Before the

**Federal Communications Commission**

**Washington, D.C. 20554**

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| In the Matter of                 | * | CC Docket No. 80-286         |
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**REPORT AND ORDER**

**Adopted: May 11, 2001** **Released: May 22, 2001**

By the Commission:

**TABLE OF CONTENTS**

Paragraph

I. INtRODUCTION 1

II\. BACKGROUND 3

III\. PART 36 FREEZE 9

A. Establishment and Purpose of a Freeze 10

B. Legal Authority to Implement a Freeze 15

C. Components of the Freeze 18

1\. Application of the Freeze to Price Cap and Rate-of-Return Carriers
18

2\. Frozen Categories and Allocation Factors 22

3\. Base Year of the Freeze 25

4\. Length of the Freeze 28

5\. Effective Date and Continuing Review of the Freeze 30

6\. Pre-Freeze Adjustments - Dial Equipment Minutes (DEM) Factor 34

7\. Data Collection and Reporting During Freeze 43

8\. Adjustments During the Freeze 48

9\. Exogenous Cost Changes 54

IV\. PROCEDURAL MATTERS 56

A. Final Regulatory Flexibility Certification. 56

B. Paperwork Reduction Act 60

V. ORDERING clauseS 61

Appendix A -- Parties Filing Comments and Reply Comments

Appendix B -- Category Relationships and Jurisdictional Allocation
Factors to Freeze

Appendix C -- Final Rules

# INTRODUCTION

1.  Today we take a significant step towards reforming outdated
    regulatory mechanisms that are out of step with today's
    rapidly-evolving telecommunications marketplace. Specifically, we
    take action to freeze, on an interim basis, the Part 36
    jurisdictional separations rules, in order to stabilize and simplify
    the separations process while we continue to work on more
    comprehensive separations reform. The current Part 36 separations
    regime, which has been largely unmodified for the past several
    decades, was developed when local telephone service was provided
    largely through circuit-switched networks operated by companies with
    monopoly power in the local market, with clear delineation between
    interstate and intrastate services. Since the enactment of the
    Telecommunications Act of 1996, however, and the growing presence of
    new, high-bandwidth technologies and services in the local market,
    including the Internet, the telecommunications landscape has changed
    significantly, and lines between interstate and intrastate services
    are becoming increasingly blurred. In addition, with the emergence
    of some competitive local exchange providers, we need to reexamine
    regulatory structures that apply only to incumbent local exchange
    carriers. We take the first step in this Report and Order towards
    the eventual reform or elimination of one such regulatory structure.

2.  In this Report and Order, we adopt the recommendation of the
    Federal-State Joint Board established in CC Docket No. 80-286 (Joint
    Board)[^1] to impose an interim freeze of the Part 36 category
    relationships and jurisdictional cost allocation factors.[^2]
    Specifically, pending comprehensive reform of the Part 36
    separations rules, we adopt a freeze of all Part 36 category
    relationships and allocation factors for price cap carriers, and a
    freeze of all allocation factors for rate-of-return carriers.[^3]
    The interim freeze will be in effect for five years or until the
    Commission has completed comprehensive separations reform, whichever
    comes first. We further conclude that several issues, including the
    separations treatment of Internet traffic, should be addressed in
    the context of comprehensive separations reform.[^4] We believe that
    these measures will bring simplification and regulatory certainty to
    the separations process in a time of rapid market and technology
    changes until reform is completed.

# BACKGROUND

3.  Jurisdictional separations is the process by which incumbent local
    exchange carriers (ILECs) apportion regulated costs between the
    intrastate and interstate jurisdictions. [^5] Historically, one of
    the primary purposes of the separations process has been to prevent
    ILECs from recovering the same costs in both the interstate and
    intrastate jurisdictions.[^6] Jurisdictional separations is the
    third step in a four-step regulatory process that begins with an
    ILEC's accounting system and ends with the establishment of rates
    for the ILEC\'s interstate and intrastate regulated services. First,
    carriers record their costs, including investments and expenses,
    into various accounts in accordance with the Uniform System of
    Accounts (USOA) prescribed by Part 32 of the Commission's rules.[^7]
    Second, carriers assign the costs in these accounts to regulated and
    nonregulated activities in accordance with Part 64 of the
    Commission's rules to ensure that the costs of non-regulated
    activities will not be recovered in regulated interstate service
    rates.[^8] Third, carriers separate the regulated costs between the
    intrastate and interstate jurisdictions in accordance with the
    Commission's Part 36 separations rules.[^9] Finally, carriers
    apportion the interstate regulated costs among the interexchange
    services and rate elements that form the cost basis for their
    interstate access tariffs.[^10] Carriers perform this apportionment
    in accordance with Part 69 of the Commission's rules.[^11] The
    intrastate costs that result from application of the Part 36 rules
    form the foundation for determining carriers' intrastate rate base,
    expenses, and taxes.

4.  The first step in the separations process requires carriers to
    assign regulated costs to various categories of plant and expenses.
    In certain instances, costs are further disaggregated among service
    categories.[^12] In the second step, the costs in each category are
    apportioned between the intrastate and interstate jurisdictions.
    These jurisdictional apportionments of categorized costs are based
    upon either a relative use factor, a fixed allocator, or, when
    specifically allowed in the Part 36 rules, by direct
    assignment.[^13] For example, loop costs are allocated by a fixed
    allocator, which allocates 25% of the loop costs to the interstate
    jurisdiction and 75% of the costs to the intrastate
    jurisdiction.[^14]

5.  In 1997, the Commission initiated a proceeding seeking comment,
    among other things, on the extent to which legislative changes,
    technological changes, and market changes warrant comprehensive
    reform of the separations process.[^15] The Commission noted that
    the current network infrastructure is vastly different from the
    network and services used to define the cost categories appearing in
    the Commission's current Part 36 rules, and that the separations
    process codified in the current Part 36 rules was developed during a
    time when common carrier regulation presumed that interstate and
    intrastate telecommunications service must be provided through a
    regulated monopoly.[^16] In addition, the Commission sought comment
    on several proposals previously submitted to the Commission.[^17]
    The Commission also invited the State Members of the Joint Board
    (State Members) to develop a report that would identify additional
    issues that should be addressed by the Commission in its
    comprehensive separations reform effort.

6.  On December 21, 1998, the State Members filed a report setting forth
    additional issues that they believe should be addressed by the Joint
    Board in connection with its consideration of comprehensive
    separations reform.[^18] The State Report proposed an interim
    freeze, among other things, to reduce the impact of changes in
    telephone usage patterns and resulting cost shifts from year to
    year.[^19]

7.  On July 21, 2000, the Joint Board issued its *Recommended Decision*
    for an interim freeze of the Part 36 category relationships and
    allocation factors.[^20] The Joint Board recommended interim action
    to provide simplicity and stability to the separations process while
    the Commission and the Joint Board continue to review comprehensive
    reform in light of legislative, technological, and market changes.
    Accordingly, the Joint Board recommended that, until comprehensive
    reform can be achieved, the Commission should freeze Part 36
    category relationships and jurisdictional allocation factors for
    price cap carriers and allocation factors only for rate-of-return
    carriers.[^21] The Joint Board further recommended that the
    Commission implement the freeze based on data from the twelve-month
    period immediately prior to the Commission's issuance of an order on
    the *Recommended Decision*.[^22]

8.  The Joint Board also recommended that, if the Commission finds that
    Internet traffic is jurisdictionally interstate in the *Intercarrier
    Compensation for ISP-Bound Traffic Remand Proceeding*, the
    Commission should freeze the local DEM factor for the duration of
    the freeze at some substantial portion of the current year level
    based on data from the twelve months preceding the implementation of
    the freeze.[^23] The Joint Board recommended that, based on the
    record established in connection with the *Recommended Decision*,
    the precise percentage of the current year\'s local DEM should be
    established according to how much of a reduction in local DEM is
    warranted in light of any effects that Internet usage has had on
    jurisdictional allocations or consumers. Finally, the Joint Board
    recommended that the Commission continue to consider, in the context
    of comprehensive reform, other proposals in the record, such as the
    NYNEX single frozen factor proposal.[^24]

# PART 36 FREEZE

9.  In this Report and Order, we adopt the Joint Board's recommendation
    to freeze the Part 36 category relationships and jurisdictional
    allocation factors for price cap carriers and the allocation factors
    only for rate-of-return carriers. The specific category
    relationships and allocation factors to be frozen are enumerated in
    Appendix B of this Report and Order. The frozen category
    relationships and allocation factors will be based on data from the
    carriers' calendar-year 2000 separations studies and will be
    effective July 1, 2001. The freeze will be in effect for five years
    from July 1, 2001, to June 30, 2006, or until the Commission has
    completed comprehensive reform of the Part 36 separations rules,
    whichever comes first. With limited exceptions, no adjustments to
    the frozen category relationships and allocation factors will be
    allowed during the freeze. We do not adopt the Joint Board's
    recommendation to reduce local dial equipment minutes (DEM) at the
    outset of the freeze to compensate for the impact of the Internet on
    local calling patterns, because we do not believe that the record
    allows us to quantify with any degree of accuracy the impact of the
    Internet on a nationwide basis. Concurrent with the implementation
    of the freeze, we will continue to work with the Joint Board to
    address several issues as detailed below, including the separations
    treatment of Internet traffic.

## Establishment and Purpose of a Freeze

10. The Joint Board recommended that, for five years or until such time
    as comprehensive reform of separations can be implemented, the
    Commission should institute an interim freeze of the Part 36
    category relationships and jurisdictional allocation factors.[^25]
    The Joint Board stated that a freeze was necessary to provide
    stability and simplification for the separations process pending
    comprehensive reform.[^26] The vast majority of commenters support
    the freeze as proposed by the Joint Board.[^27] Only the California
    Public Utilities Commission and AT&T oppose the freeze altogether,
    on grounds that the freeze would lock in current flaws in the
    separations process, and also fail to properly allocate future costs
    as they arise.[^28]

11. In this Report and Order, we conclude that an interim freeze of Part
    36 should be adopted. Under a freeze, price cap carriers will
    calculate 1) the relationships between categories of investment and
    expenses within Part 32 accounts and 2) the jurisdictional
    allocation factors, as of a specific point in time, and then lock or
    "freeze" those category relationships and allocation factors in
    place for a set period of time.[^29] The carriers will use the
    "frozen" category relationships and allocation factors for their
    calculations of separations results and therefore will not be
    required to conduct separations studies for the duration of the
    freeze. As discussed below, rate-of-return carriers will only be
    required to freeze their allocation factors, but will have the
    option to freeze their category relationships at the outset of the
    freeze.[^30]

12. We agree with the Joint Board and the commenters that instituting a
    mandatory interim freeze of Part 36 is consistent with our goals of
    stabilizing and simplifying the Part 36 separations process pending
    comprehensive reform. First, with regard to the goal of stability,
    we believe that a freeze will achieve the goal of stability and
    provide regulatory certainty for carriers by minimizing any cost
    shift impacts on separations results that might occur as a result of
    circumstances not contemplated by the Commission's current Part 36
    rules, such as growth in local competition and new
    technologies.[^31] Since the *NPRM* was released in 1997, there have
    been rapid changes in the telecommunications infrastructure, such as
    the growth in Internet usage and the increased usage of packet
    switching. We believe that these types of changes may produce cost
    shifts in separations results because these and other new
    technologies, such as digital subscriber line (DSL) services, as
    well as a competitive local exchange marketplace, are not
    sufficiently contemplated by the current Part 36 rules.[^32] We
    believe, therefore, that the most effective action at this time will
    be to freeze the separations process on an interim basis, until the
    Commission and the Joint Board have had the opportunity to more
    comprehensively reform Part 36. We recognize that some commenters
    oppose a freeze on grounds that a freeze would not account for major
    changes in the telecommunications marketplace and would only serve
    to continue what they claim is a current misallocation of costs to
    the interstate jurisdiction.[^33] We believe that such concerns are
    offset by the added regulatory certainty that carriers will enjoy,
    since freezing the separations process in place will avoid any
    sudden cost shifts in this time of rapid change. We stress that,
    under the principles of *Smith v. Illinois*, extreme precision is
    not required in the separations process, and therefore the freeze is
    a reasonable and legally sound method by which to stabilize the
    separations process pending further reform.[^34]

13. Second, with regard to simplification, we believe that a freeze of
    the separations process will reduce regulatory burdens on carriers
    during the transition from a regulated monopoly to a deregulated,
    competitive environment in the local telecommunications marketplace.
    At the present time, ILECs are required under the Part 36 rules to
    perform separations studies, while CLECs have no similar
    requirements. We believe that a freeze will further the Commission's
    stated goal in the *NPRM* of achieving greater competitive
    neutrality during the transition to a competitive marketplace by
    simplifying the separations process for those carriers subject to
    Part 36.

14. The freezing of factors and categories will reduce the Part 36
    administrative burden on ILECs in several specific ways. First,
    those carriers will no longer have to develop jurisdictional
    allocation factors for interstate purposes, as frozen factors will
    be carried forward from year to year and used by carriers to
    calculate their separations results. Second, price cap carriers and
    rate-of-return carriers who elect to freeze their categories will
    not have to perform the analyses necessary to categorize annual
    investment changes for interstate purposes. The categories of
    investment, such as central office equipment (COE) and cable and
    wire facilities (C&WF) investment, will be assigned to categories
    and, where appropriate, subcategories for the given year based on
    the frozen category relationships.[^35]

## Legal Authority to Implement a Freeze 

15. The Joint Board asserted that the Commission has legal authority to
    institute an interim freeze to provide stability to the separations
    process and to preserve the status quo pending comprehensive
    reform.[^36] First, the Joint Board stated that an interim freeze of
    the Part 36 allocation factors and category relationships would not
    contravene the United States Supreme Court's ruling in *Smith v.
    Illinois*.[^37] The Joint Board argued that, under an interim
    freeze, the costs and revenues associated with ILEC operations would
    still be separated between the intrastate and interstate
    jurisdictions, consistent with *Smith v. Illinois,* which does not
    require "extreme nicety" in the separations process.[^38]
    Accordingly, the Joint Board concluded that a freeze whereby
    category relationships and/or factors are not recalculated on an
    annual basis using current data, but instead are frozen as of a
    specific year, satisfies the *Smith v. Illinois* requirement for
    cost allocation.[^39] Second, the Joint Board found that there is
    precedent for the Commission's "freezing" of certain regulations
    and, in particular, freezing elements of Part 36 of the Commission's
    rules, such as its 1982 decision to freeze the subscriber plant
    (SPF) factor.[^40] The Joint Board noted that the Commission
    previously has frozen certain regulations in order to address
    changes in the telephone network and its usage, and to reduce any
    potential, sudden cost shift impact of such changes.[^41]

16. The overwhelming majority of commenters believe that the Commission
    has sufficient legal authority to adopt the recommended freeze.[^42]
    Only the California PUC disagrees with the Joint Board on this
    issue.[^43] The California PUC contends that the recommended freeze
    would have a far greater impact on carriers and consumers than the
    SPF freeze involved in *MCI v. FCC*, because the SPF allocated
    non-traffic sensitive costs and the recommended freeze would lock
    traffic-sensitive allocation factors in place.[^44] The California
    PUC argues that the recommended freeze would therefore fail to
    properly allocate costs as changes occur in traffic patterns during
    the freeze and thereby violate cost causation principles.[^45]
    Furthermore, the California PUC believes that the recommended freeze
    would result in separations results that fail to reflect shifts in
    investment and usage and therefore would not meet the requirement of
    *Smith v. Illinois*.[^46]

17. We agree with the Joint Board and the majority of commenters that
    the Commission has sufficient legal authority under the
    Communications Act to adopt the recommended freeze. Moreover, we
    believe the recommended freeze is consistent with *Smith v.
    Illinois* and prior Commission decisions implementing "freezes" of
    certain rules. We disagree with the California PUC's contention that
    the recommended freeze is inconsistent with the SPF freeze. Both
    freezes represent interim measures used to preserve the status quo
    pending reform and provide for a reasonable allocation of costs
    between the jurisdictions consistent with *MCI v. FCC* and *Smith v.
    Illinois*. Indeed, as previously stated, *Smith v. Illinois* does
    not require absolute precision in the separations cost allocation
    process. Furthermore, since the freeze is not a permanent freeze,
    but rather a transitional measure we adopt for five years, and
    because separations results have not fluctuated widely in recent
    years,[^47] there will not be such large cost misallocations that
    the freeze will produce results contrary to the principles of
    *Smith v. Illinois*. In sum, we conclude that the interim freeze is
    a reasonable and legally permissible approach for the Commission to
    take for a 5-year period in order to simplify and stabilize the
    separations process prior to taking up comprehensive reform.

## Components of the Freeze

### Application of the Freeze to Price Cap and Rate-of-Return Carriers

18. The Joint Board recommended that a categories and factors freeze be
    mandatory for all price cap carriers subject to the Commission's
    Part 36 rules, as advocated by many commenters.[^48] For rate-of
    return carriers, however, the Joint Board recommended that a
    mandatory factors-only freeze apply.[^49] Although the Joint Board
    recognized that a factors and categories freeze would provide more
    certain separations results for all carriers, the Joint Board was
    persuaded by the record that a categories freeze may harm
    rate-of-return carriers.[^50] The Joint Board agreed with certain
    parties that rate-of-return carriers, whose investment patterns may
    fluctuate more than those of price cap carriers from year to year,
    will retain maximum flexibility for recovering costs from new plant
    investments (upgrades) by not freezing their category relationships.
    [^51] The Joint Board concluded that a categories freeze may harm
    rate-of-return carriers by limiting their ability to account for
    changes in investment through the separations process. In this
    regard, the Joint Board was concerned that a mandatory categories
    freeze for all rate-of-return carriers would provide disincentives
    for these carriers to deploy new technologies due to insufficient
    cost recovery.

19. Furthermore, the Joint Board recognized that a categories freeze may
    have a negative impact on some rate-of-return carriers' current
    universal service high cost support levels.[^52] The Joint Board
    noted that COE Category 4.13 and CW&F Category 1.3 are included in
    the current Universal Service High Cost Loop formula that is used
    for the rate-of-return carriers under Part 36.[^53] The investment
    levels in these two categories may increase for rate-of-return
    carriers as new technologies are deployed, such as facilities to
    provide DSL services. If the category relationships are frozen at
    the current year level, rate-of-return carriers may not be able to
    recover these costs in the future through increased loop support
    under the Universal Service High Cost Loop formula.[^54] In
    contrast, the Joint Board found that price cap carriers, due to
    their sheer size, have little fluctuation in the relative category
    levels within their investment accounts.[^55] In other words, the
    category relationships for price cap carriers generally remain
    relatively constant on an annual basis.[^56]

20. Of those commenters that support a freeze, many support the Joint
    Board's recommendation for a bifurcated freeze approach for price
    cap and rate-of-return carriers.[^57] Several commenters, however,
    recommend that rate-of-return carriers be given a one-time option to
    freeze their category relationships at the onset of the freeze.[^58]

21. We agree with the Joint Board that a freeze of both category
    relationships and allocation factors is appropriate for price cap
    carriers in order to achieve maximum stability and simplification
    for those carriers. We conclude, furthermore, that because of their
    different investment and cost structures, rate-of-return carriers
    should only be required to freeze their jurisdictional allocation
    factors at this time. We understand, however, that some
    rate-of-return carriers may prefer the added simplification and
    stability from a freeze of their category relationships.[^59] Based
    on the record before us today, we are persuaded that providing
    rate-of-return carriers with an option to freeze their category
    relationships as well could have benefits for some rate-of-return
    carriers. We therefore will provide all rate-of-return carriers with
    a one-time option to freeze their category relationships at the
    outset of the freeze. Those rate-of-return carriers who elect to
    freeze their category relationships must notify the Commission of
    their election on or before July 1, 2001. We believe that this
    approach will give each rate-of-return carrier the flexibility to
    decide, based on its own circumstances and investment plans, whether
    a freeze of its category relationships will be beneficial.

### Frozen Categories and Allocation Factors 

22. We find that, for all price cap carriers and for those
    rate-of-return carriers that elect to have their categories frozen,
    all separations categories and subcategories, as specified in Part
    36, shall be frozen at their calendar year 2000 percentage ratios.
    Part 36 requires some categories of costs to be further sub-divided
    into additional classifications, but does not refer to those further
    classifications as "categories" or "subcategories." If we were to
    require carriers to continue subdividing costs into these
    classifications, carriers still would need to perform cost studies.
    Because a goal of the freeze is to reduce administrative burdens on
    carriers, we find that any Part 36 requirement to segregate costs
    recorded in Part 32 accounts into categories, subcategories, or
    further sub-classifications shall be frozen at their percentage
    relationship for the calendar year 2000.

23. Similarly, we find that in order to relieve all carriers of
    performing traffic or relative-use studies for separations purposes,
    all allocation factors used to assign Part 36 categories,
    subcategories, or further subdivisions to the state or interstate
    jurisdictions shall be frozen utilizing the factors calculated for
    the calendar year 2000. Categories or portions of categories that
    have been directly assigned in the past, however, will continue to
    be directly assigned to each jurisdiction. In other words, the
    frozen factors shall not have an effect on the direct assignment of
    costs for categories, or portions of categories, that are directly
    assigned. Since those portions of facilities that are utilized
    exclusively for services within the state or interstate jurisdiction
    are readily identifiable, we believe that the continuation of direct
    assignment of costs will not be a burden on carriers, nor will it
    adversely impact the stability of separations results throughout the
    freeze.[^60]

24. Appendix A of the Recommended Decision provides the Joint Board's
    recommendation of the categories and factors to be frozen.[^61] SBC,
    however, noted that Appendix A of the *Recommended Decision* failed
    to include Telephone Operator Expense and Published Directory
    Listing as frozen categories of Account 6620-Services.[^62] Because
    these costs and relative use factors fall within the parameters of
    the freeze, we agree with SBC that it is appropriate to include
    these costs and their relative use factors in the freeze and
    therefore amend the list of categories and factors as specified in
    Appendix B of this Report and Order.

### Base Year of the Freeze

25. The Joint Board recommended that, for all carriers, the Part 36
    freeze should be based on data from the twelve-month period
    immediately prior to the date of the Commission's release of a
    Report and Order implementing the *Recommended Decisio*n.[^63] The
    Joint Board believes that a freeze based on carriers' most recent
    data would provide the greatest measure of stability for the
    separations process.[^64] Specifically, for price cap carriers, the
    Joint Board recommended that costs should be assigned to the Part 36
    categories based upon the current year percentage relationship of
    each Part 36 category to the total amount recorded in its associated
    Part 32 account. For example, Central Office-Switching, Account
    2210, for separations purposes, is categorized into Category 2
    (Tandem Switching) and Category 3 (Local Switching).[^65] If current
    year Category 2 costs are twenty percent of total Account 2210 and
    current year Category 3 costs are eighty percent of total Account
    2210 costs, then during the interim freeze, twenty percent of
    Account 2210 will continue to be assigned to Category and eighty
    percent will be assigned to Category 3.[^66]

26. Several commenters oppose the Joint Board's recommendation for the
    base year of the freeze, and instead propose allowing carriers to
    use their most recently completed calendar-year studies.[^67]
    Several commenters representing the interests of rate-of-return
    carriers recommend basing the freeze on data from an average of
    years 1995-1997 to mitigate the impact of increased Internet
    traffic.[^68] The Pennsylvania PUC supports the recommended freeze
    basis of data from the twelve months preceding the implementation of
    the freeze.[^69]

27. We conclude that the base year of the freeze shall be calendar year
    2000, and not the twelve-month period immediately preceding the
    release of this Report and Order. We make this minor departure from
    the Joint Board's recommendation because we find that any benefit
    realized by using the prior 12-month period in an attempt to make
    the freeze as current as possible is outweighed by the simplicity
    and efficiency achieved through requiring all carriers to base the
    frozen category relationships and allocation factors on their
    calendar year 2000 data (*i.e.,* their calendar year 2000
    separations cost studies). Furthermore, we note that, due to the
    structure of the reporting requirements, carriers may not, at the
    date of release of this Report and Order, possess data for the
    entire 12-month period immediately preceding the release of this
    Report and Order. Finally, by allowing carriers to use calendar year
    2000 studies, carriers also would not be required to create any new
    studies in order to calculate their frozen category relationships
    and allocation factors.

### Length of the Freeze

28. The Joint Board recommended that the Commission institute the Part
    36 freeze for a five-year period, or until the Commission takes
    further action in this docket.[^70] The Joint Board believes that a
    five-year freeze period is adequate as an interim measure to
    maintain stable separations results while the Joint Board considers
    long-term, comprehensive separations reform. The Joint Board
    recommended that the freeze automatically expire at the end of five
    years, unless extended by the Commission upon the recommendation of
    the Joint Board.[^71] Several commenters support the recommended
    five-year freeze period.[^72] Other commenters are concerned that
    five years is too long and may discourage efforts toward
    comprehensive reform, resulting in the freeze becoming a *de facto*
    rule.[^73]

29. We agree with the Joint Board that five years is a reasonable length
    of time for the interim freeze. The five-year interim freeze period
    will maintain stability in jurisdictional separations, while
    allowing the Commission and the Joint Board sufficient time to
    assess and consider further separations reform. In the event that
    the Commission and the Joint Board are able to complete
    comprehensive separations reform within five years, then the freeze
    should be discontinued and the reformed structures implemented. We
    believe, furthermore, that five years is not such an unduly long
    period of time, and efforts towards further reform will not be
    discouraged or lose momentum over a five-year span. We also conclude
    that, prior to the expiration of the five-year period, the
    Commission shall, in consultation with the Joint Board, determine
    whether the freeze period shall be extended. The determination of
    whether the freeze should be extended at the end of the five-year
    period shall be based upon whether, and to what extent,
    comprehensive reform of separations has been undertaken by that
    time.

### Effective Date and Continuing Review of the Freeze

30. The *Recommended Decision* was silent on the issue of the
    appropriate effective date for the recommended freeze. All
    commenters who addressed the issue recommended an effective date of
    January 1, 2001.[^74] In the interest of implementing the freeze
    efficiently and swiftly, we adopt July 1, 2001, as the effective
    date of the freeze. We do not believe that January 1, 2001 would be
    an appropriate effective date of the freeze, because in the interest
    of simplicity and efficiency, we do not wish the freeze to have any
    potential retroactive effects.

31. The Joint Board also recommended that the Commission seek comment on
    the impact of the freeze after it has been in effect for two
    years.[^75] The Joint Board also recommended that the Commission
    continue its comprehensive review of the separations process during
    the freeze in order to provide a clear pathway for comprehensive
    reform of separations.[^76] Specifically, the Joint Board
    recommended that several issues be addressed by the Joint Board and
    the Commission in the near future as a result of the emergence of
    new technologies and local exchange service competition. These
    issues included the appropriate separations treatment of: 1)
    unbundled network elements (UNEs); 2) digital subscriber line (DSL)
    services; 3) private lines; and 4) Internet traffic.[^77]
    Accordingly, the Joint Board recommended that the Commission commit
    to addressing these issues and to developing a pathway to
    comprehensive reform in the near term.

32. Several commenters contend that any review of the impact of the
    freeze during the freeze period would drain resources that should be
    devoted to the effort to reform the separations process, given that
    a freeze by its very nature would eliminate the collection of
    certain data and studies.[^78] In contrast, the Pennsylvania PUC
    recommends that the Commission seek comment on the impact at the end
    of the first year.[^79] With regard to the four issues specified
    above, several commenters recommend that the Joint Board and the
    Commission address these issues during the freeze.[^80] Other
    commenters see these issues as unnecessary distractions from
    devoting time and resources during the freeze to comprehensive
    separations reform.[^81]

33. We agree with the Joint Board that it would be beneficial to seek
    comment on the impact of the freeze prior to the expiration of the
    freeze. We agree with the Joint Board that two years would generally
    be an appropriate time to seek comment on the impact of the freeze,
    but believe that it is premature for us to specify at what exact
    point in time such review shall occur. We also agree with the Joint
    Board that the comprehensive review of the separations process must
    continue during the freeze, and we thus commit to working with the
    Joint Board on a continuing basis during the freeze. As part of that
    continuing effort towards comprehensive reform, we commit to working
    with the Joint Board to begin to address the four specified issues
    during the freeze.

### Pre-Freeze Adjustments - Dial Equipment Minutes (DEM) Factor

34. The Joint Board noted in the *Recommended Decision* that there has
    been an increase in intrastate usage patterns since 1995, as
    evidenced by the growth in local dial equipment minutes (DEM).[^82]
    The Joint Board suggested that one factor in this growth in local
    minutes may be the increase in the use of the local network to
    connect to the Internet, and the attendant long holding times
    associated with Internet usage.[^83] The Joint Board also
    recognized, however, that other factors may be contributing to the
    growth in intrastate usage, including changes in the
    telecommunications environment that are resulting from the local
    competition provisions in the 1996 Act, or changes in
    technology.[^84] The Joint Board recommended that the Commission
    further develop the record on this issue, and in particular,
    determine what, if any, impact the growth in local minutes has had
    on jurisdictional allocations and consumers.[^85]

35. The Joint Board recommended that, if the Commission finds in
    *Intercarrier Compensation for ISP-Bound Traffic Remand* proceeding
    that Internet traffic is interstate,[^86] the Commission should
    freeze the local DEM factor for the duration of the freeze at some
    substantial portion of the current year level based on data from the
    twelve months preceding the implementation of the freeze.[^87]
    Specifically, the Joint Board recommended that the Commission
    determine the precise percentage reduction of local DEM by looking
    to record evidence demonstrating the effect that Internet usage has
    had on jurisdictional allocations or consumers.[^88] Given the
    inadequate record on this issue, the Joint Board stated that it
    could not recommend with precision what amount to reduce the DEM
    level by before application of the freeze. In order to facilitate
    the development of a specific record, however, the Joint Board
    suggested, as a default estimate, that the local DEM be frozen at
    95% of the current year level based on data from the twelve months
    preceding the implementation of the freeze.[^89] In other words, the
    Joint Board recommended that, at the outset of the freeze, the local
    DEM level for the base year be reduced by 5%, and that 5% would be
    shifted to interstate DEM, and the adjusted levels would be frozen.

36. Following the issuance of the *Recommended Decision,* the Common
    Carrier Bureau released a Public Notice that, among other things,
    sought comment on the Internet/DEM reduction issue as framed by the
    Joint Board.[^90] The Bureau sought specific comment on \"the impact
    of Internet traffic growth on jurisdictional allocations since
    1995.\"[^91] The Bureau asked that commenters provide specific
    information on Internet usage minutes, including the percentage of
    local minutes attributable to Internet traffic, from ISPs both
    affiliated and non-affiliated with incumbent LECs.[^92] The Bureau
    also requested that, when estimates were used, the commenters
    provide explanations and underlying documentation supporting those
    estimates.[^93]

37. A number of parties oppose any reduction of the local DEM factor in
    conjunction with the interim freeze. BellSouth and Verizon argue
    that this course of action would undermine the stability that is one
    of the stated goals of the freeze, because, among other things, it
    would result in an immediate cost shift, and interject uncertainty
    into the Commission's position on the jurisdictional nature of
    Internet traffic.[^94] Moreover, USTA, SBC, and several other
    commenters recommend that the Commission move forward quickly to
    adopt a straightforward freeze, and address the Internet issue in
    the context of comprehensive separations reform.[^95] Verizon
    contends that a local DEM reduction would contravene cost-revenue
    matching principles so long as the costs of ISP-bound traffic are
    recovered through state tariffs.[^96] In addition, Pac-West and RCN
    note that it is impossible to accurately determine the appropriate
    level for a local DEM reduction.[^97] AT&T and WorldCom oppose the
    local DEM reduction on the grounds that such actions would
    improperly allocate costs between the jurisdictions.[^98] AT&T
    contends that Internet costs are properly allocated to the
    intrastate jurisdiction for separations purposes based on cost
    causation principles and also contends that the record in this
    proceeding is inadequate to support any local DEM reduction.[^99]
    Alternatively, several commenters, including the California PUC and
    SBC, suggest that the Commission simply treat Internet traffic as
    interstate for separations purposes and avoid the need for any local
    DEM factor reduction.[^100]

38. On the other hand, NECA, many of the small rate-of-return carriers,
    Qwest, and several state commissions support the Joint Board's
    proposed 5 % DEM factor reduction (or a greater reduction ranging
    from 5 % to 35 %) to address the increased local usage that is
    alleged to be attributable to Internet traffic.[^101] Commenters'
    estimates on the percentage of intrastate traffic that represents
    Internet traffic range from 3.1% to 71.5%.[^102] The commenters who
    provided these estimates, however, did not provide much detail
    explaining how they arrived at those estimates, nor did they provide
    detailed studies or documentation. No party, furthermore, provided
    concrete evidence demonstrating rate increases or other actions
    directly attributable to increased Internet usage.

39. The Joint Board's concerns regarding increased Internet usage stem
    from the fact that costs for ISP-bound traffic, despite the
    jurisdictionally interstate nature of this traffic, are booked as
    intrastate for separations purposes. The Commission has directed
    carriers to treat the traffic-sensitive local switching costs that
    ISPs incur through their connections to LEC end-offices as
    intrastate for separations purposes, because these switching costs
    are recovered through intrastate business tariffs, and enhanced
    service providers such as ISPs are exempt from paying carrier access
    charges.[^103] Revenue for ISP connections to LEC end offices,
    therefore, is collected on the intrastate side, and the Commission
    has previously concluded that costs for ISP-bound traffic should be
    booked as intrastate in order to avoid cost-revenue mismatches.

40. The Joint Board proposed a DEM reduction as a short-term way to
    shift some costs to the interstate jurisdiction, pending further
    review of the issue of how Internet-bound traffic should be treated
    for separations purposes. Even though the Commission recently
    reaffirmed in the *Intercarrier Compensation for ISP-Bound Traffic
    Remand* proceeding that Internet traffic is jurisdictionally
    interstate, we decline to reduce the local DEM factor as recommended
    by the Joint Board.[^104] Based on the record developed from the
    *Recommended Decision*, we conclude that we lack reliable data upon
    which to set the amount of any local DEM factor reduction that may
    be warranted. We recognize that the record demonstrates some growth
    in local calling patterns, and we recognize that it may be
    reasonable to assume that some portion of this growth is
    attributable to increased Internet usage. Despite our efforts to
    focus the record on this issue, the parties have not presented
    reliable evidence that would allow us to quantify with any
    reasonable certainty the portion of local usage that can be
    attributed to Internet usage, and thus establish a reasonable amount
    of local DEM reduction that should be applied. No party has produced
    specific documentation of increased investment outlays, local rate
    increases, or requests for relief from carriers that have stemmed
    from sharp increases in local calling patterns due to increased
    Internet usage. We have no reliable data, therefore, upon which to
    set any reasonable local DEM reduction on an across-the-board,
    nationwide basis in order to compensate for any effects that
    Internet usage may have had on jurisdictional allocations or
    consumers. More importantly, we have no concrete evidence before us
    that the current situation has, in fact, had any detrimental impact
    upon consumers. In short, there is no demonstrable evidence in this
    record that freezing the local DEM factor at current levels would
    produce irrational results.

41. We note that our decision in the *Intercarrier Compensation for
    ISP-Bound Traffic Remand* proceeding has not affected our prior
    decision that local switching costs for ISP-bound traffic be treated
    as intrastate for separations purposes, because the ESP exemption
    remains in place and the local switching revenues for ISP-bound
    traffic continue to be collected on the intrastate side. As the
    Commission explained in the *GCI Order,* assigning ISP
    traffic-sensitive costs to the intrastate jurisdiction is a
    \"reasonable measure" based on sound policy choices.[^105] The
    assignment of the traffic-sensitive costs of ISP-bound traffic to
    the intrastate jurisdiction that follows from the ESP exemption
    derives from the application of the Commission's general separations
    principles to ISP-bound traffic in implementing the ESP exemption,
    and prevents a cost-revenue mismatch that the separations rules are
    designed to avoid.[^106] Moreover, the Commission\'s decision to
    retain the ESP exemption has been affirmed as a lawful exercise of
    the Commission\'s discretion.[^107] Our decision in the
    *Intercarrier Compensation for ISP-Bound Traffic Remand* *Order* has
    not altered the ESP exemption, nor the policy reasons for treating
    ISP-bound traffic as intrastate for separations purposes.

42. While we depart from the *Recommended Decision* and decline to
    require a local DEM reduction at the onset of the freeze, we do,
    however, commit to working with the Joint Board on a continuing
    basis to address the impact of the Internet and the growth in local
    minutes during the interim freeze. Furthermore, when the Commission
    and the Joint Board seek comment on the impact of the freeze after
    the freeze has been in effect for some time, we will seek specific
    comment on the status of the ISP-bound traffic issue, and the impact
    of the freeze on this situation.[^108] If we are in the future
    presented with evidence that demonstrates with greater precision the
    impact of increased Internet usage on consumers or carriers, we can
    revisit this issue.

### Data Collection and Reporting During Freeze

43. The Joint Board recommended that all carriers continue to report
    separations results under the Commission's current reporting
    rules.[^109] Under the Joint Board's recommendation, ARMIS-reporting
    companies would continue to report separations results to the
    Commission, and companies participating in NECA pools would continue
    to report separations results to NECA. The Joint Board recommended,
    however, that the Commission no longer require price cap carriers to
    conduct certain underlying separations studies to assign costs to
    the Part 36 categories, and also recommended that neither price cap
    nor rate-of-return carriers should be required to calculate updated
    jurisdictional allocation factors.[^110]

44. Most commenters assert that carriers should not be required to file
    Part 36 separations reports and related cost studies during the
    freeze, noting that this easing of administrative burden is a
    primary benefit of the freeze.[^111] Several commenters, however,
    support requiring carriers to continue annual separations reports
    and underlying studies to assign costs to the Part 32 categories and
    to compute the jurisdictional allocation factors.[^112] These
    commenters contend that continuing the separations reporting and
    study requirements are necessary to effectively evaluate the freeze
    and accomplish meaningful separations reform.

45. We conclude, consistent with the Joint Board recommendation, that
    price cap carriers need not conduct separations studies to assign
    costs to the Part 36 categories and that neither price cap carriers
    nor rate of return carriers need to perform such studies to
    calculate allocation factors. We agree with the Joint Board that
    removal of this intermediary step will simplify the separations
    process and thereby ease administrative burdens on all ILECs.

46. We also agree with the Joint Board that carriers should continue to
    report separations results for the duration of the interim freeze.
    We conclude, however, that we can streamline our current separations
    reporting requirements, while receiving sufficient information to
    evaluate the freeze and consider further separations reform. We will
    freeze category relationships and allocation factors for price cap
    carriers based on the information provided by those carriers in the
    ARMIS 43-04 on April 1, 2001, which covers data for calendar
    year 2000. We will revise ARMIS 43-04 for subsequent years so that
    price cap carriers no longer need to report all of the information
    required in the current 43-04. Instead, under the streamlined ARMIS
    43-04, price cap carriers will only report data necessary to
    evaluate further separations reform. Price cap carriers will file
    the new streamlined ARMIS 43-04 beginning April 1, 2002 and shall
    file that report on an annual basis for the duration of the
    freeze.[^113]

47. We conclude that these modifications will simplify carrier reporting
    during the interim freeze, because carriers will no longer be
    required to compile and report all of the data currently required
    under the ARMIS 43-04. At the same time, the data provided in the
    streamlined ARMIS 43-04 will provide the Commission and Joint Board
    with the selected data necessary to evaluate further action in this
    area.

### Adjustments During the Freeze

48. As explained above, the intent of the freeze is to stabilize and
    simplify the separations process. Accordingly, the Joint Board
    recommended that carriers should generally not be allowed to adjust
    the separations category relationships and allocation factors of
    price cap carriers or the allocation factors of rate-of-return
    carriers during the freeze.[^114] The Joint Board found that this
    prohibition of adjustments during the freeze is consistent with the
    stability sought through the freeze, pending more comprehensive
    reform of the separations process. The Joint Board noted, however,
    that carriers may request a waiver of the Part 36 freeze pursuant to
    the Commission's regulations, in order to make adjustments where
    special circumstances warrant such action.[^115]

49. In recommending that adjustments to the separations category
    relationships and allocation factors should not be permitted during
    the freeze, the Joint Board recognized that, during the freeze,
    carriers may merge affiliated operations, or acquire from or sell
    exchanges to non-affiliated carriers. The Joint Board recommended
    that a carrier selling or otherwise transferring exchanges to
    another carrier's study area continue to employ its pre-transfer
    frozen factors and, if applicable, category relationships. [^116]
    The Joint Board recommended, however, that the acquiring carrier be
    required to recalculate its frozen factors and category
    relationships.[^117] The acquiring carrier would calculate new,
    composite frozen factors and category relationships based on a
    weighted average of both the seller's and purchaser's existing
    frozen factors and frozen category relationships. This weighted
    average would be based on the number of access lines currently being
    served by the acquiring carrier and the number of access lines in
    the transferred exchanges.[^118] The Joint Board believes that this
    approach will result in factors and category relationships that more
    accurately reflect the acquiring carrier's post-transfer study
    area.[^119]

50. The Joint Board also recognized that, when exchanges are
    transferred, the transferred exchanges may not include all of the
    categories of investment found in the selling carrier's study area.
    Wishing to avoid the anomaly of creating categories of investment in
    the new study area that are not actually transferred to the
    purchaser,[^120] the Joint Board recommended that the Commission
    require the acquiring carrier to remove all categories of investment
    from the selling carrier's category relationships where no such
    category investment exists within the sold exchange(s). The seller's
    remaining category relationships would then be increased
    proportionately to total 100 percent. Finally, the adjusted seller's
    category relationships would be composited with those of the
    acquiring carrier to determine the category relationships for the
    acquiring carrier's post-transfer study area.[^121]

51. Several commenters support the recommendation that no adjustments
    during the freeze should be allowed and also support the proposed
    treatment of the sale or transfer of exchanges during the
    freeze.[^122] Several commenters support the recommendation, as a
    general matter, but propose that two exceptions be carved out: 1)
    when rate-of-return carriers incur new categories of investment
    during the freeze; and 2) when rate-of-return average schedule
    companies convert to become rate-of-return cost companies.[^123]
    USTA, NECA, and several commenters representing the interests of
    small carriers recommend that the Commission permit theses two
    exceptions for adjustments to the allocation factors of
    rate-of-return carriers during the freeze.[^124]

52. We adopt the recommendations of the Joint Board regarding
    adjustments during the freeze, including the Joint Board's
    recommended treatment of the sale or transfer of exchanges. We agree
    with the Joint Board that this approach is an administratively
    simple one that is consistent with our goal of stabilizing the
    separations process by halting any jurisdictional cost shifts. In
    the event of any anomalies, we believe that the Commission's waiver
    process will provide a mechanism for relief when special
    circumstances warrant deviation from the freeze.

53. We do, however, recognize that the two exceptions proposed by the
    commenters present unique circumstances that may occur with some
    frequency. Accordingly, we adopt rules to address these two
    exceptions consistent with the recommendations of the commenters.
    Rate-of-return carriers who incur new categories of investment
    during the freeze shall calculate new factors for the investment and
    then freeze the new factors for the duration of the freeze. We agree
    with USTA that, without this exception, some rate-of-return carriers
    may be precluded from allocating their costs for recovery of the new
    investment from the proper jurisdictions.[^125] We also recognize
    that carriers convert from average-schedule settlement status to
    cost-based settlement status every year. Rate-of-return carriers who
    convert from average schedule to cost company status during the
    freeze shall calculate new factors based on the twelve-month period
    immediately following the conversion and then freeze the new factors
    for the remainder of the freeze. We believe that providing this
    exception will expedite the process for those carriers by
    eliminating the need for waiver requests to calculate new factors
    following conversion.

###  Exogenous Cost Changes

54. Section 61.45 of the Commission's rules allows carriers subject to
    federal price cap regulation to adjust their price cap indices
    (PCIs) for "exogenous cost changes" to ensure that their PCIs
    accurately reflect all exogenous cost changes that may have taken
    place before the annual tariff filing.[^126] The types of exogenous
    cost changes allowed are limited to those cost changes that the
    Commission shall permit or require by rule, rule waiver, or
    declaratory ruling.[^127] Specifically, the exogenous cost changes
    allowed under the Commission's rules include those caused by
    "changes to the Separations manual."[^128] As a general matter,
    therefore, changes to the Part 36 rules that result in a cost change
    to a price cap carrier are allowable exogenous cost changes.

55. We specifically find in this Report and Order that, based on the
    nature of the changes to Part 36 that we are adopting, price cap
    carriers shall not be allowed to claim exogenous cost adjustments
    under Part 61 of the Commission's rules as a result of the
    implementation of the freeze. Because the freeze will be based upon
    the most currently-available separations data at the time of its
    implementation, the freeze would not cause any cost changes for
    price cap carriers, and therefore we see no grounds upon which to
    allow for exogenous adjustments, including exogenous adjustments
    based on projections of where cost levels would be if not for the
    existence of the freeze. Furthermore, we note that because we are
    not adopting a local DEM adjustment, there will be no cost shifts
    between the jurisdictions as a result of any DEM adjustments, and
    therefore no grounds for exogenous cost adjustments under Part
    61.[^129]

# PROCEDURAL MATTERS

## Final Regulatory Flexibility Certification.

56. The Regulatory Flexibility Act of 1980, as amended (RFA),[^130]
    requires that an RFA analysis be prepared for notice-and-comment
    rulemaking proceedings, unless the agency certifies that \"the rule
    will not, if promulgated, have a significant economic impact on a
    substantial number of small entities.\"[^131] The RFA generally
    defines \"small entity\" as having the same meaning as the terms
    \"small business,\" \"small organization,\" and \"small governmental
    jurisdiction.\"[^132] In addition, the term \"small business\" has
    the same meaning as the term \"small business concern\" under the
    Small Business Act.[^133] A small business concern is one which: (1)
    is independently owned and operated; (2) is not dominant in its
    field of operation; and (3) satisfies any additional criteria
    established by the Small Business Administration (SBA).[^134]
    Section 121.201 of the Small Business Administration regulations
    defines a small telecommunications entity in SIC code 4813
    (Telephone Companies Except Radio Telephone) as any entity with
    1,500 or fewer employees at the holding company level.[^135] As we
    described in the previous IRFA analysis in this proceeding, we
    recognize that proposals such as a freeze of the Part 36 separations
    process will affect all incumbent local exchange carriers providing
    interstate services, including some entities employing1500 or fewer
    employees at the holding company level.[^136]

57. In the instant *Report and Order*, we amend Part 36 of our rules to
    adopt a variation of the freeze proposals set forth in the
    *NPRM*.[^137] Specifically, the Commission adopts a five-year freeze
    of the Part 36 category relationships and allocation factors for
    price cap carriers and a freeze of the allocation factors only for
    rate-of-return carriers.[^138] The objectives of the modified rules
    adopted in this *Report and Order* are to freeze the separations
    process in order to ease the administrative burden of regulatory
    compliance and to provide greater regulatory certainty for all local
    exchange carriers subject to the Commission's Part 36 rules,
    including small incumbent local exchange carriers (ILECs). For the
    reasons described below, we certify, pursuant to the RFA, that the
    rules adopted in this *Report and Order* will not have a significant
    economic impact on a substantial number of small entities. The
    interim freeze will eliminate the need for all ILECs, including
    ILECs with 1500 employees or fewer, to complete certain annual
    studies formerly required by the Commission's rules; if this action
    can be said to have any affect under the RFA, it is to reduce a
    regulatory compliance burden for small ILECs by eliminating the
    aforementioned separations studies and providing these carriers with
    greater regulatory certainty.

58. We note that we specifically considered the impact of the freeze on
    small ILECs (in general, rate-of-return carriers) in this *Report
    and Order* and provided them with the option to freeze their
    category relationships at the onset of the freeze.[^139] We
    recognized that some small ILECs may be harmed if subject to a
    categories freeze, as it may reduce their ability to recover
    investment and receive sufficient universal service support, while
    other small ILECs may benefit from the added regulatory
    simplification and stability provided by a categories freeze.[^140]
    Our action, therefore, either retains the status quo for small ILECs
    choosing to freeze their category relationships, or results in less
    regulatory burden for those opting for the categories freeze.
    Furthermore, we have committed to addressing the impact of Internet
    traffic on the separations results of all carriers, including small
    ILECs, in the context of the Commission's comprehensive separations
    reform, as we do not believe carriers are harmed by the current
    separations treatment of Internet traffic and will not be harmed as
    a result of the freeze.[^141]

59. The Commission will send a copy of this *Report and Order*,
    including this final certification, in a report to Congress pursuant
    to the Congressional Review Act, *see* 5 U.S.C. § 801(a)(1)(A). In
    addition, the *Report and Order* and this certification will be sent
    to the Chief Counsel for Advocacy of the Small Business
    Administration, and will be published in the Federal Register. *See*
    5 § U.S.C. § 605(b).

## Paperwork Reduction Act 

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

# ORDERING clauseS

61. Accordingly, IT IS ORDERED that, pursuant to sections 1, 2, 4,
    201-205, 215, 218, 220, 229, 254, and 410 of the Communications Act
    of 1934, as amended, 47 U.S.C. §§ 151, 152, 154, 201-205, 215, 218,
    220, 229, 254 and 410 that the amendments to Part 36 of the
    Commission\'s rules, 47 C.F.R. Part 36, as described in this Report
    and Order and specified in Appendix C of this Report and Order ARE
    ADOPTED.

62. IT IS FURTHER ORDERED that Part 36 of the Commission's rules, 47
    C.F.R. Part 36, IS AMENDED as set forth in Appendix C hereto,
    effective immediately upon publication in the Federal Register.
    Pursuant to 5 U.S.C. § 553(d)(3), we find that good cause exists to
    have the rules take effect immediately upon publication in the
    Federal Register. July 1, 2001 is the start of a new tariff year
    and, as such, it is essential that the amended rules take effect
    immediately upon publication in the Federal Register to enable
    carriers to keep their records in accordance with the Commission's
    rules. The interim freeze of Part 36 of the Commission's

Rules, 47 C.F.R. § 36 *et seq.*, shall also be effective July 1, 2001.
The revised collections of information contained within are contingent
upon approval by the Office of Management and Budget.

> FEDERAL COMMUNICATIONS COMMISSION
>
> Magalie Roman Salas
>
> Secretary

**APPENDIX A**

**Parties Filing Comments and Reply Comments**

**Comments:**

1.  AT&T Corp.

2.  BellSouth Corporation / BellSouth Telecommunications, Inc.

3.  CHR Solutions, Inc.

4.  General Services Administration

5.  GVNW Consulting, Inc.

6.  John Staurulakis, Inc.

7.  National Exchange Carrier Association, Inc., National Rural Telecom
    Association, National Telephone Cooperative Association, and
    Organization for the Promotion and Advancement of Small
    Telecommunications Companies

8.  Pennsylvania Public Utilities Commission

9.  Qwest Corporation

10. SBC Telecommunications, Inc.

11. Telcom Consulting Associates

12. Telephone Association of New England

13. United States Telecom Association

14. Verizon Telephone Companies

15. Vermont Public Service Board

16. WorldCom, Inc.

**Reply Comments:**

1.  AT&T Corp.

2.  BellSouth Corporation / BellSouth Telecommunications, Inc.

3.  CHR Solutions, Inc.

4.  General Services Administration

5.  GVNW Consulting, Inc.

6.  John Staurulakis, Inc.

7.  National Exchange Carrier Association, Inc., National Telephone
    Cooperative Association, National Rural Telecom Association, and
    Organization for the Promotion and Advancement of Small
    Telecommunications Companies

8.  Pennsylvania Public Utilities Commission

9.  People of the State of California and the California Public
    Utilities Commission

10. Public Service Commission of Wisconsin

11. Qwest Corporation

12. SBC Communications, Inc.

13. Telecom Consulting Associates

14. Telephone Association of New England

15. United States Telephone Association

16. Verizon Telephone Companies

17. Vermont Public Service Board

18. Warinner, Gesinger & Associates, LLC

19. WorldCom, Inc.

**Appendix B**

**Category Relationships and Jurisdictional Allocation Factors to
Freeze**

Categories/Subcategories to Freeze (by account)

Account 2210 - Central Office Switching

Category 2 -- Tandem Switching Equipment

Category 3 -- Local Switching Equipment

**Account 2220 -- Operator Systems**

> Category 1 -- Operator Systems Equipment (by type of board)

-   Separate toll boards

-   Separate local manual boards

-   Combined local manual and toll boards

-   Combined toll and DSA boards

-   Separate DSA and DSB boards

-   Service observing boards

-   Auxiliary service boards

-   Traffic service positions

**Account 2230 -- Circuit Equipment**

Category 4 -- Circuit Equipment

Subcategory 4.1 -- Exchange Circuit Equipment

4.11 -- Wideband Exchange Line Circuit Equipment

4.12 -- Exchange Trunk Circuit Equipment

4.13 -- Exchange Line Circuit Equipment

-   State private line and state WATS

```{=html}
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```
-   Interstate private line and interstate WATS

```{=html}
<!-- -->
```
-   Message telephone service

4.2 -- Interexchange Circuit Equipment

4.21 -- Interexchange circuit equipment furnished to another company for
IS use

> 4.22 -- Interexchange circuit equipment used for WDBD services
> including satellite and earth station equipment

4.23 -- All other interexchange circuit equipment

-   State private line and state WATS

-   Interstate private line and interstate WATS

-   Message telephone service

4.3 -- Host/Remote Message Circuit Equipment

**Account 2310 -- Information Origination/Termination (IOT) Equipment**

Category 1 -- Other information origination / termination equipment

Category 2 -- Customer premises equipment

**Account 2410 -- Cable & Wire Facilities**

Category 1 -- Exchange Line C&WF

Subcategory 1.1 - State private line and state WATS

1.2 - Interstate private line and interstate WATS

> 1.3 - Subscriber lines jointly used for local exchange and exchange
> access
>
> Category 2 -- Wideband and Exchange Trunk C&WF
>
> Category 3 -- Interexchange C&WF
>
> Subcategory 3.1 - State private line and state WATS

3.2 - Interstate private line and interstate WATS

> 3.3 -- Message telephone service
>
> Category 4 -- Host/Remote Message C&WF

**Account 6620 -- Services**

Telephone Operator Expenses

Published Directory Listing

Category 1 -- Local Business Office Expense

-   End user service order processing

-   End user payment and collection

-   End user billing inquiry

-   Interexchange carrier service order processing

-   Interexchange carrier payment and collection

-   Interexchange carrier billing inquiry

-   Coin collection and administration

Category 2 -- Revenue Accounting Expense

-   Message processing expense

```{=html}
<!-- -->
```
-   Toll ticket processing

-   Local message processing

```{=html}
<!-- -->
```
-   Other billing and collection expense

-   Carrier access charge billing and collecting expense

Category 3 -- All Other Customer Services Expense

**Factors to Freeze (by Jurisdiction)**

1.  Subscriber Line Minutes of Use (SLU)

2.  Weighted Standard Work Seconds (WSWS) -- by type of board

3.  Tandem switch minutes of use (Tdm MOU)

4.  Dial Equipment Minutes (DEM) -- measured (i.e. unweighted)

5.  Exchange Trunk Minutes of Use (Exch Trk MOU)

6.  Wideband Minutes of Use (WDBD MOU)

7.  Conversation Minutes (CM)

8.  Conversation Minute Kilometers (CMKm)

9.  Host-Remote Minute of Use Kilometers (MOUKm)

10. Equal Access Minutes of Use (EA MOU)

11. End User service order processing -- contact factor

12. End User payment & collection -- revenue factor

13. End User billing inquiry -- contact factor

14. IXC service order processing -- contact factor

15. IXC payment & collection -- revenue factor

16. IXC billing inquiry -- contact factor

17. Coin collection & administration -- revenue factor

18. Marketing - billed revenue factor

19. SP + RC messages

20\. TSPS Relative Processor Real Time (in seconds) \[to allocate RTA
investment in end office\]

**APPENDIX C**

**Final Rules**

Part 36 of Title 47 of the Code of Federal Regulations is amended as
follows:

**PART 36 -- JURISDICTIONAL SEPARATIONS PROCEDURES; STANDARD PROCEDURES
FOR SEPARATING TELECOMMUNICATIONS PROPERTY COSTS, REVENUES, EXPENSES,
TAXES AND RESERVES FOR TELECOMMUNICATIONS COMPANIES**

**Subpart A -- General**

1.  Section 36.3 is added as follows:

**§ 36.3 Freezing of jurisdictional separations category relationships
and/or allocation factors**

\(a\) Effective July1, 2001, through June 30, 2006, all local exchange
carriers subject to Part 36 rules shall apportion costs to the
jurisdictions using their study area and/or exchange specific
separations allocation factors calculated during the twelve month period
ending December 31, 2000, for each of the categories/sub-categories as
specified herein. Direct assignment of private line service costs
between jurisdictions shall be updated annually. Other direct assignment
of investment, expenses, revenues or taxes between jurisdictions shall
be updated annually. Local exchange carriers that invest in
telecommunications plant categories during the period July 1, 2001,
through June 30, 2006, for which it had no separations allocation
factors for the twelve month period ending December 31, 2000, shall
apportion that investment among the jurisdictions in accordance with the
separations procedures in effect as of December 31, 2000 for the
duration of the freeze.

\(b\) Effective July 1, 2001, through June 30, 2006, local exchange
carriers subject to price cap regulation, pursuant to § 61.41, shall
assign costs from the Part 32 accounts to the separations
categories/sub-categories, as specified herein, based on the percentage
relationships of the categorized/sub-categorized costs to their
associated Part 32 accounts for the twelve month period ending December
31, 2000. If a Part 32 account for separations purposes is categorized
into more than one category, the percentage relationship among the
categories shall be utilized as well. Local exchange carriers that
invest in types of telecommunications plant during the period July 1,
2001, through June 30, 2006, for which it had no separations category
investment for the twelve month period ending December 31, 2000, shall
assign such investment to separations categories in accordance with the
separations procedures in effect as of December 31, 2000.

> \(1\) Local exchange carriers not subject to price cap regulation,
> pursuant to § 61.41, may elect to be subject to the provisions of §
> 36.3(b). Such election must be made prior to July 1, 2001. Local
> exchange carriers electing to become subject to § 36.3(b) shall not be
> eligible to withdraw from such regulation for the duration of the
> freeze. Local exchange carriers participating in Association tariffs,
> pursuant to § 69.601 et seq., shall notify the Association prior to
> July 1, 2001, of such intent to be subject to the provisions of §
> 36.3(b). Local exchange carriers not participating in Association
> tariffs shall notify the Commission prior to July 1, 2001, of such
> intent to be subject to the provisions of § 36.3(b).

\(c\) Effective July 1, 2001, through June 30, 2006, any local exchange
carrier that sells or otherwise transfers exchanges, or parts thereof,
to another carrier's study area shall continue to utilize the factors
and, if applicable, category relationships as specified in §§ 36.3(a)
and (b).

\(d\) Effective July 1, 2001, through June 30, 2006, any local exchange
carrier that buys or otherwise acquires exchanges or part thereof, shall
calculate new, composite factors and, if applicable, category
relationships based on a weighted average of both the seller's and
purchaser's factors and category relationships calculated pursuant to §
36.3(a) and (b). This weighted average should be based on the number of
access lines currently being served by the acquiring carrier and the
number of access lines in the acquired exchanges.

> \(1\) To compute the composite allocation factors and, if applicable,
> the composite category percentage relationships of the acquiring
> company, the acquiring carrier shall first sum its existing
> (pre-purchase) access lines (A) with the total access lines acquired
> from selling company (B). Then, multiply its factors and category
> relationship percentages by (A/(A+B)) and those of the selling company
> by (B/(A+B)) and sum the results.
>
> \(2\) For carriers subject to a freeze of category relationships, the
> acquiring carrier should remove all categories of investment from the
> selling carrier's list of frozen category relationships where no such
> category investment exists within the sold exchange(s). The seller's
> remaining category relationships must then be increased
> proportionately to total 100 percent. Then, the adjusted seller's
> category relationships must be combined with those of the acquiring
> carrier as specified in § 36.3(d)(i) to determine the category
> relationships for the acquiring carrier's post-transfer study area.

\(e\) Any local exchange carrier study area converting from average
schedule company status, as defined in Part 69.605(c), to cost company
status during the period July 1, 2001, through June 30, 2006, shall, for
the first twelve months subsequent to conversion categorize the
telecommunications plant and expenses and develop separations allocation
factors in accordance with the separations procedures in effect as of
December 31, 2000. Effective July1, 2001 through June 30, 2006, such
companies shall utilize the separations allocation factors and account
categorization subject to the requirements of §§ 36.3(a) and (b) based
on the category relationships and allocation factors for the twelve
months subsequent to the conversion to cost company status.

**Subpart B -- Telecommunications Property**

**Central Office Equipment**

2.  Section 36.123 is amended as follows:

**§ 36.123 Operator systems equipment ‑ Category 1.**

\(a\) . . .

> \(5\) Effective July 1, 2001, through June 30, 2006, study areas
> subject to price cap regulation, pursuant to §61.41, shall assign the
> average balance of Account 2220, Operator Systems, to the
> categories/subcategories, as specified in § 36.123(a)(1) above, based
> on the relative percentage assignment of the average balance of
> Account 2220 to these categories/subcategories during the twelve month
> period ending December 31, 2000.
>
> \(6\) Effective July 1, 2001 through June 30, 2006, all study areas
> shall apportion the costs assigned to the categories/subcategories, as
> specified in § 36.123(a)(1), among the jurisdictions using the
> relative use measurements for the twelve month period ending December
> 31, 2000 for each of the categories/subcategories specified in §
> 36.123 (b) through (e) below.

3.  Section 36.124 is amended as follows:

**§ 36.124 Tandem switching equipment ‑ Category 2.**

###### (a) . . . {#a-.-.-. .unnumbered}

\(c\) Effective July 1, 2001, through June 30, 2006, study areas subject
to price cap regulation, pursuant to §61.41, shall assign the average
balances of Accounts 2210, 2211, 2212 and 2215, to the Category 2,
Tandem Switching Equipment based on the relative percentage assignment
of the average balances of Account 2210, 2211, 2212 and 2215 to Category
2, Tandem Switching Equipment during the twelve month period ending
December 31, 2000.

\(d\) Effective July1, 2001, through June 30, 2006, all study areas
shall apportion costs in Category 2, Tandem Switching Equipment, among
the jurisdictions using the relative number of study area minutes of
use, as specified in § 36.124(b), for the twelve month period ending
December 31, 2000. Direct assignment of any subcategory of Category 2
Tandem Switching Equipment between jurisdictions shall be updated
annually.

4.  Section 36.125 is amended as follows:

**§ 36.125 Local switching equipment ‑ Category 3.**

\(a\) . . .

\(h\) Effective July 1, 2001, through June 30, 2006, study areas subject
to price cap regulation, pursuant to §61.41, shall assign the average
balances of Accounts 2210, 2211, 2212, and 2215 to Category 3, Local
Switching Equipment, based on the relative percentage assignment of the
average balances of Account 2210, 2211, 2212 and 2215 to Category 3,
during the twelve month period ending December 31, 2000.

\(i\) Effective July 1, 2001, through June 30, 2006, all study areas
shall apportion costs in Category 3, Local Switching Equipment, among
the jurisdictions using relative dial equipment minutes of use for the
twelve month period ending December 31, 2000.

\(j\) If during the period from January 1, 1997, through June 30, 2006,
the number of a study area's access lines increased or will increase
such that, under § 36.125(f) the weighting factor would be reduced, that
lower weighting factor shall be applied to the study area's 1996
unweighted interstate DEM factor to derive a new local switching support
factor. The study area will restate its Category 3, Local Switching
Equipment factor under § 36.125(f) and use that factor for the duration
of the freeze period.

5.  Section 36.126 is amended as follows:

**§ 36.126 Circuit equipment ‑ Category 4.**

\(a\) . . .

(b) . . .

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(1) . . .

> \(5\) Effective July 1, 2001, through June 30, 2006, study areas
> subject to price cap regulation, pursuant to §61.41, shall assign the
> average balances of Accounts 2230 through 2232 to the
> categories/subcategories as specified in §§ 36.126(b)(1) through
> (b)(4) based on the relative percentage assignment of the average
> balances of Accounts 2230 through 2232 costs to these
> categories/subcategories during the twelve month period ending
> December 31, 2000.

(c) . . .

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(1) . . .

> \(4\) Effective July 1, 2001, through June 30, 2006, all study areas
> shall apportion costs in the categories/subcategories, as specified in
> §§ 36.126(b)(1) through (b)(4), among the jurisdictions using the
> relative use measurements or factors, as specified in §§ 36.126(c)(1)
> through (c)(3) for the twelve month period ending December 31, 2000.
> Direct assignment of any subcategory of Category 4.1 Exchange Circuit
> Equipment to the jurisdictions shall be updated annually.

(e) . . .

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(1) . . .

> \(4\) Effective July1, 2001, through June 30, 2006, all study areas
> shall apportion costs in the categories/subcategories specified in §§
> 36.126(e)(1) through (e)(3) among the jurisdictions using relative use
> measurements or factors, as specified in §§ 36.126(e)(1) through
> (e)(3) for the twelve month period ending December 31, 2000. Direct
> assignment of any subcategory of Category 4.2 Interexchange Circuit
> Equipment to the jurisdictions shall be updated annually.

(f) . . .

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(1) . . .

> \(2\) Effective July1, 2001, through June 30, 2006, all study areas
> shall apportion costs in the subcategory specified in § 36.125(f)(1)
> among the jurisdictions using the allocation factor, as specified in §
> 36.125(f)(1)(i), for this subcategory for the twelve month period
> ending December 31, 2000. Direct assignment of any Category 4.3
> Host/Remote Message Circuit Equipment to the jurisdictions shall be
> updated annually.

**Information Origination/Termination Expenses**

6.  Section 36.141 is amended as follows:

**§ 36.141 General.**

\(a\) . . .

\(c\) Effective July 1, 2001, through June 30, 2006, local exchange
carriers subject to price cap regulation, pursuant to § 61.41, shall
assign the average balance of Account 2310 to the categories, as
specified in § 36.141(b), based on the relative percentage assignment of
the average balance of Account 2310 to these categories during the
twelve month period ending December 31, 2000.

7.  Section 36.142 is amended as follows:

**§ 36.142 Categories and apportionment procedures.**

\(a\) . . .

\(c\) Effective July 1, 2001, through June 30, 2006, all study areas
shall apportion costs in the categories, as specified in § 36.141(b),
among the jurisdictions using the relative use measurements or factors,
as specified in § 36.142(a), for the twelve month period ending December
31, 2000. Direct assignment of any category of Information
Origination/Termination Equipment to the jurisdictions shall be updated
annually.

**Cable and Wire Facilities**

8.  Section 36.152 is amended as follows:

**§ 36.152 Categories of Cable and Wire Facilities.**

\(a\) . . .

\(d\) Effective July 1, 2001, through June 30, 2006, study areas subject
to price cap regulation, pursuant to § 61.41, shall assign the average
balance of Account 2410 to the categories/subcategories, as specified in
§§36.152(a) through (c), based on the relative percentage assignment of
the average balance of Account 2410 to these categories/subcategories
during the twelve month period ending December 31, 2000.

9.  Section 36.154 is amended as follows:

**§ 36.154 Exchange Line Cable and Wire Facilities (C&WF) -- Category
1 - apportionment.**

\(a\) . . .

\(g\) Effective July 1, 2001, through June 30, 2006, all study areas
shall apportion Subcategory 1.3 Exchange Line C&WF among the
jurisdictions as specified in § 36.154(c). Direct assignment of
subcategory Categories 1.1 and 1.2 Exchange Line C&WF to the
jurisdictions shall be updated annually as specified in § 36.154(b).

10. Section 36.155 is amended as follows:

**§ 36.155 Wideband and exchange trunk C&WF -- Category 2 --
apportionment procedures.**

\(a\) . . .

\(b\) Effective July 1, 2001, through June 30, 2006, all study areas
shall apportion Category 2 Wideband and exchange trunk C&WF among the
jurisdictions using the relative number of minutes of use, as specified
in § 36.155(a), for the twelve-month period ending December 31, 2000.
Direct assignment of any Category 2 equipment to the jurisdictions shall
be updated annually.

11. Section 36.156 is amended as follows:

**§ 36.156 Interexchange Cable and Wire Facilities (C&WF) -- Category 3
-- apportionment procedures.**

\(a\) . . .

\(c\) Effective July 1, 2001, through June 30, 2006, all study areas
shall directly assign Category 3 Interexchange Cable and Wire Facilities
C&WF where feasible. All study areas shall apportion the non-directly
assigned costs in Category 3 equipment to the jurisdictions using the
relative use measurements, as specified in § 36.156 (b), during the
twelve-month period ending December 31, 2000.

12. Section 36.157 is amended as follows:

**§ 36.157 Host/Remote message Cable and Wire Facilities (C&WF) --
Category 4 -- apportionment procedures.**

\(a\) . . .

\(b\) Effective July 1, 2001, through June 30, 2006, all study areas
shall apportion Category 4 Host/Remote message Cable and Wire Facilities
C&WF among the jurisdictions using the relative number of study area
minutes-of-use kilometers applicable to such facilities, as specified in
§ 36.157(a)(1), for the twelve month period ending December 31, 2000.
Direct assignment of any Category 4 equipment to the jurisdictions shall
be updated annually.

**Equal Access Equipment**

13. Section 36.191 is amended as follows:

**§ 36.191 Equal access Equipment.**

\(a\) . . .

\(d\) Effective July 1, 2001, through June 30, 2006, all study areas
shall apportion Equal Access Equipment, as specified in § 36.191(a),
among the jurisdictions using the relative state and interstate equal
access traffic, as specified in § 36.191(c), for the twelve month period
ending December 31, 2000.

**Subpart C -- Operating Revenues and Certain Income Accounts**

**Operating Revenues**

14. Section 36.212 is amended as follows:

**§ 36.212 Basic local services revenue -- Account 5000.**

\(a\) . . .

(c) . . .

> \(1\) Effective July 1, 2001, through June 30, 2006, all study areas
> shall apportion Wideband Message Service and TWX revenues among the
> jurisdictions using the relative number of TWX minutes of use for the
> twelve-month period ending December 31, 2000.

15. Section 36.214 is amended as follows:

**§ 36.214 Long distance message revenue -- Account 5100.**

\(a\) . . .

> \(1\) Effective July 1, 2001, through June 30, 2006, all study areas
> shall apportion Wideband Message Service and TWX revenues among the
> jurisdictions using the relative number of TWX minutes of use for the
> twelve-month period ending December 31, 2000.

**Subpart D -- Operating Expenses and Taxes**

**Customer Operations Expenses**

16. Section 36.372 is amended as follows:

**§ 36.372 Marketing -- Account 6610.**

\(a\) . . .

> \(1\) Effective July 1, 2001, through June 30, 2006, all study areas
> shall apportion expenses in this account among the jurisdictions using
> the analysis, as specified in § 36.372(a), during the twelve-month
> period ending December 31, 2000.

17. Section 36.374 is amended as follows:

**§ 36.374 Telephone Operator Expenses.**

\(a\) . . .

\(b\) Effective July 1, 2001, through June 30, 2006, study areas subject
to price cap regulation, pursuant to § 61.41, shall assign the average
balance of Account 6620-Services to the Telephone operator expense
classification based on the relative percentage assignment of the
average balance of Account 6620 to this classification during the twelve
month period ending December 31, 2000.

\(c\) Expenses in this classification are apportioned among the
operations on the basis of the relative number of weighted standard work
seconds as determined by analysis and study for a representative period.

\(d\) Effective July 1, 2001, through June 30, 2006, all study areas
shall apportion Telephone operator expenses among the jurisdictions
using the relative number of weighted standard work seconds, as
specified in § 36.374(c), during the twelve-month period ending December
31, 2000.

18. Section 36.375 is amended as follows:

**§ 36.375 Published directory listing.**

\(a\) . . .

(b) . . .

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(1) . . .

> \(5\) Effective July 1, 2001, through June 30, 2006, study areas
> subject to price cap regulation, pursuant to § 61.41, shall assign the
> average balance of Account 6620-Services to the classifications, as
> specified in §§ 36.375(b)(1)-(4), based on the relative percentage
> assignment of the average balance of Account 6620 to these
> classifications during the twelve month period ending December 31,
> 2000.
>
> \(6\) Effective July 1, 2001, through June 30, 2006, all study areas
> shall apportion Published directory listing expenses using the
> underlying relative use measurements, as specified in §§
> 36.375(b)(1)-(4), during the twelve-month period ending December 31,
> 2000. Direct assignment of any Publishing directory listing expense to
> the jurisdictions shall be updated annually.

19. Section 36.377 is amended as follows:

**§ 36.377 Category 1 -- Local business office expense.**

\(a\) . . .

Effective July 1, 2001, through June 30, 2006, study areas subject to
price cap regulation, pursuant to § 61.41, shall assign the average
balance of Account 6620-Services to the subcategories, as specified in §
36.377(a), based on the relative percentage assignment of the average
balance of Account 6620 to these categories/subcategories during the
twelve month period ending December 31, 2000.

(1) . . .

> \(i\) . . .

A.  \(ix\) Effective July 1, 2001, through June 30, 2006, study areas
    subject to price cap regulation, pursuant to § 61.41, shall assign
    the average balance of Account 6620-Services to the
    categories/subcategories, as specified in § 36.377(a)(1)(i) through
    (viii), based on the relative percentage assignment of the average
    balance of Account 6620 to these categories/subcategories during the
    twelve month period ending December 31, 2000.

> \(a\) Effective July 1, 2001, through June 30, 2006, all study areas
> shall apportion TWX service order processing expense, as specified in
> § 36.377(a)(1)(viii) among the jurisdictions using relative billed TWX
> revenues for the twelve-month period ending December 31, 2000. All
> other subcategories of End-user service order processing expense, as
> specified in §§ 36.377(a)(1)(i)-(vii), shall be directly assigned.

(2) . . .

> \(i\) . . .
>
> \(vii\) Effective July 1, 2001, through June 30, 2006, study areas
> subject to price cap regulation, pursuant to § 61.41, shall assign the
> average balance of Account 6620- Services to the subcategories, as
> specified in § 36.377(a)(2)(i) through (vi), based on the relative
> percentage assignment of the average balance of Account 6620 to these
> categories/subcategories during the twelve month period ending
> December 31, 2000.
>
> \(a\) Effective July 1, 2001, through June 30, 2006, all study areas
> shall apportion TWX payment and collection expense, as specified in §
> 36.377(2)(vi) among the jurisdictions using relative billed TWX
> revenues for the twelve-month period ending December 31, 2000. All
> other subcategories of End User payment and collection expense, as
> specified in §§ 36.377(a)(2)(i)-(vi), shall be directly assigned.

(3) . . .

> \(i\) . . .
>
> \(vii\) Effective July 1, 2001, through June 30, 2006, study areas
> subject to price cap regulation, pursuant to § 61.41, shall assign the
> average balance of Account 6620-Services to the subcategories, as
> specified in §§ 36.377(a)(3)(i) through (vi), based on the relative
> percentage assignment of the average balance of Account 6620 to these
> subcategories during the twelve month period ending December 31, 2000.
>
> \(a\) Effective July 1, 2001, through June 30, 2006, all study areas
> shall apportion TWX billing inquiry expense, as specified in §
> 36.377(a)(3)(v) among the jurisdictions using relative billed TWX
> revenues for the twelve-month period ending December 31, 2000. All
> other subcategories of End user billing inquiry expense, as specified
> in §§ 36.377(a)(3)(i)-(iv),(vi) shall be directly assigned.

(4) . . .

> \(i\) . . .

\(vii\) Effective July 1, 2001, through June 30, 2006, study areas
subject to price cap regulation, pursuant to § 61.41, shall assign the
average balance of Account 6620-Services to the subcategories, as
specified in § 36.377(a)(4)(i) through (vi), based on the relative
percentage assignment of the average balance of Account 6620 to these
subcategories during the twelve month period ending December 31, 2000.

> \(a\) All subcategories of Interexchange carrier service order
> processing expense, as specified in §§ 36.377(a)(4)(i)-(vi), shall be
> directly assigned.

(5) . . .

> \(i\) . . .
>
> \(vii\) Effective July 1, 2001, through June 30, 2006, study areas
> subject to price cap regulation, pursuant to §61.41, shall assign the
> average balance of Account 6620-Services to the subcategories, as
> specified in § 36.377(a)(5)(i) through (vi), based on the relative
> percentage assignment of the average balance of Account 6620 to these
> subcategories during the twelve month period ending December 31, 2000.
>
> \(a\) All subcategories of Interexchange carrier payment expense, as
> specified in §§ 36.377(a)(5)(i)-(vi), shall be directly assigned.

(6) . . .

> \(i\) . . .
>
> \(vii\) Effective July 1, 2001, through June 30, 2006, study areas
> subject to price cap regulation, pursuant to § 61.41, shall assign the
> average balance of Account 6620-Services to the subcategories, as
> specified in § 36.377(a)(6)(i) through (vi), based on the relative
> percentage assignment of the average balance of Account 6620 to these
> subcategories during the twelve month period ending December 31, 2000.
>
> \(a\) All subcategories of Interexchange carrier billing inquiry
> expense, as specified in §§ 36.377(a)(6)(i)-(vi), shall be directly
> assigned.

(7) . . .

> \(i\) Effective July 1, 2001, through June 30, 2006, study areas
> subject to price cap regulation, pursuant to § 61.41, shall assign the
> average balance of Account 6620-Services to the subcategories, as
> specified in § 36.377(a)(7), based on the relative percentage
> assignment of the average balance of Account 6620 to these
> subcategories during the twelve month period ending December 31, 2000.
>
> \(ii\) Effective July 1, 2001, through June 30, 2006, all study areas
> shall apportion Coin collection and administration expense among the
> jurisdictions using the relative state and interstate revenues
> deposited in the public and semi‑public telephones, as specified in §§
> 36.377(a)(7), for the twelve month period ending December 31, 2000.
> Direct assignment of any Coin collection and administration expense
> among the jurisdictions shall be updated annually.

20. Section 36.378 is amended as follows:

**§ 36.378 Category 2 -- Customer services (revenue accounting).**

\(a\) . . .

(b) . . .

> \(i\) Effective July 1, 2001, through June 30, 2006, study areas
> subject to price cap regulation, pursuant to § 61.41, shall assign the
> average balance of Account 6620-Services to the classifications, as
> specified in § 36.378(b), based on the relative percentage assignment
> of the average balance of Account 6620 to those classifications during
> the twelve month period ending December 31, 2000.

21. Section 36.379 is amended as follows:

**§ 36.379 Message processing expense.**

\(a\) . . .

(b) . . .

> \(i\) Effective July 1, 2001, through June 30, 2006, study areas
> subject to price cap regulation, pursuant to § 61.41, shall assign the
> average balance of Account 6620-Services to the subcategories, as
> specified in § 36.379(b), based on the relative percentage assignment
> of the average balance of Account 6620 to those subcategories during
> the twelve month period ending December 31, 2000.

(ii) Effective July 1, 2001, through June 30, 2006, all study areas
     shall apportion Toll Ticketing Processing Expense among the
     jurisdictions using the relative number of toll messages for the
     twelve-month period ending December 31, 2000. Local Message Process
     Expense is assigned to the state jurisdiction.

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22. Section 36.380 is amended as follows:

**§ 36.380 Other billing and collecting expense.**

\(a\) . . .

\(d\) Effective July 1, 2001, through June 30, 2006, study areas subject
to price cap regulation, pursuant to § 61.41, shall assign the average
balance of Account 6620-Services to the Other billing and collecting
expense classification based on the relative percentage assignment of
the average balance of Account 6620 to those subcategory during the
twelve month period ending December 31, 2000.

\(e\) Effective July 1, 2001, through June 30, 2006, all study areas
shall apportion Other billing and collecting expense among the
jurisdictions using the allocation factor utilized, pursuant to §§
36.380(b) or (c), for the twelve month period ending December 31, 2000.

23. Section 36.381 is amended as follows:

**§ 36.381 Carrier access charge billing and collecting expense.**

\(a\) . . .

\(c\) Effective July 1, 2001, through June 30, 2006, study areas subject
to price cap regulation, pursuant to § 61.41, shall assign the average
balance of Account 6620-Services to the Carrier access charge billing
and collecting expense classification based on the relative percentage
assignment of the average balance of Account 6620 to that classification
during the twelve month period ending December 31, 2000.

\(d\) Effective July 1, 2001, through June 30, 2006, all study areas
shall apportion Carrier access charge billing and collecting expense
among the jurisdictions using the allocation factor, pursuant to §
36.381(b), for the twelve-month period ending December 31, 2000.

24. Section 36.382 is amended as follows:

**§ 36.382 Category 3 ‑ All other customer services expense.**

\(a\) Effective July 1, 2001, through June 30, 2006, study areas subject
to price cap regulation, pursuant to § 61.41, shall assign the average
balance of Account 6620-Services to this category based on the relative
percentage assignment of the average balance of Account 6620 to this
category during the twelve month period ending December 31, 2000.

\(b\) Category 3 is apportioned on the basis of Categories 1 and 2.

[^1]: Section 410 of the Communications Act of 1934 , as amended (the
    Act), requires that the Commission refer any proceeding regarding
    the jurisdictional separation of common carrier property and
    expenses between interstate and intrastate operations to a
    Federal-State Joint Board. 47 U.S.C. §410(c). The Joint Board for
    jurisdictional separations was established in CC Docket No. 80-286.
    *See Amendment of Part 67 of the Commission's Rules*, Notice of
    Proposed Rulemaking and Order Establishing a Joint Board, CC Docket
    No. 80-286, 78 FCC 2d 837 (1980).

[^2]: *Jurisdictional Separations Reform and Referral to the
    Federal-State Joint Board*, CC Docket No. 80-286, Recommended
    Decision, 15 FCC Rcd 13160, FCC 00J-2 (released July 21, 2000)
    (*Recommended Decision*).

[^3]: The specific Part 36 jurisdictional allocation factors and
    category relationships that are subject to the freeze are outlined
    in Appendix B of this Order.

[^4]: *See infra*, paras. 34-42.

[^5]: For purposes of section 251 of the Act, a local exchange carrier
    (LEC) is regarded as an "incumbent local exchange carrier" (ILEC)
    for a specific area if, on the date of enactment of the Act, the
    carrier provided telephone exchange service in that area and was
    deemed to be a member of the National Exchange Carrier Association,
    Inc. (NECA), or if the carrier "became a successor or assign" of
    such a member on or after that date. 47 U.S.C. § 251(h)(1). Pursuant
    to section 69.601(b) of the Commission's rules, "\[a\]ll telephone
    companies that participate in the distribution of Carrier Common
    Line revenue requirement, pay long term support to association
    Common Line tariff participants, or receive payments from the
    transitional support fund administered by \[NECA\] shall be deemed
    to be members." 47 C.F.R. § 69.601(b). For purposes of this Report
    and Order, the term "carriers" refers to ILECs. We note that, unlike
    the ILECs, competitive local exchange carriers (CLECs) are not
    subject to the requirements of Parts 36. *See* 47 C.F.R. §§ 36.

[^6]: As the Supreme Court has recognized, procedures for the separation
    of intrastate and interstate property and expenses are necessary for
    the appropriate recognition of authority between the interstate and
    intrastate jurisdictions. *Smith v. Illinois Bell Tel. Co.*, 282
    U.S. 133, 148 (1930) (*Smith v. Illinois*). The Supreme Court added
    that "\[w\]hile the difficulty in making an exact apportionment of
    the property is apparent, and extreme nicety is not required, only
    reasonable measures being essential, it is quite another matter to
    ignore altogether the actual uses to which the property is put."
    *Id.* at 150-151.

[^7]: 47 C.F.R. Part 32.

[^8]: The Part 64 cost allocation rules are codified at 47 C.F.R. §§
    64.901-904. Non-regulated activities generally consist of activities
    that have never been subject to regulation under Title II;
    activities formerly subject to Title II regulation that the
    Commission has preemptively deregulated; and activities formerly
    subject to Title II regulation that have been deregulated at the
    interstate level, but not preemptively deregulated at the intrastate
    level, which the Commission decides should be classified as
    non-regulated activities for Title II accounting purposes. *See* 47
    C.F.R. § 32.23(a). *See* *Accounting Safeguards under the
    Telecommunications Act of 1996*, Report and Order, CC Docket No.
    96-150, 11 FCC Rcd 17539, 17573 (1996), *recon. granted in part and
    denied in part*, Report and Order in CC Docket No. 98-81, First
    Order on Reconsideration in CC Docket No. 96-150, Fourth Memorandum
    Opinion and Order in AAD File No. 98-43, 14 FCC Rcd 11396 (1999)
    (granting petitions for reconsideration in part and adopting changes
    to section 274(f) reporting requirements), *recon. denied*, Second
    Order on Reconsideration, FCC 00-9 (rel. January 18, 2000)
    (rejecting petitions for reconsideration on the grounds that the
    petitions raised no new arguments). Similarly, state jurisdictions
    have the ability to remove the costs of state non-regulated
    activities so that those costs will not be recovered in regulated
    intrastate service rates.

[^9]: 47 C.F.R. Part 36. *See also MCI Telecommunications Corp. v. FCC*,
    750 F.2d 135, 137 (D.C. Cir. 1984) (*MCI v. FCC*) (stating that
    \"\'\[j\]urisdictional separations is a procedure that determines
    what proportion of jointly used plant should be allocated to the
    interstate and intrastate jurisdictions for ratemaking purposes\").

[^10]: Part 61 of the Commission's rules prescribes the procedures for
    filing and updating interstate tariffs. *See* 47 C.F.R. Part 61.

[^11]: 47 C.F.R. Part 69.

[^12]: For example, central office equipment (COE) Category 1 is
    Operator Systems Equipment, Account 2220. The Operator Systems
    Equipment account is further disaggregated or classified according
    to the following arrangements: (i) separate toll boards; (ii)
    separate local manual boards; (iii) combined local manual boards;
    (iv) combined toll and DSA boards; (v) separate DSA and DSB boards;
    (vi) service observing boards; (vii) auxiliary service boards; and
    (viii) traffic service positions. *See* 47 C.F.R. § 36.123.

[^13]: Because some costs are directly assigned to a jurisdictionally
    pure service category, *i.e.* a category used exclusively for either
    intrastate or interstate communications, both steps are often
    effectively performed simultaneously. For example, the cost of
    private line service that is wholly intrastate in nature is assigned
    directly to the intrastate jurisdiction. *See* 47 C.F.R. §
    36.154(a).

[^14]: *See* 47 C.F.R. § 36.154(c).

[^15]: *Jurisdictional Separations Reform and Referral to the
    Federal-State Joint Board*, Notice of Proposed Rulemaking, CC Docket
    No. 80-286, 12 FCC Rcd at 22126-22131, paras. 9-19 (*NPRM*). The
    Commission also contemplated issuing a further notice of proposed
    rulemaking prior to adoption of comprehensive separations reform.
    *Id.* at 22131-22132, para. 21.

[^16]: *NPRM,* 12 FCC Rcd at 22126, para. 9.

[^17]: For example, NYNEX proposed in its *Petition for Forbearance*
    that all costs be separated for each study area based on a single,
    frozen interstate allocation factor. *See New England Telephone and
    Telegraph Company and New York Telephone Company*, Petition for
    Forbearance from Jurisdictional Separations Rules, AAD 96-66 (filed
    May 2, 1996) (*NYNEX Petition for Forbearance*); *New England
    Telephone and Telegraph Company and New York Telephone Company*,
    Public Notice, AAD 96-66, 11 FCC Rcd 7139 (1996) (soliciting
    Comments on the NYNEX petition); *New England Telephone and
    Telegraph Company and New York Telephone Company*, Orde*r*, AAD
    96-66, 12 FCC Rcd 2308 (1997) (denying the NYNEX petition and
    incorporating the issues raised by NYNEX into this proceeding). In
    response to the NYNEX *Petition for Forbearance*, BellSouth proposed
    a two-factor freeze, using separate factors for investment and
    expenses in each state. *See* BellSouth *NYNEX Petition for
    Forbearance* Comments at 2. SBC proposed a simplification of
    separations through a freeze of the allocation factors for each
    category, but only after jurisdictional allocations had stabilized,
    following an initial consolidation of several dozen plant and
    service categories into four cost categories. *See* SBC *NYNEX
    Petition for Forbearance* Comments at 4. SBC, however, did not
    believe that separations reform should be undertaken immediately;
    instead, SBC recommended waiting until three related proceedings,
    interconnection, universal service, and access charge reform, had
    been substantially completed. *Id.* at 2.

[^18]: *See State Members' Report on Comprehensive Review of
    Separations*, CC Docket No. 80-286, filed December 21, 1998 (State
    Report).

[^19]: *See* State Report at 15-16.

[^20]: *Recommended Decision,* 15 FCC Rcd 13160. The Commission sought
    public comment on the *Recommend Decision*. *See Jurisdictional
    Separations Reform and Referral to the Federal-State Joint Board*,
    CC Docket No. 80-286, Public Notice, DA 00-1865 (rel. August 15,
    2000); Public Notice, DA No. 00-2433 (rel. October 30, 2000).

[^21]: *Recommended Decision,* 15 FCC Rcd at 13172*,* para. 20.
    "Category relationships" are the percentage relationships of each
    Part 36 category to the total amount recorded in its corresponding
    Part 32 account(s). *See* 47 C.F.R. Part 32, Part 36.
    "Jurisdictional allocation factors" are the percentage relationships
    that allocate costs assigned to Part 32 accounts for jointly used
    plant between the interstate (federal) and intrastate (state)
    jurisdictions. *See Id.*

[^22]: *Recommended Decision*, 15 FCC Rcd at 13174, para. 25.

[^23]: *Recommended Decision,* 15 FCC Rcd at 13175-77, paras. 28-30.
    *See* *Implementation of the Local Competition Provisions of the
    Telecommunications Act of 1996*; *Intercarrier Compensation for
    ISP-Bound Traffic*, Declaratory Ruling in CC Docket No. 96-98 and
    Notice of Proposed Rulemaking in CC Docket No. 99-68, FCC 99-38, 14
    FCC Rcd 3689, 3701-3703, 3710 (1999) (*Intercarrier Compensation for
    ISP-Bound Traffic Ruling*); Bell Atl. Tel. Companies v. FCC, 206
    F.3d 1 (D.C. Cir. 2000) (*Bell Atlantic v. FCC*); *Implementation of
    the Local Competition Provisions of the Telecommunications Act of
    1996*; *Intercarrier Compensation for ISP-Bound Traffic*, Public
    Notice, CC Docket Nos. 96-98 and 99-68, FCC 00-227 (rel. June 23,
    2000) (*Intercarrier Compensation for ISP-Bound Traffic Remand
    Public Notice*).

[^24]: *Recommended Decision*, 15 FCC Rcd at 13175-77, paras. 28-30. In
    determining the nature of the interim freeze, the Joint Board noted
    that it had considered all of the freeze proposals on the record,
    both interim and long-term. *See, e.g.,* *NYNEX Petition for
    Forbearance*; USTA *NPRM* Comments at 9-12.

[^25]: *Recommended Decision*, 15 FCC Rcd at 13160-61, paras 1-2.

[^26]: *Recommended Decision,* 15 FCC Rcd at 13166-67, para. 10.

[^27]: *See, e.g.,* Beacon *Recommended Decision* Reply at 1-3;
    BellSouth *Recommended Decision* Comments at 2-3; CHR *Recommended
    Decision* Comments at 3; GSA *Recommended Decision* Comments at 3-5;
    GVNW *Recommended Decision* Comments at 1-3; JSI *Recommended
    Decision* Comments at 2, 8-9, Reply at 1; NECA, NRTA, NTCA & OPASTCO
    *Recommended Decision* Comments at 2-3, Reply at 1; Pennsylvania PUC
    *Recommended Decision* Comments at 10; Qwest *Recommended Decision*
    Comments at 1-4, Reply at 1,4; SBC *Recommended Decision* Comments
    at 1, Reply at 1; Sprint *Recommended Decision* Reply at 1; TANE
    *Recommended Decision* Comments at 1; TCA *Recommended Decision*
    Comments at 1-2; USTA *Recommended Decision* Comments at 3-6, Reply
    at 1; Verizon *Recommended Decision* Comments at 1, Reply at 1,4;
    Vermont PSB *Recommended Decision* Comments at 1-2; Warinner,
    Gesinger *Recommended Decision* Reply at 1-2; Wisconsin PSC
    *Recommended Decision* Reply at 1-3, 8-9.

[^28]: *See, e.g.,* AT&T *Recommended Decision* Comments at 1-2, Reply
    at 1; California PUC *Recommended Decision* Comments at 4-5, Reply
    at 2-4.

[^29]: The specific point in time or period of time when category
    relationships and allocation factors are frozen shall be referred to
    as the "base year" of the freeze. *See* section III(C)(3), *infra.*

[^30]: *See* section III(C)(1), *infra*. As described more fully below,
    we adopt a freeze of category relationships and jurisdictional
    allocation factors for price cap carriers and a freeze of allocation
    factors only for rate-of-return carriers. "Price cap carriers" are
    those ILECs who are specified as subject to federal price cap
    regulation or have elected federal price cap regulation under Part
    61 of the Commission's rules. *See* 47 C.F.R. §61.41. Under price
    cap regulation, prices cannot exceed certain prescribed limits that
    typically change annually based on the index reflecting changes in
    productivity, input costs, and other pertinent factors. *See*
    *Policy and Rules Concerning Rates for Dominant Carriers*, Report
    and Order and Second Further Notice of Proposed Rulemaking, CC
    Docket No. 87-313, 4 FCC Rcd 2873 (1989); 47 C.F.R. §§ 61.41 -
    61.48. The price cap carriers include, among others, the operating
    companies owned by the Bell holding companies, Citizens Utilities
    Company, GTE Corporation, and the Sprint Corporation.
    "Rate-of-return carriers" are those carriers that are not subject to
    price cap regulation. Rate-of-return carriers either file tariffs on
    their own, or participate in tariffs filed by NECA. Each company
    participating in the tariffs administered by NECA charges the rates
    appearing in those tariffs, pools its revenues with other
    participants, and receives an amount from the pools equal to its
    costs (or surrogate cost through average schedules) and its *pro
    rata* share of the pools' earnings. Rate-of-return carriers include
    more than 1200 carriers nationwide operating in approximately 1400
    study areas. The carriers subject to the Part 36 rules include
    approximately 70 price cap ILECs and more than 600 rate-of-return
    ILECs that perform separations to determine their actual interstate
    and intrastate costs. The other nearly 600 rate-of-return ILECs are
    referred to as \"average schedule\" companies and do not perform
    separations under the Part 36 rules. *See* *also* Mid-Plains
    Telephone Company, Inc., Petition for Declaratory Ruling Regarding
    the Commission\'s Part 36 Separations Procedures, *Memorandum
    Opinion and Order*, AAD 9-1939, 5 FCC Rcd 7050 (1990). Average
    schedule companies are defined by rule as telephone companies that
    were receiving average schedule settlements on December 1, 1982.
    *See* 47 C.F.R. §69.605(c).

[^31]: Jurisdictional cost shifts in separations results generally are
    caused by changes in any of three areas: overall cost levels,
    categorization of costs (*i.e.* relative category assignments), or
    jurisdictional allocation factors. A carrier's increased overall
    cost level in a Part 32 account that has a high cost allocation to
    the interstate jurisdiction will cause shifts to the interstate
    jurisdiction for other investment and expense accounts whose
    jurisdictional allocations are dependent on that account. Increasing
    investment in specific categories (*e.g.* interexchange cable and
    wire facilities (C&WF)) may also contribute to jurisdictional shifts
    in the final results. Likewise, changes in customer calling patterns
    (*e.g.*, increased interstate calling) will cause shifts in the
    jurisdictional allocation factors, many of which are based on usage.
    These factors allocate a significant portion of a carrier's
    investment between the interstate and intrastate jurisdictions.

[^32]: For example, the increased use of packet-switched technologies
    may call into question the continued validity of usage-based
    separations procedures designed for circuit-switched technologies
    and services. Packet-switched networks use a switching technique in
    which data is divided into packets for routing through the network.
    Packet switching enables a single transmission path, *i.e.*, a
    circuit, to carry packets from many different customers during the
    same period. In contrast, circuit-switching dedicates a single
    transmission path to one customer for the duration of a call. The
    Part 36 rules do not appropriately address the allocation methods
    for these newer technologies.

[^33]: *See, e.g.,* AT&T *Recommended Decision* Comments at 1-2, Reply
    at 7-12; California PUC *Recommended Decision* Comments at 4-5,
    Reply at 4-8.

[^34]: *See* section III(B), *infra.*

[^35]: COE includes, for example, operator systems equipment and local
    switching equipment. *See* 47 C.F.R. §§36.123-26. C&WF includes, for
    example, exchange line (loop) facilities. *See* 47 C.F.R.
    §§36.151-57.

[^36]: *Recommended Decision,* 15 FCC Rcd at 13167-69, paras. 12-13.

[^37]: *Smith v. Illinois*, 282 U.S. 133 (1930).

[^38]: *Smith v. Illinois,* 282 U.S. at 150-151; *see* Ameritech *NPRM*
    Comments at 11-12.

[^39]: *Recommended Decision*, 15 FCC Rcd at 13167-68, para. 12.

[^40]: *Recommended Decision*, 15 FCC Rcd at 13168-69, para. 13. The SPF
    factor is the percentage allocator that allocates non-traffic
    sensitive subscriber plant costs between the interstate and
    intrastate jurisdictions. Subscriber plant equipment includes the
    line connecting homes to the local switching office and the
    termination of that access line in the local switching office and
    the subscriber's premises. The Commission imposed the 1982 freeze of
    the SPF factor to halt the growth in allocation of exchange plant
    costs to the interstate jurisdiction, while the Commission continued
    revision of the cost allocation procedures. *See Amendment of Part
    67 of the Commission's Rules and Establishment of a Joint Board,*
    Decision and Order, CC Docket No. 80-286, 89 F.C.C.2d 1 (1982).

[^41]: For example, the Commission adopted a freeze of all study area
    boundaries as of November 15, 1984, for universal service funding
    determinations. *See* *MTS and WATS Market Structure, Amendment of
    Part 67 of the Commission's Rules and Establishment of a Joint
    Board*, Recommendation to the Commission, CC Docket Nos. 78-72 and
    80-286, 49 Fed. Reg. 48325 (Dec. 12, 1984), adopted by the
    Commission, Final Rule, 50 Fed. Reg. 939 (Jan. 8, 1985), 47 C.F.R.
    Appendix -- Glossary, "Study Area." Similarly, as an interim
    hold-harmless measure, the Commission decided to maintain the Part
    36 high-cost support mechanism for non-rural carriers during the
    transition to a new forward-looking high-cost support mechanism.
    *See Federal-State Joint Board on Universal Service, Forward-Looking
    Mechanism for High-Cost Support for Non-rural LECs*, Report and
    Order, CC Docket Nos. 96-45, 97-160, FCC 99-306, para. 77-88 (rel.
    Nov. 2, 1999*); Federal-State Joint Board on Universal Service*,
    Recommended Decision, CC Docket No. 96-45, FCC 00J-1 (rel. June 30,
    2000).

[^42]: *See, e.g.,* BellSouth *Recommended Decision* Comments at 4-5;
    Qwest *Recommended Decision* Comments at 10-13; USTA *Recommended
    Decision* Comments at 6; Verizon *Recommended Decision* Comments at
    3-4.

[^43]: *See* California PUC *Recommended Decision* Comments at 5-6. We
    note that the Pennsylvania PUC contends that section 254(k) of the
    Act is relevant to this issue. *See* Pennsylvania PUC *Recommended
    Decision* Comments at 9. We conclude that section 254(k) does not
    speak to how costs should be allocated between the interstate and
    intrastate jurisdictions and therefore is not relevant. *See*
    Verizon *Recommended Decision* Reply at 2; *Southwestern Bell
    Telephone Company v. FCC*, 153 F.3d 523, 559 (8^th^ Cir. 1998).

[^44]: *See* California PUC *Recommended Decision* Comments at 4-5. *See
    also* n.40, *supra.*

[^45]: *See* California PUC *Recommended Decision* Comments at 5-6.

[^46]: *See Id.* at 16.

[^47]: For instance, according to ARMIS 43-04 reports for the years 1996
    through 2000, the percentage of net investment assigned to the
    interstate jurisdiction was 25.2%, 25.8%, 27.4%, 28.1%, and 27.8%,
    respectively.

[^48]: *See* *Recommended Decision*, 15 FCC Rcd at 13172, para. 20;
    Ameritech *NPRM* Comments at 8; Bell Atlantic *NPRM* Comments at 4;
    BellSouth *NPRM* Comments at 10; Southwestern Bell *NPRM* Comments
    at 7.

[^49]: *See Recommended Decision*, 15 FCC Rcd at 13172, para. 20. *See*
    n.30, *supra* for definitions of "price cap" and "rate of return"
    carriers.

[^50]: *Recommended Decision,* 15 FCC Rcd at 13172-73, para. 21; *See,
    e.g.,* Dobson and McLoud *NPRM* Comments at 1-4; NECA *NPRM*
    Comments at 3-4; RTC *NPRM* Reply Comments at 5; Western Alliance
    *NPRM* Comments at 12-13; NECA Feb.4 *ex parte*; USTA *NPRM*
    Comments at 9-12.

[^51]: *Recommended Decision,* 15 FCC Rcd at 13172-73, para. 21; *See,
    e.g.,* NECA Feb. 17 *ex parte*; USTA Feb. 11 *ex parte*.

[^52]: *Recommended Decision*, 15 FCC Rcd at 13173, para. 22; *See,
    e.g.,* NECA Feb. 17 *ex parte*; USTA Feb. 11 *ex parte*.

[^53]: *See* 47 C.F.R. Part 36, Subpart F.

[^54]: *See* NECA Feb. 17 *ex parte*.

[^55]: *See, e.g., Id.*; *Recommended Decision*, 15 FCC Rcd at 13173,
    para. 23.

[^56]: For example, a review of all companies that file ARMIS data (the
    majority of which are price cap companies) for the years 1995-1998
    shows that telephone plant under construction (TPUC) as a percent of
    total plant in service (TPIS) never exceeded 4.5%, whereas many
    rate-of-return companies, during the same time period, had TPUC that
    ranged from 20% to 40% of TPIS.

[^57]: *See, e.g.,* CHR *Recommended Decision* Comments at 2; NECA,
    NRTA, NTCA, & OPASTCO *Recommended Decision* Comments at 4-5;
    Pennsylvania PUC *Recommended Decision* Comments at 5-7; TCA
    *Recommended Decision* Comments at 5; USTA *Recommended Decision*
    Comments at 3-6;.

[^58]: *See, e.g.,* NECA, NRTA, NTCA, & OPASTCO *Recommended Decision*
    Comments at 4-5; USTA *Recommended Decision* Comments at 3-6, Reply
    at 2-4.

[^59]: *See Id.*

[^60]: Examples of facilities in which a portion can be directly
    assigned include, Central Office Equipment- Category 2, Tandem
    switching equipment and Cable and Wire Facilities-Category 2,
    Wideband and exchange trunk. *See* 47 C.F.R. §§ 36.124 and 36.155.

[^61]: *Recommended Decision*, Appendix A, 15 FCC Rcd at 13181-83.

[^62]: *See* SBC Comments at 3-4. *See also*, 47 C.F.R. §§ 36.374-375.

[^63]: *Recommended Decision*, 15 FCC Rcd at 13174, para. 25.

[^64]: *Recommended Decision*, 15 FCC Rcd at 13174, para. 25.

[^65]: *See* 47 C.F.R. §§ 36.124 and 36.125. The Joint Board noted that
    "current year" means category relationships or factors calculated
    based on data from the twelve months prior to the Commission's order
    establishing the freeze.

[^66]: *See* Appendix B for a list of the categories and factors that we
    are requiring to freeze.

[^67]: *See, e.g.,* NECA, TCA, NRTA & OPASTCO *Recommended Decision*
    Comments at 4-5; SBC *Recommended Decision* Comments at 1-2; TANE
    *Recommended Decision* Comments at 4; USTA *Recommended Decision*
    Comments at 3-6.

[^68]: *See, e.g.,* NECA, NTCA, NRTA, & OPASTCO *Recommended Decision*
    Comments at 4-5; TANE *Recommended Decision* Comments at 3; TCA
    *Recommended Decision* Comments at 4-5. We note that the impact of
    the Internet on separations results is addressed in detail below.
    *See infra*, paras. 34-42.

[^69]: Pennsylvania PUC *Recommended Decision* Comments at 5-7.

[^70]: *Recommended Decision,* 15 FCC Rcd at 13175, para. 26.

[^71]: *Recommended Decision,* 15 FCC at 13175, para. 26*.*

[^72]: *See, e.g.,* SBC *Recommended Decision* Reply at 2; USTA
    *Recommended Decision* Comments at 7-8.

[^73]: *See, e.g.,* AT&T *Recommended Decision* Comments at 2;
    California PUC *Recommended Decision* Comments at 11; GSA
    *Recommended Decision* Reply at 3-6; Pennsylvania *Recommended
    Decision* Comments at 5-7;

[^74]: *See, e.g.,* USTA *Recommended Decision* Reply at 2-4; TANE
    *Recommended Decision* Comments at 4.

[^75]: *Recommended Decision,* 15 FCC at 13175, para. 27.

[^76]: *Recommended Decision,* 15 FCC at 13175, para. 27*.*

[^77]: *Recommended Decision,* 15 FCC at 13175, para. 27*.*

[^78]: *See, e.g.,* BellSouth *Recommended Decision* Comments at 5;
    Qwest *Recommended Decision* Comments at 4-6; USTA *Recommended
    Decision* Comments at 7-8.

[^79]: *See, e.g.,* Pennsylvania PUC *Recommended Decision* Comments at
    5-7.

[^80]: *See, e.g.,* GSA *Recommended Decision* Comments at 6, Reply at
    8; NECA, NCTA, NRTA & OPASTCO *Recommended Decision* Reply at 2-5..

[^81]: *See, e.g.,* Qwest *Recommended Decision* Comments at 4-6.

[^82]: *Recommended Decision,* 15 FCC Rcd at 13175-76, para. 28; *see*
    *Trends in Telephone Service*, Industry Analysis Division, Common
    Carrier Bureau, FCC, at Table 12.1 (March 2000) (indicating the
    following annual local DEM percentage increases: 8% (1996), 12%
    (1997), and 11% (1998)).

[^83]: *Id. See also, e.g.,* NECA, NCTA, NRTA & OPASTCO *Recommended
    Decision* Reply 2-5. *Intercarrier Compensation for ISP-Bound
    Traffic Ruling*, 14 FCC Rcd at 3701-3703, 3710.

[^84]: *Recommended Decision*, 15 FCC Rcd at 13175-76, para. 28.

[^85]: *Recommended Decision*, 15 FCC Rcd at 13175-76, para. 28.

[^86]: *Recommended Decision,* 15 FCC Rcd at 13176, para. 29.
    Previously, on March 24, 2000, the United States Court of Appeals
    for the D.C. Circuit had vacated certain provisions of the
    *Intercarrier Compensation for ISP-Bound Traffic Ruling*, and
    remanded it to the Commission. The court did not dispute the
    Commission's conclusion that Internet traffic is interstate in
    nature, but rather questioned the Commission's explanation for why
    this jurisdictional analysis was relevant to the question of whether
    a call to an ISP was subject to the reciprocal compensation
    requirements of section 251(b)(5) of the Act*. Bell Atlantic v.
    FCC,* 206 F.3d 1 (D.C. Cir. 2000). On April 27, 2001, the Commission
    released its Order on Remand in the *Intercarrier Compensation for
    ISP-Bound Traffic* docket. This Order on Remand did not alter the
    Commission's conclusion that ISP-bound traffic is jurisdictionally
    interstate in nature. *See Implementation of the Local Competition
    Provisions of the Telecommunications Act of 1996, Intercarrier
    Compensation for ISP-Bound Traffic,* Order on Remand and Report and
    Order, CC Docket nos. 99-98, 99-68, FCC 01-131 (rel. April 27,
    2001)( *Intercarrier Compensation for ISP-Bound Traffic Remand
    Order)*.

[^87]: *Recommended Decision,* 15 FCC Rcd at 13176, para. 29. The Joint
    Board noted that several parties had recommended that a freeze of
    the Part 36 rules be accompanied by a classification of Internet
    traffic or Internet Service Provider (ISP)--bound traffic as
    interstate for separations purposes. *See, e.g*., Harris, Skrivan
    *NPRM* Comments at 6-7; TDS *NPRM* Comments at 9-13; BellSouth Dec.
    *6 ex parte*; USTA Jan. 27 *ex parte; see also* TANE *Recommended
    Decision* Comments at 3-4. The Joint Board did not recommend that
    the Commission address the treatment of Internet traffic for
    separations purposes in the *Recommended Decision* due to an
    insufficient record on the issue. The Joint Board recommended that
    the Commission address this issue in the context of comprehensive
    separations reform. *See Recommended Decision* at 17, para. 29,
    n.68.

[^88]: *Recommended Decision,* 15 FCC Rcd at 13176, para. 29.

[^89]: *Recommended Decision*, 15 FCC Rcd at 13176, para. 29. We note
    that several commenters proposed a freeze for rate-of-return
    carriers that would be calculated based on data from an average of
    prior years, 1995-1997. *See*, *e.g.*, USTA Jan. 27 *ex parte*;
    Letter from Gina Harrison, NECA, to Magalie Roman Salas, FCC, dated
    February 4, 2000 (NECA Feb. 4 *ex parte*); Warinner, Gesinger
    *Recommended Decision* Reply at 2. USTA and NECA argued that basing
    the freeze on prior years was necessary in light of the impact the
    Internet has had on jurisdictional allocations beginning in 1996.
    *See Id.* We further note that we have committed in this Report and
    Order to address the impact of the Internet in the context of
    comprehensive reform, as suggested by several commenters. *See,
    e.g.,* USTA *Recommended Decision* Reply at 3.

[^90]: *See Jurisdictional Separations Reform and Referral to the
    Federal-State Joint Board*, CC Docket No. 80-286, Public Notice, DA
    No. 00-2433 (rel. October 30, 2000).

[^91]: *Id.*

[^92]: *Id.*

[^93]: *Id.*

[^94]: *See* BellSouth *Recommended Decision* Comments at 4; Verizon
    *Recommended Decision* Comments at 4-8.

[^95]: *See, e.g.,* SBC *Recommended Decision* Reply at 2; USTA
    *Recommended Decision* Reply at 2.

[^96]: *See* Verizon *Recommended Decision* Reply at 1-3.

[^97]: *See* Pac-West/RCN *Recommended Decision* Reply at 2-5.

[^98]: *See, e.g.,* AT&T *Recommended Decision* Reply at 9-11;
    California PUC *Recommended Decision* Reply at 10-13; Pac-West/RCN
    *Recommended Decision* Reply at 2-5; WorldCom *Recommended Decision*
    Comments at 1-6.

[^99]: *See* AT&T *Recommended Decision* Reply at 9-11.

[^100]: *See, e.g.,* California PUC *Recommended Decision* Comments at
    18-21, Reply at 10-13; SBC *Recommended Decision* Comments at 6;
    Warinner, Gesinger *Recommended Decision* Reply at 2-4.

[^101]: *See, e.g.,* NECA, NRTA, & OPASTCO *Recommended Decision* Reply
    at 7; Beacon *Recommended Decision* Reply at 4-7; JSI *Recommended
    Decision* Reply at 2-4; Qwest *Recommended Decision* Reply at 2-3;
    Warriner, Gesinger *Recommended Decision* Reply at 2-4; Wisconsin
    PSC *Recommended Decision* Reply at 7; Vermont PSB *Recommended
    Decision* Comments at 2-5.

[^102]: *See, e.g.,* Beacon *Recommended Decision* Reply at 4-7; JSI
    *Recommended Decision* Comments at 2-5, Reply at 2-4; NECA, NTCA,
    NRTA & OPASTCO *Recommended Decision* Comments at 2-5; SBC
    *Recommended Decision* Comments at 6, Exhibits A and B; TANE
    *Recommended Decision* Comments at 2-3; TCA *Recommended Decision*
    Comments at 2-3; Warinner, Gesinger *Recommended Decision* Reply at
    2-4. JSI contends that a decision on a local DEM reduction cannot
    wait for the Commission's decision in *Intercarrier Compensation for
    ISP-Bound Traffic Remand* proceeding, because increased dial-up
    Internet traffic is already threatening rate-of-return carriers with
    cost shifts that could affect the affordability of basic local
    service rates in rural communities. *See* JSI *Recommended Decision*
    Comments at 2-5.

[^103]: *See, e.g., General Communications Inc. v. Alaska Communications
    System Holdings, Inc., et al*, Memorandum Opinion and Order, FCC
    01-32 (rel. Jan. 24, 2001) (2001 WL 58932) (*GCI Order*). This
    policy exempting enhanced service providers from the access charge
    regime is commonly referred to as the "ESP exemption."

[^104]: *See Intercarrier Compensation for ISP-Bound Traffic Remand
    Order* at paras. 52-65.

[^105]: *GCI Order* at para. 32.

[^106]: *GCI Order* at para. 32.

[^107]: *See SBC v. FCC,* 153 F.3d 523 (8^th^ Cir. 1998).

[^108]: *See* section (III)(C)(5), *supra.*

[^109]: *Recommended Decision*, 15 FCC Rcd at 13177, para. 31.
    Separations data is reported annually by carriers in their ARMIS
    reports pursuant to Part 43 of the Commission's rules. *See* 47
    C.F.R. § 43.

[^110]: *Recommended Decision*, 15 FCC Rcd at 13177, para. 31.

[^111]: *See, e.g.,* Qwest *Recommended Decision* Comments at 6-8; SBC
    *Recommended Decision* Comments at 5; USTA *Recommended Decision*
    Comments at 8-9, Reply at 3.

[^112]: *See, e.g.,* California PUC *Recommended Decision* Comments at
    7, Reply at 7; GSA *Recommended Decision* Comments at 8-9, Reply at
    6-9. (recommending elimination of annual separations studies for
    rate-of-return carriers only). *See* GSA *Recommended Decision*
    Reply at 9.

[^113]: We direct the Bureau to seek comment on the content of the
    proposed streamlined ARMIS 43-04 report. This will provide
    interested parties, including the states, the opportunity to provide
    feedback on which specific accounts are needed to evaluate the
    freeze and consider further separations reform. We will adopt
    specific reporting requirements for ARMIS 43-04 in a subsequent
    order.

[^114]: *Recommended Decision*, 15 FCC Rcd at 13177, para. 32.

[^115]: *Recommended Decision*, 15 FCC Rcd at 13177, para. 32, *citing*
    47 C.F.R. § 1.3

[^116]: *Recommended Decision*, 15 FCC Rcd at 13177-78, para. 33. In
    certain instances, exchanges are transferred between study areas
    without a monetary transaction occurring. For example, affiliated
    carriers' may reconfigure study areas within a state. For ease of
    discussion, we may refer to transfers of exchanges as purchases or
    sales of exchanges.

[^117]: *Recommended Decision,* 15 FCC Rcd at 13177-78, para. 33. The
    Joint Board recommended that, when acquiring exchanges, price cap
    carriers recalculate their frozen category relationships and
    jurisdictional allocation factors, and rate-of-return carriers
    recalculate their factors only. However, the merging and
    recalculating of category relationships would apply only to the
    investment categories in the COE (2210, 2220, 2230), IOT (2310), and
    C&WF (2410) accounts. Due to the company-specific nature of certain
    expenses, the Joint Board recommended that the acquiring carrier
    retain its own frozen category relationships for the categories
    within Account 6623, Customer Services Expense, and not merge them
    with those of the selling company.

[^118]: *Recommended Decision*, 15 FCC Rcd at 13177-78, para. 33. To
    compose the traffic factors and category percentages of the
    purchasing company with those of the selling company, the purchasing
    company must (1) combine the (pre-purchase) access lines of the
    purchasing company (A) and the total access lines purchased from the
    selling company (B), and (2) multiply the factors and category
    percentages of the purchasing company by (A/ (A+B) and those of the
    selling company by (B/ (A+B) and sum the results.

[^119]: *Recommended Decision*, 15 FCC Rcd at 13177-78, para. 33. For
    example, a small rural study area with high interstate factors could
    purchase exchanges from a large study area with low interstate
    factors. Without recalculation, the acquiring small company could
    apply its high interstate frozen factors to the acquired exchanges
    and, thus, unfairly burden the interstate jurisdiction.

[^120]: *Recommended Decision*, 15 FCC Rcd at 13178-79, para. 34, n.76.
    For example, if the purchasing company owns no host/remote
    investment and purchases a stand-alone central office from a large
    carrier that owns one or more host/remote switching complexes, the
    failure to remove the host/remote category relationships from the
    selling company's list of category investment would have the effect
    of creating COE Category 4.3 host/remote and CW&F Category 4
    host/remote investment in the new study area of the purchasing
    company.

[^121]: *Recommended Decision*, 15 FCC Rcd at 13178-79, para. 34.

[^122]: *See, e.g.,* BellSouth *Recommended Decision* Comments at 3; GSA
    *Recommended Decision* Comments at 7; Qwest *Recommended Decision*
    Comments at 10; SBC *Recommended Decision* Comments at 5-6.

[^123]: Of the more than 1200 ILECs participating in the tariff
    administered by NECA, approximately half receive settlements from
    NECA based on their actual costs. *See* Universal Service Fund 1995
    Submission of 1994 Study Results by the National Exchange Carrier
    Association, Inc. (Sept. 29, 1995). These ILECs are termed \"cost
    settlement LECs\" or \"cost companies\" because the Part 36 rules
    require them to perform cost studies to separate certain types of
    costs. To avoid the expense of performing such studies, the
    remaining half of the ILECs participating in the NECA tariff receive
    interstate settlements based on "averaged" formulas. See 47 C.F.R. §
    69.605(c). These small ILECs are commonly called \"average schedule
    companies." NECA develops that schedule based on generalized
    industry data that reflect the costs of a typical small ILEC. These
    average schedule companies may convert to \"cost companies\" and
    receive compensation from NECA based on their company-specific
    costs. Once they make this election, however, they cannot later
    resume average schedule status. *See* 47 C.F.R. § 69.605(c).

[^124]: *See, e.g.,* Beacon *Recommended Decision* Reply at 7-8; GVNW
    *Recommended Decision* Comments at 4; JSI *Recommended Decision*
    Comments at 3, 6-8; NECA, NRTA, NTCA & OPASTCO *Recommended
    Decision* Comments at 8; USTA *Recommended Decision* Comments at
    6,9; Reply at 2, n.7; Warinner, Gesinger *Recommended Decision*
    Reply at 2.

[^125]: *See* USTA *Recommended Decision* Comments at 6.

[^126]: *See* 47 C.F.R. § 61.45 *et seq.*

[^127]: 47 C.F.R. § 61.45(d).

[^128]: 47 C.F.R. § 61.45(d)(1)(iii).

[^129]: *See* Verizon *Recommended Decision* Comments at 7 (arguing
    that, because of the potential for exogenous adjustments to
    interstate rates, moving Internet costs between the jurisdictions
    would cause the market disruption that the Joint Board seeks to
    avoid with the proposed freeze).

[^130]:  The RFA, *see* § 5 U.S.C. S 601 *et seq*., has been amended by
    the Contract With America Advancement Act of 1996, Pub. L. No.
    104-121, 110 Stat. 847 (1996) (CWAAA). Title II of the CWAAA is the
    Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA).

[^131]:  5 U.S.C. § 605(b).

[^132]:  5 U.S.C. § 601(6).

[^133]:  5 U.S.C. § 601(3) (incorporating by reference the definition of
    \"small business concern\" in Small Business Act, 15 U.S.C. S §
    632). Pursuant to 5 U.S.C. § 601(3), the statutory definition of a
    small business applies \"unless an agency, after consultation with
    the Office of Advocacy of the Small Business Administration and
    after opportunity for public comment, establishes one or more
    definitions of such term which are appropriate to the activities of
    the agency and publishes such definition(s) in the Federal
    Register.\"

[^134]:  Small Business Act, § 15 U.S.C. S 632.

[^135]: 13 C.F.R. § 121.201.

[^136]: *See* *NPRM*, 12 FCC Rcd at 22169-22170. We note the Commission
    received no comments directly in response to the IRFA.

[^137]: *See supra*, para. 1; *NPRM*, 12 FCC Rcd at 22142-22145.

[^138]: *See supra*, para. 9.

[^139]: *See supra*, para. 21.

[^140]: *See id.*

[^141]: *See supra*, para. 42