4670 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules

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Dated: January 24, 1997.

John W. Carlin,

Archivist of the United States.

[FR Doc. 97–2362 Filed 1–30–97; 8:45 am]

BILLING CODE 7515–01–P

FEDERAL COMMUNICATIONS

COMMISSION

47 CFR Parts 61 and 69

[CC Docket Nos. 96–262, 94–1, 91–213, 96–

263; FCC No. 96–488]

Access Charge Reform; Price Cap

Performance Review for Local

Exchange Carriers; Transport Rate

Structure and Pricing; Usage of the

Public Switched Network by

Information Service and Internet

Access Providers

AGENCY: Federal Communications

Commission.

ACTION: Proposed rule.

SUMMARY: The Notice of Proposed

Rulemaking (NPRM) begins a review of

the Commission’s interstate access

charge rules, together with its price cap

rules, to establish fair rules of

competition for both the local and long

distance markets and determine the

extent to which it must revise these

rules in light of the local competition

and Bell Operating Company entry

provisions of the 1996 Act and state

actions to open local networks to

competition, the effects of potential and

actual competition on incumbent LEC

pricing for interstate access, and the

impact of the Act’s mandate to preserve

and enhance universal service. The

Commission outlines two possible

approaches for addressing claims that

existing access charge levels are

excessive, for establishing a transition to

access charges that more closely reflect

economic costs, and for deregulating

incumbent LEC exchange access

services as competition develops in the

local exchange and exchange access

markets. The first approach is a marketbased approach under which the

Commission would rely on potential

and actual competition from new

facilities-based providers and entrants

purchasing unbundled network

elements to drive prices for interstate

access services toward economic cost.

The second approach is a prescriptive

one under which the Commission

would specify the nature and timing of

the changes to the existing rate levels.

DATES: Comments for the notice of

proposed rulemaking are due January

27, 1997,1 and replies are due February

13, 1997. Comments for the notice of

inquiry are due no later than March 3,

1997, and replies are due April 1, 1997.

FOR FURTHER INFORMATION CONTACT:

Richard Lerner, Attorney, Common

Carrier Bureau, Competitive Pricing

Division, (202) 418–1530. For additional

information concerning the information

collections contained in this Report and

Order contact Dorothy Conway at 202–

418–0217, or via the Internet at

dconway@fcc.gov.

SUPPLEMENTARY INFORMATION: This is a

summary of the Commission’s Notice of

Proposed Rulemaking adopted

December 23, 1996, and released

December 24, 1996. The full text of this

Proposed Rulemaking is available for

inspection and copying during normal

business hours in the FCC Reference

Center (Room 239), 1919 M St., NW.,

Washington, DC. The complete text also
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules 4671

may be obtained through the World

Wide Web, at http://www.fcc.gov/

Bureaus/Common—Carrier/Notices/

fcc96488.wp, or may be purchased from

the Commission’s copy contractor,

International Transcription Service,

Inc., (202) 857–3800, 2100 M St., NW.,

Suite 140, Washington, DC 20037.

Pursuant to the Telecommunications

Act of 1996 and the decision by the

Circuit Court of Appeals for the District

of Columbia in Competitive

Telecommunications Association v.

FCC, 87 F.3d 522 (D.C. Cir. 1996)

(CompTel v. FCC), the Commission is

releasing this NPRM to seek comment

on rules that would bring about costbased access rates.

General

In passing the 1996 Act, Congress

sought to establish a pro-competitive,

deregulatory national policy framework

for the United States

telecommunications industry. The

NPRM commences the third in a trilogy

of actions that collectively are intended

to foster and accelerate the introduction

of efficient competition in all

telecommunications markets, pursuant

to the mandate of the 1996 Act. In

August 1996, the Commission adopted

rules to implement Sections 251 and

252 of the 1996 Act, which establish the

basic obligations of carriers, especially

in the local exchange and exchange

access markets. In November 1996,

pursuant to Section 254 of the 1996 Act,

the Federal-State Universal Service Joint

Board issued its recommendations to

the Commission for reforming its system

of universal service support so that

universal service is preserved and

advanced, but in a manner that permits

the local exchange and exchange access

markets to move from monopoly to

competition. The NPRM seeks comment

on proposals to reform our system of

interstate access charges to make it

compatible with the competitive

paradigm established by the 1996 Act

and state actions to open local networks

to competition.

Scope

Depending on the individual

proposal, the proposed rule revisions

considered in this NPRM apply to all

LECs, only to incumbent LECs, or only

to incumbent price cap LECs. The

NPRM generally proposes adopting

rules applicable only to price cap LECs,

with certain limited exceptions.

Reforms in two areas would apply to all

incumbent LECs: (1) The proposals

regarding reform of the transport rate

structure, including the transport

interconnection charge (TIC); and (2) the

effects of the universal service changes

under section 254 that the Commission

will adopt based upon the Joint Board

Recommended Decision. Federal-State

Joint Board on Universal Service, CC

Docket No. 96–45, Recommended

Decision, 61 FR 63778 (December 2,

1996) (Joint Board Recommended

Decision). The Commission also asks

whether its common line rate structure

modifications should also apply to rateof-return LECs. The NPRM also seeks

comment on whether terminating access

services of non-incumbent LECs should

be regulated. The NPRM states that the

Commission will undertake

comprehensive access reform for rate-ofreturn incumbent LECs in a separate

NPRM.

Part 69 Access Rate Structure

The NPRM seeks comment on a

number of proposals to revise the access

rate structure rules so that they better

reflect the manner in which LECs incur

costs when providing access. Following

up on the Joint Board’s observation in

the Universal Service Recommended

Decision that the current per-minute

CCL charge is inefficient because

common line costs generally are not

traffic sensitive, the NPRM seeks

comment on assessing a flat charge on

IXCs on a per-presubscribed

interexchange carrier (PIC) basis, or on

end users in cases where the end user

has not selected a PIC. The NPRM also

seeks comment on permitting LECs to

assess flat monthly charges to recover

the non-traffic-sensitive portion of local

switching costs and permitting LECs to

establish a per-message call setup

charge.

The NPRM also proposes to adopt a

permanent transport rate structure,

including phasing out the TIC. The

NPRM seeks comment on how the

transport rate structure should be

modified and addresses issues raised in

Comptel v. FCC. The NPRM seeks

comment on alternative resolutions to

the TIC, including reassigning TIC costs

to facility-based access charges or to

nonregulated activities; leaving some or

all of the costs in the TIC, subject to

competitive market pressures; a

combination of the previous two

approaches; or phasing TIC costs out

over a predetermined schedule.

Access Reform

The NPRM proposes that, regardless

of the approach adopted for access

reform, the goal should be deregulation

in the presence of substantial

competition. The NPRM seeks comment

on how to determine when substantial

competition exists.

The NPRM seeks comment on

alternative approaches for access

reform: a market-based approach, a

prescriptive approach, or some

combination of the two approaches. It

seeks comment on which would be the

best means to drive access rates to levels

that would enable the Commission to

deregulate the interstate access market.

A market-based approach to access

reform would rely on competition to

move access prices toward economic

levels, and lift regulatory constraints in

phases as competition allows. The

prescriptive approach would entail

more Commission involvement in

moving access prices toward economic

levels. The NPRM seeks comment on

whether the Commission should require

incumbent LECs to reprice their access

services based on TSLRIC studies. The

NPRM also seeks comment on other

methods of re-initializing price cap

indices and on increasing the X-Factor

as methods to drive access rates toward

forward-looking economic costs, if the

Commission were to adopt a

prescriptive approach to access reform.

Impact on Universal Service

Proceeding

The NPRM observes that universal

service funding may replace some of the

revenues collected by the carrier

common line charge or other interstate

access charges, and tentatively

concludes that a downward exogenous

cost adjustment to the LECs’ price cap

indices should be made to reflect any

allocation of additional universal

service funds to the interstate

jurisdiction. The NPRM also invites

parties to comment on whether this

downward adjustment should be acrossthe-board, or targeted to a particular

basket or service category.

Transition

IXCs and incumbent LECs agree that

a significant ‘‘gap’’ exists between the

forward-looking, economic cost of

providing unbundled network elements

and the embedded costs on which

existing access charges are based. The

NPRM seeks comment on how this gap

should be calculated, and on several

specific proposals for permitting LECs

an opportunity to recover some or all of

that cost difference. The NPRM also

seeks comment on whether any cost

difference resulting from ‘‘underdepreciation’’ warrants separate

treatment from residual costs resulting

from other factors.

Terminating Access

The NPRM observes that, although the

called party chooses the terminating

access provider, terminating access

charges are not imposed on the called

party. As a result, competitive LECs may
4672 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules

exercise market power over terminating

access. Therefore, the NPRM seeks

comment on whether there is need for

any regulation of terminating access

offered by new entrants.

ESP Exemption

The NPRM and Notice of Inquiry

observe that Internet usage has

increased dramatically in recent years.

The Commission seeks comment on the

effects of this increased traffic on the

public switched network, and on

whether the Commission should

address the BOCs’ request that the

Commission modify or eliminate the

exemption from access charges that

enhanced service providers (ESPs)

currently receive.

Regulatory Flexibility Analysis

As required by the Regulatory

Flexibility Act, the NPRM contains an

Initial Regulatory Flexibility Analysis

which is set forth in Section XI.C of the

NPRM.

Paperwork Reduction Act

This NPRM contains either a

proposed or modified information

collection. The Commission, as part of

its continuing effort to reduce

paperwork burdens, invites the general

public and the Office of Management

and Budget (OMB) to comment on the

information collections contained in

this NPRM, as required by the

Paperwork Reduction Act of 1995,

Public Law No. 104–13. Public and

agency comments are due at the same

time as other comments on this NPRM;

OMB notification of action is due 60

days after publication of this summary

in the Federal Register. Comments

should address: (a) whether the

proposed collection of information is

necessary for the proper performance of

the functions of the Commission,

including whether the information shall

have practical utility; (b) the accuracy of

the Commission’s burden estimates; (c)

ways to enhance the quality, utility, and

clarity of the information collected; and

(d) ways to minimize the burden of the

collection of information on the

respondents, including the use of

automated collection techniques or

other forms of information technology.

Public reporting burden for the

collection of information is estimated as

follows:

OMB Approval Number: None.

Title: Access Charge Reform.

Form No.: N/A.

Type of Review: New collection.

Information collection

No. of respondents

(approx.)

Annual hour burden

per response Total annual burden

Market-based Approach ........................................................................................... 13 137,986 hours ........... 1,793,818 hours.

Prescriptive Approach .............................................................................................. 13 400 hours .................. 5200 hours.

Transition Mechanism for access charges .............................................................. 13 220 hours .................. 2840 hours.

Regulating Terminating Access ............................................................................... 3497 26 hours .................... 90,922 hours.

Total Annual Burden: 1,895,620

hours.

Respondents: Business or other forprofit.

Estimated costs per respondent: $0.

Needs and Uses: The NPRM would

use the data submission under

consideration to bring about

competition in the access charge market,

and to bring about cost-based access

charges.

Dates: Comments are due on or before

January 27, 1997, and Reply Comments

are due on or before February 13, 1997.

Written comments must be submitted by

the Office of Management and Budget

(OMB) on the proposed and/or modified

information collections on or before 60

days after publication of this summary

in the Federal Register.

SYNOPSIS OF NOTICE OF PROPOSED

RULEMAKING, AND NOTICE OF INQUIRY

I. Introduction

A. Overview

1. In passing the Telecommunications

Act of 1996 (1996 Act), Congress sought

to establish ‘‘a pro-competitive, deregulatory national policy framework’’

for the United States

telecommunications industry. With this

NPRM, we commence the third in a

trilogy of actions that collectively are

intended to foster and accelerate the

introduction of efficient competition in

all telecommunications markets,

pursuant to the mandate of the 1996

Act. In August 1996, as required by the

1996 Act, we adopted rules to

implement Sections 251 and 252 of the

Act, which establish the basic

obligations of carriers, especially in the

local exchange and exchange access

markets. In November 1996, pursuant to

Section 254 of the Act, the Federal-State

Universal Service Joint Board issued its

recommendations to the Commission for

reforming our system of universal

service so that universal service is

preserved and advanced, but in a

manner that permits the local exchange

and exchange access markets to move

from monopoly to competition. In this

proceeding, we seek to reform our

system of interstate access charges to

make it compatible with the competitive

paradigm established by the 1996 Act

and with state actions to open local

networks to competition.

2. The 1996 Act seeks to develop

efficient competition by opening all

telecommunications markets through a

pro-competitive, deregulatory national

policy framework. To that end, the 1996

Act eliminates state and local legal and

regulatory barriers to entry, and bans

state and local governmental actions

that have the effect of prohibiting any

entity from offering any

telecommunications service. The Act

also requires all telecommunications

carriers to interconnect directly or

indirectly with other

telecommunications carriers in order to

facilitate the creation of a ‘‘network of

networks.’’ In addition, the 1996 Act

requires all local exchange carriers

(LECs) to establish reciprocal

compensation arrangements for the

transport and termination of calls, and

prohibits incumbent LECs from charging

more than the additional cost incurred

to transport and terminate a call. The

Act further directs all LECs to provide

number portability and dialing parity.

The 1996 Act confers three fundamental

rights on potential competitors to

incumbent LECs: the right to

interconnect at rates based on cost,

including a reasonable profit; the right

to obtain unbundled network elements

at cost-based rates; and the right to

obtain an incumbent LEC’s retail

services at wholesale discounts in order

to resell those services.

3. The Act also directs the

Commission, after receiving the

recommendations of a Federal-State

Joint Board, to define the services to be

supported by federal universal service

mechanisms, to support such services in

a manner that is ‘‘explicit and

sufficient,’’ and to ensure that ‘‘every

telecommunications carrier that

provides interstate telecommunications
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules 4673

services shall contribute, on an

equitable and non-discriminatory basis,

to the specific, predictable and

sufficient mechanisms * * * to

preserve and advance universal

service.’’ The Act further provides that

multiple carriers may seek and obtain

designation as carriers eligible to receive

universal service funds for service

within a particular geographic area. As

a whole, these provisions of the 1996

Act, when fully implemented, should

greatly reduce the legal, regulatory,

economic, and operational barriers to

entry in the local exchange and

exchange access market.

4. The 1996 Act also ends the

prohibition against provision of

interLATA services by Bell Operating

Companies (BOCs) that was imposed by

the Modification of Final Judgment.

United States v. AT&T, 552 F.Supp. 131

(D.D.C. 1982) (MFJ). BOCs were

permitted immediately upon enactment

of the 1996 Act to begin to provide

certain interLATA services, including

out-of-region and incidental interLATA

services. In order to provide interLATA

services originating in-region, however,

a BOC is first required to obtain

Commission approval. In order to

approve such an application, the

Commission must find that the BOC has

met the requirements of the

‘‘competitive checklist,’’ that the BOC

will comply with the Act’s separate

affiliate requirements, and that grant of

the application is consistent with the

public interest, convenience and

necessity.

5. These fundamental changes in the

structure and dynamics of the

telecommunications industry wrought

by the 1996 Act now necessitate that the

Commission review its existing access

charge regulations to ensure that they

are compatible with the 1996 Act’s farreaching changes. We also seek to

eliminate, either now or as soon as

changes in the marketplace permit, any

unnecessary regulatory requirements on

incumbent LEC exchange access

services. While a broad range of

telecommunications industry

participants, including both

interexchange carriers (IXCs) and

incumbent LECs, have long advocated

for the Commission to commence a

comprehensive review of access

charges, the Act accelerates and

intensifies the need for such a review.

We commence this review of the

Commission’s Part 69 interstate access

charge rules, together with its Part 61

price cap rules, to determine the extent

to which we must revise these rules to

take account of the local competition

and Bell entry provisions of the 1996

Act and state actions to open local

networks to competition; to reflect the

effects of potential and actual

competition on incumbent LECs’ pricing

for interstate access; to implement the

Act’s direction to end implicit universal

service subsidies in favor of a system of

explicit subsidies; and to establish fair

rules of competition for both the local

exchange and interexchange markets,

especially as carriers begin to offer

service packages that bundle local and

interexchange offerings.

6. We adopted our Part 69 rules at

approximately the same time that AT&T

divested its local exchange operations

and established the seven regional Bell

companies pursuant to the MFJ. The

rules were designed to promote

competition in the interstate,

interexchange market by ensuring that

all IXCs would be able to originate and

terminate their traffic over incumbent

LEC networks at just, reasonable, and

non-discriminatory rates. While our Part

69 rules expressly contemplated

competition in the interexchange

market, they were not designed to

address the potential effects of

competition in the local exchange and

exchange access market. Indeed, these

rules reflected the reality of the

telecommunications marketplace in

1983—and what was mandated in some

states prior to the 1996 Act—that the

incumbent LEC was the monopoly

provider of local exchange and

exchange access services. In adopting

the Part 69 rules, the Commission did

not seek to eliminate implicit support

flows, but in fact incorporated such

flows into the Part 69 rate structure. Our

Part 69 rules are designed to be

consistent with our jurisdictional

separations rules that govern the

allocation of incumbent LECs’ expenses

and investment between the interstate

and state jurisdictions. Consequently,

the Part 69 access charge system likely

reflects any jurisdictional cost

misallocations mandated by our current

separations rules. As such, the Part 69

rules are fundamentally inconsistent

with the competitive market conditions

that the 1996 Act attempts to create. We

will soon begin a related proceeding to

examine our jurisdictional separations

rules in light of the 1996 Act.

7. Competition isolates and highlights

the inefficiencies and distortions

present in the current Part 69 access

charge rules. Our present interstate

access charge regime, for example,

requires incumbent LECs to maintain

rate structures that have been widely

criticized as economically inefficient. In

particular, even though the costs of the

local loop do not vary with the amount

of traffic carried by the loop, our current

rules require incumbent LECs to recover

a portion of those costs through trafficsensitive carrier common line (CCL)

charges imposed on IXCs. While Part 69

mandates per-minute charges for local

switching, the portion of local switching

costs that is associated with ports

appears to be driven by the number of

lines connected to the switch, not by the

number of minutes of traffic routed by

the switch. The transport

interconnection charge (TIC) is a nonfacilities-based, per-minute charge

imposed on all switched access

customers regardless of whether they

use the incumbent LEC’s transport

facilities. Rather than fostering efficient

pricing and competition, these

mandatory rate structures inflate usage

charges and reduce charges for

connection to the network, in essence

overcharging high-volume end users in

order to reduce rates for low-volume

end users.

8. Although these inefficient rate

structures might have been sustainable

in a local monopoly environment, the

introduction of competition from

providers operating their own network

facilities or leasing network facilities as

unbundled network elements may

undermine these access rate structures.

A competing provider of exchange

access services entering a market can

use its own facilities or lease unbundled

network elements to target selectively

the incumbent LEC’s high-volume end

users with efficiently priced access

service offerings. This places the

incumbent LEC at a regulatorilyimposed disadvantage in competing for

high-volume end users, and jeopardizes

the source of revenue that permits the

incumbent LEC to cover its costs of

providing service to low-volume end

users. At the same time, these inefficient

rate structures and implicit support

flows also create artificial impediments

to any new entrants that might seek to

serve the subsidized end users, because

they must attempt to do so without the

benefit of a subsidy. As a result, these

access rate structures may inhibit the

development of competition for service

to low-volume end users.

9. Competition also allows entrants to

arbitrage between different pricing

systems. For example, if transport and

termination rates are lower than access

charge rates, a competitor would have

an incentive to funnel interexchange

terminating access traffic through

transport and termination arrangements

where possible. Whether traffic

originates locally or from a distant

exchange, transport and termination of

traffic by a particular LEC involves the

same network functions. Ultimately, the

rates that local carriers impose for the

transport and termination of local traffic
4674 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules

and for the transport and termination of

long distance should converge. As a

legal matter, however, transport and

termination of local traffic by an

incumbent LEC are different services

from access service provided by that

incumbent LEC for long-distance

telecommunications. Transport and

termination of local traffic are governed

by 251(b)(5) and 252(d)(2), while access

charges for interstate long-distance

traffic are governed by sections 201 and

202 of the Act.

10. This Commission has previously

examined the impact of state-led

reforms in New York and Illinois on the

existing access charge rate structures,

and has concluded that some interim

modifications to the incumbent LECs’

rate structures were warranted where

states had implemented market-opening

measures similar to those mandated by

the 1996 Act. The Commission

concluded that competitive

developments in the New York City,

Chicago, and Grand Rapids LATAs

justified granting NYNEX and

Ameritech limited waivers of our access

charge rules to allow them to recover

the TIC on a geographically deaveraged

basis and to bulk bill some of their

common line costs rather than

recovering them through the per-minute

CCL charge.

11. In addition to their criticisms of

the access charge rate structures, IXCs,

in particular, have insisted that the rate

levels of access charges are excessive

and must be reduced. AT&T asserts, for

instance, that the current average perminute access rates of the BOCs are

nearly seven times the forward-looking

economic cost of providing that service,

and that total interstate access charges

collected today from interexchange

carriers exceed forward-looking

economic cost by $11 billion, or 70

percent of the total. IXCs argue that, if

access prices are allowed to remain at

current levels, they will face an

anticompetitive disadvantage both in

the local exchange market and in the

interexchange market whenever an

incumbent LEC also provides

interexchange services.

12. In the Notice of Proposed

Rulemaking portion of this item, we

initiate a comprehensive review of our

interstate access charge regime. We

propose a series of reforms to the

existing access charge rate structure

rules that are designed to eliminate the

inefficiencies summarized above. Our

goal is to end up with access charge rate

structures that a competitive market for

access services would produce.

13. We also outline in this item two

possible approaches for addressing

claims that existing access charge levels

are excessive, for establishing a

transition to access charges that more

closely reflect economic costs, and for

deregulating incumbent LEC exchange

access services as competition develops

in the local exchange and exchange

access market. The first is a marketbased approach under which we would

rely on potential and actual competition

from new facilities-based providers and

entrants purchasing unbundled

elements to drive prices for interstate

access services toward economic cost.

Under this approach, we would

gradually relax and ultimately remove

existing Part 69 rate structure

requirements and Part 61 restrictions on

rate level changes as marketplace forces

provide the discipline on incumbent

LEC access prices that our rules are

currently needed to apply. The second

is a more prescriptive approach to

access reform under which this

Commission would specify the nature

and timing of the changes to the existing

rate levels. These approaches could be

employed singly or in combination. We

emphasize, however, that under either

approach, our ultimate goal is the

same—adoption of revisions to our

access charge rules that will foster

competition for these services and

enable marketplace forces to eliminate

the need for price regulation of these

services.

14. Under the market-based approach

to access reform, we propose two

intermediate phases, each of which

would require an incumbent LEC to

demonstrate that certain circumstances

exist in order to obtain greater pricing

flexibility than the current rules permit.

We also propose that an incumbent

LEC’s access services be deregulated,

that is, removed from price cap and

tariff regulation, once they are subject to

substantial competition. At the first

phase, an incumbent LEC would have to

show that its local market has been

opened to competition and potential

rivals are able to enter through any of

the three avenues mandated by the 1996

Act—interconnection, unbundled

network elements, and resale. We ask

whether an incumbent LEC making such

a showing should be permitted to

deaverage geographically its rates for

interstate access services, to offer

volume and term discounts, and to offer

contract-based tariff offerings for

interstate access. We also ask whether

new services should be deregulated at

that phase. At the second phase in our

market-based approach, an incumbent

LEC would have to show that it faces

actual competition in the local exchange

marketplace. We ask whether, at that

phase, we should eliminate service

categories within baskets, permit

incumbent LECs to engage in

differential pricing of access to

residential, single-line business, and

multi-line business customers, and

eliminate mandatory rate structures for

local switching and transport. We also

seek comment on combining the

trunking and traffic-sensitive baskets at

that stage.

15. A second option for access reform

is a more prescriptive approach.

Marketplace forces alone may not be

sufficient to drive access rates to

forward-looking economic costs. Under

this approach, we ask whether we

should require incumbent LECs to move

prices for interstate access in their

service areas to more economicallyefficient levels pursuant to rules

adopted in this proceeding. As with a

market-based approach, we also propose

under this prescriptive approach that

we remove incumbent LEC access

services subject to substantial

competition from price cap and tariff

regulation.

16. In Section II, below, we seek

comment on issues affecting the scope

of this proceeding. In Section III, we

propose changes to our existing

interstate access charge rate structures

to make them more conducive to

economic efficiency. We also discuss in

Section III the reassignment of certain

network facilities costs that under

current rules are allocated to the

Transport Interconnection Charge for

recovery. In Section IV, we summarize

our two basic approaches to access

reform and propose eliminating price

cap and tariff regulation for services

subject to substantial competition. We

also there seek comment on whether

and when one approach or the other is

preferable, or if a combination of these

approaches should be used, and also,

how such a combined approach should

be structured. In Section V, we discuss

in detail a market-based approach to

access reform. In Section VI, we outline

a more prescriptive approach to access

reform.

17. In Section VII, we first discuss

adjustments to the current interstate

access charge regime that may be

required due to actions taken in the

Federal-State Universal Service Joint

Board proceeding. We also raise in that

section the issue of whether there is a

significant difference between

embedded incumbent LEC costs

currently allocated to the interstate

jurisdiction and recovered through

access charges, and the forward-looking

economic costs of interstate access. To

the extent that implementation of access

charge reform is expected to cause a

significant reduction in incumbent LEC
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules 4675

access revenues from current levels, we

seek comment on whether such LECs

are entitled or should be permitted to

recover some or all of that difference

through a temporary special recovery

mechanism.

18. In Section VIII, we seek comment

on possible additional changes to our

access charge rules that may be

necessary to make them compatible

with the competitive market envisioned

by the 1996 Act, including whether

there is any special need for regulating

terminating interstate access service and

‘‘open-end’’ services, whether provided

by incumbent LECs or new entrants. We

also discuss possible changes to our

existing treatment of the use by

interstate information service providers,

such as Internet service providers, of

incumbent LEC switched access

networks to originate interstate traffic.

In Section IX, we issue a Report and

Order implementing the changes to the

LEC price cap rules discussed above

that were proposed in the Second

Further Notice of Proposed Rulemaking

in CC Docket No. 94–1, Further Notice

of Proposed Rulemaking in CC Docket

No. 93–124, and Second Further Notice

of Proposed Rulemaking in CC Docket

No. 93–197, 60 FR 49539 (September 26,

1995) (Price Cap Second FNPRM).

19. Finally, in Section X, we issue a

Notice of Inquiry to examine

fundamental issues about the

implications of usage of the public

switched network by information

service and Internet access providers.

B. Background

1. Regulation of Interstate Exchange

Access Service

20. For much of this century, most

telephone subscribers obtained both

local and long distance services from

the same company, the pre-divestiture,

integrated Bell System, owned and

operated by AT&T. Although some

telephone subscribers received local

telephone service from non-Bell

independent companies, AT&T still

provided long distance service to these

customers. AT&T compensated its Bell

Operating Company subsidiaries for

originating and terminating interstate

calls through revenue division

arrangements and compensated the

independent companies for access

pursuant to settlement agreements. In

the 1970s, MCI and other IXCs (then

called ‘‘other common carriers,’’ or

OCCs) began to provide switched long

distance services in competition with

AT&T Long Lines by attaching their

own switches to local business lines

purchased from the incumbent LECs

and reselling AT&T services. In 1979,

AT&T and the OCCs, under Commission

supervision, entered into a

comprehensive interim agreement,

known as Exchange Network Facilities

for Interstate Access (ENFIA), to replace

the local business rates with a different

set of rates AT&T would charge OCCs

for originating and terminating

interstate traffic over the facilities of its

local exchange affiliates. AT&T Long

Lines continued to compensate its local

exchange affiliates and the independent

exchange carriers for the use of their

facilities pursuant to their division of

revenues and settlements arrangements.

Following a lengthy proceeding, the

Commission in 1983 adopted uniform

access charge rules that govern the

provision of interstate access services by

all incumbent LECs, BOCs as well as

independents.

21. The costs that incumbent LECs

recover through interstate access

charges are determined by a multi-step

process. Incumbent LECs first record all

their booked expenses and their cost of

investment in the accounts prescribed

by the Commission’s Part 32 Uniform

System of Accounts (USOA). They next

divide the recorded investment and

expenses between regulated and

nonregulated services, pursuant to Part

64 of our Rules. Incumbent LECs then

divide regulated expenses and

investment between state and interstate

jurisdictions pursuant to the separations

procedures contained in Part 36 of the

Commission’s rules. Incumbent LECs

then apportion their regulated interstate

costs among the interstate access and

interexchange service categories.

Finally, to recover their access costs,

incumbent LECs charge IXCs and end

users for access services in accordance

with the Part 69 access charge rules and,

for incumbent LECs under price cap

regulation, with the provisions of the

Part 61 price cap rules.

22. Commentators have pointed out

that, because each of these divisions of

costs occurs pursuant to regulation

rather than through operation of a

competitive marketplace, these

divisions are subject to distortions. In

particular, commentators have focused

on the separations process, which

apportions costs between the intrastate

and interstate jurisdictions. These

commentators suggest that separations

allocation, in particular allocation of

common plant, reflects not only

economic considerations, but also

public policy considerations related to

universal service and the desirability of

low local rates. To the extent these

allocation decisions have resulted in

greater allocations to interstate services

than would be economically justified,

these distortions flow through Parts 69

and 61 into access charges.

23. Part 69 establishes two basic

categories of access services: special

access services and switched access

services. Special access services do not

use the local switch; they use dedicated

facilities that run directly between the

end user and the IXC’s point of presence

(POP). By contrast, switched access

services use the local exchange switch

to route originating and terminating

interstate toll calls. The special access

category includes a wide variety of

services and facilities, such as wideband

data, video, and program audio services.

The Commission does not prescribe

specific rate elements for special access

services in Part 69. Part 69 does,

however, establish specific switched

access elements and a mandatory

switched access rate structure for each

element tailored to the nature of each

service in order to promote competition

in the interexchange services market

and eliminate discrimination within or

among services. In general, we have

attempted to move toward rate

structures that create incentives for the

most efficient utilization of all

telecommunications facilities. These

elements generally correspond to the

components of switched access service,

as shown in Figure 1.

24. Interoffice transmission services,

known as transport services, carry

interstate switched access traffic

between an IXC’s POP and the end

office that serves the end user customer.

Incumbent LEC transmission facilities

that carry interstate traffic between an

IXC’s POP and the incumbent LEC end

office serving the POP (called the

serving wire center or SWC) are known

as entrance facilities. Part 69 requires

incumbent LECs to impose flat-rate

charges on IXCs to recover the costs of

entrance facilities. Incumbent LECs

currently offer two types of interstate

switched transport service between a

SWC and an end user’s end office.

Under the first service, direct-trunked

transport, calls are transported between

the SWC and the end office by means of

a direct trunk that does not pass through

an intervening switch. To recover the

costs of direct-trunked transport

facilities, Part 69 requires incumbent

LECs to impose a flat-rate charge on

IXCs. The second service, tandemswitched transport, routes calls from the

SWC to the end office through a tandem

switch located between the SWC and

the end office. Traffic travels over a

dedicated circuit from the SWC to the

tandem switch, and then, over a shared

circuit that carries the calls of many

different IXCs, from the tandem switch

to the incumbent LEC end office. For
4676 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules

tandem-switched transport, Part 69

prescribes a per-minute tandemswitching charge and a per-minute

transmission charge assessed on IXCs.

25. Incumbent LEC end offices serving

end users switch interstate traffic

between the transport trunks carrying

traffic to and from the IXC POPs and the

end users’ local loops. Our Part 69 rules

require incumbent LECs to recover the

costs of the local switch through a perminute local switching charge assessed

on IXCs. Part 69 also requires

incumbent LECs to impose a per-minute

TIC on interstate switched access traffic.

We note that an incumbent LEC’s

provision of transport and local

switching for terminating interstate

traffic is functionally the same as its

provision of transport and termination

service under the 1996 Act.

26. Finally, incumbent LECs assess

end users a flat end user common line

charge (EUCL), also known as the

subscriber line charge (SLC), to recoup

part or all of the local loop costs

allocated to the interstate jurisdiction.

The SLC currently may not exceed the

lesser of the actual interstate loop cost,

or $6 per month for multi-line business

customers and $3.50 for residential and

single-line business customers. In

addition, IXCs are assessed a per-minute

CCL charge to recover the remaining

interstate allocation of loop costs that is

not recovered through SLCs. IXCs with

at least .05 percent of the total common

lines presubscribed to IXCs in all study

areas are also assessed Universal Service

Fund and Lifeline service charges based

on each IXC’s share of presubscribed

access lines. In addition, Part 69

identifies several other charges,

including those for signalling and

database queries.

27. The specific access charges

currently assessed on interexchange

carriers and end users under our rules

vary among incumbent LECs because

their embedded costs, on which access

charges (even for price cap incumbent

LECs) are based, vary from state to state.

Significant differences in factors that

affect a carrier’s cost of providing

service, such as the topography and

population density of its service area,

are reflected in different prices for

access service.

28. The total regulated revenues of

Class A incumbent LECs by service rate

elements are shown in Table 1, below.

As indicated there, more than 25

percent of the incumbent LECs’ total

regulated revenues are derived from

interstate access services. In addition, of

the $11.9 billion in interstate switched

access revenues that incumbent LECs

recover from IXCs, approximately 90

percent ($10.8 billion) is recovered

through per-minute charges (i.e., CCL,

TIC, and local switching).

TABLE 1.— CLASS A INCUMBENT LOCAL EXCHANGE CARRIERS’ 1995 TOTAL REGULATED REVENUES

[In billions]

Interstate Revenues:

Subscriber Line Charge ............................................................................................................................................ .................... $7.1

Per-Minute Switched Access Charges: .................... ....................

Carrier Common Line ........................................................................................................................................ .................... 3.7

Transport Interconnection Charge ..................................................................................................................... .................... 2.9

Local Switching (and other T–S) ....................................................................................................................... .................... 4.2

Total Per-Minute Switched Access Charges .............................................................................................. .................... 10.8

Transport (Facilities) ................................................................................................................................................. .................... 1.1

Special Access .......................................................................................................................................................... .................... 3.1

Information ................................................................................................................................................................ .................... 0.3

Miscellaneous ........................................................................................................................................................... .................... 1.0

Total Interstate Access Revenues ........................................................................................................................ .................... 23.4

Intrastate Revenues:

Basic Local Exchange Service ................................................................................................................................. .................... 32.0

Intrastate Access ...................................................................................................................................................... .................... 7.3

Other Intrastate Services .......................................................................................................................................... .................... 28.0

Total Intrastate Revenues ..................................................................................................................................... .................... 67.4

Total Regulated Revenues .................................................................................................................................... .................... 90.8

29. The Part 61 price cap rules give

incumbent LECs that are subject to price

cap regulation—generally the largest

incumbent LECs—a degree of flexibility

in establishing the actual levels of their

access rates. Incumbent LEC price cap

regulation is designed to promote

economic efficiency by easing

restrictions on overall profits while

setting price ceilings at reasonable

levels. The incumbent LEC price cap

plan is designed to simulate some of the

efficiency incentives found in

competitive markets and to act as a

transitional regulatory scheme until the

advent of actual competition makes

price cap regulation unnecessary. Price

cap regulation encourages incumbent

LECs to improve their efficiency by

harnessing profit-making incentives to

reduce costs, invest efficiently in new

plant and facilities, and develop and

deploy innovative service offerings.

30. The price cap rules split interstate

access services into three discrete

groups, called baskets. Two baskets are

further grouped into narrower service

categories and subcategories. Price cap

incumbent LECs have some ability to

raise and lower the charges for elements

or services that are included in the same

basket as long as the actual price index

(API) for the basket does not exceed the

price cap index (PCI) for that basket.

This pricing flexibility is limited by

banding rules that establish separate

upper and lower pricing bands for each

service category or subcategory within a

basket. The price cap for each basket

and the pricing bands for each service

category and subcategory are adjusted

annually based on defined formulas.

The price cap rules place services

subject to different competitive

pressures into different baskets, service

categories, and service subcategories.

These measures limit the incumbent

LECs’ ability to offset reductions in

service prices that are subject to

competition with increases in service

prices that are not subject to

competition.
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2. The 1996 Telecommunications Act

31. The 1996 Act seeks to open for all

carriers the local and long distance

telecommunications markets to

competition by removing economic,

regulatory, and operational

impediments that have protected

monopolies in the local exchange

market. The 1996 Act requires

incumbent LECs to open their networks

to competition, and permits the BOCs,

upon meeting certain conditions, to

enter the interLATA market within their

respective service areas. The 1996 Act

also requires the Commission to forbear

from applying any regulation or any

provision of the Communications Act to

telecommunications carriers or

telecommunications services, or classes

thereof, if the Commission determines

that certain specified conditions are

satisfied. The Commission must forbear

if the Commission determines: (1) That

enforcement of the regulation or

provision is not necessary to ensure that

the charges, practices, classifications, or

regulations by, for, or in connection

with that telecommunications carrier or

service are just and reasonable and are

not unjustly or unreasonably

discriminatory; (2) that enforcement is

not necessary for the protection of

consumers; and (3) that forbearance

consistent with the public interest. The

forbearance authority applies to all

provisions of the Communications Act,

except the provisions added by the 1996

Act relating to interconnection and BOC

entry into long-distance services.

a. Local Competition. 32. The local

competition provisions of the 1996 Act

added new sections 251, 252, and 253

to the Communications Act. Section 251

establishes general interconnection

obligations for all telecommunications

carriers, delineates further obligations

for LECs, and prescribes additional

requirements for incumbent LECs.

Sections 251(c)(2) and (c)(3) require that

incumbent LECs’ ‘‘rates, terms, and

conditions’’ for interconnection,

unbundled network elements be ‘‘just,

reasonable, and nondiscriminatory in

accordance with * * * the requirements

of sections 251 and 252.’’ Section 252

generally sets forth the procedures that

state commissions, incumbent LECs,

and new entrants must follow to

implement the requirements of section

251 and establish specific

interconnection arrangements. Finally,

Section 253 bars state and local

regulations that prohibit or have the

effect of prohibiting entities from

offering telecommunications services.

33. The terms and conditions under

which such facilities and services are

made available by incumbent LECs may

be the subject of negotiated agreements

between an incumbent LEC and a

requesting carrier. If an incumbent LEC

and requesting carrier are unable to

reach a negotiated agreement, either

party may ask a state to arbitrate the

disputed issues.

34. As required by the 1996 Act,

incumbent LECs must provide

interconnection and nondiscriminatory

access to network elements on an

unbundled basis. In implementing the

Act, we identified the following

minimum set of network elements that

incumbent LECs must provide to

requesting telecommunications carriers,

many of which are analogous to

interstate access rate elements: Network

interface devices; local loops; local and

tandem switches (including all software

features provided by such switches);

interoffice transmission facilities;

signalling and call-related database

facilities; operations support systems

and information; and operator and

directory assistance facilities. States

may require unbundling of additional

elements.

b. Universal Service. 35. Section 254,

added by the 1996 Act, for the first time

codifies the role of universal service in

federal telecommunications regulation.

Section 254 directs the Commission to

commence a proceeding to implement

sections 254 and 214(e) of the Act, and

to refer such proceeding to a FederalState Joint Board. The Joint Board was

given nine months to make

recommendations to the Commission,

including a definition of the services to

be supported by federal universal

service support mechanisms and a

timetable for the implementation of

such recommendations. We initiated the

Joint Board proceeding in March 1996,

and the Joint Board issued its

Recommended Decision in November

1996.

36. The 1996 Act established several

requirements for federal universal

service support mechanisms. The

Commission, after receiving the

recommendations of the Joint Board, is

to designate specific services for federal

universal service support. Such support

is to be available for the provision,

maintenance and upgrading of facilities

and services for which the support is

intended, and not for other purposes.

Such support is to be available to all

eligible telecommunications carriers.

Such support is to be explicit, and, as

the Conference Report makes clear, shall

not be implicit. Such support is also to

be funded on an equitable and nondiscriminatory basis by all

telecommunications carriers that

provide interstate telecommunications

services.

37. In its Recommended Decision, the

Federal-State Joint Board concluded that

several universal service mechanisms

currently implemented through the

jurisdictional separations and access

charge structures must be replaced or

modified in order to meet the Act’s

requirements that support mechanisms

be explicit, specific, predictable and

sufficient to preserve and advance

universal service. Accordingly, the Joint

Board recommended that changes be

made to the high cost assistance fund,

and that the Dial Equipment Minutes

(DEM) weighting program and Long

Term Support (LTS) be phased out,

eliminated, and replaced by a new

explicit universal service mechanism. If

the Commission adopts the Joint Board’s

recommendations, our access charge

rules must be adjusted to reflect these

changes, to prevent incumbent LECs

from recovering the same costs twice,

and to provide the same subsidies to

non-incumbent LECs as are provided to

incumbent LECs for serving high-cost or

low-income subscribers.

38. At the same time, we must also

examine other features of our access

charge system to determine whether

they contain implicit universal service

support, in contravention of the Act’s

requirement that all universal service

support be explicit and its requirements

as to funding of federal universal service

support. In our Notice of Proposed

Rulemaking and Order Establishing

Joint Board, 61 FR 10499 (March 19,

1996) (Universal Service NPRM), we

asked whether the CCL charge is an

implicit universal service support

mechanism. While the Joint Board did

not reach this question, it suggested that

it would be desirable for the CCL charge

to be restructured to be collected on a

flat-rate rather than a per-minute basis

because per-minute collection is

economically inefficient.

39. We continue to recognize that,

because of the role that access charges

have played in funding and maintaining

universal service, it is important to

implement changes in the access charge

system together with complementary

changes in the universal service system.

In Sections III.B., below, we discuss

whether the CCL charge must be

restructured to comply with the Act’s

universal service requirements.

3. Need for Access Reform

40. There is a consensus among

virtually all participants in the

telecommunications industry on the

need to reform our interstate access

charge rules. IXCs and incumbent LECs,

for example, agree that current perminute interstate access charges exceed

economically efficient levels and that,
4678 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules

consequently, per-minute interstate

access charges must be reduced. They

differ, however, as to the reasons why

current charges exceed forward-looking

economic cost, the aggregate amount by

which current charges exceed economic

cost, and the effects of particular factors

(e.g., alleged excessively-long prescribed

depreciation schedules, separations

distortions, strategic investments, and

operational inefficiency). They also

disagree on what portion, if any, of the

difference between forward-looking

economic cost and the portion of

embedded costs allocated to the

interstate jurisdiction incumbent LECs

should be permitted to recover.

41. Current access charges distort

competition in the markets for local

exchange access. Our access charge

rules create incentives for IXCs to

bypass the LEC switched access network

for reasons that have nothing to do with

the economics of operating an access

network. This uneconomic bypass may

occur for a variety of reasons; rates may

be too high, or our access charge rules

may require rates for a LEC access

service to be too high in relation to the

rates for an alternative LEC service or

for a comparable service offered by an

alternative supplier. Inefficient entry

may occur if the price for a package of

jointly-provided services is above

economic cost, even if the LEC would

actually be the most efficient provider of

the service. Conversely, if a package of

jointly-provided services, including

access, is priced too low because of

regulatory requirements, efficient entry

by an otherwise efficient provider may

be precluded. In either case, the total

cost of telecommunications service will

not be as low as it could be if all

services were priced at economic levels,

thereby providing accurate price signals

to all market participants. High access

charges may also keep long-distance

rates higher than they would otherwise

be, which restricts demand for service

and harms long-distance consumers. We

describe more fully some of the causes

of uneconomic bypass below.

42. Inefficient, mandatory rate

structures are one reason that perminute interstate access charges exceed

the economic cost of providing service

to certain customers. One example is the

recovery through a per-minute CCL

charge of part of the allocated interstate

costs for incumbent LECs to provide

local loops to end users. Recovering on

a per-minute basis the cost of the local

loop, which is a fixed cost that does not

vary with usage, results in high-volume

toll users paying charges to their IXCs

that exceed the cost of serving those

customers, while some low-volume toll

users may pay rates that are below cost.

Mandatory per-minute charges for local

switching, which probably has

significant fixed costs, also results in

IXCs paying access charges for highvolume toll users that exceed the cost of

serving those customers. Finally, the

requirement that most rates be averaged

on a ‘‘study area’’ basis (i.e. generally,

state-wide) precludes incumbent LECs

from setting rates to reflect cost

differences in high-density and lowdensity areas, leaving incumbents

vulnerable to niche entry in highdensity areas, and precluding entry by

firms that might otherwise seek to serve

low-density areas.

43. Assignment of costs to the wrong

elements may also contribute to high

per-minute interstate access rates. As

discussed in Section III.E. below, the

TIC currently recovers some costs that

may be appropriately included in the

rates for services in the trunking basket.

This also results in higher-volume

switched access toll users paying rates

that exceed cost.

44. Incumbent LECs, and to a lesser

degree others such as AT&T, argue that

another reason current interstate access

charges exceed forward-looking

economic cost is the over-allocation of

costs to the interstate jurisdiction in the

separations process, which allocates

costs between the interstate and

intrastate jurisdictions. According to

these parties, the revenues now

recovered through interstate switched

access rate elements in the trafficsensitive basket exceed the cost of

providing interstate switched access

services, while intrastate rates do not

recover enough to cover the economic

cost of providing intrastate exchange

and exchange access services.

45. A major focus of the IXCs, on the

other hand, is the contention that

current interstate access charges exceed

economic cost levels because the

incumbent LECs are inefficient. As a

result, they argue, the incumbent LECs’

unseparated rate base is higher than it

should be, and all prices in both the

interstate and intrastate jurisdictions

exceed economic cost-based levels that

an efficient provider would charge.

46. Several parties, including AT&T

and MCI, argue that, to the extent access

services are not available to IXCs at their

forward-looking economic cost,

incumbent LECs and their long-distance

affiliates will have an unfair competitive

advantage in the market for longdistance services. According to these

IXCs, this is because the incumbent

LEC’s affiliate’s effective cost of

obtaining ‘‘in region’’ access service is

the incremental cost that its affiliated

LEC incurs in providing access. If an

incumbent LEC that also provides longdistance service can charge unaffiliated

IXCs access prices that are significantly

higher than forward-looking economic

cost, the IXCs argue that the incumbent

LEC may be able to create a ‘‘price

squeeze’’ by raising rivals’ costs. Under

these circumstances, the incumbent LEC

affiliate could lower its retail price to

reflect its cost advantage, and competing

unaffiliated IXCs would be forced either

to match the price reduction and absorb

profit margin reductions or maintain

their prices at existing levels and accept

reductions in their market shares.

47. Additionally, to the extent that

unbundled network elements become

available from incumbent LECs at

economically efficient prices, IXCs will

have the ability to avoid paying access

charges by purchasing such elements to

provide both local exchange and

exchange access service to end-user

customers. IXCs may also take access

service from a competitive LEC that

either provides its own facilities or takes

unbundled elements from the

incumbent LEC. The availability of

unbundled network elements at their

forward-looking economic cost would

appear to reduce the danger of a price

squeeze insofar as IXCs can use those

elements to provide their own access to

customers for whom they are the local

service provider. There may, however,

be limits on the extent to which access

charges can be replaced by unbundled

elements in either the short or longterm, because an IXC may have to take

access service for those end-user

customers for which it does not provide

local service.

48. Apart from any revisions to our

rules that we may adopt in this

proceeding, the availability of this

alternative to interstate access service

may force incumbent LECs to move

their access charges to more

economically efficient levels, and may

necessitate relief from mandatory access

charge rate structures that are not

economically efficient. We seek in this

proceeding to explore ways in which we

can harness competitive forces to

further our efforts to make our system of

interstate access charges more

economically rational and compatible

with competitive local markets. We also

seek to adopt rules and policies that will

facilitate a smooth transition from the

current system to one that can be

sustained in competitive local markets.

II. Access Reform for Incumbent Local

Exchange Carriers

A. Application of Reforms to Price Cap

Carriers and Non-Price Cap Carriers

49. Because our access charge rules

apply only to dominant LECs, the focus
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules 4679

of this proceeding is reform of our

access charge regime that currently

applies to incumbent LECs. Although

many of the reforms we propose in this

NPRM may be desirable changes to our

regulation of non-price cap incumbent

LECs, we are limiting the scope of this

proceeding to incumbent LECs subject

to price cap regulation, with limited

exceptions discussed below.

50. We note that price cap regulation

governs almost 91 percent of the

interstate access charge revenues and

more than 92 percent of the total

incumbent LEC access lines. Currently,

all ten of the incumbent LECs with more

than two million access lines and 13 of

the 17 non-NECA incumbent LECs with

more than 50,000 access lines are

subject to price cap regulation. The

remaining incumbent LECs are

telephone companies subject to various

forms of rate-of-return regulation.

Therefore, even though this proceeding

applies only to price cap incumbent

LECs, it would nonetheless affect the

vast majority of all access lines and

interstate access revenues.

51. The need for access reform is most

immediate for those incumbent LECs

that may soon be subject to competition

from the availability of unbundled

network elements. These are primarily

the price cap incumbent LECs. Many, if

not all, non-price-cap incumbent LECs

may be exempt from, or eligible for a

modification or suspension of, the

interconnection and unbundling

requirements of the 1996 Act. By

contrast, all incumbent LECs that are

ineligible for section 251(f) exemptions,

suspensions, or modifications are

incumbent price cap LECs. Because the

latter incumbent LECs must fulfill the

section 251(b) and (c) duties to provide

interconnection and unbundled

elements to new entrants, these

incumbent LECs are likely to face

significant competition in the interstate

exchange access market from new

entrants using unbundled network

elements before the small and mid-sized

rate-of-return incumbent LECs face such

competition. Although several

incumbent price cap LECs may be

eligible to request suspension or

modification under section 251(f)(2)

(e.g., Citizens, Frontier, Aliant, and

SNET), we note that these LECs may not

receive state approval of any such

petition for suspension or modification.

Thus, we conclude that we should focus

our efforts here on the immediate task

of reforming the access charge regime

for price cap incumbent LECs. We plan

to initiate a separate proceeding in 1997

to undertake comprehensive review of

our regulation of rate-of-return

incumbent LECs. That inquiry will take

up the issue of whether substantial

changes in our Part 69 cost allocation

rules for the development of access

charges for rate-of-return carriers are

needed.

52. We propose, however, limited

exceptions to our decision to confine

this proceeding to price cap incumbent

LECs. Specifically, we propose to apply

to all incumbent LECs the rules

discussed in Section VII.A, which

addresses allocation of universal service

support to the interstate revenue

requirement, and Sections III.D and E,

which propose reforms to the transport

rate structure, including the TIC.

Because rate-of-return incumbent LECs

will collect revenues from the new

universal service support mechanism,

we need to determine in this proceeding

how these payments should alter the

access charges currently assessed by

such incumbent LECs. Moreover, any

changes we adopt to the TIC pursuant

to the court’s remand in Competitive

Telecommunications Association v.

FCC, 87 F.3d 522 (D.C. Cir. 1996)

(CompTel v. FCC) should also apply to

rate-of-return incumbent LECs because

their transport rules were subject to the

rates that were remanded by the court

in that decision. In Section III.B, we

seek comment on whether we should

also apply our proposed changes to the

common line rate structure to rate-ofreturn incumbent LECs. In Section

VIII.C., we seek comment on updating

the Part 69 access rules in light of

various developments. We seek

comment on these tentative conclusions

regarding the scope of this proceeding.

We further invite parties to comment on

the effect of these proposals and

tentative conclusions on small business

entities, including small incumbent

LECs and new entrants.

B. Applicability of Part 69 to Unbundled

Elements

53. Pursuant to our jurisdiction over

interstate access charges under section

201 of the Act, we tentatively conclude

that unbundled network elements

should be excluded from the Part 69

access charge regime, regardless of

whether the carrier that purchases

unbundled network elements uses those

elements to provide local exchange

services or exchange access services.

Thus, when using unbundled network

elements to originate and terminate

interstate calls, requesting carriers

should not be required to pay the Part

69 access charges corresponding to

those elements. The 1996 Act permits

telecommunications carriers that

purchase access to unbundled network

elements from incumbent LECs to use

those elements to provide all

telecommunications services to

customers, including access in order to

originate and terminate interstate calls.

The 1996 Act in turn requires requesting

carriers to pay cost-based rates to

compensate incumbent LECs for all

such use of the unbundled network

elements. Thus, the requesting carrier

has already paid for the ability to

originate and terminate interstate calls.

Nothing in the text of the 1996 Act

compels telecommunications carriers

that use unbundled elements to pay

interstate access charges, nor limits

these carriers’ ability to use unbundled

elements to originate and terminate

interstate calls. Nothing in sections 201–

205 of the Act requires a contrary result.

We seek comment on this tentative

conclusion. We also note that the Part

69 interstate access charge rules do not

apply to the transport and termination

of local traffic provided pursuant to

section 251(b)(5).

III. Rate Structure Modifications

A. Overview

54. We tentatively conclude that

several provisions in Part 69 of our rules

compel incumbent LECs to impose

charges for access services in a manner

that does not accurately reflect the way

those LECs incur the costs of providing

those services. For example, generally

the costs associated with the local loop

are non-traffic-sensitive (NTS), but our

rules require incumbent LECs to recover

a portion of those costs through perminute CCL charges. Similarly, at least

some portion of the costs of local

switching is NTS, but our rules require

incumbent LECs to recover all local

switching costs through per-minute

charges. In these and other cases, our

rate structure rules do not send accurate

pricing signals to customers, and

consequently, encourage inefficient use

of telecommunications services. These

inaccurate pricing signals encourage

uneconomic bypass of incumbent LEC

facilities and could very well skew or

limit the development of competition in

the markets for telecommunications

services. Furthermore, these rates may

not be sustainable in the long run if

unbundled network elements are made

available at cost-based prices and used

to provide exchange access services.

55. We propose to revise our rate

structure requirements for switched

access service by eliminating some rate

structure requirements, prescribing

some new requirements, or a

combination of both. We tentatively

conclude that, regardless of which of the

approaches to access reform discussed

in Section IV we choose, establishing

more economically rational rate
4680 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules

structure rules is a necessary first step

in the new procompetitive era. We seek

through these changes to establish rate

structures for interstate access services

that send more accurate pricing signals

to both consumers and competitors.

Below, we invite comment on proposals

for rate structure rule changes to be

applicable to all price cap incumbent

LECs. Specifically, we invite comment

on rate structure rule changes for

common line, local switching, and

transport. We then seek comment on a

number of proposals for phasing out the

transport interconnection charge, and

on establishing rate structure rules for

SS7 signalling services. With the

exception of the transport rule revisions

considered in Section III.D, and the

revisions to the TIC considered in

Section III.E, we propose applying the

rate structure rule changes discussed in

Section III only to incumbent price cap

LECs. As noted in Section II, rate

structure revisions for non-price cap

incumbent LECs will be addressed in a

separate proceeding.

B. Common Line

1. Background

56. Common line costs are the costs

associated with the line connecting the

end user’s premises with the local

switch that have been assigned to the

interstate jurisdiction through the

jurisdictional separations process. These

costs are not traffic-sensitive. A portion

of the incumbent LEC’s common line

costs are recovered through EUCL

charges, also called SLCs. These charges

currently are limited to the actual cost

of the interstate portion of the local loop

or $3.50 per month for residential and

single line business users, and $6.00 per

month for multi-line business users. The

remaining common line costs, if any, are

recovered through carrier common line

charges, which are per-minute rates

imposed on access customers.

57. The current common line rate

structure, in which only a portion of

common line costs are recovered

through flat monthly rates, does not

reflect the manner in which loop costs

are incurred. As a result, the common

line rate structure forces incumbent

LECs to recover costs in an

economically inefficient manner, and so

may cause inefficient use of the network

and uneconomic bypass, as discussed in

Section III.A, above. Furthermore, in the

original MTS and WATS Market

Structure, Third Report and Order, CC

Docket No. 78–72, Phase 1, 48 FR 10319

(March 11, 1983) (Access Charge Order),

the Commission found that recovering

NTS costs through flat monthly charges

imposed on end users by incumbent

LECs would promote optimal utilization

of telecommunications facilities. The

Commission decided at that time,

however, to place a limit on the SLC,

and, consequently, required incumbent

LECs to recover the remainder of their

common line costs through per-minute

CCL rates. The current CCL charge has

been uniformly criticized by both

incumbent LECs and IXCs because it

discourages efficient use of the network

and encourages uneconomic bypass. We

invite comment below on alternative

common line rate structures.

2. Alternative Methods of Recovery of

CCL Portion of Subscriber Loop Costs

58. The Joint Board in its

Recommended Decision recognized that

the current, traffic-sensitive CCL charge

structure is economically inefficient

because the charge requires incumbent

LECs to recover a non-usage-sensitive

cost in part through a usage-sensitive

charge. The Joint Board suggested that

the Commission change the existing rate

structure so that incumbent LECs are no

longer required to recover any of the

NTS cost of the local loop from IXCs on

a per-minute basis. The Joint Board

noted that it would be preferable for

costs related to the loop to be recovered

in a manner that is consistent with the

manner in which the costs are incurred.

Because the cost of a loop generally

does not vary with the minutes of use

transmitted over the loop, the Joint

Board concluded that the current CCL

charge that mandates recovery of a

portion of loop costs through perminute charges is an inefficient costrecovery mechanism.

59. We seek comment on possible

revisions to the current CCL charge

structure so that incumbent price cap

LECs are no longer required to recover

any of the NTS costs of the loop from

IXCs on a traffic-sensitive basis. One

possible alternative, mentioned by the

Joint Board, involves permitting

incumbent LECs to recover the costs not

recovered from SLCs through a flat, perline charge paid by IXCs. An

administratively simple mechanism for

recovery of such a flat-rate charge would

be to assess it against each customer’s

presubscribed interexchange carrier

(PIC). If carriers seek to pass on that

charge to end users, however, such an

approach might encourage end users not

to select a PIC. To resolve this problem,

the Joint Board suggested that the

Commission allow incumbent LECs to

collect the flat-rate charge that would

otherwise be assessed against the PIC

directly from any customer who elects

not to choose a PIC. We seek comment

on this approach and invite parties to

discuss the potential problem created

when end-user customers have selected

PICs but use other IXCs for Internet, fax,

interexchange or other interstate

services by ‘‘dialing-around’’ the PIC.

60. The Competition Policy Institute

(CPI) has suggested several other

alternatives to the per-minute recovery

of interstate NTS loop costs. For

example, interstate NTS loop costs may

be recovered through ‘‘bulk billing,’’ in

which carriers are assessed a charge

based upon their percentage share of

interstate minutes of use or revenues.

An additional possible approach to

recovering interstate NTS loop costs is

a ‘‘capacity charge’’ assessed on carriers

based upon the number and type of

trunks that they purchase from the

incumbent LECs. Alternatively, LECs

could assess a ‘‘trunk port charge’’ to

each carrier based upon the number of

trunk-side ports, or connections it has to

the local switch. Another possibility is

a ‘‘trunk port and line port’’ charge,

which would be based upon the number

of trunk-side ports and the number of

line-side ports. We seek comment on

these approaches to recovery of

interstate NTS local loop costs and ask

parties to propose other efficient

recovery mechanisms. We invite parties

to comment on whether any changes

that we adopt to the recovery of

interstate NTS local loop costs for price

cap LECs should be extended to rate-ofreturn LECs, and the relationship of

interstate NTS loop cost recovery under

access charges to the Joint Board

Recommended Decision. Interested

parties should address how such an

extension to rate-of-return LECs would

affect small business entities, especially

small incumbent LECs.

61. Parties should also address

whether, in the event that we eliminate

the SLC cap for lines used by multi-line

business customers and residential lines

beyond the primary residential line as

discussed below, we need to adopt an

alternative mechanism for recovering

common line costs currently recovered

through the CCL charge imposed on

such lines. We also seek comment, in

conjunction with our market-based

approach to access reform, on the

circumstances under which we should

grant LECs rate structure flexibility in

their recovery of interstate common line

costs from IXCs. Interested parties

should also address the extent to which

any proposed alternative recovery

mechanism for recovering common line

costs currently recovered through the

CCL charge will affect small business

entities, including small incumbent

price cap LECs and new entrants.

62. Finally, we seek comment on

whether there are any limitations on our

authority to assess flat-rated CCL
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules 4681

charges on IXCs. In particular, we note

that section 254(g) also requires IXCs to

charge their subscribers in rural and

high cost areas within a state the same

rates they charge to their subscribers in

urban areas in that state. Section 254(g)

also requires IXCs to charge their

subscribers in each state rates no higher

than the rates charged to subscribers in

any other state. Would this requirement

preclude an IXC from charging its

customers the flat monthly rate assessed

for that line if the amount of that charge

varied among states, or between urban

and rural areas within a state? If so, do

conditions exist sufficient to require the

Commission to forbear from the

application of section 254(g) to IXC

recovery of flat-rate CCL charges?

Parties should also address the effect of

section 254(g) if CCL charges vary

among the states, but end-user rates may

not vary.

3. Alternative Methods of Recovery of

SLC Portion of Subscriber Loop Costs

63. In its Recommended Decision, the

Joint Board determined that eligible

carriers should receive support for

designated services carried on the initial

connection to a customer’s primary

residence and single-line business

customers. The Joint Board, however,

recommended that universal service

support should not be provided for

multi-line business or residential

connections beyond the primary

residential connection. The Joint Board

further concluded that the current $3.50

SLC cap for primary residential and

single-line business lines should not be

increased, but did not state that the SLC

cap should be maintained for multi-line

business or residential connections

beyond the primary residential

connection. Loop costs not recovered

from the current multi-line business

SLCs, and SLCs for residential lines in

addition to the primary connection, are

recovered through usage-sensitive CCL

charges, which in turn are recovered

from toll users. Since end user

customers of multi-line business and

multiple-line residential services do not

necessarily make large numbers of toll

calls, the toll payments of these end

users may not cover the portion of loop

costs not recovered through the SLC.

Moreover, toll rates are higher than they

otherwise would be, which discourages

demand for such services.

64. For these reasons, we propose to

increase the cap on the SLC for the

second and additional lines for

residential customers and for all lines

for multi-line business customers to the

per-line loop costs assigned to the

interstate jurisdiction. This would allow

incumbent LECs to recover interstate

common line costs for multi-line

business customers and for residential

connections beyond the primary

residential connection in a manner

consistent with the way costs are

incurred. Alternatively, we could

eliminate the cap for multi-line business

customers and for residential

connections beyond the primary

connection, especially where the

incumbent LEC has entered into

interconnection agreements and taken

other steps to lower barriers to actual or

potential local exchange competition.

Under that approach, we would not

prohibit an incumbent LEC from

charging a SLC for second and

additional lines for residential

customers and for all lines for multi-line

business customers that exceeds the perline loop costs assigned to the interstate

jurisdiction. We emphasize that this

proposal would not affect the current

cap of $3.50 on the SLC that is charged

to a residential customer’s primary line

and to a single-line business customer.

We invite parties to comment on this

proposal. We also invite parties to

comment on whether any changes that

we adopt to the cap on SLCs for price

cap LECs should be extended to rate-ofreturn LECs, and the relationship of any

such changes to the Joint Board

Recommended Decision. Interested

parties should address how applying

such a cap on SLCs to rate-of-return

LECs would affect small business

entities, especially small incumbent

LECs.

65. In the event we decide to increase

or eliminate the cap on SLCs for multiline business lines and residential lines

in addition to the primary line, we also

solicit comment on whether we should

establish a transition mechanism for this

increase, whether such a transition

could be implemented consistent with

section 254, and if so, how long this

transition period should be. We propose

establishing no transition period if the

increase in the SLC is less than one

dollar, and establishing a three-year

transition period if the increase is one

dollar or more, but we invite comments

on other alternatives in addition to

these.

66. Finally, we seek comment on

whether we should permit or require

incumbent LECs to deaverage SLCs as

part of the baseline rate structure that

would be imposed on all incumbent

price cap LECs. In particular, we note

that section 254(e) requires us to adopt

only explicit support subsidies for

universal service support. We seek

comment on whether geographic

averaging of SLCs is an implicit subsidy

that is inconsistent with the

requirements of section 254(e), and thus

on whether we are required to deaverage

SLCs.

4. Assessment of SLCs on Derived

Channels

67. Integrated services digital network

(ISDN) services permit digital

transmission over ordinary local loops

through the use of advanced hardware

and software. ISDN offers data

transmission at higher speeds and with

greater reliability than standard analog

service. Most incumbent LECs currently

offer two types of ISDN service, Basic

Rate Interface (BRI) service and Primary

Rate Interface (PRI) service. BRI service

allows a subscriber to obtain two voicegrade-equivalent channels and a

signalling/data channel over an ordinary

local loop, which generally is provided

over a single twisted pair of copper

wires. PRI service allows subscribers to

obtain 23 voice-grade-equivalent

channels and one data signalling

channel over two pairs of twisted

copper wires. BRI service generally is

used by individuals and small

businesses, and PRI service generally is

used by larger businesses. LEC services

other than ISDN use derived channel

technology to provide multiple channels

over a single facility. The LECs also use

derived channel technologies within

their networks, for example, to provide

customers with individual local loops.

In such situations, the end user

generally is not aware that the LEC is

using this technology.

68. In the End User Common Line

Charges, CC Docket No. 95–72, Notice of

Proposed Rulemaking, 60 FR 31274

(June 14, 1995) (ISDN SLC NPRM), we

noted that the application of SLCs under

our existing rules to ISDN services may

discourage demand for these services,

and we sought comment on whether

more than one subscriber line charge

should be applied to ISDN services, and

if so, how many charges.

69. As shown in Table 2 below, the

cost data submitted in response to the

ISDN SLC NPRM indicates that the ratio

of NTS costs of BRI ISDN to standard

analog service is approximately 1.24 to

1. The ratio of NTS costs of PRI ISDN

to standard analog service, excluding

NYNEX’s data, is roughly 10.5 to 1. As

shown in Table 3, NYNEX’s data appear

to be outliers and are therefore excluded

from the calculation of the average ratio

for PRI ISDN to standard analog service

because the ratios of its outside plant

and NTS costs for PRI ISDN to standard

analog service are almost twice those of

other incumbent LECs. Interested

parties filed their comments in the ISDN

SLC proceeding prior to the enactment

of the 1996 Act. We ask for comment on

the effect of the 1996 Act on
4682 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules

determining how many SLCs should be

applied to ISDN services. Finally, we

solicit comment on whether mandatory

rate structures or rate caps should be

prescribed for ISDN service or other

derived channel services.

TABLE 2.—RATIO OF COSTS OF STANDARD ANALOG SERVICE TO BRI ISDN SERVICE

Outside

plant (loop

only) costs

All NTS

costs

Ameritech ......................................................................................................................................................................... 1:1.07 1:1.45

Bell Atlantic ...................................................................................................................................................................... 1:1.01 1:1.36

NYNEX ............................................................................................................................................................................. 1:0.85 1:1.23

Pacific Bell ........................................................................................................................................................................ 1:1.05 1:1.13

US West ........................................................................................................................................................................... 1:0.80 1:1.07

Average ratio of costs ...................................................................................................................................................... *1:0.96 *1:1.24

*Averages may differ due to rounding.

TABLE 3.—RATIO OF COSTS OF STANDARD ANALOG SERVICE TO PRI ISDN SERVICE

Outside

plant (loop

only) costs

Outside

plant (loop

only) costs

(excluding

NYNEX)

All NTS

costs

All NTS

costs (excluding

NYNEX

data)

Ameritech .......................................................................................................................... 1:5.68 1:5.68 1:8.9 1:8.9

Bell Atlantic ....................................................................................................................... 1:4.13 1:4.13 1:15.80 1:15.80

NYNEX ............................................................................................................................. 1:10.94 excluded 1:27.74 excluded

Pacific Bell ........................................................................................................................ 1:4.67 1:4.67 1:8.70 1:8.70

US West ........................................................................................................................... 1:5.33 1:5.33 1:10.60 1:10.60

Average ratio of costs ...................................................................................................... *1:6.5 *1:4.95 *1:15.13 *1:10.5

*Averages may differ due to rounding.

C. Local Switching

70. The local switch connects a call

coming in on one line or trunk to

another line or trunk connected to the

switch. A local switch consists of line

and trunk cards, and an analog or digital

switching system. Line cards provide

interfaces between subscriber lines and

the switch. Trunk cards or ‘‘ports’’

provide interfaces between the switch

and interoffice trunks. Because line

cards, as well as trunk cards, are

deployed within the central office, they

are accounted for in the switching

accounts of the USOA. These costs are

therefore included in the switching

category for separations and cost

allocation purposes. The central

processing portion of the switch

performs the routing function based on

the telephone numbers dialed by the

end user placing the call.

1. Non-Traffic-Sensitive Charges

71. Currently, Section 69.106 of our

rules requires incumbent LECs to charge

per-minute rates for local switching. A

significant portion of local switching

costs, however, likely do not vary with

usage. For example, the costs associated

with line cards or line-side ports appear

to vary with the number of loops

connected to the switch, not with the

level of traffic over the loops. We

tentatively conclude that it is more

reasonable and economically efficient to

recover dedicated line card costs

through flat charges. We solicit

comment on establishing a flat rate

element for NTS local switching costs.

We also invite commenters to

recommend methods of identifying line

card costs and other NTS local

switching costs.

72. The central processing portion of

the switch, and many trunk-side ports,

are shared local switching facilities

because they are used to carry the traffic

of several access customers, and so

should be priced on a usage-sensitive

basis. By contrast, because trunks for

dedicated transport service are

dedicated to individual IXCs, ports for

dedicated transport service also appear

dedicated to individual customers, and,

consequently, the charges for such

facilities should be flat-rated. While flat

rates appear reasonable for recovering

costs associated with dedicated ports

and line cards, it is not clear what rate

structure would best reflect the manner

in which incumbent LECs incur costs

associated with shared local switching

facilities. If all shared local switching

costs are driven by the number of lines

and trunks served by the switch, flat

rates would appear appropriate. On the

other hand, usage-sensitive charges

might better reflect the way incumbent

LECs incur costs for shared local

switching facilities. Finally, a

combination of flat-rate and usagesensitive charges may best reflect cost

causation principles. AT&T and MCI

have argued that a substantial portion of

local switching costs are non-usagesensitive, and the local switching rate

structure, therefore, should include both

usage-sensitive and non-usage-sensitive

rate elements. Ameritech has stated that,

for a majority of the switches in its

network, more than 40 percent of

switching costs are NTS. We seek

comment generally on this analysis, and

on how we should establish an

appropriate, efficient rate structure for

switching. We note that states may be

considering this same issue in the

context of establishing rates for

unbundled local switching, and we seek

comment on, and analysis of how, states

are addressing these issues under

Section 252.a

2. Traffic-Sensitive Charges

73. In the following paragraphs, we

seek comment on a number of specific

proposals for rate structures governing

rates designed to recover usage-sensitive

local switching costs. Interested parties

should discuss which of these rate

structure proposals most accurately

reflect traffic-sensitive local switching

costs, and whether we should permit or

require incumbent LECs to assess these

traffic-sensitive charges. Parties

advocating a particular rate structure

should address all the issues raised by

that approach. We also invite parties to

propose other rate structures.
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules 4683

a. Call-Setup Charges. 74. Call setup

is the process of establishing a

transmission path over which a phone

call will be routed. We could permit or

require incumbent LECs to develop callsetup charges if we find that usagesensitive charges might better reflect the

way they incur certain costs for shared

local switching facilities. The perminute rate structure prescribed by Part

69 for local switching does not

separately address costs that incumbent

LECs may incur for call setup and

takedown. Call-setup costs would be

incurred for each call regardless of its

duration or whether it is completed.

Because no separate charge exists for

call setup, incumbent LECs must

recover these costs through the perminute local switching charges, or

possibly through other rate elements. It

is possible that some SS7 call-setup

costs are currently recovered through

the TIC. Thus, longer-duration calls

recover a greater portion of call-setup

costs than shorter calls even if they do

not impose greater call-setup costs. A

per-call rate element for call setup

would more rationally reflect these

costs.

75. In the past, the Commission has

rejected incumbent LEC petitions for

waiver of Part 69 for purposes of

imposing a call-setup charge, on the

grounds that such proposals should be

considered in a broader rulemaking.

Accordingly, we now seek comment on

whether we should permit or require

incumbent LECs to include a call-setup

charge in their local switching rate

structures. We also request comment on

the extent to which the current local

switching rate element recovers costs

that vary with the number of calls,

rather than their duration. Should a callsetup charge apply to all call attempts,

or only to completed calls? We seek

comment on whether incumbent LECs

incur different call-setup costs

depending on whether a call is

delivered via direct-trunked or tandemswitched transport service, and on the

different costs incurred when

multifrequency (MF) and SS7 signalling

are used for call setup. Finally, we

invite comment on whether any of these

cost differences should be reflected by

establishing different charges for

different kinds of call setup. To the

extent that parties support a separate

charge for SS7 call setup, those parties

should explain how such a charge

would be consistent with the rate

structure for other SS7 services we

discuss below.

b. Peak and Off-Peak Pricing. 76. We

could direct or allow incumbent LECs to

develop peak and off-peak pricing for

shared local switching facilities. When

incumbent LECs select the types of

switches that they will deploy in their

networks, they base their decisions on

the anticipated peak demand. Thus,

incumbent LECs arguably should be

permitted to establish separate rate

elements for local switching provided

during peak periods and off-peak

periods. The peak prices would be perminute rates, and designed to recover

the costs of additional capacity that an

incumbent LEC must install to meet the

peak demand. Because off-peak traffic

requires no additional capacity, the

costs of this traffic are lower, and

accordingly, the access charges for that

traffic should be lower as well.

77. We previously sought comment on

peak and off-peak pricing in the

Interconnection Between Local

Exchange Carriers and Commercial

Mobile Radio Service Providers, CC

Docket No. 95–185, Notice of Proposed

Rulemaking, 61 FR 3644 (February 10,

1996) (LEC/CMRS NPRM), and

addressed those comments in the

Implementation of the Local

Competition Provisions of the

Telecommunications Act of 1996, CC

Docket No. 96–98, First Report and

Order, 61 FR 45476 (Aug. 29, 1996)

(Local Competition Order). We

recognized in the Local Competition

Order that there might be practical

problems with a rate structure that had

different peak and off-peak pricing.

Therefore, we did not mandate a peaksensitive rate structure for unbundled

network elements, although we also did

not preclude use of peak/off-peak

pricing. Parties supporting requiring

rather than merely permitting peak and

off-peak pricing for local switching

should explain why this rate structure is

more suitable for access rates than it is

for unbundled network elements.

c. Current Rate Structure. 78. As

another alternative, we could retain the

existing per-minute local switching rate

structure. Because a significant portion

of local switching costs may not vary

with minutes of use, however, the

existing rate structure may be less

desirable than the other options

discussed above. We invite parties

supporting the current rate structure to

explain why they believe that it

adequately reflects the manner in which

traffic-sensitive local switching costs are

incurred.

D. Transport

1. Background

79. Transport service is the

component of interstate switched access

service corresponding to the

transmission and switching of traffic

between incumbent LEC end offices and

IXC POPs. Part 69 of our rules requires

incumbent LECs to develop charges for

transport service that may not reflect in

some cases the manner in which they

incur the costs of providing these

services. Thus, as we discussed with

respect to local switching charges above,

it may be necessary to revise our Part 69

rate structure requirements for transport

services.

80. Since December 1993, transport

has been provided pursuant to interim

rules that replaced the ‘‘equal charge per

unit of traffic’’ requirement of the MFJ.

We required incumbent LECs to

establish flat rates for: (1) ‘‘Entrance

facilities,’’ transport service from the

IXC POP to the SWC, and (2) ‘‘directtrunked transport,’’ transport service

from a SWC to an end office on

dedicated facilities without switching at

a tandem switch. In addition,

incumbent LECs were directed to

establish usage-based charges for

‘‘tandem-switched transport,’’ a

transport service from the SWC to the

end office that provides switching at a

tandem switch. The tandem-switched

transport service charge includes an

interoffice transmission charge, and a

charge for the tandem switch.

81. The initial rate levels for directtrunked transport were generally

presumed reasonable if they were based

on rates for comparable special access

services. The per-minute tandemswitched transport transmission charge

was based on assumptions about

average monthly DS1 and DS3 usage.

The charge for the tandem switch was

initially set to recover 20 percent of the

Part 69 tandem revenue requirement.

Finally, to make the restructure revenue

neutral initially, we required incumbent

LECs to establish a non-cost-based

transport interconnection charge (TIC),

to recover the revenue difference

between what the LECs would have

realized under the equal charge rate

structure and what they would realize

from the interim facility-based transport

rates, including the remaining 80

percent of the tandem revenue

requirement.

82. Subsequently, in the Transport

Rate Structure and Pricing, CC Docket

No. 91–213, First Memorandum

Opinion and Order on Reconsideration,

58 FR 41184 (August 3, 1993) (First

Transport Reconsideration Order), the

Commission required incumbent LECs

to offer two pricing options for tandemswitched transport service. First, an IXC

may purchase tandem-switched

transport at usage-sensitive rates with

any mileage component computed on

the basis of the distance between the

SWC and the end office, regardless of

the actual physical routing. Second, an
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IXC may purchase direct-trunked

transport between the SWC and the

tandem office and usage-rated tandemswitched transport between the tandem

office and the end office, with any

tandem-switched transport mileage

component computed on the basis of the

distance between the tandem office and

the end office.

83. In this section, we seek comment

on whether to revise the facility-based

components of the transport rate

structure. In the following section, we

seek comment on phasing out the TIC.

Unlike the other rate structure rules we

consider in Section III, we contemplate

imposing any rules adopted relating to

the transport rate structure or the TIC on

all incumbent LECs. We propose, for

reasons articulated in the Transport Rate

Structure and Pricing, CC Docket No.

91–213, Report and Order and Further

Notice of Proposed Rulemaking, 57 FR

54717 (November 20, 1992) (First

Transport Order), that the transport rate

structure be divided into three parts: (1)

Charges for entrance facilities; (2)

charges for direct-trunked transport

service; and (3) charges for tandemswitched transport service. We seek

comment on adopting this basic

framework for the transport rate

structure rules. In commenting on the

transport issues in this section, parties

should bear in mind the

interrelationship of these issues with

those relating to the TIC, which is

discussed in Section III.E, below.

84. We also seek comment here and

in Section III.E on the issues remanded

in CompTel v. FCC, in which the court

remanded the Orders in which we

established the transport rate structure

rules. The court held that we did not

adequately explain our decision to

require incumbent LECs to charge a

non-cost-based TIC. The court

remanded our decision to set the

tandem-based transport rate element to

recover 20 percent of the Part 69 tandem

revenue requirement and to allocate the

remaining revenue requirement to the

TIC, because the Commission did not

adequately explain why 20 percent

would be more equitable than some

other allocation. The court also found

that we did not explain our decision to

require incumbent LECs to allocate a

greater proportion of overhead costs to

the tandem-switched transport

switching charge than to direct-trunked

transport service rates. We address the

TIC issue in Section III.E below, and the

other two remand issues in this section.

2. Entrance Facilities and DirectTrunked Transport Services

85. For entrance facilities and directtrunked transport service, we tentatively

conclude that the transport rate

structure rules should mandate flatrated charges. These transport facilities

appear to be dedicated to individual

customers, and we believe that flat rates

reflect the way incumbent LECs incur

costs for dedicated facilities. We invite

comment on this tentative conclusion.

We also seek comment on whether

incumbent LECs should be permitted to

offer transport services differentiated by

whether the LEC or the IXC is

responsible for channel facility

assignments. In the past, Ameritech and

Bell Atlantic have sought waivers of our

Part 69 rules to offer such a switched

access service, alleging that it would

permit them to utilize the access

network more efficiently. We seek

comment on whether any rules beyond

those included in the interim rules are

necessary to govern rate levels for these

services.

3. Tandem-Switched Transport Services

a. Rate Structure. 86. We present

several options for the rate structure

associated with tandem-switched

transport service facilities. The first

option would maintain the interim rate

structure’s treatment of the tandemswitched transport charge, which gives

IXCs a choice of two pricing alternatives

for purchase of tandem-switched

transport service. IXCs may elect to pay

a single usage-sensitive charge, with

distance measured in airline miles from

the SWC to the end office, if applicable.

Alternatively, IXCs may choose a flatrated charge for a dedicated facility from

the SWC to the tandem office, and a

usage-sensitive charge for tandemswitched transport service from the

tandem office to the end office, with

mileage computed separately for the two

segments, if applicable.

87. The second option would

eliminate an IXC’s ability to select the

first choice and require incumbent LECs

to assess flat-rated charges for the circuit

between the SWC and the tandem,

which typically is a dedicated circuit,

and to apply usage-based rates to the

tandem-to-end office link. This was the

original transport rate structure the

Commission established in 1983 in the

Access Charge Order.

88. In conjunction with either of the

two options for pricing tandemswitched transport service transmission

facilities, we could treat tandem

switching similarly to one of our

proposals for the local switching rate

structure, discussed in Section III.C

above. As with the end-office switch,

the tandem switch may include

equipment dedicated to particular

customers, such as the network ports

through which a particular IXC’s traffic

enters and leaves the tandem switch.

Thus, we could require incumbent LECs

to develop usage-sensitive charges for

shared facilities (the tandem switching

functions and the ports on the end office

side of the tandem switch), and a flatrated charge for the dedicated ports on

the SWC side of the tandem switch.

Alternatively, shared tandem switching

costs may be driven by the number of

trunks on the end-office side and the

SWC side of the tandem switch, just as

shared local switching costs may be

driven by the number of lines and

trunks connected to the switch. If this

is the case, then flat monthly rates may

better reflect shared tandem switching

costs. Parties are invited to comment on

whether tandem switches differ in any

fundamental way from end office

switches with respect to the division of

costs associated with shared and

dedicated facilities.

89. In addition to any of the tandemswitched transport service options

discussed above, we could permit or

require incumbent LECs to develop peak

load pricing for tandem-switched

transport service. Most small IXCs use

tandem-switched transport service for

all or most of their access traffic, while

larger IXCs may use tandem-switched

transport service on relatively fewer

routes, or may use it only to handle

their overflow traffic during peak hours.

Thus, some portion of tandem costs may

be attributable to the need to

accommodate this overflow traffic from

direct-trunked transport facilities. We

invite comment on whether to permit or

require incumbent LECs to develop peak

and off-peak pricing for tandem

switching. We also invite comment on

whether some portion of tandem

switching costs should be recovered

from direct-trunked transport service

customers, if in fact a portion of tandem

switching capacity is necessary to meet

demand from direct-trunked transport

customers during peak period. Parties

advocating peak pricing should propose

a method to determine the peak period.

Because some access customers may use

some SWC-side trunks and ports to

carry overflow traffic, and the costs of

those ports are not traffic-sensitive, flat

rates may better recover the tandemswitched transport costs generated by

that overflow traffic. We invite comment

on this analysis.

90. We seek comment on the benefits

and detriments of each of the above

options for reforming the tandemswitched transport rate structure. Parties

are specifically asked to discuss

whether any of these options accurately

reflect the way incumbent LECs incur

tandem switching costs. For example,

we seek comment on the extent to
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which tandem-switched and directtrunked transport use the same or

different physical routing, and in light

of this, on whether the distance

component of setting tandem-switched

transport rates is most appropriately

measured between the SWC and the end

office, or in two charges, one for the

SWC-to-tandem circuit and one for the

tandem-to-end office circuit. We invite

parties to identify and quantify the

specific NTS costs associated with the

tandem switch that they believe are

currently recovered through the usagesensitive tandem charge. We also invite

parties to suggest additional options for

the tandem-switched transport charge.

b. Rate Levels. 91. We seek comment

on how to establish a reasonable tandem

switching charge in light of the court’s

remand. The interim transport

restructure rules, which the court

remanded, required incumbent LECs to

base their initial tandem switching

charge on 20 percent of the interstate

revenue requirement for tandem

switching, with the remaining 80

percent to be recovered through the TIC.

Thus, both the tandem charge and some

portion of the TIC were designed to

recover the costs included in the

tandem-switched transport revenue

requirement. The Commission found in

the First Transport Order that this

revenue requirement included some SS7

signalling cost, in addition to tandem

switching costs. In Section III.E, below,

we propose to reassign costs included in

the TIC to those rate elements to which

they are related, including the different

transport rate elements. We seek

comment on what costs are

appropriately associated with the

tandem switching function. Parties

commenting on this issue should

address how their proposals are

consistent with the court’s remand

directives. We also ask parties to

comment on whether, if we permit

direct-trunked transport or entrance

facility rate structure options based on

whether the channel facility assignment

is done by the IXC or the LEC, a similar

option should be available for tandemswitched transport. We ask parties to

comment on the interrelationship of the

rate level issue and how any decision on

transport rate levels affects the options

for phasing out the TIC that are

discussed in the following section.

92. The court in CompTel v. FCC also

directed us to explain why we permitted

incumbent LECs to load a relatively

large portion of their transport overhead

costs to tandem-switched transport

rates, and to base their direct-trunked

transport overhead loadings on the

lower overhead loading factors used for

special access. Our resolution of the

transport overhead loadings issue

remanded by the court is also affected

by our treatment of the TIC. If we decide

to reallocate costs currently recovered

through the TIC to other rate elements,

this could change the amount of

overhead costs allocated to both directtrunked transport and tandem-switched

transport. It is possible that reallocating

costs from the TIC to direct-trunked

transport and tandem-switched

transport charges would result in costbased direct-trunked transport and

tandem-switched transport charges, that

is, direct-trunked transport and tandemswitched transport charges that recover

a proportionate amount of overhead

costs. Thus, reallocating costs from the

TIC could contribute to correcting any

imbalance in overhead cost allocations

between transport rate elements. We

invite parties to discuss what other

regulatory requirements are necessary to

comply with the court’s mandate on

transport service overhead loadings.

93. Furthermore, initial tandemswitched transport transmission rates

were presumed reasonable if set as a

weighted average of the per-minute cost

of DS3 and DS1 rates calculated using

9000 minutes of use per month. We note

that USTA has alleged that the number

of actual minutes traversing tandem

circuits is significantly below 9000

minutes per month. We solicit comment

on whether we should revise any

transport rate structure requirement,

either as a result of CompTel v. FCC, or

for any other reason.

94. Finally, we solicit comment on the

relationship between our transport rate

structure rules and the market-based

access reform proposals we discuss in

Section IV, and on the relationship

between the transport rate structure

rules and the prescriptive access reform

proposals we discuss in Section V. Is

our goal of driving interstate access rates

to forward-looking economic cost

consistent with retaining rules

governing transport rate level

relationships? Is it possible to comply

with the court’s mandate with regard to

the tandem switching charge and

transport overhead cost allocations

without retaining some rules governing

transport rate level relationships?

E. Transport Interconnection Charge

1. Background

95. Under our Part 36 separations

rules, certain costs of the incumbent

LEC network are assigned to the

interstate jurisdiction. The Part 69 cost

allocation rules allocate these costs

among the various access and

interexchange services, including

transport. In the First Transport Order,

we restructured interstate transport rates

for incumbent LECs. The restructure

created facility-based rates for dedicated

transport services based on comparable

special access rates as of September 1,

1991, derived per minute tandemswitched transport transmission rates

from those dedicated rates, established

a tandem switching rate, and

established a TIC that initially recovered

the difference between the revenues

from the new facility-based rates and

the revenues that would have been

realized under the preexisting ‘‘equal

charge rule.’’ The TIC was intended as

a transitional measure that initially

made the transport rate restructure

revenue neutral for incumbent LECs and

reduced any harmful interim effects on

small IXCs caused by the restructuring

of transport rates. Approximately 70

percent of incumbent LEC transport

revenues are generated through TIC

charges, or approximately $2.9 billion

out of $4.0 billion in transport revenues.

96. The TIC is a per-minute charge

assessed on all switched access minutes,

including those of competitors that

interconnect with the LEC switched

access network through expanded

interconnection. The usage-rated TIC

increases the per-minute access charges

paid by IXCs and long-distance

consumers, thus artificially suppressing

demand for such services and

encouraging customers to bypass the

LEC switched access network,

particularly through the use of switched

facilities of providers other than the

incumbent LEC. In addition, to the

extent that any portion of the TIC

should properly be included in LEC

transport rates, other than the TIC, the

TIC provides the LECs with a

competitive advantage for their

interstate transport services because

incumbent LEC transport rates are

priced below cost while the LECs’

competitors using expanded

interconnection must pay a share of

incumbent LEC transport costs through

the TIC.

97. Our goal in this proceeding is to

establish a mechanism to phase out the

TIC in a manner that fosters competition

and responds to the court’s remand. The

resolution of the TIC issues is also

related to the resolution of three other

issues. First, the Universal Service Joint

Board recently recommended

establishing a universal service support

mechanism. In Section VII.A, below, we

seek comment on how any support

amounts should be allocated to reduce

interstate rates. Some of those support

amounts may reduce the amount that

would otherwise be recovered through

the TIC. Second, the adoption of either

the market-based or prescriptive
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approach to access reform will establish

the extent to which incumbent LEC

costs will be recovered through facilitybased access charges. Third, if we

conclude that incumbent LECs should

be permitted to recover some embedded

access costs for some period in a

competitively neutral manner, as

discussed in Section VII.B, below, some

of those costs may be costs that are

currently included in the TIC.

Consequently, resolution of these issues

may reduce the costs currently included

in the TIC.

98. As we discuss more fully below,

the costs now recovered in the TIC

could be addressed in several different

ways. Some incumbent LECs have urged

us to give them significant pricing

flexibility and allow market forces to

discipline the recovery of the TIC, either

alone, or in conjunction with a phaseout of the TIC. A second method of

eliminating the TIC would be to

quantify and correct all identifiable cost

misallocations and other practices that

result in costs being recovered through

the TIC. A third approach would be a

combination of these approaches. For

example, we could address directly the

most significant and readily-corrected

misallocations, and then rely on a

market-based approach to reducing

what remains of the TIC. Finally, we

could provide for the termination of the

TIC over a specified time period, such

as three years.

99. We address below some

explanations for the amounts in the TIC,

and then seek comment on possible

means of reducing or eliminating the

TIC.

2. Possible Sources of Costs in the TIC

100. In the NPRM included in the

First Transport Order, the Commission

sought comment on the nature of the

costs included in the TIC so that those

costs could be reallocated. Parties in the

Transport proceeding and in more

recent ex parte filings have offered

various explanations of the composition

of the costs included in the TIC. We

summarize below several of the more

significant explanations presented by

the parties. Our discussion of these

comments is divided into two parts.

One group of comments describes the

costs included in the TIC as the result

of transport rate setting choices. The

other group of comments describes the

costs as related to potential cost

misallocations.

a. Transport Rate Setting. 101.

Tandem Switching and SS7 Costs. In

the First Transport Order, we concluded

that the interim transport rate structure

should include a tandem element that

would initially recover 20 percent of the

interstate revenue requirement

associated with the tandem switch,

while the remaining 80 percent of the

interstate revenue requirement would be

assigned to the TIC. We took this action

because of our uncertainty about the

specific sources of the costs that were in

the tandem switching revenue

requirement and because of our concern

about possible adverse impacts on small

and medium IXCs as the new rate

structure was introduced.

102. USTA submits that the portion of

the tandem interstate revenue

requirement that is included in the TIC

includes some costs incurred in the

provision of SS7 signalling, line

information database (LIDB), and other

related signalling services. These costs

bear no particular relationship to the

operation of the tandem switch. As

discussed below, under the interim

transport rate structure, LECs recover a

portion of their SS7 costs through a flatrated dedicated signalling transport

charge assessed on a per-line basis and

a flat-rated STP port termination charge.

The costs associated with other

signalling functions, such as

transporting SS7 messages within the

signalling network, are not recovered

through any facility-based rate element,

having generally been incorporated in

the transport function, and thus are

presumably embedded in the TIC. These

SS7 costs relate to services used by all

LEC transport customers, and, in the

future, potentially to users who are not

LEC transport customers. The costs

associated with the provision of

signalling services are related to the new

signalling rate elements discussed

below, and if we establish such

signalling rate elements, they would not

need to be recovered through the TIC.

103. Tandem-Switched Transport

Rate Setting. The Commission

employed several assumptions in setting

tandem-switched transport rates, which

USTA alleges understate the rates for

tandem-switched transport. First, under

the interim transport rules, per minute

tandem-switched transport transmission

rates between the SWC and the end

office were presumed reasonable if they

were based on a weighted mix of DS1

and DS3 special access rates and

assumed 9000 minutes of use per voice

grade circuit per month. USTA argues

that the Commission’s assumption of

9000 minutes of use per circuit per

month for tandem-switched transport

circuits resulted in tandem-switched

transport rates that were too low. It

contends that the actual usage on

tandem circuits can be measured and

often is far less than the 9000 minutes

assumed by the Commission. Second,

USTA contends that the use of a per

minute tandem-switched transport

transmission rate from the SWC to the

end office ignores that the SWC-totandem segment of tandem-switched

transport is provided over a circuit that

is dedicated to an IXC. It argues that the

failure to price the SWC-to-tandem

segment of tandem-switched transport

on a flat-rated basis led to some of those

costs being included in the TIC. Third,

USTA also alleges that tandem-switched

transport uses low-density routes

between small end offices and tandem

switches and thus does not use DS3

circuits to the same extent that DS3

circuits are used for direct-trunked

transport service. Thus, according to

USTA, the tandem-switched transport

rate applicable to these low-density

routes is too low. Finally, USTA asserts

that distance-sensitive tandem-switched

transport rates are too low because the

rules used airline miles from the SWC

to the end office rather than measuring

distance through the tandem office.

Each of these assumptions has been said

to result in tandem-switched transport

rates that produce revenues that are less

than costs, with the difference being

assigned to the TIC.

104. Host-Remote Trunking Rate. The

interim transport rules require

incumbent LECs to assess tandemswitched transport rates for the carriage

of traffic between a host switch and its

remote. As with the tandem-switched

transport rate itself, USTA argues that

the 9000 minutes of use per circuit

reflects more usage than actually

transits a circuit, and that the trunks do

not exhibit the ratio of DS3–DS1

relationship that was employed in

setting the tandem-switched transport

rate. USTA contends that the rate

therefore does not recover all the costs

of host-remote trunking.

105. Multiplexing Costs. USTA asserts

that the existing transport rates for

transmission facilities do not account

for all multiplexing costs in two

instances, and that this results in costs

being recovered through the TIC rather

than in appropriate facility-based rates.

First, it alleges that none of the

transmission rates reflects the cost of the

DS1/DS0 multiplexing needed to access

those end office switches that cannot

handle DS1 interfacing, such as analog

electronic switches. Such switches

constitute approximately 25 percent of

the BOC switches. Second, USTA

contends that the TIC also includes the

two additional multiplexers needed in

order to multiplex a DS3 circuit down

to a DS1 level before being switched at

the tandem, and then back up to DS3

afterward for transmission to an end

office. To the extent that analog tandem

switches exist, two additional DS1/DS0
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multiplexers are needed to achieve the

voice-grade interface with the tandem

switch.

106. Direct-Trunked Transport Rate.

In the First Transport Order we

established initial direct-trunked

transport rates that generally were

presumed reasonable if set at the LECs’

September 1, 1992, rates for comparable

special access services. USTA and other

incumbent LECs argue that this resulted

in costs being included in the TIC

because facilities-based transport rates

are too low outside high-volume, lowcost areas. These LECs argue that highcapacity special access is provided

primarily in high-volume, low-cost

areas, making special access rates a good

surrogate for transport rates only in such

areas. They assert that transport in lowvolume areas has significantly higher

costs that are not recovered by rates for

transport facilities because those rates

were based on rates for special access

service, which is more heavily

concentrated in low-cost urban areas

than is transport. SBC, for example,

contends that a study of its interoffice

facilities indicates that transport may

cost over five times more in low-density

areas than in high-density areas. These

parties submit that these higher costs

are included in the TIC.

b. Possible Cost Misallocations. 107.

As we noted above, the Commission’s

Part 36 separations and Part 69 cost

allocation rules assign costs to access

categories, including transport. Some of

these costs were included in the TIC

when it was established in 1993. Some

LECs have indicated that some of the

costs included in the TIC result from

cost misallocations in these processes,

as described below.

108. Central Office Equipment (COE)

Maintenance Expenses. USTA alleges

that the TIC includes costs allocated to

transport by current separations and

cost allocation procedures that are

properly excluded from facility-based

transport rates. For instance, the

separations rules allocate all expenses

for maintaining central office equipment

(including circuit equipment, switches,

and operator services equipment) among

the separations categories for circuit

equipment, switching, and operator

service on the basis of the

apportionment of total COE investment

that is allocated to each of those three

categories. The separations expense

allocations are then carried over into

Part 69 and allocated among the

interexchange and access categories.

These parties contend that a more costcausative approach would allocate each

of these three types of expense based on

the allocation of the investment

associated with that type of expense.

For example, they would allocate circuit

equipment maintenance expenses

between the jurisdictions and among the

Part 69 elements based on the allocation

of circuit equipment investment. The

LECs allege that this change would

move costs primarily from the TIC to the

local switching category.

109. Use of Circuit Terminations in

Separating Costs Between Private Line

and Message Services. Some parties

contend that costs are included in the

TIC because the separations procedures

do not allocate costs to special access

and transport categories in the same

way, even though, as we concluded in

the First Transport Order, the two

categories of service use similar

facilities. Specifically, these parties

argue that the use of circuit termination

counts in allocating trunking facilities

under-allocates costs to the private line

separations category. This occurs

because a DS1 circuit (which generally

carries 24 voice-grade circuits) used for

private line service is counted as having

only two terminations, while a similar

circuit used for switched message

services is counted as having 48

terminations (two per voice-grade

circuit). Because the Commission used

special access rates to establish the

initial facility-based transport rate

levels, and the TIC was derived from

those rates, any under-allocation of

costs to special access could result in

the TIC containing costs that may be

more appropriately recovered through

facility-based special access rates.

110. Over-allocation of costs to the

interstate jurisdiction. Some parties also

allege that the TIC recovers costs

allocated to the interstate jurisdiction

that should properly be allocated to the

intrastate jurisdiction. These parties

contend that such costs were not

included in the special access rates that

were the basis for the initial transport

rates, and that these costs therefore were

included in the TIC.

3. Possible Revisions to the TIC

111. As we have noted earlier, our

goals are to move towards significantly

more cost-based access rates and

competition in the access and

interexchange markets. The

development of a competitive access

market will be distorted by the

assessment of the TIC as a surcharge on

local switching. The TIC therefore will

be unsustainable. In this section we

describe several approaches for revising

the TIC and raise specific questions

concerning the various approaches.

112. As discussed further below, one

approach to revising the TIC that has

been suggested by some incumbent

LECs would be to give them significant

pricing flexibility, thereby permitting

them to address the TIC problem in a

manner consistent with the dictates of

the market. These LECs argue that the

presence of unbundled elements makes

it possible for competitors to reach all

customers immediately and warrants

significant pricing flexibility. They

request various types of pricing

flexibility now, including deaveraged

rates, consolidation of price cap baskets,

contract carriage, and access rates based

on end-user customer class distinctions.

113. Ameritech and NYNEX have

made such proposals. Ameritech favors

phasing the TIC down over a short

transition period of three to five years.

Under this plan, the TIC reductions

would not affect the basket PCI and thus

rate increases for other services would

be possible within the current bounds of

the price cap rules. NYNEX claims that,

if given sufficient pricing flexibility for

facility-based rates and the TIC, it will

be able to manage access pricing in a

way that permits it a reasonable

opportunity to recover its costs, while

minimizing the effect on the

competitive marketplace. For example,

NYNEX would deaverage its rates

downward in high-density areas to

permit it to respond to competition,

while leaving its other rates unchanged

in order to permit it to continue

recovering the existing contribution

included in those rates. NYNEX does

not propose any specific phase out of

the TIC, because it asserts that the

market will discipline its pricing

practices.

114. We ask parties to comment on

the need for some transitional

mechanisms given that approximately

seventy percent of interstate transport

revenues are currently generated from

TIC charges. We seek comment on what

would constitute a sufficient reason to

use a transition mechanism. For

example, should any transition consider

the extent to which IXCs must make

significant adjustments to their network

configurations in response to any

revised TIC recovery methods? We also

seek comment on the duration of any

transition period.

115. Alternatively, we could revise

the TIC by quantifying and correcting all

identifiable cost misallocations and

other practices that cause costs to be

included in the TIC. This approach

would require difficult, detailed

analysis of individual LEC cost data and

probably would not provide an

explanation for all the costs in the TIC.

Furthermore, it would undoubtedly

identify cost allocation problems that

we could not remedy in this proceeding

because of the need to refer

jurisdictional costs allocation issues to a
4688 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules

Federal-State Joint Board. Once

identified and quantified, the costs

comprising the TIC could be: (1) left in

the TIC subject to market pressures; (2)

reassigned to various access services

(including transport facility-based

elements) and to nonregulated activities,

as appropriate; (3) recovered in a

competitively-neutral manner as a

matter of public policy; or (4) removed

from the regulated books of account. In

evaluating these options, we would bear

in mind that the incumbent LECs are in

the best position to identify and

quantify the reasons costs are in the TIC,

and we would therefore place the

burden on them to justify particular

treatment of TIC costs. As with the

preceding approach, we seek comment

on the need for, and the duration of, any

transition period.

116. As a third method, we could

combine the forgoing alternatives. That

is, we could reassign some costs to

facility-based elements when warranted

by forward-looking cost indicia and

address the remaining costs in the TIC

through a phase-out methodology.

Under this approach, we could, for

example, reassign those costs that were

readily identifiable and quantifiable, or

necessary to respond to the court’s

remand directives, and phase out the

remainder of the TIC under either the

market-based or prescriptive approach

to access reform. We tentatively

conclude that this approach better

serves the public interest than would an

attempt to determine exhaustively the

sources of the costs included in the TIC

because it is administratively simpler,

and it is likely that we could not

establish the causes for all the costs

included in the TIC. We seek comment

on the relationship of this method to

whether we select a market-based or

prescriptive approach to rate levels, as

discussed further below. As with the

preceding two approaches, we seek

comment on the need for, and the

duration of, any transition period.

117. Finally, as a fourth option, we

could establish a schedule under which

the costs included in the TIC are phased

out. Under this option, we would

establish a fixed time period during

which incumbent LECs could in

succeeding years recover a declining

portion of the amounts included in the

TIC. At the conclusion of the period,

LECs could no longer recover any TIC

revenues. In conjunction with the

option of phasing out of the TIC, a LEC’s

PCIs, or SBIs, could be adjusted to

reflect the phase-out of the TIC, or they

could be left unchanged. Again, we seek

comment on the relationship of this

method to whether we select a marketbased or prescriptive approach to rate

levels, as discussed further below.

118. We seek comment on the extent

to which the above approaches to

revising the TIC will achieve the goals

of this proceeding. Parties should

address the relative merits of each, or of

other approaches that they may suggest.

In particular, they should address how

each plan would accommodate any

universal service or residual cost

amounts that might be allocated to the

TIC. We also seek comment on how

each of the above approaches affects

small business entities, including small

LECs and new entrants. Below, we

inquire about specific issues concerning

these approaches.

119. In evaluating possible

approaches to recovery of the TIC,

parties should address the possible

explanations set out above for the sums

in the TIC, including the reasonableness

and significance of each of the

explanations. We invite incumbent

LECs to quantify the amounts

attributable to each explanation. Parties

presenting data to quantify amounts in

the TIC should include sufficient detail

to permit the Commission and

interested parties to evaluate the

procedures used and to adjust the

results, if necessary, to address concerns

raised in the record. Parties are also

asked whether there are any additional

explanations for the amounts included

in the TIC. Parties should quantify their

explanations to the extent possible.

Finally, we ask parties to comment on

whether any interstate costs are

included in the TIC that the LECs

should be required to write off their

regulated books of account as not

prudently invested, no longer used and

useful, or for some other reason. Any

party believing that such costs exist

should explain why they should be

written off, and provide the legal basis

and methodology for doing so. In this

connection, they should comment on

the approaches discussed in Section

VII.B.3, below regarding possible

disallowances.

120. In Section V, below, we discuss

giving incumbent LECs additional

pricing flexibility as certain triggers are

satisfied. We ask parties to comment on

the relationship of those pricing

flexibility approaches to the need for

pricing flexibility in conjunction with

revising the TIC under any of the

methods discussed above, or suggested

by any party. For example, because

some of the costs in the TIC may result

from facility-based rates not reflecting

the full costs of serving rural or lowdensity areas, we ask parties to

comment on whether deaveraged

pricing is essential to the achievement

of our goals with respect to the TIC. We

also seek comment on whether other

forms of pricing flexibility are essential

to reform of the TIC. We invite parties

to comment on how any pricing

flexibility needed for this purpose

would affect the competitive

development of the broader access

market. We invite parties to comment

on whether any public policy reasons

would support retaining some costs in

the TIC.

121. Any reallocations that may be

necessary to implement the elimination

or revision of the TIC will give rise to

exogenous cost adjustments for price

cap LECs under our price cap rules.

Parties therefore are asked to comment

on whether any special exogenous cost

adjustment procedures are necessary to

adjust the affected PCIs, APIs, or SBIs.

Parties are asked to comment on

whether any downward exogenous cost

adjustments resulting from access

reform should be targeted to the TIC. We

also ask parties to comment on what

modifications to our access charge rules

for rate-of-return LECs are necessary to

address any revisions to the TIC that

may be adopted. Finally, we ask

whether any modifications to the rules

applicable to special access services are

necessary to accommodate any of the

modifications discussed in this section

of the NPRM.

F. SS7 Signalling

1. Background

122. SS7 is the international standard

network protocol currently used to

transmit signalling information over

common channel signalling (CCS)

networks, and consequently those

networks are often described as ‘‘SS7

networks.’’ The Part 69 rate structure for

SS7 services or facilities may not

currently reflect the manner in which

incumbent LECs incur SS7 costs, and so

may skew the development of

competition for SS7 services. Therefore,

we seek comment in this section on

whether and how to revise the rate

structure for SS7 services.

123. SS7 networks consist of highspeed packet switches and dedicated

circuits that are separate from, but

interconnected with, the

telecommunications networks over

which telephone calls are carried.

Incumbent LECs typically use SS7

networks for three purposes: (1) For call

setup; (2) to obtain information from

remote databases, such as billing

information that must be obtained from

the line information database (LIDB) to

determine whether a calling card is

valid, or information identifying the

designated carrier of a toll-free 800
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules 4689

service subscriber; and (3) to transmit

the information and instructions

necessary to provide custom local area

signaling services (CLASS features),

such as automatic call back and caller

ID. The SS7 signalling networks will

also play an important role in the

implementation of intelligent network

(IN) functionality in incumbent LEC

networks.

124. As illustrated in Figure 2 above,

incumbent LEC CCS networks generally

include the following basic components.

Dedicated network access lines (DNALs)

are dedicated circuits that transmit

queries between incumbent LECs’

signalling networks and the signalling

networks of other carriers, such as IXCs.

The DNAL can be provided by the

incumbent LEC or by the other carrier,

although incumbent LECs generally

provide the DNAL under their current

SS7 tariffs. The DNAL is connected to

a port on an incumbent LEC’s signal

transfer point (STP), a specialized

packet switch that performs screening

and security functions, and switches

SS7 messages within the incumbent

LEC signalling network. Messages

within the incumbent LEC signalling

network travel over signal transport

links, which are typically dedicated DS1

circuits. SS7 messages are formulated

within the incumbent LEC signalling

network at service switching points

(SSPs), which are generally end office

and tandem switches with the necessary

software. Finally, service control points

(SCPs) are computer databases that

respond to network signalling queries

and perform related functions. An

additional term that is often used in

describing SS7 networks is a signalling

point (SP), which refers to any point on

an SS7 network that formulates or

switches signalling queries.

125. Under the interim transport rate

structure, incumbent LECs charge IXCs

and other access customers a flat-rated

charge (called ‘‘dedicated signalling

transport’’ in Part 69 of the rules) for the

use of dedicated facilities to connect to

the incumbent LECs’ signalling

networks. This rate element is

composed of two subelements: a flatrated signalling link charge for the

DNAL, and a flat-rated STP port

termination charge. Most other SS7

signalling costs, including those for

switching messages at the local STP, for

transmitting messages between an STP

and the incumbent LEC end office

switch or tandem switch, and for

processing and formulating signal

information at an end office or tandem

switch, are not recovered through

facility-based charges, and thus most, if

not all, of these costs are presumably

embedded in the TIC and the local

switching charge. At SCPs, such as the

800 and LIDB databases, incumbent

LECs typically assess a per-query charge

for the retrieval of information and the

transmission of the query to and from

the database. Incumbent LECs also

recover costs associated with the

provision of certain signalling

information necessary for third-parties

to offer tandem switching through the

‘‘signalling for tandem switching’’ rate

element.

2. Ameritech’s SS7 Rate Structure

126. On March 27, 1996, the Common

Carrier Bureau granted Ameritech a

waiver to restructure the manner in

which it recovers its SS7 costs. The rate

structure established by Ameritech

pursuant to that waiver recovers costs

associated with the provision of SS7

signalling services through four

unbundled charges for the various

functions performed by incumbent LEC

CCS networks: (1) Signal link; (2) STP

port termination; (3) signal transport;

and (4) signal switching. We invite

comment on using the waiver granted to

Ameritech as a model for a revised SS7

rate structure for the industry as a

whole.

127. Signal Link. We seek comment

on whether costs associated with the

DNAL—the dedicated facility

connecting an SS7 customer’s network

to a dedicated port on the incumbent

LEC’s STP—should continue to be

recovered through a flat-rated distancesensitive signal link charge. Flat-rated

cost recovery appears reasonable

because the DNAL is a dedicated circuit

serving a single SS7 customer, similar to

those circuits used to provide special

access or direct-trunked transport.

Incumbent LECs’ SS7 customers could

provide their own DNAL, or purchase a

DNAL from the incumbent LEC by

paying the signal link charge. We also

seek comment on whether the signal

link should remain in the transport

service categories in the trunking basket.

128. STP Port Termination. We seek

comment on whether the costs

associated with the dedicated port on

the incumbent LEC’s local STP that

connects to a customer’s DNAL should

be recovered through a flat-rated charge.

This charge would include the portion

of costs currently recovered through the

STP port termination subelement

associated with the STP port, but not

the costs recovered through that

subelement today associated with the

screening and switching functions of the

STP, which we understand are not

performed by the port. Because the STP

port termination costs are dedicated to

a particular SS7 customer, we ask

whether they should be recovered on a

flat-rated basis.

129. We also seek comment on

whether the STP port termination

element should be placed in a new

service category in the traffic-sensitive

basket. Although STP port termination

rates today are in the same service

category as the signalling link, these two

services are subject to different

competitive conditions. Specifically,

although interconnectors can provide

their own signal link, the STP port is

part of the incumbent LEC’s STP and

therefore must be purchased from the

incumbent LEC. Consequently,

incumbent LECs could offset reductions

in their charges for the signal link with

increases in the STP port charges if STP

port termination and the signal link

remained in the same service category.

The STP port termination element

appears analogous to the dedicated line

cards and trunk cards discussed in the

local switching rate structure discussion

above, and therefore we seek comment

on whether it should be placed in a new

‘‘signalling’’ service category in the

traffic-sensitive basket. Recognizing that

STP port costs may be relatively small

compared to signal link costs, we seek

comment on whether the benefits we

have identified outweigh the

administrative burdens of implementing

such a system and creating a new price

cap service category. Another

alternative would be to remove the STP

port termination element, and other

non-competitive SS7 elements essential

for interconnection, from price caps

entirely, as we have done for expanded

interconnection. We seek comment on

this option.

130. Signal Transport. The circuits

that carry SS7 queries between STPs,

switches, and SCPs within incumbent

LEC signalling networks are comparable

to the shared circuits incumbent LECs

use to provide transport between end

office and tandem switches. SS7 queries

associated with many different calls

traverse the same signal transport links

simultaneously, and so a usage-sensitive

charge for these shared facilities appears

appropriate. As with signal switching,

discussed below, the costs of signal

transport appear most closely related to

the number of queries, and therefore we

seek comment on whether this charge

should be assessed on a per-query basis.

We also seek comment on whether

incumbent LECs should be permitted to

charge distance sensitive rates for signal

transport, and the appropriate level of

distance sensitivity that should be

allowed.

131. It appears that signal transport is

a form of transport, and therefore we

invite comment on placing this service
4690 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules

in the trunking basket. We also invite

comment on placing signal transport in

the existing ‘‘signalling for tandem

switching’’ service category. In addition,

interested parties may discuss whether

to place this service in a separate service

category from the signal link, because

the signal link may be provided by other

carriers while signal transport generally

must be performed by the incumbent

LEC.

132. Signal Switching. We seek

comment on whether costs related to

processing and switching by the STP

should be recovered on a per-query,

usage-sensitive basis. These costs are

similar to the costs incurred in

switching telephone calls at end office

and tandem switches. Unlike end office

and tandem switches, however, STPs

switch only data, and a single call may

involve multiple instances of signal

switching. Because the costs associated

with signal switching relate more to the

number of SS7 queries switched than to

the number or duration of calls, we ask

whether the signal switching charge

should be assessed based on the number

of SS7 messages switched. For the

reasons we have identified above in the

context of central office and tandem

switching, we seek comment on

whether peak load pricing would be

appropriate for signal switching.

133. We propose to place this service

in the traffic-sensitive basket. We

further seek comment on whether to

place this service in the same service

category as the STP port termination

charge, or whether to create a new

service category for signal switching.

3. Other SS7 Issues

134. We also invite parties to suggest

alternative rate structures for SS7

signalling. For example, we permitted

Ameritech to implement rate elements

for signal tandem switching, signal

formulation, and optional parameters.

We also seek comment on whether

incumbent LECs should be permitted to

impose separate charges for ISDN User

Part (ISUP) messages, which are used in

setting up and taking down calls, and

Transaction Capabilities Application

Part (TCAP) messages, which are used

primarily for database queries and

CLASS services such as enhanced caller

ID, or whether some other

differentiation should be made between

charges for different types of SS7

messages. Although such differentiation

could be economically justified on the

basis of the different average lengths of

ISUP and TCAP queries (and therefore

the differential load they tend to place

on the SS7 network), we question

whether we should do so in the interests

of rate structure simplicity. To the

extent that parties contend that

differentiated charges for TCAP and

ISUP messages should be adopted, we

ask those parties to provide specific

information and data to support such a

claim. Parties that favor an alternate

structure are asked to provide details of

any such alternatives, and to explain

how such alternatives would be

consistent with the goals of this

proceeding. In particular, we ask parties

to discuss ways in which the SS7 rate

structure we have proposed could be

simplified. The desire for rate structure

simplicity may conflict with the goal of

economic cost-causation, and we seek

comment on the appropriate manner in

which we should strike this balance for

SS7 signalling.

135. We seek comment on whether

the pricing for facility-based signalling

rate elements should be determined

under the price caps new services test.

As we discussed in the Ameritech

Operating Companies Petition for

Waiver of Part 69 of the Commission’s

Rules to Establish Unbundled Rate

Elements for SS7 Signalling, although

the proposed SS7 rate elements would

probably be considered restructured

services under our price cap rules, we

tentatively conclude a requirement of

revenue neutrality and the cost showing

specified under the new services test

would serve the public interest in this

context. The different SS7 elements are

likely to be subject to different

competitive pressures, and the current

rate structure does not provide a

sufficient basis, absent a cost showing

by incumbent LECs, on which to base

the rates for these new charges.

136. Incumbent LECs may need to

install additional monitoring equipment

in order to bill properly for unbundled

SS7 services. Some incumbent LECs

may not currently have the capacity to

meter any SS7 traffic, and some

incumbent LECs may only have such

metering capacity at STPs, not at

signalling points in tandem offices. We

seek comment on the feasibility and cost

of mandating a rate structure for SS7

services that would require incumbent

price cap LECs to install equipment for

metering SS7 traffic in their networks.

We also invite comment on whether and

the extent to which the costs of any

equipment needed to comply with our

proposed rules warrant exogenous cost

treatment under our price cap rules. In

the 800 Database proceeding, Provision

of Access for 800 Service, CC Docket

No. 86–10, Second Report and Order, 58

FR 7867 (February 10, 1993), the

Commission permitted incumbent LECs

exogenous treatment of the reasonable

costs they incurred specifically to

provide basic 800 database service.

Unlike the rules we adopted in the 800

Database proceeding, however, the SS7

rules we are contemplating here would

not require incumbent LECs to provide

any service they are not currently

providing. The rules instead would

require incumbent LECs to recover the

costs of any SS7 service they choose to

provide in a fashion that reflects the

way they incur those costs. Thus, the

costs of SS7 metering equipment may

not warrant exogenous cost treatment.

137. We tentatively conclude that,

under the proposal described above, the

existing charge incumbent LECs assess

on third party tandem switching

providers (TSPs) for the provision of

signalling codes necessary for those

TSPs to interconnect their tandem

switches with incumbent LEC transport

networks should be eliminated and

replaced by charges for the specific SS7

functions associated with providing this

signalling information. Although this

charge serves a particular purpose, this

service appears to use the same basic

SS7 functions as other signalling

services. Thus, although the ‘‘signalling

for tandem switching’’ service category

would remain in the trunking basket,

that category would include only the

newly-created signal transport element,

and would be renamed as the

‘‘signalling transport’’ service category.

We seek comment on this analysis. Even

if we do not eliminate the existing

signalling for tandem switching charge,

we have proposed to place several new

rate elements into the existing signalling

for tandem switching service category

that recover some costs not related to

tandem switching. Signal transport, for

example, recovers costs for signalling

associated both with tandem-switched

and with direct-trunked calls. In order

to avoid confusion, we tentatively

conclude that the signalling for tandem

switching service category in the

trunking basket should be renamed as

the ‘‘signalling’’ service category.

G. New Technologies

138. Developments in switching and

transmission technology are producing

new telecommunications capabilities

that offer the potential for new services

and lower prices in the future. These

include synchronous optical networks

(SONET), Asynchronous Transfer Mode

(ATM) switching, and advanced

intelligent networks (AIN). We seek

comment on whether, and how, we

should take these new technologies into

account in adopting access charge rules.

We also invite parties to recommend

specific rate structure rules that would

reflect the manner in which incumbent

LECs incur costs when providing

services using these technologies. We
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules 4691

also seek comment on whether we

should adopt access charge rules to

govern rate structures for services

employing any other new technologies.

IV. Approaches To Access Rate Reform

and Deregulation

A. Different Approaches to Access

Reform

139. Our overriding goal in this

proceeding is to adopt revisions to our

access charge rules that will foster

competition for these services and

eventually enable marketplace forces to

eliminate the need for price regulation

of these services. In addition to the rate

structure changes discussed above, we

suggest in this NPRM two different

approaches to access reform—a marketbased approach and a more prescriptive

approach. We could adopt a marketbased approach to access reform under

which we would let marketplace

pressure move interstate access prices to

competitive levels. This approach could

be implemented incrementally, first

eliminating certain regulatory

constraints as incumbent price cap LECs

demonstrate through credible, verifiable

evidence that the conditions necessary

for efficient local competition to

develop in their service areas exist.

Then, as incumbent LECs show that

competition has emerged, additional

regulatory constraints, including

mandatory rate structures, would be

eliminated to allow those LECs to adjust

their interstate access rates. Finally,

when substantial competition has

developed, price regulation would be

eliminated.

140. Some parties, however, may

contend that a market-based approach

will allow incumbent LECs to continue

indefinitely to assess inflated prices for

some or most access services in some or

most geographic areas. These parties

would urge us to adopt a prescriptive

approach to access reform. Under this

approach, we would require incumbent

LECs to move their prices to specified

levels and allow such LECs limited

pricing flexibility until they can

demonstrate they face actual

competition for access.

141. A market-based approach has a

number of advantages. It creates

incentives for incumbent LECs to act

quickly to open the local exchange and

exchange access market to competition,

by making that a condition for having

additional flexibility to respond to

competition from facilities-based

competitors. It allows marketplace

forces, rather than regulation, to

determine how quickly prices move to

cost-based levels. A market-based

approach also has some disadvantages.

Marketplace forces may not require

incumbent LECs to assess cost-based

prices for access prices as quickly as a

prescriptive approach. It may also be

difficult to develop reliable,

administratively simple criteria for

assessing evidence of competitive entry

and determining the existing regulatory

constraints that should be relaxed based

on such a showing.

142. Conversely, the advantages to a

prescriptive approach are that the

Commission can move prices to costbased levels quickly and avoid the need

to develop criteria for determining

whether competition is sufficient to

allow incumbent LECs additional

pricing flexibility. The principal

disadvantage to a prescriptive approach

is that it requires the Commission to

make detailed determinations of

appropriate price levels for multiple

services throughout the country.

Another disadvantage is that, in the

event an incumbent LEC can show its

embedded costs are significantly higher

than its forward-looking costs, the

Commission would be required to

determine how much of the difference

incumbent LECs should be given a

reasonable opportunity to recover and

the method for that recovery.

143. We set forth below both a

market-based approach and a more

prescriptive approach. We seek

comment on whether we should: Select

one of the two approaches as our

exclusive method of reforming access

charges in a manner that is most likely

to lead to the conditions that will enable

us to deregulate access charges; adopt

both approaches as alternatives; or

merge the two approaches in some

fashion. For example, if barriers to

competition are not eliminated, a

market-based approach to access reform

likely would not work. If a market-based

approach were adopted, we might

nonetheless seek to ensure that prices

move toward economic cost even

though barriers to competition are not

eliminated within a reasonable time for

certain services or in some geographic

areas, by adopting an alternative

prescriptive approach for those services

or geographic areas.

144. Commenters advocating a merger

of both a market-based approach and a

prescriptive approach should describe

how the two approaches can be melded.

For example, what criteria should be

used for determining whether to impose

prescriptive access reform and at what

time? How would a combination of the

two approaches work if barriers to

competition were eliminated, but later

reinstituted?

145. Commenters proposing a

melding of both approaches should also

discuss any regulatory safeguards that

may be needed. For example, an

incumbent LEC might face different

regulatory regimes in different parts of

its service region, or for different access

services. This may create an incentive

for incumbent LECs to increase costs

artificially for the services or areas that

are subject to prescriptive regulation or

less competition. Incumbent LEC

incentives to misallocate costs in this

manner would depend on whether such

cost changes would affect incumbent

LEC rates under prescriptive regulation,

and on the magnitude of any such effect.

146. We have previously faced issues

that arise when an incumbent LEC is

subject to different regulatory regimes

for different access services, in the

context of the BOCs’ provision of

enhanced services. Specifically, the

Commission decided not to regulate

enhanced services because the market

for such services is competitive. The

Commission currently employs

accounting safeguards designed to

prevent common carriers from shifting

costs from nonregulated to regulated

services, without precluding them from

taking advantage of any economies of

scope. We adopted the ‘‘all or nothing’’

rule in the Policy and Rules Concerning

Rates for Dominant Carriers, Second

Report and Order, CC Docket No. 87–

313, 55 FR 42375 (October 19, 1990)

(LEC Price Cap Order) to address similar

concerns about incumbent LECs shifting

costs from affiliates governed by price

cap regulation to affiliates governed by

rate-of-return regulation. Should similar

safeguards be adopted if a combination

of market-based access reform and

prescriptive access reform is adopted?

We also invite comment on whether

there are any other issues raised by

applying different regulations to

different services or areas.

147. We also seek comment generally

on how incumbent LEC provision of inregion interLATA services—either by

independent incumbent LECs or

potentially by BOCs upon FCC approval

under section 271—should affect our

choice of a market-based or prescriptive

approach, or the phases for

implementing each approach.

Conversely, we seek comment on how

our selection of a market-based or

prescriptive approach should affect, if at

all, our consideration, of BOC

applications, for in-region provision of

interLATA services. As discussed

earlier in Section I.B, IXCs argue that, to

the extent access services are not

available to IXCs at their forwardlooking economic cost, incumbent LECs

and their long-distance affiliates will

have an artificial competitive advantage

in the market for long-distance services
4692 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules

that may distort the effects of

competition and result in inflated retail

prices. We ask parties concerned about

a possible ‘‘price squeeze’’ to identify

the conditions under which we should

be concerned. We ask parties to

comment on whether the availability of

unbundled network elements at their

forward-looking economic cost would

reduce the danger of a price squeeze

insofar as IXCs might use those

elements to provide their own access to

customers for whom they are the local

service provider.

B. The Goal—Deregulation in the

Presence of Substantial Competition

1. Objectives

148. Regardless of the specific

approach that we adopt in this

proceeding—market-based, prescriptive,

or some combination of the two—our

goal is to foster the development of

substantial competition for interstate

access services. Once substantial

competition is present for a particular

service in a particular area, we propose

to remove that service from price cap

and tariff regulation for that area.

149. Our plan to remove from price

cap regulation interstate access services

that are subject to substantial

competition is consistent with prior

decisions in which the FCC gradually

removed AT&T’s services from price cap

regulation. Our analysis of whether

AT&T’s services were subject to

substantial competition rested on

considerations of market share, demand

responsiveness, supply responsiveness,

and AT&T’s pricing behavior. We

recognize, that unlike AT&T, incumbent

LECs control bottleneck facilities,

particularly the loop. Nevertheless, the

1996 Act seeks to erode this source of

market power by requiring incumbent

LECs to make unbundled network

elements and resale available. In view of

the similarities between the structure of

and purposes behind the AT&T and the

LEC price cap plans, the analytical

framework that we used to streamline

AT&T’s services would appear to be an

appropriate method for effectively

deregulating incumbent LEC services.

We also propose to eliminate tariff filing

requirements for services subject to

substantial competition. We seek

comment on whether these actions are

appropriate under these conditions, and

whether we should adopt any other

deregulatory measures when an

incumbent LEC service is subject to

substantial competition. Below, we seek

comment on the factors used in

examining AT&T’s pricing behavior. We

invite comment on which of these,

alone or in conjunction with these or

other factors, could be used to

determine when to remove incumbent

LEC access services from price cap

regulation.

150. We propose that the substantial

competition analysis should be

considered on a service-by-service basis

so that, for example, directory assistance

could be removed from price cap

regulation where substantial

competition exists for directory

assistance, even if not for local

switching. Such an approach is

consistent with our approach to

removing AT&T’s services from price

cap regulation, and would allow

incumbent LECs to price competitively

where competition has developed,

while not permitting incumbent LECs to

raise prices for services for which

competition has not developed

sufficiently.

151. We ask commenters to address

whether, instead of requiring the

presence of substantial competition, we

should remove from price cap

regulation services for which the

incumbent LEC cannot influence price

movements. There may be

circumstances in which incumbent

LECs cannot affect price changes in the

market, even in the absence of

substantial competition. Our public

interest concern is whether incumbent

LECs can adversely affect price

movements. Using such an approach

may remove an incumbent LEC’s

services from price cap regulation even

if no competitors enter the market, but

the incumbent LEC has complied with

the requirements of the 1996 Act.

152. We further ask whether highcapacity special access services, e.g.,

those special access services offered at

speeds of DS1 or higher, should be

removed immediately from price cap

regulation. Many incumbent LECs

contend that for certain geographic

markets these special access services are

already subject to intense competitive

pressures that today discipline

incumbent LEC pricing of such services.

If these allegations are correct, our procompetitive goals could be served by

removing these services from price caps.

We ask parties to address the degree of

competition that exists for such

services, including any quantification

that may be available. We invite parties

to comment on whether any other

incumbent LEC services in particular

geographic areas are already subject to

substantial competition and therefore

should be removed from price cap

regulation.

153. We solicit comment on the

procedures that an incumbent LEC

should follow to demonstrate that one

or more services are subject to

substantial competition. Parties should

discuss whether an incumbent LEC

should file a petition for waiver, a

petition for declaratory ruling, or some

other filing, and how the incumbent

LEC should satisfy its burden of proof.

In addition, we tentatively conclude

that we should adopt rules governing

the recalculation of the price cap

indices when one or more services in a

basket are removed. Such rules would

speed the review of the tariffs that

incorporate the recalculated indices. We

invite parties to comment on this

tentative conclusion, and to propose

particular rules that we should adopt.

154. We also seek comment on what

geographic area should be used in

examining whether a service is subject

to substantial competition. The level of

competition for different services likely

will vary by geographic area, even

within the same state. Thus, we propose

not to rely on a statewide analysis of

competition. We seek comment on

whether the relevant geographic areas

should conform to the areas

implemented by the relevant state in

making unbundled network elements

available to competitors. Because the

costs of competitors using unbundled

network elements will be affected by

these geographic areas, it may be

appropriate that incumbent LEC access

prices vary according to them. We

acknowledge that it is possible that

competition can vary significantly even

within such a zone. Alternatively,

should we require that the geographic

areas coincide with the zones adopted

in the Universal Service proceeding to

determine high cost areas? A third

approach would be to use the same

geographic areas that we might select for

geographic deaveraging if we were to

adopt the market-based approach set out

in Section V, below. We seek comment

on these options.

2. Competitive Factors

a. Demand Responsiveness. 155.

Incumbent LECs may seek to

demonstrate that the market for

particular interstate access services is

competitive through evidence indicating

that, where comparable access services

are available to the incumbent LECs’

customers, a significant number of those

customers have the ability to evaluate

the full range of market options

available to them, and the customers do

in fact exercise these options. We

therefore propose that the demand

responsiveness of the incumbent LECs’

customers should be an important factor

in assessing the level of competition for

incumbent LEC services for purposes of

determining whether a service should

be removed from price cap regulation.
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules 4693

We seek comment on this proposal.

Parties should identify the relevant

factors that should be used in

determining whether an incumbent

LEC’s customers are demandresponsive; the data and information

that would be necessary and relevant in

determining whether an incumbent

LEC’s customers are demandresponsive; and whether the fact that

incumbent LECs have relatively few

customers that account for most of their

interstate access demand affects the

usefulness of demand-responsiveness as

a factor in determining the level of

competition. Alternatively, we seek

comment on the proposal that a LEC

need only provide evidence that

comparable access services are available

from other carriers and need not provide

evidence specifically on demand

responsiveness.

b. Supply Responsiveness. 156. We

invite comment on whether supply

responsiveness should be a factor in

determining the level of competition for

purposes of determining whether

specific interstate access services should

be removed from price cap regulation. If

so, we ask parties to identify the factors

that are relevant in determining whether

an incumbent LEC’s competitors have

enough readily-available supply

capacity to constrain the incumbent

LEC’s market behavior and inhibit it

from charging excessive rates; and the

data and information that would be

necessary and relevant in determining

whether an incumbent LEC’s

competitors are supply-responsive.

Supply elasticities of an incumbent

LEC’s competitors may be important in

assessing the level of competition for

incumbent LEC services. However, we

tentatively conclude that the ready

availability of unbundled network

elements at forward-looking economic

cost decreases the cost of entry for

access services. Their ready availability

would indicate a high supply elasticity

in the access market.

c. Market Share. 157. As we observed

in the Price Cap Second FNPRM, at the

time we considered giving AT&T

streamlined regulation for certain longdistance services, we determined that a

high market share does not necessarily

confer market power. A company that

enjoys a very high market share will be

constrained from raising its prices above

cost if the market is characterized by

high supply and demand elasticities at

prices even slightly above competitive

levels. An analysis of the level of

competition for incumbent LEC services

based solely on an incumbent LEC’s

market share at a given time may not

provide sufficient evidence for us to

conclude that substantial competition

truly exists. While we do not propose to

ignore market share data in assessing

the level of competition for incumbent

LEC services, we propose to consider

market share in conjunction with other

factors, including, but not necessarily

limited to, supply and demand

elasticities and pricing trends. We ask

parties whether market share should be

a factor in determining the level of

competition for purposes of determining

whether services should be removed

from price cap regulation. If so, we ask

parties to discuss how market share

should be measured.

d. Pricing of Services Under Price Cap

Regulation. 158. Evidence that a price

cap LEC is pricing services below the

price cap ceiling over a sustained period

may indicate that such services are

subject to competitive pressures,

particularly in markets with high supply

and demand elasticities. An incumbent

LEC’s below-cap pricing of services,

however, is not necessarily a reliable

measure of competition. While belowcap pricing may indicate a market with

high supply and demand elasticities, it

could also occur because the incumbent

LEC is behaving strategically in order to

be relieved of regulation. Pricing at the

cap may be evidence of a lack of

competition, or that the cap is close to

the forward-looking economic cost of

the service. How much significance

should we give to evidence that a price

cap LEC is pricing services below the

price cap ceiling over a sustained

period?

e. Other Factors. 159. We invite

comment and discussion on whether

there are other factors in addition to

those discussed above that we should

consider in an evaluation of the

competition faced by an incumbent

LEC, for example elimination of barriers

to entry in the event it is not otherwise

required. Parties that suggest other

factors to assess the level of competition

for incumbent LEC services should

discuss what data and information

would be necessary to assess the relative

importance of these factors.

V. Market-based Approach To Access

Reform

A. Introduction

160. In this section, we seek comment

on an approach to access reform that

relies on marketplace forces to move

interstate access prices to more

economically efficient levels. Under this

approach, our primary role would be to

remove regulatory requirements that

inhibit the operation of market forces. In

Section III, above, we propose rate

structure changes designed to make the

baseline regulatory scheme more

efficient. In this section, we propose a

plan for reducing regulation in two

phases as competitive benchmarks are

achieved short of substantial

competition.

161. Using a competitive paradigm,

the issue becomes one of identifying the

market conditions that should trigger

the removal of existing regulatory

constraints. Under the procedure we

propose in this section, we would

implement regulatory reforms as

incumbent LECs demonstrate that their

local markets have achieved predefined, specific transition points, or

‘‘competitive triggers.’’ We are seeking

comment on removing uneconomic

regulatory constraints in two

preliminary phases before a finding of

substantial competition for access

services in specific areas permits the

detariffing of access services.

162. We seek comment on whether

Phase 1, potential competition, would

be achieved when an incumbent LEC

has opened its network by removing the

most immediate barriers to competitive

entry. At this stage, we are seeking

comment on targeted reforms that

remove uneconomic regulatory

requirements that inhibit incumbent

LECs from charging access prices that

reflect the cost differentials in serving

different geographic areas, from

lowering access prices non-predatorily,

and from pricing optional new services

based on market considerations. We are

seeking comment on whether an

incumbent LEC should be required to

show that some or all of the following

conditions exist to trigger Phase 1: (1)

Unbundled network element prices are

based on geographically deaveraged,

forward-looking economic costs in a

manner that reflects the way costs are

incurred; (2) transport and termination

charges are based on the additional cost

of transporting and terminating another

carrier’s traffic; (3) wholesale prices for

retail services are based on reasonably

avoidable costs; (4) network elements

and services are capable of being

provisioned rapidly and consistent with

a significant level of demand; (5) dialing

parity is provided by the incumbent

LEC to competitors; (6) number

portability is provided by the incumbent

LEC to competitors; (7) access to

incumbent LEC rights-of-way is

provided to competitors; and (8) open

and non-discriminatory network

standards and protocols are put into

effect. We anticipate that at least some

incumbent LECs reasonably should be

able to satisfy these conditions during

1997. We also invite comment on

whether the first three possible

conditions, which relate to the pricing

of uses of the incumbent LECs’ networks
4694 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules

other than access, might be sufficient to

permit certain of the access pricing

reforms about which we are seeking

comment.

163. We invite comment on whether

Phase 2 would be met when an actual

competitive presence has developed in

the marketplace. For an incumbent LEC

to demonstrate that Phase 2 has been

achieved for a particular service or

within a given area, we invite parties to

comment on the following tests: (1)

Demonstrated presence of competition;

(2) full implementation of competitively

neutral universal service support

mechanisms; and (3) credible and

timely enforcement of pro-competitive

rules. We also seek comment on

whether an incumbent LEC should

instead be eligible for Phase 2 treatment

if it has made its facilities and services

available in a reasonable and

nondiscriminatory fashion, but no

competitors have entered to serve the

incumbent LEC’s service area. Would

this be sufficient to address the public

interest considerations involved in

implementing the Phase 2 reforms?

164. We invite comment on this

general approach to access reform, and

on the specific regulatory reforms

proposed and their respective

competitive benchmarks. We also seek

comment on whether these or other

regulatory reforms should be

implemented without the achievement

of any competitive benchmarks, or upon

the achievement of benchmarks

different from those proposed.

165. The 1996 Act became law after

we issued the Price Cap Second

FNPRM. Because many of the issues

raised in that NPRM are closely related

to issues central to this proceeding, we

here re-notice many of the proposed

provisions to remove regulatory burdens

contained in the Price Cap Second

FNPRM. In developing this NPRM we

have considered the comments we

received in response to the Price Cap

Second FNPRM. Because of the

intervening passage of the 1996 Act,

however, we will limit the record in this

proceeding to the comments received in

response to this NPRM. Parties who

filed in response to the Price Cap

Second FNPRM should not rely on

those comments, but instead should file

anew. Parties may attach their Price Cap

Second FNPRM comments as

appendices and incorporate them by

reference.

166. As discussed in Section II.A,

above, the removal of regulatory

constraints considered in this section is

applicable to incumbent LECs subject to

price cap regulation. Arguably, small

incumbent LECs are affected in the

sense that regulatory constraints are not

being removed for them as are some of

the constraints for price cap incumbent

LECs. Small incumbent LECs will not be

otherwise affected by the proposals

contained herein. While these proposals

may indirectly affect small entities,

especially competitive LECs and access

customers, we anticipate that they will

not have an impact on small entity

reporting, record keeping, or other

compliance requirements. We invite

parties to comment on this analysis.

B. Phase 1—Potential Competition

167. We propose to eliminate four

significant regulatory constraints when

an incumbent LEC can demonstrate that

it faces potential competition for

interstate access services in specific

geographic areas: The prohibition

against geographic deaveraging within a

study area; the ban on volume and term

discounts for interstate access services;

the current prohibition against contract

tariffs and individual request for

proposals (RFP) responses; and various

restraints on the ability of incumbent

LECs to offer new, innovative access

services. We note that Ameritech has

proposed conditioning simplification of

price cap regulation upon the

achievement of certain competitive

triggers. We propose these changes

because, once a LEC satisfies the triggers

we have identified, competitive forces

should come most quickly to bear on the

provision of interstate access in low-cost

geographic areas and to large customers.

Removing these restraints should permit

LECs greater ability to price

economically and therefore bring more

competitive pressures, including lower

prices, in areas and for services where

we expect competitive forces initially to

be strongest. Such reforms would have

the goal of fostering efficient and

effective competition, to the benefit of

customers, wherever possible. Without

such reform, continuing uneconomic

regulation may serve primarily to permit

inefficient new entrants to gain market

share among the most attractive

customers rapidly. We seek comment

generally on this analysis and

specifically on the conditions and

pricing reforms set out below. We also

seek comment on whether we should

modify any other of our regulatory

pricing constraints at the time the Phase

1 competitive triggers have been met.

1. Trigger and Geographic Scope

168. We propose that the Phase 1 rule

changes take effect when an incumbent

LEC’s network has been successfully

opened to competition. The proposed

Phase 1 rule changes remove restrictions

that limit the ability of incumbent LECs

to re-price access services in ways that

respond to competitive pressure, but do

not impede competitive entry. We seek

comment on whether some or all of the

tests described below provide the

necessary and sufficient criteria for us to

determine, for this purpose, whether an

incumbent LEC’s network has been

opened to competition. We also seek

comment on whether we should use any

other test instead of, or in conjunction

with, those we propose.

169. Unbundled Network Elements.

The first condition we propose is that

unbundled network elements be

available at forward-looking economic

cost, i.e., on the basis of the TELRIC of

the network element (also known as

Total Element Long Run Incremental

Cost), plus a reasonable allocation of

common cost. Unbundled elements

provide a ubiquitous substitute for

access service. Where access charges

exceed forward-looking economic cost

(due to the structure or level of access

being inefficient), IXCs have an artificial

incentive to ‘‘win’’ the customer and

provide both local and toll service using

unbundled elements. We expect that

availability of unbundled elements at

TELRIC prices as a substitute for access

charges will ultimately require the LEC

to set its charges in an economically

efficient manner so as to give customers

the most economic value consistent

with covering costs. Will the availability

of unbundled network elements at

forward-looking economic costs drive

LECs’ access charges to efficient levels

and structures? Or will it only tend to

constrain the overall level of charges,

and give incumbent LECs incentives to

choose inefficiently high or inefficiently

structured access charges, thus

disadvantaging IXCs that are not

effectively integrated into local service,

and thus driving the market, possibly

inefficiently, towards one-stop

shopping? Commenters are asked to

outline the specific mechanism by

which such competition will affect

access rates. Those who believe

competition from unbundled network

elements will not affect access rates

should explain why.

170. In order for unbundled elements

to promote ubiquitous competition

effectively, prices for unbundled

network elements must be

geographically deaveraged. Costs may

vary across geographic areas based on

the density of the area served,

topography, or other characteristics of

the area. When the prices of elements

that vary materially in cost are averaged,

the ability to substitute unbundled

elements for access will not drive access

rates to their efficient level, because

such prices will understate the cost of

providing services over the elements in
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules 4695

high-cost areas and overstate the cost of

providing services over the elements in

low-cost areas. When element prices

have been deaveraged to reflect cost

differences, any divergence between

element prices and access charges

required by regulation creates an

artificial incentive to substitute

unbundled elements for access.

171. We seek comment on whether,

for purposes of implementing marketbased access reform, an incumbent LEC

should not be deemed to have satisfied

the Phase 1 competitive triggers unless

and until rates for unbundled network

elements are available at geographically

deaveraged, forward-looking economic

costs in a manner that reflects the way

costs are incurred. For the purpose of

determining whether deaveraging has

occurred, we tentatively conclude that

there should must be at least three

geographic zones.

172. Transport and Termination. The

next condition we propose for Phase 1

is that transport and termination be

available for local traffic at cost-based

rates. Because unbundled network

elements only act as an effective

substitute for switched access where the

requesting carrier can provide both local

and interexchange service to the end

user, a carrier must be able to offer

ubiquitous local service at competitive

rates. This requires transport and

termination on the LEC network to be

available at the incumbent LEC’s

additional cost. Even assuming rates are

reciprocal, transport and termination

rates that exceed cost impede efficient

entry and limit the extent to which

competitive LECs will compete for

customers in local exchange and

exchange access markets. Where a

customer makes more calls than he

receives, inflated transport and

termination rates will impede

competition for that customer. We seek

comment on whether we should begin

to implement market-based access

reform for an incumbent LEC before that

incumbent LEC has complied with the

statutory requirement to provide

transport and termination at cost-based

rates.

173. Resale. We also propose that, in

order to gain Phase 1 treatment, an

incumbent LEC must offer its retail

services to resellers at a wholesale price,

which is equal to the retail price minus

the reasonably avoidable cost of

providing wholesale rather than retail

service. Congress provided that

incumbent LECs should make their

retail services available to new entrants

at the retail rate less costs that will be

avoided. Although resellers do not

compete with incumbent LECs in the

provision of access, this requirement is

a ‘‘stepping stone’’ in the provision of

other forms of competition. Resale

should provide new entrants with a

vehicle for rapid entry into the local

exchange retail marketplace and with

the ability to compete throughout an

incumbent LEC’s service area. We seek

comment on this proposal.

174. Availability of Elements and

Services. Fourth, we propose that

incumbent LECs be required to

demonstrate that competitors are able

actually to order and receive elements

and services in a commercially

reasonable manner and in necessary

quantities. Provisioning limits and

provisioning delays must not materially

limit the flow of customers from the

incumbent LEC to its rivals. Incumbent

LECs must create well-functioning and

adequately sized provisioning systems,

both for resale and for unbundled

elements. We invite parties to comment

on this proposal.

175. Other Factors. We propose

several other factors for determining

whether a LEC has made its network

available to competitors; namely,

whether an incumbent LEC provides

dialing parity and number portability,

whether an incumbent LEC gives

competitors access to its rights-of-way,

and whether network standards are

open and non-discriminatory. For

example, without the provision of

dialing parity, competitors’ customers

must dial additional digits. Without

number portability, a customer’s desire

to keep his phone number becomes a

barrier to new entrants. We seek

comment on these factors, and invite

parties to comment on the availability of

any factor that should be taken into

account in determining whether the

Phase 1 trigger has been met.

176. We tentatively conclude that it is

important to use objectively measurable

criteria for determining whether an

incumbent LEC has achieved the Phase

1 trigger, so as to avoid delay caused by

protracted proceedings and to minimize

administrative burdens for all parties. In

determining whether an incumbent LEC

meets the Phase 1 criteria, we

tentatively conclude that the incumbent

LEC seeking Phase 1 treatment offer us

objective evidence of the existence of

these conditions. After receiving the

incumbent LEC’s filing, we propose to

allow for public comment. We propose

that we would then issue our decision

within 90 days after the comment

period has ended. We seek comment on

this proposed review mechanism.

177. We solicit comment on the

procedures that an incumbent LEC

should follow to demonstrate that it has

met the Phase 1 competitive trigger.

Petitioners should discuss whether an

incumbent LEC should file a petition for

waiver, a petition for declaratory ruling,

or some other filing, and how the

incumbent LEC should satisfy its

burden of proof. Because incumbent

LECs are required to open their

networks throughout each state in

which they offer service, we propose to

require that incumbent LECs meet this

competitive trigger on a state-by-state

basis in order to qualify for this relief.

We ask, however, whether incumbent

LECs should be able to seek Phase 1

treatment by geographic area, as

discussed in Section IV.B., above, even

though these areas would be smaller

than study areas. We seek comment on

this proposal.

178. We also invite parties to

comment on what actions the

Commission should take in the event

that it is shown that a LEC that has

received approval for Phase 1 or Phase

2 relief, or has demonstrated that

substantial competition exists for a

particular service, no longer satisfies the

applicable criteria. We particularly

invite comment on whether the

Commission’s complaint process is the

appropriate vehicle for parties to

demonstrate the necessary changed

circumstances and the specific remedies

the Commission should employ in the

event that an incumbent LEC no longer

meets the applicable Phase 1 or Phase

2 criteria, or can no longer demonstrate

the existence of substantial competition

for a particular service.

2. Reforms

a. Geographic Deaveraging. 179. Our

Part 69 rules generally require that an

incumbent LEC’s charges for access

elements be averaged within each of its

study areas. We have developed,

however, a system of density pricing

zones, which may be used by an

incumbent LEC to deaverage

geographically its rates for special

access and switched transport services if

that incumbent LEC meets certain

threshold interconnection requirements.

We instituted this density zone pricing

in response to the emergence of

competition in markets for those

services. In this NPRM, we propose

allowing incumbent LECs that have met

the Phase 1 trigger to deaverage rates

geographically for all access charge

elements other than the SLC. We ask

generally whether incumbent LECs

should also be able to deaverage the SLC

geographically. In the case of first

residential lines and single-line

business lines, should incumbent LECs

be permitted only to make

geographically-deaveraged reductions in

the SLC, in light of the Joint Board’s
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recommended decision that there be no

increases in the SLC for those lines?

180. In this NPRM, we propose to

permit price cap incumbent LECs that

satisfy the Phase 1 eligibility

requirements to deaverage

geographically their access charge

elements. We note that the availability

of geographically deaveraged unbundled

network elements is proposed as a

prerequisite for Phase 1 relief. Where

unbundled network elements are

deaveraged, continuing to require access

rates to be averaged across the study

area would foreclose the incumbent LEC

from meeting competition from

unbundled network elements in lowcost areas, while still requiring the

incumbent LEC to charge below-cost

access rates in high-cost areas. As

discussed in Section III.B, above, we

seek comment on whether section

254(e) requires geographic deaveraging.

We also seek comment on the

relationship between geographic

deaveraging of access charges and

section 254(g).

181. Moreover, such discrepancies

between price and cost distort

competition by creating incentives for

entry in low-cost areas by carriers

whose cost of providing service is

actually higher than the incumbent

LEC’s cost of serving that area.

Similarly, geographic averaging across

large geographic areas distorts the

operation of markets in high-cost areas

when we require incumbent LECs to

continue offering services in those areas

at prices substantially lower than their

costs of providing those services. Prices

that are below cost reduce the

incentives for entry by firms that could

provide the services as efficiently, or

more efficiently, than the incumbent

LEC. Therefore, we propose that once

the requirements under Phase 1 have

been met, incumbent LECs should be

permitted to deaverage geographically

rates for access elements.

182. We note that, pursuant to the

Expanded Interconnection with Local

Telephone Company Facilities, CC

Docket No. 91–141, Report and Order

and Notice of Proposed Rulemaking, 57

FR 54323 (November 18, 1992) (Special

Access Expanded Interconnection

Order) and the Transport Phase 1,

Second Report and Order and Third

Notice of Proposed Rulemaking, 58 FR

48756 (September 17, 1993) (Switched

Transport Expanded Interconnection

Order), incumbent LECs currently may

deaverage access charges for special

access and switched transport services

when one cross-connect has been taken

within the study area. Phase 1

deaveraging would be broader—

extending to all access elements other

than the SLC, not just special access and

switched transport—and

complementary to deaveraging under

our Expanded Interconnection orders.

Thus, for any incumbent price cap LECs

that have not already met the one crossconnect threshold for transport

deaveraging, we propose to permit

geographic deaveraging for special

access and switched transport when one

cross-connect has been taken in the

study area or when Phase 1 has been

met, whichever is earlier.

183. We seek comment on the

variability of the costs of providing

access charge elements. In particular,

we ask parties to submit evidence

indicating whether per-line and/or perminute costs of local switching services

vary geographically. We also seek

comment on the number and size of

zones that should be required or

allowed. One possible method is to

permit or require that the geographic

areas for access deaveraging match those

implemented by each state pursuant to

the 1996 Act. Because the prices for

competitors using incumbent LEC

unbundled network elements will differ

among these density zones, it would

seem necessary to permit incumbent

LECs to price their own access services

using the same areas. If the states

deaverage network elements and the

Commission does not deaverage access,

IXCs would only purchase network

elements in low-cost areas, and would

only take access in high-cost areas. We

seek comment on alternative approaches

for ensuring that geographic zones

generally reflect cost differences and

that the zones for unbundled network

elements, universal service, and access

charges are compatible. We also ask

whether any other geographic areas

would be more appropriate than either

of these options. Further, we seek

comment on whether incumbent LECs

should be permitted or required to

change the density zones established for

special access and switched transport to

coincide with the zones we ultimately

adopt in this proceeding. In considering

how best to deaverage geographically

the remaining access elements, we seek

to minimize administrative burdens for

incumbent LECs and the Commission.

184. Finally, we note that section

254(g) requires IXCs’ rates to subscribers

in rural and high cost areas to be no

higher than the rates for subscribers in

urban areas. We therefore invite parties

to comment on how IXCs would be

affected by incumbent LECs

geographically deaveraging their rates

for access elements.

b. Volume and Term Discounts. 185.

In this section, we consider permitting

incumbent LECs to offer volume and

term discounts for all of their access

charge elements upon achievement of

the Phase 1 competitive conditions.

Volume and term discounts are

permitted for special access services

without any competitive showing or

waiver of Part 69 of the Commission’s

rules. We currently permit volume and

term discounts on certain transport

services when incumbent LECs can

show a certain level of competition, as

evidenced by a specified demand for

their expanded interconnection

services. In the Switched Transport

Expanded Interconnection Order, we

permitted incumbent LECs, once a

specified threshold of interconnection

was met, to offer reasonable volume and

term discounts on entrance facilities

and interoffice facilities and tandemswitched transport, including pricing

that reflects speeds greater than DS3.

We noted that, as a general matter, such

discounts should be permitted if they

are justified by underlying costs, and are

not otherwise unlawful, because they

encourage efficiency and full

competition. Term discounts recognize

cost savings that result from the

certainty of longer-term arrangements,

and volume discounts reflect the lower

per-unit cost of providing higher traffic

volumes on high capacity facilities. We

have previously concluded that volume

and term discounts can reasonably

recognize certain efficiencies that flow

from volume or term commitments

made by purchasers.

186. The Commission currently

allows an incumbent LEC to offer

volume and term discounts on switched

transport when one of the following

conditions has been met: (1) 100 DS1-

equivalent cross-connects for switched

transport service were taken by an

interconnector in the incumbent LEC’s

zone 1 offices in a study area, or (2) an

average of 25 DS1-equivalent switched

transport cross-connects per zone 1

office have been taken. These thresholds

were designed to balance the incumbent

LECs’ need for flexibility in light of

growing competition with the need to

give incumbent LECs incentive to act

cooperatively in implementing

expanded interconnection. We found

that discounted switched transport

service constituted a new service under

the price cap rules, thereby

necessitating the filing of cost

justification by the incumbent LEC. We

also required that discounted switched

transport tariff filings be made 120 days

in advance of their effective date, rather

than 45 days in advance, as required for

other new services.

187. Because of our current inefficient

rate structures, incumbent LECs face

pressure from high-volume customers
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due to the availability of bypass

facilities. The condition that incumbent

LECs make available unbundled

network elements at forward-looking

economic costs, including substantial

scale and scope economies, will place

additional pressure on access prices that

do not also reflect forward-looking

economic costs. We recognize the

significant benefits that may result from

volume and term discounts, including

the possibility that volume and term

discounts may enable an incumbent

LEC to reflect its actual costs more

accurately. However, we do not propose

permitting incumbent LECs to offer

volume and term discounts without first

meeting a competitive condition

because we remain concerned that such

discounts may serve to inhibit

competition if employed by incumbent

LECs before competitors can offer

volume and term discounts of their

own. By ‘‘locking in’’ customers with

substantial discounts for long-term

contracts and volume commitments

before a new entrant that could become

more efficient than the incumbent can

offer comparable volume and term

discounts, it is possible that even a

relatively inefficient incumbent LEC

may be able to forestall the day when

the more efficient entrant is able to

provide customers with better prices.

188. Because of this concern, we

therefore propose that incumbent LECs

be permitted to offer volume and term

discounts only if they have met the

Phase 1 conditions. The existence of

competition from the availability of

unbundled elements makes it less likely

that an incumbent LEC could lock in

particularly desirable customers with

long-term plans before competitors can

respond. Instead, it seems more likely

that the competitors will be able to use

unbundled network elements to offer

services at significant, pro-competitive

volume and term discounts. Precluding

volume and term discounts for access

service rates would require the

incumbent LEC to offer local switching

services purchased in high volume or

for long terms at prices greater than the

incumbent LEC’s costs for providing

those services, which would impede the

full development of effective

competition. We seek comment on this

proposal to give incumbent LECs the

authority to provide volume and term

discounts, and on the extent to which it

might affect the emergence of

competition in markets for exchange

access services. We seek comment on

whether these discounts need to be cost

justified.

189. On the other hand, we tentatively

conclude that it would not be in the

public interest to permit incumbent

LECs to offer ‘‘growth discounts’’ for

particular access services at Phase 1.

Growth discounts refer to pricing plans

under which incumbent LECs offer

reduced per-unit access service prices

for customers that commit to purchase

a certain percentage above their past

usage, or reduced prices based on

growth in traffic placed over an

incumbent LEC’s network. We are

concerned that because BOC affiliates

will begin with existing relationships

with end users, name recognition, and

no subscribers, they will grow much

more quickly than existing IXCs and

other new entrants. Thus, incumbent

LECs could circumvent the

nondiscrimination provisions of section

272 by offering growth discounts for

which, as a practical matter, only their

affiliates would qualify. Some

incumbent LECs argued in comments

filed in response to our Price Cap

Second FNPRM, that growth discounts

could benefit smaller IXCs that do not

qualify for volume discounts. These

incumbent LECs, however, failed to

provide evidence that growth discounts

would be cost-justified. We invite

parties to provide evidence that growth

discounts would not circumvent the

safeguards of section 272, and are, in

fact, justified by reduced costs of

providing service. We also seek

comment on whether the development

of competitive access markets would be

enhanced if incumbent LECs were

permitted to offer growth discounts.

c. Contract Tariffs and Individual RFP

Responses. 190. In the Competition in

the Interstate Interexchange

Marketplace, CC Docket No. 90–132,

Report and Order, 56 FR 55235 (October

25, 1991) (Interexchange Order), the

Commission adopted rules permitting

IXCs to offer common carrier services

pursuant to individually negotiated

contract tariffs. AT&T, then deemed as

a dominant carrier, was permitted to

offer services under contract tariff rates

only for those services that we had

found to be subject to substantial

competition. We required AT&T to file

a tariff setting forth the terms of each

negotiated contract, and to make the

same terms and conditions generally

available to similarly situated customers

under substantially similar

circumstances so as to comply with the

nondiscrimination provisions of the

Communications Act.

191. In the Price Cap Second FNPRM,

we proposed to apply similar contract

carriage rules to access services that the

Commission finds to be subject to

substantial competition, provided the

contract rates were made generally

available to similarly situated customers

under substantially similar

circumstances.

192. We propose to permit incumbent

LECs to offer contract tariffs when Phase

1 has been met. Incumbent LECs would

be required to make each contract tariff

both publicly available through a tariff

filing setting forth the contract’s terms,

and generally available to similarlysituated customers on the same terms

and conditions. The availability of

contract carriage should lead to lower

prices for those customers using

contract tariffs. Under our price cap

rules, contract tariffs at reduced prices

could allow incumbent LECs to raise

prices for those customers not taking

service subject to these contract tariffs

due to the way the actual price indices

(APIs) are calculated. At Phase 1, the

entry barriers to competition will have

been removed, but competition may not

yet be sufficient to constrain the

incumbent LECs from raising prices

unreasonably for those customers not

under contract tariffs. Thus, as

suggested by Pacific Bell, we also

propose to remove contract carriage

service when calculating incumbent

LECs’ APIs in our price cap system. We

note that parties will be negotiating, or

obtaining arbitration of individual

arrangements before the states, under

section 252, and that certain

interconnection arrangements may be

substitutable for access services. This

may well place greater competitive

pressure on prices for incumbent LEC

access services at an earlier phase in the

development of competition than

existed for AT&T. Parties advocating

that we should delay contract carriage

until Phase 2 or until substantial

competition has been reached should

identify and quantify their concerns

with implementing this reform at Phase

1.

193. We also propose to remove the

prohibition against incumbent LECs

offering competitive response tariffs

when the requirements of Phase 1 have

been met. A competitive response tariff

is a contract tariff that a LEC initiates

when it responds to a competitor’s offer

to an end user, or in response to a

request for proposal. By requiring that a

competitor be present, competitive

response tariffs by definition provide an

additional justification for being made

available at this phase. To the extent

that parties disagree with our proposed

treatment of contract tariffs offered in

response to requests for proposals, we

invite comments demonstrating why

different conclusions would be in the

public interest.

d. Deregulating New Services. 194. We

also seek comment on whether to permit

incumbent LECs to offer certain access
4698 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules

services outside price cap regulation

upon achievement of the Phase 1 trigger.

Such treatment might be possible

because a baseline access offering exists

that ensures continued provision of a

core service at reasonable rates. The

ability of incumbent LECs to offer some

access services outside price caps could

create incentives for incumbent LECs to

introduce services using the capabilities

of new technologies. Modifications to

our regulatory regime along these lines

for such services could increase

customer choice, streamline regulation,

and increase consumer welfare by

increasing incentives for innovation.

195. As BOCs are permitted to enter

the long-distance market, however, their

long-distance affiliates may well be

purchasing many of these new services,

as long-distance carriers with LEC

affiliates may well today. We seek

comment on whether this may give rise

to circumstances in which the LEC

could reduce the effects of competition

if it offered certain new services outside

price cap regulation. If so, when? We

also ask whether the section 202

prohibition against discrimination and,

with respect to the BOCs, the section

271(c) checklist and the section

272(e)(3) requirement that a BOC charge

its long-distance affiliate an amount for

access that is no less than the amount

charged to any unaffiliated

interexchange carriers, provide

sufficient protection against possible

anticompetitive conduct that we need

not make special exceptions to our

proposal. We also seek comment on the

relationship of this proposal to the

requirement to unbundle network

elements under the 1996 Act.

196. We also seek comment on

whether we could deregulate new

services. We now seek comment on

whether we should eliminate all

requirements that an incumbent LEC

obtain any regulatory approval before a

tariff introducing a new service can take

effect. Many new services take

advantage of new technical capabilities,

and the delay entailed in obtaining

regulatory approval may harm consumer

welfare. Because the underlying core

access service offerings, as well as

unbundled network elements, would

still be available, there may be little

benefit from requiring an incumbent

LEC to obtain regulatory approval before

introducing a new service. We ask

whether, if the new service is far

superior to the existing service, the

availability of the old service may not

provide sufficient safeguards. The

availability of the core service also

raises the question of whether price

regulation of new services is still

needed or warranted. If not, these

services could be removed from price

cap regulation. Alternatively, if such

services are not removed from price cap

regulation altogether, we seek comment

on whether we should eliminate the

new services test. We seek comment on

these alternatives. Parties are invited to

comment on whether relaxed regulation

is more appropriate for some types of

new services than it is for other new

services.

197. Finally, we seek comment on

whether, if we adopt the proposal in the

preceding paragraph, we should also

remove from price cap regulation some

services that have required waivers in

the past for their introduction. This

would equate the treatment of existing

services that were introduced following

a waiver request to that for future new

services. One example of such a service

is 500 access service, which allows IXCs

to offer their customers a service by

which a call to one number is routed to

a different telephone number at

different times, or in different

sequencing arrangements (a ‘‘followme’’ service). This service offers

specialized features for which

continued regulation may not be

necessary if competing carriers can

develop substitute services to respond

to customer needs. We seek comment on

this example, and seek comment on

whether other similar services exist for

which continued price cap regulation

may not be necessary.

C. Phase 2—Actual Competition

198. In this subsection, we seek

comment on the removal of additional

regulatory constraints from incumbent

price cap LECs upon the establishment

of an actual competitive presence for an

exchange access service in a relevant

geographic area. A competitive presence

short of substantial competition would

help to ensure that the opening of the

network has happened in fact, not just

in theory, and would allow for further

reforms under conditions short of the

substantial competition necessary for

full deregulation and detariffing. At

Phase 2, we are seeking comment

broadly on: (1) Eliminating price cap

service categories within baskets; (2)

removing the ban on differential pricing

for access among different classes of

customers; (3) ending mandatory rate

structure rules for transport and local

switching; and (4) consolidating trafficsensitive and trunking baskets. We are

also seeking comment on whether and

how to implement these reforms, or

equivalent reforms, if the development

of competition comes at significantly

different rates for different switched

access services in different areas. These

reforms would appear appropriate

because the competition present at

Phase 2, together with the availability of

unbundled network elements and the

continuing price cap limits on price

increases, should restrain incumbent

LECs from overcharging their customers.

We seek comment as well on how to

define competitive presence for these

purposes, including whether we should

define the term differently for certain of

the above reforms than for others.

Finally, we seek comment on various

alternatives—including whether we

should remove any of these regulatory

constraints at Phase 1; whether we

should remove additional regulatory

constraints at Phase 2; and whether we

should wait until substantial

competition has developed, as described

above, before eliminating some or all

these constraints.

1. Trigger and Relevant Markets

199. We invite comment on three

possible factors for determining whether

an incumbent LEC has met the trigger

for Phase 2: (1) Demonstrated presence

of competition; (2) full implementation

of competitively neutral universal

service support mechanisms; and (3)

credible and timely enforcement of procompetitive rules. We also ask whether

the proposals for deregulating new

services we seek comment on in

subsection V.B.2.d, above, would be

better suited for Phase 2. We seek

comment on whether we should adopt

any or all of these factors for the Phase

2 trigger point, and whether there are

other competitive factors that we should

consider.

200. First, we seek comment on how

to determine when competition is

sufficient to end mandatory rate

structure rules for transport and local

switching, remove the ban on

differential pricing for access among

different classes of customers, eliminate

price cap service categories within

baskets, and consolidate the trafficsensitive and trunking baskets. We

could measure market share as one

factor, among others, in determining

whether competition exists in a given

market for purposes of removing the

regulatory constraints we have

identified. As we observed in the Price

Cap Second FNPRM, we previously

have used market share as one factor in

measuring the presence of competition.

Nevertheless, there are drawbacks to

using market share. An analysis of the

level of competition for incumbent LEC

services based solely on an incumbent

LEC’s market share at one time may not

provide an adequate basis for us to

conclude that a competitive presence

truly exists. Further, we lack data on the

relative market shares of incumbent
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules 4699

LECs and their rivals, and thus would

need to develop reasonable and

nonburdensome ways to gather that

information if we were to rely on it. If

the Commission considers the relative

market shares of the incumbent LECs

and their competitors as one factor in

assessing the level of competition for

incumbent LEC services, what data and

information about incumbent LECs and

their competitors would be necessary to

assess their relative market shares? Also,

we would have to determine the

appropriate market to be measured and

the unit of measurement, such as

customer lines, revenues, or access

minutes. We seek comment on whether

using a market share trigger could affect

how the market develops. We seek

comment on whether, notwithstanding

an absence of competitive entry, the

incumbent could be adequately

restrained from raising its prices such

that it could obtain Phase 2 treatment.

If we were to adopt any new reporting

requirements for purposes of calculating

market share, we invite comment on

what effect this requirement would have

on incumbent LECs considered ‘‘small

businesses’’ for purposes of the

Regulatory Flexibility Act.

201. In addition to measuring market

share as a percentage, we seek comment

on the possible use of absolute measures

of competitors’ presence for services in

an area. For instance, we ask parties to

discuss whether a competitive presence

should be measured in terms of an

absolute number of customer lines,

residential lines, or access minutes. Are

there other factors that could be

measured that could support a finding

of competitive presence, e.g., a specified

number of competitive switches; or a

certain number of customers receiving

service from unbundled network

elements or competitive facilities? What

should be the relative importance of a

measurement of competition in light of

other factors that we propose to

incorporate into our analysis and on any

other factors that may be proposed? On

one hand, a simple measurable test

would be easier to administer than most

other potential tests; on the other hand,

the real significance of any particular

competitive presence in the marketplace

often only becomes clear after analyzing

several different variables that measure

competition.

202. We propose to apply any marketpresence test we might adopt on a

service-by-service basis. For example,

we propose to allow an incumbent LEC

to establish differential rates for

transport when that incumbent LEC has

satisfied the Phase 2 trigger for

transport, even if there is no

demonstrated presence of competitors

for local switching. Such an approach

would allow the incumbent LEC to

respond to competitive alternatives for

specific services, which should result in

lower prices and more efficient

utilization of the network, without

permitting incumbent LECs to raise

rates unreasonably for less competitive

services. Also, this approach would be

consistent with our proposal to remove

services from price cap regulation when

they are subject to substantial

competition. Certain Phase 2 proposals,

such as elimination of service categories

and consolidation of price cap baskets,

may not be amenable to implementation

on a service-by-service basis. We seek

comment on how any such elements of

Phase 2 regulatory relief should be

implemented.

203. A second possible factor to

consider in determining whether the

Phase 2 trigger has been met is whether

the universal service programs available

to incumbent LECs and other eligible

telecommunications carriers are

competitively neutral. The Universal

Service Joint Board recommended that

both the collection mechanism and the

disbursement mechanism for universal

service programs be competitively

neutral. We ask whether some

consumers will not see the benefits of

competition if the state universal service

programs are not competitively neutral.

If in practice only incumbent LECs can

receive universal service support, then

the disbursement mechanism is not

competitively neutral. Customers

should be able to choose their provider

based on who best serves their needs,

not on which provider specifically

qualifies for a subsidy payment. We

seek comment on this proposed factor.

204. We ask to what extent and how

enforcement of pro-competitive rules

should be a factor in determining

whether Phase 2 has been achieved.

Any state or federal rules or rights must

be enforced vigorously and swiftly so

that consumers enjoy the benefits of the

promised competition. States and the

FCC have a duty to create forums for

fast, fair and efficient dispute

resolution. We seek comment on

whether enforcement should be used as

a Phase 2 condition, and if so, on what

the specific criteria should be for

determining whether enforcement is

adequate.

205. We also seek comment here on

whether additional or different

conditions should apply before

implementing Phase 2 reforms. For

instance, we seek comment on whether

our definition of actual competitive

presence should differ for implementing

various of the reforms discussed here.

Should we require greater competitive

pressures on incumbent LEC access

charges before we implement certain of

the reforms discussed below? If so,

which ones, and why? We also seek

comment on the extent to which an

actual competitive presence, from

entrants purchasing unbundled

elements, using their own constructed

facilities, or a combination of the two as

a substitute for current access service,

would provide incumbent LECs

incentives to reduce access charges. If it

develops that carriers are competing for

end-user customers primarily by

providing bundles of local and long

distance service, to what extent would

incumbent LECs decide not to lower

access charges charged to IXCs, but

instead to raise them as high as possible

as long as possible? If this occurs for

certain groups of customers, or in

certain areas, should this affect how we

implement reforms at Phase 2, and, if

so, how? To what extent is this

competitive dynamic affected by the

absence of a legal requirement under the

1996 Act that a requesting carrier

provide local exchange service to an end

user in order to purchase unbundled

network elements and use them as a

substitute for access service? To what

extent would the continued constraints

of price cap regulation for certain access

services, perhaps as modified according

to certain of the methods discussed in

the prescriptive approach to access

reform, provide sufficient protection

during the transition to substantial

competition?

206. We solicit comment on the

procedures that an incumbent LEC

should follow to demonstrate that it has

met the Phase 2 triggers for one or more

services. Petitioners should discuss

whether an incumbent LEC should file

a petition for waiver, a petition for

declaratory ruling, or some other filing,

and how the incumbent LEC should

satisfy its burden of proof.

207. We also seek comment on the

relevant geographic area that should be

considered in determining whether an

incumbent LEC has met the Phase 2

competitive trigger. As discussed in

Section II.D.1 above, there are several

possible ways of specifying geographic

areas. We tentatively conclude that any

geographic area used in considering the

presence of substantial competition

would be appropriate for purposes of

Phase 2. Moreover, by not requiring

parties to maintain data on multiple

geographic areas, such an approach

would keep administrative burdens on

all parties to a minimum. We seek

comment on this tentative conclusion.
4700 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules

2. Reforms

a. Service Categories Within Baskets.

208. The price cap service categories

were developed both to protect

ratepayers from precipitous changes in

the prices for incumbent LEC services,

and to prevent incumbent LECs from

disadvantaging one class of ratepayers

to the benefit of another class. We

tentatively conclude that, given

competition in Phase 2, the current

service categories in the trunking and

traffic-sensitive baskets would no longer

be necessary. We invite comment on

how we should eliminate service

categories, because doing so on a

service-by-service basis appears

infeasible. While the upper service band

indices (SBIs) prevent incumbent LECs

from offsetting price reductions in one

service category with increases for less

competitive services, the development

of a competitive presence will provide

IXCs with the alternatives of obtaining

service from competitive LECs or using

unbundled network elements instead.

We seek comment on eliminating the

current service categories at Phase 2.

Parties should address whether there

will be a need for any service categories

at that point, to describe those

categories, and to explain why it would

be in the public interest to retain them.

b. Differential Pricing for Access to

Different Classes of End-Users. 209.

While we generally have not considered

differential pricing for access services to

different classes of customers in prior

proceedings (except for the Subscriber

Line Charge), we seek comment on

whether we should permit such

flexibility at Phase 2. As used in this

NPRM, we define differential pricing as

permitting incumbent LECs to charge

different rates for access to different

classes of customers. There are at least

three classes for which differential

pricing may be appropriate: Residential,

single-line business, and multi-line

business. We invite parties to suggest

additional classes, and to analyze why

rates for access to such classes should

be afforded differential treatment. We

seek comment on whether, for

incumbent LECs that use differential

pricing for their access rates, we should

adopt some safeguards to protect the

classes of customers not subject to

competition, e.g., residential and singleline business, and if so, what those

safeguards should be.

210. Differential pricing for access

could pose the same substantial risks to

competition that accompany contract

carriage and RFPs, but, because

differential pricing would enable an

incumbent LEC to adjust all prices for

access to a class of customers within a

zone at the same time, the risks would

be on a greater scale. We seek comment

on whether we should permit

incumbent LECs to offer differential

pricing for access once the requirements

of Phase 2 have been met.

c. Rate Structure Rules for Transport

and Local Switching. 211. We seek

comment on eliminating the rate

structure rules for the transport and

local switching rate elements at Phase 2.

We would also eliminate the mandatory

rate structure modifications for

transport and local switching that we

propose in Section III, above. At Phase

2, if an incumbent LEC attempted to

establish an inefficient rate structure, an

IXC would be able to avoid paying

above-cost rates by using cost-based

unbundled network elements to

originate and terminate toll traffic, or by

acquiring access from a competitive

provider. We will be able to rely on the

presence of competitors to oblige the

incumbent LECs to establish rate

structures that reflect the manner in

which costs are incurred. We do not

propose to introduce this reform at

Phase 1, even though unbundled

network elements can act as an effective

substitute for switched access at that

point. We tentatively conclude that we

should allow the Phase 1 reforms to take

their effect prior to eliminating our

mandatory rate structure rules, because

it is not clear that the mere existence of

efficient rate structure rules for

unbundled network elements will cause

incumbent LECs to adopt efficient

access rate structures. For example,

incumbent LECs may have an incentive

to set per-minute access charges to raise

the cost for interexchange resellers, who

may have difficulty vertically

integrating. This pricing would raise the

marginal costs of those IXCs, distorting

competition and raising prices and the

profits of a LEC or its interexchange

affiliate. We seek comment on this

reform, and on when our mandatory rate

structure rules should no longer apply.

We also seek comment on whether we

should keep our rate structure rules for

terminating access even after we have

removed them for originating access.

212. In conjunction with elimination

of transport and switching rate structure

rules, we also ask parties to comment on

whether carriers satisfying Phase 2

requirements should be permitted to

apportion access charges between

carrier and end user according to

marketplace pressures. In this regard,

incumbent LECs would be treated in the

same manner as competitive LECs, with

neither a requirement nor a prohibition

against adopting the most commercially

appropriate rate structure. Commenters

should discuss whether we should

permit LECs to collect charges from end

users for originating access, terminating

access, or both, and whether such

charges should be imposed on the party

placing a call or the party receiving the

call. Commenters should also address

whether providing this flexibility might

violate section 254(g), which prohibits

interexchange rates in rural or high cost

areas from exceeding rates in urban

areas. Alternatively, we seek comment

on any steps we should take to ensure

that an IXC can recover access charges

from its customers in an efficient

manner.

d. Consolidation of the TrafficSensitive and Trunking Baskets. 213.

When we created the price cap baskets

for incumbent LECs, each with separate

price cap indices and bands, we

balanced two competing concerns. First,

we limited the number of baskets to

ensure that the company-wide

productivity offset would be appropriate

for each basket. Second, we sought to

limit the incumbent LECs’ ability to

subsidize price decreases for

competitive services with price

increases for services in a less

competitive basket. We expect that

competition in trunking and switching

will develop at approximately the same

rate. Thus, the need to separate the

traffic-sensitive and trunking baskets is

reduced. We do not seek comment on

consolidating the common line basket,

because the common line possesses

different bottleneck characteristics than

do local switching and transport. These

differences are likely to cause

competition for common line services to

develop differently than and probably

generally lag somewhat behind

competitive developments in the trafficsensitive and trunking baskets. We do

not seek comment on consolidating the

interexchange basket because services

within the interexchange basket are

more competitive, and so are likely to be

subject to substantial competition more

quickly than traffic-sensitive or trunking

services. At this point, we invite

comment on consolidating the trafficsensitive and trunking baskets, enabling

incumbent LECs to price their services

more efficiently in response to the

competitive market. Consolidating the

traffic-sensitive and trunking baskets

also reduces the administrative burdens

placed on incumbent LECs.

214. We have considered modifying

price cap baskets in the past, but

declined to do so in the absence of

information about the state of

competition in the local telephone

markets. We suggest two possible points

at which to remove this constraint:

Phase 2 or in conjunction with the

phase-out of the TIC, discussed below.
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Our Phase 2 triggers should assess

competition adequately for the purpose

of determining whether incumbent LECs

should be able to consolidate the trafficsensitive and trunking baskets. Until the

incumbent LEC reaches Phase 2 for each

basket, it continues to face less

competition for the services in one of

the baskets relative to the services in the

other. During this time, an incumbent

LEC that can consolidate these baskets

may still have an incentive and the

ability to engage in anticompetitive

behavior. We believe that in order to

reduce this incentive, incumbent LECs

would have to reach Phase 2 for each of

the services within these baskets.

Nevertheless, it may be better to permit

consolidation of the traffic-sensitive and

trunking baskets as part of the

incumbent LECs’ phasing out of the TIC.

Removing this constraint at the time of

the TIC phase-out would provide a

method for incumbent LECs to reassign

costs from the TIC. We seek comment

on consolidating the traffic-sensitive

and trunking baskets, particularly on

when the consolidation should take

place. We ask parties that favor

consolidating the traffic-sensitive and

trunking baskets as part of the

incumbent LECs’ phasing out of the TIC

address what would ensure that

incumbent LECs would not engage in

anticompetitive behavior with respect to

the services within these baskets.

VI. Prescriptive Approach to Access

Reform

A. Introduction

215. In Section V above, we have set

forth a framework under which we

would reduce or eliminate, in phases

tied to the potential for and growth of

competition, access charge requirements

that constrain rate structures and price

levels. Some parties, such as MCI, may

contend that a market-based approach is

inadequate to the task of reforming

access. Such parties might argue that, at

best, competition will emerge unevenly

among geographic areas, services, and

customer classes, and argue that a

second option for access reform, a

prescriptive approach, should be

followed. Although a prescriptive

approach would move access rates to

forward-looking economic costs in a

more predictable and uniform manner

than a market-based approach, such an

approach would also require that the

Commission play a greater role in the

telecommunications marketplace. In

Section IV.A above, we invite comment

generally on whether a market-based

approach, prescriptive approach, or

some combination of the two

approaches provides the best path for

access reform.

216. In this Section, we seek comment

on the specific requirements we should

apply to incumbent LECs if we adopt an

alternative, more prescriptive approach

to access reform. First, we invite

comment on the goal of a prescriptive

approach. Next, we invite comment on

a number of proposals, many of which

have been suggested by industry

participants, for specific requirements

that could be incorporated into the

prescriptive approach. Many proposals

discussed below are designed to reduce

access rates generally, because reducing

access rates should in most, if not all,

cases result in rates that are closer to

cost. One of our proposals is to

prescribe TSLRIC-based access rates,

which would force rates to cost more

effectively than our other proposals, but

would also be more administratively

burdensome. Finally, we address

establishing phases for prescriptive

access reform, to avoid the market

disruptions that might occur if we

required incumbent LECs to move

interstate access rates to cost on a

‘‘flash-cut’’ basis.

B. Goal of Prescriptive Access Reform

217. In both the prescriptive approach

to access reform discussed in this

Section and the market-based approach

discussed in Section V, we seek to

develop competition for interstate

access services, which will ultimately

result in the deregulation of these

services. As we have emphasized

elsewhere in this NPRM and in other

proceedings, the 1996 Act commands us

to foster efficient competition in all

telecommunications markets and to

remove regulation when marketplace

forces will drive competing providers to

lower their costs and prices and offer

services that are responsive to the

demands of consumers. An intermediate

goal of the market-based approach is to

permit market forces to drive interstate

access rates to economically efficient

levels. We propose adopting a similar

intermediate goal for prescriptive access

reform; i.e., we propose to adopt rules

that would drive access rates to

economically efficient levels. MCI and

AT&T have argued that interstate access

rates, as well as prices for unbundled

network elements offered pursuant to

the 1996 Act, should be based on the

forward-looking economic costs of those

services or elements. Those IXCs have

also submitted computer models

designed to calculate forward-looking

economic cost. Specifically, in the case

of access services, the model calculates

‘‘Total Service Long Run Incremental

Cost’’ (TSLRIC) of the access service,

and in the case of unbundled network

elements, the model calculates the

TSLRIC of network elements, also

known as Total Element Long Run

Incremental Cost (TELRIC).

218. An incumbent LEC’s TSLRIC for

a given service or facility, such as

exchange access service, should include

all incremental costs directly

attributable, or dedicated, to the

delivery of the service or facility in

question. Carriers also should be

allowed to recover a reasonable

allocation of their forward-looking

common costs, defined as those costs

that are incurred in connection with the

production of multiple products or

services that remain unchanged as the

relative proportion of those products or

services varies. We note that when

calculating the forward-looking

economic cost of exchange access

services, because these services share

common network facilities with other

incumbent LEC-provided services, such

as local exchange service and

intraLATA toll, fewer costs will be

directly attributable or dedicated totally

to exchange access services.

Consequently, the incumbent LEC may

need to recover significant common

costs in addition to the TSLRIC of

exchange access. These common costs

should be recovered in a manner that is

economically efficient and consistent

with the pro-competitive goals of the

1996 Act. By contrast, the TELRIC of a

specific facility, such the loop or the

switch, would directly attribute to that

facility all costs caused by that facility,

regardless of the services provided by

that facility. Consequently, the forwardlooking common costs that the

incumbent LEC must recover in

addition to the TELRIC of that facility in

order to recover forward-looking

economic costs are lower than the

forward-looking common costs that

need to be recovered for a service.

Additionally, the forward-looking costs

of unbundled network elements should

not include the costs of billing and

marketing to end users, because

unbundled network elements are

intermediate products offered to

competing carriers.

219. Under both TSLRIC and TELRICbased pricing methodologies, prices

should be based on forward-looking

economic costs, including a reasonable

allocation of forward-looking joint and

common costs, and allow incumbent

LECs to earn a fair, risk-adjusted rate of

return on their investments. Such

pricing should encourage efficient and

effective entry into the local

telecommunications marketplace.

Commission staff will soon be releasing

for comment an analysis of the use of
4702 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules

computer models in estimating forwardlooking economic costs. In the event we

determine that a market-based approach

will not result in the development of

efficient competition, we tentatively

conclude that our goal for prescriptive

access reform should focus on interstate

access rates based on some form of a

TSLRIC pricing method. We seek

comment on this tentative conclusion.

Below, we seek comment on several

proposals for rules that would drive

interstate access rates to TSLRIC levels.

C. Specific Regulatory Requirements

1. Readjustment of Rates to Economic

Cost Levels

220. In the Price Cap Performance

Review for Local Exchange Carriers, CC

Docket No. 94–1, First Report and

Order, 60 FR 19526 (April 19, 1995)

(LEC Price Cap Performance Review),

we required incumbent price cap LECs

to adjust their price cap indices (PCIs)

downward to reflect our decision to

revise, in light of our past experience

with price cap regulation, one of the

economic studies on which we based

the X-Factor in the LEC Price Cap Order.

In this Section, we seek comment on

whether we should require a similar

reinitialization in this proceeding.

Specifically, we seek comment on the

feasibility of readjusting the PCIs

applicable to an incumbent LEC’s

baskets on the basis of a TSLRIC-based

study. This would be one means of

implementing the proposals of AT&T

and MCI that access rates should be set

at forward-looking economic costs.

Under this approach, we would

determine the forward-looking

incremental costs of providing all the

access services in a price cap basket,

and then add a suitable allocation of

forward-looking common costs. Finally,

we would require incumbent LECs to

reduce their PCIs by an amount

equivalent to the difference between

their current PCIs and the TSLRIC

revenues of providing the services in

each basket. One benefit of requiring

such a reinitialization is that it would

enable us to avoid the administrative

burdens associated with determining

the proper allocation of common costs

to each service within a basket. On the

other hand, the reinitialization of PCIs

we consider in this Section would

simply lower rate levels. It would not

guarantee that the incumbent LECs’ rate

structures would be reasonable. We seek

comment on whether rate structure

concerns should outweigh our concerns

regarding the administrative burdens of

allocating common costs. In Section

VI.C.4 below, we seek comment on

prescribing rate levels and rate

structures based on TSLRIC studies,

which would help ensure that

incumbent LECs’ rate structures are

reasonable, but would also require us to

determine how to allocate common

costs.

221. In order to reinitialize PCIs to

levels that are consistent with the

TSLRIC of incumbent LECs’ access

services, the Commission could evaluate

incumbent LECs’ TSLRIC studies for

each price cap basket. This approach,

however, could impose significant and

potentially costly burdens on the FCC,

incumbent LECs, and interested parties.

Alternatively, state commissions might

be better suited to evaluate TSLRICbased studies because state

commissions generally have more

experience with cost studies. Under this

approach, which we could implement

under section 410(a) of the Act, we

would rely on the state commissions’

results to determine the difference

between current interstate access rates

and forward-looking economic costbased access rates, and reinitialize

interstate PCIs based on this difference.

This approach ensures coordinated

treatment between jurisdictions. We

seek comment on this alternative and

invite parties to comment on what, if

any, federal guidelines should be

established for the conduct of these state

studies. Commenters should also

suggest alternative proposals for

reinitializing PCIs at forward-looking,

economic cost, in the event we

determine that a market-based approach

will not result in economically efficient

rates.

222. We seek comment on whether

TSLRIC calculations for the services in

some price cap baskets could be based

in part on or derived from the TELRIC

of certain unbundled network elements.

TSLRIC and TELRIC are different

versions of the same pricing

methodology. To the extent that states

reviewing arbitration agreements

governing the prices of unbundled

network elements rely on TELRIC

studies, those studies might also

provide data useful for determining

TSLRIC rates for access prices. We seek

comment generally on the feasibility of

using prices derived from individual

network element costs to establish

prices for interstate access service. In

particular, are there access services that

employ dedicated facilities that are

equivalent to an unbundled network

element, and in those cases, would there

be any difference between the TSLRIC

of the access service and the TELRIC of

the unbundled network element? For

instance, it is not clear that the TSLRIC

price of dedicated transport service, as

opposed to tandem-switched transport

service, should significantly differ from

the TELRIC of a dedicated transport

element. We also seek comment on what

costs, if any, should be included in the

price of interstate access that are not

included in the price of unbundled

elements. For example, we ask

commenters to address the nature of

marketing and other customer

operations costs that are involved with

the provision of access services, and ask

that they identify any costs that are

incurred in the sale of access services

that are not incurred in the sale of

unbundled elements.

223. In addition, we solicit comment

on whether it is possible to reduce the

administrative burdens associated with

this approach by deriving estimates for

TSLRIC-based prices in some study

areas from TSLRIC or TELRIC studies

conducted previously in other study

areas. Is there a generic cost model that

could be used to determine TSLRICbased interstate access prices?

224. Some parties that advocate

readjusting access rates to the TSLRIC

level maintain that TSLRIC rates would,

in most cases, result in access rate

reductions. In Section VII.A below, we

seek comment on whether this is the

case, the reasons therefore, and the

magnitude of any differential. TSLRICbased rates by definition would not be

based on the level of embedded costs,

regardless of whether embedded costs

exceed TSLRIC-based rates or TSLRICbased rates exceed embedded costs. We

note that the presence of competitive

LECs might increase incumbents’ cost of

capital, and might warrant increasing

depreciation rates. These effects might

decrease to some extent any difference

between TSLRIC-based rates and current

rates. In Section VII.B, below, we seek

comment on whether and to what extent

incumbent LECs should be permitted an

opportunity to recover any difference

between TSLRIC-based rates and current

rates.

2. Reinitialization of Rates on Some

Other Basis

225. In the event we determine that a

market-based approach to interstate

access charge reform will not move rates

closer to their economic cost, and

reinitialization of PCIs based on TSLRIC

studies or TELRIC cost models is not

feasible, we could reinitialize PCIs on

some other basis. For example, we could

reduce PCIs to a level that would result

in rates targeted to yield a rate of return

of no more than 11.25 percent. A second

basis for reinitialization could be to

prescribe a new rate of return and then

reinitialize access rates based on that

rate of return as urged by MCI, AT&T,

and GSA in the LEC Price Cap

Performance Review proceeding.
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules 4703

Developing a new starting point for

incumbent LEC PCIs under either of

these two approaches might be

reasonable for several reasons. First, to

the extent that current price cap rates

include a cost of capital greater than

that necessary to enable carriers to

attract investors, these rates may not

represent the most reasonable balance

between ratepayer and stockholder

interests. Second, although we found in

the LEC Price Cap Performance Review

Order that there was not sufficient

reason for reducing access rates in the

1995–96 access period for changes in

the cost of capital, the incumbent LECs’

cost of capital may now be less than

11.25 percent. Specifically, in the

Amendment of Parts 65 and 69 of the

Commission’s Rules to Reform the

Interstate Rate of Return Represcription

and Enforcement Processes, CC Docket

No. 92–133, Report and Order, 60 FR

28542 (June 1, 1995) (Represcription

Reform Order), we found that the rate of

return prescription may warrant

revision if the monthly average on tenyear U.S. Treasury securities changes by

more than 150 basis points, and the

change continues for six months or

more. In February 1996, the Common

Carrier Bureau invited comment on

whether to initiate a proceeding to

represcribe the authorized rate of return

for incumbent LECs subject to rate-ofreturn regulation, pursuant to the trigger

mechanism we established in the

Represcription Reform Order. If that

proceeding reveals that the rate-ofreturn LECs’ cost of capital has

decreased since we prescribed the

current authorized rate of return in

1990, then the price cap LECs’ cost of

capital may possibly be lower as well.

On the other hand, incumbent LECs face

potential competition as a result of the

Act that they did not face previously.

This potential competition could

increase the risks facing the incumbent

LECs, and thus increase their cost of

capital, thus mitigating to some extent

the factors suggesting that incumbent

LECs’ cost of capital has decreased since

1990. We also note that evolving

competition may make it appropriate to

assign different costs of capital to

different services, reflecting differences

in competition and higher risks in

transport, switching, and loop services

respectively.

226. We invite parties to discuss

whether our prescriptive regulatory

requirements should include

reinitialization of price cap indices on

any of the above-mentioned bases in

this Section or Section VI.C.1. We seek

comment on how, if we were to proceed

with this approach, to reinitialize price

cap indices. We also invite parties to

provide estimates of what effect these

reinitializations would have on the

incumbent LECs’ PCIs. In Section III.E

above, we solicit comment on whether

we should target the effects of any

reinitialization to the TIC as a means of

phasing out that rate element.

227. While reducing PCIs would

clearly reduce access rates, reinitializing

indices based on earnings could have a

negative effect on the productivity

incentives of the LEC price cap plan.

Represcribing a rate of return would

also be administratively burdensome.

We invite commenters to discuss

whether any such negative effects are

likely to outweigh the benefits of

moving rates closer to their economic

cost, and whether this approach is

consistent with the development of

efficient competition.

3. Revision of LEC Price Cap Plan

228. In 1990, the Commission adopted

mandatory price cap regulation for the

BOCs and GTE. Other incumbent LECs

may elect to be governed by price cap

regulation. In simple terms, price cap

regulation permits rates to increase no

more than a measure of inflation minus

an ‘‘X-Factor,’’ that largely reflects a

reasonable productivity target. Thus, the

higher the X-Factor, the more

downward pressure price cap regulation

applies to access rates.

229. The X-Factor represents in large

part the amount by which carrier

productivity has historically exceeded

productivity in the economy generally.

The X-Factor also includes a 0.5 percent

consumer productivity dividend (CPD).

The CPD was intended to serve the

policy goal of assuring that the first

benefits of the incumbent LECs’

productivity growth induced by price

cap regulation would flow to access

customers in the form of reduced rates.

A policy-based mechanism similar to

the CPD could be used to force price cap

incumbent LECs to reduce their rates

further. For example, if we can rely on

TELRIC studies to estimate the

economic costs of access services, as we

discuss in Section VI.C.1 above, then we

could set this policy-based mechanism

at some fraction of the percentage

difference between current access rates

and rates based on economic costs.

Therefore, in this example, setting the

policy-based mechanism at 20 percent

of the initial difference between current

rates and economic cost-based rates

should then cause the price cap formula

to drive access rates to cost over a fiveyear period, assuming that costs do not

change during that period. We invite

comment on the use of such a policybased mechanism, and on the derivation

of such a mechanism.

230. In 1995, we adopted the Price

Cap Performance Review for Local

Exchange Carriers, CC Docket No. 94–1,

Fourth Further Notice of Proposed

Rulemaking, 60 FR 52362 (October 6,

1995) (Price Cap Fourth FNPRM), in

which we sought comment on various

proposals for revising the productivity

offset component of the X-Factor, and

for eliminating sharing obligations and

the low end adjustment mechanism.

Subsequently, the Customers for Access

Rate Equity (CARE) Coalition has filed

several ex parte statements urging that

we complete expeditiously the

rulemaking proceeding initiated in the

Price Cap Fourth FNPRM and adopt a

higher X-Factor or set of X-Factor

options. AT&T and MCI have also urged

us to adopt a higher X-Factor. We solicit

comment on whether there is any

justification for increasing the

productivity offset, either on the basis of

the record developed pursuant to the

Price Cap Fourth FNPRM, or on more

recent economic studies. We

specifically invite parties to discuss the

effects of a forward-looking cost of

capital and economic depreciation on

TFP measurement. Parties relying on

more recent economic studies must

comply with the ‘‘general criteria’’ we

established for economic studies in the

Price Cap Fourth FNPRM.

231. We also seek comment on

whether we should change the rules

governing justification of tariff filings

that cause the API for a basket to exceed

the PCI. The price cap plan does not

prohibit above-cap rate filings, but does

subject such filings to stringent review

standards. An incumbent LEC making

an above-cap filing must submit an

extensive cost showing that explains all

cost allocations down to the lowest

possible level of disaggregation. It must

also give a detailed explanation of the

reasons for the prices of all rate

elements to which costs are not

assigned. We have stated that we will

find such filings lawful only if the

incumbent LEC can demonstrate that

compliance with the price cap rules

would have the effect of denying the

LEC the opportunity to attract capital

and continue to operate. A LEC that is

permitted to charge above-cap rates

becomes subject to traditional rate-ofreturn regulation with respect to those

rates.

232. The cost showing contemplated

by the price cap rules is, in essence, a

traditional, embedded-cost rate case. We

seek comment on whether the rules

should be changed to require that abovecap filings be justified based on the
4704 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules

forward-looking economic cost of

providing access service.

4. Rate Prescription

233. The proposals we discuss above,

reinitializing price cap indices and

increasing the X-Factor, are designed to

reduce access rates. None of those

proposals would necessarily compel

price cap incumbent LECs to adopt

efficient rate structures, nor ensure that

price cap incumbent LECs allocate

common costs in a reasonable manner.

In Section III above, we invite comment

on revisions to the rate structure rules

to require price cap LECs to develop

access rates that reasonably reflect the

manner in which they incur costs. Here,

we seek comment on whether those

rules are sufficient to ensure that access

rates reflect costs in areas subject to

prescriptive access reform. We also seek

comment on prescribing forwardlooking incremental cost-based access

rates as part of our prescriptive

approach to access reform.

234. Basing the prices of discrete

unbundled network elements, such as

loops and switching, on a forwardlooking economic cost methodology

may be more economically rational than

using the same methodology to price

conventional services, such as interstate

access. Separate services are typically

provided over shared network facilities,

the costs of which may be joint and

common. For example, interstate access

is typically provided using the same

loops and line cards that are used to

provide local service. The costs of these

elements are, therefore, common to the

provision of both local and longdistance services. Conversely, certain

unbundled elements, such as loops and

line cards, can be priced individually

using a TELRIC methodology, and in

those cases the allocation of common

costs is less problematic than when

pricing services.

235. We invite comment on whether,

if we adopt a prescriptive approach to

access reform, we should require

incumbent LECs to conduct TSLRIC

studies, and create new prices for

individual interstate access services on

the basis of those studies. Under this

proposal, we would reset access prices

once, and then rely on price cap

regulation to keep rates just and

reasonable. We also seek comment on

how to allocate common costs if we

were to adopt this approach, and

whether problems raised by allocating a

large amount of common costs relative

to direct costs outweigh the benefits of

this approach.

D. Phases for Prescriptive Approach

236. We are unable at this time to

quantify the magnitude of the

difference, if any, between current

interstate access rates and rates based on

forward-looking economic costs. We

seek comment on the amount of that

difference in Section VII.B below, and

the extent to which incumbent LECs

should be permitted an opportunity to

recover that amount. In this Section of

the NPRM, we observe only that there

may be a substantial cost difference

relative to interstate access revenues as

a whole. If so, we tentatively conclude

that we should include some sort of

transition mechanism in the

prescriptive access reform plan,

comparable to the phases of the marketbased access reform plan we discuss in

Section V above.

237. One possible transition

mechanism could be to establish phases

for any reinitialization of price cap

indices that we may adopt. In other

words, we would implement the

reduction in price cap indices through

a series of reinitializations rather than a

single reinitialization. A second option

could be to adopt a policy-based

increase to the X-Factor for a number of

years, to reduce interstate access

gradually, and then reinitialize price

cap indices to TSLRIC levels as

discussed in Section VI.C.1 above. We

could also adopt a policy-based increase

to the X-Factor for a number of years,

and then prescribe TSLRIC-based access

rates. Parties are invited to comment on

all these options, and to make

suggestions of their own.

VII. Transition Issues

238. In this proceeding, we must

address a variety of issues relating to the

transition from the regulatory structure

that existed before the passage of the

1996 Act to that which will exist after

the three proceedings have been

completed. In Section VII.A, below, we

seek comment on the manner in which

the universal service support amounts

attributable to the interstate jurisdiction

should reduce interstate access rates. In

Section VII.B., we address issues

relating to the potential difference

between the revenues that incumbent

LECs generate from current interstate

access charges and the revenues that

revised access charges are likely to

generate. We seek comment on both the

estimated magnitude of that difference

and the extent to which alternative

methods of recovery of that difference

should be permitted.

A. Universal Service Joint Board

Recommended Decision

239. The 1996 Act states that any

federal universal service support

provided to eligible carriers ‘‘should be

explicit’’ and recovered on an

‘‘equitable and nondiscriminatory

basis’’ from all telecommunications

carriers providing interstate

telecommunications service. In the Joint

Board Recommended Decision, the Joint

Board recommended that the

Commission establish a nationwide

benchmark to use in calculating the

amount of universal service support

eligible telecommunications providers

will receive. Each eligible carrier would

receive revenues from the federal

universal service support mechanism

based on the amount its forward-looking

costs of serving a subscriber, as

calculated using a proxy model, exceed

the benchmark. The Joint Board advised

that the benchmark be based on the

nationwide average revenue-per-line,

i.e., the sum of the revenue generated by

local, discretionary, access services, and

others as found appropriate, divided by

the number of loops served. Final

determination of this issue, however,

must also take into consideration the

revenue base for universal service

contributions. The Joint Board further

advised the Commission to construct

two benchmarks, one for residential

service and a second for single line

business service. The Joint Board

recommended that costs in excess of the

benchmark be funded through an

assessment based either on the interstate

revenues of all interstate

telecommunications carriers less

interstate payments to other carriers, or

interstate and intrastate revenues of all

interstate telecommunications carriers

less payments to other carriers.

240. In its Recommended Decision,

the Joint Board affirmed the

Commission’s tentative conclusion that

LTS payments constitute a universal

service support mechanism that serve to

equalize LECs’ access charges by raising

some carriers’ charges and lowering

others. The Joint Board concluded that

the LTS mechanism is inconsistent with

the 1996 Act’s requirement that support

be collected from all providers of

interstate telecommunications services

on a non-discriminatory basis.

Accordingly, the Joint Board

recommended that the LTS system no

longer be supported via the access

charge regime, and that rural incumbent

LECs continue to receive payments

comparable to LTS from the new

universal service support mechanism. In

the event the Commission implements a

rule assessing carriers’ universal service
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules 4705

support contributions based on both

interstate and intrastate

telecommunications revenues, the Joint

Board recommended that there should

be a downward adjustment in the

residential and single-line business SLC

cap and CCL charges to reflect the

recovery of LTS from other sources.

241. We recognize that, because of the

role that access charges have played in

funding and maintaining universal

service, it is critical to implement

changes in the access charge system

together with complementary changes

in the universal service system.

Regardless of whether features of our

access charge system, such as the perminute CCL charge and geographicallyaveraged rates, contravene section 254

as discussed in Section III.B., above, we

seek comment on whether retaining

such features in light of the possible

changes in universal service could, in

essence, compensate incumbent LECs

twice for providing universal service.

We ask commenters addressing this

issue to identify the circumstances,

including assumed structure of the highcost area support mechanisms, under

which any ‘‘double recovery’’ may exist.

We further seek comment on how we

could best address any potential double

recovery.

242. We propose that a downward

exogenous cost adjustment should be

made for price cap incumbent LECs to

reflect revenues received from any new

universal service support mechanism.

We note that the Commission, after

receiving recommendation from a joint

board, must determine the extent to

which universal service support

revenues are apportioned to the

interstate jurisdiction. In the event the

Commission concludes that high cost

universal service support should be

allocated to the interstate jurisdiction,

how should we adjust the price cap

indices to reflect new explicit universal

service support? Parties should also

comment on whether a downward

adjustment to the incumbent LECs’ PCIs

should be across-the-board, or targeted

to a particular basket or service

category, e.g., the trunking basket or the

TIC, or to the CCL charge or any new

mechanism that may replace it. We seek

comment on the manner in which we

must adjust incumbent LECs’ price cap

indices to account for the removal of

LTS from incumbent LECs’ access

charges. We tentatively conclude that a

downward exogenous cost adjustment

should be made to the CCL charge, or

to any new mechanism that may replace

it, to the extent that the recovery of LTS

from other sources is not offset by a SLC

cap reduction, and seek comment on

this tentative conclusion.

243. For rate-of-return incumbent

LECs, interstate costs must be reduced

to reflect revenues received from any

new universal service support

mechanism to the extent allocated to the

interstate jurisdiction. We seek

comment on how such reductions

should be treated in Part 69 for nonprice cap incumbent LECs. Finally, we

seek comment on how our proposed

interstate ratemaking treatment of the

new universal service support

mechanism affects small business

entities, including small incumbent

LECs and new entrants.

B. Treatment of Any Remaining

Embedded Costs Allocated to the

Interstate Jurisdiction

244. A number of IXCs assert that a

significant difference exists between the

revenues generated by access charges

based on embedded costs allocated to

the interstate jurisdiction by Part 36,

and the revenues that would be

produced by access rates based on the

forward-looking economic cost of

providing access services. For example,

as of November 1996, AT&T estimated

that total interstate access charges

collected today from interexchange

carriers exceed the forward-looking

economic cost of providing access by

about $11.0 billion, or nearly 70 percent

of that total. Similarly, in October 1996,

AT&T asserted that it pays incumbent

LECs an average (interstate/intrastate)

per-minute access rate of 3.06 cents, and

that this rate is more than 7.5 times

greater than the TELRIC per-minute

access rate of .40 cents. AT&T labels

$7.0 billion of the $11 billion as ‘‘pure

uneconomic subsidy to monopoly

incumbent local exchange carriers’’

caused by overallocation of costs to the

interstate jurisdiction, the inclusion of

retail and other costs unrelated to the

provision of access, the understatement

of incumbent LEC productivity, and

other historical inefficiencies. AT&T

asserts that $4.0 billion of the current

access revenues are universal service

support amounts and should be

recovered through mechanisms under

section 254 and not through access

charges. In March 1996, MCI estimated

that approximately $46 billion (or more

than 55 percent) out of $82 billion total

network revenues for Tier 1 local

telephone companies is the difference

between the accounting costs and the

economic costs of providing those

networks as network elements. MCI

attributed this gap largely to the

inclusion of over-built plant ($17

billion), excess customer operations

expenses ($15 billion), excess corporate

operations expenses ($8.3 billion), and

inefficiencies ($3.8 billion) in network

charges. According to MCI, very little of

the gap results from under-depreciation

($0.85 billion).

245. Current interstate access service

revenues permit recovery of the

interstate portion of embedded costs,

subject since 1991 to the constraints of

price cap regulation. The revenues that

would be generated if all access services

were priced at forward-looking,

economic cost may be much smaller.

We generally ask parties to discuss, in

light of the other reforms discussed in

this proceeding and other developments

pursuant to the 1996 Act, the following

issues: the amount and make-up of the

difference between these amounts,

whether recovery of the remaining

interstate-allocated costs should be

permitted, the lawfulness of a denial of

such recovery, and possible recovery

mechanisms. We also invite parties to

comment on the impact of the following

proposals on small business entities,

including small incumbent LECs and

new entrants. In addition to seeking

comment on the nature and magnitude

of the difference, which could include

a portion of the revenues that would

remain in the TIC after the steps

discussed in Section III.E. above, we

seek comment on whether the

identification and ratemaking treatment

of remaining interstate-allocated costs

should vary depending on whether an

incumbent LEC is under a market-based

or prescriptive approach to access

reform.

1. Nature and Magnitude of Any

Remaining Interstate-Allocated Costs

246. Some of the difference between

the incumbent LECs’ interstate-allocated

embedded costs and forward-looking

costs may be traced to past regulatory

practices. For example, interstate access

rates may exceed forward-looking

economic cost, and thus produce some

difference, because of misallocation of

costs to the interstate jurisdiction.

Historically, some separations rules

were designed to shift some costs from

the intrastate to the interstate

jurisdiction, in order to further

universal service goals. For example, in

1987 the Commission agreed with a

Federal-State Joint Board’s

recommendation to exclude interstate

access revenues from the allocation

factor used to apportion marketing

expenses between the interstate and

intrastate jurisdictions. The Commission

reconsidered its decision, however, and

reinstated separations procedures that

allocate marketing expenses in

accordance with revenues in order to

avoid shifting significant amounts of

revenue requirement to the intrastate

jurisdiction. We note further that, to the
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extent that unbundled network element

revenues are unseparated, a difference

between the interstate-allocated

embedded and forward-looking costs of

providing access service may result

when these revenues are removed from

the interstate jurisdiction.

247. Another possible regulatory

cause of any difference between

interstate-allocated embedded or

accounting costs and forward-looking

costs may be under-depreciation of

incumbent LEC assets. Our depreciation

procedures provide for incumbent LECs

to depreciate the total investment in

assets over the estimated useful life of

the assets at rates we prescribe for each

class of assets. Under rate-of-return

regulation, the incumbent LECs set rates

for their access services that

incorporated these depreciation charges;

those rates were the foundation for the

initial price cap rates. Many incumbent

LECs contend that this Commission

prescribed depreciation schedules based

on relatively long asset lives in order to

spread recovery of investment over an

extended period and prevent large rate

increases. In a monopoly environment,

there were no competitive providers

that might prevent an incumbent LEC

from eventually recovering its entire

investment at the end of the prescribed

period.

248. Under-depreciation of incumbent

LEC capital assets can occur in two

ways. First, facilities may be underdepreciated if the useful lives

prescribed for regulated facilities exceed

the economic lives of those facilities.

This under-depreciation often occurs

when new technologies are introduced

that reduce the remaining economic

lives of embedded plant. In that event,

the existing depreciation rate will not

produce an adequate depreciation

charge to account for the shorter

remaining lives of the old equipment. In

other words, if a new technology

shortens the economic life of existing

incumbent LEC plant from 25 to 15

years, a prescribed depreciation

schedule of 25 years for that plant will

not enable the incumbent LEC to

recover its investment during the useful

economic life of the plant. However,

under the remaining life techniques a

LEC has the ability to request revised

depreciation rates and recover its

investment over the expected remaining

life.

249. We note that, in response to the

Price Cap Fourth FNPRM, MCI

submitted a study analyzing the

depreciation reserve deficiency. The

study concludes that changes in the

Commission’s depreciation practices

during the 1980s reduced the reserve

deficit from $21 billion in 1983 to only

$3 billion in 1994. Incumbent LECs, on

the other hand, have claimed that

unreasonably low depreciation rates

(resulting from life estimates that are too

long) have created a large overvaluation

of their rate bases and a $40 billion

depreciation reserve deficiency. We

note that traditional depreciation

reserve studies, such as that employed

by MCI, do not address the effects of a

decline in replacement value during an

asset’s life, as discussed below.

250. Under-depreciation also can

occur if the depreciation procedures do

not recognize the decline in the

economic value of plant already in

service that occurs when the

replacement cost is less than the cost of

the older equipment. The annual charge

to depreciation expense for incumbent

LEC assets of different vintages or

different technologies of comparable

capacity will vary in an industry where

the cost of assets is declining over time

such as telecommunications. A price

based on forward-looking economic cost

would be based on the annual economic

depreciation expense of the newer

facility. Thus, a market characterized by

developing competition may no longer

support a price designed to recover

depreciation expenses based on the

Commission’s currently prescribed

depreciation rates for deployed

equipment. In the emerging competitive

marketplace that finds incumbent LECs

facing competitors using newer, less

expensive equipment, some portion of

the deployed equipment is arguably

under-depreciated by an amount equal

to the difference between the current net

book value and the forward-looking

replacement cost of the depreciable

plant.

251. We invite parties to explain in

detail the magnitude of any difference

between existing interstate-allocated

embedded costs and interstate access

revenues, on the one hand, and the

revenues that would be generated if all

interstate access services were offered at

forward-looking, economic cost, on the

other. We invite parties to submit data

quantifying any difference, and

explaining in detail to what extent the

underlying difference between

embedded and forward-looking costs

results from the Part 36 allocation rules,

under-depreciation, or other factors.

Parties should also specify the

methodology used to calculate the

amount, and define and show the

calculation of economic lives, economic

obsolescence, economic depreciation,

and actual lives. We seek comment on

what effect the significant underutilization of equipment because of a

transition to newer equipment, or

because of reduced demand, should

have on the calculation of any underdepreciation.

252. We also seek comment on

whether the amount of any difference

should be determined and fixed as of a

date certain, such as the enactment of

the 1996 Act. Under such an approach,

some or all of unrecovered embedded

costs incurred before that date might be

eligible for special recovery

mechanisms, but all costs incurred after

that date would be regarded as incurred

under the new competitive paradigm

established by the Act and thus entitled

to no special treatment. We invite

comment as well on whether any

special mechanisms would be necessary

to ensure that the jurisdictional

separations process does not allocate

additional residual embedded costs to

the interstate jurisdiction during any

transitional recovery period. In

addition, LECs may be permitted to

recover some portion of the difference

through explicit universal service

support mechanisms adopted in the

universal service proceeding.

Accordingly, we ask parties, when

identifying any difference between

interstate-allocated embedded costs and

the forward-looking economic costs of

access, to take into account the amount

of interstate costs that are likely to be

recovered through such universal

service support flows.

2. Recovery of Remaining InterstateAllocated Embedded Costs

253. We invite parties to comment on

whether, as a matter of law or equity,

incumbent LECs are entitled, should be

permitted an opportunity, or have

already been permitted an opportunity,

to recover some or all of the difference

between interstate-allocated embedded

costs and forward-looking economic

costs that might be created by the access

reform proposals discussed above in

Sections V and VI. We specifically

request that parties comment on

whether the legal basis for permitting or

denying such recovery varies depending

on whether an incumbent LEC is under

a market-based approach to access

reform, as described in Section V, a

prescriptive approach to access reform,

as described in Section VI, or some

combination of these approaches.

NARUC has suggested that new sources

of revenue from incumbent LEC inregion interLATA market entry may

constitute a mitigating factor that should

be reflected in the evaluation of any

difference between embedded and

forward-looking economic costs. We

seek comment on whether and how

entry into the in-region, interLATA

long-distance market or any other

additional revenue flows should affect
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the amount of any remaining interstateallocated embedded costs that

incumbent LECs should have a special

opportunity to recover.

254. Some parties have suggested that

we should limit recovery to those

remaining embedded costs arising from

certain sources, e.g., under-depreciation,

and deny recovery of remaining

embedded costs resulting from overinvestment and other inefficiencies. We

seek comment on this approach and ask

commenting parties to specify those

costs that incumbent LECs should be

permitted an opportunity to recover and

those that should be disallowed. Should

incumbent LECs be required to

demonstrate the specific costs they seek

to recover and satisfy a burden or

standard in order to recover some or all

of such costs? Should we establish a

rebuttable presumption that certain

costs are recoverable? We invite parties

to comment on this issue and specify

any appropriate standard that should be

applied and which party should bear

the burden of proof. For example,

should incumbent LECs seeking such

recovery be required to show that their

investment in telecommunications plant

was prudent at the time it was made and

does not reflect over-investment? Or

should other parties bear the burden of

showing that certain investments are no

longer used and useful? If so, how

should we determine whether any

particular investment was prudent? Are

there any legal constraints on where we

place the burden? Parties should be

specific in addressing these questions.

255. One option is to refer issues

relating to the difference between

revenues generated by rates based on

embedded costs and revenues produced

by rates based on forward-looking costs

to state commissions to conduct the

necessary rate cases and to make

recommendations to the Commission on

possible disallowances of imprudently

incurred investments or excessive

expenditures. Once the state

commission reported back, we would

determine the manner of recovery of the

interstate portion of any difference. This

approach, which we could implement

under section 410(a) of the Act, permits

coordinated treatment between the

federal and state jurisdictions and

assigns the responsibility of conducting

such rate cases to state commissions,

which have substantial experience with

the carriers operating in their respective

states. This approach also conserves

industry resources, because each state

will have to address the issue of

embedded cost recovery if it decides to

set prices for intrastate services based

on forward-looking costs or some basis

other than embedded costs. We seek

comment on this alternative and invite

parties to comment on what, if any,

federal guidelines should be established

for the conduct of the prudence aspects

of any rate cases referred to state

commissions under section 410(a).

256. We also invite interested parties

to comment on whether the incumbent

LECs should be required to mitigate the

magnitude of this potential problem by

reducing their costs, and if so, how they

might do so. We first discuss possible

general mechanisms under the marketbased and prescriptive approaches to

access reform, and then address whether

any recovery due to under-depreciation

should be treated separately. Interested

parties should also comment on how a

decision to permit incumbent LECs to

recover some or all of the difference

between embedded and forward-looking

costs would affect small business

entities, including small incumbent

LECs and new entrants.

3. Recovery Mechanisms

257. In the event we determine that

incumbent LECs should be permitted a

special opportunity to recover some or

all of the difference between revenues

generated by access charges based on

embedded and forward-looking costs,

we invite parties to comment on the

various recovery mechanisms discussed

below and to propose alternatives. We

seek comment on the impact of any

particular recovery mechanism on small

business entities, including small

incumbent LECs and new entrants.

a. Market-Based Recovery. 258. As

new entrants succeed in attracting

incumbent LEC customers, we expect

competition gradually to drive access

rates to more economically efficient

levels. With a gradual transition, our

removal of economic regulatory

constraints may well give the incumbent

LECs ample opportunity to recover any

of the difference between embedded and

forward-looking costs and therefore

obviate any need for a formal recovery

mechanism. Price cap incumbent LECs

could use pricing and rate structure

flexibility to reduce the revenue

difference during a transitional period.

Incumbent LECs would also have an

opportunity, while competition is still

developing, to reduce their costs of

service to levels consistent with the

revenues available to them in a

competitive market. We seek comment

on this approach. Specifically, does the

timing of the proposed stages and the

flexibility proposed permit incumbent

LECs a reasonable opportunity to

recover any of the revenue differential

and adjust to a competitive market? On

the other hand, we ask parties to

comment on whether, to the extent that

our separations rules over-allocate costs

to the interstate jurisdiction, this

market-based approach may not give

incumbent price cap LECs a reasonable

opportunity to recover some portion of

the difference between embedded and

forward-looking costs and, if so, what

measures would be appropriate.

b. Regulated Recovery. 259. We seek

comment on two situations under which

it might be necessary to establish a

separate regulatory mechanism for

recovery of some portion of the

interstate-allocated embedded costs that

might remain unrecovered if access

service were priced based on forwardlooking cost. First, in the event we

determine that the market-based

approach discussed above fails to

provide incumbent LECs a fair

opportunity to recover some or all

remaining embedded costs, we invite

parties to comment on whether we

should implement a recovery

mechanism to operate in lieu of, or in

conjunction with, the market-based

approach. Second, as we discussed in

Section VI., above, a separate regulatory

recovery mechanism may be necessary

to the extent an incumbent price cap

LEC is subject to prescriptive access

reform. We seek comment on whether,

and the degree to which, a separate

recovery mechanism is required.

260. If we conclude that a recovery

mechanism is necessary, we could

design a mechanism to recover a

specific, fixed, dollar amount of

remaining embedded costs, over a fixed

period. We seek comment on this

proposal and invite parties to offer

possible recovery mechanisms of

limited duration. For example, one

possible recovery mechanism might be

to permit incumbent LECs to ‘‘amortize’’

their recovery of the difference, i.e., to

permit incumbent LECs to include in

their rates a certain fraction of the

difference each year for a certain

number of years. The period could be

designed to coincide with a gradual

phase-out of the TIC, as discussed in

Section III.E., above. We discuss issues

raised by amortization of remaining

embedded costs in more detail below, in

conjunction with recovery of costs

related to under-depreciation.

261. Another option would be to

establish a competitively-neutral

recovery mechanism that is separate and

distinct from access charges. For

example, should we permit incumbent

LECs to impose a surcharge, either on

all access customers, or on all providers

or users of telecommunications services,

in order to recover some portion of any

remaining interstate-allocated costs?

This mechanism could be similar to the

mechanism for collecting universal
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service funds, except that this recovery

fund would not be permanent, nor

would payments be portable to other

eligible telecommunications carriers.

We seek comment on when and how

such a fund should be terminated. We

seek comment on this option and our

legal authority to adopt such an option.

We ask parties to address, in particular,

how to structure any such surcharge so

that it is collected in a competitivelyneutral manner, such as on the basis of

telecommunications revenues, net of

payments to other carriers, whether

such surcharges should be levied on

telecommunications carriers purchasing

unbundled network elements, and, if so,

how. Parties should also comment on

how any surcharge imposed only on

access customers could be structured so

as not to burden unduly access

customers and offer as little impediment

as possible to our long-term goal of

having access charges consistent with a

competitive exchange access market. We

invite parties to comment on the impact

of this option on investment,

innovation, and competition.

262. In the event we adopt one of the

special regulatory mechanisms

described above or an alternative

mechanism advocated by parties in this

proceeding, as part of a transition to a

competitive environment, we seek

comment on whether some limitation

on incumbent LECs’ earnings is

warranted. For example, we invite

parties to comment on whether, if we

set up a special mechanism that

permitted incumbent LECs a reasonable

opportunity to recover certain costs, it

would be appropriate to limit to a

certain prescribed rate of return the

incumbent LEC earnings on the

investment portion of the costs

designated for recovery, or to increase

the incumbent LEC’s price cap sharing

obligations, given the limited risk of

non-recovery under such a mechanism.

Alternatively, we could permit

incumbent LECs to select from two

recovery options—cost recovery through

market-based prices to the extent they

are able in a competitive market; or cost

recovery through a regulatory

mechanism, with a greater sharing

obligation under the price cap plan. In

the event we determine that incumbent

LECs should be permitted to select the

manner of recovery, we seek comment

on whether we should limit the ability

to choose only to incumbent LECs that

can make a competitive showing, as

discussed in Section V., above. We

invite parties to comment on this

approach and other possible

adjustments to the price cap plan that

would be appropriate in the event we

adopt a regulatory recovery mechanism.

c. Recovery of Difference Caused by

Under-Depreciation. 263. The portion of

the difference between embedded costs

and forward-looking costs that is

attributable to under-depreciation may

warrant separate treatment. Specifically,

we must consider the appropriate

balance between customer and

shareholder risk as telecommunications

markets become more competitive. In a

competitive market, a firm’s ability to

raise its rates to recover higher

depreciation costs is constrained by the

pricing practices of other competitors,

some of which may well have cost

advantages through use of newer, more

efficient equipment. A competitive firm

is able to establish its depreciation

charges and its prices free of any

regulatory constraints, but its

shareholders bear the risk of loss if the

resulting prices are too high and,

consequently, fail to generate revenues

sufficient to cover the depreciation

charges. The incumbent LEC’s ability to

recover its investment in a competitive

market is dependent in part on

depreciation practices that accurately

reflect the decline in economic value of

the LEC investment. The issue then is

whether to permit incumbent LECs any

relief with respect to the depreciation of

equipment on their books at the time

that the regulatory approach changes,

whether the depreciation process

should proceed unaffected by the shift

in regulatory policies, or whether to

modify our depreciation procedures. If,

for example, the Commission concluded

that incumbent LECs have not incurred

significant depreciation reserve

deficiencies to date, it could continue

the current depreciation policies, or

reflect small changes through increased

depreciation rates in the future.

264. If, on the other hand, we

conclude that the public interest would

be served by adjusting the customer/

shareholder risk levels because of

regulatory changes, we could permit the

incumbent LECs to adjust their accounts

to establish an amortization of plant to

reflect some or all of the change in

economic value of the equipment

installed under the earlier regulatory

regime. We invite parties to comment on

whether the local competition

provisions of the 1996 Act and the

competition expected to result from the

implementation of those provisions

constitute such an unexpected and

dramatic regulatory shift that incumbent

LECs should be permitted to adjust their

accounts to reflect some or all of the

change in economic value of their

embedded investment. Parties should

also address the appropriate balance

between customer and shareholder risk

entailed in the shift to a more

competitive regulatory policy.

265. If we permit incumbent LECs to

adjust their accounts in such a way, the

depreciation adjustment would

presumably take the form of an

amortization of these amounts over a

prescribed period. An amortization plan

would increase access rates in the short

term, but, all other things being equal,

would lead to lower access rates after

the amortization was completed. We

invite parties to comment on the

desirability of establishing an

amortization plan, under which

incumbent LECs could recover more

rapidly some or all of any demonstrated

under-depreciation costs resulting from

economic obsolescence. We also ask

whether any such amortization should

be recovered in a competitively-neutral

manner.

266. If we decide to take some action,

we will need to determine the period

over which to calculate the amount of

the depreciation reserve deficiency. For

example, we might measure underdepreciation for a period ending with

the enactment of the 1996 Act. In

addition, parties should comment on

the period over which any amortization

should take place. We invite any

incumbent LEC, believing that it has

facilities that are under-depreciated due

to economic obsolescence, to submit a

study demonstrating the extent of such

under-depreciation and proposing the

appropriate time period over which to

amortize such amounts. Any incumbent

LEC submitting such a study should

provide complete details on original

cost, salvage value, economic lives, and

other relevant factors, for both old and

new technologies that are necessary to

permit us to make an informed decision.

We invite parties to address whether a

different rate of economic obsolescence

might occur in low-density areas than in

high density areas.

267. Price cap incumbent LECs would

account for this amortization through an

upward exogenous adjustment to the

price cap indices. Parties are also

invited to suggest procedures for

adjusting the PCIs, APIs, and SBIs to

reflect the exogenous treatment of any

amortization, if we permit incumbent

LECs to adopt an amortization plan.

VIII. Other Issues

A. Regulation of Terminating Access

268. Some analysts have contended

that an access provider’s market power

differs between originating and

terminating access service. With

originating access, the calling party has

the choice of service provider, the
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decision to place a call, and the ultimate

obligation to pay for the call. The calling

party is also the customer of the IXC

that is purchasing the originating access

service. As long as IXCs can influence

the choice of the access provider, a

LEC’s ability to charge excessive

originating access rates is limited, as

IXCs will shift their traffic from that

carrier to a competing access provider.

This is particularly true for multi-line

customers, who may select one carrier

with lower access rates for their outgoing interexchange calls and a different

carrier with a lower flat monthly rate for

local service. For terminating access, the

choice of service provider is made by

the called party. The decision to place

the call and payment for the call lies,

however, with the calling party. The

calling party, or its long-distance service

provider, has little or no ability to

influence the called party’s choice of

service provider. Thus, it appears that

even with a competitive presence in the

market, terminating access may remain

a bottleneck controlled by whichever

LEC provides access for a particular

customer. As such, the presence of

unbundled network elements or

facilities-based competition may not

affect terminating access charges.

269. On the other hand, high

terminating access rates may create an

incentive for IXCs to win the local

customer. It is true that winning the end

user as customer will allow the IXC to

save only a fraction of the total

terminating access charges generated by

the end user, because the IXC will carry

only a fraction of the calls received by

the end user. Nevertheless, serving the

local customer using unbundled

elements will also allow the IXC to

collect terminating access charges on

calls received by the end user. Thus, in

this analysis, it would appear that high

terminating access charges may give an

IXC an incentive to win an end user as

a local customer similar to the incentive

created by high originating access rates.

In this section, we seek comment on

whether and to what extent we should

regulate the terminating access services

of price cap incumbent LECs and nonincumbent LECs and whether

competition will have the same effect on

terminating access rates as on

originating access rates.

1. Price Cap Incumbent LECs

270. We seek comment on the

implications of the above analysis for

regulating the terminating access service

of price cap LECs and ask parties to

address the necessity of continued

regulatory oversight of access prices for

the termination of interstate calls by

price cap LECs in markets where we

find originating access services are

subject to substantial competition.

271. One possible method of

regulating price cap incumbent LECs’

terminating access service is to establish

a rate ceiling that prevents incumbent

LECs from charging more for

terminating access than the forwardlooking, economic cost of providing the

service. We seek comment on whether

and how we should require incumbent

price cap LECs to price terminating

access service at forward-looking,

economic costs. Whether an incumbent

price cap LEC is offering terminating

access at forward-looking economic cost

could be measured by the prices in

reciprocal compensation arrangements

for the transport and termination

charges of telecommunications pursuant

to sections 251(b)(5) and 252(d)(2).

Arbitrated reciprocal compensation

rates may not include the NTS costs of

either local switching or the subscriber

line. Therefore, these NTS costs, which

are now recovered in part from

terminating access, would have to be

recovered solely from originating access

or a flat charge. Alternatively, we could

ensure that terminating access is priced

at its forward-looking economic cost by

requiring such prices to be based on a

TSLRIC study or other acceptable

forward-looking, cost-based model. We

invite parties to comment on these and

alternative measures of forward-looking,

economic costs to be used for

terminating access rates.

272. Some observers have suggested

that another possible method of

regulating incumbent price cap LECs’

terminating access service is to require

the incumbent price cap LEC to charge

the end user for the service. If called

parties paid for terminating access, the

individual who paid for the service

would be the same individual who

selected the provider. We seek comment

on whether requiring called parties to

pay for terminating access might

encourage competition for terminating

access. We note that wireless companies

already charge the called parties for

receiving calls. Would charging the

called party for terminating access result

in an increase of uncompleted calls, due

to a reluctance by called parties to

accept the charges? We invite parties to

address how charging the customer

receiving the call for terminating access

could be accomplished, and whether

this approach would be superior to

using forward-looking economic cost.

BellSouth argues that the availability of

transport and termination under Section

251 for local traffic makes unnecessary

any special regulation for terminating

access that is different from originating

access. BellSouth argues that

terminating interstate traffic would be

disguised as terminating local traffic,

resulting in less expensive terminating

access. We seek comment on

BellSouth’s analysis.

273. Alternatively, we could require

incumbent price cap LECs to charge

nothing for terminating access service

and permit them to recover all such

costs from originating access charges.

We invite parties to comment on the

merits of this approach and whether

incumbent price cap LECs should be

permitted to choose between this

approach and some other form of

regulation of their terminating access

services. Parties should also suggest

other possible methods of regulating

incumbent price cap LECs’ terminating

access service not discussed above. We

seek comment on whether we should

adopt different regulatory mechanisms

for terminating access for those

incumbent price cap LECs that are

subject to the alternative regulatory

regime discussed in Section VI, above.

Finally, we invite parties to address

whether we should keep our rate

structure rules for terminating access for

incumbent LECs even after we have

eliminated such rate structure rules for

originating access.

2. Non-Incumbent LECs

274. Between 1979 and 1985, the

Commission conducted the Competitive

Carrier proceeding, in which it

examined how its regulations should be

adapted to reflect and promote

increasing competition in

telecommunications markets. Policy and

Rules Concerning Rates for Competitive

Common Carrier Services and Facilities

Authorizations Therefor, CC Docket No.

79–252, Notice of Inquiry and Proposed

Rulemaking, 44 FR 67445 (November

26, 1979); First Report and Order, 45 FR

76148 (November 18, 1980); Further

Notice of Proposed Rulemaking, 46 FR

10924 (February 5, 1981); Second

Further Notice of Proposed Rulemaking,

FCC 82–187, 47 FR 17308 (April 22,

1982); Second Report and Order, 47 FR

37889 (August 27, 1982); Order on

Reconsideration, 93 FCC 2d 54 (1983);

Third Further Notice of Proposed

Rulemaking, 48 FR 28292 (June 21,

1983); Third Report and Order, 48 FR

46791 (October 14, 1983); Fourth Report

and Order, 48 FR 52452 (November 18,

1983), vacated, AT&T v. FCC, 978 F.2d

727 (D.C. Cir. 1992), cert. denied, MCI

Telecommunications Corp. v. AT&T,

113 S.Ct. 3020 (1993); Fourth Further

Notice of Proposed Rulemaking, 49 FR

11856 (March 28, 1984); Fifth Report

and Order, 49 FR 34824 (September 2,

1984); Sixth Report and Order, 50 FR

1215 (January 1, 1985), vacated MCI
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Telecommunications Corp. v. FCC, 765

F.2d 1186 (D.C. Cir. 1985) (collectively

referred to as Competitive Carrier). In a

series of orders, the Commission

distinguished between two kinds of

carriers: Those with market power (i.e.,

the power to control prices) are deemed

dominant carriers, and those without

market power are deemed nondominant carriers. The Commission has

regulated incumbent LECs as dominant

carriers in their provision of interstate

access service. The Commission’s policy

since Competitive Carrier has

consistently been that a carrier is nondominant unless the Commission makes

or has made a finding that it is

dominant.

275. Competitors have begun to

provide exchange access services, aided

in significant part by our expanded

interconnection policies. The procompetitive policies of the 1996 Act are

expected to result in increased entry

into the exchange and exchange access

markets. To date, the Commission has

only applied the interstate access charge

rules to incumbent LECs. New entrants

into the exchange access market, such as

competitive access providers (CAPs),

have been presumptively classified as

non-dominant because they have been

deemed not to have the ability to

exercise market power in particular

service areas. NYNEX has suggested that

there is a need for regulation of certain

access services, particularly terminating

access, offered by all LECs, including

new entrants. In this section, we

consider and invite comment on

whether, and the extent to which, we

should establish any rules for the

provision of access services by nonincumbent LECs, or competitive LECs,

most particularly terminating access

service. We note that we are extremely

reluctant to impose price regulation on

non-dominant carrier services without a

strong showing that such regulation is

necessary.

276. The factors that warrant

continued regulation of incumbent

LECs’ terminating access service appear

to apply to all access providers,

including competitive LECs, because

these new entrants appear to possess

market power over IXCs needing to

terminate calls. As previously

discussed, the recipient of a call, the

called party, selects the carrier that

provides the terminating access for the

calls destined for that party. The

decision to place the call, however, lies

with the calling party, who currently

pays for the call. In those cases, the

calling party’s long-distance service

provider appears to have little or no

influence on the called party’s choice of

service provider. Because the paying

parties do not choose the carrier that

terminates their interstate calls,

competitive LECs potentially could

charge excessive prices for terminating

access. We therefore seek comment on

whether there are some aspects of the

competitive situation facing nondominant LECs with respect to

terminating access that distinguishes

non-dominant from dominant carriers.

277. In the event we conclude that

non-dominant carriers have market

power with regard to terminating access

charges or that market failure would

preclude the marketplace from ensuring

that terminating access rates are just and

reasonable, we also invite parties to

comment on whether competitive LECs’

terminating access service should be

subject to different limits than

incumbent price cap LECs’ terminating

access service, or to similar limits on

rate structure or rate level. Parties

should address whether the incumbent

LECs’ terminating access charges should

serve as a benchmark to evaluate

competitive LECs’ terminating rates. For

example, we could find a competitive

LEC’s terminating access charge to be

presumptively just and reasonable if the

charge is less than or equal to the

terminating access charge of the

incumbent LEC with which the

competitive LEC is competing. If, on the

other hand, the competitive LEC’s

terminating access charge is greater than

the incumbent LEC’s charge, the

competitive LEC could be required to

provide cost support for its charge or it

could collect the difference from its end

users. We seek comment on these

proposals, as well as on other less

intrusive methods of ensuring a

competitive LEC’s terminating access

charges are just and reasonable. We

further invite parties to comment how

small business entities, including small

incumbent LECs and new entrants will

be affected by this tentative conclusion

and proposals to regulate terminating

access.

3. ‘‘Open End’’ Services

278. In some instances, an IXC may

not be able to influence the choice of the

originating access provider, and,

consequently, marketplace forces may

be less effective in limiting a competing

LEC’s ability to charge higher

originating access rates. For example,

for ‘‘open end’’ originating minutes,

such as originating access for 800

service, it is the called party that pays

for the call. Thus, while the calling

party, who selects the local carrier/

access provider, decides to place an

individual call, that party pays nothing

for the call. For these reasons, the

Commission has long treated incumbent

LECs’ originating ‘‘open end’’ minutes

as terminating minutes for access charge

purposes. We seek comment on whether

this analysis should continue to apply

to incumbent LECs’ originating access

for 800 service and other similar ‘‘open

end’’ services for which terminating

access rates serve as originating access

rates, and whether such regulation

should be extended to apply to

competitive LECs.

B. Treatment of Interstate Information

Services

279. Usage of interstate information

services, and in particular the Internet

and other interactive computer

networks, has increased dramatically in

recent years. Such new services create

significant benefits for the economy and

the American people. The 1996 Act

states that it is the policy of the United

States ‘‘to preserve the vibrant and

competitive free market that presently

exists for the Internet and other

interactive computer services,

unfettered by Federal or State

regulation,’’ and we have long sought to

avoid unnecessary regulation of

information services. As usage

continues to grow, such services may

have an increasingly significant effect

on the public switched network.

280. Therefore, as part of this

comprehensive proceeding, we must

consider how our rules can provide

incentives for investment and

innovation in the underlying networks

that support the Internet and other

information services. We consider in

this section the narrow question of

whether to permit incumbent LECs to

assess interstate access charges on

information service providers. We make

no specific proposals, and we

tentatively conclude that the existing

pricing structure for information

services should remain in place at this

time. In Section X, we issue a Notice of

Inquiry to examine various fundamental

issues about the implications of usage of

the public switched network by

information service and Internet access

providers.

281. Beginning with the Amendment

of Section 64.702 of the Commission’s

Rules and Regulations (Second

Computer Inquiry), Docket No. 20828,

Final Decision, 45 FR 31319 (May 13,

1980) proceeding in the 1970s, we have

distinguished between basic and

enhanced communications services. The

category of enhanced services, which

includes access to the Internet and other

interactive computer networks, as well

as telemessaging, alarm monitoring, and

other services, appears to be quite

similar to the term ‘‘information

services’’ in the 1996 Act. In the MTS
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and WATS Market Structure,

Memorandum Opinion and Order,

Docket No. 78–72, 48 FR 42984

(September 21, 1983) (Access Charge

Reconsideration Order), we decided

that, although enhanced service

providers (ESPs) may use incumbent

LEC facilities to originate and terminate

interstate calls, ESPs should not be

required to pay interstate access

charges.

282. As a result of these decisions,

ESPs may purchase services from

incumbent LECs under the same

intrastate tariffs available to end users,

by paying business line rates and the

appropriate subscriber line charge,

rather than interstate access rates. Those

business line rates are significantly

lower than the equivalent interstate

access charges, in part because of

separations allocations and the access

charge per-minute rate structure, and in

part because the business lines that

ESPs now purchase generally do not

include usage-sensitive charges for

receiving local calls. ESPs,

consequently, typically pay incumbent

LECs a flat monthly rate for their

connections regardless of the amount of

usage they generate. Pacific Bell

estimates that calls to Internet-provided

services could comprise up to 25

percent of its traffic by the end of the

decade. US West projects that 30

percent of all local exchange traffic will

be for access to the Internet by the year

2000. The Internet access market is also

highly competitive and dynamic, with

over 2,000 companies offering Internet

access as of mid-1996. It is extremely

likely that, had per-minute interstate

access rates applied to ESPs over the

past 13 years, the Internet and other

information services would not have

developed to the extent they have

today—and indeed may not have

developed commercially at all.

283. For some time, however,

incumbent LECs and others have argued

that ESPs impose costs on the network

that are similar to those imposed by

providers of interstate voice telephony,

and that ESPs should therefore pay

interstate access charges. Several parties

made this argument in their comments

in response to a petition filed by

America’s Carriers Telecommunications

Association (ACTA) earlier this year. In

addition, four BOCs have filed studies

in recent months purporting to show

that the current pricing structure for

Internet access contributes to the

congestion of incumbent LEC networks.

The BOCs claim that Internet users

typically stay on the line far longer than

voice users, but that the flat monthly

rates Internet service providers pay to

incumbent LECs do not cover the

additional cost of network upgrades that

are required to support such traffic.

284. In response, information service

providers argue that the rates they pay

to incumbent LECs, combined with the

additional revenues from sources such

as second lines installed for Internet

usage, more than cover the costs they

impose on the network. These parties

also argue that the imposition of access

charges would stifle growth, investment,

and innovation in information services,

causing detrimental effects for the

economy and U.S. competitiveness. The

Network Reliability and Interoperability

Council (NRIC), an advisory committee

of industry representatives organized to

advise the FCC, is also looking into the

effects of Internet usage on the public

switched telephone network.

285. We tentatively conclude that

information service providers should

not be required to pay interstate access

charges as currently constituted. As we

have explained throughout this NPRM,

the existing access charge system

includes non-cost-based rates and

inefficient rate structures. We see no

reason to extend this regime to an

additional class of users, especially

given the potentially detrimental effects

on the growth of the still-evolving

information services industry. Although

our original decision in the Access

Charge Reconsideration Order to treat

ESPs as end users rather than carriers

was explained as a temporary

exemption, we tentatively conclude that

the current pricing structure should not

be changed so long as the existing

access charge system remains in place.

The mere fact that providers of

information services use incumbent LEC

networks to receive calls from their

customers does not mean that such

providers should be subject to an

interstate regulatory system designed for

circuit-switched interexchange voice

telephony. We seek comment on this

tentative conclusion.

286. We recognize that this issue is of

special interest to users of the Internet

and online services. Therefore, we have

established an electronic mailbox at

<isp@fcc.gov> for submission of

informal comments on the treatment of

Internet and other information services.

Additional information on this issue is

available through our World Wide Web

site at <http://www.fcc.gov/isp.html>.

We are inviting all parties that file

formal paper comments in this

proceeding to submit copies of their

comments in electronic form, and we

intend to make those electronic

submissions available for review on the

World Wide Web.

287. We invite interested parties to

discuss the number of ESPs and Internet

service providers, if any, that can be

considered ‘‘small entities’’ within the

meaning of the Regulatory Flexibility

Act, and whether there is any reason to

establish different requirements for

small ESPs and information service

providers.

C. Other Part 69 Revisions

1. Equal Access Network

Reconfiguration Costs

288. The court in the MFJ required all

Bell Operating Companies to provide

access service that would enable

subscribers to reach their interexchange

carrier of choice without dialing

additional digits, or in other words, ‘‘1+

dialing.’’ GTE was later required by

court order to provide to all IXCs, upon

bona fide request, exchange access that

is equal in type and quality to that

provided to AT&T. The Commission

later imposed similar ‘‘equal access’’

obligations on independent telephone

companies other than GTE.

289. In 1986, the Commission

prohibited incumbent LECs from

recovering all the costs incurred in

converting their networks to equal

access at the time they incurred those

costs. Instead, LECs were required to

amortize those costs over an eight-year

period ending on December 31, 1993.

Prior to the termination of this

amortization period, the Commission

adopted price cap regulation for

incumbent LECs, and based the initial

price cap rates on the access rates in

effect as of July 1, 1990, as adjusted for

the represcription of the authorized rate

of return we adopted in 1990. In the

LEC Price Cap Reconsideration Order,

the Commission declined to extend

exogenous treatment to equal access

reconfiguration costs because it might

give incumbent LECs an artificial

incentive to increase their investment in

equal access facilities at a time when

conversion to equal access was

substantially complete. In petitions to

reject or suspend the price cap

incumbent LECs’ 1994 annual access

tariffs, AT&T and MCI argued that the

incumbent LECs’ PCIs should be

reduced to reflect the completion of the

amortization of equal access costs. The

Common Carrier Bureau did not

suspend any tariffs for this reason, in

part because the Commission decided

not to require exogenous cost treatment

in the LEC Price Cap Reconsideration

Order, and in part because the

completion of the equal access cost

amortization is not listed in section

61.45(d)(1) of our rules as warranting

exogenous cost treatment. Later, in the

LEC Price Cap Performance Review, the

Commission considered requiring
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incumbent LECs to make an exogenous

cost decrease to account for the

completion of the equal access cost

amortization, but found that the record

was not adequate in that proceeding to

require such an adjustment.

290. We invite comment on whether

to require incumbent price cap LECs to

make an exogenous cost decrease to one

or more of their PCIs to account for the

completion of the amortization of equal

access network reconfiguration costs on

December 31, 1993. Parties supporting

an exogenous cost reduction should

explain in detail how such an

adjustment should be calculated, and to

which basket or baskets should the

exogenous reduction apply. In addition,

we invite interested parties to discuss

whether it would be fair to require

exogenous cost decreases to account for

the completion of the amortization of

equal access network reconfiguration

costs in light of the fact that the

Commission did not permit exogenous

cost increases for equal access network

reconfiguration costs.

2. Part 69 Allocation Rules

291. We invite comment on relieving

incumbent price cap LECs from the

application of Part 69, Subparts D and

E of our rules, in certain instances.

Subparts D and E allocate incumbent

LECs’ investments and expenses to all

the access rate elements. If we adopt a

market-based approach to access reform

as we discuss in Section V above, and

decide to eliminate the rate structure

rules, this would appear to eliminate the

need for the Part 69 cost allocation

rules. Alternatively, if we adopt a more

prescriptive approach to access reform

as we discuss in Section VI above, and

decide to base some or all their access

rates on TSLRIC costs, then it may not

be necessary to retain rules for fully

distributing costs to different rate

elements. We solicit comment on

whether there might be any other reason

to relieve any price cap LEC from the

requirements of Subparts D and E, and

if so, what the timing of that relief

should be.

3. Other Proposed Part 69 Changes

292. Regardless of whether we adopt

any of the proposals discussed in this

NPRM, we tentatively conclude that a

number of provisions in Part 69 warrant

revision. These revisions are necessary

to conform Part 69 to the 1996 Act, or

to update the rules for other reasons. We

seek comment below on what these

conforming or updating amendments

should be. Also, over the years, several

incumbent LECs have established access

rate elements or subelements pursuant

to waiver. We seek comment below on

incorporating these rate elements into

Part 69.

293. First, we discuss rule revisions

necessary to conform Part 69 to the 1996

Act. Section 69.2(hh) of the

Commission’s rules defines ‘‘Telephone

Company’’ in terms of section 3(r) of the

1934 Act. We propose to change this

reference to ‘‘incumbent LEC’’ as it is

defined in the 1996 Act. Sections 69.4(f)

and 69.122, providing for a

‘‘contribution charge’’ that may be

assessed on special access and

expanded interconnection, appear to be

inconsistent with the requirement in

section 254 that such carrier

contributions be equitable and

nondiscriminatory. Accordingly, we

propose to delete these two rule

sections. We also seek comment on

what effect, if any, adoption of this

proposal might have on small

incumbent LECs or other small

businesses. In addition, we invite

parties to identify other rules which

may be inconsistent with the Act.

294. Second, we seek comment on

eliminating Part 69 rules that are no

longer effective. For example, in the

mid-1980s, we permitted incumbent

LECs to recover their equal access

conversion costs through a separate rate

element. We also required carriers to

eliminate any separate equal access

charge by January 1, 1994. Therefore, we

propose deleting section 69.107,

permitting carriers to establish an equal

access element, and sections 69.308 and

69.410, which allocate costs to the equal

access rate element. We also propose

removing section 69.4(d), and in its

place creating a new section 69.3(e)(12)

to read as follows: ‘‘Such a tariff shall

not contain any separate carrier’s carrier

tariff charges for an Equal Access

element.’’ Finally, we would remove the

reference to section 69.308 in section

69.309, and the reference to section

69.410 in section 69.411. Similarly, the

transitions in section 69.205 have been

completed, and so we propose deleting

that section. We invite comment on

whether there are any other similar

rules in Part 69 that are no longer

effective, or duplicate other rules, and

so could be deleted without changing

any current Part 69 requirements.

Finally, we invite comment on our

tentative conclusion that eliminating

such rules would not affect any

requirements currently placed on small

telecommunications providers or any

other small businesses.

295. Similarly, section 69.103 of our

rules requires incumbent LECs to

establish a separate rate element for

costs associated with lines terminating

at ‘‘limited pay telephones,’’ which are

pay telephones designed to provide

access to only one interexchange carrier.

Section 276 of the Act provides

statutory requirements governing pay

telephones that we recently

implemented. In light of the new

payphone compensation procedures, we

seek comment on whether section

69.103 of our rules serves any ongoing

purpose, or whether we should

eliminate section 69.103, and the rules

allocating costs to this rate element,

from our rules.

296. Lastly, several incumbent LECs

provide service using rate elements

created pursuant to waiver, and we seek

comment on incorporating those

waivers into Part 69. For example, in

1994, the Common Carrier Bureau

granted several waivers of Part 69 to

permit incumbent LECs to establish rate

elements for 500 access service. In 1990,

the Bureau granted several incumbent

LECs waivers of Part 69 to establish rate

elements for electronic white pages

service. Also, in 1985, the Bureau

granted incumbent LECs waivers of

section 69.109 to create a subelement

within the Information rate element to

recover costs they could show were not

incurred in the provision of interstate

directory assistance. In this NPRM, we

seek comment on codifying these

waivers as access rate elements or

subelements in Part 69. We also seek

comment on whether to incorporate any

other rate elements created pursuant to

waiver into the Commission’s rules.

Commenters supporting these rule

revisions should also specify any

revisions to Part 69, Subparts D and E,

needed to allocate the proper costs to

these rate elements.

IX. Notice of Inquiry on Implications of

Information Service and Internet Usage

297. In Section VIII.B, above, we

tentatively concluded that information

service providers should not be subject

to interstate access charges as currently

constituted. However, the development

of the Internet and other information

services raise many critical questions

that go beyond the interstate access

charge system that is the subject of this

proceeding. Ultimately, these questions

concern no less than the future of the

public switched telephone network in a

world of digitalization and growing

importance of data technologies. Our

existing rules have been designed for

traditional circuit-switched voice

networks, and thus may hinder the

development of emerging packetswitched data networks. To avoid this

result, we must identify what FCC

policies would best facilitate the

development of the high-bandwidth

data networks of the future, while

preserving efficient incentives for
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules 4713

investment and innovation in the

underlying voice network. In particular,

better empirical data are needed before

we can make informed judgments in

this area.

298. We ask whether, after we

complete reform of access charges as

contemplated in this proceeding, we

should consider any additional actions

relating to interstate information

services and the Internet. We therefore

initiate this Notice of Inquiry, with a

separate pleading cycle, to address these

issues. Based on the record in response

to this Notice of Inquiry, and the

decisions we make in the Access Reform

Report and Order, we will determine

whether to make proposals in this area

in a subsequent Notice of Proposed

Rulemaking.

299. Many of the concerns now being

raised about switch congestion caused

by Internet usage arise because virtually

all residential users today connect to the

Internet—a packet-switched data

network—through incumbent LEC

switching facilities designed for circuitswitched voice calls. The end-to-end

dedicated channels created by circuit

switches are unnecessary and even

inefficient when used to connect an end

user to an ISP. We seek comment on

how our rules can most effectively

create incentives for the deployment of

services and facilities to allow more

efficient transport of data traffic to and

from end users. We invite parties to

identify means of addressing the

congestion concerns raised by

incumbent LECs, for example by

deploying hardware to route data traffic

around incumbent LEC switches, or by

installing new high-bandwidth access

technologies such as asymmetric digital

subscriber line (ADSL) or wireless

solutions.

300. We seek comment on what

regulatory barriers—at either the state or

federal level—might prevent provision

of alternate network access

arrangements for information service

providers, or might create artificial

disincentives against use of such

arrangements when they become

available. Should we consider using our

forbearance or preemption authority to

avoid results that would hamper the

deployment of new technologies? We

also seek comment on how the matters

before us in our Local Competition and

Universal Service proceedings affect

information service providers and raise

issues that we need to address in this

proceeding.

301. We seek comment on the effects

of the current system on network usage,

incumbent LEC cost-recovery, and the

development of the information services

marketplace. We are disinclined to take

actions that would stifle, rather than

enhance, the development of the

Internet, or similar packet-switched

networks. We encourage commenters to

provide data on the characteristics of

information service usage and its effects

on the network. We are also particularly

interested in data on the incumbent

LECs’ costs directly related to ESPs’ use

of the PSTN, on incumbent LECs’

revenues attributable to ESP traffic

(including second phone line revenue),

and in a comparison of what PSTN

services ESPs desire, as opposed to what

they currently have access to. We seek

comment on administrative and

technical issues that may arise either

under continued operation of the

current system or as modified by this

proceeding. In particular, we seek

comment on jurisdictional, metering,

and billing questions, given the

difficulty of applying jurisdictional

divisions or time-sensitive rates to

packet-switched networks such as the

Internet.

302. The current division in our rules

between basic and enhanced services

may not accurately capture the types of

companies that provide information

services today, and the manner in which

these companies use incumbent LEC

facilities. There are many kinds of

information services, with different

usage patterns and effects on the

network. For example, arguments about

network congestion caused by long

hold-time calls would not seem to apply

to information services such as

telemessaging or credit card validation.

We seek comment on whether we

should distinguish between different

categories of information or enhanced

services. In addition, several companies

now provide software that allows a

voice conversation to be conducted over

the Internet. Such ‘‘Internet telephony’’

allows what appears to be a basic

service—voice transmission—to take

place over a packet-switched interactive

data network that we have traditionally

considered to be an enhanced service.

We seek comment on how new services

such as Internet telephony, as well as

real-time streaming audio and video

services over the Internet, should affect

our analysis.

303. We seek comment as to whether

the issues raised in this Notice of

Inquiry should be addressed in any

existing proceeding, or a new

proceeding. As discussed in Section

VIII, above, the Network Reliability and

Interoperability Council (NRIC) is also

currently evaluating the effects of

Internet usage on the voice network. We

do not intend for this proceeding to in

any way supersede the NRIC’s efforts,

and we believe that the NRIC’s

recommendations will complement the

record we develop here. Ultimately, a

full and open debate about the

relationship of information services to

the public switched network will

benefit all parties. We also strongly

encourage interested parties among

incumbent LECs and ESPs to work

together to identify which technological

solutions hold the greatest promise in

carrying Internet traffic most efficiently

and with the least adverse price impact

on consumers.

304. As discussed in Section VIII,

above, we have established an electronic

mailbox at <isp@fcc.gov> for

submission of informal comments on

the treatment of Internet and other

information services, and we have made

additional information available

through our World Wide Web site at

<http://www.fcc.gov/isp.html>.

X. Procedural Issues

A. Ex Parte Presentations

305. This is a non-restricted noticeand-comment rulemaking proceeding.

Ex parte presentations are permitted,

except during the Sunshine Agenda

period, provided that they are disclosed

as provided in the Commission’s rules.

See generally 47 CFR 1.1202, 1.1203,

1.1206.

B. Paperwork Reduction Act

306. This NPRM contains either a

proposed or modified information

collection. As part of its continuing

effort to reduce paperwork burdens, we

invite the general public and the Office

of Management and Budget (OMB) to

take this opportunity to comment on the

information collections contained in

this NPRM, as required by the

Paperwork Reduction Act of 1995,

Public Law No. 104–13. Public and

agency comments are due at the same

time as other comments on this NPRM;

OMB comments are due 60 days from

date of publication of this NPRM in the

Federal Register. Comments should

address: (a) Whether the proposed

collection of information is necessary

for the proper performance of the

functions of the Commission, including

whether the information shall have

practical utility; (b) the accuracy of the

Commission’s burden estimates; (c)

ways to enhance the quality, utility, and

clarity of the information collected; and

(d) ways to minimize the burden of the

collection of information on the

respondents, including the use of

automated collection techniques or

other forms of information technology.
4714 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules

C. Initial Regulatory Flexibility Act

Analysis

307. Pursuant to Section 603 of the

Regulatory Flexibility Act, the

Commission has prepared the following

initial regulatory flexibility analysis

(IRFA) of the expected impact of these

proposed policies and rules on small

entities. Written public comments are

requested on the IRFA. These comments

must be filed in accordance with the

same filing deadlines as comments on

the rest of the NPRM, but they must

have a separate and distinct heading

designating them as responses to the

regulatory flexibility analysis. The

Secretary shall cause a copy of the

NPRM, including the initial regulatory

flexibility analysis, to be sent to the

Chief Counsel for Advocacy of the Small

Business Administration in accordance

with Section 603(a) of the Regulatory

Flexibility Act, Public Law 96–354, 94

Stat. 1164, 5 U.S.C. Section 601 et seq.

(1981).

308. Reason for action. The

Telecommunications Act of 1996

requires incumbent LECs to offer

interconnection and unbundled

elements on an unbundled basis, and

imposes a duty to establish reciprocal

compensation arrangements for the

transport and termination of calls. The

Commission’s access charge rules were

adopted at a time when interstate access

and local exchange services were

offered on a monopoly basis, and in

many cases are inconsistent with the

competitive market envisioned by the

1996 Act.

309. Objectives. To revise the

Commission’s access charge rules to

make them consistent with the

Telecommunications Act of 1996.

310. Legal Basis. The proposed action

is supported by Sections 4(i), 4(j), 201–

205, 251, 252, 253, and 403 of the

Communications Act of 1934, as

amended, 47 U.S.C. 154(i), 154(j), 201–

205, 251, 252, 253, 403.

311. Description, potential impact

and number of small entities affected.

For purposes of this NPRM, the

Regulatory Flexibility Act defines a

‘‘small business’’ to be the same as a

‘‘small business concern’’ under the

Small Business Act (SBA), 15 U.S.C.

632, unless the Commission has

developed one or more definitions that

are appropriate to its activities. Under

the SBA, a ‘‘small business concern’’ is

one that: (1) is independently owned

and operated; (2) is not dominant in its

field of operation; and (3) meets any

additional criteria established by the

SBA. The Small Business

Administration has defined a small

business for Standard Industrial

Classification (SIC) category 4813

(Telephone Communications, Except

Radiotelephone) to be small entities

when they have fewer than 1500

employees.

312. Total Number of Telephone

Companies Affected. With the

exceptions of the proposals under

consideration in Sections III.D, III.E,

VII.A, and VIII.C of this NPRM, the

proposals in this NPRM, if adopted,

would affect all LECs that are regulated

by the Commission’s price cap rules.

Currently, 13 incumbent LECs are

subject to price cap regulation. We

tentatively conclude that all price cap

carriers have more than 1500 employees

and therefore are not small entities.

313. The proposals under

consideration in Sections III.B, III.D,

III.E, VII.A., and VIII.C of this NPRM, if

adopted, would affect all incumbent

LECs regulated by the Commission. The

United States Bureau of the Census

(Census Bureau) reports that, at the end

of 1992, there were 3497 firms engaged

in providing telephone service, as

defined therein, for at least one year.

This number contains a variety of

different categories of carriers, including

incumbent LECs, IXCs, competitive

access providers, cellular carriers,

mobile service carriers, operator service

providers, pay telephone operators, PCS

providers, covered SMR providers, and

resellers. It seems certain that some of

those 3497 telephone service firms may

not qualify as small entities or small

incumbent LECs because they are not

independently owned or operated.

314. Because the small incumbent

LECs that would be subject to these

rules are either dominant in their field

of operations or are not independently

owned and operated, consistent with

our prior practice, they are excluded

from the definition of ‘‘small entity’’

and ‘‘small business concerns.’’

Accordingly, our use of the terms ‘‘small

entities’’ and ‘‘small businesses’’ does

not encompass small incumbent LECs.

Out of an abundance of caution,

however, for regulatory flexibility

analysis purposes, we will consider

small incumbent LECs within this

analysis and use the term ‘‘small

incumbent LECs’’ to refer to any

incumbent LECs that arguably might be

defined by SBA as ‘‘small business

concerns.’’

315. Local Exchange Carriers. Neither

the Commission nor the Small Business

Administration has developed a

definition of small providers of local

exchange service. The closest applicable

definition under Small Business

Administration rules is for telephone

telecommunications companies other

than radiotelephone (wireless)

companies. The most reliable source of

information regarding the number of

incumbent LECs nationwide appears to

be the data that we collect annually in

the provision of Telecommunications

Relay Service (TRS). According to our

most recent data, 1347 companies

reported that they were engaged in the

provision of local exchange service.

Although it seems certain that some of

these carriers are not independently

owned or operated, or have fewer than

1500 employees, we are unable at this

time to estimate with greater precision

the number of incumbent LECs that

would qualify as small business

concerns under the Small Business

Administration’s definition.

Consequently, we estimate that there are

fewer than 1347 small incumbent LECs

that may be affected by the proposals in

this NPRM. We seek comment on this

estimate.

316. Under the new competitive

provisions of the 1996 Act, however,

there could be a number of new LECs

entering the local exchange market that

would be considered small businesses.

In Section VIII.A of this NPRM, we seek

comment on whether to apply certain of

the regulations applicable to incumbent

LECs to new entrant LECs. Thus, it is

possible that new entrants will be

affected by our actions in this

proceeding.

317. Enhanced Service Providers. In

Section VIII.B of this NPRM, we seek

comment on whether to continue to

exempt enhanced service providers

(ESPs) from any requirement to pay

access charges. Because we are not

contemplating imposing any new

regulatory requirement on ESPs, we

conclude that the Regulatory Flexibility

Act does not require us to consider the

effects of these proposed rules on ESPs

that would fit the definition of small

entity. If we modify the ‘‘ESP

Exemption,’’ we will consider the effect

on small ESPs at that time. We seek

comment on this tentative conclusion.

318. Reporting, recordkeeping and

other compliance requirements. It is not

clear whether, on balance, all proposals

in this NPRM would increase or

decrease incumbent LECs’

administrative burdens.

319. With respect to all incumbent

LECs, we believe that the reforms to rate

structure that we propose in Section III

would require at least one, and possibly

several additional filings, but otherwise

should not affect their administrative

burdens. We expect that the proposal

we make in Section VII relating to the

allocation of universal service support

to the interstate revenue requirement

could increase their administrative

burdens. We expect that some of the
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules 4715

Part 69 revisions that we propose in

Section VIII would reduce, others

increase, and the remainder have no

effect on their administrative burdens.

320. With regard to incumbent price

cap LECs, we expect the changes to the

existing local switching rate structure

that we propose in Section III would

require an initial additional filing, but

otherwise would have no effect on their

administrative burdens. As to the

proposals in Section V, to the extent

that a carrier chooses to avail itself of

the additional reforms, it will need to

file a petition demonstrating that it has

met the trigger, and make an initial tariff

filing. Otherwise, most of the proposed

reforms in Section V would reduce or

have no effect on its administrative

burdens. We expect that some of our

proposals in Section VI of this NPRM,

if adopted, would increase the

administrative burdens placed on

incumbent LECs. We expect that the

other proposals in Section VI of this

NPRM would have no effect on their

administrative burdens. We expect that

the proposal to continue regulating

terminating access charges in Section

VIII would have no effect on the

administrative burden placed on

incumbent price cap LECs.

321. In Section II, we address the

likelihood that many, if not all, new

entrants would be considered ‘‘domestic

nondominant carriers,’’ whose tariff

filings would be governed by §§ 61.20

through 61.23 of our rules, 47 CFR

61.20–23, unless they are exempted

from some or all of those requirements.

We are unable to estimate the number

of times these incumbent LECs would

file tariffs annually, but it could vary

from none to 20 or more. Nor are we

able to estimate how extensive each

tariff filing, on average, would be. If

these new entrants are not exempted

from any tariff filing requirements, then

we estimate that, on average, it would

take approximately two hours per page

for the incumbent LEC to prepare each

tariff filing, at a cost of $80 per hour in

professional level and support staff

salaries. If these carriers are exempted

from some or all the regulations

applicable to incumbent LECs, then the

administrative burdens imposed on

such carriers would be less. In Section

V, we ask whether a market share test

to measure the level of competition may

impose a reporting requirement on new

entrants. We expect that the proposal in

Section VIII to regulate terminating

access charges for new entrants would

increase the administrative burden

placed on incumbent price cap LECs.

Compliance with these requests may

require the use of engineering,

technical, operational, accounting,

billing, and legal skills.

322. Federal rules which overlap,

duplicate or conflict with this proposal.

None.

323. Any significant alternatives

minimizing impact on small entities and

consistent with stated objectives. In

Section II of this NPRM, we seek

comment on whether to exempt new

entrant LECs from some or all of the

regulations applicable to incumbent

LECs. Thus, new entrants that may also

be small entities may or may not

become subject to any new

requirements. In any case, new entrants

will become subject to no more

requirements than those imposed on

incumbent LECs. However, we

recognize that new entrants may have

different business or operational

concerns compared to incumbent LECs.

In Sections II.A, III.B, III.E, V.A, V.C,

VII.A, and VII.B, we have sought

comment on how a number of proposals

would affect small entities. These

proposals could have varying positive or

negative impacts on small entities. We

are unable to ascertain, at this time,

what the significant economic impact

would be on small entities as defined by

the SBA. We seek comment on these

proposals and urge that parties support

their comments with specific evidence

and analysis.

D. Notice of Proposed Rulemaking

Comment Filing Dates

324. Pursuant to applicable

procedures set forth in §§ 1.399 and

1.411 et seq. of the Commission’s Rules,

47 CFR 1.399, 1.411 et seq., interested

parties may file comments with the

Secretary, Federal Communications

Commission, Washington, D.C. 20554

no later than January 27, 1997.

Interested parties may file replies no

later than February 13, 1997. To file

formally in this proceeding, participants

must file an original and twelve copies

of all comments, reply comments, and

supporting comments. If participants

want each Commissioner to receive a

personal copy of their comments, an

original plus 16 copies must be filed. In

addition, parties should file two copies

of any such pleading with the

Competitive Pricing Division, Common

Carrier Bureau, Room 518, 1919 M

Street, N.W., Washington, D.C. 20554.

Comments and reply comments will be

available for public inspection during

regular business hours in the FCC

Reference Center, Room 239, 1919 M

Street, N.W., Washington, D.C. 20554.

325. Parties submitting diskettes

should submit them along with their

formal filings to the Office of the

Secretary. Submissions should be on a

3.5 inch diskette formatted in an DOS

PC compatible form. The document

should be saved into WordPerfect 5.1

for Windows format. The diskette

should be submitted in ‘‘read only’’

mode. The diskette should be clearly

labelled with the party’s name,

proceeding, type of pleading (comment

or reply comment), Docket number, and

date of submission.

326. You may also file informal

comments electronically via e-mail

<access@fcc.gov>. Only one copy of

electronically-filed comments must be

submitted. You must put the docket

number of this proceeding in the subject

line (see the caption at the beginning of

this NPRM, or in the body of the text if

by Internet). You must note whether an

electronic submission is an exact copy

of formal comments on the subject line.

You also must include your full name

and Postal Service mailing address in

your submission.

327. In order to facilitate review of

comments and replies, by both parties

and Commission staff, we require that

comments be no longer than 100 pages,

and that replies be no longer than 50

pages. Comments and replies must also

comply with § 1.49 and all other

applicable sections of the Commission’s

Rules. We also direct all interested

parties to include the name of the filing

party and the date of the filing on each

page of their comments and replies.

Comments and replies must also clearly

identify the specific portion of this

Notice of Proposed Rulemaking to

which a particular comment or set of

comments is responsive. If a portion of

a party’s comments does not fall under

a particular topic listed in the Table of

Contents of this NPRM, such comments

must be included in a clearly labelled

section at the beginning or end of the

filing. Parties may not file more than a

total of ten pages of ex parte

submissions, excluding cover letters.

This ten page limit does not include the

following: (1) Written ex parte

statements made solely to disclose an

oral ex parte contact; (2) written

material submitted at the time of an oral

presentation that provides a brief

outline of the presentation; (3) written

material filed in response to direct

requests from Commission staff; or (4)

any proposed rule language. Ex parte

filings in excess of this limit will not be

considered part of the record in this

proceeding.

328. Written comments by the public

on the proposed and/or modified

information collections are due January

27, 1997. Written comments must be

submitted by the Office of Management

and Budget (OMB) on the proposed and/

or modified information collections on
4716 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules

or before 60 days after date of

publication in the Federal Register. In

addition to filing comments with the

Secretary, a copy of any comments on

the information collections contained

herein should be submitted to Dorothy

Conway, Federal Communications

Commission, Room 234, 1919 M Street,

N.W., Washington, DC 20554, or via the

Internet to dconway@fcc.gov and to

Timothy Fain, OMB Desk Officer, 10236

NEOB, 725—17th Street, N.W.,

Washington, DC 20503 or via the

Internet to fainlt@al.eop.gov.

E. Notice of Inquiry Comment Filing

Dates

329. Pursuant to applicable

procedures set forth in §§ 1.399 and

1.411 et seq. of the Commission’s Rules,

47 CFR 1.399, 1.411 et seq., interested

parties may file comments with the

Secretary, Federal Communications

Commission, Washington, D.C. 20554

no later than February 21, 1997.

Interested parties may file replies no

later than March 24, 1997. Comments

and replies must comply with § 1.49

and all other applicable sections of the

Commission’s Rules. To file formally in

this proceeding, participants must file

an original and twelve copies of all

comments, reply comments, and

supporting comments. If participants

want each Commissioner to receive a

personal copy of their comments, an

original plus 16 copies must be filed. In

addition, parties should file two copies

of any such pleading with the

Competitive Pricing Division, Common

Carrier Bureau, Room 518, 1919 M

Street, N.W., Washington, D.C. 20554.

We also direct all interested parties to

include the name of the filing party and

the date of the filing on each page of

their comments and replies. Comments

and reply comments will be available

for public inspection during regular

business hours in the FCC Reference

Center, Room 239, 1919 M Street, N.W.,

Washington, D.C. 20554.

330. Parties submitting diskettes

should submit them along with their

formal filings to the Office of the

Secretary. Submissions should be on a

3.5 inch diskette formatted in an DOS

PC compatible form. The document

should be saved into WordPerfect 5.1

for Windows format. The diskette

should be submitted in ‘‘read only’’

mode. The diskette should be clearly

labelled with the party’s name,

proceeding, type of pleading (comment

or reply comment), Docket number, and

date of submission.

331. You may also file informal

comments electronically via e-mail

<isp@fcc.gov>, or via the World Wide

Web. Information on how to file

electronically is available at <http://

www.fcc.gov/isp.html>. Only one copy

of electronically-filed comments must

be submitted. If you are using e-mail,

you must put the docket number of this

proceeding in the subject line (see the

caption at the beginning of this Notice),

and you also must note in the subject

line if an electronic submission is an

exact copy of formal comments. You

also must include your full name and

Postal Service mailing address in your

submission.

XI. Ordering Clauses

332. Accordingly, it is ordered,

pursuant to Sections 1–4, 10, 201–205,

251, 254, 303(r), and 410(a) of the

Communications Act of 1934, as

amended, and Section 601 of the

Telecommunications Act of 1996, 47

U.S.C. 10, 151–154, 201–205, 224, 251,

254, 303(r), 410(a), and 601, that notice

is hereby given of the rulemaking

described above and that comment is

sought on these issues.

333. It is further ordered, pursuant to

Sections 1–4, 10, 201–205, 251, 254, and

303(r) of the Communications Act of

1934, as amended, and Section 601 of

the Telecommunications Act of 1996, 47

U.S.C. 10, 151–154, 201–205, 224, 251,

254, 303(r), and 601, that notice is

hereby given of the inquiry described

above and that comment is sought on

these issues.

Federal Communications Commission

William F. Caton,

Acting Secretary.

List of Subjects

47 CFR Part 61

Communications common carriers,

Tariffs.

47 CFR Part 69

Communications common carriers,

Access charges.

Attachment—Parties Filing Pleadings

I. Pleadings in CC Docket No. 95–72

(ISDN SLC NPRM)

Comments

America Online Incorporated;

CompuServe Incorporated; GE

Information Services, Inc.; Prodigy

Services Company (America Online)

American Petroleum Institute

Ameritech

AT&T Corp. (AT&T)

Bell Atlantic Telephone Companies

(Bell Atlantic)

BellSouth Telecommunications, Inc.

(BellSouth)

Cable & Wireless, Inc. (Cable & Wireless)

California Bankers’ Clearing House

Association, MasterCard International

Incorporated, the New York Clearing

House Association, and Securities

Industry Association (California

Bankers’ Clearing House)

Center for Democracy and Technology

Cincinnati Bell Telephone (Cincinnati

Bell)

Commercial Internet eXchange

Association (CIX)

Communications Managers Association

(CMA)

Consumer Project on Technology

GTE Service Corporation (GTE)

Information Technology Industry

Council (ITIC)

MCI Telecommunications Corporation

(MCI)

Microsoft Corporation (Microsoft)

National Information Infrastructure

Working Group

National Public Radio, Inc. (National

Public Radio)

National Telephone Cooperative

Association (NTCA)

Northern Arkansas Telephone

Company, Inc. (Northern Arkansas

Telephone Company)

NYNEX Telephone Companies

(NYNEX)

Pacific Bell and Nevada Bell (Pacific

Bell)

Public Utility Commission of Texas

Rochester Telephone Corp.

Roseville Telephone Company

(Roseville)

Rural Telephone Coalition

Southwestern Bell Telephone Company

(Southwestern Bell)

Sprint Corporation (Sprint)

Tele-Communications Association

(TCA)

Tennessee Public Service Commission

Time Warner Communications

Holdings, Inc. (Time Warner

Communications)

United States Telephone Association

(USTA)

U S WEST Communications, Inc. (US

West)

West Virginia University

Replies

America Online

Ameritech

AT&T

Bell Atlantic

BellSouth

Cable & Wireless

Cincinnati Bell

CIX

CMA

GTE

ITIC

Information Technology Industry

Council, United States Telephone

Association, California ISDN Users

Group, Center for Democracy and

Technology, Consumer Federation of

America, Information Industry
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Proposed Rules 4717

Association, California Bankers’

Clearing House Association, US.

Chamber of Commerce, Independent

Data Communications Manufacturers

Association, Information Technology

Association of America,

Telecommunications Industry

Association (Joint Parties)

Interactive Services Association

MCI

Microsoft

Northern Telecom Inc. (Northern

Telecom)

NYNEX

Pacific Bell

Roseville

Sprint

Southwestern Bell

3Com Corporation

USTA

Comments on Bell Operating

Companies’ Cost Data

Comments

GTE Operating Company (GTE)

MCI Telecommunications Corporation

(MCI)

Replies

America Online

NYNEX

Pacific Bell

Southwestern Bell

US West

II. Pleadings in CC Docket No. 94–1

(Price Cap Second FNPRM)

Comments

Ad Hoc Telecommunications Users

Group (Ad Hoc)

Ameritech

ALTS

AT&T

Association for Local Telephone

Services (ALTS)

Bell Atlantic

BellSouth

California Cable Television Association

(CCTA)

Cincinnati Bell

Competitive Telecommmunications

Association (CompTel)

Comcast Corp. (Comcast)

Cox Enterprises, Inc. (Cox)

General Services Administration (GSA)

GTE

ICG Access Services, Inc. (ICG)

Information Industry Association (IIA)

LCI International, Inc. (LCI)

LDDS Worldcom (LDDS)

Lincoln Telephone and Telegraph Co.

(Lincoln)

MCI

MFS

NCTA

NYNEX

Organization for the Protection and

Advancement of Small Telephone

Companies (Opastco)

Pacific Bell and Nevada Bell

Southern New England Telephone Co.

(SNET)

Southwestern Bell

Sprint

Sprint Telecommunications Venture

TCA

Teleport

Telecommunciations Resellers

Association

Time Warner Communications

Holdings, Inc., (Time Warner)

USTA

US West

Replies

Ad Hoc

Ameritech

ALTS

AT&T

Bell Atlantic

BellSouth

Cincinnati Bell

Competitive Telecommmunications

Association (CompTel)

Comcast

Cox

Frontier

GSA

GTE

LDDS

MCI

MFS

NCTA

NYNEX

Pacific Bell and Nevada Bell

Southwestern Bell

Sprint

Sprint Telecommunications Venture

Teleport

TRA

Time Warner

USTA

US West

[FR Doc. 97–2142 Filed 1–29–97; 8:45 am]

BILLING CODE 6712–01–P

47 CFR Part 90

[PR Docket No. 92–235, DA 97–206]

Consolidation of the Private Land

Mobile Radio Services

AGENCY: Federal Communications

Commission.

ACTION: Proposed rule.

SUMMARY: This action seeks additional

comment on the consolidation of the

Private Land Mobile Radio Services. It

is necessary for the Commission to

receive comment on the precise

contours of consolidation of the radio

services in order to build a consensus.

The effect of the action will be to seek

additional comment on the

consolidation of the Private Land

Mobile Radio Services and advance and

expedite the benefits of efficient use of

the spectrum.

DATES: Comments are due February 7,

1997; reply comments are due February

12, 1997.

ADDRESSES: Office of the Secretary,

Federal Communications Commission,

1919 M Street, NW., Room 222,

Washington, DC 20554. For further

addresses see SUPPLEMENTARY

INFORMATION.

FOR FURTHER INFORMATION CONTACT: Ira

Keltz in the Wireless

Telecommunications Bureau at (202)

418–0680.

SUPPLEMENTARY INFORMATION: This is a

summary of the Commission’s Public

Notice released January 28, 1997. The

full text of this action is available for

inspection and copying during normal

business hours in the FCC Reference

Center, Room 239, 1919 M Street, NW.,

Washington, DC. The complete text may

be purchased from the Commission’s

copy contractor, ITS, Inc., (202) 857–

3800, 2100 M Street, NW., Suite 140,

Washington, DC. 20037.

Summary of Public Notice

1. In the Report and Order in PR

Docket No. 92–235, the Commission

concluded that the Private Land Mobile

Radio (PLMR) Services will be

consolidated. (60 FR 37152, July 19,

1995). The Commission, however,

deferred a final decision as to how the

services would be consolidated in an

effort to provide the PLMR community

with an opportunity to negotiate and

submit a consensus consolidation

proposal to the Commission. While the

Commission received numerous

comments on the consolidation issue,

no consensus plan was submitted.

2. The Industrial Telecommunications

Association, Inc. (‘‘ITA’’) recently filed

a ‘‘proposed technical blueprint for

frequency use limitations in the postrefarming environment.’’ The blueprint

contains a consolidated Frequency

Table and associated limitations. ITA

notes that in developing this blueprint

it made certain assumptions regarding

consolidation of the PLMR Services.

Further, it states that it offers this

blueprint in the hope of advancing the

refarming effort and expediting the

realization of the long-awaited benefits

of this proceeding.

3. Interested parties may file

comments concerning ITA’s

consolidation blueprint on or before

February 7, 1997. Reply comments are

due on or before February 12, 1997.

Comments and reply comments should

be sent or delivered to: Office of the

Secretary, Federal Communications

Commission, 1919 M Street, NW., Room