67098 Federal Register / Vol. 83, No. 248 / Friday, December 28, 2018 / Rules and Regulations 

Dated: December 21, 2018. 

Tim Noelker, 

General Counsel. 

[FR Doc. 2018–28266 Filed 12–27–18; 8:45 am] 

BILLING CODE 6050–28–P 

FEDERAL COMMUNICATIONS 

COMMISSION 

47 CFR Parts 1, 32, 51, 61, and 69 

[WC Docket Nos. 17–144, 16–143, 05–25; 

FCC 18–146] 

Regulation of Business Data Services 

for Rate-of-Return Local Exchange 

Carriers; Business Data Services in an 

internet Protocol Environment; Special 

Access for Price Cap Local Exchange 

Carriers 

AGENCY: Federal Communications 

Commission. 

ACTION: Final rule. 

SUMMARY: The Commission continues its 

efforts to modernize its rules governing 

the pricing of business data services 

(BDS) by allowing rate-of-return carriers 

to voluntarily elect to transition their 

BDS offerings out of rate-of-return 

regulation to a lighter-touch regulatory 

framework. This action is intended to 

promote competition and reduce costly 

regulatory burdens which no longer 

serve the public interest. Under this 

new framework, rate-of-return carriers 

would be incentivized to use the savings 

realized from the regulatory relief to 

improve existing networks and service. 

DATES: The amendments contained in 

this final rule shall become effective 

February 26, 2019. 

ADDRESSES: Federal Communications 

Commission, 445 12th Street SW, 

Washington, DC 20554. 

FOR FURTHER INFORMATION CONTACT: 

Justin Faulb, Pricing Policy Division of 

the Wireline Competition Bureau at 

202–418–1540 or by email at 

Justin.Faulb@fcc.gov. 

SUPPLEMENTARY INFORMATION: This is a 

summary of the Commission’s Report 

and Order, released October 24, 2018. A 

full-text version may be obtained at the 

following internet address: https://

www.fcc.gov/document/fcc-spurscompetition-rural-business-dataservices-0. 

I. Background 

1. In 1990, the Commission began the 

process of encouraging carriers to move 

from rate-of-return to incentive 

regulation by adopting price cap rules 

governing the largest incumbent LECs’ 

interstate access charges and allowing 

other incumbent LECs to elect price cap 

regulation voluntarily. Price cap 

regulation was designed to ‘‘reward 

companies that became more productive 

and efficient, while ensuring that 

productivity and efficiency gains are 

shared with ratepayers.’’ Through a 

series of subsequent decisions, the 

Commission allowed other carriers to 

convert voluntarily from rate-of-return 

to price cap regulation. 

2. Since then, the Commission has 

taken additional steps to transition 

certain services and revenues of rate-ofreturn carriers from rate-of-return 

regulation to other more efficient forms 

of regulation. In 2011, as part of 

comprehensive universal service and 

intercarrier compensation reform, the 

Commission imposed rate caps on rateof-return carriers’ switched access 

services, removing those services from 

the obligations that accompany 

traditional rate-or-return regulation. In 

the USF/ICC Transformation Order, 76 

FR 73830, November 29, 2011, the 

Commission also changed its method for 

calculating high-cost universal service 

support received by rate-of-return 

affiliates of price cap carriers. 

Specifically, the Commission began to 

treat rate-of-return operating companies 

affiliated with price-cap holding 

companies as price cap LECs for the 

purposes of the Connect America Fund 

(CAF) Phase I distribution mechanism. 

As a result, rate-of-return carriers 

affiliated with price-cap companies now 

receive the same type of fixed universal 

service support that their price cap 

affiliates receive. 

3. Two years ago, the Commission 

gave rate-of-return carriers the option of 

receiving forward looking, model-based 

universal service support based on the 

Alternative Connect America Cost 

Model (A–CAM), which more than 200 

carriers opted to receive (A–CAM 

carriers). The Commission observed that 

‘‘the carriers that choose to take the 

voluntary path to the model are electing 

incentive regulation for common line 

offerings.’’ Consequently, for A–CAM 

carriers, only their BDS offerings are 

currently subject to rate-of-return 

regulation. 

4. In 2016, the Commission also 

adopted the Alaska Plan Order, 81 FR 

69696, October 7, 2016, which allowed 

Alaskan rate-of-return carriers to elect 

fixed universal service support on a 

state-wide basis for a defined term in 

exchange for committing to deployment 

obligations. Specifically, the 

Commission provided a one-time 

opportunity for Alaskan rate-of-return 

carriers to elect to receive universal 

service support frozen at adjusted 2011 

levels for a 10-year term in exchange for 

meeting individualized performance 

benchmarks to offer voice and 

broadband services. Subsequently, in 

2016, the Wireline Competition Bureau 

(Bureau) authorized 13 Alaskan rate-ofreturn carriers to receive universal 

service support under the Alaska Plan 

(Alaska Plan carriers). Similar to A– 

CAM carriers, Alaska Plan carriers 

receive fixed universal service support 

that is not based on current cost, and 

only file cost studies for purposes of 

their BDS offerings. 

5. In addition to encouraging carriers 

to migrate from cost-based to incentive 

regulation, over time the Commission 

has reduced ex ante pricing regulation 

in favor of relying on competition to the 

extent possible. In 1999, the 

Commission granted pricing flexibility 

to price cap carriers that provided 

service in areas where carriers could 

demonstrate threshold levels of 

deployment by competitive providers. 

Pricing flexibility allowed eligible 

carriers to offer BDS using contract 

tariffs, volume and term discounts and, 

in markets that demonstrated higher 

levels of competition, at unregulated 

rates. Beginning in 2007, the 

Commission granted forbearance from 

dominant carrier regulation, including 

tariffing and pricing regulation, to a 

number of price cap incumbent LECs for 

their newer packet-based broadband 

services. These forbearance orders 

concluded that forbearance from 

dominant carrier regulation was 

warranted given the existence of 

competition for these newer services, 

which ensured that rates and practices 

for these services remained just and 

reasonable, adequately protected 

consumers, and was in the public 

interest. 

6. In 2017, the Commission adjusted 

BDS pricing regulation to the reality of 

a dynamically competitive BDS market 

in areas where incumbent LECs were 

subject to price cap regulation. The 

Commission premised its reductions in 

ex ante pricing regulation in part on a 

substantial data collection and in part 

on its predictive judgment that dynamic 

and growing competition in the BDS 

market, driven increasingly by the 

emergence of cable competition, would 

allow reliance on competition rather 

than regulation to ensure rates remain 

just and reasonable. The BDS Order, 82 

FR 25660, June 2, 2017, represented yet 

another step in the process of reducing 

dominant carrier regulation in response 

to the growth of competition. In that 

order, the Commission found that 

reducing government intervention and 

allowing market forces to continue 

working would further spur entry, 

innovation, and competition in BDS 

markets served by price cap carriers. 


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The Commission applied ex ante pricing 

regulation ‘‘only where competition is 

expected to materially fail to ensure just 

and reasonable rates’’ and stated its 

preference to rely ‘‘on competition 

rather than regulation, wherever 

purchasers can realistically turn to a 

supplier beyond the incumbent LEC.’’ 

Based on the record before it, the 

Commission found that, on balance, 

competition was sufficient to ensure just 

and reasonable rates for packet-based 

business data services, TDM transport 

services, and higher bandwidth (i.e., 

above a DS3-level) TDM services 

(including OCn services) in the absence 

of ex ante pricing regulation in areas 

served by price cap carriers. It also 

adopted a competitive market test for 

lower bandwidth TDM end user channel 

terminations (i.e., DS3-level and lower) 

in price cap areas and refrained from ex 

ante pricing regulation of those services 

in areas deemed competitive by that 

test. 

7. Recently, the Eighth Circuit Court 

of Appeals upheld all aspects of the BDS 

Order save the portions of the order 

affecting price cap carriers’ TDM 

transport service, which it vacated and 

remanded on notice grounds—namely 

that the Commission had not provided 

sufficient notice that it might relieve 

those services of ex ante pricing 

regulation. 

8. After the Commission adopted 

changes to its rules governing price cap 

carriers’ BDS offerings, ITTA and 

USTelecom (together, Petitioners) filed a 

petition seeking the same regulatory 

treatment of BDS offerings for rate-ofreturn carriers receiving fixed support 

as that the Commission had recently 

adopted for price cap carriers (Joint 

Petition). According to Petitioners, rateof-return regulation deters investment in 

networks and harms competition. 

Petitioners argue that the inflexibility of 

rate-of-return regulation makes it 

difficult to justify and fund upgrades to 

their rural networks. They point out that 

for rate-of-return carriers, ‘‘the need to 

perform annual cost studies now applies 

only with respect to BDS.’’ As a result, 

they argue that the expense associated 

with conducting cost studies and 

complying with other rate-of-return 

expenses are difficult to recover and 

burden rate-of-return carriers receiving 

fixed support but not their competitors. 

The Bureau sought and received 

comment on the Joint Petition. 

9. Upon review of the record received 

in response to the Joint Petition, earlier 

this year, the Commission released a 

notice of proposed rulemaking (NPRM), 

83 FR 22923, May 17, 2018, proposing 

to allow A–CAM and other rate-ofreturn carriers that receive fixed 

universal service support to voluntarily 

migrate their lower speed TDM-based 

BDS offerings to incentive regulation. 

The Commission also sought comment 

on adopting a competitive market test to 

determine when the market for lower 

speed TDM-based BDS offerings offered 

by rate-of-return carriers that receive 

fixed support are sufficiently 

competitive to justify eliminating ex 

ante pricing regulation of such offerings. 

Additionally, the NPRM sought 

comment on eliminating ex ante pricing 

regulation for such carriers’ packetbased and higher speed TDM-based BDS 

offerings nationwide, while maintaining 

oversight authority through sections 

201, 202, and 208 of the 

Communications Act of 1934, as 

amended (the Communications Act or 

the Act) to ensure BDS rates and 

practices remain just and reasonable. 

II. An Administrable Framework for 

Business Data Services Offered By Rateof-Return Carriers That Receive Fixed 

Support 

10. Upon review of the record, we 

allow rate-of-return carriers receiving 

fixed universal service support to 

choose to migrate their BDS offerings to 

a new, comprehensive, lighter-touch 

regulatory framework that is better 

aligned to the competitive realities of 

the BDS markets they serve. The 

framework we adopt includes voluntary 

incentive regulation with pricing 

flexibility for electing carriers’ lower 

capacity (DS3 and below) TDM 

transport and end user channel 

termination services. We also adopt a 

competitive market test for such 

carriers’ lower capacity TDM end user 

channel termination services to identify 

competition by study area. In electing 

carriers’ study areas that the competitive 

market test deems competitive, we 

eliminate ex ante pricing regulation for 

lower capacity TDM end user channel 

termination services. We also remove ex 

ante pricing regulation from electing 

carriers’ packet-based and higher 

capacity (above a DS3 bandwidth level) 

TDM services and grant forbearance 

from tariffing requirements for those 

services. To reduce the burden of legacy 

rate-of-return regulation on electing 

carriers, we also grant forbearance from 

cost assignment and separations rules 

and related reporting requirements, 

because we determine that such action 

is warranted by the non-cost-based 

regulation that will apply to electing 

carriers and the competitive 

circumstances of their BDS markets. 

11. We find that adopting the lightertouch incentive regulatory framework 

proposed by the Commission for 

electing carriers will remove 

unnecessary regulatory burdens and 

encourage competition. Based on the 

record before us, we decline at this time 

to relieve electing carriers’ lower 

capacity TDM transport (at or below a 

DS3-level) of ex ante pricing regulation 

nationwide, as Petitioners sought. 

Instead we allow electing carriers to 

move their lower speed TDM transport 

services to incentive regulation. 

Additionally, we adopt a competitive 

market test tailored to rate-of-return 

carriers’ study areas, which will allow 

us to properly evaluate competition in 

the areas served by electing carriers and 

remove ex ante pricing regulation for 

end user channel terminations in areas 

deemed competitive, instead of basing 

our decision on the competitive 

characteristics of areas served by price 

cap carriers. 

12. We decline to adopt Petitioners’ 

proposal to apply to electing carriers’ 

BDS offerings the regulatory framework 

and the results of the price cap 

competitive market test adopted in the 

BDS Order for price cap carriers’ BDS 

offerings. Petitioners argue that applying 

the price cap BDS rules to electing rateof-return carriers would result in 

regulatory parity that ‘‘would promote 

competition and make the rules less 

complex.’’ TDS Telecom asserts that 

adopting a separate incentive regulatory 

framework is unnecessary. The price 

cap BDS rules, however, were based on 

an analysis of BDS competition in areas 

served by price cap carriers, consistent 

with our obligation to ensure that the 

rates charged by common carriers are 

just and reasonable. The Commission 

found sufficient evidence of 

competition in these areas to discipline 

pricing and therefore adopt a lighter 

touch regulatory framework for these 

carriers. That same history and record of 

competition for BDS services does not 

exist in the study areas served by rateof-return carriers that Petitioners seek to 

have covered by price cap BDS 

regulation. Thus, we find that adopting 

a separate, albeit largely parallel, 

regulatory framework for rate-of-return 

carriers receiving fixed support will be 

better suited to their circumstances. 

A. Transitioning to a New Framework 

13. Consistent with the Commission’s 

proposal and the Joint Petition, we 

allow all rate-of-return carriers receiving 

fixed universal service support to 

voluntarily elect to move their BDS 

offerings out of rate-of-return regulation 

to the new lighter touch framework we 

adopt today. Carriers eligible to make 

this election include A–CAM carriers, 

rate-of-return carriers receiving fixed 

support by virtue of being affiliated with 

price cap carriers, Alaska Plan carriers, 


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and rate-of-return carriers that accept 

future offers of A–CAM support or 

otherwise transition away from legacy 

support mechanisms. The first three 

types of carriers receive fixed or modelbased universal service support, rather 

than receiving high-cost support based 

on their costs, and therefore are 

currently required to prepare cost 

studies only for their BDS offerings. 

Relieving these carriers of rate-of-return 

regulation for their BDS will save them 

the expense of preparing burdensome 

cost studies only for those offerings. 

14. Similarly, to the extent the 

Commission provides future offers of A– 

CAM support or otherwise transitions 

carriers away from legacy support 

mechanisms, carriers that receive such 

support will only have to prepare cost 

studies for purposes of their BDS 

offerings. Therefore, if the Commission 

announces future offers of A–CAM 

support or otherwise transitions carriers 

away from legacy support mechanisms, 

the actions we take in this Order will 

allow carriers eligible for or subject to 

such transitions to elect the same lighter 

touch regulatory framework we provide 

for other rate-of-return carriers that 

receive fixed support, and may provide 

further incentives for rate-of-return 

carriers to elect to receive non-legacy, 

fixed or model-based support. This will 

further the Commission’s longstanding 

objective of providing universal service 

support based on forward-looking 

efficient costs as opposed to actual costs 

that may be less efficient. 

15. Consistent with Commission 

precedent, we do not require all rate-ofreturn carriers receiving fixed support to 

migrate their BDS offerings away from 

rate-of-return regulation to the new 

framework, but instead allow each 

carrier to voluntarily make that 

determination based on its 

circumstances. When the Commission 

adopted price cap regulation in 1990, it 

made price cap regulation voluntary for 

all but the largest incumbent LECs. At 

that time, the Commission expressed 

concern that assigning one productivity 

factor on a mandatory basis to all LECs, 

regardless of size, could prove unduly 

burdensome for smaller and mid-sized 

carriers that may have fewer 

opportunities than larger companies to 

achieve cost savings and efficiencies. 

Commenters echoed those concerns in 

this proceeding. By making the election 

voluntary, we ensure that only carriers 

that can achieve sufficient efficiencies 

are likely to elect incentive regulation; 

our new framework will not, therefore, 

impose additional burdens on smaller 

carriers that cannot achieve such 

efficiencies. 

16. We also adopt the Commission’s 

proposal to require electing carriers to 

elect incentive regulation at the holding 

company-level for study areas in all 

states where that carrier receives fixed 

support. Commenters do not oppose 

requiring holding company-level 

election. AT&T requests that the 

Commission ‘‘require that any A–CAM 

carrier that elects incentive regulation 

have that election apply across all its 

study areas’’ because this prevents 

‘‘internal cost shifting among study 

areas.’’ Holding company-level election 

will maximize the regulatory 

efficiencies achieved by incentive 

regulation, including maximizing cost 

savings from the elimination of cost 

studies for all electing carriers. It is also 

consistent with the Commission’s past 

practices. For example, the Commission 

gave rate-of-return carriers the 

opportunity to elect between A–CAM 

and legacy cost-based support at a statewide level. Likewise, the Commission 

required Alaska Plan carriers to elect 

fixed, frozen support on a state-wide 

basis. Requiring rate-of-return carriers 

receiving fixed support to elect 

regulatory treatment at the holding 

company-level is also consistent with 

the underlying premise of price cap 

regulation, which assumed a broad 

representation of carrier operations to 

provide a basis for establishing an 

industry-wide productivity factor. 

17. We provide eligible carriers with 

two opportunities to elect to move their 

BDS offerings out of rate-of-return 

regulation—one to be effective as of July 

1, 2019 and a second effective as of July 

1, 2020—to encourage them to take 

advantage without undue delay of the 

benefits that will be realized by electing 

carriers under the new framework and 

to discourage potential gaming 

opportunities. We provide two 

opportunities to elect this new 

regulatory framework, in recognition of 

the fact that some carriers may not have 

sufficient time to assess their options in 

time for the July 1, 2019 effective date. 

Providing a second opportunity to elect 

incentive regulation will facilitate 

carriers’ ability to assess incentive 

regulation for their BDS and ultimately 

enhance participation in the new 

regulatory framework, which will 

further reduce unnecessary regulatory 

burdens and positively impact 

competition in electing carriers’ BDS 

markets. 

18. Some commenters recommend 

that we provide an ‘‘annual opportunity 

to elect the new regime’’ based on 

‘‘business strategy and compliance 

measures.’’ Giving eligible carriers an 

annual opportunity to elect incentive 

regulation, however, would also give 

them an incentive to increase their 

operating costs and rate base under rateof-return regulation in order to raise 

rates prior to electing incentive 

regulation, then realize additional 

profits by cutting costs under incentive 

regulation at the expense of ratepayers. 

By providing only two opportunities to 

elect to move to the new framework, we 

discourage such gaming opportunities. 

19. We prohibit electing carriers from 

returning their study areas to rate-ofreturn regulation. One of the rationales 

for the Commission’s ‘‘all-or-nothing’’ 

rules for price cap carriers is to prevent 

carriers from potentially switching back 

and forth between rate-of-return and 

price cap regulation to take advantage of 

uneven cycles of investment. We are 

likewise concerned with potential 

gaming opportunities for electing 

carriers if they are allowed to switch 

back and forth between rate-of-return 

and incentive regulation. Electing 

carriers could inflate their revenues by 

opting-out of incentive regulation, 

building a larger rate base under rate-ofreturn regulation in order to raise rates, 

and then, returning to incentive 

regulation or opting into price cap 

regulation, thus reducing costs back to 

an efficient level. These gaming 

opportunities would distort carriers’ 

decisions to invest and frustrate the 

public interest because ratepayers 

would not see the benefit of capped and 

decreased rates in the manner intended 

under incentive regulation. Further, in 

the 1990 Price Cap Order, 55 FR 42375, 

October 19, 1990, the Commission 

determined that for price cap regulation 

to work effectively and for incentives to 

develop and influence carrier behavior 

and earnings, an electing carrier must 

make a permanent commitment. We 

similarly find, that for incentive 

regulation to work properly, the election 

must be permanent. Accordingly, a 

carrier’s voluntary election of incentive 

regulation will be irrevocable. 

20. AT&T requests that the 

‘‘Commission decline to waive the ‘allor-nothing’ rule for these carriers and 

require that any A–CAM carrier that 

elects incentive regulation have that 

election apply across all its study areas 

and, even more critically, across all of 

its interstate services within a study 

area.’’ The all-or-nothing rule AT&T 

cites, however, applies to price cap 

carriers, not to rate-of-return carriers 

that elect incentive regulation. While 

the incentive regulation rules we adopt 

for electing carriers impose price caps 

on some of the BDS services offered by 

electing carriers, electing carriers do not 

become price cap carriers by virtue of 

their election; therefore the all-orVerDate Sep<11>2014 16:02 Dec 27, 2018 Jkt 247001 PO 00000 Frm 00068 Fmt 4700 Sfmt 4700 E:\FR\FM\28DER1.SGM 28DER1

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nothing rule is simply not applicable 

here. 

21. We allow electing carriers’ 

switched access services to remain 

subject to the multi-year transition 

provided for rate-of-return carriers in 

the USF/ICC Transformation Order. We 

therefore decline to adopt AT&T’s 

recommendation that electing carriers 

be required to convert all their services 

to price cap regulation, including their 

switched access services, which— 

compared to price-cap carriers’ 

switched access services—benefit from a 

longer transition to bill-and-keep and no 

phase-out of Connect America Fund 

Intercarrier Compensation replacement 

support. 

22. According to AT&T ‘‘[w]hile 

different transitions for price cap 

carriers and rate-of-return carriers may 

have made sense in 2011, those 

distinctions should not unfairly benefit 

carriers’’ electing incentive regulation 

and could lead to cost-shifting between 

types of services. We disagree with 

AT&T’s assertion that electing carriers 

will ‘‘unfairly benefit’’ from our 

decision not to convert all of their 

offerings to incentive regulation. The 

Commission adopted different 

intercarrier compensation transitions in 

the context of a complex rulemaking 

that were the result of a careful analysis 

of a variety of factors and policy 

considerations, including the 

differential impact of universal service 

and intercarrier compensation reform on 

price cap as compared to rate-of-return 

carriers. As TDS Telecom explains, in 

the intervening seven years, carriers 

have relied on those transitions to plan 

their businesses and make investments. 

Changing those transitions at this point 

would disrupt these settled expectations 

and potentially undermine, rather than 

encourage, investment and innovation 

in electing carriers’ BDS markets. We 

also find AT&T’s concerns about costshifting unfounded because switched 

access rates were capped and therefore 

removed from cost-based regulation in 

2011 by the USF/ICC Transformation 

Order, eliminating the incentive for 

inappropriate cost shifting. 

23. Following the same logic, we 

decline to adopt AT&T’s proposal that 

we require electing carriers to exit the 

National Exchange Carrier Association 

(NECA) tariff pool for their ‘‘switched 

and special access services to avoid 

additional complexities in the annual 

tariff review process and to avoid 

potential gaming.’’ As Petitioners argue, 

AT&T ‘‘fails to explain how any cost 

shifting would be useful given the 

switched access rules [that cap rates].’’ 

Moreover, the scrutiny inherent in the 

part 61 tariff review process helps 

reduce the risk of cost-shifting or other 

gaming by pool participants. We do, 

however, require electing carriers 

currently participating in the NECA 

traffic-sensitive tariff pool for their BDS 

or special access service offerings to 

remove their BDS and special access 

offerings from the pool since those 

services will be subject to incentive 

regulation. 

24. We find that the lighter touch 

regulatory framework we adopt provides 

electing carriers the right balance of 

relief from the burdensome aspects of 

rate-of-return regulation and pricing 

discipline. The efficiencies gained from 

reducing regulatory burdens on electing 

carriers, including the increased 

flexibility to compete in the market, will 

foster network investment and impose 

downward pressure on prices. We also 

find here, as we did in the BDS Order, 

that ‘‘minimiz[ing] unnecessary 

government intervention . . . allows 

market forces to continue working to 

spur entry, innovation, and 

competition.’’ 

B. Applying Voluntary Incentive 

Regulation to Electing Carriers’ Lower 

Speed TDM Transport and End User 

Channel Termination Services 

25. In this section, we provide 

direction on implementing the 

voluntary incentive regulation we adopt 

today for electing carriers’ lower 

capacity (i.e., at or below a DS3-level) 

TDM transport and end user channel 

termination services as part of our 

comprehensive lighter touch regulatory 

framework for electing carriers’ BDS. 

We treat electing carriers’ lower 

capacity TDM transport and end user 

channel terminations differently from 

packet-based and higher speed TDMbased BDS offerings because the record 

shows that packet-based offerings are 

subject to competition that will ensure 

just and reasonable rates for those 

services. By contrast, the record shows 

that demand for lower speed TDMbased transport and end user channel 

terminations services is shrinking as 

purchasers increasingly prefer higher 

speed and packet-based services. 

Recognizing that the market is 

transitioning to new technologies, we 

provide protections for lower speed 

TDM-based transport and end user 

channel termination services. Based on 

the current record, we preserve ex ante 

pricing regulation for lower speed TDMbased transport services and adopt a 

competitive market test that will 

preserve ex ante pricing regulation in 

those study areas where we predict 

there is a substantial likelihood that 

competition will fail to ensure just and 

reasonable rates for the lower capacity 

TDM-based end user channel 

termination services. 

26. Rate-of-return carriers that make 

this election will convert to incentive 

regulation for their lower capacity TDM 

transport and end user channel 

termination services as well as other 

generally lower capacity non-packetbased services that are commonly 

considered special access services. 

Specifically, among other matters, we 

adopt a methodology for electing 

carriers to set their initial rates, allow an 

unfreeze of separations category 

relationships for carriers that elected to 

freeze them in 2001, adopt a 

productivity factor and measure of 

inflation to adjust rates, and grant 

pricing flexibility to electing carriers for 

their lower capacity TDM services. 

1. Initial Rate Levels 

27. First, we adopt the methodology 

electing carriers must use to establish 

rates for their lower capacity TDM 

transport and end user channel 

termination services pursuant to 

incentive regulation. For rate-of-return 

carriers that file their own tariffed rates, 

we adopt the approach proposed in the 

NPRM to set initial BDS rate levels 

based on rates in effect on January 1, 

2019 for carriers converting to incentive 

regulation as of July 1, 2019 and on rates 

in effect on January 1, 2020 for carriers 

that elect incentive regulation effective 

as of July 1, 2020. For rate-of-return 

carriers participating in the NECA 

traffic-sensitive tariff pool that elect 

incentive regulation effective July 1, 

2019, we adopt the approach proposed 

in the NPRM for members exiting the 

pool to set their initial BDS rate levels 

by adjusting NECA pool rates in effect 

on January 1, 2019 by a net contribution 

or net recipient factor. Carriers electing 

incentive regulation as of July 1, 2020 

must set their initial BDS rate levels by 

adjusting NECA pool rates in effect on 

January 1, 2020. Electing carriers will 

then adjust their rates using a 

methodology that is consistent with the 

price cap formulas in §§ 61.45 to 61.47 

of our rules, by applying the 

productivity factor (X-factor), inflation 

factor (Gross Domestic Product-Price 

Index (GDP–PI)), and any required 

exogenous cost changes. Carriers may 

adjust these rates to reflect the pricing 

flexibility permitted by the pricing 

bands in the Special Access category. 

28. Under rate-of-return regulation, 

incumbent LECs are permitted to 

recover through tariffed rates their 

revenue requirement, which is equal to 

their regulated operating costs plus a 

prescribed rate of return on their 

regulated rate base. Rate-of-return 

carriers set rates at levels that when 


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multiplied by demand will yield 

revenues equal to their revenue 

requirement, and are targeted to earn the 

Commission’s prescribed rate of return. 

Rate-of-return carriers establish rates for 

BDS offerings either by filing their own 

interstate access tariffs and cost support 

pursuant to § 61.38 or § 61.39 of our 

rules or, for most rate-of-return carriers, 

by participating in the NECA trafficsensitive tariff and traffic-sensitive pool. 

NECA sets the BDS rates in the trafficsensitive tariff based on projected 

aggregate costs (or average schedule 

settlements) and demand of all pool 

members, which are targeted to earn the 

authorized rate of return for NECA pool 

members. 

29. When the Commission launched 

price cap regulation in 1990, it found 

that interstate access rates as they 

existed on July 1, 1990, six months prior 

to the date price caps went into effect 

on January 1, 1991, were the most 

reasonable basis from which to set 

initial rate levels under price cap 

regulation. In other words, those rates 

created the starting point for the 

indexing of rates under price cap 

regulation—setting their price cap 

index, actual price index and service 

band index at a value of 100. The price 

cap index is adjusted by the 

productivity offset (X-factor) and 

inflation (GDP–PI) for the first year, and 

each year thereafter. The Commission 

reasoned that interstate rates that 

existed on July 1, 1990 ‘‘while perhaps 

not perfect, in general represent the best 

that rate-of-return regulation can 

produce.’’ 

30. Beginning with the Windstream 

Order, the Commission granted several 

waivers allowing price cap carriers to 

convert their rate-of-return study areas 

to price cap regulation. Carriers were, 

among other things, required to 

establish initial price cap indexes using 

the rates in effect on January 1 of the 

conversion year, six months prior to the 

July 1 effective date of conversion, the 

demand from the preceding year, and 

required to target their rates using the Xfactor in effect at that time. In the 2012 

Average Schedule Conversion Order, the 

Commission permitted several rate-ofreturn carriers to, among other things, 

withdraw their average schedule study 

areas from the NECA pool and convert 

them to price cap regulation. In that 

order, the Commission approved a 

methodology for establishing initial 

price cap rates using existing NECA 

pool tariffed rates adjusted to reflect the 

extent to which the exiting study areas 

were either a net contributor to, or a net 

recipient from, the NECA pool. 

31. Carriers Currently Filing Their 

Own Tariffs. Consistent with past 

practice, we adopt the proposal in the 

NPRM for carriers that currently file 

their own tariffs to use existing tariffed 

rates to set their initial BDS rates under 

incentive regulation. Carriers first will 

set their price cap indexes based on 

their tariffed interstate special access 

rates in effect on January 1, 2019, or 

based on those rates in effect on January 

1, 2020 for carriers electing to convert 

to incentive regulation effective July 1, 

2020. The price cap indexes (i.e., the 

price cap index, actual price index, and 

service band index) will be assigned 

values of 100 as starting points, which 

correspond to rate levels in effect on 

January 1, 2019 or on January 1, 2020, 

as applicable. Carriers then will adjust 

the price cap index and the pricing band 

limits for each service category or 

subcategory consistent with §§ 61.45 

through 61.47 of our rules, by applying 

the X-factor (2.0%), inflation factor 

(GDP–PI), and any required exogenous 

cost changes. Carriers, next, will set 

rates so that the actual price index, 

calculated pursuant to § 61.46, does not 

exceed the price cap index, and the 

service band indexes for each service 

category or subcategory, calculated 

pursuant to § 61.47, do not exceed the 

pricing band limits for each category or 

subcategory, for the first year of 

incentive regulation and each year 

thereafter. 

32. Carriers Participating in NECA 

Pool. We also adopt the approach 

proposed in the NPRM for electing 

carrier study areas exiting the NECA 

traffic-sensitive tariff pool to establish 

their initial BDS rates under incentive 

regulation by multiplying the NECA 

pool rate in effect on January 1, 2019 by 

a net contribution or net recipient factor 

or by doing so using the NECA pool rate 

in effect on January 1, 2020 for carriers 

electing conversion in 2020. No 

commenters opposed this proposal. 

Electing carriers exiting the NECA pool 

will adjust the NECA pool rate to reflect 

the extent they are either a net 

contributor or net recipient in order to 

ensure their rates are just and 

reasonable. Each NECA pool member 

receives a settlement from the pool 

based on its costs plus a pro rata share 

of the earnings, or based on its 

settlement pursuant to the average 

schedule formulas. NECA pool rates are 

lower than necessary for a net recipient 

to recover its revenue requirement, or 

higher than necessary for a net 

contributor to recover its revenue 

requirement and must be adjusted by 

the extent to which the existing study 

area is a net contributor to, or net 

recipient from, the NECA pool in order 

to satisfy the just and reasonable 

standard. Without an adjustment, 

electing carriers’ BDS rates would be 

either artificially high or low going 

forward. 

33. First, to determine the appropriate 

net contributor or net recipient factor, 

electing carriers exiting the pool 

effective July 1, 2019 will determine 

their interstate special access revenue 

for the period July 1 to December 31, 

2018. An electing carrier exiting the 

NECA tariff shall determine its pool 

settlements to be used in developing the 

factor based on costs for the period July 

1 through December 31, 2018, which 

reflects the first six months of tariff year 

2018–19, the 12-month period for which 

the costs underlying the January 1, 2019 

rates were projected. The pool 

settlements shall be adjusted to reflect 

the 10.5% rate of return which was used 

to establish the revenue requirement for 

the January 1, 2019 rates. Second, 

carriers will calculate the difference 

between the exiting pool member’s 

interstate special access revenues for 

July 1 to December 31, 2018 and special 

access pool settlements reflecting the 

authorized rate of return for this same 

period. Third, this net contribution or 

net recipient amount will then be 

divided by interstate special access 

revenues for the same period to produce 

a percent net contribution or net 

recipient factor. Fourth, carriers shall 

proportionately adjust their special 

access NECA pool rates in effect on 

January 1, 2019 downward by the net 

contribution factor or upward by the net 

recipient factor. Finally, carriers will 

adjust these rates further consistent with 

§§ 61.45 through 61.47 of our rules, in 

the manner described above for carriers 

that file their own tariffs, to set their 

initial BDS rates for the first year of 

incentive regulation. Carriers electing to 

exit the NECA pool effective July 1, 

2020 will use the same methodology to 

adjust their rates but using the 

corresponding dates that are one year 

later. 

34. We agree with Petitioners that 

recommend that initial rates be based on 

the existing tariffed rates at the time of 

a carrier’s election of incentive 

regulation. AT&T and Sprint disagree 

and argue that the Commission should 

adjust initial BDS rates to account for 

the rate-of-return transition that is 

currently underway. The Commission 

adopted a six-year transition in 2016 to 

reduce the then-11.25% rate of return by 

25 basis points per year until the rate of 

return reaches 9.75% in 2021. AT&T 

and Sprint argue that the Commission 

should adjust electing carriers’ initial 

BDS rates to reflect the fullytransitioned 9.75% rate of return or, at 

a minimum, Sprint argues that the 


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Commission should adjust the price 

capped rates each year during the rateof-return transition until it ends in 2021. 

AT&T claims that ‘‘[s]etting electing A– 

CAM carriers’ initial rate-of-return at the 

9.75% level immediately upon 

converting to price cap, while not 

completely correcting, would help 

alleviate any rate disparities and aligns 

with the Commission’s finding that a 

9.75% rate of return is more than 

reasonable.’’ 

35. We find that existing tariffed rates 

targeting the transitional 10.5% rate of 

return in effect is the more appropriate 

rate from which to launch incentive 

regulation for carriers electing to 

convert to incentive regulation effective 

July 1, 2019. AT&T and Sprint fail to 

accord any significance to the 

Commission’s decision to implement 

changes in the prescribed rate of return 

over six years and the reasons for such 

a measured and lengthy transition. In 

granting a six-year transition, the 

Commission acknowledged that ‘‘for 

almost 25 years, rate-of-return carriers 

have made significant infrastructure 

investments . . . and that represcribing 

the rate of return will have a financial 

impact on these carriers.’’ Rate-of-return 

carriers’ business plans and long-term 

capital investments are typically based 

on an expected multi-year revenue 

stream. The Commission determined 

that an immediate transition to a 9.75% 

rate of return would disrupt these 

carriers’ reasonable reliance on these 

expected revenues. The Commission 

also recognized that ‘‘rate-of-return 

incumbent LECs have been subject to 

significant regulatory changes in recent 

years, and that such changes are 

occurring at a time when these carriers 

are attempting to transition their 

networks and service offerings to a 

broadband world.’’ Reflecting the 

balance of the six-year transition 

whether through a one-time adjustment, 

or through a series of three adjustments, 

would abandon this careful transition 

and would likely disrupt electing 

carriers’ ability to invest in upgrading 

and transitioning their networks to 

provide broadband in the rural 

communities they serve. 

36. We also find that once a carrier 

elects incentive regulation, its rates 

should be based on that form of 

regulation and not effectively a hybrid 

or combination of rate-of-return and 

incentive regulation, which would be 

the result were we to adopt the annual 

adjustment the Commission has applied 

to carriers that are subject to cost-based 

rate-of-return regulation as proposed by 

Sprint. Capping BDS rates of an electing 

carrier that will be subject to incentive 

regulation and reducing them annually 

by the X-factor going forward will be 

sufficient to ensure these rates are just 

and reasonable while at the same time 

creating the right incentives to operate 

efficiently—a goal we cannot expect to 

achieve by continuing to overlay rate-ofreturn obligations on top of an incentive 

regulation scheme. An annual 25 basis 

point adjustment would also be more 

administratively burdensome to 

implement. Rather than perpetuating 

policies associated with an inefficient 

rate-of-return system, we look to the 

ongoing operation of incentive 

regulation to spur carriers to be more 

efficient and productive than they were 

under rate-of-return regulation using Xfactor-based rate reductions. 

37. Finally, as some commenters 

explain, reducing initial BDS rate levels 

to account for the rate-of-return 

transition would ‘‘reduce the motivation 

of a carrier to opt into incentive 

regulation’’ contrary to the goals of this 

Order and the Commission’s preference 

for incentive-based regulation. If initial 

BDS rates were adjusted to the fullytransitioned rate of return of 9.75%, 

carriers would be able to earn a higher 

return and revenue during the rate-ofreturn regulation transition that ends in 

2021 than by moving to incentive 

regulation. This outcome is contrary to 

the Commission’s long-standing policy 

preferring incentive-based regulation 

over rate-of-return regulation and 

encouraging conversions to incentivebased regulation. Incentive regulation 

will encourage electing carriers to be 

more efficient than they were under 

rate-of-return regulation, and pass some 

of these efficiencies on to consumers 

through rate reductions (or rates that are 

lower than otherwise) through the 

application of a price cap formula that 

reflects a properly calculated X-factor. 

Accordingly, we seek to encourage 

carriers to adopt incentive regulation by 

allowing electing carriers to set their 

initial rates under incentive regulation 

based on rates reflecting the transitional 

rate of return currently in effect. 

38. We agree with Petitioners that 

initial rates for lower capacity TDM 

transport and end user channel 

termination services should be based on 

existing tariffed deemed lawful rates— 

rates that target the effective transitional 

rate of return. We therefore set initial 

rates for carriers electing to convert to 

incentive regulation as of July 1, 2019 

for lower capacity TDM transport and 

end user channel termination services 

based on electing carriers’ tariffed rates 

in effect on January 1, 2019, six months 

prior to when incentive regulation goes 

into effect on July 1, 2019. Similarly, 

initial rates for carriers electing to 

convert to incentive regulation as of July 

1, 2020 will be based on the tariffed 

rates in effect on January 1, 2020. 

Existing tariffed rates filed pursuant to 

section 204(a)(3) of the Act that take 

effect, without prior suspension and 

investigation, are deemed lawful and 

conclusively presumed to be just and 

reasonable. Setting initial rates based on 

existing tariffed rates, as noted by 

commenters, is ‘‘consistent with the 

methodologies used in the past when 

rate-of-return carriers have converted to 

price cap regulation.’’ Further, the 

selection of tariffed rates in effect on a 

date that precedes the effective date of 

incentive regulation helps prevent rapid 

aggregate price increases in the period 

leading up to the incentive regulation 

that would inflate price cap baseline 

rates. Accordingly, price cap indexes 

under incentive regulation will be 

initially set at a value of 100 based on 

rates in effect on January 1, 2019 for 

carriers electing incentive regulation as 

of July 1, 2019, and on rates in effect on 

January 1, 2020 for carriers electing 

incentive regulation as of July 1, 2020. 

Business data services rates for carriers 

accepting future offers of A–CAM 

support or otherwise transition away 

from legacy support mechanisms will be 

effective on July 1 in the year following 

their election. 

2. Category Relationships Unfreeze 

39. We give electing carriers subject to 

the category relationships freeze of our 

separations rules, including any such 

carriers that accept future offers of A– 

CAM support or otherwise transition 

away from legacy support mechanisms, 

the opportunity to opt out of that freeze. 

We agree with Petitioners and WTA that 

the category relationships freeze creates 

a cost recovery hardship for certain 

carriers and a distortion in rates that 

should not be incorporated into rates 

that electing carriers set for lower 

capacity circuit-based business data 

services under incentive regulation. 

40. Background. Rate-of-return 

incumbent LECs use their networks and 

other resources to provide both 

interstate and intrastate services. The 

Commission’s part 36 jurisdictional 

separations rules are designed to help 

prevent the recovery of the same costs 

from both the interstate and intrastate 

jurisdictions and require that rate-ofreturn incumbent LECs divide their 

costs and revenues between the 

respective jurisdictions. The 

jurisdictional separations analysis 

begins with categorizing the incumbent 

LEC’s regulated costs and revenues, a 

process requiring that the incumbent 

LEC assign the regulated investments, 

expenses, and revenues recorded in its 

part 32 accounts to various part 36 


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categories. The incumbent LEC then 

directly assigns to the interstate or 

intrastate jurisdiction, or allocates 

between those jurisdictions, the costs or 

revenues in each part 36 category. 

41. In 1997, the Commission initiated 

a proceeding to comprehensively reform 

its jurisdictional separations rules and 

referred that matter to the Federal-State 

Joint Board on Jurisdictional 

Separations (Joint Board) for preparation 

of a recommended decision. In the 2001 

Separations Freeze Order, 66 FR 33202, 

June 21, 2001, the Commission froze the 

jurisdictional separations rules to allow 

time for the Joint Board to develop 

recommendations on comprehensive 

separations reform. Also, in that Order, 

the Commission granted rate-of-return 

carriers a one-time option to freeze their 

category relationships, enabling each 

carrier to determine whether such a 

freeze would be beneficial ‘‘based on its 

own circumstances and investment 

plans.’’ Carriers that elected this freeze 

assign regulated costs to separations 

categories based on separations category 

relationships from 2001, rather than on 

current data. Presently, approximately 

28 rate-of-return carriers that receive 

fixed high-cost universal service 

support operate under this category 

relationships freeze. 

42. The Commission has repeatedly 

extended the separations freeze. The 

most recent extension is set to expire on 

December 31, 2018. In the 2018 

Separations Freeze Extension 

proceeding, the Commission proposed 

to extend the separations freeze for 15 

years, while providing a one-time 

opportunity for carriers that had elected 

to freeze their category relationships to 

opt out of that freeze and categorize 

their costs based on current data rather 

than separations category results from 

2001. The Commission has not yet acted 

on that proposal. 

43. Category Relationships Unfreeze. 

The category relationships freeze has 

now been in place for more than 17 

years, and our rules prohibit carriers 

that elected that freeze from 

withdrawing from it. Rate-of-return 

carriers that chose to freeze their 

category relationships in 2001 assign 

costs within part 32 accounts to 

categories using their separations 

category relationships from 2000. This 

means that these companies are still 

separating their costs based on the 

technologies and services that were in 

place in 2000, instead of being able to 

adjust the amounts assigned to 

separations categories to reflect the 

current network costs and services that 

would allow these carriers to properly 

recover their costs. Investment by 

carriers is becoming more weighted 

toward BDS and away from switched 

access and common line categories. 

Thus, we agree with Petitioners that the 

result is that some, if not all, carriers 

with frozen category relationships are 

unable to recover their BDS costs from 

BDS customers or from NECA traffic 

sensitive pool settlements. 

44. We therefore allow electing 

carriers to unfreeze and update their 

category relationships in conjunction 

with setting their initial rates, which 

will enable such carriers to more closely 

align their BDS rates with their 

underlying costs as they set initial 

incentive regulation rates. Once an 

electing carrier implements incentive 

regulation rates for its BDS, it will no 

longer need to comply with the 

separations rules by virtue of our action 

below forbearing from application of the 

separations and other cost assignment 

rules to electing carriers. This, in turn, 

will allow the carriers and their 

customers to benefit from the 

efficiencies of incentive regulation. 

45. The Commission originally 

allowed rate-of-return carriers the 

flexibility to choose whether to freeze 

their category relationships because 

those carriers’ size, cost structures, and 

investment patterns vary widely. For 

similar reasons, we conclude that the 

burden on electing carriers, were we to 

require all impacted carriers to unfreeze 

and update their category relationships, 

would outweigh any benefits, and thus 

grant these carriers the flexibility to 

choose. For example, some carriers may 

have based their current business plans 

and investment on a continuation of the 

freeze since it has been in effect for such 

a long period and compelling these 

carriers to unfreeze their categories now 

could be disruptive. Further, it would 

impose a disproportionate burden on 

companies with cost structures that 

have not changed significantly enough 

to warrant the administrative costs that 

these carriers would incur in updating 

their relationships. Moreover, the 

process of unfreezing and updating 

category relationships is resourceintensive, requiring carriers to develop 

detailed analyses for new categorization 

cost studies. As a result, we recognize 

that some electing carriers may choose 

not to unfreeze their category 

relationships in conjunction with 

setting initial incentive regulation rates 

for lower capacity circuit-based 

business data services because of the 

administrative costs they would incur in 

updating these relationships. We see no 

need to require that electing carriers 

incur these costs, particularly since one 

of the principal goals of this proceeding 

is to reduce unnecessary regulatory 

burdens. 

46. In adopting this option, we reject 

NARUC’s contention that we are 

violating section 410(c) of the 

Communications Act by failing to 

meaningfully consult with, and receive 

a recommendation from the Joint Board. 

Section 410(c) applies only to the extent 

the Commission engages in ‘‘the 

jurisdictional separation of common 

carrier property and expenses between 

interstate and intrastate operations.’’ 

Here, we are not engaged in that 

process. Instead, we are determining 

which costs electing carriers should use 

to calculate their incentive regulation 

rates for lower capacity circuit-based 

BDS. In allowing electing carriers to set 

those rates using data from 2018, rather 

than 2000, we make no change to the 

jurisdictional separations rules. 

47. As set forth more fully below, we 

direct each electing carrier that chooses 

to update its separations category 

relationships to conduct two cost 

studies for 2018 and to use those cost 

studies in determining its initial 

incentive regulation rates. In so doing, 

we are exercising our authority over 

interstate rates and are not in any way 

requiring state commissions to make 

similar intrastate adjustments. On the 

contrary, our forbearance from 

application of the separations rules to 

electing carriers will allow the states to 

adopt their own rules for determining 

the costs carriers incur in providing 

intrastate services to the extent they 

have authority under state law. 

48. Moreover, even if we were to 

interpret 410(c) so broadly as to be 

applicable to the opportunity we 

provide electing carriers to unfreeze 

their category relationships, our actions 

are not in conflict with our obligations 

under section 410(c). In 2009, the 

Commission asked the Joint Board to 

consider whether the Commission 

should allow carriers a one-time 

opportunity to unfreeze their 

separations category relationships and 

requested that the Joint Board prepare a 

recommended decision on that matter. 

No recommendation has been 

forthcoming. Section 410(c) directs that, 

after a referral, the Joint Board ‘‘shall 

prepare a recommended decision for 

prompt review and action by the 

Commission.’’ Nothing in section 410(c) 

obligates the Commission to wait 

indefinitely for a recommended 

decision before acting. We conclude that 

the only reasonable interpretation of 

this statutory language allows the 

Commission to act unilaterally where, 

as here, an issue has been pending 

before the Joint Board for more than 

nine years without a recommended 

decision. Any contrary interpretation 

would allow the Joint Board to 


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indefinitely delay Commission action. 

Congress could not have intended that 

result while requiring that that the 

Commission act promptly once the Joint 

Board issues a recommended decision. 

49. Section 410(c) also requires that 

the Commission ‘‘afford the State 

members of the Joint Board an 

opportunity to participate in its 

deliberations’’ on ‘‘decisional action[s]’’ 

regarding matters that have been 

referred to the Joint Board. To the extent 

this provision can be read as applying 

to this proceeding, the notice and 

comment periods and permit-butdisclose rules governing this proceeding 

have provided plenty of opportunity for 

the state members of the Joint Board to 

voice their opinions on allowing 

electing carriers to opt out of the 

category relationships freeze. 

50. Implementation. To ensure that 

updated category relationships are 

properly reflected in incentive 

regulation rates, we require each 

electing carrier that chooses to update 

its frozen category relationships to 

conduct two 2018 cost studies—one 

based on frozen category relationships 

and one based on unfrozen 

relationships. To determine its incentive 

regulation rates for BDS, the carrier 

shall divide the BDS costs under the 

revised 2018 cost study by the BDS 

costs determined in the original 2018 

cost study using frozen category 

relationships to develop a rate 

adjustment factor. The carrier shall 

apply this factor to the initial (prior to 

adjustments for the X-factor, inflation 

factor, and any exogenous cost changes) 

rates established in accordance with the 

procedures explained elsewhere in this 

Order to set the carrier’s initial rates for 

lower capacity circuit-based BDS under 

incentive regulation. The carrier shall 

adjust these rates for the X-factor, 

inflation factor, and any exogenous cost 

changes and may adjust these rates to 

reflect any pricing flexibility allowed 

among services within the special 

access basket. Carriers that elect 

incentive regulation effective as of July 

1, 2020 will follow these directions, 

except that if an electing carrier chooses 

to update its frozen category 

relationships it will conduct two 2019 

cost studies and use the results of these 

cost studies to complete the steps 

described in this paragraph. 

51. Unfreezing separations category 

relationships could result in a carrier 

recovering the same costs through 

higher BDS rates and unchanged 

switched access recovery. Incorporating 

updated category relationships into the 

2018 cost study, or 2019 cost study for 

carriers electing the January 1, 2020 

effective date, will change the costs 

assigned to the switched access category 

just as it will for BDS. The USF/ICC 

Transformation Order capped all 

interstate switched access rates at 2011 

levels, subject to specified reductions 

over time. We do not permit electing 

carriers to increase their switched 

access rate caps. Unless cost reductions 

to interstate switched access are 

reflected in a carrier’s revised base 

period revenue amount, a carrier will 

double-recover costs through its 

interstate switched access rates. To 

account for this effect, an electing 

carrier that unfreezes its separations 

category relationships must calculate 

the difference between the interstate 

switched access costs in the two 2018 

cost studies. Each electing carrier must 

adjust its base period revenue by an 

amount equal to the interstate switched 

access cost difference between the two 

2018 cost studies before applying the 

annual 5% reduction to the base period 

revenue. This is the process that the 

Commission employed in the Eastex 

proceeding. Carriers electing a January 

1, 2020 effective date will do the same 

with 2019 cost studies. 

52. An electing carrier that 

participates in the NECA interstate 

switched access tariff must report to 

NECA the interstate switched access 

cost difference between the two 2018, 

or, 2019, studies and its revised base 

period revenue amount. These 

procedures protect both carriers and 

customers from any unintended 

consequences of moving BDS from rateof-return regulation to incentive 

regulation. Any electing carrier that opts 

out of the category relationships freeze 

shall include, in its 2019 or 2020, 

respectively, annual filing, workpapers 

showing how it implemented the 

measures set forth above. This does not 

eliminate the need for an electing carrier 

to adjust its Eligible Recovery for any 

other instances of double recovery. 

Finally, we require NECA to reflect 

these base period revenue changes in its 

settlement procedures. 

53. We find that these measures 

provide a reasonable and not unduly 

burdensome method for ensuring that 

costs shifted from an electing carrier’s 

unfreezing of its category relationships 

are carried forward into its incentive 

regulation rates for BDS without any 

double-recovery. Each electing carrier 

that chooses to update its category 

relationships will necessarily need to 

perform detailed calculations to 

implement that choice. We minimize 

the associated burdens by specifying 

that the electing carrier adjust its 

business data service rates to account 

for the changes in the category 

relationships using the 2018 cost study, 

or the 2019 cost study for carriers 

electing to convert effective July 1, 2020, 

that this Order requires of all electing 

carriers and therefore will impose only 

a minimal incremental burden on 

electing carriers. 

3. Special Access Basket, Categories, 

and Subcategories 

54. We retain the special access 

basket, categories and subcategories, 

and the attendant rules governing the 

allowed annual rate adjustments for 

price cap regulation for incentive 

regulation. Commenting parties support 

this approach. The category and subcategory requirements limit the degree 

to which a carrier can raise rates for 

particular groups of services in any 

given year. Each electing carrier that 

elects incentive regulation must set its 

initial price cap indexes for the special 

access basket and associated service 

band indices at 100 and use the rate 

adjustment rules for price cap carriers 

contained in §§ 61.45 to 61.48 of our 

rules, as appropriate, to reflect the 

prescribed productivity factor, the 

inflation factor, and any required 

exogenous cost adjustment in the price 

cap index. These steps will ensure that 

the carrier’s actual price index does not 

exceed its price cap index, and that its 

service band indexes for each category 

or subcategory do not exceed their 

upper limits. 

4. Productivity X-Factor and Measure of 

Inflation 

55. Consistent with the price cap BDS 

Order, we adopt 2.0% as the 

productivity factor (X-factor) and the 

Gross Domestic Product-Price Index 

(GDP–PI) as the inflation factor used to 

adjust price cap indexes in the first year 

of incentive regulation, and each year 

thereafter. As proposed in the NPRM, 

we decline to incorporate a consumer 

productivity dividend adjustment into 

the X-factor. 

56. Background. Under price cap 

regulation, the price cap index seeks to 

replicate the beneficial cost-reducing 

incentives of a competitive market by 

limiting the prices that a price cap LEC 

may charge for services. After price cap 

carriers set initial price cap indexes 

based on going-in rate levels, these 

indexes are adjusted annually based 

primarily on the productivity factor (Xfactor) and inflation factor (GDP–PI) as 

well as any exogenous cost adjustments. 

The X-factor adjustment is intended to 

capture the amount by which 

incumbent LECs could be expected to 

outperform economy-wide productivity 

gains and to pass those gains on to 

consumers in the form of lower prices. 

In the past, the Commission has also 


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applied a consumer productivity 

dividend adjustment to the X-factor to 

capture for ratepayers a portion of the 

benefits from expected productivity 

gains exceeding those incumbent LECs 

had historically achieved under rate-ofreturn regulation. The inflation factor is 

intended to adjust prices to capture 

economy-wide rates of inflation. 

Historically, the Commission has used 

the U.S. Department of Commerce’s 

Bureau of Economic Analysis’s GDP–PI, 

a chain-weighted index of overall 

national prices, as the inflation factor. 

57. In the BDS Order, the Commission 

adopted for price cap carriers a 2.0% 

productivity-based X-factor and retained 

GDP–PI as the inflation factor but 

declined to apply a consumer 

productivity dividend adjustment. The 

Commission found that 2.0% reflects its 

best estimate of the productivity growth 

that incumbent LECs will experience in 

the provision of BDS services relative to 

productivity growth in the overall 

economy. To determine the X-factor, the 

Commission applied a total factor 

productivity methodology, which 

measures the relationship between the 

output of goods and services to inputs. 

The Commission applied this 

methodology to the U.S. Bureau of 

Labor Statistics’ Capital, Labor, Energy, 

Materials, and Services (KLEMS) dataset 

for the broadcasting and 

telecommunications industries for 

estimating incumbent LEC productivity 

and input prices. The Commission used 

these data to establish a zone of 

reasonable X-factor estimates based on 

four relevant time periods, and from this 

zone selected an X-factor of 2.0%. The 

Commission also retained GDP–PI as the 

measure of inflation. Accordingly, price 

cap LECs adjust their price cap indexes 

annually by the 2.0% X-factor and GDP– 

PI to ensure just and reasonable rates for 

these BDS services. 

58. Discussion. Consistent with the 

BDS Order, we adopt 2.0% as the 

productivity factor electing carriers will 

use to adjust their price cap indexes. In 

so doing, we reaffirm the Commission’s 

finding in the BDS Order that the 2.0% 

X-factor represents our best estimate of 

BDS productivity gains or losses relative 

to the general economy and is a 

reasonable productivity factor with 

which to adjust price cap indexes for 

purposes of incentive regulation. 

59. WTA opposes adoption of the 

2.0% productivity X-factor for incentive 

regulation, contending that ‘‘given 

increasing broadband-related labor costs 

and the fact that the typical WTA 

member has only 10-to-20 employees, it 

does not appear possible for many small 

A–CAM and Alaska Plan companies to 

achieve productivity gains of two 

percent each year.’’ We believe, 

however, that the 2.0% X-factor is the 

most reliable estimate of BDS 

productivity growth for carriers 

generally, including smaller carriers. 

The 2.0% X-factor was the product of an 

economically-sound total factor 

productivity methodology, consistent 

with past Commission practice, using 

the only reliable and internally 

consistent dataset in the record in the 

BDS proceeding, KLEMS, for measuring 

incumbent LEC productivity and input 

prices. WTA focuses on one type of 

input price—labor costs—for which 

KLEMS captures telecommunications 

industry trends, including broadbandrelated trends, for carriers of all sizes. 

WTA implicitly assumes that its 

members’ labor costs will rise more 

quickly (or fall more slowly) than price 

cap carriers’ labor costs. Even if we were 

to accept this assumption, WTA does 

not address whether other factors 

affecting BDS productivity growth, such 

as changes in BDS demand, offset any 

disparity in the rate of change in labor 

costs. 

60. The Commission sought comment 

on alternative X-factors for electing 

carriers but received no data or other 

information that would allow us to 

calculate an alternative X-factor. And 

while WTA provides anecdotal data on 

a selected portion of its members’ costs, 

it has ‘‘not submitted the companyspecific input price and output data that 

we would need to quantify’’ the extent 

to which its members’ productivity 

growth and ability to recover costs 

deviate from the industry average. In the 

BDS Order, the Commission declined to 

adjust the X-factor to account for 

conflicting and unquantifiable evidence 

in the record that the KLEMS dataset 

overstated or understated productivity 

growth. And the Eighth Circuit Court of 

Appeals upheld the Commission’s 

decision not to adjust the KLEMS 

dataset ‘‘in light of the conflicting 

evidence on what sort of adjustment 

was appropriate.’’ In these 

circumstances, we see no valid basis on 

which to adopt an alternative X-factor. 

61. Notwithstanding WTA’s concerns, 

we believe that most electing carriers 

will be able to achieve the 2.0% Xfactor. Petitioners support our use of a 

2.0% X-factor, even though they state 

that rate-of-return carriers may generally 

achieve lower productivity growth than 

price cap carriers, and TDS Telecom 

endorses the regulatory framework 

adopted in the BDS Order that includes 

a 2.0% X-factor. Given that rate-ofreturn carriers receiving fixed support 

are not required to move to incentive 

regulation, carriers unable to achieve 

the 2.0% X-factor will avoid any harm 

by simply not electing incentive 

regulation. The voluntary nature of 

incentive regulation therefore renders 

moot any risk involved in attempting 

today to determine what an appropriate 

productivity factor would be for this 

group of carriers. Carriers themselves 

are in the best position to determine 

whether they will benefit from incentive 

regulation and we have afforded them 

that flexibility. 

62. Inflation Factor. We adopt GDP– 

PI as the inflation factor as proposed in 

the NPRM. No commenter opposed this 

proposal. As we found in the BDS 

Order, there is no alternative measure of 

inflation presented in the record that is 

as accurate as GDP–PI in the mediumand long-term and that is not 

susceptible to carrier influence or 

manipulation. Accordingly, electing 

carriers will adjust their price cap 

indexes by GDP–PI during the first year 

of incentive regulation, and each year 

thereafter. 

63. Consumer Productivity Dividend. 

We decline to incorporate a consumer 

productivity dividend adjustment into 

the X-factor adopted in this Order. No 

commenter opposed this proposal in the 

NPRM. In the BDS Order, the 

Commission found that the 2.0% Xfactor reflected all anticipated future 

BDS productivity growth and declined 

to include a consumer productivity 

dividend adjustment in the X-factor. For 

similar reasons, and to avoid regulatory 

disparity with price cap regulation, we 

decline to include a consumer 

productivity dividend in the X-factor for 

incentive regulation. 

5. Exogenous Costs 

64. After reviewing the record, we 

adopt the proposal in the NPRM that 

exogenous costs be allocated based on a 

ratio of BDS revenues to total revenues 

from all regulated services and an 

electing carrier’s universal service 

support payments. Exogenous costs are 

those costs that are beyond the control 

of the carrier, as determined by the 

Commission. We agree with Petitioners 

that allowing exogenous cost 

adjustments is appropriate. When costs 

are beyond the carrier’s control, they are 

often of a nature that is not reflected in 

the measurement of productivity. It is 

therefore appropriate to allow 

adjustments to reflect exogenous events 

upon Commission approval. 

65. We reject Sprint’s proposal that 

any exogenous cost changes should be 

limited by applying the ratio of BDS 

revenues to total enterprise revenues. 

Sprint does not define ‘‘total enterprise 

revenues’’ or explain why it would 

result in a more relevant comparison to 

BDS revenues than using total regulated 


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revenues, and we find it too expansive 

for use here. The exogenous costs being 

allocated are those associated with 

regulated services as determined by the 

part 64 allocation rules for assigning 

costs associated with non-regulated 

activities. Thus, we find that regulated 

BDS revenues compared to all regulated 

revenues and related support receipts is 

the most relevant relationship to 

allocate a portion of exogenous costs 

related to regulated services to BDS. 

66. Finally, we will not require 

electing carriers to incur the costs of 

filing a short form tariff review plan as 

price cap carriers are required to do. In 

recent years, the Bureau has waived the 

requirement that price cap LECs file the 

short form, finding that it would 

provide little value to the Commission, 

industry, and consumers. We find that 

the short form tariff review plan would 

also provide little value to the 

Commission, industry, and consumers 

in conjunction with incentive regulation 

for electing carriers. We accordingly do 

not require its filing. 

6. Low-end Adjustment 

67. We adopt the low-end adjustment 

mechanism proposed in the NPRM to 

provide an appropriate backstop to 

ensure that electing carriers are not 

subject to protracted periods of low 

earnings. A below-normal rate of return 

over a prolonged period could threaten 

a carrier’s ability to raise the capital 

necessary to provide modern, efficient 

services to customers. The low-end 

adjustment mechanism will permit a 

one-time adjustment to a single year’s 

BDS rates to avoid back-to-back annual 

earnings below a set benchmark. This 

course should allow electing carriers to 

meet their existing obligations to 

debtholders and attract sufficient capital 

while continuing to provide BDS. 

68. We reject Sprint’s argument that 

any low-end adjustment should be 

allowed only if a sharing mechanism is 

adopted for a carrier’s earnings. A 

sharing mechanism is a process that 

allocates a portion of a carrier’s excess 

earnings under price cap regulation to 

the consumer through a one-time 

reduction in a carrier’s price cap index. 

The Commission eliminated the sharing 

mechanism for price cap carriers in 

1997. There is no causal link between 

the low-end adjustment mechanism and 

earnings sharing, and the two have not 

previously been tied together in other 

incentive regulation programs. The BDS 

Order allowed a low-end adjustment 

without a sharing mechanism and 

Sprint provides no convincing basis for 

diverging from that approach. 

69. We use 100 basis points below the 

authorized rate of return for rate-ofreturn carriers as the benchmark for 

establishing the low-end adjustment as 

we did in the BDS Order. This approach 

will approximate the transition to the 

authorized rate of return of 9.75%. A 

carrier asserting a claim for a low-end 

adjustment bears the burden of showing 

that its return is below the prescribed 

benchmark and that the revised rate(s) 

are consistent with the benchmark. 

70. Finally, as the Commission 

proposed in the NPRM, electing carriers 

that exercise downward pricing 

flexibility (for example, by entering into 

a contract tariff with a customer), or use 

generally accepted accounting 

principles (GAAP) rather than the part 

32 Uniform System of Accounts, will be 

ineligible for a low-end adjustment. No 

party has opposed this limitation to the 

availability of the low-end adjustment 

mechanism. This limitation is 

consistent with that imposed in the BDS 

Order, and we see no reason to diverge 

from that approach here. 

7. Pricing Flexibility for Lower Capacity 

TDM Transport and End User Channel 

Termination Services 

71. We adopt the proposal in the 

NPRM to grant pricing flexibility to 

electing carriers for their lower capacity 

TDM transport and end user channel 

termination services under incentive 

regulation similar to the pricing 

flexibility the Commission granted to 

price cap carriers’ lower capacity TDM 

end user channel terminations in areas 

deemed non-competitive. We agree with 

commenters that permitting electing 

carriers to offer contract tariff pricing 

and volume and term discounts will 

benefit both carriers and customers and 

will promote competition in electing 

carriers’ BDS markets. Requiring that 

electing carriers also maintain generally 

available tariff rates for their lower 

capacity TDM transport and end user 

channel termination services will 

ensure that the rates of customers that 

do not negotiate contract-based or term 

and volume discounted rates for such 

services will continue to be just and 

reasonable. Additionally, we condition 

this grant of pricing flexibility on the 

requirement that electing carriers 

remove contract tariff demand from the 

relevant incentive regulation basket for 

purposes of determining their price cap 

indexes and actual price indexes, which 

will ensure that those customers that do 

not negotiate contract tariffs will not 

cross-subsidize customers that do. 

C. Removal of Ex Ante Pricing 

Regulation of Lower Capacity TDM End 

User Channel Termination Services in 

Areas Deemed Competitive 

72. As part of our framework for 

moving electing carriers to less intrusive 

pricing regulation of their BDS offerings, 

we adopt a competitive market test to 

identify those areas served by electing 

carriers where competition or potential 

competition for lower speed (DS3 or 

less) TDM end user channel termination 

services justifies removing ex ante 

pricing regulation for those services. In 

adopting a competitive market test for 

electing carriers, we are guided by the 

Commission’s previous work in 

developing a competitive market test for 

price cap carriers’ BDS offerings. At the 

same time, we are persuaded by 

commenters that argue that the 

competitive market test should rely on 

evidence of competition in the study 

areas served by electing carriers. 

73. We adopt a competitive market 

test for electing carriers that is based on 

a modified version of the second prong 

of the BDS Order competitive market 

test, which uses publicly available Form 

477 data to measure whether a cable 

operator offers a minimum of 10/1 Mbps 

in 75% of census blocks in a study area 

served by a price cap provider. We will 

apply this test in electing carriers’ study 

areas, and in those study areas deemed 

competitive by the competitive market 

test, we remove ex ante pricing 

regulation of lower capacity TDM end 

user channel terminations. 

74. We are also constrained in the 

development of a competitive market 

test by the limited availability of data in 

the record regarding competition for 

BDS services in the study areas served 

by eligible rate-of-return carriers. We 

decline, however, to adopt any of the 

options we proposed in the NPRM for a 

competitive market test that would 

require a new data collection. 

Commenters strongly oppose a new 

information collection, arguing it would 

be burdensome and unnecessary. We 

agree. A new information collection for 

electing carriers would be especially 

burdensome given their relatively 

smaller size. The Commission similarly 

declined to require a new data 

collection even for larger price cap 

carriers in the BDS Order, as part of 

deciding to update the price cap 

competitive market test results, finding 

that the burdens would outweigh the 

benefits, and the burden of collecting 

the information would be considerable. 

Additionally, the burdens associated 

with an information collection could 

reduce incentives for eligible carriers to 

elect incentive regulation, counter to 


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our goals. A simple, administrable test 

will ensure more resources are available 

for competition and deployment in 

electing carriers’ study areas. 

75. In the NPRM, we sought comment 

on whether to include lower capacity 

TDM transport services in the 

competitive market test. Given the lack 

of data in our record, we find that 

including such transport services would 

be unworkable at this time. We therefore 

decline to adopt a competitive market 

test for lower capacity TDM transport in 

electing carriers’ study areas. 

1. Criteria for a Competitive Market Test 

76. In this section, we address 

appropriate criteria for a competitive 

market test for electing carriers’ lower 

speed TDM end user channel 

termination services, including the 

appropriate product market, number of 

competitors in a market, and geographic 

market. 

77. Product market. When defining a 

product market, to ensure our action 

affects an appropriate group of services, 

we look to which services are 

sufficiently similar to reasonably be 

considered substitutes. We find the 

Commission’s analysis of the relevant 

market in the BDS Order to be 

applicable to the current situation, and, 

therefore find the relevant product 

market includes circuit- and packetbased business data services, legacy 

hybrid-fiber-coaxial, and copper. For the 

same reason, we find that the product 

market also includes unbundled 

network elements, dark fiber, and fixed 

wireless services and facilities used to 

provision BDS. These services play 

competitive roles in BDS markets. While 

the Commission did not find best-efforts 

services to be close substitutes for all 

types of BDS in the BDS Order, we 

acknowledge here as the Commission 

did there that they nonetheless place a 

degree of competitive pressure on BDS 

suppliers, particularly for lower 

capacity services. Further, we believe a 

best-efforts supplier with its own 

ubiquitous wireline network has strong 

incentives to supply BDS to locations 

where it currently does not, and all the 

more so to the extent that an existing 

supplier is charging supra-competitive 

prices. We also continue to expect that 

suppliers exercising any short-term 

market power generally will be 

constrained by supply-side substitution 

over the medium term (3–5 years) in 

locations where other providers, such as 

cable companies, offer best-efforts or 

other telecommunications services over 

their own facilities. We therefore find 

that the product market analysis that the 

Commission conducted for price cap 

areas in the BDS Order applies equally 

to electing carrier areas. 

78. Competition Within a Study Area. 

We must also determine the appropriate 

level of competition for any competitive 

market test. The Commission, in the 

BDS Order determined that a 

‘‘combination of either one competitive 

provider with a network within a half 

mile from a location served by an 

incumbent LEC or a cable operator’s 

facilities in the same census block as a 

location with demand will provide 

competitive restraint’’ more effectively 

than legacy regulation. The Commission 

decided that a ‘‘nearby’’ BDS competitor 

provides sufficient competition after 

analyzing three findings: (1) The 

geographic scope within which a likely 

BDS provider can realistically compete 

with an incumbent LEC; (2) a finding 

that one competitor in addition to the 

incumbent LEC provides a reasonable 

degree of competition; and, (3) the 

benefits of competition outweigh the 

potential unintended costs of regulation. 

79. We do not have data showing 

where there is a competitive provider 

with a network half a mile from a 

location served by carriers eligible to 

elect the lighter touch regulatory 

framework we adopt today. We do, 

however, have Form 477 data which is 

organized on a census block-level. We 

can therefore identify the census blocks 

served by an electing carrier where 

cable broadband services are also 

deployed. We find it appropriate to use 

cable broadband in the census blocks 

that comprise the electing carrier’s 

study area as a proxy for competition 

because, as the Commission previously 

determined, ‘‘cable companies have 

focused investment on building fiber 

networks for higher-bandwidth Ethernet 

services, which is enabling them to 

overcome limitations of traditional 

coaxial-based cable systems that cannot 

meet higher bandwidth demand.’’ Cable 

providers have shifted to offering 

‘‘higher (and more competitive) 

bandwidths. At the same time, cable 

operators’ best efforts (and Ethernet over 

Hybrid Fiber-coaxial (EoHFC)) services 

continue to compete effectively against 

incumbent LECs’ lower speed TDM 

services. The Commission also found 

that because cable operators have 

‘‘aggressive[ly] deploy[ed]’’ it was 

‘‘highly likely the cable-only measure 

found in the Form 477 data will capture 

the vast bulk of additional deployments; 

it is likely that most non-cable 

competitive extension of business data 

services networks will occur where 

cable is also deploying or has already 

deployed.’’ This rationale is equally 

applicable to electing carriers’ provision 

of BDS in their study areas. 

80. As the Commission found in the 

BDS Order, and as the Eighth Circuit 

Court affirmed, a single wireline 

competitor provides a substantial 

competitive effect by disciplining rates, 

terms, and conditions to just and 

reasonable levels. In industries with 

large sunk costs, such as wireline 

providers, the largest impact occurs 

with the entry of a second provider, 

with added benefits from additional 

competitors declining thereafter. This is 

because the presence of a nearby 

provider is likely to prevent or mitigate 

substantial abuse of market power, 

either through lack of innovation or 

high prices. This finding is not 

challenged in the record. Consistent 

with the analysis in the BDS Order, we 

find that the effect of a single BDS 

competitor is sufficient to limit 

anticompetitive behavior, and that the 

presence of a cable network offering a 

minimum of 10/1 Mbps broadband 

service in 75% of the census blocks in 

a study area is sufficient to deem a 

study area competitive for the purposes 

of the competitive market test for 

electing carriers. 

81. Geographic Market. We find that 

an electing carrier’s individual study 

area is the appropriate geographic 

market measure for the competitive 

market test because it is 

administratively feasible but is granular 

enough to capture reasonably similar 

competitive conditions. A study area is 

a geographic segment of a rate-of-return 

incumbent LEC’s telephone operations 

that generally corresponds to the 

carrier’s entire service territory within a 

state. Incumbent LECs determine 

eligibility for high-cost universal service 

support at the study area level, perform 

jurisdictional separations at the study 

area level and generally tariff their rates 

at the study area level. As a result, the 

Commission and the industry have 

substantial experience administering 

rules on a study area basis. What’s more, 

a study area is granular enough to 

capture reasonably similar competitive 

conditions. Rate-of-return study areas 

vary in size but are significantly smaller 

than metropolitan statistical areas and 

generally smaller than counties and are 

therefore sufficiently granular to assess 

competitive conditions. Given their 

mostly rural nature, the average size of 

a rate-of-return study area is 992.82 

square miles, compared to the average 

county, 1,180.40 square miles, and the 

average metropolitan statistical area, 

2,720.95 square miles. Adopting study 

areas as the geographic market also 

avoids risk of competitive overlap by, 

for example, a rate-of-return study area 


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crossing county lines that are deemed 

competitive and noncompetitive. 

82. We also reject other proposals in 

the record, including suggestions to 

build a competitive market test for 

electing carriers that uses counties or 

census blocks as the relevant geographic 

market. We agree with Smithville that 

the selection of counties for use in the 

price cap competitive market test was ‘‘a 

well-documented effective approach for 

competitive area evaluation for larger 

price cap carriers that operate service 

areas dimensioned at statewide levels 

but does not work well for carriers that 

have sub-county service areas.’’ To the 

extent such proposals seek to assess 

competition in electing carriers’ study 

areas based on competition elsewhere 

within the county, we reject that 

proposition—any competitive market 

test must be based on the competitive 

conditions each carrier faces, not those 

another carrier faces somewhere else in 

a county. Additionally, some study 

areas cross county lines. Using counties 

would potentially require us to 

subdivide study areas along county 

boundaries, which would involve 

unreasonable administrative burdens 

and could lead to varying treatment of 

a single study area depending on the 

counties in which it is located. 

83. In response to the 2017 Public 

Notice, Smithville argues that using 

census blocks to assess competition in 

electing carriers’ study areas would be 

a better approach. We decline to adopt 

census blocks as a geographic measure 

for our competitive market test. The 

Commission previously found that 

census blocks or census tracts are too 

numerous to efficiently administer. 

Additionally, they can be impacted by 

changes in demand as small as a single 

building and could lead to a patchwork 

of different regulations that vary from 

census block-to-census block, or even 

building-to-building. Study areas, on the 

other hand, are more administratively 

feasible because there are a limited 

number of study areas eligible to elect 

our BDS regulatory framework. 

2. Competitive Market Test 

Methodology 

84. In this section, we describe the 

specific structure of the electing 

carriers’ competitive market test we 

adopt for electing carriers’ lower 

capacity TDM end user channel 

termination services. In determining 

whether electing carriers with lower 

capacity TDM-based end user channel 

termination services (at a DS3 or below), 

face sufficient competition to allow 

competition, rather than ex ante pricing 

regulation, to ensure rates are just and 

reasonable, we adopt a competitive 

market test modeled on a modified 

version of the second prong of the 

existing price cap competitive market 

test using data from census blocks 

served by electing carriers. The second 

prong of the price cap competitive 

market test uses Form 477 data to 

measure whether a cable operator offers 

a minimum of 10/1 Mbps broadband 

service in 75% of the census blocks in 

the price-cap service areas within a 

county. Having decided that we will use 

only existing data to gauge competition 

in the study areas served by an electing 

carrier, for purposes of the electing 

carriers’ competitive market test, if a 

cable operator or other competitive 

provider offers a minimum of 10/1 

Mbps broadband service in 75% of the 

census blocks in an electing carrier’s 

study area, we will deem the study area 

competitive. 

85. We set 10 Mbps downstream and 

1 Mbps upstream as minimum 

thresholds for a cable operator’s service 

to be included in the competitive 

market test. Setting a minimum 

threshold ensures that the networks that 

supply these services are reasonable 

proxies for the type of network facilities 

needed to deliver BDS. As we observed 

in the BDS Order, ‘‘when a cable 

provider is capable of providing internet 

broadband service within any census 

block, then generally they have the 

incentive to make the incremental 

investment necessary to serve locations 

with BDS demand in that census block, 

especially over the medium term.’’ 

Cable operators are continuing to invest 

in and upgrade the capacities of their 

networks, which give us reasonable 

assurance that these networks will be 

capable of providing BDS competition 

over the short- to medium-term. 

Additionally, the 10/1 Mbps threshold 

is also the threshold that rate-of-return 

carriers accepting fixed A–CAM support 

are required to offer to funded locations. 

86. Using Form 477 data for electing 

carriers’ study areas is administratively 

simple for both the Commission and 

electing carriers. We already regularly 

require providers to update their Form 

477 submissions, so we do not need to 

undertake a new data collection. 

Another benefit of the new electing 

carriers’ competitive market test is the 

incorporation of the 78 rate-of-returnonly counties that cannot be analyzed 

using the price cap competitive market 

test. Had we decided to allow electing 

carriers to opt-in to the price cap 

competitive market test, the competitive 

status of electing carriers serving any of 

those 78 rate-of-return-only counties 

would have been unresolved because 

they were not included in the original 

analysis. 

87. We recognize that under the 

electing carriers’ competitive market 

test, a relatively small percentage of 

electing carriers’ study areas will be 

deemed competitive at this time. The 

current result of the competitive market 

test we adopt today for rate-of-return 

carriers receiving fixed support is 

consistent with the rural nature and the 

nascent deployment of cable in many 

eligible carriers’ study areas. We expect 

the number of electing carriers’ study 

areas deemed competitive by the 

competitive market test will increase as 

competition grows and cable companies 

expand their reach. This 

administratively simple competitive 

market test ensures that all carriers are 

included in the electing carriers’ 

competitive market test and will have 

an opportunity to be deregulated as 

competition develops. 

3. Declining To Use the Results of the 

Price Cap Competitive Market Test 

88. Notwithstanding Petitioners’ and 

some other commenters’ request that we 

use the results of the price cap 

competitive market test adopted by the 

Commission in the BDS Order to 

determine where ex ante pricing 

regulation should be removed from 

electing carriers’ lower capacity TDM 

end user channel termination services, 

we decline to do so. In arguing that the 

Commission should use the BDS Order 

price cap competitive market test for 

electing rate-of-return carriers, some 

commenters claim ‘‘the same 

marketplace analyses the Commission 

undertook for price cap carriers apply 

equally to BDS provided by modelbased rate-of-return carriers.’’ While 

using the results of the existing 

competitive market test to determine 

whether an area served by an electing 

carrier is competitive would be fast, no 

data in the record support that 

approach. In fact, the result of the 

competitive market test we adopt for 

electing carriers, which results in very 

few study areas being deemed 

competitive, underscores our finding 

that application of the price cap 

competitive market test results to 

electing carriers—which would result in 

far more electing carriers’ study areas 

being deemed competitive—would not 

accurately measure competition in the 

geographic areas served by rate-of-return 

carriers receiving fixed support. 

89. The BDS Order relied upon the 

largest information collection in the 

history of the Commission to analyze 

and determine the competitive nature of 

price cap carrier study areas. Even if a 

county contained both price cap and 

rate-of-return study areas, the 

Commission’s analysis only included 


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the price cap study area. The 

Commission created the price cap 

competitive market test after a thorough 

review of the 2015 Collection, Form 477 

data, and established the specific test 

metrics based upon an informed 

knowledge of the level of competition 

that existed and was necessary to 

protect consumers in the absence of 

regulation. Petitioners, however, offer 

no data showing the extent of BDS 

competition in areas served by rate-ofreturn carriers that receive fixed 

support. Instead, they argue that the 

level of competition on a county-bycounty basis for price cap carriers’ lower 

capacity TDM-based BDS offerings is 

comparable to the level of competition 

for lower capacity TDM-based BDS 

offerings of rate-of-return carriers that 

receive fixed support. The principal 

support Petitioners offer for this 

assertion is a study that purports to 

demonstrate that price cap rural areas 

immediately proximate to certain A– 

CAM study areas exhibit sufficiently 

similar characteristics that we should 

include A–CAM study areas in the same 

competitive market test that we used for 

price cap carriers. We find the 

Petitioners’ study unpersuasive. 

90. The study suffers from several 

methodological defects. First, the study 

is not based on a representative sample 

of electing carriers’ study areas. Instead, 

it relies solely on Consolidated 

Communications’ rate-of-return study 

areas. We are doubtful, for example, that 

the Consolidated study areas are a good 

proxy for the Alaska rate-of-return 

carriers that are eligible to elect our new 

regulatory framework. Second, two of 

the study’s principal metrics 

(population and housing density) are 

unlikely to be the critical drivers of 

competitive BDS deployment. 

91. Additionally, in some instances 

the study compares non-urbanized price 

cap areas with areas served by rate-ofreturn carriers that receive fixed support 

that include urbanized areas. These 

areas are not comparable. At least some 

of the counties included in the study’s 

comparison were deemed noncompetitive by the price cap 

competitive market test. Inclusion in the 

price cap competitive market test of A– 

CAM areas in these instances would 

have no effect on the regulatory status 

of these study areas. The study does not 

directly compare study areas with high 

cable presence with competitive 

counties and study areas with low cable 

presence with non-competitive 

counties, as would be expected if the 

study was trying to show similarities. 

92. The study also compares the 

percentage of census blocks with cable 

broadband availability between price 

cap and nearby A–CAM areas and 

claims that, on average, ‘‘the percentage 

of Census blocks in Consolidated tracts 

with cable service (21%) is similar to 

the surrounding rural price cap tracts 

(28%).’’ But the study’s use of average 

percentages obscures wide variations in 

percentage cable broadband 

deployment. For price cap study areas, 

cable broadband deployment was found 

to be 3.88% to 68.68%. For A–CAM 

study areas, broadband deployment in 

areas varied from 0.00% to 89.60%. The 

study further attempts to compare price 

cap areas with nearby A–CAM areas by 

claiming that the differences in the 

percentage of cable broadband 

deployment between the two sets of 

areas are small, ‘‘only 15 percentage 

points.’’ This is not small. 

93. The study also does not state 

whether it limited its analysis of cable 

deployment in rate-of-return study areas 

to those deployments offering a 

minimum of 10/1 Mbps. The study may 

have included residential cable 

deployments at speeds lower than the 

threshold the Commission established 

for the price cap competitive market 

test. Any such deployments should not 

be included in a comparison of price 

cap and nearby A–CAM areas. 

94. We are also unable to rely on the 

conclusions in the Petitioners’ study 

since it is based on a misplaced reliance 

on inaccuracies inherent in the structure 

of the price cap competitive market 

test—inaccuracies the Commission 

acknowledged when it adopted the 

competitive market test in the BDS 

Order. In the BDS Order, the 

Commission conceded that its countybased competitive market test 

unavoidably included a relatively small 

number of areas that would be 

inappropriately regulated or 

inappropriately deregulated. It 

explained that the only competitive 

market test that would be free of such 

inaccuracies would be one that would 

be run at a building level—with over a 

million buildings with BDS demand, an 

administratively unworkable option. It 

adopted percentage thresholds for both 

prongs of the competitive market test 

and employed certain statistical tools to 

ensure those thresholds were set at 

levels that would minimize 

inaccuracies. It further reasoned that 

competitive options would become 

available for many of these areas in the 

short- to medium-term given the 

dynamic nature of the BDS marketplace. 

95. The Petitioners’ study attempts to 

compare A–CAM areas to some of the 

very price cap areas most likely to 

contain these inaccuracies and to argue 

that these inaccuracies justify inclusion 

of rural A–CAM areas in the price cap 

competitive market test. Extrapolating 

from the characterization of peripheral 

parts of price cap study areas to A–CAM 

areas is likely to exacerbate these 

inaccuracies. And unnecessarily so, 

since the competitive market test we 

adopt offers a simple way of estimating 

competition in A–CAM study areas. 

Further, these are areas the study 

concedes typically lack even the most 

basic evidence of BDS competition. 

Areas where there is little evidence of 

competition are also likely areas where 

there is little to no demand for BDS. 

96. Given these methodological and 

conceptual flaws, we conclude that the 

Petitioners’ study fails to establish the 

comparability of price cap and nearby 

A–CAM areas or provide a reasonable 

basis on which to include A–CAM areas 

in the price cap competitive market test. 

We therefore decline to apply the results 

of the price cap competitive market test 

to electing carriers’ serving areas. 

4. Updating Competitive Market Test 

Results 

97. Consistent with the BDS Order 

competitive market test, we eliminate ex 

ante pricing regulation of circuit-based 

end user channel terminations at or 

below a DS3 level in study areas 

deemed competitive by the electing 

carriers’ competitive market test. We 

direct the Bureau to release a Public 

Notice that lists the results of the 

competitive market test, and to provide 

the information on the Commission’s 

website. We will re-run the electing 

carriers’ competitive market test every 

three years to assess whether any 

additional electing carriers’ study areas 

meet the 75% threshold. This will 

identify any additional electing carriers’ 

study areas that should be deemed 

competitive. We believe a three-year 

timeframe balances the need to ensure 

the electing carriers’ competitive market 

test remains accurate and the 

Commission’s desire to avoid disrupting 

contracts and burdening carriers with 

overly frequent updates. The sunk and 

irreversible cost of providing business 

data services and deploying a network 

represents the biggest barrier to entry for 

providers. Once the barrier is overcome, 

the marginal cost of operating is low, so 

it is unlikely that competition will exit. 

Thus, electing carriers’ study areas 

deemed competitive will not be 

reassessed. 

98. To avoid confusion from both 

carriers and businesses stemming from 

updates from the price cap competitive 

market test and the electing carriers 

competitive market test, we direct the 

Wireline Competition Bureau to re-run 

the three-year updates for both the BDS 

Order price cap competitive market test, 


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and the electing carriers competitive 

market test concurrently. Thus, the 

electing carriers’ competitive market test 

will initially be re-run in 2020, at the 

same time as the BDS Order price cap 

competitive market test, to align the 

tests’ timing. The re-running of these 

tests will coincide with the initial 

running of the test for carriers electing 

to convert to incentive regulation as of 

July 1, 2020. After that, both tests will 

be re-run every three years. This 

approach will make it easier for 

stakeholders to determine the regulatory 

status of price cap and rate-of-return 

BDS providers since the results will be 

published all at once and ease the 

burden on Commission resources. The 

Bureau shall release a Public Notice that 

lists newly competitive counties (for 

price cap areas) and study areas (for 

electing carriers’ study areas) and shall 

also provide this information on the 

Commission’s website. As with the BDS 

Order competitive market test, parties 

may challenge the results of the electing 

carriers’ competitive market test by 

filing petitions for reconsideration or by 

seeking full Commission review through 

an application for review. 

5. Removal of Ex Ante Pricing 

Regulation of Electing Carriers’ Lower 

Capacity TDM End User Channel 

Termination Services 

99. We remove ex ante pricing 

regulation from electing carriers’ lower 

capacity TDM end user channel 

termination services offered in study 

areas that are deemed competitive by 

the electing carriers’ competitive market 

test. Such services are presumed to be 

subject to sufficient competitive 

pressure that removing this layer of 

regulation will not result in excessive 

rates. Removing this layer of regulation 

will reduce unnecessary regulatory 

burdens and will enable these carriers to 

contribute to BDS competition in their 

markets. Such services in such areas 

will be relieved of ex ante pricing 

regulation and detariffed in the same 

manner and with the same transition 

provisions as we adopt today for 

electing carriers’ packet-based and 

higher capacity TDM BDS. As with 

packet-based and higher capacity TDM 

BDS, we continue to maintain our 

oversight over these TDM services 

pursuant to sections 201, 202, and 208 

of the Act to ensure rates for these 

services remain just and reasonable. 

Lower capacity TDM transport and end 

user channel termination services in 

areas deemed noncompetitive by the 

competitive market test will continue to 

be subject to the incentive regulation 

and pricing flexibility we adopt today. 

D. Ending Ex Ante Pricing Regulation 

for Electing Carriers’ Packet-Based and 

Higher Capacity TDM BDS Offerings 

100. We conclude that electing 

carriers’ packet-based and higher 

capacity TDM-based BDS offerings 

above a DS3 bandwidth level (which 

includes both higher capacity TDM end 

user channel terminations and higher 

capacity TDM transport) should not be 

subject to ex ante pricing regulation and 

direct electing carriers to detariff these 

services following a transition period. 

Our decision to end ex ante pricing 

regulation for electing carriers’ packetbased and higher capacity TDM BDS 

offerings will facilitate competition for 

and deployment of these packet-based 

and higher capacity TDM services and 

is consistent with the Commission’s 

statutory obligation to ensure that rates 

are just and reasonable. 

101. In the BDS Order, after reviewing 

an extensive record, the Commission 

found that in price cap markets 

nationwide there was no compelling 

evidence of incumbent LEC market 

power for packet-based and higher 

capacity circuit-based BDS. Specifically, 

the record demonstrated that demand 

for these services was increasing, prices 

were declining, and competitive 

investment was growing significantly. 

The Commission also determined that 

the price cap BDS market for packetbased and higher capacity TDM-based 

offerings had the characteristics of a 

bidding market such that even 

competitors that did not have preexisting facilities to serve a potential 

customer were nonetheless capable and 

willing to bid on requests for proposals 

by customers, particularly those with 

higher bandwidth needs. 

102. The record in this proceeding 

lacks the comprehensive and 

voluminous data collection available to 

the Commission in the price cap BDS 

proceeding. But, we recognize that recreating such a similarly detailed data 

collection would have been more 

difficult for rate-of-return carriers that 

receive fixed support, because they have 

vastly fewer resources to produce such 

information and the benefits of such a 

data collection would likely be far 

outweighed by its costs. Instead, we 

draw parallels where we can from our 

conclusions in the BDS Order to inform 

our analysis of the record in this 

proceeding. 

103. In the BDS Order, the fact that 

the Commission could not find 

compelling evidence to suggest market 

power in packet-based and higher 

capacity TDM BDS in price cap markets 

suggests that the same circumstances 

could exist in electing carriers’ BDS 

markets. A variety of companies are 

investing in next generation networks, 

not legacy networks, to compete via 

different technologies, which is 

consistent with a lack of market power. 

Additionally, demand for high speed 

BDS exists nationwide. Customer 

requests for proposals (RFPs) are not 

restricted to price cap areas but seek 

proposals for service wherever they 

have demand. Thus, the characteristics 

of a bidding market that exist in price 

cap areas are also likely to be present in 

areas served by rate-of-return carriers 

that receive fixed support. 

104. Relatedly, there is evidence that 

the deployment of fiber and sales of 

packet-based BDS such as Ethernet 

continue to grow substantially and 

pervasively. Analysts report that, for the 

first time, fiber-connected commercial 

building penetration exceeded 50% in 

2017—the availability of optical fiber 

connectivity to large and medium size 

commercial buildings in the U.S. 

increased from 49.6% in 2016 to 54.8% 

in 2017. In 2018, 98% of our nation’s 

elementary and secondary school 

districts are served by fiber optic or 

other high speed connections. An 

analyst’s equipment revenue forecast for 

2017 to 2022 projects that Ethernet 

access and aggregation will grow 9% 

annually. The record in this proceeding 

shows that these growth trends are also 

apparent in A–CAM carriers’ served 

areas. For example, TDS Telecom, Great 

Plains, and Consolidated report a fouryear average annual growth rate in 

Ethernet sales from December 2014 to 

2017 of 10.7%, 15.4%, and 38.3%, 

respectively. Over the same periods, 

these carriers report declines in legacy 

BDS in study areas that were similar to 

declines in legacy BDS in price cap 

areas. At the same time, consistent with 

the Commission’s findings in the BDS 

Order, analysts report actual and 

forecasted growth in cable revenues, 

deployment and market share for small 

to national enterprise customers that are 

significantly contributing to overall 

growth and competition in the BDS 

market. 

105. There are other reasons to believe 

market power for packet-based and 

higher capacity TDM business data 

services is not present in areas served by 

rate-of-return carriers that receive fixed 

support. The record shows that large 

customers have significant bargaining 

leverage over relatively smaller rate-ofreturn carriers that receive fixed 

support, limiting what the carriers may 

negotiate when bidding on contracts. 

For example, ex ante pricing regulation 

is unnecessary to protect large and 

powerful entities, such as wireless 


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carriers, that purchase large quantities 

of BDS. 

106. The Commission has repeatedly 

emphasized its preference for relying on 

competition instead of regulation. We 

seek to minimize the burdens of 

regulation while ensuring that rates and 

practices remain just and reasonable. 

The Commission previously identified 

packet-based services as the ‘‘future of 

business data services’’ that are also 

‘‘readily scalable.’’ While legacy TDM 

BDS is declining, carriers, including 

rate-of-return carriers that receive fixed 

support, are generally investing 

aggressively to deploy high speed 

networks in their study areas. The 

record shows growing demand for 

packet-based and higher capacity TDM 

BDS consistent with the Commission’s 

findings in the BDS Order, and we find 

the record persuasive. 

107. Removing ex ante pricing 

regulation for packet-based and higher 

capacity TDM services, will also 

encourage innovation. As the 

Commission has previously found, the 

potential unintended costs of regulation 

are far greater for new services. The 

Commission has concluded that ex ante 

pricing regulation for these services 

should not be imposed even with 

‘‘insufficiently robust competition’’ 

because it would be difficult to 

administer such complex regulations. 

We are keenly aware of the risk that 

heavy-handed regulation could 

discourage competitive investment 

which would have long-term negative 

consequences on competitive 

deployment over time. 

108. These considerations also apply 

to the study areas of rate-of-return 

carriers that receive fixed support. 

Innovation does not stop at the borders 

of a price cap carrier’s study areas. The 

record shows that all providers are 

accelerating their deployment of next 

generation packet-based services in 

response to customer demand. We find 

that the sensitivity of new and growing 

services to imprecise regulation, 

particularly rate regulation, is a factor in 

areas served by rate-of-return carriers 

receiving fixed support as well as areas 

served by price cap carriers. For that 

reason, consistent with our decision in 

the BDS Order, we find that the costs 

and potential risks of ex ante pricing 

regulation for packet-based and higher 

capacity TDM business data services 

exceed the benefits and we therefore 

eliminate such regulation. This result 

provides regulatory parity between 

electing carriers and price cap carriers 

in their provision of packet-based and 

higher capacity TDM business data 

services which will benefit consumers. 

109. We eliminate ex ante pricing 

regulation on the provision of these 

services by electing carriers to hasten 

deployment of advanced services and 

because competition and the size of 

purchasers of these services is sufficient 

to protect consumers. We affirm, 

however, that the Commission retains 

authority under sections 201, 202, and 

208 of the Act to ensure that packetbased and higher capacity TDM BDS 

rates and practices are just, reasonable, 

and not unreasonably discriminatory. 

The availability of the protections of 

sections 201 and 202, and the 

importance of the formal fast-track 

complaint process of section 208, will 

provide sufficient protection against 

unreasonable rates and practices in this 

increasingly competitive market. 

E. Implementation Issues 

110. We take a series of additional 

steps to ensure electing carriers will be 

able fully to implement the BDS 

regulatory framework we adopt today, 

including adopting deadlines for 

implementing incentive regulation, 

forbearing from cost assignment and 

jurisdictional separations rules, 

forbearing from § 54.1305 reporting 

requirements, forbearing from section 

203 tariffing requirements, allowing 

electing carriers to elect to use GAAP 

accounting instead of part 32 

accounting, and adopting certain 

transitional timeframes to facilitate the 

detariffing of electing carriers’ packetbased and higher capacity TDM 

offerings. 

1. Effective Date of Elections 

111. We adopt the following 

requirements to implement voluntary 

incentive regulation for electing carriers. 

We adopt the proposal in the NPRM to 

make incentive regulation for electing 

carriers effective as of July 1, 2019 and 

add a second election date option for 

carriers that will be effective July 1, 

2020. We agree with Petitioners that a 

January 1, 2019 effective date would be 

the least burdensome for carriers 

because cost studies are performed on a 

calendar year basis and ‘‘would benefit 

customers and competition alike.’’ 

However, a January 1, 2019 effective 

date is not practicable because the rules 

adopted in this Order contain new or 

modified information collection 

requirements triggering Paperwork 

Reduction Act review by the Office of 

Management and Budget (OMB), a 

process which takes approximately five 

months to complete. A January 1, 2019 

effective date would also provide 

insufficient time for electing carriers in 

the traffic-sensitive NECA pool to 

remove their BDS offerings from the 

pool. Our rules require that annual 

access charge tariff filings be filed with 

a scheduled effective date of July 1. As 

such, a July 1 effective date is consistent 

with current tariffing procedures and 

will simplify the implementation of the 

changes adopted in this Order. 

112. Similarly, we adopt July 1 as the 

effective date for any future election. 

July 1 is the most efficient effective date 

because allowing carriers accepting 

future offers of A–CAM support to set 

their initial rates on another date would 

add cost and complexity to the process. 

Petitioners suggest using a January 1 

effective date but doing so would 

require an electing carrier to make an 

additional tariff filing beyond the 

required July 1 annual filing. NECA, and 

the Commission, would have to 

undertake their associated review of the 

tariff, and NECA would be required to 

conduct its mid-year cost studies for the 

remaining pool members, calculate 

support for existing members, reband, 

and undertake other steps it would not 

do otherwise. Additionally, a January 1 

effective date would be based on the 

previous year’s cost study. Relying on 

year-old data would undermine the 

validity of the tariff filings. It is possible 

that an electing carrier could prepare a 

cost study for only a portion of the 

current year and multiply the results of 

the study to estimate a year’s data, but 

that approach creates additional 

burdens for carriers, complicates 

NECA’s implementation, and would 

still not represent a fully accurate 

picture of the carrier’s costs and 

demand. When considered together, we 

find that using July 1 as a deadline for 

setting initial rates in any future A– 

CAM offer is the most efficient and 

feasible approach. 

113. Electing carriers currently in the 

NECA pool are required to notify NECA 

by March 1, 2019 that they will not 

participate in the upcoming NECA 

traffic-sensitive tariff for their BDS 

offerings consistent with § 69.3 of our 

rules. Similarly, NECA pool carriers that 

elect to convert to incentive regulation 

effective July 1, 2020, must notify NECA 

that they will not participate in the 

NECA traffic-sensitive pool for BDS 

offerings by March 1, 2020. NECA pool 

carriers that accept future offers of A– 

CAM support and elect the incentive 

regulation framework we adopt today or 

otherwise transition away from legacy 

support mechanisms must notify NECA 

by March 1 of their election year 

consistent with § 69.3. The Commission 

proposed requiring electing carriers to 

provide the Bureau with 120 days’ 

notice of their election to facilitate 

implementation of the revised tariffs but 

we now agree with Petitioners that 


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opposed granting so much advanced 

notice. Accordingly, we require electing 

carriers electing to convert to incentive 

regulation effective July 1, 2019 to 

provide the Bureau with notice of their 

election by May 1, 2019. Carriers that 

elect our second incentive regulation 

option date, effective July 1, 2020, must 

notify the Bureau by May 1, 2020. 

Carriers that accept future offers of A– 

CAM support and carriers that 

otherwise transition away from legacy 

support mechanisms must provide 

notice of their election or transition to 

the Bureau by May 1 of the year of 

election or transition. Electing carriers 

that choose to update their separations 

category relationships pursuant to this 

Order shall include information to that 

effect in these notices to NECA and the 

Bureau. 

2. Implementing Forbearance 

114. As part of implementing our new 

regulatory framework for electing 

carriers’ BDS, we grant forbearance from 

certain existing Commission rules and 

statutory requirements, including our 

tariffing obligations for electing carriers’ 

packet-based and higher capacity (i.e., 

above a DS3 bandwidth level) TDM 

business data services and lower 

capacity TDM end user channel 

termination services in study areas 

deemed competitive; our Cost 

Assignment Rules; and our § 54.1305 

reporting requirements, for electing 

carriers’ lower capacity (i.e., at or below 

a DS3 bandwidth level) TDM transport 

and end user channel termination 

services. Forbearance will be effective 

July 1, 2019 for carriers electing 

incentive regulation of their business 

data services as of July 1, 2019, and July 

1, 2020 for carrier’s electing incentive 

regulation as of July 1, 2020. Section 10 

of the Act requires that the Commission 

forbear from applying any provision of 

the Act, or any of the Commission’s 

regulations, if the Commission 

determines that: (1) Enforcement of the 

provision or regulation is not necessary 

to ensure that a telecommunications 

carrier’s ‘‘charges, practices, 

classifications or regulations’’ are ‘‘just 

and reasonable and are not unjustly or 

unreasonably discriminatory,’’ (2) 

enforcement of the provision or 

regulation is ‘‘not necessary for the 

protection of consumers,’’ and (3) 

forbearance is consistent with the public 

interest. In making the public interest 

determination, the Commission must 

also consider, pursuant to section 10(b), 

‘‘whether forbearance from enforcing 

the provision or regulation will promote 

competitive market conditions.’’ We 

find that granting forbearance in these 

instances will meet the statutory 

forbearance requirements and will 

facilitate electing carriers’ transition to 

incentive regulation, putting them on a 

footing similar to that of price cap 

carriers in their provision of BDS. 

a. Forbearance from Tariffing 

Requirements for Packet-Based and 

Higher Capacity TDM Services and 

Lower Capacity TDM End User Channel 

Terminations in Study Areas Deemed 

Competitive 

115. In order to effectuate our lighttouch regulatory framework for packetbased and higher capacity TDM 

business data services above the DS3 

bandwidth level, we grant forbearance, 

pursuant to section 10 of the Act, from 

section 203 tariffing requirements for 

these services offered by electing 

carriers. In addition, we grant 

forbearance for lower capacity TDM end 

user channel terminations offered in 

electing carriers’ study areas deemed 

competitive by the competitive market 

test. Forbearance from section 203 

tariffing obligations is warranted under 

section 10 of the Act, is consistent with 

our finding that electing carriers lack 

market power in packet-based and 

higher capacity TDM business data 

services, and end user channel 

terminations in study areas deemed 

competitive by the competitive market 

test, and will enhance competition and 

deployment of these next generation 

services. 

116. Forbearance from section 203 

tariffing requirements for packet-based 

and higher capacity TDM BDS offerings 

above the DS3 bandwidth level, and for 

lower capacity TDM end user channel 

terminations in study areas deemed 

competitive by the competitive market 

test, satisfies all three prongs of the 

forbearance analysis. First, pursuant to 

section 10(a)(1), we conclude in the 

context of growing demand for high 

speed services detariffing these services 

will promote competitive market 

conditions, which will result in lower 

prices and better services, thus ensuring 

that electing carriers’ relevant charges, 

practices, classifications, and 

regulations are just and reasonable and 

not unreasonably discriminatory. 

Similarly, the existence of demonstrated 

competition for end user channel 

terminations in markets deemed 

competitive will restrain 

anticompetitive behavior, lower prices, 

increase innovation, and protect 

consumers from charges, practices, 

classifications, and regulations that are 

not just and reasonable and 

unreasonably discriminatory. 

Competition will serve to limit electing 

carriers’ behavior. Absent forbearance, 

as commenters argue, Commission 

regulation could have the inverse effect 

and harm competition and network 

deployment. 

117. We also conclude that, pursuant 

to section 10(a)(2), enforcement of our 

tariffing requirements for these services 

is ‘‘not necessary for the protection of 

consumers.’’ Indeed, by encouraging 

competition, granting forbearance from 

tariffing of these services will benefit 

consumers by increasing deployment 

and lowering cost. Competition among 

carriers and the roll-out of next 

generation packet-based and higher 

capacity TDM circuit-based BDS will 

lower prices and provide new services. 

In study areas deemed competitive, 

competition will also protect 

consumers. The Commission has 

previously found that tariffs were 

originally required to protect consumers 

but they are unnecessary if a provider 

faces competitive pressures. If an 

electing carrier harms a consumer the 

consumer can switch to other 

competitors present in the study area. 

This threat protects consumers. Of 

course, in the event that there is risk of 

consumer harm, sections 201, 202, and 

208 remain applicable to enforce the 

Commission’s rules and protect 

consumers’ welfare. Based on 

competition in the market and our 

statutory mandate as a backstop, we find 

that section 203 is not necessary to 

protect consumers in electing carriers’ 

packet-based and higher capacity TDM 

markets, and for lower capacity TDM 

end user channel termination in study 

areas deemed competitive by the 

electing carriers’ competitive market 

test. 

118. Third, we conclude that 

forbearance from these statutory and 

regulatory requirements is in the public 

interest. Forbearance from the tariffing 

requirement for these packet-based and 

higher capacity TDM services and for 

lower capacity TDM end user channel 

terminations in markets deemed 

competitive will promote competition, 

reduce compliance costs, increase 

investment and innovation, and 

facilitate the technology transitions. We 

therefore find that application of section 

203 is not necessary under sections 

10(a)(1) and 10(a)(2), and is in the 

public interest, consistent with sections 

10(a)(3) and 10(b). 

b. Cost Assignment Rules Forbearance 

119. In light of our decision to relieve 

electing carriers of the obligation to 

conduct cost studies, we grant electing 

carriers forbearance, pursuant to section 

10 of the Act, from the Commission’s 

Cost Assignment Rules for their BDS 

services, although we grant forbearance 

for their lower capacity (i.e., at or below 


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a DS3 bandwidth level) TDM transport 

and end user channel termination 

services after they have set initial rates 

for those offerings. Additionally, 

electing carriers that participate in the 

NECA pool must conduct cost studies 

for the calendar year prior to their 

election and the first half of the year of 

their election to comply with their pool 

settlement requirements. 

120. Background. The Cost 

Assignment Rules generally require 

carriers to assign costs to build and 

maintain the network and revenues 

from services provided to specific 

categories. Categories include 

nonregulated or regulated service, the 

intrastate or interstate jurisdiction, and 

specific access services, such as local 

switching or common line. The Cost 

Assignment Rules also govern the 

accounting treatment of transactions 

between a carrier and its affiliate, such 

as the sale or transfer of assets between 

regulated and nonregulated affiliates. In 

addition, the rules include certain 

reporting requirements, which depend 

on the availability of data produced by 

the Cost Assignment Rules. 

121. As part of the regulatory 

accounting process, carriers first 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. Next, using 

the Cost Assignment Rules in part 64, 

carriers directly assign, or allocate if 

direct assignment is not possible, the 

costs and revenues associated with their 

regulated and nonregulated activities. 

After costs and revenues are divided 

between those that are regulated and 

nonregulated, interstate and intrastate 

costs and revenues are separated as 

provided in part 36. Federal and state 

regulatory jurisdictions apply their own 

ratemaking processes to the amounts 

assigned to each jurisdiction. Finally, 

the access charge rules in part 69 

require carriers to separate regulated 

interstate costs into interexchange costs 

and access costs, and then apportion the 

latter among access categories or 

elements. 

122. The Commission adopted the 

Cost Assignment Rules to help ensure 

that carriers charge just and reasonable 

rates for the services they provide. The 

Commission adopted the Cost 

Assignment Rules prior to 1991 when 

all incumbent LECs were subject to rateof-return regulation, so that it could set 

rates that allowed carriers to recover 

their costs and earn a specific return on 

their regulated investment. 

Subsequently, the Commission moved 

away from rate-of-return regulation for 

the larger incumbent LECs. In its place, 

it adopted price cap regulation, a form 

of incentive regulation that seeks to 

‘‘harness the profit-making incentives 

common to all businesses to produce a 

set of outcomes that advance the public 

interest goals of just, reasonable, and 

nondiscriminatory rates, as well as a 

communications system that offers 

innovative, high quality services.’’ 

123. In 2008, the Commission granted 

AT&T conditional forbearance from the 

Cost Assignment Rules. The 

Commission conditioned the 

forbearance on, among other things, 

requiring AT&T to retain part 32 

Uniform System of Accounts data and 

submit a compliance plan describing in 

detail how it would fulfill its statutory 

and regulatory requirements. The 

Commission granted similar conditional 

forbearance from the Cost Assignment 

Rules to Verizon and Qwest. 

Subsequently, Qwest, Verizon, and 

AT&T obtained conditional forbearance 

from certain financial reporting 

requirements that relied on the Cost 

Assignment Rules. In 2013, the 

Commission extended the conditional 

forbearance granted the three carriers to 

all price cap carriers. 

124. In the Part 32 Order, 82 FR 

20833, May 4, 2017, the Commission 

terminated the conditions that the 

Commission placed on a variety of 

carriers granted forbearance from our 

Cost Assignment Rules. The 

Commission noted that forbearance was 

expressly premised on the continued 

availability of part 32 accounting data 

and the filing of compliance plans 

consistent with that condition. The 

Commission determined that continuing 

to maintain these costly requirements 

on the speculation that at some point 

the Commission might do something 

with them failed any cost-benefit 

analysis. 

125. Discussion. We find that 

applying the Cost Assignment Rules to 

electing carriers is no longer necessary 

to ensure that charges and practices are 

just, reasonable, and not unjustly or 

unreasonably discriminatory; to protect 

consumers; or to protect the public 

interest. Much of the reasoning in the 

Commission’s earlier decisions to grant 

price cap LECs forbearance from the 

Cost Assignment Rules applies equally 

to rate-of-return carriers receiving fixed 

support that elect incentive regulation. 

With respect to ensuring charges, 

practices, classifications, and 

regulations are just and reasonable and 

not unjustly or unreasonably 

discriminatory, as discussed above, the 

Cost Assignment Rules were developed 

when the incumbent LECs’ interstate 

rates and many of their intrastate rates 

were set under rate-based, cost-ofservice regulation. Because the 

incentive regulation we adopt severs for 

BDS the direct link between regulated 

costs and prices just as price cap 

regulation did, a carrier is not able 

automatically to recoup misallocated 

nonregulated costs by raising BDS rates, 

thus reducing incentives to shift 

nonregulated costs to regulated services. 

To the extent incentives remain, we find 

our positive experience with the 

waivers of the all-or-nothing rule 

provides confidence that the additional 

costs of maintaining the Cost 

Assignment Rules outweighs any 

possible benefit of maintaining them. 

There is no reason to impose on electing 

carriers cost assignment requirements 

that were ‘‘designed to parallel the level 

of detail in the cost-of-service 

calculations that LECs performed to 

develop their rates for interstate access 

services.’’ Moreover, if the need arises 

for cost data from electing carriers, we 

find there are less costly ways to meet 

that need. 

126. With respect to the second prong 

of the forbearance test, protecting 

consumers, the Commission adopted the 

Cost Assignment Rules in part to help 

protect consumers from improper crosssubsidization of competitive services 

provided on an integrated basis with 

noncompetitive services by dominant 

providers with individual market 

power. Because the rates for regulated 

services and the determination of the 

level of universal service support are no 

longer tied to accounting costs, electing 

carriers will have no incentive to shift 

costs between regulated and 

nonregulated services, or to services 

receiving universal service support, thus 

the consumer protection issues that 

animate the Cost Assignment Rules are 

not relevant for electing carriers. 

127. We also find that forbearing from 

the Cost Assignment Rules for electing 

carriers is in the public interest. Because 

neither rates nor universal service 

support will be cost-based for electing 

carriers, relieving electing carriers of the 

expense of compliance with the Cost 

Assignment Rules will allow electing 

carriers to offer more competitive rates 

and more innovative service, thus 

furthering the public interest. 

128. Finally, section 10(b) requires us 

to consider, as part of our analysis of the 

public interest prong, whether 

forbearance will promote competitive 

market conditions. We agree with 

Petitioners, TDS Telecom and other 

commenters that contend that 

forbearance will enhance competition. 

Eliminating unnecessary regulation will 

generally reduce electing carriers’ costs 

and, in turn, benefit consumers through 

lower rates and/or more vibrant 


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competitive offerings. Because other 

providers of similar services are not 

subject to the rules, it also promotes 

competition by providing a more level 

playing field. Moreover, as noted above, 

we find that sufficient protections 

remain in place to prevent anticompetitive cross-subsidization. 

129. We note that there still may be 

instances in which an electing carrier 

seeks some other type of relief from the 

Commission that requires supporting 

cost assignment data. In such instances, 

the burden is on the carrier to retain 

data sufficient to make the required 

showing to the Commission in support 

of such a carrier-initiated request. 

130. As part of our forbearance from 

the Cost Assignment Rules, we also 

forbear from the NECA data reporting 

requirement in § 54.1305 of our rules 

and, by extension, from the related 

requirement to update information 

shared with NECA. Under the 

Commission’s rules, incumbent LECs 

are required to report unseparated loop 

cost data to NECA annually. Price cap 

carriers and their affiliates have been 

exempt from this obligation since the 

Commission adopted the USF/ICC 

Transformation Order and various price 

cap cost assignment forbearance orders. 

This reporting requirement depends on 

the availability of data produced by the 

Cost Assignment Rules. As part of the 

forbearance adopted in this Order, we 

cease to require data that would 

otherwise be reported as part of a cost 

study. Retaining this obligation is thus 

inconsistent with our grant of 

forbearance and is inconsistent with 

past price cap carrier forbearance grants. 

Retaining this obligation would also 

eliminate one of the core incentives for 

rate-of-return carriers to elect incentive 

regulation—cost savings from the 

elimination of the obligation to 

undertake cost studies. 

131. Granting forbearance from NECA 

reporting requirements satisfies all three 

prongs of the forbearance analysis. The 

NECA data collection requirement is not 

necessary to ensure that carrier charges 

and practices are just and reasonable, as 

evidenced by the fact that price cap 

carriers have been operating without 

NECA reporting for nearly six years 

without issue. While no longer 

including electing carriers’ data in the 

calculation of the national average cost 

per loop will affect that calculation, we 

do not think that any impact it may 

have outweighs the benefits of removing 

these reporting obligations. Since the 

very goal of incentive regulation is to 

disconnect cost and rates to promote 

competition in the marketplace, 

reporting cost data to NECA is also 

unnecessary to protect consumers. 

Additionally, because forbearance from 

enforcing these rules is necessary to 

obtain the benefit of reducing 

unnecessary regulatory compliance 

costs this Order seeks, forbearance is 

consistent with the public interest. 

Retaining the data collection and 

reporting requirements of §§ 54.1305 

and 54.1306 would force electing 

carriers to continue to perform annual 

cost studies and would thus eliminate 

one of the chief sources of cost savings 

of this Order. Forbearing from these 

requirements will promote competition 

by allowing these resources to be 

redirected to increase network 

investment and to accelerate the 

technology transition from legacy 

circuit-based services to packet-based 

services such as Ethernet. 

3. GAAP Accounting 

132. We allow electing carriers the 

option of using generally accepted 

accounting principles (GAAP) for 

keeping their accounts. The only 

commenters that oppose allowing 

electing carriers to use GAAP 

accounting incorrectly argue that for 

electing carriers part 32, cost studies 

and other protections are necessary 

because ‘‘these electing carriers would 

continue to have certain of their 

interstate services under rate-of-return.’’ 

In fact, as explained by Petitioners, all 

of the interstate telecommunications 

services offered by electing carriers will 

either be (1) subject to incentive 

regulation, (2) not subject to ex ante 

pricing regulation, or (3) capped and 

transitioning downward by the terms of 

the rate-of-return intercarrier 

compensation rules. Thus, there is no 

significant reason to continue to 

maintain burdensome part 32 

accounting for electing carriers. 

133. The Commission recently revised 

its part 32 accounting rules to allow 

price cap LECs to elect to use GAAP in 

recording and reporting their financial 

data, subject to two targeted accounting 

requirements. We subject electing 

carriers that choose to use GAAP 

accounting to the same data 

provisioning requirements as price cap 

carriers, including the requirements 

relating to the calculation of pole 

attachment rates. Electing carriers may 

either (a) calculate an Implementation 

Rate Difference between the attachment 

rates calculated by the carrier under the 

Uniform System of Accounts (USOA) 

and under GAAP as of the last full year 

preceding the carrier’s initial opting-out 

of part 32 USOA accounting 

requirements; or (b) comply with GAAP 

accounting for all purposes other than 

those associated with setting pole 

attachment rates while continuing to 

use the part 32 accounts and procedures 

necessary to establish and evaluate pole 

attachment rates. Electing carriers must 

adjust their annually computed GAAPbased rates by the Implementation Rate 

Difference for a period of 12 years after 

the election. This will free electing 

carriers from having to maintain two 

sets of books: one for financial reporting 

purposes consistent with GAAP and one 

for regulatory reporting purposes 

consistent with the accounting 

requirements of part 32. 

4. Transitions 

134. Consistent with our actions in 

the BDS Order, our detariffing actions in 

this Order for electing carriers’ study 

areas will be mandatory after a 

transition that will provide electing 

carriers sufficient time to adapt their 

business data services operations to a 

detariffing regime. 

135. The transition period will begin 

on the date incentive regulation 

becomes effective for electing carriers, 

either July 1, 2019 or July 1, 2020, and 

will end thirty-six (36) months 

thereafter, a period that we find 

sufficient for electing carriers to adapt to 

a detariffing regime. In addition, for six 

(6) months following the date incentive 

regulation becomes effective, we require 

electing carriers to freeze the tariffed 

rates for their business data services that 

are no longer subject to ex ante pricing 

regulation, including lower speed TDM 

end user channel terminations in newly 

deregulated study areas, provided those 

services remain tariffed. These 

transition mechanisms will ensure that 

small businesses and other purchasers 

have time to adjust to the new 

regulatory framework we adopt. 

136. Similarly, carriers electing 

incentive regulation in connection with 

a subsequent offer of A–CAM support, 

or carriers that the Commission 

otherwise transitions away from legacy 

support mechanisms must detariff the 

relevant business data services within 

thirty-six (36) months of the date on 

which their incentive-based rates take 

effect or their transition away from 

legacy support mechanisms becomes 

effective. Further, for six (6) months 

following such dates, such carriers will 

be required to freeze their tariffed rates 

for BDS that are no longer subject to ex 

ante pricing regulation, provided those 

rates remain tariffed. 

137. Tariffing for these services will 

be permissive during the transition—we 

will accept new tariffs and revisions to 

existing tariffs for the affected services 

during this time period. Electing carriers 

may also detariff during the transition. 

Apart from the rate freeze noted above, 

carriers will no longer be required to 


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comply with ex ante pricing regulation 

for these services. Once the rules 

adopted in this Order are effective, 

carriers that wish to continue filing 

tariffs under the permissive detariffing 

regime are free to modify such tariffs to 

reflect the new regulatory structure 

outlined in this Order for the affected 

services. This will allow carriers to be 

more competitive and introduce new 

business data services as they adapt to 

detariffing. 

138. Electing carriers may remove the 

relevant portions of their tariffs for the 

affected services at any time during the 

transition, and the rate freeze does not 

apply to services that are no longer 

tariffed. Electing carriers may not file or 

maintain any interstate tariffs for 

affected business data services once the 

transition ends. This will prevent 

electing carriers from obtaining 

‘‘deemed lawful’’ status for tariff filings 

that are not accompanied by cost 

support and invoking the filed-rate 

doctrine in contractual disputes with 

customers. Business data service 

providers will also be prevented from 

picking and choosing when they are 

able to invoke the protections of tariffs. 

139. We do not intend our actions to 

disturb existing contractual or other 

long-term arrangements—a contract 

tariff remains a contract even if it is no 

longer tariffed. As we stated in the BDS 

Order, contract tariffs, term and volume 

discount plans, and individual circuit 

plans do not become void upon 

detariffing. All carriers are to act in good 

faith to develop solutions to ensure rates 

remain just and reasonable. 

III. Other Rule Changes 

140. We adopt several other rule 

changes which can be found set out 

below. These rule changes include 

changes arising from this Order as well 

as corrections to inaccuracies in our 

current rules. Thus, we change (1) the 

cross reference to § 61.3(aa) in 

§ 51.903(g) to § 61.3(bb), (2) the cross 

reference to § 61.3(ee) in § 61.41(d) to 

§ 61.3(ff), (3) the cross reference 

§ 61.3(x) in § 69.114 to § 61.3(ff), and (4) 

the cross reference to § 69.801(g) in 

§ 69.805(a) to § 69.801(h). These cross 

references have been rendered 

inaccurate because of changes in the 

definitions contained in § 61.3. 

IV. Final Regulatory Flexibility 

Analysis 

141. As required by the Regulatory by 

the Regulatory Flexibility Act of 1980, 

as amended (RFA) an Initial Regulatory 

Flexibility Analysis (IRFA) was 

incorporated into the Notice of 

Proposed Rulemaking (NPRM) for the 

rate-of-return business data services 

(BDS) proceeding. The Commission 

sought written public comment on the 

proposals in the NPRM, including 

comment on the IRFA. The Commission 

received no comments on the IRFA. 

Because the Commission amends its 

rules in this Report and Order, the 

Commission has included this Final 

Regulatory Flexibility Analysis (FRFA). 

This present FRFA conforms to the 

RFA. 

A. Need for, and Objectives of, the Rules 

142. In the NPRM, the Commission 

proposed to adopt a form of incentive 

regulation for the provision of business 

data services by rate-of-return carriers 

receiving fixed universal service 

support, conduct a market analysis to 

evaluate the characteristics of BDS 

markets served by rate-of-return carriers 

receiving fixed support, and adopt a 

new lighter touch regulatory framework 

for these carriers’ BDS that in most 

respects parallels the framework 

recently adopted for price cap carriers 

in the BDS Order. This Order provides 

a new framework for BDS offered by 

rate-of-return carriers that receive fixed 

support that minimizes unnecessary 

regulatory burdens on certain rate-ofreturn carriers and allows market forces 

to foster appropriate incentives for these 

carriers to be efficient, to innovate and 

to compete. 

143. In this Order, the Commission 

takes the next step in a series of steps 

to encourage carriers to move from rateof-return to incentive regulation, and to 

remove ex ante pricing regulation where 

competitive conditions justify doing so. 

This Order focuses on allowing rate-ofreturn carriers that currently receive 

fixed high-cost universal service 

support to voluntarily elect to transition 

out of rate-of-return regulation for their 

BDS offerings. In so doing, the 

Commission amends its rules to allow 

such carriers to move their lower 

capacity time division multiplexing 

(TDM) circuit-based transport and end 

user channel termination offerings to 

incentive regulation while providing a 

path for those carriers that elect our new 

framework (electing carriers) to 

demonstrate that their lower capacity 

circuit-based end user channel 

termination offerings are competitive, 

and therefore should not be subject to ex 

ante pricing regulation. We also remove 

ex ante pricing regulation from electing 

carriers’ higher capacity circuit-based 

and their packet-based BDS offerings. 

144. Allowing rate-of-return carriers 

that receive fixed support to move their 

BDS offerings away from rate-of-return 

regulation will help drive competition 

for BDS offerings in the communities 

served by those carriers. It will also 

reduce unnecessary regulatory burdens 

faced by electing carriers. They will no 

longer be required to provide cost-based 

justification for their BDS rates and will 

therefore no longer need to conduct 

annual cost studies to justify those rates. 

They will also no longer be required to 

file tariffs for their packed-based and 

higher capacity TDM-based end user 

channel terminations offerings in areas 

deemed competitive. The regulatory 

burdens on electing carriers, most of 

which are small entities, will be vastly 

reduced. 

145. We take these steps while 

affirming our core statutory obligations 

pursuant to sections 201, 202, and 208 

of the Communications Act to ensure 

that the rates and practices of these 

carriers’ BDS remain just, reasonable 

and not unreasonably discriminatory. 

Collectively, these actions will 

streamline regulation, and spur entry, 

investment, innovation, and 

competition in the affected BDS markets 

to the benefit of businesses and other 

institutional users that rely on these 

services. 

B. Summary of Significant Issues Raised 

by Public Comments in Response to the 

IRFA 

146. The Commission did not receive 

comments specifically addressing the 

rules and policies proposed in the IRFA. 

C. Response to Comments by the Chief 

Counsel for Advocacy of the Small 

Business Administration 

147. The Chief Counsel did not file 

any comments in response to this 

proceeding. 

D. Description and Estimate of the 

Number of Small Entities to Which the 

Rules Will Apply 

148. The RFA directs agencies to 

provide a description of, and where 

feasible, an estimate of the number of 

small entities that may be affected by 

the proposed rules, if adopted. The RFA 

generally defines the term ‘‘small 

entity’’ as having the same meaning as 

the terms ‘‘small business,’’ ‘‘small 

organization,’’ and ‘‘small governmental 

jurisdiction.’’ In addition, the term 

‘‘small business’’ has the same meaning 

as the term ‘‘small-business concern’’ 

under the Small Business Act. A smallbusiness 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). 

1. Total Small Entities 

149. Our proposed action, if 

implemented, may, over time, affect 


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small entities that are not easily 

categorized at present. We therefore 

describe here, at the outset, three 

comprehensive, statutory small entity 

size standards. First, as of 2013, the SBA 

estimates there are an estimated 28.8 

million small businesses nationwide— 

comprising some 99.9% of all 

businesses. In addition, a ‘‘small 

organization’’ is generally ‘‘any not-forprofit enterprise which is independently 

owned and operated and is not 

dominant in its field.’’ Nationwide, as of 

2007, there were approximately 

1,621,315 small organizations. Finally, 

the term ‘‘small governmental 

jurisdiction’’ is defined generally as 

‘‘governments of cities, towns, 

townships, villages, school districts, or 

special districts, with a population of 

less than fifty thousand.’’ Census 

Bureau data for 2012 indicate that there 

were 90,056 local governmental 

jurisdictions in the United States. We 

estimate that, of this total, as many as 

89,195 entities may qualify as ‘‘small 

governmental jurisdictions.’’ Thus, we 

estimate that most governmental 

jurisdictions are small. 

2. Broadband internet Access Service 

Providers 

150. internet Service Providers 

(Broadband). Broadband internet 

service providers include wired (e.g., 

cable, DSL) and VoIP service providers 

using their own operated wired 

telecommunications infrastructure fall 

in the category of Wired 

Telecommunication Carriers. Wired 

Telecommunications Carriers are 

comprised of establishments primarily 

engaged in operating and/or providing 

access to transmission facilities and 

infrastructure that they own and/or 

lease for the transmission of voice, data, 

text, sound, and video using wired 

telecommunications networks. 

Transmission facilities may be based on 

a single technology or a combination of 

technologies. The SBA size standard for 

this category classifies a business as 

small if it has 1,500 or fewer employees. 

U.S. Census data for 2012 show that 

there were 3,117 firms that operated that 

year. Of this total, 3,083 operated with 

fewer than 1,000 employees. 

Consequently, under this size standard 

the majority of firms in this industry can 

be considered small. 

3. Wireline Providers 

151. Wired Telecommunications 

Carriers. The U.S. Census Bureau 

defines this industry as ‘‘establishments 

primarily engaged in operating and/or 

providing access to transmission 

facilities and infrastructure that they 

own and/or lease for the transmission of 

voice, data, text, sound, and video using 

wired communications networks. 

Transmission facilities may be based on 

a single technology or a combination of 

technologies. Establishments in this 

industry use the wired 

telecommunications network facilities 

that they operate to provide a variety of 

services, such as wired telephony 

services, including VoIP services, wired 

(cable) audio and video programming 

distribution, and wired broadband 

internet services. By exception, 

establishments providing satellite 

television distribution services using 

facilities and infrastructure that they 

operate are included in this industry.’’ 

The SBA has developed a small 

business size standard for Wired 

Telecommunications Carriers, which 

consists of all such companies having 

1,500 or fewer employees. Census data 

for 2012 show that there were 3,117 

firms that operated that year. Of this 

total, 3,083 operated with fewer than 

1,000 employees. Thus, under this size 

standard, the majority of firms in this 

industry can be considered small. 

152. Incumbent Local Exchange 

Carriers (Incumbent LECs). Neither the 

Commission nor the SBA has developed 

a small business size standard 

specifically for incumbent LEC services. 

The closest applicable size standard 

under SBA rules is for the category 

Wired Telecommunications Carriers as 

defined above. Under that size standard, 

such a business is small if it has 1,500 

or fewer employees. According to 

Commission data, 3,117 firms operated 

in that year. Of this total, 3,083 operated 

with fewer than 1,000 employees. 

Consequently, the Commission 

estimates that most providers of 

incumbent local exchange service are 

small businesses that may be affected by 

the rules and policies adopted. A total 

of 1,307 firms reported that they were 

incumbent local exchange service 

providers. Of this total, an estimated 

1,006 have 1,500 or fewer employees. 

153. Competitive Local Exchange 

Carriers (Competitive LECs), 

Competitive Access Providers (CAPs), 

Shared-Tenant Service Providers, and 

Other Local Service Providers. Neither 

the Commission nor the SBA has 

developed a small business size 

standard specifically for these service 

providers. The appropriate NAICS Code 

category is Wired Telecommunications 

Carriers, as defined above. Under that 

size standard, such a business is small 

if it has 1,500 or fewer employees. U.S. 

Census data for 2012 indicate that 3,117 

firms operated during that year. Of that 

number, 3,083 operated with fewer than 

1,000 employees. Based on this data, the 

Commission concludes that the majority 

of Competitive LECS, CAPs, SharedTenant Service Providers, and Other 

Local Service Providers, are small 

entities. According to Commission data, 

1,442 carriers reported that they were 

engaged in the provision of either 

competitive local exchange services or 

competitive access provider services. Of 

these 1,442 carriers, an estimated 1,256 

have 1,500 or fewer employees. In 

addition, 17 carriers have reported that 

they are Shared-Tenant Service 

Providers, and all 17 are estimated to 

have 1,500 or fewer employees. Also, 72 

carriers have reported that they are 

Other Local Service Providers. Of this 

total, 70 have 1,500 or fewer employees. 

Consequently, based on internally 

researched FCC data, the Commission 

estimates that most providers of 

competitive local exchange service, 

competitive access providers, SharedTenant Service Providers, and Other 

Local Service Providers are small 

entities. 

154. We have included small 

incumbent LECs in this present RFA 

analysis. As noted above, a ‘‘small 

business’’ under the RFA is one that, 

inter alia, meets the pertinent small 

business size standard (e.g., a telephone 

communications business having 1,500 

or fewer employees), and ‘‘is not 

dominant in its field of operation.’’ The 

SBA’s Office of Advocacy contends that, 

for RFA purposes, small incumbent 

LECs are not dominant in their field of 

operation because any such dominance 

is not ‘‘national’’ in scope. We have 

therefore included small incumbent 

LECs in this RFA analysis, although we 

emphasize that this RFA action has no 

effect on Commission analyses and 

determinations in other, non-RFA 

contexts. 

155. Interexchange Carriers (IXCs). 

Neither the Commission nor the SBA 

has developed a definition for 

Interexchange Carriers. The closest 

NAICS Code category is Wired 

Telecommunications Carriers as defined 

above. The applicable size standard 

under SBA rules is that such a business 

is small if it has 1,500 or fewer 

employees. U.S. Census data for 2012 

indicates that 3,117 firms operated 

during that year. Of that number, 3,083 

operated with fewer than 1,000 

employees. According to internally 

developed Commission data, 359 

companies reported that their primary 

telecommunications service activity was 

the provision of interexchange services. 

Of this total, an estimated 317 have 

1,500 or fewer employees. 

Consequently, the Commission 

estimates that the majority of IXCs are 

small entities that may be affected by 

our rules. 


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156. Local Resellers. The SBA has 

developed a small business size 

standard for the category of 

Telecommunications Resellers. The 

Telecommunications Resellers industry 

comprises establishments engaged in 

purchasing access and network capacity 

from owners and operators of 

telecommunications networks and 

reselling wired and wireless 

telecommunications services (except 

satellite) to businesses and households. 

Establishments in this industry resell 

telecommunications; they do not 

operate transmission facilities and 

infrastructure. Mobile virtual network 

operators (MVNOs) are included in this 

industry. Under that size standard, such 

a business is small if it has 1,500 or 

fewer employees. Census data for 2012 

show that 1,341 firms provided resale 

services during that year. Of that 

number, all operated with fewer than 

1,000 employees. Thus, under this 

category and the associated small 

business size standard, the majority of 

these prepaid calling card providers can 

be considered small entities. 

157. Toll Resellers. The Commission 

has not developed a definition for Toll 

Resellers. The closest NAICS Code 

Category is Telecommunications 

Resellers. The Telecommunications 

Resellers industry comprises 

establishments engaged in purchasing 

access and network capacity from 

owners and operators of 

telecommunications networks and 

reselling wired and wireless 

telecommunications services (except 

satellite) to businesses and households. 

Establishments in this industry resell 

telecommunications; they do not 

operate transmission facilities and 

infrastructure. Mobile virtual network 

operators (MVNOs) are included in this 

industry. The SBA has developed a 

small business size standard for the 

category of Telecommunications 

Resellers. Under that size standard, such 

a business is small if it has 1,500 or 

fewer employees. Census data for 2012 

show that 1,341 firms provided resale 

services during that year. Of that 

number, 1,341 operated with fewer than 

1,000 employees. Thus, under this 

category and the associated small 

business size standard, the majority of 

these resellers can be considered small 

entities. According to Commission data, 

881 carriers have reported that they are 

engaged in the provision of toll resale 

services. Of this total, an estimated 857 

have 1,500 or fewer employees. 

Consequently, the Commission 

estimates that the majority of toll 

resellers are small entities. 

158. Other Toll Carriers. Neither the 

Commission nor the SBA has developed 

a definition for small businesses 

specifically applicable to Other Toll 

Carriers. This category includes toll 

carriers that do not fall within the 

categories of interexchange carriers, 

operator service providers, prepaid 

calling card providers, satellite service 

carriers, or toll resellers. The closest 

applicable NAICS Code category is for 

Wired Telecommunications Carriers as 

defined above. Under the applicable 

SBA size standard, such a business is 

small if it has 1,500 or fewer employees. 

Census data for 2012 show that there 

were 3,117 firms that operated that year. 

Of this total, 3,083 operated with fewer 

than 1,000 employees. Thus, under this 

category and the associated small 

business size standard, the majority of 

Other Toll Carriers can be considered 

small. According to internally 

developed Commission data, 284 

companies reported that their primary 

telecommunications service activity was 

the provision of other toll carriage. Of 

these, an estimated 279 have 1,500 or 

fewer employees. Consequently, the 

Commission estimates that most Other 

Toll Carriers are small entities that may 

be affected by rules adopted pursuant to 

the Order. 

159. Operator Service Providers 

(OSPs). Neither the Commission nor the 

SBA has developed a small business 

size standard specifically for operator 

service providers. The appropriate size 

standard under SBA rules is for the 

category Wired Telecommunications 

Carriers. Under that size standard, such 

a business is small if it has 1,500 or 

fewer employees. According to 

Commission data, 33 carriers have 

reported that they are engaged in the 

provision of operator services. Of these, 

an estimated 31 have 1,500 or fewer 

employees and two have more than 

1,500 employees. Consequently, the 

Commission estimates that the majority 

of OSPs are small entities. 

4. Wireless Providers—Fixed and 

Mobile 

160. Wireless Telecommunications 

Carriers (except Satellite). This industry 

comprises establishments engaged in 

operating and maintaining switching 

and transmission facilities to provide 

communications via the airwaves. 

Establishments in this industry have 

spectrum licenses and provide services 

using that spectrum, such as cellular 

services, paging services, wireless 

internet access, and wireless video 

services. The appropriate size standard 

under SBA rules is that such a business 

is small if it has 1,500 or fewer 

employees. For this industry, U.S. 

Census data for 2012 show that there 

were 967 firms that operated for the 

entire year. Of this total, 955 firms had 

employment of 999 or fewer employees 

and 12 had employment of 1000 

employees or more. Thus under this 

category and the associated size 

standard, the Commission estimates that 

the majority of wireless 

telecommunications carriers (except 

satellite) are small entities. 

161. The Commission’s own data— 

available in its Universal Licensing 

System—indicate that, as of October 25, 

2016, there are 280 Cellular licensees 

that will be affected by our actions 

today. The Commission does not know 

how many of these licensees are small, 

as the Commission does not collect that 

information for these types of entities. 

Similarly, according to internally 

developed Commission data, 413 

carriers reported that they were engaged 

in the provision of wireless telephony, 

including cellular service, Personal 

Communications Service, and 

Specialized Mobile Radio Telephony 

services. Of this total, an estimated 261 

have 1,500 or fewer employees, and 152 

have more than 1,500 employees. Thus, 

using available data, we estimate that 

the majority of wireless firms can be 

considered small. 

162. Wireless Communications 

Services. This service can be used for 

fixed, mobile, radiolocation, and digital 

audio broadcasting satellite uses. The 

Commission defined ‘‘small business’’ 

for the wireless communications 

services (WCS) auction as an entity with 

average gross revenues of $40 million 

for each of the three preceding years, 

and a ‘‘very small business’’ as an entity 

with average gross revenues of $15 

million for each of the three preceding 

years. The SBA has approved these 

definitions. 

163. Wireless Telephony. Wireless 

telephony includes cellular, personal 

communications services, and 

specialized mobile radio telephony 

carriers. As noted, the SBA has 

developed a small business size 

standard for Wireless 

Telecommunications Carriers (except 

Satellite). Under the SBA small business 

size standard, a business is small if it 

has 1,500 or fewer employees. 

According to Commission data, 413 

carriers reported that they were engaged 

in wireless telephony. Of these, an 

estimated 261 have 1,500 or fewer 

employees and 152 have more than 

1,500 employees. Therefore, a little less 

than one third of these entities can be 

considered small. 

5. Cable Service Providers 

164. Because section 706 requires us 

to monitor the deployment of broadband 

using any technology, we anticipate that 


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some broadband service providers may 

not provide telephone service. 

Accordingly, we describe below other 

types of firms that may provide 

broadband services, including cable 

companies, MDS providers, and 

utilities, among others. 

165. Cable and Other Subscription 

Programming. This industry comprises 

establishments primarily engaged in 

operating studios and facilities for the 

broadcasting of programs on a 

subscription or fee basis. The broadcast 

programming is typically narrowcast in 

nature (e.g. limited format, such as 

news, sports, education, or youthoriented). These establishments produce 

programming in their own facilities or 

acquire programming from external 

sources. The programming material is 

usually delivered to a third party, such 

as cable systems or direct-to-home 

satellite systems, for transmission to 

viewers. The SBA has established a size 

standard for this industry stating that a 

business in this industry is small if it 

has 1,500 or fewer employees. The 2012 

Economic Census indicates that 367 

firms were operational for that entire 

year. Of this total, 357 operated with 

less than 1,000 employees. Accordingly, 

we conclude that a substantial majority 

of firms in this industry are small under 

the applicable SBA size standard. 

166. Cable Companies and Systems 

(Rate Regulation). The Commission has 

developed its own small business size 

standards for the purpose of cable rate 

regulation. Under the Commission’s 

rules, a ‘‘small cable company’’ is one 

serving 400,000 or fewer subscribers 

nationwide. Industry data indicate that 

there are currently 4,600 active cable 

systems in the United States. Of this 

total, all but eleven cable operators 

nationwide are small under the 400,000- 

subscriber size standard. In addition, 

under the Commission’s rate regulation 

rules, a ‘‘small system’’ is a cable system 

serving 15,000 or fewer subscribers. 

Current Commission records show 4,600 

cable systems nationwide. Of this total, 

3,900 cable systems have fewer than 

15,000 subscribers, and 700 systems 

have 15,000 or more subscribers, based 

on the same records. Thus, under this 

standard as well, we estimate that most 

cable systems are small entities. 

167. Cable System Operators 

(Telecom Act Standard). The 

Communications Act also contains a 

size standard for small cable system 

operators, which is ‘‘a cable operator 

that, directly or through an affiliate, 

serves in the aggregate fewer than 1% of 

all subscribers in the United States and 

is not affiliated with any entity or 

entities whose gross annual revenues in 

the aggregate exceed $250,000,000.’’ 

There are approximately 52,403,705 

cable video subscribers in the United 

States today. Accordingly, an operator 

serving fewer than 524,037 subscribers 

shall be deemed a small operator if its 

annual revenues, when combined with 

the total annual revenues of all its 

affiliates, do not exceed $250 million in 

the aggregate. Based on available data, 

we find that all but nine incumbent 

cable operators are small entities under 

this size standard. The Commission 

neither requests nor collects information 

on whether cable system operators are 

affiliated with entities whose gross 

annual revenues exceed $250 million. 

Although it seems certain that some of 

these cable system operators are 

affiliated with entities whose gross 

annual revenues exceed $250 million, 

we are unable at this time to estimate 

with greater precision the number of 

cable system operators that would 

qualify as small cable operators under 

the definition in the Communications 

Act. 

168. All Other Telecommunications. 

‘‘All Other Telecommunications’’ is 

defined as follows: This U.S. industry is 

comprised of establishments that are 

primarily engaged in providing 

specialized telecommunications 

services, such as satellite tracking, 

communications telemetry, and radar 

station operation. This industry also 

includes establishments primarily 

engaged in providing satellite terminal 

stations and associated facilities 

connected with one or more terrestrial 

systems and capable of transmitting 

telecommunications to, and receiving 

telecommunications from, satellite 

systems. Establishments providing 

internet services or voice over internet 

protocol (VoIP) services via clientsupplied telecommunications 

connections are also included in this 

industry. The SBA has developed a 

small business size standard for ‘‘All 

Other Telecommunications,’’ which 

consists of all such firms with gross 

annual receipts of $32.5 million or less. 

For this category, census data for 2012 

show that there were 1,442 firms that 

operated for the entire year. Of these 

firms, a total of 1,400 had gross annual 

receipts of less than $25 million. 

Consequently, we estimate that the 

majority of All Other 

Telecommunications firms are small 

entities that might be affected by our 

action. 

E. Description of Projected Reporting, 

Recordkeeping, and Other Compliance 

Requirements for Small Entities 

169. Recordkeeping and Reporting. 

The rule revisions adopted in the Order 

include changes that will require 

electing rate-of-return carriers receiving 

fixed universal service support to make 

various revisions to their business data 

service tariffs. For example, rate-ofreturn carriers receiving fixed support 

that elect incentive regulation will be 

required to file Tariff Review Plans and 

incentive regulation tariffs for their 

lower capacity TDM BDS. Packet-based 

BDS and higher capacity TDM BDS end 

user channel termination and lower 

capacity TDM BDS end user channel 

terminations offered by electing carriers 

in study areas deemed competitive by a 

competitive market test will be relieved 

of ex ante pricing regulation and will be 

subject to permissive detariffing for a 

period of 36 months at which time they 

will be subject to mandatory detariffing. 

170. The Commission also 

incorporates a productivity factor (Xfactor) of 2.0% and GDP–PI as the 

inflation factor used to adjust price cap 

indexes in the first year of incentive 

regulation, and each year thereafter for 

electing carriers. Electing carriers will 

be required to revise their rates and 

tariff review plans for business data 

services in filings with the Commission 

to reflect the new X-factor. Finally, the 

Commission grants forbearance from the 

requirement in § 54.1305 of our rules 

annually to report unseparated loop 

costs and other accounting data to 

NECA. 

F. Steps Taken To Minimize the 

Significant Economic Impact on Small 

Entities and Significant Alternatives 

Considered 

171. The RFA requires an agency to 

describe any significant alternatives that 

it has considered in reaching its 

proposed approach, which may include 

(among others) the following four 

alternatives: (1) The establishment of 

differing compliance or reporting 

requirements or timetables that take into 

account the resources available to small 

entities; (2) the clarification, 

consolidation, or simplification of 

compliance or reporting requirements 

under the rule for small entities; (3) the 

use of performance, rather than design, 

standards; and (4) an exemption from 

coverage of the rule, or any part thereof, 

for small entities. 

172. Incentive Regulation. In the 

Order, the Commission sheds 

burdensome rate-of-return regulation in 

favor of lighter touch incentive 

regulation for electing carriers’ lower 

capacity TDM transport and end user 

channel termination services. 

Additionally, the Commission adopted 

the proposal in the NPRM to grant 

pricing flexibility to electing carriers’ 

lower capacity TDM transport and end 

user channel termination services under 


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incentive regulation similar to the 

pricing flexibility the Commission 

granted to price cap carriers’ lower 

capacity TDM end user channel 

terminations in areas deemed noncompetitive in the BDS Order. The 

pricing flexibility available to electing 

carriers, most of which are small 

entities, will enable them to sell their 

BDS using contract tariffs and term and 

volume discounts, enhancing their 

ability to respond to competition. 

173. Competitive Market Test. The 

Commission sought comment on four 

options for a competitive market test for 

electing rate-of-return carriers that 

receive fixed support. The option we 

selected is one of the least burdensome 

options and relies on existing Form 477 

data, avoiding any additional 

burdensome data collection. We did not 

adopt the proposal to use both prongs of 

the BDS Order competitive market test 

to assess the competitiveness of study 

areas served by rate-of-return carriers 

that receive fixed support despite its 

apparent simplicity because we found 

methodological and conceptual flaws in 

the proposal and in the study submitted 

by Petitioners to support the proposal. 

Among the flaws the Commission 

identified is that the study does not 

claim to be based on a representative 

sample of model-based rate-of-return 

carriers that receive fixed support, the 

study compares non-urbanized price 

cap areas with model-based rate-ofreturn areas that in some instances 

include urbanized areas, and some of 

the relevant counties included in the 

study were deemed non-competitive by 

the price cap competitive market test. 

Further, the Commission declined to 

adopt the other two options from the 

NPRM which would have required 

costly, time consuming, burdensome 

data collections. Instead, the Order 

found that the record supports adopting 

the second option from the NPRM 

which uses the second prong of the BDS 

Order competitive market test that is 

based on Form 477 data. As a result, ex 

ante pricing regulation of lower capacity 

TDM end user channel terminations 

will no longer apply in study areas 

served by rate-of-return carriers that 

receive fixed support that are deemed 

competitive. 

174. Packet-based and Higher 

Capacity TDM Business Data Services. 

The Commission removed ex ante 

pricing regulation for electing rate-ofreturn carriers’ packet-based and higher 

capacity TDM business data services 

and directed electing carriers to detariff 

these services following a transition 

period. This action is consistent with 

the Commission’s preference to 

minimize the burdens of regulation. 

175. X-factor. Rate-of-return carriers 

that receive fixed support that elect 

incentive regulation are required to file 

revised annual access charge tariffs 

every year, which become effective on 

July 1. The annual filings include 

submission of tariff review plans that 

are used to support revisions to the 

rates, including revisions that pertain to 

the X-factor. To ease the burden on the 

industry in connection with this filing, 

and because base period demand and 

the value of GDP–PI reflected in the 

price cap indices typically are not 

updated during a tariff year, the 

Commission permits electing carriers to 

use, in their filings implementing the 

2.0% X-factor, the same base period 

demand and value of GDP–PI as in the 

prior year’s annual filing. 

176. Periodic Revision to Competitive 

Market Test. Related to the competitive 

market test proposal, the Commission 

also proposed future periodic data 

collections to allow for market test 

updates for determining competitive 

and non-competitive areas. The periodic 

collections could have resulted in a 

significant reporting burden on small 

entities. Instead, the Commission 

adopted a process for updating the 

competitive market test every three 

years using the data from Form 477 that 

is already routinely filed by providers 

and thus entails no additional 

recordkeeping or reporting burden. 

177. Forbearance. The Commission 

granted forbearance, pursuant to section 

10 of the Act, from the Cost Assignment 

Rules for electing carriers, subject to the 

requirement relating to the calculation 

of pole attachment rates. The 

Commission found that the Cost 

Assignment Rules are no longer 

necessary to ensure that charges and 

practices are just, reasonable, and not 

unjustly or unreasonably 

discriminatory; to protect consumers; 

and to protect the public interest. The 

Commission found that the rules were 

no longer necessary for carriers 

converting to incentive regulation and 

that eliminating unnecessary regulation 

will generally reduce providers’ costs 

and provide a more level playing field 

because other providers of similar 

services are not subject to these 

requirements. 

178. Detariffing. To minimize 

economic impact, the Commission 

provides a transition period to provide 

electing rate-of-return carriers that 

receive fixed support with sufficient 

time to detariff their business data 

services. The Commission does not 

intend its actions to disturb existing 

contractual or other long-term 

arrangements, which it grandfathered 

and which continue to remain in effect 

for the length of the contract. 

G. Report to Congress 

179. The Commission will send a 

copy of the Report and Order, including 

this FRFA, in a report to be sent to 

Congress pursuant to the Congressional 

Review Act. In addition, the 

Commission will send a copy of the 

Report and Order, including this FRFA, 

to the Chief Counsel for Advocacy of the 

SBA. A copy of the Order and FRFA (or 

summaries thereof) will also be 

published in the Federal Register. 

V. Procedural Matters 

180. Paperwork Reduction Act 

Analysis. It was determined that the 

final rule makes only non-substantive 

changes to currently approved 

information collections and therefore 

does not require separate Paperwork 

Reduction Act approval. The rules are 

effective 60 days after publication in the 

Federal Register. In addition, we note 

that pursuant to the Small Business 

Paperwork Relief Act of 2002, we 

previously sought specific comment on 

how the Commission might further 

reduce the information collection 

burden for small business concerns with 

fewer than 25 employees. We describe 

impacts that might affect small 

businesses, which includes most 

businesses with fewer than 25 

employees, in the Final Regulatory 

Flexibility Analysis in Section IV above. 

181. Congressional Review Act. The 

Commission will send a copy of this 

Report and Order to Congress and the 

Government Accountability Office 

pursuant to the Congressional Review 

Act, see 5 U.S.C. 801(a)(1)(A). 

182. Final Regulatory Flexibility 

Analysis. As required by the Regulatory 

Flexibility Act (RFA), an Initial 

Regulatory Flexibility Analysis (IRFA) 

was incorporated into the NPRM. The 

Commission sought written public 

comment on the possible significant 

economic impact on small entities 

regarding the proposals addressed in the 

NPRM, including comments on the 

IRFA. Pursuant to the RFA, a Final 

Regulatory Flexibility Analysis is set 

forth in Section IV above. 

183. Contact Person. For further 

information about this proceeding, 

please contact Justin Faulb, FCC 

Wireline Competition Bureau, Pricing 

Policy Division, 445 12th Street SW, 

Washington, DC 20554, (202) 418–1589, 

Justin.Faulb@fcc.gov. 

VI. Ordering Clauses 

184. Accordingly, it is ordered that, 

pursuant to sections 1, 2, 4(i)–(j), 10, 

201(b), 202(a), 214, 303(r), 403, of the 


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Federal Register / Vol. 83, No. 248 / Friday, December 28, 2018 / Rules and Regulations 67121 

Communications Act of 1934, as 

amended, and section 706 of the 

Telecommunications Act of 1996, 47 

U.S.C. 151, 152, 154(i)–(j), 160, 201(b), 

202(a), 214, 303(r), 403, 1302, this 

Report and Order IS ADOPTED and 

shall be effective sixty (60) days after 

publication in the Federal Register, 

except to the extent expressly addressed 

below. 

185. It is further ordered that parts 1, 

32, 51, 61, and 69 of the Commission’s 

rules, 47 CFR parts 1, 32, 51, 61, and 69, 

are amended as set forth below, and that 

such rule amendments shall be effective 

sixty (60) days after publication of this 

Report and Order in the Federal 

Register. 

186. It is further ordered that pursuant 

to sections 201(b) and 202(a) of the 

Communications Act of 1934, as 

amended, 47 U.S.C. 201(b), 202(a), rateof-return carriers electing to offer 

business data services shall freeze the 

tariffed rates for packet-based and 

higher capacity TDM services and for 

TDM end-user channel terminations at 

or below a DS3 in study areas deemed 

competitive that the rate-of-return 

carrier continues to tariff for six (6) 

months following the applicable 

effective date of the carrier’s election. 

187. It is further ordered that the 

Commission’s Consumer & 

Governmental Affairs Bureau, Reference 

Information Center, shall send a copy of 

this Report and Order to Congress and 

the Government Accountability Office 

pursuant to the Congressional Review 

Act, see 5 U.S.C. 801(a)(1)(A). 

188. It is further ordered, that the 

Commission’s Consumer & 

Governmental Affairs Bureau, Reference 

Information Center, shall send a copy of 

this Report and Order to the Chief 

Counsel for Advocacy of the Small 

Business Administration. 

List of Subjects 

47 CFR Part 1 

Communications common carriers, 

Reporting and recordkeeping, 

Telecommunications. 

47 CFR Part 32 

Communications, Reporting and 

recordkeeping requirements, Telephone, 

Uniform System of Accounts. 

47 CFR Part 51 

Communications common carriers, 

Telecommunications. 

47 CFR Part 61 

Communications common carriers, 

Radio, Reporting and recordkeeping 

requirements, Telegraph, Telephone. 

47 CFR Part 69 

Communications common carriers, 

Reporting and recordkeeping 

requirements, Telephone. 

Federal Communications Commission 

Marlene Dortch, 

Secretary. 

RULES 

The Federal Communications 

Commission amends 47 CFR parts 1, 32, 

51, 61, and 69 as follows: 

PART 1—PRACTICE AND 

PROCEDURE 

■ 1. The authority citation for part 1 

continues to read as follows: 

Authority: 47 U.S.C. 151, 154(i) and (j), 

155, 157, 160, 201, 224, 225, 227, 303, 309, 

310, 332, 1403, 1404, 1451, 1452, and 1455. 

■ 2. Section 1.1406 is amended by 

adding paragraph (e) to read as follows: 

§ 1.1406 Commission consideration of the 

complaint. 

* * * * * 

(e) A price cap company, or a rate-ofreturn carrier electing to provide service 

pursuant to § 61.50 of this chapter, that 

opts-out of part 32 of this chapter may 

calculate attachment rates for its poles, 

ducts, conduits, and rights of way using 

either part 32 accounting data or GAAP 

accounting data. A company using 

GAAP accounting data to compute rates 

to attach to its poles, ducts, conduits, 

and rights of way in any of the first 

twelve years after opting-out must 

adjust (increase or decrease) its annually 

computed GAAP-based rates by an 

Implementation Rate Difference for each 

of the remaining years in the period. 

The Implementation Rate Difference 

means the difference between 

attachment rates calculated by the 

carrier under part 32 and under GAAP 

as of the last full year preceding the 

carrier’s initial opting-out of part 32 

USOA accounting requirements. 

PART 32—UNIFORM SYSTEM OF 

ACCOUNTS FOR 

TELECOMMUNICATIONS COMPANIES 

■ 3. The authority citation for part 32 

continues to read as follows: 

Authority: 47 U.S.C. 219, 220 as amended, 

unless otherwise noted. 

■ 4. Section 32.1 is revised to read as 

follows: 

§ 32.1 Background. 

The revised Uniform System of 

Accounts (USOA) is a historical 

financial accounting system which 

reports the results of operational and 

financial events in a manner which 

enables both management and 

regulators to assess these results within 

a specified accounting period. The 

USOA also provides the financial 

community and others with financial 

performance results. In order for an 

accounting system to fulfill these 

purposes, it must exhibit consistency 

and stability in financial reporting 

(including the results published for 

regulatory purposes). Accordingly, the 

USOA has been designed to reflect 

stable, recurring financial data based to 

the extent regulatory considerations 

permit upon the consistency of the wellestablished body of accounting theories 

and principles commonly referred to as 

generally accepted accounting 

principles (GAAP). The rules of this 

part, and any other rules or orders that 

are derivative of or dependent on the 

rules in this part, do not apply to price 

cap companies, and rate-of-return 

telephone companies offering business 

data services pursuant to § 61.50 of this 

chapter, that have opted-out of USOA 

requirements pursuant to the conditions 

specified by the Commission in 

§ 32.11(g). 

■ 5. Section 32.11 is amended by 

revising paragraph (g) to read as follows: 

§ 32.11 Companies subject to this part. 

* * * * * 

(g) Notwithstanding paragraph (a) of 

this section, a price cap company, or a 

rate-of-return telephone company 

offering business data services pursuant 

to § 61.50 of this chapter, that elects to 

calculate its pole attachment rates 

pursuant to § 1.1406(e) of this chapter 

will not be subject to this Uniform 

System of Accounts. 

PART 51—INTERCONNECTION 

■ 6. The authority citation for part 51 

continues to read as follows: 

Authority: 47 U.S.C. 151–55, 201–05, 207– 

09, 218, 225–27, 251–52, 271, 332 unless 

otherwise noted. 

■ 7. Section 51.903 is amended by 

revising paragraph (g) to read as follows: 

§ 51.903 Definitions. 

* * * * * 

(g) Rate-of-Return Carrier is any 

incumbent local exchange carrier not 

subject to price cap regulation as that 

term is defined in § 61.3(bb) of this 

chapter, but only with respect to the 

territory in which it operates as an 

incumbent local exchange carrier. 

* * * * * 

PART 61—TARIFFS 

■ 8. The authority citation for part 61 

continues to read as follows: 


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Authority: 47 U.S.C. 151, 154(i), 154(j), 

201–05 and 403, unless otherwise noted. 

■ 9. Section 61.41 is amended by 

revising paragraph (d) and adding 

paragraph (f) to read as follows: 

§ 61.41 Price cap requirements generally. 

* * * * * 

(d) Except as provided in paragraph 

(e) of this section, local exchange 

carriers that become subject to price cap 

regulation as that term is defined in 

§ 61.3(ff) shall not be eligible to 

withdraw from such regulation. 

* * * * * 

(f) Notwithstanding the requirements 

of paragraphs (c) and (d) of this section, 

a telephone company subject to rate-ofreturn regulation that is affiliated with 

a price cap local exchange carrier may 

provide business data services pursuant 

to § 61.50 without converting other 

services to price cap regulation. 

■ 10. Section 61.50 is added to read as 

follows: 

§ 61.50 Regulation of business data 

services offered by rate-of-return carriers 

electing incentive regulation. 

(a) A rate-of-return carrier, as defined 

in § 51.903(g) of this chapter, may elect 

to offer its business data services subject 

to incentive regulation pursuant to this 

section. A rate-of-return carrier may 

elect to offer business data services 

subject to incentive regulation pursuant 

to this section only if all affiliated rateof-return carriers meeting the 

requirements of paragraph (b) of this 

section make the election. A carrier’s 

election under this section is 

irrevocable. 

(b) A rate-of-return carrier is eligible 

to elect incentive regulation for its 

business data services if the carrier: 

(1) Receives universal service 

payments pursuant to the AlternativeConnect America Cost Model pursuant 

to § 54.311 of this chapter; 

(2) Is an affiliate of a price cap local 

exchange carrier operating pursuant to a 

waiver of § 61.41; 

(3) Receives universal service 

payments pursuant to § 54.306 of this 

chapter; or 

(4) Transitions away from legacy 

support mechanisms in the future. 

(c) A rate-of-return carrier electing to 

offer business data services pursuant to 

this section shall employ the procedures 

outlined in §§ 61.42 through 61.49 to 

calculate rates for its business data 

services and adjust its indexes for those 

rates to the extent those sections are 

applicable to business data services, 

except that: 

(1) Exogenous costs associated with 

regulated services shall be allocated to 

business data services based on relative 

regulated business data services 

revenues, compared to regulated 

revenues and related support receipts; 

and 

(2) An electing carrier is not required 

to file a short form tariff review plan as 

required by § 61.49(k). 

(d) A rate-of-return carrier electing to 

offer business data services pursuant to 

this section must remove its business 

data services from the NECA Traffic 

Sensitive Pool. Such a carrier may 

continue to participate in the NECA 

Traffic Sensitive Pool and tariff for 

access services other than business data 

services. 

(e) A rate-of-return carrier offering 

business data services pursuant to this 

section may offer those business data 

services at different rates in different 

study areas. 

(f) A rate-of-return carrier offering 

business data services pursuant to this 

section may make a low-end adjustment 

pursuant to § 61.45(d)(1)(vii) unless it: 

(1) Exercises the regulatory relief 

pursuant to paragraph (g) of this section 

in any part of its service region; or 

(2) Exercises the option to use 

Generally Accepted Accounting 

Principles rather than the part 32 

Uniform System of Accounts pursuant 

to § 32.11(g) of this chapter. 

(g) A rate-of-return carrier electing to 

offer business data services pursuant to 

this section may offer time division 

multiplexed transport and end user 

channel termination services at or below 

a DS3 bandwidth that include: 

(1) Volume and term discounts; 

(2) Contract-based tariffs, provided 

that: 

(i) Contract-based tariff services are 

made generally available to all similarly 

situated customers; and 

(ii) The rate-of-return carrier excludes 

all contract-based tariff offerings from 

incentive regulation; and 

(3) The ability to file tariff revisions 

on at least one day’s notice, 

notwithstanding the notice 

requirements for tariff filings specified 

in § 61.58. 

(h) A rate-of-return carrier electing to 

offer business data services pursuant to 

this section shall comply with the 

requirements of § 69.805 of this chapter 

in its study areas deemed noncompetitive pursuant to this section. 

(i) The regulation of other services 

offered by a carrier that offers business 

data services pursuant to this section 

shall not be modified as a result of the 

requirements of this section. 

(j)(1) The Wireline Competition 

Bureau will conduct an initial 

competitive market test for rate-ofreturn carriers eligible to elect incentive 

regulation pursuant to this section. 

Study areas of such carriers will be 

deemed competitive if 75 percent of the 

census blocks within the study area are 

reported to have a minimum of 10 Mbps 

download and 1 Mbps upload 

broadband service offered by a cable 

operator based on the most current 

publicly available Form 477 data. A list 

of study areas deemed competitive by 

the competitive market test will be 

published on the Commission’s website. 

(2) The Wireline Competition Bureau 

will conduct subsequent competitive 

market tests for rate-of-return carriers 

electing incentive regulation pursuant to 

this section contemporaneously with 

the subsequent tests mandated by 

§ 69.803 of this chapter for price cap 

carriers. 

(3) A study area of an electing carrier 

deemed competitive by the competitive 

market test will retain its status in 

subsequent tests. 

(k)(1) Packet-based and time division 

multiplexed business data services 

above a DS3 bandwidth offered by a 

rate-of-return carrier pursuant to this 

section shall not be subject to ex ante 

pricing regulation. 

(2) Time division multiplexed end 

user channel termination business data 

services at or below a DS3 bandwidth 

offered by a rate-of-return carrier 

pursuant to this section in study areas 

deemed competitive by the competitive 

market test shall not be subject to ex 

ante pricing regulation. 

(3) A rate-of-return carrier electing 

incentive regulation for its business data 

services must detariff: 

(i) All packet-based and time division 

multiplexed business data services 

above a DS3 bandwidth within thirtysix months after the effective date of its 

election of incentive regulation; and 

(ii) All time division multiplexed end 

user channel termination business data 

services at or below a DS3 bandwidth in 

any study area deemed competitive by 

the competitive market test within 

thirty-six months after such services 

shall be deemed competitive in a study 

area. 

(l)(1) A rate-of-return carrier electing 

incentive regulation for its business data 

services effective July 1, 2019 must 

notify the Chief of the Wireline 

Competition Bureau of its election by 

May 1, 2019 for it to become effective 

concurrent with the annual access tariff 

filing in 2019. 

(2) A rate-of-return carrier electing 

incentive regulation for its business data 

services effective July 1, 2020 must 

notify the Chief of the Wireline 

Competition Bureau of its election by 

May 1, 2020 for it to become effective 

concurrent with the annual access tariff 

filing in 2020. 


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Federal Register / Vol. 83, No. 248 / Friday, December 28, 2018 / Rules and Regulations 67123 

1See Public Law 111–350, (Jan. 4, 2011). 

(3) A rate-of-return carrier accepting 

future offers of Alternative-Connect 

America Cost Model support or 

otherwise transitioning away from 

legacy support mechanisms and electing 

incentive regulation for its business data 

services must notify the Chief of the 

Wireline Competition Bureau of its 

election by May 1 following its 

acceptance of the offer for it to become 

effective concurrent with that year’s 

annual access tariff filing. 

■ 11. Section 61.55 is amended by 

revising paragraph (a) to read as follows: 

§ 61.55 Contract-based tariffs. 

(a) This section shall apply to price 

cap local exchange carriers permitted to 

offer contract-based tariffs under § 1.776 

or § 69.805 of this chapter, as well as to 

the offering of business data services by 

rate-of-return carriers pursuant to 

§ 61.50. 

* * * * * 

PART 69—ACCESS CHARGES 

■ 12. The authority citation for part 69 

continues to read as follows: 

Authority: 47 U.S.C. 154, 201, 202, 203, 

205, 218, 220, 254, 403. 

■ 13. Section 69.114 is amended by 

revising paragraph (a) to read as follows: 

§ 69.114 Special access. 

(a) Appropriate subelements shall be 

established for the use of equipment or 

facilities that are assigned to the Special 

Access element for purposes of 

apportioning net investment, or that are 

equivalent to such equipment or 

facilities for companies subject to price 

cap regulation as that term is defined in 

§ 61.3(ff) of this chapter. 

* * * * * 

[FR Doc. 2018–27528 Filed 12–27–18; 8:45 am] 

BILLING CODE 6712–01–P 

DEPARTMENT OF HOMELAND 

SECURITY 

48 CFR Parts 3019 and 3052 

[Docket No. DHS–2018–0024] 

RIN 1601–AA83 

Rescinding Department of Homeland 

Security Acquisition Regulation 

(HSAR) Clause Regarding Small 

Business Subcontracting Plan 

Reporting (HSAR Case 2017–001) 

AGENCY: Office of the Chief Procurement 

Officer, Department of Homeland 

Security (DHS). 

ACTION: Final rule. 

SUMMARY: This final rule amends the 

HSAR by removing the HSAR clause 

regarding small business subcontracting 

plan reporting because the requirements 

of this clause duplicate the 

requirements in a Federal Acquisition 

Regulation (FAR) clause. The HSAR 

clause is no longer needed to provide 

guidance to contractors and DHS 

proposes to remove the clause from the 

HSAR. 

DATES: Effective Date: January 28, 2019. 

FOR FURTHER INFORMATION CONTACT: Ms. 

Candace Lightfoot, Procurement 

Analyst, DHS, Office of the Chief 

Procurement Officer, Acquisition Policy 

and Legislation at (202) 447–0882 or 

email HSAR@hq.dhs.gov for 

clarification of content. When using 

email, include HSAR Case 2017–001 in 

the ‘‘Subject’’ line. 

SUPPLEMENTARY INFORMATION: 

I. Background 

In a Notice of Proposed Rulemaking 

(NPRM) published in the Federal 

Register (83 FR 25638) on June 4, 2018, 

the Department of Homeland Security, 

Office of the Chief Procurement Officer, 

proposed to remove HSAR clause 

3052.219–70 and the cross-reference to 

it found in paragraph (a) of 48 CFR 

3019.708–70. 

As explained in the NPRM, on 

December 4, 2003, DHS published an 

interim final rule to establish the 

Department of Homeland Security 

Acquisition Regulation (HSAR). 68 FR 

67867 (Dec. 4, 2003). On May 2, 2006, 

DHS published a final rule, which 

adopted the interim rule with some 

changes in response to public comment 

(HSAR final rule). 71 FR 25759 (May 2, 

2006). The HSAR final rule finalized, 

among other things, HSAR clause 

3052.219–70, Small Business 

Subcontracting Reporting Plan (48 CFR 

3052.219–70). HSAR clause 3052.219– 

70 requires contractors to: (a) Enter the 

information for the Subcontracting 

Report for Individual Contracts 

(formally the Standard Form 294 (SF– 

294)) and the Summary Subcontract 

Report (formally the Standard Form 295 

(SF–295)) into the Electronic 

Subcontracting Reporting System (eSRS) 

at www.esrs.gov; and (b) include HSAR 

clause 3052.219.70 in all subcontracts 

that include the clause at (FAR) 48 CFR 

52.219–9. The eSRS is a web-based 

system, which replaces the Standard 

Forms 294 and 295 as the mechanism 

for submitting reports required by the 

small business subcontracting program. 

On June 16, 2010, the Civilian Agency 

Acquisition Council and the Defense 

Acquisition Regulations Council issued 

a final rule amending the Federal 

Acquisition Regulation (FAR) to require 

contractors’ small business subcontract 

reports be submitted using the eSRS, 

rather than Standard Forms 294 and 

295. 75 FR 34260; FAR Case 2005–040 

(June 16, 2010). This change to the FAR 

was issued under Federal Acquisition 

Circular 2005–42 of June 16, 2010. 75 

FR 34291 (June 16, 2010). As a result of 

the FAR revision HSAR clause 

3052.219–70 is no longer needed to 

provide guidance to contractors on the 

eSRS requirements. Therefore, DHS is 

amending the HSAR to remove HSAR 

clause 3052.219–70 and the crossreference to it found in paragraph (a) of 

48 CFR 3019.708–70. 

In addition, DHS is also to amending 

the authority citation for part 3019 to 

conform with the authority of the 

Positive Law Codification of Title 41, 

United States code, ‘‘Public Contracts’’. 

The new codification of Title 41 was 

enacted on January 4, 2011.1

II. Discussion and Analysis 

Interested parties were given until 

July 5, 2018, to comment on the 

proposed changes. No public comments 

were submitted in response to the 

proposed rule. Accordingly, DHS will 

adopt the proposal as set forth in the 

NPRM without change. 

III. Executive Orders 12866, 13563, and 

13771 

Executive Orders 13563 (‘‘Improving 

Regulation and Regulatory Review’’) 

and 12866 (‘‘Regulatory Planning and 

Review’’) direct agencies to assess the 

costs and benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). Executive Order 13563 

emphasizes the importance of 

quantifying both costs and benefits, of 

reducing costs, of harmonizing rules, 

and of promoting flexibility. Executive 

Order 13771 (‘‘Reducing Regulation and 

Controlling Regulatory Costs’’) directs 

agencies to reduce regulation and 

control regulatory costs and provides 

that ‘‘for every one new regulation 

issued, at least two prior regulations be 

identified for elimination, and that the 

cost of planned regulations be prudently 

managed and controlled through a 

budgeting process.’’ 

The Office of Management and Budget 

(OMB) has not designated this rule a 

‘‘significant regulatory action,’’ under 

section 3(f) of Executive Order 12866. 

Accordingly, OMB has not reviewed it. 


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