**Before the**

**FEDERAL COMMUNICATIONS COMMISSION**

**Washington, D.C. 20554**

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

)

In the Matter of )

)

Improved Regulation of Interstate Services ) RM No. 10011

of Non-Price Cap Incumbent )

Local Exchange Carriers )

And Interexchange Carriers )

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_)

**PETITION FOR RULEMAKING**

**OF THE LEC MULTI-ASSOCIATION GROUP**

FILING ASSOCIATIONS:

National Rural Telecom Association

National Telephone Cooperative Association

Organization for the Promotion and

Advancement of Small Telecommunications Companies

United States Telecom Association

October 20, 2000

SUMMARY

The Multi-Association Group (NRTA, NTCA, OPASTCO, and USTA) presents
this holistic plan for the Commission's regulation of those incumbent
local exchange carriers ("LECs") not subject to price cap regulation.
These non-price cap LECs include most of the small and mid-sized LECs
that serve U.S. rural and insular areas.

The plan seeks to address in a comprehensive manner the numerous issues
that face non-price cap LECs. The plan would create more efficient cost
recovery under the Commission's access charge system while making
universal service support more explicit and enforcing the geographic
averaging requirements of the Communications Act. The plan will help
ensure that up-to-date broadband infrastructure and advanced services
will be widely available to all Americans, consistent with section 706
of the Act. The plan would take effect on July 1, 2001.

The plan moves in the same policy direction as the recent recommendation
of the Rural Task Force ("RTF") to the Federal-State Joint Board,
although there are differences between the plan and the RTF
recommendation. This plan also is compatible with, but not identical to,
one for price cap LECs and interexchange carriers ("IXCs") that the
Commission adopted based on a proposal of the Coalition for Affordable
Local and Long Distance Service ("CALLS").

The plan consists of two regulatory regimes or "paths," Path A and Path
B. The plan's features, and the two regulatory paths it adopts, reflect
the great diversity of non-price cap LECs. These LECs range in size from
those serving a few hundred customers to multiple thousands. They serve
the most rural areas of the United States as well as some growing
suburban areas.

Each operating company of the non-price cap LECs will elect either Path
A or Path B before the start of the plan. Both paths of the plan reform
the access charge structure to provide for more efficient cost recovery.
They do so by raising the subscriber line charges ("SLCs") of the
non-price cap LECs. The plan also mandates lower long distance rates for
residential consumers in the territories of LECs subject to it. With the
more economically efficient access charges that will result from the
plan, IXCs more readily will be able to satisfy the geographic rate
averaging requirements of the Act. IXCs will flow through to consumers
the savings from decreases in such charges.

For both paths of the plan, Lifeline support will be increased to be
consistent with the Commission's recent CALLS order. Like the RTF
recommendation, the plan recognizes that the Commission's current rules
do not fully address universal service concerns. The plan moves further
than the RTF recommendation by removing the current caps on high cost
loop support and other universal service support for both Path A and
Path B.

LECs electing Path A will have a period of up to five years from the
start of the plan to transition on a per-study-area basis from their
existing forms of rate-of-return regulation to a new form of incentive
regulation. The length of this period is designed to permit a
reasonable, but flexible, transition to incentive regulation. At the end
of the transition period, all study areas of Path A LECs that have not
already converted to incentive regulation will do so.

In the plan's form of incentive regulation, a LEC's interstate access
revenue per line ("RPL") is fixed but adjusted annually for inflation.
Under this type of incentive regulation, a Path A LEC's annual
interstate access revenues will be calculated as the product of its
annual RPL and its line count for that year. Such regulation
incorporates major incentives for maximizing efficiency, thus
complementing the Commission's price cap regime for the largest LECs.
Similar to that regime, the plan includes a low end adjustment mechanism
for Path A LECs. This RPL-based form of incentive regulation is designed
to be compatible with the pooling system administered by NECA. The plan
replaces the current two-pool system that NECA administers with a single
pool.

The plan creates a new form of explicit interstate universal service
support, known as rate averaging support ("RAS"), to be available to
Path A LECs in the NECA pool. The RAS will function similarly to long
term support in lowering access charges. The RAS will be portable to
eligible telecommunications carriers. The RAS is a major step in moving
universal service support for LECs subject to the plan away from
implicit mechanisms in a competitively neutral way. By providing for
more explicit universal service support, Path A also promotes equitable
and efficient competition.

LECs that elect Path B initially will remain under their existing forms
of rate-of-return regulation as average schedule or cost companies. Path
B serves the public interest because it recognizes the diverse
conditions faced by non-price cap LECs. Path B advances the public
interest by implementing most of the same access charge and universal
service reforms as Path A, with the same types of benefits to consumers.
Path B LECs do not receive the RAS. The currently authorized interstate
rate of return will remain in place for Path B LECs and Path A LECs with
study areas not yet subject to incentive regulation.

The plan encourages Path B LECs to move to the plan's form of incentive
regulation by permitting them to choose to become Path A LECs prior to
the end of the five-year transition period. From the time that such LECs
become Path A LECs through the end of the transition period, they will
be able to elect incentive regulation on a per-study area basis, like
other Path A LECs. After the end of the transition period, like other
Path A LECs, all Path B study areas that have moved to Path A within the
transition period must convert to incentive regulation.

The Group asks the Commission to adopt the plan as expeditiously as
possible.

**GLOSSARY**

+---------+------------------------------------------------------------+
| CALLS   | Coalition for Affordable Local and Long Distance Service   |
+---------+------------------------------------------------------------+
| CAR     | Composite Access Rate                                      |
+---------+------------------------------------------------------------+
| CCL     | Carrier Common Line                                        |
+---------+------------------------------------------------------------+
| ETC     | Eligible Telecommunications Carrier                        |
+---------+------------------------------------------------------------+
| IXC     | Interexchange Carrier                                      |
+---------+------------------------------------------------------------+
| LEC     | Local Exchange Carrier                                     |
+---------+------------------------------------------------------------+
| LSS     | Local Switching Support                                    |
+---------+------------------------------------------------------------+
| LTS     | Long Term Support                                          |
+---------+------------------------------------------------------------+
| MAG     | LEC Multi-Association Group                                |
+---------+------------------------------------------------------------+
| NRTA    | National Rural Telephone Association                       |
+---------+------------------------------------------------------------+
| NTCA    | National Telephone Cooperative Association                 |
+---------+------------------------------------------------------------+
| NTS     | Non Traffic Sensitive                                      |
+---------+------------------------------------------------------------+
| OPASTCO | Organization for the Promotion and Advancement of Small    |
|         |                                                            |
|         | Telecommunication Companies                                |
+---------+------------------------------------------------------------+
| RAS     | Rate Averaging Support                                     |
+---------+------------------------------------------------------------+
| RPL     | Revenue Per Line                                           |
+---------+------------------------------------------------------------+
| RTF     | Rural Task Force                                           |
+---------+------------------------------------------------------------+
| SLC     | Subscriber Line Charge                                     |
+---------+------------------------------------------------------------+
| TS      | Traffic Sensitive                                          |
+---------+------------------------------------------------------------+
| USTA    | United States Telecom Association                          |
+---------+------------------------------------------------------------+
|         |                                                            |
+---------+------------------------------------------------------------+
|         |                                                            |
+---------+------------------------------------------------------------+

######### TABLE OF CONTENTS {#table-of-contents .unnumbered}

I. INTRODUCTION [1](#i.-introduction)

A. The Group Requests Adoption Of The Plan Presented Here
[1](#the-group-requests-adoption-of-the-plan-presented-here)

B. Overview Of The Plan [4](#overview-of-the-plan)

1\. General Characteristics 4

2\. Path A [5](#path-a)

3\. Path B [6](#path-b)

II\. THE POLICY ISSUES AFFECTING NON-PRICE CAP LECs REQUIRE A
COMPREHENSIVE APPROACH
[7](#the-policy-issues-affecting-non-price-cap-lecs-require-a-comprehensive-approach)

III\. THE PLAN ADDRESSES THE MAJOR POLICY ISSUES INVOLVING

NON-PRICE CAP LECs AND THEIR CUSTOMERS
[9](#iii.-the-plan-addresses-the-major-policy-issues-involving)

A. The Plan Promotes Efficient Cost Recovery
[10](#the-plan-promotes-efficient-cost-recovery)

B. The Plan Makes Universal Service Support More Explicit And Advances
The Goals Of Rate and Service Comparability
[12](#the-plan-makes-universal-service-support-more-explicit-and-advances-the-goals-of-rate-and-service-comparability)

C. The Plan's Form Of Incentive Regulation Serves The Public Interest
[16](#the-plans-form-of-incentive-regulation-serves-the-public-interest)

D. The Plan Reforms Current Pooling Mechanisms
[19](#the-plan-reforms-current-pooling-mechanisms)

IV\. CONCLUSION [21](#__RefHeading___Toc492432501)

Exhibit 1: Detailed Description Of The Plan

Exhibit 2: Affidavit of Dr. James H. Vander Weide

Exhibit 3: Proposed Rules To Implement The Plan

######### Before the {#before-the .unnumbered}

######### FEDERAL COMMUNICATIONS COMMISSION {#federal-communications-commission .unnumbered}

**Washington, D.C. 20554**

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

)

In the Matter of )

)

Improved Regulation of Interstate Services ) RM No. \_\_\_\_\_\_\_

Of Non-Price Cap Local Exchange )

Carriers and Interexchange Carriers )

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_)

**PETITION FOR RULEMAKING**

**OF THE LEC MULTI-ASSOCIATION GROUP**

# **I. INTRODUCTION** {#i.-introduction .unnumbered}

## **The Group Requests Adoption Of The Plan Presented Here**

##  I {#i .unnumbered}

The LEC Multi-Association Group (the \"Group\")[^1] hereby files this
petition for rulemaking pursuant to section 1.401 of the Commission\'s
Rules.[^2] In this petition, the Group presents a holistic plan for the
Commission's regulation of those incumbent local exchange carriers
("LECs") not subject to price cap regulation (hereinafter "non-price cap
LECs"). These carriers, many of which belong to one or more of the
associations in the Group, include most of the small and mid-sized LECs
that serve the rural and insular areas of the United States. The Group's
plan is essential to meeting the Commission's multiple policy goals for
rural and insular areas under the Communications Act of 1934, as amended
by the Telecommunications Act of 1996 (collectively the "Act").

The plan presented here moves in the same policy direction as the
recommendation to the Federal-State Joint Board that the Rural Task
Force ("RTF") recently released, although there are differences between
the plan and the RTF recommendation.[^3] The RTF recommendation makes a
very strong start in addressing the universal service issues that face
rural America, and the Group endorses many of the RTF's policy
positions. In contrast to the RTF recommendation, this plan provides a
comprehensive approach to access reform and incentive regulation as well
as universal service. Indeed, the differences between the plan presented
here and the RTF recommendation are the result of the Group's
consideration of the additional issues facing non-price cap LECs that
were not the focus of the RTF recommendation. The Group supports efforts
by the RTF for the Joint Board and the Commission to consider promptly
the RTF Recommendation and this plan, which are closely linked.

This plan also is compatible with, but not identical to, one for price
cap LECs and IXCs that the Commission adopted in May 2000 based on a
proposal of the Coalition for Affordable Local and Long Distance Service
("CALLS").[^4] When adopted, the plan presented in this petition will
result in benefits for consumers and regulation for non-price cap LECs
that are consistent with those of the CALLS order. The differences
between this plan and that of the CALLS order are necessary to address
the high costs and diverse service conditions faced by most non-price
cap LECs in serving their customers.[^5]

Section II of this petition discusses the need for a comprehensive
approach to the policy issues involving non-price cap LECs and their
customers. Section III discusses the consumer benefits of the plan in
addressing these issues. Exhibit 1 explains the plan in detail.[^6]
Exhibit 2 is an affidavit of Dr. James H. Vander Weide, Research
Professor of Finance and Economics, Fuqua School of Business, Duke
University, that discusses the economic and consumer welfare
characteristics of the plan.[^7] Proposed rules to implement the plan
are attached in Exhibit 3. Because of the plan's comprehensive nature,
the Group urges the Commission to issue a notice of proposed rulemaking
seeking implementation of the plan as presented here, in a docket that
addresses the pending proceedings that apply to non-price cap LECs.[^8]
Doing so will permit the Commission and the public to consider fully the
plan's merits. The Group urges the Commission to adopt the plan
expeditiously in the form presented here.

## **Overview Of The Plan**

### **General Characteristics**

We propose that the plan take effect on July 1, 2001. The plan consists
of two regulatory regimes or "paths," Path A and Path B.[^9] Each
operating company of the non-price cap LECs will elect one of the paths
before the start of the plan. Both paths of the plan reform the access
charge structure to provide for more efficient cost recovery. They do so
by raising subscriber line charges ("SLCs") for non-price cap LECs.[^10]
The plan also mandates lower long distance rates for residential
consumers in the territories of LECs subject to it. With the more
economically efficient access charges that will result from Paths A and
B under the plan, IXCs more readily will be able to satisfy the
geographic rate averaging requirements of the Act.[^11] Interexchange
carriers ("IXCs") will flow through to consumers the savings from
decreases in such charges.

For both paths, the plan increases Lifeline support to be consistent
with the CALLS order. Like the RTF recommendation, the plan recognizes
that the Commission's current rules do not fully address universal
service concerns.[^12] The plan moves further than the RTF

recommendation by removing the current caps on high cost loop support
and other universal service support for both Path A and Path B.

### **2. Path A** {#path-a .unnumbered}

The Group anticipates that LECs electing "Path A" will be those serving
the majority of access lines of LECs subject to the plan. Path A LECs
will have a period of up to five years from the start of the plan to
transition on a per-study-area basis from their existing forms of
rate-of-return regulation to a new form of incentive regulation.[^13]
The length of this period is designed to permit a reasonable, but
flexible, transition to incentive regulation. At the end of the
transition period, all study areas of Path A LECs that have not already
converted to incentive regulation will do so.

In the plan's form of incentive regulation, a LEC's interstate access
revenue per line ("RPL") is fixed but adjusted annually for inflation.
Under this type of incentive regulation, a Path A LEC's annual
interstate revenues will be calculated as the product of its annual RPL
and its line count for that year. This RPL-based form of incentive
regulation is designed to be compatible with the pooling system
administered by NECA. The Vander Weide testimony makes clear that such
regulation incorporates major incentives for maximizing efficiency.
[^14]

RPL regulation thus complements the Commission's system of price cap
regulation of the largest LECs.

The plan also creates a new form of explicit interstate universal
service support, known as rate averaging support ("RAS"), that is
available to Path A LECs in the NECA pool. The RAS functions similarly
to long term support in lowering access charges. The RAS is portable to
eligible telecommunications carriers ("ETCs"). The RAS is a major step
in moving universal service support for LECs subject to the plan away
from implicit mechanisms in a competitively neutral way.[^15] By
providing for more explicit universal service support, Path A also
promotes equitable and efficient competition. The plan's incentives for
efficient operation under RPL regulation, the continued availability of
universal service support through the RAS, and removal of the caps on
universal service funding will ensure that up-to-date broadband
infrastructure and advanced services will be widely available to all
Americans, consistent with section 706 of the Act.[^16]

###  **3. Path B** {#path-b .unnumbered}

Those LECs that elect "Path B" initially will remain under their
existing forms of rate-of-return regulation as average schedule or cost
companies. Path B serves the public interest because it recognizes the
diverse conditions faced by non-price cap LECs.[^17] Path B addresses
the concerns of those LECs that determine that Path A incentive
regulation is not feasible for their demographic, geographic, and
operating conditions. Path B advances the public interest by
implementing most of the same access charge and universal service
reforms as Path A, with the same types of benefits to consumers. Path B
LECs do not receive the RAS.

The plan encourages Path B LECs to move to the plan's form of incentive
regulation by permitting them to choose to become Path A LECs prior to
the end of the five-year transition period. From the time that such LECs
become Path A LECs through the end of the transition period, they will
be able to elect incentive regulation on a per-study area basis, like
other Path A LECs. After the end of the transition period, like other
Path A LECs, all Path B study areas that have moved to Path A within the
transition period must convert to incentive regulation. After the end of
the transition period, any LEC that remains on Path B must obtain a
waiver of the Commission's rules to be subject to incentive regulation.
The currently authorized interstate rate of return will remain in place
for Path B LECs and those study areas of Path A LECs not yet subject to
incentive regulation.

The plan's features, and particularly the two regulatory paths it
adopts, reflect the great diversity of non-price cap LECs. These LECs
range in size from those serving a few hundred customers to multiple
thousands. They serve the most rural areas of the United States as well
as some growing suburban areas. Non-price cap LECs are regulated at the
federal level under systems as different as average schedule and cost
regulation, although the overwhelming majority participate in the NECA
pooling system.[^18] As distinguished from the CALLS order, this plan
accounts for these differences, and does so in a comprehensive, flexible
manner.

#  {#section .unnumbered}

# **THE POLICY ISSUES AFFECTING NON-PRICE CAP LECs REQUIRE** **A COMPREHENSIVE APPROACH**

The plan presented in this petition is the best way to address several
fundamental issues that are critical to non-price cap LECs and the
customers they serve. These issues include access charge reform,
universal service, separations reform, and rate of return
represcription. The Commission currently has separate dockets pending
for all of these matters.[^19] Yet these issues are inter-related, and
they have major effects on the benefits to consumers and service
providers that effective regulation must address. Indeed, the outcome of
any one of these proceedings will affect, and could determine, the
outcomes of the others.

With these proceedings pending, LECs subject to the plan must address
substantial regulatory uncertainty at the federal level. The 1996
amendments to the Act fundamentally changed the structure of the
telecommunications industry, most notably by opening to competition
those LEC markets that previously were subject to exclusive regulatory
franchises.[^20] The LECs subject to this plan and their customers have
been adjusting to the implications of these fundamental changes.
However, the future is anything but certain.[^21] Such uncertainty
diminishes the incentives of these carriers to invest, and its raises
their cost of capital.[^22] At the same time, risk increases for all
telecommunications service providers in the service areas of these
carriers. This unnecessary risk harms, rather than benefits, consumers.

> Rather than permitting such uncertainty to continue, the Commission
> should move to resolve the regulatory issues that confront non-price
> cap LECs. In light of the numerous competing issues that the
> associations in the Group and their members have considered in
> designing the plan, the Group urges the Commission to adopt the plan
> presented here in its entirety. The plan, with its alternative
> regulatory paths, resolves these issues in an integrated manner,
> consistent with the Act. The plan is the product of lengthy
> discussions and compromises among the associations in the Group and
> their member LECs. These compromises were necessary because of the
> great diversity among these LECs, their customers, and the areas that
> they serve.[^23]

# **III. THE PLAN ADDRESSES THE MAJOR POLICY ISSUES INVOLVING** {#iii.-the-plan-addresses-the-major-policy-issues-involving .unnumbered}

> **NON-PRICE CAP LECs AND THEIR CUSTOMERS**
>
> The Group believes that this plan best meets the needs of customers in
> the service areas of non-price cap LECs, as well as the LECs
> themselves. The Group and its members have a strong interest in
> adoption of this plan, which will improve the ability of these members
> \-- incumbent LECs operating in rural and insular areas throughout the
> United States \-- to serve the public.
>
> The plan will serve the public interest by benefiting consumers in
> several ways. The plan will set the interstate access charges of
> non-price cap LECs on a more economically sound basis by increasing
> SLCs and lowering per-minute access charges. This access charge reform
> will permit more efficient cost recovery. It will result in lower
> per-minute charges from IXCs, saving consumers money and stimulating
> network usage.

Both Paths A and B of the plan benefit consumers by promoting rate and
service comparability between rural and urban areas. Moreover, Path A of
the plan reduces implicit universal support and makes such support
portable, explicit, and competitively neutral. The plan advances the
public interest by providing the stable regulatory environment necessary
to encourage the deployment of new network technologies, while
permitting competition in the lightly populated areas served by many
LECs subject to the plan.

## **The Plan Promotes Efficient Cost Recovery** 

The plan improves the access charge structure for all Path A and Path B
LECs, both within and outside the NECA pool system. It benefits
consumers by doing so consistently with, but not identically to, the
CALLS order. The SLCs of all non-price cap LECs will increase, tracking
the SLC caps for carriers subject to the CALLS order (the "CALLS
carriers"), so long as those caps are reasonably comparable to the CALLS
carriers' actual SLCs.[^24] Thus, the SLC for residential and single
business lines would change to \$5.00 per month on July 1, 2001, and
would change consistent with the SLC caps for CALLS carriers
thereafter.[^25] SLCs for multi-line business lines would change from
the current rate of \$6.00 per line to \$9.20 per line by July 1, 2003.
These changes will substantially increase the portion of the common line
revenue requirement recovered through flat-rated charges.[^26]

For both Path A and Path B LECs, the plan retains existing per-minute
switched access rate elements such as those for local switching,
transport, the residual interconnection charge, and the carrier common
line charge. However, for Path A LECs, the plan establishes a weighted

per-minute aggregate target for these rates, known as the Composite
Access Rate ("CAR"). Path A pool switched access rates will be adjusted
to meet this target composite rate. Under the plan, the Commission will
set the CAR to be 1.6 cents per minute on average by July 1, 2003 -- two
years after the start of the transition period \-- for Path A LECs'
study areas that participate in the pool. While SLCs increase, NECA will
adjust the CAR to reach the 1.6 cents per minute target by July 1, 2003,
two years into the transition period. Indeed, the existing composite
interstate per-minute access rate for non-price cap LECs is 3.94 cents
per-minute.[^27] The CAR at the 1.6 cents per minute level thus reflects
a percentage reduction in the per-minute switched access rates of
non-price cap LECs comparable to that of the CALLS order.

NECA will tariff special access services for Path A and Path B pool
participants, and will have the flexibility to develop price structures
that align prices for special access more closely with costs as they
vary by study area. These LECs also may elect to tariff special access
services outside the NECA pool. Current flexibility for individual
special access rates would continue to apply.

New services that Path A LECs introduce will be priced at current market
rates, either by NECA as part of the pooling process or outside that
process. Path A also provides for adjustments to incentive-based RPL
pool settlements and streamlining of existing processes when Path A LECs
with study areas in the pool acquire lines, exchanges or study
areas.[^28]

All LECs subject to incentive regulation may leave the NECA pool on a
per-study area basis to gain additional pricing flexibility outside the
pool. Such LECs must file and maintain their own access tariffs for
non-pooling study areas. The benefits of the plan's access charge
reforms continue to apply, since the increased SLCs will result in
reduced per-minute charges.[^29] Special access rates would be set on a
flexible market basis. Path A LECs would set all other access rates
using their existing RPL, including universal service funding foregone
by exiting the pool. LECs outside the pool do not receive the RAS or
LTS. The plan thus provides that Path A LECs that choose not to
participate in the NECA pool will bear the greater risks associated with
the flexibility that they gain. Path B LECs outside the pool will be
subject to existing forms of regulation.

## **The Plan Makes Universal Service Support More Explicit And Advances The Goals Of Rate and Service Comparability**

Non-price cap LECs confront unique challenges in providing universal
service while addressing the prospect of competition as mandated by the
Act. These LECs serve only about seven percent of U.S. access lines.
Such LECs are predominantly in the rural and insular areas of the United
States with high line costs and low population densities, where
universal service and broadband deployment concerns are greatest. As
elsewhere, competition in the service areas of LECs subject to the plan
focuses on business customers.[^30] Because many of these LECs have very
limited customer bases, the loss of a few business customers to
competitors can place these LECs and their residential customers at
risk. Regulatory reform for non-price cap carriers must account for such
conditions in order to advance traditional concepts of universal
service, as well as to close the "Digital Divide" in under-served areas.
As NECA recently concluded, more than \$10.9 billion is needed to
upgrade telephone lines served by rural telephone companies to broadband
capability.[^31]

At the same time, in many rural, insular, and high-cost areas, IXCs have
not provided services and rates comparable to those available in urban
areas, contrary to the Act's important national goal of making
comparable rates and services available to consumers in rural and urban
areas alike.[^32] Because some IXCs have refused to offer their discount
calling plans to rural and insular customers served by LECs subject to
the plan, customers in those areas do not receive the full benefits of
access charge reductions by LECs subject to the plan or of competition
among IXCs.[^33]

The plan addresses these problems by ensuring that IXCs will comply
fully with the geographic averaging of section 254(g) of the Act.[^34]
The plan thus requires IXCs to pass through to long distance customers
the savings that IXCs realize from lower access charges in the areas
served by LECs subject to it. The plan proposes to continue the
elimination of IXCs' minimum monthly charges for long distance service
customers in the service areas of LECs subject to it. Similarly, the
plan requires IXCs to offer the same optional calling plans to rural and
urban customers alike.

The plan provides for portable universal service support, which it
defines as the sum of high cost loop support, local switching support,
long term support, and a new explicit support component, for Path A pool
participants only, known as Rate Averaging Support ("RAS"). The RAS
operates like long term support to reduce access charges and bring them
closer to cost. The RAS recovers the Path A pool members' residual
revenue requirements that are not recovered through SLCs, explicit
support, and the rate elements that comprise the CAR.[^35] The RAS will
be adjusted to reflect the costs of certain regulations, such as those
involving number portability and the Communications Assistance for Law
Enforcement Act, as applicable to Path A LECs in the pool.

As discussed in detail in Exhibit 1, Path A adjusts existing methods of
determining the levels of these support components to the new form of
incentive regulation that will be phased in.[^36] These forms of support
are portable to other ETCs. Because the RAS supports lower access
charges in Path A LECs' areas, it will enable IXCs to comply with their
nationwide rate averaging and rate integration obligations. Indeed, the
plan's access charge reforms for Path A LECs and Path B LECs similarly
enable IXCs to comply with their nationwide rate averaging and rate
integration obligations. The RAS would not apply to Path A study areas
outside the pool or to Path B study areas.

Within the pool, when a Path A LEC becomes subject to incentive
regulation in a study area, the plan freezes per-line universal service
support flows at the level that the LEC is receiving immediately before
the effective date of incentive regulation. Analogously to the
adjustments applicable to the RPL, such per-line support is subject to
annual adjustments for inflation. Per-line support is also subject to
adjustment if the definition of supported services changes, and for the
costs of complying with other government regulation for which direct
cost recovery has not been provided. For both Path A and Path B, the
plan broadens the definitions of Lifeline support to be consistent with
the CALLS order.

Under Paths A and B, LECs have the ability to disaggregate universal
service support per line among up to three zones per wire center.[^37]
LECs must file these zones and the associated per-line support with the
Commission, relevant state regulators, and the Universal Service
Administrative Company. Such zoned support will define more closely how
much portable support will flow in each zone.[^38]

Those non-price cap-LECs not subject to incentive regulation would
continue to participate in universal service as they do today, but with
the ability to disaggregate support.

For both Path A and Path B LECs, the plan immediately removes the
"interim" cap on high cost loop support and the corporate operations
expense limitation. Although the interim cap had only a minor effect on
investment when first imposed, it now has a major annual impact. Indeed,
the "interim" cap is expected to reduce such support for rural LECs by
about \$118.5 million in 2000.[^39] This reduction will be a significant
disincentive for investment in high cost and under-served areas. The
caps now in place limit the universal service support available to all
carriers. Even the areas that are most in need of upgrades must make do
with less in any given year that the cap operates. Eliminating these
caps will provide LECs with a greater incentive to make the investments
required to deliver advanced services in high cost areas. To reflect
such removal, universal service support for all LECs subject to the plan
will be recalculated. Removal of these caps will go far toward assisting
all carriers to satisfy the universal service goals of Section 254 of
the Act.[^40]

## **The Plan's Form Of Incentive Regulation Serves The Public Interest**

Path A of the plan provides for a transition period of up to five years,
at any time during which Path A LECs may elect to move to RPL-based
incentive regulation on a per-study area basis.[^41] At the end of this
transition period, existing forms of rate-of-return regulation for all
study areas of Path A LECs will be replaced by this type of incentive
regulation, which will fix

participating carriers' RPL at a base year level subject to adjustments
for inflation, regulatory changes, mergers and acquisitions, and certain
other costs.

By fixing the RPL, the plan ensures that Path A LECs subject to such
regulation have strong incentives to improve their efficiency. As the
Vander Weide testimony demonstrates, such LECs can do so by limiting
their costs and by increasing the number of lines deployed.[^42] The
constraints on prices for the LECs' interstate access services in Path A
will ensure that these services continue to comply with the fundamental
requirements of the Act, including the duty to charge just, reasonable,
and non-discriminatory rates for these services.[^43] LECs will also
have strong incentives to increase the number of lines served, which
will advance universal service goals.

During the transition period, Path A LECs may elect to switch to
incentive regulation at any time, on a per-study area basis, whether
they are pool participants or not. Otherwise, during the transition
period, Path A LECs will continue under rate-of-return regulation at the
authorized rate of return of 11.25%, and settle on either a cost or
average schedule basis. NECA will be able to update average schedule
formulas during the five-year period to reflect changes in costs and
demand. [^44]

Whether in or out of the pool, Path A LECs with study areas subject to
incentive regulation that realize unusually low returns may file for a
low end adjustment to bring their returns to backstops set below 11.25%.
This mechanism, which is similar to that long in place under Commission
price cap regulation, will be available to Path A LECs subject to
incentive regulation. As the Vander Weide testimony shows, the
adjustment ensures that Path A LECs have an incentive to reduce costs
and invest in new infrastructure by providing a backstop that reduces
risk.[^45] Such LECs with five or fewer study areas that realize study
area returns more than 50 basis points less than 11.25% would be
entitled to an earnings adjustment to bring their study area return for
the relevant year to 10.75%. Path A LECs with more than five study areas
subject to incentive regulation that under-earn by more than 100 basis
points less than 11.25% in a study area would be eligible for an
earnings adjustment to bring their study area return for the relevant
year to 10.25%.[^46]

As described in Exhibit 1, the plan provides that Path A and Path B LECs
participating in the pool may bring into the pool exchanges or study
areas that they acquire, with rules for initializing the RPL of the
combined or new study areas if the Path A study area is already subject
to incentive regulation.

As noted above, Path B LECs may elect to become Path A LECs during the
five-year transition period.[^47] Otherwise, Path B LECs will continue
with their present forms of rate-of-return regulation**.** After the
transition period, a waiver of the Commission's rules would be needed
for Path B carriers to move to Path A incentive regulation.

## **The Plan Reforms Current Pooling Mechanisms**

To simplify the administration of Paths A and B, the plan replaces the
present two pools administered by NECA with a single pool. NECA will
perform appropriate rate banding in the pool. Path A and Path B LECs may
decide on a per-study area basis whether to participate in the reformed
NECA pool.

During the five-year transition period, Path A pool participants would
be permitted to elect separate tariff options on a per-study area basis,
for the common line and traffic sensitive elements of switched access,
as well as for special access. After the transition period ends, a
tariff option for special access will be available to all Path A LECs
participating in the pool. The current authorized rate of return would
remain in effect for the pool, and jurisdictional separations factors
would be frozen consistent with the Joint Board's recent Recommended
Decision in CC Docket No. 80-286.[^48]

Settlements for the study areas of Path A LECs that are in the pool and
subject to incentive regulation would be initialized based on the most
recent cost study data or average schedule revenue requirement data
available prior to joining the incentive plan. As noted above, the RPL
will be adjusted, initially and annually thereafter, for inflation and
can be adjusted to account for several additional factors.[^49]
Settlements for a study area in any year will be calculated as the
product of the RPL calculated for that year and the study area's line
count for the year. During the transition period, pool settlements will
be based on the study area's RPL, but adjusted for the pool's realized
rate of return.[^50] NECA will determine special access settlements for
Path A pool participants subject to incentive regulation using retention
ratios for the base year prior to electing such regulation. After the
transition period, adjustments to bring pool revenues and settlement
claims into balance will be included in the pool's new RAS component.

[]{#__RefHeading___Toc492432501 .anchor}

II. **CONCLUSION**

By adopting the plan presented in this petition, the Commission will go
far toward bringing access charges closer to costs, providing more
explicit and realistic universal service support, and reducing the
regulatory risks of the LECs subject to the plan, to the benefit of
consumers throughout the United States. For the reasons discussed above,
the Group respectfully requests the Commission to grant this petition
for rulemaking and release a notice of proposed rulemaking that proposes
adoption of this plan in its entirety. After public comment, the
Commission should expeditiously adopt the plan presented herein.

Respectfully submitted,

LEC MULTI-ASSOCIATION GROUP

By:
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

John N. Rose William F. Maher, Jr.

Stuart Polikoff Halprin, Temple, Goodman & Maher

OPASTCO 555 12^th^ Street, N.W.

21 Dupont Circle N.W., Suite 700 Suite 950 North

Washington, DC 20036 Washington, D.C. 20004

\(202\) 659-5990 (202) 371-9100

*Its Counsel*

L. Marie Guillory Lawrence E. Sarjeant

National Telephone Cooperative Linda Kent

Association Keith Townsend

2626 Pennsylvania Avenue, N.W. John Hunter

Washington, DC 20037-1695 Julie Rones

\(202\) 298-2300 United States Telecom Association

1401 H Street, N.W.

Margot Smiley Humphrey Suite 600

National Rural Telecom Association Washington, DC 20005

1150 Connecticut Avenue, N.W., #1000 (202) 326-7371

Washington, DC 20036-4104

\(202\) 467-5700

October 20, 2000

**LIST OF EXHIBITS**

Exhibit 1: Detailed Description Of The Plan For Improved Regulation Of
Interstate Services Of Non-Price Cap Incumbent Local Exchange Carriers

Exhibit 2: Affidavit of Dr. James H. Vander Weide

Exhibit 3: Proposed Rules To Implement The Plan

[^1]: The Group consists of the National Rural Telecom Association
    (\"NRTA\"), the National Telephone Cooperative Association
    (\"NTCA\"), the Organization for the Promotion and Advancement of
    Small Telecommunications Companies (\"OPASTCO\"), and the United
    States Telecom Association (\"USTA\"). The National Exchange Carrier
    Association ("NECA") provided numerical support for the development
    of the plan presented in this petition.

[^2]: *See* 47 C.F.R. § 1.401.

[^3]: *See Federal-State Joint Board on Universal Service*, CC Docket
    No. 96-45, Rural Task Force Recommendation to the Federal-State
    Joint Board on Universal Service (rel. Sept. 29, 2000) ("RTF
    Recommendation").

[^4]: *See 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 *et al*.,
    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, FCC 00-193 (rel. May 31, 2000) (the "CALLS
    order").

[^5]: The RTF has documented the diversity of rural and insular service
    areas and their differences from urban areas. *See* RTF, *The Rural
    Difference*, White Paper 2 (Jan. 2000).

[^6]: The attached exhibits are to be considered part of this petition.

[^7]: Affidavit of Dr. James H. Vander Weide, Research Professor of
    Finance and Economics, Fuqua School of Business, Duke University,
    attached as Exhibit 2 (the "Vander Weide testimony").

[^8]: The Group respectfully requests the Commission to move speedily to
    issue a notice of proposed rulemaking regarding this petition as it
    did in the CALLS proceeding. This petition clearly presents a
    comprehensive and workable plan to address the issues facing
    non-price cap LECs and their customers. *See 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 *et al*., Notice of Proposed
    Rulemaking, 14 FCC Rcd. 16872 (1999).

    The Group recognizes that the Commission will likely refer aspects
    of this plan involving universal service to the Federal-State Joint
    Board that is considering such issues, and commits to working
    closely with the Joint Board to expedite consideration of the plan.

[^9]: Because this plan applies to only the interstate access services
    of certain LECs, it does not affect the states' jurisdiction over
    those carriers' intrastate services.

[^10]: *See Deployment of Advanced Telecommunications Capability: Second
    Report, CC Docket No. 98-146*, (rel. Aug. 21, 2000) para. 267, n.
    395.

[^11]: *See* section 254(g) of the Act, 47 U.S.C. § 254(g).

[^12]: *See,* *e.g.,* RTF Recommendation at 21.

[^13]: Under Path A, non-price cap LECs would elect the plan's form of
    incentive regulation on a per-study area basis, and also elect
    whether such study areas would participate in the pool. All study
    areas of such LECs not on the plan's form of incentive regulation
    would continue to be subject to their pre-existing form of
    rate-of-return regulation -- that is, regulation on a cost or
    average schedule basis.

[^14]: *See* Exhibit 2 at 2-14, 2-18, 2-19.

[^15]: *See* Exhibit 2 at 2-14 through 2-16.

[^16]: *See* Section 706 of the Act, 47 U.S.C. § 706.

[^17]: *See, e.g., The Rural Difference, supra*, at 15-17, 25-26.

[^18]: Indeed, 99.4% of all non-price cap LECs now participate in NECA's
    common line pool.

[^19]: *See, e.g., Prescribing the Authorized Unitary Rate of Return for
    Interstate Services of Local Exchange Carriers*, CC Docket No.
    98-166, Notice Initiating a Prescription Proceeding and Notice of
    Proposed Rulemaking, 13 FCC Rcd 20561 (1998) ("Represcription
    Notice"); *Access Charge Reform For Incumbent Local Exchange
    Carriers Subject to Rate-of-Return Regulation,* CC Docket No. 98-77,
    Notice of Proposed Rulemaking, 13 FCC Rcd 14238 (1998) ("Access
    Notice"); *Federal-State Joint Board on Universal Service*, CC
    Docket No. 96-45, Report and Order, 12 FCC Rcd 8776, 8889, 8936
    (1997) (holding that existing high-cost support mechanisms for rural
    LECs shall remain in place until at least January 1, 2001);
    *Jurisdictional Separations Reform and Referral to the Federal-State
    Joint Board*, CC Docket No. 80-286, Recommended Decision, FCC 00J-2
    (Jt. Bd. rel. July 21, 2000).

[^20]: *See, e.g.*, section 253 of the Act, 47 U.S.C. § 253.

[^21]: Certain LECs were either exempted from some provisions of the Act
    or were expressly permitted to seek suspension or modification of
    some of those provisions. *See, e.g*., section 251(f) of the Act, 47
    U.S.C. § 251(f).

[^22]: *See* Joint Direct Case and Comments of Local Exchange Carrier
    Associations, CC Docket No. 98-166 (filed Jan. 19, 1999) at 7-11.

[^23]: *See The Rural Difference*, *supra*, at 24-31.

[^24]: The CALLS order provides that CALLS carriers' primary residential
    and single-line business SLC is capped at \$4.35 per line beginning
    July 1, 2000, \$5.00 per line as of July 1, 2001, \$6.00 per line as
    of July 1, 2002, and \$6.50 per line as of July 1, 2003, subject to
    Commission review. *See* CALLS order, para 70.

[^25]: There will be no separate SLC for non-primary residence lines.

[^26]: Similarly to the CALLS order, the plan permits limited SLC
    deaveraging. The Plan provides for SLC deaveraging in up to three
    geographic zones. However, if pool participants deaverage their
    SLCs, their revenues from SLCs will be imputed as if they had been
    set at the maximum amount.

[^27]: The comparable NECA per-minute access rate is 4.3 cents
    per-minute.

[^28]: The plan also modifies the Commission's existing rules regarding
    the application of price cap regulation and study area boundaries in
    mergers and acquisitions. *See* Exhibit 1 at 1-13; Exhibit 3 at 3-3,
    3-8 (discussing the plan's treatment of mergers and acquisitions).

[^29]: There will be no non-primary line SLC.

[^30]: *See, e.g., Federal Communications Commission Takes Steps To
    Promote Telecommunications on Tribal Lands*, WT Docket No. 99-266,
    CC Docket No. 96-45, FCC News Release (June 8, 2000).

[^31]: *See* Letter from NECA to Magalie Roman Salas, Secretary, FCC
    (June 21, 2000), transmitting Summary of Results of Broadband Study;
    *Telephony,* Communications Daily (June 22, 2000) at 2.

[^32]: *See* sections 254(b)(3) and (g) of the Act, 47 U.S.C. §§
    254(b)(3), (g).

[^33]: *See* [http://www.ATT.com](http://www.ATT.com/), AT&T One Rate 7¢
    Plan; AT&T Communications Tariff FCC No. 27, Optional Calling Plans
    and Discounts § 4.2 *et. seq*., listing the companies and their
    customers to which AT&T offers the optional and discount calling
    plans. The AT&T list does not include many rural telephone companies
    and their customers in rural America. *See also* Stephen Labaton,
    *AT&T Move Means Millions Will Face Higher Phone Bill,* New York
    Times (June 7, 2000) at A1.

[^34]: *See* Exhibit 2 at 2-17. Under Section 254(g), the Commission
    must adopt rules requiring that:

    > \[T\]he rates charged by providers of interexchange
    > telecommunications services to subscribers in rural and high cost
    > areas shall be no higher than the rates charged by each such
    > provider to its subscribers in urban areas. Such rules shall also
    > require that a provider of interstate interexchange
    > telecommunications services shall provide such services to its
    > subscribers in each State at rates no higher than the rates
    > charged to its subscribers in any other State.

    *See also* 47 C.F.R. § 64.1801; Exhibit 3 at 3-14.

[^35]: The RAS includes a component to support a portion of special
    access designed to preclude rate shock that could result from study
    areas increasing special access rates. The special access component
    of the RAS will also help to ensure that small rate-of-return LECs
    have the incentive to deploy advanced services in their territories.

[^36]: *See* Exhibit 1 at 1-16 through 1-21.

[^37]: If the characteristics of a particular wire center justify more
    zones, Path A and Path B LECs may seek waivers from the Commission
    and the state regulator, as needed, to disaggregate support into
    additional zones.

[^38]: *See* Exhibit 1 at 1-21.

[^39]: *See* RTF Recommendation at 4, 21 n.40, and 24 n. 46 (This figure
    does not appear to include Puerto Rico).

[^40]: *See* 47 U.S.C. § 254.

[^41]: Once a LEC elects incentive regulation for a study area, that
    study area cannot return to traditional rate-of-return regulation.

[^42]: *See* Exhibit 2 at 2-18 through 2-19.

[^43]: *See, e.g.,* sections 201, 202 of the Act, 47 U.S.C. §§ 201, 202.

[^44]: Structural changes to the average schedule formulas also will be
    permitted during the transition period to reflect changes in network
    design, the types of service offered, or operating practices.

[^45]: *See* Exhibit 2 at 2-20.

[^46]: Rules for applying for a low end adjustment differ for study
    areas in or out of the pool. *See* Exhibit 1 at 1-11 through 1-12;
    1-15 through 1-16.

[^47]: During the portion of the transition period that remains after
    such election, these LECs, like other Path A LECs, can become
    subject to incentive regulation on a per-study area basis. After the
    last day of the transition period for incentive regulation, all
    study areas of these LECs, like other Path A LECs, would become
    subject to incentive regulation.

[^48]: *See Jurisdictional Separations Reform and Referral to the
    Federal-State Joint Board*, CC Docket No. 80-286, Recommended
    Decision, FCC 00J-2 (Jt. Bd. rel. July 21, 2000).

[^49]: *See* Exhibit 1 at 1-8 through 1-11.

[^50]: Thus, a Path A pool participant that has elected incentive
    regulation during the transition period potentially could obtain
    settlements paid on a RPL basis slightly above or below its RPL.