more precise estimate of
    the number of firms that have employment of 1,500 or fewer
    employees; the largest category provided is "Firms with 1,000
    employees or more."

[^262]: 13 C.F.R. § 121.201, NAICS code 513310 (changed to 517110 in
    October 2002).

[^263]: *Trends in Telephone Service* at Table 5.3.

[^264]: 13 C.F.R. § 121.201, NAICS code 513310 (changed to 517110 in
    October 2002).

[^265]: *Trends in Telephone Service* at Table 5.3.

[^266]: *Id.*

[^267]: *Id.*

[^268]: 13 C.F.R. § 121.201, NAICS code 513310 (changed to 517110 in
    October 2002).

[^269]: *Trends in Telephone Service* at Table 5.3.

[^270]: *Id.*

[^271]: 13 C.F.R. § 121.201, NAICS code 513310 (changed to 517110 in
    October 2002).

[^272]: *Trends in Telephone Service* at Table 5.3.

[^273]: *Id.*

[^274]: 13 C.F.R. § 121.201, NAICS code 513310 (changed to 517110 in
    October 2002).

[^275]: *Trends in Telephone Service* at Table 5.3.

[^276]: *Id*.

[^277]: 13 C.F.R. § 121.201, NAICS code 513330 (changed to 517310 in
    October 2002).

[^278]: *Trends in Telephone Service* at Table 5.3.

[^279]: *Id.*

[^280]: 13 C.F.R. § 121.201, NAICS code 513310 (changed to 517110 in
    October 2002).

[^281]: *Trends in Telephone Service* at Table 5.3.

[^282]: *Id*.

[^283]: 13 C.F.R. § 121.201, NAICS code 517211 (changed from 513321 in
    October 2002).

[^284]: U.S. Census Bureau, 1997 Economic Census, Subject Series:
    Information, "Establishment and Firm Size (Including Legal Form of
    Organization)," Table 5, NAICS code 513321 (issued October 2000).

[^285]: *Id*. The census data do not provide a more precise estimate of
    the number of firms that have employment of 1,500 or fewer
    employees; the largest category provided is "Firms with 1,000
    employees or more."

[^286]: 13 C.F.R. § 121.201, NAICS code 517212 (changed from 513322 in
    October 2002).

[^287]: U.S. Census Bureau, 1997 Economic Census, Subject Series:
    Information, "Establishment and Firm Size (Including Legal Form of
    Organization)," Table 5, NAICS code 513322 (issued October 2000).

[^288]: *Id*. The census data do not provide a more precise estimate of
    the number of firms that have 1,500 or fewer employees; the largest
    category provided is "Firms with 1,000 employees or more."

[^289]: *See Amendment of Parts 20 and 24 of the Commission's Rules --
    Broadband PCS Competitive Bidding and the Commercial Mobile Radio
    Service Spectrum Cap*, WT Docket No. 96-59, Report and Order, 61 FR
    33859 (July 1, 1996); *see also* 47 C.F.R. § 24.720(b).

[^290]: *See* *id*.

[^291]: *See. e.g.,* *Implementation of Section 309(j) of the
    Communications Act -- Competitive Bidding*, PP Docket No. 93-253,
    Fifth Report and Order, 59 FR 37566 (July 22, 1994).

[^292]: FCC News, Broadband PCS, D, E and F Block Auction Closes, No.
    71744 (rel. January 14, 1997). *See also* *Amendment of the
    Commission's Rules Regarding Installment Payment Financing for
    Personal Communications Services (PCS) Licenses*, WT Docket No.
    97-82, Second Report and Order, 62 FR 55348 (Oct. 24,1997).

[^293]: *Amendment of the Commission's Rules to Establish New Personal
    Communications Services, Narrowband PCS*, Docket No. ET 92-100,
    Docket No. PP 93-253, Second Report and Order and Second Further
    Notice of Proposed Rulemaking, 65 FR 35875 (June 6, 2000).

[^294]: *See* Letter to Amy Zoslov, Chief, Auctions and Industry
    Analysis Division, Wireless Telecommunications Bureau, FCC, from
    Aida Alvarez, Administrator, SBA (Dec. 2, 1998).

[^295]: 13 C.F.R. § 121.201, NAICS code 513322 (changed to 517212 in
    October 2002).

[^296]: U.S. Census Bureau, 1997 Economic Census, Subject Series:
    Information, "Employment Size of Firms Subject to Federal Income
    Tax: 1997," Table 5, NAICS code 513322 (issued Oct. 2000).

[^297]: *Id*. The census data do not provide a more precise estimate of
    the number of firms that have employment of 1,500 or fewer
    employees; the largest category provided is "Firms with 1,000
    employees or more."

[^298]: *Amendment of Part 90 of the Commission's Rules to Provide for
    the Use of the 220-222 MHz Band by the Private Land Mobile Radio
    Service*, PR Docket No. 89-552, GN Docket No. 93-252, PP Docket No.
    93-253, Third Report and Order and Fifth Notice of Proposed
    Rulemaking, 12 FCC Rcd 10943, 11068-70, paras. 291-95 (1997) (*220
    MHz Third Report and Order*).

[^299]: *Id*. at 11068-70, para. 291.

[^300]: *See* letter to D. Phythyon, Chief, Wireless Telecommunications
    Bureau, FCC, from Aida Alvarez, Administrator, SBA (Jan. 6, 1998).

[^301]: *See generally* Public Notice, "220 MHz Service Auction Closes,"
    14 FCC Rcd 605 (1998).

[^302]: Public Notice, "Phase II 220 MHz Service Spectrum Auction
    Closes," 14 FCC Rcd 11218 (1999).

[^303]: 47 C.F.R. § 90.814(b)(1).

[^304]: *See* Letter from Aida Alvarez, Administration, Small Business
    Administration to Daniel B. Phythyon, Chief, Wireless
    Telecommunications Bureau, Federal Communications Commission (Oct.
    27, 1997). *See* Letter from Aida Alvarez, Administrator, Small
    Business Administration to Thomas Sugrue, Chief, Auctions and
    Industry Analysis Division, Wireless Telecommunications Bureau,
    Federal Communications Commission (Aug. 10, 1999).

[^305]: 47 C.F.R. § 90.814(b)(1) A request for approval of 800 MHz
    standards was sent to the SBA on May 13, 1999. The matter remains
    pending.

[^306]: *220 MHz Third Report and Order*, 12 FCC Rcd at 11068-70, paras.
    291-295, 62 FR 16004 at paras. 291-295 (1997).

[^307]: *See* Letter from Aida Alvarez, Administrator, Small Business
    Administration to Thomas Sugrue, Chief, Auctions and Industry
    Analysis Division, Wireless Telecommunications Bureau, Federal
    Communications Commission (June 4, 1999).

[^308]: *Revision of Part 22 and Part 90 of the Commission's Rules to
    Facilitate Future Development of Paging Systems*, WT Docket No.
    96-18, PR Docket No. 93-253, Memorandum Opinion and Order on
    Reconsideration and Third Report and Order, 14 FCC Rcd 10030, 10085,
    para. 98 (1999).

[^309]: *Trends in Telephone Service* at Table 5.3.

[^310]: *Id*. The SBA size standard is that of Paging, 13 C.F.R. §
    121.201, NAICS code 517211.

[^311]: *See* *Service Rules for the 746-764 MHz Bands, and Revisions to
    part 27 of the Commission's Rules*, WT Docket No. 99-168, Second
    Report and Order, 15 FCC Rcd 5299, 5344, para. 108 (2000).

[^312]: *See generally* Public Notice, "220 MHz Service Auction Closes,"
    Report No. WT 98-36 (Wireless Telecommunications Bureau, Oct. 23,
    1998).

[^313]: Public Notice, "700 MHz Guard Band Auction Closes," DA 01-478
    (rel. Feb. 22, 2001).

[^314]: The service is defined in § 22.99 of the Commission's Rules, 47
    C.F.R. § 22.99.

[^315]: BETRS is defined in §§ 22.757 and 22.759 of the Commission's
    Rules, 47 C.F.R. §§ 22.757 and 22.759.

[^316]: 13 C.F.R. § 121.201, NAICS code 513322 (changed to 517212 in
    October 2002).

[^317]: The service is defined in § 22.99 of the Commission's Rules, 47
    C.F.R. § 22.99.

[^318]: 13 C.F.R § 121.201, NAICS codes 513322 (changed to 517212 in
    October 2002).

[^319]: *Id*. § 121.201, NAICS code 513322 (changed to 517212 in October
    2002).

[^320]: *Amendment of the Commission\'s Rules Concerning Maritime
    Communications*, PR Docket No. 92-257, Third Report and Order and
    Memorandum Opinion and Order, 13 FCC Rcd 19853 (1998).

[^321]: *See* 47 C.F.R. §§ 101 *et seq*. (formerly, Part 21 of the
    Commission's Rules) for common carrier fixed microwave services
    (except Multipoint Distribution Service).

[^322]: Persons eligible under parts 80 and 90 of the Commission's Rules
    can use Private Operational-Fixed Microwave services. *See* 47
    C.F.R. Parts 80 and 90. Stations in this service are called
    operational-fixed to distinguish them from common carrier and public
    fixed stations. Only the licensee may use the operational-fixed
    station, and only for communications related to the licensee's
    commercial, industrial, or safety operations.

[^323]: Auxiliary Microwave Service is governed by Part 74 of Title 47
    of the Commission's Rules. *See* 47 C.F.R. Part 74. This service is
    available to licensees of broadcast stations and to broadcast and
    cable network entities. Broadcast auxiliary microwave stations are
    used for relaying broadcast television signals from the studio to
    the transmitter, or between two points such as a main studio and an
    auxiliary studio. The service also includes mobile television
    pickups, which relay signals from a remote location back to the
    studio.

[^324]: 13 C.F.R. § 121.201, NAICS code 513322 (changed to 517212 in
    October 2002).

[^325]: This service is governed by Subpart I of Part 22 of the
    Commission's Rules. *See* 47 C.F.R. §§ 22.1001-22.1037.

[^326]: 13 C.F.R. § 121.201, NAICS code 513322 (changed to 517212 in
    October 2002).

[^327]: *Id*.

[^328]: *See* Letter to Amy Zoslov, Chief, Auctions and Industry
    Analysis Division, Wireless Telecommunications Bureau, FCC, from
    Aida Alvarez, Administrator, SBA (Dec. 2, 1998).

[^329]: *See* Amendment of the Commission's Rules Regarding the
    37.0-38.6 GHz and 38.6-40.0 GHz Bands, ET Docket No. 95-183, *Report
    and Order*, 63 FR 6079 (Feb. 6, 1998).

[^330]: *Id.*

[^331]: *See* Letter to Kathleen O'Brien Ham, Chief, Auctions and
    Industry Analysis Division, Wireless Telecommunications Bureau, FCC,
    from Aida Alvarez, Administrator, SBA (Feb. 4, 1998).

[^332]: *Amendment of Parts 21 and 74 of the Commission's Rules with
    Regard to Filing Procedures in the Multipoint Distribution Service
    and in the Instructional Television Fixed Service and Implementation
    of Section 309(j) of the Communications Act -- Competitive Bidding*,
    MM Docket No. 94-131 and PP Docket No. 93-253, Report and Order, 10
    FCC Rcd 9589, 9593 para. 7 (1995).

[^333]: 47 C.F.R. § 21.961(b)(1).

[^334]: 13 C.F.R. § 121.201, NAICS code 513220 (changed to 517510 in
    October 2002).

[^335]: U.S. Census Bureau, 1997 Economic Census, Subject Series:
    Information, "Establishment and Firm Size (Including Legal Form of
    Organization)," Table 4, NAICS code 513220 (issued October 2000).

[^336]: In addition, the term "small entity" within SBREFA applies to
    small organizations (nonprofits) and to small governmental
    jurisdictions (cities, counties, towns, townships, villages, school
    districts, and special districts with populations of less than
    50,000). 5 U.S.C. §§ 601(4)-(6). We do not collect annual revenue
    data on ITFS licensees.

[^337]: *See* *Rulemaking to Amend Parts 1, 2, 21, and 25 of the
    Commission's Rules to Redesignate the 27.5-29.5 GHz Frequency Band,
    to Reallocate the 29.5-30.0 GHz Frequency Band, and to Establish
    Rules and Policies for Local Multipoint Distribution Service and for
    Fixed Satellite Services*, CC Docket No. 92-297, Second Report and
    Order, 12 FCC Rcd 12545 (1997).

[^338]: *Id.*

[^339]: *See id*.

[^340]: *See* Letter to Dan Phythyon, Chief, Wireless Telecommunications
    Bureau, FCC, from Aida Alvarez, Administrator, SBA (Jan. 6, 1998).

[^341]: *Implementation of Section 309(j) of the Communications Act --
    Competitive Bidding*, PP Docket No. 93-253, Fourth Report and Order,
    59 FR 24947 (May 13, 1994).

[^342]: *Amendment of Part 95 of the Commission's Rules to Provide
    Regulatory Flexibility in the 218-219 MHz Service*, WT Docket No.
    98-169, Report and Order and Memorandum Opinion and Order, 64 FR
    59656 (Nov. 3, 1999).

[^343]: *Id*.

[^344]: *See* Letter to Daniel B. Phythyon, Chief, Wireless
    Telecommunications Bureau, Federal Communications Commission, from
    Aida Alvarez, Administrator, Small Business Administration (Jan. 6,
    1998).

[^345]: 13 C.F.R. § 121.201, NAICS code 513322 (changed to 517212 in
    October 2002).

[^346]: U.S. Census Bureau, 1997 Economic Census, Subject Series:
    Information, "Employment Size of Firms Subject to Federal Income
    Tax: 1997," Table 5, NAICS code 513322 (issued Oct. 2000).

[^347]: *Id*. The census data do not provide a more precise estimate of
    the number of firms that have employment of 1,500 or fewer
    employees; the largest category provided is "Firms with 1,000
    employees or more."

[^348]: Teligent acquired the DEMS licenses of FirstMark, the only
    licensee other than TRW in the 24 GHz band whose license has been
    modified to require relocation to the 24 GHz band.

[^349]: *Amendments to Parts 1, 2, 87 and 101 of the Commission's Rules
    to License Fixed Services at 24 GHz*, WT Docket No. 99-327, Report
    and Order, 15 FCC Rcd 16934, 16967 (2000); *see also* 47 C.F.R. §
    101.538(a)(2).

[^350]: *Amendments to Parts 1, 2, 87 and 101 of the Commission's Rules
    to License Fixed Services at 24 GHz*, WT Docket No. 99-327, Report
    and Order, 15 FCC Rcd at 16967; *see also* 47 C.F.R. §
    101.538(a)(1).

[^351]: *See* Letter to Margaret W. Wiener, Deputy Chief, Auctions and
    Industry Analysis Division, Wireless Telecommunications Bureau, FCC,
    from Gary M. Jackson, Assistant Administrator, SBA (July 28, 2000).

[^352]: *See supra* § III.A.2.

[^353]: *See supra* § III.B.2.a.

[^354]: *Id.*

[^355]: *Id.*

[^356]: *Id.*

[^357]: *See supra* § III.C.2.

[^358]: *See* *supra* § III.B.2.a.

[^359]: *See supra* § III.B.2.b.

[^360]: *Id.*

[^361]: *See supra* § III.B.2.c.

[^362]: *See supra* § III.C.2.

[^363]: *Id.*

[^364]: *See* 5 U.S.C. § 801(a)(1)(A).

[^365]: *See* 5 U.S.C. § 604(b).

[^366]: *See* 5 U.S.C. § 603. The RFA, *see* 5 U.S.C. § 601 *et seq*.,
    has been amended by the Small Business Regulatory Enforcement
    Fairness Act of 1996 (SBREFA), Pub. L. No. 104-121, Title II, 110
    Stat. 857 (1996).

[^367]: 5 U.S.C. § 605(b).

[^368]: 5 U.S.C. § 601(6).

[^369]: 5 U.S.C. § 601(3) (incorporating by reference the definition of
    "small business concern" in the Small Business Act, 5 U.S.C. § 632).
    Pursuant to 5 U.S.C. § 601(3), the statutory definition of a small
    business applies "unless an agency, after consultation with the
    Office of Advocacy of the Small Business Administration and after
    opportunity for public comment, establishes one or more definitions
    of such term which are appropriate to the activities of the agency
    and publishes such definition(s) in the Federal Register."

[^370]: 15 U.S.C. § 632.

[^371]: *See* *supra* § IV.A.2.

[^372]: *See supra* § IV.A.3.

[^373]: *See* *supra* para. 72.

[^374]: 47 U.S.C. §§ 154(i), 154(j), 201-205, 254 and 403.

[^375]: *See supra* § V.A.2.

[^376]: *See id.*

[^377]: *See supra* § IV.A.3.

[^378]: 5 U.S.C. § 603(c)(1)--(c)(4).

[^379]: *See* 5 U.S.C. § 603(a).

[^380]: *Id.*

[^381]: See Electronic Filing of Documents in Rulemaking Proceedings, 63
    Fed. Reg. 24121 (1998).

[^382]: *In the Matter of Regulatory Reform for Local Exchange Carriers
    Subject to Rate of Return Regulation*, CC Docket No. 92-135, Report
    and Order released June 11, 1993 (the "[OIR Order]{.underline}"),
    para. 4.

[^383]: The optional application of § 61.39 to the common line rate was
    effectuated by the [OIR Order]{.underline}, and reflects the
    Commission's intent to enhance the provision of a continuum of
    incentive choices to non-price cap carriers.

[^384]: *See, e.g.,* [MAG Order]{.underline}, para. 86. "Rate-of-return
    carriers also have fewer opportunities than large price cap carriers
    to achieve cost savings because of their limited size, their lumpy
    investment patterns, and fluctuating operating expenses."

[^385]: "Our own review of the rates filed pursuant to Section 61.39 . .
    . demonstrates the success of these rules." [OIR Order]{.underline},
    para. 94.

[^386]: "Collectively, these revisions to our rules governing small and
    mid-size LECs were designed to assure reasonable rates, reduce
    regulatory burdens and introduce (or expand) incentives for
    efficiency and innovation." *In the Matter of Regulatory Reform for
    Local Exchange Carriers Subject to Rate of Return Regulation*,
    [Order on Reconsideration]{.underline}, February 18, 1997, at para.
    11.

[^387]: In establishing the limitation the Commission noted that it was
    considering forms of alternative or reduced regulation in separate
    proceedings.

[^388]: *See* § 69.130 of the Commission's Rules.