WPCh\ 2BJ Courier3|x 9Xxjp P7XPGaramond Antiqua_1HPLAS4.PRS 4x  @\_)^X@2#6i ZyEGaramond AntiquaGaramond HalbfettGaramond Kursiv3|xHP LaserJet 4_230_1HPLAS4.PRS 4Xxjp P7\_)^XP \-#Xxjp P79XP#2vJpk0ka8DocumentgDocument Style StyleXX` `  ` a4DocumentgDocument Style Style . a6DocumentgDocument Style Style GX  a5DocumentgDocument Style Style }X(# 2a8vtSa2DocumentgDocument Style Style<o   ?  A.  a7DocumentgDocument Style StyleyXX` ` (#` BibliogrphyBibliography:X (# a1Right ParRight-Aligned Paragraph Numbers:`S@ I.  X(# 2>  6  a2Right ParRight-Aligned Paragraph Numbers C @` A. ` ` (#` a3DocumentgDocument Style Style B b  ?  1.  a3Right ParRight-Aligned Paragraph Numbers L! ` ` @P 1. ` `  (# a4Right ParRight-Aligned Paragraph Numbers Uj` `  @ a. ` (# 2 p /   a5Right ParRight-Aligned Paragraph Numbers _o` `  @h(1)  hh#(#h a6Right ParRight-Aligned Paragraph Numbersh` `  hh#@$(a) hh#((# a7Right ParRight-Aligned Paragraph NumberspfJ` `  hh#(@*i) (h-(# a8Right ParRight-Aligned Paragraph NumbersyW"3!` `  hh#(-@p/a) -pp2(#p 2  )Tech InitInitialize Technical Style. k I. A. 1. a.(1)(a) i) a) 1 .1 .1 .1 .1 .1 .1 .1 Technicala1DocumentgDocument Style Style\s0  zN8F I. ׃  a5TechnicalTechnical Document Style)WD (1) . a6TechnicalTechnical Document Style)D (a) . 27a2TechnicalTechnical Document Style<6  ?  A.   a3TechnicalTechnical Document Style9Wg  2  1.   a4TechnicalTechnical Document Style8bv{ 2  a.   a1TechnicalTechnical Document StyleF!<  ?  I.   2W3a7TechnicalTechnical Document Style(@D i) . a8TechnicalTechnical Document Style(D a) . Doc InitInitialize Document Stylez   0*0*0*  I. A. 1. a.(1)(a) i) a) I. 1. A. a.(1)(a) i) a)DocumentgPleadingHeader for Numbered Pleading PaperE!n    X X` hp x (#%'0*,.8135@8:3&8C!C!bC@@>.*(@<[<@85<5x::::::::::::<:C![3[3[3[3[3NY3L3L3L3L3(!(!(!(!fCf@f@f@f@b@b@b@b@W@[3`H:eC::R:W@H<<!!!WxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxNWWW<::,33::o:::bb:(C<<:b(!!33:b!!xx::II[xprogrammers can obtain access to any or all video programming offered over the platform.0 2 \y- xԍ The Commission has noted that the basic platform "could include transport, switching,  xinterconnection between the telephone company and the video programmer, and a means of  xyaccessing the consumer." Services other than those that are basic or adjunct to the offering of  \4- xbasic service are not permitted on the basic common carrier platform. Video Dialtone Order,  \-7 FCC Rcd at 581012 nn.147, 150.0  x1A carrier must first provide this basic platform before it may use the platform to offer  x"enhanced" services related to the provision of video programming on a noncommon carrier  \- xkbasis. v2 \ - xԍ Because the Commission concluded that marketplace forces, rather than governmental  xaction, should determine the precise nature of enhanced video dialtone services, it did not  x=dictate the functions of enhanced video dialtone gateways or other services. For example, the  x?Commission noted, but did not require, that the enhanced video dialtone platform might  xinclude customized menus and directories to allow subscribers to select individualized  \-programming and information services. Video Dialtone Order, 7 FCC Rcd at 5821 n.146. Video dialtone service provided over the basic platform is a common carrier service  \- xsubject to Title II tariffing and nondiscrimination requirements.g [ 2 \-ԍ Video Dialtone Order, 7 FCC Rcd at 581012, 5827.g Our existing safeguards  xapply to a LEC's provision of enhanced and other nonregulated service over the video  \v- xjdialtone platform. v 2 \3-ԍ Id. at 582829; Video Dialtone Reconsideration Order at paras. 22433. These safeguards include accounting and cost allocation rules to separate  x>enhanced and other nonregulated service costs from regulated service costs, and network  x<disclosure rules that ensure that telephone equipment manufacturers and vendors have adequate  \1-notice of changes that could affect the compatibility of their equipment. 12 \- xԍ Video Dialtone Order, 7 FCC Rcd at 582829; Video Dialtone Reconsideration Order at paras. 22433. x  \ -  x4. In the Video Dialtone Reconsideration Order, we concluded that video dialtone  xservice would be treated as a new service under the price cap rules because it adds to the range  xof options available to customers by giving multiple video programmers access to a basic  \ - xcommon carrier platform for the first time.b W2 \ -ԍ Video Dialtone Reconsideration Order at para. 206.b We also concluded that consistent with our rules  x>governing the pricing of new services, rates for video dialtone service must be designed to  \- x[recover the direct costs of providing the service.2 \I$- xԍ See Amendment of Part 69 of the Commission's Rules Relating to the Creation of  xMAccess Charge Subelements for Open Network Architecture: Policy and Rules Concerning  xRates for Dominant Carriers, Report and Order, Order on Further Reconsideration, and  x]Supplemental Notice of Proposed Rulemaking, CC Docket Nos. 8979, 87313, 6 FCC Rcd"'0*(( '"  \- x 4524, 4531 (1991) (Part 69 ONA Order), second further recon., 7 FCC Rcd 5235, 5237 (1992)  \y-(Part 69 ONA Reconsideration Order).  In addition to the generally applicable rules"b0*(("  xkthat specify the cost support that must be submitted with any price cap new service, we set  xforth specific guidelines for the LECs to follow in developing their rates for video dialtone  xservice offerings. Those guidelines, among other things, directed the LECs to include as direct  xcosts of video dialtone service: the costs and cost components associated with the primary  xkplant investment that are incremental costs dedicated to video dialtone service; incremental  x.costs that are associated with shared plant used to provide video dialtone and other services;  x\a reasonable allocation of other costs that are associated with shared plant used to provide  xvideo dialtone and other services; costs in accounts other than primary plant accounts that are  x!reasonably identifiable as incremental costs of video dialtone service; and a reasonable  \1-allocation of overheads.z1b2 \D -ԍ  Video Dialtone Reconsideration Order at paras. 21720 (footnotes omitted).z  ] -x B. The LEC Price Cap Plan  \ -x  \ -  |x5. Under Section 61.42(d) of the Commission's rules,B 2 \-ԍ 47 C.F.R.  61.42(d).B price cap LECs must divide the  xkaccess rate elements of their various interstate services among four baskets common line,  \ - x=traffic sensitive, trunking and interexchange. 2 \- x=ԍ LEC Price Cap Order, 5 FCC Rcd at 6811; see also Transport Rate Structure and Pricing,  \-9 FCC Rcd 615, 62223 (1994) (Transport Second Report and Order). The aggregate price levels of services grouped  xwithin each of the price cap baskets may not exceed the maximum permitted by the price cap  \y- x?index (PCI) applicable to that basket.Xy^ 2 \-ԍ LEC Price Cap Order, 5 FCC Rcd at 6811.X Services within the traffic sensitive and trunking  xbaskets are further subdivided into separate service categories, which place additional  \K- xjconstraints on pricing.F K 2 \ - xԍ LEC Price Cap Order, 5 FCC Rcd at 6788; LEC Price Cap Reconsideration Order, 6 FCC  \- xRcd at 2679; Transport Second Report and Order, 9 FCC Rcd at 62223. The service categories  x[within the traffic sensitive basket are: (1) local switching; (2) information; (3) database access;  \ - xand (4) billing name and address. LEC Price Cap Order, 5 FCC Rcd at 6811; see also Treatment  xof Operator Services Under Price Cap Regulation, Notice of Proposed Rulemaking, CC  xzDocket No. 93124, 8 FCC Rcd 3655 (1993) (proposing to establish a new service category in  xthe traffic sensitive basket for operator services rates). The service categories in the trunking  xbasket are: (1) voice grade flatrated transport; (2) audio and video; (3) high capacity and  xDigital Data Service (DDS); (4) wideband data and wideband analog; (5) tandemswitched  \<&- xtransport; and (6) the interconnection charge. LEC Price Cap Order, 5 FCC Rcd. at 6811; see  \%'- x{also Treatment of Operator Services Under Price Cap Regulation, 8 FCC Rcd 3655 (1993). "%'0*((&"  xWithin the high capacityDDS service category are subcategories for (1) DS1 special access and  \y-(2) DS3 special access and DS3 flatrated transport. Id.F The service categories prevent a LEC from offsetting increases in the"Kb0*((+"  xprices of services within one category by reducing the prices of services in another category  \- xof the same basket.mb2 \-ԍ Transport Second Report and Order, 9 FCC Rcd at 62223.m There are no service categories in the common line or interexchange  \-baskets.2 \- xԍ The Commission decided in the LEC Price Cap Order that service category subdivisions  xwere not necessary in either the common line basket or the interexchange basket because all  x>of the common line rate elements but one were to be priced according to Commission rules,  xand only a small amount of interexchange service was subject to price cap regulation. 5 FCC Rcd at 6811.   3x6. The formula that governs annual adjustments to a LEC's PCIs for the traffic  xsensitive, trunking, and interexchange baskets consists of three main elements an inflation  \v- xfactor, a productivity offset, and exogenous costs.vh 2 \- xԍ The formula for the common line basket is slightly different from the formula used to  xcap the other three baskets. This arises because the actual costs of common line are nontraffic  \a- xsensitive, but a portion of the cost is recovered through rates that are traffic sensitive. LEC  \J-Price Cap Order, 5 FCC Rcd at 6787, 679495.  The inflation factor is based on the Gross  xNational Product Price Index (GNPPI). The productivity offset, which is subtracted from the  xzinflation factor, reflects the amount by which LEC productivity gains are expected to exceed  \1- xproductivity gains in the economy as a whole.12 \- xԍ The minimum productivity factor for the traffic sensitive, trunking and common line  xbaskets is 3.3 percent, which reflects historical telephone industry productivity growth of 2.8  xpercent and an annual Consumer Productivity Dividend (CPD) of 0.5 percent, for the three  xMaccess service baskets. The productivity factor for the interexchange basket is 3.0 percent, matching the factor established for AT&T's interexchange services. The resulting figure is also adjusted for a  xlimited set of exogenous cost changes, generally those attributable to administrative, legislative,  xOor judicial action beyond the carrier's control and not otherwise reflected in price cap  \ - x calculations. )2 \ - x0ԍ See Policy and Rules Concerning Rates for Dominant Carriers, Second Report and  \!- xOrder, 5 FCC Rcd 6786 (1990) (LEC Price Cap Order), Erratum, 5 FCC Rcd 7664 (Com. Car.  \"-Bur. 1990), modified on recon., 6 FCC Rcd 2637 (1991) (LEC Price Cap Reconsideration Order). Within each basket, services may be grouped into service categories. Rate  xchanges in any one year are also limited by rate bands. The rate band for each designated service category is computed around the Service Band Index (SBI)  \-  x7. The price cap baskets and service categories established by the Commission are"0*(("  \- xdesigned to balance the competing interests of LECs and their ratepayers.z2 \y- x/ԍ LEC Price Cap Order, 5 FCC Rcd at 681011; see also Policies and Rules Concerning  xLocal Exchange Carrier Validation and Billing Information for Joint Use Calling Cards, Second  \K-Report and Order, 8 FCC Rcd 4478, 4483 n.68 (1993) ( Billing Name and Address Order).z The Commission  xintended to give LECs sufficient pricing flexibility as an incentive to be efficient and  xproductive, without subjecting ratepayers to precipitous fluctuations in prices for LEC services  xor allowing LECs to discriminate against one class of ratepayers at the expense of another  \- xclass.ZK2 \ -ԍ LEC Price Cap Order, 5 FCC Rcd at 681011.Z Moreover, the assignment of services to price cap baskets and service categories is  \- x\intended to replicate the effect that a competitive market would have on pricing practices.~2 \: -ԍ See, e.g., Price Cap Performance Review Notice, 9 FCC Rcd at 1694.~  xGrouping services with common characteristics, such as similar levels of competition, within  xthe same basket is intended to give the LECs pricing flexibility with respect to comparable  xlservices and to restrict the ability of LECs to offset increases for some services with rate  xdecreases for dissimilar services. Price cap LECs receive streamlined tariffing procedures for  xzrate changes that are within the appropriate PCI for the basket and, where applicable, within  \ -the service category bands. 2 \a- xԍ In contrast, LECs must file cost support to justify rate changes that fall outside the  \J- x=constraints applicable to baskets or service categories. See Section 61.49 of the Commission's  \3-rules, 47 C.F.R.  61.49; see also Transport Second Report and Order, 9 FCC Rcd at 627 n.3.   ] - III. DISCUSSION ă  ] - xA. Price Cap Basket for Video Dialtone Services  \y-  ]x8. We stated in the Video Dialtone Reconsideration Order that "video dialtone service  xdoes not fit into existing price caps baskets given its unique characteristic of transmitting the  \K- xvideo services of multiple program providers to end users on a common carrier basis."bK0 2 \,-ԍ Video Dialtone Reconsideration Order at para. 222.b We  xjtherefore tentatively concluded that "a separate price cap basket for video dialtone would help  xjprevent improper crosssubsidization by preventing local telephone companies from offsetting  xa price reduction for video dialtone service with an increase in rates for other regulated  \- xinterstate services."3 2 \#-ԍ Id.3 We seek in this proceeding to determine whether affirmation of this  \- x/tentative conclusion will advance the public interest objectives that underlie our system of  x.price cap regulation and video dialtone service rules. Specifically, we must determine whether  xthe creation of a video dialtone service basket will further the price cap goals of promoting  xyeconomic efficiency, ensuring reasonable nondiscriminatory rates, and reducing administrative"0*((o"  \- xOcosts.` 2 \y-ԍ Price Cap Performance Review, 9 FCC Rcd at 1695.` We must also assess whether establishing a separate basket will further the  \- xCommission's objectives, articulated in its Video Dialtone Reconsideration Order, of facilitating  xcompetition in the provision of video services, promoting efficient investment in the national  xjtelecommunications infrastructure, and fostering the availability of new and diverse sources of  \- xvideo programming to the public.`!y2 \-ԍ Video Dialtone Reconsideration Order at para. 3.` We invite parties to comment on whether and how  xestablishment of a separate price cap basket for video dialtone service will advance these objectives.  \H-  Px9. We indicated in the Video Dialtone Reconsideration proceeding our tentative  x>agreement with proponents of a separate price cap basket that this approach would help to  \ - x[ensure that telephone ratepayers do not improperly subsidize video dialtone service." *2 \- xԍ  See id. at para. 157 (joint petition for rulemaking filed by the Consumer Federation of America and National Cable Television Association). Parties  xalso have contended that a separate basket is needed to protect cable operators and other  xproviders of multichannel video services from potential anticompetitive actions by LECs.  x>They claim that LECs otherwise will have the incentive and ability to offset price decreases  xfor video dialtone service with price increases for other regulated interstate services. We invite  xparties to comment on our tentative conclusion and to address specifically our concern that a separate basket is needed to address our crosssubsidy and competitive concerns.   x 10. The Commission previously has based its decision to create a separate price caps  xbasket on an analysis of whether the service possesses characteristics, such as technical  x.differences or the level of competition in the service markets, that were not shared by services  \- xin the existing baskets. The Commission concluded in the LEC Price Cap Order, for example,  xthat it was necessary to establish a separate price cap basket for interexchange services because  \- xsuch offerings were found to be "fundamentally different" from special access services.W#2 \d-ԍ LEC Price Cap Order, 5 FCC Rcd at 6812.W In addition, the Commission noted that:  Xx[p]lacing two very different services, with different sets of customers, in the  \- #same basket is a result [the Commission has] attempted to avoid due to the cross  \|-subsidy issues that might arise.3$|u2 \#-ԍ Id.3    x 11. In reaching our tentative conclusion that a separate basket is needed for this service, we noted that the technical and competitive characteristics of video dialtone are not similar "7& $0*(("  xto any services in our existing price cap baskets. We invite parties to comment on this  xtentative finding that video dialtone offerings are different from, and compete for different  \-customers than, services in the existing price cap baskets.%2 \K- x=ԍ AT&T notes in its comments to the Price Cap Performance Review Notice, for example,  x\that the "potential competitive nature" of the video dialtone services that are the subject of  xrecently granted or pending Section 214 applications may warrant a separate price cap basket  \-for these services. See AT&T Comments at 40 n.59.  \-  x 12. As we stated in the Video Dialtone Reconsideration Order, video dialtone is but  \- xthe first of what we expect to be an array of broadband services.b&42 \r -ԍ Video Dialtone Reconsideration Order at para. 188.b As discussed above, our  x1current price cap rules group services with similar characteristics in the same basket.  xConsequently, it may be desirable to group broadband services whose technical or other  x[characteristics, such as the availability of competitive alternatives, are similar to video dialtone  x{service in the same price cap basket with video dialtone service. Such a requirement may  xincrease the pricing flexibility of LECs with respect to broadband services, such as video  xdialtone, while restricting their ability to offset price changes for such services with price  xchanges for dissimilar services. We request comment on whether the Commission should  xestablish a new price cap basket that would include not only video dialtone services, but also  xother broadband, transportrelated services. Parties favoring this approach should describe the criteria that should be used to determine the services that should be included in such a basket. x   ^x 13. LECs have claimed in our video dialtone rulemaking that the rates for this service  xshould be included within the existing price cap baskets. BellSouth, for example, asserted in  \K- x{its comments in the Video Dialtone Reconsideration proceeding that video dialtone is a  xtransport service that will fit comfortably into the existing price cap baskets depending upon  \- x.how the service is offered.C'2 \-ԍ BellSouth Comments at 14.C We invite commenters who advocate inclusion of video dialtone  xservice in an existing price cap basket to identify the specific basket and, if applicable, service  xcategory in which the rates for this service should be placed and to explain the basis for their  xproposal. Commenters favoring this alternative should also show that video dialtone service  xpossesses characteristics that are similar to the services that are currently included in the basket  xOthey propose, including the availability of competitive alternatives. Furthermore, the  x.commenters should address the concern that inclusion of video dialtone service in an existing  xbasket would permit LECs to crosssubsidize their entry into video service improperly and to engage in anticompetitive practices. "N '0*(("  ]-x B. Implementation Issues  ]- x441. The Productivity Factor   nx 14. If the Commission decides to create a separate video dialtone basket, it will be  x\necessary to determine whether the price cap formula that is used to adjust the PCIs for the  xother LEC interstate access service baskets should be used for the video dialtone basket. In  xOparticular, the Commission will have to address whether the same productivity factor  x(currently 3.3 percent or 4.3 percent) should be used. Selection of a reasonable productivity  x=factor for a video dialtone basket is crucial to ensuring that price cap regulation of this service  x.would be efficient and fair to LECs, their customers, and consumers. If the productivity factor  x|is too low, prices will be too high, depressing demand from consumers and leading to  xinefficiently low levels of traffic. If the productivity factor is set too high, investment may be  xdiscouraged because carriers may conclude that investment of capital in other ventures and services is more attractive than providing video dialtone service.  \y-  x15. In the LEC Price Cap Order, the Commission determined that the GNPPI does  x]not fully reflect that the LECs' higher than average growth in productivity had produced  x{lower than average telephone prices, relative to inflation. We therefore concluded that a  xproductivity factor offset must be included in the price cap formula to ensure that rates  xcontinued to decline in relation to the GNPPI. Our selection of a 3.3 percent productivity  xfactor for the interstate access baskets was based largely upon two Commission staff studies  x{investigating the extent to which LEC productivity in the provision of interstate services  x^historically had outperformed the economy as a whole. A short term study examined  x/productivity trends in interstate access from 1984 through 1990; a long term study covered  xinterstate charges generally for the years 1930 through 1989. A 0.5 percent Consumer  x>Productivity Dividend (CPD) was added (to arrive at a productivity factor of 3.3 percent) to  xensure that the first price cap productivity gains would be assigned to customers in the form  xlof lower rates. As noted above, we selected a factor of 3.0 percent for the interexchange  xzbasket, because that was the factor we previously had computed for AT&T's interexchange  xservices. We also note that we recently declined to include a productivity offset in the price  \ -cap formula applicable to cable television rates.(1 2 \- x-ԍ  Implementation of Section of the Cable Television Consumer Protection and Competition  \ - xAct of 1992 Rate Regulation, 9 FCC Rcd 5760 (1994). In the Cable Order, the Commission  xdetermined that "a productivity offset should be based to the extent possible on observed  \T"- xefficiency gains experienced by the cable industry." Id. at 5761. The Commission found that  xzthe only study submitted in the docket that "purported" to provide an economic analysis in  x.support of a productivity offset factor for cable service was not based on an analysis of costs  x/or productivity in the cable industry. The Commission therefore concluded that the record  xdid not provide an adequate factual basis for the incorporation for a productivity offset in the  \&-price cap governing cable service rates. Id."  (0*(( "Ԍ   ^x16. We invite parties to comment on the appropriate formula to be used to adjust the  xPCI for a video dialtone price cap basket in the event we affirm our tentative conclusion to  x/require a separate basket. Parties advocating the use of the same formula that is applied to  xother baskets should explain why that approach is reasonable since the historical data upon  xwhich the current minimum productivity factor is based did not include information  xNconcerning the LECs' provision of video dialtone service. Parties advocating a different  \_- xformula (e.g., formulas that do not include a productivity factor) should explain the basis for  x"their proposed formulas. Advocates of either approach should address whether the  x?Commission should include a CPD in setting the productivity factor for a video dialtone  x.basket. We also request comment on whether adjustments might be needed to the other price  x\cap baskets arising from the price cap LECs' more efficient use of common plant and shared  xexpenses between video dialtone and preexisting services. Such adjustments might include, for example, changes in the productivity factors for the other price cap baskets.  ] -x44 2. Setting the Initial Price Cap    x17. If we create a separate price cap basket for video dialtone service, we must decide  \b- xzhow to set the initial price cap for the basket. In the LEC Price Cap Order, the Commission  xdetermined that the July 1, 1990 LEC interstate access rates (adjusted downward to implement  xthe 11.25 percent industry rate of return adopted by the Commission on the same day as the  xLEC price cap rules) were the best set of rates from which to initiate price cap indexing. In  xreaching its decision, the Commission stated that the July 1, 1990 rates were the culmination  xof a sixyear history of developing, refining, and overseeing the Commission's administration  \- xof rate of return regulation. The Commission noted that these rates were the result inter alia  \- xof a revised system of tracking costs (i.e., the Uniform System of Accounts (USOA)), cost  xallocation procedures to separate nonregulated costs from the combined regulated and  xnonregulated costs recorded in USOA accounts, and related reporting requirements. The  x Commission also noted that the rates reflected a tariff review process that ensured that the  xCommon Carrier Bureau had usable and reliable cost support in reviewing a LEC's annual  xaccess charge revisions. As a result of this process, the Commission decided that these rates  x in general provided the "most reasonable basis from which to launch a system of price cap  \ -regulation.") 2 \- xԍ LEC Price Cap Order, 5 FCC Rcd at 6814; see also Price Cap Performance Review Notice,  xl9 FCC Rcd at 1696 (as part of its fourth year review of the LECs' performance under price  xcap regulation, the Commission requested comment on "whether a onetime change in the LECs' price cap index should be required.").    x18. We tentatively conclude that in the absence of a long history of regulatory review  x=and oversight of the video dialtone rates, the best approach for establishing the initial rates to  xbe included in a video dialtone basket would be to apply our existing rules for new services.  \!- xAs noted supra, the Commission has already determined that for purposes of the initial"! 4)0*(( "  x.offering, video dialtone services are subject to the new services rules. Under these rules, new  xservices are excluded from price cap baskets and indexes when the services are first introduced.  xMThe new services are incorporated into baskets and reflected in the price cap indexes at the  xfirst annual price cap filing following the calendar year in which the new service has been  xoffered, a period of between 6 and 18 months after the introduction of the new service,  \- xdepending upon the timing of the introduction of the new service.*2 \-ԍ Id. at 6825; LEC Price Cap Reconsideration Order, 6 FCC Rcd at 2693. ć Consistent with our  xtreatment of other new services under the LEC price cap regulation, we believe that video  xdialtone services should be folded into the video dialtone basket at the first annual price cap  xfiling following the calendar year in which the new service is first offered. Further, consistent  xwith the approach we followed in initializing the indexes for the existing price cap baskets,  xwe recommend that the price cap index and the actual price index for a new video dialtone  x/basket be assigned an initial value of 100 prior to adjustment for inflation and productivity,  x.corresponding to the rates in effect just prior to the effective date of the annual filing in which  \ -the video dialtone basket is introduced.}+ y2 \-ԍ See, e.g., Section 61.42 of the Commission's Rules, 47 C.F.R.  61.42(d).}   x19. We invite comment on our tentative conclusion regarding the method the  xCommission should use for setting the initial rates for a new price cap basket for video dialtone. x  ]K-x 3. Service Category Bands  \-  x20. The Commission concluded in the Video Dialtone Reconsideration Order that the  xbasic video dialtone platform is a form of interstate access to the extent it is used to route  \- xinterstate video programming to end users.b,*2 \-ԍ Video Dialtone Reconsideration Order at para. 195.b The Commission further stated in the Video  \- xiDialtone Reconsideration Order that service offered over the basic video dialtone platform could  x.potentially include transport, switching, interconnection between the telephone company and  \- xthe video programmer, and a means of accessing the consumer.G-2 \6-ԍ See note 9 supra.G Although the Commission  xindicated that it would treat video dialtone as a switched access service, it declined to prescribe  xMnew rate elements for video dialtone and, instead, directed telephone companies seeking to  xoffer video dialtone service to file petitions for waiver of Part 69 prior to the establishment  \N- xof a permanent video dialtone rate structure.&.N2 \$- xԍ Id. at paras. 19698 n.368, citing Provisions of Access for 800 Service, 4 FCC Rcd 2824,  x2833 (1989) (permitting carriers to receive Part 69 waivers to establish separate unbundled  xsubelements for 800 data base access and vertical features prior to the establishment of a  \F'- x>permanent rate structure); Southwestern B ell Telephone Company, Petitions for Wavier of"F'-0*((L'"  x>Part 69 of the Commission's Rules, 6 FCC Rcd 6095, 6098 (1991) (allowing carriers to receive  xLPart 69 waivers to offer Line Identification Database (LIDB) services prior to the establishment of a permanent rate structure).& We seek comment on whether video dialtone"N K.0*(("  xservice offerings may require establishment of separate service categories if the Commission  xestablished a separate video dialtone basket. Commenters proposing establishment of such  xservice categories should discuss in detail why further subdivision of a video dialtone services price cap basket is necessary or desirable.   Px21. Under the price cap rules, pricing bands apply to each service category. The  x>pricing bands limit the amount by which the carrier can raise or lower a rate without making  xa special showing. Tariff filings that propose rates within the pricing bands (and at or below  \H- xthe price cap for the basket) are reviewed on a streamlined basis, i.e., on 14 days' notice, with  xla presumption of lawfulness. Aboveband rates are filed on 90 days' notice and must be  x[accompanied by a showing of substantial cause. Belowband rates are filed on 45 days' notice  xyand must be accompanied by a showing that the rates cover the average variable costs and are  \ - x otherwise just, reasonable, and nondiscriminatory.f/ K2 \-ԍ LEC Price Cap Order, 5 FCC Rcd at 6788, 682224.f Pricing bands are intended to protect  xyratepayers from substantial and precipitous changes in services rates, and to prevent the LECs  \ - x0from engaging in predatory pricing and other anticompetitive practices.0 2 \k- xԍ LEC Price Cap Order, 5 FCC Rcd at 6788, 6811, 681314; LEC Price Cap Reconsideration  \T-Order, 6 FCC Rcd at 617. Commenters  x/opposing the subdivision of a new video dialtone basket into service categories subject to  xpricing bands should discuss whether some other regulatory mechanism is needed to limit a LEC's ability to raise or lower rates within the basket.  ]K-x44 4. Sharing Issues   x22. Under price cap regulation, a LEC is required to adjust its PCIs downward if its  x>rate of return for the preceding calendar year exceeds 12.25 percent or, in some cases, 13.25  \- xpercent,12 \7- xԍ The 12.25 benchmark applies to LECs that operate with a 3.3 productivity offset. LECs  x1that elect the more challenging 4.3 productivity offset do not have to make a sharing  \ !- xjadjustment unless their rate of return exceeds 13.25 percent. LEC Price Cap Order, 5 FCC Rcd at 6788, 68012. and may adjust its PCIs upward if its rate of return for that period falls below 10.25  \- x.percent.v2 2 \$- xԍ For example, under the sharing adjustment, a LEC that uses the 3.3 percent productivity  xloffset must share with its customers half of its earnings between 12.25 percent and 16.25  x percent, and all of its earnings in excess of 16.25 percent. Under the lower end adjustment,  xza LEC that posts earnings below 10.25 percent is entitled to adjust its rates upward to target"G'10*((M'"  \-earnings to 10.25 percent (the "lower end adjustment") in the following year. Id. v The sharing and lower end adjustment mechanisms are intended to compensate for" y20*((r"  xthe possibility of an error in the choice of the productivity factor and performance variations  \- xamong the different LECs.r3y2 \-ԍ See, e.g., Price Cap Performance Review Notice, 9 FCC Rcd at 1689.r The sharing and lower end adjustments are made as onetime  \-adjustments to a single year's rates.4*2 \- x-ԍ LEC Price Cap Order, 5 FCC Rcd at 6803; see also LEC Price Cap Reconsideration Order, 6 FCC Rcd at 2691 n.166.  \-  x23. The Commission concluded in the LEC Price Cap Order that a carrier's sharing  \- xyobligation would be based on its total interstate earnings.52 \ - xԍ LEC Price Cap Order, 5 FCC Rcd at 6805; LEC Price Cap Reconsideration Order, 6 FCC Rcd at 2677. The customer's share plus interest  xzis returned through a onetime reduction in the PCI for the next rate period, calculated in the  \_- x|same manner as other exogenous changes in the formula.f6_^ 2 \n- xԍ LEC Price Cap Order, 5 FCC Rcd at 6801; LEC Price Cap Reconsideration Order, 6 FCC  \W- xRcd at 2686; see also Section 61.45(d)(4) of the Commission's Rules; 1992 Annual Access Tariff  \@- x#Filings, 7 FCC Rcd 4731, 4733 (Com. Car. Bur. 1992) (The Common Carrier Bureau  x="require[d] that LECs allocate their [sharing] adjustments to all price cap baskets based on the proportion of total revenue in each basket to total interstate revenue.").f The Commission rejected  xcommenters' arguments that basing sharing on total interstate earnings would provide  xincentives for LECs to engage in crosssubsidization among service baskets and that sharing  xshould therefore be based on perbasket or perservice earnings. The Commission reasoned  xthat in view of the limitations imposed by the price cap indexes, subindexes, and service  xcategories and the requirement that sharing be allocated among the baskets on a costcausative  \ -basis, the commenters' concerns were "at best speculative."y7 2 \9-ԍ LEC Price Cap Reconsideration Order, 6 FCC Rcd at 2680.y   x24. If we affirm our tentative conclusion to establish a separate price cap basket, we  xbelieve that we should consider whether the costs and revenues associated with this basket  xshould be included with those from the other baskets to compute a LEC's interstate earnings.  xWe have previously noted our objective of ensuring that video dialtone costs are not recovered  \K- xthrough charges for other interstate access services.b8Kd2 \`#-ԍ Video Dialtone Reconsideration Order at para. 195.b Our decision to adopt a uniform sharing  xkmechanism for all baskets was based in part on our decision to adopt a unitary productivity  \- xoffset,W92 \&-ԍ  LEC Price Cap Order, 5 FCC Rcd at 6805.W and we have raised the issue here of whether the productivity factor set forth in the"90*(()"  \- xLEC Price Cap Order should be applied to video dialtone.G:2 \y-ԍ  See supra paras. 1113.G While we rejected arguments to  xjexclude LEC interexchange earnings from the calculation of total interstate earnings that define  xLEC sharing obligations, we did exclude the earnings and costs of services excluded from the  \-price cap plan from such calculations.p;y2 \-ԍ  LEC Price Cap Reconsideration Order, 6 FCC Rcd at 268182.p   x25. We request comment on whether the costs and revenues associated with video  xdialtone should be included in the calculation of a LEC's interstate rate of return for purposes  xof the sharing and low end adjustment mechanisms. Inclusion of these costs and revenues will  x>change a LEC's earnings whenever the return earned on video dialtone is different from the  xreturn on other interstate services. In some circumstances, the change may be significant  x enough to move a LEC's total interstate earnings into or out of the sharing zones or into or  xout of the low end adjustment area. In view of these different possible outcomes, we seek  xcomment on whether our price cap and video dialtone public interest goals would be served  xby including the costs and revenues of video dialtone service with the costs and revenues of  xother price cap baskets in calculating a LEC's interstate earnings for purposes of the sharing  xland low end adjustment mechanisms. More generally, we seek comment on whether our  xLexisting and proposed price cap mechanisms, including a separate video dialtone basket, fulfill  xour commitment "to implement[] video dialtone in a manner that does not subject basic  \b-telephone ratepayers to unreasonable rate increases or allow improper crosssubsidization."<b*2 \=- xԍ Video Dialtone Reconsideration Order at para. 162; see also id. at para. 217 (recognizing  \&-need to take into account all costs resulting from a carrier's decision to provide video dialtone).   ]-0 IV. PROCEDURAL MATTERS ă  ]-x A. Ex Parte Rules NonRestricted Proceeding  \-  _x26. This is a nonrestricted notice and comment rulemaking proceeding. Ex parte  xpresentations are permitted, except during the Sunshine Agenda period, provided they are  \-disclosed as provided in the Commission's rules.o=2 \ !-ԍ  See generally 47 C.F.R.  1.1202, 1.1203, and 1.1206(a).o  ]f-x B. Regulatory Flexibility Act  \8-  x27. We certify that the Regulatory Flexibility Act of 1980 does not apply to this  xrulemaking proceeding because if the proposed rule amendments are promulgated, there will  x not be a significant economic impact on a substantial number of small business entities, as  x?defined by Section 601(3) of the Regulatory Flexibility Act. Carriers subject to price cap"u=0*((Z"  xOregulation for local exchange access services affected by the rule amendments under  xyconsideration generally are large corporations or affiliates of such corporations. The Secretary  xshall send a copy of the Notice of Proposed Rulemaking, including the certification, to the  xChief Counsel for Advocacy of the Small Business Administration in accordance with  x\paragraph 603(a) of the Regulatory Flexibility Act, Pub. L. No. 96354, 94 Stat. 1164, 5 U.S.C.  \-601 et seq.  (1981).  ]_-x C. Comment Filing Dates  \1-  2x28. Pursuant to applicable procedures set forth in Sections 1.415 and 1.419 of the  \ - x\Commission's Rules,J> 2 \ -ԍ 47 C.F.R.  1.415, 1.419.J interested parties may file comments on or before April 17, 1995, and  x\reply comments on or before May 17, 1995. To file formally in this proceeding, parties must  xkfile an original and four copies of all comments, reply comments, and supporting comments.  xIf parties want each Commissioner to receive a personal copy of their comments, parties must  xfile an original plus nine copies. Comments and reply comments should be sent to the Office  x{of the Secretary, Federal Communications Commission, Washington, D.C. 20554. Parties  xzshould also file one copy of any documents filed in this docket with the Commission's copy  x"contractor, International Transcription Service, Inc., Room 246, 1919 M Street, N.W.,  xWashington, D.C. 20037. Comments and reply comments will be available for public  xinspection during regular business hours in the FCC Reference Center, Room 239, 1919 M Street, N.W., Washington, D.C. 20554.  ]- B V. ORDERING CLAUSE  \-   x29. Accordingly, IT IS ORDERED that, pursuant to Sections 1, 4, 201205, 215, and  x218 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154, 201205, 215, 218,  xNa NOTICE IS HEREBY GIVEN OF the rulemaking described above and that COMMENT IS SOUGHT on the issues contained therein. x44` `  hh@FEDERAL COMMUNICATIONS COMMISSION x44` `  hh@William F. Caton x44` `  hh@Secretary