DA 03-1101

April 7, 2003

**FURTHER COMMENT REQUESTED ON THE APPROPRIATE TREATMENT OF SHARING AND
LOW-END ADJUSTMENTS MADE BY PRICE CAP LOCAL EXCHANGE CARRIERS IN FILING
1993 AND 1994 INTERSTATE ACCESS TARIFFS**

**PLEADING CYCLE ESTABLISHED**

**1993 Annual Access Tariffs, CC Docket No. 93-193**

**1994 Annual Access Tariffs, CC Docket No. 94-65**

**Comments Due: May 5, 2003**

**Replies Due: May 19, 2003**

This Public Notice seeks comment on the appropriate treatment of sharing
and low-end adjustments made by price cap local exchange carriers (LECs)
in 1992 and 1993 for purposes of calculating their rates of return in
filing their interstate access tariffs for the years 1993 and 1994.

On June 23, 1993, the Common Carrier Bureau (the Bureau) suspended the
1993 annual access tariffs of price cap LECs that had implemented
sharing or low-end adjustments in 1992. The Bureau imposed an accounting
order and designated for investigation the issue of the appropriate
treatment of sharing and low-end adjustments made by price cap LECs in
1992 in calculating their 1992 rates of return and their consequent
sharing obligations or low-end adjustments for 1993.[^1] The
investigation of this issue had not been completed when price cap LECs
filed their 1994 access tariffs. Therefore, the Bureau suspended the
1994 annual access tariffs of price cap LECs that had implemented a
sharing or low-end adjustment in 1993. The Bureau incorporated the issue
of the appropriate treatment of sharing and low-end adjustments made by
price cap LECs in 1993 in calculating their 1993 rates of return and
consequent sharing obligations and low-end adjustments for 1994 into the
investigation of the same issue for the 1993 access tariffs.[^2] These
issues remain pending before the Commission.

# BACKGROUND

In September 1990, the Commission replaced rate-of-return regulation for
the largest LECs, including the regional Bell Operating Companies (BOCs)
and GTE, with the incentive-based system of price cap regulation.[^3]
Under rate-of-return regulation, LECs could charge rates that earned a
maximum allowable return on interstate investment.[^4] If the LEC
actually earned more than the maximum allowable rate of return during a
specified period, the Commission required the LEC to return the excess
earnings to its interstate access customers by charging lower rates in
the subsequent tariff filing period.[^5] The Commission also required
the LEC to treat any return of excess earnings as an adjustment to
earnings in the period in which the over-earnings occurred, known as the
enforcement period, rather than to the period in which the refund was
actually paid by a reduction in rates, or the subsequent enforcement
period.[^6] The Commission thus required the LEC to "add back" the
amount of the refund for prior over-earnings into the total earnings
used to compute the rate of return for the enforcement period and any
consequent refund obligation for the subsequent enforcement period. The
refund thus had the same effect on earnings that it would have had if
the LEC had written a check for the amount of the over-earnings on the
last day of the enforcement period during which the over-earnings
occurred.[^7]

Under price cap regulation, the ceiling or maximum price a LEC may
charge for interstate access services is adjusted annually by a price
cap index that is a measure of inflation minus a productivity factor, or
\"X-Factor.\"[^8] Price cap regulation is intended to encourage growth
in productivity by permitting price cap LECs that increase their
productivity to earn higher profits, while at the same time ensuring
that interstate access customers share in the benefits of productivity
growth in the form of lower rates.[^9] Under the original price cap
plan, a LEC's interstate rate of return in one year could be the basis
for "back stop" adjustments to that carrier's price cap indices and
rates in the following year.[^10] Specifically, the Commission required
price cap LECs opting for an X-factor of 3.3 percent and earning a rate
of return above 12.25 percent to "share" half of earnings above that
level with their interstate access customers by lowering their rates in
the following year.[^11] The Commission's rules also permitted price cap
LECs earning less than 10.25 percent in a particular year to adjust
their rates upward in the following year to achieve an earnings rate of
at least 10.25 percent for the year in which they under-earned.[^12]
This mechanism is called a "low-end" or "lower formula" adjustment. The
Commission adopted these rate-of-return based "back stop" adjustments to
ensure that LEC rates under price cap regulation did not become
unreasonably high or low due to the varying operational and economic
circumstances of the many individual LECs.[^13] The Commission
determined that the sharing and low-end adjustments would be one-time
adjustments to a single year's rates, so as not to affect future
earnings.[^14] To provide price cap LECs greater incentives to increase
efficiency, the Commission eliminated the sharing obligation in
1997.[^15]

The Bureau permitted NYNEX and the Southern New England Telephone
Company (SNET)[^16] to make low-end adjustments in 1992 to compensate
for under-earnings they experienced in 1991. Thereafter, in filing their
1993 interstate access tariffs, NYNEX and SNET restated their 1992
earnings, excluding the revenues they received in 1992 due to the higher
rates they were allowed to charge as a result of the low-end adjustment.
This restatement reduced the 1992 earnings and rates of return of both
NYNEX and SNET and their consequent 1993 sharing obligations. According
to AT&T, which protested this restatement when NYNEX and SNET filed
their 1993 access tariffs, NYNEX's restatement of 1992 earnings reduced
its 1993 sharing obligation by \$19.7 million.[^17] SNET's restatement
of 1992 earnings allegedly eliminated the sharing obligation it
otherwise would have had in 1993.[^18] Because this issue was relevant
to all price cap LECs\' sharing and low-end adjustment calculations, the
Bureau suspended the potentially-affected 1993 access tariffs for one
day, imposed an accounting order, and designated this issue for
investigation.[^19]

Before the Bureau completed this investigation, price cap LECs filed
their 1994 interstate access tariffs. The Bureau permitted NYNEX and
SNET to make low-end adjustments again in 1993 to compensate for
under-earnings they experienced in 1992, and NYNEX and SNET again
excluded the revenues resulting from these adjustments from their 1993
earnings in calculating their 1994 sharing obligations. AT&T again
protested this restatement of 1993 earnings, claiming that it reduced
NYNEX's 1994 sharing obligation by \$15.9 million and eliminated SNET's
1994 sharing obligation.[^20] Because of the similarities of the "add
back" issues in 1993 and 1994, the Bureau suspended the 1994 access
tariffs of the price cap LECs that had implemented a sharing or low-end
adjustment in 1993 and incorporated the 1994 access tariffs into the
1993 investigation.[^21] In doing so the Bureau stated: "After the
termination of the 1993 investigation and prior to the termination of
this \[1994\] investigation, we will give parties an opportunity to
present any legal argument or factual circumstances that would lead us
to conclude that the decisions reached in \[the 1993 investigation\] on
add-back issues should not control our treatment of the 1994 access
transmittals."[^22]

Simultaneously with the Bureau's suspension of the 1993 access tariffs
of the price cap LECs that had implemented a sharing or low-end
adjustment in 1992, the Commission adopted a Notice of Proposed
Rulemaking (NPRM) to consider further the appropriate treatment of these
adjustments. The NPRM tentatively concluded that the add back adjustment
should continue to be part of the rate-of-return calculations of LECs
subject to price caps, requiring them to "add back" or remove the effect
of any sharing obligation or low-end adjustment in a particular year to
determine their rates of return for that year and their consequent
sharing obligation or low-end adjustment in the following year.[^23] The
Commission ultimately adopted this tentative conclusion, reasoning that,
as with over earning rate-of-return carriers subject to refund
requirements, price cap LECs implementing a sharing or low-end
adjustment in one year should be required to "add back" or remove the
effect of those adjustments in calculating rates of return for that
year, and consequent sharing or low-end adjustments in the subsequent
year.[^24] In applying its rate-of-return reasoning to price cap
carriers, the Commission explained:

> Suppose a LEC earned \$400 million from its interstate operations in
> 1994, with \$100 million of that amount subject to a 50 percent
> sharing obligation. Pursuant to our rules, the LEC would be required
> to flow back \$50 million to its ratepayers in 1995. If the LEC
> replicates its 1994 performance in 1995 by earning \$350 million
> (i.e., \$400 million minus the \$50 million sharing adjustment),
> should it be allowed to say that it must only share half of the \$50
> million to consumers in 1995 due to its 1994 performance? It is clear
> that under our reporting rules for carriers subject to rate-of-return
> regulation the answer is 'no'; in this order, we conclude that the
> answer is also 'no' prospectively for companies subject to price cap
> regulation.[^25]

# CURRENT PROCEEDING

While the Commission resolved other issues designated for investigation
regarding the 1993 and 1994 interstate access tariffs, and resolved the
add back issue for subsequent tariffs, the add back issue for the 1993
and 1994 tariffs is still outstanding.[^26] The purpose of this Public
Notice is to seek comment on the appropriate treatment of sharing and
low-end adjustments in the 1993 and 1994 access tariffs, to refresh a
record that, due to passage of time and several mergers and acquisitions
among the interested parties, may have now grown stale. A specific issue
on which we seek comment is similar to an issue designated for
investigation in 1993: How should price cap LECs have reflected amounts
from prior year sharing or low-end adjustments in computing their rates
of return for that prior year and their consequent sharing and low-end
adjustments to price cap indices for the following year? Appropriate
amounts of the sharing or low-end adjustments should be specified. In
addition, we ask for comment on an issue raised by commenters in the
1993 and 1994 access tariff investigations: Would application of the add
back rule to the 1993 and 1994 access tariffs constitute unlawful
retroactive application of a substantive rule change?[^27] Finally, as
stated in our *1994 Designation Order*, parties may present any legal
argument or factual circumstance that would lead us to conclude that the
decision reached with respect to appropriate treatment of sharing and
low-end adjustments for the 1993 access tariffs should not control our
treatment of sharing and low-end adjustments for the 1994 access
tariffs.

We note that, since the original tariff investigation in 1993, several
of the parties have merged and that the existing record may not
accurately reflect the parties' current positions on the add back issue
and its application to the 1993 and 1994 access tariffs. Therefore, we
ask that parties restate their positions on the issues and not merely
incorporate by reference filings they may have made in the original
investigation or add back rulemaking.

# FILING PROCEDURES 

Comments in response to this Public Notice are due **May 5, 2003.**
Reply Comments are due **May** **19, 2003**. When filing comments,
please reference CC Docket Nos. 93-193 and 94-65. An original and four
copies of all comments should be addressed to Marlene H. Dortch,
Secretary, Federal Communications Commission, 445 12^th^ Street, SW,
Room TW-B204, Washington, DC 20554. A courtesy copy should be addressed
to Chief, Pricing Policy Division, Wireline Competition Bureau, 445 12th
Street, S.W., Room 5-A225, Washington, D.C. 20554, and e-mailed to
<jsaulnie@fcc.gov>. A courtesy copy should also be addressed to Qualex
International, Portals II, 445 12th Street, S.W., Room CY-B402,
Washington, D.C. 20554, telephone (202) 863-2893, facsimile
202-863-2898, or sent via e-mail to [qualexint@aol.com]{.underline}.
Parties also are strongly encouraged to submit their comments via the
Internet through the Electronic Comment Filing System at
\<http://www.fcc.gov/e-file/ecfs.html\>. Generally, only one copy of an
electronic submission must be filed. In completing the transmittal
screen, commenters should include their full name, Postal Service
mailing address, and the applicable docket numbers, which in this
instance are CC Docket Nos. 93-193 and 94-65. Parties may also submit an
electronic comment via Internet e-mail. To get filing instructions for
e-mail comments, commenters should send an e-mail to \<ecfs@fcc.gov\>,
and should include the following words in the body of the message: "get
form \<your e-mail address\>." A sample form and directions will be sent
in reply.

Interested parties who wish to file comments via hand-delivery are also
notified that the Commission will only receive such deliveries weekdays
from 8:00 a.m. to 7:00 p.m., via its contractor, Vistronix, Inc.,
located at 236 Massachusetts Avenue, NE, Suite 110, Washington, DC
20002. **The Commission no longer accepts these filings at 9300 East
Hampton Drive, Capitol Heights, MD 20743.** Please note that all hand
deliveries must be held together with rubber bands or fasteners, and
envelopes must be disposed of before entering the building. In addition,
this is a reminder that the Commission no longer accepts hand-delivered
or messenger-delivered filings at its headquarters at 445 12th Street,
SW, Washington, DC 20554. Messenger-delivered documents (*e.g.*, FedEx),
including documents sent by overnight mail (other than United States
Postal Service (USPS) Express and Priority Mail), must be addressed to
9300 East Hampton Drive, Capitol Heights, MD 20743. This location is
open weekdays from 8:00 a.m. to 5:30 p.m. USPS First-Class, Express, and
Priority Mail should be addressed to the Commission's headquarters at
445 12th Street, SW, Washington, DC 20554. The following chart
summarizes this information:

+-----------------------------------+----------------------------------+
| **TYPE OF DELIVERY**              | > **PROPER DELIVERY ADDRESS**    |
+-----------------------------------+----------------------------------+
| Hand-delivered paper filings      | > 236 Massachusetts Avenue, NE,  |
|                                   | >                                |
|                                   | > Suite 110, Washington, DC      |
|                                   | > 20002 (Weekdays - 8:00 a.m. to |
|                                   | > 7:00 p.m.)                     |
+-----------------------------------+----------------------------------+
| Messenger-delivered documents     | > 9300 East Hampton Drive,       |
| (*e.g.*, FedEx), including        | >                                |
| documents sent by overnight mail  | > Capitol Heights, MD 20743      |
| (this type excludes USPS Express  | >                                |
| and Priority Mail)                | > (Weekdays - 8:00 a.m. to 5:30  |
|                                   | > p.m.)                          |
+-----------------------------------+----------------------------------+
| USPS First-Class, Express, and    | > 445 12^th^ Street, SW          |
| Priority Mail                     | >                                |
|                                   | > Washington, DC 20554           |
+-----------------------------------+----------------------------------+

***Ex Parte* Requirements**

This Public Notice is designated a permit-but-disclose proceeding and is
subject to the requirements of section 1.1206(b) of the Commission's
rules, 47 C.F.R. § 1.1206(b), as revised. Persons making oral *ex parte*
presentations are reminded that memoranda summarizing the presentations
must contain a summary of the substance of the presentation and not
merely a listing of the subjects discussed. More than a one- or
two-sentence description of the views and arguments presented is
generally required.[^28] Other rules pertaining to oral and written
presentations are also set forth in section 1.1206(b).

Interested parties should address any memoranda summarizing oral *ex
parte* presentations or written *ex parte* presentations in this
proceeding to Marlene H. Dortch, Secretary, Federal Communications
Commission, 445 12th Street, S.W., TW-B204, Washington, D.C. 20554.
Parties making either oral or written *ex parte* presentations also
should address copies of memoranda summarizing any oral *ex parte*
presentations or any written *ex parte* presentations to the Chief,
Pricing Policy Division, Wireline Competition Bureau, 445 12th Street,
S.W., Room 5-A222, Washington, D.C. 20554 and e-mail copies to
[jsaulnie@fcc.gov]{.underline}. A courtesy copy also should be addressed
to Qualex International, Portals II, 445 12th Street, S.W., Room
CY-B402, Washington, D.C. 20554, telephone (202) 863-2893., facsimile
(202)-863-2898, or sent via e-mail to <qualexint@aol.com>. Parties also
are strongly encouraged to file copies of memoranda summarizing oral *ex
parte* presentations or any written ex parte presentations via the
Internet through the Electronic Comment Filing System at
\<http://www.fcc.gov/e-file/ecfs.html\>.

For further information regarding this proceeding contact Julie
Saulnier, Pricing Policy Division, Wireline Competition Bureau, (202)
418-1530.

[^1]: *See 1993 Annual Access Tariff Filings*, CC Docket No. 93-193,
    *National Exchange Carrier Association Universal Service Fund and
    Lifeline Assistance Rates, Transmittal No. 556,* CC Docket No.
    93-123, *GSF Order Compliance Filings, Bell Operating Companies
    Tariff for the 800 Service Management System and 800 Data Base
    Access Tariffs,* CC Docket No. 93-129, Memorandum Opinion and Order
    Suspending Rates and Designating Issues for Investigation, 8 FCC Rcd
    4960, 4965, para. 32 (Com. Car. Bur. 1993) (*1993 Designation
    Order*). In March 2002, the Commission renamed the Bureau the
    Wireline Competition Bureau.

[^2]: *See* *1994 Annual Access Tariff Filings*, CC Docket No. 94-65,
    *National Exchange Carrier Association Universal Service Fund and
    Lifeline Assistance Rates, Transmittal No. 612,* Memorandum Opinion
    and Order Suspending Rates, 9 FCC Rcd 3705, 3713, para. 12 (Com.
    Car. Bur. 1994) (*1994 Designation Order*).

[^3]: ^?^ *Policy and Rules Concerning Rates for Dominant Carriers*, CC
    Docket No. 87-313, Second Report and Order, 5 FCC Rcd 6786 (1990)
    (*LEC Price Cap Order*). At that time there were seven regional
    BOCs. As a result of mergers and acquisitions, today there are four.
    For a complete summary of the original price cap plan, *see* *LEC
    Price Cap Order*, 5 FCC Rcd at 6787-89, paras. 5-19.

[^4]: The maximum allowable rate of return consists of the prescribed
    rate of return plus four tenths of one percent of the prescribed
    rate of return. *See* 47 C.F.R. § 67.700.

[^5]: The Commission's former rule requiring direct refund of excess
    earnings to customers was found to be arbitrary and capricious
    without a corresponding method for carriers to recover
    underearnings. *AT&T Co. v. FCC*, 836 F.2d 1386, 1389, 1393 (D.C.
    Cir. 1988).

[^6]: *Amendment of Part 65, Interstate Rate of Return Prescription:
    Procedures and Methodologies to Establish Reporting Requirements*,
    CC Docket No. 86-127, Report and Order, 1 FCC Rcd 952, 956-57, para.
    43 and Appendix C (1986) (establishing a rate of return monitoring
    report, which includes a line to record the amount of the refund).
    *See also* *Price Cap Regulation of Local Exchange Carriers, Rate of
    Return Sharing and Lower Formula Adjustment*, CC Docket No. 93-179,
    Notice of Proposed Rulemaking, 8 FCC Rcd 4415 (1993) (*Add Back
    Notice*); *Price Cap Regulation of Local Exchange Carriers, Rate of
    Return Sharing and Lower Formula Adjustment*, CC Docket No. 93-179,
    Report and Order, 10 FCC Rcd 5656 (1995) (*Add Back Order*).

[^7]: *Add Back Order*, 10 FCC Rcd at 5656-57, para. 2.

[^8]: *Price Cap Performance Review for Local Exchange Carriers*, CC
    Docket No. 94-1, Fourth Report and Order, *Access Charge Reform*, CC
    Docket No. 96-262, Second Report and Order, 12 FCC Rcd 16642, 16646,
    para. 3 (1997) (*Price Cap Fourth Report and Order*). *See also LEC
    Price Cap Order*, 5 FCC Rcd at 6792, paras. 47-49. Exogenous costs
    also are added in determining the price cap index. *See* 47 C.F.R. §
    61.45(a).

[^9]: *LEC Price Cap Order*, 5 FCC Rcd at 6790-91, paras. 21-37.

[^10]: *Id.* at 6801, paras. 120-21.

[^11]: *Id.* at 6801, para. 124. A price cap LEC opting for an X-factor
    of 3.3. percent and earning a rate of return above 16.25 percent was
    required to share all earnings above that level with its access
    customers. *Id*. at 6801, para. 125.

[^12]: *Id.* at 6802, para. 127. This low end adjustment has been
    eliminated for price cap LECs that exercise pricing flexibility. 47
    C.F.R. § 69.731.

[^13]: *Id.* at 6801, para. 120. *See also Add Back Notice*, 8 FCC Rcd
    at 4416, para. 7.

[^14]: *Id.* at 6803, para. 136. *See also* *Policy and Rules Concerning
    Rates for Dominant Carriers*, CC Docket No. 87-313, Order on
    Reconsideration, 6 FCC Rcd 2637, 2691 n.166 (1991) (*LEC Price Cap
    Reconsideration Order*), *aff\'d sub nom*. *National Rural Telecom
    Ass\'n v. FCC*, 988 F.2d 174 (D.C. Cir. 1993).

[^15]: *See Price Cap Fourth Report and Order*, 12 FCC Rcd at 16699-70,
    paras. 147-48.

[^16]: NYNEX has now merged with Bell Atlantic and GTE to become
    Verizon. SNET has become one of the SBC companies.

[^17]: *1993 Annual Access Tariffs*, Petition of American Telephone and
    Telegraph Company at 22 (filed Apr. 27, 1993).

[^18]: *Id.* at 23-24.

[^19]: *1993 Designation Order*, 8 FCC Rcd at 4965, para. 32.

[^20]: *1994 Annual Access Tariffs*, Petition of AT&T Corp. at 9-11
    (filed Apr. 26, 1994).

[^21]: *1994 Designation Order,* 9 FCC Rcd at 3713, para. 12.

[^22]: *Id.*

[^23]: *Add Back Notice,* 8 FCC Rcd at 4417, para. 15*.*

[^24]: *Add Back Order*, 10 FCC Rcd at 5657, para. 4

[^25]: *Id.* at para. 3. The Commission explicitly declined to decide at
    that time whether any add back adjustment should be required for the
    1993 and 1994 annual access tariffs subject to investigation. *Id.*
    at n.3. The District of Columbia Circuit Court of Appeals has
    affirmed the add back rule. *Bell Atlantic v. FCC*, 79 F.3d 1195,
    1205-08 (D.C. Cir. 1996).

[^26]: *See* Letter from Patrick H. Merrick, Director, AT&T Federal
    Government Affairs, to Marlene H. Dortch, Secretary, FCC, CC Docket
    No. 93-193 (filed Oct. 23, 2002).

[^27]: *1994 Designation Order*, 9 FCC Rcd at 3713, para. 12.

[^28]: *See* 47 C.F.R. §1.1206(b)(2), as revised.