$// Further Notice of Proposed Rulemaking; CC Dkt. 87-313 & 93-197; FCC 95-198 //$
$/ Part 61 of Commission's Rules /$
TRANSMITTED FOR FCC RECORD ONLY

20554
FCC 95-198

Before the
Federal Communications Commission
Washington, D.C.

CC Docket No. 87-313
CC Docket No. 93-197

In the matter of:

Policy and Rules Concerning Rates for Dominant Carriers Revisions to Price Cap Rules for AT&T

FURTHER NOTICE OF PROPOSED RULEMAKING

Adopted: May 5, 1995; Released: May 18, 1995
COMMENTS DUE:
July 3, 1995
REPLY COMMENTS DUE:
July 24, 1995

By the Commission:






I.  INTRODUCTION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-3

II.  BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-9
A.  AT&T Promotions . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-20
B.  AT&T Optional Calling Plans . . . . . . . . . . . . . . . . . . . . . 21-27
C.  The "Headroom" Issue  . . . . . . . . . . . . . . . . . . . . . . . . 28-31
D.  Reclassification of AT&T as a Non-Dominant Carrier  . . . . . . . . . .  32

III.  DISCUSSION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  33
A.  Commission Goals  . . . . . . . . . . . . . . . . . . . . . . . . . . 33-35
B.  Proposed Revisions to the AT&T Price Cap Plan . . . . . . . . . . . . .  36
Definitional Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . 37-39
Basket 1 Service Categories . . . . . . . . . . . . . . . . . . . . . . . 40-42
Service Category Bands  . . . . . . . . . . . . . . . . . . . . . . . . . 43-45
New Services Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . 46-57
C.   Limitations on Rate Increases for Basic MTS  . . . . . . . . . . . . 58-67
D.  Exogenous Costs Issues  . . . . . . . . . . . . . . . . . . . . . . . 68-70

IV.  COMMENTS: PROCEDURAL RULES . . . . . . . . . . . . . . . . . . . . . 71-74

V.  ORDERING CLAUSE . . . . . . . . . . . . . . . . . . . . . . . . . . . .  75

APPENDIX A



I. INTRODUCTION

1.
In this Further Notice we initiate a further examination of our regulation of services provided by AT&T Corporation (AT&T) subject to price cap treatment and, in particular, the regulation of AT&T's residential services. We seek comments on, among other things, our tentative conclusion that promotional tariffs and optional calling plans (OCPs) should remain subject to price cap regulation to the extent described herein. These issues have been addressed in two separate proceedings. In the Notice of Proposed Rulemaking in CC Docket No. 87-313,(n1) the Commission sought comments on its tentative conclusion to remove promotions from price cap regulation. In the Notice of Proposed Rulemaking in CC Docket No. 93-197,(n2) the Commission sought comment on, among otherissues, whether to remove OCPs from price cap regulation. Due to the commonality of the issues presented in determining the regulatory treatment of promotions and OCPs, we consolidate these issues here in one Further Notice of Proposed Rulemaking for further consideration.

2. This Further Notice also asks for comment on a broader range of issues than were raised in either of the earlier Notices in both dockets. Although we will consider the earlier records in these dockets, we invite commenters to supplement the record by addressing all of the issues raised herein. Specifically, we go beyond the earlier proceedings in both dockets to seek comments on our tentative conclusions regarding the regulatory treatment, described in detail below, that we would accord to all AT&T's Basket 1 services.(n3) Our tentative conclusions also address issues raised in AT&T's petition for waiver of the price cap rules, which is pending before the Commission.(n4) In addition, we tentatively conclude that we should revise the treatment of AT&T's exogenous costs to conform to the revisions that we adopted in the LEC Price Cap Performance Review Report and Order.(n5)

3. Price cap regulation is designed to mirror the efficiency incentives found in competitive markets, thus acting as a transitional regulatory scheme until the advent of substantial competition makes price cap regulation unnecessary.(n6) One purpose of the revisions on which we seek comment below is thus to provide a regulatory framework that will better serve the transition to further streamlining of AT&T's price cap services. AT&T has asked the Commission to rule that AT&T is a non-dominant carrier and, accordingly, should be permitted to remove all of its services from price cap regulation.(n7)

II. BACKGROUND

4. In 1989, the Commission replaced rate-of-return regulation of AT&T with an incentive-based system of regulation, known as price caps, for most of AT&T's telecommunications services.(n8) The Commission stated that price caps would encourage efficiency and innovation while decreasing the incentive for AT&T to shift costs from more competitive to less competitive service offerings.(n9) Under this system, prices are capped rather than profits. Thus, the plan gives AT&T the incentive to earn potentially higher profits if it can operate more efficiently, for example, by reducing its costs. To implement the price cap system, the Commission defined three categories of AT&T services, or baskets, and defined a price cap index (PCI) for each basket.(n10) The basket structure is designed so that AT&T will not be able to raise prices for services in onebasket in order to lower prices for dissimilar services in another basket.(n11) Thus, a change in rates in one basket or in services outside price caps does not affect either the PCI or the actual price index (API) for the other baskets. The PCI for each basket imposes a price ceiling for the services in that basket. In order for the Commission to determine whether rate levels exceed the PCI, AT&T must compute and file for each basket an actual price index (API), which represents a weighted average of actual prices of the services within the basket.(n12) PCIs and APIs are adjusted each year in AT&T's annual price caps filing to reflect the annual productivity offset of 3 percent and exogenous cost changes.(n13) In addition, the API is computed for every tariff transmittal that includes a rate change.

5. AT&T may change rates for services within each basket subject only to streamlined scrutiny, provided that the weighted average of all those prices remains below the cap.(n14) Under streamlining, the tariff filing is presumed lawful and may take effect on 14 days' notice without extensive cost support data. If, however, the proposed rate change would push a basket API above the cap, AT&T is required to file the change on the statutory maximum notice period of 120 days and to provide a full cost-based showing for such filings.(n15)

6. Basket 1 is further divided into service categories, or bands.(n16) In the AT&T Price Cap Order the Commission concluded that "banding by service category, rather than by rate element, will give AT&T the flexibility it requires to allocate costs and price efficiently, while still protecting customers from large rate increases and rate churn."(n17) An individual service band index (SBI) is established for each service band. SBIs for all service bands are calculated each year in AT&T's annual price caps filing. In addition, for any price cap tariff filing proposing changes in the rates of service categories, AT&T must calculate an SBI value for each affected service category.(n18)

7. AT&T's Basket 1 historically has included toll services targeted to residential and small business customers. We recently removed AT&T's Basket 1 commercial services from price cap regulation and made them subject to streamlined regulation.(n19) As a result, Basket 1 currently is divided into six service categories, all of which include primarily residential services.(n20) Residential services have been the object of special Commission concern since the beginning of price cap regulation, when it sought to balance concerns for economic efficiency with the need to minimize the possibility of cross-subsidization and predation and to foster competition that would benefit all ratepayers.(n21) The Commission recognized that residential customers are significant users of day, evening, and night/weekend MTS.(n22) The pricing for evening and night/weekend MTS, which are predominantly used by residential customers, originally was subject to an upward band limit of four percent per year.(n23) In addition, we barred AT&T from increasing the average rate paid by residential customers for services in Basket 1 by more than one percent per year relative to the change in the PCI.(n24)

8. An integral part of the price cap plan is a periodic review of the working of the plan to determine whether it is functioning as the Commission intended and in accordance with the Communications Act. Accordingly, the Commission adopted a program that combines ongoing monitoring of the price cap plan with periodic formal reviews. The Commission undertook the first performance review, as scheduled, in 1992.(n25)

9. As a result of that review, the Commission determined that, while overall the price cap plan is achieving its intended goals, some adjustments to the plan might enhance its effectiveness.(n26) Accordingly, the Commission initiated another proceeding to determine whether the price cap plan should be revised in four specific areas.(n27) In particular, the FCC sought comment on whether to remove commercial services, 800 Directory Assistance, analog private line service, and optional callings plans (OCPs) from price caps.(n28) The Commission did not address AT&T's promotional offerings in this proceeding. In the recently released Commercial Services Price Cap Order,(n29) we removed AT&T's commercial services from price caps regulation. In that Order, we stated that "AT&T demonstrates both in its comments and through additional information submitted in the record of this proceeding that there is sufficient evidence to conclude that AT&T's commercial long distance services are subject to substantial competition." We stated that ". . . our analysis rests on considerations of market share, demand responsiveness and supply responsiveness. As the result of this analysis, we conclude that AT&T lacks the ability to exercise unilateral market power in the provision of these services and that there is sufficient competition among providers to justify moving AT&T's commercial services from price caps to streamlined regulation."(n30) We concluded, however, that 800 Directory Assistance should remain under price cap regulation because it ". . . remains a monopoly service and therefore it is necessary to regulate the price for this service to protect consumers."(n31) Further, we concluded that analog private line services should remain under price caps regulation because "none of the parties has presented any evidence that the situation has changed since the Commission's 1991 decision in the Interexchange Proceeding."(n32) We stated that "[t]he Commission concluded that the market for these services was not as competitive as the market for other services offered by AT&T andtherefore required continued oversight under price caps."(n33) We deferred to this consolidated proceeding further consideration of the removal of OCPs from price caps.(n34)

A. AT&T Promotions

10. A promotion usually involves a discounted offering of an existing tariffed service or service category to a particular sub-class of customers for a limited period of time.(n35) For example, promotions might be limited to customers in a particular geographic area, to customers that historically have achieved a specified level of monthly usage, or to new subscribers.(n36) Thus, while the basic rates for a service remain in effect and apply to some customers of a service, other customers of that service may be paying a discounted rate for a specified period of time. In other instances, all customers of a service may receive the discounted rate for a specified time, and then revert to the basic rates when the promotion expires.(n37)

11. The Commission was silent in the AT&T Price Cap Order as to the treatment of promotional rates under price caps. After the Commission adopted the price cap rules, AT&T filed a significant number of promotions in which it treated the rates associated with these offerings as rate reductions for purposes of API calculations. MCI Telecommunications Corporation (MCI) and Sprint Communications Company LP (Sprint) sought reconsideration of the AT&T Price Cap Order, requesting clarification of the treatment promotional pricing activities should receive under price caps.(n38) In the Reconsideration Order, the Commission decided to exclude promotional tariffs from the price cap index prospectively. It reasoned that including promotional rates in price caps would give AT&T too much flexibility to change prices within Basket 1, which contained residential and small business rates.(n39) Although the Commission decided to exclude promotions from price caps, it also stated that "as long as a promotional offering does not raise discrimination issues or otherwise fail to comply with the Communications Act, we will not limit AT&T's efforts to generate greater network efficiencies by restricting promotional activity."(n40)

12. In its appeal of the Reconsideration Order, AT&T asked the court to vacate the Commission's decision to exclude promotional offerings from price caps as arbitrary and capricious because the Commission failed to explain adequately its change in the treatment of promotional rates.(n41) The court agreed with AT&T, finding that the Commission's decision to exclude promotional tariffs from the price cap index was not a reasoned decision supported by the record. The court remanded the Reconsideration Order to the Commission with instructions either to show that its action is a clarification of the original Price Cap Order, despite the evidence AT&T presented to the contrary, or to "offer a reasoned explanation of why promotional rates should be treated differently from other rates."(n42)

13. In response, the Commission vacated its prior decision on this issue and issued the Promotions NPRM in Docket 87-313, in which it tentatively concluded that promotions should be excluded from price cap regulation prospectively.(n43) The Commission offered several reasons to support this proposal. First, a basic purpose of price caps is to assure a reasonable basic schedule of long distance rates for ratepayers. Although price cap regulation is designed to reward efficiency by granting carriers flexibility in pricing individual services, the Commission had rejected a price cap system that would have granted AT&T unlimited flexibility to increase basic schedule rates to offset promotional rate decreases.(n44) The Commission reasoned that "[i]f AT&T is allowed to take index credit for promotions, its actual price index (API) would decrease. As historically hasbeen the case, AT&T could then increase its API by increasing general schedule rates." The Commission tentatively concluded that:

permitting promotional offerings to be used as a basis for raising basic schedule rates, without limitation, would strongly encourage the proliferation of excessive promotional offerings and undercut the efficiency incentives of the price cap program. For example, AT&T could attempt to promote its services to customers of other IXCs with the promise of interim rate cuts or long distance gift certificates, and then protect its revenue stream by increasing rates in the basic MTS schedule for existing customers. . . . In other words, AT&T could offer promotions when it needed to raise general schedule rates to cover its inefficiencies even though price cap regulation is designed to provide an incentive for companies to operate more efficiently.(n45)

The Promotions NPRM further reasoned that "since one of the fundamental purposes of price cap regulation is to put AT&T on a more equal competitive footing with other IXCs, allowing AT&T to insulate itself from revenue losses caused by promotional pricing undercuts one of the basic goals of price cap regulation."(n46) The Commission concluded that "[i]f AT&T operated in a completely competitive market, this issue would be moot because AT&T could not raise general schedule rates without the fear of losing customers to a competitor."(n47)

14. The Commission thus tentatively concluded that "allowing AT&T to offset rate reductions for promotional offerings against increases in the basic rates could undercut the Commission's enforcement mechanism for price cap regulation."(n48) For example, under price cap rules, if AT&T were to file an above-cap tariff, the filing would be subject to full regulatory scrutiny and possible suspension.(n49) The potential problem, however, asdescribed by the Commission in the Promotions NPRM, is that if AT&T were to file a promotional tariff that decreased rates for certain services within Basket 1, the API would be lowered for the duration of the promotion, thus allowing AT&T to raise rates within the basket for other services without exceeding the basket's PCI. When the promotion expired, however, the API would rise and prices for some services within the basket could be left above cap for the period of time between the expiration of the promotion and the next AT&T rate filing that proposed rates above the PCI.(n50) Because the promotion had expired, however, the Commission could not investigate it in order to deter unreasonable, above-cap rates for the basket.(n51)

15. As an alternative, the Commission sought comment on whether to treat promotional tariffs as either new or restructured services.(n52) Under price cap regulation, a service is classified as new if it provides an additional option to a service, but does not replace the existing service. Conversely, a service is classified as a restructured offering if it replaces an existing service.(n53) Rates for restructured services are immediately incorporated into the price cap calculations upon effectiveness of the tariff. Rates for new services, however, are not incorporated into the price cap calculations until the first annual price cap tariff filing following completion of the base period in which they are introduced.(n54) At that point, actual revenues and demand data for the service are available. A promotion resembles a new service because it provides a new option, a discount from the existing basic schedule, which does not replace the existing service. On the other hand, a promotion differs from a new service, in that it restricts the availability to eligible customers and limits the time during which those customers may subscribe to the promotion. New services are generally available and may be ordered at any time. A more significant distinction is that as a result of the 1992 court of appeals decision,(n55)promotions are incorporated into price cap calculations immediately upon effectiveness of the tariff, while new services are excluded from price caps until AT&T has obtained actual demand and revenue information concerning the service.

16. Commenters other than AT&T generally supported the Commission's proposals and tentative conclusions as set forth in the Promotions NPRM. They asserted that excluding the value of promotions from API calculations would protect one group of ratepayers from subsidizing the promotions that benefit another group of ratepayers(n56) and would be consistent with the goals of price cap regulation.(n57)

17. In opposing the proposals set forth in the Promotions NPRM, AT&T argued that its promotional tariffs are not different from other types of tariff filings and should be entitled to receive index credit under the Commission's price cap plan.(n58) Moreover, AT&T argued that because none of its promotions has been rejected or suspended for violations of Sections 201(b) and 202(a) of the Communications Act, there is no justification for treating promotional tariffs differently from other price cap tariff filings.(n59) AT&T also disputed the Commission's argument that including promotional tariffs in price caps will create the potential for cross-subsidization,(n60) especially given their short duration.(n61)

18. AT&T further contended that both MCI and Sprint have made extensive use of promotional offerings throughout the time that AT&T has been subject to price caps. AT&T argued that it therefore would be at a competitive disadvantage if the Commission did not permit it to receive index credits for promotions.(n62) Finally, AT&T stated that it is required to disclose certain information about its promotions to the Commission. According to AT&T, it would be impossible to raise the API for its capped services abovethe price cap index at the expiration of a promotion without prompt detection and immediate corrective action by the Commission.(n63)

19. As discussed above, the Commission was initially silent on the issue of promotions. Our decision on the subject in the Reconsideration Order was then remanded by the court of appeals, and we have taken no action following the Promotions NPRM. In the meantime, AT&T has introduced new promotional offerings that expand the general class of discounts offered under the term "promotions." For example, the original class of promotions implemented by AT&T in 1989, which it submitted in a "generic" tariff, consisted of discounts on monthly usage charges.(n64) These promotions were limited to designated services or to customers in specified geographic areas, and were of short duration, in some instances lasting no more than 90 days.(n65)

20. In recent years, however, AT&T has introduced several widely-available mass-market discounts for domestic MTS, such as the current "True USA" and "True Rewards" (the "True promotions"). AT&T reported that, for calendar year 1994, 17 million customers enrolled in the True USA savings plan, and 14 million customers enrolled in the True Rewards program.(n66) In addition, discounted interstate long-distance calls under the True promotions accounted for 53 percent of all minutes of consumer, i.e., Basket 1, traffic on AT&T's network in 1994, whereas in 1993, interstate long-distance usage under discount plans that were in effect in that year accounted for 33 percent of Basket 1 traffic.(n67) The True promotions also attracted an additional 1 million new customers for AT&T in 1994.(n68) The amount of actual discounts off basic schedule domestic MTS rates to customers under the True USA promotion during the month of November 1994, alone,was $265.3 million.(n69) This unprecedented growth in AT&T's promotional activities has caused a major realignment in prices for Basket 1 services, especially basic schedule rates. Basic schedule ratepayers who have not elected a promotional discount plan have generally witnessed steady increases in their rates over the same period of time that AT&T has introduced mass-market promotions for residential customers.(n70)

B. AT&T Optional Calling Plans

21. AT&T's promotional offerings to date have involved discounts based on its basic schedule MTS rates. Optional calling plans (OCPs) offer discounts or reduced rates for a specified period of calling to long distance customers in exchange for the customer's commitment to a fixed monthly charge or to participate for a minimum period of service.(n71) Addressing AT&T's initial types of OCPs, for example, the Commission in the OCP Guidelines Order adopted the following definitions:

Basic MTS: MTS service as it was offered pursuant to AT&T tariffs in effect before June 7, 1984, the effective date of the AT&T `Block of Time' plan [citation omitted].

Optional Calling Plan: A supplemental or additional MTS offering which allows customers to take MTS under an alternative, nontraditional pricing mechanism. For example, an OCP may offer service on a distance- insensitive basis or in bulk at reduced rate. An OCP may not involve changes to the rates or rate structure of the underlying basic MTS service.(n72)

22. OCPs are usually designed to attract frequent callers who can take advantage of the discounts and other benefits to reduce their bills.(n73) Examples of OCPs in theReachOut service category include Block-of-Time (such as ReachOut America), AnyHour Saver, and EasyReach service.(n74) MCI, Sprint, and a number of other interexchange carriers also offer discounted residential services that compete with these AT&T offerings.(n75)

23. The price cap system's treatment of OCPs also differs from that accorded promotions. OCPs are included in a separate service category (the Reach-Out service category) from the basic MTS service categories within Basket 1,(n76) whereas promotions are included in the applicable MTS service categories. Changes in OCP rates, therefore, are not subject to the SBI limitations on rate changes in the basic schedule service categories.

24. In the OCP NPRM, the Commission tentatively concluded that the ReachOut category of services (i.e., most domestic MTS OCPs) should be removed from Basket 1 because there is substantial competition among providers of discounted residential services. The Commission noted that because rates for these services already appeared to be determined by market forces, not price cap limits, customers were unlikely to be harmed if the Commission made these services subject to streamlined regulation in the tariff review process. Moreover, customers would retain the option of choosing between AT&T's basic schedule or the discounted services of AT&T and other carriers.(n77) The Commission also noted that to the extent that ReachOut services have had larger rate reductions than the standard long distance schedules for which they are substitutes, removal of ReachOut services from Basket 1 might encourage AT&T to target productivity gains to customers for the standard service.(n78)

25. The Commission sought comment on whether the treatment of OCPs under the AT&T price cap plan should be changed, and, if so, in what manner. Specifically, the Commission sought comment on whether it should adjust the API or the PCI for Basket 1 to reflect the removal of OCPs from Basket 1. As an alternative to removal of OCPs from price cap regulation, it asked for comment on whether OCPs should remain subject to price cap regulation, but be placed in a separate basket.

26. In its initial comments, AT&T supported removing OCPs from Basket 1 "without delay"(n79) in order to gain the pricing flexibility it assertedly needs to respond to market conditions and customer demands.(n80) AT&T also contended that if the Commission adopted new streamlined regulations for OCPs, it should not adjust the API or PCI to eliminate the "headroom" for Basket 1 services that AT&T would gain from this action.(n81) In its reply comments, however, AT&T changed its position, and argued that, because the rates for residential OCPs and basic residential schedule services have been reduced significantly under price cap regulation, both categories of service should be removed from price caps and subject to streamlined regulation.(n82) AT&T also opposed moving OCPs to another basket if they remained under price cap regulation.(n83)

27. Although all commenters agreed that AT&T has maintained a market share for interstate traffic in the low 60 percent range for the past three years,(n84) many commenters expressed doubts that reducing price cap regulation over AT&T would benefitconsumers.(n85) Some commenters expressed concern that AT&T would use the $270 million in headroom that would result from removing OCPS from Basket 1 to raise prices on the remaining services in the basket.(n86)

C. The "Headroom" Issue

28. Because mass-market promotions such as AT&T's True offerings are widely available to all customers, they can create apparent anomalies when calculating earnings and establishing indexes under the existing price cap plan. For example, AT&T may use the forecasted demand for its promotional plans to lower its adjusted price index (API) for Basket 1 services.(n87) By substantially lowering the API,(n88) AT&T's mass-market promotions also maximize the gap -- or "headroom" -- between AT&T's API and its price cap index (PCI) ceiling for Basket 1. AT&T's headroom in Basket 1 determines the extent to which AT&T can raise rates for non-discounted Basket 1 residential services without exceeding the PCI ceiling or the upper limits of its service band indexes (SBIs). Mass-market promotions, therefore, give AT&T the ability to offer widespread discounts to some residential services ratepayers, while increasing the basic schedule rates, without exceeding the SBI ceiling for the rate increases or dropping below the SBI floor with its promotional discounts.(n89) If AT&T's basic schedule rate increase offsets the demand decrease caused by the higher basic schedule rates, AT&T would not forego any revenues as a result of its promotional offerings.

29. The headroom that permits these basic rate increases is, moreover, predicated upon forecasts of the expected demand for the promotional offerings. Currently, AT&T forecasts its demand for the life of the promotion at the time the promotion is filed. An error in this forecast could permit AT&T to adjust the API downward based on forecasts for higher demand for a promotion than actually materialize. In such a situation, AT&T would be able to increase its basic rates more sharply than if actual demand were used to calculate the effect of the promotional offering on the API. Customers of basic schedule service consequently are charged more for service when AT&T's forecasts for promotions are higher than actual demand. No mechanism exists under the price cap rules to correct for any inaccuracies in forecasted demand, although AT&T has committed from time to time to "true up" its headroom calculation based on actual demand.(n90) AT&T, however, is not required to refund overcharges to customers of basic schedule service.

30. AT&T has increased its basic schedule rates in Basket 1 during the past two years concurrently with the implementation of its True promotion offerings. For example, on December 5, 1994, AT&T implemented an average rate increase in basic schedule MTS rates of 3.9 percent, valued at $274 million.(n91) On December 27, 1994, AT&T also raised rates for optional calling plans, operator/card services, and international MTS (IMTS) within Basket 1 by approximately $260 million.(n92) Increases in AT&T's basic schedule rates are also reflected in studies conducted by Commission staff, which are based on the Bureau of Labor and Statistics's (BLS) consumer price index (CPI) and producer price index (PPI) for interstate toll calls from 1984 through May, 1994. The Commission staff study, released in May, 1994, found that AT&T's basic schedule rates increased by 6.5 percent for calendar year 1993 and 9.3 percent from March 1993 through March 1994, based on the BLS-maintained consumer price index (CPI) for interstate toll services.(n93) A study completed by Commission staff in February, 1995, which addressesAT&T's long distance prices through year-end 1994, finds that the CPI for AT&T's interstate toll calls increased a total of 5.4 percent in 1994.(n94)

31. AT&T has informally objected to the use of the CPI and PPI as measures of rate changes. AT&T contends that the indices are not reliable indicators of overall long distance pricing performance because they do not adequately reflect the offsetting effect of discount plans.(n95) The Commission staff study released in February, 1995, for example, states that the CPI for interstate toll services, as computed by BLS, overstate the increases in average charges because the CPI sample underweights discount plans and the PPI sample excludes discount plans.(n96) It is clear, nonetheless, that the overall increases in basic schedule rates, when compared with the significant discounts in AT&T's True promotions, have created a wide range in prices for Basket 1 residential services. The issue posed below is whether this realignment in prices to residential subscribers in the MTS categories, which are not substantially affected by such price cap mechanisms as the SBI limits and the residential rate index,(n97) requires revisions to the price cap system.

D. Reclassification of AT&T as a Non-Dominant Carrier

32. The Commission based its tentative conclusions in the OCP NPRM and the Promotions NPRM to remove OCPs and promotions from Basket 1 primarily on findings that such treatment would not hinder competition for OCPs and would deter AT&T fromusing promotions anti-competitively.(n98) Since the release of the OCP NPRM and the Promotions NPRM, however, AT&T has filed a motion requesting that it be reclassified as a nondominant carrier.(n99) AT&T argues in its petition that circumstances have changed since the time it was originally classified as a dominant carrier, including the divestiture of the Bell System's bottleneck local facilities and the increase in interexchange carriers, resulting in "thriving" and "robust" interexchange competition.(n100)

III. DISCUSSION

A. Commission Goals

33. The Commission's primary goals in applying price cap regulation to AT&T include ensuring just and reasonable long distance rates for ratepayers, without unreasonable discrimination,(n101) as well as promoting the universal availability of such reasonably priced service.(n102) Moreover, the Commission's price cap plan for AT&T is intended to afford AT&T the flexibility to adjust prices to approximate more closelymarginal costs and to encourage innovation and the introduction of new services.(n103) The primary focus of this Further Notice, therefore, is to determine whether the existing price cap plan should be modified to ensure that promotions and Optional Calling Plans (OCPs) advance the Commission's public interest goals. In addition, we seek to adopt a regulatory scheme for promotions and OCPs that will continue to foster greater competitiveness in the interexchange market and to permit us to remove more of AT&T's services from price cap regulation.(n104)

34. To these ends, we seek to reduce regulatory burdens on AT&T that do not serve the public interest goals of our price cap plan for AT&T. Moreover, our intention is to provide AT&T with greater flexibility to respond promptly to developments in the interstate interexchange marketplace. We also want to simplify price cap procedures and reduce periods of delay caused by the tariff review process. In addition, we seek to ensure that our price cap scheme for AT&T treats like services in a sensible, consistent manner. Finally, as discussed below, we seek comment on the degree of protection that the price cap plan should afford AT&T subscribers who obtain domestic MTS from basic rate schedules.

35. We tentatively conclude that at the present time these goals would not be served by removing AT&T's current Basket 1 promotions and OCPs from price cap regulation. As discussed below, we tentatively conclude in this Further Notice that Basket 1 domestic MTS promotions, domestic MTS OCPs, and basic schedule MTS offerings exhibit substantial cross-elasticities of demand, and are generally offered to the same class of customers, i.e., residential customers, following the removal of AT&T's commercial services from price cap regulation. The removal of domestic MTS OCPs and promotions from price caps would thus streamline some AT&T offerings of domestic MTS for residential customers and retain price cap regulation for similar offerings to the same class of customers.(n105) We decline to take such a step at this time and, contrary to the tentative conclusions of both the Promotions NPRM and the OCP NPRM, we now tentatively conclude that the issue of further streamlining of OCPs and promotions shouldbe considered together with AT&T's motion for non-dominant status in a separate proceeding. We believe that the regulatory status of OCPs and promotions should be considered as part of the larger issue raised by AT&T's motion: whether all of the services that currently are included in Basket 1 should be removed from price cap regulation and afforded streamlined regulatory treatment. We invite comment on these tentative conclusions.

B. Proposed Revisions to the AT&T Price Cap Plan

36. Having tentatively concluded that neither OCPs nor promotions should be removed from price cap regulation at this time, we now consider whether any modifications to the existing price cap plan would advance our public interest goals more effectively. We seek comment on the tentative conclusions and issues described below.

37. Definitional Issues. As discussed in the background section of this Further Notice, no precise definition of promotions has been included in our price cap rules. It is clear, however, that the effects of mass-market promotions were not contemplated when we formulated the baskets and bands that restrict AT&T's pricing practices. Furthermore, although we have defined OCPs, the services covered by this definition are very similar to self-selected promotions in that OCPs offer a discounted alternative to basic schedule MTS. Accordingly, we tentatively conclude that self-selected promotions and OCPs should be treated in the same manner under our price cap rules. We propose to establish a new regulatory category for self-selected promotions and OCPs: "alternative pricing plans" (APPs). The defining characteristic of an APP is that it offers a self-selected alternative, i.e., discounted rate, to domestic MTS or other price cap services provided under basic schedule rates.

38. We also conclude that an APP does not differ from an existing service in the domestic MTS service category, and possibly in the other Basket 1 service categories as well, except in ways related to pricing and terms and conditions affecting pricing. APPs are thus "like" existing domestic MTS services.(n106) Although we have previously rejectedthe notion that only services offering new functional capabilities be treated as "new,"(n107) we believe that our rules for the treatment of new services should not apply to APPs, as we discuss below. For example, we propose allowing AT&T to file an APP on a streamlined basis, without cost support, outside of price cap regulation. A streamlined APP would expire automatically 90 days after its effective date unless AT&T would file a transmittal with actual cost and demand revenues for the initial 90-day period, subject to tariff review and approval, to include the APP as a permanent offering under price cap regulation.(n108)

39. We also tentatively conclude that alternative pricing plans are, by definition, not restructured services. A restructured service is one that replaces an existing service, whereas an APP offers an alternative to an existing service without replacing it. Moreover, a restructured service is automatically available to anyone who simply uses basic schedule MTS, whereas an APP is available only to an eligible customer who signs up for the service. Under this approach, we would tentatively conclude that services that AT&T currently labels "promotions" that automatically change MTS rates without creating additional options, even if for a limited period or for limited locations, should be treated as restructures, not alternative pricing plans, and should be subject to price cap regulation as soon as the tariff becomes effective.(n109) In contrast, an alternative pricing plan, such as any of AT&T's True promotions, does not replace the underlying basic rate, but rather provides an optional discount off the basic rate that a customer can "self-select." We seek comment on these tentative conclusions. We also seek comment on whether our definition of APPs and the proposed rule changes guiding the regulatory treatment of APPs outlined below should be applied to the IMTS and operator/card service categories.

40. Basket 1 Service Categories. In light of our decision to remove commercial services from price caps and our tentative conclusions discussed above concerning alternative pricing plans, we believe it is appropriate to examine the existing Basket 1 service categories in order to determine whether any modifications to them are necessary. We tentatively conclude, for the reasons set forth below, that the four existing domestic MTS service categories in Basket 1 -- namely, (1) domestic day MTS; (2) domestic evening MTS; (3) domestic night/weekend MTS; and (4) ReachOut America -- should be combined as a single service category. If this restructuring were implemented, AT&T's Basket 1 would consist of three service categories: (1) domestic MTS, including all three current time-of-day MTS categories, OCPs in the existing ReachOut America category covering domestic MTS and domestic MTS promotions (in other words, domestic MTS basic schedule services and APPs as discussed above); (2) operator and credit card services; and (3) international MTS.

41. We believe that establishing a single domestic MTS service category to encompass the existing time-of-day MTS service categories as well as APPs will increase AT&T's pricing flexibility and better reflect the realities of the interexchange market. We note, for example, that interstate access rates, which appear to be a major component of AT&T's marginal costs of providing service, are not time-of-day-sensitive(n110) and thus do not track pricing differences among AT&T's domestic MTS categories. We also observe that removal of Basket 1 commercial services from price cap regulation would appear to make our conclusion that residential callers are the predominant users of evening and night/weekend MTS equally applicable to day MTS.(n111) There is thus no significant differentiation by class of customer in the three domestic MTS service categories. We seek comment on whether a single domestic MTS category or retention of the day, evening, and night/weekend structure is appropriate.

42. When we first authorized AT&T to offer optional calling plans which met an increased net revenues standard, we recognized the existence of cross-elasticities of demand in switched services, and the importance of information about cross-elasticity of demand in the evaluation of OCPs.(n112) Cross-elasticity of demand between basic schedule domestic MTS and AT&T's mass-market True promotions is implicit in the headroom calculations AT&T presents as the result of these promotional offerings; these reductions in the API and relevant SBIs involve revenues "foregone" because of a shift by customers from basic schedule rates to promotional rates in the domestic MTS service categories,within the parameters of stabilized base-year demand.(n113) Such evidence of cross-elasticity of demand between the non-discounted domestic MTS basic schedule offerings and the services we have defined above as APPs is not restricted to the regulatory sphere. A recent news article, for example, reported that:

AT&T . . . saw a huge shift among its own customers toward discount calling plans. Company executives say 53 percent of all minutes of consumer traffic on its network last year were discounted calls, a jump from 33 percent in 1993.(n114)

The evidence of cross-elasticity of demand between basic schedule MTS and APPs argues in favor of a finding that these services should be classified within the same service category, much as AT&T's True promotions and basic schedule offerings co-exist at present within the three domestic MTS service categories. We thus tentatively conclude that domestic MTS self-selected promotions and OCPs, i.e., APPs, are sufficiently substitutable with domestic MTS services to warrant their inclusion in a single domestic MTS service category. We seek comment on this tentative conclusion.

43. Service Category Bands. The establishment of a single domestic MTS service category would require modifications to the service category bands applicable to the existing residential service categories. The services currently within Basket 1 that would be merged into a single domestic MTS service category -- namely, time-of-day domestic MTS, ReachOut America, and current domestic MTS promotions -- are currently subject to both upward and downward banding limitations.(n115) Under the downward banding limitation in the current price cap rules, a Basket 1 rate decrease proposed by AT&T that would result in an overall change in a service category rate that is greater than five (5) percent relative to the change in the price cap index (PCI) does not qualify for streamlinedreview.(n116) Under the upward banding limitation in the current price cap rules, any Basket 1 rate increase proposed by AT&T that results in an overall change in a service category rate that is greater than five (5) percent relative to the change in the PCI, or in the case of the domestic evening MTS and domestic night/weekend MTS service categories, greater than four (4) percent relative to the change in the PCI, does not qualify for streamlined review.(n117) Within-band filings are considered to be prima facie lawful, and petitioners seeking suspension of such filings are held to a high burden of proof.(n118)

44. We tentatively conclude that a four-percent ceiling should be placed on the single domestic MTS service category band. In the AT&T Price Cap Order, the Commission imposed a similar four-percent upper limit on the domestic MTS evening and domestic MTS night/weekend service category bands because it found that these categories were "predominantly used by residential callers." The Commission expressed particular concern that there are "a significant number of customers residing in non-equal access, rural areas who have no alternative to turn to should AT&T raise its evening and night/weekend rates."(n119) We seek comment whether this reasoning or other reasons for tighter band limits on the domestic MTS category retain their viability. In any event, because we believe that the single domestic MTS service category we propose in this Further Notice will be used predominantly by residential customers, we tentatively conclude that a four-percent upper limit is therefore appropriate. We seek comment on this tentative conclusion.

45. We further propose to modify the existing five-percent floor on Basket 1 services with respect to the proposed single domestic MTS service category. The lower band was created in the price caps scheme to deter AT&T predatory conduct. In the AT&T Price Cap Order, the Commission decided to establish a five-percent floor on price decreases within the Basket 1 service categories because it believed that the "threat of predatory pricing is one that is best addressed in a structural manner as part of price cap regulation."(n120) The Commission acknowledged that rate decreases below the lower band limits are not evidence of predatory pricing: "such below-band reductions as are possible within the limits of our price cap scheme are more likely to be competitive than predatory."(n121) We believe that successful predation, defined as the ability to lower prices below a relevant measure of costs in order to drive competitors from the market, is an unlikely occurrence.(n122) In the AT&T Price Cap Order, the Commission observed that "[p]redatory pricing, though often alleged, is generally uncommon, and proven cases are rare. We have, through the structure of AT&T's service baskets, created conditions under which predation should be as unlikely in the interexchange telecommunications market as it is in the economy generally."(n123) We also tentatively conclude that the possibility of predation presents less of a concern in an environment where each of the largest three interexchange carriers offers some form of long distance promotional discount.(n124) We therefore propose that prices for the single domestic MTS service category band be allowed to decrease by greater than five percent. We seek comment on whether a 15 percent lower limit on the domestic MTS service category band would be more appropriate while not significantly increasing the likelihood of predatory pricing.

46. New Services Issues. In proposing to establish a single domestic MTS service category including the services we have defined above as APPs, we also propose to modify our existing new services rules to clarify that these rules do not apply to APPs. Under our current system, the manner in which AT&T styles a new discounted offering determines whether the price cap new services rules apply to the service. Thus, a new offering classified as an optional calling plan is subject to new services treatment, while essentiallythe same offering styled as a promotion is not treated as a new service but, instead, as a rate change for an existing service. As explained below, this difference in labels has significant consequences for price index calculations without any sound basis for the differing results ensuing from these calculations. We propose to retain our new services rules for AT&T services that are "new" in all respects, i.e., unlike existing services, but to create new rules to bring new APPs within price cap regulation.

47. As stated in the background section, supra, a new service is defined as any filing that expands ratepayers' range of service options within those services subject to price cap regulation.(n125) New services may be introduced on 45 days' notice, provided AT&T can demonstrate that the new service will generate a net revenue increase within 24 months after incorporation of the new service into an annual price cap tariff or within 36 months after the effective date, whichever occurs first.(n126) To develop the historical data needed to perform index calculations for new services, new services are included in price cap regulation in the first annual price cap tariff filing after completion of the base year in which the new service becomes effective.(n127) AT&T does not receive price cap credit for a new service that offers a rate reduction, even after the service is introduced into a price cap basket, because the rate reduction occurred outside of price caps.

48. The current requirements that new services be filed on 45 days' notice, supported by a showing that they will result in a net revenue increase, can severely limit AT&T's ability to respond promptly to new developments in the increasingly competitive marketplace in which it offers its price cap services. We therefore tentatively conclude that we should not apply our new services rules to APPs. Instead, we propose to allow AT&T to file alternative pricing plans initially outside of price caps, as are new services, but on a streamlined basis, i.e., on 14 days' notice, without cost support. As discussed more fully below, we propose to allow AT&T to receive immediate price cap credit for APPs upon the conclusion of a shortened 90-day initial period, as opposed to the current one-year base period for new services.

49. We are concerned that basing PCI, API, and SBI calculations for inclusion of new services into price caps on forecasted, as opposed to actual, data may result in overstated headroom, especially when such forecasts can extend over a period of one year or more. We have also observed that the use of extended forecasts may also allow AT&Tto ratchet up forecasted demand by making repetitive filings several times a year. We tentatively conclude that we should avoid the use of demand forecasts that are not based on actual data in connection with the inclusion of APPs into price caps. We also tentatively conclude that AT&T should not be required to delay the inclusion of APPs into Basket 1 for up to 18 months. We believe that allowing AT&T to offer APPs on 14 days' notice and with a shortened 90-day base period will address effectively AT&T's interest in greater streamlining. At the same time, requiring the use of actual demand and cost data upon the conclusion of ninety-day base period should address our concerns regarding the possibility that AT&T may ratchet up its forecasted demand by means of repetitive filings of extended forecasts.

50. We believe that these modified procedures for the introduction of APPs will therefore effectively streamline and preserve the integrity of our price cap rules. We tentatively conclude that this approach would address many of AT&T's concerns about the inflexibility of applying our new services rules to discount service plans, while meeting our concerns about the use of forecasted data in making price caps calculations. We seek comment on these tentative conclusions. We also seek comment as to how the approach to price cap treatment for APPs outlined here should be applied to AT&T existing, on-going promotional offerings which fall within the APP definition we have proposed and are currently under price cap regulation, such as the "True" promotions.

51. We also propose to maintain our current new service rules as they apply to new AT&T price cap offerings that are not APPs. Because such services will presumably be primarily services that are not "like" already-provided services, these services are likely to present cost and demand issues beyond the narrow set of "headroom" issues we address in this Further Notice. We thus believe that we should continue to hold such new services outside of price caps until the first annual price cap tariff filing after completion of the base year in which the new service becomes effective in order to gather complete and comprehensive data on the costs, demand, and revenues associated with such new services before they are placed within a price cap basket and thus affect the demand and revenue factors for that basket.(n128) Moreover, when we instituted price cap regulation for AT&T, we recognized that new services can raise complex issues, including discrimination and anticompetitive behavior, which require careful review.(n129) Tariffs proposing new services were thus required to be filed on 45 days' notice, with supporting information and data todemonstrate compliance with the requirement that such new services increase net revenues for price cap services.(n130) Because we believe that such complex issues may remain of potential great concern at present, AT&T should continue to file tariffs for new services other than APPs on 45 days' notice and to make the showing of increased net revenues for new services currently required under our rules, in order to minimize any risk of unreasonable discrimination, cross-subsidization or anticompetitive behavior.

52. We also seek specific comment on the proper price cap treatment of AT&T's recently introduced 500 service, which appears not to fall within our proposed definition of alternative pricing plans. AT&T filed this offering on 27 days' notice as a streamlined business service, arguing that such treatment was appropriate because the new service was primarily designed for and particularly useful to business customers.(n131) In petitioning against the AT&T tariff introducing 500 service, MCI quoted Section 61.58(c)(5) of our Rules, which states, in relevant part: "Tariff filings involving the introduction of a new service within the scope of Section 61.42(g) . . . must be made on at least 45 days' notice."(n132) MCI interpreted this rule to encompass all new services tariffs filed by AT&T, and contended that AT&T must adhere to this rule or obtain a waiver for its tariff to be lawful.(n133) After the Common Carrier Bureau deferred AT&T's tariff to 45 days' notice and AT&T submitted cost data which it represented met the requirements of Section 61.49(g) of our rules, the service was permitted to take effect without an investigation.(n134) The potential ambiguity in our Rules with regard to streamlined versus price cap treatment of new services is of concern to us. With particular relevance to 500 service, we now propose to change our rules to specify that to be subject to streamlined rather than price cap regulation, the projected demand for such new services can include only de minimis usage by AT&T's residential subscribers, (i.e., less than five percent of overall projected demand within the net revenue test period set forth in Section 61.49(g)(1)). We seek comment on these tentative conclusions and proposals.

53. We accordingly propose to change our new service rules to allow AT&T to file all new APPs on a streamlined basis, i.e., on 14 days' notice, without cost data, provided that the APPS are scheduled to expire automatically no later than 90 days after the initial effective date. The APPs will be kept outside of price caps during this period; we will not allow AT&T price cap credit for these new APPs. On the last business day of the 90-day period, AT&T may extend the expiration date of the APP for 30 days in order to permit the conversion of the APP as a permanent offering under price caps. These revisions would allow AT&T to continue to provide the APP outside of price caps for the extended period. Within this thirty-day period, AT&T would be required to submit tariff revisions on not less than 14 days' notice. The new tariff pages would remove the expiration date and would be accompanied by supporting information required to include the service under price caps. If a longer period is required for review of the tariff filing by the Common Carrier Bureau, AT&T would be required to defer tariff revisions introducing the permanent offering for a period not to exceed 120 days. AT&T would also be permitted to extend the termination of the APP during this period. In this way, AT&T would be able to avoid any interruption in its offering of discounted rates, pending completion of the Bureau's review of the permanent offering.

54. We caution that we will not allow AT&T to evade the 90-day expiration period for new APPs held outside of price caps by making insubstantial changes to the rates, terms and conditions of such APPs and reintroducing them through such tariff revisions as "new" APPs. We will consider all relevant indicia in our tariff review process as to whether APPs are indeed new offerings, including branding, trademarks, AT&T's identification of APPs to consumers, and other marketing and marketplace factors.

55. The tariff revisions that propose to include the APP under price caps would be subject to the provisions of Section 61.49 of our Rules. These revisions would be supported by actual demand figures from the 90-day period that the initial APP filing was effective. The rates, terms and conditions of the APP to be subject to price caps may not differ in any material respect from the rates, terms and conditions of the APP as originally introduced outside of price caps. We would allow AT&T immediate index credit on the date that the tariff revisions placing the APP under price caps take effect, based on its representation of the annualized actual demand for the APP, as well as any exogenous cost changes that may relate to the APP.(n135)

56. We also propose to require AT&T to file quarterly "true-up" reports, i.e., quarterly updates of actual demand figures, during the initial year that the new APP is incorporated into price caps, in order to refine its calculations of the headroom created by the offering. We would allow AT&T to file rate changes to the new APP during the first year of price cap regulation by means of a tariff transmittal, giving 14 days' notice of such changes, but any change in price cap indices would have to filed on 45 days' notice and based on historical demand data such as AT&T would be required to file with the quarterly true-up report.

57. We thus propose changes to Sections 61.3, 61.43-.44, 61.46-.47, 61.49 and 61.58 of our Rules to permit streamlined treatment for new APPs. We believe that requiring AT&T to use historical demand, as required for other types of rate changes under our current price cap rules, will eliminate the creation of headroom based on demand projections for promotions. Any increases in the basic schedule rates, therefore, will be based on actual revenue balancing, not merely on forecasts of revenue stream, thus providing stability for basic schedule ratepayers and for AT&T. AT&T will also benefit from the increased flexibility to file "initially streamlined" APPs and to receive nearly immediate index credit for those APPs filed on a permanent basis after the initial 90-day period. The Common Carrier Bureau would also retain the ability to defer APP tariff filings, either upon the initial filing or upon the price cap filing after the initial 90-day period, if additional information or review is required, and to suspend or reject such filings based on applicable legal standards.

C. Limitations on Rate Increases for Basic MTS

58. As discussed above in the background section of this Further Notice, AT&T's creation of price cap "headroom" through discounted offerings has permitted it to increase it's basic schedule rates for domestic MTS. We ask here whether such basic schedule rate increases implicate our statutory and policy goals, pursued through price cap regulation, of just and reasonable rates, without unreasonable discrimination, and universal availability of such reasonably priced service. AT&T has asserted that its increases for basic schedule rates are reasonable. We seek comment on this matter generally and on the specific issues discussed below.

59. As a threshold matter, we seek comment on the significance of the AT&T basic rate schedule for domestic MTS relative to other rates offered for domestic MTS inthe interexchange marketplace. We note, for example, that many of AT&T's discounted offerings, such as the True promotions, are framed in terms of percentage discounts off the basic rate schedule at various usage levels. We also seek comment on the relationship of AT&T's basic rate to the basic rates of its competitors.

60. Commenters should discuss whether, and, if so, how our public policy goals, such as the achievement of reasonably nondiscriminatory, cost-based rates or the promotion of universal service, should affect our regulatory treatment of Basket 1 domestic MTS. We address specific issues relating to discrimination and the cost basis for AT&T's rates below. We also seek comment as to whether universal service concerns are implicated in our regulation of AT&T's basic rates. Although "universal service" is most generally regarded as a goal pursued through the widespread availability of reasonably priced local telephone service, some have advocated that this goal should be expanded to include services made available through a more technologically advanced communications infrastructure. We recognize that Section 1 of the Communications Act, usually regarded as the locus of the universal service mandate, requires us to regulate so as "to make available, so far as possible, to all the people of the United States, a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges, . . . ."(n136) We seek comment on what level of scrutiny this statutory mandate requires us to undertake with respect to the basic schedule offerings of the dominant interexchange carrier.

61. We also seek comment on whether the availability of local telephone service is affected by increases in AT&T's basic schedule rates for interstate MTS. We note, for example, that studies indicate that the majority of those without telephone service once were subscribers, but have been disconnected for nonpayment of toll charges.(n137) We seek comment on the relationship, if any, of increased basic schedule service rates for domestic MTS with the disconnection of local telephone subscribers due to nonpayment of toll charges.

62. AT&T states that it typically does not recover the incremental costs of providing service to its "low-volume" basic schedule customers, while its price structure for its "high-volume" customers has normally exceeded the incremental costs of providingresidential long-distance service to them.(n138) According to AT&T, the provision of mass-market discounts, such as the True promotions, to high-volume customers and increases in rates for low-volume customers are justified as a means of rebalancing prices with costs.(n139) Commenters should discuss the validity of AT&T's arguments regarding cost recovery for serving "low-volume" customers of basic schedule offerings vis-a-vis cost recovery for serving "high-volume" customers of discounted offerings, and the degree to which "low-volume" customers experience periods of higher-volume usage which can offset the costs of providing low volume service in other periods. We also seek comment on the extent to which the Communications Act's protections against unreasonable discrimination are implicated by the cost issues we raise here, i.e., if rate differences between AT&T's basic schedule services and its discounted offerings reflect a wider variation than corresponding cost differences, at what point do such rate variations become unreasonable?

63. We seek comment on the relative availability of AT&T discounted offerings as compared to domestic MTS offered at basic rates. If AT&T's discounted offerings are unavailable to a significant body of residential customers, then AT&T's increases in basic rates to these customers may extend well beyond any AT&T need to recover costs and may demonstrate a public interest need to curb unrestricted rate increases. To what extent are AT&T's discounted offerings available to "high-volume" residential subscribers where the advanced billing techniques upon which these offerings rely may not be readily available? Such a lack of availability could occur in rural areas served by independent telephone companies, and areas where "equal access" to interexchange carriers has not been implemented. What proportion of AT&T's residential customers are located in such areas are thus affected?

64. We seek comment on whether we should adopt one of the two following options that will afford varying measures of protection against basic schedule rate increases. First, we seek comment on creating a basic rate index to replace the residential index in Basket 1. The residential PCI was created as a subindex of the Basket 1 total PCI, and was calculated for revenue for all the services in Basket 1. It created a separatecap on the amount that residential services in Basket 1 could increase each year.(n140) The purpose of the residential PCI was to protect residential services against price increases which would offset price decreases for commercial service. The recent streamlining of commercial services, however, renders this function obsolete. Thus, we propose to delete the residential PCI from our rules.

65. In place of the residential index, we propose creating a basic rate index, similar in operation to the residential index, which would govern increases in basic domestic MTS service rates to a given percentage per year.(n141) We tentatively conclude that this percentage should be set at 5 percent, that is, AT&T would not be able to increase basic rates by a margin of more than 5 percent per year in relation to the Basket 1 PCI. We select 5 percent because it is a reasonably restrained application of indexed increases in AT&T's basic toll rates in recent years,(n142) and reflects as well the general limitation we have placed on the pricing flexibility in price caps service categories.(n143) We seek comment on these conclusions and proposals.

66. As an alternative to adopting our above proposed basic rate index to protect basic MTS rates, we seek comment on adopting AT&T's "safety net" proposal. AT&T has proposed an option that is predicated on the market for Basket 1 services being segmented among discrete classes of customers.(n144) AT&T requests that the Commission reclassify AT&T as a non-dominant carrier. In return, AT&T states that it will provide low-income and low-volume consumers with a "safety net" of low-usage service plans. This plan would consist of two services: one targeted for low-income users, the other available to all consumers but intended to benefit low-volume users. Prices would remain fixed until 1998. This option offers a measure of built-in protection for low-income and low-volume users. AT&T bases its proposal on its assertion that "[t]here is overwhelmingevidence that the current state of competition in this market fully support[s] the reclassification of AT&T as non-dominant . . . ."(n145)

67. We seek comment on this option generally and whether such an approach is feasible and desirable without reclassification of AT&T as a non-dominant carrier.(n146) We also seek comment on the appropriate price levels for low-income and low-volume users, respectively. We further seek comment as to the period that such price levels should remain fixed and what approach would replace this mechanism after the expiration date.

D. Exogenous Costs Issues.

68. All carriers subject to price cap regulation file adjustments to the PCI at the annual price cap tariff filing and maintain updated PCIs to reflect the effect of midyear access and exogenous cost changes. Exogenous costs are costs that change due to changes in laws, regulations, or rules, or other administrative, legislative, or judicial changes beyond a carrier's control and not reflected elsewhere in the price cap formula.(n147) Carriers calculate these adjustments using the price cap formulas set forth in our rules.(n148) Exogenous costs are represented by the "z factor."(n149) In addition, the price cap formula applied to AT&T includes a "y factor," which allocates AT&T's access costs among all capped services in AT&T's price cap baskets.(n150) Changes in access costs are treated as exogenous costs for AT&T.

69. When it adopted the AT&T price cap plan in 1989, the Commission determined that exogenous costs should result in an adjustment to the PCI to ensure that the price cap formula does not lead to unreasonably high or low rates.(n151) We recentlyrevised our rules for local exchange carriers (LECs) in the LEC Price Cap Performance Review Report and Order(n152) to change the exogenous cost rules applicable to accounting changes. Exogenous treatment is now permitted only for those accounting changes that result in economic cost changes, i.e., that affect the discounted cash flow of the LEC. We concluded that most accounting changes, generally, will have no direct impact on the cash flow choices available to LECs because financial accounting charges are designed primarily to give the financial markets a more accurate portrayal of the financial health of the corporation, and not necessarily to make the company behave differently.(n153) We also concluded that adopting this economic cost standard will narrow the exception that exogenous cost treatment represents to the general principle that, under price caps, cost changes do not flow directly into rate changes.(n154) We ordered the LECs to adjust their PCIs to exclude prospectively any accounting cost changes currently reflected there for which carriers did not incur an economic cost,(n155) for example, the changes in accounting for costs of employee post-retirement benefits other than pensions (commonly know as "other post-retirement employee benefits" or "OPEBs") that are engendered by the Financial Accounting Standards Board's (FASB's) Statement of Financial Accounting Standards-106 (SFAS-106)(n156) and Statement of Financial Accounting Standards-112 (SFAS-112).(n157)

70. We tentatively conclude that we should adopt the same treatment for exogenous costs for AT&T as we adopted for LECs in the LEC Price Cap Performance ReviewReport and Order. We seek comment on this tentative conclusion. We also seek comment on whether differences between AT&T and the LECs justify the adoption of different rules governing the eligibility for exogenous treatment of costs resulting from changes in accounting procedures, and, if so, what these rules should be.

IV. COMMENTS: PROCEDURAL RULES

71. This is a non-restricted notice and comment rulemaking proceeding. Ex parte presentations are permitted, except during the Sunshine Agenda period, provided that they are disclosed as provided in Sections 1.1202, 1.1203, and 1.1206(a) of the Commission's Rules, 47 C.F.R. 1.1202, 1.203, and 1.1206(a).

72. Pursuant to applicable procedures set forth in Section 1.415 and 1.419 of the Commission's Rules, 47 C.F.R. 1.415 and 1.419, interested parties may file comments in this proceeding on or before July 3, 1995, and reply comments on or before July 24, 1995. All relevant and timely comments will be considered by this Commission before final action is taken in this proceeding. In reaching its decision, the Commission may take into consideration information and ideas not contained in the comments, provided that such information or a writing indicating the nature and source of such information is placed in the public file, and provided that the fact of the Commission's reliance on such information is noted in the Report and Order.

73. To file formally in this proceeding, participants must file an original and five copies of all comments, reply comments and supporting comments. If participants want each Commissioner to receive a personal copy of their comments, an original and 11 copies must be filed. Comments and reply comments should be sent to the Office of the Secretary, Federal Communications Commission, 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) at its headquarters at 1919 M Street, N.W., Washington, D.C.

74. We have determined that Section 605(b) of the Regulatory Flexibility Act of 1980, 5 U.S.C. 605(b), does not apply to this rulemaking proceeding because if promulgated, it would not have a significant economic impact on a substantial number of small entities. Although we do not find that the Regulatory Flexibility Act is applicable to this proceeding, this Commission has an ongoing concern with the effect of its rules and regulation on small business and the customers of the regulated carriers. The Secretary shall send a copy of this Further Notice of Proposed Rulemaking, including the Initial Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of the Small BusinessAdministration in accordance with paragraph 603(a) of the Regulatory Flexibility Act, Pub. L. No. 96- 354, 94 Stat. 1164, 5 U.S.C. 601 et seq (1981).

V. ORDERING CLAUSE

75. Accordingly, IT IS ORDERED that, pursuant to Sections 4(i), 4(j), 201-205, 303(r), and 403 of the Communications Act of 1934, 47 U.S.C. 154(i), 154(j), 201-205, 303(r), 403, NOTICE IS HEREBY GIVEN of proposed amendments to Part 61, and Sections 61.3, 61.43-.44, 61.46-.47, 61.49 and 61.58, in accordance with the proposals, discussions, and statement of issues in this Further Notice of Proposed rulemaking, and that COMMENT IS SOUGHT regarding such proposals, discussion, and statement of issues.

FEDERAL COMMUNICATIONS COMMISSION

William F. Caton
Acting Secretary

APPENDIX A

Proposed Amendments to the Code of Federal Regulations

PART 61 -- TARIFFS

` 1. The authority citation for Part 61 continues to read as follows:

AUTHORITY: Secs. 1, 4(i), 4(j), 201-205, and 403 of the Communications Act of 1934, as amended; 47 U.S.C. 151, 154(i), 154(j), 201-205, and 403, unless otherwise noted.

2. Section 61.3 is amended by redesignating paragraphs (c) through (mm) as paragraphs (d) through (nn), and adding new paragraph (c) to read as follows:

61.3 Definitions.

* * * * *

61.3(c) through (ll) are redesignated as follows:

Old section New section

61.3(c) 61.3(d)
61.3(d) 61.3(e)
61.3(e) 61.3(f)
61.3(f) 61.3(g)
61.3(g) 61.3(h)
61.3(h) 61.3(i)
61.3(i) 61.3(j)
61.3(j) 61.3(k)
61.3(k) 61.3(l)
61.3(l) 61.3(m)
61.3(m) 61.3(n)
61.3(n) 61.3(o)
61.3(o) 61.3(p)
61.3(p) 61.3(q)
61.3(q) 61.3(r)
61.3(r) 61.3(s)
61.3(s) 61.3(t)
61.3(t) 61.3(u)
61.3(u) 61.3(v)
61.3(v) 61.3(w)
61.3(w) 61.3(x)
61.3(x) 61.3(y)
61.3(y) 61.3(z)
61.3(z) 61.3(aa)
61.3(aa) 61.3(bb)
61.3(bb) 61.3(cc)
61.3(cc) 61.3(dd)
61.3(dd) 61.3(ee)
61.3(ee) 61.3(ff)
61.3(ff) 61.3(gg)
61.3(gg) 61.3(hh)
61.3(hh) 61.3(ii)
61.3(ii) 61.3(jj)
61.3(jj) 61.3(kk)
61.3(kk) 61.3(ll)
61.3(ll) 61.3(mm)
61.3(mm) 61.3(nn)
* * * * *

(c) Alternative Pricing Plan (APP). Any deviation from the basic schedule rates for domestic MTS offered on an optional basis by an interexchange carrier subject to price cap regulation pursuant to 61.41(a)(1) to an eligible customer who enrolls for the service.

* * * * *

3. Section 61.42 is amended by revising paragraph (b)(1)(i) through (vi) to read as follows:

61.42 Price cap baskets and service categories.

* * * * *

(b) * * *

(1) * * *

(i) Domestic MTS;
(ii) International MTS; and
(iii) Operator and credit card services.

* * * * *

4. Section 61.43 is amended by revising the section to read as follows:

61.43 Annual price cap filings required.

Carriers subject to price cap regulation shall submit annual price cap tariff filings that propose rates for the upcoming year, that make appropriate adjustments to their PCI, API, and SBI values pursuant to 61.44 through 61.47, that incorporate the costs and rates of new services and APPs into the PCI, API, or SBI calculations pursuant to 61.44(g), 61.45(g), 61.46(b) and (c), and 61.47(b) through (d). * * *

5. Section 61.44 is amended by revising paragraph (c) to read as follows:

61.44 Adjustments to the PCI for Dominant Interexchange Carriers.

(c) The exogenous cost changes represented by the term "Z" in the formula detailed in paragraph (b) of this section shall be limited to those cost changes that the Commission shall permit or require by rule, rule waiver, or declaratory ruling, and include those caused by :

* * * * *

(2) Such changes in the Uniform System of Accounts, including changes in the Uniform System of Accounts requirements made pursuant to 32.16, as the Commission shall permit or require be treated as exogenous by rule, rule waiver, or declaratory ruling.

* * * * *

(5) Such tax law changes and other extraordinary cost changes as the Commission shall permit or require be treated as exogenous by rule, rule waiver, or declaratory ruling.

* * * * *

6. Section 61.46 is amended by redesignating paragraphs (c) through (f) as paragraphs (d) through (g), and adding new paragraph (c) to read as follows:

61.46 Adjustments to the API.

* * * * *

61.46 is redesignated as follows:

Old section New section

(c) (d)
(d) (e)
(e) (f)
(f) (g)

* * * * *

(c) APPs, as defined in 61.3(c), must be included in the appropriate API calculations under paragraph (a) of this section beginning at the date that the tariff revisions placing the APP under price cap regulation take effect, and quarterly thereafter until the annual price cap filing made pursuant to 61.43 before which the APP has been effective for the full base year. This index adjustment requires that the demand for the APP during the initial 90-day period and each quarterly period during the period before the annual price cap filing made pursuant to 61.43 before which the APP has been effective for the full base year must be included in determining the revenues used in calculating the API.

* * * * *

7. Section 61.47 is amended by redesignating paragraphs (d) through (h) as paragraphs (e) through (i), adding new paragraph (d), and revising paragraph (g) to read as follows:

61.47 Adjustments to the SBI; pricing bands.

* * * * *

61.47 is redesignated as follows:

Old section New section

(d) (e)
(e) (f)
(f) (g)
(g) (h)
(h) (i)

* * * * *

(d) APPs, as defined in 61.3(c), must be included in the appropriate SBI calculations under paragraph (a) of this section beginning at the date that the tariff revisions placing the APP under price cap regulation take effect, and quarterly thereafter until the annual price cap filing made pursuant to 61.43 before which the APP has been effective for the full base year. This index adjustment requires that the demand for the APP during the base period and each quarterly period during the period before the annual price cap filing made pursuant to 61.43 before which the APP has been effective for the full base year must be included in determining the revenues used in calculating the SBI.

* * * * *

(g) * * *

(1) The pricing bands for the domestic MTS service category shall limit the annual upward pricing flexibility for that service category, as reflected in its SBI, to four percent, and the annual downward pricing flexibility to 15 percent, relative to the percentage change in the PCI for the residential services basket, measured from the last day of the preceding tariff year.

(2) Dominant interexchange carriers subject to price cap regulation shall calculate a composite basic rate for undiscounted domestic MTS service contained in the residential services basket. Notwithstanding paragraph (g)(1) of this section, the annual upward pricing flexibility for this composite rate shall be limited to five percent, relative to thepercentage change in the PCI for the residential services basket, measured from the last day of the preceding tariff year.

8. Section 61.49 is amended by revising paragraphs (c), (d), and (g)(1) and adding paragraph (g)(3) to reads as follows:

61.49 Supporting information to be submitted with letters of transmittal for tariffs of carriers subject to price cap regulation.

* * * * *

(c) Each price cap tariff filing that proposes rates above the applicable band limits established in 61.47(f), (g)(1), (h) and (i) or above the limit on the basic rate for undiscounted domestic MTS established in 61.47(g)(2) must be accompanied by supporting materials establishing substantial cause for the proposed rates.

(d) Each price cap filing that proposes service category rates below applicable band limits established in 61.47(f), (g)(1), (h) and (i) of this part must be accompanied by supporting material establishing that the rates cover the service category's average variable cost, or equivalently, that the service category's net additional revenue resulting from the price change exceeds additional costs.

* * * * *

(g) * * *

(1) A new service introduced by a dominant interexchange carrier's tariff filing is subject to price cap regulation when the projected demand for such new service includes more than de minimis usage by subscribers to the services described in 61.42(b)(1), i.e., when such projected usage constitutes more than five percent of overall projected demand within the net revenue test period set forth in this paragraph. * * *

(2) * * *

(3) Accompanying demand and revenue data is not required for tariffs introducing an APP, as defined in 61.3(c), filed on an initial streamlined basis. Tariff revisions placing APPs under price cap regulation must be accompanied by actual demand and revenue data for the 90-day period that the initial APP filing was effective.

* * * *

9. Section 61.58 is amended by revising paragraph (c)(3) and adding new paragraph (c)(8) to read as follows:

61.58 Notice requirements.

* * * * *

(c) * * *

(3) Tariff filings that will cause any API to exceed its applicable PCI pursuant to calculations provided for in 61.46 of this part, that will cause any SBI to exceed its upper banding limitations established in 61.47(f), (g)(1), (h), and (i) of this part, or that will cause the basic schedule domestic MTS rate to exceed its limitation on upward pricing flexibility established in 61.47(g)(2) of this part, must be made on at least 120 days' notice, or such other maximum period of notice permitted by section 203(b) of the Communications Act, regardless of whether petitions under 1.773 of the Commission's Rules have been filed.

* * * * *

(8) Tariff filings for APPs, as defined in 61.3(c), that are initially filed on a streamlined basis must be made on at least 14 days' notice. Tariff filings to extend the initial 90-day effective period of an APP that was filed on a streamlined basis for an additional maximum of 30 days must be filed on at least one day's notice, i.e., no later than the 89th day, or the last business day, whichever is earlier, of the initial 90-day effective period. Tariff filings that remove the expiration date of an APP initially filed on a streamlined basis and place the APP under price cap regulation must be filed on at least fourteen days' notice, to become effective no later than 120 days from the date the APP initially was filed on a streamlined basis.

* * * * *


I.  INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II.  BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
   A.  AT&T Promotions. . . . . . . . . . . . . . . . . . . . . . . . . . .  10
   B.  AT&T Optional Calling Plans. . . . . . . . . . . . . . . . . . . . .  21
   C.  The "Headroom" Issue . . . . . . . . . . . . . . . . . . . . . . . .  28
   D.  Reclassification of AT&T as a Non-Dominant Carrier . . . . . . . . .  32
III.  DISCUSSION 
   A.  Commission Goals . . . . . . . . . . . . . . . . . . . . . . . . . .  33
   B.  Proposed Revisions to the AT&T Price Cap Plan. . . . . . . . . . . .  36
   C.  Limitations on Rate Increases for Basic MTS  . . . . . . . . . . . .  58
   D.  Exogenous Costs Issues.. . . . . . . . . . . . . . . . . . . . . . .  68
IV.  COMMENTS: PROCEDURAL RULES . . . . . . . . . . . . . . . . . . . . . .  71
V.  ORDERING CLAUSE . . . . . . . . . . . . . . . . . . . . . . . . . . . .  75
APPENDIX A

Footnote 1 Policy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87-313, Order and Notice of Proposed Rulemaking, 8 FCC Rcd 3715 (1993) (Promotions NPRM).

Footnote 2 Revision to Price Cap Rules for AT&T, CC Docket No. 93-197, Notice of Proposed Rulemaking, 8 FCC Rcd 5205 (1993) (OCP NPRM). The Commission also proposed a number of other changes to the price cap rules in the OCP NPRM, including whether to remove commercial, 800 Directory Assistance, and analog private line services from price caps. In the Report and Order in CC Docket No. 93-197, 10 FCC Rcd. 3009 (1995) (Commercial Services Price Cap Order) the Commission resolved these issues, removed commercial services from price cap regulation, and deferred the question of the regulatory treatment of OCPs to this proceeding.

Footnote 3 See paras. 4-7-, infra, for an explanation of price caps regulation and Basket 1. Although the earlier proceedings in both dockets involved OCPs, a service category in Basket 1, and promotions for certain Basket 1 services, they did not address all the services in Basket 1.

Footnote 4 AT&T Corp. Petition for Waiver of Price Cap Rules to Allow AT&T to Bring the LDMTS Basic Schedule NPA Volume Discount Option Under Price Caps (filed May 17, 1994) (AT&T Price Cap Waiver Petition).

Footnote 5 Price Cap Performance Review for Local Exchange Carriers, First Report and Order, CC Docket No. 94-1, FCC 95-132 (rel. April 7, 1995) (LEC Price Cap Performance Review Report and Order.

Footnote 6 See id. at 1.

Footnote 7 See Motion for Reclassification of American Telephone & Telegraph Company as a Nondominant Carrier, CC Docket 79-252 (filed Sept. 22, 1993).

Footnote 8 Policy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87-313, Notice of Proposed Rulemaking, 2 FCC Rcd 5208 (1987) (Price Cap NPRM), Further Notice of Proposed Rule Making, 3 FCC Rcd 3195 (1988) (Further Notice), Report and Order and Second Further Notice, 4 FCC Rcd 2873 (1989) (AT&T Price Cap Order), Erratum, 4 FCC Rcd 3379 (1989), on reconsideration, 6 FCC Rcd 665 (1991) (Reconsideration Order), remanded sub nom. American Telephone and Telegraph Company v. FCC, 974 F.2d 1351, 1353 (D.C. Cir. 1992) (Remand Order). Those services that are not in price caps are subject to streamlined regulation, which reduces their regulatory obligations under Part 61 of the Commission's Rules. Competition in the Interstate Interexchange Marketplace, Report and Order, 6 FCC Rcd 5880 (1991) (Interexchange Order), on reconsideration, 6 FCC Rcd 7569 (1991) (subsequent history omitted).

Footnote 9 Price Cap NPRM, 2 FCC Rcd at 5213.

Footnote 10 The three baskets were comprised respectively of: (1) residential and small business services; (2) "800" number services; and (3) other business services. Recently the Commission removed Basket 1 commercial services from price cap regulation. See note 2, supra. In addition, a number of AT&T services are excluded from price cap regulation, including: (1) services offered pursuant to Tariffs 11, 12 and 16; (2) services subject to below-the-line accounting; (3) international private line and record carrier services; (4) contract-based tariffs; and (5) the custom tariff services removed from price cap regulation pursuant to CC Docket No. 90-132. See 47 C.F.R. 61.42 (c). Services subject to below-the-line accounting are services that AT&T is not able to operate at a profit, such as KU Band Satellite and Accunet Packet Services. Custom tariff services are services such as Software Defined Network that AT&T provides to large business customers.

Footnote 11 See also Price Cap Performance Review for Local Exchange Carriers; Treatment of Video Dialtone Service under Price Cap Regulation, CC Docket No. 94-1, FCC 95-49 (rel. February 15, 1995).

Footnote 12 See Reconsideration Order, 6 FCC Rcd at 665-66, for an explanation of how the price cap index is calculated.

Footnote 13 Exogenous costs are costs that change due to changes in laws, regulations, or rules, or other administrative, legislative, or judicial changes beyond a carrier's control and are not reflected in the GNP-PI. Further Notice, 3 FCC Rcd at 3383 n.738.

Footnote 14 In addition to setting limits on the aggregate rates within each basket, the Commission also instituted rate bands to limit the range within which AT&T could raise or lower individual rate element prices each year while continuing to receive streamlined tariff scrutiny. AT&T Price Cap Order, 4 FCC Rcd at 3077, citing Further Notice, 3 FCC Rcd at 3440.

Footnote 15 See AT&T Price Cap Order, 4 FCC Rcd at 3109-11.

Footnote 16 Baskets 2 and 3 also were divided into service bands or categories. A number of Basket 2 and 3 services were removed from price cap regulation and are now subject to streamlined regulation. As a result, Basket 2 currently contains only 800 Directory Service, and Basket 3 contains analog private line offerings, including analog voice grade private line and terrestrial television transmission service. See 47 C.F.R. 61.42(a)(2)-(3).

Footnote 17 Id. at 3059.

Footnote 18 See 47 C.F.R. 61.43 (annual price cap filings required) and 47 C.F.R. 61.47 (adjustments to the SBI; pricing bands).

Footnote 19 See Commercial Services Price Cap Order, 10 FCC Rcd. at 3011.

Footnote 20 Basket 1 includes the following service categories: (1) domestic day message telecommunications service (MTS); (2) domestic evening MTS; (3) domestic night/weekend MTS; (4) international MTS; (5) operator and credit card service; and (6) ReachOut America (OCPs). See 47 C.F.R. 61.42(b). ReachOut America was the original OCP that comprised category 6. Currently, most OCPs for domestic MTS are in the ReachOut America service category. See infra at notes 62 & 64 and accompanying text.

Footnote 21 See AT&T Price Cap Order, 4 FCC Rcd at 3051-52, 3059-60; see also Interexchange Order, 6 FCC Rcd at 5908 (noting need for "particular caution" in streamlining residential and small business services).

Footnote 22 AT&T Price Cap Order, 4 FCC Rcd at 3059. We will refer to AT&T's non-discounted pricing in these three bands throughout this Further Notice as the "basic schedule" of residential service rates.

Footnote 23 Id. at 3060; 47 C.F.R. 61.47(f).

Footnote 24 AT&T Price Cap Order, 4 FCC Rcd at 3060-61; 47 C.F.R. 61.47(f)(2).

Footnote 25 Price Cap Performance Review for AT&T, Notice of Inquiry, CC Docket No. 92-134, 7 FCC Rcd 5322, 5323 (1992).

Footnote 26 Price Cap Performance Review for AT&T, Report, 8 FCC Rcd 5165 (1993) (AT&T Performance Review Report).

Footnote 27 Revisions to Price Cap Rules for AT&T, CC Docket No. 93-197, Notice of Proposed Rulemaking, 8 FCC Rcd 5205 (1993) (OCP NPRM). In addition, the Commission requested more information from AT&T regarding AT&T's Equipment Failure and Blockage Reports, which track AT&T's service quality and network reliability. The Commission recently adopted a Report and Order on the issues other than OCPs that were raised in the OCP NPRM. See Commercial Services Price Cap Order, FCC 95-18, note 2, supra, in which the Commission resolved these issues and deferred the question of the regulatory treatment of OCPs to this proceeding.

Footnote 28 Streamlined regulation was adopted for Basket 3, except for analog private lines, effective in October 1991. Interexchange Order, 6 FCC Rcd at 5894 and 6 FCC Rcd 7255 (Com.Car.Bur. 1991). Streamlining of Basket 2, except for 800 Directory Assistance, took effect in May 1993 following the successful deployment of the technology for 800 number portability. "Portability" refers to 800 number subscribers' ability to retain their 800 numbers when switching their 800 service from one IXC to another. The Commission ordered local exchange carriers (LECs) to implement technology to make such portability possible no later than March 4, 1993. Interexchange Order, 6 FCC Rcd at 5905-06, citing Provision of Access for 800 Service, CC Docket No. 86-10, 6 FCC Rcd 5421, 5425 (1991). In response to petitions of the Ad Hoc Telecommunications Users Committee and the Financial Services Providers, the Commission granted a three-month delay, until May 1, 1993, for implementing the mandatory 800 data base access. Provision of Access for 800 Service, CC Docket No. 86-10, 7 FCC Rcd 8616 (1992).

Footnote 29 Commercial Services Price Cap Order, 10 FCC Rcd. at 3011.

Footnote 30 Id. at 3014.

Footnote 31 Id. at 3023.

Footnote 32 Interexchange Order, 6 FCC Rcd at 5895.

Footnote 33 Commercial Services Price Cap Order, 10 FCC Rcd. at 3024.

Footnote 34 Id. at 3011.

Footnote 35 On occasion, AT&T's promotions alternatively have provided, among other things, long distance gift certificates or points to be redeemed for merchandise and travel.

Footnote 36 Reconsideration Order, 6 FCC Rcd at 671.

Footnote 37 For example, AT&T offered a discount off Reach Out World service during December 24, 1994 through January 31, 1995 to customers who originate calls from Hawaii. AT&T Communications Tariff F.C.C. No. 2, Transmittal No. 7856 (effective Dec. 24, 1994).

Footnote 38 Reconsideration Order, 6 FCC Rcd at 671.

Footnote 39 The Commission subsequently removed commercial services from price cap regulation. Commercial Services Price Cap Order, 10 FCC Rcd. at 3011.

Footnote 40 Reconsideration Order, 6 FCC Rcd at 670.

Footnote 41 See Remand Order, 974 F.2d at 1353.

Footnote 42 Id. at 1355.

Footnote 43 Promotions NPRM, 8 FCC Rcd at 3717.

Footnote 44 Id. at 3716, citing Reconsideration Order, 6 FCC Rcd at 665-69 (Commission established baskets and bands to limit pricing flexibility).

Footnote 45 Id. at 3716. This reasoning assumes that a rate increase would offset the depressive effect that such an increase would have on demand and that AT&T basic schedule customers would not respond to such increases by switching to another carrier.

Footnote 46 Id.

Footnote 47 Id. at 3716 & n.14. This reasoning assumes that the existing rates reflected competitive levels.

Footnote 48 Id. at 3716.

Footnote 49 See para. 2, supra.

Footnote 50 See 47 C.F.R. 61.49(c), which requires filings that propose rates above the applicable SBI limits to be accompanied by supporting materials establishing substantial cause for the proposed rates.

Footnote 51 Promotions NPRM, 8 FCC Rcd at 3716.

Footnote 52 Id. at 3717.

Footnote 53 See Policy and Rules Concerning Rates for Dominant Carriers, 5 FCC Rcd 6786, 6824-25 (1990).

Footnote 54 See 47 C.F.R. 61.44(g), 61.46(b), and 61.47(b).

Footnote 55 See Reconsideration Order, remanded sub nom. American Telephone and Telegraph Company v. FCC, 974 F.2d 1351, 1353 (D.C. Cir. 1992) (Remand Order).

Footnote 56 Sprint Comments at 2-3; see also GTE Comments at 2.

Footnote 57 GTE Comments at 2.

Footnote 58 AT&T Comments at 10-11.

Footnote 59 Id. at 14-15.

Footnote 60 Id. at 11-12, citing Reconsideration Order, 6 FCC Rcd at 670.

Footnote 61 Id. at 12-13.

Footnote 62 Id. at 16-17 and Exhibit C.

Footnote 63 Id. at 18.

Footnote 64 See, e.g., AT&T Communications, Transmittal Nos. 1431 and 1552, Revisions to Tariff F.C.C. Nos. 1, 2, 4, 7, 9, 11, 13, and 14, 4 FCC Rcd 4475 (Com. Car. Bur. 1989).

Footnote 65 Id.

Footnote 66 See AT&T Posts Earnings Increase, Communications Daily, January 25, 1995, at 3.

Footnote 67 Id.

Footnote 68 See Edmund L. Andrews, No-Holds-Barred Battle For Long-Distance Calls, New York Times, January 21, 1995, at 48.

Footnote 69 See Letter, from M.F. Del Casino, Administrator -- Rates & Tariffs, AT&T, to Acting Secretary, Federal Communications Commission (Dec. 27, 1994).

Footnote 70 See discussion at para. 28, infra.

Footnote 71 By contrast, a typical mass-market promotion offered by AT&T requires enrollment or "self-selection," but does not usually bind a customer to a minimum payment or term of service.

Footnote 72 Guidelines for Dominant Carriers' MTS Rates and Rate Structure Plans, CC Docket No. 94-1235, 59 Rad. Reg. 2d (P&F) 70, 71-2 n.3 (1985) (OCP Guidelines Order).

Footnote 73 OCP NPRM, 8 FCC Rcd at 5205.

Footnote 74 Examples of OCPs offered in other Basket 1 service categories are: international (ReachOut Overseas and USA Direct), operator/card (Card Only Plan 1), and day, evening, and night/weekend (Area Code Calling Plan).

Footnote 75 For example, Sprint offers Sprint Select; MCI offers such plans as Prime Time and Sure-Save.

Footnote 76 The majority of OCPs are offered in the ReachOut service category. AT&T now also offers certain OCPs in the other service categories in Basket 1. See note 72, supra.

Footnote 77 OCP NPRM, 8 FCC Rcd at 5205.

Footnote 78 Id. The PCI is adjusted each year to reflect a 3.0 percent productivity gain. To the extent that the price caps formula results in a lowered PCI, AT&T must reduce rates for Basket 1 each year to remain under the PCI. If OCPs were removed from Basket 1, the reduced rates required as a result of a lowered PCI would affect only the remaining services in the basket, andtherefore could potentially result in proportionally greater rate decreases for these services.

Footnote 79 AT&T Comments at i.

Footnote 80 Id. at 4.

Footnote 81 As discussed in the next section, headroom is the gap between AT&T's Actual Price Index (API) and its price cap index (PCI) ceiling for Basket 1.

Footnote 82 Id. at 9-10.

Footnote 83 Id. at 4.

Footnote 84 Comments regarding OCPs were filed by AT&T, Sprint Communications Company LP (Sprint), WilTel, Inc. (WilTel), the Competitive Telecommunications Association (CompTel), and Pacific Bell and Nevada Bell (Pacific Companies).

Footnote 85 Sprint Comments at 3; Sprint Reply at 2; see also CompTel Comments at 2; WilTel Comments at 3; Pacific Companies Reply at 3-5.

Footnote 86 WilTel Reply at 2.

Footnote 87 See generally 47 C.F.R. 61.44, 61.46.

Footnote 88 For example, as of July 1, 1994, AT&T's headroom under the PCI in Basket 1 amounted to $1.12 billion on an annualized basis. Under Section 61.46(a) of the rules, when AT&T adjusts a rate, the demand component used to calculate the API remains constant at the base year level. AT&T's headroom is thus calculated based on 1993 demand multiplied by rates as of July 1, 1994 for Basket 1 services. AT&T's True promotions accounted for $893.5 million of this annualized headroom. See, e.g., Letter from Thomas H. Norris, Vice President, Regulatory Affairs, AT&T, to Acting Chief, Common Carrier Bureau, Federal Communications Commission (Aug. 15, 1994).

Footnote 89 See notes 80, 97, infra.

Footnote 90 See, e.g., Letter from Thomas H. Norris, Vice President, Regulatory Affairs, AT&T, to Acting Chief, Common Carrier Bureau, Federal Communications Commission (Jan. 15, 1994).

Footnote 91 See AT&T Communications Transmittal Nos. 7824, 7832, 7848, Revisions to Tariff F.C.C. No. 1 (December 5, 1994); see also AT&T Proposes $274 Million in Domestic Price Hikes, Telecommunications Reports, December 12, 1994, at 41.

Footnote 92 AT&T Communications Transmittal No. 7967, Revisions to Tariff F.C.C. No. 1 (Dec. 27, 1994).

Footnote 93 See Trends in Telephone Service (Industry Analysis Div., released May 1994).

Footnote 94 See Trends in Telephone Service, at Table 5 (Industry Analysis Div., released Feb. 1995).

Footnote 95 See Letter of Thomas H. Norris, Vice President, Government Affairs, AT&T, to Chairman, FCC (June 10, 1994) (criticizing use of CPI as indicator of basic schedule rates on grounds that it takes into account only basic schedule rates, and not the offsetting effect of discount plans); Adam Clymer, As Parties Skirmish Over Budget, Greenspan Offers a Painless Cure, New York Times, January 11, 1995, at 1, 18 (testimony by Chairman of Federal Reserve Board before joint meeting of House and Senate Budget Committees that the overall CPI exaggerates annual inflation by 0.5 to 1.5 percentage points because ten-year adjustment period for CPI fails to capture fully such changes as suddenly successful inventions like television sets or the introduction of more sophisticated computers, which reduce prices and enhance efficiency).

Footnote 96 See Trends in Telephone Service, at Table 5 (Industry Analysis Div., released Feb. 1995).

Footnote 97 AT&T is required under current rules to calculate a composite average rate for Basket 1 services purchased by residential customers. This rate may not increase more than one percent relative to the annual percentage change in the Basket 1 PCI. See 47 C.F.R. 61.47(g).

Footnote 98 See discussion at paras. 12-19 and 23-26, supra.

Footnote 99 See Motion for Reclassification of American Telephone & Telegraph Company as a Nondominant Carrier, CC Docket 79-252 (filed Sept. 22, 1993). This motion is still pending before the Commission.

Footnote 100 See id.

Footnote 101 See 47 U.S.C. 201(b), 202(a). In deciding to establish an incentive-based system of regulation for AT&T, the Commission found in the AT&T Price Cap Order, for example, that:

price cap regulation is a far better regulatory system to employ in an environment in transition to full competition than is rate-of-return . . . . [T]he discipline that competition brings to a carrier's prices can be employed in the design of a price cap system to ensure that rates are just, reasonable, and non-discriminatory.

4 FCC Rcd at 2939-43 (footnotes omitted); see also Promotions NPRM, 8 FCC Rcd at 3716.

Footnote 102 See 47 U.S.C. 151. In the AT&T Price Cap Order, the Commission referenced its adoption of universal service as one of the four primary goals in the access charge proceeding MTS and WATS Market Structure, 97 FCC 2d 834, 835 (1984), and reconfirmed its commitment to residential customers in adopting price cap regulation. 4 FCC Rcd at 3053-4.

Footnote 103 See id. at 2922-33.

Footnote 104 See id.

Footnote 105 In our decisions to streamline AT&T's commercial services and outbound business services, we were able to differentiate these services from those services remaining in price caps on the basis of, among other things, the class of customers to whom those services were offered, and the demand elasticities among these classes of customers. See Commercial Services Price Cap Order, FCC 95-18 at paras 15, 20-21; Interexchange Order, 6 FCC Rcd at 5887-88.

Footnote 106 Services are "like" if they are "functionally equivalent," that is, if a customer perceives that the services perform the same function. See Ad Hoc Telecommunications Users Com. v. F.C.C., 680 F.2d 790, 797 (1982). Services need not be "identical" to be functionally equivalent. In the context of mobile services, for example, the Commission has held that the "principal inquiry" in determining whether two services are functionally equivalent involves "evaluating consumer demand for the service" and "whether changes in price for the service under examination . . . would prompt customers to change from one service to the other." See Implementation of Sections 3(n) and 332 of the Communications Act; Regulatory Treatmentof Mobile Services, Second Report and Order, GN Docket No. 93-252, 9 FCC Rcd 1411, 1447-48 (1994).

Footnote 107 See AT&T Price Cap Order, 4 FCC Rcd at 3123 n. 1103 (holding that repriced version of already-existing service cannot be considered the same service as the pre-existing one).

Footnote 108 See discussion at para. 46-57, infra.

Footnote 109 For example, under the proposed approach, the Cinco de Mayo "promotion," which offers a discounted MTS rate to anyone who calls from the United States to Mexico on May 5th, would be treated as a restructure of MTS rates for a one-day period.

Footnote 110 The LECs do not charge access rates according to time of day.

Footnote 111 AT&T Price Cap Order, 4 FCC Rcd at 3060.

Footnote 112 OCP Guidelines Order, 59 Rad. Reg. 2d (P&F) at 83.

Footnote 113 See, e.g., Letter from Charles L. Ward, AT&T to Acting Secretary, Federal Communications Commission, at 3 (April 20, 1994) (". . . the larger historic demand of domestic services [as compared to international services] provides greater price cap credit for rate reductions made in those services.")

Footnote 114 Edmund L. Andrews, No-Holds-Barred Battle for Long-Distance Calls, New York Times, January 21, 1995, at 48.

Footnote 115 See Section 61.47 of the Commission's Rules, 47 C.F.R. 61.47 (adjustments to the service band index; pricing bands).

Footnote 116 See AT&T Price Cap Order, 4 FCC Rcd at 3056; 47 C.F.R. 61.49(d).

Footnote 117 See id. at 3059-60.

Footnote 118 See Section 1.773 of the Commission's rules, 47 C.F.R. 1.773.

Footnote 119 See AT&T Price Cap Order, 4 FCC Rcd at 3059-60.

Footnote 120 See AT&T Price Cap Order, 4 FCC Rcd at 3056.

Footnote 121 Id. at 3114.

Footnote 122 See, e.g., Brook Group Ltd. v. Brown & Williamson Tobacco Corp., 113 S. Ct. 2578, 2587-88 (1993).

Footnote 123 AT&T Price Cap Order at 3114.

Footnote 124 See John J. Keeler, MCI and Sprint Unveil Deep Discounts, New Services in Fresh Fight With AT&T, Wall Street Journal, January 6, 1995, at A3. In addition, a statement attributed to a Sprint spokeswoman in a recent trade press article regarding a new marketing campaign initiated by long-distance carrier LCI International, for example, indicates that:

Sprint follows [the] lead of AT&T and MCI in determining and setting rates for [the] consumer market. [The spokeswoman said] "That's our competition and that's who we deal with."

See LCI Charges Big 3 Long Distance Companies Overcharge by $2 Billion Annually, Communications Daily, January 31, 1995, at 1-2 (quoting Sprint Consumer Services Group spokeswoman Juanita Teas).

Footnote 125 See AT&T Price Cap Reconsideration Order, 6 FCC Rcd at 666-67.

Footnote 126 See id.

Footnote 127 See id.; see also 47 C.F.R. 61.42(g), 61.44(g), 61.46(b), 61.47(b).

Footnote 128 See 47 C.F.R. 61.44(g) (exogenous cost changes to PCI attributable to new services); 47 C.F.R. 61.46(b) (adjustments to demand weighting used in API calculations); and 61.47(b) (adjustments to demand weighting used in SBI calculations).

Footnote 129 See AT&T Price Cap Order, 4 FCC Rcd at 3122.

Footnote 130 Id. at 3123-24; see also id. at 3127-28 (rejecting AT&T proposal that we apply streamlined tariff review to new services).

Footnote 131 See AT&T Communications Transmittal No.7698, 10 FCC Rcd 900 (1994) ("Transmittal 7698 Order").

Footnote 132 47 C.F.R. 61.58(c)(5).

Footnote 133 MCI Petition To Reject Or, In The Alternative, To Suspend And Investigate, AT&T Communications Transmittal No. 7698 (filed Nov. 10, 1994).

Footnote 134 Transmittal 7698 Order, 10 FCC Rcd at 900-01.

Footnote 135 By "annualized" demand, we mean that AT&T would be able to apply demand figures gained from the initial 90-day period by adjusting this actual demand data to correspond to the base year demand used in calculating the API and SBIs. For example, data for the full 90 dayswould multiplied by a factor of 4.05 to calculate the "annual" headroom effect of the APPs' discounted rates.

Footnote 136 47 U.S.C. 151 (emphasis added).

Footnote 137 See Field Research Corp., Affordability of Telephone Service, Vol. 1, Non-Customer Survey, for GTE/Pacific Bell (Oct. 1993); Chesapeake and Potomac Telephone Co.'s Submission of Telephone Penetration Studies, Docket 850 (D.C. Pub. Service Comm'n., Oct. 1993).

Footnote 138 See Peter K. Pitsch, A Brief History of Competition in the Long Distance Communications Market, at 15-22, attached to Letter from Charles L. Ward, Government Affairs Director, AT&T, to Chief Economist, Office of Plans & Policy, Federal Communications Commission, submitted in CC Docket 79-252 (Sept. 22, 1994); see also Letter from Charles L. Ward to Federal Communications Commission, (April 20, 1994), supra at note 110.

Footnote 139 See Letter from Charles L. Ward, AT&T, to Acting Secretary, Federal Communications Commission, submitted in CC Docket 79-252 (April 20, 1994).

Footnote 140 See AT&T Price Cap Order, 4 FCC Rcd at 3052-53.

Footnote 141 In calculating the basic rate index, we would require AT&T to utilize its non-discounted basic rates and exclude any discounts based on volume, term, "loyalty" (length of service), "win-back" (change from another carrier's service), or other factors, even if these discounts are offered on an automatic, non-"self-selecting" basis.

Footnote 142 See para. 36-37, supra, for a discussion of recent increases in AT&T's basic rates.

Footnote 143 See 47 C.F.R. 61.47(e)(1).

Footnote 144 Letter of Alex Mandl, AT&T, to the Chairman, Federal Communications Commission, dated October 4, 1994.

Footnote 145 Id.

Footnote 146 We note, for example, that the OCP Guidelines Order permitted a dominant carrier to offer service with minimum monthly charges "as long as it also makes available unbundled basic MTS offerings." OCP Guidelines Order, 59 Rad. Reg. 2d (P&F) at 89.

Footnote 147 Further Notice, 3 FCC Rcd at 3383 n.738.

Footnote 148 See 47 C.F.R. 61.44-61.45.

Footnote 149 See id. 61.44(c), 61.45(d).

Footnote 150 Id. 61.44(d)-(h).

Footnote 151 AT&T Price Cap Order, 4 FCC Rcd at 3002-03, 3017-18.

Footnote 152 Price Cap Performance Review for Local Exchange Carriers, CC Docket No. 94-1, FCC 95-132, (rel. April 7, 1995), (LEC Price Cap Performance Review Report and Order), at paras. 292-320.

Footnote 153 Id. at para. 306.

Footnote 154 Id. at paras. 294-96.

Footnote 155 Id. at paras. 307-10.

Footnote 156 SFAS-106 requires companies to account for OPEBs on an accrual basis beginning December 15, 1992. SFAS-106 also requires companies to book the previously unaccrued OPEB amounts for retirees and active employees as of the date that the company adopts SFAS-106. See id. at para. 276.

Footnote 157 SFAS-112 requires companies to account for such post-employment benefits on an accrual basis beginning December 15, 1993. The Common Carrier Bureau required the LECs to adopt SFAS-112 for regulatory accounting purposes no later than January 1, 1994. Bell Atlantic has sought exogenous treatment of its SFAS-112 costs. See id. at para. 277.