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A. a.(1)(a) i) a)DocumentgPleadingHeader for Numbered Pleading PaperE!n    X X` hp x (#%'0*,.8135@8:1Rdtt21nENf Tf o_\j"i~'K2^$(8<><q*"xxxxWWxxxWWkkxxx6uC;,^Xu&_ x7XX?9}G?,o}&_ x7XD@7zC;, bXz_ pi7X]#K+&,ḁK&_ x7X2yf cnQj 2",tB^ f ^;C]ddCCCdCCCCddddddddddCCdxN`xoCCCddCdoYoYFdo8Co8odooYNCodddYdddd4dddddCddddddddo8dddddYYYYYN8N8N8N8oddddooooddpddddxodddXXddXddXdddddooL8doddNorddo8PdN8ppoddXXdpLoNpLodPDdopoopodXYXodoodddCddCCCWxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxNdddCdUUddddddFddddFCCssd44ddzzddd~ooCsdF"dsd9dCCzCddoddCdYds`zUvdddCCCCzozoYNYYYN8YooYdYzzdzddYYzozzzNdzYzzzzCCdddddddzCzdYC\   pxtll\tll@\@\`L2y Y-gx` `  hh@hppgQ< `F#O PE374P#QՊ$// Further Notice of Proposed Rulemaking; CC Dkt. 87313 & 93197; FCC 95198 //$(#(#X Y   Y-$/ Part 61 of  Y Commission's Rules /$ Y @hpp  xx TRANSMITTED FOR FCC RECORD ONLY Y   \-   LP  P7\   LP  P7\  2Before the ă  \- FEDERAL COMMUNICATIONS COMMISSION ă  ]y- JWashington, D.C. 20554 ă  ]p- x` `  hh@hpp  FCC 95198  ]R -In the Matter of hh@h) x` ` hh@h)  ]> -Policy and Rules Concerning Rates for@h) CC Docket No. 87313  ]4 -Dominant Carriers hh@h) x` `  hh@h)  ] -Revisions to Price Cap Rules for AT&Th) CC Docket No. 93197 x` ` hh@hpp    \-  FURTHER NOTICE OF PROPOSED RULEMAKING ă U Adopted: May 5, 1995; Released: May 18, 1995  ]- COMMENTS DUE: July 3, 1995  ]-REPLY COMMENTS DUE: July 24, 1995 By the Commission:  ]-_ TABLE OF CONTENTS ă  ]- x` `  hh@hpp  xx 0 Para.     ]o -XxP I. INTRODUCTION p}!(#> 13  ]\"-XxP II. BACKGROUND p}!(#> 49 XxX` ` xA. AT&T Promotions ` p (#0 1020 XxX` ` xB. AT&T Optional Calling Plans ` p (#4 2127 XxX` ` xC. The "Headroom" Issue ` p (#4 2831"?%0*''aa$"ԌXxX` ` xD. Reclassification of AT&T as a NonDominant Carrier ` p "(#F 32 XxP III. DISCUSSION p "(#F 33 XxX` ` xA. Commission Goals ` p (#4 3335 XxX` ` xB. Proposed Revisions to the AT&T Price Cap Plan ` p "(#F 36 XxX` ` X ` ` Definitional Issues p (#4 3739 XxX` ` X ` ` Basket 1 Service Categories p (#4 4042 XxX` ` X ` ` Service Category Bands p (#4 4345 XxX` ` X ` ` New Services Issues p (#4 4657 XxX` ` xC. Limitations on Rate Increases for Basic MTS ` p (#4 5867 XxX` ` xD. Exogenous Costs Issues ` p (#4 6870 XxX` ` X  ] -XxP IV. COMMENTS: PROCEDURAL RULES p (#4 7174  ] -XxP V. ORDERING CLAUSE p "(#F 75  \w -XxP APPENDIX A   ]m-  ]Y- I. INTRODUCTION ׃   "x1. In this Further Notice we initiate a further examination of our regulation of  xservices provided by AT&T Corporation (AT&T) subject to price cap treatment and, in  xparticular, the regulation of AT&T's residential services. We seek comments on, among  xother things, our tentative conclusion that promotional tariffs and optional calling plans  x(OCPs) should remain subject to price cap regulation to the extent described herein. These  xlissues have been addressed in two separate proceedings. In the Notice of Proposed  ] - xRulemaking in CC Docket No. 87313,  Y- xԍPolicy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87313, Order  Yy-and Notice of Proposed Rulemaking, 8 FCC Rcd 3715 (1993) (Promotions NPRM). the Commission sought comments on its tentative  xconclusion to remove promotions from price cap regulation. In the Notice of Proposed  ]- xRulemaking in CC Docket No. 93197,^Pd Y- x.ԍRevision to Price Cap Rules for AT&T, CC Docket No. 93197, Notice of Proposed  Y - xJRulemaking, 8 FCC Rcd 5205 (1993) (OCP NPRM). The Commission also proposed a number  Y - xof other changes to the price cap rules in the OCP NPRM, including whether to remove  x;commercial, 800 Directory Assistance, and analog private line services from price caps. In the  Y"- xReport and Order in CC Docket No. 93197, 10 FCC Rcd. 3009 (1995) (Commercial Services  Y#- xPrice Cap Order) the Commission resolved these issues, removed commercial services from  xprice cap regulation, and deferred the question of the regulatory treatment of OCPs to this proceeding. ^ the Commission sought comment on, among other"| 0*&&aan"  xissues, whether to remove OCPs from price cap regulation. Due to the commonality of  xythe issues presented in determining the regulatory treatment of promotions and OCPs, we  xconsolidate these issues here in one Further Notice of Proposed Rulemaking for further consideration. x   @x2. This Further Notice also asks for comment on a broader range of issues than  xwere raised in either of the earlier Notices in both dockets. Although we will consider the  xNearlier records in these dockets, we invite commenters to supplement the record by  xaddressing all of the issues raised herein. Specifically, we go beyond the earlier  xLproceedings in both dockets to seek comments on our tentative conclusions regarding the  xregulatory treatment, described in detail below, that we would accord to all AT&T's  ] - xBasket 1 services.g  Y - xԍSee paras. 47, infra, for an explanation of price caps regulation and Basket 1. Although  xthe 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.g Our tentative conclusions also address issues raised in AT&T's petition  ] - xyfor waiver of the price cap rules, which is pending before the Commission.3 M Y- xhԍAT&T Corp. Petition for Waiver of Price Cap Rules to Allow AT&T to Bring the LDMTS  Y|- xBasic Schedule NPA Volume Discount Option Under Price Caps (filed May 17, 1994) (AT&T  Yg-Price Cap Waiver Petition). 3 In addition,  xwe tentatively conclude that we should revise the treatment of AT&T's exogenous costs  ]t - xto conform to the revisions that we adopted in the LEC Price Cap Performance Review  ]m-Report and Order.'m Y- xԍPrice Cap Performance Review for Local Exchange Carriers, First Report and Order, CC  Y- xDocket No. 941, FCC 95132 (rel. April 7, 1995) (LEC Price Cap Performance Review Report  Y-and Order.'   "x3. Price cap regulation is designed to mirror the efficiency incentives found in  xcompetitive markets, thus acting as a transitional regulatory scheme until the advent of  ]H- xsubstantial competition makes price cap regulation unnecessary.@H[  Ya-ԍSee id. at  1.@ One purpose of the  xrevisions on which we seek comment below is thus to provide a regulatory framework that  xwill better serve the transition to further streamlining of AT&T's price cap services.  x?AT&T has asked the Commission to rule that AT&T is a nondominant carrier and,  ] -accordingly, should be permitted to remove all of its services from price cap regulation.   Y$- xԍSee Motion for Reclassification of American Telephone & Telegraph Company as a Nondominant Carrier, CC Docket 79252 (filed Sept. 22, 1993)." 0*&&aa"Ԍ ]-ԙ! II. BACKGROUND ׃   x4. In 1989, the Commission replaced rateofreturn regulation of AT&T with an  x"incentivebased system of regulation, known as price caps, for most of AT&T's  ]- xtelecommunications services.  Y_- xJԍPolicy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87313, Notice  YH- x=of Proposed Rulemaking, 2 FCC Rcd 5208 (1987) (Price Cap NPRM), Further Notice of  Y3- xProposed Rule Making, 3 FCC Rcd 3195 (1988) (Further Notice), Report and Order and Second  Y - xFurther Notice, 4 FCC Rcd 2873 (1989) (AT&T Price Cap Order), Erratum, 4 FCC Rcd 3379  Y - x(1989), on reconsideration, 6 FCC Rcd 665 (1991) (Reconsideration Order), remanded sub nom.  Y - xAmerican Telephone and Telegraph Company v. FCC, 974 F.2d 1351, 1353 (D.C. Cir. 1992)  Y - x(Remand Order). Those services that are not in price caps are subject to streamlined regulation,  xwhich reduces their regulatory obligations under Part 61 of the Commission's Rules.  xCompetition in the Interstate Interexchange Marketplace, Report and Order, 6 FCC Rcd 5880  Y- x(1991) (Interexchange Order), on reconsideration, 6 FCC Rcd 7569 (1991) (subsequent history omitted). The Commission stated that price caps would encourage  xzefficiency and innovation while decreasing the incentive for AT&T to shift costs from  ]- x>more competitive to less competitive service offerings.Q   Y$-ԍ Price Cap NPRM, 2 FCC Rcd at 5213.Q Under this system, prices are  xcapped rather than profits. Thus, the plan gives AT&T the incentive to earn potentially  xhigher profits if it can operate more efficiently, for example, by reducing its costs. To  xNimplement the price cap system, the Commission defined three categories of AT&T  ] - x>services, or baskets, and defined a price cap index (PCI) for each basket. T  Y- xԍThe three baskets were comprised respectively of: (1) residential and small business  xservices; (2) "800" number services; and (3) other business services. Recently the Commission  Y- xremoved Basket 1 commercial services from price cap regulation. See note 2, supra. In  x<addition, a number of AT&T services are excluded from price cap regulation, including: (1)  xservices offered pursuant to Tariffs 11, 12 and 16; (2) services subject to belowtheline  xaccounting; (3) international private line and record carrier services; (4) contractbased tariffs;  xand (5) the custom tariff services removed from price cap regulation pursuant to CC Docket No.  Y- x90132. See 47 C.F.R.  61.42 (c). Services subject to belowtheline accounting are services  xthat AT&T is not able to operate at a profit, such as KU Band Satellite and Accunet Packet  xKServices. Custom tariff services are services such as Software Defined Network that AT&T provides to large business customers.  The basket  xstructure is designed so that AT&T will not be able to raise prices for services in one"   0*&&aa "  ]- xbasket in order to lower prices for dissimilar services in another basket.  Y- xYԍSee also Price Cap Performance Review for Local Exchange Carriers; Treatment of Video  Yq- xDialtone Service under Price Cap Regulation, CC Docket No. 941, FCC 9549 (rel. February 15, 1995). Thus, a change  xin rates in one basket or in services outside price caps does not affect either the PCI or the  xactual price index (API) for the other baskets. The PCI for each basket imposes a price  xjceiling for the services in that basket. In order for the Commission to determine whether  xrate levels exceed the PCI, AT&T must compute and file for each basket an actual price  xindex (API), which represents a weighted average of actual prices of the services within  ]- xthe basket. O Y - xԍSee Reconsideration Order, 6 FCC Rcd at 66566, for an explanation of how the price cap index is calculated. PCIs and APIs are adjusted each year in AT&T's annual price caps filing  ]- xto reflect the annual productivity offset of 3 percent and exogenous cost changes.\  Yc- xԍExogenous costs are costs that change due to changes in laws, regulations, or rules, or  xother administrative, legislative, or judicial changes beyond a carrier's control and are not  Y5-reflected in the GNPPI. Further Notice, 3 FCC Rcd at 3383 n.738. \ In addition, the API is computed for every tariff transmittal that includes a rate change.   x5. AT&T may change rates for services within each basket subject only to  xstreamlined scrutiny, provided that the weighted average of all those prices remains below  ] - xthe cap. p  Y- xԍIn addition to setting limits on the aggregate rates within each basket, the Commission also  xinstituted rate bands to limit the range within which AT&T could raise or lower individual rate  Y- xelement prices each year while continuing to receive streamlined tariff scrutiny. AT&T Price  Ys-Cap Order, 4 FCC Rcd at 3077, citing Further Notice, 3 FCC Rcd at 3440. Under streamlining, the tariff filing is presumed lawful and may take effect on  x14 days' notice without extensive cost support data. If, however, the proposed rate change  xwould push a basket API above the cap, AT&T is required to file the change on the  xstatutory maximum notice period of 120 days and to provide a full costbased showing for  ]`-such filings.c` Y-ԍSee AT&T Price Cap Order, 4 FCC Rcd at 310911.c  "V0*&&aa"Ԍ ]-  1x6. Basket 1 is further divided into service categories, or bands.C Y- xԍBaskets 2 and 3 also were divided into service bands or categories. A number of Basket  x2 and 3 services were removed from price cap regulation and are now subject to streamlined  xregulation. As a result, Basket 2 currently contains only 800 Directory Service, and Basket 3  xcontains analog private line offerings, including analog voice grade private line and terrestrial  Y*-television transmission service. See 47 C.F.R.  61.42(a)(2)(3).C In the AT&T  ]- xPrice Cap Order the Commission concluded that "banding by service category, rather than  xby rate element, will give AT&T the flexibility it requires to allocate costs and price  ]- xefficiently, while still protecting customers from large rate increases and rate churn.": Y -ԍId. at 3059.:  xAn individual service band index (SBI) is established for each service band. SBIs for all  xservice bands are calculated each year in AT&T's annual price caps filing. In addition,  x[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. YP- x ԍSee 47 C.F.R.  61.43 (annual price cap filings required) and 47 C.F.R.  61.47 (adjustments to the SBI; pricing bands).   x7. AT&T's Basket 1 historically has included toll services targeted to residential  x!and small business customers. We recently removed AT&T's Basket 1 commercial  ] - xyservices from price cap regulation and made them subject to streamlined regulation.k n  Y-ԍSee Commercial Services Price Cap Order, 10 FCC Rcd. at 3011.k As  x/a result, Basket 1 currently is divided into six service categories, all of which include  ] - xprimarily residential services.z !  Yc- xԍBasket 1 includes the following service categories: (1) domestic day message  xtelecommunications service (MTS); (2) domestic evening MTS; (3) domestic night/weekend  xZMTS; (4) international MTS; (5) operator and credit card service; and (6) ReachOut America  Y- x(OCPs). See 47 C.F.R.  61.42(b). ReachOut America was the original OCP that comprised  xcategory 6. Currently, most OCPs for domestic MTS are in the ReachOut America service  Y-category. See infra at notes 62 & 64 and accompanying text. Residential services have been the object of special  xCommission concern since the beginning of price cap regulation, when it sought to balance  xconcerns for economic efficiency with the need to minimize the possibility of cross ]f- xLsubsidization and predation and to foster competition that would benefit all ratepayers.(fc Y#- xԍSee AT&T Price Cap Order, 4 FCC Rcd at 305152, 305960; see also Interexchange  Yr$- xJOrder, 6 FCC Rcd at 5908 (noting need for "particular caution" in streamlining residential and small business services).( "f0*&&aa"  x0The Commission recognized that residential customers are significant users of day,  ]- xevening, and night/weekend MTS. Y|- xxԍAT&T Price Cap Order, 4 FCC Rcd at 3059. We will refer to AT&T's nondiscounted  xpricing in these three bands throughout this Further Notice as the "basic schedule" of residential service rates.  The pricing for evening and night/weekend MTS,  xwhich are predominantly used by residential customers, originally was subject to an  ]- xupward band limit of four percent per year.SM Y-ԍId. at 3060; 47 C.F.R.  61.47(f).S In addition, we barred AT&T from  xjincreasing 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.u Y -ԍAT&T Price Cap Order, 4 FCC Rcd at 306061; 47 C.F.R.  61.47(f)(2).u   x8. An integral part of the price cap plan is a periodic review of the working of the  xplan to determine whether it is functioning as the Commission intended and in accordance  x/with the Communications Act. Accordingly, the Commission adopted a program that  xcombines ongoing monitoring of the price cap plan with periodic formal reviews. The  ] -Commission undertook the first performance review, as scheduled, in 1992.  Y- xԍPrice Cap Performance Review for AT&T, Notice of Inquiry, CC Docket No. 92134, 7 FCC Rcd 5322, 5323 (1992).   x9. As a result of that review, the Commission determined that, while overall the  xprice cap plan is achieving its intended goals, some adjustments to the plan might enhance  ]j- xits effectiveness.jM  Yu- x=ԍPrice Cap Performance Review for AT&T, Report, 8 FCC Rcd 5165 (1993) (AT&T  Y`-Performance Review Report). Accordingly, the Commission initiated another proceeding to determine  ]`- xwhether the price cap plan should be revised in four specific areas.WN`  Y - xԍRevisions to Price Cap Rules for AT&T, CC Docket No. 93197, Notice of Proposed  Y- xiRulemaking, 8 FCC Rcd 5205 (1993) (OCP NPRM). In addition, the Commission requested  xmore information from AT&T regarding AT&T's Equipment Failure and Blockage Reports,  xwhich track AT&T's service quality and network reliability. The Commission recently adopted  Y!- x<a Report and Order on the issues other than OCPs that were raised in the OCP NPRM. See  Y"- x-Commercial Services Price Cap Order, FCC 9518, note 2, supra, in which the Commission  xresolved these issues and deferred the question of the regulatory treatment of OCPs to this proceeding. W In particular, the  x|FCC sought comment on whether to remove commercial services, 800 Directory "V0*&&aa"  xAssistance, analog private line service, and optional callings plans (OCPs) from price  ]- xcaps.  Y|- xԍStreamlined regulation was adopted for Basket 3, except for analog private lines, effective  Ye- xin October 1991. Interexchange Order, 6 FCC Rcd at 5894 and 6 FCC Rcd 7255  x(Com.Car.Bur. 1991). Streamlining of Basket 2, except for 800 Directory Assistance, took  xeffect in May 1993 following the successful deployment of the technology for 800 number  x,portability. "Portability" refers to 800 number subscribers' ability to retain their 800 numbers  xwhen switching their 800 service from one IXC to another. The Commission ordered local  xiexchange carriers (LECs) to implement technology to make such portability possible no later  Y - xthan March 4, 1993. Interexchange Order, 6 FCC Rcd at 590506, citing Provision of Access  xfor 800 Service, CC Docket No. 8610, 6 FCC Rcd 5421, 5425 (1991). In response to petitions  x,of the Ad Hoc Telecommunications Users Committee and the Financial Services Providers, the  xCommission granted a threemonth delay, until May 1, 1993, for implementing the mandatory  x800 data base access. Provision of Access for 800 Service, CC Docket No. 8610, 7 FCC Rcd 8616 (1992). The Commission did not address AT&T's promotional offerings in this  ]- xproceeding. In the recently released Commercial Services Price Cap Order,hi  Y-ԍCommercial Services Price Cap Order, 10 FCC Rcd. at 3011. h we removed  x\AT&T's commercial services from price caps regulation. In that Order, we stated that  x."AT&T demonstrates both in its comments and through additional information submitted  x[in the record of this proceeding that there is sufficient evidence to conclude that AT&T's  x[commercial long distance services are subject to substantial competition." We stated that  x ". . . our analysis rests on considerations of market share, demand responsiveness and  xsupply responsiveness. As the result of this analysis, we conclude that AT&T lacks the  xability to exercise unilateral market power in the provision of these services and that there  xLis sufficient competition among providers to justify moving AT&T's commercial services  ] - xfrom price caps to streamlined regulation.":  Yo-ԍId. at 3014.: We concluded, however, that 800 Directory  x=Assistance should remain under price cap regulation because it ". . . remains a monopoly  x!service and therefore it is necessary to regulate the price for this service to protect  ]w - x-consumers.";w  Y -ԍId. at 3023. ; Further, we concluded that analog private line services should remain under  x/price caps regulation because "none of the parties has presented any evidence that the  ]c- xsituation has changed since the Commission's 1991 decision in the Interexchange  ]\- x/Proceeding."U \ Y$-ԍInterexchange Order, 6 FCC Rcd at 5895.U We stated that "[t]he Commission concluded that the market for these  xMservices was not as competitive as the market for other services offered by AT&T and"U5 0*&&aav"  ]- xmtherefore required continued oversight under price caps."g! Y-ԍCommercial Services Price Cap Order, 10 FCC Rcd. at 3024.g We deferred to this  ]- x[consolidated proceeding further consideration of the removal of OCPs from price caps.:"{ Y/-ԍId. at 3011.:   ]-xA. AT&T Promotions   x10. A promotion usually involves a discounted offering of an existing tariffed  xservice or service category to a particular subclass of customers for a limited period of  ]- xtime.#. Y - xԍOn occasion, AT&T's promotions alternatively have provided, among other things, long distance gift certificates or points to be redeemed for merchandise and travel. For example, promotions might be limited to customers in a particular geographic  xarea, to customers that historically have achieved a specified level of monthly usage, or  ]- xyto new subscribers.V$ Y,-ԍReconsideration Order, 6 FCC Rcd at 671.V Thus, while the basic rates for a service remain in effect and apply  x1to some customers of a service, other customers of that service may be paying a  xdiscounted rate for a specified period of time. In other instances, all customers of a  xservice may receive the discounted rate for a specified time, and then revert to the basic  ]~ -rates when the promotion expires.C%~ { Y- xԍFor example, AT&T offered a discount off Reach Out World service during December 24,  x1994 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). C  ]j-  x11. The Commission was silent in the AT&T Price Cap Order as to the treatment  xof promotional rates under price caps. After the Commission adopted the price cap rules,  xAT&T filed a significant number of promotions in which it treated the rates associated  xwith these offerings as rate reductions for purposes of API calculations. MCI  xTelecommunications Corporation (MCI) and Sprint Communications Company LP (Sprint)  ];- xsought reconsideration of the AT&T Price Cap Order, requesting clarification of the  ]4- xtreatment promotional pricing activities should receive under price caps.\&4  Y!-ԍReconsideration Order, 6 FCC Rcd at 671.\ In the  ]*- xReconsideration Order, the Commission decided to exclude promotional tariffs from the  xprice cap index prospectively. It reasoned that including promotional rates in price caps  xwould give AT&T too much flexibility to change prices within Basket 1, which contained " &0*&&aa4"  ]- xresidential and small business rates.' Y- x<ԍThe Commission subsequently removed commercial services from price cap regulation.  Yo-Commercial Services Price Cap Order, 10 FCC Rcd. at 3011. Although the Commission decided to exclude  xpromotions from price caps, it also stated that "as long as a promotional offering does not  x[raise discrimination issues or otherwise fail to comply with the Communications Act, we  xwill not limit AT&T's efforts to generate greater network efficiencies by restricting  ]-promotional activity."V(d Y-ԍReconsideration Order, 6 FCC Rcd at 670.V  ]-  Ox12. In its appeal of the Reconsideration Order, AT&T asked the court to vacate  xthe Commission's decision to exclude promotional offerings from price caps as arbitrary  xand capricious because the Commission failed to explain adequately its change in the  ]- x|treatment of promotional rates.Q) Y~-ԍSee Remand Order, 974 F.2d at 1353.Q The court agreed with AT&T, finding that the  x=Commission's decision to exclude promotional tariffs from the price cap index was not a  ] - xreasoned decision supported by the record. The court remanded the Reconsideration Order  xLto the Commission with instructions either to show that its action is a clarification of the  ] - x original Price Cap Order, despite the evidence AT&T presented to the contrary, or to  x"offer a reasoned explanation of why promotional rates should be treated differently from  ]s-other rates.":*s Y-ԍId. at 1355.:   Nx13. In response, the Commission vacated its prior decision on this issue and issued  ]U- x<the Promotions NPRM in Docket 87313, in which it tentatively concluded that promotions  ]N- xshould be excluded from price cap regulation prospectively.R+N} Y-ԍPromotions NPRM, 8 FCC Rcd at 3717. R The Commission offered  xseveral reasons to support this proposal. First, a basic purpose of price caps is to assure  xa reasonable basic schedule of long distance rates for ratepayers. Although price cap  xregulation is designed to reward efficiency by granting carriers flexibility in pricing  xindividual services, the Commission had rejected a price cap system that would have  xLgranted AT&T unlimited flexibility to increase basic schedule rates to offset promotional  ]- xrate decreases.,0  Y$- x;ԍId. at 3716, citing Reconsideration Order, 6 FCC Rcd at 66569 (Commission established baskets and bands to limit pricing flexibility). The Commission reasoned that "[i]f AT&T is allowed to take index  xcredit for promotions, its actual price index (API) would decrease. As historically has" ,0*&&aa"  xbeen the case, AT&T could then increase its API by increasing general schedule rates." The Commission tentatively concluded that:  CXxpermitting 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  3increasing 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  ] - ndesigned to provide an incentive for companies to operate more efficiently.A-  Y- xYԍId. at 3716. This reasoning assumes that a rate increase would offset the depressive effect  xthat 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.A   ]t - xThe Promotions NPRM further reasoned that "since one of the fundamental purposes of  xprice cap regulation is to put AT&T on a more equal competitive footing with other IXCs,  xallowing AT&T to insulate itself from revenue losses caused by promotional pricing  ]Y- xundercuts one of the basic goals of price cap regulation."/.YM Yd-ԍId. / The Commission concluded  xthat "[i]f AT&T operated in a completely competitive market, this issue would be moot  xbecause AT&T could not raise general schedule rates without the fear of losing customers  ];-to a competitor."/; Y- xxԍId. at 3716 & n.14. This reasoning assumes that the existing rates reflected competitive levels.   x14. The Commission thus tentatively concluded that "allowing AT&T to offset rate  xreductions for promotional offerings against increases in the basic rates could undercut the  ]- xCommission's enforcement mechanism for price cap regulation.":0 Ym!-ԍId. at 3716.: For example, under  xprice cap rules, if AT&T were to file an abovecap tariff, the filing would be subject to  ]- xzfull regulatory scrutiny and possible suspension.D1O  Y %-ԍSee para. 2, supra.D The potential problem, however, as"  10*&&aa"  ]- xzdescribed by the Commission in the Promotions NPRM, is that if AT&T were to file a  xpromotional tariff that decreased rates for certain services within Basket 1, the API would  xbe lowered for the duration of the promotion, thus allowing AT&T to raise rates within  xthe basket for other services without exceeding the basket's PCI. When the promotion  xexpired, however, the API would rise and prices for some services within the basket could  x=be left above cap for the period of time between the expiration of the promotion and the  ]- xnext AT&T rate filing that proposed rates above the PCI.2 YM- xԍSee 47 C.F.R.  61.49(c), which requires filings that propose rates above the applicable  xSBI limits to be accompanied by supporting materials establishing substantial cause for the proposed rates. Because the promotion had  xexpired, however, the Commission could not investigate it in order to deter unreasonable,  ]-abovecap rates for the basket.W3M Y -ԍPromotions NPRM, 8 FCC Rcd at 3716.W   x15. As an alternative, the Commission sought comment on whether to treat  ] - xpromotional tariffs as either new or restructured services.:4  YS-ԍId. at 3717.: Under price cap regulation,  xLa service is classified as new if it provides an additional option to a service, but does not  x=replace the existing service. Conversely, a service is classified as a restructured offering  ]w - x!if it replaces an existing service.5w  Y- xYԍSee Policy and Rules Concerning Rates for Dominant Carriers, 5 FCC Rcd 6786, 682425 (1990). Rates for restructured services are immediately  xincorporated into the price cap calculations upon effectiveness of the tariff. Rates for new  xservices, however, are not incorporated into the price cap calculations until the first annual  xprice cap tariff filing following completion of the base period in which they are  ]O- xintroduced.f6OO  Y\-ԍSee 47 C.F.R.  61.44(g), 61.46(b), and 61.47(b).f At that point, actual revenues and demand data for the service are available.  xA promotion resembles a new service because it provides a new option, a discount from  x>the existing basic schedule, which does not replace the existing service. On the other  xhand, a promotion differs from a new service, in that it restricts the availability to eligible  xcustomers and limits the time during which those customers may subscribe to the  xpromotion. New services are generally available and may be ordered at any time. A  ]- xmore significant distinction is that as a result of the 1992 court of appeals decision,7  Y$- x=ԍSee Reconsideration Order, remanded sub nom. American Telephone and Telegraph  Y%-Company v. FCC, 974 F.2d 1351, 1353 (D.C. Cir. 1992) (Remand Order). " 70*&&aa"  xpromotions are incorporated into price cap calculations immediately upon effectiveness of  xthe tariff, while new services are excluded from price caps until AT&T has obtained actual demand and revenue information concerning the service.   x16. Commenters other than AT&T generally supported the Commission's proposals  ]- x]and tentative conclusions as set forth in the Promotions NPRM. They asserted that  x excluding the value of promotions from API calculations would protect one group of  ]- xratepayers from subsidizing the promotions that benefit another group of ratepayersa8 YC -ԍSprint Comments at 23; see also GTE Comments at 2.a and  ]-would be consistent with the goals of price cap regulation.:9{ Y -ԍGTE Comments at 2.:   x17. In opposing the proposals set forth in the Promotions NPRM, AT&T argued  xthat its promotional tariffs are not different from other types of tariff filings and should be  ] - xentitled to receive index credit under the Commission's price cap plan.?: , Yu-ԍAT&T Comments at 1011.? Moreover,  xAT&T argued that because none of its promotions has been rejected or suspended for  xOviolations of Sections 201(b) and 202(a) of the Communications Act, there is no  ]m- x-justification for treating promotional tariffs differently from other price cap tariff filings.;;m Y-ԍId. at 1415.;  xAT&T also disputed the Commission's argument that including promotional tariffs in price  ]Y- xcaps will create the potential for crosssubsidization,x<Y Y-ԍId. at 1112, citing Reconsideration Order, 6 FCC Rcd at 670. x especially given their short  ]O-duration.@=OC  YP-ԍId. at 1213. @   |x18. AT&T further contended that both MCI and Sprint have made extensive use  xof promotional offerings throughout the time that AT&T has been subject to price caps.  xjAT&T argued that it therefore would be at a competitive disadvantage if the Commission  ]- xdid not permit it to receive index credits for promotions.K>  Y"-ԍId. at 1617 and Exhibit C. K Finally, AT&T stated that it  xis required to disclose certain information about its promotions to the Commission.  xAccording to AT&T, it would be impossible to raise the API for its capped services above"  >0*&&aaB"  xthe price cap index at the expiration of a promotion without prompt detection and  ]-immediate corrective action by the Commission.:? Y|-ԍId. at 18. :   x19. As discussed above, the Commission was initially silent on the issue of  ]- xpromotions. Our decision on the subject in the Reconsideration Order was then remanded  ]- xby the court of appeals, and we have taken no action following the Promotions NPRM.  xIn the meantime, AT&T has introduced new promotional offerings that expand the general  xclass of discounts offered under the term "promotions." For example, the original class  xof promotions implemented by AT&T in 1989, which it submitted in a "generic" tariff,  ]- xMconsisted of discounts on monthly usage charges.@{ Y - xxԍSee, 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). These promotions were limited to  xdesignated services or to customers in specified geographic areas, and were of short  ] -duration, in some instances lasting no more than 90 days.1A  Ym-ԍId.1   {x20. In recent years, however, AT&T has introduced several widelyavailable mass xmarket discounts for domestic MTS, such as the current "True USA" and "True Rewards"  x(the "True promotions"). AT&T reported that, for calendar year 1994, 17 million  xcustomers enrolled in the True USA savings plan, and 14 million customers enrolled in  ]\- xLthe True Rewards program.~B\ Y-ԍSee AT&T Posts Earnings Increase, Communications Daily, January 25, 1995, at 3. ~ In addition, discounted interstate longdistance calls under  ]R- xthe True promotions accounted for 53 percent of all minutes of consumer, i.e., Basket 1,  xtraffic on AT&T's network in 1994, whereas in 1993, interstate longdistance usage under  x]discount plans that were in effect in that year accounted for 33 percent of Basket 1  ]7- xtraffic.1C7} Yr-ԍId.1 The True promotions also attracted an additional 1 million new customers for  ]-- x=AT&T in 1994.D-0  Y!- x<ԍSee Edmund L. Andrews, NoHoldsBarred Battle For LongDistance Calls, New York Times, January 21, 1995, at 48. The amount of actual discounts off basic schedule domestic MTS rates  xyto customers under the True USA promotion during the month of November 1994, alone,"# D0*&&aaD"  ]- xwas $265.3 million.E Y- xԍSee Letter, from M.F. Del Casino, Administrator Rates & Tariffs, AT&T, to Acting Secretary, Federal Communications Commission (Dec. 27, 1994). This unprecedented growth in AT&T's promotional activities has  xcaused a major realignment in prices for Basket 1 services, especially basic schedule rates.  xBasic schedule ratepayers who have not elected a promotional discount plan have generally  xwitnessed steady increases in their rates over the same period of time that AT&T has  ]-introduced massmarket promotions for residential customers.VFd Y-ԍSee discussion at para. 28, infra.V  ]-xB. AT&T Optional Calling Plans   Ox21. AT&T's promotional offerings to date have involved discounts based on its  xybasic schedule MTS rates. Optional calling plans (OCPs) offer discounts or reduced rates  xfor a specified period of calling to long distance customers in exchange for the customer's  ] - xcommitment to a fixed monthly charge or to participate for a minimum period of service.G  Yg- xԍBy contrast, a typical massmarket promotion offered by AT&T requires enrollment or "selfselection," but does not usually bind a customer to a minimum payment or term of service.  ] - xAddressing AT&T's initial types of OCPs, for example, the Commission in the OCP  ] -Guidelines Order adopted the following definitions:  ]p- 4XxBasic 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].   ]H- ~XxOptional 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.H  Y- xԍGuidelines for Dominant Carriers' MTS Rates and Rate Structure Plans, CC Docket No.  Yx -941235, 59 Rad. Reg. 2d (P&F) 70, 712 n.3 (1985) (OCP Guidelines Order).  x   x22. OCPs are usually designed to attract frequent callers who can take advantage  ]- xof the discounts and other benefits to reduce their bills.JIM  Y %-ԍOCP NPRM, 8 FCC Rcd at 5205.J Examples of OCPs in the" I0*&&aa"  xjReachOut service category include BlockofTime (such as ReachOut America), AnyHour  ]- xSaver, and EasyReach service.J Y|- xԍExamples of OCPs offered in other Basket 1 service categories are: international (ReachOut  xOverseas and USA Direct), operator/card (Card Only Plan 1), and day, evening, and night/weekend (Area Code Calling Plan). MCI, Sprint, and a number of other interexchange  xmcarriers also offer discounted residential services that compete with these AT&T  ]-offerings.KK Y- x;ԍFor example, Sprint offers Sprint Select; MCI offers such plans as Prime Time and SureSave.   x23. The price cap system's treatment of OCPs also differs from that accorded  x promotions. OCPs are included in a separate service category (the ReachOut service  ]- xcategory) from the basic MTS service categories within Basket 1,L Y]- xԍThe majority of OCPs are offered in the ReachOut service category. AT&T now also  YF-offers certain OCPs in the other service categories in Basket 1. See note 72, supra. whereas promotions  x.are included in the applicable MTS service categories. Changes in OCP rates, therefore,  xare not subject to the SBI limitations on rate changes in the basic schedule service categories.  ] -  x24. In the OCP NPRM, the Commission tentatively concluded that the ReachOut  ] - xcategory of services (i.e., most domestic MTS OCPs) should be removed from Basket 1  xbecause there is substantial competition among providers of discounted residential services.  xThe Commission noted that because rates for these services already appeared to be  x.determined by market forces, not price cap limits, customers were unlikely to be harmed  xif the Commission made these services subject to streamlined regulation in the tariff review  xprocess. Moreover, customers would retain the option of choosing between AT&T's basic  ]H- xschedule or the discounted services of AT&T and other carriers.JMH  Y-ԍOCP NPRM, 8 FCC Rcd at 5205.J The Commission also  xnoted that to the extent that ReachOut services have had larger rate reductions than the  x/standard long distance schedules for which they are substitutes, removal of ReachOut  xservices from Basket 1 might encourage AT&T to target productivity gains to customers  ] -for the standard service.tN 4  Y#- xhԍId. The PCI is adjusted each year to reflect a 3.0 percent productivity gain. To the extent  xthat the price caps formula results in a lowered PCI, AT&T must reduce rates for Basket 1 each  xyear to remain under the PCI. If OCPs were removed from Basket 1, the reduced rates required  xas a result of a lowered PCI would affect only the remaining services in the basket, and"%M0*&&%" therefore could potentially result in proportionally greater rate decreases for these services. t " yN0*&&aa"Ԍ  lԙx25. The Commission sought comment on whether the treatment of OCPs under the  xAT&T price cap plan should be changed, and, if so, in what manner. Specifically, the  xCommission sought comment on whether it should adjust the API or the PCI for Basket  x1 to reflect the removal of OCPs from Basket 1. As an alternative to removal of OCPs  x=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.   x26. In its initial comments, AT&T supported removing OCPs from Basket 1  ]- x["without delay";Oy Y -ԍAT&T Comments at i.; in order to gain the pricing flexibility it assertedly needs to respond to  ]- xmarket conditions and customer demands.7P* Y-ԍId. at 4.7 AT&T also contended that if the Commission  x>adopted new streamlined regulations for OCPs, it should not adjust the API or PCI to  ] - xyeliminate the "headroom" for Basket 1 services that AT&T would gain from this action.Q  Y-- xhԍAs 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.  xIn its reply comments, however, AT&T changed its position, and argued that, because the  xrates for residential OCPs and basic residential schedule services have been reduced  x-significantly under price cap regulation, both categories of service should be removed from  ]j- x.price caps and subject to streamlined regulation.:Rjw Y-ԍId. at 910.: AT&T also opposed moving OCPs to  ]`-another basket if they remained under price cap regulation.7S`*  YH-ԍId. at 4.7  ]V- x   Nx27. Although all commenters agreed that AT&T has maintained a market share for  ]B- x[interstate traffic in the low 60 percent range for the past three years,%TB  Y- x<ԍComments regarding OCPs were filed by AT&T, Sprint Communications Company LP  x(Sprint), WilTel, Inc. (WilTel), the Competitive Telecommunications Association (CompTel), and Pacific Bell and Nevada Bell (Pacific Companies).% many commenters  xexpressed doubts that reducing price cap regulation over AT&T would benefit"8`T0*&&aat"  ]- xconsumers.U Y- xԍSprint Comments at 3; Sprint Reply at 2; see also CompTel Comments at 2; WilTel Comments at 3; Pacific Companies Reply at 35. Some commenters expressed concern that AT&T would use the $270 million  x=in headroom that would result from removing OCPS from Basket 1 to raise prices on the  ]-remaining services in the basket.;Vd Y-ԍWilTel Reply at 2. ;  ]-xC. The "Headroom" Issue   mx28. Because massmarket promotions such as AT&T's True offerings are widely  xavailable to all customers, they can create apparent anomalies when calculating earnings  x=and establishing indexes under the existing price cap plan. For example, AT&T may use  xthe forecasted demand for its promotional plans to lower its adjusted price index (API) for  ] - xBasket 1 services.\W  Yo-ԍSee generally 47 C.F.R.  61.44, 61.46.\ By substantially lowering the API,IXJ  Y"- xԍFor example, as of July 1, 1994, AT&T's headroom under the PCI in Basket 1 amounted  xto $1.12 billion on an annualized basis. Under Section 61.46(a) of the rules, when AT&T  xadjusts a rate, the demand component used to calculate the API remains constant at the base year  xlevel. AT&T's headroom is thus calculated based on 1993 demand multiplied by rates as of July  x1, 1994 for Basket 1 services. AT&T's True promotions accounted for $893.5 million of this  Y- x<annualized headroom. See, e.g., Letter from Thomas H. Norris, Vice President, Regulatory  xAffairs, AT&T, to Acting Chief, Common Carrier Bureau, Federal Communications Commission (Aug. 15, 1994).I AT&T's massmarket promotions  xalso maximize the gap or "headroom" between AT&T's API and its price cap index  xj(PCI) ceiling for Basket 1. AT&T's headroom in Basket 1 determines the extent to which  x.AT&T can raise rates for nondiscounted Basket 1 residential services without exceeding  x!the PCI ceiling or the upper limits of its service band indexes (SBIs). Massmarket  xpromotions, therefore, give AT&T the ability to offer widespread discounts to some  x-residential services ratepayers, while increasing the basic schedule rates, without exceeding  xthe SBI ceiling for the rate increases or dropping below the SBI floor with its promotional  ]L- xdiscounts.LYL Y!-ԍSee notes 80, 97, infra.L If AT&T's basic schedule rate increase offsets the demand decrease caused  xby the higher basic schedule rates, AT&T would not forego any revenues as a result of its promotional offerings. ".Y0*&&aa("Ԍ  x29. The headroom that permits these basic rate increases is, moreover, predicated  xupon forecasts of the expected demand for the promotional offerings. Currently, AT&T  xforecasts its demand for the life of the promotion at the time the promotion is filed. An  xLerror in this forecast could permit AT&T to adjust the API downward based on forecasts  xfor higher demand for a promotion than actually materialize. In such a situation, AT&T  x[would be able to increase its basic rates more sharply than if actual demand were used to  xLcalculate the effect of the promotional offering on the API. Customers of basic schedule  xservice consequently are charged more for service when AT&T's forecasts for promotions  x=are higher than actual demand. No mechanism exists under the price cap rules to correct  xfor any inaccuracies in forecasted demand, although AT&T has committed from time to  ] - xtime to "true up" its headroom calculation based on actual demand.Z  Y" - xxԍSee, 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). AT&T, however, is not required to refund overcharges to customers of basic schedule service.   mx30. AT&T has increased its basic schedule rates in Basket 1 during the past two  xyears concurrently with the implementation of its True promotion offerings. For example,  xon December 5, 1994, AT&T implemented an average rate increase in basic schedule  ]`- x.MTS rates of 3.9 percent, valued at $274 million.W[`d Y- x=ԍSee AT&T Communications Transmittal Nos. 7824, 7832, 7848, Revisions to Tariff  Ym- xxF.C.C. No. 1 (December 5, 1994); see also AT&T Proposes $274 Million in Domestic Price  YX-Hikes, Telecommunications Reports, December 12, 1994, at 41.W On December 27, 1994, AT&T also  xraised rates for optional calling plans, operator/card services, and international MTS  ]L- x(IMTS) within Basket 1 by approximately $260 million.\L Y- x;ԍAT&T Communications Transmittal No. 7967, Revisions to Tariff F.C.C. No. 1 (Dec. 27, 1994). Increases in AT&T's basic  xschedule rates are also reflected in studies conducted by Commission staff, which are  xlbased on the Bureau of Labor and Statistics's (BLS) consumer price index (CPI) and  ].- xzproducer price index (PPI) for interstate toll calls from 1984 through May, 1994. The  xCommission staff study, released in May, 1994, found that AT&T's basic schedule rates  xincreased by 6.5 percent for calendar year 1993 and 9.3 percent from March 1993 through  xMarch 1994, based on the BLSmaintained consumer price index (CPI) for interstate toll  ]- xservices.z]  YK#-ԍSee Trends in Telephone Service (Industry Analysis Div., released May 1994).z A study completed by Commission staff in February, 1995, which addresses": ]0*&&aa"  x{AT&T's long distance prices through yearend 1994, finds that the CPI for AT&T's  ]-interstate toll calls increased a total of 5.4 percent in 1994.^ Y|-ԍSee Trends in Telephone Service, at Table 5 (Industry Analysis Div., released Feb. 1995).   mx31. AT&T has informally objected to the use of the CPI and PPI as measures of  xrate changes. AT&T contends that the indices are not reliable indicators of overall long  xdistance pricing performance because they do not adequately reflect the offsetting effect  ]- xof discount plans.3_ { Y - xԍSee Letter of Thomas H. Norris, Vice President, Government Affairs, AT&T, to  xChairman, FCC (June 10, 1994) (criticizing use of CPI as indicator of basic schedule rates on  xgrounds that it takes into account only basic schedule rates, and not the offsetting effect of  Y - x;discount plans); Adam Clymer, As Parties Skirmish Over Budget, Greenspan Offers a Painless  Y - xhCure, New York Times, January 11, 1995, at 1, 18 (testimony by Chairman of Federal Reserve  xBoard before joint meeting of House and Senate Budget Committees that the overall CPI  xwexaggerates annual inflation by 0.5 to 1.5 percentage points because tenyear adjustment period  xhfor CPI fails to capture fully such changes as suddenly successful inventions like television sets  xkor the introduction of more sophisticated computers, which reduce prices and enhance efficiency).3 The Commission staff study released in February, 1995, for example,  xstates that the CPI for interstate toll services, as computed by BLS, overstate the increases  xin average charges because the CPI sample underweights discount plans and the PPI  ]- xsample excludes discount plans.`c  Y-ԍSee Trends in Telephone Service, at Table 5 (Industry Analysis Div., released Feb. 1995). It is clear, nonetheless, that the overall increases in basic  xschedule rates, when compared with the significant discounts in AT&T's True promotions,  xkhave created a wide range in prices for Basket 1 residential services. The issue posed  xbelow is whether this realignment in prices to residential subscribers in the MTS  xcategories, which are not substantially affected by such price cap mechanisms as the SBI  ]t -limits and the residential rate index,tat  YH- xԍAT&T is required under current rules to calculate a composite average rate for Basket 1  xservices purchased by residential customers. This rate may not increase more than one percent  Y-relative to the annual percentage change in the Basket 1 PCI. See 47 C.F.R.  61.47(g).t requires revisions to the price cap system.  ]`-xD. Reclassification of AT&T as a NonDominant Carrier  ]L-  1x32. The Commission based its tentative conclusions in the OCP NPRM and the  ]E- xLPromotions NPRM to remove OCPs and promotions from Basket 1 primarily on findings  xjthat such treatment would not hinder competition for OCPs and would deter AT&T from">a0*&&aa8"  ]- xusing promotions anticompetitively.db Y-ԍSee discussion at paras. 1219 and 2326, supra.d Since the release of the OCP NPRM and the  ]- xPromotions NPRM, however, AT&T has filed a motion requesting that it be reclassified  ]- xjas a nondominant carrier.c{ Y+- xԍSee Motion for Reclassification of American Telephone & Telegraph Company as a  xNondominant Carrier, CC Docket 79252 (filed Sept. 22, 1993). This motion is still pending before the Commission. AT&T argues in its petition that circumstances have changed  xsince the time it was originally classified as a dominant carrier, including the divestiture  xof the Bell System's bottleneck local facilities and the increase in interexchange carriers,  ]-resulting in "thriving" and "robust" interexchange competition.6d Y -ԍSee id.6  ]- 2 III. DISCUSSION  ]-xA. Commission Goals   @x33. The Commission's primary goals in applying price cap regulation to AT&T  x"include ensuring just and reasonable long distance rates for ratepayers, without  ] - xkunreasonable discrimination,$e7  Y- xԍ See 47 U.S.C.  201(b), 202(a). In deciding to establish an incentivebased system of  Y-regulation for AT&T, the Commission found in the AT&T Price Cap Order, for example, that:  Xxprice cap regulation is a far better regulatory system to employ in an environment  in transition to full competition than is rateofreturn . . . . [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 nondiscriminatory.   YB-4 FCC Rcd at 293943 (footnotes omitted); see also Promotions NPRM, 8 FCC Rcd at 3716.$ as well as promoting the universal availability of such  ]{ - xreasonably priced service.f{  Y- xԍSee 47 U.S.C.  151. In the AT&T Price Cap Order, the Commission referenced its  xadoption of universal service as one of the four primary goals in the access charge proceeding  Y!- xMTS 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 30534. Moreover, the Commission's price cap plan for AT&T is  xintended to afford AT&T the flexibility to adjust prices to approximate more closely"q"f0*&&aa"  ]- xjmarginal costs and to encourage innovation and the introduction of new services.Ag Y-ԍSee id. at 292233.A The  xprimary focus of this Further Notice, therefore, is to determine whether the existing price  xcap plan should be modified to ensure that promotions and Optional Calling Plans (OCPs)  xadvance the Commission's public interest goals. In addition, we seek to adopt a regulatory  xscheme for promotions and OCPs that will continue to foster greater competitiveness in  xthe interexchange market and to permit us to remove more of AT&T's services from price  ]-cap regulation.5h{ Y -ԍSee id.5   x34. To these ends, we seek to reduce regulatory burdens on AT&T that do not  x.serve the public interest goals of our price cap plan for AT&T. Moreover, our intention  xis to provide AT&T with greater flexibility to respond promptly to developments in the  xyinterstate interexchange marketplace. We also want to simplify price cap procedures and  xreduce periods of delay caused by the tariff review process. In addition, we seek to  xensure that our price cap scheme for AT&T treats like services in a sensible, consistent  xmanner. Finally, as discussed below, we seek comment on the degree of protection that  x[the price cap plan should afford AT&T subscribers who obtain domestic MTS from basic rate schedules. x   x35. We tentatively conclude that at the present time these goals would not be  xlserved by removing AT&T's current Basket 1 promotions and OCPs from price cap  xregulation. As discussed below, we tentatively conclude in this Further Notice that  x?Basket1 domestic MTS promotions, domestic MTS OCPs, and basic schedule MTS  xLofferings exhibit substantial crosselasticities of demand, and are generally offered to the  ]- x>same class of customers, i.e., residential customers, following the removal of AT&T's  x[commercial services from price cap regulation. The removal of domestic MTS OCPs and  xpromotions from price caps would thus streamline some AT&T offerings of domestic MTS  x=for residential customers and retain price cap regulation for similar offerings to the same  ]- x class of customers.ai. Y- xԍIn our decisions to streamline AT&T's commercial services and outbound business  xservices, we were able to differentiate these services from those services remaining in price caps  xon the basis of, among other things, the class of customers to whom those services were offered,  Y"- xand the demand elasticities among these classes of customers.  See Commercial Services Price  Y#-Cap Order, FCC 9518 at paras 15, 2021; Interexchange Order, 6 FCC Rcd at 588788.a We decline to take such a step at this time and, contrary to the  ]- x]tentative conclusions of both the Promotions NPRM and the OCP NPRM, we now  xtentatively conclude that the issue of further streamlining of OCPs and promotions should" i0*&&aa"  xbe considered together with AT&T's motion for nondominant status in a separate  x>proceeding. We believe that the regulatory status of OCPs and promotions should be  xNconsidered as part of the larger issue raised by AT&T's motion: whether all of the  xservices that currently are included in Basket 1 should be removed from price cap  xregulation and afforded streamlined regulatory treatment. We invite comment on these tentative conclusions.  ]- xB. Proposed Revisions to the AT&T Price Cap Plan   x36. Having tentatively concluded that neither OCPs nor promotions should be  xremoved from price cap regulation at this time, we now consider whether any  xmodifications 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.  ]t -  @x37. Definitional Issues. As discussed in the background section of this Further  xNotice, no precise definition of promotions has been included in our price cap rules. It  xis clear, however, that the effects of massmarket promotions were not contemplated when  xwe formulated the baskets and bands that restrict AT&T's pricing practices. Furthermore,  xalthough we have defined OCPs, the services covered by this definition are very similar  xto selfselected promotions in that OCPs offer a discounted alternative to basic schedule  xMTS. Accordingly, we tentatively conclude that selfselected promotions and OCPs  xLshould be treated in the same manner under our price cap rules. We propose to establish  xka new regulatory category for selfselected promotions and OCPs: "alternative pricing  xplans" (APPs). The defining characteristic of an APP is that it offers a selfselected  ]- xalternative, i.e., discounted rate, to domestic MTS or other price cap services provided under basic schedule rates.   x38. We also conclude that an APP does not differ from an existing service in the  xdomestic MTS service category, and possibly in the other Basket 1 service categories as  xywell, except in ways related to pricing and terms and conditions affecting pricing. APPs  ]- xyare thus "like" existing domestic MTS services.jN Y]- xԍServices are "like" if they are "functionally equivalent," that is, if a customer perceives  YF - xthat the services perform the same function. See Ad Hoc Telecommunications Users Com. v.  Y1!- xzF.C.C., 680 F.2d 790, 797 (1982). Services need not be "identical" to be functionally  xKequivalent. In the context of mobile services, for example, the Commission has held that the  x"principal inquiry" in determining whether two services are functionally equivalent involves  xi"evaluating consumer demand for the service" and "whether changes in price for the service  xunder examination . . . would prompt customers to change from one service to the other."  Y%- xSee Implementation of Sections 3(n) and 332 of the Communications Act; Regulatory Treatment"%i0*&&%"  xof Mobile Services, Second Report and Order, GN Docket No. 93252, 9 FCC Rcd 1411, 1447 Yy-48 (1994). ď Although we have previously rejected"dj0*&&aa "  ]- x.the notion that only services offering new functional capabilities be treated as "new,"kd Y"- xԍSee AT&T Price Cap Order, 4 FCC Rcd at 3123 n. 1103 (holding that repriced version of alreadyexisting service cannot be considered the same service as the preexisting one).  xwe believe that our rules for the treatment of new services should not apply to APPs, as  xwe discuss below. For example, we propose allowing AT&T to file an APP on a  xstreamlined basis, without cost support, outside of price cap regulation. A streamlined  x=APP would expire automatically 90 days after its effective date unless AT&T would file  xa transmittal with actual cost and demand revenues for the initial 90day period, subject  xto tariff review and approval, to include the APP as a permanent offering under price cap  ]-regulation.Yl Yx-ԍSee discussion at para. 4657, infra.Y   x39. We also tentatively conclude that alternative pricing plans are, by definition,  xnot restructured services. A restructured service is one that replaces an existing service,  xwhereas an APP offers an alternative to an existing service without replacing it.  xkMoreover, a restructured service is automatically available to anyone who simply uses  x[basic schedule MTS, whereas an APP is available only to an eligible customer who signs  xup for the service. Under this approach, we would tentatively conclude that services that  xAT&T currently labels "promotions" that automatically change MTS rates without creating  xLadditional options, even if for a limited period or for limited locations, should be treated  xas restructures, not alternative pricing plans, and should be subject to price cap regulation  ]L- xas soon as the tariff becomes effective.9mL Y- xԍFor example, under the proposed approach, the Cinco de Mayo "promotion," which offers  x 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 oneday period.9 In contrast, an alternative pricing plan, such as  xany of AT&T's True promotions, does not replace the underlying basic rate, but rather  xprovides an optional discount off the basic rate that a customer can "selfselect." We seek  xcomment on these tentative conclusions. We also seek comment on whether our definition  xof 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.  ]-  mx40. Basket 1 Service Categories. In light of our decision to remove commercial  xservices from price caps and our tentative conclusions discussed above concerning  xMalternative pricing plans, we believe it is appropriate to examine the existing Basket 1 "6 m0*&&aa"  xservice categories in order to determine whether any modifications to them are necessary.  xWe tentatively conclude, for the reasons set forth below, that the four existing domestic  xMTS service categories in Basket 1 namely, (1) domestic day MTS; (2) domestic  xevening MTS; (3) domestic night/weekend MTS; and (4) ReachOut America should be  xcombined as a single service category. If this restructuring were implemented, AT&T's  x.Basket 1 would consist of three service categories: (1) domestic MTS, including all three  xkcurrent timeofday MTS categories, OCPs in the existing ReachOut America category  xcovering domestic MTS and domestic MTS promotions (in other words, domestic MTS  xbasic schedule services and APPs as discussed above); (2) operator and credit card services; and (3) international MTS.   x41. We believe that establishing a single domestic MTS service category to  xLencompass the existing timeofday MTS service categories as well as APPs will increase  xAT&T's pricing flexibility and better reflect the realities of the interexchange market. We  xnote, for example, that interstate access rates, which appear to be a major component of  ]j- x.AT&T's marginal costs of providing service, are not timeofdaysensitiveenj Y-ԍThe LECs do not charge access rates according to time of day.e and thus do  x=not track pricing differences among AT&T's domestic MTS categories. We also observe  xthat removal of Basket1 commercial services from price cap regulation would appear to  xmake our conclusion that residential callers are the predominant users of evening and  ]B- xnight/weekend MTS equally applicable to day MTS.VoBy Yy-ԍAT&T Price Cap Order, 4 FCC Rcd at 3060.V There is thus no significant  xdifferentiation by class of customer in the three domestic MTS service categories. We  x0seek comment on whether a single domestic MTS category or retention of the day, evening, and night/weekend structure is appropriate.   !x42. When we first authorized AT&T to offer optional calling plans which met an  x{increased net revenues standard, we recognized the existence of crosselasticities of  x.demand in switched services, and the importance of information about crosselasticity of  ]- xydemand in the evaluation of OCPs.sp, Y-ԍOCP Guidelines Order, 59 Rad. Reg. 2d (P&F) at 83.  s Crosselasticity of demand between basic schedule  xdomestic MTS and AT&T's massmarket True promotions is implicit in the headroom  x=calculations AT&T presents as the result of these promotional offerings; these reductions  xyin the API and relevant SBIs involve revenues "foregone" because of a shift by customers  xkfrom basic schedule rates to promotional rates in the domestic MTS service categories,"p0*&&aaj"  ]- xwithin the parameters of stabilized baseyear demand.q Y- xԍSee, e.g., Letter from Charles L. Ward, AT&T to Acting Secretary, Federal  xCommunications Commission, at 3 (April 20, 1994) (". . . the larger historic demand of  xdomestic services [as compared to international services] provides greater price cap credit for rate reductions made in those services.") Such evidence of crosselasticity  xof demand between the nondiscounted domestic MTS basic schedule offerings and the  xservices we have defined above as APPs is not restricted to the regulatory sphere. A recent news article, for example, reported that:  3XxAT&T . . . saw a huge shift among its own customers toward discount  Dcalling plans. Company executives say 53 percent of all minutes of  Aconsumer traffic on its network last year were discounted calls, a jump from  ]-33 percent in 1993.r6 Y- xYԍEdmund L. Andrews, NoHoldsBarred Battle for LongDistance Calls, New York Times, January 21, 1995, at 48.   xThe evidence of crosselasticity of demand between basic schedule MTS and APPs argues  xin favor of a finding that these services should be classified within the same service  xcategory, much as AT&T's True promotions and basic schedule offerings coexist at  xpresent within the three domestic MTS service categories. We thus tentatively conclude  ]t - xthat domestic MTS selfselected promotions and OCPs, i.e., APPs, are sufficiently  xsubstitutable with domestic MTS services to warrant their inclusion in a single domestic MTS service category. We seek comment on this tentative conclusion.  ]O-  x43. Service Category Bands. The establishment of a single domestic MTS service  xcategory would require modifications to the service category bands applicable to the  xjexisting residential service categories. The services currently within Basket 1 that would  xbe merged into a single domestic MTS service category namely, timeofday domestic  xMTS, ReachOut America, and current domestic MTS promotions are currently subject  ]- xkto both upward and downward banding limitations.s Y- xԍSee Section 61.47 of the Commission's Rules, 47 C.F.R.  61.47 (adjustments to the service band index; pricing bands). Under the downward banding  x=limitation in the current price cap rules, a Basket 1 rate decrease proposed by AT&T that  xwould result in an overall change in a service category rate that is greater than five (5)  xpercent relative to the change in the price cap index (PCI) does not qualify for streamlined"n s0*&&aa"  ]- xreview.st Y-ԍSee AT&T Price Cap Order, 4 FCC Rcd at 3056; 47 C.F.R.  61.49(d).s Under the upward banding limitation in the current price cap rules, any Basket  x1 rate increase proposed by AT&T that results in an overall change in a service category  xrate that is greater than five (5) percent relative to the change in the PCI, or in the case  xof the domestic evening MTS and domestic night/weekend MTS service categories, greater  xthan four (4) percent relative to the change in the PCI, does not qualify for streamlined  ]- xreview.Au{ Y -ԍSee id. at 305960.A Withinband filings are considered to be prima facie lawful, and petitioners  ]-seeking suspension of such filings are held to a high burden of proof.pv. Y -ԍSee Section 1.773 of the Commission's rules, 47 C.F.R.  1.773.p   ^x44. We tentatively conclude that a fourpercent ceiling should be placed on the  ]- x@single domestic MTS service category band. In the AT&T Price Cap Order, the  xCommission imposed a similar fourpercent upper limit on the domestic MTS evening and  xdomestic MTS night/weekend service category bands because it found that these categories  xwere "predominantly used by residential callers." The Commission expressed particular  xconcern that there are "a significant number of customers residing in nonequal access,  xrural areas who have no alternative to turn to should AT&T raise its evening and  ]p- xnight/weekend rates."]wp Y-ԍSee AT&T Price Cap Order, 4 FCC Rcd at 305960.] We seek comment whether this reasoning or other reasons for  x tighter band limits on the domestic MTS category retain their viability. In any event,  xbecause we believe that the single domestic MTS service category we propose in this  xlFurther Notice will be used predominantly by residential customers, we tentatively  xconclude that a fourpercent upper limit is therefore appropriate. We seek comment on this tentative conclusion.   x45. We further propose to modify the existing fivepercent floor on Basket 1  xservices with respect to the proposed single domestic MTS service category. The lower  xband was created in the price caps scheme to deter AT&T predatory conduct. In the  ] - xAT&T Price Cap Order, the Commission decided to establish a fivepercent floor on price  x>decreases within the Basket 1 service categories because it believed that the "threat of  xpredatory pricing is one that is best addressed in a structural manner as part of price cap  ]- xjregulation."Zx YC$-ԍSee AT&T Price Cap Order, 4 FCC Rcd at 3056.Z The Commission acknowledged that rate decreases below the lower band  xlimits are not evidence of predatory pricing: "such belowband reductions as are possible "G x0*&&aa"  xOwithin the limits of our price cap scheme are more likely to be competitive than  ]- xpredatory.":y Y|-ԍId. at 3114.: We believe that successful predation, defined as the ability to lower prices  x\below a relevant measure of costs in order to drive competitors from the market, is an  ]- x>unlikely occurrence.z{ Y- xKԍSee, e.g., Brook Group Ltd. v. Brown & Williamson Tobacco Corp., 113 S. Ct. 2578,  Y-258788 (1993). Ľ In the AT&T Price Cap Order, the Commission observed that  x."[p]redatory pricing, though often alleged, is generally uncommon, and proven cases are  xrare. We have, through the structure of AT&T's service baskets, created conditions under  xwhich predation should be as unlikely in the interexchange telecommunications market as  ]- xit is in the economy generally."K{ Y -ԍAT&T Price Cap Order at 3114.K We also tentatively conclude that the possibility of  x\predation presents less of a concern in an environment where each of the largest three  ]- xinterexchange carriers offers some form of long distance promotional discount.|  Y1- x,ԍSee John J. Keeler, MCI and Sprint Unveil Deep Discounts, New Services in Fresh Fight  Y- xWith AT&T, Wall Street Journal, January 6, 1995, at A3. In addition, a statement attributed to  xa Sprint spokeswoman in a recent trade press article regarding a new marketing campaign initiated by longdistance carrier LCI International, for example, indicates that:  @XxSprint follows [the] lead of AT&T and MCI in determining and setting rates for  2[the] consumer market. [The spokeswoman said] "That's our competition and that's who we deal with."   Yf- x\See LCI Charges Big 3 Long Distance Companies Overcharge by $2 Billion Annually,  xCommunications Daily, January 31, 1995, at 12 (quoting Sprint Consumer Services Group spokeswoman Juanita Teas).  We  x]therefore propose that prices for the single domestic MTS service category band be  x/allowed to decrease by greater than five percent. We seek comment on whether a 15  xpercent lower limit on the domestic MTS service category band would be more appropriate while not significantly increasing the likelihood of predatory pricing. x  ]m-  !x46. New Services Issues. In proposing to establish a single domestic MTS service  x<category including the services we have defined above as APPs, we also propose to modify  xour existing new services rules to clarify that these rules do not apply to APPs. Under our  xcurrent system, the manner in which AT&T styles a new discounted offering determines  xwhether the price cap new services rules apply to the service. Thus, a new offering  xclassified as an optional calling plan is subject to new services treatment, while essentially";|0*&&aa8"  xthe same offering styled as a promotion is not treated as a new service but, instead, as a  xrate change for an existing service. As explained below, this difference in labels has  xsignificant consequences for price index calculations without any sound basis for the  xLdiffering results ensuing from these calculations. We propose to retain our new services  ]- xrules 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.  ]-  1x47. As stated in the background section, supra, a new service is defined as any  xfiling that expands ratepayers' range of service options within those services subject to  ]- xprice cap regulation.l} Y2 -ԍSee AT&T Price Cap Reconsideration Order, 6 FCC Rcd at 66667.l New services may be introduced on 45 days' notice, provided  xAT&T can demonstrate that the new service will generate a net revenue increase within  x24 months after incorporation of the new service into an annual price cap tariff or within  ] - xK36 months after the effective date, whichever occurs first.5~ { Y-ԍSee id.5 To develop the historical data  xneeded to perform index calculations for new services, new services are included in price  xcap regulation in the first annual price cap tariff filing after completion of the base year  ]p- xin which the new service becomes effective.p. Y\-ԍSee id.; see also 47 C.F.R.  61.42(g), 61.44(g), 61.46(b), 61.47(b). AT&T does not receive price cap credit  xfor 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.   x48. The current requirements that new services be filed on 45 days' notice,  xLsupported by a showing that they will result in a net revenue increase, can severely limit  xyAT&T's ability to respond promptly to new developments in the increasingly competitive  x.marketplace in which it offers its price cap services. We therefore tentatively conclude  ] - xthat we should not apply our new services rules to APPs. Instead, we propose to allow  xjAT&T to file alternative pricing plans initially outside of price caps, as are new services,  ] - xbut on a streamlined basis, i.e., on 14 days' notice, without cost support. As discussed  xmore fully below, we propose to allow AT&T to receive immediate price cap credit for  xLAPPs upon the conclusion of a shortened 90day initial period, as opposed to the current oneyear base period for new services.   x49. We are concerned that basing PCI, API, and SBI calculations for inclusion of  xNnew services into price caps on forecasted, as opposed to actual, data may result in  xoverstated headroom, especially when such forecasts can extend over a period of one year  xor more. We have also observed that the use of extended forecasts may also allow AT&T"0*&&aaJ"  xkto ratchet up forecasted demand by making repetitive filings several times a year. We  xtentatively conclude that we should avoid the use of demand forecasts that are not based  xon actual data in connection with the inclusion of APPs into price caps. We also  xtentatively conclude that AT&T should not be required to delay the inclusion of APPs into  xBasket 1 for up to 18 months. We believe that allowing AT&T to offer APPs on 14 days'  xnotice and with a shortened 90day base period will address effectively AT&T's interest  xzin greater streamlining. At the same time, requiring the use of actual demand and cost  xdata upon the conclusion of ninetyday base period should address our concerns regarding  xkthe possibility that AT&T may ratchet up its forecasted demand by means of repetitive filings of extended forecasts.   x50. We believe that these modified procedures for the introduction of APPs will  x/therefore effectively streamline and preserve the integrity of our price cap rules. We  xtentatively conclude that this approach would address many of AT&T's concerns about the  xinflexibility of applying our new services rules to discount service plans, while meeting  xour concerns about the use of forecasted data in making price caps calculations. We seek  xcomment on these tentative conclusions. We also seek comment as to how the approach  xto price cap treatment for APPs outlined here should be applied to AT&T existing, on xjgoing promotional offerings which fall within the APP definition we have proposed and are currently under price cap regulation, such as the "True" promotions.  ].-  O x51. We also propose to maintain our current new service rules as they apply to  xnew AT&T price cap offerings that are not APPs. Because such services will presumably  xbe primarily services that are not "like" alreadyprovided services, these services are likely  xto present cost and demand issues beyond the narrow set of "headroom" issues we address  xin this Further Notice. We thus believe that we should continue to hold such new services  xoutside of price caps until the first annual price cap tariff filing after completion of the  xMbase year in which the new service becomes effective in order to gather complete and  xcomprehensive data on the costs, demand, and revenues associated with such new services  xbefore they are placed within a price cap basket and thus affect the demand and revenue  ]- xjfactors for that basket.J YZ- xԍSee 47 C.F.R.  61.44(g) (exogenous cost changes to PCI attributable to new services);  xz47 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).J Moreover, when we instituted price cap regulation for AT&T,  xwe recognized that new services can raise complex issues, including discrimination and  ]- xanticompetitive behavior, which require careful review.ZM Y$-ԍSee AT&T Price Cap Order, 4 FCC Rcd at 3122.Z Tariffs proposing new services  xwere thus required to be filed on 45 days' notice, with supporting information and data to"0*&&aa,"  xdemonstrate compliance with the requirement that such new services increase net revenues  ]- x>for price cap services. Y|- xԍId. at 312324; see also id. at 312728 (rejecting AT&T proposal that we apply streamlined tariff review to new services). Because we believe that such complex issues may remain of  x[potential great concern at present, AT&T should continue to file tariffs for new services  xother than APPs on 45 days' notice and to make the showing of increased net revenues for  xnew services currently required under our rules, in order to minimize any risk of unreasonable discrimination, crosssubsidization or anticompetitive behavior.   x52. We also seek specific comment on the proper price cap treatment of AT&T's  xrecently introduced 500 service, which appears not to fall within our proposed definition  xof alternative pricing plans. AT&T filed this offering on 27 days' notice as a streamlined  xbusiness service, arguing that such treatment was appropriate because the new service was  ] - x primarily designed for and particularly useful to business customers. d Y- xԍSee AT&T Communications Transmittal No.7698, 10 FCC Rcd 900 (1994) ("Transmittal  Y-7698 Order"). In petitioning  xagainst the AT&T tariff introducing 500 service, MCI quoted Section 61.58(c)(5) of our  xRules, which states, in relevant part: "Tariff filings involving the introduction of a new  x0service within the scope of Section 61.42(g) . . . must be made on at least 45 days'  ]j- xnotice."Cj Y*-ԍ47 C.F.R.  61.58(c)(5).C MCI interpreted this rule to encompass all new services tariffs filed by AT&T,  xand contended that AT&T must adhere to this rule or obtain a waiver for its tariff to be  ]V- xlawful.V Y- xjԍMCI Petition To Reject Or, In The Alternative, To Suspend And Investigate, AT&T Communications Transmittal No. 7698 (filed Nov. 10, 1994). After the Common Carrier Bureau deferred AT&T's tariff to 45 days' notice  xand AT&T submitted cost data which it represented met the requirements of Section  ]B- x61.49(g) of our rules, the service was permitted to take effect without an investigation.[BM  YM-ԍTransmittal 7698 Order, 10 FCC Rcd at 90001.[  xThe potential ambiguity in our Rules with regard to streamlined versus price cap treatment  xof new services is of concern to us. With particular relevance to 500 service, we now  xpropose to change our rules to specify that to be subject to streamlined rather than price  ]- xcap regulation, the projected demand for such new services can include only de minimis  ]- x.usage by AT&T's residential subscribers, (i.e., less than five percent of overall projected  xdemand within the net revenue test period set forth in Section 61.49(g)(1)). We seek comment on these tentative conclusions and proposals." 0*&&aa"Ԍ ]- x  ]-   x53. We accordingly propose to change our new service rules to allow AT&T to file  ]- xall new APPs on a streamlined basis, i.e., on 14 days' notice, without cost data, provided  xjthat the APPS are scheduled to expire automatically no later than 90 days after the initial  x-effective date. The APPs will be kept outside of price caps during this period; we will not  xallow AT&T price cap credit for these new APPs. On the last business day of the 90day  xperiod, AT&T may extend the expiration date of the APP for 30 days in order to permit  x the conversion of the APP as a permanent offering under price caps. These revisions  xwould allow AT&T to continue to provide the APP outside of price caps for the extended  xperiod. Within this thirtyday period, AT&T would be required to submit tariff revisions  xLon not less than 14 days' notice. The new tariff pages would remove the expiration date  x<and would be accompanied by supporting information required to include the service under  xprice caps. If a longer period is required for review of the tariff filing by the Common  xCarrier Bureau, AT&T would be required to defer tariff revisions introducing the  xLpermanent offering for a period not to exceed 120 days. AT&T would also be permitted  xto extend the termination of the APP during this period. In this way, AT&T would be  xable to avoid any interruption in its offering of discounted rates, pending completion of the Bureau's review of the permanent offering.   x54. We caution that we will not allow AT&T to evade the 90day expiration period  xMfor new APPs held outside of price caps by making insubstantial changes to the rates,  xterms and conditions of such APPs and reintroducing them through such tariff revisions  xas "new" APPs. We will consider all relevant indicia in our tariff review process as to  x!whether APPs are indeed new offerings, including branding, trademarks, AT&T's identification of APPs to consumers, and other marketing and marketplace factors.   x55. The tariff revisions that propose to include the APP under price caps would  x be subject to the provisions of Section 61.49 of our Rules. These revisions would be  xsupported by actual demand figures from the 90day period that the initial APP filing was  xeffective. The rates, terms and conditions of the APP to be subject to price caps may not  xdiffer in any material respect from the rates, terms and conditions of the APP as originally  x=introduced outside of price caps. We would allow AT&T immediate index credit on the  xkdate that the tariff revisions placing the APP under price caps take effect, based on its  xrepresentation of the annualized actual demand for the APP, as well as any exogenous cost  ] -changes that may relate to the APP.  Y5#- xKԍBy "annualized" demand, we mean that AT&T would be able to apply demand figures  xwgained from the initial 90day period by adjusting this actual demand data to correspond to the  x;base year demand used in calculating the API and SBIs. For example, data for the full 90 days"%0*&&$%"  xwould multiplied by a factor of 4.05 to calculate the "annual" headroom effect of the APPs' discounted rates. " b0*&&aa"Ԍ ]-  ԙx56. We also propose to require AT&T to file quarterly "trueup" reports, i.e.,  xquarterly updates of actual demand figures, during the initial year that the new APP is  xincorporated into price caps, in order to refine its calculations of the headroom created by  xthe offering. We would allow AT&T to file rate changes to the new APP during the first  xyear of price cap regulation by means of a tariff transmittal, giving 14 days' notice of such  xchanges, but any change in price cap indices would have to filed on 45 days' notice and  x-based on historical demand data such as AT&T would be required to file with the quarterly trueup report.   mx57. We thus propose changes to Sections 61.3, 61.43.44, 61.46.47, 61.49 and  x61.58 of our Rules to permit streamlined treatment for new APPs. We believe that  xrequiring AT&T to use historical demand, as required for other types of rate changes  x{under our current price cap rules, will eliminate the creation of headroom based on  xLdemand projections for promotions. Any increases in the basic schedule rates, therefore,  xwill be based on actual revenue balancing, not merely on forecasts of revenue stream, thus  x=providing stability for basic schedule ratepayers and for AT&T. AT&T will also benefit  xfrom the increased flexibility to file "initially streamlined" APPs and to receive nearly  x.immediate index credit for those APPs filed on a permanent basis after the initial 90day  x\period. The Common Carrier Bureau would also retain the ability to defer APP tariff  xfilings, either upon the initial filing or upon the price cap filing after the initial 90day  xKperiod, if additional information or review is required, and to suspend or reject such filings based on applicable legal standards.  ]-xC. Limitations on Rate Increases for Basic MTS    !x58. As discussed above in the background section of this Further Notice, AT&T's  xcreation of price cap "headroom" through discounted offerings has permitted it to increase  xit's basic schedule rates for domestic MTS. We ask here whether such basic schedule rate  xincreases implicate our statutory and policy goals, pursued through price cap regulation,  x<of just and reasonable rates, without unreasonable discrimination, and universal availability  xof such reasonably priced service. AT&T has asserted that its increases for basic schedule  xrates are reasonable. We seek comment on this matter generally and on the specific issues discussed below.   x59. As a threshold matter, we seek comment on the significance of the AT&T  x=basic rate schedule for domestic MTS relative to other rates offered for domestic MTS in"!!b0*&&aa "  xthe interexchange marketplace. We note, for example, that many of AT&T's discounted  xofferings, such as the True promotions, are framed in terms of percentage discounts off  xthe 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.   x60. Commenters should discuss whether, and, if so, how our public policy goals,  x|such as the achievement of reasonably nondiscriminatory, costbased rates or the  xpromotion of universal service, should affect our regulatory treatment of Basket 1 domestic  xMTS. We address specific issues relating to discrimination and the cost basis for AT&T's  xrates below. We also seek comment as to whether universal service concerns are  xjimplicated in our regulation of AT&T's basic rates. Although "universal service" is most  xgenerally regarded as a goal pursued through the widespread availability of reasonably  xLpriced local telephone service, some have advocated that this goal should be expanded to  xinclude services made available through a more technologically advanced communications  xinfrastructure. We recognize that Section 1 of the Communications Act, usually regarded  xlas the locus of the universal service mandate, requires us to regulate so as "to make  ]`- xavailable, so far as possible, to all the people of the United States, a rapid, efficient,  ]V- xNationwide, and worldwide wire and radio communication service with adequate  ]L- xfacilities at reasonable charges, . . . ."LL Y-ԍ47 U.S.C.  151 (emphasis added).L We seek comment on what level of scrutiny this  xjstatutory mandate requires us to undertake with respect to the basic schedule offerings of the dominant interexchange carrier.   x61. We also seek comment on whether the availability of local telephone service  xLis affected by increases in AT&T's basic schedule rates for interstate MTS. We note, for  xexample, that studies indicate that the majority of those without telephone service once  ]- xwere subscribers, but have been disconnected for nonpayment of toll charges.}y Y=- xԍSee Field Research Corp., Affordability of Telephone Service, Vol. 1, NonCustomer  Y(- xSurvey, for GTE/Pacific Bell (Oct. 1993); Chesapeake and Potomac Telephone Co.'s Submission  Y-of Telephone Penetration Studies, Docket 850 (D.C. Pub. Service Comm'n., Oct. 1993).} We seek  xcomment on the relationship, if any, of increased basic schedule service rates for domestic  x MTS with the disconnection of local telephone subscribers due to nonpayment of toll charges.   x62. AT&T states that it typically does not recover the incremental costs of  x.providing service to its "lowvolume" basic schedule customers, while its price structure  xfor its "highvolume" customers has normally exceeded the incremental costs of providing""0*&&aa<"  ]- xjresidential longdistance service to them.a Y- xԍSee Peter K. Pitsch, A Brief History of Competition in the Long Distance Communications  Yq- xMarket, at 1522, attached to Letter from Charles L. Ward, Government Affairs Director,  xAT&T, to Chief Economist, Office of Plans & Policy, Federal Communications Commission,  YE- xsubmitted in CC Docket 79252 (Sept. 22, 1994); see also Letter from Charles L. Ward to  Y0-Federal Communications Commission, (April 20, 1994), supra at note 110.a According to AT&T, the provision of mass xmarket discounts, such as the True promotions, to highvolume customers and increases  x>in rates for lowvolume customers are justified as a means of rebalancing prices with  ]- xcosts.% Y - xԍSee Letter from Charles L. Ward, AT&T, to Acting Secretary, Federal Communications Commission, submitted in CC Docket 79252 (April 20, 1994). Commenters should discuss the validity of AT&T's arguments regarding cost  xrecovery for serving "lowvolume" customers of basic schedule offerings visavis cost  xLrecovery for serving "highvolume" customers of discounted offerings, and the degree to  x\which "lowvolume" customers experience periods of highervolume usage which can  xoffset the costs of providing low volume service in other periods. We also seek comment  x0on the extent to which the Communications Act's protections against unreasonable  ]- xdiscrimination are implicated by the cost issues we raise here, i.e., if rate differences  xbetween AT&T's basic schedule services and its discounted offerings reflect a wider  xvariation than corresponding cost differences, at what point do such rate variations become unreasonable?   x63. We seek comment on the relative availability of AT&T discounted offerings  x=as compared to domestic MTS offered at basic rates. If AT&T's discounted offerings are  xyunavailable to a significant body of residential customers, then AT&T's increases in basic  x\rates to these customers may extend well beyond any AT&T need to recover costs and  xmay demonstrate a public interest need to curb unrestricted rate increases. To what extent  xare AT&T's discounted offerings available to "highvolume" residential subscribers where  xthe advanced billing techniques upon which these offerings rely may not be readily  xavailable? Such a lack of availability could occur in rural areas served by independent  xztelephone companies, and areas where "equal access" to interexchange carriers has not  xybeen implemented. What proportion of AT&T's residential customers are located in such areas are thus affected? x   x64. We seek comment on whether we should adopt one of the two following  xoptions that will afford varying measures of protection against basic schedule rate  xincreases. First, we seek comment on creating a basic rate index to replace the residential  xMindex in Basket 1. The residential PCI was created as a subindex of the Basket 1 total  x[PCI, and was calculated for revenue for all the services in Basket 1. It created a separate"#0*&&aa\"  ]- xcap on the amount that residential services in Basket 1 could increase each year.] Y-ԍSee AT&T Price Cap Order, 4 FCC Rcd at 305253.] The  xpurpose of the residential PCI was to protect residential services against price increases  xwhich would offset price decreases for commercial service. The recent streamlining of  xcommercial services, however, renders this function obsolete. Thus, we propose to delete the residential PCI from our rules.   x65. In place of the residential index, we propose creating a basic rate index, similar  xin operation to the residential index, which would govern increases in basic domestic MTS  ]- xservice rates to a given percentage per year.{ Y - xԍIn calculating the basic rate index, we would require AT&T to utilize its nondiscounted  xbasic rates and exclude any discounts based on volume, term, "loyalty" (length of service),  xh"winback" (change from another carrier's service), or other factors, even if these discounts are offered on an automatic, non"selfselecting" basis. We tentatively conclude that this  xpercentage should be set at 5 percent, that is, AT&T would not be able to increase basic  xkrates by a margin of more than 5 percent per year in relation to the Basket 1 PCI. We  xselect 5 percent because it is a reasonably restrained application of indexed increases in  ] - xAT&T's basic toll rates in recent years,  Y--ԍSee para. 3637, supra, for a discussion of recent increases in AT&T's basic rates. and reflects as well the general limitation we  ]~ - x<have placed on the pricing flexibility in price caps service categories.M~  Y-ԍSee 47 C.F.R.  61.47(e)(1).M We seek comment on these conclusions and proposals.  ]j-   x66. As an alternative to adopting our above proposed basic rate index to protect  ]V- xzbasic MTS rates, we seek comment on adopting AT&T's "safety net" proposal. AT&T  xNhas proposed an option that is predicated on the market for Basket 1 services being  ]B- xsegmented among discrete classes of customers.BM  YM- xKԍLetter of Alex Mandl, AT&T, to the Chairman, Federal Communications Commission, dated October 4, 1994. AT&T requests that the Commission  xreclassify AT&T as a nondominant carrier. In return, AT&T states that it will provide  xlowincome and lowvolume consumers with a "safety net" of lowusage service plans.  x>This plan would consist of two services: one targeted for lowincome users, the other  xavailable to all consumers but intended to benefit lowvolume users. Prices would remain  xLfixed until 1998. This option offers a measure of builtin protection for lowincome and  xlowvolume users. AT&T bases its proposal on its assertion that "[t]here is overwhelming"$ 0*&&aa"  x"evidence that the current state of competition in this market fully support[s] the  ]-reclassification of AT&T as nondominant . . . ."2 Y|-ԍId. 2   x67. We seek comment on this option generally and whether such an approach is  ]- xfeasible and desirable without reclassification of AT&T as a nondominant carrier.^{ Y- x<ԍWe note, for example, that the OCP Guidelines Order permitted a dominant carrier to  xoffer service with minimum monthly charges "as long as it also makes available unbundled basic  Y -MTS offerings." OCP Guidelines Order, 59 Rad. Reg. 2d (P&F) at 89.^ We  x[also seek comment on the appropriate price levels for lowincome and lowvolume users,  xrespectively. 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.  ]-xD. Exogenous Costs Issues.   |x68. All carriers subject to price cap regulation file adjustments to the PCI at the  xannual price cap tariff filing and maintain updated PCIs to reflect the effect of midyear  xaccess and exogenous cost changes. Exogenous costs are costs that change due to changes  xin laws, regulations, or rules, or other administrative, legislative, or judicial changes  ]j- x-beyond a carrier's control and not reflected elsewhere in the price cap formula.Wj Y*-ԍFurther Notice, 3 FCC Rcd at 3383 n.738. W Carriers  ]`- x|calculate these adjustments using the price cap formulas set forth in our rules.Z` Y- See 47 C.F.R.  61.4461.45. Z  ]V- xExogenous costs are represented by the "z factor."YVh  Y|-ԍSee id.  61.44(c), 61.45(d). Y In addition, the price cap formula  xapplied to AT&T includes a "y factor," which allocates AT&T's access costs among all  ]B- xzcapped services in AT&T's price cap baskets.OB  Y-ԍId.  61.44(d)(h). O Changes in access costs are treated as exogenous costs for AT&T.   x69. When it adopted the AT&T price cap plan in 1989, the Commission  xdetermined that exogenous costs should result in an adjustment to the PCI to ensure that  ]- xthe price cap formula does not lead to unreasonably high or low rates.n  Y%-ԍAT&T Price Cap Order, 4 FCC Rcd at 300203, 301718. n We recently"%0*&&aa4"  ]- xrevised our rules for local exchange carriers (LECs) in the LEC Price Cap Performance  ]- x[Review Report and Order, Y- xԍPrice Cap Performance Review for Local Exchange Carriers, CC Docket No. 941, FCC  Yh- xY95132, (rel. April 7, 1995), (LEC Price Cap Performance Review Report and Order), at paras.  YS-292320. , to change the exogenous cost rules applicable to accounting  xchanges. Exogenous treatment is now permitted only for those accounting changes that  ]- xresult in economic cost changes, i.e., that affect the discounted cash flow of the LEC. We  xconcluded that most accounting changes, generally, will have no direct impact on the cash  xflow choices available to LECs because financial accounting charges are designed  xprimarily to give the financial markets a more accurate portrayal of the financial health of  ]- xthe corporation, and not necessarily to make the company behave differently.@M Y -ԍId. at para. 306. @ We also  x{concluded that adopting this economic cost standard will narrow the exception that  xexogenous cost treatment represents to the general principle that, under price caps, cost  ] - xchanges do not flow directly into rate changes.C  Yc-ԍId. at paras. 29496.C We ordered the LECs to adjust their  xPCIs to exclude prospectively any accounting cost changes currently reflected there for  ] - x[which carriers did not incur an economic cost,D  Y-ԍId. at paras. 30710. D for example, the changes in accounting  xfor costs of employee postretirement benefits other than pensions (commonly know as  x"other postretirement employee benefits" or "OPEBs") that are engendered by the  xFinancial Accounting Standards Board's (FASB's) Statement of Financial Accounting  ]i- xStandards106 (SFAS106)if  Y- xԍSFAS106 requires companies to account for OPEBs on an accrual basis beginning  xDecember 15, 1992. SFAS106 also requires companies to book the previously unaccrued  x,OPEB amounts for retirees and active employees as of the date that the company adopts SFAS YH-106. See id. at para. 276. and Statement of Financial Accounting Standards112 (SFAS ]_-112)._  Y- xԍSFAS112 requires companies to account for such postemployment benefits on an accrual  Y - xbasis beginning December 15, 1993. The Common Carrier Bureau required the LECs to adopt  Y!- x,SFAS112 for regulatory accounting purposes no later than January 1, 1994. Bell Atlantic has  Y"-sought exogenous treatment of its SFAS112 costs. See id. at para. 277.   x70. We tentatively conclude that we should adopt the same treatment for exogenous  ]A- xcosts for AT&T as we adopted for LECs in the LEC Price Cap Performance Review"A&B0*&&aat"  ]- xReport and Order. We seek comment on this tentative conclusion. We also seek comment  xon whether differences between AT&T and the LECs justify the adoption of different rules  xgoverning 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 ׃  ]-  x71. This is a nonrestricted notice and comment rulemaking proceeding. Ex parte  xpresentations are permitted, except during the Sunshine Agenda period, provided that they  x=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).   x72. Pursuant to applicable procedures set forth in Section 1.415 and 1.419 of the  xjCommission's Rules, 47 C.F.R.  1.415 and 1.419, interested parties may file comments  xin this proceeding on or before July 3, 1995, and reply comments on or before July 24,  x1995. All relevant and timely comments will be considered by this Commission before  xfinal action is taken in this proceeding. In reaching its decision, the Commission may take  xinto consideration information and ideas not contained in the comments, provided that such  xinformation or a writing indicating the nature and source of such information is placed in  x-the public file, and provided that the fact of the Commission's reliance on such information is noted in the Report and Order.   x73. To file formally in this proceeding, participants must file an original and five  xcopies of all comments, reply comments and supporting comments. If participants want  xeach Commissioner to receive a personal copy of their comments, an original and 11  xcopies must be filed. Comments and reply comments should be sent to the Office of the  xSecretary, Federal Communications Commission, Washington, D.C. 20554. Comments  x[and reply comments will be available for public inspection during regular business hours  x/in the FCC Reference Center (Room 239) at its headquarters at 1919 M Street, N.W., Washington, D.C.   x74. We have determined that Section 605(b) of the Regulatory Flexibility Act of  x1980, 5 U.S.C.  605(b), does not apply to this rulemaking proceeding because if  xjpromulgated, it would not have a significant economic impact on a substantial number of  x=small entities. Although we do not find that the Regulatory Flexibility Act is applicable  xto this proceeding, this Commission has an ongoing concern with the effect of its rules and  xregulation on small business and the customers of the regulated carriers. The Secretary  xkshall send a copy of this Further Notice of Proposed Rulemaking, including the Initial  xRegulatory Flexibility Analysis, to the Chief Counsel for Advocacy of the Small Business"$'0*&&aa#"  xZAdministration in accordance with paragraph 603(a) of the Regulatory Flexibility Act, Pub.  ]-L. No. 96 354, 94 Stat. 1164, 5 U.S.C.  601 et seq (1981).    ]- V. ORDERING CLAUSE ׃   x75. Accordingly, IT IS ORDERED that, pursuant to Sections 4(i), 4(j), 201205,  xz303(r), and 403 of the Communications Act of 1934, 47 U.S.C.  154(i), 154(j), 201 x.205, 303(r), 403, NOTICE IS HEREBY GIVEN of proposed amendments to Part 61, and  xSections 61.3, 61.43.44, 61.46.47, 61.49 and 61.58, in accordance with the proposals,  xdiscussions, and statement of issues in this Further Notice of Proposed rulemaking, and  xthat COMMENT IS SOUGHT regarding such proposals, discussion, and statement of issues.  ]x -x` `  FEDERAL COMMUNICATIONS COMMISSION  0(#(#Xx` `  hh@ x` `  William F. Caton x` `  Acting Secretary "<(0*&&aa"  ]- )  W& APPENDIX A ă  ]-F  Proposed Amendments to the Code of Federal Regulations ă  \-  \-PART 61 TARIFFS  ]-`x1. The authority citation for Part 61 continues to read as follows:   OxAUTHORITY: Secs. 1, 4(i), 4(j), 201205, and 403 of the Communications Act  xof 1934, as amended; 47 U.S.C. 151, 154(i), 154(j), 201205, and 403, unless otherwise noted.   2x2. Section 61.3 is amended by redesignating paragraphs (c) through (mm) as  ]l-paragraphs (d) through (nn), and adding new paragraph (c) to read as follows:  \X-  61.3 Definitions.  ]D- * * * * *  61.3(c) through (ll) are redesignated as follows:  ]-Old section ` `  New section  ]-61.3(c)` `  61.3(d)  ]-61.3(d)` `  61.3(e)  ]-61.3(e)` `  61.3(f)  ]-61.3(f)` `  61.3(g)  ]-61.3(g)` `  61.3(h)  ]-61.3(h)` `  61.3(i)  ]-61.3(i)` `  61.3(j)  ]-61.3(j)` `  61.3(k)  ]-61.3(k)` `  61.3(l)  ] -61.3(l)` `  61.3(m)  ]!-61.3(m)` `  61.3(n)  ]"-61.3(n)` `  61.3(o)  ]#-61.3(o)` `  61.3(p)  ]$-61.3(p)` `  61.3(q)  ]|%-61.3(q)` `  61.3(r)"|%)0*&&aa$"Ԍ ]-61.3(r)` `  61.3(s)  ]-61.3(s)` `  61.3(t)  ]-61.3(t)` `  61.3(u)  ]-61.3(u)` `  61.3(v)  ]-61.3(v)` `  61.3(w)  ]-61.3(w)` `  61.3(x)  ]-61.3(x)` `  61.3(y)  ]-61.3(y)` `  61.3(z)  ]-61.3(z)` `  61.3(aa)  ]-61.3(aa)` `  61.3(bb)  ] -61.3(bb)` `  61.3(cc)  ] -61.3(cc)` `  61.3(dd)  ] -61.3(dd)` `  61.3(ee)  ]~ -61.3(ee)` `  61.3(ff)  ]t -61.3(ff)` `  61.3(gg)  ]j-61.3(gg)` `  61.3(hh)  ]`-61.3(hh)` `  61.3(ii)  ]V-61.3(ii)` `  61.3(jj)  ]L-61.3(jj)` `  61.3(kk)  ]B-61.3(kk)` `  61.3(ll)  ]8-61.3(ll)` `  61.3(mm)  ].-61.3(mm)` `  61.3(nn) * * * * *  x(c) Alternative Pricing Plan (APP). Any deviation from the basic schedule rates for  xdomestic MTS offered on an optional basis by an interexchange carrier subject to price cap regulation pursuant to  61.41(a)(1) to an eligible customer who enrolls for the service. * * * * *   Ox3. Section 61.42 is amended by revising paragraph (b)(1)(i) through (vi) to read as follows:  \ -  61.42 Price cap baskets and service categories. * * * * * (b) * * * "z%*0*&&aa$"Ԍ(1) * * * (i) Domestic MTS; (ii) International MTS; and (iii) Operator and credit card services. * * * * * x4. Section 61.43 is amended by revising the section to read as follows:  ] -  61.43 Annual price cap filings required .   xCarriers subject to price cap regulation shall submit annual price cap tariff filings  x[that propose rates for the upcoming year, that make appropriate adjustments to their PCI,  xAPI, and SBI values pursuant to  61.44 through 61.47, that incorporate the costs and  xrates 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). * * * x5. Section 61.44 is amended by revising paragraph (c) to read as follows:  \%-  61.44 Adjustments to the PCI for Dominant Interexchange Carriers.  ]-  }x(c) The exogenous cost changes represented by the term "Z" in the formula  xdetailed in paragraph (b) of this section shall be limited to those cost changes that the  xCommission shall permit or require by rule, rule waiver, or declaratory ruling, and include those caused by : * * * * *   "x(2) Such changes in the Uniform System of Accounts, including changes in the  x.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. * * * * *   !x(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. "{%+0*&&aa$"Ԍ* * * * *   x6. 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  ]t -(c)x` `  (d)  ]j-(d)x` `  (e)  ]`-(e)x` `  (f)  ]V-(f)x` `  (g) * * * * *  x(c) APPs, as defined in  61.3(c), must be included in the appropriate API calculations  xunder paragraph (a) of this section beginning at the date that the tariff revisions placing  xthe APP under price cap regulation take effect, and quarterly thereafter until the annual  xprice cap filing made pursuant to  61.43 before which the APP has been effective for the  xfull base year. This index adjustment requires that the demand for the APP during the  x=initial 90day period and each quarterly period during the period before the annual price  xjcap 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. * * * * *  ]-  ]-  x7. Section 61.47 is amended by redesignating paragraphs (d) through (h) as  xparagraphs (e) through (i), adding new paragraph (d), and revising paragraph (g) to read as follows: "",0*&&aa!"Ԍ \-  61.47 Adjustments to the SBI; pricing bands. * * * * *   61.47 is redesignated as follows:  ]-Old section ` `  New section  ]-(d)x` `  (e)  ]-(e)x` `  (f)  ] -(f)x` `  (g)  ] -(g)x` `  (h)  ] -(h)x` `  (i) * * * * *  x(d) APPs, as defined in  61.3(c), must be included in the appropriate SBI calculations  xunder paragraph (a) of this section beginning at the date that the tariff revisions placing  xthe APP under price cap regulation take effect, and quarterly thereafter until the annual  xprice cap filing made pursuant to  61.43 before which the APP has been effective for the  xfull base year. This index adjustment requires that the demand for the APP during the base  xperiod and each quarterly period during the period before the annual price cap filing made  xpursuant 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) * * *  ]- x](1) The pricing bands for the domestic MTS service category shall limit the annual  xupward pricing flexibility for that service category, as reflected in its SBI, to four percent,  xand the annual downward pricing flexibility to 15 percent, relative to the percentage  xchange in the PCI for the residential services basket, measured from the last day of the preceding tariff year.  x(2) Dominant interexchange carriers subject to price cap regulation shall calculate a  xcomposite basic rate for undiscounted domestic MTS service contained in the residential  xservices basket. Notwithstanding paragraph (g)(1) of this section, the annual upward  xpricing flexibility for this composite rate shall be limited to five percent, relative to the"$-0*&&aa#"  xpercentage change in the PCI for the residential services basket, measured from the last day of the preceding tariff year.   !x8. Section 61.49 is amended by revising paragraphs (c), (d), and (g)(1) and adding paragraph (g)(3) to reads as follows:  \- xu!  61.49 Supporting information to be submitted with letters of transmittal for tariffs  ]-of carriers subject to price cap regulation . * * * * *   x?(c) Each price cap tariff filing that proposes rates above the applicable band limits  x?established in  61.47(f), (g)(1), (h) and (i) or above the limit on the basic rate for  xundiscounted domestic MTS established in  61.47(g)(2) must be accompanied by supporting materials establishing substantial cause for the proposed rates.  x(d) Each price cap filing that proposes service category rates below applicable band limits  xestablished in  61.47(f), (g)(1), (h) and (i) of this part must be accompanied by  xsupporting material establishing that the rates cover the service category's average variable  xycost, or equivalently, that the service category's net additional revenue resulting from the price change exceeds additional costs. * * * * * (g) * * *  x(1) A new service introduced by a dominant interexchange carrier's tariff filing is subject  xto price cap regulation when the projected demand for such new service includes more  ]- xthan de minimis usage by subscribers to the services described in  61.42(b)(1), i.e., when  xsuch projected usage constitutes more than five percent of overall projected demand within the net revenue test period set forth in this paragraph. * * * (2) * * *  x\(3) Accompanying demand and revenue data is not required for tariffs introducing an  xAPP, as defined in  61.3(c), filed on an initial streamlined basis. Tariff revisions placing  xAPPs under price cap regulation must be accompanied by actual demand and revenue data for the 90day period that the initial APP filing was effective. * * * * "~%.0*&&aa$"Ԍ  `ԙx9. 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) * * *  x(3) Tariff filings that will cause any API to exceed its applicable PCI pursuant to  x calculations provided for in  61.46 of this part, that will cause any SBI to exceed its  xupper banding limitations established in  61.47(f), (g)(1), (h), and (i) of this part, or that  xwill cause the basic schedule domestic MTS rate to exceed its limitation on upward pricing  x>flexibility established in  61.47(g)(2) of this part, must be made on at least 120 days'  x!notice, or such other maximum period of notice permitted by section 203(b) of the  xLCommunications Act, regardless of whether petitions under  1.773 of the Commission's Rules have been filed. * * * * *  x(8) Tariff filings for APPs, as defined in  61.3(c), that are initially filed on a streamlined  x.basis must be made on at least 14 days' notice. Tariff filings to extend the initial 90day  xeffective period of an APP that was filed on a streamlined basis for an additional  ]- xmaximum of 30 days must be filed on at least one day's notice, i.e., no later than the 89th  xday, or the last business day, whichever is earlier, of the initial 90day effective period.  xTariff filings that remove the expiration date of an APP initially filed on a streamlined  xbasis and place the APP under price cap regulation must be filed on at least fourteen days'  x-notice, to become effective no later than 120 days from the date the APP initially was filed on a streamlined basis. * * * * *