*Pages 1--12 from  Microsoft Word - 13249.doc*
 Federal  Communications  Commission  FCC  01-  352 
 Before  the 
 Federal  Communications  Commission 
 Washington,  D.  C.  20554 
 In  the  Matter  of 
 2001  Annual  Access  Tariff  Filings 
 ) 
 ) 
 ) 
 ) 
 ) 
 ) 
 CC  Docket  No.  01-  206 
 MEMORANDUM  OPINION  AND  ORDER 
 Adopted:  December  3,  2001  Released:  December  3,  2001 
 By  the  Commission:  Commissioner  Martin  approving  in  part,  concurring  in  part,  and  issuing  a 
 statement. 
 I.  INTRODUCTION 
 1.  Under  section  201  of  the  Communications  Act  of  1934  (the  Act),  as  amended,  all 
 charges,  practices,  classifications,  and  regulations  for  communication  services  are  required  to  be 
 just  and  reasonable.  1  Sections  204  and  205  of  the  Act  authorize  the  Commission  to  review  the 
 reasonableness  of  carriers  rates,  and  to  prescribe  just  and  reasonable  charges.  2 
 2.  On  July  2,  2001,  the  Competitive  Pricing  Division  (Division)  of  the  Common 
 Carrier  Bureau  (Bureau)  released  the  Suspension  Order,  3  which,  inter  alia,  suspended  for  five 
 months  and  set  for  investigation  the  rates  for  the  traffic  sensitive  basket  filed  by  Moultrie 
 Independent  Telephone  Company,  Inc.  (Moultrie),  suspended  for  one  day  ALLTEL  Telephone 
 Systems  (ALLTELs)  rates  for  local  switching,  imposed  an  accounting  order,  and  initiated  an 
 investigation  into  the  lawfulness  of  issues  raised  by  these  carriers  2001  annual  access  tariff  filings.  4  The  Bureau  designated  for  investigation  the  increase  in  Moultries  traffic  sensitive  rates, 
 particularly  of  its  local  switching  per  minute  rate,  as  reflected  in  Moultries  Transmittal  Number  4 
 1  47  U.  S.  C.    201(  b). 
 2  47  U.  S.  C.    204  and  205. 
 3  2001  Annual  Access  Tariff  Filings,  CCB/  CPD  File  No.  01-  08,  Memorandum  Opinion  and  Order,  16  FCC  Rcd 
 13123  (Comp.  Pric.  Div.  2001)  (Suspension  Order). 
 4  The  Division  subsequently  reconsidered  on  its  own  motion  its  decision  to  suspend  and  investigate  the  proposed 
 multi-  line  business  subscriber  line  charges  of  Ameritech  Operating  Companies,  Frontier  Telephone  of  Rochester, 
 Inc.,  Pacific  Bell  Telephone  Company,  Qwest  Communications,  Inc.,  and  Sprint  Local  Telephone  Companies-Nevada. 
 2001  Annual  Access  Tariff  Filings,  CCB/  CPD  File  No.  01-  08,  Order  on  Reconsideration,  16  FCC  Rcd 
 14857  (Comp.  Pric.  Div.  2001). 
1
 Federal  Communications  Commission  FCC  01-  352 
 2 
 to  Tariff  FCC  Number  1.  5  The  Bureau  also  designated  for  investigation  ALLTELs  derivation  of 
 a  dial  equipment  minutes  (DEM)  allocation  factor  in  setting  local  switching  rates  in  Transmittal 
 Number  90  to  its  Tariff  FCC  Number  1.  6  Moultrie  and  ALLTEL  filed  their  direct  cases  on 
 September  13,  2001,  7  AT&  T  filed  oppositions  to  the  direct  cases  on  September  26,  2001,  8  and 
 Moultrie  and  ALLTEL  filed  rebuttals  to  the  opposition  on  October  3,  2001.  9 
 3.  After  a  thorough  review  of  the  record,  we  conclude  in  this  order  that  Moultrie  and 
 ALLTEL  have  failed  to  demonstrate  the  reasonableness  of  their  local  switching  rates.  As 
 discussed  more  fully  below,  we  direct  Moultrie  to  file  tariff  revisions  reflecting  corrected  local 
 switching  rates,  taking  into  account  the  amount  of  universal  service  fund  (USF)  local  switching 
 support  that  is  available  to  Moultrie.  We  also  find  that  ALLTEL  incorrectly  computed  its  DEM 
 allocation  factor  and  order  it  to  recalculate  its  local  switching  rates  using  corrected  DEM 
 allocation  factors.  We  direct  Moultrie  and  ALLTEL  to  file  tariff  revisions  reflecting  these 
 changes  within  ten  days  from  the  release  date  of  this  order.  In  addition,  we  require  ALLTEL  to 
 make  refunds  to  its  customers  for  overcharges  resulting  from  the  unreasonable  local  switching 
 rates  that  went  into  effect  on  July  3,  2001. 
 II.  MOULTRIES  CALCULATION  OF  LOCAL  SWITCHING  RATES 
 4.  When  Moultrie  made  its  2001  annual  access  tariff  filing,  it  proposed  to  increase  its 
 local  switching  rate  by  more  than  335  percent,  from  $0.05713  per  minute  to  $0.191586  per 
 minute,  to  reflect  the  loss  of  USF  local  switching  support  payments.  10  Moultries  loss  of  USF 
 support  stems  from  a  dispute  with  the  National  Exchange  Carrier  Association  (NECA)  over 
 Moultries  treatment  of  certain  assets  in  its  separations  cost  studies.  In  1997,  Moultrie  transferred 
 ownership  of  certain  non-  loop-  related  assets  to  an  affiliate  and  leased  them  back.  11  This 
 5  2001  Annual  Access  Tariff  Filings,  CC  Docket  No.  01-  206,  Order  Designating  Issues  for  Investigation,  16 
 FCC  Rcd  15929,  15932,  paras.  7-  8  (Comm.  Carr.  Bur.  2001)  (Designation  Order). 
 6  Designation  Order,  16  FCC  Rcd  at  15934-  35,  paras.  11-  14. 
 7  Direct  Case  of  Moultrie  Independent  Telephone  Company,  CC  Docket  No.  01-  206  (filed  Sept.  13,  2001) 
 (Moultrie  Direct  Case);  Direct  Case  of  ALLTEL  Telephone  Systems,  Inc.,  CC  Docket  No.  01-  206  (filed  Sept.  13, 
 2001)  (ALLTEL  Direct  Case).  Both  parties  filed  motions  to  accept  late-  filed  pleadings  which  we  hereby  grant. 
 8  Opposition  of  AT&  T  Corp.  to  the  Direct  Cases  of  ALLTEL  Telephone  Systems,  Inc.  &  Moultrie  Independent 
 Telephone  Company,  CC  Docket  No.  01-  206  (filed  Sept.  26,  2001)  (AT&  T  Opposition). 
 9  Rebuttal  of  Moultrie  Independent  Telephone  Company,  CC  Docket  No.  01-  206  (filed  Oct.  3,  2001)  (Moultrie 
 Rebuttal);  Reply  Comments  of  ALLTEL  Communications,  Inc.  to  the  Opposition  of  AT&  T  Corp.  to  the  Direct 
 Case  of  ALLTEL  Telephone  Systems,  Inc.,  CC  Docket  No.  01-  206  (filed  Oct.  3,  2001)  (ALLTEL  Rebuttal). 
 Moultrie  also  filed  a  supplement  to  its  direct  case  on  October  3,  2001.  See  Supplement  to  Direct  Case  of  Moultrie 
 Independent  Telephone  Company,  CC  Docket  No.  01-  206  (filed  Oct.  3,  2001)  (Moultrie  Supplement). 
 10  See  Letter  from  Steve  Bowers,  President,  Moultrie  Independent  Telephone  Company,  Inc.,  to  Secretary,  FCC, 
 Description  and  Justification  (June  18,  2001)  (Moultrie  Transmittal  No.  4). 
 11  See  Moultrie  Independent  Telephone  Company  Petition  for  Declaratory  Ruling,  CC  Docket  No.  96-  45  at  5 
 (filed  Mar.  29,  1999)  (Moultrie  Petition).  These  assets  include  motor  vehicles,  other  work  equipment,  land  and 
 (continued.) 
2
 Federal  Communications  Commission  FCC  01-  352 
 3 
 transaction  was  designed  to  maximize  Moultries  USF  support  recovery.  12  In  reporting  the 
 transaction  to  NECA  for  determining  its  USF  support  allocation,  Moultrie  removed  the 
 investment  in  the  sold  assets  from  its  cost  calculations  while  including  the  lease  payments  to  the 
 affiliate  in  its  operating  expenses.  The  calculation  used  to  derive  USF  loop  costs  compares  a 
 companys  loop-  related  investment  to  total  investment.  13  After  the  sale  of  its  non-  loop  assets, 
 Moultries  loop  investment  represented  a  much  higher  percentage  of  its  total  company 
 investments.  As  a  result  of  this  transaction,  Moultries  loop  cost  and  expense  adjustment  data  for 
 1997  increased  significantly.  14 
 5.  NECA  sought  a  determination  from  the  Bureau  as  to  the  calculation  of  USF 
 expense  adjustments  when  affiliate  sale/  lease-  back  arrangements  are  involved,  15  and  Moultrie  filed 
 a  Petition  for  Declaratory  Ruling  seeking  clarification  of  the  patent  ambiguity  between  the 
 treatment  of  affiliate  sale/  lease-  back  transactions  under  sections  32.  27(  a)-(  c),  for  accounting 
 purposes,  and  36.2(  a)  and  (c),  for  separations  purposes.  16  On  August  4,  1999,  the  Bureau 
 responded  to  NECAs  request  by  indicating  that,  for  calculating  USF  expense  adjustments, 
 Moultries  sale/  lease-  back  arrangement  as  described  by  NECA  should  be  accounted  for  under 
 section  36.2(  c)(  2),  i.  e.,  by  including  the  property  and  related  expenses  with,  and  excluding  the 
 (Continued  from  previous  page) 
 buildings,  furniture,  office  equipment,  general  purpose  computers,  circuit  equipment,  and  non-  loop-  related  buried 
 cable.  See  Letter  from  Gina  Harrison,  Senior  Counsel  and  Director,  NECA  Washington  Office,  to  Magalie  Roman 
 Salas,  Secretary,  Federal  Communications  Commission  at  2  (Mar.  10,  1999)  (NECA  Mar.  10,  1999  Ex  Parte 
 Letter). 
 12  In  its  petition,  Moultrie  states,  Moultrie  structured  the  transfer  to  optimize  its  recovery  under  the  USF  and  to 
 maximize  tax  benefits.  Moultrie  Petition  at  5. 
 13  See  NECA  Mar.  10,  1999  Ex  Parte  Letter  at  2. 
 14  Specifically,  the  sale/  lease-  back  transaction  as  reported  by  Moultrie  would  have  increased  Moultries  USF 
 support  by  2887  percent,  from  $15  per  loop  per  year  to  $433  per  loop  per  year.  See  NECA  Mar.  10,  1999  Ex  Parte 
 Letter  at  3. 
 15  See  NECA  Mar.  10,  1999  Ex  Parte  Letter.  In  its  direct  case  and  rebuttal,  Moultrie  claims  that  NECA  violated 
 the  Commissions  ex  parte  rules  by  failing  to  serve  a  copy  of  the  March  10,  1999  letter  on  Moultrie.  See  Moultrie 
 Direct  Case  at  4;  Moultrie  Rebuttal  at  4.  Moultrie  is  incorrect.  The  Commissions  ex  parte  rules  do  not  require 
 filers  to  serve  copies  on  parties  to  the  proceeding;  on  the  contrary,  the  definition  of  an  ex  parte  presentation  is 
 [  a]  ny  presentation  which  .  .  .  [i]  f  written,  is  not  served  on  the  parties  to  the  proceeding.  47  C.  F.  R.   
 1.1202(  b)(  1).  NECA  complied  with  the  ex  parte  rule  requirements  by  submitting  two  copies  of  the  filing  to  the 
 Commissions  secretary.  47  C.  F.  R.    1.1206(  b)(  1). 
 16  Moultrie  Petition  at  1.  See  also  Moultrie  Independent  Telephone  Company  Motion  for  Stay  of  Section  69.  605 
 of  the  Commissions  Rules,  CC  Docket  No.  96-  45  (filed  Feb.  2,  2001)  (Motion  for  Stay)  (seeking  to  preclude 
 NECA  from  collecting  cost  information  from  Moultrie  until  the  Commission  rules  on  the  Petition  for  Declaratory 
 Ruling);  Moultrie  Independent  Telephone  Company  Amendment  to  Petition  for  Declaratory  Ruling,  CC  Docket 
 No.  96-  45  (filed  Apr.  6,  1999)  (requesting  the  Commission  to  direct  NECA  to  re-  open  the  24-  month  window  in 
 which  members  may  adjust  cost  studies);  and  Moultrie  Independent  Telephone  Company  Amendment  to  Motion 
 for  Stay  of  Section  69.605  of  the  Commissions  Rules,  CC  Docket  No.  96-  45  (filed  Feb.  6,  2001)  (requesting 
 expedited  action  on  the  Motion  for  Stay). 
3
 Federal  Communications  Commission  FCC  01-  352 
 4 
 rent  expenses  from,  the  carriers  regulated  telephone  operations.  17  Based  upon  this  guidance, 
 NECA  requested  that  Moultrie  file  amended  cost  studies  reflecting  the  sale/  lease-  back 
 arrangement  in  accordance  with  section  36.2(  c)(  2).  Moultrie  refused  to  do  so.  18  As  a  result,  the 
 Universal  Service  Administrative  Company  (USAC),  the  administrative  body  tasked  with 
 administering  USF  support,  determined  that  it  could  no  longer  rely  on  the  cost  data  submitted  by 
 Moultrie  and  suspended  all  high  cost  loop  and  local  switching  support  USF  payments  to  Moultrie, 
 effective  January  1,  2001.  19 
 6.  On  October  5,  2001,  the  Commission  denied  Moultries  petition  for  declaratory 
 ruling,  request  for  waiver  of  part  36,  and  motion  for  stay.  20  The  Commission  found  that  there  was 
 no  patent  ambiguity  between  sections  32.  27(  a)-(  c)  and  36.  2(  c)(  2).  Section  32.  27(  a)-(  c)  directs 
 carriers  on  how  to  value  their  assets  or  services  involved  in  transactions  with  affiliates  and  how  to 
 account  for  such  transactions  on  the  carriers  books.  The  rules  in  section  36.2(  c),  on  the  other 
 hand,  govern  the  treatment  of  rented  property,  related  expenses,  and  lease  payments  between 
 carriers  and  their  affiliates  for  ratemaking  purposes,  specifically  for  application  of  jurisdictional 
 separations  and  high-  cost  loop  expense  adjustments.  21  Therefore,  the  Commission  directed 
 Moultrie  to  reflect  the  application  of  section  36.2(  c)(  2)  by  including  the  property  and  related 
 expenses  with,  and  excluding  the  related  rent  expenses  from,  the  carriers  regulated  telephone 
 operations  in  revised  cost  studies  where  the  affiliate  sale/  lease-  back  arrangement  exists.  22 
 7.  In  the  instant  tariff  investigation,  Moultrie  asserts  that  it  followed  the 
 Commissions  rules  in  calculating  its  per-  minute  local  switching  rates.  Specifically,  section 
 69.106(  b)  states: 
 The  per  minute  [local  switching]  charge  described  in  paragraph  (a) 
 of  this  section  shall  be  computed  by  dividing  the  projected  annual 
 revenue  requirement  for  the  Local  Switching  element,  excluding 
 any  local  switching  support  received  by  the  carrier  pursuant  to   
 54.301  of  this  chapter,  by  the  projected  annual  access  minutes  of 
 use  for  all  interstate  or  foreign  services  that  use  local  exchange 
 17  Letter  from  Lisa  Zaina,  Acting  Deputy,  Federal  Communications  Commission  Common  Carrier  Bureau,  to 
 John  A.  Ricker,  Executive  Director-  Universal  Service  Program  Support,  National  Exchange  Carrier  Association, 
 Inc.  (Aug.  4,  1999)  (Aug.  4  Bureau  Letter). 
 18  See  Letter  from  David  A.  Irwin,  Irwin,  Campbell  &  Tannenwald,  P.  C.,  to  Jane  Mago,  General  Counsel, 
 Federal  Communications  Commission,  Attachment  (July  17,  2001). 
 19  See  Letter  from  David  A.  Irwin,  Irwin,  Campbell  &  Tannenwald,  P.  C.,  to  Dorothy  Attwood,  Chief,  Federal 
 Communications  Commission  Common  Carrier  Bureau,  Attachment  (Dec.  29,  2000). 
 20  Moultrie  Independent  Telephone  Company,  Motion  for  Stay  of  Part  69.605(  a)  of  the  Commissions  Rules  and 
 Petition  for  Declaratory  Ruling,  Request  for  Waiver  of  Part  36  of  the  Commissions  Rules,  Federal-  State  Joint 
 Board  on  Universal  Service,  CC  Docket  No.  96-  45,  Order,  FCC  01-  292  (Oct.  5,  2001)  (Moultrie  Order). 
 21  See  Moultrie  Order  at  paras.  9-  10. 
 22  See  Moultrie  Order  at  para.  17. 
4
 Federal  Communications  Commission  FCC  01-  352 
 5 
 switching  facilities.  23 
 According  to  Moultrie,  because  it  has  not  received  any  local  switching  support,  it  must  recover  its 
 entire  local  switching  revenue  requirement  through  its  rates.  24  We  find  that  this  is  an  unreasonable 
 application  of  the  Commissions  rules. 
 8.  Moultrie  notes  in  its  rebuttal  that  it  has  received  no  local  switching  support  for 
 2001  and  none  is  expected,  depending  only  on  the  outcome  of  the  pending  petition  for  declaratory 
 ruling.  25  The  Commission  has  now  ruled  upon  that  petition,  and  Moultrie  will  receive  local 
 switching  support  after  it  files  its  revised  cost  studies.  26  Moultries  projection  of  $0  in  local 
 switching  support  for  2001  is  therefore  incorrect  and  must  be  revised. 
 9.  Even  though  Moultrie  has  not  yet  received  its  local  switching  support  from  the 
 USF  due  to  the  dispute,  Moultrie  is  not  entitled  to  recover  this  support  from  its  access  charge 
 customers.  In  accordance  with  the  Moultrie  Order,  Moultrie  has  submitted  revised  cost  studies 
 to  NECA,  27  and  USAC  will  confirm  the  amount  of  USF  support  available  to  Moultrie.  Moultries 
 access  rates  should  reflect  the  amount  of  local  switching  support  available  to  it,  which  it  has 
 foregone  pending  resolution  of  the  dispute.  By  contrast,  allowing  Moultrie  to  recover  local 
 switching  support  instead  through  interstate  access  charges  would  create  an  implicit  subsidy.  28 
 Section  254(  e)  of  the  Act  states  that  USF  support  should  be  explicit,  29  and  the  Commission 
 regularly  has  eliminated  implicit  subsidies  in  favor  of  explicit  USF  support.  30  As  AT&  T  notes  in 
 23  47  C.  F.  R.    69.106(  b). 
 24  See  Moultrie  Direct  Case  at  4-  5;  Moultrie  Rebuttal  at  2. 
 25  Moultrie  Rebuttal  at  2. 
 26  See  Moultrie  Order  at  para.  21. 
 27  Moultrie  submitted  the  revised  cost  studies  to  NECA  on  November  2,  2001.  See  Letter  from  David  A.  Irwin, 
 Irwin,  Campbell  &  Tannenwald,  P.  C.,  to  Roberta  L.  Alvir,  Manager,  Midwest  Region,  National  Exchange  Carrier 
 Association  (Nov.  2,  2001). 
 28  See  Alenco  Communications,  Inc.  v.  FCC,  201  F.  3d  608,  623  (5  th  Cir.  2000)  (finding  that  the  distinction 
 between  explicit  funding  and  implicit  funding  turns  on  the  difference  between  direct  subsidies  from  support  funds 
 and  recovery  through  access  charges  and  rate  structures.). 
 29  47  U.  S.  C.    254(  e). 
 30  See  Federal-  State  Joint  Board  on  Universal  Service,  CC  Docket  No.  96-  45,  Report  and  Order,  12  FCC  Rcd 
 8776,  8940-  42,  paras.  303-  04  (1997)  (converting  the  DEM  weighting  factor  from  implicit  recovery  through 
 interstate  access  rates  to  explicit  recovery  through  the  USF),  affd  in  part,  revd  in  part  by  Texas  Office  of  Public 
 Utility  Counsel  v.  FCC,  183  F.  3d  393  (5  th  Cir.  1999)  (TOPUC);  Access  Charge  Reform,  Price  Cap  Performance 
 Review  for  Local  Exchange  Carriers,  Transport  Rate  Structure  and  Pricing,  End  User  Common  Line  Charges,  CC 
 Docket  Nos.  96-  262,  94-  1,  91-  213,  and  95-  72,  First  Report  and  Order,  12  FCC  Rcd  15982,  15986-  87,  paras.  5-  8 
 (1997)  (Access  Charge  Reform  Order)  (determining  that  implicit  support  for  universal  service  should  be  identified 
 and  removed  from  interstate  access  charges  and  should  be  provided  instead  through  explicit  support  mechanisms), 
 affd  sub  nom.,  Southwestern  Bell  v.  FCC,  153  F.  3d  523  (8  th  Cir.  1998);  Access  Charge  Reform,  Price  Cap 
 Performance  Review  for  Local  Exchange  Carriers,  Low-  Volume  Long-  Distance  Users,  Federal-  State  Joint  Board 
 (continued.) 
5
 Federal  Communications  Commission  FCC  01-  352 
 6 
 its  opposition,  interexchange  carriers  and  others  that  contribute  to  the  USF  have  already  paid  the 
 local  switching  support  that  has  been  collected  by  USAC  on  Moultries  behalf.  31  The 
 interexchange  carriers  should  not  have  to  pay  the  USF  support  again  in  the  form  of  Moultries 
 increased  local  switching  rates. 
 10.  We  therefore  find  that  Moultries  proposed  local  switching  rates  are  unreasonable. 
 We  direct  Moultrie  to  recalculate  its  local  switching  rate  pursuant  to  section  69.106(  b),  excluding 
 from  its  projected  local  switching  annual  revenue  requirement  the  amount  of  USF  local  switching 
 support  available  to  Moultrie.  Moultrie  must  refile  its  tariff  to  include  this  corrected  local 
 switching  rate  within  ten  days  from  the  release  date  of  this  order.  In  the  interim,  Moultries 
 current  local  switching  rates  will  remain  in  effect  until  Moultries  tariff  revisions  filed  pursuant  to 
 this  order  become  effective. 
 III.  ALLTELS  DEM  ALLOCATION  FACTOR 
 11.  DEM  factors  are  used  in  calculating  access  service  costs  and  in  allocating  local 
 switching  equipment  investment  costs  between  the  interstate  and  intrastate  jurisdictions.  DEMs 
 are  defined  in  section  36.125(  a)(  3)  of  the  Commissions  rules  as  the  minutes  of  holding  time  of 
 the  originating  and  terminating  local  switching  equipment.  32  For  each  one-  minute  call,  there  is 
 one  minute  during  which  the  switching  equipment  originating  the  call  is  in  use  (an  originating 
 minute),  and  one  minute  during  which  the  switching  equipment  terminating  the  call  is  in  use  (a 
 terminating  minute).  The  interstate  DEM  factor  is  the  ratio  of  the  interstate  DEM  to  the  total 
 DEM.  33  Under  section  36.125(  a)(  3),  each  minute  of  use  is  treated  as  two  DEMs,  one  terminating 
 and  one  originating.  34  Historically,  because  there  has  to  be  a  terminating  minute  for  each 
 originating  minute,  and  to  provide  a  simple  method  for  counting  DEMs,  carriers  have  counted  one 
 terminating  minute  for  each  originating  minute.  Although  this  method  does  not  account  for 
 (Continued  from  previous  page) 
 on  Universal  Service,  Sixth  Report  and  Order  in  CC  Docket  Nos.  96-  262  and  94-  1,  Report  and  Order  in  CC 
 Docket  No.  99-  249,  Eleventh  Report  and  Order  in  CC  Docket  No.  96-  45,  15  FCC  Rcd  12962,  13039-  62,  paras. 
 185-  232  (2000)  (CALLS  Order)  (identifying  as  implicit  support  for  universal  service  a  specific  amount  of  interstate 
 access  charges  and  replacing  this  implicit  support  with  an  explicit  interstate  access  universal  service  support 
 mechanism).  See  also  Multi-  Association  Group  (MAG)  Plan  for  Regulation  of  Interstate  Services  of  Non-  Price 
 Cap  Incumbent  Local  Exchange  Carriers  and  Interexchange  Carriers,  Federal-  State  Joint  Board  on  Universal 
 Service,  Access  Charge  Reform  for  Incumbent  Local  Exchange  Carriers  Subject  to  Rate-  of-  Return  Regulation, 
 Prescribing  the  Authorized  Rate  of  Return  for  Interstate  Services  of  Local  Exchange  Carriers,  Second  Report  and 
 Order  and  Further  Notice  of  Proposed  Rulemaking  in  CC  Docket  No.  00-  256,  Fifteenth  Report  and  Order  in  CC 
 Docket  No.  96-  45,  and  Report  and  Order  in  CC  Docket  Nos.  98-  77  and  98-  166,  FCC  01-  304,  para.  8  (Nov.  8, 
 2001)  (MAG  Order)  (concluding  that  leaving  the  removal  of  implicit  support  to  the  discretion  of  individual  carriers 
 is  neither  consistent  with  the  mandate  of  the  1996  Act  nor  justified  from  a  public  policy  standpoint). 
 31  See  AT&  T  Opposition  at  5. 
 32  47  C.  F.  R.    36.125(  a)(  3).  Holding  time  is  the  time  in  which  an  item  of  telephone  plant  is  in  actual  use  either 
 by  a  customer  or  an  operator.  47  C.  F.  R.  Part  36  Appendix-  Glossary. 
 33  47  C.  F.  R.    36.125(  a)(  5). 
 34  See  id.  See  also  General  Communication,  Inc.  v.  Alaska  Communications  Sys.  Holdings,  Inc.,  EB-  00-  MD-016, 
 Memorandum  Opinion  and  Order,  16  FCC  Rcd  2834,  2852,  para.  44  (2001)  (GCI  Order). 
6
 Federal  Communications  Commission  FCC  01-  352 
 7 
 imbalances  in  specific  types  of  traffic,  it  provides  carriers  with  an  administratively  simple  method 
 for  separating  traffic  minutes  between  the  interstate  and  intrastate  jurisdictions.  35 
 12.  In  ALLTELs  2001  access  tariff  filing,  the  interstate  DEM  factor  increased  in 
 several  study  areas.  ALLTEL  explained  that  it  had  changed  its  method  for  estimating  terminating 
 interlocal  minutes  of  use.  36  This  change  reduced  in  some  ALLTEL  study  areas  the  amount  of 
 total  DEMs  attributable  to  local  traffic,  and  this  caused  a  corresponding  increase  in  the  DEMs 
 attributable  to  interstate  traffic.  Therefore,  the  interstate  DEM  factor  increased  in  these  study 
 areas. 
 13.  ALLTEL  states  that  it  is  able  to  determine  and  allocate  between  local  and 
 interstate  the  total  number  of  originating  minutes  on  each  of  its  switches.  ALLTEL  also  explains 
 that  it  can  count  the  total  number  of  terminating  minutes  on  each  of  its  switches.  When  shared 
 trunks  carrying  both  toll  and  interlocal  traffic  terminate  at  an  ALLTEL  switch,  however, 
 ALLTEL  states  that  it  cannot  determine  how  many  of  the  total  terminating  minutes  on  those 
 trunks  are  toll  and  how  many  are  interlocal  because  switch  measurements  cannot  determine  where 
 an  incoming  call  originated.  Therefore,  ALLTEL  has  to  estimate  how  many  minutes  of  traffic  on 
 these  shared  trunks  should  be  counted  as  local. 
 14.  Prior  to  2000,  ALLTEL  had  attributed  the  same  number  of  terminating  interlocal 
 minutes  as  originating  interlocal  minutes  on  the  shared  trunks.  In  2000,  however,  ALLTEL 
 conducted  traffic  studies  which  indicated  that  Internet  traffic  does  not  follow  this  one-  terminating-minute- 
 to-  one-  originating-  minute  relationship.  37  This,  ALLTEL  argues,  is  because  ALLTELs 
 customers  call  ISPs  in  other  carriers  exchange  areas,  creating  originating  minutes,  but  those  ISPs 
 do  not  call  back,  therefore  ALLTEL  does  not  receive  terminating  minutes  corresponding  to  these 
 originated  Internet  calls.  For  purposes  of  calculating  its  DEM  factors,  ALLTEL  applied  a  one-terminating- 
 minute-  to-  one-  originating-  minute  relationship  only  to  non-  Internet  interlocal  traffic, 
 and  applied  a  factor  of  0.5  to  Internet  interlocal  originating  minutes  to  derive  Internet  interlocal 
 terminating  minutes  (i.  e.,  a  one-  terminating-  to-  two-  originating  minutes  relationship)  over  the 
 shared  trunks.  38 
 35  See,  e.  g.,  Amendment  of  Part  67  of  the  Commissions  Rules  and  Establishment  of  a  Joint  Board,  CC  Docket 
 No.  80-  286,  Recommended  Decision  and  Order,  2  FCC  Rcd  2551,  2559,  para.  48  (Fed.-  State  Jt.  Bd.  1987) 
 (Recommending  the  use  of  measured  DEM  because  it  is  a  simple  allocator  that  is  easy  to  implement  and 
 administer.). 
 36  Reply  Comments  of  ALLTEL  Corporation,  CCB/  CPD  File  No.  01-  08,  (filed  June  29,  2001)  (ALLTEL  Reply). 
 Interlocal  calls  are  those  in  which  lines  are  connected  to  local  trunks,  i.  e.,  calls  with  different  originating  and 
 terminating  switches. 
 37  ALLTEL  Reply  at  1. 
 38  To  determine  the  number  of  its  originating  Internet  minutes,  ALLTEL  identified  numbers  with  high  call 
 durations,  i.  e.,  calls  that  lasted  for  more  than  60  minutes  with  at  least  500  total  minutes  to  the  number  per  month. 
 ALLTEL  then  called  the  numbers  to  which  these  calls  were  placed.  Any  numbers  that  were  answered  with  a 
 modem  tone  were  determined  to  be  ISP  numbers  and  the  corresponding  minutes  were  determined  to  be  Internet 
 (continued.) 
7
 Federal  Communications  Commission  FCC  01-  352 
 8 
 15.  ALLTEL  assigned  all  originating  interlocal  traffic,  including  Internet,  plus  the 
 lower  number  of  derived  interlocal  terminating  minutes  to  the  local  jurisdiction.  This  decrease  in 
 the  number  of  minutes  attributed  as  interlocal  terminating  minutes  reduced  the  total  amount  of 
 traffic  allocated  as  interlocal,  and  created  a  corresponding  increase  in  the  percentage  of  traffic 
 allocated  to  other  jurisdictions,  including  interstate.  39  Therefore,  ALLTELs  decision  to  apply  a 
 0.5  factor  rather  than  a  1.0  factor  to  terminating  Internet  interlocal  traffic  caused  its  interstate 
 DEM  allocation  factors  to  increase.  This  change  increased  the  costs  attributable  to  interstate 
 traffic,  resulting  in  an  increase  in  ALLTELs  interstate  charge  for  a  minute  of  use  of  its  switches. 
 16.  We  find  that  the  DEM  allocation  factors  proposed  by  ALLTEL  in  this  matter  are 
 not  reasonable,  and  therefore  ALLTELs  local  switching  rates  calculated  based  on  these  factors 
 are  unreasonable  in  violation  of  section  201(  b)  of  the  Communications  Act  of  1934,  as  amended.  40 
 Where  carriers  are  unable  to  accurately  measure  the  number  of  terminating  DEMs,  the 
 Commission  has  affirmed  the  standard  industry  practice  of  counting  one  terminating  DEM  for 
 each  originating  DEM.  41  ALLTEL  did  not  use  this  one-  originating-  minute-  to-  one-  terminating-minute 
 approach,  but  instead  used  a  flawed  method  of  calculating  terminating  DEMs  over  shared 
 traffic  trunks.  ALLTEL  did  not  adequately  address  types  of  traffic  imbalances  other  than  the 
 purported  Internet  traffic  imbalance.  For  example,  ALLTEL  has  not  shown  that  it  properly 
 accounted  for  the  fact  that  ISPs  may  be  served  by  ALLTELs  exchanges  and  that  these  ISPs  may 
 receive  calls  from  customers  of  other  carriers.  In  that  circumstance,  ALLTELs  switch  serving  its 
 ISP  customer  would  be  receiving  more  traffic  in  terminating  minutes,  but  would  have  fewer 
 originating  minutes  because  ALLTELs  ISP  customer  would  not  be  making  any  outgoing  calls. 
 ALLTEL  adjusted  its  DEM  factors  only  to  account  for  ISPs  served  by  other  carriers  exchanges. 
 If  we  were  to  allow  carriers  selectively  to  calculate  their  DEM  factors  in  this  manner,  reducing 
 terminating  DEMs  for  outgoing  ISP  calls  without  making  any  similar  increases  to  terminating 
 DEMs  for  incoming  ISP  calls,  the  DEM  factor  would  be  improperly  skewed.  Minutes  that  should 
 properly  be  attributed  to  the  intrastate  jurisdiction  would  be  included  in  the  interstate  jurisdiction, 
 and  interstate  access  rates  would  be  unreasonably  inflated. 
 17.  Furthermore,  ALLTEL  made  an  adjustment  to  correct  for  only  one  type  of  traffic 
 imbalance.  ALLTEL  chose  to  adjust  DEMs  for  Internet  traffic,  which  caused  its  intrastate  DEM 
 factors  to  decrease  and  its  interstate  DEM  factors  to  increase,  but  did  not  address  other 
 imbalances  that  would  presumably  have  the  opposite  effect,  such  as  wireless  traffic.  Due  to 
 typical  calling  patterns,  it  is  likely  that  ALLTEL  switches  terminate  more  minutes  of  calls  from 
 wireless  carriers  than  they  originate,  yet  ALLTEL  did  not  address  this  issue,  instead  continuing  to 
 rely  on  the  one-  originating-  minute-  to-  one-  terminating-  minute  ratio  for  this  type  of  traffic.  We 
 find  that  it  is  unreasonable  to  allow  ALLTEL  to  choose  to  address  purported  Internet  traffic 
 (Continued  from  previous  page) 
 minutes.  See  Letter  from  David  Bartlett,  ALLTEL  Corporation,  to  Magalie  Roman  Salas,  Secretary,  Federal 
 Communications  Commission  (July  23,  2001)  (ALLTEL  July  23  Ex  Parte  Letter). 
 39  ALLTEL  Reply  at  1-  2. 
 40  47  U.  S.  C.    201(  b). 
 41  See  GCI  Order,  16  FCC  Rcd  at  2852,  para.  44. 
8
 Federal  Communications  Commission  FCC  01-  352 
 9 
 imbalances  while  ignoring  other  traffic  imbalances  that  may  offset  the  effect  of  the  Internet  traffic. 
 Allowing  carriers  to  pick  and  choose  which  traffic  imbalances  to  address  would  undermine  the 
 one-  originating-  minute-  to-  one-  terminating-  minute  approach,  which  provides  all  carriers  with  an 
 administratively  simple  method  of  separating  traffic  between  the  jurisdictions  without  requiring 
 them  to  measure  and  account  for  each  and  every  type  of  traffic  imbalance. 
 18.  In  the  Separations  Freeze  Order,  the  Commission  recognized  that  some  parties 
 believed  that  Internet  usage  may  be  affecting  local  DEMs.  The  Commission  found  that 
 commenters  had  not  supplied  reliable  data  upon  which  to  set  the  amount  of  any  local  DEM  factor 
 reduction  that  might  be  warranted.  42  Instead,  the  Commission  committed  to  seek  specific 
 comment  on  the  status  of  this  issue  when  it  examines  the  effects  of  the  separations  freeze  at  a 
 future  date,  and  to  work  with  the  Joint  Board  to  address  the  impact  of  the  Internet  and  the  growth 
 of  local  minutes  during  the  interim  freeze.  43  The  Commission  to  date  has  not  altered  its 
 jurisdictional  separations  rules  or  policies  due  to  Internet  usage,  therefore  ALLTEL  is  not  justified 
 in  its  attempt  to  alter  its  DEM  allocation  factors  to  account  for  the  alleged  Internet  traffic 
 imbalance. 
 19.  Therefore,  we  direct  ALLTEL,  in  the  absence  of  a  reasonable  manner  of 
 estimating  this  traffic,  to  recalculate  its  DEM  allocation  factors  counting  one  terminating  minute 
 for  each  minute  of  originating  traffic,  and  to  recalculate  its  interstate  local  switching  rates  based 
 on  the  revised  DEM  allocation  factors.  In  accordance  with  the  Separations  Freeze  Order, 
 ALLTEL  must  use  only  data  from  calendar  year  2000  in  calculating  its  DEM  allocation  factors.  44 
 IV.  ORDERING  CLAUSES 
 20.  Accordingly,  IT  IS  ORDERED,  that,  pursuant  to  sections  4(  i),  4(  j),  201(  b), 
 203(  a),  204(  a),  205,  and  403  of  the  Communications  Act,  47  U.  S.  C.    154(  i),  154(  j),  201(  b), 
 203(  a),  204(  a),  205,  and  403,  Moultrie  Independent  Telephone  Company,  Inc.  SHALL  FILE 
 REVISED  RATES,  as  described  in  paragraphs  3  and  10  above,  no  later  than  ten  (10)  calendar 
 days  from  the  release  date  of  this  order.  These  rates  SHALL  BE  EFFECTIVE  on  five  (5)  days 
 notice.  For  this  purpose,  we  waive  section  61.58  of  the  Commissions  rules,  47  C.  F.  R.    61.58. 
 21.  IT  IS  FURTHER  ORDERED,  that,  pursuant  to  sections  4(  i),  4(  j),  201(  b),  203(  a), 
 204(  a),  205,  and  403  of  the  Communications  Act  of  1934,  as  amended,  47  U.  S.  C.    154(  i), 
 154(  j),  201(  b),  203(  a),  204(  a),  205,  and  403,  ALLTEL  Telephone  Systems  SHALL  FILE 
 REVISED  RATES,  as  described  in  paragraphs  3  and  19  above,  no  later  than  ten  (10)  calendar 
 42  Jurisdictional  Separations  and  Referral  to  the  Federal-  State  Joint  Board,  CC  Docket  No.  80-  286,  Report  and 
 Order,  16  FCC  Rcd  11382,  11402,  para.  40  (2001)  (Separations  Freeze  Order)  (  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.). 
 43  Separations  Freeze  Order,  16  FCC  Rcd  at  11403,  para.  42. 
 44  See  Separations  Freeze  Order,  16  FCC  Rcd  at  11396,  para.  27. 
9
 Federal  Communications  Commission  FCC  01-  352 
 10 
 days  from  the  release  date  of  this  order.  These  rates  SHALL  BE  EFFECTIVE  on  five  (5)  days 
 notice.  For  this  purpose,  we  waive  section  61.58  of  the  Commissions  rules,  47  C.  F.  R.    61.58. 
 22.  IT  IS  FURTHER  ORDERED,  that  ALLTEL  Telephone  Systems  SHALL  ISSUE 
 REFUNDS,  plus  interest,  for  the  period  from  July  3,  2001  through  the  effective  date  of  its  revised 
 local  switching  rates  filed  as  prescribed  in  this  order. 
 23.  IT  IS  FURTHER  ORDERED,  that  ALLTEL  Telephone  Systems  SHALL  submit 
 to  the  Common  Carrier  Bureau  for  review  and  approval  plans  for  issuing  refunds  pursuant  to  our 
 delegation  of  authority  under  section  0.291  of  the  Commissions  rules,  47  C.  F.  R.    0.291,  within 
 60  days  of  the  release  of  this  order.  Refunds  shall  be  calculated  in  accordance  with  the 
 requirements  of  this  order. 
 24.  IT  IS  FURTHER  ORDERED,  that  the  investigation  and  accounting  order  imposed 
 in  the  July  2,  2001  Memorandum  Opinion  and  Order,  DA  01-  1563,  IS  TERMINATED. 
 FEDERAL  COMMUNICATIONS  COMMISSION 
 Magalie  Roman  Salas 
 Secretary 
10
 Federal  Communications  Commission  FCC  01-  352 
 11 
 STATEMENT  OF 
 COMMISSIONER  KEVIN  J  .  MARTIN,  APPROVING  IN  PART  AND  CONCURRING 
 IN  PART 
 Re:  2001  Annual  Access  Tariff  Filings,  Memorandum  Opinion  and  Order,  CC  Docket  No.  01- 
 206 
 I  have  concerns  with  this  Orders  discussion  of  ALLTELs  tariff  filing  and  thus,  with 
 respect  to  that  part  of  the  Order  (Part  III),  I  concur  only  in  the  result.  Part  III  of  the  Order 
 addresses  ALLTELs  effort,  in  setting  its  access  rates,  to  account  for  the  impact  of  Internet 
 traffic.  Although  I  agree  with  the  Commission  that  the  particular  method  used  by  ALLTEL  was 
 not  reasonable,  I  reject  the  Orders  suggestion  that  carriers  may  not,  in  allocating  costs  between 
 the  interstate  and  intrastate  jurisdictions,  attempt  to  account  for  the  unique  nature  of  Internet 
 traffic.  Despite  requests  from  the  States  and  the  Federal-  State  Joint  Board  on  Separations  to 
 provide  a  systematic  method  to  address  Internet  traffic  in  the  separations  process,  the  FCC  has 
 failed  to  do  so.  In  the  absence  of  Commission  action  on  this  issue    which  I  continue  to 
 encourage    carriers  should  not  be  prohibited  from  addressing  the  problem. 
 At  issue  here  is  ALLTELs  recognition  that  Internet  phone  calls  frequently  move  in  only 
 one  direction:  customers  call  ISPs,  but  ISPs  do  not  call  customers.  Based  on  this  premise, 
 ALLTEL  assumed  that,  for  calls  made  from  its  exchanges  to  ISPs  in  other  exchanges,  there  would 
 be  only  half  as  many  minutes  of  calls  being  made  to  ALLTELs  exchanges.  For  other  calls  made 
 from  its  exchanges  to  other  exchanges,  ALLTEL  assumed  an  equal  number  of  minutes  of  calls 
 would  be  made  to  its  exchanges. 
 The  Commission  finds  this  methodology  unreasonable,  concluding  that  ALLTEL 
 measured  traffic  imbalances  selectively.  According  to  the  Commission,  ALLTEL  took  into 
 account  only  ISPs  in  other  exchanges,  failing  to  address  the  fact  that  ISPs  served  by  its  local 
 exchanges  will  generate  more  terminating  traffic  than  originating  traffic.  Additionally,  however, 
 the  Commission  finds  fault  with  the  fact  that  ALLTEL  addressed  only  imbalances  caused  by 
 Internet  usage  and  did  not  consider  other  traffic  imbalances,  such  as  those  caused  by  the  use  of 
 wireless  phones.  The  Commission  strongly  encourages  ALLTEL  to  use  a  one-  to-  one 
 presumption  for  all  traffic. 
 While  I  agree  that  ALLTEL  should  have  considered  ISPs  served  by  its  local  exchanges 
 and  thus  concur  with  the  Commissions  resolution  of  this  issue,  I  have  concerns  with  the  rest  of 
 the  Commissions  discussion.  Specifically,  I  disagree  with  the  Commissions  suggestion  that 
 ALLTEL  was  required  to  account  for  all  types  of  traffic  imbalances  or  else  use  a  one-  to-  one 
 presumption  for  all  traffic.  There  is  no  Commission  rule  stating  such  a  requirement,  and  I  am 
 unaware  of  any  reason  why  we  should  create  one.  A  fair  and  balanced  approach  to  consider 
 solely  the  impact  of  Internet  traffic  should  not  render  a  tariff  unreasonable    especially  when 
 States  and  the  Separations  Joint  Board  specifically  called  on  the  Commission  to  adjust  the 
 separations  process  to  take  this  phenomenon  into  account  and  the  Commission  failed  to  do  so. 
 As  many  States  and  the  Separations  Joint  Board  have  recognized,  the  growing  amount  of 
 Internet  traffic  has  a  significant  impact  on  cost  allocations.  The  Commission  has  nevertheless 
11
 Federal  Communications  Commission  FCC  01-  352 
 12 
 failed  to  act  on  their  request  to  reform  the  separations  process.  As  I  have  stated,  I  believe  the 
 Commission  should  move  forward  on  this  issue  and  alter  the  separations  rules  in  some  manner,  as 
 was  proposed  by  the  Joint  Board.  The  Separations  Joint  Board  even  suggested  a  specific 
 adjustment  if  the  Commission  could  not  determine  the  precise  impact  of  Internet  traffic.  The 
 Commission  rejected  this  proposal,  arguing  that  it  had  insufficient  information  to  make  such  an 
 estimate.  It  is  thus  particularly  ironic  that  we  find  fault  with  a  carrier  that  has  attempted  to  gather 
 some  of  this  information  and  adopt  a  process  to  address  an  issue  that  we  failed  to  address.  In  the 
 meantime,  while  the  Commission  has  failed  to  act,  I  cannot  find  fault  with  individual  carriers 
 taking  reasonable  steps  to  address  the  impact  of  Internet  traffic. 
 Accordingly,  I  concur  in  the  result  of  Part  III  and  approve  the  remainder  of  the  Order. 
12