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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**SEVENTH REPORT AND ORDER AND**

**FURTHER NOTICE OF PROPOSED RULEMAKING**

**Adopted:** April 26, 2001 **Released:** April 27, 2001

Comment date: \[30 days after publication in the Federal Register\]

Reply Comment date: \[60 days after publication in the Federal
Register\]

By the Commission: Commissioner Furchtgott-Roth concurring in part,
dissenting in part, and issuing a separate statement.

Paragraph

I. Introduction [2](#introduction)

II\. Background [4](#background)

III\. CLEC Switched Access Services [9](#clec-switched-access-services)

A. Overview [9](#overview)

B. The Structure of the Access Service Market
[12](#the-structure-of-the-access-service-market)

C. Tariff Benchmark Mechanism [15](#tariff-benchmark-mechanism)

D. Level and Structure of the Tariff Benchmark
[19](#level-and-structure-of-the-tariff-benchmark)

E. Safe Harbor Rates for Rural CLECs
[28](#safe-harbor-rates-for-rural-clecs)

1\. Whether to Create a Rural Exemption
[29](#whether-to-create-a-rural-exemption)

2\. Carriers Eligible for Rural Exemption
[32](#carriers-eligible-for-rural-exemption)

3\. Rate for Exemption Carriers [34](#rate-for-exemption-carriers)

F. Forbearance Analysis for Rates Above the Benchmark
[35](#forbearance-analysis-for-rates-above-the-benchmark)

IV\. Interconnection Obligations [37](#interconnection-obligations)

A. Interconnection and Sections 201 and 251
[38](#interconnection-and-sections-201-and-251)

B. Section 214 and Discontinuance of Service
[40](#section-214-and-discontinuance-of-service)

V. Further notice of proposed rulemaking
[40](#further-notice-of-proposed-rulemaking)

VI\. Procedural Matters [43](#procedural-matters)

A. Paperwork Reduction Act [43](#paperwork-reduction-act)

B. Final Regulatory Flexibility Analysis
[43](#final-regulatory-flexibility-analysis)

1\. Need for, and Objectives of, the Proposed Action
[44](#need-for-and-objectives-of-the-proposed-action)

2\. Summary of Significant Issues Raised by Public Comment in Response
to the IRFA
[44](#summary-of-significant-issues-raised-by-public-comment-in-response-to-the-irfa)

3\. Description and Estimate of the Number of Small Entities to Which
the Rules Apply
[46](#description-and-estimate-of-the-number-of-small-entities-to-which-the-rules-apply)

4\. Description of Reporting, Recordkeeping, and Other Compliance
Requirements
[47](#description-of-reporting-recordkeeping-and-other-compliance-requirements)

5\. Steps Taken to Minimize Significant Economic Impact on Small
Entities, and Significant Alternatives Considered
[48](#steps-taken-to-minimize-significant-economic-impact-on-small-entities-and-significant-alternatives-considered)

C. Initial Regulatory Flexibility Analysis
[50](#initial-regulatory-flexibility-analysis)

1\. Need for, and Objectives of, the Proposed Action
[51](#need-for-and-objectives-of-the-proposed-action-1)

2\. Legal Basis [51](#legal-basis)

3\. Description and Estimate of the Number of Small Entities to Which
the Proposed Action May Apply
[51](#description-and-estimate-of-the-number-of-small-entities-to-which-the-proposed-action-may-apply)

4\. Description of Proposed Reporting, Recordkeeping, and Other
Compliance Requirements
[51](#description-of-proposed-reporting-recordkeeping-and-other-compliance-requirements)

5\. Steps Taken to Minimize Significant Economic Impact on Small
Entities, and Significant Alternatives Considered
[52](#steps-taken-to-minimize-significant-economic-impact-on-small-entities-and-significant-alternatives-considered-1)

6\. Federal Rules that May Duplicate, Overlap, or Conflict With the
Proposed Rules
[52](#federal-rules-that-may-duplicate-overlap-or-conflict-with-the-proposed-rules)

D. Comment Filing Procedures [53](#comment-filing-procedures)

VII\. Ordering Clauses [54](#ordering-clauses)

A. Comments [1](#a.-comments)

B. Reply Comments [3](#b.-reply-comments)

A. Comments [3](#a.-comments-1)

I. Government, Markets, Consumer Welfare, And The Public Interest
[1](#i.-government-markets-consumer-welfare-and-the-public-interest)

V. Conclusion [7](#v.-conclusion)

# Introduction

1.  With this order, we continue our efforts to establish a
    "pro-competitive, deregulatory national policy framework" for the
    United States' telecommunications industry by addressing a number of
    interrelated issues concerning competitive local exchange carrier
    (CLEC) charges for interstate switched access services and the
    obligations of interexchange carriers (IXCs) to exchange access
    traffic with CLECs.[^1] Parties on both sides of these issues have
    requested Commission involvement in shaping a resolution to what the
    IXCs view as the CLECs' abuse of our tariff rules to impose
    excessive access charges and what the CLECs view as the IXCs'
    unreasonable demands for lower access charges and threats to reject
    CLEC access traffic.

2.  By this order, we seek to ensure, by the least intrusive means
    possible, that CLEC access charges are just and reasonable.
    Specifically, we limit the application of our tariff rules to CLEC
    access services[^2] in order to prevent use of the regulatory
    process to impose excessive access charges on IXCs and their
    customers. Previously, certain CLECs have used the tariff system to
    set access rates that were subject neither to negotiation nor to
    regulation designed to ensure their reasonableness. These CLECs have
    then relied on their tariff to demand payment from IXCs for access
    services that the long distance carriers likely would have declined
    to purchase at the tariffed rate.

3.  Our goal in this process is ultimately to eliminate regulatory
    arbitrage opportunities that previously have existed with respect to
    tariffed CLEC access services. We accomplish this goal by revising
    our tariff rules more closely to align tariffed CLEC access rates
    with those of the incumbent LECs. Under the detariffing regime we
    adopt, CLEC access rates that are at or below the benchmark that we
    set will be presumed to be just and reasonable and CLECs may impose
    them by tariff. Above the benchmark, CLEC access services will be
    mandatorily detariffed, so CLECs must negotiate higher rates with
    the IXCs. During the pendency of negotiations, or if the parties
    cannot agree, the CLEC must charge the IXC the appropriate benchmark
    rate. We also adopt a rural exemption to our benchmark scheme,
    recognizing that a higher level of access charges is justified for
    certain CLECs serving truly rural areas.

4.  To avoid too great a disruption for competitive carriers, we
    implement the benchmark in a way that will cause CLEC rates to
    decrease over time until they reach the rate charged by the
    incumbent LEC. This mechanism will mimic the operation of the
    marketplace as competitive LECs will no longer be operating in the
    access market with tariffed rates well above the prevailing market
    price. We are optimistic that this approach will provide a bright
    line rule that permits a simple determination as to whether CLEC
    access charges are just and reasonable and, at the same time, will
    enable both sellers and purchasers of CLEC access services to avail
    themselves of the convenience of a tariffed service offering. In
    addition, this approach maintains the ability of CLECs to negotiate
    access service arrangements with IXCs at any mutually agreed upon
    rate. Naturally, the CLECs also retain the option of recovering from
    their end users any additional costs that they may experience.

5.  The regulatory forbearance that we undertake today continues our
    move to market-based solutions by encouraging CLECs to negotiate
    rates outside of the tariff safe harbor where they see fit. We also
    make clear that an IXC's refusal to serve the customers of a CLEC
    that tariffs access rates within our safe harbor, when the IXC
    serves ILEC end users in the same area, generally constitutes a
    violation of the duty of all common carriers to provide service upon
    reasonable request.

6.  Our order today is designed to spur more efficient local competition
    and to avoid disrupting the development of competition in the local
    telecommunications market currently taking root. We intend to allow
    CLECs a period of flexibility during which they can conform their
    business models to the market paradigm that we adopt herein. In
    addition, these rules should continue to ensure the ubiquity of a
    fully interconnected telecommunications network that consumers have
    come to expect. Finally, by ensuring that CLECs do not shift an
    unjust portion of their costs to interexchange carriers, our actions
    should help continue the downward trend in long-distance rates for
    end users.

7.  We stress, however, that the mechanism set out below is a
    transitional one; it is not designed as a permanent solution to the
    issues surrounding CLEC access charges. Rather, we view the
    mechanism we adopt today as a means of moving the marketplace for
    access services closer to a competitive model. Because our tariff
    benchmark is tied to the incumbent LEC rate, we will re-examine
    these rates at the close of the period specified in the *CALLS
    Order*.[^3] Through a separate notice of proposed rulemaking that we
    issue today, we also evaluate the access charge scheme as part of a
    broader review of inter-carrier compensation.[^4]

# Background

8.  Competitive entrants into the exchange access market have
    historically been subject to our tariff rules, but have been largely
    free of the other regulations applicable to incumbent LECs.[^5]
    Incumbent LECs, on the other hand, are closely regulated in their
    ratemaking to ensure that their interstate access charges are just
    and reasonable.[^6] In recent years, the Commission has repeatedly
    examined access rates, attempting to make them more economically
    rational. Some of the overarching goals the Commission has pursued
    in this effort include the promotion of competition, aligning access
    rate structures more closely with the manner in which costs are
    incurred, the removal of subsidies from access rates and
    deregulation as competition develops.[^7] The result of the
    Commission's efforts has been a steady reduction in access charges
    and in long distance rates which, in turn, has dramatically
    increased consumer usage of long distance service.

9.  Although the access charge debate previously has focused primarily
    on dominant carriers, as CLEC market share has increased, a
    correspondingly greater interest in the rates of competitive
    carriers has developed. As a result, CLEC access charges recently
    have been the subject of several Commission proceedings and the
    filings of several parties.

10. [The *Access Reform NPRM*]{.underline}: In the *Access Reform NPRM*,
    the Commission sought comment on whether CLECs can exercise market
    power with regard to terminating access services and whether and how
    the Commission should regulate those services.[^8] The Commission
    noted the differences between the originating and terminating access
    markets. For example, with *originating* access, the Commission
    recognized that the calling party chooses the service provider and
    decides whether to place a call, and it has the ultimate obligation
    to pay for the call.[^9] The calling party also is the customer of
    the IXC that purchases the originating access service.[^10] The
    Commission tentatively concluded, that, as long as IXCs could
    influence the calling party's choice of the access provider, a
    LEC\'s ability to charge excessive originating access rates would be
    limited, because IXCs likely would create incentives for their end
    users to move to competing, less expensive access providers.[^11] On
    the other hand, the Commission recognized that, with *terminating*
    access, the called party chooses the access service provider, while
    the decision to make the call and the ultimate responsibility to pay
    for the call reside with the calling party, and the calling party's
    IXC must pay for the terminating access service.[^12] Because of
    this disjunction implicit in terminating access, neither the party
    placing a long distance call, nor that party's IXC, can easily
    influence the called party\'s choice of service provider.[^13] The
    Commission noted that this may give CLECs the incentive to charge
    excessive rates for terminating access service.[^14]

11. The Commission also noted an additional complication for an IXC
    faced with high CLEC access rates. Not only does the calling party
    not choose the terminating LEC, but section 254(g) requires IXCs to
    spread the cost of terminating access rates among all of its end
    users.[^15] Accordingly, the Commission tentatively concluded in the
    *Access Reform NPRM* that terminating access may remain a bottleneck
    controlled by whichever LEC provides terminating access to a
    particular customer, even if competitors have entered the
    market.[^16] The Commission also opined, however, that excessive
    terminating access charges might encourage IXCs to enter the access
    market themselves.[^17]

12. [The *Hyperion Order*]{.underline}: In the *Hyperion Order*, the
    Commission established permissive detariffing for non-incumbent LEC
    providers of interstate exchange access services.[^18] The
    Commission also sought comment on mandatory detariffing for CLEC
    interstate access services.[^19] The Commission did not take further
    action, however, because the District of Columbia Circuit Court of
    Appeals stayed the Commission's mandatory detariffing order for
    IXCs. Later, after the D.C. Circuit upheld the Commission's IXC
    mandatory detariffing order,[^20] the Commission issued a public
    notice to refresh the record on the issue of mandatory detariffing
    for CLEC access services.[^21]

13. [The *Access Reform Order*]{.underline}*:* In the *Access Reform
    Order*, the Commission declined to adopt regulations governing CLEC
    terminating access charges, or to address the issue of CLEC
    originating access charges.[^22] Based on the available record, the
    Commission decided to continue to refrain from regulating the rates
    charged by non-incumbent LECs for terminating access service.[^23]
    Although an IXC must use the CLEC serving an end user to terminate a
    call, the Commission found that the record did not indicate that
    CLECs previously had charged excessive terminating access rates or
    that CLECs distinguished between originating and terminating access
    in their service offerings.[^24] As a result, the Commission
    concluded that CLECs did not appear to have structured their service
    offerings in ways designed to exercise market power over terminating
    access.

14. The Commission further observed that, as CLECs attempted to expand
    their market presence, the rates of incumbent LECs or other
    potential competitors should constrain the CLECs\' terminating
    access rates.[^25] The Commission found that access customers likely
    would take competitive steps to avoid paying unreasonable
    terminating access charges.[^26] Thus, it explained that a call
    recipient might switch to another local carrier in response to
    incentives offered by an IXC.[^27]

15. Although the Commission declined to adopt regulations governing the
    provision of CLEC terminating access, it noted that it could address
    the reasonableness of CLEC terminating access rates in individual
    instances through the section 208 process for the adjudication of
    complaints.[^28] Moreover, the Commission stated that it would be
    sensitive to indications that the terminating access rates of CLECs
    were unreasonable, and it committed to revisit the issue of CLEC
    access rates if there were sufficient indications that CLECs were
    imposing unreasonable terminating access charges.[^29]

16. [Complaint Proceedings]{.underline}: The Commission addressed issues
    related to competitive carriers' access services in three different
    section 208 complaint proceedings.[^30] On July 16, 1999, in *MGC v.
    AT&T*, the Commission ruled that AT&T was liable to MGC for
    originating access charges at MGC's tariffed rate because AT&T had
    failed to take the necessary steps to terminate its access service
    arrangement with MGC.[^31] On June 9, 2000, in *Sprint v. MGC*, the
    Commission rejected the argument that a CLEC's access rates are *per
    se* unjust and unreasonable -- and therefore violative of section
    201(b) -- because they exceed the rates charged by incumbent LECs in
    the CLEC's region.[^32] Finally, on March 13, 2001, in *Total
    Tel. v. AT&T*,[^33] the Commission ruled that a competitive access
    provider's rates for terminating access were the product of a sham
    arrangement to inflate its rates and to pass on a portion of the
    inflated rate to the carrier's single end user. Accordingly, we
    ruled in that proceeding that AT&T did not violate sections 201(a),
    202(a), 214(a) or 251(a) of the Act[^34] when it declined the access
    provider's terminating access service and blocked traffic bound for
    the access provider's single end-user customer.

17. *[Pricing Flexibility Order and Further Notice of Proposed
    Rulemaking]{.underline}*: In August of 1999, the Commission issued
    its *Pricing Flexibility Order and Notice*, which, *inter alia*,
    denied AT&T's petition for a declaratory ruling that IXCs may refuse
    to purchase CLECs' tariffed switched access service.[^35] The
    Commission noted that, in the *Access Charge Reform Order*, it may
    have overestimated the ability of the marketplace to constrain CLEC
    access rates.[^36] In particular, the Commission noted that AT&T's
    Petition for Declaratory Ruling, the comments provided in support of
    it, and the decision in *MGC v. AT&T* suggested the need to revisit
    the issue of CLEC access rates.[^37] Accordingly, the Commission
    initiated the current rulemaking proceeding to examine CLEC
    originating and terminating access rates, and it sought comment on
    regulatory and market-based solutions to ensure that CLEC rates for
    interstate access are just and reasonable.[^38]

18. The Commission again invited comment on, *inter alia*, whether CLECs
    possess market power over IXCs that need to terminate long distance
    calls, whether mandatory detariffing of CLEC interstate access
    services would provide a market-based deterrent to excessive
    terminating access charges, and whether rates could be constrained
    by establishing a benchmark for CLEC access charges that would be
    presumed reasonable.[^39] We acknowledged that CLEC access rates
    may, in fact, be higher due to the CLECs\' high start-up costs for
    building new networks, their small geographical service areas, and
    the limited number of subscribers over which CLECs can distribute
    costs.[^40] We also recognized, however, that IXCs currently spread
    their access costs among all their end users and that requiring IXCs
    to bear a CLEC's higher start-up costs may impose unfair burdens on
    IXC customers that pay rates reflecting these CLEC costs even though
    many of the IXC customers may not subscribe to those CLECs.[^41]

19. [The *CALLS Order*]{.underline}: During the course of the debate
    over CLEC access charges, the Commission adopted an integrated
    interstate access reform and universal service proposal put forth by
    the members of the Coalition for Affordable Local and Long Distance
    Service (CALLS).[^42] The *CALLS Order* resolved major outstanding
    issues concerning access charges of price-cap ILECs by determining
    the appropriate level of interstate access charges and by converting
    implicit subsidies in interstate access charges into explicit,
    portable, and sufficient universal service support.[^43] The
    adoption of the *CALLS Order* moved the Commission a step closer to
    its access charge reform goals for dominant carriers. The *CALLS
    Order* is interim in nature, covering a five-year period[^44]; its
    reforms became effective on July 1, 2000.

20. [Emergency Petitions]{.underline}: In February and May 2000, we
    received two declaratory ruling petitions asking that we prohibit
    AT&T from withdrawing its interexchange services from customers of
    CLECs pending the outcome of the rulemaking proceedings relating to
    CLEC access charges. We subsequently sought comment on these
    petitions.[^45]

# CLEC Switched Access Services

## Overview

21. Congress and the Commission have adopted policies designed to
    encourage competition for local exchange and exchange access
    services. Although competition for access services existed to some
    extent prior to 1996, the 1996 Act created new opportunities for
    competing access providers by opening the local exchange market to
    competition.[^46] As a result, competition for local exchange and
    exchange access service is taking root: between 1996 and 1999, the
    number of competitive LECs increased from 94 to 349.[^47] During
    their development, CLECs have been largely unregulated in the manner
    that they set their access rates. We note, however, that section 201
    gives us the authority to ensure that CLEC rates are just and
    reasonable.[^48]

22. Our review of the record reveals that CLEC access rates vary quite
    dramatically and, on the average, are well above the rates that
    ILECs charge for similar service. Sprint, WorldCom and AT&T have
    submitted information on the CLEC access charges for which they have
    been billed. These data sets reveal a strikingly broad range of
    rates. Some competitive LECs charge at or even below 1 cent per
    minute; indeed, it appears that many CLECs are charging
    approximately the ILEC access rate.[^49] On the other hand, certain
    CLECs are charging above 9 cents per minute and the weighted average
    of CLEC access rates falls above 4 cents per minute.[^50] AT&T
    estimates that approximately 100 CLECs have tariffed rates above 2.5
    cents per minute and 60 have per-minute rates above 5.0 cents.[^51]
    AT&T further asserts that, in 2000, it was billed for \$106 million
    in CLEC access charges, representing a premium of \$92 million over
    what the competing ILECs would have billed for the same number of
    minutes of service.[^52] While we have questions about AT&T's
    calculation of this premium,[^53] there can be little question that
    CLECs are adding dramatically to the overall level of access charges
    that IXCs are paying. We are concerned that the higher CLEC rates
    may shift an inappropriate share of the carriers' costs onto the
    IXCs and, through them, the long distance market in general.

23. Reacting to what they perceive as excessive rate levels, the major
    IXCs have begun to try to force CLECs to reduce their rates. The
    IXCs' primary means of exerting pressure on CLEC access rates has
    been to refuse payment for the CLEC access services. Thus, Sprint
    has unilaterally recalculated and paid CLEC invoices for tariffed
    access charges based on what it believes constitutes a just and
    reasonable rate.[^54] AT&T, on the other hand, has frequently
    declined altogether to pay CLEC access invoices that it views as
    unreasonable.[^55] We see these developments as problematic for a
    variety of reasons. We are concerned that the IXCs appear routinely
    to be flouting their obligations under the tariff system.
    Additionally, the IXCs' attempt to bring pressure to bear on CLECs
    has resulted in litigation both before the Commission and in the
    courts.[^56] And finally, the uncertainty of litigation has created
    substantial financial uncertainty for parties on both sides of the
    dispute. This uncertainty, in turn, poses a significant threat to
    the continued development of local-service competition, and it may
    dampen CLEC innovation and the development of new product offerings.
    [^57]

24. Additionally, IXCs have threatened to stop delivering traffic to, or
    accepting it from, certain CLECs that they view as over-priced.
    Thus, AT&T has notified a number of CLECs that it refused to
    exchange originating or terminating traffic.[^58] In some instances,
    AT&T has terminated its relationship with CLECs and is blocking
    traffic, thus raising various consumer and service quality
    issues.[^59] These practices threaten to compromise the ubiquity and
    seamlessness of the nation's telecommunications network and could
    result in consumer confusion.[^60] Once one or more IXCs refuse to
    do business with a CLEC, it will become impossible for that CLEC's
    end users to reach, or receive calls from, some parties outside of
    the local calling area. If such refusals to exchange traffic were to
    become a routine bargaining tool, callers might never be assured
    that their calls would go through. We are particularly concerned
    with preventing such a degradation of the country's
    telecommunications network. It is not difficult to foresee instances
    in which the failure of a call to go through would represent a
    serious problem, and, in certain circumstances, it could be
    life-threatening. Accordingly, the public interest demands a
    resolution to this set of problems.

25. Given the state of the marketplace for CLEC access services, and our
    judgment that more serious developments could loom in the future if
    we do not take action, we are persuaded of the need to revisit these
    issues in a global fashion. Previously, the Commission refrained
    from involving itself in a general examination of the reasonableness
    of CLEC access rates, ruling instead that any unreasonable rates
    could be addressed through the section 208 complaint process.
    However, this regime has often failed to keep CLEC access rates
    within a zone of reasonableness. It now appears that the best means
    of proceeding is to restructure and partially deregulate the
    environment in which CLECs provide access service, providing a
    bright-line rule that will facilitate effective enforcement.
    Additionally, the record indicates that numerous questions about the
    reasonableness of CLEC rates exist in the industry. Several parties
    have already filed with the Commission informal complaints raising
    this issue in order to preserve their claims from lapse.[^61] We are
    concerned that a flood of unreasonable-rate complaints could overtax
    the Commission's resources to deal with such proceedings in a manner
    that is timely and efficient yet gives each complaint the attention
    it deserves.

## The Structure of the Access Service Market

26. The commenters present two dramatically different views of the
    problem of CLEC access charges. IXC purchasers of CLEC access
    services contend that CLECs have tariffed switched access rates at
    unjust and unreasonable levels.[^62] They assert that it is an
    anomaly for a "competitive" provider to enter a market by charging
    well in excess of the rate charged by the market's incumbent and
    that such entry could not be maintained in a competitive
    market.[^63] The IXCs argue that high access charges allow CLECs
    unfairly to shift their operational expenses and their network
    build-out expenses to IXCs and, through them, to long distance
    ratepayers generally.[^64] Moreover, IXC commenters complain that
    these unreasonable rates are unilaterally imposed through tariffs,
    rather than through negotiation with a willing purchaser.[^65]
    Furthermore, the IXCs complain that many CLECs take the position
    that IXCs may not refuse CLEC access services.[^66] Thus, the IXC
    commenters see themselves as unwilling consumers of the CLECs'
    access services.[^67]

27. By contrast, CLECs assert that their rates are justified by their
    substantial network development costs and their significantly higher
    per-unit cost of providing service that arises from the smaller
    customer base over which they may spread their operational
    costs.[^68] They argue that ILECs were for many years protected
    monopoly providers of local exchange and exchange access services;
    during that time, they funded the build-out of their networks
    through rates imposed on captive customers and through access rates
    that were dramatically higher than they are today.[^69] Defending
    their filing of tariffs for access service, CLEC commenters assert
    that the section 208 complaint process provides IXCs an adequate
    remedy against unjust and unreasonable rates.[^70]

28. Tariffs require IXCs to pay the published rate for tariffed CLEC
    access services, absent an agreement to the contrary or a finding by
    the Commission that the rate is unreasonable.[^71] It appears that
    certain CLECs have availed themselves of this rule and have refused
    to enter meaningful negotiations on access rates, choosing instead
    simply to file a tariff and bind IXCs receiving their access service
    to the rates therein.[^72] CLEC use of this strategy raises
    questions about the extent to which CLECs truly are subject to
    competition in their provision of access service. The Commission has
    previously noted the unique difficulties presented by the case of
    terminating access, where the called party is the one that chooses
    the access provider, but it neither pays for terminating access
    service, nor does it pay for, or choose to place, the call.[^73] It
    further complicates the case of terminating access that an IXC may
    have no prior relationship with a CLEC, but may incur access charges
    simply for delivering a call to the access provider's customer.[^74]
    In these circumstances, providers of terminating access may be
    particularly insulated from the effects of competition in the market
    for access services. The party that actually chooses the terminating
    access provider does not also pay the provider's access charges and
    therefore has no incentive to select a provider with low rates.[^75]
    Indeed, end users may have the incentive to choose a CLEC with the
    highest access rates because greater access revenues likely permit
    CLECs to offer lower rates to their end users.[^76]

29. The record does not indicate that a significant number of CLECs
    charge markedly higher rates for terminating than they do for
    originating access. It thus appears that CLEC originating access
    service may also be subject to little competitive pressure,
    notwithstanding the fact that the IXCs typically have a relationship
    with the local exchange provider in order to be included on the
    LEC's list of presubscribed IXCs.

30. Sprint and AT&T persuasively characterize both the terminating and
    the originating access markets as consisting of a series of
    bottleneck monopolies over access to each individual end user.[^77]
    Thus, once an end user decides to take service from a particular
    LEC, that LEC controls an essential component of the system that
    provides interexchange calls, and it becomes the bottleneck for IXCs
    wishing to complete calls to, or carry calls from, that end user.

31. On further consideration, it appears that the CLECs' ability to
    impose excessive access charges is attributable to two separate
    factors. First, although the end user chooses her access provider,
    she does not pay that provider's access charges. Rather, the access
    charges are paid by the caller's IXC, which has little practical
    means of affecting the caller's choice of access provider (and even
    less opportunity to affect the called party's choice of provider)
    and thus cannot easily avoid the expensive ones. Second, the
    Commission has interpreted section 254(g) to require IXCs
    geographically to average their rates and thereby to spread the cost
    of both originating and terminating access over all their end users.
    Consequently, IXCs have little or no ability to create incentives
    for their customers to choose CLECs with low access charges.[^78]
    Since the IXCs are effectively unable either to pass through access
    charges to their end users or to create other incentives for end
    users to choose LECs with low access rates, the party causing the
    costs -- the end user that chooses the high-priced LEC -- has no
    incentive to minimize costs. Accordingly, CLECs can impose high
    access rates without creating the incentive for the end user to shop
    for a lower-priced access provider.

32. The Commission previously projected that, at least in the case of
    originating access service, IXCs would likely enter marketing
    alliances with LECs offering low-priced access service and would
    thereby be able to exert downward pressure on CLEC access
    rates.[^79] The Commission even raised the prospect that IXCs would
    themselves choose to enter the local service market as a means of
    exerting downward pressure on terminating rates. However, neither of
    these eventualities has come to pass, at least not to an extent that
    has resulted in effective downward competitive pressure on CLEC
    access rates. We now acknowledge that the market for access services
    does not appear to be *structured* in a manner that allows
    competition to discipline rates.[^80]

33. We are concerned that, in this environment, permitting CLECs to
    tariff any rate that they choose may allow some CLECs
    inappropriately to shift onto the long distance market in general a
    substantial portion of the CLECs' start-up and network build-out
    costs. Such cost shifting is inconsistent with the competitive
    market that we seek to encourage for access service.[^81] Rather, it
    may promote economically inefficient entry into the local markets
    and may distort the long distance market. While we seek to promote
    competition among local-service providers, we also seek to eliminate
    from our rules opportunities for arbitrage and incentives for
    inefficient market entry.

34. We decline to conclude, in this order, that CLEC access rates,
    across the board, are unreasonable. Nevertheless, there is ample
    evidence that the combination of the market's failure to constrain
    CLEC access rates, our geographic rate averaging rules for IXCs, the
    absence of effective limits on CLEC rates and the tariff system
    create an arbitrage opportunity for CLECs to charge unreasonable
    access rates.[^82] Thus, we conclude that some action is necessary
    to prevent CLECs from exploiting the market power in the rates that
    they tariff for switched access services.

## Tariff Benchmark Mechanism

35. We have previously sought comment on a variety of solutions to the
    problems connected with CLEC access charges, including mandatory
    detariffing of CLEC switched access services and setting a benchmark
    to constrain CLEC switched access charges.[^83] A substantial
    majority of commenters, including CLECs, IXCs, and ILECs, strongly
    oppose the mandatory detariffing option.[^84] They urge that it
    would cause both CLECs and IXCs to incur substantial and unnecessary
    negotiation costs simply to exchange traffic.[^85] They further
    contend that these costs would create a significant barrier to entry
    for competitors seeking to enter the local market and would at least
    marginally drive up end-user rates for both local and long distance
    service.[^86]

36. Apart from their opposition to mandatory detariffing, however, the
    two sides of the debate have been largely unable to agree about how
    CLECs should set rates for their switched access services. Certain
    IXCs assert that the Commission should immediately set CLEC tariffed
    rates at or near the rates of the ILEC operating in the CLEC's
    service territory.[^87] On the other hand, citing their high
    start-up costs and greater per-minute cost of providing service,
    many CLECs have argued that they should be permitted to tariff rates
    at whatever level, in their view, is necessary to recover their
    costs.[^88]

37. We decline to immediately move CLEC access rates to the rate of the
    competing ILEC.[^89] CLECs have, in the past, set their rates
    without having to conform to the regulatory standards imposed on
    ILECs, and this Commission has twice ruled, in essence, that a
    CLEC's rate is not per se unreasonable merely because it exceeds the
    ILEC rate.[^90] Accordingly, we are reluctant to flash-cut CLEC
    access rates to the level of the competing ILEC; a more gradual
    transition is appropriate so that the affected carriers will have
    the opportunity to adjust their business models. On the other hand,
    we are equally reluctant to permit CLECs to continue to tariff the
    access rates they charge IXCs at the level they see fit, without any
    guidelines to ensure their reasonableness. We find persuasive IXC
    arguments that it is highly unusual for a competitor to enter a
    market at a price dramatically above the price charged by the
    incumbent, absent a differentiated service offering.

38. In analyzing the problems surrounding CLEC access charges, it is
    important to recognize that, in their provision of access services,
    competitive carriers actually serve two distinct customer groups.
    The first is the IXCs, which purchase access service as an input for
    the long distance service that they provide to their end-user
    customers. As we discuss above, IXCs are subject to the monopoly
    power that CLECs wield over access to their end users. However, an
    equally important group of customers for access services is the end
    users who benefit from the ability, provided by access service, to
    place and receive long distance calls. In regulating ILEC access
    rates, this Commission has recognized the benefit that end users
    receive from access service and has concluded that it justifies the
    ILECs' imposition of the subscriber line charge (SLC) on end
    users.[^91] The noteworthy aspect of this second group of access
    consumers, or beneficiaries, is that, unlike IXCs, they have
    competitive alternatives in the market in which they purchase CLEC
    access service: In any market where a CLEC operates, there is, by
    definition, at least one alternative provider -- the ILEC.

39. The notion of these two, parallel markets for access service sheds
    light on the dilemma presented by CLEC access charges. It leads us
    to conclude that, in keeping with their competitive, unregulated
    character, CLECs should be permitted to set the combined level of
    their access charges, for all the consumers of the service, as they
    please. If, as they contend, their per-unit costs are higher than
    those of the ILECs, we will not stand in the way of their recovering
    those costs. Given the unique nature of the market in which the IXCs
    purchase CLEC access, however, we conclude that it is necessary to
    constrain the extent to which CLECs can exercise their monopoly
    power and recover an excessive share of their costs from their IXC
    access customers -- and, through them, the long distance market
    generally. On the other hand, we continue to abstain entirely from
    regulating the market in which end-user customers purchase access
    service. Accordingly, CLECs remain free to recover from their end
    users any greater costs that they incur in providing either
    originating or terminating access services. When a CLEC attempts to
    recover additional amounts from its own end user, that customer
    receives correct price signals and can decide whether he should find
    an alternative provider for access (and likely local exchange)
    service. This approach brings market discipline and accurate price
    signals to bear on the end user's choice of access providers.

40. Under the regime we adopt in this order, CLECs will be restricted
    only in the manner that they recover their costs from those
    access-service consumers that have no competitive alternative. We
    implement this restriction on the CLEC's exercise of their monopoly
    power by establishing a benchmark level at which CLEC access rates
    will be conclusively presumed to be just and reasonable and at (or
    below) which they may therefore be tariffed. Above the benchmark,
    CLECs will be mandatorily detariffed. CLECs that seek to charge to
    IXCs rates that are in excess of this benchmark may do so, but only
    outside of the regulated tariff process. A substantial number of
    commenters on both sides of the issue have suggested this safe
    harbor approach.[^92] Given the historical disagreement among CLECs
    and IXCs on this issue, we find their joint support for this
    solution to be particularly persuasive. In addition to enjoying
    their support, the benchmark approach has several virtues that
    recommend it.

41. First, a benchmark provides a bright line rule that permits a simple
    determination of whether a CLEC's access rates are just and
    reasonable. Such a bright line approach is particularly desirable
    given the current legal and practical difficulties involved with
    comparing CLEC rates to any objective standard of "reasonableness."
    Historically, ILEC access charges have been the product of an
    extensive regulatory process by which an incumbent's costs are
    subject to detailed accounting requirements, divided into regulated
    and non-regulated portions, and separated between the interstate and
    intrastate jurisdictions. Once the regulated, interstate portion of
    an ILEC's costs is identified, our access charge rules specify in
    detail the rate structure under which an incumbent may recover those
    costs.[^93] This process has yielded presumptively just and
    reasonable access rates for ILECs. Recently, the Commission has
    attempted to move away from such extensive regulation of ILECs. With
    the *CALLS Order*, we solved some of the most vexing problems
    relating to ILEC access rates, reducing the subsidies implicit in
    access rates and establishing target rates to which the
    participating LECs will move over the five years following the
    order. Given our attempts to reduce the regulatory burden on ILECs,
    we are especially reluctant to impose similar legacy regulation on
    new competitive carriers. We note that no CLEC has suggested that we
    adopt such a heavily regulatory approach to setting their access
    rates.[^94]

42. Second, by permitting CLECs to file access tariffs at or below a
    benchmark rate, our interim approach continues to allow the carriers
    on both sides of the access transaction to enjoy the convenience of
    a tariffed service. As noted above, both IXCs and CLECs assert that
    their transaction costs would rise substantially if they were
    required to negotiate the terms on which they exchange access
    traffic.[^95] Moreover, several commenters argue that the failure of
    some of these negotiations likely would lead to disruptions in the
    exchange of access traffic, which would, in turn, threaten the
    ubiquity of the public switched network.[^96] We question whether
    the consequences of mandatory detariffing would be as drastic as
    some of the commenters contend.[^97] Nevertheless, we recognize the
    attraction of a tariffed regime because it permits CLECs to file the
    terms on which they will provide service and to know that, absent
    some contrary, negotiated agreement, any IXC that receives access
    service is bound to pay the tariffed rates.[^98] Similarly, IXCs
    will know that, whatever the source or destination of their access
    traffic, they will be assured a rate that either is within the
    benchmark zone of reasonableness or is one to which they have agreed
    in negotiations.

43. Third, adopting a benchmark for tariffed rates allows CLECs the
    flexibility to obtain additional revenues from alternative sources.
    They may obtain higher rates through negotiation. If a particular
    CLEC provides a superior quality of access service, or if it has a
    particularly desirable subscriber base, one or more IXCs may be
    willing to pay rates above the benchmark in order to receive that
    CLEC's switched access service. Similarly, CLECs retain the
    flexibility to charge their end users higher rates for the access
    service to which they subscribe. Here again, if the CLEC provides a
    superior product, the end user likely will be willing to pay for it;
    however, if a CLEC attempts to impose an unreasonable surcharge on
    its customer, the customer receives accurate price signals and may
    be motivated to find an alternative provider.

44. We conclude that the benchmark we adopt will address persistent
    concern over the reasonableness of CLEC access charges and will
    provide critical stability for both the long distance and exchange
    access markets. In structuring the benchmark mechanism, we have
    taken into account a broad variety of competing factors,
    including: (1) the need to constrain access rates with an eye toward
    continuing the downward trend in long distance prices, (2) the
    importance of having new entrants' rates move toward and ultimately
    meet those of market incumbents, (3) the need to avoid too severe of
    a disruption in the CLEC sector of the industry, and (4) the extreme
    difficulty of establishing a "reasonable" CLEC access rate given the
    historical lack of regulation on the process of CLEC ratemaking. We
    conclude that our benchmark system, with its conclusive presumption
    of reasonableness, provides the best solution to the difficult
    problems associated with how CLECs set their access charges. We are
    optimistic that it will serve as a reasonable response, pending our
    more complete review of intercarrier compensation issues,[^99] to
    the many competing pressures and priorities that surround CLEC
    access charges.

## Level and Structure of the Tariff Benchmark 

45. Our orders addressing ILEC access charges have consistently stated
    our preference to rely on market forces as a means of reducing
    access charges. Thus, in setting the level of our benchmark, we
    seek, to the extent possible, to mimic the actions of a competitive
    marketplace, in which new entrants typically price their product at
    or below the level of the incumbent provider. We conclude that the
    benchmark rate, above which a CLEC may not tariff, should eventually
    be equivalent to the switched access rate of the incumbent provider
    operating in the CLEC's service area.[^100] We do not, however,
    immediately set the benchmark rate at the competing ILEC rate
    because such a flash cut likely would be unduly detrimental to the
    competitive carriers that have not previously been held to the
    regulatory standards imposed on ILECs. Our benchmark mechanism, with
    certain exceptions, will permit CLECs initially to tariff rates for
    their switched access service of up to 2.5 cents per minute, or the
    rate charged by the competing incumbent LEC, whichever is
    higher.[^101] For those carriers competing with ILECs that have
    tariffed rates below the benchmark (generally, the Bell operating
    companies), the benchmark rate will decline over the course of three
    years until it reaches the competing ILEC's rate. For at least one
    additional year, CLECs will be permitted to continue to tariff this
    rate, even if we decide to move other access traffic to a
    bill-and-keep regime. We also adopt rules to ensure that no CLEC
    avails itself of our benchmark scheme to *increase* its access
    rates,[^102] and we adopt a separate benchmark for certain firms
    operating in rural areas.[^103]

46. In determining the initial level for the safe harbor rates which may
    be imposed by tariff, we use current CLEC rates as a starting point
    for analysis because, as noted above, we lack an established
    framework for translating CLEC costs into access rates.[^104]
    Current CLEC rates provide a useful analytical tool since, in most
    instances, they were set unilaterally by the individual CLECs. Thus,
    there should be no concern that the current rates provide an
    inadequate return to the carrier that tariffed them. Additionally,
    we note that precedent exists for setting rates by some means other
    than reviewing the costs of each individual industry
    participant.[^105]

47. Our understanding of current CLEC access rates is based on several
    sources. We have anecdotal information about a few CLECs' access
    charges through the complaint proceedings initiated at the
    Commission. At the time it filed its complaint against AT&T, MGC was
    charging slightly in excess of 8.5 cents per minute.[^106]
    Similarly, in *U.S. TelePacific v. AT&T*[^107] the CLEC was charging
    approximately 7.45 cents per minute for switched access. In
    addition, AT&T, WorldCom and Sprint submitted information regarding
    what they have been charged for CLEC access service and how many
    minutes of service this represents. The Association for Local
    Telecommunications Services (ALTS) also filed summary statistics on
    CLEC access rates based on a survey of its members. Each of these
    data sources has its limitations[^108]; nonetheless, we believe that
    the information submitted by AT&T, WorldCom, and Sprint, provides
    the best, most comprehensive information available on CLEC access
    rates. In particular, we believe that by analyzing the IXC data on
    actual amounts billed and actual minutes of use, we can calculate
    composite access rates and largely avoid the problems that arise
    from the fact that CLEC rate structures vary widely and that many
    rely, in part, on flat-rated, or distance-sensitive, charges.[^109]

48. Taken together, the IXC submissions include usable data on switched
    access rates for over 70 CLECs. The carriers' submissions show a
    range of 0.4 cents to 9.5 cents per minute for CLEC-provided
    switched access service.[^110] From the underlying, individual CLEC
    data, we are able to determine the average, weighted by minutes of
    use, for tariffed access rates.[^111] Table 1 indicates that, while
    there is minor variation between the weighted averages for each
    IXC's data, they are notably similar. Indeed, given the wide *range*
    of tariffed CLEC rates, we conclude that these averages are similar
    enough to give us an accurate view of current tariffed CLEC access
    rates.

Table 1

+-----------------------------------+-----------------------------------+
| **data source**                   | **weighted**                      |
|                                   |                                   |
|                                   | **average**                       |
+-----------------------------------+-----------------------------------+
| AT&T                              | 4.33 cents/min                    |
+-----------------------------------+-----------------------------------+
| Sprint                            | 3.48 cents/min                    |
+-----------------------------------+-----------------------------------+
| WorldCom                          | 4.16 cents/min                    |
+-----------------------------------+-----------------------------------+

49. This data provides some guidance for our choice of an initial
    benchmark level. It is important that the benchmark, though within
    this range, also move CLEC access charges appreciably closer to the
    competing ILEC rate. The record indicates that many CLECs have
    tariffed rates that are less than or equal to the competing ILEC
    rate, although these rates are not reflected in the usable data
    submitted by AT&T, WorldCom, and Sprint.[^112] Indeed, AT&T asserts
    that over 80% of the CLECs from which it receives access bills
    charge rates at or below those of the competing ILEC.[^113]
    Accordingly, setting the initial benchmark toward the lower end of
    the range appears to be justified. Based on our review of the
    universe and concentration of tariffed access rates being charged to
    these three IXCs, we conclude that -- again, subject to certain
    exceptions that we discuss below -- our safe harbor for CLEC
    tariffed access rates will begin at 2.5 cents. This rate is within
    the current range of rates, but represents an appreciable reduction
    in the tariffed rate for many CLECs.

50. We draw additional support for this initial benchmark level from a
    consensus solution submitted by parties on both sides of the present
    dispute. In comments to the *Safe Harbor Public Notice*, the
    Association for Local Telecommunications Services (ALTS) filed a
    proposed resolution, negotiated with WorldCom, suggesting, in
    relevant part, that a benchmark of 2.5 cents per minute for CLEC
    tariffed access rates would be a reasonable one in at least some
    markets.[^114] WorldCom described the parties' proposal as a "good
    faith attempt to reach a compromise among competing interests" and
    stated that it was "consistent with sound public policy and merits
    serious consideration."[^115] ALTS's web site states that it
    represents over "200 companies that build, own, and operate"
    competitive, facilities-based networks.[^116] We note that many of
    the CLECs participating in this proceeding are listed as members on
    ALTS's web site. Accordingly, it appears that this rate is
    acceptable to a substantial number of CLECs, although it represents
    a significant reduction in access rates. While ALTS suggests a
    different timeframe for reducing the safe harbor limit over time, we
    find its support for the initial rate to be a fair indicator of its
    reasonableness. Similarly, we note that this rate is significantly
    below the average tariffed CLEC access rate, as reported by the IXC
    commenters. We conclude that this joint proposal offers a workable
    starting point for our benchmark, when combined with the rule that
    will prevent any CLEC from *increasing* its rates to the benchmark
    level and from entering new markets above the prevailing ILEC
    rate.[^117]

51. On the effective date of the rules we promulgate today, CLECs will
    be permitted (subject to a rural exemption discussed below) to
    tariff their access rates, for those areas where they have
    previously offered service,[^118] at either the benchmark of 2.5
    cents per minute, or the rate of the corresponding incumbent carrier
    in the study area of the relevant end-user customer, whichever is
    higher. By permitting CLECs to tariff their rates up to the level of
    the carrier with which they compete, we recognize that some
    competitive carriers may operate in areas served by incumbent LECs
    -- often rural ones -- that our rules already permit to charge
    access rates above those of the large price-cap ILECs.[^119] If
    operation in these areas justifies higher access rates for the
    regulated incumbents, we conclude that it justifies equivalent rates
    for any competitor operating in the area.

52. Over time, our benchmark figure will decrease until it reaches the
    rate of the ILEC with which a CLEC competes. One year after the
    effective date of these rules, the benchmark rate will drop from 2.5
    to 1.8 cents per minute, or the ILEC rate, whichever is higher. On
    the second anniversary of the rules' effective date, the rate will
    drop to 1.2 cents per minute, or the ILEC rate, whichever is
    higher.[^120] Finally, three years after the rules become effective,
    the benchmark figure will drop to the switched access rate of the
    competing ILEC. It will remain at that level through the rule's
    fourth year. We conclude that such a transition period is
    appropriate because, as discussed above, we are concerned about the
    effects of a flash-cut to the ILEC rate.[^121] Instead, we are
    persuaded that CLECs should be allowed an opportunity to adapt to
    the less tariff-dependent regulatory environment to which we move
    with this order. We adopt a three-year transition to the ILEC rate
    both because it appears to allow sufficient time for CLECs to adjust
    their business models and because it is consistent with several
    other Commission reform initiatives relating to inter-carrier
    compensation that are currently under way.[^122]

53. In order further to ease CLEC transition to the market paradigm that
    we adopt today, our rules permit CLECs to tariff, through the fourth
    year of the rule's effectiveness, a rate equivalent to the benchmark
    level established three years after the effective date of this
    order. As previously noted, the Commission is conducting a more
    general examination of inter-carrier compensation by way of a notice
    of proposed rulemaking. One of the options under serious
    consideration in that proceeding is a move to a bill-and-keep
    regime, under which carriers would recover their costs from end
    users, rather than from interconnecting carriers. Even if we choose
    that route in the inter-carrier compensation proceeding, the rules
    we adopt today would not mandate bill-and-keep for CLEC access
    tariffs until a full four years after the effective date of this
    order.

54. By moving CLEC tariffs to the "rate of the competing ILEC" we do not
    intend to restrict CLECs to tariffing solely the per-minute rate
    that a particular ILEC charges for its switched, interstate access
    service. As WorldCom notes, CLECs should not be "deprived of revenue
    streams available to the incumbent monopolists with which they
    compete."[^123] Rather, by moving CLEC access tariffs to the
    competing ILEC rate, we intend to permit CLECs to receive revenues
    equivalent to those the ILECs receive *from IXCs*, whether they are
    expressed as per-minute or flat-rate charges. For example, CLECs
    shall be permitted to set their tariffed rates so that they receive
    revenues equivalent to those that the ILECs receive through the
    presubscribed interexchange carrier charge (PICC), to the extent
    that it survives in the wake of our *CALLS Order*.[^124] This does
    not entitle CLECs to build into their tariffed per-minute access
    rates a component representing the subscriber line charge (SLC) that
    ILECs impose on their end users, or any other charges that ILECs
    recover from parties other than the IXCs to which they provide
    access service.

55. A number of CLEC commenters urge the Commission not to set the
    benchmark at "the ILEC rate" because they claim that CLECs structure
    their service offerings differently than ILECs.[^125] We seek to
    preserve the flexibility which CLECs currently enjoy in setting
    their access rates. Thus, in contrast to our regulation of incumbent
    LECs, our benchmark rate for CLEC switched access does not require
    any particular rate elements or rate structure; for example, it does
    not dictate whether a CLEC must use flat-rate charges or per-minute
    charges, so long as the composite rate does not exceed the
    benchmark. Rather it is based on a per-minute cap for all interstate
    switched access service charges. In this regard, there are certain
    basic services that make up interstate switched access service
    offered by most carriers. Switched access service typically
    entails: (1) a connection between the caller and the local
    switch, (2) a connection between the LEC switch and the serving wire
    center (often referred to as "interoffice transport"), and (3) an
    entrance facility which connects the serving wire center and the
    long distance company's point of presence. Using traditional ILEC
    nomenclature, it appears that most CLECs seek compensation for the
    same basic elements, however precisely named: (1) common line
    charges; (2) local switching; and (3) transport.[^126] The only
    requirement is that the aggregate charge for these services, however
    described in their tariffs, cannot exceed our benchmark. In
    addition, by permitting CLECs to decide whether to tariff within the
    safe harbor or to negotiate terms for their services, we allow CLECs
    additional flexibility in setting their rates and the amount that
    they receive for their access services.

56. We will apply the benchmark for both originating and terminating
    access charges. That is, it will apply to tariffs for both
    categories of service, including to toll-free, 8YY traffic, and will
    decline toward the rate of the competing ILEC for each category of
    service. We note, however, that shortly before the issuance of this
    order, AT&T raised questions regarding the application of our
    benchmark to originating 8YY traffic generated by CLEC
    customers.[^127] Because these issues arose so late in the
    proceeding, and because of the sparse record on them, we decline to
    do as AT&T suggests and immediately detariff this category of CLEC
    services above the rate of the competing ILEC. Instead, in this
    order, we solicit comment on the issues AT&T has raised so that we
    may decide them on an adequately developed record.[^128]

57. Our benchmark mechanism may create the possibility for carriers with
    lower rates to raise their rates to the benchmark. We seek to avoid
    this result, which could have the consequence of *increasing* the
    amount that IXCs pay for some CLECs' access service. This, in turn,
    would again allow these CLECs to shift a portion of their costs onto
    the long distance market generally. Accordingly, we further restrict
    the tariff benchmark that may be charged to a particular IXC by
    tariff to the lower of: (1) the 2.5 figure, declining as discussed
    above, or (2) the lowest rate that a CLEC has tariffed for access,
    during the 6 months immediately preceding the effective date of
    these rules. Any rate above this level (unless it is still below the
    competing ILEC's rate) will be conclusively deemed to be
    unreasonable in any proceeding challenging the rate.[^129] By
    restricting CLECs to no more than the access rates they previously
    have chosen to tariff, we minimize the opportunities for arbitrage
    that grow out of the rule we adopt today. Additionally, we expect
    that our benchmark rule will have no effect on negotiated contracts,
    under which CLECs have chosen to charge even more favorable access
    rates to particular IXCs.[^130] Rather, these contracts will remain
    in place and the participating IXCs will continue to be entitled to
    any lower access rates for which they provide.

58. We also find that it is prudent to permit CLECs to tariff the
    benchmark rate for their access services only in the markets where
    they have operations that are actually serving end-user customers on
    the effective date of these rules. As we note above, the historical
    ability of CLECs to tariff access rates well above the prevailing
    ILEC rate may have contributed to economically inefficient market
    entry by certain CLECs. We intend the declining benchmark scheme to
    wean competitive carriers off of their dependence on tariffed,
    supra-ILEC access rates without the disruption of a flash-cut to the
    prevailing market rate. We therefore think it important to ensure
    that this transitional mechanism serves that purpose, rather than
    presenting CLECs with the opportunity to enter additional markets in
    a potentially inefficient manner through reliance on tariffed access
    rates above those of the competing ILEC. Accordingly, we restrict
    the availability of the transitional benchmark rate to those
    metropolitan statistical areas (MSAs) in which CLECs are actually
    serving end users on the effective date of these rules. In MSAs
    where they begin serving end users *after* the effective date of
    these rules, we permit CLECs to tariff rates only equivalent to
    those of the competing ILEC; they will have to achieve rates above
    this level by negotiation.

59. We recognize that the benchmark we adopt may dramatically reduce the
    tariffed access rates and revenues of many CLECs, particularly as
    the benchmark levels transition down over time. We conclude,
    however, that this reduction is warranted. As discussed above, we
    are concerned that numerous CLECs have been entering the
    access-service market at rates well above the prevailing rate
    charged by the incumbent.[^131] Moreover, we are troubled by
    indications that CLECs are using these high access rates to shift a
    substantial portion of their start-up costs onto the long distance
    market and thus onto many subscribers who have chosen an access
    provider with lower rates. As the CLEC industry's market share
    continues to grow, this burden would only increase, absent some
    constraint on rates. We have noted that CLECs' ability to charge
    rates above the incumbent's appears to be due largely to the
    configuration of the access-service market and the geographical rate
    averaging required of the IXCs, both of which prevent market forces
    from disciplining rates. Our benchmark system will drive CLEC rates
    down toward the level charged by the ILECs, thereby bringing them
    toward the model of a competitive market, in which new entrants can
    successfully enter only at or below the prevailing market price. In
    so doing, the rules we adopt today reduce the opportunity for
    strategic use of the tariff system to impose unreasonable rates that
    are not subject to effective competition.

60. At the same time, we believe that our benchmark mechanism may
    actually result in increased access revenues for many CLECs. Many
    IXCs disputing the reasonableness of CLEC access rates have either
    been paying only the ILEC rate or have refused payment altogether.
    For these CLECs, our approach should provide greater certainty, and
    a more reliable stream of revenue, because we conclude that CLEC
    access rates will be conclusively deemed reasonable if they fall
    within the safe harbor that we have established. Accordingly, an IXC
    that refused payment of tariffed rates within the safe harbor would
    be subject to suit on the tariff in the appropriate federal district
    court, without the impediment of a primary jurisdiction referral to
    this Commission to determine the reasonableness of the rate.
    Similarly, because of the conclusive presumption of reasonableness
    that we will accord to tariffed rates at or below the benchmark, a
    CLEC with qualifying rates will not be subject to a section 208
    complaint challenging its rates.

61. We expect that some IXC participants in this proceeding will find
    fault with our ruling because it does not immediately reduce CLEC
    access charges to the rates charged by incumbent LECs. It is true
    that, for the three-year phase-in period, many tariffed CLEC access
    rates will continue to exceed the prevailing market price charged by
    the ILEC. However, by limiting tariffed rates to our benchmark, we
    have immediately provided IXCs with relief from the substantially
    higher rates that many CLECs have been tariffing. In addition to the
    immediate relief on access charges that the benchmark mechanism
    affords IXCs, it also ensures that CLEC access rates will continue
    to decline until they reach the level of the ILEC rates. In setting
    the benchmark, we have adopted, on a prospective basis and over the
    long run, the IXCs' argument that the reasonable rate for CLEC
    access service is the rate that the ILECs are charging for similar
    service in the market. We decline, however, immediately to drop the
    CLEC rate to that point.

62. This type of transitional mechanism is vitally important to avoid
    too great of a dislocation in the CLEC segment of the industry. As
    noted above, the Commission has taken a broad variety of steps to
    ensure the development of local competition in keeping with the
    explicit goals of the 1996 Act. Avoiding unnecessary damage to this
    growing competition, as likely would result from an immediate
    transition to the ILEC rate, is consistent with our approach in
    other proceedings, such as the reform of reciprocal compensation
    that we recently adopted, in which we have sought to reduce the
    opportunity for regulatory arbitrage but have nevertheless provided
    a transition mechanism to prevent too great of a revenue shock to a
    particular group of carriers.[^132] This transition period is
    necessary to permit CLECs to adjust their business plans and obtain
    alternative sources for the substantial revenues of which the
    benchmark will deprive them -- revenues on which they have
    previously relied in formulating their business plans because they
    were not held to the regulatory standards imposed on ILECs.

63. Again, we emphasize that we adopt this benchmark approach on an
    *interim* basis. Concurrent with our adoption of this order, we
    initiate a proceeding in which we will broadly examine various
    categories of existing intercarrier compensation regimes and seek
    comment on whether these existing rules lead to efficient usage of,
    and investment in, network infrastructure, or to the efficient
    development of competition.[^133] In that proceeding, we seek
    comment on whether alternative rules for access charges might limit
    the ability of LECs, including CLECs, to exercise market power in
    their provision of access service.

## Safe Harbor Rates for Rural CLECs

64. Limiting CLECs to the higher of the benchmark rate or the access
    rate of its ILEC competitor could prove rather harsh for some of the
    small number of CLECs that operate in rural areas.[^134] The
    difficulty would likely arise for those CLECs that operate in a
    rural area served by a price-cap incumbent with state-wide
    operations. Our rules require such ILECs to geographically average
    their access rates.[^135] This regulatory requirement causes these
    "non-rural ILECs" effectively to use their low-cost, urban and
    suburban operations to subsidize their higher cost, rural
    operations, with the effect that their state-wide averaged access
    rates recover only a portion of the ILEC's regulated costs for
    providing access service to the rural portions of its study area.
    During the course of this proceeding, we became concerned that tying
    the access rates of rural CLECs to those of such non-rural ILECs
    could unfairly disadvantage CLECs that lacked urban operations with
    which they could similarly subsidize their service to rural areas.
    Accordingly, we sought comment on whether the phenomenon of the
    non-rural ILEC justified the creation of a "rural exemption" to our
    benchmark scheme and, if so, how that exemption should be
    structured.[^136]

### Whether to Create a Rural Exemption

65. We conclude that the record supports the creation of a rural
    exemption to permit rural CLECs competing with non-rural ILECs to
    charge access rates above those charged by the competing ILEC.
    First, we note that such a device is consistent with the
    Commission's obligations, under section 254(d)(3) of the Act and
    section 706 of the 1996 Act, to encourage the deployment to rural
    areas of the infrastructure necessary to support advanced
    telecommunications services and of the services themselves.[^137]
    The record indicates that CLECs often are more likely to deploy in
    rural areas the new facilities capable of supporting advanced
    calling features and advanced telecommunications services than are
    non-rural ILECs, which are more likely first to deploy such
    facilities in their more concentrated, urban markets.[^138] Given
    the role that CLECs appear likely to play in bringing the benefits
    of new technologies to rural areas, we are reluctant to limit
    unnecessarily their spread by restricting them to the access rates
    of non-rural ILECs.

66. We are persuaded by the CLEC comments indicating that they
    experience much higher costs, particularly loop costs, when serving
    a rural area with a diffuse customer base than they do when serving
    a more concentrated urban or suburban area.[^139] The CLECs argue
    that, lacking the lower-cost urban operations that non-rural ILECs
    can use to subsidize their rural operations, the CLECs should be
    permitted to charge more for access service, as do the small rural
    incumbents that charge the National Exchange Carrier Association
    (NECA) schedule rates.[^140] We note in this regard that a rural
    exemption will also create parity between the rural CLECs competing
    with NECA carriers and those competing with non-rural ILECs.

67. In adopting the rural exemption, we reject the characterization of
    the exemption as an implicit subsidy of rural CLEC operations.[^141]
    It is true that an exemption scheme will permit rural CLECs to
    charge IXCs more for access to their end-user customers than was
    charged by the non-rural ILECs from whom the CLECs captured their
    customers. But that does not necessarily justify limiting the rural
    CLEC to the access rates of the non-rural ILEC. The same increase in
    access rates would occur if, rather than entering an area as a
    competitive carrier, a small local-service provider were to purchase
    a rural exchange and thus become the rural ILEC serving the end
    users in that exchange.[^142] In that event, the IXC's cost for
    access to the exchange's end users would also increase, as the new
    ILEC likely would charge either NECA schedule rates or conduct a
    cost study to support its own access rates, and our rules would
    permit either outcome. This analysis leads us to conclude that the
    exemption we adopt today is not properly viewed as an implicit
    subsidy of rural CLEC operations. Instead, it merely deprives IXCs
    of the implicit subsidy for access to certain rural customers that
    has arisen from the fact that non-rural ILECs average their access
    rates across their state-wide study areas.

68. Our level of comfort in creating a rural exemption is markedly
    increased by the fact that the record indicates it likely will apply
    to a small number of carriers serving a tiny portion of the nation's
    access lines. The Rural Independent Competitive Alliance (RICA)
    asserts that, fewer than 100,000 access lines are served by carriers
    falling in the definition that it proffers for a rural CLEC.[^143]
    This number is entirely overwhelmed by the approximately 192 million
    access lines reported by the Commission in its last report on local
    telephone competition.[^144] Indeed, this figure for rural CLECs'
    customers amounts to substantially less than one percent of the 12.7
    million lines served by CLECs.[^145] We acknowledge that the
    definition for a rural CLEC that we adopt below is somewhat broader
    than that proposed by RICA.[^146] It nevertheless appears likely to
    encompass only a small number of the overall total of CLEC end
    users.

69. We reject AT&T's argument that CLECs must rely solely on the *CALLS
    Order*'s interstate access support when entering the territories of
    non-rural ILECs. The *CALLS Order*'s \$650 million portable
    universal service support mechanism represented the amount necessary
    to compensate participating ILECs for the subsidies that the order
    removed from their access revenues. This interstate access support
    mechanism is portable, but that does not necessarily indicate that
    it fully reflects the costs (above those recovered through ILEC
    access rates) that a rural CLEC would encounter in serving customers
    in the high-cost areas for which the subsidy is available. For
    example, we note that a CLEC entering the territory of a non-rural
    ILEC likely would not enjoy the economies of scope and scale that
    the ILEC does in the same territory.

70. We are also skeptical of AT&T's assertions about the incentives that
    would flow from a rural exemption. First, AT&T argues that the
    exemption would "create perverse incentives for uneconomic
    competitive entry by CLECs in any 'rural' areas in which it might be
    applicable."[^147] It appears from the record that both AT&T and
    Sprint have routinely been paying for CLEC access billed at the rate
    charged by the competing incumbent. If AT&T were accurate in its
    projection about higher access rates spurring a rash of uneconomic
    market entry in rural areas, such uneconomic entry should already
    have occurred in the territories of the rural incumbent carriers
    that charge the higher NECA rates. However, the record fails to
    indicate such a trend. Additionally, we note WorldCom's assertion
    that geographically variable rates will create the incentive for
    CLECs to make it appear, through "foreign exchange type offerings,"
    as if their end users were located in rural areas when they are
    not.[^148] Here again, it appears that this incentive already has
    existed for any CLECs that choose to compete with NECA carriers and
    that consequently would receive the equivalent of NECA rates from
    Sprint and AT&T. However, the record discloses no significant
    attempt by CLECs to collect high charges for access to end users
    that are actually located outside of the NECA carriers' territory.

71. We are similarly unpersuaded by AT&T's argument that a rural
    exemption will cause a proliferation of chat line providers in the
    territories served by rural CLECs. We recognize that AT&T has
    alleged that, in certain circumstances, it violates the Act for a
    LEC with relatively high access rates (such as a NECA carrier) to
    serve a chat line provider as a means of increasing the LEC's access
    traffic.[^149] It appears that the conduct that AT&T challenges in
    these proceedings grows out of the arbitrage opportunity created by
    the higher access rates charged by rural NECA carriers. However, we
    are skeptical that the rural exemption that we create today will add
    markedly to AT&T's problem in this regard. The FCC recently reported
    that non-price cap incumbent carriers served in excess of 12 million
    lines in the U.S.[^150] The bulk of these carriers either charge
    NECA access rates or something similar. Adding less than one percent
    to the number of rural lines eligible for higher access rates seems
    highly unlikely to increase dramatically the arbitrage opportunities
    involving chat line providers.

72. Furthermore, as we have noted previously, the mechanism that we
    implement today serves as only a transitional solution to a portion
    of the much larger question of inter-carrier compensation. We are
    examining the broader questions of inter-carrier compensation
    through a notice of proposed rulemaking. Additionally, the
    Commission currently has before it the Multi-Association Group (MAG)
    Plan, which has as one of its goals the reduction of rural ILECs\'
    access charges.[^151] Below, we tie the rates for rural CLECs to the
    NECA rates charged by rural ILECs. Accordingly, as our access reform
    efforts for rate-of-return carriers and our other efforts on
    inter-carrier compensation bring down the access rates of rural
    ILECs, any opportunities for arbitrage growing out of the exemption
    for rural CLECs will also diminish.

73. We thus conclude that the record supports the creation of a rural
    exemption to the benchmark scheme that we adopt for CLEC access
    charges. Under this exemption, a CLEC that is operating in a rural
    area, as defined below, and that is competing against a non-rural
    ILEC may tariff access rates equivalent to those of NECA carriers.
    Below we discuss more precisely the CLECs to which this exemption
    will be available and the access rates that they may impose by
    tariff.

### Carriers Eligible for Rural Exemption

74. In response to our public notice inquiring about the potential of
    the rural exemption from our benchmark scheme, we received a variety
    of suggested structures. CTSI and BayRing assert that the
    exemption's higher access rates should be available on an
    end-user-by-end-user basis for all customers living outside of
    density zone 1 of the nation's top 50 metropolitan statistical areas
    (MSAs), a standard that would open the exemption to a far broader
    range of carriers than we think is necessary to promote competitive
    entrants in truly rural areas.[^152] As Sprint notes, this
    definition of rural would "include metropolitan areas having
    populations of up to 958,000, and would include such sizable cities
    as Honolulu, Tucson, Tulsa, Omaha, and Albuquerque."[^153] At the
    other extreme, Sprint argues that the exemption should be available
    to a CLEC that serves both business and residential customers and
    that operates exclusively outside of any MSA.[^154] As some
    commenters assert, this definition may be overly exclusive because
    MSAs typically include the full area of the counties contiguous with
    the central population center, and, especially in the case of larger
    counties, may therefore include substantial areas that are
    undeniably rural.

75. Administrative simplicity is an important consideration in our
    choice of a way to define rural CLECs. Thus, we conclude that the
    availability of the exemption (and the higher access rates that come
    with it) should be determined based on the CLEC's entire service
    area, not on a subscriber-by-subscriber basis. Similarly, we are
    concerned that the definition rely on objectively available
    information that will not require extensive calculation or analysis
    by either carriers or this Commission. For example, many comments
    suggest that, at bottom, density is the factor that should determine
    whether an area qualifies as rural; it is the factor that reflects a
    LEC's loop lengths and, not surprisingly, the number of potential
    subscribers in an area. The factors of longer loop length and lower
    concentration of potential subscribers are, in turn, what motivate
    us to permit higher access rates in rural areas. However, our
    concern with objectivity leads us to conclude that rural CLECs
    should not be defined explicitly by the population density in their
    service areas because density figures for the irregular areas likely
    to be served by CLECs -- areas that typically will not correspond to
    state or municipal boundaries or to Census Bureau divisions -- are
    not readily available.

76. We conclude that the rural exemption to our benchmark limitation on
    access charges will be available for a CLEC competing with a
    non-rural ILEC, where no portion of the CLEC's service area falls
    within: (1) any incorporated place of 50,000 inhabitants or more,
    based on the most recently available population statistics of the
    Census Bureau or (2) an urbanized area, as defined by the Census
    Bureau.[^155] Thus, if any portion of a CLEC's access traffic
    originates from or terminates to end users located within either of
    these two types of areas, the carrier will be ineligible for the
    rural exemption to our benchmark rule. Relying on information that
    is readily and publicly available, this definition excludes from the
    exemption those CLECs operating within reasonably dense areas that
    are not typically considered to be rural. It does not, however,
    exclude from eligibility entire counties that border high population
    areas, as would a definition based on MSAs.

77. Sprint has raised the issue of how best to ensure that the rural
    exemption does not create the potential for abuse and that it is
    restricted to CLECs that are serving rural end users.[^156] Thus,
    Sprint is concerned about the potential for competitive carriers,
    with some qualifying end users, creating two separate operating
    entities so that the one serving rural end users could tariff the
    higher access rate permitted under the exemption. While we want to
    forestall that strategy for exploiting our rule, we also realize
    that certain incumbents with urban (or non-rural) operations may
    choose to enter adjacent rural markets as a competitive carrier. To
    the extent that such carriers provide the benefit of competition in
    rural markets, their non-qualifying incumbent operations should not
    operate entirely to deny them the benefit of the rural exemption.
    Accordingly, we decline Sprint's invitation to examine all of the
    subsidiary operations of a holding company in order to determine the
    applicability of the rural exemption. We expect that we will be able
    to address, on a case-by-case basis, the improper exploitation of
    our rule -- such as a competitive carrier's splitting itself into
    two subsidiaries to qualify, in part, for the exemption rates where
    it would not otherwise do so.

78. Our definition for rural CLECs closely resembles the first major
    division of the Act's definition for rural telephone
    companies.[^157] It departs from the remaining three major divisions
    of the definition either because they would be administratively
    burdensome, or because they would be overly inclusive or irrational
    when applied solely to CLECs.[^158] Our definition adopts 50,000,
    rather than 10,000, as the population cut-off for incorporated
    places because we are concerned that, without the statute's
    remaining three portions of the definition as a way for a company to
    attain rural status, the 10,000-person threshold would be unduly
    restrictive and deny the exemption to companies operating in areas
    that would generally be viewed as rural.

79. It is also necessary to discuss briefly the type of carrier with
    which a CLEC must be competing in order to qualify for the rural
    exemption. Our intent is that this exemption will permit a CLEC to
    tariff access rates above the competing ILEC's only when the
    competing ILEC has broad-based operations that include concentrated,
    urban areas that allow it to subsidize its rural operations and
    therefore charge an artificially low rate for access to its rural
    customers. We conclude that the most effective and objective means
    of accomplishing this is to allow the rural exemption only to those
    CLECs that are competing with price-cap ILECs that do not qualify as
    "rural telephone companies" under the Act's definition.[^159] Those
    CLECs competing with carriers that qualify as rural under the Act's
    definition are excluded from the rural exemption and are therefore
    limited, under the rule we announce above, to tariffing access rates
    equal only to those of the competing ILEC.

### Rate for Exemption Carriers

80. The final question with respect to the rural exemption is what the
    access service benchmark is for those carriers that qualify. We
    adopt the NECA tariff for switched access service as the standard
    that is the most appropriately reflective of the considerations that
    should go into pricing the access service of rural CLECs.
    Accordingly, qualifying rural CLECs may tariff rates at the level of
    those in the NECA access tariff, assuming the highest rate band for
    local switching and the transport interconnection charge, *minus*
    the tariff's carrier common line (CCL) charge if the competing ILEC
    is subject to our *CALLS Order*. Above this benchmark, rural CLECs
    will be mandatorily detariffed in their provision of access
    services.

81. We adopt the NECA access rate because it is tariffed on a regular
    basis and is routinely updated to reflect factors relevant to
    pricing rural carriers' access service. We choose the highest rate
    bands for the two variable rate elements because the opportunity to
    tariff those rates will most effectively spur the development of
    local-service competition in the nation's rural markets and because
    the burden created by choosing the highest rate will be relatively
    minor, owing to the small number of carriers involved. We deny rural
    CLECs the NECA tariff's CCL charge when they compete with a *CALLS*
    ILEC because the price-cap LECs' CCL charge has been largely
    eliminated through implementation of higher subscriber line charge
    (SLC) caps and the multi-line business PICC. CLECs competing with
    *CALLS* ILECs are free to build into their end-user rates a
    component approximately equivalent to (or slightly below) the ILEC's
    SLC, as well as assessing IXCs a multi-line business PICC. These
    potential revenue sources obviate the need for a CCL charge, which
    NECA carriers use to recover loop costs that cannot be recovered
    because of their lower SLC caps and the absence of PICCs.

## Forbearance Analysis for Rates Above the Benchmark

82. As previously indicated, we conclude that a CLEC must negotiate with
    an IXC to reach a contractual agreement before it can charge that
    IXC access rates above the benchmark. During the pendency of these
    negotiations, or to the extent the parties cannot agree, the CLEC
    may charge the IXC only the benchmark rate. In order to implement
    this approach, we adopt mandatory detariffing for access rates in
    excess of the benchmark. That is, we exercise our statutory
    authority to forbear from the enforcement of our tariff rules and
    the Act's tariff requirements for CLEC access services priced above
    our benchmark.[^160]

83. Section 10 of the Act requires, *inter alia*, that the Commission
    forbear from applying any regulation or provision of the Act to
    telecommunications carriers or telecommunications services, or
    classes thereof, if the Commission determines that certain statutory
    conditions are satisfied.[^161] Because section 10 permits us to
    exercise our forbearance authority with respect to classes of
    services, we conduct a forbearance analysis only for those CLEC
    interstate access services for which the aggregate charges exceed
    our benchmark. For this class of services, we conclude that the
    section 10 forbearance criteria are satisfied; accordingly, we must
    take action pursuant to the terms of this statute.

84. Under the first criterion for forbearance, we examine whether our
    tariff filing requirements for CLEC interstate access services
    priced above the benchmark are necessary to ensure that rates for
    these services are just and reasonable and not unreasonably
    discriminatory.[^162] We conclude they are not. As noted above,
    CLECs are positioned to wield market power with respect to access
    service. Requiring CLECs to negotiate with their IXC customers in
    order to obtain access rates above the benchmark will limit the
    CLECs' ability to exercise this market power and unilaterally impose
    rates above the level that we have found to be presumptively
    reasonable.

85. We are not persuaded by CLEC commenters that contend they will be
    unable to negotiate agreements with IXCs because IXCs wield
    significant market power in the purchase of access services. We find
    these claims of IXC monopsony power unsupported in the record. We
    note that three major IXCs are purchasers in the market for access
    services, and numerous smaller players also purchase LEC access
    services. Moreover, we note that our tariff rules were historically
    intended to protect purchasers of services from monopoly providers,
    not to protect sellers from monopsony purchasing power. We conclude
    that other remedies, like those under the antitrust laws, are
    available to protect CLECs from the exploitation of any monopsony
    power that IXCs may possess.[^163]

86. Under the second forbearance criterion, we must determine whether
    tariffing of CLEC access charges above the benchmark is necessary to
    protect consumers.[^164] Such tariffing is not necessary to ensure
    that consumer rates are just and reasonable. To the contrary,
    requiring negotiation of access rates above the benchmark will
    provide greater assurance that the rates are just and reasonable and
    will likely prevent CLECs from using long distance ratepayers to
    subsidize their operational and build-out expenses. It is possible
    that the reduction of CLEC access revenue caused by the benchmark
    scheme will increase the rates CLECs charge their end users.
    However, all CLEC end users have competitive alternative service
    providers, in the form of regulated incumbents. We are therefore not
    concerned that any increase in CLEC end-user rates will unduly harm
    consumers. To the extent that this provision requires us to examine
    the effect on the IXC consumers of CLEC access services, mandatory
    detariffing likely will protect that group by removing the CLEC\'s
    ability unilaterally to impose excessive rates through the tariff
    process.

87. The third forbearance criterion requires that we determine whether
    mandatory detariffing of CLEC access services priced above the
    benchmark is consistent with the public interest and, in particular,
    whether it will promote competitive market conditions.[^165] We
    conclude, as discussed above, that adopting mandatory detariffing
    for access rates in excess of the safe harbor limit will subject to
    negotiation between two willing parties any access services offered
    at a rate above the benchmark. The negotiation-driven approach that
    we adopt will provide a better mechanism for IXCs to control costs,
    since they will not be subject to tariffs with unilaterally
    established rates at excessive levels. In addition, our benchmark
    system, with its presumption that qualifying rates are reasonable,
    will provide greater certainty for CLECs that they will receive full
    compensation for the access services that they provide. By limiting
    a CLEC's ability to shift its start-up costs onto the long-distance
    market, our benchmark approach will restrict market entry to the
    efficient providers. Accordingly, mandatory detariffing of CLEC
    access services above the benchmark fulfills all three of the
    criteria for forbearance.

# Interconnection Obligations

88. Although we have created a safe harbor for CLEC access rates, within
    which they will be presumed to be just and reasonable, the question
    remains of whether and under what circumstances an IXC can decline
    to provide service to the end users of a CLEC. In this proceeding,
    we sought comment on whether either section 201(a) or section 251(a)
    prohibit an IXC from declining to serve the customers of a CLEC
    because the IXC believes that the CLEC's access rates are too high.
    We also sought comment on whether an IXC must first obtain section
    214 approval from the Commission before terminating service to CLEC
    customers.

89. Below, we conclude that section 201(a)'s requirement that a carrier
    provide communications service upon reasonable request obligates
    IXCs to serve the end users of a CLEC that is charging rates at or
    below the benchmark when the IXC is also serving the customers of
    other LECs in the same geographic area. We are optimistic that our
    conclusions in this regard will maintain the benefits of a seamless,
    interconnected public telephone network. Given the structure of the
    rules that we adopt, we need not address the applicability of
    section 214.

## Interconnection and Sections 201 and 251

90. Section 201(a) of the Communications Act states that it is "the duty
    of every common carrier engaged in interstate or foreign
    communication . . . to furnish such communication service upon
    reasonable request therefor."[^166] It also requires that common
    carriers establish physical connection with other carriers where,
    after the opportunity for a hearing, the Commission has found such
    action "necessary or desirable in the public interest."[^167]
    Similarly, section 251(a)(1) of the Communications Act requires all
    telecommunications carriers to interconnect directly or indirectly
    with each other.[^168]

91. CLECs contend that sections 201(a) and 251(a)(1) require IXCs to
    accept all originating, and deliver all terminating, access traffic
    and to comply with all reasonable requests for
    interconnection.[^169] IXCs, on the other hand, contend that a
    carrier's decision whether to interconnect is a matter of business
    judgment that is not subject to section 201(a).[^170] They further
    argue that section 251(a)(1) only obligates a carrier physically to
    interconnect with the facilities of other carriers and does not
    require the acceptance or delivery of access traffic.[^171]

92. We are generally persuaded by the IXCs' arguments. Sections 201(a)
    and 251(a)(1) do not expressly require IXCs to accept traffic from,
    and terminate traffic to, all CLECs, regardless of their access
    rates. In the *Local Competition Order*, the Commission found that a
    section 251(a)(1) duty to interconnect, directly or indirectly, is
    central to the Communications Act and achieves important policy
    objectives.[^172] However, the Commission construed the statute to
    require only the physical linking of networks, not to impose
    obligations relating to the transport and termination of
    traffic.[^173] Section 201 empowers the Commission, after a hearing
    and a determination of the public interest, to order the physical
    connection of networks and to establish routes and charges for
    certain communications. This also falls short of creating the
    blanket duty that the CLECs seek to impose on the IXCs to accept all
    access service, regardless of the rate at which it is offered.
    Certainly, we have made no finding that the public interest dictates
    such broad acceptance of access service, whatever its price.
    Nevertheless, we conclude that section 201(a) places certain
    limitations on an IXC's ability to refuse CLEC access service.

93. We agree that universal connectivity is an important policy goal
    that our rules should continue to promote. The public has come to
    value and expect the ubiquity of the nation's telecommunications
    network. Accordingly, any solution to the current problem that
    allows IXCs unilaterally and without restriction to refuse to
    terminate calls or indiscriminately to pick and choose which traffic
    they will deliver would result in substantial confusion for
    consumers, would fundamentally disrupt the workings of the public
    switched telephone network, and would harm universal service.[^174]

94. We therefore conclude that an IXC that refuses to provide service to
    an end user of a CLEC charging rates within the safe harbor, while
    serving the customers of other LECs within the same geographic area,
    would violate section 201(a). That section imposes on common
    carriers the obligation to furnish communication service "upon
    reasonable request therefor." As set out above, we will conclusively
    presume that a CLEC's access rates are reasonable if they fall at or
    below the benchmark that we establish herein. When an IXC's end-user
    customer attempts to place a call either from or to a local access
    line, that customer makes a request for communication service --
    from the originating LEC, the IXC and the terminating LEC. When that
    customer attempts to call from and/or to an access line served by a
    CLEC with presumptively reasonable rates, that request for
    communications service is a reasonable one that the IXC may not
    refuse without running afoul of section 201(a).[^175] This
    obligation may be enforced through a section 208 complaint before
    the Commission.[^176]

## Section 214 and Discontinuance of Service

95. Section 214 of the Communications Act and section 63.71 of the
    Commission's rules govern an IXC's withdrawal of service. Section
    214 of the Communications Act provides, in relevant part, that
    "\[n\]o carrier shall discontinue, reduce, or impair service to a
    community, or part of a community, unless and until there shall
    first have been obtained from the Commission a certificate that
    neither the present nor future public convenience and necessity will
    be adversely affected thereby."[^177] In light of the solution we
    adopt herein, we need not address the application of either section
    214 or our rule 63.17.

96. Above, we conclude that it would be a violation of section 201(a)
    for an IXC to refuse CLEC access service, either terminating or
    originating, where the CLEC has tariffed access rates within our
    safe harbor and, in the case of originating access, where the IXC is
    already providing service to other members in the same geographical
    area. Since section 201(a) already prohibits such a withdrawal of
    service, we need not address the question of whether section 214
    applies to an IXC that finds itself in that position.

97. The remaining possible scenario to which section 214 might apply is
    that in which a CLEC wishes to charge access rates above our
    benchmark and an IXC will not agree to pay them. Under the rules we
    adopt today, a CLEC must charge the benchmark rate during the
    pendency of negotiations or if the parties cannot agree to a rate in
    excess of the benchmark. In either case, since the benchmark rate is
    conclusively presumed reasonable, an IXC cannot refuse to provide
    service to an end user served by the CLEC without violating
    section 201. Here again, we need not address the applicability of
    section 214.

# Further notice of proposed rulemaking

98. Shortly before we issued this item, AT&T asserted, for the first
    time in this proceeding, that CLEC originating 8YY, toll-free
    traffic should be subject to a different benchmark scheme than other
    categories of switched access traffic.[^178] AT&T argues that the
    benchmark for CLEC 8YY traffic should immediately move to the access
    rate of the competing ILEC and that CLECs should be mandatorily
    detariffed above that point.[^179] In support of this position, AT&T
    asserts that certain CLECs with higher access charges attempt to
    obtain as customers end users that typically generate high volumes
    of 8YY traffic, such as hotels and universities. AT&T further
    asserts that some CLECs then "install limited, high-capacity
    facilities designed only to handle 8YY traffic" and "share their
    access revenues with the customers generating the \[8YY\] traffic"
    through agreements that provide for payments to the end user based
    on the level of 8YY traffic it generates.[^180] AT&T contends that
    such arrangements do not promote the development of local exchange
    competition. Rather, it argues that these arrangements merely create
    the incentive for end users artificially to generate heavy 8YY
    traffic loads, which, in turn generate revenues for CLECs and their
    end-user customers.[^181]

99. Given the paucity of record evidence on this issue, we seek comment
    generally on AT&T's proposal immediately to benchmark CLEC 8YY
    access services to the ILEC rate. Is the generation of 8YY traffic
    in order to collect greater access charges, as AT&T complains,
    something that the Commission should attempt to address through a
    rulemaking, or should the IXCs be left to address specific instances
    of abuse directly with the relevant CLEC, with the aid of the
    Commission's complaint process where appropriate?[^182] In this
    regard, we note AT&T's assertion that one recent case of apparent
    abuse, confirmed by WorldCom, arose from the sequential dialing of
    over 800,000 8YY calls by a single end user.[^183] It appears that,
    even without the rule it now requests, AT&T may, through discussions
    with the relevant CLEC, have been able to act to prevent payment for
    improperly generated 8YY access minutes.

100. We seek comment on the magnitude of the potential problem with 8YY
     traffic that AT&T identifies. AT&T estimates that approximately 30%
     of its CLEC access traffic is generated by 8YY aggregators that, it
     speculates, have revenue-sharing agreements with their end-user
     subscribers.[^184] Is this an accurate figure across the industry?
     How many minutes and what premium over the competing ILEC rate does
     this represent? More generally, what proportion of CLEC access
     traffic is composed of originating 8YY service? What proportion of
     CLEC end users have 8YY revenue-sharing agreements with their
     carrier?

101. Are CLECs continuing to offer 8YY revenue-sharing agreements to
     their new end users, or are they currently available only to end
     users that negotiated them at some point in the past? Do CLECs
     notice a difference in the 8YY traffic patterns generated by end
     users with revenue-sharing agreements, compared to those end users
     without such agreements? What are the typical terms of a
     revenue-sharing agreement? Do they provide for payment of a
     per-minute fee for 8YY traffic, a per-call fee or some other
     arrangement? What is the magnitude of the fee paid? How, if at all,
     will the Commission's imposition of the switched-access benchmark
     affect CLECs' existing revenue-sharing agreements?

102. We are concerned that AT&T's proposed solution to the problem it
     identifies may paint with too broad of a brush. Does the existence
     of some CLECs' revenue-sharing agreements justify immediately
     limiting CLEC tariffed access rates for all 8YY traffic to the rate
     of the competing ILEC? Should the Commission instead impose such a
     limitation only on those CLECs that actually offer revenue-sharing
     agreements to their end users?

103. Additionally, we seek comment on AT&T's assertion that it promotes
     neither appropriate policy goals nor the development of local
     exchange competition when a CLEC carries an end user's 8YY traffic
     without also providing that end user with local exchange service or
     other types of access service.[^185] Would we be justified in
     immediately tying 8YY access tariffs to the ILEC rate for all
     CLECs, regardless of the services that they provide to their end
     users? Or would such a rule be appropriate, if at all, only for
     those CLECs that carry exclusively their end users' 8YY traffic?
     How does the presence or absence of revenue-sharing agreements,
     discussed above, fit into the analysis of whether a CLEC's service
     offerings support restricting their tariffed 8YY access rates to
     the competing ILEC's rate?

104. We question whether, at bottom, CLEC 8YY traffic is inherently
     worthy of lower access charges than are other types of access
     traffic. A CLEC provides a closely similar service and uses similar
     or identical facilities, regardless of whether it provides
     originating 8YY access service, or terminating or originating
     access service for conventional 1+ calls. Accordingly, we seek
     comment on whether the presence of certain incentives to generate
     artificially high levels of 8YY traffic necessarily justifies
     reducing the tariffed rate for all such traffic immediately to the
     ILEC rate. Should we instead presume that there exists some
     "legitimate" level of CLEC 8YY traffic that should be treated as
     other categories of access traffic and subject to a lower benchmark
     only the traffic that exceeds this "legitimate" level? If this is
     an appropriate alternative, how should we define the level at or
     below which 8YY access traffic may be subject to the higher tariff
     benchmark that we permit for other categories of CLEC access
     service? Additionally, we seek comment on any other reasons that
     CLEC 8YY traffic should be subjected to a different tariff
     benchmark than are other categories of CLEC access traffic. We also
     seek comment on whether, if we adopt a different benchmark for 8YY
     access services, there are any different tariff filing requirements
     or timetables that we might adopt to account for the resources
     available to small entities. Commenters should indicate whether and
     how such provisions would be consistent with our goals in this
     proceeding, including our obligation to ensure just and reasonable
     rates for interstate access services.

# Procedural Matters

## Paperwork Reduction Act

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

## Final Regulatory Flexibility Analysis

106. Number range level0Number range level1Number range level2Number
     range level3Number range level4Number range level5Number range
     level6Number range level7As required by the Regulatory Flexibility
     Act (RFA),[^186] an Initial Regulatory Flexibility Analysis (IRFA)
     was incorporated in the *Pricing Flexibility Order and Further
     Notice*.[^187] The Commission sought written comments on the
     proposals in the *Pricing Flexibility Order and Further Notice*,
     including the IRFA. The Commission's Final Regulatory Flexibility
     Analysis (FRFA) in this order conforms to the RFA, as
     amended.[^188]

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

107. With this order, we address a number of interrelated issues
     concerning charges for interstate switched access services provided
     by competitive local exchange carriers (CLECs) and the obligations
     of interexchange carriers (IXCs) to exchange access traffic with
     CLECs. In so doing, we seek to ensure, by the least intrusive means
     possible, that CLEC access charges are just and reasonable. We also
     seek to reduce regulatory arbitrage opportunities that previously
     have existed with respect to tariffed CLEC access services. This
     order is designed to spur more efficient local competition and to
     avoid disrupting the development of competition in the local
     telecommunications market.

108. We accomplish these goals by revising our tariff rules more closely
     to align tariffed CLEC access rates with those of the incumbent
     LECs. Under the detariffing regime we adopt, CLEC access rates that
     are at or below the benchmark that we set will be presumed to be
     just and reasonable and CLECs may impose them by tariff. Above the
     benchmark, CLEC access services will be mandatorily detariffed, so
     CLECs must negotiate higher rates with the IXCs. However, to avoid
     too great a disruption for competitive carriers (many of which may
     fall within the SBA's definition of a small entity), we implement
     this approach in a way that will cause CLEC tariffs to ramp down
     over time until they reach the level tariffed by the incumbent LEC.
     This mechanism will mimic the operation of the marketplace, as
     competitive LECs ultimately will have tariffed rates at or below
     the prevailing market price. At the same time, this approach
     maintains the ability of CLECs to negotiate access service
     arrangements with IXCs at any mutually agreed upon rate. In this
     order, we also make clear that an IXC's refusal to serve the
     customers of a CLEC that tariffs access rates within our safe
     harbor constitutes a violation of the duty of all common carriers
     to provide service upon reasonable request.

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

109. In the *Pricing Flexibility Order and Further Notice*, we sought
     comment on various, alternative proposals to prevent CLECs from
     charging unreasonable rates for their switched access services. In
     the IRFA, we tentatively concluded that the proposed rule changes
     would have no effect on the administrative burdens of competitive
     LECs because they would have no additional filing
     requirement.[^189] In response to the Notice, we received comments
     from more than 40 parties and held a series of ex parte meetings
     addressing these issues. Among those parties, only ALLTEL and the
     Rural Independent Competitive Alliance (RICA) commented
     specifically on the IRFA.[^190]

110. We disagree with ALLTEL's contention that the Commission\'s IRFA
     was incomplete.[^191] ALLTEL argues that the Commission, in the
     IRFA, did not adequately address: 1) proposals in the Notice that
     might affect originating access and "open-end" access services; 2)
     the potential burden on CLECs to modify their tariffs or to
     eliminate those tariffs and negotiate individual contracts;[^192]
     and 3) potential burdens on other carriers, such as ILECs (which,
     ALLTEL asserts, might have to modify their tariffs and perform cost
     studies). To the contrary, for several different reasons, we
     conclude that the IRFA gave adequate notice of our proposals to
     address CLEC access service. First, we chose to discuss, in the
     IRFA, the primary proposals set out in the Notice, though we sought
     comment in the Notice on a number of variations to those primary
     proposals. Thus, while the IRFA only expressly mentions proposals
     to address terminating access, it includes cross-references to the
     text of the Notice, which discusses all variations of the
     Commission's proposals.[^193] Moreover, we observe that the Notice
     and the IRFA were sufficient to generate a very sizable record,
     including comments from many competitive LECs that likely would be
     considered small businesses under the closest applicable SBA
     definition. The IRFA provided sufficient information so that the
     public could react to the Commission\'s proposals in an informed
     manner.[^194]

111. Second, with respect to the administrative burdens associated with
     our proposals in the Notice, we have reconsidered our tentative
     conclusion to adopt mandatory detariffing.[^195] We note that many
     commenters, large and small, oppose the Commission's proposal to
     adopt mandatory detariffing for all CLEC access services. These
     commenters, like ALLTEL, argue that while mandatory detariffing
     would reduce burdens associated with filing tariffs, it would
     increase administrative burdens overall by imposing greater
     transaction costs on CLECs and IXCs.[^196] Having received these
     almost unanimous comments, we conclude that we should not adopt our
     proposal to implement mandatory detariffing, at this time. Rather,
     we only adopt mandatory detariffing to the extent that a CLEC
     chooses to charge a rate that exceeds our defined benchmark. Under
     this approach, CLECs and IXCs -- both large and small -- will be
     able to continue to enjoy the benefits of a tariffed service.

112. Similarly, we take into account RICA's assertion that mandatory
     detariffing, as proposed, might cause particular hardship for CLECs
     operating in rural areas.[^197] Again, we have factored these
     comments into our decision to adopt a benchmark system, pursuant to
     which CLECs will continue to be permitted to file tariffs for their
     switched access services. Thus, we believe that our approach
     adequately addresses the concerns of these CLEC commenters.
     Moreover, we restate that our decision to detariff rates above the
     benchmark was motivated by our conclusion that rates above that
     level would be excessive (absent an agreement between the parties)
     and would place an inappropriate burden on IXCs and long distance
     customers.[^198] In this regard, we note that even the small CLECs
     covered by our RFA analysis are clearly prohibited by the Act and
     our rules from charging unjust or unreasonable rates.[^199] This
     order is designed to prevent such unjust or unreasonable rates.

113. Finally, we reject ALLTEL's assertion that the proposals in the
     Notice would place additional regulatory burden on ILECs. The
     proposals applied solely to CLECs and IXCs and we find ALLTEL's
     arguments to be unsupported in the record.[^200]

114. Although not responding specifically to the IRFA, many parties
     commented generally on the potential regulatory burdens associated
     with the Commission's various proposals. In brief, IXC commenters
     typically sought a mechanism to constrain CLEC access
     charges.[^201] In contrast, CLEC commenters typically sought to
     preserve their freedom to set access rates as they choose.[^202] We
     note that there are small entities on both sides of this debate. We
     encourage readers of this FRFA also to consult the complete text of
     this order, which describes in detail our analysis of the
     issues.[^203]

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

115. The RFA directs agencies to provide a description of and, where
     feasible, an estimate of the number of small entities that may be
     affected by the proposed rules, if adopted.[^204] Number range
     level0Number range level1Number range level2Number range
     level3Number range level4Number range level5Number range
     level6Number range level7To estimate the number of small entities
     that may be affected by the proposed rules, we first consider the
     statutory definition of \"small entity\" under the RFA. The RFA
     generally defines \"small entity\" as having the same meaning as
     the term \"small business,\" \"small organization,\" and \"small
     governmental jurisdiction.\"[^205] In addition, the term \"small
     business\" has the same meaning as the term \"small business
     concern\" under the Small Business Act, unless the Commission has
     developed one or more definitions that are appropriate to its
     activities.[^206] Under the Small Business Act, a \"small business
     concern\" is one that: (1) is independently owned and operated; (2)
     is not dominant in its field of operation; and (3) meets any
     additional criteria established by the SBA.[^207] The SBA has
     defined a small business for Standard Industrial Classification
     (SIC) categories 4812 (Radiotelephone Communications) and 4813
     (Telephone Communications, Except Radiotelephone) to be small
     entities when they have no more than 1,500 employees.[^208]

116. The rules adopted in this order apply to CLECs and IXCs. Neither
     the Commission nor the SBA has developed a definition of small
     CLECs or small IXCs. The closest applicable definition for these
     carrier-types under SBA rules is for telephone communications
     companies other than radiotelephone (wireless) companies.[^209] The
     most reliable source of information regarding the number of these
     carriers nationwide of which we are aware appears to be the data
     that telecommunications carriers file annually in connection with
     the Commission's universal services requirements.[^210] According
     to our most recent data, 349 companies reported that they were
     engaged in the provision of either competitive access services or
     competitive local exchange services (referred to collectively as
     CLECs) and 204 companies reported that they were engaged in the
     provision of interexchange services.[^211] Among these companies,
     we estimate that approximately 297 of the CLECs have 1500 or fewer
     employees and that approximately 163 of the IXCs have 1500 or fewer
     employees. Although it seems certain that some of these carriers
     are not independently owned and operated, we are unable at this
     time to estimate with greater precision the number of these
     carriers that would qualify as small business concerns under SBA\'s
     definition. Consequently, we estimate that there are 297 or fewer
     small CLECs, and 163 or fewer small IXCs that may be affected by
     the decisions and rules adopted in this order.

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

117. ALLTEL asserts that the Commission's proposals in the Notice "could
     require CLECs to modify their tariffs or to eliminate those tariffs
     and negotiate individual contracts."[^212] This argument was echoed
     by other commenters who assert that the Commission's proposal to
     adopt mandatory detariffing would increase carriers' transaction
     costs, even though tariff filing requirements would be
     eliminated.[^213] We acknowledge these concerns and have decided
     not to adopt mandatory detariffing for all CLEC switched access
     services, at this time.[^214]

118. Thus, pursuant to this order, we allow competitive LECs to continue
     to file tariffs, as long as the rates for those services are within
     the defined safe harbor. We recognize that many CLECs \-- we
     estimate between 100-150 CLECs \-- may be required to re-file their
     tariffs in order to comply with this order. Given that ALTS, an
     organization which represents many CLECs, has supported this
     proposal, we believe that any increased burden will be outweighed
     by the benefits associated with resolving these issues. Further, we
     conclude that it is a burden that is justified by the Act's
     requirement that all rates be just and reasonable. We are
     optimistic that this approach will provide a bright line rule that
     permits a simple determination as to whether CLEC access charges
     are just and reasonable and, at the same time, will enable both
     sellers and purchasers of CLEC access services to avail themselves
     of the convenience of a tariffed service offering. Thus, we believe
     that this approach should minimize reporting and recordkeeping
     requirements on IXCs and CLECs, including any small entities, while
     also providing carriers with considerable flexibility.

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

119. Through this order, we seek to resolve contentious issues that have
     arisen with respect to CLEC switched access services. Because there
     are both small entity IXCs and small entity CLECs -- often with
     conflicting interests in this proceeding \-- we expect that small
     entities will be affected by any approach that we adopt. As
     discussed below, we conclude that our approach best balances these
     goals by removing opportunities for regulatory arbitrage and
     minimizing the burdens placed on carriers.

120. In this order, we adopt a benchmark approach to CLEC access
     charges. We find that this approach will minimize the impact of the
     rules on small entities in several ways. First, it allows small
     business CLECs to continue to enjoy the convenience of offering a
     tariffed service, an advantage sought by CLECs, many of which may
     be relatively new and small businesses. Second, it will enable
     small IXCs to purchase most access services via tariff, rather than
     having to negotiate agreements with every CLEC. Finally, our
     approach ensures that IXCs will continue to accept and pay for CLEC
     switched access services, as long as the CLEC tariffs rates within
     the Commission's benchmarks.[^215] Many CLECs argued that such an
     outcome was essential for new, relatively small CLECs to continue
     to offer services.[^216]

121. In this order, we consider and reject several alternatives to the
     benchmark approach. In particular, we also considered: 1)
     continuing to rely on market forces to constrain CLEC switched
     access charges; 2) adopting a mandatory detariffing policy, which
     would prohibit CLECs from filing any tariffs for their switched
     access services; and, 3) subjecting CLECs to the panoply of
     regulation with which incumbents must comply.

122. Although many CLECs contend that the Commission need not take any
     particular action with respect to CLEC switched access charges, we
     disagree.[^217] We conclude that our action is compelled by several
     factors, including: 1) our desire to reduce regulatory arbitrage
     opportunities and to revise our rules to allow competitive market
     forces to constrain CLEC access charges; 2) growing evidence that
     CLEC switched access charges do not appear to be constrained by
     market forces; 3) significant concerns that allowing IXCs to refuse
     to exchange traffic without restriction may lead to a decline in
     the universal connectivity upon which telephone users have come to
     rely.

123. On the other hand, we do not impose mandatory detariffing for all
     CLEC switched access services because we believe that our benchmark
     approach will provide a less drastic alternative for carriers,
     including small entity CLECs and small entity IXCs.[^218] For
     example, by enabling CLECs to continue to file tariffs within a
     safe harbor range, we respond to concerns expressed by many CLECs
     that complete detariffing of CLEC services would cause
     significantly increased transaction costs. We note, as well, that
     many IXC commenters supported this solution.[^219]

124. We also conclude that our benchmark approach is more desirable than
     subjecting CLECs to the panoply of ILEC regulation. The Commission
     has long stated its desire to allow competitive forces to constrain
     access charges. By adopting a benchmark approach, we continue to
     allow CLECs to tariff their services, while ensuring IXCs and long
     distance customers, generally, that CLEC rates will be just and
     reasonable. We note that no commenter favors subjecting CLECs to
     dominant carrier regulation.[^220]

125. We also adopted a transition mechanism that should minimize the
     impact of the decision on all carriers, including small
     entities.[^221] While we considered adopting a benchmark that would
     immediately drop CLEC access rates to that level charged by the
     competing incumbent LEC, we instead implement the benchmark through
     a three-year transition. This will allow CLECs, including any small
     businesses, a period of flexibility during which they can conform
     their business models to the new market paradigm that we adopt,
     herein. At the same time, by effecting significant reductions in
     switched access charges immediately, we will minimize the impact
     that excessive access rates might have on IXCs, including any small
     businesses. We believe that this transition should significantly
     reduce the impact of this order on small businesses.

126. In addition, by clarifying rules for the transport and origination
     of traffic between CLECs and IXCs, this order should continue to
     ensure the ubiquity of a fully interconnected telecommunications
     network that consumers have come to expect.[^222] We considered
     counter-proposals from some carriers that there should be no
     obligation to exchange traffic;[^223] however, we believe that our
     approach will best satisfy the expectations of end users who have
     come to rely on a seamless, fully-interconnected telephone network.
     Further, these rules should provide considerable assurance to
     CLECs, many of which may be small businesses, that seek to offer
     their customers access to the broadest range of IXCs possible. Many
     of these CLECs asserted that, without such a rule, larger, more
     established IXCs likely would refuse to exchange traffic with them,
     essentially driving them out of business.[^224] Our rules should
     address this concern by requiring IXCs to exchange traffic with
     CLECs that tariff rates within the benchmark, where IXCs already
     exchange traffic with other carriers in the same geographic area.

127. Overall, we believe that this order best balances the competing
     goals that we have for our rules governing CLEC switched access
     charges. We have not identified any additional alternatives that
     would have further limited the impact on small entities
     across-the-board while remaining consistent with Congress'
     pro-competitive objectives set out in the 1996 Act.

128. [Report to Congress]{.underline}: The Commission will send a copy
     of the *CLEC Access Charge Reform Order*, including this FRFA, in a
     report to be sent to Congress pursuant to the Congressional Review
     Act. *See* 5 U.S.C. § 801(a)(1)(A). In addition, the Commission
     will send a copy of this *CLEC Access Charge Reform Order*,
     including FRFA, to the Chief Counsel for Advocacy of the Small
     Business Administration. A copy of the *CLEC Access Charge Reform
     Order* and FRFA (or summaries thereof) will also be published in
     the Federal Register. *See* 5 U.S.C. § 604(b).

## Initial Regulatory Flexibility Analysis

129. Number range level0Number range level1Number range level2Number
     range level3Number range level4Number range level5Number range
     level6Number range level7As required by the Regulatory Flexibility
     Act (RFA),[^225] the Commission has prepared this present Initial
     Regulatory Flexibility Analysis (IRFA) of the possible significant
     economic impact on small entities by the policies and rules
     proposed in this *CLEC Access Order and Further Notice* (Further
     Notice). Written public comments are requested on this IRFA.
     Comments must be identified as responses to the IRFA and must be
     filed by the deadlines for comments on this Notice, which are set
     out in Section VI of this Order. The Commission will send a copy of
     this Further Notice, including this IRFA, to the Chief Counsel for
     Advocacy of the Small Business Administration (SBA).[^226] In
     addition, this Notice and IRFA (or summaries thereof) will be
     published in the Federal Register.[^227]

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

130. In this *CLEC Access Order and Further Notice*, the Commission sets
     a benchmark for CLEC interstate switched access services that
     declines over time to the competing ILEC rate.[^228] In the Further
     Notice, tNumber range level0Number range level1Number range
     level2Number range level3Number range level4Number range
     level5Number range level6Number range level7he Commission seeks
     comment on a proposal offered by AT&T to move immediately the
     benchmark for CLEC 8YY access services to the competing ILEC rate
     and to mandatorily detariff CLEC interstate access rates for such
     8YY traffic above that point.[^229] The Commission seeks comment on
     the nature and extent of the problem alleged by AT&T and on various
     means of addressing CLEC 8YY access service rates. Through the
     Further Notice, the Commission seeks to ensure that CLEC rates for
     8YY access services are just and reasonable.

### Legal Basis

131. The legal basis for the action as proposed for this rulemaking is
     contained in sections 1-5, 201-205, 208, 251-271, 403, 502, and 503
     of the Communications Act of 1934, as amended, 47 U.S.C. §§
     151-155, 201-205, 208, 251-271, 403, 502, and 503.

### Description and Estimate of the Number of Small Entities to Which the Proposed Action May Apply

132. We discuss above at paragraphs 115 to 116 the small entities to
     which this proposed action may apply. We incorporate that
     discussion here by reference.

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

133. In the *CLEC Access Order*, the Commission sets a benchmark for
     CLEC interstate switched access services that declines over time to
     the competing ILEC rate. Through the Further Notice, the Commission
     seeks comment on whether it should move immediately the benchmark
     for CLEC 8YY access services to the competing ILEC rate and
     mandatorily detariff CLEC interstate access rates for such 8YY
     access services above that point. Adopting this proposal may
     require CLECs to refile tariffs with the Commission or to negotiate
     contracts with IXCs, rather than filing tariffs.

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

134. Number range level0Number range level1Number range level2Number
     range level3Number range level4Number range level5Number range
     level6Number range level7Number range level0Number range
     level1Number range level2Number range level3Number range
     level4Number range level5Number range level6Number range level7 The
     RFA requires an agency to describe any significant alternatives
     that it has considered in reaching its proposed approach, which may
     include the following four alternatives: (1) the establishment of
     differing compliance or reporting requirements or timetables that
     take into account the resources available to small entities; (2)
     the clarification, consolidation, or simplification of compliance
     or reporting requirements under the rule for small entities; (3)
     the use of performance, rather than design, standards; and (4) an
     exemption from coverage of the rule, or any part thereof, for small
     entities.[^230]

135. As mentioned above, through the Further Notice, the Commission
     seeks to ensure that CLEC rates for 8YY access services are just
     and reasonable. Our proposals may affect CLECs, by altering the
     rates that they may tariff for 8YY access services. At the same
     time, our proposals might affect indirectly IXCs that must pay
     access charges for 8YY traffic. Because there are both small entity
     IXCs and small entity CLECs -- with conflicting interests in this
     proceeding \-- we expect that small entities may be affected by any
     approach that we adopt. We seek an approach that both reduces
     opportunities for regulatory arbitrage and minimizes the burdens
     placed on carriers.

136. Among the alternatives proposed, the Commission seeks comment
     whether it should move immediately the benchmark for CLEC 8YY
     access services to the competing ILEC rate and mandatorily detariff
     CLEC interstate access rates for such 8YY access services above
     that point. The Commission seeks comment, to the extent that it
     finds that a separate benchmark is appropriate for 8YY access
     rates, on whether it should instead impose such a limitation only
     on those CLECs that offer revenue-sharing agreements to their end
     users or only on those CLECs that do not offer local exchange
     services in addition to their 8YY access services. Alternatively,
     the Commission seeks comment on whether the Commission should take
     no additional action and whether IXCs should be left to address
     specific instances of abuse directly with the relevant CLEC, with
     the aid of the Commission's complaint process where appropriate.

137. We also seek comment on whether, if we adopt a different benchmark
     for 8YY access services, there are any different tariff filing
     requirements or timetables that we might adopt to account for the
     resources available to small entities.[^231] We ask commenters to
     indicate whether and how such provisions would be consistent with
     our goals in this proceeding, including our obligation to ensure
     just and reasonable rates for interstate access services.

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

138. Number range level0Number range level1Number range level2Number
     range level3Number range level4Number range level5Number range
     level6Number range level7None.

## Comment Filing Procedures

139. Pursuant to sections 1.415, 1.419, and 1.430 of the Commission's
     rules, 47 C.F.R. §§ 1.415, 1.419, 1.430, interested parties may
     file comments within 30 days after publication in the Federal
     Register, and reply comments within 60 days after publication in
     the Federal Register. All filings should refer to CC Docket No.
     96-262. Comments may be filed using the Commission's Electronic
     Comment Filing System (ECFS) or by filing paper copies.[^232]
     Comments filed through the ECFS can be sent as an electronic file
     via the Internet to \<http://www.fcc.gov/e-file/ecfs.html\>.
     Generally, only one copy of an electronic submission must be filed.
     In completing the transmittal screen, commenters should include
     their full name, Postal Service mailing address, and the applicable
     docket number, CC Docket No. 96-262. Parties may also submit an
     electronic comment by Internet e-mail. To get filing instructions
     for e-mail comments, commenters should send an e-mail to
     \<ecfs@fcc.gov\>, and should include the following words in the
     body of the message: "get form \<your e-mail address\>." A sample
     form and directions will be sent in reply.

140. Parties that choose to file by paper must file an original and four
     copies of each filing. All filings must be sent to the Commission's
     Secretary, Magalie Roman Salas, Office of the Secretary, Federal
     Communications Commission, Room TW-B204, 445 12th Street, S.W.,
     Washington, D.C. 20554. Regardless of whether parties choose to
     file electronically or by paper, parties should also serve: (1)
     Jane Jackson, Common Carrier Bureau, 445 12th Street, S.W.,
     Room 5-A225, Washington, D.C. 20554; and (2) the Commission's
     copy contractor, International Transcription Service, Inc. (ITS),
     445 12th Street, S.W., Room CY‑B402, Washington, D.C. 20554, (202)
     857-3800, with copies of any documents filed in this proceeding.
     Comments and reply comments will be available for public inspection
     during regular business hours in the FCC Reference Center, Room
     CY-A257, 445 12th Street, S.W., Washington, D.C. 20554.

141. Parties that choose to file by paper should also submit their
     comments on diskette to the Commission's copy contractor,
     International Transcription Service, Inc., 1231 20th Street, N.W.,
     Washington, D.C. 20036. These submissions should be on a 3.5-inch
     diskette formatted in a Windows-compatible format using Microsoft
     Word or compatible software. The diskette should be accompanied by
     a cover letter and should be submitted in \"read only\" mode. The
     diskette should be clearly labeled with the commenter's name,
     proceeding (including the docket number, CC Docket No. 96-262),
     type of pleading (comment or reply comment), date of submission,
     and the name of the electronic file on the diskette. The label
     should also include the following phrase: \"Disk Copy---Not an
     Original.\" Each diskette should contain only one party's
     pleadings, preferably in a single electronic file.

142. Comments and reply comments must comply with section 1.49 and all
     other applicable sections of the Commission's rules.[^233] We also
     direct all interested parties to include the name of the filing
     party and the date of the filing on each page of their comments and
     reply comments.

143. This proceeding will continue to be governed by
     "permit-but-disclose" *ex parte* procedures that are applicable to
     non-restricted proceedings under 47 C.F.R. § 1.1206. This will
     provide an opportunity for all interested parties to receive notice
     of the various issues raised in *ex parte* presentations made to
     the Commission in this proceeding; it will also allow interested
     parties to file responses or rebuttals to proposals made on the
     record in this proceeding. We find that it is in the public
     interest to continue this proceeding's designation
     as "permit-but-disclose."

144. Alternative formats (computer diskette, large print, audio
     recording, and Braille) are available to persons with disabilities
     by contacting Brian Millin at (202) 418-7426 voice, (202) 418-7365
     TTY, or \<bmillin@fcc.gov\>. This further notice of proposed
     rulemaking can also be downloaded in Microsoft Word and ASCII
     formats at \<http://www.fcc.gov/ccb/cpd\>.

# Ordering Clauses

145. Accordingly, IT IS ORDERED that, pursuant to sections 1-5, 201-205,
     303(r), 403, 502, and 503 of the Communications Act of 1934, as
     amended, 47 U.S.C. §§ 151-155, 201-205, 303(r), 403, 502, and 503,
     this REPORT AND ORDER AND FURTHER NOTICE OF PROPOSED RULEMAKING,
     with all attachments, including revisions to Part 61 of the
     Commission's rules, 47 C.F.R Part 61, is hereby ADOPTED.

146. IT IS FURTHER ORDERED that the rule revisions adopted in this Order
     SHALL BECOME EFFECTIVE upon approval by OMB of the modified
     information collection requirements adopted herein, but no sooner
     than thirty days after publication in the Federal Register. The
     Commission shall place a notice in the Federal Register announcing
     the effective date of the requirements and regulations adopted
     herein.

147. IT IS FURTHER ORDERED that the Commission\'s Consumer Information
     Bureau, Reference Information Center, SHALL SEND a copy of this
     CLEC Access Charge Order and Further Notice, including the Final
     and Initial Regulatory Flexibility Analyses, to the Chief Counsel
     for Advocacy of the Small Business Administration.

     FEDERAL COMMUNICATIONS COMMISSION

     Magalie Roman Salas

Secretary

APPENDIX A

**Parties Filing Pleadings**

I.  ***PRICING FLEXIBILITY ORDER & NOTICE***

# A. Comments {#a.-comments .unnumbered}

1.  Ad Hoc Telecommunications Users Committee (Ad Hoc)

2.  State of Alaska (Alaska)

3.  Allegiance Telecom, Inc. (Allegiance)

4.  ALLTEL Communications, Inc. (ALLTEL)

5.  Association for Local Telecommunications Services (ALTS)

6.  American Public Communications Council (APCC)

7.  AT&T Corp. (AT&T)

8.  Bell Atlantic Telephone Companies (Bell Atlantic)

9.  BellSouth Corporation (BellSouth)

10. Cable & Wireless USA, Inc. (Cable & Wireless)

11. Competitive Communications Group (CCG)

12. Competitive Telecommunications Association (CTA)

13. CoreComm, Limited (CoreComm)

14. Cox Communications, Inc. (Cox)

15. CTSI, Inc. (CTSI)

16. Focal Communications Corporation, Hyperion Telecommunications, Inc.
    d/b/a Adelphia Business Solutions (Focal/Hyperion)

17. General Services Administration (GSA)

18. GTE Service Corporation (GTE)

19. State of Hawaii (Hawaii)

20. MCI WorldCom, Inc. (WorldCom)

21. McLeodUSA Telecommunications Services, Inc. (McLeodUSA)

22. MediaOne Group, Inc. (MediaOne) **(ex parte/late filing)**

23. MGC Communications, Inc. (MGC)

24. Minnesota CLEC Consortium

25. National Rural Telecom Association (NRTA)

26. National Telephone Cooperative Association (NTCA)

27. New York Department of Public Service (NYDPS)

28. Organization for the Promotion and Advancement of Small
    Telecommunications Cos. (OPASTCO)

29. Ranier Cable, Inc. (RCI)

30. RCN Telecom Services, Inc. (RCN)

31. Rural Independent Competitive Alliance (RICA)

32. SBC Communications, Inc. (SBC)

33. Sprint Corporation (Sprint)

34. Telecommunications Resellers Association (TRA)

35. Teligent, Inc. (Teligent)

36. Time Warner Telecom (Time Warner)

37. Total Telecommunications Services (TTS)

38. U S West, Inc. (US West)

39. United States Telephone Association (USTA)

40. Winstar Communications, Inc. (Winstar)

41. Public Service Commission of Wisconsin (Wisconsin PSC)

**B. Reply Comments**

1.  Allegiance

2.  ALTS

3.  Ad Hoc

4.  AT&T

5.  Bell Atlantic

6.  BellSouth

7.  CTSI, Inc.

8.  State of Florida Public Service Commission (Fla. PSC)

9.  Focal/Hyperion

10. GVNW Consulting, Inc. (GVNW)

11. GSA

12. GTE

13. ITCs, Inc. (ITCs)

14. WorldCom

15. Minnesota CLEC Consortium

16. MGC

17. RICA

18. SBC

19. Sprint

20. Time Warner

21. TRA

22. USTA

23. US West

**II. *EMERGENCY PETITION PUBLIC NOTICE***

**A. Comments**

1.  Allegiance **(ex parte/late filing)**

2.  Association of Communications Enterprises (ASCENT)

3.  AT&T

4.  Buckeye Telesystem, Inc. (Buckeye)

5.  Haxtun Telephone Company (Haxtun)

6.  Montana Telecommunications Association (MTA)

7.  NTCA

8.  Sprint

9.  Time Warner

10. TTS

11. U S West

12. USTA

13. WorldCom

## B. Reply Comments {#b.-reply-comments .unnumbered}

1.  Allegiance

2.  ASCENT

3.  AT&T

4.  Minnesota CLEC Consortium

5.  Sprint

6.  RICA

7.  USTA

**III. *MANDATORY DETARIFFING PUBLIC NOTICE***

### A. Comments {#a.-comments-1 .unnumbered}

1.  Ad Hoc

2.  Allegiance

3.  ASCENT

4.  ALTS

5.  AT&T

6.  CTSI, RCN Telecom Services, Inc. and Telergy, Inc. (CTSI Joint
    Commenters)

7.  e.spire Communications, Fairpoint Communications Solutions Corp.,
    Intermedia Communications Inc., Newsouth Communications Corp.,
    Nextlink Communications, Inc. and Talk.com, Inc. (collectively Joint
    CLEC Commenters)

8.  Fairpoint Communications Solutions Corp. (Fairpoint)

9.  Focal Communications Corporation (Focal)

10. GSA

11. Global Crossing North America, Inc. (Global Crossing)

12. MGC Communications, Inc. d/b/a Mpower Communications Corp.,
    ITC^∧^Deltacom, Inc. and Broadstreet Communications, Inc. (MGC Joint
    Commenters)

13. Minnesota CLEC Consortium

14. Prism Communications Services, Inc. (Prism)

15. RICA

16. Sprint

17. Teligent

18. Time Warner

19. Verizon Companies (Verizon)

20. Winstar

21. WorldCom

22. Z-Tel Communications, Inc. (Z-Tel)

**B. Reply Comments**

1.  Ad Hoc

2.  Allegiance

3.  ALTS

4.  ASCENT

5.  AT&T

6.  Cable & Wireless

7.  Centennial Communications Corp. (Centennial)

8.  Joint CTSI Commenters

9.  Joint CLEC Commenters

10. Focal

11. GSA

12. MGC

13. Minnesota CLEC Consortium

14. RICA

15. Sprint

16. U.S. TelePacific Corp. (US TelePacific)

17. WorldCom

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IV. ***SAFE HARBOR PUBLIC NOTICE***

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A.  **Comments**

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1.  ALTS

2.  ASCENT

3.  AT&T

4.  BayRing Communications and Lightship Telecom, LLC (collectively
    BayRing)

5.  CTSI, Inc. and Madison River Communications

6.  Eschelon Telecom, Inc. (Eschelon)

7.  e.spire Communications, Inc., KMC Telecom, Inc., Talk.com Holding
    Corp. and XO Communications, Inc.

8.  FairPoint Communications Solutions Corp. (FairPoint)

9.  Focal Communicaitons Corporation, RCN Telecom Services, Inc. and
    Winstar Communications, Inc.

10. McLeodUSA Telecommunications Services, Inc.

11. Minnesota CLEC Consortium

12. NTCA

13. OPASTCO

14. RICA

15. Sprint

16. TDS Metrocom, Inc. (TDS)

17. USTA

18. WorldCom

19. Z-Tel

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B.  **Reply Comments**

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```
1.  AT&T

2.  Ad Hoc

3.  BayRing

4.  CTSI, Inc.

5.  Cox

6.  e.spire Communications, Inc., KMC Telecom, Inc., Talk.com Holding
    Corp. and XO Communications, Inc.

7.  Eschelon

8.  FairPoint

9.  Focal and Winstar

10. Minnesota CLEC Consortium

11. RICA

12. Sprint

13. Z-Tel

APPENDIX B -- Final Rules

**AMENDMENTS TO THE CODE OF FEDERAL REGULATIONS**

Part 61, Subpart C, of Title 47 of the Code of Federal Regulations
(C.F.R.) is amended by adding section 61.26 as follows:

**61.26 Tariffing of competitive interstate switched exchange access
services**.

a.  *Definitions*. For purposes of this section 61.26, the following
    definitions shall apply:

    1.  "CLEC" shall mean a provider of interstate exchange access
        services that does not fall within the definition of "incumbent
        local exchange carrier" in 47 U.S.C. § 251(h).

    2.  "Competing ILEC" shall mean the incumbent local exchange
        carrier, as defined in 47 U.S.C. § 251(h), that would provide
        interstate exchange access service to a particular end user if
        that end user were not served by the CLEC.

    3.  "Interstate switched exchange access services" shall include the
        functional equivalent of the ILEC interstate exchange access
        services typically associated with following rate elements:
        carrier common line (originating); carrier common line
        (terminating); local end office switching; interconnection
        charge; information surcharge; tandem switched transport
        termination (fixed); tandem switched transport facility (per
        mile); tandem switching.

    4.  "Non-rural ILEC" shall mean an incumbent local exchange carrier
        that is not a "rural telephone company" under 47 U.S.C. §
        153(37).

    5.  The "rate" for interstate switched exchange access services
        shall mean the composite, per-minute rate for these services,
        including all applicable fixed and traffic-sensitive charges.

    6.  "Rural CLEC" shall mean a CLEC that does not serve (i.e.,
        terminate traffic to or originate traffic from) any end users
        located within either:

        i.  Any incorporated place of 50,000 inhabitants or more, based
            on the most recently available population statistics of the
            Census Bureau or

        ii. An urbanized area, as defined by the Census Bureau.

b.  Except as provided in paragraphs (c) and (e) of this section, a CLEC
    shall not file a tariff for its interstate switched exchange access
    services that prices those services above the higher of:

    1.  The rate charged for such services by the competing ILEC or

    2.  The lower of:

        i.  The benchmark rate described in paragraph (c) of this
            section or

        ii. The lowest rate that the CLEC has tariffed for its
            interstate exchange access services, within the six months
            preceding \[insert date 30 days after publication in the
            Federal Register\].

c.  From \[insert date 30 days after publication in the Federal
    Register\] until \[insert date one year and 30 days after
    publication in the Federal Register\], the benchmark rate for a
    CLEC's interstate switched exchange access services will be \$0.025
    per minute. From \[insert date one year and 30 days after
    publication in the Federal Register\] until \[insert date two years
    and 30 days after publication in the Federal Register\], the
    benchmark rate for a CLEC's interstate switched exchange access
    services will be \$0.018 per minute. From \[insert date two years
    and 30 days after publication in the Federal Register\] until
    \[insert date three years and 30 days after publication in the
    Federal Register\], the benchmark rate for a CLEC's interstate
    switched exchange access services will be \$0.012 per minute. After
    \[insert date three years and 30 days after publication in the
    Federal Register\], the benchmark rate for a CLEC's interstate
    switched exchange access services will be the rate charged for
    similar services by the competing ILEC, *provided, however*, that
    the benchmark rate for a CLEC's interstate switched exchange access
    services will not move to bill-and-keep, if at all, until \[insert
    date four years and 30 days after publication in the Federal
    Register\].

d.  Notwithstanding paragraphs (b) and (c) of this section, in the event
    that, after \[insert date 30 days after publication in the Federal
    Register\], a CLEC begins serving end users in a metropolitan
    statistical area (MSA) where it has not previously served end users,
    the CLEC shall not file a tariff for its interstate exchange access
    services in that MSA that prices those services above the rate
    charged for such services by the competing ILEC.

e.  Rural exemption: Notwithstanding paragraphs (b) through (c) of this
    section, a rural CLEC competing with a non-rural ILEC shall not file
    a tariff for its interstate exchange access services that prices
    those services above the rate prescribed in the NECA access tariff,
    assuming the highest rate band for local switching and the transport
    interconnection charge. If the competing ILEC is subject to the
    Commission's *CALLS Order*, 65 Fed. Reg. 38684 (June 21, 2000), this
    rate shall be reduced by the NECA tariff's carrier common line
    charge.

STATEMENT OF COMMISSIONER HAROLD FURCHTGOTT-ROTH, CONCURRING IN PART,
DISSENTING IN PART

*Re: Access Charge Reform*, Seventh Report and Order and Further Notice
of Proposed Rulemaking, CC Docket No. 96-262.

Until today, competitive carriers could freely enter into contracts and
adopt tariffs for exchange access on terms and conditions as determined
by the market. Now, as a result of this order, the tariffs and contracts
that competitive carriers may offer are substantially circumscribed.
Specifically, the order creates a "safe harbor" range for CLEC access
charge tariffs, which, over time, coincides with the regulated tariffs
of the ILECs. Although the order permits carriers to contract for access
charges above the safe harbor, it is difficult to imagine the
circumstances under which such contracts will be adopted. Buyers are
entitled to insist on the safe harbor rate, and they have no incentive
to agree to higher rates. Indeed, in most markets, buyers seek to
contract a price *lower* than the posted tariff rate. The Commission's
safe harbor rule is thus a kinder, gentler term for price regulation.

The majority finds this course of action necessary, because, as a result
of our myriad regulations that limit separable contracts and markets for
exchange access services, the parties that consume exchange access
services rarely receive accurate price signals. Rather than remove the
regulations that limit the clarity of price signals, the majority
resorts to the opiate for regulators -- price regulation.

Two wrongs do not make a right. We should correct the regulations that
interfere with price signals, not enshrine price regulation forever
while doing nothing to remove the regulatory barriers to exchange access
services. To be sure, the Commission's adoption of price regulation in
this context is probably lawful, and I do not ordinarily dissent from
items that I believe are merely unwise. However, restraint in the face
of unwise decisions has its limits. Here, the Commission's decision to
initiate price regulation runs counter to basic economic principles as
well as the deregulatory mandate of the Telecommunications Act of 1996.
Accordingly, I dissent from this order with the exception of Section IV.

I concur with respect to Section IV, which clarifies the circumstances
under which carriers may refuse to accept or deliver access traffic.
That section reinforces the importance of contractual relationships,
rather than regulatory compulsion, in setting access charges.

### I. Government, Markets, Consumer Welfare, And The Public Interest {#i.-government-markets-consumer-welfare-and-the-public-interest .unnumbered}

Modern economics is laid upon two foundations: first, individuals can
better protect their own interests than can others; and second, a higher
social welfare -- under almost any measure -- is obtained by individuals
making decisions in their own interest rather than by a single
individual or government making decisions on behalf of others. This is
the basis of market economics. While there are some situations
(externalities) in which government intervention may be helpful, these
are merely exceptions, not rules.

Individuals look after their own interests best when they are free to
enter into whatever arrangements they choose with other individuals or
businesses. When government limits the types of arrangements that
individuals or businesses can make, the individuals, businesses, and
society at large are no better off, and, quite likely, are worse off.

For example, individuals can purchase a loaf of bread from one of
countless shops and bakeries. Or individuals can buy flour, yeast,
water, and an oven from many different providers and bake their own
bread. An interventionist government might issue an edict that requires
millers to sell flour only to bakers and not to consumers. Such an edict
would likely harm not only millers and bakers, but the bread-consuming
public as well.

Governments are often confronted with petitions pleading for such
intervention. Given the harm that comes from limiting freedom in the
market, a wise government must be extremely careful in considering such
action. A wise government must be able to distinguish between problems
that warrant *attention* and those that do not and between those that
warrant *intervention* and those that do not.

In the above example, bread prices might be high, and the government may
receive a petition to regulate the price of bread or the price of flour
that millers sell to bakers. It may be that some suppliers of flour, or
yeast, or baking facilities exercise some degree of market power in some
local markets. Prices of these wares may exceed those that some believe
to be competitive. What should the government do for the market where
undue market power may be present?

Before answering the question of what the government can do for a
market, the government should ask what the market can do for itself.
Nothing stimulates the imagination of an entrepreneur more than
observing a price that seems too high. A "high" price is an invitation
to an entrepreneur for at least a momentary profit. The profit may prove
transitory, ephemeral, even elusive. But the entrepreneur's struggle,
investment, and efforts to capture that profit are real. The greatest
threat to "high" prices from the exercise of market power is the zeal of
an entrepreneur. Indeed, without the efforts to enter a market by
entrepreneurs thirsting for profits, the conditions creating the market
power that led to high prices in the first instance will remain in
place.

Price signals are essential to entrepreneurs (as well as to consumers).
Price regulation discourages entrepreneurs by destroying the hope of
ever observing "high" prices. Why struggle, invest, and enter a market
where profits are proscribed?

And exactly when are prices too *high* or too *low*? Prices, like
beauty, are in the eye of the beholder. Different entrepreneurs and
different consumers will respond differently to different price signals.
The beauty of markets is that they beckon for buyers and sellers to
respond to price signals. Through the responses of buyers and sellers,
through the interest they exhibit and the investments they make, markets
become stronger and more resilient. Price signals are the very oxygen
that makes markets viable.

Price regulation is a harmful, addictive hallucinogen. It deludes those
who administer it into believing that they are helping markets. Once
price regulation begins, regulators seem to want more, not less,
intervention as markets perform ever more poorly. Yet price regulation
enervates markets by depriving them of the very oxygen that sustains
them. To the outside observer, a market under price regulation is the
subject of pity: listless and slowly sinking into the abyss of
dysfunction. Entrepreneurship and investment wane. Problems of quality
of service wax.

Perhaps there are some examples where price regulation has unambiguously
succeeded. A wise government must be able to distinguish between the
successes and the failures and to identify the circumstances that will
lead to one and not the other. The prescription for the narcotic of
price regulation that can guarantee that it does not lead to side
effects more harmful than the symptoms has yet to be written.

Moreover, even where intervention may be warranted, a wise government
must be able to distinguish between instances in which the harm sought
to be remedied is the result of too little government intervention and
instances in which the harm is caused by too much. Price regulation is
rarely the first government-created wrong in a market. More often, other
forms of government intervention have distorted markets leading to
requests for yet more government intervention such as price regulation.
In the above example, high bread prices are most likely not the result
of a market externality but instead the result of excessive government
intervention, which has prohibited consumers from purchasing flour
directly from millers.

Two wrongs do not make a right. Price regulation should not be the
solution to market failures caused by excessive regulation. Instead, the
barriers to consumer transactions should be removed. Long-distance
markets are a case in point.

###### II. Long-Distance Service, Insurance, And Moral Hazard {#ii.-long-distance-service-insurance-and-moral-hazard .unnumbered}

This order concerns federal regulation of compensation arrangements
among different, specialized providers of the component services that
comprise a long-distance call. A long-distance call can be divided into
five discreet, separately regulated, services: local exchange service
for origination, exchange access for origination, transport, exchange
access for termination, and local exchange service for termination. For
each of these five services, billing and collection are also separable
services.

In practice, originating local exchange service and exchange access are
usually provided by a single carrier, as are terminating exchange access
and local exchange service. A call involving five or more different
services in five different markets is usually provided by, at most,
three companies.

The consumer -- the party originating the call-- perceives just one
market and is billed by just one company for the long-distance call,
usually the IXC, which provides some, but not all, of the other
services. The IXC then compensates all of the other companies providing
the other services.

The actual charges associated with each of the five services in each
long-distance call can vary substantially from call to call and from
customer to customer. However, the customer's bill does not reflect the
actual charges incurred by the carriers providing these services.
Instead, the customer generally receives a bill for all long-distance
calls based on the same per-minute rate, regardless of actual cost
incurred. With respect to access charges, the customer's bill
incorporates only an average cost, as the Commission's rules require
IXCs to spread the cost of both originating and terminating access among
all their end users. *See* Order ¶ 31.

The IXC thus typically acts as an insurer. By charging a flat rate
regardless of the actual costs of a particular call, the IXC insures
against losses from the distribution of unknown charges, as well as
against losses from the distribution of uncollectibles -- instances
where consumers fail to pay their bills. The IXC charges customers a
premium for this insurance, which is more than the expected value of
losses.

This system has led to four broad "problems," which are explicitly or
implicitly raised in this order:

\(1\) Consumers are largely limited to purchasing long-distance services
in packages that bundle all five regulated services, plus insurance,
billing, and collection.

\(2\) No one, including the company bundling the long-distance services,
can choose the lowest cost and highest quality providers of local
exchange service and exchange access. Providers of these services are
assigned independently by the originating party and the terminating
party.

(3) Entry into all of the regulated services except for transport,
    billing, and collection is difficult. Entry into exchange access
    without being bundled with local exchange service is rare.

\(4\) Given (1), (2) and (3), providers of exchange access face a moral
hazard in pricing their services. Parties consuming their services do
not have a direct contractual relationship with them, and a third party
insures all expenses. Under these circumstances, there are substantial
economic incentives to engage in monopoly pricing. Moreover, with
extremely inelastic demand over a wide range of prices resulting from
the insurance scheme, the monopoly price is higher than it would be if
exchange access providers contracted directly with the end users.

##### III. The Regulatory Solution {#iii.-the-regulatory-solution .unnumbered}

The majority's solution to these problems is to engage in more
government regulation -- specifically, to regulate the rates that
exchange access providers may charge. It is a regulatory solution, not a
market solution. It does not address the root problems in either (1),
(2), or (3). Consumers will still suffer from a lack of contracting
options for long-distance services. No one will have the authority or
incentive to seek out the lowest cost and highest quality providers of
local exchange service and exchange access for long-distance calls.
Market entry, particularly in exchange access, will still be difficult.
Moreover, the moral hazard associated with the insurance scheme will
only be limited, not cured.

Resorting to price regulation for access charges based exclusively on
Section 201 jurisdiction, while perhaps lawful, is a giant step
backwards for those who believe in the power of markets to allocate
resources and services in society. Price regulation not required by law
is a declaration of defeat by those entrusted with implementing a law
dedicated to removing regulatory barriers and promoting competition in
telecommunications markets. Practically every introductory economics
text book describes the ills of price regulation: either prices are set
too low, and supplies wither despite excess demand, or prices are set
too high, and demand withers despite ample supply.

Section 201, which requires that rates be "just and reasonable," should
never be invoked to require price regulation where multiple competitors
are present. There is simply no better approximation of "just and
reasonable" rates than those that exist in a market with multiple
competitors. Where multiple competitors are present in a market,
limitations on consumers' ability to perceive price competition are
almost always the result of government regulation. That is certainly the
problem in this order, where providers are not permitted to compete
separately for transport, exchange access, and local exchange service,
nor are packagers even allowed to bill separately for those services.
Removing those barriers is the proper solution, not price regulation.

**IV. The Deregulatory Solution**

A far different solution from that adopted in this order would be to
deregulate entirely the market for long-distance services. It would
allow any and all contractual arrangements to be made available to
consumers. It would encourage entry into all elements of long-distance
service, including separate entry into exchange access. Carriers could
offer any combination of the five components of long-distance service as
well as any combination of the peripheral services such as billing,
collection, and insurance for variability in the range of charges. Under
this market solution, all of the four problems identified above,
including moral hazard in the pricing of exchange access, would be
largely resolved. Exchange access providers -- whether ILECs, CLECs, or
competitive access providers -- would have no ability, much less
incentive, to subsidize other services with revenue from exchange
access. Consumers could contract directly or as part of a larger package
for all services, including exchange access services -- presumably at
the lowest price and highest quality -- and be billed directly for those
services. The consumer, not the regulator, would be sovereign.

Practically all markets for complex services work well without
substantial government interference to set prices or prevent
transactions. For example, housing, clothing, and food can be purchased
on a bundled or unbundled basis through both explicit and implicit
contractual arrangements. Except where government has intervened to
prohibit certain explicit or implicit contractual arrangements,
consumers can choose to purchase goods and services with embedded
insurance against the distribution of underlying costs for components,
or the consumer can purchase the components separately. Consumer welfare
is enhanced with a variety of contractual options for services with
varying degrees of bundling. Depriving consumers of some or all options
only harms them.

According to the majority, 47 U.S.C. § 254(g), which requires the
Commission to adopt rules governing interexchange services, presents a
substantial impediment to adopting a similar market-based approach for
long-distance service. *See* Order ¶ 31. Under section 254(g), the
Commission's rules must "require that the 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." 47 U.S.C. § 254(g). In
addition, these rules must "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." *Id.* The Commission has
previously determined that section 254(g) mandates that IXCs spread the
cost of exchange access among all of their end users. *See* Order ¶ 11 &
n.15; *Policy and Rules Concerning the Interstate, Interexchange
Marketplace, Implementation of § Section 254(g) of the Communications
Act of 1934, as amended*, Report and Order, 11 FCC Rcd 9564, ¶ 9 (1996).
As a result, IXCs billing their end users cannot pass through the actual
cost of exchange access and thus cannot send their end users accurate
price signals.

However, the Commission's interpretation of section 254(g) -- while not
unreasonable -- is by no means compelled. To the contrary, the language
of the statute merely requires "providers of interexchange
telecommunications services" -- IXCs -- to provide "interexchange
telecommunications services" at the same rates in different geographic
areas. It says nothing about the rates for exchange access, which are
generally imposed by local exchange carriers and for which IXCs act
merely as billing agents. From the IXCs' perspective, these charges are
no different than state-specific gross receipts taxes, which the
Commission already allows IXCs to pass through to end users on a
deaveraged basis. *See Policy and Rules Concerning the Interstate,
Interexchange Marketplace, Implementation of § Section 254(g) of the
Communications Act of 1934, as amended*, 11 FCC Rcd 9564 at ¶ 12.
Section 254(g) thus need not prohibit IXCs from passing through the
actual costs of exchange access to their end users. Moreover, the
statute is no bar to allowing local exchange carriers and special access
providers to bill the actual costs of exchange access directly to end
users.

If the Commission abandoned its broad reading of section 254(g) and
removed the other regulatory barriers in the long-distance markets,
companies could compete for business by offering differing packages of
services. Some would offer to provide all billing and collection
services as well as insurance for the risk associated with the
distribution of access charges. Others would offer different types of
insurance, and still others would offer no insurance, instead passing
all charges directly to the consumer.

Indeed, despite the Commission's restrictive regulations, some companies
have already begun to offer such differentiated services. For example,
some carriers, such as iPhonebill, implicitly pass access charges on to
customers. Rates for their long-distance service vary by the combination
of the originating and terminating area code and carrier-specific
three-digit exchanges. The IXC iPhonebill charges more for calls with
higher access charges and less for those with lower access charges.
Because customers, rather than the IXC, bear the risk associated with
the distribution of access charges, iPhonebill does not charge an
insurance premium for bearing that risk. Consequently, iPhonebill's
rates are among the lowest of any IXC.

Other IXCs, such as OPEX and Unitel, offer originating service only to
ILEC customers with low originating access charges. In this way, the
risk associated with the distribution of originating access charges is
reduced, and the insurance premium that these carriers charge is less
than that of major IXCs offering ubiquitous service.

Removing regulatory barriers would promote the development of more
services like these and would resolve the problems identified by the
majority. Unfortunately, however, the majority has not chosen this
course of action.

# V. Conclusion {#v.-conclusion .unnumbered}

The proper role of government in a free society is to protect property,
enforce contracts, and tear down barriers to markets. Yet vestiges of
ill-conceived government remain from the days when contracts were
restricted by government fiat, when property was limited by government
restrictions, and when opportunities to deploy, manipulate, and engage
in the trade of property, services, and contracts, were severely
curtailed.

A government of a free society should be the champion of free markets
and unfettered competition. It should intercede where market barriers
prevent entry but turn a cold shoulder to those who petition for price
regulation or other government action noxious to a free market.

If wisely interpreted, the Telecommunications Act of 1996 would serve as
a basis for the proper government role in a free society. For more than
five years, however, the Act has not been interpreted wisely. Indeed, it
has served as a vehicle to support the ideas of those more comfortable
with the opiate of regulation than with the nourishment of competition.
Such regulation is no less harmful when, as here, it is masked in
pro-competitive rhetoric.

Today's order is a profound disappointment to those who seek competitive
markets rather than the oxymoron of managed competition. It may be a
lawful order, but it is unwise. An order that is both lawful and wise
would tear down market barriers rather than erect new ones, enforce
contracts rather than effectively outlaw them, and protect property
rights rather than limit them.

[^1]: In addressing these issues, the Commission has requested and
    received comments in several proceedings: *Access Charge Reform*, CC
    Docket No. 96-262, Fifth Report and Order and Further Notice of
    Proposed Rulemaking, 14 FCC Rcd 14221 (1999) (*Pricing Flexibility
    Order & Notice*); *Commission Asks Parties to Update and Refresh
    Record on Mandatory Detariffing of CLEC Interstate Access Services*,
    CC Docket Nos. 96-262 and 97-146, Public Notice, 15 FCC Rcd 10181
    (Comm. Carr. Bur. 2000) (*Mandatory Detariffing Public Notice*);
    *Common Carrier Bureau Seeks Comment on the Request for Emergency
    Temporary Relief of the Minnesota CLEC Consortium and the Rural
    Independent Competitive Alliance Enjoining AT&T Corp. from
    Discontinuing Service Pending Final Decision*, CC Docket No. 96-262,
    Public Notice, DA-00-1067, 2000 WL 217601 (Comm. Carr. Bur., rel.
    May 15, 2000) (*Emergency Petition Public Notice*); *Common Carrier
    Bureau Seeks Comment on Issues Relating to CLEC Access Charge
    Reform*, CC Docket No. 96-262, Public Notice, 15 FCC Rcd 24102
    (2000) (*Safe Harbor Public Notice*). Below, we refer to a comment
    or reply comment to the *Pricing Flexibility Order & Notice* as
    Comment or Reply Comment, respectively. A comment or reply comment
    to the *Mandatory Detariffing Public Notice* is identified as
    Detariffing Comment or Detariffing Reply Comment, respectively. We
    refer to a comment or reply comment to the *Emergency Petition
    Public Notice* as Emerg. Pet. Comment or Emerg. Pet. Reply Comment,
    respectively. A comment or reply comment to the *Safe Harbor Public
    Notice* is identified as Safe Harbor Comment or Safe Harbor Reply
    Comment, respectively. Appendix A includes a list of parties filing
    comments in each of these proceedings.

[^2]: In this order, we use the term "access services" to refer only to
    interstate switched access services, unless we specifically indicate
    to the contrary.

[^3]: *Access Charge Reform*, CC Docket No. 96-262, Sixth Report and
    Order, 15 FCC Rcd 12962 (2000) (*CALLS Order*).

[^4]: *Developing a Unified Intercarrier Compensation Regime*, Notice of
    Proposed Rulemaking, CC Dkt. Nos. 01-92, 99-68, 96-98, FCC 01-132
    (rel. April 27, 2001) (*Intercarrier Compensation NPRM*).

[^5]: *See Tariff Filing Requirements for Non-Dominant Common Carriers*,
    CC Dkt. No. 93-36, Memorandum Opinion and Order, 8 FCC Rcd 6752,
    6754 (1993) (CLECs are non-dominant carriers because they have not
    been previously declared dominant), *vacated and remanded in part on
    other grounds, Southwestern Bell Corp. v. FCC*, 43 F.3d 1515 (D.C.
    Cir. 1995); *on remand*, 10 FCC Rcd 13653 (1995).

[^6]: *See infra* note Error: Reference source not found.

[^7]: *See Access Charge Reform*, CC Docket 96-262, First Report and
    Order, 12 FCC Rcd 15982 (*Access Charge Reform Order*), *aff'd sub.
    nom. Southwestern Bell v. FCC*, 153 F.3d 523 (8^th^ Cir. 1998);
    *Pricing Flexibility Order & Notice*, 14 FCC Rcd 14221; *Access
    Charge Reform*, CC Docket No. 96-262, Sixth Report and Order, 15 FCC
    Rcd 12962 (2000) (*CALLS Order*).

[^8]: *Access Charge Reform*, CC Docket 96-262, Notice of Proposed
    Rulemaking, Third Report and Order, and Notice of Inquiry, 11 FCC
    Rcd 21354, 21476 (1996) (*Access Reform NPRM)*.

[^9]: *Id.* at 21472.

[^10]: *Id.*

[^11]: *Id.*

[^12]: *Id.* at 21476.

[^13]: *Id.*

[^14]: *Id.*

[^15]: *See* 47 U.S.C. § 254(g). *See also* *Policy and Rules Concerning
    the Interstate, Interexchange Marketplace, Implementation of Section
    254(g) of the Communications Act of 1934, as amended*, CC Docket No.
    96-61, Report and Order, 11 FCC Rcd 9564 (1996) (requiring IXCs to
    integrate and average the rates they charge for service).

[^16]: *Access Reform NPRM,* 11 FCC Rcd at 21476.

[^17]: *See* *id. at* 21477. The Commission also sought comment on
    whether it should treat CLEC originating \"open end\" minutes, such
    as originating access for 800 service, as terminating minutes for
    access charge purposes. *Id.* "The term open end of a call describes
    the origination or termination of a call that utilizes exchange
    carrier common line plant (a call can have no, one, or two open
    ends.)" 47 C.F.R. § 69.105(b)(1)(ii). The Commission noted that, in
    some cases, such as 800 and 888 service, the called party, which
    pays for the call, is unable to influence the calling party\'s
    choice of provider for originating access services. *Access Reform
    NPRM,* 11 FCC Rcd at 21477*.*

[^18]: *See* *Hyperion Telecommunications, Inc. Petition for
    Forbearance*, Memorandum Opinion and Order, 12 FCC Rcd 8596 (1997)
    (*Hyperion Order*) (granting petitions seeking permissive
    detariffing for provision of interstate exchange access services by
    providers other than the incumbent LEC).

[^19]: *Hyperion Order*, 12 FCC Rcd at 8613.

[^20]: *MCI WorldCom, Inc. v. Federal Communications Commission*, 209
    F.3d 760 (D.C. Cir. 2000).

[^21]: *Mandatory Detariffing Public Notice*, 15 FCC Rcd 10181.

[^22]: *Access Charge Reform Order*, 12 FCC Rcd at 15982.

[^23]: *Id.* at 16140.

[^24]: *Id.*

[^25]: *Id.*

[^26]: *Id.* at 16140-41.

[^27]: *Id.* at 16141.

[^28]: *Id. See generally* 47 C.F.R. §§ 1.720-1.735 (Commission rules
    governing formal complaints); 47 U.S.C. § 208.

[^29]: *Access Charge Reform Order*, 12 FCC Rcd at 16141.

[^30]: The Commission currently has before it several additional
    complaint proceedings. *See infra* note Error: Reference source not
    found.

[^31]: *MGC Communications, Inc. v. AT&T Corp.*, 14 FCC Rcd 11647
    (1999).

[^32]: *Sprint Communications Company, L.P. v. MGC Communications,
    Inc.*, 15 FCC Rcd 14027 (2000).

[^33]: *Total Tel. v. AT&T*, FCC 01-84, File No. E-97-003 (rel. Mar. 13,
    2001) (*Total Tel. Order*).

[^34]: 47 U.S.C. §§ 201(a), 202(a), 214(a), 251(a).

[^35]: *Pricing Flexibility Order & Notice*, 14 FCC Rcd 14221.

[^36]: *Id.* at 14339.

[^37]: *Id.* at 14340.

[^38]: *Id.* at 14340.

[^39]: *Id.* at 14340-45.

[^40]: *Id.* at 14343.

[^41]: *Id.*

[^42]: *CALLS Order,* 15 FCC Rcd 12962.

[^43]: *Id.* at 12974-76.

[^44]: *Id.* at 12977.

[^45]: *Emergency Petition Public Notice*, DA-00-1067, 2000 WL 217601.

[^46]: *See, e.g.*, 47 U.S.C. § 251.

[^47]: Industry Analysis Division, Federal Communications Commission,
    [Trends in Telephone Service]{.smallcaps}, Tbl. 9.6 (Dec. 2000).

[^48]: *See generally* *Access Reform NPRM*, 11 FCC Rcd at 21474-76;
    *Policy and Rules Concerning Rates for Competitive Common Carrier
    Services and Facilities Authorizations Therefor*, CC Docket No.
    79-252, First Report & Order, 85 FCC 2d 1, ¶¶ 88-96 (1980).

[^49]: *See* AT&T Safe Harbor Comments at 7.

[^50]: *See infra* paragraphs 48-49

[^51]: *See* AT&T Safe Harbor Comments at 7.

[^52]: AT&T Safe Harbor Comments, Appendix A.

[^53]: For example, it is unclear whether AT&T's calculation of the
    competing ILEC rate includes certain flat-rated elements.

[^54]: Buckeye Comments at 3; Sprint Reply Comments at 28-30; Allegiance
    Comments at 18-19; MGC Comments at 7. In performing these
    calculations, Sprint appears typically to have used the rate of the
    competing ILEC as the just and reasonable rate.

[^55]: *See, e.g., Advamtel, LLC v. AT&T Corp.*, 118 F. Supp. 2d 680,
    682 (E.D. Va. 2000).

[^56]: *See Advamtel, LLC v. AT&T Corp.*, CIV. A. No. 00-643-A (E.D.
    Va., Alexandria Div., complaint filed Apr. 17, 2000); *Advamtel, LLC
    v. Sprint Communications.*, CIV. A. No. 00-1074-A (E.D. Va.,
    Alexandria Div., complaint filed Apr. 17, 2000); *Total Telecomm.
    Servs., Inc. v. AT&T Corp.*, FCC 01-84, File No. E-97-003 (rel. Mar.
    13, 2001); *Time Warner Telecom, Inc. v. Sprint Communications
    Company, L.P.*, File No. EB-00-MD-004 (complaint filed Mar. 16,
    2000); *U.S. TelePacific Corp. v. AT&T Corp.*, File No. EB-00-MD-010
    (complaint filed June 16, 2000); *AT&T Corp. v. Business Telecom,
    Inc.,* File No. EB-01-MD-001 (complaint filed Jan. 16, 2001);
    *Sprint Communications Company, L.P. v. Business Telecom, Inc.*,
    File No. EB-01-MD-002 (complaint filed Jan. 16, 2001).

[^57]: MTA Emerg. Pet. Comments at 4; Minnesota CLEC Consortium Request
    for Emergency Relief, CC Dkt. No. 96-262, at 3 (filed May 5, 2000).

[^58]: *See* RICA Request for Emergency Relief, CC Dkt. No. 96-262, at
    2-3 (filed Feb. 18, 2000); Minnesota CLEC Consortium Request for
    Emergency Relief at 2-3; Buckeye Emerg. Pet. Comments at 1-3; MTA
    Emerg. Pet. Comments at 3-4.

[^59]: *See Advamtel*, 118 F. Supp. 2d at 682; RICA Comments at 4-7,
    12-13. *Cf.* Sprint Comments at 24-25; CCG Comments at 5.

[^60]: MTA Emerg. Pet. Comments at 4; Minnesota CLEC Consortium Request
    for Emergency Relief at 3.

[^61]: *See, e.g., AT&T v. CFW Communications Company*, File No.
    EB-01-MDIC-0003 (informal complaint filed Jan. 16, 2001); *AT&T v.
    Commonwealth Telephone*, File No. EB-01-MDIC-0004 (informal
    complaint filed Jan. 16, 2001); *Sprint v. e.spire Communications,
    Inc.*, File No. EB-01-MDIC-0015 (informal complaint filed Jan 12,
    2001).

[^62]: AT&T Comments at 28 (numerous CLECs tariff rates at
    "supracompetitive" levels); Sprint Comments at 14-15; Cable &
    Wireless Comments at 2. *But see* MCI WorldCom Comments at 18
    ("there is no evidence in the record to demonstrate that
    unreasonably high CLEC access charges are ubiquitous or even
    widespread").

[^63]: *See, e.g.,* Sprint Comments at 19 (CLECs "cannot expect to enter
    a market, of their own free will, as competitors and yet attempt to
    recover their start-up costs from customers").

[^64]: Sprint Comments at 16 ("The level of charges some CLECs are
    seeking to collect could easily undermine the basis for current long
    distance rates.").

[^65]: *See, e.g.,* AT&T Comments at 28.

[^66]: *See* AT&T Reply Comments at 31 (noting CLEC "claims that IXCs
    are obligated to pay CLECs' exorbitant access charges simply by
    virtue of the fact that their networks receive traffic from, or
    terminate traffic to, the CLECs' end users"); AT&T Public Notice
    Comments at 6 (citing to *Advamtel* case).

[^67]: AT&T Reply Comments at 31 ("\[I\]t is not technically feasible
    without time-consuming and costly development ... to identify and
    then selectively block calling over their networks from or to end
    users served by CLECs.").

[^68]: *See, e.g.,* ALTS Comments at 3-4; CCG Comments at 9 ("As brand
    new entities, CLECs have substantially higher costs and serve a
    smaller customer base than their ILEC counterparts."); Allegiance
    Comments at 13, 20; McLeod Comments at 3; RICA Comments at 15-16.

[^69]: *See, e.g.,* Focal Comments at 17 ("Incumbent LECs ... benefit
    from their historical monopolies and decades of rate of return
    regulation, and thus already have ubiquitous telecommunications
    networks in place.").

[^70]: *See, e.g.,* Cox Comments at 3;

[^71]: *See Hyperion Order*, 12 FCC Rcd 8596, 8608-8611, ¶¶ 23-29
    (1997). *Cf.* *Advamtel*, 118 F. Supp. 2d at 687 (concluding that
    parties are precluded from negotiating separate agreements that
    affect the rate for services once a tariff has been filed with the
    Commission).

[^72]: *See, e.g.* AT&T Safe Harbor Comments at 3; Allegiance Comments
    at 4 ("customers of a tariffed service are required to pay tariffed
    charges until they obtain a ruling in a Section 208 complaint
    proceeding that the tariffed charges are unlawful"); RCN Comments at
    10-11.

[^73]: *See Pricing Flexibility Order and Notice*, 14 FCC Rcd at 14338.

[^74]: Toll free calling and casual calling (dial around, credit card,
    etc.) may also result in an IXC paying access charges despite the
    fact that there is no pre-existing relationship between an IXC and
    the calling party's access provider.

[^75]: *See Pricing Flexibility Order and Notice*, 14 FCC Rcd at 14338.
    *Cf.* AT&T Safe Harbor Comments at 2 ("recipient of a traditional
    long distance call does not pay for the cost of that call; hence,
    end users are indifferent to the terminating access rates of the
    CLEC they select as a service provider, and that carrier can raise
    terminating access rates without impairing demand for its local
    service").

[^76]: *See, e.g.*, Sprint Comments at 17 (suggesting that some CLECs
    may provide local service free of charge to customers that generate
    significant access traffic).

[^77]: *See* Sprint Comments at 17-18; AT&T Safe Harbor Public Notice
    Comments at 2-3; NY PSC Comments at 2; Alaska Comments at 5;
    Wisconsin PSC Comments at 3-5; Sprint Reply Comments at 9-12.

[^78]: *See* AT&T Safe Harbor Comments at 2. *See also* 47 U.S.C. §
    254(g).

[^79]: *Access Charge Reform Order*, 12 FCC Rcd at 16141.

[^80]: *See generally* J. Acton & S. Besen, *An Economic Analysis of
    CLEC Access Pricing*, Charles River Associates, Cambridge, MA, 1999;
    R. Crandall & L. Waverman, *Talk Is Cheap*, The Brookings
    Institution, Washington, DC 1995.

[^81]: Parenthetically, we note that the drafters of the 1996 Act
    anticipated the high costs associated with facilities-based entry
    into local markets and, thus, adopted market opening provisions,
    such as section 251's mandate that incumbent local exchange carriers
    make available access to unbundled network elements, that promote
    market entry by competitors. 47 U.S.C. § 251(c).

[^82]: For instance, in *Total Tel. v. AT&T*, the Commission recently
    addressed a case in which a purportedly competitive access provider
    had tariffed rates that were in excess of \$0.05 per minute. *Total
    Tel.*, FCC 01-84, File No. E-97-003.

[^83]: *Pricing Flexibility Order and Notice*, 14 FCC Rcd at 14338-49,
    ¶¶ 239-257; *Mandatory Detariffing Public Notice*, 15 FCC Rcd 10181;
    *Safe Harbor Public Notice*, 15 FCC Rcd 24102.

[^84]: *See, e.g.,* ALTS Comments at 35-36; RCN Comments at 12; AT&T
    Comments at 29-30; ALLTEL Comments at 7; USTA Comments at 24.
    *Accord* Sprint Comments at 25-27.

[^85]: *See, e.g.,* ALTS Comments at 35-36; AT&T Comments at 29-30; CCG
    Comments at 6; USTA Comments at 24.

[^86]: *See, e.g.,* CCG Comments at 6; CTSI Comments at 16-18.

[^87]: Sprint Comments at 20. *See also* AT&T Safe Harbor Comments at 15
    ("the Commission should mandatorily detariff all CLEC switched
    access rates that exceed the ILECs' rates in the same service
    area"). *Cf.* WorldCom Safe Harbor Comments at 3-5.

[^88]: *See, e.g.,* CCG Comments at 7-12; CoreComm Comments at 3-4; RCN
    Comments at 5 n.8.

[^89]: *See* Sprint Comments at 21 (advocating that we "set an absolute
    ceiling on what CLECs can charge IXCs"). *See also* WorldCom Safe
    Harbor Comments at 4-5; WorldCom Reply Comments at 20.

[^90]: *See Sprint Communications Co. v. MGC Communications, Inc.*, 15
    FCC Rcd 14027 (2000); *MGC Communications, Inc. v. AT&T Corp.*, 14
    FCC Rcd 11647 (1999).

[^91]: *See, e.g., CALLS Order*, 15 FCC Rcd at 13000, ¶ 95.

[^92]: *See, e.g.*, WorldCom Safe Harbor Comments at 1-5; AT&T Safe
    Harbor Comments at 4-5; ALTS Safe Harbor Comments at 4-6; Minnesota
    CLEC Safe Harbor Comments at 2-6; CompTel Comments at 2-3; OPASTCO
    Safe Harbor Comments at 2. *But see* USTA Safe Harbor Comments at 4.

[^93]: First, an incumbent LEC must keep its books in accordance with
    Uniform System of Accounts set forth in Part 32 of the Commission
    rules. *See* 47 C.F.R. §§ 32.1 - 32.9000. Second, Part 64 of the
    Commission's rules divides an incumbent's costs between those
    associated with regulated telecommunications services and those
    associated with non-regulated activities. *See* 47 C.F.R. §§
    64.901 - 64.904. Third, our Part 36 separations rules determine the
    fraction of the incumbent LEC's regulated costs, 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
    regulated, interstate cost is identified, the access charge and
    price cap rules translate these interstate costs into charges for
    the specific interstate access services and rate elements. Part 69
    specifies in detail the rate structure for recovering these costs.
    *See* 47 C.F.R. §§ 69.1 - 69.731. These rules tell the incumbent
    LECs the precise manner in which they may assess interstate access
    charges on interexchange carriers and end users. Additionally, the
    Commission regulates the rate levels incumbents may charge for their
    access services, requiring them to comply with either the
    rate-of-return or the price-cap regulations. *Compare* 47 C.F.R. §§
    65.1 - 65.830 (relating to rate of return that certain non-price-cap
    ILECs may earn on interstate access service) *with* *CALLS Order*,
    15 FCC Rcd at 12962, ¶¶ 151-84 (adopting rate level components for
    price-cap carriers). Finally, Part 61 requires incumbent LECs to
    publish their rates in tariffs, and the rules restrict how and when
    incumbents may change their rates. *See* 47 C.F.R. §§ 61.1 - 61.193.

[^94]: *See, e.g.*, ALTS Reply Comments at 6 ("CLECs are unanimous in
    rejecting any need for further rate regulation of their industry").
    *See also* Cox Safe Harbor Reply Comments at 6 (noting difficulty of
    applying traditional ILEC regulation to CLECs).

[^95]: *See, e.g.*, ALTS Comments at 35-36; AT&T Comments at 29-30;
    ASCENT Detariffing Comments at 1-7.

[^96]: *See, e.g.*, Global Crossing Detariffing Comments at 7; Minnesota
    CLEC Detariffing Comments at 6; Time Warner Detariffing Comments at
    7. *Cf*. Sprint Comments at 20.

[^97]: For example, we expect that stock contracts, broadly acceptable
    to both IXCs and CLECs, would quickly develop. Similarly, given all
    carriers' business incentives to maintain traffic flow, we question
    whether anything beyond minor customer inconvenience would develop.
    Moreover, the increased transaction costs of negotiation would
    likely be substantially offset by reduced regulatory and litigation
    costs associated with justifying tariffed rates.

[^98]: *See supra* note Error: Reference source not found.

[^99]: *See Intercarrier Compensation NPRM*, FCC 01-132.

[^100]: We refer to this rate as the "competing ILEC rate."

[^101]: Appendix B sets out the new rule 61.46 that we adopt to
    effectuate the benchmark for CLEC access rates.

[^102]: *See infra* paragraph 57.

[^103]: *See infra* paragraphs 64-87.

[^104]: Moreover, CLEC commenters have not submitted, in this
    proceeding, any data to justify their rates. Rather, these
    commenters have relied upon generalized assertions that their rates
    are justified by higher costs.

[^105]: In the *Permian Basin Area Rate Cases*, 390 U.S. 747, 769
    (1968), the Court noted that "administrative agencies may calculate
    rates for a regulated class without first evaluating the separate
    financial position of each member of the class; it has been thought
    to be sufficient if the agency has before it representative
    evidence, ample in quantity to measure with appropriate precision
    the financial and other requirements of the pertinent parties."
    Recognizing the need for "more expeditious administrative methods,"
    the Court further stated that "rate-making agencies are not bound to
    the service of any single regulatory formula; they are permitted . .
    . 'to make the pragmatic adjustments which may be called for by
    particular circumstances.'" *Id.* at 776-77 (quoting *FPC v. Natural
    Gas Pipeline Co.*, 315 U.S. 575, 586 (1942)). *See also FERC v.
    Pennzoil Producing Co.*, 439 U.S. 508, 517 (1979) (agency is not
    required "to adhere rigidly to a cost-based determination of rates,
    much less to one that bases each producer's rates on his own costs"
    (internal quotation omitted)); *Farmers Union Central Exchange, Inc.
    v. FERC*, 734 F.2d 1486, 1501 (D.C. Cir. 1984); *Wisconsin v.
    Federal Power Commission*, 373 U.S. 294, 309 (1963) ("Court has
    never held that the individual company cost-of-service method is a
    *sine qua non*" of rate regulation); *American Public Gas
    Association v. Federal Power Commission*, 576 F.2d 1016, 1037 (D.C.
    Cir. 1977) (approving economic modeling as basis for ratemaking). As
    noted elsewhere, we do not set rates in this order. We only limit
    the rates that CLECs may impose through the tariff system.

[^106]: *MGC v. AT&T*, 14 FCC Rcd at 11647, n.4.

[^107]: File No. EB-00-MD-010.

[^108]: For example, Sprint does not provide minute-of-use data for
    those CLECs that charge less than or equal to the corresponding ILEC
    rate. Similarly, AT&T and WorldCom appear not to have submitted
    *any* data for CLECs that charge less than or equal to the
    corresponding ILEC rate. Finally, the estimates submitted by ALTS
    are of questionable value, because they have not submitted the
    underlying data, they have not indicated whether they calculated a
    weighted or unweighted average, nor have they indicated how they
    selected the 32 CLECs in their sample from among their approximately
    200 CLEC members.

[^109]: We consider the "composite rate" to be the amount billed for a
    given period divided by the minutes of use. Thus, flat rated
    elements or per mile charges are translated into a per minute rate
    for purposes of this analysis.

[^110]: Estimates for this range exclude outlying observations that
    appear to be clearly inaccurate. For example, certain data points
    yielded a composite per-minute access rate in excess of 25 cents.

[^111]: The averages are weighted by overall minutes of use. We were
    able to calculate weighted averages based on the data filed by AT&T,
    WorldCom, and Sprint.

[^112]: We note, for example, that Sprint submitted data on the amounts
    billed by CLECs that, according to Sprint, charge less than or equal
    to the ILEC rate. Sprint Safe Harbor Comments at Appendix 1.
    However, because Sprint has not provided the Commission with
    corresponding actual minutes of use data, it is impossible to
    calculate composite rates for these carriers, let alone confirm
    Sprint's contention that these carriers charge less than or equal to
    the ILEC rate.

[^113]: *See* AT&T Safe Harbor Comments at 7.

[^114]: ALTS Safe Harbor Comments at 4. *See also* ASCENT Safe Harbor
    Comments at 5 (ALTS proposal has "significant merit" and "may well
    form a viable basis for Commission action").

[^115]: WorldCom Safe Harbor Comments at 5. We note that the only
    portion of the ALTS proposal with which WorldCom specifically
    disagreed in its comments to the *Safe Harbor Public Notice* was the
    implementation schedule. *See id.* n.5. It is also noteworthy that
    ALTS and WorldCom personnel jointly met with Commission staff to
    discuss their proposal. *See* October 30, 2000 letter of Jonathan
    Canis, counsel for ALTS, to Magalie Salas, Secretary, FCC, CC Dkt.
    No. 96-262. Subsequently, WorldCom has also expressed support for a
    lower benchmark figure proposed by AT&T and NewSouth Communications.
    *See* March 22, 2001 letter of Donna Sorgi, WorldCom, to Dorothy
    Attwood, Chief, Common Carrier Bureau, CC Dkt. No. 96-262.

[^116]: Association for Local Telecommunications Services,
    <http://www.alts.org/frames/aboutalts.htm> (visited Mar. 2, 2001).

[^117]: *See* *infra* paragraph 57. As additional support for the
    benchmark framework and the transition mechanism, if not the precise
    figure, that we adopt, we note that NewSouth Communications and AT&T
    have both recently expressed support for an initial benchmark figure
    of 1.2 cents per minute, transitioning to the ILEC rate within one
    year. *See* March 15, 2001 of Jake Jennings, NewSouth
    Communications, to Dorothy Attwood, Chief, Common Carrier Bureau, CC
    Dkt. No. 96-262; March 16, 2001 letter of Patrick Merrick, AT&T, to
    Magalie Salas, Secretary, Federal Communications Commission, CC Dkt.
    No. 96-262.

[^118]: *See infra* paragraph 58.

[^119]: *See* *Multi-Association Group (MAG) Plan For Regulation of
    Interstate Services of Non-Price Incumbent Local Exchange Carriers
    and Interexchange Carriers*, CC Dkt. No. 00-256, Notice of Proposed
    Rulemaking, FCC 00-448, ¶ 5 (rel. Jan. 5, 2001).

[^120]: We note that this is the level that AT&T and NewSouth propose as
    the starting point for the benchmark. *See supra* note Error:
    Reference source not found.

[^121]: *See supra* paragraph 37.

[^122]: We have chosen a three-year ramp-down period in the recently
    adopted order governing reciprocal compensation payments for traffic
    bound for internet service providers. *See Implementation of the
    Local Competition Provisions in the Telecommunications Act of 1996,*
    CC Dkt No. 96-98, *Intercarrier Compensation for ISP-Bound Traffic*,
    CC Dkt. No. 99-68, Order on Remand and Report and Order, FCC 01-131
    (rel. Apr. 27, 2001). The transition period in this item should also
    bring CLEC rates down to the ILEC rate one year before ILEC rates
    are set to be reexamined in the *CALLS Order.* *See* *CALLS Order*,
    15 FCC Rcd at 12977, ¶ 35*.* Lastly, the ramp-down period that we
    adopt today is consistent with the likely timeframe for the more
    far-reaching and general examination of inter-carrier compensation
    mechanisms that we initiated through another recent notice of
    proposed rulemaking. *See* *Intercarrier Compensation NPRM*, FCC
    01-132 .

[^123]: WorldCom Safe Harbor Comments at 2.

[^124]: In the *CALLS Order*, we eliminated the PICC for residential and
    single-line business users. *See CALLS Order* 15 FCC Rcd at
    12991-13004, ¶¶76-104. For multi-line business users, we initially
    set it at \$4.31 per line, subject to additional reductions that
    will ultimately eliminate it as well. *See id.* at 13004-07, ¶¶
    105-112.

[^125]: CLECs contend that they are using different technologies,
    different network architectures and different pricing plans that
    make comparison between CLEC and ILEC rates difficult. *See* BayRing
    Safe Harbor Comments at 3; Focal & Winstar Safe Harbor Reply
    Comments at 8.

[^126]: Thus, the safe harbor rate applies, but is not necessarily
    limited, to the following specific rate elements and their
    equivalents: carrier common line (originating); carrier common line
    (terminating); local end office switching; interconnection charge;
    information surcharge; tandem switched transport termination
    (fixed); tandem switched transport facility (per mile); tandem
    switching.

[^127]: *See* March 29, 2001 letter of Robert Quinn, AT&T, to Dorothy
    Attwood, Chief, Common Carrier Bureau, CC Dkt. No. 96-262; April 3,
    2001 letter of Robert Quinn, AT&T, to Jeff Dygert, Assistant Chief,
    Common Carrier Bureau, CC Dkt. No. 96-262.

[^128]: *See infra* paragraphs 98-104. Late in this proceeding, Sprint
    argued that CLEC toll-free database query charges should also be
    subject to a tariff benchmark or should be detariffed above the rate
    of the competing ILEC. *See* April 6, 2001 letter of Richard Juhnke,
    Sprint, to Magalie Salas, Secretary, Federal Communications
    Commission, CC Dkt. No. 96-262. Sprint also mentioned this issue,
    but only in passing, in its comments to our *Safe Harbor Public
    Notice. See* Sprint Safe Harbor Reply Comments at 5. Given the
    dearth of record evidence on this issue, we decline at this time to
    impose by rule the limit on database query charges that Sprint
    proposes. We expect, however, that CLECs will not look to this
    category of tariffed charges to make up for access revenues that the
    benchmark system denies them.

[^129]: As set out in the regulations accompanying this order (*see*
    Appendix B), CLECs may thus tariff rates for switched access service
    that do not exceed the greater of:

    The rate of the competing ILEC, or

    The lower of:

    The presumptively reasonable benchmark of 2.5 cents per minute,
    declining as described in paragraph 52 above, or

    The CLEC's lowest tariffed rate during the six months preceding the
    effective date of these rules.

[^130]: *See, e.g.*, *Federal Power Commission v. Sierra Pacific Power
    Co.*, 350 U.S. 348 (1956); *United Gas Pipe Line Co. v. Mobile Gas
    Service Corp.*, 350 U.S. 332 (1956); *MCI Telecommunications Corp.
    v. FCC*, 665 F.2d 1300, 1301 (D.C. Cir. 1981) ("The *Sierra-Mobile*
    doctrine restricts federal agencies from permitting regulatees to
    unilaterally abrogate their private contracts by filing tariffs
    altering the terms of those contracts.").

[^131]: We do not decide, in this order, whether those rates were
    reasonable at the time they were being charged. Rather, we conclude,
    on a prospective basis, that CLEC access rates will be deemed to be
    reasonable if they fall within the declining safe harbor that we
    have established.

[^132]: *See Intercarrier Compensation for ISP-Bound Traffic*, FCC
    01-131. *See also* *Access Charge Reform*, CC Docket No. 96-262*,*
    First Report and Order, 12 FCC Rcd 15,982, 16002, FCC 97-158, para.
    46 (1997) (\"we are concerned that any attempt to move immediately
    to competitive prices for \[certain ILEC access\] services would
    require dramatic cuts in access charges for some carriers. Such an
    action could result in a substantial decrease in revenue for
    incumbent LECs, which could prove highly disruptive to business
    operations, even when new explicit universal support mechanisms are
    taken into account.\").

[^133]: *See Intercarrier Compensation NPRM*, FCC 01-132.

[^134]: *See, e.g.,* ALTS Safe Harbor Comments at 5; CTSI Safe Harbor
    Comments at 9-11; Minnesota CLEC Safe Harbor Comments at 2-7; RICA
    Safe Harbor Comments at 4-9.

[^135]: *See Policy and Rules Concerning Rates for Dominant Carriers*,
    CC Docket No. 87-313, Second Report & Order, 5 FCC Rcd 6786, 6788
    (1990); *Price Cap Performance Review for Local Exchange Carriers*,
    CC Docket No. 94-1, Second Further Notice of Proposed Rulemaking, 11
    FCC Rcd 858, 866 (1995).

[^136]: *Safe Harbor Public Notice*, 15 FCC Rcd 24102, ¶¶ 5-7.

[^137]: *See* 47 U.S.C. § 254(d)(3); Telecommunications Act of 1996,
    Pub. L. No. 104-104, § 706, 110 Stat. 153, (1996) (reproduced in the
    notes under 47 U.S.C. § 157).

[^138]: *See e.g.,* RICA Safe Harbor Comments at 2.

[^139]: *Cf.* RICA Safe Harbor Reply Comments at 7.

[^140]: *See* Minnesota CLEC Safe Harbor Reply Comments at 2; NTCA Safe
    Harbor Comments at 4-5; BayRing Safe Harbor Comments at 23; BayRing
    Safe Harbor Reply Comments at 3-4. The National Exchange Carrier
    Association is a non-stock, not-for-profit association that the FCC
    established in 1983, *inter alia*, to administer its Access Charge
    Plan and the associated pools and tariffs. *See* 47 C.F.R. §§
    69.601, *et seq*. NECA files interstate access tariffs for primarily
    small, rural and high-cost ILECs that participate in its common line
    or traffic-sensitive pools. NECA has over one thousand members that
    are either "cost" or "average schedule" companies. Cost companies
    submit cost studies to NECA; these studies form the basis for the
    cost companies' settlements with the NECA pools. For average
    schedule companies, NECA collects cost information from selected
    representative members on a periodic basis. It uses this information
    to generate average schedule rates. These rates, rather than the
    actual costs of the individual average schedule companies, govern
    the settlements of these average schedule companies with the NECA
    pools. The data from the cost companies and the average schedule
    companies together provide the support for the development of the
    NECA tariffs.

[^141]: *See* AT&T Safe Harbor Reply Comments at 12-13.

[^142]: *Cf.* RICA Safe Harbor Reply Comments at 7. *See also* OPASTCO
    Safe Harbor Comments at 4 (many rural ILECs pursue an "edge-out"
    strategy, moving into territory of adjacent ILEC as competitor;
    arguing that, since these carriers charge NECA rates in their home
    territories, they should also be permitted to do so in areas they
    enter competitively).

[^143]: RICA Safe Harbor Comments at 17.

[^144]: *See* Industry Analysis Division, FCC, *Local Telephone
    Competition: Status as of June 30, 2000* at 1 (rel. Dec. 4, 2000)
    (*Local Telephone Competition*).

[^145]: *See id.*

[^146]: Below, we define rural areas as those falling outside of (1) any
    incorporated place of 50,000 inhabitants or more or (2) an urbanized
    area defined by the Census Bureau. *See infra* paragraph 76. RICA,
    on the other hand, proposes to include within the first portion of
    the definition only incorporated places of 20,000 inhabitants or
    more. *See* RICA Safe Harbor Comments at 6.

[^147]: AT&T Safe Harbor Comments at 13.

[^148]: WorldCom Safe Harbor Reply Comments at 4.

[^149]: *See* AT&T Safe Harbor Reply Comments at 16. AT&T has raised
    these allegations in complaint proceedings that remain pending at
    the Commission. Our discussion of the issue presented in these
    proceedings should not be interpreted as prejudging them in any way.

[^150]: *See* Industry Analysis Division, Federal Communications
    Commission, [Trends in Telephone Service]{.smallcaps}, Tbl. Table
    8.2 (Dec. 2000).

[^151]: *See* *Multi-Association Group (MAG) Plan for Regulation of
    Interstate Services of Non-Price Cap Incumbent Local Exchange
    Carriers and Interexchange Carriers*, CC Docket No. 00-256, Notice
    of Proposed Rulemaking, FCC 00-448 (rel. Jan. 5, 2001).

[^152]: BayRing Safe Harbor Comments at 21-22; CTXI Safe Harbor Comments
    at 11-14. The Office of Management and Budget defines metropolitan
    statistical areas. Essentially, they encompass cities with a
    population of more than 50,000 and all of the adjoining counties.
    *See* Alternative Approaches to Defining Metropolitan and
    Nonmetropolitan Areas, 63 Fed. Reg. 70525, 70526 (OMB 1998).
    Currently, there are 258 MSAs in the country.

[^153]: Sprint Safe Harbor Reply Comments at 7.

[^154]: *See* October 11, 2000 letter of Richard Juhnke, Sprint Corp.,
    to Magalie Salas, Secretary, FCC, CC Dkt. No. 96-262.

[^155]: An urbanized area "is a continuously built-up area with a
    population of 50,000 or more. It comprises one or more places --
    central place(s) -- and the adjacent densely settled surrounding
    area -- urban fringe -- consisting of other places and nonplace
    territory." U.S. Bureau of the Census, [Geographic Areas Reference
    Manual]{.smallcaps} at 12-1; available at
    http://www.census.gov/ftp/pub/geo/www/GARM/Ch12GARM.pdf (visited
    February 7, 2001). *See also id.* at 12-7 to 12-8 (further
    discussion of criteria for defining urbanized areas). 405 urbanized
    areas were defined by the time of the 1990 census. *Id.* at 12-5.

[^156]: *See* April 6, 2001 letter of Richard Juhnke, Sprint, to Magalie
    Salas, Secretary, Federal Communications Commission, CC Dkt. No.
    96-262.

[^157]: *See* 47 U.S.C. § 153(37)(A).

[^158]: We do not adopt the portion of the Act's definition that
    classifies as rural those companies providing service to "fewer than
    50,000 access lines," 47 U.S.C. §153(37)(B), because it would permit
    a CLEC serving 45,000 access lines in downtown Manhattan or Los
    Angeles to qualify as rural. Because CLECs may not have assigned
    geographic areas in which they must offer service to all
    subscribers, the portion of the definition relating to carriers
    serving study areas with fewer than 100,000 access lines, *id.* §
    153(37)(C), simply does not apply to CLECs. Finally, because we
    decline, for reasons of administrative simplicity, to get into a
    subscriber-by-subscriber analysis of where a CLEC's end-user
    customers are located, we decline to adopt that portion of the Act's
    definition that defines as rural those companies with less than 15
    percent of their access lines within a community of more than 50,000
    people. *Id.* § 153(37)(D).

[^159]: 47 U.S.C. § 153(37).

[^160]: *See* 47 U.S.C. § 160 (forbearance authority); 47 C.F.R. Part 61
    (tariff regulations). As modified by the *Hyperion Order*, our
    tariff rules currently subject CLECs to permissive detariffing and
    set no pre-determined limits on the level of charges that CLECs may
    establish by tariff. *See supra* paragraph 12 (discussing *Hyperion
    Order*). We note that the law is somewhat unclear on which section
    of the Act requires or permits the filing of interstate access
    tariffs. In *Lincoln Telephone & Telegraph Co. v. FCC*, 659 F.2d
    1092, 1108-09 (D.C. Cir. 1981), the Court of Appeals for the D.C.
    Circuit stated in dicta that access providers qualified as
    "connecting carriers" and were therefore exempt from the
    tariff-filing requirements of section 203(a). Rather, the court
    opined, the Commission could "exercise the residual authority" of
    section 4(i) to require tariffing of access services. *Id.* at 1109.
    In contrast, the court in *Advamtel v. AT&T* appears to have assumed
    that section 203 supported the tariffing of interstate access
    services. *See* 118 F. Supp. 2d at 683-84, 688.

[^161]: 47 U.S.C. § 160. Section 10(a) provides that:

    REGULATORY FLEXIBILITY. -- Notwithstanding section 332(c)(1)(A) of
    this Act, the Commission shall forbear from applying any regulation
    or any provision of this Act to a telecommunications carrier or
    telecommunications service, or class of telecommunications carriers
    or telecommunications services, in any or some of its geographic
    markets, if the Commission determines that --

    enforcement of such regulation or provision is not necessary to
    ensure that the charges, practices, classifications, or regulations
    by, form or in connection with that telecommunications carrier or
    telecommunications service are just and reasonable and are not
    unjustly or unreasonably discriminatory;

    enforcement of such regulation or provision is not necessary for the
    protection of consumers; and

    forbearance from applying such provision or regulation is consistent
    with the public interest."

    47 U.S.C. § 160(a). Section 10(b) further provides:

    COMPETITIVE EFFECT TO BE WEIGHED. \-- In making the determination
    under subsection (a)(3), the Commission shall consider whether
    forbearance from enforcing the provision or regulation will promote
    competitive market conditions, including the extent to such
    forbearance will enhance competition among providers of
    telecommunications services. If the Commission determines that such
    forbearance will promote competition among providers of
    telecommunications services, that determination may be the basis for
    a Commission finding that forbearance is in the public interest.

    47 U.S.C. § 160(b).

[^162]: 47 U.S.C. § 160(a)(1).

[^163]: *See, e.g., United States v. Griffith*, 334 U.S. 100, 108
    (1948); *Sunshine Cellular v. Vanguard Cellular Sys.*, 810 F. Supp.
    486, 493-94 (S.D.N.Y. 1992) (denying motion to dismiss monopsony
    claim with respect to cellular phone roaming services).

[^164]: 47 U.S.C. § 160(a)(2).

[^165]: 47 U.S.C. § 160(b).

[^166]: 47 U.S.C. § 201(a).

[^167]: Section 201(a) states --

    > It shall be the duty of every common carrier engaged in interstate
    > or foreign communication by wire or radio to furnish such
    > communication service upon reasonable request therefore; and in
    > accordance with the orders of the Commission, in cases where the
    > Commission, after opportunity for hearing, finds such action
    > necessary or desirable in the public interest, to establish
    > physical connections with other carriers, to establish through
    > routes and charges applicable thereto and the divisions of such
    > charges, and to establish and provide facilities and regulations
    > for operating such through routes.
    >
    > 47 U.S.C. § 201(a).

[^168]: Section 251(a)(1) states that "\[e\]ach telecommunications
    carrier has the duty . . . to interconnect directly or indirectly
    with the facilities and equipment of other telecommunications
    carriers." 47 U.S.C. §251(a).

[^169]: Teligent Comments at 3-5; Allegiance Comments at 6; ALTS
    Comments at 25; Alltel Comments at 5; RCN Comments at 6-8; MGC
    Comments at 17; Minnesota CLEC Comments at 3-5; Winstar Comments at
    6-7; RICA Comments at 7-9; USTA Comments at 21-22.

[^170]: AT&T Reply Comments at 29-30; Sprint Comments at 24-25; WorldCom
    Comments at 19.

[^171]: Sprint Reply Comments at 22-24.

[^172]: *Implementation of the Local Competition Provisions in the
    Telecommunications Act of 1996; Interconnection Between Local
    Exchange Carriers and Commercial Mobile Radio Service Providers*, CC
    Docket No. 96-98, First Report and Order, 11 FCC Rcd 15499,
    15988-15991 (1996) (*Local Competition Order*). MGC Comments at
    17-18.

[^173]: The Commission's rules implementing section 251(a)(1) define
    "interconnection" as the "linking of two networks for the mutual
    exchange of traffic" and state that it "does not include the
    transport and termination of traffic." 47 C.F.R. § 51.5.

[^174]: Winstar Comments at 5; OPASTCO Comments at 2-3; Allegiance
    Comments at 8; MGC Comments at 16-17; Minnesota CLEC Comments at
    3-5; RCN Comments at 8; Winstar Comments at 6-7; RICA Comments at
    7-9; USTA Comments at 21-22; WorldCom Reply Comments at 14. *See
    also* ITC Reply Comments at 6-7 (regulatory intervention is
    necessary when market forces fail to ensure customer expectations of
    call completion). Even Sprint acknowledges that an IXC's refusal to
    exchange traffic is undesirable. *See* Sprint Comments at 24.

    Incumbent LECs also are generally supportive of the approach we
    adopt in this Order. For example, SBC argues that an IXC that
    chooses to serve a geographic area as a common carrier should serve
    all users inside that area, and should not be allowed to refuse or
    discontinue service to those served by any LEC with whom the IXC
    cannot agree upon access rates. *See* SBC Reply Comments at 6. It
    further contends that all section 201 interconnection obligations
    must be correspondingly limited if the Commission determines that an
    IXC has the power to discontinue service. *Id.* *See also* US West
    Comments at 26.

[^175]: Naturally, our decision in this regard does not mean that an IXC
    would be amenable to suit under section 201(a) if it received a
    request for service to or from an area of the country that it does
    not otherwise serve. Thus, for example, this order does not place a
    section 201(a) obligation on a Bell operating company to accept
    originating access traffic from one of its in-region states for
    which it has not yet received section 271 authority to carry
    interLATA traffic.

[^176]: 47 U.S.C. 208(a). This section of the statute explicitly states
    that "\[n\]o complaint shall . . . be dismissed because of the
    absence of direct damage to the complainant." *Id.*

[^177]: 47 U.S.C. § 214.

[^178]: *See* March 29, 2001 letter of Robert Quinn, AT&T, to Dorothy
    Attwood, Chief, Common Carrier Bureau, CC Dkt. No. 96-262 (AT&T
    March 29, 2001 letter); April 3, 2001 letter of Robert Quinn, AT&T,
    to Jeff Dygert, Assistant Chief, Common Carrier Bureau, CC Dkt. No.
    96-262 (AT&T April 3, 2001 letter).

[^179]: *See* AT&T March 29, 2001 letter at 1-2.

[^180]: *Id.* at 2.

[^181]: AT&T April 3, 2001 letter at 2.

[^182]: As AT&T indicates, the question of the propriety of a CLEC's
    revenue-sharing agreement is before the Commission in the complaint
    proceeding styled *U.S. TelePacific Corp v. AT&T*, File No.
    EB-00-MD-010 (complaint filed June 16, 2000).

[^183]: *See* Declaration of William J. Taggart III, paragraphs 3-4
    (appended to AT&T April 3, 2001 letter).

[^184]: AT&T April 3, 2001 letter at 2. AT&T estimates that this
    translates into a premium of approximately \$38 million above what
    it would have paid for similar services at the ILEC rate. *Id.*

[^185]: AT&T April 3, 2001 letter at 2.

[^186]: *See* 5 U.S.C. § 603. The RFA, *see* 5 U.S.C. § 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).

[^187]: *Access Charge Reform*, CC Docket No. 96-262, Fifth Report and
    Order and Further Notice of Proposed Rulemaking, 14 FCC Rcd 14221
    (1999) (*Pricing Flexibility Order and Further Notice*).

[^188]: *See* 5 U.S.C. § 604. To the extent that any statement contained
    in this FRFA is perceived as creating ambiguity with respect to our
    rules or statements made in preceding sections of this Order, the
    rules and statements set forth in those preceding sections shall be
    controlling.

    Although we conduct a final regulatory flexibility analysis in this
    order, we note that we could also certify the rules we adopt will
    not \"have a significant economic impact on a substantial number of
    small entities.\" 5 U.S.C. § 605(b). CLECs have historically been
    subject to the just and reasonable rate requirement under section
    201(b). However, in the past, the Commission has not adopted
    specific rules to guide CLECs in tariffing their access rates. In
    this order, we adopt a rules that will remove any uncertainty
    regarding the justness and reasonableness of CLECs' tariffed rates.
    In doing so, we relieve CLECs of the burdens previously associated
    with challenges to the justness and reasonableness of their tariffed
    access rates. Furthermore, as we have noted above, many CLECs with
    tariffed rates above the benchmark have been receiving at most
    partial payment for their access services. *See supra* paragraph 60.
    This order's creation of a presumption that rates at or below the
    tariff benchmark are just and reasonable will facilitate CLECs'
    attempts to collect their access charges through an action in the
    appropriate court. This will have a positive economic impact on the
    CLECs.

    Similarly, all IXCs, including small entities, will benefit from
    reductions, both immediate and over time, in the tariffed access
    rates charged by CLECs. Moreover, IXCs, including any small
    businesses, will benefit from increased regulatory certainty about
    CLEC access rates as a result of this order. We expect that this
    will reduce the need for these IXCs to take other actions to ensure
    just and reasonable rates, such as initiating complaint proceedings.
    Accordingly, we conclude that there will be a positive impact for
    small IXCs.

[^189]: *See also* *Safe Harbor Public Notice*, ¶ 11 (inviting further
    comment on the IRFA that was included in the *Pricing Flexibility
    Order and Further Notice*). We note that no parties addressed the
    IRFA in their comments to the *Safe Harbor Public Notice*.

[^190]: ALLTEL Comments at 3-4; RICA Comments at 18.

[^191]: ALLTEL Comments at 3-4.

[^192]: *See also* RICA Comments at 18 (arguing that the IRFA does not
    adequately assess the impact of the proposals on small CLECs).

[^193]: *Pricing Flexibility Order and Notice,* 14 FCC Rcd at 14353.

[^194]: In considering ALLTEL's argument, we note that many commenters
    in the proceeding addressed the administrative burdens associated
    with our proposals. We have taken the opportunity to reconsider our
    initial conclusions in this order and FRFA. *See* *infra* paragraphs
    119 through 127.

[^195]: Parenthetically, we believe that our tentative conclusion, in
    the IRFA, that there would be no effect on CLEC administrative
    burdens was reasonable, given that the Commission proposed to
    reduce, not increase, tariff filings. We have, nevertheless, taken
    ALLTEL's arguments into account, in reconsidering our proposal to
    adopt mandatory detariffing for all CLEC switched access services.

[^196]: ALLTEL Comments at 3-4;

[^197]: RICA Comments at 18-19.

[^198]: *See supra* paragraphs 37 - 39.

[^199]: 47 U.S.C. §§ 201, 202.

[^200]: *See, e.g.,* *Pricing Flexibility Order and Notice*, 14 FCC Rcd
    14221, 14338-49.

[^201]: *See, e.g.*, Sprint Safe Harbor Comments at 1.

[^202]: *See, e.g.,* CoreComm Comments at 1.

[^203]: *See also infra*, paragraphs 119 - 127 (discussing steps taken
    to minimize significant economic impact on small entities, and
    significant alternatives considered).

[^204]: 5 U.S.C. § 603(b)(3).

[^205]: 5 U.S.C. § 601(6).

[^206]: 5 U.S.C. § 601(3) (incorporating by reference the definition of
    \"small business concern\" in 15 U.S.C. § 632). Pursuant to 5 U.S.C.
    § 601(3), the statutory definition of a small business applies
    \"unless an agency after consultation with the Office of Advocacy of
    the Small Business Administration and after opportunity for public
    comment, establishes one or more definitions of such term which are
    appropriate to the activities of the agency and publishes such
    definition in the Federal Register.\"

[^207]: 15 U.S.C. § 632. *See*, *e.g.*, *Brown Transport Truckload, Inc.
    v. Southern Wipers, Inc.*, 176 B.R. 82 (N.D. Ga. 1994).

[^208]: 13 C.F.R. § 121.201.

[^209]: 13 C.F.R. § 121.210, SIC Code 4813.

[^210]: *See* Industry Analysis Division, Federal Communications
    Commission, [Trends in Telephone Service]{.smallcaps}, Tbl. 5.3
    (Dec. 2000) (*Trends in Telephone Service*); 47 C.F.R. § 54.711 *et
    seq.*

[^211]: *Trends in Telephone Service*, Table 5.3

[^212]: ALLTEL Comments at 4.

[^213]: *See, e.g.,* ALTS Comments at 35 ("mandatory detariffing could
    be very costly for CLECs").

[^214]: *See* *supra* paragraph 42.

[^215]: We note that many CLECs sought action from the Commission
    precisely because IXCs threatened to cut off traffic and had stopped
    paying for CLEC switched access services. *See* RICA Comments at 21.

[^216]: *See, e.g.*, RICA Comments 18-20.

[^217]: *See, e.g.,* CoreComm Comments at 1.

[^218]: *See* *supra* paragraphs 35 - 44.

[^219]: *See, e.g.,* WorldCom Safe Harbor Comments at 3-6.

[^220]: *See, e.g.,* ALTS Reply Comments at 6.

[^221]: *See supra* paragraph 52.

[^222]: *See supra* paragraphs 90 - 94.

[^223]: *See, e.g.,* AT&T Comments at 27.

[^224]: *See, e.g.,* Minnesota CLEC Comments at 12.

[^225]: *See* 5 U.S.C. § 603. The RFA, *see* 5 U.S.C. § 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).

[^226]: *See* 5 U.S.C. § 603(a).

[^227]: *See id.*

[^228]: *See supra* paragraphs 35 - 44 (discussing tariff benchmark
    mechanism).

[^229]: *See* AT&T March 29, 2001 letter at 1-2.

[^230]: 5 U.S.C. § 603(c).

[^231]: *See* *supra* paragraphs 98 - 104.

[^232]: *See Electronic Filing of Documents in Rulemaking Proceedings*,
    63 Fed. Reg. 24121 (1998).

[^233]: *See* 47 C.F.R. § 1.49.