**Before the**

**Federal Communications Commission**

**Washington, D.C. 20554**

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| In the Matter of                 | * | CC Docket No. 96-262         |
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| Access Charge Reform             | ) | CC Docket No. 94-1           |
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| Price Cap Performance Review for | * | CC Docket No. 99-249         |
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ORDER ON REMAND

**Adopted: July 3, 2003 Released: July 10, 2003**

By the Commission:

# introduction

1.  In this order, we address two issues before the Commission on remand
    from the United States Court of Appeals for the Fifth Circuit.[^1]
    In the *CALLS Order*, the Commission adopted comprehensive reforms
    to the interstate access charge regime and universal service support
    for price cap carriers, based in part on a proposal submitted by the
    Coalition for Affordable Local and Long-Distance Service
    (CALLS).[^2] On September 10, 2001, the Fifth Circuit affirmed the
    *CALLS Order* in most respects, but remanded for further analysis
    and explanation the decisions to size the Interstate Access Support
    (IAS) mechanism at \$650 million and to adopt the 6.5 percent
    X-factor.[^3] For the reasons explained below, we conclude that the
    \$650 million IAS amount included in the integrated CALLS plan
    represents a reasonable estimate of the implicit support in access
    charges to be replaced with explicit support and is supported by the
    record in this proceeding. We also conclude that the record supports
    the adoption of a 6.5 percent X-factor to achieve the Commission's
    target rate levels for price cap carriers.

# background

## Interstate Access Charges

2.  Interstate access charges are imposed by local exchange carriers
    (LECs) to recover the costs of providing access to their networks
    for interstate and long-distance service.[^4] The Commission has
    long recognized that, to the extent possible, interstate access
    costs should be recovered in the manner in which they are incurred.
    In particular, non-traffic-sensitive costs---costs that do not vary
    with the amount of traffic carried over the facilities---should be
    recovered through flat-rate charges, and traffic-sensitive costs
    should be recovered through per-minute charges.[^5] This approach
    fosters competition and efficient pricing. The Part 69 rules
    governing access charges, however, have not been fully consistent
    with this goal. For example, the costs of the common line or loop
    that connects an end user to a LEC's central office should be
    recovered from the end user through a flat charge, because loop
    costs do not vary with usage.[^6] Yet the subscriber line charge
    (SLC), a flat monthly charge assessed directly on end users to
    recover interstate loop costs, has been capped since its inception
    due to affordability concerns.[^7] Historically, LECs recovered
    their remaining common line costs through per-minute carrier common
    line (CCL) charges imposed on interexchange carriers (IXCs) which,
    in turn, passed these charges on to their customers in the form of
    higher long distance rates.[^8] By making the end-user rate for long
    distance calls more expensive, CCL charges artificially suppressed
    demand for interstate long distance services.[^9] CCL charges also
    created significant implicit subsidies flowing from high-volume to
    low-volume users of interstate long distance services, which have a
    disruptive effect on competition in the markets for local exchange
    and exchange access services.[^10]

3.  Prior to 1991, LECs' access revenues were governed by
    "rate-of-return" regulation. Under rate-of-return regulation, an
    incumbent LEC is limited to recovering its costs plus a prescribed
    return on investment, and is potentially obligated to provide
    refunds if its interstate rate of return exceeds the authorized
    level.[^11] In 1991, the Commission implemented a price cap system
    for the largest incumbent LECs that altered the regulation of their
    interstate access charges.[^12] Rather than focusing on costs, price
    cap regulation focuses primarily on the rates incumbent LECs may
    charge and the revenues they may generate from interstate access
    services.[^13] By severing the direct link between authorized rates
    and realized costs, the price cap system was intended to create
    incentives for LECs to reduce costs and improve productivity, while
    maintaining affordable rates for consumers through the caps on
    prices.[^14]

4.  Although the initial price cap rates were set equal to the rates the
    LECs were charging under rate-of-return regulation, the rates of
    price cap LECs have been limited ever since by price indices that
    have been adjusted annually pursuant to formulas set forth in the
    Commission's Part 61 rules. Price cap carriers may earn returns
    higher or lower than the prescribed rate of return that incumbent
    LECs are allowed to earn under rate-of-return regulation. Price cap
    regulation encourages incumbent LECs to improve their efficiency by
    harnessing profit-making incentives to reduce costs, invest
    efficiently in new plant and facilities, and develop and deploy
    innovative service offerings, while setting price ceilings at
    reasonable levels. Individual companies retain an incentive to cut
    costs and increase productivity because, in the short run, their
    behavior has no effect on the prices they are permitted to charge,
    and they are able to keep any additional profits resulting from
    reduced costs.

## Universal Service

5.  One of the primary purposes of universal service support is to help
    provide access to telecommunications service in areas where the cost
    of such service otherwise might be prohibitively expensive.[^15]
    Historically, this purpose has been achieved both through explicit
    monetary payments and implicit support flows that enable carriers to
    serve high-cost areas at below-cost rates. Congress established
    principles for the preservation and advancement of universal service
    in the Telecommunications Act of 1996, directing the Commission to
    create explicit universal service support mechanisms that will be
    specific, predictable, and sufficient.[^16] The Commission has
    approached this goal by, among other things, pursuing reforms
    intended to make universal service explicit and portable to
    competitive carriers.[^17] Congress also articulated a national goal
    that consumers in all regions of the nation, including rural,
    insular, and high-cost areas, should have access to
    telecommunications services at rates that are affordable and
    reasonably comparable to rates charged for similar services in urban
    areas.[^18] Section 254 provides that federal universal service
    support mechanisms should be specific, predictable, and sufficient
    to achieve the purposes of the Act.[^19]

## Prior Commission Orders

6.  With the passage of the 1996 Act, the Commission determined that it
    was necessary to make substantial revisions to access charges and
    universal service in order to promote competition and preserve and
    advance universal service. Specifically, the Commission aligned the
    access charge rate structure more closely with the manner in which
    costs are incurred.[^20] In the *Access Charge Reform First Report
    and Order*, the Commission created the presubscribed interexchange
    carrier charge (PICC), a flat per-line charge imposed by a price cap
    LEC on an end user's IXC. To the extent that the SLC cap prevented a
    price cap LEC from fully recovering its costs through the SLC, [^21]
    the LEC could recover those costs through the PICC, up to the PICC
    cap.[^22] Any costs above the PICC cap could be recovered through
    the CCL charge.[^23] PICCs markedly reduced the inefficient
    per-minute recovery of local loop costs through the CCL charge, and
    increased the portion of loop costs recovered through flat
    charges.[^24]

7.  Unfortunately, the advent of PICCs also created market
    inefficiencies.[^25] Because IXCs recovered the residential PICCs on
    a per-account basis, residential customers with only one line paid
    the same as those with two or more lines, and so paid more than the
    costs IXCs incurred for providing them service.[^26] In addition,
    because PICCs were not assessed directly on consumers, but instead
    were subjected to averaging and mark-ups by the IXCs, consumers were
    prevented from making head-to-head comparisons among local service
    providers.[^27] Moreover, residential consumers paid more overall
    because IXCs included "transaction costs," such as Lifeline costs,
    universal service contributions, and bad debts associated with
    non-paying subscribers, in the PICCs passed through to their
    customers.[^28]

## The *CALLS Order*

8.  On May 31, 2000, the Commission adopted the *CALLS Order*, a
    five-year transitional interstate access and universal service
    reform plan for price cap carriers, largely based on a proposal from
    the CALLS members.[^29] In the *CALLS Order*, the Commission sought
    to address several controversial and interrelated issues. Incumbent
    LECs have traditionally argued that they must maintain their revenue
    streams from access charges in order to support universal service
    goals, while IXCs and consumers have argued that the prices charged
    and revenues recovered by incumbent LECs reflect the inefficient
    rate structure developed in a monopoly environment.[^30] In order to
    resolve these difficult issues, the CALLS members proposed their
    plan for comprehensive reform of the interrelated aspects of the
    interstate access charge regime and universal service.[^31] The
    Commission exercised its own independent judgment in reviewing the
    CALLS plan.[^32] The Commission reviewed it as a single, integrated
    proposal, "focus\[ing its\] inquiry on the reasonableness of the
    proposal taken as a whole."[^33] The Commission found, among other
    things, that "its essential constituent parts individually fall
    within the range of reasonableness."[^34] It also found that the
    CALLS plan served the public interest because it resolved several
    controversial, interrelated issues in a manner satisfactory to
    traditionally adverse industry groups and advanced the Commission's
    competitive and universal service goals.[^35]

9.  In the *CALLS Order*, the Commission further reformed the access
    charge regime for price cap carriers. Recognizing that the PICCs
    created market inefficiencies, the Commission sought to establish a
    more straightforward, economically rational common line rate
    structure.[^36] Therefore, the Commission increased SLC caps,[^37]
    eliminated the residential and single-line business PICC,[^38] and
    capped multi-line business PICCs.[^39] The Commission limited a
    price cap carrier's recovery from SLCs, the new Interstate Access
    Support (IAS) mechanism, multi-line business PICCs, and CCL charges
    to "Price Cap CMT Revenue."[^40] It also addressed the historically
    controversial "X-factor" in the price cap formula by changing the
    X-factor's function from a productivity offset to a transitional
    mechanism for reducing per-minute access charges to target levels
    proposed by the CALLS members.[^41] In addition, the Commission
    approved an immediate \$2.1 billion reduction in per-minute switched
    access charges, which the CALLS IXC members committed to pass
    through to their customers.[^42]

10. Furthermore, the Commission established a new interstate access
    support mechanism, sized at \$650 million annually, to replace
    implicit support in the interstate access charges of price cap
    carriers.[^43] The IAS mechanism provides price cap carriers with
    the support required to recover a portion of their Price Cap CMT
    Revenues that cannot be recovered through SLCs. The Commission found
    \$650 million to be a reasonable amount that would provide
    sufficient, but not excessive, support.[^44] In this regard, it
    observed that a range of funding levels might be deemed "sufficient"
    for the purposes of the 1996 Act, and that "identifying an amount of
    implicit support in our interstate access charge system is an
    imprecise exercise."[^45]

## Fifth Circuit Decision

11. On September 10, 2001, the United States Court of Appeals for the
    Fifth Circuit upheld the *CALLS Order* in most respects, but
    remanded to the Commission for further consideration its decisions
    to size the IAS mechanism at \$650 million and to set the X-factor
    at 6.5 percent.[^46] The court held that the Commission reasonably
    interpreted sections 254(b)(1) and 254(i) as aspirational with
    respect to the maintenance of affordable rates and therefore upheld
    the decision to increase the residential and single-line business
    SLC caps.[^47] The court found that, though the Commission could not
    reverse past policy regarding SLC caps without explanation, the
    Commission had articulated rational reasons for the increases.[^48]
    The court also held that the Commission reasonably concluded that
    section 254(k), which requires that the Commission establish cost
    allocation rules, concerns allocation of joint and common costs,
    rather than the SLC and the PICC, which relate to the recovery of
    such costs.[^49] The court further held that the Commission could
    reasonably rely on market forces to restructure access rates and
    need not conduct a forward-looking cost study to set access
    rates.[^50]

12. The court did find, however, that the Commission needed to provide
    further explanation of two aspects of the *CALLS Order*. With
    respect to the \$650 million size of the IAS mechanism, the court
    concluded that, while identifying a specific amount of support is an
    imprecise exercise, the Commission must better explain how it
    arrived at the \$650 million amount.[^51] Similarly, the court found
    that the Commission must demonstrate a rational basis for its
    derivation of the 6.5 percent X-factor.[^52] In response to the
    remand, the Common Carrier Bureau issued a public notice seeking
    further comment regarding the \$650 million IAS amount.[^53]

# discussion

## \$650 Million Interstate Access Support Amount

13. We conclude that \$650 million is a reasonable estimate of the
    implicit support in the interstate access rate structure that must
    be replaced by IAS in order to accomplish the Commission's
    competitive and universal service goals in adopting the transitional
    CALLS plan. The CALLS members proposed a \$650 million support
    amount as part of their integrated proposal for resolving several
    interrelated and difficult issues associated with access charge
    reform. The Commission stated that it would adopt individual
    elements of the proposal, including the \$650 million support
    amount, if the elements were, in the Commission's independent
    judgment, within a range of reasonableness.[^54] Careful
    consideration of all of the studies submitted in this proceeding
    allows us to define a relatively narrow range of reasonable support
    amounts. The \$650 million IAS amount proposed by the CALLS members
    falls within this range of reasonable support amounts. Moreover, as
    we discuss below, we conclude that nothing in the record, including
    recent studies by NASUCA and Qwest, indicates that there is a more
    reasonable support amount than the one proposed in the CALLS plan.
    We find that a \$650 million support amount adequately balances our
    various policy goals, including the availability of service in all
    areas at rates that are affordable and reasonably comparable to
    nationwide rates, the promotion of competition and efficient
    investment in rural America, and the facilitation of the
    transitional reforms of the access rate structure adopted in the
    *CALLS Order*.

### Background

14. As discussed above, in the *CALLS Order*, the Commission adopted
    several reforms designed to rationalize, and remove implicit support
    from, price cap carriers' interstate access rates.[^55] In order to
    make these reforms possible, the Commission adopted a new explicit
    universal service mechanism---IAS---to replace implicit support
    previously collected through interstate access charges.[^56] The IAS
    mechanism distributes support to carriers serving lines in areas
    where they are unable to recover their permitted CMT revenues from
    SLCs despite the revised caps.[^57] The IAS mechanism accomplishes
    this by using several mathematical calculations to determine
    per-line support amounts for each Unbundled Network Element (UNE)
    zone based on the extent to which the average allowable CMT revenue
    per line for the zone exceeds certain benchmarks.[^58] Specifically,
    in any geographically deaveraged UNE zone where the average common
    line revenue per line for that zone would exceed a benchmark of
    \$7.00 per line for residential and single-line business lines and a
    benchmark of \$9.20 per line for multi-line business lines, the IAS
    mechanism would provide support for a portion of the difference
    between CMT revenue allowed and the benchmarks.[^59] Although the
    aggregate difference between permitted common line revenue per line
    and the benchmarks exceeds \$650 million, the IAS mechanism employs
    a series of formulas to apportion support so that it does not exceed
    \$650 million per year.[^60] The amount of IAS provided in each
    study area is also adjusted on a phased-in basis so that by July 1,
    2003, CCL charges and multi-line business PICCs will be eliminated
    for most lines served by price cap LECs.[^61] To the extent that
    carriers cannot recover their allowable CMT revenues through SLCs
    and IAS, they recover their CMT revenues through a multi-line
    business PICC---up to a monthly cap of \$4.31---and then CCL
    charges.[^62]

15. In adopting this mechanism, the Commission found the proposed \$650
    million IAS support amount to be a reasonable estimate of the amount
    of implicit support to be replaced in the price cap access rate
    structure with explicit, portable support.[^63] In light of the
    inherently imprecise nature of identifying implicit support in the
    access rate structure, the Commission found the \$650 million
    support amount reasonable for several reasons. The divergent
    interests of the CALLS members---IXCs and low-cost LECs that are net
    contributors to the universal service fund and high-cost LECs that
    are net recipients of universal service---provided significant
    incentive for the CALLS members to ensure that the estimate was
    reasonable.[^64] The Commission further noted that the CALLS group
    submitted an AT&T-developed forward-looking cost study that
    estimated a support amount of \$613 million.[^65] This estimate
    relied on the Commission's model for calculating high cost loop
    support for non-rural carriers and assumed increases to the SLC cap
    consistent with those the Commission adopted.[^66]

16. The Commission found further evidence of the reasonableness of the
    \$650 million support amount in the fact that this amount was within
    the widely ranging estimates of implicit support in various studies
    before the Commission. For example, the United States Telecom
    Association estimated, based on embedded costs, that interstate
    common line rates then contained \$3.9 billion in implicit universal
    service support.[^67] Commission economists William Rogerson and
    Evan Kwerel compared embedded costs to forward-looking costs to
    estimate that interstate access rates included \$1.9 billion in
    implicit support.[^68] The CALLS members noted, but did not advocate
    reliance on, a study that used the HAI forward-looking model to
    estimate a \$250 million support amount.[^69] US West used the
    Commission's Synthesis model to estimate a support amount of \$1.2
    billion, but did not assume increases to the SLC cap consistent with
    those the Commission adopted.[^70] ALTS and Time Warner proposed an
    alternative plan that would provide \$300 million in explicit
    universal service support, but provided no empirical evidence in
    support of this amount.[^71] Also before the Commission, but not
    cited with respect to the Commission's decision to size the IAS
    mechanism at \$650 million, was a study filed by the Common Carrier
    Bureau's Industry Analysis Division (IAD).[^72]

17. The Fifth Circuit remanded the *CALLS Order* to the Commission for
    further analysis and explanation of the \$650 million support
    amount.[^73] The court recognized that "identifying a specific
    amount is an 'imprecise exercise' and that \[its\] review of the
    \[support amount\] is especially deferential due to its transitional
    nature."[^74] The court concluded, however, that the Commission
    "failed to exercise sufficiently independent judgment in
    establishing the \$650 million amount," by granting "near-total
    deference" to the fact that many parties agreed that \$650 million
    was an adequate support amount.[^75] The court stated that "the
    \[Commission\] must provide some explanation as to why it found one
    study more persuasive than the other, even if it does not determine
    a precise amount as the 'only' correct figure."[^76] In particular,
    the court noted that the Commission "hint\[ed\] at a reasoned
    analysis" with respect to the AT&T study based on the Synthesis
    model and the ALTS/Time Warner estimate, but failed to address other
    studies.[^77] On remand, the court therefore directed the Commission
    to provide further analysis and explanation justifying \$650 million
    as an appropriate amount of support available under the IAS
    mechanism.[^78]

18. In response to the remand, the Common Carrier Bureau (Bureau) issued
    a public notice seeking further comment on the \$650 million support
    amount.[^79] Specifically, the Bureau sought comment on the uses of
    a cost model, including the Commission's Synthesis model and the
    AT&T study, to identify the appropriate size of the IAS
    mechanism.[^80] The Bureau also sought comment on the use of other
    studies to determine whether \$650 million is the support amount
    that best serves the Commission's universal service goals.[^81] In
    addition to the comments and reply comments addressing the studies
    previously filed in the proceeding, NASUCA filed reply comments
    outlining its own study, which relied on the Commission's Synthesis
    model, albeit with significant alterations.[^82] Based on this
    study, NASUCA claims that the IAS mechanism should be sized at \$336
    million if the residential and single-line business SLC cap is
    \$6.50.[^83] Qwest, successor to US West, revised US West's earlier
    estimate of \$1.2 billion to \$978 million to reflect the higher SLC
    caps adopted by the Commission.[^84]

### Discussion

19. We conclude that the record in this proceeding supports the
    Commission's decision to size the IAS mechanism at \$650 million.
    Below, we address each of the cost studies filed in this proceeding.
    We conclude that they establish a range of reasonable support
    amounts, based on forward-looking and embedded cost estimates, from
    \$593 million to \$978 million. Because the \$650 million IAS amount
    proposed in the CALLS members' comprehensive plan for access reform
    falls within this range of reasonable estimates, we then address
    whether the \$650 million IAS amount appropriately balances the
    Commission's relevant goals. We conclude that the \$650 million
    support amount is a reasonable estimate of the amount of implicit
    support in access charges to be replaced by explicit, portable
    support. This support amount appropriately balances the Commission's
    relevant policy goals. We therefore do not change the support amount
    adopted in the *CALLS Order*.

#### Cost Studies in the Record

20. In this section, we address each of the cost studies in the
    proceeding, as requested by the Fifth Circuit. We first discuss the
    relevance, as a general matter, of forward-looking cost studies to
    our analysis. We then address each of the seven cost studies
    discussed by the Commission in the *CALLS Order*. Finally, we
    address the more recent study filed by NASUCA in response to the
    *CALLS Remand Public Notice*.

21. As an initial matter, we agree with commenters that it is
    appropriate to consider forward-looking cost estimates in
    determining the reasonableness of the \$650 million support
    amount.[^85] We disagree, however, with commenters who contend that
    IAS should be sized solely on the basis of a forward-looking cost
    estimate.[^86] In the *Universal Service First Report and Order*,
    the Commission established that, ideally, federal universal service
    support would be based on the forward-looking economic cost of
    constructing and operating the network used to provide supported
    services, rather than on a carrier's embedded costs.[^87]
    Forward-looking support mechanisms promote efficiency and send the
    correct signals for entry, innovation, and investment.[^88] In the
    context of determining the appropriate size of the IAS mechanism,
    forward-looking studies may provide useful insight into the costs
    associated with providing services with an efficient network and, in
    turn, an appropriate amount of support for an efficient network. We
    conclude, however, that it would not be appropriate to rely solely
    on estimates derived from forward-looking analysis in determining
    the amount of support to provide under the *CALLS Order*. The access
    reform measures adopted in the *CALLS Order* continue to rely on
    embedded costs rather than forward-looking costs. Specifically, the
    IAS mechanism adopted by the Commission distributes support based on
    embedded costs because the Commission concluded that this would best
    facilitate the transitional reform of the access rate
    structure.[^89] Also, the Commission concluded that forward-looking
    costs should not be used to set rates for price cap carriers, and
    the access rate structure that was reformed in the *CALLS Order*
    continues to rely on embedded costs to set rates for SLCs,
    multi-line business PICCs, and CCL charges, a decision upheld by the
    Fifth Circuit Court of Appeals.[^90] We further note that the
    Commission has, at this time, authorized use of the forward-looking
    Synthesis model only for the distribution of non-rural high-cost
    support, and not for other universal service mechanisms. Moreover,
    the Synthesis model does not include data for the approximately 105
    rural study areas served by price cap carriers subject to the *CALLS
    Order*.[^91] For these reasons, we find that the Commission's
    Synthesis model produces useful evidence for estimating the
    appropriate size of the IAS mechanism, but that it would be
    inappropriate to rely solely on forward-looking cost estimates to
    determine an IAS amount.

22. Several estimates of the appropriate size of the IAS mechanism were
    considered by the Commission in the *CALLS Order*. Of these, AT&T's
    estimate of \$613 million was the most reasonable forward-looking
    study available. The study utilizes the Synthesis model, which has
    been studied by many parties and approved by the Commission for
    calculating intrastate high-cost support for non-rural carriers. The
    study's methodology---comparison of the interstate portion of the
    costs generated by the model to the then-proposed SLC caps of \$7.00
    for residential and single-line business lines and \$9.20 for
    multi-line business lines---is generally reasonable. Nevertheless,
    there are some problems with AT&T's study. Some parties have
    questioned AT&T's method of aggregating the lines in the model into
    three zones per study area.[^92] AT&T offers no justification for
    this aggregation method.[^93] AT&T has not provided sufficient
    supporting documentation for the Commission staff to quantify the
    effect of using AT&T's aggregation method, rather than another
    method.[^94] Notwithstanding these deficiencies, the AT&T study
    methodology generally appears reasonable. We conclude that the AT&T
    study provided the most reasonable estimate based on forward-looking
    costs available at the time of the *CALLS Order*.

23. Staff in the Bureau's Industry Analysis Division also performed a
    credible analysis based on publicly available embedded cost data
    that permits an IAS estimate of \$978 million.[^95] The IAD CALLS
    Study compares forecasted rates and revenues under the existing
    rules at the time of the CALLS plan to what would likely occur for
    each year of the CALLS plan.[^96] The study reasonably forecasts
    growth for each price cap study area and estimates the amount of
    revenue that will be recovered by each price cap carrier from each
    of the various revenue streams, including SLCs, universal service
    support, multi-line business PICCs, and CCL charges.[^97] These
    estimates accurately account for each of the access reforms adopted
    by the Commission, including the phased-in increases to the
    residential and single-line business SLC caps, the elimination of
    the residential and single-line business PICCs, and the cap on the
    multi-line business PICC.[^98] The study concludes that, in the
    final year of the transitional reforms adopted in the *CALLS Order*,
    the gap between the capped SLC revenues and allowable CMT revenues
    will be approximately \$978 million.[^99] We note that this finding
    is consistent with comments filed by Verizon and SBC, who argue that
    the \$650 million support amount is appropriate because it permits
    price cap carriers to recover most, but not all, of the gap between
    their SLC revenues and their allowable CMT revenues through
    IAS.[^100] As discussed below, we agree that it is appropriate to
    size the IAS mechanism to permit carriers to recover most, but not
    all, of this gap in order to balance the Commission's access reform
    and universal service policy goals in this proceeding.[^101]

24. The remaining cost studies considered by the Commission at the time
    of the *CALLS Order* provide little or no aid in identifying a
    reasonable range of support amounts. We do not find Qwest's \$978
    million forward-looking estimate persuasive.[^102] Qwest used the
    Synthesis model in its "density zone" mode, which clusters lines
    within a study area to non-contiguous zones based on the density of
    their line populations.[^103] This tends to aggregate very high-cost
    lines with only other very high-cost lines, thereby substantially
    reducing the effects of rate averaging and increasing the estimated
    support amount.[^104] For example, aggregating lines at the wire
    center---still a very fine level of granularity, but larger than
    density zones---decreases the amount of support required under
    Qwest's study to \$765 million.[^105] We find that, contrary to
    Qwest's arguments, this failure to provide any rate averaging
    benefit creates a significant upward bias in the amount of support
    required.

25. We also find that it would be inappropriate to rely on USTA's \$3.9
    billion embedded cost estimate in determining a range of reasonable
    support amounts. USTA's estimate, which was examined by the
    Commission at the time but was not provided by USTA specifically for
    the CALLS proceeding, provides insufficient documentation for the
    Commission to determine whether there are any flaws in the
    methodology.[^106] The estimate appears to include universal service
    support for purposes that are not at issue in this proceeding, such
    as intrastate support for non-rural carriers and implicit support in
    the access rate structure for rate-of-return carriers.[^107] Thus,
    we cannot conclude that the USTA study represents a reliable
    estimate for our purposes in this proceeding.

26. As part of a separate proposal to reform the interstate access rate
    structure and universal service filed prior to the first CALLS
    proposal, Commission economists Rogerson and Kwerel submitted a
    study indicating that the support amount with a \$6.50 SLC cap
    should be \$1.9 billion.[^108] The Rogerson and Kwerel methodology
    is primarily concerned with promoting efficient competition in all
    regions, including those with significant geographic rate-averaging.
    It seeks to accomplish this goal by making available a large amount
    of support to completely eliminate alleged competitive advantages
    for competitive carriers that serve only low-cost areas within a
    study area.[^109] We therefore find the Rogerson and Kwerel study
    inappropriate for the purposes of identifying the appropriate size
    of the IAS mechanism because it is not specifically designed to
    estimate the amount of implicit support in interstate access charges
    to be replaced by explicit support in order to accomplish the *CALLS
    Order*'s reforms.

27. Finally, the ALTS/Time Warner study and the HAI model study cited by
    the CALLS members are unsupported. As the Commission noted in the
    *CALLS Order*, ALTS and Time Warner "merely assert, without any
    empirical support, that the interstate access universal service
    support mechanism would be more appropriately sized at \$300
    million."[^110] In addition, the interstate support mechanism
    proposed by ALTS and Time Warner was based on an alternate plan
    which would have substantially reduced the need for interstate
    access support and was ultimately rejected by the Commission.[^111]
    The CALLS members cited the \$250 million estimate based on the
    forward-looking HAI model to demonstrate the widely ranging
    estimates of appropriate support amounts, but no party, including
    the CALLS members, advocated its use in this proceeding or provided
    a detailed description of the study.[^112] Moreover, the Commission
    previously had rejected the use of the HAI model as the appropriate
    tool for estimating forward-looking costs for purposes of
    calculating non-rural high-cost support and our reasons for doing so
    apply here as well.[^113] Therefore, we do not believe that it would
    be appropriate to use the HAI model to size IAS.

28. In addition to the studies before the Commission at the time it
    adopted the *CALLS Order*, one party filed a new study in response
    to the *CALLS Remand Public Notice*. NASUCA filed a forward-looking
    study estimating that IAS should be sized at \$336 million if the
    SLC cap on residential and single-line business lines were
    \$6.50.[^114] Although a useful starting point, we find that the
    NASUCA study would require significant adjustment to yield a
    reliable forward-looking cost estimate.[^115] The NASUCA study
    includes changes to the Synthesis model that the Commission declined
    to adopt in the *SLC Review* proceeding.[^116] Specifically, NASUCA
    modifies the model results to permit structure sharing between the
    feeder and distribution networks, to remove loop costs that it
    considers to be traffic-sensitive in nature, and to attribute
    different portions of the port to the interstate jurisdiction and
    different portions of the corporate overhead to the loop.[^117] In
    the *SLC Review* proceeding, the Commission declined to rely on
    NASUCA's studies that incorporated these changes because their
    results were unverifiable by the Commission staff and because the
    changed assumptions in those studies generated disagreement among
    parties.[^118] Moreover, these loop and port costs are currently
    included in price cap carriers' allowed CMT revenues and therefore
    recoverable through the IAS mechanism. We do not consider this
    remand proceeding an appropriate venue for reexamining the
    underlying decision to allocate costs in this manner. For the same
    reasons, we agree with Sprint that it is inappropriate to rely on
    NASUCA's study as submitted.[^119] NASUCA's study is further flawed
    because it does not include forward-looking costs associated with
    serving multi-line business lines, which are also supported in
    certain high-cost areas. We also note that NASUCA estimates the
    amount of support for rural price cap study areas that are not in
    the Synthesis model based on actual IAS received, rather than
    forward-looking model results.[^120] NASUCA's inability to use the
    Synthesis model to estimate forward-looking costs for these study
    areas demonstrates the inappropriateness of relying solely on
    forward-looking costs to size IAS.[^121] For these reasons, we do
    not find NASUCA's \$336 million estimate to be a reasonable IAS
    amount.

29. Nevertheless, we find that NASUCA's study, with appropriate
    adjustments, permits us to reasonably estimate forward-looking
    costs.[^122] Undoing NASUCA's modifications to the Synthesis model
    related to structure sharing and costs that NASUCA argues are
    traffic-sensitive increases the support amount estimated by NASUCA's
    study from \$336 million to \$516 million. Including multi-line
    business lines in the study increases the support amount estimated
    by the model by another \$80 million to \$593 million. We note that
    this support estimate may still be conservative, because we believe
    that there may be merit to Sprint's argument that NASUCA's
    methodology underestimates support required for rural price cap
    study areas not reflected in the Synthesis model.[^123] Without
    NASUCA's alterations to the Commission's Synthesis model, and with
    the costs of multi-line business lines included, the NASUCA study
    yields a forward-looking cost estimate of \$593 million.

#### Appropriateness of \$650 million IAS amount

30. The studies before us, therefore, establish a range of reasonable
    estimates of implicit support to be replaced by IAS between \$593
    million, as established by the restated NASUCA study, and \$978
    million, as established by the IAD CALLS Study. As we have noted,
    identifying the amount of implicit support to be replaced by
    explicit universal service support is an imprecise task.[^124] The
    court recognized, however, that the Commission does not need to
    determine "a precise amount as the only 'correct' figure."[^125]
    Rather, we must explain why, in our independent judgment, the \$650
    million support amount is appropriate. Having determined that the
    \$650 million IAS amount proposed by the CALLS members is within the
    range of reasonable support amounts, we address whether there is any
    basis for concluding that a different support amount within the
    range would better balance the Commission's goals. We conclude that
    the IAS amount proposed by the CALLS members as part of its
    integrated plan for reforming access charges reasonably and
    appropriately balances all of the Commission's relevant policy
    goals.

31. We conclude that the \$650 million amount more appropriately
    balances the Commission's goals than would a higher support amount.
    By conservatively setting the support amount at \$650 million, we
    ensure that a substantial portion of the gap between SLC revenues
    and allowable CMT revenues will be covered by support, while
    minimizing the risk that the support amount will be too large. The
    Commission will, at the end of the transitional period of reform
    adopted in the *CALLS Order*, consider permanent resolution of any
    remaining issues related to the price cap access rate structure. The
    amount of support in the IAS mechanism may then be adjusted upward
    or downward, as warranted by the Commission's experience.[^126] The
    Commission may, at that time, conclude that there are inefficiencies
    in embedded costs that the Commission may wish to discourage by
    excluding from IAS. Setting the IAS amount at the high end of the
    range at this time, however, may commit the Commission to providing
    universal service support for any inefficient embedded costs
    reflected in the price cap access rate structure in a manner that
    would be difficult to reverse. As several commenters note, adjusting
    the support amount upward at that time may be administratively
    easier than adjusting the amount downward.[^127] Erring toward a
    conservative support amount\--*i.e.*, one that may not permit
    complete recovery through the universal service fund of the "gap"
    between SLC revenues and allowable CMT revenues\--facilitates proper
    adjustments when the Commission further addresses interstate access
    reform for price cap carriers at the end of the transitional period.
    Moreover, because price cap carriers will retain the ability to
    recover their allowable CMT revenues through multi-line business
    PICCs and CCL charges, the consequences of setting the support
    amount slightly low are less problematic than the consequences of
    setting the support amount too high.

32. On the other hand, we conclude that a lower support amount than
    \$650 million would not permit price cap carriers to realize
    significant enough reductions to inefficient rate elements that
    contain implicit support, like the multi-line business PICC and the
    CCL charge.[^128] For example, setting the support amount at \$593
    million, as suggested by the restated NASUCA study, would leave an
    additional \$57 million, or approximately 17 percent, in those
    inefficient, implicit-support-containing rate elements in the final
    year of the transitional plan.[^129] Thus, the \$650 million support
    amount encourages efficient investment in rural America and allows
    price cap carriers to recover their permitted revenues while making
    significant reductions to inefficient rate elements.

33. Based on the foregoing considerations, the record does not indicate
    that another support amount would better serve the Commission's
    policy goals. We also note that the CALLS members proposed a \$650
    million support amount as part of their integrated proposal for
    resolving several interrelated and difficult issues associated with
    access charge reform. The \$650 million support amount reflects the
    CALLS plan's comprehensive approach to resolving a number of
    complicated and interrelated issues. The rules governing the
    distribution of the IAS reflect the proposed \$650 million support
    amount, and adjusting the amount may have unexpected ramifications
    with respect to the distribution method. For example, the
    distribution method was designed to promote competition by creating
    additional incentives for price cap carriers to deaverage their UNE
    rates.[^130] As the Commission noted in the *CALLS Order*, the fact
    that both net payers and net recipients of universal service support
    agreed to the \$650 million amount as members of CALLS also
    indicates strongly that the CALLS plan appropriately balanced the
    various and divergent interests implicated in access charge reform.
    The \$650 million IAS mechanism, in concert with other reforms to
    the interstate access rate structure adopted in the *CALLS Order*,
    has resulted in the \$2.6 billion reduction in recovery of common
    line costs through inefficient rate elements that contain implicit
    universal service support.[^131] Thus, the \$650 million amount is
    part of a "single, cohesive" transitional plan for accommodating the
    Act's universal service goals with the development of fuller, more
    rational competition. For all of these reasons, we conclude that the
    record in this proceeding supports the Commission's decision to size
    the IAS mechanism at \$650 million.

## The Commission's Selection of a 6.5 Percent X-Factor

34. In its review of the *CALLS Order*, the court remanded to the
    Commission for further explanation the selection of the 6.5 percent
    X-factor by which price cap LECs' rates are reduced.[^132] The 6.5
    percent X-factor in the *CALLS Order* applied to price cap LECs'
    switched access rates and served as a transitional mechanism to
    reduce switched access rates to specified target rate levels.[^133]

### Background 

35. [The X-Factor Prior to the *CALLS Order*]{.underline}. When the
    Commission first established price cap regulation in 1990, it
    included a productivity offset in the price cap formula that was
    meant to represent the amount by which LEC productivity exceeded
    that of the economy as a whole.[^134] This productivity offset
    became known as the "X-factor" and was applied to reduce the rates
    in each of the service groups, or "price cap baskets," of the price
    cap LECs.[^135] The productivity factor initially adopted in the
    *LEC Price Cap Order* included a component based on historical LEC
    productivity, and an additional productivity obligation of 0.5
    percent as a consumer productivity dividend (CPD) to ensure that
    consumers shared in the anticipated productivity gains in the form
    of lower rates.[^136] The Commission prescribed two productivity
    factors: a minimum 3.3 percent factor and an optional 4.3 percent
    factor.[^137] Price cap LECs that opted to use the higher 4.3
    percent productivity factor were allowed to retain larger shares of
    their earnings.[^138] Pursuant to the *LEC Price Cap Order*, the
    Commission performed periodic reviews of the price cap regime.[^139]
    After the first performance review in 1995, the Commission found
    that the initial productivity factor was too low, and increased the
    minimum productivity factor from 3.3 percent to 4.0 percent.[^140]
    The Commission also provided two optional productivity factors of
    4.7 and 5.3 percent.[^141] In the next price cap performance review
    in 1997, the Commission increased the productivity factor to 6.5
    percent for all price cap LECs.[^142] This productivity factor
    prescription primarily relied on a staff study of the historical
    rate of growth in LEC total factor productivity (TFP).[^143]

36. Several entities filed petitions for review of the *1997 Price Cap
    Review Order* with the United States Court of Appeals for the D.C.
    Circuit. In *USTA v. FCC*, the court reversed and remanded for
    further explanation the Commission's prescription of a 6.5 percent
    productivity factor, although it affirmed the order against the
    petitioners' remaining challenges.[^144] The court rejected the
    Commission's stated rationales for selecting 6.0 as the historical
    component of the productivity factor, and sought further explanation
    of the Commission's choice of a 0.5 percent CPD component.[^145] The
    court withheld issuance of its mandate, pending the Commission's
    reconsideration of the productivity factor, through June 30,
    2000.[^146]

37. [The *CALLS Order* X-Factor]{.underline}. On May 31, 2000, the
    Commission reformed its price cap regulation regime in the *CALLS
    Order*.[^147] The rulemaking leading to adoption of the *CALLS
    Order* was initiated by the Commission in response to a proposal put
    forth by CALLS.[^148] Among other things, this proposal changed the
    price cap basket structure by separating trunking services and
    special access services into two separate baskets.[^149] The
    Commission adopted CALLS' proposal to reduce the rates for the
    traffic sensitive switched access services and transport services
    baskets to specified average traffic sensitive (ATS) target
    rates.[^150] CALLS proposed that price cap LECs would reduce their
    ATS rates over time by applying an annual reduction of 6.5 percent
    until the target rates are reached.[^151] This transitional
    mechanism was called an "X-factor," although the Commission made
    clear that it was [not]{.underline} tied to productivity, but was
    merely meant to reduce rates to the target levels at a reasonable
    pace over the course of the five-year period of the CALLS
    proposal.[^152] The Commission stated, "During the five-year term of
    the CALLS Proposal, the X-factor as adopted herein will not be a
    productivity factor as it has been in past price cap formulas.
    Instead, the X-factor is now a transitional mechanism to lower
    access charges to target rates for switched access . . . ."[^153]

38. [Court Decision]{.underline}. In challenging the *CALLS Order*
    before the United States Court of Appeals for the Fifth Circuit,
    petitioner NASUCA raised several issues regarding the 6.5 percent
    X-factor. First, NASUCA argued that the D.C. Circuit previously had
    rejected use of a 6.5 percent X-factor in *USTA v. FCC*.[^154]
    Second, NASUCA argued against the targeting of the 6.5 percent
    reductions to the ATS rates (i.e., switched access usage rates) as
    opposed to applying them to local loop rates (the CMT
    elements).[^155] Third, NASUCA argued that the X-factor reduction
    should not be set equal to inflation after the target rates are
    reached.[^156] In its decision, the court remanded to the Commission
    only the issue of the selection of the 6.5 percent X-factor.[^157]

### Discussion

39. In its decision, the court affirmed several important components of
    the Commission's *CALLS Order*. Specifically, the court upheld the
    Commission's authority to set access charge rates that are not based
    on forward-looking cost, so long as they are just, reasonable and
    nondiscriminatory as required by sections 201(b) and 202(a) of the
    Communications Act, thus leaving intact the Commission's adoption of
    the target ATS rates.[^158] The court also left intact the
    Commission's decision to target the X-factor's reductions to
    switched access services as opposed to common line services, and to
    adjust the X-factor to the rate of inflation after the ATS target
    rates are met. Finally, the court did not find unreasonable the
    Commission's use of the X-factor as a transitional mechanism for
    reducing rates, as opposed to a productivity factor.[^159] The only
    issue related to the X-factor remanded by the court for further
    explanation was the Commission's basis for picking the precise
    figure of 6.5 percent as the transitional X-factor.[^160]

40. Using 6.5 percent as a transitional X-factor was the Commission's
    reasoned approach to reconciling the competing goals of moving
    traffic-sensitive access charges closer to cost-based rates while
    avoiding a flash cut.[^161] The Commission wanted to ensure that ATS
    rates reached the target levels within a reasonable period of time
    to ensure that consumers reaped the benefits of the *CALLS Order* as
    soon as possible. Some commenters, however, argued that the
    Commission should avoid a flash cut of access charge rates, which
    could harm competition.[^162] Moreover, the Commission previously
    has held that flash cuts in access rates should be avoided to
    provide LECs, IXCs, and end users time to adjust to changes in rate
    structures.[^163] Thus, the Commission adopted a transitional
    X-factor to reduce ATS rates, in order to avoid the harms associated
    with a flash cut.

41. Having rejected an immediate reduction to target levels, the
    Commission then had to determine the most reasonable X-factor to
    apply. In doing so, it was necessary for the Commission to consider
    a number of criteria: which factor would work best for the broadest
    range of carriers; which factor could be most easily understood and
    implemented; and which factor was best supported by record evidence
    submitted by all parties. The 6.5 percent X-factor best fit these
    criteria, and was thus the most reasonable choice for the Commission
    to make. The 6.5 percent X-factor had been in place, although
    subject to a remand order, since 1997. Indeed, commenters in the
    *CALLS Order* proceeding did not propose any amount other than 6.5
    percent for the transitional X-factor.[^164] The Commission
    determined that the transitional mechanism, featuring a 6.5 percent
    X-factor, would achieve the goal of reducing rates over a reasonable
    time period, without reducing rates too quickly so as to harm LECs.
    The Commission was able to rely on the fact that the 6.5 percent
    transitional X-factor was proposed by CALLS, a group that included
    both price cap LECs and IXCs, as evidence that it reduced rates at a
    reasonable pace, i.e., not too quickly so as to harm LECs, but fast
    enough that the benefits of the rate reductions would flow to IXCs
    and their end-user customers in a timely manner.

42. The court has recognized the legitimacy of the Commission's reliance
    on its expertise in setting rates.[^165] In *NARUC*, the court
    upheld the Commission's development of a \$25 private line
    surcharge, even though this charge was "an estimate based upon
    assumptions drawn from the collective experience of the
    Commission."[^166] The record was inadequate to allow the Commission
    to derive a more precise rate; therefore the court found that it was
    reasonable for the Commission to rely on its expertise in setting
    the rate.[^167] In the case of the 6.5 percent X-factor, the record
    did not provide any number other than 6.5 percent as the
    transitional mechanism. No party argued that 6.5 percent was an
    unreasonable number for the Commission to use as a transitional
    mechanism. Furthermore, the Commission had experience with using a
    6.5 percent X-factor previously. It was therefore familiar with the
    types of reductions that could be expected from using this number,
    as opposed to some other number that no party had proposed, and that
    had not been used previously to reduce rates. As discussed above,
    the Commission relied on its expertise in determining that the 6.5
    percent X-factor would achieve the policy goals of reducing ATS
    rates to target levels in a timely manner that would not harm LECs.

43. Before adoption of the *CALLS Order* in 2000, Commission staff
    analyzed the potential effects of adopting the CALLS plan when
    compared to the access charge regulations in existence at the
    time.[^168] In that analysis, IAD predicted when price cap carriers
    would reach their target rates using a 6.5 percent X-factor.[^169]
    According to the IAD CALLS Study, carriers representing the
    following percentages of total access lines would reach their target
    rates: 6 percent in 2000; another 42 percent for a total of 48
    percent in 2001; another 26 percent for a total of 74 percent in
    2002; and another 22 percent for a total of 96 percent in
    2003.[^170] The application of the 6.5 percent X-factor has yielded
    results strikingly similar to those predicted by IAD in 2000. Price
    cap LEC companies that met their target ATS rates immediately upon
    filing their 2000 annual access filings represent approximately 58
    million access lines, or 36 percent of the approximately 163 million
    total access lines.[^171] In 2001, companies representing another 39
    percent met their ATS target rates, for a total of 75 percent.[^172]
    In 2002, companies representing another 21 percent met their ATS
    target ATS rates, for a total of 96 percent.[^173] There are only
    approximately 6 million lines, or 4 percent of the total, served by
    price cap LEC companies that have not yet met their target ATS
    rates.[^174] These companies will continue to apply the 6.5 percent
    transitional X-factor to reduce their ATS rates. We note that
    companies representing approximately 3 million access lines were
    very close to meeting their ATS target rates in their 2002 annual
    access filings, and it is likely that these companies will meet the
    target rates in their 2003 access filing.[^175] Therefore, we expect
    that, after the 2003 access filing, price cap LECs that have not
    reached their ATS target rates will represent fewer than 3 million
    lines, or 2 percent of total access lines, with companies
    representing 98 percent at their target rates. Actual application of
    the 6.5 percent X-factor generally followed Commission staff's
    predictions on when companies would reach their target rates,
    establishing a timely transition path and bringing benefits to
    consumers in a timely manner.

44. Application of a significantly different X-factor would have had
    very different consequences.[^176] A higher X-factor would have
    reduced the price cap companies' ATS rates to the target levels at a
    faster rate, thereby possibly harming those smaller price cap
    companies that have not yet met the target rates. A lower X-factor
    would have reduced price cap companies' ATS rates to the target
    levels at a slower rate; therefore, IXCs and their end-user
    customers would not have received the benefits of these lower rates
    in as timely a manner. The Commission relied on the record before it
    and its expertise in selecting a 6.5 percent X-factor in 2000, and
    this X-factor has achieved the Commission's policy goals of reducing
    ATS rates in a timely manner without harming price cap companies by
    cutting rates too quickly.

45. The Commission's selection of a 6.5 percent X-factor as a
    transitional mechanism for moving to ATS target rates was based on
    the record before it. Indeed, the Commission was without a reasoned
    basis for selecting an alternative, transitional X-factor. The
    Commission's selection of a 6.5 percent X-factor in 2000 will bring
    ATS access charges to the target levels for price cap LECs
    representing at least 98 percent of total price cap access lines
    after the July 2003 annual access filing. This percentage represents
    reasonable levels of lines reaching the ATS target rates during the
    third and fourth years of the five-year CALLS proposal. The benefits
    of lower access charges are being provided to consumers in a timely
    manner as envisioned by the Commission in the *CALLS Order*. The
    remaining carriers continue to move toward the target rates in a
    manner that provides meaningful consumer benefits, while avoiding
    the kind of dramatic rate cut that, as the Commission previously
    discussed, could harm LECs. Although 6.5 percent is not the only
    possible transitional mechanism that the Commission could have
    adopted, for the reasons articulated above, it represents a
    reasonable exercise of the Commission's discretion in setting rates.

# Procedural Matters

## Supplemental Final Regulatory Flexibility Certification

46. The Regulatory Flexibility Act of 1980, as amended (RFA)[^177]
    requires that a regulatory flexibility analysis be prepared for
    rulemaking proceedings, unless the agency certifies that \"the rule
    will not have a significant economic impact on a substantial number
    of small entities.\"[^178] The RFA generally defines \"small
    entity\" as having the same meaning as the terms \"small business,\"
    \"small organization,\" and \"small governmental
    jurisdiction.\"[^179] In addition, the term \"small business\" has
    the same meaning as the term \"small business concern\" under the
    Small Business Act.[^180] 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).[^181]

47. On May 31, 2000, the Commission adopted the *CALLS Order*, which
    reformed the interstate access rate structure and created a new
    universal service mechanism, Interstate Access Support (IAS), for
    price cap carriers.[^182] On September 10, 2001, the Fifth Circuit
    affirmed the *CALLS Order* in most respects, but remanded for
    further analysis and explanation the decisions to size the IAS
    mechanism at \$650 million and to adopt the 6.5 percent
    X-factor.[^183] Specifically, with respect to the \$650 million size
    of the IAS mechanism, the court concluded that, while identifying a
    specific amount of support is an imprecise exercise, the Commission
    must better explain how it arrived at the \$650 million
    amount.[^184] Similarly, the court found that the Commission must
    demonstrate a rational basis for its derivation of the 6.5 percent
    X-factor.[^185]

48. In this Order on Remand, we provide further analysis and explanation
    as required by the court, but do not adopt any changes to the
    Commission's prior decisions. With respect to the \$650 million IAS
    mechanism, we examine each of the studies in the record to determine
    the range of reasonable estimates of implicit support to be replaced
    by explicit support,[^186] and then explain why, in our independent
    judgment, \$650 million is the most appropriate amount of implicit
    support within this range to replace with explicit support.[^187]
    Specifically, we conclude that by conservatively setting the support
    amount at \$650 million, we ensure that a substantial portion of the
    gap between SLC revenues and allowable CMT revenues will be covered
    by support, while minimizing the risk that the support amount will
    be too large. We also further explain the Commission's reasoned
    approach in the *CALLS Order* in adopting the transitional 6.5
    percent X-factor as a means of achieving reductions in
    traffic-sensitive rates while avoiding a flash cut in access rates
    that could harm competition.[^188] Specifically the Commission
    considered all relevant criteria, include which factor would work
    best for the broadest range of carriers; which factor could be most
    easily understood and implemented; and which factor was best
    supported by record evidence submitted by all parties. The 6.5
    percent X-factor best fit these criteria, and was thus the most
    reasonable choice for the Commission to make. Because this Order on
    Remand does not change either \$650 million IAS mechanism or the 6.5
    percent X-factor, no economic impact of any kind result from our
    action. Therefore, we certify that this Order on Remand will not
    have a significant economic impact on a substantial number of small
    entities.

49. The Commission will send a copy of this Order on Remand, including a
    copy of this supplemental certification, in a report to Congress
    pursuant to the Congressional Review Act.[^189] In addition, this
    Order on Reconsideration and supplemental final certification will
    be sent to the Chief Counsel for Advocacy of the Small Business
    Administration, and will be published in the Federal Register.[^190]

## Paperwork Reduction Act Analysis

50. The decision herein has been analyzed with respect to the Paperwork
    Reduction Act of 1995, Pub. L. 104-13, and found to impose no new or
    modified reporting and/or recordkeeping requirements or burdens on
    the public.

# Ordering Clauses

51. IT IS ORDERED, pursuant to sections 1, 4(i) and (j), 201-209,
    218-222, 254, and 403 of the Communications Act, as amended, 47
    U.S.C. §§ 151, 154(i), 154(j), 201-209, 218-222, 254, and 403, that
    this Order IS HEREBY ADOPTED as described above.

52. IT IS FURTHER ORDERED that the Commission\'s Consumer Information
    Bureau, Reference Information Center, SHALL SEND a copy of this
    Order on Remand, including the Supplemental Final Regulatory
    Flexibility Certification, to the Chief Counsel for Advocacy of the
    Small Business Administration.

    FEDERAL COMMUNICATION COMMISSION

Marlene H. Dortch

Secretary

**Appendix A**

**FCC Staff Restatement Analysis of NASUCA Forward-Looking Cost Model**

**Introduction**

NASUCA filed reply comments in this proceeding describing a
forward-looking cost study which indicated that the Interstate Access
Support (IAS) mechanism adopted in the *CALLS Order* would be
appropriately sized at \$629 million if SLCs were capped at \$5.00 and
\$336 million if SLCs were capped at \$6.50. On May 29, 2002, NASUCA
filed ex parte letters further detailing its study. As discussed in the
Order, the Commission concludes that the NASUCA study should be restated
to eliminate certain assumptions.[^191] The following sets forth the
Commission staff's restatement analysis of NASUCA's study.

**Restatement**

1.  **NASUCA's Assumptions Related to Structure Sharing and
    Traffic-Sensitive Costs**

In its study (or "preferred scenario"), NASUCA makes certain changes to
the Commission's Synthesis model in order to permit structure sharing
between the feeder and distribution networks and to remove loop costs
that it considers to be traffic-sensitive in nature. In order to
estimate the amount of support using NASUCA's methodology, but without
relying on these assumptions, Commission staff referred to the results
of the "default scenario" submitted by NASUCA in the Cost Review
proceeding.[^192] This default scenario produces forward-looking costs
that do not rely on NASUCA's changed assumptions.[^193] Using these
costs in NASUCA's methodology increases the estimate support from \$336
million to \$516 million, as shown in Table 1 below.

Table 1.

+---------------------------------+---------+--------+-----+---------+
|                                 |         |        |     |         |
+---------------------------------+---------+--------+-----+---------+
| [NASUCA Preferred               | (in     | Source |     |         |
| Scenario]{.underline}           | mi      |        |     |         |
|                                 | llions) |        |     |         |
+---------------------------------+---------+--------+-----+---------+
|                                 |         |        |     |         |
+---------------------------------+---------+--------+-----+---------+
| NASUCA Preferred Scenario       |         |        |     |         |
|                                 |         |        |     |         |
| at \$5.00 SLC Cap               |         |        |     |         |
+---------------------------------+---------+--------+-----+---------+
| 76 price cap, non-rural study   | \$472   | L1=    |     |         |
| areas                           |         | NASUCA |     |         |
|                                 |         | Pre    |     |         |
| with UNE Zones                  |         | ferred |     |         |
|                                 |         | Sc     |     |         |
|                                 |         | enario |     |         |
+---------------------------------+---------+--------+-----+---------+
| Additional 105 study areas      | \$157   | L      |     |         |
|                                 |         | 2=USAC |     |         |
|                                 |         | data   |     |         |
+---------------------------------+---------+--------+-----+---------+
| Total                           | \$629   | L3     |     |         |
|                                 |         | =L1+L2 |     |         |
+---------------------------------+---------+--------+-----+---------+
|                                 |         |        |     |         |
+---------------------------------+---------+--------+-----+---------+
| NASUCA Preferred Scenario       |         |        |     |         |
|                                 |         |        |     |         |
| at \$6.50 SLC Cap               |         |        |     |         |
+---------------------------------+---------+--------+-----+---------+
| 76 price cap, non-rural study   | \$252   | L4=    |     |         |
| areas                           |         | NASUCA |     |         |
|                                 |         | Pre    |     |         |
| with UNE Zones                  |         | ferred |     |         |
|                                 |         | Sc     |     |         |
|                                 |         | enario |     |         |
+---------------------------------+---------+--------+-----+---------+
| NASUCA Factor                   | 53.39%  | L5=L4  |     |         |
|                                 |         | / L1   |     |         |
+---------------------------------+---------+--------+-----+---------+
| Additional 105 study areas      | \$84    | L6=L2  |     |         |
|                                 |         | x L5   |     |         |
+---------------------------------+---------+--------+-----+---------+
| Total                           | \$336   | L7 =   |     |         |
|                                 |         | L4+L5  |     |         |
+---------------------------------+---------+--------+-----+---------+
|                                 |         |        |     |         |
+---------------------------------+---------+--------+-----+---------+
|                                 |         |        |     |         |
+---------------------------------+---------+--------+-----+---------+
| [FCC Staff Analysis of NASUCA   |         |        |     |         |
| Study]{.underline}              |         |        |     |         |
+---------------------------------+---------+--------+-----+---------+
|                                 |         |        |     |         |
+---------------------------------+---------+--------+-----+---------+
| NASUCA Default Scenario         |         |        |     |         |
|                                 |         |        |     |         |
| at \$5.00 SLC Cap               |         |        |     |         |
+---------------------------------+---------+--------+-----+---------+
| 76 price cap, non-rural study   | \$685   | L1=    |     |         |
| areas                           |         | NASUCA |     |         |
|                                 |         | D      |     |         |
| with UNE Zones                  |         | efault |     |         |
|                                 |         | Sc     |     |         |
|                                 |         | enario |     |         |
+---------------------------------+---------+--------+-----+---------+
| Additional 105 study areas      | \$157   | L      |     |         |
|                                 |         | 2=USAC |     |         |
|                                 |         | data   |     |         |
+---------------------------------+---------+--------+-----+---------+
| Total                           | \$842   | L3     |     |         |
|                                 |         | =L1+L2 |     |         |
+---------------------------------+---------+--------+-----+---------+
|                                 |         |        |     |         |
+---------------------------------+---------+--------+-----+---------+
| NASUCA Default Scenario         |         |        |     |         |
|                                 |         |        |     |         |
| at \$6.50 SLC Cap               |         |        |     |         |
+---------------------------------+---------+--------+-----+---------+
| 76 price cap, non-rural study   | \$419   | L4=    |     |         |
| areas                           |         | NASUCA |     |         |
|                                 |         | D      |     |         |
| with UNE Zones                  |         | efault |     |         |
|                                 |         | Sc     |     |         |
|                                 |         | enario |     |         |
+---------------------------------+---------+--------+-----+---------+
| NASUCA Factor Recomputed        | 61.17%  | L5=L4  |     |         |
|                                 |         | / L1   |     |         |
+---------------------------------+---------+--------+-----+---------+
| Additional 105 study areas      | \$96    | L6=L2  |     |         |
|                                 |         | x L5   |     |         |
+---------------------------------+---------+--------+-----+---------+
| Total                           | \$516   | L7 =   |     |         |
|                                 |         | L4+L5  |     |         |
+---------------------------------+---------+--------+-----+---------+
|                                 |         |        |     |         |
+---------------------------------+---------+--------+-----+---------+

As shown in Table 1, for the \$5.00 SLC cap, the NASUCA [preferred
scenario]{.underline} calculates a forward-looking support amount of
\$472 M, to which is added another \$157 M of support for 105 study
areas not included in the model. For the \$6.50 SLC cap, the NASUCA
preferred scenario calculates a forward-looking support amount of \$252
M, to which is added another \$84 M of support for 105 study areas not
included in the model. The \$84 M is derived using a NASUCA factor, more
fully explained in NASUCA pleadings.[^194] A total of \$336 M in support
is calculated.

For the \$5.00 SLC cap, the NASUCA [default scenario]{.underline}
calculates a forward-looking support amount of \$685 M, to which is
added another \$157 M of support for 105 study areas not included in the
model. For the \$6.50 SLC cap, the NASUCA default scenario calculates a
forward-looking support amount of \$419 M, to which is added another
\$96 M of support for 105 study areas not included in the model. The
\$96 M is derived using a modified NASUCA factor computed in the same
manner as the original factor.[^195] A total of \$516 M in support is
calculated.

2.  **NASUCA's Exclusion of Multi-Line Business Lines**

The NASUCA study also fails to include SLC revenues and costs for
multi-line business (MLB) lines. To include these MLB lines in the
NASUCA default scenario, Commission staff modified the worksheet
(resbusbyzone) in wc_cost so that the SLC revenues and costs are
computed to include MLB lines.[^196] This was accomplished in the
following manner. The MLB lines are already displayed in a separate
column in the same worksheet. The formulas in the columns labeled "SLC
revenues" and "economic costs" were modified.

The SLC revenue formulas must be changed to reflect the relevant SLC
caps. These SLC caps were obtained from publicly available CMT revenue
per line data. For example, SWB-AK's CMT revenue per line = \$5.20,
therefore SLC revenues at a \$5.00 residential and single line business
cap = ((\$5.20\*MLB lines) +\$5.00\*(SLB lines + residential
lines))\*12\]. For another example, GTE NW-WA (Contel)'s CMT revenue per
line is \$9.37, therefore SLC revenues at a \$6.50 residential and
single-line business cap = \[(9.20\*MLB lines) + \$6.50\*(SLB lines +
residential lines))\*12\]. The SLC revenues computed for a company
reflect the CMT revenue per line for the company, which in turn
determines which caps are effective for that company.

The cost formulas in the column labeled "economic costs" were modified
to include the MLB lines (i.e., economic cost = cost per line\*12\*(SLB
lines + residential lines + MLB lines). Once these changes are made, the
spreadsheet performs the calculations for support amounts. The results
are shown in Table 2.

Table 2.

FCC Staff Analysis of NASUCA Study Including MLB Lines

  --------------------------------- ----------- --------------------------
                                    (in         
                                    millions)   

                                                

  Restated NASUCA Forward-Looking               
  Support at \$5.00 SLC                         

  76 price cap, non-rural with UNE  \$712       L1= NASUCA default plus
  Zones                                         MLB

  Additional 105 study areas        \$157       L2=USAC data

  Total                             \$869       L3=L1+L2

                                                

  Restated NASUCA Forward-Looking               
  Support at \$6.50 SLC                         

  76 price cap, non-rural with UNE  \$485       L4= NASUCA default plus
  Zones                                         MLB

  NASUCA Factor Recomputed          68.12%      L5=L4 / L1

  Additional 105 study areas        \$107       L6=L2 x L5

  Total                             \$593       L7 = L4+L5

                                                
  --------------------------------- ----------- --------------------------

For the \$5.00 SLC cap, the NASUCA default scenario including MLB
calculates a support amount of \$712 M, to which is added another \$157
M of support for 105 study areas not included in the model. For the
\$6.50 SLC cap, the NASUCA default scenario including MLB calculates a
support amount of \$485 M, to which is added another \$107 M of support
for 105 study areas not included in the model. The \$107 M is derived
using a modified NASUCA factor computed in the same manner as the
original factor.[^197] A total of \$593 M in support is calculated.

**Results**

Removing NASUCA's assumptions regarding traffic-sensitive costs and
structure sharing from the NASUCA preferred scenario raises the amount
of support from \$336 M to \$516 M. Including the MLB lines raises
support from \$516 M to \$593 M.

**APPENDIX B**

+--------------------------+-------------------+-----------------------+
| [Companies Reaching ATS  |                   |                       |
| Target Rates in 2000     |                   |                       |
| Annual Access            |                   |                       |
| Filing]{.underline}      |                   |                       |
+--------------------------+-------------------+-----------------------+
| [Company (TRP            | [Date ATS Rate    | [Approximate Access   |
| Name)]{.underline}       | Reached]{         | Lin                   |
|                          | .underline}[^198] | es]{.underline}[^199] |
+--------------------------+-------------------+-----------------------+
| BellSouth (bstran)       | 8/1/2000          | 23,711,051            |
+--------------------------+-------------------+-----------------------+
| Cincinnati Bell (cbtcan) | 6/16/2000         | 1,024,941             |
+--------------------------+-------------------+-----------------------+
| Citizens Group 4         | 8/17/2000         | 309,044               |
| (ctc4an)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Iowa Telecommunications  | 7/27/2000         | 166,290               |
| (coitan)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Sprint Nevada (cenvan)   | 7/27/2000         | 879,230               |
+--------------------------+-------------------+-----------------------+
| Sprint North Carolina    | 7/27/2000         | 1,490,285             |
| (ucncan)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Sprint Southeast         | 7/27/2000         | 767,102               |
| (ucsean)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Valor Oklahoma (vaokan)  | 7/27/2000         | 121,454               |
+--------------------------+-------------------+-----------------------+
| Valor Texas (vctxan)     | 7/27/2000         | 142,348               |
+--------------------------+-------------------+-----------------------+
| Valor Texas (vatxan)     | 7/27/2000         | 175,610               |
+--------------------------+-------------------+-----------------------+
| Verizon Alabama (coalan) | 7/27/2000         | 125,572               |
+--------------------------+-------------------+-----------------------+
| Verizon California       | 7/27/2000         | 4,180,621             |
| (gtcaan)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Verizon East -- South    | 7/27/2000         | 21,312,646            |
| (batran)[^200]           |                   |                       |
+--------------------------+-------------------+-----------------------+
| Verizon Florida (gtflan) | 7/27/2000         | 2,302,687             |
+--------------------------+-------------------+-----------------------+
| Verizon Kentucky         | 7/27/2000         | 102,126               |
| (cokyan)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Verizon Missouri         | 7/27/2000         | 95,715                |
| (gtmoan)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Verizon Nevada (convan)  | 7/27/2000         | 38,685                |
+--------------------------+-------------------+-----------------------+
| Verizon North Carolina   | 7/27/2000         | 140,159               |
| (concan)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Verizon Pennsylvania     | 7/27/2000         | 114,782               |
| (coptan)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Verizon Pennsylvania     | 7/27/2000         | 557,794               |
| (gtpaan)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Verizon Virginia         | 7/27/2000         | 596,299               |
| (covaan)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Verizon Virginia         | 7/27/2000         | 37,138                |
| (gtvaan)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
|                          |                   |                       |
+--------------------------+-------------------+-----------------------+
| Total Lines:             |                   | 58,391,579            |
|                          |                   |                       |
|                          |                   | (36% of total         |
|                          |                   | nationwide access     |
|                          |                   | lines)                |
+--------------------------+-------------------+-----------------------+

+--------------------------+-------------------+-----------------------+
| [Companies Reaching ATS  |                   |                       |
| Target Rates in 2001     |                   |                       |
| Annual Access            |                   |                       |
| Filing]{.underline}      |                   |                       |
+--------------------------+-------------------+-----------------------+
| [Company (TRP            | [Date ATS Rate    | [Approximate Access   |
| Name)]{.underline}       | Reached]{         | Lin                   |
|                          | .underline}[^201] | es]{.underline}[^202] |
+--------------------------+-------------------+-----------------------+
| Ameritech (amtran)       | 6/18/2001         | 20,160,284            |
+--------------------------+-------------------+-----------------------+
| Citizens Group 5         | 7/3/2001          | 16,688                |
| (ctc5an)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Frontier -- Rochester    | 6/18/2001         | 505,442               |
| Tier I (rtnyan)          |                   |                       |
+--------------------------+-------------------+-----------------------+
| Iowa Telecommunications  | 6/18/2001         | 121,037               |
| (gtiaan)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Pacific Bell (ptcaan)    | 5/7/2001          | 17,669,307            |
+--------------------------+-------------------+-----------------------+
| Qwest (ustran)           | 7/27/2001         | 16,820,389            |
+--------------------------+-------------------+-----------------------+
| Sprint Florida (ucflan)  | 6/18/2001         | 2,147,259             |
+--------------------------+-------------------+-----------------------+
| Sprint East (utegan)     | 6/18/2001         | 634,060               |
+--------------------------+-------------------+-----------------------+
| Valor New Mexico         | 6/18/2001         | 46,687                |
| (vanman)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Verizon Alabama (gtalan) | 8/7/2001          | 166,076               |
+--------------------------+-------------------+-----------------------+
| Verizon California       | 8/7/2001          | 396,213               |
| (cocaan)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Verizon Illinois         | 8/7/2001          | 136,016               |
| (coilan)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Verizon Indiana (coinan) | 8/7/2001          | 196,011               |
+--------------------------+-------------------+-----------------------+
| Verizon Indiana (gainan) | 8/7/2001          | 772,588               |
+--------------------------+-------------------+-----------------------+
| Verizon North Carolina   | 8/7/2001          | 217,956               |
| (gtncan)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Verizon Ohio (gtohan)    | 8/7/2001          | 929,637               |
+--------------------------+-------------------+-----------------------+
| Verizon Oregon (gtoran)  | 8/7/2001          | 474,800               |
+--------------------------+-------------------+-----------------------+
| Verizon South Carolina   | 8/7/2001          | 214,442               |
| (gtstan)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Verizon Texas (cotxan)   | 8/7/2001          | 114,399               |
+--------------------------+-------------------+-----------------------+
| Verizon Texas (gttxan)   | 8/7/2001          | 1,568,135             |
+--------------------------+-------------------+-----------------------+
| Verizon Washington       | 8/7/2001          | 88,259                |
| (cowaan)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Verizon Washington       | 8/7/2001          | 785,108               |
| (gtwaan)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
|                          |                   |                       |
+--------------------------+-------------------+-----------------------+
| Total Lines:             |                   | 64,180,793            |
|                          |                   |                       |
|                          |                   | (39% of total         |
|                          |                   | nationwide access     |
|                          |                   | lines)                |
|                          |                   |                       |
|                          |                   | (75% at target rates) |
+--------------------------+-------------------+-----------------------+

+--------------------------+-------------------+-----------------------+
| [Companies Reaching ATS  |                   |                       |
| Target Rates in 2002     |                   |                       |
| Annual Access            |                   |                       |
| Filing]{.underline}      |                   |                       |
+--------------------------+-------------------+-----------------------+
| [Company (TRP            | [Date ATS Rate    | [Approximate Access   |
| Name)]{.underline}       | Reached]{         | Lin                   |
|                          | .underline}[^203] | es]{.underline}[^204] |
+--------------------------+-------------------+-----------------------+
| SWBT (swtran)            | 7/2/2002          | 14,490,907            |
+--------------------------+-------------------+-----------------------+
| Sprint Indiana (utinan)  | 7/2/2002          | 269,421               |
+--------------------------+-------------------+-----------------------+
| Sprint Midwest (utmwan)  | 7/2/2002          | 1,010,581             |
+--------------------------+-------------------+-----------------------+
| Verizon East -- North    | 7/2/2002          | 16,423,404            |
| (nxtran)[^205]           |                   |                       |
+--------------------------+-------------------+-----------------------+
| Verizon Illinois         | 7/2/2002          | 704,829               |
| (gailan)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Verizon Kentucky         | 7/2/2002          | 457,694               |
| (gtkyan)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Verizon Michigan         | 7/2/2002          | 795,676               |
| (gamian)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Verizon Minnesota        | 7/2/2002          | 255,338               |
| (comtan)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
| Verizon Wisconsin        | 7/2/2002          | 400,562               |
| (gtwian)                 |                   |                       |
+--------------------------+-------------------+-----------------------+
|                          |                   |                       |
+--------------------------+-------------------+-----------------------+
| Total Lines:             |                   | 34,808,412            |
|                          |                   |                       |
|                          |                   | (21% of total         |
|                          |                   | nationwide access     |
|                          |                   | lines)                |
|                          |                   |                       |
|                          |                   | (96% at target rates) |
+--------------------------+-------------------+-----------------------+

+--------------------------+------------------+-----------------------+
| [Companies Not Yet at    |                  |                       |
| Their Target             |                  |                       |
| Rates]{.underline}       |                  |                       |
+--------------------------+------------------+-----------------------+
| [Company (TRP            | [Likely to Reach | [Approximate Access   |
| Name)]{.underline}       | ATS Rate in 2003 | Lin                   |
|                          | Filing?]{.       | es]{.underline}[^207] |
|                          | underline}[^206] |                       |
+--------------------------+------------------+-----------------------+
| Aliant (ltnean)          | No               | 278,372               |
+--------------------------+------------------+-----------------------+
| Citizens Group 1         | No               | 881,794               |
| (ctc1an)                 |                  |                       |
+--------------------------+------------------+-----------------------+
| Citizens Group 2         | No               | 142,834               |
| (ctc2an)                 |                  |                       |
+--------------------------+------------------+-----------------------+
| Citizens Group 3         | No               | 23,134                |
| (ctc3an)                 |                  |                       |
+--------------------------+------------------+-----------------------+
| Frontier Minnesota &     | Yes              | 202,657               |
| Iowa (vitcan)            |                  |                       |
+--------------------------+------------------+-----------------------+
| Frontier Rochester Tier  | No               | 267,188               |
| II (rtcsan)              |                  |                       |
+--------------------------+------------------+-----------------------+
| Nevada Bell (ptnvan)     | No               | 362,684               |
+--------------------------+------------------+-----------------------+
| SNET (snctan)            | Yes              | 2,164,403             |
+--------------------------+------------------+-----------------------+
| Sprint Northwest         | No               | 162,537               |
| (utnwan)                 |                  |                       |
+--------------------------+------------------+-----------------------+
| Sprint Ohio (utohan)     | Yes              | 631,095               |
+--------------------------+------------------+-----------------------+
| Verizon Arizona (coazan) | No               | 8,347                 |
+--------------------------+------------------+-----------------------+
| Verizon Hawaii (gthian)  | No               | 709,498               |
+--------------------------+------------------+-----------------------+
| Verizon Idaho (gtidan)   | No[^208]         | 136,322               |
+--------------------------+------------------+-----------------------+
| Verizon Micronesia       | No               | 21,011                |
| (gtmcan)                 |                  |                       |
+--------------------------+------------------+-----------------------+
|                          |                  |                       |
+--------------------------+------------------+-----------------------+
| Total Lines:             |                  | 5,991,876             |
|                          |                  |                       |
|                          |                  | (4% of total          |
|                          |                  | nationwide access     |
|                          |                  | lines)                |
+--------------------------+------------------+-----------------------+
| Total Lines Likely to    |                  | 2,998,155             |
| Reach ATS Target Rate in |                  |                       |
| 2003:                    |                  | (2% of total          |
|                          |                  | nationwide access     |
|                          |                  | lines)                |
|                          |                  |                       |
|                          |                  | (98% at target rates  |
|                          |                  | after 2003 filing)    |
+--------------------------+------------------+-----------------------+

[^1]: *Texas Office of Public Utility Counsel v. FCC*, 265 F.3d 313
    (5^th^ Cir. 2001) (*TOPUC)*.

[^2]: *Access Charge Reform*, *Price Cap Performance Review for Local
    Exchange Carriers, Low-Volume Long-Distance Users, Federal-State
    Joint Board on Universal Service*, Sixth Report and Order in CC
    Docket Nos. 96-262 and 94-1, Report and Order in CC Docket No.
    99-249, Eleventh Report and Order in CC Docket No. 96-45, 15 FCC Rcd
    12962 (2000) (*CALLS Order*), *aff'd in part, rev'd in part, and
    remanded in part*, *Texas Office of Public Utility Counsel*, 265
    F.3d 313 (5^th^ Cir. 2001) (*TOPUC*). CALLS consisted of the
    following members: AT&T, Bell Atlantic, BellSouth, GTE, SBC, and
    Sprint, representing both incumbent local exchange carriers (LECs)
    and interexchange carriers (IXCs).

[^3]: *TOPUC*, 265 F.3d at 317.

[^4]: The Commission uses a multi-step process to identify the cost of
    providing access service. First, an incumbent LEC must record all of
    its expenses, investments, and revenues in accordance with
    accounting rules set forth in our regulations. *See* 47 C.F.R. §§
    32.1-32.9000. Second, these carriers must divide these costs between
    those associated with regulated telecommunications services and
    those associated with nonregulated activities. *See* 47 C.F.R. §§
    64.901-64.904. Third, the separations rules determine the fraction
    of the incumbent carrier's regulated expenses and investment that
    should be allocated to the interstate jurisdiction. *See* 47 C.F.R.
    §§ 36.1-36.741. After the total amount of interstate cost is
    identified, the access charge rules translate these interstate costs
    into charges for the specific interstate access services and rate
    elements. *See* 47 C.F.R. §§ 69.1-69.731.

[^5]: *Access Charge Reform*, CC Docket No. 96-262, First Report and
    Order, 12 FCC Rcd 15982, 15992-93, para. 24 (1997) (*Access Charge
    Reform First Report and Order*).

[^6]: *Access Charge Reform First Report and Order*, 12 FCC Rcd at
    16013, para. 77 ("Because common line costs do not vary with usage,
    these costs should be recovered on a flat-rated instead of
    per-minute basis. In addition, these costs should be assigned, where
    possible, to those customers who benefit from the services provided
    by the local loop.")

[^7]: This charge is also referred to as the end user common line (EUCL)
    charge. *See* 47 C.F.R. § 69.152.

[^8]: *See CALLS Order*, 15 FCC Rcd at 12969-70, para. 18.

[^9]: *CALLS Order*, 15 FCC Rcd at 12969-70 para. 18.

[^10]: *Access Charge Reform First Report and Order*, 12 FCC Rcd at
    15986 para. 6, 15995-96 para. 30, 16013 para. 76.

[^11]: *See Multi-Association Group (MAG) Plan for Regulation of
    Interstate Services of Non-Price Cap Incumbent LEC and IXCs*, 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, 19624, para. 19 (2001) (*MAG Order*).

[^12]: *See Policy and Rules Concerning Rates for Dominant Carriers*, CC
    Docket No. 87-313, Second Report and Order, 5 FCC Rcd 6786 (1990)
    (*LEC Price Cap Order*).

[^13]: *See LEC Price Cap Order*, 5 FCC Rcd at 6787, para. 2.

[^14]: *Id.*

[^15]: *See*, *e.g.*, *Federal-State Joint Board on Universal Service*,
    Fourteenth Report and Order, Twenty-Second Order on Reconsideration,
    and Further Notice of Proposed Rulemaking in CC Docket No. 96-45,
    and Report and Order in CC Docket No. 00-256, 16 FCC Rcd 11244,
    11251, para. 13 (2001) (*RTF Order*).

[^16]: Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56
    (1996) (1996 Act). The 1996 Act amended the Communications Act of
    1934 (the Act) (codified at 47 U.S.C. §§ 151 *et seq*.); s*ee also*
    47 U.S.C. § 254(e).

[^17]: *Federal-State Joint Board on Universal Service*, CC Docket No.
    96-45, Report and Order, 12 FCC Rcd 8667, 8801-03, paras. 46-51
    (1997) (subsequent history omitted) (adopting the principle under
    section 254(b)(7) of the Act that federal support mechanisms should
    be competitively neutral); *see also* 47 U.S.C. § 254(e). In
    November 2002, the Commission referred to the Federal-State Joint
    Board on Universal Service several issues related to the portability
    of universal service support. *Federal-State Joint Board on
    Universal Service*, CC Docket No. 96-45, Order, 17 FCC Rcd 22642
    (2002).

[^18]: 47 U.S.C. § 254(b)(3).

[^19]: 47 U.S.C. §§254(b)(5), (e).

[^20]: *Access Charge Reform First Report and Order*, 12 FCC Rcd at
    15998, para. 36.

[^21]: As discussed above, due to affordability concerns, the SLC is
    subject to a cap that, particularly for residential customers, is
    often below the level that would enable the LEC to recover the
    entire interstate cost of the local loop. *See* para. 2, *supra*.

[^22]: *Access Charge Reform First Report and Order*, 12 FCC Rcd at
    16022, para. 99. Under the Commission's rules, there were separate
    caps for the residential and single-line business PICC and the
    multi-line business PICC. As discussed below, the Commission
    eliminated the residential and single-line business PICC in the
    *CALLS Order*.

[^23]: *Id.* at 16005, para. 60.

[^24]: *See CALLS Order*, 15 FCC Rcd at 12970, para. 19.

[^25]: *See id.* at 12970, para. 19.

[^26]: *Id.*

[^27]: *Id.*

[^28]: *Id* at 12992, para. 78.

[^29]: *Id.* at 12964, para. 1.

[^30]: *Id.* at 12973, 12978, paras. 26, 38.

[^31]: *Id.* at 12974, para. 28.

[^32]: *Id.* at 12981-82, para. 49.

[^33]: *Id.*

[^34]: *Id.* at 12981-82, para. 49.

[^35]: *Id.* at 12977 para. 36, 12981-82 paras. 48-49.

[^36]: *Id.* at 12970, para. 19.

[^37]: *See id.* at 12991-93, paras. 76-79. In the *CALLS Order*, the
    Commission approved graduated increases in the SLC cap for
    residential and single-line business lines to \$5.00 per month, and
    approved a series of further increases conditioned on cost studies
    to be submitted in a future cost review proceeding. *CALLS Order*,
    15 FCC Rcd at 12994, para. 83. In order to preserve affordability
    for low-income consumers, the Commission also increased universal
    service support under the Lifeline mechanism. *CALLS Order*, 15 FCC
    Rcd at 13057-59, paras. 218-21. Recently, the Commission approved
    increases in residential and single-line SLC caps to \$6.50. *Cost
    Review Proceeding for Residential and Single-Line Business
    Subscriber Line Charge (SLC) Caps*, CC Docket Nos. 96-262, 94-1,
    Order, 17 FCC Rcd 10868, 10869-70, para. 1 (2002) (*SLC Cap Review
    Order*).

[^38]: *CALLS Order*, 15 FCC Rcd at 12991-93, paras. 76-79.

[^39]: *Id.* at 13004-06, paras. 105-12. The multi-line business PICC is
    a transitional mechanism that recovers revenue that would otherwise
    be recoverable through charges on residential and single-line
    business lines. *Id.* at 13004, para. 106. In the *CALLS Order*, the
    Commission concluded that "maintaining this transitional mechanism
    continues to be a reasonable measure to avoid an adverse impact on
    universal service and residential customers, and is the better
    approach in establishing a more efficient interstate access charge
    rate structure consistent with our long-term universal service goals
    in a competitive local exchange environment." *Id.*

[^40]: *Id.* at 12988-89, para. 70. Price Cap CMT Revenue includes
    common line costs, marketing expenses, and residual revenues
    previously recovered through the transport interconnection charge.
    *Id.*

[^41]: *Id.* at 13028-39, paras. 160-84. We discuss the X-factor in
    greater detail in section B. *infra*.

[^42]: *Id.* at 13025, paras. 151-52.

[^43]: *Id*. at 13046, para. 202; *see TOPUC,* 265 F.3d at 327-28. We
    discuss the Commission's decision to size IAS at \$650 million in
    greater detail in section III.A., *infra*.

[^44]: *CALLS Order*, 15 FCC Rcd at 13046, para. 202.

[^45]: *Id.* at 13046, para. 201 ("The various implicit support flows
    (*e.g.*, business to residential, high-volume to low-volume, and
    geographic rate averaging) are not easily severable and
    quantifiable. Moreover, the competitive pricing pressures present
    during this transitional period between monopoly and competition
    present additional complexities in identifying a specific amount of
    implicit support.").

[^46]: *See TOPUC*, 265 F.3d at 329. The court also found that the
    Commission did not violate the Administrative Procedure Act with
    respect to the abbreviated notice-and-comment period for the revised
    CALLS proposal and *ex parte* contacts between the Commission and
    CALLS proponents. *Id.* at 325-27.

[^47]: *Id.* at 322.

[^48]: *Id*. The court noted several reasons for increasing the SLC cap:
    the effects of inflation since the last SLC cap increase minimized
    the real effect of the increase; studies indicating that telephone
    subscribership would not be negatively affected by the SLC cap
    increase; the increased funding of the Lifeline support program,
    which allayed some prior fears about affordability; the promise to
    conduct a cost study before the latter stages of the SLC increase;
    and the offset of the SLC increase by the pro-competitive benefits
    of the elimination of the PICC. *Id.*

[^49]: *Id.* at 324.

[^50]: *Id*. at 324-25.

[^51]: *Id*. at 328; *see also* para. 17, *infra*.

[^52]: *TOPUC*, 265 F.3d at 328-29; *see also* para. 38, *infra*.

[^53]: *Common Carrier Bureau Seeks Comment on Remand of \$650 Million
    Support Amount Under Interstate Access Support Mechanism for Price
    Cap Carriers*, CC Docket Nos. 96-262, 94-1, 99-249, and 96-45,
    Public Notice, 16 FCC Rcd 21307 (Com. Car. Bur. 2001) (*CALLS Remand
    Public Notice*). The Bureau did not seek further comment on the
    remand of the 6.5 percent X-factor, indicating that it would rely on
    the existing record with respect to that issue. *Id.* at 21308 n. 5.
    Pursuant to an agency reorganization, the Common Carrier Bureau
    subsequently became the Wireline Competition Bureau.

[^54]: *CALLS Order*, 15 FCC Rcd at 12981-82, para. 49.

[^55]: Carriers recover costs assigned to the interstate jurisdiction
    pursuant to either the Commission's price cap regulations or its
    rate-of-return regulations. The Commission addressed reform of the
    access rate structure for rate-of-return carriers in the *MAG
    Order*. *MAG Order*, 16 FCC Rcd at 19616**,** para. 2. The
    Commission's universal service rules also distinguish between rural
    carriers, which are typically small carriers that meet the
    definition of "rural telephone company" in the Act, and non-rural
    carriers for the purpose distributing support for costs assigned to
    the intrastate jurisdiction. *See* 47 U.S.C. § 153(37). Although
    most rural carriers are subject to rate-of-return regulation, there
    are approximately 105 rural price cap carriers. *See* NASUCA Reply
    at 11.

[^56]: *CALLS Order*, 15 FCC Rcd at 13039, para. 185.

[^57]: *Id*. at 13043, para. 195; *see also supra* note Error: Reference
    source not found and accompanying text.

[^58]: *CALLS Order*, 15 FCC Rcd at 13043-44, para. 196. A UNE zone is a
    state-created zone pursuant to section 51.507(f) of the Commission's
    rules, which requires states to establish different rates for
    unbundled network elements in at least three defined geographic
    areas within the state to reflect geographic costs differences. 47
    C.F.R. § 51.507(f).

[^59]: *CALLS Order*, 15 FCC Rcd at 13043 para. 196. For purposes of
    calculating IAS, the SLC cap on non-primary residential lines and
    single-line business lines is set at \$7.00, and the SLC cap on
    multi-line business lines is set at \$9.20. Although the maximum
    residential SLC cap changed from \$7.00 in the Original CALLS
    Proposal to \$6.50 in the Modified Proposal, the CALLS members
    continued to use \$7.00 for purposes of allocating IAS to each price
    cap LEC's service area to maintain consistency of benchmarks between
    primary and non-primary residential lines. *Id.* at 13043 n. 427.

[^60]: *Id.* at 13043-44, para. 196.

[^61]: *Id.*

[^62]: *See* 47 C.F.R. §§ 61.46(d), 69.153.

[^63]: *CALLS Order*, 15 FCC Rcd at 13046-47, para. 202.

[^64]: *Id*. at 13046-47, para. 202.

[^65]: *Id*. at 13045, para. 200. The other members of the CALLS group
    did not join in the citation of this study. *See* *Memorandum in
    Support of the Revised Plan of the Coalition for Affordable Local
    and Long Distance Service*, CC Dockets 94-1, 96-45, 99-249, 96-262,
    filed by CALLS on March 8, 2000.

[^66]: *CALLS Order*, 15 FCC Rcd at 13045, para. 200. In the *Universal
    Service Fifth Report and Order*, the Commission approved the
    Synthesis model for use in calculating high-cost support for
    non-rural carriers. *Federal-State Joint Board on Universal
    Service*, CC Docket No. 96-45, Fifth Report and Order, 13 FCC Rcd
    21323 (1998) (*Universal Service Fifth Report and Order*). The
    Synthesis model is a series of algorithms that allow the user to
    estimate the cost of building a telephone network. *CALLS Order*, 15
    FCC Rcd at 13045 n. 438; *see also generally* *Universal Service
    Fifth Report and Order*.

[^67]: *CALLS Order*, 15 FCC Rcd at 13045, para. 199 (citing USTA
    Comments, CC Dockets 96-45 and 96-262 filed July 23, 1999).

[^68]: *Id*. at 13045, para. 199 (citing *A Proposal for Universal
    Service and Access Reform*, Rogerson and Kwerel, CC Docket Nos.
    96-45 and 96-262 (filed May 27, 1999) (Rogerson and Kwerel study).

[^69]: *Id*. at 13045, para. 199 (citing CALLS Supplemental Reply at 11
    n. 20 (filed April 17, 2000)). The CALLS members noted this study as
    an example of the wide-ranging estimates of the appropriate size of
    the mechanism. CALLS Supplemental Reply at 11. AT&T developed the
    study based on the HAI model, but has advocated that the Commission
    rely on its other study, which used the Synthesis model. Like the
    Synthesis model, the HAI model uses a series of algorithms to
    estimate the cost of building a telephone network. *CALLS Order*, 15
    FCC Rcd at 13045 n. 436. The Commission incorporated some elements
    of the HAI model in developing the Synthesis model, but has not
    approved the HAI model for use in calculating universal service
    support. *See generally Universal Service Fifth Report and Order*.

[^70]: *CALLS Order*, 15 FCC Rcd at 13048, para. 204 (citing US West
    Supp. Comments at 7).

[^71]: *Id.* at 13048, para. 204 (citing ALTS and Time Warner Supp.
    Comments at 17).

[^72]: CALLS Analysis, CC Docket Nos. 96-262, 94-1, 99-249, and 96-45,
    (filed by Industry Analysis Division, Common Carrier Bureau on May
    25, 2000) (IAD CALLS Study). IAD is now known as the Industry
    Analysis and Technology Division. The work underlying this study is
    posted to the Commission website at
    [www.fcc.gov/wcb/iatd/lec.html](http://www.fcc.gov/wcb/iatd/lec.html).
    The Commission relied on this study in other aspects and attached
    portions of the study as Appendix C of the *CALLS Order*. *See CALLS
    Order*, 15 FCC Rcd at 12978-79 para. 41, 13140-43.

[^73]: *TOPUC*, 265 F.3d at 327-28.

[^74]: *Id*. at 328.

[^75]: *Id*.

[^76]: *Id*.

[^77]: *Id*.

[^78]: *Id*.

[^79]: *CALLS Remand Public Notice*, 16 FCC Rcd at 21307. The Bureau did
    not seek further comment regarding the 6.5 percent X-factor. *Id.*
    at 21308 n. 5. The Bureau is now known as the Wireline Competition
    Bureau.

[^80]: *Id.* at 21308.

[^81]: *Id*. at 21308.

[^82]: NASUCA Reply. The NASUCA study was originally developed for the
    SLC cap review proceeding. *See* NASUCA Reply in CC Docket Nos.
    96-262, 94-1, and 96-45 (filed January 24, 2002). In the *CALLS
    Order*, the Commission stated that it would conduct a cost review
    proceeding prior to the scheduled increase to the residential and
    single-line business SLC cap above \$5.00. *CALLS Order*, 15 FCC Rcd
    at 12994, para. 83. As stated above, the Commission recently
    approved graduated SLC cap increases to \$6.50. *SLC Cap Review
    Order*, 17 FCC Rcd at 10869-70, para. 1.

[^83]: On January 14, 2002, eight days before comments were due in
    response to the *CALLS Remand Public Notice*, NASUCA filed a
    petition requesting modification of the Interim Protective Order in
    the non-rural high-cost proceeding in order to permit it to use wire
    center line data necessary to its detailed study. *Request of
    National Association of State Utility Consumer Advocates for a
    Second Limited Modification of Interim Protective Order (IPO)*, CC
    Docket Nos. 96-262, 94-1, and 96-45 (filed January 14, 2002). On
    February 6, 2002, two days after reply comments were due, NASUCA
    filed "reply comments" in which it outlined the conclusions of its
    study along with some of its major features. On May 6, 2002, the
    Commission released a modification to the Interim Protective Order
    to permit NASUCA to file its complete cost study. *Access Charge
    Reform*, *Price Cap Performance Review for Local Exchange Carriers*,
    *Low Volume Long Distance Users*, *Federal-State Joint Board on
    Universal Service*, CC Docket Nos. 96-262, 94-1, 99-249, and 96-45,
    Order, 17 FCC Rcd 8252 (2002). On May 29, 2002, NASUCA made two *ex
    parte* filings which included its detailed cost study. Letters from
    Michael J. Travieso, Maryland People's Counsel, to Marlene H.
    Dortch, FCC, filed May 29, 2002 (NASUCA *ex parte* letters).

[^84]: Qwest Comments at 7-10.

[^85]: AT&T Comments at 2-3; NASUCA Reply at 3-4. The studies in this
    proceeding use two kinds of methodologies to estimate the amount of
    implicit support that should be replaced with explicit support.
    Forward-looking cost studies---such as those submitted by AT&T, US
    West, and NASUCA---estimate the amount of costs incurred in
    constructing and maintaining a theoretical efficient network that
    cannot be recovered through a carrier's end-user charges, such as
    SLCs. On the other hand, embedded cost studies---such as those
    provided by USTA and IAD---estimate the difference between price cap
    carriers' allowable CMT revenues and their revenues from SLCs. The
    difference, or "gap," indicates the amount of allowable CMT revenues
    that may only be recovered through explicit support or inefficient
    rate elements that contain implicit support, such as the PICC or the
    CCL charge.

[^86]: NASUCA Reply at 4-6; Focal Communications Supplemental Comments
    at 16 (filed April 3, 2000); Level 3 Supplemental Comments at 5-6
    (filed April 3, 2000). We do not address NASUCA's contention that we
    should not provide support to price cap carriers that exceeds the
    forward-looking cost of service. NASUCA Reply at 3. This contention
    relates to the IAS distribution formula, which is not at issue on
    remand, rather than the size of the IAS mechanism.

[^87]: *Universal Service First Report and Order*, 12 FCC Rcd at
    8899-901, paras. 224-29. We note that in the *MAG Order*, 16 FCC Rcd
    at 19668, para. 129, the Commission concluded that the appropriate
    level of interstate support for rate-of-return carriers should be
    determined based on embedded costs.

[^88]: *Id.* at 8899 para. 224.

[^89]: *CALLS Order*, 15 FCC Rcd at 13049-55, paras. 206-13.

[^90]: *See id.* at 12990-3007, paras.75-112; *TOPUC*, 265 F.3d at
    324-25.

[^91]: *See* NASUCA Reply at 11. In comparison, there are 80 non-rural
    price cap studies in the model. *See id.*

[^92]: Qwest Comments at 6; NASUCA Reply at 10.

[^93]: *See* NASUCA Reply at 10. Elsewhere, AT&T states that a different
    aggregation method based on UNE zones creates the most appropriate
    balance of incentives for price cap carriers. AT&T Reply at 2-4
    ("\[The *CALLS Order*\] created a unified and harmonized structure
    between SLC deaveraging, UNE bundling and interstate access support
    centering on the UNE zone (which reflects aggregated wire center
    data). That structure creates balanced incentives for all parties to
    seek reasonable disaggregation. Disassociating USF from the UNE zone
    would unbalance those incentives.").

[^94]: Qwest contends that AT&T's method of aggregation results in a
    downward bias in the estimated support amount. *See* Qwest Comments
    at 6 ("AT&T inappropriately combines high-cost, low-density areas
    with urban and suburban areas in a way that dramatically
    underestimates the amount of universal service support needed in
    very high-cost, low-density areas"). *But see also* NASUCA Reply at
    3 (contending that AT&T uses inappropriate aggregation method and
    that results of AT&T study are too high).

[^95]: CALLS Analysis, CC Docket Nos. 96-262, 94-1, 99-249, and 96-45,
    (filed by Industry Analysis Division, Common Carrier Bureau on May
    25, 2000) (IAD CALLS Study). IAD is now known as the Industry
    Analysis and Technology Division. The work underlying this study is
    posted to the Commission website at www.fcc.gov/wcb/iatd/lec.html.

[^96]: IAD CALLS Study.

[^97]: *Id*.

[^98]: *Id*.

[^99]: IAD estimated that in the final year of the CALLS plan, price cap
    carriers would recover \$650 million in CMT revenues from the IAS
    mechanism, \$238 million from multi-line business PICCs, and \$90
    million from CCL charges. IAD CALLS Study, Appendix D at 4
    (estimating IAS and multi-line business PICC revenue), Appendix E at
    11 (estimate of CCL charge revenues equals difference between
    originating and terminating per-minute access rates multiplied by
    forecasted minutes of use). Thus, the IAD CALLS Study suggests an
    explicit universal service mechanism totaling \$978 million would be
    necessary to eliminate completely all of the implicit support
    remaining in the access rate structure after the access charge
    reforms that the Commission adopted are taken into account.

[^100]: Verizon Comments at 3-6 (arguing that \$650 million represents
    approximately 70 percent of the price cap carriers' allowable CMT
    revenues); SBC Comments at 3-4 ("The purpose of the \$650 million is
    to provide support for a portion of the difference between an
    incumbent LEC's actual common line revenue requirement and the
    incumbent LEC's permitted common line end user recovery. . . .").

[^101]: *See* section III.A.2.b., *infra*.

[^102]: When the *CALLS Order* was adopted, US West---Qwest's
    predecessor---used the same general methodology to estimate a \$1.2
    billion support amount. *See CALLS Order*, 15 FCC Rcd at 13048,
    para. 204. That study assumed a \$6.50 SLC cap on multi-line
    business lines, when a \$9.20 SLC cap was, in fact, adopted by the
    Commission. *Id.* The Qwest study filed in this proceeding corrects
    this assumption. Qwest Comments at 8. We note that the \$978 million
    estimated by Qwest's forward-looking study is the same as the amount
    estimated by IAD's embedded cost analysis. These results are merely
    coincidental, however, and are not relevant to our conclusions that
    the methodology underlying IAD's study is persuasive while the
    methodology underlying Qwest's study is not persuasive.

[^103]: Qwest Comments at 7-8. The Synthesis model is able to calculate
    costs for an entire study area or, at a more disaggregated level, on
    either a wire center or density zone basis. In all cases, the model
    first identifies clusters of customer locations. In each cluster,
    density is computed by dividing surface area (in square miles) by
    the number of lines. The model aggregates clusters into either wire
    centers or density zones, depending on the \"output mode\" chosen by
    the programmer. In wire center aggregation mode, the model assigns
    all clusters within a particular wire center to that wire center. In
    density zone aggregation mode, the model assigns each cluster to one
    of nine density zones (*e.g*., 0-5 lines per square mile, 5-100
    lines per square mile, etc.), which are not necessarily contiguous.

[^104]: AT&T Reply at 2-3; NASUCA Reply at 10-11.

[^105]: Qwest Comments at 9 n. 32.

[^106]: USTA Comments, CC Docket Nos. 96-45 and 96-262 (filed July 23,
    1999).

[^107]: *Id.*

[^108]: Rogerson and Kwerel study.

[^109]: *Id*. at 4. The Rogerson and Kwerel study computes
    forward-looking loop costs for each wire center in a company study
    area. *Id.* at 9. It then computes an average loop cost in three
    different density zones by inflating these forward-looking costs
    proportionally to obtain deaveraged loop costs, so that each ILEC
    will recover permitted revenue if it charges prices equal to the
    deaveraged loop costs. *Id.* at 9, 12 n.3. Finally, the study
    computes a support amount by comparing average cost per zone to a
    company\'s SLC revenues in that zone. *Id.* at 12 nn. 4-5, 15, 31.

[^110]: *CALLS Order*, 15 FCC Rcd at 13048, para. 204.

[^111]: *See* ALTS/Time Warner Supplemental Comments at 14 (filed April
    3, 2000); AT&T Comments at 6.

[^112]: CALLS Supplemental Reply at 11 n. 20 (filed April 17, 2000).
    AT&T developed the study, but never advocated its use in this
    proceeding.

[^113]: *Universal Service Fifth Report and Order*, 13 FCC Rcd at 21323,
    para. 3; The Commission included elements of the HAI model (as well
    as other proposed models) in its Synthesis model, but found that the
    HAI model did not permit the Commission "to adopt a framework or
    platform that would estimate the cost of building a telephone
    network to the subscriber's actual geographic location, taking into
    account the actual clustering of customers groupings such as
    neighborhoods and towns." *Id.* Additionally, the HAI model did not
    sufficiently permit the Commission to vary engineering assumptions.
    *Id.* The HAI results are not readily accessible to the public,
    while the Synthesis model's results are posted to the Commission's
    website.

[^114]: NASUCA Reply at 11-12; NASUCA *ex parte* letters. As stated
    above, the Commission approved incremental increases to the SLC cap
    on June 4, 2002. 17 FCC Rcd 10868, 10869-70, para. 1 (2002) (*SLC
    Cap Review Order*, 17 FCC Rcd at 10869-70 para. 1. The SLC cap will
    be \$6.50 beginning July 1, 2003. *Id.*

[^115]: Among its merits, the NASUCA study aggregates lines by UNE zone,
    which is consistent with the Commission's decisions to permit price
    cap carriers to disaggregate universal service support and deaverage
    SLCs by UNE zone. NASUCA Reply at 9-11.

[^116]: *SLC Review Order*, 17 FCC Rcd at 10884-85 para. 37. In the *SLC
    Review* proceeding, NASUCA presented the results of six different
    model runs, with each run highlighting an assumption over which
    parties debated. *Id*. at 10883 para. 34. The first, or default, run
    used all assumptions relied on by the Commission in determining
    forward-looking costs for universal service purposes, with the
    exception of the method for allocating common costs (which is
    unnecessary for purposes of calculating non-rural high-cost support,
    but is necessary for determining loop costs). The other runs were
    based on the default run, but changed certain parameters of the
    model. *Id.* at 10883 para. 34.

[^117]: NASUCA Reply at 6-11. We note that there is a limited record in
    this proceeding with respect to NASUCA's proposed changes to the
    model. This circumstance may be attributable to NASUCA's filing of
    its study in its reply comments. In an ex parte filing with the
    Commission, however, Sprint contests the appropriateness of NASUCA's
    changes to the model. Letter from Pete Sywenki, Sprint, to Marlene
    H. Dortch, Federal Communications Commission, filed September 13,
    2002 (*Sprint Ex Parte Letter*). Sprint argues that, contrary to
    NASUCA's assertions, the feeder and transmission portion of the
    digital loop carrier are not traffic sensitive components of the
    loop and that the formula on which NASUCA relies to determine the
    amount of feeder and distribution network that share common
    structure has flaws that result in overstatement of shared
    structure. *Id.*

[^118]: *SLC Cap Review Order*, 17 FCC Rcd at 10884-85, para. 37.

[^119]: *Sprint Ex Parte Letter*.

[^120]: NASUCA Reply at 11-12; NASUCA *ex parte* letters. NASUCA also
    uses actual support amounts for four Qwest study areas that have UNE
    zones below the wire center level. *Id.* Sprint argues that NASUCA's
    methodology underestimates the amount of support for rural price cap
    study areas, because it assumes that the impact of reducing support
    for non-rural companies would be directly proportional to the impact
    on rural companies. *Sprint Ex Parte Letter*. Because rural price
    cap carriers tend serve higher cost lines than non-rural price cap
    carriers, Sprint contends that the support amount estimated for
    rural price cap carriers should be higher than estimated by NASUCA's
    study. *Id.*

[^121]: *See* para. 21, *supra.*

[^122]: See Appendix A (describing Commission staff's methodology for
    restating NASUCA study).

[^123]: *Sprint Ex Parte Letter*. We did not quantify the impact of
    Sprint's concern regarding NASUCA's methodology for estimating
    support for rural price cap carriers because the record before us
    does not include any alternative methodology for performing this
    estimate. The Commission's restatement of the NASUCA study does
    adjust the amount of attributed to rural price cap study areas to
    reflect its other adjustments to the non-rural price cap portion of
    the NASUCA study, but does so proportionally to non-rural study
    areas as done in NASUCA's methodology. *See* Appendix A.

[^124]: *CALLS Order*, 15 FCC Rcd at 13046, para. 201.

[^125]: *TOPUC*, 265 F.3d at 328.

[^126]: *See* *Universal Service First Report and Order*, 12 FCC Rcd at
    8929-30, paras. 281-82.

[^127]: CALLS Comments, Appendix Bt 2 ("By sizing universal service at
    the lower end of the range indicated by studies in the record . . .
    the Commission left itself greater latitude in later adjusting that
    level of support, if necessary, based upon the empirical experience
    gained during the five years that the size of universal service is
    to be fixed.")

[^128]: As noted above, allowable CMT revenues that cannot be recovered
    through SLCs and IAS will be recovered through multi-line business
    PICCs and CCL charges, which are inefficient and contain implicit
    support. *See* para. 14, *supra.* Reducing the size of the IAS
    mechanism will create a dollar-for-dollar increase in recovery from
    multi-line PICCs and CCL charges.

[^129]: Setting the support amount at \$336 million, as proposed by
    NASUCA, would leave an additional \$214 million, or 65 percent, in
    the inefficient rate elements.

[^130]: *See CALLS Order*, 15 FCC Rcd at 13049 para. 206.

[^131]: From July 1, 1999, to June 30, 2000, prior to the *CALLS
    Order's* effect, price cap carriers recovered \$2.7 billion through
    PICCs, *see* IAD CALLS Study, Chart 2, and an estimated \$688
    million through CCL charges. *See* Trends in Telephone Service,
    Industry Analysis Division, September 1999, at Table 1.4; Trends in
    Telephone Service, Industry Analysis Division, March 2000, at Table
    1.4; Trends in Telephone Service, Industry Analysis Division,
    December 2000, at Table 1.4. From July 1, 2000, to June 30, 2001,
    after the *CALLS Order* became effective, price cap carriers
    recovered \$670 million through PICCs and \$133 million through CCL
    charges. *See generally* Tariff Review Plans.

[^132]: *See TOPUC*, 265 F.3d at 328-29. The Commission's 6.5 percent
    X-factor was applied to reduce price cap LECs' switched access
    rates. The Commission also adopted a separate X-factor to reduce
    price cap LECs' special access rates. At the time the *CALLS Order*
    was adopted and the petitioners sought court review of the order,
    the X-factor was 3 percent for the special access rates. The
    petitioners did not challenge, nor does it appear that the court
    addressed, the X-factor for special access service. We therefore
    restrict our discussion to the X-factor applicable to switched
    access service.

[^133]: *See CALLS Order*, 15 FCC Rcd at 13020-21, para. 140.

[^134]: *See LEC Price Cap Order*, 5 FCC Rcd at 6796, para. 74.

[^135]: The price cap baskets are broad groupings of LEC services. Each
    basket is subject to its own price cap. The Commission initially
    adopted four price cap baskets: (1) common line services; (2)
    traffic sensitive services; (3) special access services; and (4)
    interexchange services. The Commission applied a separate, lower
    productivity factor of 3 percent to the interexchange services
    basket because its evaluation of LEC productivity included only
    interstate access activity; therefore, the record did not support a
    higher productivity factor for LEC interexchange services. *See LEC
    Price Cap Order*, 5 FCC Rcd at 6811, paras. 200-201, 206. In 1994
    the Commission removed transport services from the traffic sensitive
    basket and combined them with special access services to create a
    new trunking basket. *See Transport Rate Structure and Pricing*, CC
    Docket No. 91-213, Second Report and Order, 9 FCC Rcd 615, 622,
    para. 12 (1994).

[^136]: *See LEC Price Cap Order*, 5 FCC Rcd at 6796, paras. 74-75.

[^137]: *See LEC Price Cap Order*, 5 FCC Rcd at 6787, 6796, paras. 5,
    74.

[^138]: Initially, price cap LECs were required to share a portion of
    their earnings in excess of specified rates of return with their
    access customers by temporarily reducing the price cap ceiling in a
    subsequent period. The price cap sharing requirement established
    three sharing zones determined by specified rate-of-return levels.
    In the first "no sharing zone," price cap LECs were allowed to keep
    all of their earnings up to the first rate-of-return ceiling. Above
    that ceiling, in the "50-50 sharing zone," price cap LECs were
    entitled to retain 50 percent of their earnings and were required to
    return 50 percent of their earnings to ratepayers up to the second
    ceiling. Price cap LECs were required to return 100 percent of any
    earnings above the "50-50 sharing zone" ceiling to ratepayers. *See
    LEC Price Cap Order*, 5 FCC Rcd at 6801-02, paras. 122-26.

[^139]: *See LEC Price Cap Order*, 5 FCC Rcd at 6789, para. 20.

[^140]: *See Price Cap Performance Review for Local Exchange Carriers*,
    CC Docket No. 94-1, First Report and Order, 10 FCC Rcd 8961,
    9053-54, para. 209 (1995) (*1995 Price Cap Review Order*).

[^141]: *See 1995 Price Cap Review Order*, 10 FCC Rcd 8961 at 9055-56,
    paras. 213-15. No sharing obligations were imposed on LECs that
    chose the highest productivity factor of 5.3 percent. *See id.* at
    9057-58, paras. 220-22.

[^142]: *See Price Cap Performance Review for Local Exchange Carriers*,
    Fourth Report and Order in CC Docket No. 94-1 and Second Report and
    Order in CC Docket No. 96-262, 12 FCC Rcd 16642, 16645, para. 1
    (1997) (*1997 Price Cap Review Order*). The Commission also
    eliminated the sharing requirements. *Id.*

[^143]: *See 1997 Price Cap Review Order*, 12 FCC Rcd at 16645,
    16693-98, paras. 1, 133-43. TFP measurement is a methodology
    commonly used to measure productivity and productivity growth in the
    economy as a whole. Productivity is measured as the ratio of an
    index of the outputs of a firm (or industry, or nation) to an index
    of its inputs. Productivity growth is measured by changes in this
    ratio over time. The 1997 staff TFP study calculated the historical
    difference in productivity growth between LECs and the economy
    nationwide for the period 1986 through 1995. Specifically, it
    calculated the differential reflecting the difference in the rate of
    change of LEC input prices as compared with the economy as a whole.
    These two factors were then added together for each year. *Id.* at
    16696, para. 138.

[^144]: *See USTA v. FCC*, 188 F.3d 521, 530 (D.C. Cir. 1999) (*USTA*).

[^145]: *See USTA*, 188 F.3d at 525-28.

[^146]: *See USTA v. FCC*, Order, No. 97-1469 *et al.* (D.C. Cir. June
    21, 1999); *USTA v. FCC*, Order, No. 97-1469 *et al.* (D.C. Cir.
    Apr. 13, 2000).

[^147]: *See generally CALLS Order*, 15 FCC Rcd 12962.

[^148]: CALLS consisted of several price cap LECs and IXCs. *See* note
    Error: Reference source not found, *supra*.

[^149]: *See CALLS Order*, 15 FCC Rcd at 13021, 13025, paras. 141, 149;
    47 C.F.R. § 61.42(3), (5). After the *CALLS Order*, there are five
    price cap baskets for: (1) common line, marketing and transport
    interconnection charge (CMT) elements; (2) traffic sensitive
    switched interstate access elements; (3) trunking services; (4)
    interexchange services; and (5) special access services.

[^150]: The target rates are \$0.0055 for regional Bell Operating
    Companies; \$0.0095 for very low-density price cap LECs, and
    \$0.0065 for other price cap LECs. *See CALLS Order*, 15 FCC Rcd at
    13021-22, para. 142; 47 C.F.R. § 61.3(qq).

[^151]: *See CALLS Order*, 15 FCC Rcd at 13020-21, para. 140.

[^152]: *See CALLS Order*, 15 FCC Rcd at 13028, para. 160.

[^153]: *See CALLS Order*, 15 FCC Rcd at 13028, para. 160.

[^154]: *See* Initial Brief for Petitioner National Association of
    Regulatory Utility Consumer Advocates (NASUCA), 5^th^ Cir. Case No.
    00-60434 at 56 (filed Sept. 20, 2000) (NASUCA Initial Brief).

[^155]: *See* NASUCA Initial Brief at 56. *See also* note Error:
    Reference source not found, *supra* (defining CMT revenue).

[^156]: *See* NASUCA Initial Brief at 56. In the *CALLS Order*, the
    Commission found that, once a price cap LEC reached the applicable
    ATS target rate, the 6.5 percent reduction factor would be set to
    equal inflation, which, under the price cap formula for these
    services, essentially would freeze the price caps for services in
    the traffic sensitive switched access and trunking services baskets.
    *See CALLS Order*, 15 FCC Rcd at 13022, 13029, paras. 144, 163.

[^157]: *See TOPUC*, 265 F.3d at 329.

[^158]: *See TOPUC*, 265 F.3d at 324; 47 U.S.C. §§ 201(b), 202(a).

[^159]: Indeed, the court explicitly recognized that the X-factor "is no
    longer tethered to any productivity measure." *TOPUC*, 265 F.3d at
    329.

[^160]: *See TOPUC*, 265 F.3d at 329.

[^161]: *See CALLS Order*, 15 FCC Rcd at 13036-37, paras. 178-179.

[^162]: *See* Letter from Donald F. Shepheard, Vice President Federal
    Regulatory Affairs & Policy, Time Warner Telecom, to Magalie R.
    Salas, Secretary, FCC, CC Docket Nos. 96-262, 94-1, 99-249, and
    96-45 (May 8, 2000).

[^163]: *See Access Charge Reform First Report and Order*, 12 FCC Rcd at
    15987, 16083, paras. 9, 234 (adopting a gradual, market-based
    approach, rather than a flash cut, in eliminating implicit subsidies
    in interstate access charges and in migrating usage-based charges
    into flat-rated charges). *Cf. Access Charge Reform*, CC Docket No.
    96-262, Seventh Report and Order and Further Notice of Proposed
    Rulemaking, 16 FCC Rcd 9923, 9937, para. 37 (2001) (declining to
    flash cut competitive LEC access rates to the level of the competing
    incumbent LEC and finding that a gradual transition is more
    appropriate).

[^164]: ALTS/Time Warner submitted a proposal to use the 6.5 percent
    transitional X-factor, but to target 50 percent of the X-factor to
    ATS rates and 50 percent to CMT rates. *See* Joint Comments of the
    Association for Local Telecommunications Services and Time Warner
    Telecom, CC Docket Nos. 96-262, 94-1, 99-249, 96-45 at 16 (filed
    Apr. 3, 2000).

[^165]: *See Nat'l Ass'n of Regulatory Comm'rs v. FCC*, 737 F.2d 1095
    (D.C. Cir. 1984) (*NARUC*).

[^166]: *NARUC*, 737 F.2d at 1139.

[^167]: *NARUC*, 737 F.2d at 1140.

[^168]: *See* IAD CALLS Study.

[^169]: IAD CALLS Study at App. E.

[^170]: IAD CALLS Study at App. E. Approximate line counts from the
    carriers' 2002 annual access filings were used to determine the
    percentage of total access lines at the target levels in each year
    of the IAD CALLS Study.

[^171]: *See* Appendix B. Approximate access line counts for the price
    cap LEC companies are based on the 2002 annual access filings.

[^172]: *See* Appendix B.

[^173]: *See* Appendix B.

[^174]: *See* Appendix B.

[^175]: *See* Appendix B. For purposes of this analysis, we expect that
    companies with 2002 annual access tariff ATS rates less than \$0.001
    above their target rates are likely to reach the ATS target rates in
    their 2003 annual access tariff filings.

[^176]: An X-factor slightly higher or lower than 6.5 percent, however,
    would not have had much impact on the timetable. Most carriers would
    have reached their target ATS rates on the same time schedule in
    that case.

[^177]:  The RFA, *see* § 5 U.S.C. S 601 *et. seq*., has been amended by
    the Contract With America Advancement Act of 1996, Pub. L. No.
    104-121, 110 Stat. 847 (1996) (CWAAA). Title II of the CWAAA is the
    Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA).

[^178]:  5 U.S.C. § 605(b).

[^179]:  5 U.S.C. § 601(6).

[^180]:  5 U.S.C. § 601(3) (incorporating by reference the definition of
    \"small business concern\" in Small Business Act, 15 U.S.C. S §
    632).

[^181]:  Small Business Act, § 15 U.S.C. S 632.

[^182]: *CALLS Order*, 15 FCC Rcd 12962; *see id.* at 13071-76 paras.
    251-63 (Final Regulatory Flexibility Analysis).

[^183]: *TOPUC*, 265 F.3d at 317.

[^184]: *Id*. at 328; *see also* para. 17, *infra*.

[^185]: *TOPUC*, 265 F.3d at 328-29; *see also* para. 38, *infra*.

[^186]: *See supra* paras. 20-29.

[^187]: *See supra* paras. 30-33.

[^188]: *See supra* paras. 39-45.

[^189]: *See* 5 U.S.C. § 801(a)(1)(A).

[^190]: *See* 5 U.S.C. § 605(b).

[^191]: *See* para. 29, *supra.*

[^192]: In the SLC Cost Review Proceeding, NASUCA submitted several
    studies describing different model outputs resulting from different
    "scenarios," or sets of assumptions factored into the model. NASUCA
    Comments in CC Docket Nos. 96-262, 94-1, and 96-45 (filed January
    24, 2002). These scenarios included the "default scenario," which
    utilized the Commission's model without changes and the scenario
    which herein is referred to at the "NASUCA preferred scenario,"
    which make changes to the Commission's model consistent with
    NASUCA's arguments that certain costs should be removed from the
    model. NASUCA submitted these studies in Excel format, calling the
    file containing the default scenario "wc_cost" and calling the file
    contained its preferred scenario "wc_cost_dlcts."

[^193]: NASUCA's default scenario does include changed assumptions
    regarding the attribution of corporate overhead costs to the loop as
    compared to previous Commission uses of the Synthesis model. *See*
    para. 28, *supra*. Commission staff has not estimated the impact of
    this change by NASUCA.

[^194]: NASUCA Reply at 12.

[^195]: NASUCA Reply at 12.

[^196]: *See* note 2, *supra*.

[^197]: NASUCA Reply at 12.

[^198]: ^\*^ The dates are based on those reported by the price cap
    companies at line 475 of the TGT-1 form in their 2002 annual access
    tariff review plan (TRP) filings.

[^199]: ^†^ Approximate access line counts for the price cap LEC
    companies are based on these companies' 2002 annual access TRP
    filings, CAP-1 form, line 130. The line count information is
    annualized in the TRP filing. We have adjusted the annualized line
    count information to represent the average number of lines in use on
    a monthly basis. Based on the 2002 TRP filings, the price cap
    companies have approximately 163,372,660 monthly total lines.

[^200]: ^^ As reported by Verizon in its April 10, 2003 *ex parte*
    filing, the former Bell Atlantic entity reached the ATS target rate
    in the 2000 annual filing. Line counts for the former Bell Atlantic
    entity are based on the 2002 annual access filing. Letter from
    Richard T. Ellis, Director - Federal Regulatory Advocacy, Verizon,
    to Marlene H. Dortch, Secretary, Federal Communications Commission,
    CC Docket Nos. 96-262, 94-1, 99-249, and 96-45 (filed Apr. 10, 2003)
    (Verizon Apr. 10 *Ex Parte* Letter).

[^201]: ^\*^ The dates are based on those reported by the price cap
    companies at line 475 of the TGT-1 form in their 2002 annual access
    tariff review plan (TRP) filings.

[^202]: ^†^ Approximate access line counts for the price cap LEC
    companies are based on these companies' 2002 annual access TRP
    filings, CAP-1 form, line 130. The line count information is
    annualized in the TRP filing. We have adjusted the annualized line
    count information to represent the average number of lines in use on
    a monthly basis. Based on the 2002 TRP filings, the price cap
    companies have approximately 163,372,660 monthly total lines.

[^203]: ^\*^ To determine which companies reached their target ATS rates
    in the 2002 annual access filing, we identified the companies that
    responded "No" at line 475 of the 2002 TRP form TGT-1, asking
    whether the ATS target rate was met in prior filings. We then
    compared these companies' proposed ATS rates at line 1120 of the
    TGT-3 TRP form, with the original target ATS rate at line 470 of the
    TGT-1 TRP form. Those companies with a proposed ATS rate lower than
    the target ATS rate met the target as of the effective date of the
    2002 annual access filing.

[^204]: ^†^ Approximate access line counts for the price cap LEC
    companies are based on these companies' 2002 annual access TRP
    filings, CAP-1 form, line 130. The line count information is
    annualized in the TRP filing. We have adjusted the annualized line
    count information to represent the average number of lines in use on
    a monthly basis. Based on the 2002 TRP filings, the price cap
    companies have approximately 163,372,660 monthly total lines.

[^205]: ^^ As reported by Verizon in its April 10, 2003 *ex parte*
    filing, the former NYNEX entity reached the ATS target rate in the
    2002 annual filing. Line counts for the former NYNEX entity are
    based on the 2002 annual access filing. Verizon Apr. 10 *Ex Parte*
    Letter.

[^206]: ^‡^ For purposes of this analysis, we expect that companies with
    2002 annual access tariff ATS rates less than \$0.001 above their
    target rates are likely to reach the ATS target rates in their 2003
    annual access tariff filings.

[^207]: ^†^ Approximate access line counts for the price cap LEC
    companies are based on these companies' 2002 annual access TRP
    filings, CAP-1 form, line 130. The line count information is
    annualized in the TRP filing. We have adjusted the annualized line
    count information to represent the average number of lines in use on
    a monthly basis. Based on the 2002 TRP filings, the price cap
    companies have approximately 163,372,660 monthly total lines.

[^208]: ^^ Although the Verizon Idaho entity's 2002 ATS rate is less
    than \$0.001 above its target rate, Verizon claims that it is not
    likely to reach the ATS target rate in the 2003 annual filing.
    Verizon Apr. 10 *Ex Parte* Letter.