$// Second Further NPRM & FNPR; CC Dkt. 94-1; 93-124; 93-197; FCC 95-393 //$
$/ Section 601(3
Regulatory Flexibility Act /$
TRANSMITTED FOR FCC RECORD ONLY
FCC 95-393

Before the
Federal Communications Commission
Washington, D.C.

CC Docket No. 94-1
CC Docket No. 93-124
CC Docket No. 93-197

In the matter of:

Price Cap Performance Review for Local Exchange Carriers Treatment of Operator Services Under Price Cap Regulation Revisions to Price Cap Rules for AT&T

SECOND FURTHER NOTICE OF PROPOSED RULEMAKING

IN CC DOCKET NO. 94-1, FURTHER NOTICE OF PROPOSED
RULEMAKING IN CC DOCKET NO. 93-124, AND SECOND FURTHER
NOTICE OF PROPOSED RULEMAKING IN CC DOCKET NO. 93-197
Adopted: September 14, 1995; Released: September 20, 1995
Comment Date: November 20, 1995
Reply Date:
December 20, 1995

By the Commission: Commissioner Barrett issuing a statement.






I.  Introduction  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. Background  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

III.Goals and Regulatory Principles . . . . . . . . . . . . . . . . . . . .  18

IV.   Revisions to the LEC Price Cap Plan . . . . . . . . . . . . . . . . .  32

 A.General  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  32

 B.  Proposed Modifications to the Price Cap Plan . . . . . . . . . . . . .  37

  1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  37
  2. Implementation of Service Offerings and Rate Changes
....  38 
   a. Introduction  . . . . . . . . . . . . . . . . . . . . . . . . . . . .  38
   b. New Services and Restructures . . . . . . . . . . . . . . . . . . . .  39
   c.  Alternative Pricing Plans  . . . . . . . . . . . . . . . . . . . . .  54
   d. Individual Case Basis Tariffs . . . . . . . . . . . . . . . . . . . .  61
  3. Part 69 Waiver Process . . . . . . . . . . . . . . . . . . . . . . . .  66
    4.Elimination of Lower Service Band Index Limits and
   Other Pricing Flexibilities  . . . . . . . . . . . . . . . . . . . . . .  75
  5.  Revision of Baskets . . . . . . . . . . . . . . . . . . . . . . . . .  86
  6. Consolidation of Service Categories  . . . . . . . . . . . . . . . . .  93
  7. Further Notice of Proposed Rulemaking in CC Docket
   No. 93-124 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  96
   a. Operator Services . . . . . . . . . . . . . . . . . . . . . . . . . .  96
   b.Call Completion Services . . . . . . . . . . . . . . . . . . . . . . .  99
  8. General Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

  C. Measures of Competition for Regulatory Relief  . . . . . . . . . . . . 106

  1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
    2. Removal of Barriers to Local Competition . . . . . . . . . . . . . . 107
  3.Procedural Matters  . . . . . . . . . . . . . . . . . . . . . . . . . . 111

 D. Relevant Markets  . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

  1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
  2. Relevant Product Market  . . . . . . . . . . . . . . . . . . . . . . . 117
  3. Relevant Geographic Market . . . . . . . . . . . . . . . . . . . . . . 120

V.Streamlined Regulation  . . . . . . . . . . . . . . . . . . . . . . . . . 127

 A. Background  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

1. General  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
  2.Criteria Used for AT&T in 
   CC Docket Nos. 90-132 and 93-197 . . . . . . . . . . . . . . . . . . . . 130

B. Proposed Factors for Determining When 
  Streamlined Regulation is Warranted . . . . . . . . . . . . . . . . . . . 133

  1. Demand Responsiveness  . . . . . . . . . . . . . . . . . . . . . . . . 134
  2.Supply Responsiveness . . . . . . . . . . . . . . . . . . . . . . . . . 138
    3. Market Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
  4.  Pricing of Services Under Price Cap Regulation  . . . . . . . . . . . 144
5.Other Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146

 C. Contract Carriage . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

 D. Procedural Matters  . . . . . . . . . . . . . . . . . . . . . . . . . . 151

VI. Nondominant Treatment . . . . . . . . . . . . . . . . . . . . . . . . . 152

VII. Other Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

 A. Other Changes to the LEC Price Cap Plan . . . . . . . . . . . . . . . . 159
  1.X-Factor Flexibility  . . . . . . . . . . . . . . . . . . . . . . . . . 159
  2. Relaxation of Sharing Requirements . . . . . . . . . . . . . . . . . . 163

 B. Second Further Notice of Proposed Rulemaking in CC
Docket No.
  93-197: Changes to AT&T's Price Cap Plan  . . . . . . . . . . . . . . . . 173

VIII.Procedural Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 175

 A.Regulatory Flexibility Act . . . . . . . . . . . . . . . . . . . . . . . 179

 B.Ex Parte Rules - Non-Restricted Proceeding . . . . . . . . . . . . . . . 180

 C. Comment Filing Dates  . . . . . . . . . . . . . . . . . . . . . . . . . 181

IX. Ordering Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182



I. INTRODUCTION

1.
The purpose of this Second Further Notice of Proposed Rulemaking (Second Further Notice) in CC Docket No. 94-1 in our performance review of the LEC price cap plan is to consider and propose specific changes to interstate access price regulation to respond to changes in the market for these services and to rely more heavily on market forces to achieve our public policy goals. The changes we contemplate are specifically designed to benefit consumers by: (1) encouraging market-based prices that reflect the cost of service; (2) encouraging efficient investment and innovation; (3) encouraging competitive entry in the interstate access and related local exchange markets; and (4) permitting us to regulate noncompetitive markets in the most efficient and least intrusive way.

2. We propose here to establish a framework for three gradations of increasingly less stringent price regulation. At the first level, we seek comment on, and in certain cases propose, a number of modifications within the price cap plan. Specifically, we consider (1) clarifying and simplifying the treatment of new and innovative tariff offerings for price cap LECs; and (2) making certain modifications relating to the price cap plan itself, including allowing certain downward pricing flexibility and changing the structure of the service baskets and categories within the plan.(n1) We believe the changes we propose will facilitate the introduction of services and the alignment of rates with costs without posing any threat to competition or consumers. We propose that generally these rule revisions be effective for all price cap LECs without regard to the current level of competition because they will serve our goals of moving prices toward costs, encouraging efficient investment in infrastructure, and ultimately producing robust competition. An alternative approach would be to require LECs to satisfy an objective set of criteria established by the Commission indicating the presence of a certain measure of competition for a particular service or services within a prescribed geographic market before certain of the proposals would be effective. Even where we decide not to adopt a particular change to the price cap rules at this time, we believe that establishing the criteria under which such a rule change would be implemented may facilitate the removal of barriers to entry in exchange and access markets, and discourage inefficient investment in infrastructure by potential entrants.

3. At the second level, for price cap LECs that are able to demonstrate substantial competition for particular services within a geographic market, we propose to remove those services from price cap regulation in that market and place them under streamlined regulation. Streamlined regulation would permit price cap LECs to file tariffs on 14 days' notice; the tariffs would be presumed lawful for purposes of review, would be filed without cost support, and would no longer be subject to price cap ceilings, or upper or lower pricinglimits. At the third level, we propose that a price cap LEC that demonstrates that it no longer exercises market power for particular services in a geographic market would qualify for nondominant regulation as to those services in that market. Under non-dominant regulation, price cap LECs would file tariffs on one day's notice with no cost support.

4. We also discuss certain other miscellaneous issues relating to competition, such as whether competitive considerations should influence the X-Factor used by or sharing obligations imposed on price cap LECs, and whether to treat changes in competitive access providers' (CAPs) rates exogenously in AT&T's price cap plan.

5. Although we recently found in the First Report and Order in CC Docket No. 94-1 that LECs retain considerable market power, we also took notice of the growing evidence that an increasing variety of local telecommunication services are available on a competitive basis.(n2) We are issuing this Second Further Notice in response to these signs of changing market structure, and we propose to revise our regulations to protect and foster competition and allow market forces to operate where they are present. Competition is the surest means of achieving the consumer benefits we seek to promote.

6. Even where competition has not yet arrived, we believe that certain changes to our price regulations will yield public benefits. For example, there may be situations in which regulation forces LECs with substantial market power to price above economic costs. Allowing greater downward pricing flexibility will benefit consumers both directly through lower prices and indirectly by encouraging only efficient competitive entry.

7. Our proposed regulatory changes are also intended to encourage the development of competitive conditions in both the interstate access and the related local exchange markets. We are of the view that interstate switched access competition cannot reach meaningful levels so long as end-users are exclusively reliant upon the incumbent LEC's switch to direct calls to interexchange carriers (IXCs).(n3) This situation will be mitigated as barriers to local competition are eliminated. Consequently, we may want to condition certain relaxed regulatory treatment on reductions in entry barriers or demonstrations of actual competition for interstate access services. Properly designed, our system of price regulation shouldfacilitate the transition to competition in local and interstate telecommunications markets by offering incentives for incumbents to foster competitive markets for particular services.(n4)

8. In commenting on the specific proposals and issues set out below, we expect participants to address particularly, in addition to other issues, whether and how the proposed changes will affect innovation, efficiency, and elimination of implicit and explicit barriers to interstate access and local exchange competition. We also seek comments on whether there are any rules that should be eliminated or modified without regard to the level of competition because to do so would not harm competition or consumers and would serve our general policies of encouraging efficient pricing of access services and eliminating unnecessary and inefficient regulation.

II. BACKGROUND

9. In 1990, we replaced rate-of-return regulation for the Bell Operating Companies (BOCs) and GTE Operating Companies with price cap regulation, effective January 1, 1991,(n5) and made price cap regulation optional for other local exchange carriers (LECs).(n6) The LEC price cap plan was designed to simulate some of the efficiency incentives found in competitive markets and to act as a transitional regulatory scheme until the advent of actual competition makes price cap regulation unnecessary. Price cap regulation encourages LECs to improve their efficiency by harnessing profit-making incentives to reduce costs, invest efficiently in new plant and facilities, and develop and deploy innovative service offerings.

10. Under the price cap plan, there is a price cap index (PCI) for each of several different "baskets" of LEC access services. The PCI indicates the maximum level that LECsmay charge for services covered by the index.(n7) The PCI is adjusted each year based on a measure of inflation that embodies economy-wide productivity gains and price changes,(n8) minus a factor which reflects the fact that changes in telephone companies' costs per unit of output have historically been below that of the economy as a whole (or "X-Factor"). The PCI is further adjusted for certain exogenous cost changes.

11. LECs calculate a separate PCI for each of four price cap baskets. Each basket is designed to include similar services that have been grouped together to limit a LEC's ability to cross-subsidize different services.(n9) The four baskets are: (1) common line, (2) traffic sensitive, (3) trunking, and (4) interexchange services.(n10) In addition, the traffic sensitive and trunking baskets are subdivided into service categories, and we have established service band indexes (SBIs) and upper and lower pricing limits for each service category, which further limit the LEC's ability to price anti-competitively the services in those baskets. Rate changes that conform to the limits set by a LEC's PCIs and SBI bands are presumed lawful and permitted to take effect under limited review, on 14 days' notice. If a LEC files rates outside the PCI or service band pricing limits, we do not extend a presumption of lawfulness but rather require the filing of more extensive documentation and apply longer noticeperiods. Above-cap and above-band filings carry a heavy burden of justification and a strong likelihood of suspension and investigation.(n11)

12. The LEC price cap plan also includes sharing and low-end adjustment mechanisms, which are automatic adjustments to the PCI that are triggered by an individual LEC's rate-of-return performance. The sharing and low-end adjustment mechanisms were intended to compensate for the possibility of an error in the establishment of the X-Factor and variations among the different LECs.(n12)

13. In the LEC Price Cap Order, we scheduled a performance review to evaluate the price cap system as implemented and LEC performance under that system.(n13) We completed the first phase of this performance review in March 1995.(n14) In Phase I of this proceeding, we adopted several interim revisions to the LEC price cap plan pending adoption of long-term revisions to the plan. First, we increased the X-Factor in the price cap formula. In the original plan, we had set the minimum X-Factor at 3.3 percent and had given the LECs the option of using a higher X-Factor of 4.3 percent. In the First Report and Order, we revised the minimum X-Factor to 4.0 percent and increased the number of X-Factor options from two to three, with the optional X-Factors set at 4.7 percent and 5.3 percent.(n15) Second, we revised the rules governing sharing obligations and the low-end adjustments for the interim plan, including eliminating sharing and low-end adjustments for companies electing the 5.3 percent X-Factor.(n16) Third, we revised our exogenous cost rules relating to changes in accounting rules.(n17) We also adopted a number of other revisions to the LEC price cap plan, including changing the lower pricing limits that apply to most of the service categories withinthe traffic sensitive and trunking baskets from 5 percent to 10 percent,(n18) and changing the lower pricing limits that apply to density pricing zones from 10 percent to 15 percent.(n19)

14. Although our initial price cap rules already gave the LECs greater pricing flexibility than rate-of-return regulation, during the first four years of LEC price cap regulation, the Commission took a number of significant steps to increase the LECs' pricing flexibility and ability to compete with new entrants. When we adopted the LEC Price Cap Order, the LECs were required to offer all special and switched access services at rates that are geographically averaged for each study area.(n20) In the Special Access Expanded Interconnection Order, the Commission permitted LECs with operational special access expanded interconnection arrangements and at least one competitor in a study area to introduce zone density pricing for interstate high-capacity special access services (and other services found to be subject to competition) in that study area.(n21) Zone density pricing is a system that permits the LECs gradually to reduce rates in geographic areas that are less costly to serve, and to increase rates, relatively speaking, in areas that are more costly to serve. Zone density pricing is implemented through special price cap service subcategories for each zone.(n22) In the Switched Transport Expanded Interconnection Order, the Commission permitted LECs with operational switched transport expanded interconnection arrangementsin a study area to implement zone density pricing for interstate switched transport in that study area.(n23)

15. In the Special Access Expanded Interconnection Order, the Commission examined existing volume discounts and term discounts for special access services and found that they can be an effective approach to pricing that recognizes the efficiencies associated with larger traffic volumes and the certainty of longer-term arrangements.(n24) In the Switched Transport Expanded Interconnection Order, and more recently in the Virtual Collocation Order, the Commission allowed the LECs to offer volume and term discounts for switched transport services after a certain degree of competitive entry has occurred in the relevant study area.(n25)

16. We have demonstrated, in acting upon waiver petitions proposed by Rochester Telephone Corp. and the NYNEX Telephone Companies, our willingness to act on waiver petitions that seek relief from existing Part 61 and Part 69 rules in order to implement proposals for promoting and responding to competition in cases where special circumstancesare shown to be present.(n26) We have also promoted competition by permitting below-band rate changes, which cut transport prices by more than 70 percent, to take effect.(n27)

17. In the initial Notice in CC Docket No. 94-1, we designated several issues as "Transition Issues."(n28) We invited comment in the Notice on a variety of questions concerning the manner in which our current LEC price cap plan should be modified in order to adapt the system to the emergence of competition in local access and exchange telecommunications markets. In the First Report and Order, although we acknowledged the emergence of competition in a number of segments of the LECs' markets, we generally found that the record before us was insufficient on these issues, and we decided to defer them until this Second Further Notice.(n29)

III. GOALS AND REGULATORY PRINCIPLES

18. A goal of our policies is to promote economic efficiency, which includes regulating prices so that they emulate the economic performance of competitive markets as closely as possible until actual competition arrives. This will ensure that the consumer welfare benefits approximate those of competitive markets, which should result in just and reasonable rates.(n30) We also seek to encourage the transition to competition wherever it may be feasible. LEC price cap regulation is designed to promote economic efficiency by easing restrictions on overall profits while setting price ceilings at reasonable levels. Under pricecaps, the LECs have the incentive to become more efficient and innovative at the same time that customers benefit from lower rates.(n31)

19. Price cap regulation also discourages discriminatory pricing by LECs in favor of their own vertically integrated operations and against customers that are CAPs, dependent on specific bottleneck facilities of LECs. Given that LECs are both competitors and suppliers of CAPs, and in certain markets of the IXCs, LECs have the opportunity to "price squeeze" their competitors by raising the price of the bottleneck services and lowering the price in competitive downstream markets.(n32) In the price cap system, there are four basic safeguards for controlling a price squeeze. First, the price cap system places services with high cross-elasticities of demand (competing services) in the same basket, while separating services without high cross-elasticities of demand.(n33) Second, service subcategories/pricing bands prevent LECs from offsetting price decreases for competitive services with price increases for bottleneck services. Third, our rules governing the introduction of new services prevent LECs from charging anti-competitively high prices for new bottleneck services required by CAPs.(n34) Finally, an aggrieved party may file a complaint charging a violation of Section 202 of the Communications Act.(n35)

20. On the whole, the Commission's system has assured that interstate access prices charged by LECs generally decline in real, inflation-adjusted terms. Moreover, by grouping similar services together in service baskets subject to their own price cap and (where relevant) service categories subject to pricing bands, the LEC price cap plan deters the LECs from recouping reductions in prices for competitive services with price increases for captive services.

21. Like all price regulation, the Commission's price cap system is an imperfect substitute for actual competition. LEC price cap regulation should continue only untilcompetition emerges in the interstate access market. While the current price cap plan gives LECs greater incentives to operate efficiently and greater flexibility in setting rates, compared to rate-of-return regulation, it still imposes significant regulatory constraints upon carriers. Such constraints tend to become unnecessary or counterproductive as market forces become operational.

22. Price cap regulation limits the exercise of market power by the monopoly local exchange carriers, who may remain protected today from competitive rivalry by endogenous and exogenous barriers to entry. Endogenous barriers to entry are barriers erected by the incumbent firms to discourage new entrants. Endogenous barriers in certain circumstances may include building substantial excess capacity,(n36) vertical integration,(n37) and establishing conditions or agreements that limit a customer's ability to switch to alternative suppliers.(n38) Still another endogenous barrier that is of concern to this Commission is predatory pricing.(n39) Predatory pricing is defined as "deliberately pricing below cost to drive out rivals and raising the price to the monopoly level after their exit."(n40) We have defined cost for these purposesas average variable cost ("AVC").(n41) While actual instances of predatory pricing in the economy as a whole are generally considered to be rare,(n42) some experts believe that the telecommunications industry is susceptible to predatory pricing because its market structure and production characteristics are consistent with the conditions necessary for this pricing strategy.(n43) Others believe the substantial sunk costs required to enter the telecommunications industry provide protection against predatory pricing once the new entrant has constructed its plant, because if the new entrant is driven from the marketplace others can acquire these facilities and continue to provide competition.(n44)

23. Exogenous barriers to entry are those that are beyond the direct control of the incumbent firm and are due to either technological limitations or government regulation. Technological barriers are frequently associated with production economies.(n45) Government-imposed barriers typically consist of regulations that limit entry and exit or control rates.

24. Rate regulation may distort the prices access customers pay for services by holding them at levels that are either above or below their economic costs.(n46) Prices set above the economic cost of providing service distort consumer decision-making. Above cost prices for interstate access services, for example, likely result in higher interstate retail toll prices and cause toll customers at the margin to consume other goods and services rather than to increase their use of interstate long distance services. Such prices also cause high-volume and even moderate-volume business customers to substitute dedicated facilities, which may be the local exchange carrier's special access facilities, or those of an alternative provider, even where the use of such facilities is not economically efficient, if the price of dedicated access is less than an above cost price that the customer would pay for services that use switched access.(n47)

25. Prices above costs also attract inefficient service providers. Prices establish important decision-making signals for both potential (and existing) suppliers of communications services as they do for users of these services. If the prices that LECs are permitted to charge are held above the competitive level by our regulations, inefficient entry may be encouraged. Furthermore, such entry may occur in the expectation that existing price relationships will be maintained. Permitting rates to reflect costs will limit new entry to efficient providers.(n48)

26. Rates that are held below costs are equally undesirable because they also can distort decision-making by potential competitors concerning entry and investment in the market. Rates in low-density markets that are held below cost by regulation can create an illusion of under-investment in communication facilities in those areas. This is because the communications users will demand more at these prices than producers are willing to offer. In addition, potential efficient entrants may be deterred by the appearance that incumbents' costs, as reflected in artificially depressed prices, are lower than their own. The existence of a bona fide shortage of telephone services cannot be established until prices rise to cost. Only when prices equal or exceed costs will potential entrants be able to evaluate properly the financial benefits of entering these markets. Permitting rates to rise to cost would facilitate efficient, competitive entry.

27. The institutional structure of the industry itself may operate in combination with our access charge rate structure to contribute to suboptimal pricing. This is because the end-user generally selects the local service provider, to the extent there is any selection to be made, even though the IXC is responsible for compensating the local service provider for much of the cost of access. Furthermore, an IXC terminating a call has no choice regarding the local service provider whose facilities will be used for that purpose. This dichotomy between the service provider selection process and the compensation process may inhibit competition and delay efficient pricing for access services. Thus, it is possible that competition in the access market may develop at a different pace and in a different manner than competition in the provision of local telephone service.

28. In the First Report and Order, we recognized that competition in the access markets is starting to emerge. As previously stated, this Second Further Notice is a response to this development. We consider issues relating to clarifying and simplifying the introduction of services, giving the price cap LECs certain additional pricing flexibility, and revising the structure of service baskets and categories under the price cap plan. We believe these proposals will achieve the goals we have articulated herein without risking competitive harm. In this context, we define competitive harm in terms of the ability of a LEC to prevent prices paid by access customers from moving toward their efficient economic cost or to reduce the quality or range of services provided to access customers or to impose unreasonable endogenous barriers to entry. Because interstate access services are a critical input in the provision of interstate interexchange service, we also define competitive harm to include LEC actions that could affect adversely competition in the interexchange market, which would collaterally harm long distance users, such as by preventing long distance prices paid by end users from moving toward their efficient economic cost, or by reducing the quality or range of services provided to long distance users.

29. To meet our objectives of promoting competition, encouraging market-based pricing, encouraging efficiency and innovation, and permitting us to regulate efficiently and unintrusively to the benefit of consumers, we offer the following guidelines. First, we generally propose to limit the relaxation of regulation to that which will not cause competitive harm as defined herein. We expect the reforms we propose to implement within the price cap plan to benefit consumers regardless of the actual level of competition. If the potential for harm is evident, however, the grant of pricing flexibilities and other relief would be postponed until specific competitive standards are met. Pricing flexibilities and other relief that have less potential for creating harm would face a lower competitive threshold than those that are potentially more harmful. Second, we expect the pricing flexibilities that we propose here will result primarily in rate reductions. Downward pricing flexibility will permit LECs to respond to competition and rationalize rates that otherwise are inefficiently inflated. Third, we propose to eliminate price cap regulations that are no longer necessary to prevent anti-competitive behavior or promote LEC innovation or efficiency whenever doing so would not disadvantage consumers. In addition to the relief and pricing flexibility we specifically propose, we also request comment on a number of other possible forms of regulatory relief and price cap modifications.

30. We also ask for comment in Section V. of this Second Further Notice on the extent to which services should be removed from price cap regulation or subject to "streamlined" regulation, the conditions under which this should be permitted, and the best way to proceed in granting such regulatory relief. In Section VI., we ask under what conditions LECs should be deemed "nondominant" and relieved from all but the minimum statutory requirements.

31. There are a number of issues which we consider outside the scope of this Second Further Notice. First, we anticipate seeking comment on a number of specific issues regarding our long-term price cap plan in an upcoming further notice. In particular, that notice will request comment on the following: (a) the X-Factor, including calculation of the X-Factor, the number of X-Factors to be included in the price cap plan, and whether the X-Factor should be reviewed and modified periodically or set on a permanent basis; (b) the sharing and low-end adjustment mechanisms; (c) the common line formula; and (d) the exogenous cost rules. We do seek comment in Section VII.A. of this Second Further Notice, however, on whether the competition faced by a LEC should influence its X-Factor or sharing obligations. Second, we will not consider making comprehensive or substantial revisions to Part 69 of the Commission's Rules,(n49) although we consider in Section IV.B. modifying Part 69 to simplify the procedures for introducing new switched access services. Finally, some changes to the price cap rules proposed here might place pressure on rates for which we do not propose pricing flexibility because such flexibility may impact the broader access charge rate structure. For example, we do not propose here that carriers be permitted to change the way they compute their end-user common line charges. We believe consideration of such changes would be more appropriate in a separate proceeding on access charge reform which we intend to initiate in the near future.

IV. REVISIONS TO THE LEC PRICE CAP PLAN

A. General

32. As explained previously, we propose a framework of LEC price cap regulation with three gradations generally reflecting increasing degrees of competition for a LEC's services. In this section, we seek comment on issues related to the first gradation of our envisioned framework: modifying the price cap system itself. We solicit comment on the second and third gradations, streamlined regulation and nondominant treatment, later in this Notice.

33. In this section, we seek comment on a number of possible changes to our LEC price cap rules. These fall into three basic categories: (1) simplifying treatment of newservices and innovative tariff offerings, including alternative pricing plans ("APPs");(n50) (2) granting price cap LECs certain additional pricing flexibility, including the offering of APPs such as volume and term discounts and eliminating the lower SBI limits; and (3) changing the price cap service basket and category structure. Each modification of the price cap plan is described in Part B.

34. We propose that the changes we describe herein generally be effective without regard to the current level of competition. Because we believe these proposals will facilitate more efficient pricing by LECs and remove incentives for inefficient entry, we tentatively conclude that they need not be conditioned on a competitive showing. Alternatively, these changes could be made effective only upon a showing that barriers to competition have been removed. In Part C, we discuss several potential criteria that could be used to determine whether markets are open to competition to an extent that would justify affording the LECs the proposed regulatory relief if we conclude that a proposal should not be implemented without consideration of current market conditions. In those situations in which a commenter recommends requiring some demonstration that barriers to competition have been removed prior to making a change or granting some specific relief or pricing flexibility, the commenter should explain why current market conditions require that relief or flexibility be conditioned upon such a showing. The commenters should also discuss the evidence that should be required, how the Commission could verify such demonstration, and the causal nexus between the recommended showing and the relief at issue. For example, what threat to competition would be engendered by allowing the proposed change without a demonstration that no barriers to competition exist? How would the recommended competitive test alleviate this threat? Conversely, commenters supporting our proposal should explain why affording LECs a certain type of relief or pricing flexibility before they have demonstrated some level of actual or potential competition would not create an unreasonable risk to competition or consumers.

35. Adopting competitive standards requires a definition of competitive markets to which the standards apply. In Part D, we propose definitions of geographic and product markets for purposes of measuring competition and defining the area in which we would grant any relief that we decide to make contingent on a finding of a competitive market. Market definitions are also necessary for streamlining and non-dominance determinations. We propose to use the same market definitions in Section V (Streamlined Regulation) and Section VI (Non-dominance).

36. Comments on the price cap modifications, the competitive "triggers," and the market definitions should address, among other things, the expected impacts on the prices, innovation, short-term and long-term growth of competition, and efficient investment in and use of telecommunications services and facilities. In addition to commenting on theindividual rule changes we propose below, we request commenters to consider the implications of adopting various of these rule changes in combination with one another. In other words, we seek comment on the likely cumulative effect of these proposed changes in addition to the impact of particular proposals in terms of their potential effects with respect to our regulatory goals. To the extent that states have implemented price caps and other flexible regulatory structures, we would be interested in receiving comments concerning the experiences in those states as they relate to the issues in this Second Further Notice.

B.Proposed Modifications to the Price Cap Plan

1. Introduction

37. In this Section, we seek comment on clarifying and relaxing certain tariff and waiver requirements for the introduction of certain service offerings, allowing LECs additional pricing flexibility, and changing the existing service basket and category structure under the price cap rules. We believe these changes to the price cap rules will encourage LECs to introduce innovative services, enable them to do so expeditiously under clearly defined procedures, and enable them to move prices closer to cost because doing so will replicate the results of a competitive market. As we consider the possible changes discussed in this Notice, we do not want to relax regulation so much that consumers will be harmed by monopoly pricing or allow LECs so much pricing flexibility that they could recoup foregone revenues from more competitive services with revenues from less competitive services, or engage in predatory pricing, unlawful discrimination, or other anticompetitive practices.

2.Implementation of Service Offerings and Rate Changes

a. Introduction

38. We propose to clarify or modify the definitions of new services, restructured services, and individual case basis (ICB) filings and the filing requirements relating to each type of service offering. We also seek comment on whether to introduce a new category of service offering, alternative pricing plans (APPs), with separate filing requirements. The modified filing requirements we propose for new services, restructured services, ICBs, and APPs would apply unless the Commission has established special, specific guidelines for filing tariffs and introducing a rate structure for a particular service (as we have, for example, for expanded interconnection and video dialtone).(n51) We are concerned about thedelay and burden that our current rules may cause in introducing new services. Further, many "new" services may actually be optional discounted versions of existing services. We are concerned that the current system may hinder the introduction of services, a result that is harmful to customers and competition. We believe the changes we propose will allow for more efficient and expeditious introduction of new services, and encourage innovation, consistent with the public interest.

b. New Services and Restructures

39. We propose in this Notice to modify the rules relating to the treatment of new services either now or in the future as competition develops so as to allow price cap LECS to introduce certain new services under a relaxed regulatory framework. We propose shortening the notice requirements for restructured services and to revise the definition of new services to exclude APPs. These proposed changes are intended to encourage the prompt introduction of new tariff offerings, while maintaining an appropriate level of regulatory oversight.

40. By way of background, new services are currently defined as services that add to the range of options already available to customers.(n52) Under the existing rules, a new service may include, but need not, a new technology or functional capability; the test is simply whether the service adds to the existing array of services.(n53) New services are distinguished from "restructured" services, which replace existing services and consequently do not expand the range of services available.(n54) Under the current rules, a new option that is functionally indistinguishable from an existing service but is offered under different rates, terms, and conditions (an APP as we propose to use the term) is treated as a new service and is subject to the same regulatory requirements that apply to new services that are different from existing service offerings.

41. Under current rules, new service tariff filings must be made on at least 45 days' notice(n55) and be accompanied by detailed cost support. Specifically, a LEC introducing a new service is required to submit cost studies to identify the direct costs of providing the new service, absent overheads. The LEC must use a consistent costing methodology for direct costs for all related services.(n56) The LEC may, but does not have to, add a level of overhead costs to the direct costs to support the proposed price of the new service. Uniform overhead loadings are not required, but the LEC must justify its methodology for determining overhead loadings and any deviations from the methodology.(n57) In cases where a LEC develops a lower-cost version of an existing service, it may employ non-uniform overhead loadings if necessary for the LEC to break even in providing the service.(n58) Further, non-uniform overhead loadings are presumptively reasonable whenever a LEC uses them to justify the introduction of a new service at a level below the imputed "old" price of a close substitute service.(n59) The new services test thus places a flexible, cost-based upper bound on the prices of new services offered by LECs under price cap regulation. The requirement that prices exceed a direct cost showing also establishes a price floor for new services,, ensuringthat prices are not predatory.(n60) As discussed above, the Commission has also adopted special rules for video dialtone service and expanded interconnection collocation tariffs.(n61)

42. In addition, each new service is initially held outside the LEC's price cap indexes for at least six months, and is incorporated into the relevant index in the first annual price cap tariff filing after the completion of the base year in which the new service becomes available; i.e., 6 to 18 months after the tariff takes effect.(n62) We adopted this procedure in part to encourage LECs to develop innovative new services.(n63) We also found that excluding new services from price cap regulation for a period of time is necessary to enable LECs to develop historical data, so that the new service can be incorporated into the LEC's price cap indexes based on actual data, rather than the 12-month projections included in its initial cost support.(n64) The use of historical data helps ensure that the service will properly be incorporated into the plan in a manner that protects the public interest.

43. The tariff filing and other requirements currently applicable to restructured service offerings differ from those applied to new services. Restructured service offerings must be filed on 45 days' notice and no cost showing is required. Rather, LECs are required to show only that the rates for the restructured service fall within their existing PCI, and the actual price indexes (APIs) and SBIs must be recalculated.(n65) Further, restructured services are incorporated into the applicable price cap basket immediately upon effectiveness of the tariff.

44. In the comments submitted in response to the Phase I Notice in this proceeding, several LECs argued that the new service rules are unreasonably time-consuming and burdensome, and may impede the development and introduction of new services.(n66) We decided not to consider revising the new service rules in the First Report and Order, so that we could address this issue in conjunction with issues raised by other revisions to the pricecap plan to be made in response to the emergence of competition.(n67) We seek to eliminate unreasonable restrictions or undue delays that our current rules may impose on LECs' ability to introduce new offerings. We also seek to make our procedures governing the introduction of new service offerings more efficient and certain.

45. We propose that LECs be allowed to introduce certain new services on shorter notice and with less cost support than our current rules require for new services. We propose that new services be divided into two categories, known as "Track 1" and "Track 2" services. Track 1 new services would remain subject to current notice, cost support and other requirements. Track 2 new services would be subject to reduced notice and cost support requirements.

46. As a preliminary issue, we must determine the new services that should remain subject to Track 1 treatment. We see at least two general options for making this determination. A first option would be to treat all new services in a relevant market as Track 1, until the LEC has made some kind of demonstration that its competitive circumstances warrant the relaxed Track 2 regulatory relief. (Issues related to these "triggers" are discussed in Section IV.C., below.) A second option would be to establish a test to distinguish between new services that warrant higher scrutiny from those that warrant a lower level of scrutiny, based on the nature of the services themselves. Those services requiring less scrutiny because they raise no competitive implications (based on a standard such as we propose below) would be afforded Track 2 treatment regardless of the level of competition the LEC actually faces for those or other services. We invite interested parties to comment on both approaches. In particular, we seek comment on the approach that would enable us to focus our attention on new services that need closer review, without becoming administratively burdensome.

47. If we adopt the second definitional approach and base the definitions of Track 1 and Track 2 on the nature of the new services themselves, we would need to establish those definitions. As a starting point, we would propose to include as Track 1 services any services that the Commission requires LECs to offer. An example of a service that we require LECs to offer is expanded interconnection(n68) (although we note that expandedinterconnection is currently subject to special pricing requirements in addition to the basic new services test rules, and we do not propose to modify those requirements).(n69) A second possible category of services we might consider as Track 1 is services essential to a LEC's competitors. Expanded interconnection is also an example of a service that we would consider essential to a LEC's competitors. We consider expanded interconnection essential to a LEC's competitors because it enables those competitors to offer transmission segments that can substitute for the previously bundled segments offered by the LECs.(n70) This facilitates competitive entry into the markets for special access and switched transport services in an environment where LECs control essential facilities. A possible alternative to this "essential services" test might be a "close substitutes" test. Under this alternative, Track 1 services would include services that are not "close substitutes" for an existing service, within the meaning of the Second ONA Reconsideration Order.(n71) A new service would be considered a close substitute for an existing service or a group of existing services when a carrier can show that it reasonably expects customers of those existing services to migrate to the new service.(n72) The rationale for this possible approach is that the absence of a close substitute to which a LEC customer could turn warrants more careful regulatory review of the new service to ensure that other providers can effectively compete with the LEC. We solicit comment on these definitions, and invite parties to suggest other possible definitions for Track 1 services that would help us identify offerings that may have a significant effect on the competitive marketplace we desire to see established. It is important that any definition be easy to administer. Thus, commenters should explain, for example, how any proposed distinctions in services would provide a "bright line" test for distinguishing Track 1 from Track 2 services, and how any proposals would reduce the regulatory burden for all concerned.

48. If we adopt the definitional approach and distinguish between Track 1 and Track 2 based on the nature of the service itself, then we propose to delegate to the Common Carrier Bureau the authority to determine whether a particular new service should beclassified as Track 1 or Track 2 under definitions established by the Commission. For example, price cap LECs seeking Track 2 treatment for a new service could submit a petition prior to filing its tariff explaining why Track 2 treatment is warranted. The petition would be deemed granted on the 10th day after it is filed unless the Bureau notifies the carrier that its request is denied on or before the 10th day. Parties opposed to the classification of a new service as Track 2 would have the opportunity to object within that framework. We invite parties to comment on this proposal, and to recommend other possible procedures that would enable us to determine whether a new service warrants Track 1 or Track 2 treatment without creating excessive administrative burdens for the Commission or the industry.

49. We propose retaining the existing notice and cost support requirements for Track 1 new services.(n73) For Track 2 new services, we propose reducing the notice requirement to 14 days, but invite comment on whether a longer or shorter period would be preferable and, if so, why. We also propose with respect to Track 2 services to require carriers to show that the new service rates will recover the direct costs of providing the service as we currently do for new services, and to eliminate all other currently required cost support requirements for these services, except if the Commission has prescribed special, specific cost and other filing requirements relating to the type of service concerned. If the Commission has adopted such special cost and other rules, as it has, for example, with respect to expanded interconnection and video dialtone, then these specific requirements would be followed in lieu of the rules we are proposing. We believe that under the relaxed rules we are proposing, the direct cost showing and the definition of Track 2 services will be adequate to ensure that the offering of such services will not have anti-competitive effects.

50. Unlike the new services test, the filing support requirements for restructures do not seem to raise the same potential for chilling innovation or hindering responsiveness to the marketplace. The filing support requirements for restructured service offerings are minimal. Thus, we propose to retain our current cost support filing requirements for restructured services and invite comment on this proposal. Parties that support changing these requirements should suggest specific modifications.

51. It may not be necessary to retain the current 45-day notice requirement for restructures. We originally adopted a 45-day notice requirement rather than 14 days because we were concerned that it would not be possible to address issues of unreasonable rate levels or discriminatory pricing in 14 days.(n74) As the competitive circumstances faced by LECs increase, unreasonably high restructured rates become less likely, and thus a notice period ofless than 45 days would appear to be appropriate. One option would be to establish a uniform notice period for all restructured tariff filings. A second option would be to establish two notice periods, one for restructured service rates that would be higher than the replaced, "old" service rates, and another notice period for restructured service rates that would be lower than the replaced service rates. For example, we could require 15 days' notice for rate "increases," and 7 days' notice for rate "decreases." Parties should comment on the practicality of these suggestions, including how long any revised notice periods should be.

52. We further propose to revise the definition of new services to exclude APPs. As discussed more fully below, we propose defining APPs as services that permit customers to "self-select" an optional discounted rate for a service which continues to be offered to customers. Otherwise, we propose retaining the current definition of new service: any service that expands the range of service offerings available to the consumer. Our rationale in excluding APPs from the definition of new services is to allow such optional discounted offerings of existing services to avoid the more thorough regulatory review given to new services. We believe LEC customers would be protected because the original offering was subject to the normal regulatory review and customers still have that service choice available to them.

53. We seek comment on the regulatory treatment of new services and restructured services under the price cap plan, including comment on the following questions:

Issue 1a:Should we relax the regulatory requirements relating to new services for some or all new services? Will there be any anti-competitive or other negative effects as a result of such modifications to the plan? If a relaxed treatment is appropriate for only certain new services, how should we distinguish between the services eligible for the simplified treatment and those which are not? What are some examples of the services that would fall into each category? How would this distinction be administered? What cost showings, notice, and other regulatory requirements are necessary with respect to the various types of new services to provide the appropriate level of regulatory oversight without hindering the efficient introduction of new services?

Issue 1b:Should we modify the definition of new services to exclude APPs or otherwise?

Issue 1c:Should we modify the definition of restructured services? What, if any, changes should be made with respect to the treatment of restructured services?

c.Alternative Pricing Plans

54. We seek comment on whether to allow optional discounted offerings of services that have been, and continue to be, provided (APPs), establish a new category of tariff filing for such services and subject the introduction of such services to relaxed regulatory treatment. In addition to seeking comment on this proposal, we seek comment on certain other related issues.

55. By way of background, currently there are no special rules governing the provision of APPs by price cap LECs. If a LEC wishes to introduce an optional discounted plan for a service it currently provides, the plan would be treated as a new service under current rules. We currently permit one type of switched access service that would fall within our proposed definition of APP, namely, volume and term discounts on certain transport services when LECs can show a certain level of demand for their expanded interconnection services.(n75) In the Switched Transport Expanded Interconnection Order, we permitted LECs to offer reasonable volume and term discounts on entrance facilities and interoffice facilities and tandem-switched transport, including pricing that reflects speeds greater than DS3. We noted that as a general matter such discounts should be permitted if they are justified by underlying costs, and are not otherwise unlawful, because they encourage efficiency and full competition.(n76) While we found that term discounts were not controversial,(n77) some small IXCs were concerned that volume discounts would benefit primarily AT&T.(n78) We decided to permit volume and term discounts in certain geographic markets where a certain level of expanded interconnection exists, so that LECs would be able to respond to discount plans offered by other access providers.(n79) Specifically, we permitted LECs to offer volume and term discounts in a study area once they were able to show either that (1) 100 DS1-equivalent switched transport cross-connects have been taken by interconnectors in the zone 1 offices in that study area; or (2) an average of 25 DS1-equivalent switched transport cross-connects per zone 1 office in the study area have been taken by interconnectors.(n80) In study areas without any zone 1 offices, we permitted volume and term discounts after five DS1equivalent cross-connects have been taken in the study area.(n81) These volume and term discounts are filed under the "new services" test.

56. When we adopted the Switched Transport Expanded Interconnection Order, the problems with respect to headroom arising out of volume and term discount plans or other new services that would fall within our proposed definition of APPs had not yet been brought to our attention. "Headroom" refers to the difference between the PCI and the API for any particular basket of price cap services. We have focused on those issues more recently, however, in the AT&T notice of proposed rulemaking concerning APPs.(n82) Specifically, in AT&T's case, optional discount offerings enable it to offer discounts to some residential service ratepayers, while increasing its basic schedule rates for residential service, without any loss of revenues.(n83) Under current practice, the headroom on which AT&T predicates its basic schedule increases is based on AT&T's forecasted demand estimates for its promotional offerings. Because these offerings are incorporated into the price cap indexes based on the weighted average demand of the services in the basket, customers of AT&T's basic schedule services may be charged more than they would have been otherwise when AT&T's forecasted demand exceeds actual demand. There is currently no requirement in our rules that AT&T "true up" its demand estimates, nor any requirement to refund charges based on overestimated demand.(n84)

57. The AT&T APP Notice seeks comment on our proposals for revising AT&T's price cap plan to account for APPs. AT&T would be allowed to file APPs initially outside of price caps on 14 days' notice and without cost support, provided that the APPs are scheduled to expire automatically no later than 90 days after the initial effective date.(n85) Because the APPs would be kept outside of price caps during this period, AT&T would not receive headroom "credit" for the APP. AT&T would be permitted to incorporate the APP into its price cap indexes upon the conclusion of this 90-day period, as opposed to the six to eighteen month base period for new services. At the end of the 90-day period, AT&T would be allowed to convert the APP to a permanent offering under price caps, subject to the provisions of Section 61.49 of the Commission's rules.(n86) The estimated annual revenue contribution of APPs would be computed by extrapolating actual demand data collectedduring the 90-day period.(n87) AT&T also would be required to file quarterly reports updating the estimated demand amounts during the first 12 months after the APP is incorporated into price caps.(n88)

58. AT&T offers APPs to end users on a national basis. The market for access services in which LECs participate is limited geographically relative to the market for interexchange services,(n89) and the access customers are generally a relatively small number of interexchange carriers and large end-users in any given market as opposed to the millions of customers for interexchange services. In addition to the differences between AT&T interexchange services and LEC exchange access services, there are also differences among the interstate access services that LECs offer. As a result, our proposals for APPs for AT&T may not be appropriate with respect to LECs, or at least with respect to certain LEC service baskets or services. For example, the proposed rules for AT&T APPs are designed, in part, to address the effects of the headroom created by AT&T's optional service offerings. To the extent that LEC APPs are not likely to generate substantial headroom, because of the LEC price cap basket structure or otherwise, extending the proposed AT&T rules to the LECs may not be appropriate. In addition, we note that LECs currently are required to offer interstate switched access services in accordance with a prescribed rate structure. LECs might seek to offer APPs for switched access services that would lead IXCs to shift their interstate traffic from the current offerings to APPs. We seek comment on whether there is the potential for competitive harm in allowing the LECs to offer APPs that is not present in the interexchange market. There may be other reasons for concluding that it would not be in the public interest to apply to the LECs the rules we have proposed for AT&T.

59. We invite parties to comment on whether we should allow price cap LECs regulatory flexibility to offer other APPs in addition to volume and term discounts currently allowed so long as the LEC continues to offer the standard service offering of which the APP is an optional discounted plan. For this purpose, we would define APPs as services that permit customers to "self-select" an optional discounted rate plan for a service that currently exists and propose considering APPs as a service classification which is distinct from either new services or restructures.(n90) In addition, we invite comment on whether we should allow LEC APPs to be introduced pursuant to the same rules we have proposed for AT&T, i.e., on fourteen days' notice and without cost support for up to 90 days. We would allow LECs to convert APPs to permanent offerings under price caps following the submission of tariff revisions complying with our new services test, on not less than 45 days' notice andaccompanied by cost support as required under Section 61.49 of our rules. In addition to these proposals, we also seek comment on whether we should adopt other rules for APPs modeled on those we proposed in the AT&T APP Notice.(n91) Commenters advocating different approaches to the price cap treatment of LEC APPs should explain the advantages of their proposals. If we do not permit LECs generally to introduce APPs, we invite parties to comment on whether we nevertheless should permit LECs to offer volume and term discounts for switched access services in addition to those currently permitted and, if so, what rules should govern such offerings. We particularly invite proponents of other approaches to discuss how their proposals strike a proper balance between our interest in promoting expeditious and efficient introduction of offerings and the need to ensure appropriate oversight to protect against anti-competitive practices.

60. Allowing the LECs to provide APPs and subjecting them to this relaxed review may encourage a greater variety of offering for consumers, result in at least certain ratepayers and consumers paying lower rates and allow the LECs the opportunity to better respond to the marketplace. Although the review of APPs would be relaxed, because the non-discounted offering remains available to customers, there may be little likelihood of harm to customers. We request comment on the subject of APPs, in particular on the following questions:

Issue 2a:Should we allow LECs to file APPs in addition to the volume and term discounts currently permitted? Under what terms and conditions? How should APPs be defined? Would the introduction of APPs cause any anti-competitive effects? If we permit LECs to offer APPs, what notice, cost support, and other requirements should be applied to those tariff filings? Should the rules be different depending on the particular LEC service basket or services involved and, if so, how? How and when should APPs be integrated into the price cap plan?

Issue 2b:If we do not generally permit LECs to introduce APPs, should we nevertheless permit volume and term discounts for switched access services other than those currently permitted? If so, should we condition such offerings on a showing of competitive presence similar to the conditions adopted in the Switched Transport Expanded Interconnection Order or on the other measures of competition discussed in this Second Further Notice in the geographic areas where such competition exists?

d. Individual Case Basis Tariffs

61. We have recently seen an increase in the number of individual case basis (ICB) tariff filings. Although ICB tariff filings have some characteristics of contract tariffs, they are generally intended to be precursors to new service offerings. Because this Second Further Notice raises definitional and other regulatory questions relating to the introduction of services, we believe it is advisable to consider ICBs here as well. That will permit us to develop a consistent regulatory framework that allows price cap LECs appropriate flexibility in light of existing market conditions, while protecting against anti-competitive, unreasonably discriminatory or other negative consequences. Accordingly, we make several proposals to further define the treatment of ICB filings.

62. In the past, we have occasionally permitted LECs to file ICB rates. ICB pricing is the practice of developing a price for a particular service or facility in response to each customer request for the service or facility.(n92) ICB pricing is usually used for services that the carrier has no experience in providing and that are unlike any existing service, so that the carrier has no basis on which to develop generally available rates. We have also permitted ICB pricing for special construction offerings, which are one-time, non-recurring charges for construction activity on a customer's premises. Each special construction offering can have unique cost characteristics, and thus it may not be reasonable to develop averaged rates for these offerings.

63. We have excluded ICB offerings from price cap regulation, because they are offered on a contract-type basis rather than a generally available basis.(n93) We have stated that price cap treatment would have little effect on one-time special construction activity, and so such offerings should be excluded from price cap regulation.(n94) We have also concluded that ICB tariffs would continue to be appropriate for services featuring a new technology for which little demand exists, but stated that those services should be treated as new services when the LEC develops generally available averaged rates for them.(n95)

64. We established general requirements for ICB rates in the ECA Tariff Order and the ICB Order.(n96) We found that ICB rates were acceptable as an interim measure for certainservices, until the carrier has gained sufficient experience in providing the service to develop generally available averaged rates.(n97) Specifically, we found that ICB rates would be acceptable only for those services which the carrier has no experience providing, i.e., it must be a service that the carrier has not offered previously, and it must not be "like" any other previously offered service, within the meaning of Section 202 of the Communications Act.(n98) The ICB rate must be used only as an interim measure, and the carrier must develop averaged rates within a reasonable period of time.(n99) Although we did not state specifically what would be a reasonable period of time in which to develop generally available rates, we did find that five years was an unreasonably long period of time to provide a service on an ICB basis.(n100)

65. We specifically propose requiring a LEC seeking to offer a common carrier service, except for special construction, at ICB rates to show in the supporting documentation that the service is so unlike any existing service that the LEC would have no reasonable basis to develop generally available rates. Furthermore, we believe that when a carrier has more than two customers for a common carrier service, or has provided the service for six months or more, it has or should have sufficient experience with the service to develop averaged rates. At that time, we propose that the offering may not be continued as an ICB but must be treated as a new service subject to the new service requirements. We propose that the cost support requirements of Section 61.38, applicable to non-price cap carriers, should apply to the tariff filings establishing ICB rates.(n101) We also propose to continue to exclude ICBtariffs from price cap regulation.(n102) Finally, we propose to continue to permit LECs to offer special construction on an ICB basis, without requiring averaged rates. We believe that these proposals will allow price cap LECs the flexibility they need to respond promptly to certain specialized needs of customers, while maintaining regulatory review necessary to assure that ICBs are not used in an anti-competitive, unreasonably discriminatory or other manner which is inconsistent with the public interest. Accordingly, we seek comment on our proposals and more generally on the following issues:

Issue 3:Under what conditions, if any, should we permit price cap carriers to establish ICB rates? What showing would enable us to determine that the carrier cannot reasonably be expected to establish generally available averaged rates at the time the common carrier service is introduced? How long should we permit those rates to remain in effect before we require generally available averaged rates? What cost support requirements should apply when the carrier files ICB tariffs, and when the LEC files tariffs establishing generally available averaged rates?

3.Part 69 Waiver Process

66. We propose modifications to the current procedures that price cap LECs must follow in order to establish new rate elements for a new switched access service. We make this proposal in order to encourage LECs to introduce new services and to allow them to do so more expeditiously.

67. By way of background, the Commission promulgated rules in the early 1980s to establish a system of tariffed charges for interstate access services provided by LECs.(n103) The access charge rules, which are found in Part 69 of the Commission's Rules,(n104) prescribe the service definitions and rate structures for interstate access services provided by the LECs.(n105) The Part 69 rules prescribe the offering of two basic forms of interstate access services -- "switched access" and "special access."(n106) For the switched access services, the Part 69 rules prescribe the elements that must be used in the access tariffs. Part 69 does not prescribe a rate structure for special access services.

68. A LEC that seeks to introduce a rate element for interstate switched access services that is not provided under the Part 69 rate structure rules may request that the Commission grant the LEC a waiver of the rules pursuant to Section 1.3.(n107) In the waiver request, the LEC specifies the exact rate elements intended for the service. Under Section 1.3, we are authorized to grant a waiver of our rules "if good cause therefor is shown."(n108) As interpreted by the courts, this requires that a petitioner demonstrate that "special circumstances warrant a deviation from the general rule and such deviation will serve the public interest."(n109)

69. LECs have argued that many new services and technologies do not readily fit the existing Part 69 rate structure requirements, and that the process for obtaining a waiver of the rules to introduce a new rate element is costly, time-consuming, and poses a significant impediment to the development and introduction of new services.(n110) In the First Report and Order, we indicated that we were not convinced that this proceeding was the appropriate forum in which to conduct a review of the Commission's Part 69 rules and did not anticipate that this Second Further Notice would include a review of the Part 69 rules.(n111) We continue to believe that a comprehensive review of our Part 69 rules should appropriately be pursued in a separate proceeding; however, we also believe that the benefits of the changes to the treatment of new services proposed above might be diminished if we did not make some immediate changes to the Part 69 waiver process. We are concerned that we not retain any undue restrictions which might hinder LECs' ability to respond to the marketplace or to introduce new services.

70. We propose to modify Part 69 so that price cap LECs would not be required to seek a waiver of Part 69 each time they want to establish new rate elements for a new switched access service, thus relaxing the regulatory process relating to the introduction of such new services. Our intention is to facilitate the expeditious introduction of new switched access services while insuring that there is adequate protection against anti-competitive actions. Specifically, we propose to eliminate the need for waiver of the Part 69 rules. We further propose to modify Part 69 to permit the introduction of new services based on a public interest finding. Once the Commission determines that the public interest would be served by one price cap LEC establishing new rate elements for a new switched access service, we propose to permit others to introduce new services consistent with that ruling in an expedited fashion. These proposals would apply to the offering of an APP which establishes new rate elements for an existing service, as well as the introduction of a new service.

71. First, we propose amending Part 69 to allow a price cap LEC to file a petition proposing to establish new rate elements for a new switched access service. Rather than meeting the standard required for a waiver of our rules, the LEC would be required to show that the offering would serve the public interest. We seek comment on specific criteria by which to evaluate such a public interest showing. Second, we propose that once the Commission grants the first LEC's petition to establish a new rate element, other price cap LECs would be allowed to submit a certification letter stating an intention to provide the same service and to establish the same rate elements. The certification would include a description of the proposed service and the rate elements to be utilized so that we can analyze the proposed offering. No waiver of our rules would be required, and Part 69 requirements would be deemed satisfied within a short period of time (e.g., 10 days), unless the Bureau concludes within that time that the subsequent LEC's service offering raises issues that were not considered in the original order granting the petition to establish the new rate elements. If the Bureau does not act within the prescribed period of time, authority to establish the rate elements in question would be deemed granted. In the event the Bureau denies certification, we propose requiring the LEC to file a traditional Part 69 waiver petition.

72. Third, we propose permitting the first LEC proposing the new switched access service to provide less specificity in the description of its proposed rate structure than we have required previously. Rather than requiring the LEC to request and be granted authority to establish specific rate elements for a service, we propose permitting it to describe the service to be offered and to describe alternative ways in which the rate elements may be established for the service. The Bureau order granting the petition would specify which types of rate elements would be acceptable for the proposed service.

73. Fourth, if we divide new services into Track 1 and Track 2 categories as discussed previously, we propose to amend Part 69 to relax further the procedures for establishing new rate elements for services that would be eligible for Track 2 new service treatment. Specifically, we would propose permitting a price cap LEC desiring Track 2treatment for a new service and needing grant of its petition to establish new rate elements for the service (again this would be the first LEC proposing a particular new service) to seek both a determination of Track 2 status and grant of its petition in the same filing and to review the filing under the same expedited procedures that we propose for petitions which seek only a determination of Track 2 status. By consolidating the procedures for obtaining Track 2 treatment and grant of the petition, we believe that we would facilitate the introduction of new services and ease administrative burdens faced by price cap LECs without significant risks of anti-competitive consequences.

74. We seek comment on our proposal, and invite commenters to make other proposals on this subject. Commenters suggesting other approaches should explain how their approaches would still provide an appropriate level of regulatory protection and the ease in which they could be administered.

Issue 4a:Should we eliminate the requirement for, or simplify the process of, obtaining a waiver of Part 69 for new switched access services and, if so, how? What standard should we use in determining whether to grant a petition proposing to establish new rate elements for a switched access service? Would there be any anti-competitive or other negative effects from modifying the current system?

Issue 4b:How should any new procedures with respect to Part 69 waivers be coordinated with the process for determining whether a new service is a Track 1 or Track 2 service as defined in the previous subsection herein if those concepts are adopted?

4.Elimination of Lower Service Band Index Limits and Other Pricing Flexibilities

75. We propose the elimination of the lower service band limits in the price cap plan. We believe this change will result in more efficient pricing, enhance competition, and will not adversely affect ratepayers. We also invite commenters to propose other measures we could take which could promote cost-based pricing, eliminate pricing restrictions, and enhance competition.

76. By way of background, under the price cap plan, a separate PCI applies to each of the four service baskets and separate upper and lower SBI limits apply to each of the categories and subcategories within the traffic sensitive and trunking baskets. Service baskets and bands are methods of restricting pricing flexibility that carriers would otherwise have if the Commission had adopted a theoretically pure price cap system. In a pure price cap system, all services offered by a carrier would be subject to a single price cap, and carrierswould have unlimited ability to migrate individual prices up or down so long as aggregate prices remained below the cap.(n112)

77. In the AT&T Price Cap Order, we established the price cap plan for AT&T and sought comment on and proposed the LEC price cap plan. We noted there that the proposed LEC price cap plan restricted pricing flexibility more than the baskets and bands we established for AT&T. These greater restrictions were imposed because LEC services were less competitive than interexchange services. We initially proposed setting the pricing bands for service categories in the traffic sensitive and special access (now trunking) baskets at plus or minus 5 percent, to balance the need for regulatory control and rate flexibility.(n113) Central to the Commission's decision to impose the lower band limits was its concern that LECs would set prices in an anticompetitive manner.(n114) In that decision, however, we sought further comment on whether the lower bands regulation could be relaxed and whether these pricing limits should be set at the same level as AT&T's bands.(n115)

78. In the LEC Price Cap Order, we established upper and lower limits for service categories in the traffic sensitive and special access service baskets to create a "no-suspend" band within which LECs may move prices up or down five percent on short notice, and with a presumption of lawfulness. Rates that departed from the band were subject to a more challenging tariff review process.(n116) No service category banding requirements were imposed on the common line basket or on the interexchange basket.(n117)

79. Subsequently, we re-evaluated the service categories and rate bands in a number of orders with the objective of reducing unneeded regulation. For example, in the Switched Transport Expanded Interconnection Order, we adopted zone density pricing for switched transport services and expanded the pricing band within each zone to 5 percent up and 10 percent down annually relative to the price cap index applicable to the traffic sensitive service basket without triggering any additional cost justification or advance notice requirements. The weighted average of all rates in the same service category, however, must conform to the pricing bands for that service category. To achieve this goal, wecreated two subindexes in each density zone, one for tandem-switched transport rates and the other for direct trunked transport, entrance facilities, and dedicated signalling transport. Transport services in the aggregate were banded at plus 5 and minus 5 percent at the service category level for direct-trunked transport and entrance facilities or at plus 2 percent and minus 5 percent at the service category level for tandem-switched transport. In addition, LECs were permitted to price within plus 5 percent and minus 10 percent ranges in each density zone.(n118)

80. We again examined the service band issue in the Second Transport Order.(n119) Although the LECs urged us to expand the bands, especially in the presence of competition, we elected to make no changes at that time. We continued to believe that there was insufficient competition to protect the public interest and that the service category bands constrained the LECs' ability to offset rate reductions in some service categories with rate increases in other categories. Because of those concerns, we adopted additional constraints on the LECs' ability to change rate relationships in the trunking basket. Specifically, we placed flat-rated DS3, DS1 and tandem-switched transport in separate service categories or subcategories and applied separate zone bands to each category.(n120)

81. In the First Report and Order in this proceeding, we considered once again the issue of expanding the service bands and concluded that enlarging the lower service band limits would not greatly increase the risk of successful predation. This conclusion was based in part on the growth in competition that the industry has experienced since the adoption of expanded interconnection for special access and switched transport and in part on the substantial benefits that consumers would realize from lower prices. We noted that the Commission has other mechanisms at its disposal to inhibit predatory pricing, such as the continuing requirement that below-band rate reductions be accompanied by cost support, and the formal complaint process established by Section 208 of the Communications Act. Finally, we noted that permitting LECs greater downward pricing flexibility removes incentives for inefficient entry. As a first step, we modified the five percent lower band limits that apply to most service categories within the traffic sensitive and trunking baskets by expanding them to 10 percent. In addition, we increased the lower pricing band limits that apply to density pricing zones from 10 percent to 15 percent to ensure that LECs continue to have the opportunity to move their rate levels in particular geographic zones toward cost.(n121)

82. Although the changes that we imposed in the First Report and Order were limited in scope, we indicated a willingness to make additional changes in the price cap rules as competition developed.(n122) We pointed out our belief that downward pricing flexibility is in the public interest and stated that we would issue another notice to investigate the conditions that might warrant further relaxation of the lower bands.(n123) We have also permitted substantial downward pricing flexibility by allowing below-band rates to take effect.(n124)

83. Eliminating the lower service band limits for all service categories in both the traffic sensitive and trunking baskets would increase LEC pricing flexibility and allow price cap LECs to move prices closer to cost. We expect that it might immediately result in lower rates for certain competitive access services. The current price cap plan may inhibit a LEC from lowering its prices to cost in certain instances, because of the administrative burden and length of time it can take for below-band filings to be approved.(n125) In those instances, inefficient entry may be encouraged and new or existing LEC competitors have no incentive to price their services at cost. Instead, they will price their service just enough below the LEC price to attract customers. If the lower service band limit were eliminated, the LECs and their competitors will be able to engage in true competition and bring prices down toward cost immediately. The lower service band limits were designed to prevent LECs from lowering their prices below cost in order to thwart competition and then raising them after competitors have been driven from the market. Because they restrict the LECs' ability to raise prices after they have been lowered, the upper service band limit, at five percent above the LEC's new lower rate, and the price cap itself would remain as disincentives to predatory pricing if the lower service band limits were to be eliminated. Additional restrictions on raising rates after rate reductions could further serve as a disincentive to predatory pricing in the absence of lower service band limits. In addition, below cost or predatory prices could still be challenged through a petition against a tariff filing or the formal complaint process. The petitioning or complaining party bears the burden of demonstrating that the challenged prices are below cost, while currently the LEC bears the burden of demonstrating that below-band rate reductions are not below cost. Thus, elimination of lower service bands shifts the burden of proof from the LEC to the petitioner.

84. As we stated, one of the primary reasons for our proposing to eliminate the lower service band limits is to allow price cap LECs to move prices more quickly towards costs in situations where they may be currently inhibited from doing so. As discussed above, moving prices towards economic costs is a key goal as we consider modifications to the pricecap system. Since the establishment of the price cap system, we have made certain changes which may promote this goal, including modifying the principle that prices must be geographically averaged for each study area to allow zone density pricing for certain services. For some services, we have permitted increased downward pricing flexibility in some geographic areas, or zones, to reflect cost differences due to differences in traffic density.(n126) For example, we allowed NYNEX to deaverage the residual interconnection charge (RIC) in the New York City metropolitan area and to establish different RICs in each density pricing zone.(n127) We invite parties to propose additional pricing flexibilities that would promote the movement of prices towards costs generally. We invite parties specifically to discuss the relationship between downward pricing flexibility and varying costs, demand and other characteristics of different geographic markets such as density zones. Parties should explain how a particular proposal would promote our goals, why it would not have negative competitive effects, and discuss whether this is the appropriate forum for considering the issue. They should also discuss whether the proposal should be allowed regardless of the current level of competition or only upon a showing that certain competitive conditions exists.

85. We solicit comment on the following questions:

Issue 5a:Should we further expand or eliminate the lower service band index limits for all access services? Does there remain a danger of predatory pricing or other anti-competitive practices? Would this additional downward pricing flexibility harm any LEC customers? Would it harm competition?

Issue 5b:Should we place additional limits on the ability of a LEC that decreases prices pursuant to this flexibility to subsequently increase those prices in order to preclude the potential for anti-competitive pricing strategies?

Issue 5c:Are there any other pricing flexibilities which we should adopt to promote cost-based pricing? How would the proposal promote our objectives? Would added flexibilities cause competitive harm? What is the relationship between downward pricing flexibility and the varying cost, demand, and othercharacteristics of different geographic markets? Should additional pricing flexibilities be considered in this proceeding or in another context?

5. Revision of Baskets

86. The price cap plan divides services among four service baskets, each subject to its own price cap.(n128) The four service baskets are common line, traffic sensitive, trunking and interexchange.(n129) Within the traffic sensitive and trunking baskets, services are grouped into separate service categories.(n130) Price changes within service categories are constrained by the upper and lower service band indexes.(n131) The assignment of services to price cap baskets and bands is intended to replicate the effect of competition.(n132) Services with common characteristics, for example, similar levels of competition, are grouped within a single basket. A carrier is prevented from subsidizing price decreases for services in one basket with increases in another, because changes in prices within one basket do not affect computation of the API and PCI in other baskets.(n133)

87. In the LEC Price Cap Order, we divided services among baskets according to the then-existing interstate access structure set forth in Part 69 of the Commission's Rules.(n134) In the Second Transport Order, we realigned the division of services among baskets by combining transport and special access services into the newly-created trunking basket. The Commission decided to "mov[e] transport services out of the traffic sensitive basket and into a basket with special access services . . . [to] prevent the LECs from offsetting rate reductions for transport services subject to competition with rate increases for switching and other traffic sensitive services, which [were] subject to much less competition" at that time.(n135)

88. In the initial Notice, we sought comment on whether we should revise the basket structure both as a baseline and as a transition issue.(n136) In its comments, USTA proposed four baskets organized to allow for the grouping of rates for equivalent functions: transport, switching, "public policy,"(n137) and "other."(n138) Most LECs generally supported USTA's proposal.(n139) NYNEX noted that with the recent formation of the trunking basket, the Commission's current baskets adequately group services by functionality. It suggested retaining them with minor revisions and renaming them with the names suggested by USTA.(n140) Pac Bell supported USTA's proposal and stated that ultimately there should be only two baskets: one basket for services subject to explicit and implicit subsidies, and the other for services that are subject to high elasticities of supply and demand, but are not fully competitive. Services offered in competitive markets would be removed from price cap regulation altogether.(n141) Other commenters supported maintaining the current composition of baskets.(n142)

89. In the First Report and Order, we noted that the rate of development of competition is likely to differ for each of the price cap baskets, and that it will remain important to avoid grouping services with different levels of competition in the same basket.(n143) Because the baskets were established to prevent LECs from raising prices for non-competitive services to recoup lost revenues due to price decreases for competitive services, we concluded that modifications to price cap baskets and bands may be necessary as competition develops in local telephone markets.(n144) The record in Phase I of Docket No. 94-1 did not provide sufficient information on the state of competition to support making any immediate changes in the composition of baskets.(n145)

90. We seek comment on whether the development of competition for particular services requires adjustment to the current basket structure and whether and how the basket structure should be changed as competition continues to emerge. For example, we seek comment on the kinds of changes in market circumstances that might be identified now as triggers for future revisions to the basket structure. We seek comment on whether we should plan to make changes to the basket structure on an industry-wide basis, in this or future rulemakings, or on a case-by-case basis as competitive circumstances change for individual price cap LECs. Commenters should also address under what circumstances, if any, multiple baskets could be eliminated. For example, if sharing were eliminated, thereby diminishing LEC incentives to manipulate their rate of return, and entry barriers come down, including unbundling of the local loop, would there be a continuing need for multiple baskets?

91. In addition, parties should comment on the need to create one or more new baskets to accommodate LEC entry into new services that may not be subject to competition. For example, the expanded interconnection virtual and physical collocation tariffs have until now been held out of price caps. We seek comment on whether there are circumstances, now or in the future, that would justify bringing these services into price caps.

92. We solicit comment on this issue, particularly the following questions:

Issue 6a:Would any revisions to the price cap baskets serve our goals in this proceeding? If so, explain how they would serve those goals. Would there be any adverse effects on end-users or competition?

Issue 6b:Under what circumstances should the price cap baskets be revised? Can revisions be planned to take place automatically on achievement of particular milestones or must they be done on an individual basis or after a periodic review? If they can be planned to take place on achievement of particular milestones, what should those milestones be? Should any individual review of the basket structure be done as part of a rulemaking proceeding? Are there any other procedures that would be appropriate?

Issue 6c:As competition develops at different rates for different services within different geographic markets, should different basket structures be established for a particular LEC or within a particular study area or even within a smaller geographic area?

6.Consolidation of Service Categories

93. Consolidation of service categories would allow a LEC more pricing flexibility. We created separate service categories in the price cap plan to group together services with high cross-elasticities of demand. This limits the LECs' ability to offset rate decreases for more competitive services with rate increases for less competitive services.(n146) If services have high cross elasticities and are competitive with one another, then they can be included in the same service category without creating an incentive for the LECs to lower the price of one service and raise the price of another.

94. We invite commenters to suggest service category consolidations that they believe would be appropriate and would not result in competitive harm. For example, USTA, in an ex parte statement filed in Phase I of the performance review proceeding, advocated eliminating the DS1 and DS3 subcategories.(n147) Comments should address whether the services proposed to be grouped in the same category share similar demand characteristics, and whether there is any reason to anticipate that LECs would adjust their prices in a way that would harm competition or otherwise not be in the public interest. We note, however, that if we eliminate lower service band index limits as proposed earlier in this Second Further Notice, consolidation of service categories would not provide any additional downward pricing flexibility, but instead would provide additional upward pricing flexibility by creating "headroom" for services that are in the same service category with services for which the LECs have lowered their rates.

95. Combining service categories would entail adjusting the relevant SBIs. For example, when we combined the transport services with special access services to create the trunking basket, we based the upper and lower bands on the weighted average of the pre-existing upper and lower bands for special access services and the five percent upper and lower bands for the flat-rated transport services.(n148)

Issue 7a:Would any service category consolidations serve our goals in this proceeding? If so, explain how they would serve those goals. Would there be any adverse effects on end-users or competition?

Issue 7b:Under what circumstances can consolidation of service categories occur?

Issue 7c:If service categories are combined, how should the relevant SBIs and the SBI upper and lower limits be adjusted?

7. Further Notice of Proposed Rulemaking in CC Docket No. 93-124

a. Operator Services

96. In 1993 we initiated a rulemaking proceeding in which we proposed that a new service category be created in the traffic sensitive basket for certain operator services (Operator Services Notice),(n149) specifically, operator transfer service and line status verification. Operator transfer service (also known as "0-" transfer) is provided when a LEC operator receives a "0-" call from a party seeking to place an interLATA call and the LEC operator transfers that call directly to the interexchange carrier (IXC) selected by that party. Line status verification (also know as busy line - verification) is provided when a LEC operator checks, on behalf of an IXC operator, whether a particular access line is either "busy" or out-of-service. The LEC operator, after determining that a line is "busy," may also interrupt that line for emergency purposes (known as busy line - interrupt).(n150)

97. Since the Operator Services Notice was released, we have created other new categories, including billing name and address (BNA) in the traffic sensitive basket(n151) and signalling for tandem switching in the trunking basket.(n152) BNA is the name and address provided to a LEC by each of its local exchange customers to which the LEC directs its bills for its services. Provision of BNA by a LEC to one of its IXC customers is a communications common carrier service which must be provided under tariff.(n153) Signalling for tandem switching is the provision of signalling information necessary for tandem switching from LEC equal access end offices to a tandem switching provider.(n154)

98. We now seek comment whether operator services should be in its own service category or combined with any others. We hereby incorporate the Operator Services Notice and the record created in response to that notice into this proceeding. Commenters, however, should update their remarks in the Operator Services docket to address whether operator services can be consolidated with any other recently established service categories.

Issue 8:Should operator services be placed in its own service category in the traffic sensitive basket or combined with another new or pre-existing service category?

b. Call Completion Services

99. In the Operator Services Notice discussed above, we sought comment on the price cap treatment of two particular operator services.(n155) Since 1993, when we developed the record in that proceeding, several LECs have begun to provide more general "call completion" services, such as, for example, automated handling of calling card, third party, or collect calls, or live operator assistance.(n156) As a result, we have not developed a record on the proper price cap treatment of call completion services. For purposes of this Notice, we will refer to these services as "operator-related call completion services."

100. These services are distinguishable from another service developed since 1993, also referred to as "call completion" service, in which the carrier completes the call for the end user immediately after providing directory assistance.(n157) We have not developed a record on the proper price cap treatment of these call completion services either. For purposes of this Notice, we will refer to these services as "directory assistance-related call completion services."

101. We believe that both operator-related and directory assistance call completion services are properly placed in the traffic-sensitive basket. We also believe that operator-related call completion services are subject to more competition than operator transfer serviceand line status verification, because they may be provided by any operator service provider (OSP). Accordingly, placing these services in the same service category as operator transfer service and line status verification may not be appropriate. On the other hand, directory assistance-related call completion services do not seem likely to be competitive, because access to current directory listings would seem to be necessary to provide this service.

102. Accordingly, we seek comment on the following issues:

Issue 9a:What is the proper price cap treatment of operator-related call completion services?

Issue 9b:What is the proper price cap treatment of directory assistance-related call completion services?

8. General Issues

103. We propose that price cap LECs generally at this time be afforded the relaxed regulatory treatment for the introduction of service offerings and allowed to utilize the pricing flexibilities discussed in this Section IV.B. We request that parties comment on this question:

Issue 10a:As to each proposed relaxation of regulation and pricing flexibility, should LECs be permitted to take advantage of the regulatory relief and pricing flexibility at this time or should they first have to make a showing that a certain level of competition exists before being able to use it? If a showing should be required, what should the showing be and why?

104. We propose that LECs be permitted to take advantage of any or all of the relief and flexibilities proposed in this Section IV.B. at their discretion. All of our proposals are designed to encourage the expeditious introduction of new services and give LECs increased flexibility to reduce rates. We do not believe that the cumulative effect will cause competitive harm. We request that parties comment on the following:

Issue 10b:What is the relationship between the various regulatory relief and pricing flexibilities we have proposed and should any restrictions be placed on the ability of a LEC to take advantage of one type of relief or flexibility in combination with another? Should some relief be granted only after successful implementation of other forms of relief, or are there other sequencing concerns we should consider?

105. The downward pricing flexibilities provided by our proposals in this Second Further Notice are designed to stimulate the movement of rates for services closer to thecosts of those services. We recognize, however, that there may be a concern that LECs might utilize these flexibilities to temporarily decrease prices to drive competitors out of the market or discourage entry and then subsequently raise those prices. We therefore propose additional limits on subsequent upward pricing to preclude this type of anticompetitive behavior. Although rate increases under our existing regulations for most service categories and subcategories are limited to five percent by the upper SBI limit, we propose, with respect to any service category or subcategory in which a LEC makes price reductions pursuant to the pricing flexibilities in this Second Further Notice, that the LEC be subject to a one percent upper SBI limit. This would insure that rate reductions undertaken pursuant to the flexibilities provided in this Second Further Notice are more or less permanent.

Issue 10c:Should we impose new limits on subsequent upward pricing flexibility after a price has been reduced? If so, what should those limits be? If such limits are unnecessary, explain why they are not needed to protect consumers and to insure a competitive marketplace.

C. Measures of Competition for Regulatory Relief

1. Introduction

106. In the preceding section of this Second Further Notice, we solicit comment on several proposals to relax our requirements relating to the introduction of service offerings, afford price cap LECs certain additional pricing flexibility within the LEC price cap plan and certain other matters, and whether some or all could be implemented immediately. We are aware that parties may recommend providing this relaxed regulatory treatment only after a LEC has demonstrated that it has begun to face a higher level of competition, or has taken certain steps to remove barriers to competitive entry. We expect that such a demonstration of competitive circumstances would be a lower hurdle to meet than the substantial competition test discussed in Section V for streamlining, and would focus primarily on removal of barriers to competition. In this section, we propose to examine the existence of competitive circumstances within a given geographic and product market in terms of barriers to competitive entry in the market. We tentatively conclude that lowering entry barriers is the most appropriate mechanism for conditioning additional price cap flexibilities because additional flexibilities within the price cap framework are forms of regulatory relief that are intended to allow the LECs to respond to emerging competition, and in some cases that allow efficient competition to occur. In contrast, we propose later in this notice to remove services from price caps altogether once we have evidence of a certain level of actual competition for those services. We believe that in those cases in which pricing flexibility or other regulatory relief is predicated on some demonstration of competitive circumstances, the demonstration should be related to the type of regulatory relief that is being sought. Also, the relief should leave intact the regulation that is necessary to limit or prevent anti-competitive pricing practices. Clearly, some competitive criteria are more relevant to some kinds of regulatoryrelief than to others. Parties recommending requiring a demonstration prior to a particular grant of pricing flexibility or other regulatory relief should explain why that particular regulation is necessary to limit or prevent cross-subsidization, predatory pricing or other anticompetitive behavior.

2.Removal of Barriers to Local Competition

107. We could predicate the granting of relaxed regulatory treatment or additional pricing flexibility on a demonstration that certain barriers to competitive entry into the local services market have been removed. Basing relaxed regulatory treatment and additional pricing flexibility on the elimination of entry barriers can serve as a mechanism for encouraging LECs to open their markets to local competition.

108. Some parties in the first phase of CC Docket No. 94-1 and in other contexts have developed lists of criteria that they believe provide reasonable indicators that barriers to entry into the market for local service have been lowered sufficiently to warrant some kind of regulatory relief.(n158) These "competitive checklists" contain many of the same criteria. Some criteria common to most, if not all, of these checklists are as follows:(n159)

a.competing providers of local switched telephone service have been authorized and have become operational;
b.local loops and switches have been unbundled, i.e., a LEC's competitors may obtain access to the local loop directly, without purchasing local switching or other services;
c.intrastate expanded interconnection is available through tariff or contract (physical or virtual collocation);
d.service provider number portability is available, i.e., end users are able to switch local service providers and retain their current telephone number;
e.compensation arrangements have been established for the LEC and its competitors to complete telephone calls originated on the other carrier's networks;
f.competitors have access to directory assistance, 911, and other databases;
g.intra-LATA toll dialing parity is implemented, i.e., consumers are able to place calls dialing the same number of digits when using any local service provider; and
h.competitors have implemented or announced plans to collocate, or otherwise deploy facilities, and serve customers in wire centers (or other geographic areas) that account for a significant portion of the incumbent LEC's business lines or interstate access revenues.(n160)

109. We note that while some barriers may be directly under the incumbent's control, others are the result of state regulations or statutes. Nonetheless, eliminating state-imposed entry barriers may be necessary to ensure that our proposed modifications to the price cap plan promote competition.

110. We invite comment on basing grants of additional regulatory relief and pricing flexibility on some "competitive checklist" in general. We also seek comment on what items should be included in the checklist to be used for particular grants of regulatory relief and pricing flexibility. Although we do not intend in this proceeding to decide, for example, whether or how local loops should be "unbundled" or how local number portability should be achieved,(n161) we are interested in the views of the parties whether the removal of any particular barriers to entry would be truly essential to facilitate competition before we can make any of the proposed changes in LEC price cap regulation. Conversely, we ask parties to address whether the elimination of all barriers to entry would in itself be sufficient to move prices toward cost in the interstate access market. In addition, we seek comment on the relationship between exogenous and endogenous barriers to entry in a price cap LEC's market and the LEC's ability to enter its competitors' or its customers' markets. Finally, we invite commenters to propose any other tests that reasonably could be used as a trigger for the relaxed regulatory measures we propose. For example, some parties have suggested that local bottlenecks to access services can be eliminated by having LECs separate the bottleneck facilities from the provision of access services and offer the unbundled loop elements to competitors at "wholesale" rates. Access services would be offered to end-users only through a subsidiary or affiliate of the LEC, purchasing the loop facilities at the same wholesale rate as competitors. The plan recently implemented in Rochester is one model of such an approach,(n162) and we seek comment on this approach for markets other than Rochester.

Issue 11a:Which of the changes discussed in Section IV.B. herein, if any, should be predicated on a demonstration that certain barriers to entry have been removed, and why? If such a demonstration should be required, should a competitive checklist be used and, if so, what should be included in it? Are there any other tests for the existence of competition that should be used to determine whether regulatory relief and pricing flexibility should be granted? Should any of the proposed changes to our price cap rules be predicated on a demonstration of actual competition or upon some other circumstances and, if so, why?

Issue 11b:In addition to adopting a "competitive checklist", are there other steps that need to be taken to ensure competition in the interstate access market. For example, is it necessary for the LECs to separate local bottleneck facilities, such as loops and switching, through a separate subsidiary, and to provide these facilities to all access providers at "wholesale prices"?

3.Procedural Matters

111. As discussed above, we are contemplating modifying the price cap plan in various ways when a LEC can show the existence of certain competitive circumstances in a relevant part or parts of its service region. In this section, we seek comment on the procedures with which the LECs should comply when making these showings.

112. Ideally, the procedural mechanism we adopt would create little or no administrative burden on the Commission, price cap LECs, or other interested parties. Specifically, the required showing should be relatively simple for the LEC to make, while still enabling us and other interested parties to determine relatively quickly that the LEC has in fact met the criteria for the regulatory relief it seeks.

113. One possibility would be to require the carrier to submit a separate filing, prior to filing tariffs, showing that the conditions it faces warrant the relief it seeks. We have a number of options to use as a procedural mechanism for this separate filing, such as waiver requests or petitions for declaratory rulings. If we adopt any regulatory relief based on a checklist as proposed above, we could permit that relief on the basis of a certification letter. Under this approach, the LEC would submit a letter showing that it has met all the criteria spelled out in the checklist, and the relief would be granted automatically unless the Common Carrier Bureau denies certification within a specified period of time. An example of another kind of procedure would be the procedure followed in establishing zone density pricing plans. In that procedure, the LECs were required to submit plans which showed that the assignment of each of their central offices into a zone reflected some cost-relatedcharacteristics, such as traffic density or some measure of traffic through each office, which were reviewed and approved by the Common Carrier Bureau.(n163)

114. Another possibility would be to permit carriers to seek regulatory relief in the context of a tariff filing. This procedure is not optimal, however. In the First Report and Order, for example, we found that permitting carriers to seek exogenous treatment for certain categories of cost changes in tariff filings makes the tariff review process cumbersome and subject to manipulation.(n164) We would prefer the tariff review process to focus on the issues for which it was designed, such as compliance with cost support requirements.

115. We invite comment on these procedures, and invite parties to propose other procedural methods for LECs to seek the proposed relaxed regulatory relief or additional pricing flexibility within price caps. Commenters should explain why they believe that the procedure they advocate would permit us and other interested parties to determine that the carrier does in fact face the conditions that we have decided warrant some regulatory relief. Parties should also discuss why they believe the procedures they advocate are less administratively burdensome than other procedures that might be used for this purpose.

Issue 12:What is the best procedural mechanism for price cap LECs to use when seeking regulatory relief or pricing flexibility within the price cap plan?

D.Relevant Markets

1.Introduction

116. As we pointed out in Part A, several of our proposals may require us to evaluate the competitiveness of specific markets. To make such determinations, it is necessary to define "the relevant market." A relevant market is typically defined to encompass commodities that are easily substituted for each other and may be verified by measuring the cross-elasticities of demand.(n165) A high, positive cross-elasticity of demand indicates that purchasers can easily substitute another product or service when the incumbent provider increases its prices. As an example of an approach to defining the relevant market,the Department of Justice/Federal Trade Commission Horizontal Merger Guidelines (Merger Guidelines) define a relevant market as:

(A) group of products and a geographic area in which it is produced or sold such that a hypothetical profit-maximizing firm . . . that was the only present and future producer or seller of the products in that market likely would impose at least a "small but significant and nontransitory increase in price . . . ."(n166)

Under the Guidelines, once a properly-defined market is identified, current market participants are identified. To this list are added "uncommitted entrants", or firms which would be likely to enter "within one year and without the expenditure of significant sunk costs of entry and exit, in response to a small but significant and nontransitory' price increase."(n167) We propose and seek comments below on an operational model for defining the relevant product and geographic markets in access service. The model must be tailored to provide generally applicable definitions of relevant product and geographic markets that can serve as base units for evaluating competition in access markets.

2. Relevant Product Market

117. Conceptually, the product market can be defined in two ways. One method that is frequently used in competitive analyses is to rely on the judgment of industry experts.(n168) The alternative approach is to use formal econometric studies that measure long-run cross-elasticities of either supply or demand. We believe that market definitions based on judgment are sufficiently useful for evaluating access services and that the existing services categories and subcategories described above are both acceptable and useful. We observe that they were initially developed after consideration of cross-elasticity,(n169) and we believe that the fundamental relationships are generally unchanged. Furthermore, the existing definitions are well accepted and understood. We believe that the single product market which was defined for interstate services of the IXCs(n170) is not the appropriate product market definition for the services of the LECs.

118. We therefore propose to define the relevant product market using existing definitions of current service categories within each access service baskets. Under Parts 61 and 69 of the Commission's Rules, LEC interstate services are divided into common line, traffic sensitive, trunking, and interexchange baskets of services. Within the traffic sensitive basket, there are four services categories: (1) local switching; (2) information; (3) data base access; and (4) billing name and address. The seven categories of the trunking basket are (1) voice grade flat-rate transport, voice grade special access, WATS, metallic, and telegraph; (2) audio and video; (3) high capacity and digital data services (DDS"); (4) wide band data and wide band analog; (5) tandem-switch transport;(6) the interconnection charge; and (7) signalling for tandem switching. Within the high capacity-DDS service category, there are two sub-categories: (a) DS1 special access and DS1 flat-rate transport; and (b) DS3 special access and DS3 flat-rate transport.(n171) In addition to the price cap baskets, service categories, and subcategories, there are various rate elements (billing elements) that are associated with specific costs and/or functions of LEC interstate services. We seek comments on using these access service definitions for defining the relevant market for purposes of determining whether to grant additional pricing flexibility or other regulatory relief within the LEC price cap plan, as well as in streamlining and non-dominance determinations.

Issue 13:Should we use the existing price cap service categories within the baskets to define the relevant product market?

119. If alternative definitions are proposed, parties should provide support for their proposals. Parties also should comment on the use of econometric studies to estimate cross elasticities in defining markets and should provide studies that define homogeneous access services.

3.Relevant Geographic Market

120. We propose to define the geographic market for access services using the density zones developed by LECs for the provision of expanded interconnection service.(n172) It is likely that demand and supply elasticities in a particular geographic area served by a given LEC will differ from the demand and supply elasticities in other geographic areas served by it or another LEC. This implies that a single national market, which was defined for interstate services of the IXCs,(n173) is not the appropriate geographic market definition for the services of the LECs. The relevant geographic market must be narrow enough to only encompass competing access services for the same set of customers, yet be broad enough tobe administratively workable. Defining the relevant geographic market incorrectly will misstate competition. We believe that density-based zones of the kind adopted in the expanded interconnection proceeding generally reflect the individual markets for access services.

121. When we adopted the expanded interconnection rules,(n174) we permitted LECs to establish three or more pricing zones for special access services within each study area, based primarily on traffic density.(n175) We subsequently permitted LECs to establish zone density pricing for switched transport services as well.(n176) We required the LECs to file and obtain approval of their zone density pricing plans. In filing a proposal, the LECs must assign each central office in a study area to a zone. The LECs must make a showing that the assignment of central offices to each of the zones reflects cost-related characteristics, such as traffic density or some measure of traffic through each office. Geographic contiguity may also be considered as well as communities of interest, but these are less important factors in establishing the pricing zones than traffic density.(n177) LECs are permitted to redefine one or more central offices from one zone to another.(n178)

122. The pricing zones with the highest traffic density are designated as Zone 1. Because they tend to serve high-volume customers, Zone 1 offices generally represent a disproportionately large level of switched minutes of use and central office equipment investment. These high densities make Zone 1 offices the most attractive areas for entry by competitors and, therefore, may represent the geographic markets in which the LECs are most likely to take advantage of the pricing flexibility we are proposing herein.

123. As noted earlier, we have permitted LECs to geographically deaverage their rates in response to competitive pressure on a limited basis,(n179) and are considering a pendingrequest for some further limited geographic deaveraging in another proceeding.(n180) We believe that if we condition the regulatory relief and pricing flexibility discussed in Section IV.B. on a showing of competitive conditions in a geographic market smaller than a study area, then the relief and flexibility should only be given in that geographic market within which the competition exists. We recognize that this will further expand the number of instances in which we currently permit geographic deaveraging. We therefore seek comment on the following questions:

Issue 14a:Should the Commission adopt density-based pricing zones as the relevant geographic market for assessing competition and granting regulatory relief under price caps? Should some other defined geographic area be used?

Issue 14b:If we condition the regulatory relief and pricing flexibility discussed in Section IV.B. on a demonstration of competitive conditions, should the relief and flexibility be allowed only in the geographic market in which the demonstration of competitive conditions has been made? How would this affect interstate toll rates? Should the relief and flexibility be permitted in an entire study area even if a demonstration of competitive conditions has been made only in a portion of the study area?

124. Parties supporting the use of density zones in this context should comment on whether these zones would be valid market definitions for all access service baskets and categories or only for specific ones. The original pricing zone definitions were based on traffic densities and cost characteristics for the trunking basket. The Commission assumed that LEC costs were likely to be the lowest and competition the most vigorous for trunking services in the zones with the highest amounts of trunking traffic. As a result, the zones may not be useful in defining relevant geographic markets for services in the traffic sensitive, common line and interexchange baskets. We also seek comment on whether different pricing zones should be established for different service baskets based on their particular cost characteristics or other criteria. In addition, only three different zone levels are used today. For some services, however, three pricing zones may not be adequate to reflect the differing states of competition. Should the number of pricing zones that a LEC can establish without additional scrutiny and justification be increased? Commenters advocating increasing the number of zones should address whether that would also increase administrative costs for LECs or the Commission. We also have some concerns over the configuration of zones. Reflective of the marketplace, the pricing zones for trunking services have developed in acheckerboard fashion, rather than in contiguous geographic areas. Does this characteristic pose any significant disadvantage for defining geographic markets for our plan?

125. Another approach for defining the geographic market would be to use pre-existing, fixed geographic units, such as study areas, Local Access and Transport Areas (LATAs), or Metropolitan Statistical Areas (MSAs). LATAs or MSAs may be too heterogeneous to provide useful definitions of competitive geographic markets. There may or may not be some administrative benefit in defining markets as contiguous areas. Parties that believe that these fixed boundary geographic units should be used should explain what geographic units they recommend and how these units reflect a market for various access services.

126. Other possible geographic definitions have been proposed by participants to the First Report and Order. In its prior comments, USTA proposed defining the relevant market area by individual wire center.(n181) According to USTA, the LEC wire center is the smallest geographic area to which a competitive market analysis can be applied; therefore, it would be the most precise geographic area for measuring competition. We recognize that USTA's proposal was developed some time ago. USTA may now support a broader definition. In any event we are disinclined to adopt a wire center definition because there it would create thousands of individual markets and impose substantial administrative burdens on both the industry and this agency. One possible solution would be to consolidate individual wire centers into geographic markets in some rational way, based on competitive considerations. Parties advocating a wire center approach for defining the market should address the administrative advantages and disadvantages of using wire centers for purposes of assessing competition. Is it feasible for us to evaluate competition in each wire center, and what, if anything, can be done to ease administrative burdens associated with that approach? Advocates of this approach also should discuss possible methods for combining them into economically meaningful and administratively reasonable units. Parties recommending consolidation of individual wire centers into geographic markets also should propose a procedural mechanism for determining the grouping of specific wire centers.

V. STREAMLINED REGULATION

A. Background

1. General

127. As we previously noted, the competitive standards we propose for granting LECs streamlined regulation are more stringent than those we envision for the increased pricing flexibilities within the price cap plan we have proposed above. The competitive standards that we propose using for the latter focus on reducing barriers to entry to permit additional competition. Streamlined regulation would provide a LEC considerably more pricing flexibility than what we propose in Section IV, and we therefore propose to condition streamlining on a showing of actual competition.

128. Although the Commission has not yet "streamlined" any LEC services, as described in greater detail below, the Commission has granted streamlined regulation for AT&T services that we have found to be subject to substantial competition. The Commission's analysis of whether AT&T's services are subject to substantial competition rested on considerations of market share, demand responsiveness, supply responsiveness, and AT&T's pricing behavior. AT&T's tariff filings for services subject to streamlined regulation are filed on fourteen days' notice, are presumed lawful for purposes of tariff review, do not have to be accompanied by cost support (although the Commission may request it), and are no longer subject to price cap ceilings, bands and rate floors. Also, AT&T is permitted to offer individually negotiated customer contract rates for services subject to streamlined regulation, provided these contract rates are generally available to other similarly situated customers.(n182) In view of the similarities between the structure of and purposes behind the AT&T price cap plan and the LEC price cap plan, we believe that the analytical framework that we used to streamline AT&T's services may be an appropriate method for relaxing our regulation of LEC price cap services.

129. Allowing the price cap LECs to file tariffs that are presumed lawful, on fourteen days' notice, and without cost support would not constitute an abandonment of this Commission's responsibilities. Where warranted, we can require carriers to come forward with cost information to support its proposed rates.(n183) The advance review would provide us with an opportunity to suspend or reject tariffs where necessary before they go into effect. We would reject any tariff that we found on its face to conflict with a statute or an agency regulation ororder.(n184) In addition, we retain authority to institute at any time on our own motion investigations of LEC tariffs after they become effective and to declare tariffs unlawful, if necessary. We would also adjudicate in the complaint process claims of unlawful actions by the LECs.(n185)

2. Criteria Used for AT&T in CC Docket Nos. 90-132 and 93-197

130. The analytical framework that the Commission applied to determine which of AT&T's services should be subject to streamlined regulation may prove applicable to LEC interstate access services. By way of background, in 1989, the Commission eliminated traditional rate-of-return regulation for AT&T and implemented a system of price cap regulation for most of AT&T's telecommunications services.(n186) The basic structure of the AT&T price cap plan is similar to the price cap plan adopted for the LECs and shares many of its rules. To implement the AT&T price cap system, the Commission divided AT&T's services subject to price cap regulation into three separate baskets and defined a PCI for each basket. As under the LEC price cap plan, the PCI for each basket imposes a price ceiling for the services in that basket. In order for the Commission to determine whether rate levels exceed the PCI, AT&T must compute and file for each basket an API, which represents a weighted average of actual prices of the services within the basket.(n187) Also similar to the LEC price cap plan, AT&T may change rates for services within each basket subject to limited scrutiny, provided that the weighted average of all those prices remains below the cap.(n188) The tariff filing is presumed lawful and may take effect on 14 days' notice without extensive cost support data. If, however, the proposed rate change would cause a basket API to exceed the applicable PCI, AT&T isrequired to file the change on the statutory maximum notice period of 120 days and to provide a full cost-based showing for such filings.(n189)

131. The AT&T plan does, however, differ from the LEC plan in substantial ways. The interstate services the LECs offer are primarily access services used by long distance carriers, whereas AT&T's services are intended primarily for end users. Accordingly, the LEC service baskets, organized around network functionalities, differ substantially from the AT&T baskets, which are organized according to end users services.(n190) As originally established, the three baskets of AT&T services consisted of: (1) residential and small business services (Basket 1); (2) "800" number services (Basket 2); and (3) other business services (Basket 3).(n191) In 1991, after concluding an examination of the state of competition in the interstate interexchange marketplace, the Commission determined that there is substantial competition in the provision of most business services in the long distance marketplace and modified the AT&T price cap plan by granting streamlined regulation to all of AT&T's Basket 3 services,(n192) except analog private line services.(n193) As discussed in further detail below, the Commission based its finding of substantial competition in part on its conclusion that the business services marketplace is characterized by substantial demand and supply elasticities that limit AT&T's ability to exercise market power in this market segment.(n194) The Commission also relied on AT&T's pricing of business services under price cap regulation and unrefuted evidence that AT&T's market share was substantially lower in business services than it was in other markets.(n195)

132. In the Commercial Services Order, the Commission found that AT&T's Basket 1 commercial long distance services are subject to substantial competition and that AT&T lacksunilateral market power in the provision of these services.(n196) The Commission therefore concluded that there is sufficient competition among providers to justify moving AT&T's commercial services from price cap regulation to streamlined regulation.(n197) Consistent with the approach followed in the Interexchange Order, the Commission's market analysis rested on considerations of market share, demand responsiveness, and supply responsiveness.(n198)

B.Proposed Factors for Determining When Streamlined Regulation Is Warranted

133. Based on a review of the information currently available to us, we believe that increased competition for LEC services is inevitable. We seek comment on whether the analytical framework that the Commission applied in the Interexchange Order and the Commercial Services Order is a reasonable basis for determining which of the LECs' services should be accorded streamlined regulation. Specifically, we propose that a price cap LEC service be permitted streamlined regulation when such service is subject to substantial competition, based on considerations of demand responsiveness, supply responsiveness, market share, and pricing trends. We request comment on the relative importance of these factors and on any other factors that may be proposed.

1. Demand Responsiveness

134. Demand elasticity measures the sensitivity of quantity demanded to price changes. It indicates what the percentage change in the quantity demanded for a particular product will be following a one percent increase in the price of that product.(n199)

135. In the Interexchange Order, the Commission's determination that customers of business services are to a large degree demand-elastic was based on evidence that these customers tend to be sophisticated and knowledgeable purchasers of telecommunications services who exercised their "buyer power" by soliciting competitive bids before procuring telecommunications services.(n200) The Commission also found that AT&T's market share in thebusiness services segment was significantly lower than in other segments(n201) and that AT&T's competitors had invested considerable capital in expanding their supply capacity and would not have done so if they were convinced that they would be unable to attract substantial numbers of new customers over time.(n202)

136. In the Commercial Services Order, the Commission determined that AT&T's principal competitors provide a number of commercial services that are comparable to those offered by AT&T, and that customers are well aware of and make use of these alternative suppliers.(n203) The Commission found that evidence indicating that approximately 23 percent of AT&T's commercial customers annually switch either from AT&T to another long distance provider or from another provider to AT&T annually provides "strong support for the argument that AT&T lacks market power over its customers."(n204) The Commission concluded that fluctuations in AT&T's market share from 54 percent in 1987, to 39 percent in 1991, to 44 percent in 1993, corroborated evidence that commercial customers are significantly sensitive to price and quality changes.(n205)

137. We believe that strong evidence of competition in the interstate access market exists where services comparable to those offered by the LECs are available to their customers, a significant number of those customers have the ability to evaluate the full range of market options available to them, and these customers do in fact exercise these options. We therefore propose that the demand responsiveness of the LECs' customers should be an important factor in assessing the level of competition for LEC services for purposes of determining whether a service should be accorded streamlined regulation.

Issue 15a:Should demand-responsiveness be a factor in determining the level of competition for purposes of determining whether services should be streamlined? What should be the relevant factors in determining whether a LEC's customers are demand-responsive? What data and information would be necessary and relevant in determining whether a LEC's customers are demand-responsive? Does the fact that LECs have relatively few customers that account for most of their interstate access demand affect the usefulness of demand-responsiveness as a factor in determining the level of competition?

2.Supply Responsiveness

138. Supply responsiveness is a critical element in evaluating the level of competition for access services. As a conceptual matter, supply responsiveness or elasticity is measured using a parallel concept to that used for demand. It measures the percentage change in the quantity supplied resulting from a one percent increase in the price of a product.(n206) A high supply elasticity indicates that entry is relatively easy and that any attempt by an incumbent to raise prices will result in new entry. Conversely, a low supply elasticity is indicative of market power.

139. Competitive response in the access market has two major sources. In the short run, competitors will respond to price increases by using existing capacity, while in the long run, new capacity will be built. A competitor's ability to utilize existing capacity in response to a price increase is measured by "addressability."(n207) The presence of available, unused capacity of competitors is believed to constrain the exercise of market power by limiting the ability of dominant firms to raise prices above competitive levels.(n208) Once competitive capacity is built and available, attempts by an entity to restrain output and raise prices will encourage alternative suppliers to increase production, thereby protecting the customers from the first entity's actions. Although addressability in principle measures available alternative capacity, it is unclear how it should be measured and whether adequate data are available to permit us to use it to evaluate whether competitive circumstances are sufficient to allow regulatory relief. Addressability also appears to be relative rather than absolute. In some cases, available capacity can be used immediately as a substitute for the incumbent's capacity and in other cases much longer periods are required before the capacity can actually be used to provide access services. There also are questions regarding how well some types of capacity can be substituted for other types and at what cost specific customers can avail themselves of alternative capacity. In the long run, competitive responsiveness will depend on the ease of entry and alternative technologies which permit new entrants to respond to price increases. Such entry will be vital in establishing a competitive market for access services.

140. In the Interexchange Order, the Commission's determination that supply elasticities in the interstate interexchange business services marketplace are high was based on evidence that AT&T's competitors had substantial excess capacity available immediately and in the relative short-term.(n209) In the Commercial Services Order, the Commission determined that there appeared to be a high elasticity of supply among AT&T's commercial long distance competitors(n210) based upon evidence that AT&T's competitors appear to have sufficient network capacity to serve a significant portion of AT&T's commercial long distance traffic and that AT&T's competitors have a proportionately greater supply of unused fiber capacity than AT&T.(n211) Evidence that AT&T's commercial long distance traffic represented a small portion of the overall switched traffic and that other carriers could absorb all of AT&T's traffic provided additional support for the Commission's finding of high elasticity of supply among AT&T's commercial long distance competitors.(n212)

141. We believe that supply elasticities of a LEC's competitors are important in assessing the level of competition for LEC services. We believe that sufficient excess or readily available supply capacities enable firms with relatively small market shares to be well-positioned to capture large numbers of their competitors' customers if their competitors choose to price above competitive rates.(n213) We therefore propose that the relative supply capabilities of the LECs' competitors should be an important factor to be considered in assessing the level of competition for LEC services for purposes of determining whether a service should be accorded streamlined regulation.

Issue 15b:Should supply-responsiveness be a factor in determining the level of competition for purposes of determining whether services should be streamlined? What should be the relevant factors in determining whether a LEC's competitors have enough readily available supply capacity to constrain the LEC's market behavior and inhibit it from charging excess rates? What data and information would be necessary and relevant in determining whether a LEC's competitors are supply-responsive?

3. Market Share

142. In the Interexchange Order, the Commission found that AT&T's 50 percent share of the Basket 3 business services market was "a level that is not incompatible with a highly competitive market" and, hence does not by itself demonstrate that a firm possesses market power.(n214) In the Commercial Services Order, the Commission determined that AT&T's 44 percent share of the overall minutes of use of commercial long distance services provided evidence of AT&T's lack of unilateral market power.(n215) The Commission also found that the fluctuations in AT&T's market share indicated the "considerable" willingness of commercial long distance customers to shift between long distance service carriers and provided further evidence of AT&T's lack of unilateral market power.(n216) In addition, the Commission found that the market size of AT&T's competitors relative to AT&T suggested that they have capacity to service a significant portion of AT&T's customers, should these customers desire to switch carriers.(n217)

143. We believe that market share should be one factor, among others, to be considered in determining the level of competition in a given market for purposes of streamlined regulation. As discussed above, a high market share does not necessarily confer market power. A company that enjoys a very high market share will be constrained from raising its prices above cost if the market is characterized by high supply and demand elasticities.(n218) We believe that an analysis of the level of competition for LEC services based solely on a LEC's market share at a given point in time would be too static and one-dimensional. However, while we do not propose toignore market share data in assessing the level of competition for LEC services, we do propose considering market share in conjunction with other factors, including, but not necessarily limited to, supply and demand elasticities and pricing trends.

Issue 15c:Should market share be a factor in determining the level of competition for purposes of determining whether services should be streamlined? If the Commission considers the relative market share of the LECs and their competitors as one factor in assessing the level of competition for LEC services, what data and information would be necessary to assess the relative market shares of the LECs and their competitors? What should be the relative importance of the market share of the LECs and their competitors in light of other factors incorporated into our analysis and on any other factors that may be proposed?

4. Pricing of Services Under Price Cap Regulation

144. In the Interexchange Order, AT&T's pricing of business services since the implementation of price cap regulation provided additional support for the Commission's finding of substantial competition in the business services segment of the long distance marketplace.(n219) The Commission stated that none of AT&T's tariff filings for Basket 3 business services exceeded the price cap ceiling, and all but one of AT&T's Basket 3 filings were below the applicable upper service rate band.(n220) The Commission determined that this pricing behavior for Basket 3 services reflected the competitiveness of business services.(n221)

145. We believe that evidence that a price cap LEC is pricing services below the price cap ceiling over a sustained period of time may indicate that such services are subject to competitive pressures, particularly in markets with high supply and demand elasticities. Conversely, we do not believe that a LEC's lower-than-required pricing of services is necessarily a reliable measure of competition in a market without such high supply and demand elasticities. We therefore propose that evidence that a price cap LEC is pricing services below the price cap ceiling over a sustained period of time should be considered as additional evidence that such services are subject to competitive pressures in markets with high supply and demand elasticities.

Issue 15d:Should we consider evidence that a price cap LEC is pricing services below the price cap ceiling over a sustained period of time as additional evidence that such services are subject to competitive pressures in markets with high supply and demand elasticities? If so, what is the competitive significance of a LEC's pricing below the price cap ceiling for such a period?

5. Other Factors

146. Although we believe that the demand and supply elasticities are the most important factors to be considered in assessing the level of competition for LEC services for purposes of streamlined regulation, we invite comment and discussion on additional factors that we should consider in an evaluation of LEC competition, for example elimination of barriers to entry in the event it is not otherwise required.

Issue 15e:Should the Commission consider factors other than demand responsiveness, supply responsiveness, market share, and pricing behavior in assessing the level of competition for LEC services? If the Commission considers such other factors in assessing the level of competition for LEC services, what data and information would be necessary to assess the relative importance of these factors?

C. Contract Carriage

147. In the Interexchange Order, the Commission adopted rules permitting the interexchange carriers to offer services pursuant to individually negotiated contracts, but allowed AT&T to offer contract rates only for services found subject to substantial competition and accorded streamlined regulation.(n222) The Commission required that all individually negotiated contracts offered by the interexchange carriers be made generally available to similarly situated customers under substantially similar circumstances so as to comply with the nondiscrimination provisions of the Communications Act.(n223) The Commission found that allowing AT&T the freedom to enter into contracts with customers for services subject to streamlined regulation would benefit consumers without increasing the risk of anti-competitive or "other undesirable behavior by AT&T."(n224) AT&T is required to file, at least fourteen days prior to the effectivedate of its contracts, a tariff based on the terms of the contract containing all information required under Section 203 of the Act.(n225)

148. We propose to permit the price cap LECs to offer contract prices for access services that the Commission has found subject to substantial competition and are subject to streamlined regulation, provided the contract rates are made generally available to similarly situated customers under substantially similar circumstances. Permitting the price cap LECs to offer such contract rates would seemingly offer significant benefits for consumers without increasing the risk of anti-competitive, unreasonably discriminatory, or otherwise undesirable behavior by the LECs. Contract carriage would benefit consumers by allowing them to negotiate service arrangements that best address their particular needs. Moreover, by requiring individually negotiated contract arrangements to be made generally available to other similarly situated customers, other customers would be able to reap the benefits of these new, more specialized arrangements. Contract carriage would further benefit consumers by stimulating competition for such streamlined services. By allowing the LECs to offer customers the same types of contract services that the LECs' competitors may already be offering, contract carriage will expand customers' choices.(n226) This, in turn, will likely result in better service options from all carriers. Contract carriage can promote efficiencies that the LECs will be able to share with their contract customers. Also, permitting carriers to offer contract rates to win business that they might otherwise lose to a competitor might result in lower prices for consumers.

149. We do not believe that our contract carriage proposal will lead to predatory pricing as such contracts must be made generally available and are typically long term. Further, as discussed above, predatory pricing is likely to occur only if a carrier can eliminate competition and continue to deter potential competitors from entering the marketplace. Once competitors have invested substantial sunk costs necessary to participate in the access market, the existence of those facilities will deter the incumbent from raising rates in the future. We also do not believe that a LEC could effect a predatory scheme without detection in light of our proposal that contract terms be made public. Nor do we think that our contract carriage proposal will present an undue risk of discrimination. First, we would require the price cap LECs to make its contracts generally available to similarly situated customers so as to comply with the Section202(a) nondiscrimination provisions of the Communications Act.(n227) Second, contract carriage would only be allowed for services subject to substantial competition. Such competition would help to ensure that all customers purchasing services subject to streamlined review would receive just, reasonable and nondiscriminatory rates, regardless of whether the purchase is made pursuant to generic or contract-based tariffs.

150. With these considerations in mind, we request comment on the following issues:

Issue 16a: Should the Commission allow the price cap LECs to offer individually negotiated contracts for services subject to streamlined regulation, provided such contracts are made generally available to similarly situated customers under substantially similar circumstances? In particular, would allowing such contract carriage benefit consumer welfare, foster competition, and foster efficient use of the network? Would allowing such contract carriage result in unreasonable price discrimination?

Issue 16b:If such contracts should be allowed, what tariff filings requirements should we adopt for such contract rates? Specifically, should we require the LECs to file on 14 days' notice a tariff summarizing the contract and containing the following information: (1) the term of the contract, including any renewal options; (2) a brief description of each of the services provided under the contract; (3) minimum volume commitments for each service; (4) the contract price for each service or services at the volume levels committed to by the customers; (5) a general description of any volume discounts built into the contract rate structure; and (6) a general description of other classifications, practices, and regulations affecting the contract rate?

D. Procedural Matters

151. In this section we seek comment on what procedures the Commission should follow in considering whether a particular service in a given market should be subject to streamlined regulation outside the price cap plan. The level of competition for each LEC access service is likely to vary from one geographic market to another. We propose, therefore, that consideration of the transition of a service to streamlined regulation should be initiated by the filing of a petition by the LEC seeking streamlined regulation and that the petitioner shall have the burden to show that streamlined regulation is justified. We seek comment on what type of petition the LEC should file to seek streamlined regulation for a particular service in a given market -- apetition for waiver, a petition for a declaratory ruling or some other sort of petition -- as well as the procedures and standards which would apply in our review of the matter.

Issue 17:What procedure should be followed to implement streamlined regulation for a LEC?

VI. NONDOMINANT TREATMENT

152. As discussed above, we envision a three-part framework for our adaptive price cap regulation. In addition to providing certain regulatory relief within the price cap plan, and streamlining certain services out of price cap regulation, we would consider a LEC nondominant and forbear from price regulation to the extent permitted under the Communications Act where a LEC is shown to lack market power.

153. Currently, we define carriers as either dominant or nondominant in the domestic market as a whole. A carrier is classified as dominant if it has market power in the domestic market as a whole. We have not held that a carrier is dominant in the provision of some domestic services but not dominant for others.(n228) Nor have we held that a carrier is dominant in one geographic market but not dominant in another.(n229) When the Commission adopted this approach for determining market power, however, we explicitly recognized it as a "conservative approach to regulation."(n230) After more than a decade of experience with this approach for determining market power, and with the advent of emerging competition in the interexchange access market, we believe a less encompassing definition of market power for LECs may be appropriate. Indeed, there appears to be no reason why a LEC should be considered dominant in any new geographic markets it may enter outside its traditional region. Moreover, we recently have received several petitions in which price cap LECs or their affiliates seek nondominant treatment for some services and geographic markets only.(n231) For example, Bell Atlantic has filed a petition seeking regulation as a nondominant provider of interstateinterLATA services in the corridor areas it serves.(n232) We propose that a LEC be allowed to be regulated as nondominant with respect to a particular service and with respect to a particular geographic market.(n233) We would permit nondominant carriers to file tariffs on one day's notice, and would not require them to submit cost support.(n234)

154. Accordingly, we seek comment on the following issues:

Issue 18:Should we adopt rules now that would define the conditions LECs must meet to be considered nondominant? If so, should those conditions be what we used in Competitive Carrier, or some other conditions? Are there any reasons not to regulate a LEC as nondominant for some services and dominant for other services? Are there any reasons not to regulate a LEC as nondominant in some geographic markets and dominant in others? What procedure should a LEC follow to obtain nondominant status? What procedures would apply to a carrier that is determined to be nondominant?

155. First, we invite parties to discuss whether any LECs are likely to lose market power for any geographic and product markets in the foreseeable future, and if not, whether it is premature at this time to adopt rules governing nondominant local exchange carriers at this time. Parties who maintain that it is not premature to consider the possibility of LEC nondominance at some time in the future should provide support for their positions. Parties should also discuss whether there are specific services, such as services in the interexchange basket, for which LECs are likely to become nondominant sooner than others.(n235)

156. Second, we solicit comment on the criteria that a LEC must meet to be considered nondominant in the provision of one or more services. In the Competitive Carrier proceeding,(n236) we defined a "dominant" firm as one with market power; i.e., the power to control prices or foreclose market entry. We used a number of criteria to determine whether a firm has market power, such as the number and size of competitors, the existence of barriers to entry, availability of substitute services, control of bottleneck facilities. We considered control of bottlenecks as prima facie evidence of market power. We also found that, in general, a firm or group of firms has control over a bottleneck when it has sufficient command over some essential commodity or facility in its industry to be able to impede new entrants.(n237) In the Competitive Carrier proceeding, we concluded that we could "forbear" from applying certain tariffing requirements to nondominant carriers.(n238) Although Courts later vacated our forbearance rules, they have not found our definition of dominance to be unreasonable. We have recently declined to revise the definition of dominance.(n239) Accordingly, the standard for nondominance established in the Competitive Carrier proceeding appears to be one reasonable standard for determining whether the LECs have become nondominant. Parties supporting some other standard should explain in detail why the existing standard should not be used for this purpose and discuss why their proposal is preferable. If we adopt new criteria for determining whether LECs have become nondominant, should they apply to pending LEC petitions for nondominance?(n240)

157. Third, we solicit comment on the procedures that a LEC should follow to obtain nondominant status for provision of one or more services. Petitioners should discuss whether a LEC should file a petition for waiver, a petition for a declaratory ruling or some other filing and how the LEC should satisfy its burden of proof.

158. Finally, we request comment on the tariff filing procedures that should apply to a carrier that is determined to be nondominant.

VII. OTHER ISSUES

A. Other Changes to the LEC Price Cap Plan

1. X-Factor Flexibility

159. In the First Report and Order, we tentatively concluded that the long-term price cap plan should include more than one X-Factor. Because LECs are not uniform,(n241) a single X-Factor might not reflect accurately the differences in economic circumstances faced by each LEC.(n242) Establishing multiple X-Factors, however, may require us to develop a "matching" mechanism, so that each LEC is matched with the X-Factor that is most appropriate for its individual economic circumstances. We could either rely on a voluntary selection process, such as the one we are currently using in which LECs choose their X-Factor among various options, or a mandatory selection process in which we would assign each LEC an X-Factor through procedures established by the Commission. While there are a number of possible mechanisms in both categories, our discussion below seeks comment on those that rely on competition or additional pricing flexibility. Mechanisms that rely on other criteria and the larger question of whether we should use a voluntary or mandatory selection process will be addressed in a future further notice.

160. With respect to voluntary X-Factors, we invite comment on encouraging LECs to elect the appropriate X-Factor by permitting additional pricing flexibility for LECs electing higher X-Factors. We further invite commenters to explain the relationship between their responses to this issue and their responses above regarding relaxed regulatory treatment within the price cap plan and the triggers that might warrant each grant of regulatory relief.

161. With respect to mandatory X-Factors, we could use the level of competition faced by a LEC as a basis for assigning an X-Factor. We invite comment on whether we could base the X-Factor assignment for each LEC on the competitive circumstances faced by that LEC if we adopt mandatory X-Factors. Parties supporting or opposing this proposal should discuss whether the extent of competition has an effect on potential productivity growth. Specifically,they should address whether competition will decrease or increase productivity. As competition increases, productivity growth may decrease, as customers shift their demand from LECs to new market entrants, or, conversely, competitive pressure may provide a spur to increased productivity growth. In other words, should the higher X-Factors be assigned to LECs facing less competition or more competition? Parties supporting assignment based on competitive criteria should also discuss what X-Factor should be assigned given specific competitive criteria.

162. In this Notice above, we contemplate that we may provide regulatory relief in a geographic market that may be smaller than the LEC's entire service region, if the level of competition in that area warrants that regulatory relief. We invite comment on whether it would be possible or desirable to permit or require LECs to use different X-Factors in different parts of its service area.

Issue 19a:If we adopt optional rather than mandatory X-Factors, could we use relaxed regulatory relief to encourage price cap LECs to elect the X-Factor most appropriate for their circumstances? If so, what types of relief would most reasonably or most effectively encourage LECs to select an appropriate X-Factor? How is this issue related to the issues above regarding relaxed regulatory treatment within the price cap plan and the triggers that might warrant each grant of relief?

Issue 19b:If we adopt mandatory X-Factors, should we include considerations based on competitive circumstances in our assignment of an X-Factor to each LEC? Should the higher X-Factors be assigned to LECs facing less competition or more competition? What methods of measuring the extent of competition would be appropriate for this purpose?

Issue 19c:If we assign X-Factors to each LEC based on competitive criteria, would it be reasonable to establish different X-Factors for more competitive and less competitive areas in the LEC's service region?

2. Relaxation of Sharing Requirements

163. Growth in competition may also serve to reduce our need for a sharing mechanism if competitive pressures replicate some of the functions served by sharing. Consequently, we seek comment on whether it would be possible to permit LECs to decrease their sharing obligation as competition grows. By way of background, we established sharing in the LEC Price Cap Order to serve a number of beneficial purposes, including: (1) a "backstop" mechanism for the X-Factor, in case the X-Factors we establish turn out to be substantially in error or a particular LEC's productivity varies substantially; (2) a "flow-through" mechanism that ensures that a LEC's customers receive a portion of the benefits the carrier makes inreducing unit costs; and (3) a "matching" mechanism to encourage LECs to elect the most appropriate X-Factor in a price cap plan with multiple optional X-Factors.(n243) In the First Report and Order, we found, however, that sharing has a harmful side-effect in that it can blunt the efficiency incentives created by the price cap formula.(n244) Therefore, we tentatively decided to establish a long-term plan that has at least one X-Factor without sharing requirements, and we established a long-term goal to eliminate sharing.(n245) On an interim basis, we adopted three X-Factors but narrowed the non-sharing ranges and lowered the threshold at which 100 percent sharing would take effect for LECs choosing the lowest X-Factor. We also crafted the highest X-Factor option as a no-sharing option.

164. As each LEC faces increased competition for specific services, that competition will tend to force the prices towards cost. Eventually, the effect of this increased competition on prices may develop to a point such that it could replace the "flow-through" purpose of the sharing mechanism. Furthermore, it is possible that as LECs face more competition, their earnings will decrease, at least in the short run. If this is the case, then increases in competition at some point could replace the "backstop" purpose of the sharing mechanism.

165. We noted in the First Report and Order that NYNEX has proposed reducing or eliminating sharing for LECs that have implemented measures to promote local exchange competition and said that we would seek comment on NYNEX's proposal in this Notice.(n246) NYNEX proposes to reduce sharing burdens as competition increases, and would measure competition by determining the percentage of lines in a study area that satisfy a list of competitive criteria.(n247) Specifically, NYNEX proposes a four-tiered approach in which sharing burdens are lessened as competition increases.

166. Where there is no evidence of local or intrastate competition, NYNEX's proposal would impose fairly stringent sharing requirements on LECs. LECs would share half their interstate earnings above 11.75 percent and all of its interstate earnings above 13.75 percent. The low-end adjustment mechanism would be set at 10.75 percent.(n248)

167. NYNEX's proposal would widen the ranges within which LECs are permitted to retain some or all their earnings when 30 percent of a LEC's access lines were in states where the first four criteria on its proposed competitive checklist have been satisfied.(n249) Under these circumstances, NYNEX's proposal would require the LEC to share half of its interstate earnings above 12.25 percent and all of its interstate earnings above 16.25 percent. The low-end adjustment mechanism would be set at 10.75 percent.(n250)

168. The no-sharing ranges would be widened further under NYNEX's proposal when 80 percent of the LEC's access lines meet those criteria. The LEC would share half of its interstate earnings above 13.25 percent and all of its interstate earnings above 18.25 percent. The low-end adjustment mechanism would be set at 9.25 percent.(n251)

169. Finally, NYNEX's proposal would eliminate sharing requirements and the low-end adjustment mechanism when 80 percent of the LEC's access lines meet all of the criteria on its proposed competitive checklist.(n252)

170. We believe that if we were to retain sharing, it might be possible to rely on increased competition to replace one or possibly two of the purposes of the sharing mechanism, the "flow-through" purpose and the "backstop" purpose. In particular, if we find that carriers facing actual competition in fact earn lower returns, then it is unlikely that such carriers' earnings would be high enough to fall within the sharing range. We seek comment on NYNEX's proposal, whether we can rely on competition either for flowing through reductions in unit costs to access customers or as a "backstop" mechanism, and whether there are other implications to tying the elimination of sharing to the emergence of competition. For example, in the interim plan the no-sharing option acts as an incentive for a LEC to choose the highest X-Factor option.(n253) If the elimination of sharing is tied to competition and the LECs continue tohave a choice of X-Factor, other changes to the price cap plan may be necessary to create incentives for LECs to choose an appropriately high X-Factor.

171. We invite parties to discuss whether the checklist discussed in Section IV.C. would be appropriate for determining whether the extent of competition faced by a LEC is sufficient to replace the flow-through function and the backstop function provided by sharing. We would expect any measure of competition we would adopt for this purpose to be a reasonably accurate guide for determining the extent of competition faced by a LEC. In other words, we would not expect this measure to enable a LEC to manipulate its sharing obligations without actually experiencing an increase in competition or without actually eliminating barriers to entry.

172. Accordingly, we seek comment on the following issues:

Issue 20a:Is NYNEX's proposal a reasonable one? Should we adopt it in some modified way? For example, if we were to retain sharing, should we adjust the specific sharing bands, change the number of levels of regulation, or include or exclude certain criteria from NYNEX's checklists?

Issue 20b:Under what circumstances could competition be used to replace the "flow-through" function of sharing? What incentives and disincentives are created by linking sharing and competition? Is it logical to establish wider sharing ranges as intermediate steps to the elimination of sharing? If so, how would such steps be reconciled with our policy of encouraging price cap companies to increase their productivity? If it is reasonable to link competition and the elimination of sharing, are other measures of competition more appropriate than those suggested by NYNEX? (Parties may refer to their discussion of the issues raised in Section IV.C. above.)

B. Second Further Notice of Proposed Rulemaking in CC Docket No. 93-197: Changes to AT&T's Price Cap Plan

173. Currently, changes in LEC access charges are treated exogenously in AT&T's price cap plan because we concluded that access charges were outside AT&T's control,(n254) but changes in CAP charges are treated endogenously. One of the issues raised in the First Report and Order was whether this biases the market for access services in favor of the CAPs. We concluded in the First Report and Order that AT&T's demand for CAP services for the residential services that currently remain in the AT&T price cap plan is not sufficient to create any actual bias in AT&T's choice of access provider. We said that we might revisit this issuein this proceeding, however, as competition in the provision of switched transport service develops.(n255) Accordingly, we solicit comment on the following issue:

Issue 21: Under what circumstances would the treatment of access charges imposed by LECs and other access providers under AT&T's price cap plan create actual bias in the access services market? Is there any reason not to treat CAP and LEC charges the same under the AT&T price cap plan?

174. In the First Report and Order, and the AT&T Performance Review, we focused on AT&T's use of different access suppliers in AT&T's provision of its Basket 1 services, the services that remain under price cap regulation. Specifically, we used AT&T's demand for LEC access services relative to its demand for access services provided by others to determine the likelihood of actual bias in the access services market.(n256) We also said that the development of expanded interconnection for switched access might cause the exogenous cost rules applied to AT&T to create actual bias in the access market, and so might require us to reexamine this issue.(n257) Accordingly, we invite parties to comment on what competitive circumstances in the access market would warrant revision of AT&T's access charge exogenous cost rule.

VIII. PROCEDURAL MATTERS

175. This review will be conducted as a non-restricted notice and comment rulemaking. See 47 C.F.R. Section 1.399 et seq.

176. Our decision in this phase of the LEC price cap performance review will be based on the comments received in response to this Second Further Notice. We will also consider relevant information that was submitted in the initial phase, either in the comments and reply comments or in the numerous ex parte filings, as well as in Phase II, provided that a party incorporates such information by reference in its pleadings in this phase of the proceeding. We will consider comments submitted in response to the Operator Services NPRM in this proceeding without any requirement that a party incorporate it by reference in a new pleading.

177. All relevant and timely comments and reply comments will be considered by this Commission. In reaching our decision, this Commission may take into account information and ideas not contained in the comments, provided that such information or a writing containing the nature and source of such information is placed in the public file, and provided that the fact of this Commission's reliance on such information is noted in the Order.

178. We direct all parties submitting studies to the Commission to provide all supporting data and workpapers on which those studies rely. This material must be provided both on paper and on computer disk. We require parties submitting spreadsheets to do so in Lotus 1-2-3 DOS format.

A. Regulatory Flexibility Act

179. We certify that the Regulatory Flexibility Act of 1980 does not apply to this rulemaking proceeding because if the proposed rule amendments are promulgated, there will not be a significant economic impact on a substantial number of small business entities, as defined by Section 601(3) of the Regulatory Flexibility Act. Carriers subject to price cap regulation for local exchange access services affected by the rule amendments under consideration generally are large corporations or affiliates of such corporations. The Secretary shall send a copy of this Further Notice of Proposed Rule Making, including the certification, to the Chief Counsel for Advocacy of the Small Business Administration in accordance with paragraph 603(a) of the Regulatory Flexibility Act, Pub. L. No. 96-354, 94 Stat. 1164, 5 U.S.C. Section 601 et seq. (1981).

B. Ex Parte Rules - Non-Restricted Proceeding

180. This is a non-restricted notice and comment rulemaking proceeding. Ex Parte presentations are permitted, except during the Sunshine Agenda period, provided they are disclosed as provided in Commission rules. See generally 47 C.F.R. Sections 1.1202, 1.1203, and 1.1206(a).

C. Comment Filing Dates

181. Pursuant to applicable procedures set forth in Section 1.399 and 1.411 et seq. of the Commission's Rules, 47 C.F.R. Sections 1.399, 1.411 et seq., interested parties may file comments with the Secretary, Federal Communications Commission, Washington D.C. 20554 on or before November 20, 1995, and reply comments on or before December 20, 1995. To file formally in this proceeding, participants must file an original and four copies of all comments, reply comments, and supporting comments. If participants want each Commissioner to receive a personal copy of their comments, an original plus nine copies must be filed. In addition, parties should file two copies of any such pleading with the Tariff Division, Common Carrier Bureau, Room 518, 1919 M Street, N.W., Washington, D.C. 20554, and one copy submitted on computer disk to the Industry Analysis Division, Common Carrier Bureau, Room 534, 1919 M Street, N.W., Washington, D.C. 20554. Comments and reply comments will be available for public inspection during regular business hours in the FCC Reference Center, Room 239, 1919 M Street, N.W., Washington D.C. 20554.

IX. ORDERING CLAUSE

182. Accordingly, IT IS ORDERED that NOTICE IS HEREBY GIVEN OF the rulemaking described above and that COMMENT IS SOUGHT on these issues.

FEDERAL COMMUNICATIONS COMMISSION

William F. Caton
Acting Secretary


I.  INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II. BACKGROUND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
III.  GOALS AND REGULATORY PRINCIPLES . . . . . . . . . . . . . . . . . . .  18
IV.  REVISIONS TO THE LEC PRICE CAP PLAN
   A. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  32
   B.Proposed Modifications to the Price Cap Plan
      1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . .  37
      2.Implementation of Service Offerings and Rate Changes
        
         a.  Introduction . . . . . . . . . . . . . . . . . . . . . . . . .  38
         b.  New Services and Restructures. . . . . . . . . . . . . . . . .  39
         c.Alternative Pricing Plans. . . . . . . . . . . . . . . . . . . .  54
         d.  Individual Case Basis Tariffs. . . . . . . . . . . . . . . . .  61
      3.Part 69 Waiver Process. . . . . . . . . . . . . . . . . . . . . . .  66
      4.Elimination of Lower Service Band Index Limits
        and Other Pricing Flexibilities . . . . . . . . . . . . . . . . . .  75
      5. Revision of Baskets. . . . . . . . . . . . . . . . . . . . . . . .  86
      6.Consolidation of Service Categories . . . . . . . . . . . . . . . .  93
      7.  Further Notice of Proposed Rulemaking in CC Docket
        No. 93-124
         a. Operator Services . . . . . . . . . . . . . . . . . . . . . . .  96
         b. Call Completion Services. . . . . . . . . . . . . . . . . . . .  99
      8.  General Issues. . . . . . . . . . . . . . . . . . . . . . . . . . 103
   C. Measures of Competition for Regulatory Relief
      1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
      2.Removal of Barriers to Local Competition. . . . . . . . . . . . . . 107
         a.competing providers of local switched telephone
           service have been authorized and have become
           operational;
         b.local loops and switches have been unbundled,
           i.e., a LEC's competitors may obtain access
           to the local loop directly, without purchasing
           local switching or other services;
         c.intrastate expanded interconnection is available
           through tariff or contract (physical or virtual
           collocation);
         d.service provider number portability is available,
           i.e., end users are able to switch local service
           providers and retain their current telephone
           number;
         e.compensation arrangements have been established
           for the LEC and its competitors to complete
           telephone calls originated on the other carrier's
           networks;
         f.competitors have access to directory assistance,
           911, and other databases;
         g.intra-LATA toll dialing parity is implemented,
           i.e., consumers are able to place calls dialing
           the same number of digits when using any local
           service provider; and
         h.competitors have implemented or announced plans
           to collocate, or otherwise deploy facilities,
           and serve customers in wire centers (or other
           geographic areas) that account for a significant
           portion of the incumbent LEC's business lines
           or interstate access revenues. . . . . . . . . . . . . . . . . . 109
      3.Procedural Matters. . . . . . . . . . . . . . . . . . . . . . . . . 111
   D.Relevant Markets
      1.Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
      2. Relevant Product Market. . . . . . . . . . . . . . . . . . . . . . 117
      3.Relevant Geographic Market. . . . . . . . . . . . . . . . . . . . . 120
V.  STREAMLINED REGULATION
   A. Background
      1. General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
      2. Criteria Used for AT&T in CC Docket Nos. 90-132
        and 93-197. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
   B.Proposed Factors for Determining When Streamlined
     Regulation Is Warranted. . . . . . . . . . . . . . . . . . . . . . . . 133
      1. Demand Responsiveness. . . . . . . . . . . . . . . . . . . . . . . 134
      2.Supply Responsiveness . . . . . . . . . . . . . . . . . . . . . . . 138
      3. Market Share . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
      4. Pricing of Services Under Price Cap Regulation . . . . . . . . . . 144
      5. Other Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . 146
   C. Contract Carriage . . . . . . . . . . . . . . . . . . . . . . . . . . 147
   D. Procedural Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 151
VI.  NONDOMINANT TREATMENT  . . . . . . . . . . . . . . . . . . . . . . . . 152
VII.  OTHER ISSUES
   A.  Other Changes to the LEC Price Cap Plan
      1.  X-Factor Flexibility. . . . . . . . . . . . . . . . . . . . . . . 159
      2. Relaxation of Sharing Requirements . . . . . . . . . . . . . . . . 163
   B. Second Further Notice of Proposed Rulemaking in CC
     Docket No. 93-197: Changes to AT&T's Price Cap Plan. . . . . . . . . . 173
VIII.  PROCEDURAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . 175
   A.  Regulatory Flexibility Act . . . . . . . . . . . . . . . . . . . . . 179
   B.  Ex Parte Rules - Non-Restricted Proceeding . . . . . . . . . . . . . 180
   C.  Comment Filing Dates . . . . . . . . . . . . . . . . . . . . . . . . 181
IX.  ORDERING CLAUSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 182

Footnote 1 For example, in Section IV.B.7., we consolidate CC Docket No. 93-124 with our performance review of the LEC price cap plan so that we can consider in the context of larger changes to the price cap plan the question of whether a separate basket should be created for operator services or whether it should be combined into one basket with another service or services.

Footnote 2 Price Cap Performance Review for Local Exchange Carriers, First Report and Order, 10 FCC Rcd 8962, para. 25 (1995) (First Report and Order) (noting that this trend appears to be most pronounced in larger urban areas where new entrants appear to be marketing their services to high-volume toll users that offer the most lucrative returns).

Footnote 3 The Commission has previously acknowledged the relationship between interstate access and local exchange competition. See, e.g., Transition Plan to Preserve Universal Service in a Competitive Environment, 10 FCC Rcd 7445, para. 39 (1995) (NYNEX Universal Service Waiver Order), petitions for recon. pending.

Footnote 4 In the case of AT&T, for example, the emergence of competition for specific interstate long distance services led us to remove those services from price cap regulation and subject them to streamlined regulation. See Competition in the Interexchange Marketplace, Report and Order, 6 FCC Rcd 5880 (1991) (Interexchange Order), recon., 6 FCC Rcd 7569 (1991), further recon., 7 FCC Rcd 2677 (1992), Second Report and Order, 8 FCC Rcd 3668 (1993), recon., 8 FCC Rcd 5046 (1993); Revisions to Price Cap Rules for AT&T Corp., 10 FCC Rcd 3009, 3011, 3014 (1995) (Commercial Services Order).

Footnote 5 Policy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87-313, 5 FCC Rcd 6786 (1990) (LEC Price Cap Order), recon., 6 FCC Rcd 2637 (1991) (LEC Price Cap Reconsideration Order), aff'd sub. nom., National Rural Telecom Assoc. v. FCC, 988 F.2d. 174 (D.C. Cir. 1993).

Footnote 6 LEC Price Cap Order, 5 FCC Rcd at 6818 (para. 260). Those LECs electing price caps include United and Central Telephone Companies, Rochester Telephone Corporation, The Lincoln Telephone and Telegraph Company, and Southern New England Telephone Company.

Footnote 7 The LEC Price Cap Order stated that it would allow above-cap tariff filings, but only in the unlikely event that the price cap rules have the effect of denying the LEC the opportunity to attract capital and continue to operate, despite the low-end adjustment mechanism and the opportunity afforded LECs to increase earnings through greater efficiency. LEC Price Cap Order, 5 FCC Rcd at 6823-24 (para. 304).

Footnote 8 In the LEC Price Cap Order, we used the Gross National Product Price Index (GNP-PI) as the inflation measure. LEC Price Cap Order, 5 FCC Rcd at 6792-93 (para. 50). In the First Report and Order, we replaced our inflation measure with the Gross Domestic Product Price Index (GDP-PI). First Report and Order, paras. 347-51.

Footnote 9 LEC Price Cap Order, 5 FCC Rcd at 6811; see also Policy and Rules Concerning Local Exchange Carrier Validation and Billing Information for Joint Use Calling Cards, CC Docket No. 91-115, 8 FCC Rcd 4478, 4483 (1993) (BNA Order), modified on recon., 8 FCC Rcd 6393 (1993)(First BNA Reconsideration Order); further modified on recon., 8 FCC Rcd 8798 (1993)(Second BNA Reconsideration Order).

Footnote 10 In the Further Notice in this docket, we solicited comment on whether to establish a separate price cap basket for video dialtone services, and whether to establish separate price cap rules governing that basket. Price Cap Performance Review for Local Exchange Carriers; Treatment of Video Dialtone Services Under Price Cap Regulation, CC Docket No. 94-1, 10 FCC 3141 (1995) (Further Notice). In a companion order we adopt today, we conclude that a separate basket for video dialtone services is necessary. Price Cap Performance Review for Local Exchange Carriers; Treatment of Video Dialtone Services Under Price Cap Regulation, Second Report and Order and Third Further Notice of Proposed Rulemaking, CC Docket No. 94-1, FCC 95-394 (adopted Sept. 14, 1995) (Third Further Notice).

Footnote 11 See Section 61.49 of the Commission's Rules, 47 C.F.R. 61.49; see also Transport Rate Structure and Pricing, 9 FCC Rcd 615, 627 n.3 (1994) (Transport Second Report and Order).

Footnote 12 LEC Price Cap Order, 5 FCC Rcd at 6801.

Footnote 13 LEC Price Cap Order, 5 FCC Rcd at 6834.

Footnote 14 See First Report and Order.

Footnote 15 First Report and Order, paras. 213-15.

Footnote 16 First Report and Order, paras. 220-22.

Footnote 17 First Report and Order, paras. 293-96.

Footnote 18 First Report and Order, paras. 26, 408, 411; id. (determining that a 10 percent lower pricing band limit would provide the LECs with a reasonable additional amount of downward pricing flexibility, without risking predation or cross-subsidization).

Footnote 19 First Report and Order, paras. 408, 411.

Footnote 20 A study area is a geographical segment of a carrier's telephone operations. Generally, a study area corresponds to a carrier's entire service territory within a state.

Footnote 21 Expanded Interconnection with Local Telephone Company Facilities; Amendment of the Part 69 Allocation of General Support Facility Costs, 7 FCC Rcd 7369, 7454 n.411 (Special Access Expanded Interconnection Order), vacated in part and remanded, Bell Atlantic Tel. Cos. v. FCC, 24 F.3d. 1441 (D.C. Cir. 1994); Expanded Interconnection with Local Telephone Company Facilities, 9 FCC Rcd 5154, 5196 (1994) (Virtual Collocation Order).

Footnote 22 Transport Rate Structure and Pricing, 10 FCC Rcd 3030, 3042 (1994) (Transport Rate Structure and Pricing). The zone subcategories have an upper pricing band of 5 percent and a lower band which we recently increased from 10 percent to 15 percent. First Report and Order, para. 411. In the year during which a LEC introduces zone density pricing, the LEC must apply the same upper and lower bands to all of the zone subcategories for a given service, but the rate levels may diverge to the extent permitted by the upper and lower bands without the justifications that the price cap rules require for above-band or below-band rates. Special Access Expanded Interconnection Order, 7 FCC Rcd at 7456, paras. 181-83; Expanded Interconnection with Local Telephone Company Facilities; Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, 8 FCC Rcd 7374, 7430-32 (1993) (Switched Transport Expanded Interconnection Order).

Footnote 23 Switched Transport Expanded Interconnection Order, 8 FCC Rcd at 7425-32, aff'd, Virtual Collocation Order, 9 FCC Rcd at 5196.

Footnote 24 Special Access Expanded Interconnection Order, 7 FCC Rcd at 7463. A volume discount would include, for example, lower per-unit rates for service with the capacity of multiple DS3s, while a term discount would include, for example, lower per-unit rates when a customer commits to continue using the service over a multi-year period.

Footnote 25 Specifically, we permitted LECs to implement volume and term discounts for switched transport rates in a study area when one of the following two conditions has been met: (1) 100 DS1-equivalent switched cross-connects are operational in the Zone 1 offices in the study area; or (2) an average of 25 DS1-equivalent switched cross-connects per Zone 1 office are operational. In study areas with no Zone 1 offices, volume and term discounts may be implemented once five DS1-equivalent switched cross-connects are operational in the study area. Switched Transport Expanded Interconnection Order, 8 FCC Rcd at 7435; Virtual Collocation Order, 9 FCC Rcd at 5202. A cross-connect is the cabling inside the LEC central office that connects the LEC network to the collocated equipment dedicated to a competitive access provider using expanded interconnection. See Section 69.121(a) of the Commission's Rules, 47 C.F.R. 69.121(a). A Zone 1 office is a LEC end office located in the zone with the highest traffic density characteristics pursuant to the zone density pricing policies set forth in the expanded interconnection orders.

Footnote 26 See Rochester Telephone Corp. Petition for Waivers to Implement its Open Market Plan, 10 FCC Rcd 6776 (1995) (Rochester Telephone Corp. Order); NYNEX Universal Service Waiver Order, 10 FCC Rcd 7445, petitions for recon. pending. We also note a pending petition filed by Ameritech with the Commission regarding its plan to take certain measures that could facilitate competitive entry into the local exchange market concurrently with its proposed unbundling of access facilities. Petition for Declaratory Ruling and Related Waivers to Establish a New Regulatory Model for the Ameritech Region (filed Mar. 1, 1995); Update to Ameritech Customers First Waiver Request (filed Apr. 12, 1995). The Department of Justice has reviewed Ameritech's plan and has filed a motion, which the Commission has supported, with the United States District Court for the District of Columbia to permit Ameritech to provide interexchange service under certain conditions.

Footnote 27 GTE Telephone Operating Companies, Investigation of Below-band Transport Rates, Memorandum Opinion and Order, 10 FCC Rcd 1573 (1994)(GTE Below-band Investigation).

Footnote 28 Price Cap Performance Review for Local Exchange Carriers, 9 FCC Rcd 1687, 1705 (1994) (Notice).

Footnote 29 First Report and Order, paras. 25, 368-69, 407-08, 418.

Footnote 30 See Policy and Rules Concerning Rates for Dominant Carriers, Report and Order and Second Further Notice of Proposed Rulemaking, 4 FCC Rcd 2873, 2941 (1989) (AT&T Price Cap Order).

Footnote 31 See also First Report and Order, paras. 93-94 (stating that, in considering revisions to the price cap plan, our goal would be to replicate and stimulate competitive outcomes); id. at para. 94 ("as a general corollary to the goal of seeking to both replicate and stimulate competitive outcomes, we will also prefer policies and programs that minimize distortion of competitive marketplace forces in telecommunications"); id. at para. 406 (stating that, as we proceed to refine the price cap plan, it is our intention "that it will advance the goal of fostering an efficiently competitive local market").

Footnote 32 See Local Exchange Carriers' Rates, Terms, and Conditions for Expanded Interconnection Through Virtual Collocation for Special Access and Switched Transport, Report and Order, 10 FCC Rcd 6375, 6403 (1995)(Virtual Collocation Overhead Prescription Order).

Footnote 33 Cross-elasticity measures the changes in demand (or supply) of commodity X when the price of commodity Y changes. A positive cross-elasticity indicates that the commodities are substitutes.

Footnote 34 See discussion infra at Section IV.B.2.b.

Footnote 35 47 U.S.C. 202.

Footnote 36 Excess capacity serves as a threat to new entrants because the incumbent can control the market price by increasing or decreasing its output. See, e.g., Avinash Dixit, A Model of Duopoly Suggesting a Theory of Entry Barriers, BELL J. ECON. 20 (1979).

Footnote 37 Vertical integration makes entry more difficult because new entrants must either obtain permission from the incumbent to use essential facilities or enter the industry at the same level of integration as the incumbent in order to achieve the same economies of scope as the incumbent. Dennis W. Carlton & Jeffrey M. Perloff, Modern Industrial Organization, Second Edition, Harper Collins College Publishers at 806 (1994).

Footnote 38 Assuming number portability were technologically feasible, a LEC's refusal to offer it might be an example of this type of barrier. The Commission is currently considering the feasibility and desirability of requiring telephone companies to implement local number portability in a separate proceeding. Telephone Number Portability, Notice of Proposed Rulemaking, CC Docket No. 95-116, FCC 95-284 (released July 13, 1995).

Footnote 39 See, e.g., Amendments of Part 69 of the Commission's Rules Relating to the Creation of Access Charge Subelements for Open Network Architecture, CC Docket No. 89-79, 7 FCC Rcd 5235, 5237 (Second ONA Reconsideration Order), recon. denied, Amendments of Part 69 of the Commission's Rules Relating to the Creation of Access Charge Subelements for Open Network Architecture, CC Docket No. 89-79, 10 FCC Rcd 1570 (1994) (Third ONA Reconsideration Order).

Footnote 40 W. Kip Viscusi, John M. Vernon & Joseph E. Harrington, Jr., Economics of Regulation, D.C. Heath and Company at 213 (1992). Courts also have defined predatory pricing as pricing below some relevant measure of cost in order to drive competitors from the market. See, e.g., Southern Pacific Communications Co. v. American Telephone and Telegraph Co., 740 F.2d 980, 1002-05 (D.C. Cir. 1984), cert. denied. 470 U.S. 1005 (1985); citing Areeda & Turner, Predatory Pricing and Related Practices Under Section 2 of the Sherman Act, 88 Harv.L.Rev. 697 (1975); cited in Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 584 n.8 (1986). Previously, the Commission has concluded that requiring the price of a service to exceed the service's direct costswill prevent predatory pricing. Second ONA Reconsideration Order, 7 FCC Rcd at 5237 (para. 12); (Third ONA Reconsideration Order, 10 FCC Rcd at 1571 (para. 5).

Footnote 41 AVC is defined as all non-fixed costs which would not be incurred if that service were not offered. AT&T Price Cap Order at 3115.

Footnote 42 See LEC Price Cap Order, 5 FCC Rcd at 6824 ("Predatory pricing, though often alleged, is fairly uncommon, and proven cases are rare") (citing Areeda & D. Turner, Antitrust Law, para. 711 (1978)); R. Koller, The Myth of Predatory Pricing: An Empirical Study, 4 Antitrust Law & Econ. Rev. 105 (1971); J. Kwoka & L. White, The Antitrust Revolution (1989)).

Footnote 43 Paul L. Joskow & Alvin K. Klevorick, A Framework for Analyzing Predatory Pricing Policy, 89 YALE L.J. 213, 219-20 (1979). Joskow and Klevorick identify several structural factors that they argue are generally required for predatory pricing to occur. The most relevant of these are: (1) the predating firm must have monopoly power and (2) there must be entry barriers. In examining entry conditions, Joskow and Klevorick suggest looking at the amount of capital required by a new firm to enter a market at minimum efficient scale; whether the dominant firm has been successful in establishing a significant "brand preference" in the eyes of consumers; whether productive resources or assets can be transferred from one firm to another; whether entry occurs through "entry point" submarkets (in which case the dominant firm could prey only in the entry point markets); and the perceptions of the risks of entry. Id. at 227-31.

Footnote 44 Modern Industrial Organization at 385.

Footnote 45 Production economies may limit entry in several ways. First, large scale operations require substantial amounts of capital before entry into the industry can take place. Second, production economies limit the number of firms that a market can accommodate. In some cases, one or two firms can meet all market demand. Finally, the amount of "sunk" or unrecoverable investment may be proportional to total investment - the larger the scale, the greater the amount of sunk costs. The risk that a firm in a market may be unable to recover substantial sunk costs discourages new entry. Modern Industrial Organization at 806.

Footnote 46 Economic costs (hereinafter "costs") reflect the current value of all the resources used to produce a product or service. The current values of resources are measured by their opportunity cost, i.e., their best alternative use. See generally, Modern Industrial Organization at 56.

Footnote 47 Switched access prices that impose excessive charges on large users create an incentive for them to substitute dedicated access for switched access even if the cost the carrier incurs to provide the dedicated access is greater than the cost to the LEC of providing the switched access. Such inefficiencies are magnified in areas where there are numerous high volume toll users coupled with the availability of competing services. NYNEX Universal Service Waiver Order, 10 FCC Rcd 7445.

Footnote 48 Id.

Footnote 49 See First Report and Order, para. 416.

Footnote 50 As discussed infra at Section IV.B.2.c., we seek comment on whether to define APPs as services that are self-selected optional discounted rate plans for a service that currently exists.

Footnote 51 Virtual Collocation Order, 9 FCC Rcd at 5189 (para. 128); Virtual Collocation Overhead Prescription Order. In expanded interconnection, we required carriers to show that they do not recover a greater share of overhead loadings from expanded interconnection charges than they do for the charges for comparable services. With respect to video dialtone service, the Commission found that LECs have an incentive to understate their direct costs, to set unreasonably low prices and engage in cross-subsidization. Accordingly, the Commission required each LEC to include all its incremental costs associated with plant dedicated to video dialtone as direct costs, in addition to a reasonableallocation of other costs associated with shared plant used to provide video dialtone and other services. Furthermore, it required LECs to provide a strong justification for allocation of extremely low overhead costs to video dialtone service. Telephone Company-Cable Television Cross Ownership Rules, Section 63.54-63.58, CC Docket No. 87-266, and Amendments of Parts 32, 36, 61, 64, and 69 of the Commission's Rules to Establish and Implement Regulatory Procedures for Video Dialtone Service, RM-8221, 10 FCC Rcd 244, 344-46 (paras. 216-20) (1994) (Video Dialtone Order). But cf. US West Communications, Inc., Tariff F.C.C. No. 5, Market Trial of Basic Video Dialtone Service in Omaha, Nebraska (Com. Car. Bur., released Aug. 30, 1995)(approval of cost allocation methodology for market trial that differs from methodology prescribed in Video Dialtone Order).

Footnote 52 LEC Price Cap Order, 5 FCC Rcd at 6824 (para. 314).

Footnote 53 LEC Price Cap Order, 5 FCC Rcd at 6824 (para. 314).

Footnote 54 New services and restructures are both distinguished from a mere change in the rate for an existing service.

Footnote 55 Section 61.58(c)(5) of the Commission's Rules, 47 C.F.R. 61.58(c)(5); LEC Price Cap Order, 5 FCC Rcd at 6825 (para. 320).

Footnote 56 Amendments of Part 69 of the Commission's Rules Relating to the Creation of Access Charge Subelements for Open Network Architecture, CC Docket Nos. 89-79 and 87-313, 6 FCC Rcd 4524, 4531 (para. 42) (1991) (Part 69 ONA Order), modified on recon., 7 FCC Rcd 5235 (1992); further recon. denied, 10 FCC Rcd 1570 (1994). Cost support accompanying a LEC new service tariff filing must include, in part, a study containing a projection of costs for a representative 12-month period and estimates of the effect of the new service on traffic and revenues. Part 69 ONA Order, 6 FCC Rcd at 4531 (para. 42). As part of the justification for the price selected for the new service, LECs may include a "risk premium" on investments in unusually risky new services. Part 69 ONA Order, 6 FCC Rcd at 4531 (para 43). A risk premium is defined as the additional rate of return a LEC needs to justify the development of a particularly risky new service. Second ONA Reconsideration Order, 7 FCC Rcd at 5237 (para. 13).

Footnote 57 Part 69 ONA Order, 6 FCC Rcd at 4531 (para. 42).

Footnote 58 Requiring uniform overhead loadings for close substitute services in some cases may force the LEC's revenues to a level below what it would receive if it did not offer the new service. See Second ONA Reconsideration Order, 7 FCC Rcd at 5236 (para. 9); Third ONA Reconsideration Order, 10 FCC Rcd at 1571 (para. 5).

Footnote 59 Second ONA Reconsideration Order, 7 FCC Rcd at 5237; Third ONA Reconsideration Order, 10 FCC Rcd at 1571 (para. 5).

Footnote 60 Second ONA Reconsideration Order, 7 FCC Rcd at 5237; Video Dialtone Order, 10 FCC Rcd at 343.

Footnote 61 Video Dialtone Order, 10 FCC Rcd at 344-46 (paras. 216-20); Virtual Collocation Order, 9 FCC Rcd at 5189 (para. 128); Virtual Collocation Overhead Prescription Order.

Footnote 62 LEC Price Cap Order, 5 FCC Rcd at 6825 (para. 319).

Footnote 63 LEC Price Cap Order, 5 FCC Rcd at 6825 (para. 318).

Footnote 64 LEC Price Cap Order, 5 FCC Rcd at 6825 (para. 319).

Footnote 65 Section 61.49(f) of the Commission's Rules, 47 C.F.R. 61.49(f); LEC Price Cap Order, 5 FCC Rcd at 6826 (para. 325).

Footnote 66 See First Report and Order, paras. 398-402.

Footnote 67 First Report and Order, para. 415.

Footnote 68 See, e.g., Virtual Collocation Order, 9 FCC Rcd 5154. We required all Tier 1 LECs, except members of National Exchange Carrier Association (NECA) pools, to provide expanded interconnection service. Puerto Rico Telephone Company is the only Tier 1 carrier participating in NECA pools. Special Access Expanded Interconnection Order, 7 FCC Rcd at 7398 (para. 57). Tier 1 LECs are those earning $100 million or more per year from regulated telecommunication operations. Section 32.11 of the Commission's Rules, 47 C.F.R. 32.11. In the provision of expanded interconnection, LECs permit competitors and access customers to terminate their own basic transmission facilities at LEC central offices and to interconnect with LEC special access or switched transport facilities. See Sections 64.1401(d), (e), and (f) of the Commission's Rules, 47 C.F.R. 64.1401(d), (e), (f). Tier 1 LECs are required to offer expanded interconnection through "virtual collocation," which would permit an interconnector to designate or specify equipment needed to terminate basic transmission facilities to be located within or upon the LEC's central offices and dedicated to that interconnector's use, unless the LEC and the interconnector agree to a physical collocation arrangement. Under physical collocation, an interconnector would be permitted to place its own equipment needed to terminate basic transmission facilities in the LEC's central office. See Section 64.1401(c) of the Commission's Rules, 47 C.F.R. 64.1401(c).

Footnote 69 Virtual Collocation Order, 9 FCC Rcd at 5185-91; Virtual Collocation Overhead Prescription Order.

Footnote 70 Virtual Collocation Order, 9 FCC Rcd at 5159 (para. 9).

Footnote 71 Second ONA Reconsideration Order, 7 FCC Rcd 5235.

Footnote 72 Second ONA Reconsideration Order, 7 FCC Rcd at 5237 (para. 11) and n.18.

Footnote 73 Sections 61.49(g) and 61.58(c)(5) of the Commission's Rules, 47 C.F.R. 61.49(g) and 69.58(c). Of course, the Commission can specify different notice and cost support, as well as other special requirements such as overhead loading specifications, for any service it deems of special concern. See, e.g., Video Dialtone Order, 10 FCC Rcd 244; Virtual Collocation Order, 9 FCC Rcd at 5189.

Footnote 74 LEC Price Cap Order, 5 FCC Rcd at 6826 (para. 324).

Footnote 75 Volume and term discounts are permitted for special access services without any competitive showing or Part 69 filing. See Special Access Expanded Interconnection Order, 7 FCC Rcd at 7458-65.

Footnote 76 Switched Transport Expanded Interconnection Order, 8 FCC Rcd at 7432-33 (para. 115).

Footnote 77 Id. at 7434 (para. 116).

Footnote 78 Id. at 7434 (para. 117).

Footnote 79 Id.

Footnote 80 Id. at 7434-35 (para. 118). (See discussion of density-based "zones" in SectionIV.D.3., supra).

Footnote 81 Id. n.264.

Footnote 82 See Policy and Rules Concerning Rates for Dominant Carriers, Revisions to Price Cap Rules for AT&T, 10 FCC Rcd 7854 (1995) (AT&T APP Notice).

Footnote 83 AT&T APP Notice, 10 FCC Rcd at 7860.

Footnote 84 AT&T APP Notice. 10 FCC Rcd at 7860.

Footnote 85 AT&T APP Notice, 10 FCC Rcd at 7865.

Footnote 86 47 C.F.R. 61.49. See AT&T APP Notice at 7865-66.

Footnote 87 AT&T APP Notice, 10 FCC Rcd at 7864.

Footnote 88 AT&T APP Notice, 10 FCC Rcd at 7866.

Footnote 89 We discuss issues related to the relevant geographic market for access services in Section IV.D. of this Notice.

Footnote 90 See AT&T APP Notice, 10 FCC Rcd at 7862.

Footnote 91 See AT&T APP Notice, 10 FCC Rcd at 7862-66.

Footnote 92 Local Exchange Carriers' Individual Case Basis DS3 Service Offerings, CC Docket No. 88-136, 4 FCC Rcd 8634, 8641 (para. 63) (1989) (ICB Order).

Footnote 93 LEC Price Cap Order, 5 FCC Rcd at 6810 (para. 193).

Footnote 94 Id.

Footnote 95 Id.

Footnote 96 Investigation of Access and Divestiture Related Tariffs, CC Docket No. 83-1145, 97 FCC 2d 1082, 1143 (1984) (ECA Tariff Order); ICB Order.

Footnote 97 ICB Order, 4 FCC Rcd at 8641-42 (paras. 63-64), quoting ECA Tariff Order, 97 FCC 2d at 1143.

Footnote 98 ICB Order, 4 FCC Rcd at 8642 (para. 66). Services are not "like" within the meaning of Section 202 if they differ in any material functional respect.- Ad Hoc Telecommunications Users Committee v. FCC, 680 F.2d 790, 795-96 (D.C. Cir. 1980) (Ad Hoc); Western Union v. FCC, 568 F.2d 1012, 1018 (2d Cir. 1977), cert. denied, 436 U.S. 944 (1978) (Western Union); American Broadcasting Co. v. FCC, 663 F.2d 133 (D.C. Cir. 1980) (ABC)); American Trucking Ass'n v. FCC, 377 F.2d 121 (D.C. Cir. 1966), cert. denied, 386 U.S. 943 (1967) (American Trucking); American Tel. & Tel. Co. (Hi/Lo), 55 FCC 2d 224, 230 (1975), aff'd mem. sub nom. Commodity News Services, Inc. v. FCC, 561 F.2d 1021 (D.C. Cir. 1977); MCI Communications Corp. v. FCC, 917 F.2d 30 (D.C. Cir. 1990) (MCI v. FCC). Customer perception is a "critical concept" and a "linchpin" of the functional equivalency test. Ad Hoc, 680 F.2d at 796.

Footnote 99 ICB Order, 4 FCC Rcd at 8642.

Footnote 100 ICB Order, 4 FCC Rcd at 8642 (para. 69).

Footnote 101 In the past, the Common Carrier Bureau has rejected ICB tariffs because the LEC failed to comply with Section 61.38. BellSouth Telephone Companies, Revisions to Tariff F.C.C. No. 4, 6 FCC Rcd 373 (Com. Car. Bur. 1991); Southwestern Bell Telephone Co., Revisions to Tariff F.C.C. No. 68, 5 FCC Rcd 5980 (Com. Car. Bur. 1990). In pertinent part, Section 61.38 requires: (1) a study containing a projection of costs for a representative 12 month period, and (2) estimates of theeffects of the service on the carrier's traffic and revenues for that representative 12 month period. Section 61.38(b)(2) of the Commission's Rules, 47 C.F.R. 61.38(b)(2).

Footnote 102 LEC Price Cap Order, 5 FCC Rcd at 6810 (para. 193).

Footnote 103 MTS and WATS Market Structure, CC Docket No. 78-72, Phase I, Third Report and Order, 93 FCC 2d 241 (1983), modified on recon., 97 FCC 2d 682 (1983), modified on further recon., 97 FCC 2d 834 (1984), aff'd in principal part and remanded in part, National Association of Regulatory Utility Commissioners v. FCC, 737 F.2d 1095 (D.C. Cir. 1984), cert. denied, 469 U.S. 1227 (1985), modified on further recon., 102 FCC 2d 849 (1985).

Footnote 104 47 C.F.R. Part 69.

Footnote 105 All LECs are required to comply with the Part 69 rules.

Footnote 106 Switched access services utilize the local exchange switch to interconnect transmission facilities and route traffic. With special access or leased line service, traffic is carried on facilities dedicated to the use of a particular customer, which could be an interexchange carrier or a business user.

Footnote 107 A LEC seeking to introduce a rate element not prescribed under the Part 69 rate structure rules for interstate access services may also request that the Commission initiate a proceeding to change our rules.

Footnote 108 47 C.F.R. 1.3.

Footnote 109 Northeast Cellular Telephone Co. v. FCC, 897 F.2d 1164, 1166 (D.C. Cir. 1990); WAIT Radio v. FCC, 418 F.2d 1153 (D.C. Cir. 1969).

Footnote 110 See First Report and Order, para. 398, and pleadings cited therein.

Footnote 111 Id. at para. 416.

Footnote 112 LEC Price Cap Order, 5 FCC Rcd at 6810 (para. 198).

Footnote 113 AT&T Price Cap Order, 4 FCC Rcd at 3239 (para. 758). In the LEC Price Cap Order, we adopted 5 percent as the upper and lower bounds for the service categories in the special access basket. LEC Price Cap Order, 5 FCC Rcd at 6813-14 (paras. 224-26).

Footnote 114 AT&T Price Cap Order, 4 FCC Rcd at 3239 (para. 758).

Footnote 115 AT&T Price Cap Order, 4 FCC Rcd at 3239 (para. 758).

Footnote 116 LEC Price Cap Order, 5 FCC Rcd at 6811 (para 204).

Footnote 117 LEC Price Cap Order, 5 FCC Rcd at 6811 (paras. 205-06).

Footnote 118 Switched Transport Expanded Interconnection Order, 8 FCC Rcd at 7431-32 (paras. 111-12).

Footnote 119 Transport Second Report and Order, 9 FCC Rcd 615, 629 (para. 32).

Footnote 120 Transport Second Report and Order at 625, 629 (paras. 21, 32).

Footnote 121 First Report and Order, para. 411.

Footnote 122 First Report and Order, para. 412.

Footnote 123 First Report and Order, para. 408.

Footnote 124 GTE Below-band Investigation, 10 FCC Rcd 1573.

Footnote 125 See id.

Footnote 126 Special Access Expanded Interconnection Order; Switched Transport Expanded Interconnection Order.

Footnote 127 The conditions we placed on this waiver are: (1) NYNEX may not raise any interconnection charge to offset a decrease in another interconnection charge; (2) NYNEX may not, once it lowers an interconnection charge, raise that charge later; and (3) NYNEX may not lower the RIC below a floor equal to the rate element's relative share of tandem switching costs. NYNEX Universal Service Waiver Order, 10 FCC Rcd 7445, paras. 54-55.

Footnote 128 LEC Price Cap Order, 5 FCC Rcd at 6811.

Footnote 129 Section 61.42(d) of the Commission's Rules, 47 C.F.R. 61.42(d). We have also solicited comment on whether to establish a separate price cap basket for video dialtone services. Further Notice, 10 FCC Rcd at 3147-49.

Footnote 130 Section 61.42(e) of the Commission's Rules, 47 C.F.R. 61.42(e).

Footnote 131 Section 61.47 of the Commission's Rules, 47 C.F.R. 61.47.

Footnote 132 Notice, 9 FCC Rcd at 1694.

Footnote 133 Id.

Footnote 134 LEC Price Cap Order, 5 FCC Rcd at 6788.

Footnote 135 Transport Second Report and Order, 9 FCC Rcd at 622.

Footnote 136 Notice, 9 FCC Rcd at 1695, 1705-06.

Footnote 137 USTA's proposed public policy basket would include the special access surcharge, end user common line charge, and the carrier common line charge (or any substitute recovery mechanism). USTA Comments at 68.

Footnote 138 USTA Comments at 66-72; see also First Report and Order, para. 380.

Footnote 139 See First Report and Order, para. 381.

Footnote 140 NYNEX Comments at 23-27.

Footnote 141 Pac Bell Comments at 102.

Footnote 142 See First Report and Order, para. 382.

Footnote 143 Id., para. 414.

Footnote 144 Id.

Footnote 145 Id.

Footnote 146 LEC Price Cap Order, 5 FCC Rcd at 6811 (para. 203); BNA Order, 8 FCC Rcd at 4483 (para. 24).

Footnote 147 Ex Parte Letter from USTA, Attachment 2 at 2 (filed Jan. 18, 1995)(January 18 Letter); see also First Report and Order, para. 386. We stated in the First Report and Order that we believed that it would be premature on the record that we had before us at that time to modify the structure of the LEC price cap baskets. First Report and Order, para. 412.

Footnote 148 Transport Second Report and Order, 9 FCC Rcd at 631-632 (paras. 35-36).

Footnote 149 See Treatment of Operator Services Under Price Cap Regulation, CC Docket No. 93-124, Notice of Proposed Rulemaking, 8 FCC Rcd 3655 (1993) (Operator Services Notice).

Footnote 150 See Operator Services Notice, 8 FCC Rcd 3655 n.1.

Footnote 151 BNA Order, 8 FCC Rcd 4478 (1993) (BNA Order); modified on recon. 8 FCC Rcd 6393; further modified on recon., 8 FCC Rcd 8798.

Footnote 152 Expanded Interconnection with Local Telephone Company Facilities, Transport Phase II, Third Report and Order, 9 FCC Rcd 2718 (1994)(Expanded Interconnection Third Report and Order).

Footnote 153 Second BNA Reconsideration Order, 8 FCC Rcd at 8798.

Footnote 154 Expanded Interconnection Third Report and Order, 9 FCC Rcd 2718.

Footnote 155 See Operator Services Notice, 8 FCC Rcd 3655.

Footnote 156 LECs have established a separate rate element for these services, established pursuant to waiver. See Bell Atlantic Telephone Companies, Southwestern Bell Telephone Company, Petitions for Waiver of Section 69.4(b) of the Commission's Rules, 9 FCC Rcd 7868 (Com. Car. Bur. 1994); BellSouth Telecommunications, Inc. Petition for Waiver of Section 69.4(b) of the Commission's Rules, 10 FCC Rcd 3312 (Com. Car. Bur. 1995); NYNEX Telephone Companies, Petition for Waiver of Section 69.4(b) of the Commission's Rules, 10 FCC Rcd 4593 (Com. Car. Bur. 1995).

Footnote 157 See Ameritech Operating Companies, 10 FCC Rcd 4559 (Com. Car. Bur. 1995). Ameritech sought a waiver of Part 69 to establish a subelement within the information rate element for this service. The Bureau denied this petition, but granted Ameritech a waiver to establish a new separate rate element outside any existing rate element for this service.

Footnote 158 See NYNEX March 3 Proposal at 4; S. Rep. No. 104-23, 104th Cong., 1st Sess. (Mar. 30, 1995), regarding S.652, at Section 251(b); Anne K. Bingaman, Assistant Attorney General for the Antitrust Division for the Department of Justice, speech before the National Press Club on Feb. 28, 1995; Discussion paper of Ray Marshall, former Secretary of Labor, presented at the University of Texas at Austin in May 1994. A copy of this speech and discussion paper will be placed in the docket file for this proceeding at the time this Second Further Notice is released.

Footnote 159 Most of these criteria are also contained in pending legislation. H.R. 1555, 104th Cong., 1st Sess. (1995); S. 652, 104th Cong., 1st Sess. (1995).

Footnote 160 This particular measure is one of near-term supply elasticity or addressability, but may be an indicator that entry barriers have been removed.

Footnote 161 Telephone Number Portability, Notice of Proposed Rulemaking, CC Docket No. 95-116, FCC 95-284 (released: July 13, 1995).

Footnote 162 Rochester Telephone Corp. Order.

Footnote 163 See, e.g., Special Access Expanded Interconnection, 7 FCC Rcd at 7454-55; BellSouth Telecommunications, Inc., et al., Zone Density Pricing Plans, 8 FCC Rcd 4443 (Com. Car. Bur. 1993)(LECs' Zone Density Pricing Plans).

Footnote 164 First Report and Order, para. 315.

Footnote 165 Cross-elasticity measures the changes in demand (or supply) of commodity X when the price of commodity Y changes. A positive cross-elasticity indicates that the commodities are substitutes.

Footnote 166 Merger Guidelines, at 4.

Footnote 167 Merger Guidelines, at 11.

Footnote 168 Modern Industrial Organization at 806.

Footnote 169 LEC Price Cap Order, 5 FCC Rcd at 6711 (para. 203); BNA Order, 8 FCC Rcd at 4483 (para. 24).

Footnote 170 Common Carrier Services, 95 FCC 2d 554, 562-63 (1983)(Common Carrier Services), rev'd on other grounds sub nom., AT&T v. FCC, 978 F.2d 727 (D.C. Cir. 1992)(AT&T v. FCC).

Footnote 171 Section 61.42 of the Commission's Rules, 47 C.F.R. 61.42(e).

Footnote 172 See, e.g., Special Access Expanded Interconnection, 7 FCC Rcd at 7454-55 (paras. 179-80); LECs' Zone Density Pricing Plans, 8 FCC Rcd 4443.

Footnote 173 Common Carrier Services, 95 FCC 2d at 562-63, rev'd on other grounds sub nom., AT&T v. FCC.

Footnote 174 Special Access Expanded Interconnection Order, 7 FCC Rcd at 7451-55.

Footnote 175 The LECs are required to provide additional justification to establish more than three zones and such proposals are subject to greater scrutiny by the Commission.

Footnote 176 Switched Transport Expanded Interconnection Order, 8 FCC Rcd at 7426-27 (paras. 98-101).

Footnote 177 Special Access Expanded Interconnection Order, 7 FCC Rcd at 7451-55.

Footnote 178 See GTE Service Corporation, Revised Zone Density Pricing Plan, 10 FCC Rcd 5696 (Com. Car. Bur. May 2, 1995).

Footnote 179 Special Access Expanded Interconnection Order; Switched Transport Expanded Interconnection Order; NYNEX Universal Service Waiver Order.

Footnote 180 See Petition for Declaratory Ruling and Related Waivers to Establish a New Regulatory Model for the Ameritech Region (Mar. 1, 1995); Update to Ameritech Customers First Waiver Request (Apr. 12, 1995).

Footnote 181 See First Report and Order, paras. 372-73.

Footnote 182 Interexchange Order, 6 FCC Rcd at 5881, 5894, recon., 6 FCC Rcd 7569 (1991), further recon., 7 FCC Rcd 2677 (1992) Second Report and Order, 8 FCC Rcd 3668 (1993), recon., 8 FCC Rcd 5046 (1993).

Footnote 183 See, e.g., LEC Price Cap Order, 5 FCC Rcd at 6822.

Footnote 184 See e.g. American Broadcasting Companies, Inc. v. FCC, 633 F.2d 133, 138 (D.C. Cir. 1980); Associated Press v. FCC, 4498 F.2d 1095, 1103 (D.C. Cir. 1971).

Footnote 185 See Sections 205 and 208 of the Communications Act, 47 U.S.C. 205, 208; see also Interexchange Order, 6 FCC Rcd at 5894-95.

Footnote 186 Policy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87-313, Notice of Proposed Rule Making, 2 FCC Rcd 5208 (1987), Further Notice of Proposed Rule Making, 3 FCC Rcd 3195 (1988) (AT&T Further Notice), Report and Order and Second Further Notice, 4 FCC Rcd 2873 (1989) (AT&T Price Cap Order), Erratum, 4 FCC Rcd 3379 (1989), recon., 6 FCC Rcd 665 (1991) (AT&T Reconsideration Order), remanded sub nom. American Telephone and Telegraph Company v. FCC, 974 F.2d 1351, 1353 (D.C. Cir. 1992).

Footnote 187 See AT&T Reconsideration Order, 6 FCC Rcd at 665-66, for an explanation of how the price cap index is calculated.

Footnote 188 In addition to setting limits on the aggregate rates within each basket, the Commission instituted rate bands to limit the range within which AT&T could raise or lower individual rate element prices each year without becoming subject to additional tariff scrutiny. AT&T Price Cap Order, 4 FCC Rcd at 3077, citing AT&T Further Notice, 3 FCC Rcd at 3440.

Footnote 189 AT&T Price Cap Order, 4 FCC Rcd at 3109-11.

Footnote 190 Also, unlike the LEC price cap plan, the Commission did not adopt sharing and low-end adjustment mechanisms for the AT&T price cap plan. The Commission believed that competition would serve as a similar check on AT&T's potential earnings. AT&T Price Cap Order, 4 FCC Rcd at 3144.

Footnote 191 AT&T Price Cap Order, 4 FCC Rcd at 3064.

Footnote 192 Interexchange Order, 6 FCC Rcd 5880, 5893-95, 5905. AT&T's Basket 3 services included ProAmerica; WATS; Megacom; SDN; other switched services; voice grade and below private line service; and other private line service. Interexchange Order, 6 FCC Rcd at 5881 n.4.

Footnote 193 The Commission retained price cap regulation for AT&T's analog private line services after finding that they are of diminishing importance in the marketplace and are consequently less subject to competition than other business services. Interexchange Order, 6 FCC Rcd at 5895.

Footnote 194 Interexchange Order, 6 FCC Rcd at 5887.

Footnote 195 Interexchange Order, 6 FCC Rcd at 5887.

Footnote 196 Commercial Services Order, 10 FCC Rcd at 3011, 3014.

Footnote 197 Commercial Services Order, 10 FCC Rcd at 3014; id. at 3018 (permitting AT&T to offer commercial long distance services under streamlined regulation enables AT&T to enter into contracts with customers for these services).

Footnote 198 Commercial Services Order, 10 FCC Rcd at 3014. Unlike the Commission's approach in the Interexchange Order, however, the Commission's analysis in the Commercial Services Order was not based on AT&T's pricing of commercial services under price cap regulation.

Footnote 199 Robert S. Pindyck and Daniel L Rubinfeld, Microeconomics, Macmillan Publishing Company New York, 1992, p.29.

Footnote 200 Interexchange Order, 6 FCC Rcd at 5887.

Footnote 201 Interexchange Order, 6 FCC Rcd at 5887.

Footnote 202 Id. at 5888.

Footnote 203 Commercial Services Order, 10 FCC Rcd at 3016.

Footnote 204 Commercial Services Order, 10 FCC Rcd at 3016.

Footnote 205 Commercial Services Order, 10 FCC Rcd at 3015-16.

Footnote 206 Robert S. Pindyck and Daniel L Rubinfeld, Microeconomics, Macmillan Publishing Company New York, 1992, p.32.

Footnote 207 Addressability is narrower than supply elasticity. Supply elasticity measures both addressability (immediate ability of competitors to supply additional capacity if prices rise) and the additional capacity that could easily be added by competitors and new entrants as prices rise. USTA asserts that for a customer's demand to be addressable an alternative provider must have facilities that can readily extend services to the customer upon request. It states that a measure of addressability is based on observable fact -- the physical presence of alternative providers with the capacity and geographic coverage to serve a substantial portion of the market. USTA Comments, June 29, 1994.

Footnote 208 See Interexchange Order, 6 FCC Rcd at 5888-89.

Footnote 209 Interexchange Order, 6 FCC Rcd at 5888-89. Specifically, the Commission found that MCI and Sprint could immediately absorb as much as 15 percent of AT&T's business day traffic without any expansion of their existing capacity. The Commission determined that this capacity was in itself more than sufficient to constrain AT&T's pricing behavior insofar as this capacity could accommodate a substantial number of new customers. The Commission also found that Sprint and MCI together could add about 25 billion minutes of new capacity to their networks for a combined investment of about $600 million. Id.

Footnote 210 Commercial Services Order, 10 FCC Rcd at 3016.

Footnote 211 Commercial Services Order, 10 FCC Rcd at 3017; id. ("much of the network capacity owned by the long distance carriers is fiber optic technology"); id. (noting that in 1993, AT&T owned 47 percent of the total fiber miles while serving 60 percent of the minutes of use of the interexchange market, while, in contrast, all other interexchange carriers owned 53 percent of the total fiber miles while serving 40 percent of the interexchange market).

Footnote 212 Commercial Service Order, 10 FCC Rcd at 3017-18.

Footnote 213 See Interexchange Order, 6 FCC Rcd at 5888; Commercial Services Order, 10 FCC Rcd at 3017; see also generally id. ("competitors must be willing and able to serve a significant portion of AT&T's commercial long distance traffic in response to a price increase, but by no means all of its traffic, in order to deter a price increase").

Footnote 214 Interexchange Order, 6 FCC Rcd at 5890 (footnote omitted).

Footnote 215 Commercial Services Order, 10 FCC Rcd at 3015.

Footnote 216 Commercial Services Order, 10 FCC Rcd at 3015. As noted supra, AT&T's market share fluctuated from 54 percent in 1987, to 39 percent in 1991, to 44 percent in 1993. Id.

Footnote 217 Commercial Services Order, 10 FCC Rcd at 3015. In comparison to AT&T's 44 percent share, MCI's share of this market in 1993 was 21 percent, Sprint's share was 13 percent, and all other long distance providers had a combined market share of 20 percent. Id.

Footnote 218 Interexchange Order, 6 FCC Rcd at 5887.

Footnote 219 Interexchange Order, 6 FCC Rcd at 5889.

Footnote 220 Interexchange Order, 6 FCC Rcd at 5889. The one Basket 3 tariff filing that was not below the upper rate band was an analog private line filing at the upper rate band. The Commission did not streamline the regulation of AT&T's analog private line services. Id. at 5889 n.88.

Footnote 221 Interexchange Order, 6 FCC Rcd at 5889.

Footnote 222 Interexchange Order, 6 FCC Rcd at 5897.

Footnote 223 Interexchange Order, 6 FCC Rcd at 5897.

Footnote 224 Interexchange Order, 6 FCC Rcd at 5899.

Footnote 225 Interexchange Order, 6 FCC Rcd at 5897. Specifically, AT&T is required to file a tariff summarizing the contract and containing the following information: (1) the term of the contract, including any renewal options; (2) a brief description of each of the services provided under the contract; (3) minimum volume commitments for each service; (4) the contract price for each service or services at the volume levels committed to by the customers; (5) a general description of any volume discounts built into the contract rate structure; and (6) a general description of other classifications, practices, and regulations affecting the contract rate. Id. at 5902.

Footnote 226 Nondominant common carriers routinely file contract rates for interstate services. Tariff filings by nondominant common carriers are presumed lawful. See Section 1.773 of the Commission's Rules, 47 C.F.R. 1.773.

Footnote 227 47 U.S.C. 202(a).

Footnote 228 See Policy and Rules Concerning Rates for Competitive Common Carrier Services and Facilities Authorization Therefor, CC Docket No. 79-252, First Report and Order, 85 FCC 2d 1, 22, n. 55, 24, n. 61 (1980) (First Competitive Carrier Order).

Footnote 229 We note, however, that we have held that AT&T is dominant in the provision of international message telephone service (IMTS), but is nondominant in the provision of non-IMTS services, i.e., telex, telegram, TWX, private line, high and low speed data, videoconferencing and International Business Service. International Competitive Carrier Policies, Report and Order, 102 FCC 2d 812, 834 (1985), recon. denied, 60 Pike & Fischer 1435 (1986).

Footnote 230 First Competitive Carrier Order at 22, fn. 55.

Footnote 231 See Petition to Regulate Bell Atlantic as a Nondominant Provider of Interstate InterLATA Corridor Service (filed July 7, 1995) (Bell Atlantic Interexchange Corridor Nondominance Petition); Ameritech Communications, Inc. Petition for Nondominant Status, (filed July 21, 1995).

Footnote 232 Bell Atlantic Interexchange Corridor Nondominance Petition.

Footnote 233 See Section IV.D., supra.

Footnote 234 The Commission's Rules governing tariff filings by nondominant carriers, Section 61.20, et. seq., of the Commission's Rules, 47 C.F.R. 61.20, et. seq., have been vacated. Southwestern Bell Telephone Co. v. FCC, 43 F.3d 1515 (D.C. Cir. 1995) (Southwestern Bell v. FCC). The Commission is currently in the process of revising its rules to conform to the court's decision. See Public Notice, Tariff Filing Requirements for Nondominant Common Carriers, 10 FCC Rcd 4074 (1995).

Footnote 235 See First Report and Order, para. 407 (discussing Bell Atlantic's and Ameritech's claims that their interstate intraLATA toll and corridor interexchange services should be removed from price caps).

Footnote 236 First Competitive Carrier Order, 85 FCC 2d 1; Second Report and Order, 91 FCC 2d 59 (1982), recon. denied, 93 FCC 2d 54 (1983); Third Report and Order, 48 Fed.Reg. 46,791 (1983); Fourth Report and Order, 95 FCC 2d 554 (1984) (Fourth Competitive Carrier Order), vacated, AT&T v. FCC, 978 F.2d 727 (D.C. Cir. 1992), cert. denied, MCI Telecommunication Corp. v. FCC, 113 S.Ct. 3020 (1993); Fifth Report and Order, 98 FCC 2d 1191 (1984); Sixth Report and Order, 99 FCC 2d 1020 (1985) (Sixth Competitive Carrier Order); rev'd, MCI Telecommunications Corp. v. FCC, 765 F.2d 1186 (D.C. Cir. 1985) (collectively, Competitive Carrier).

Footnote 237 First Competitive Carrier Order, 85 FCC 2d 1, 20-22 (paras. 55-59).

Footnote 238 Specifically, in the Fourth Competitive Carrier Order, we adopted "permissive detariffing," which permitted nondominant carriers to provide common carrier services without filing tariffs. In the Sixth Competitive Carrier Order, we adopted "mandatory detariffing," which required nondominant carriers to offer their services on an untariffed basis. In both cases, the Courts vacated our forbearance rules as inconsistent with Section 203 of the Communications Act, 47 U.S.C. 203. See MCI v. FCC, 765 F.2d 1186 (vacating mandatory detariffing); MCI v. AT&T, 114 S.Ct. 2223 (1994) (vacating permissive detariffing).

Footnote 239 Specifically, when we adopted rules to govern tariff filings of nondominant carriers, we specifically declined to modify the dominant\nondominant regulatory dichotomy. Tariff Filing Requirements for Nondominant Common Carriers, CC Docket No. 93-36, 8 FCC Rcd 6752, 6754 (para. 8) (1993), cited in First Report and Order, para. 346.

Footnote 240 See, e.g., Bell Atlantic Petition for Regulation as a Nondominant Provider of Interstate InterLATA Corridor Service, Public Notice, DA 95-1666 (rel. July 26, 1995).

Footnote 241 LECs vary, among other things, in business strategies, regional economic circumstances, plant vintages, state regulatory schemes and competitive circumstances.

Footnote 242 First Report and Order, para. 165.

Footnote 243 LEC Price Cap Order, 5 FCC Rcd at 6801.

Footnote 244 First Report and Order, paras. 187-89.

Footnote 245 First Report and Order, para. 197.

Footnote 246 First Report and Order, para. 375. NYNEX discussed the details of its proposal in an ex parte statement it filed in this docket on March 3, 1995 (NYNEX March 3 Letter).

Footnote 247 The criteria on NYNEX's checklist are: (1) local exchange competition has been approved; (2) local loops have been unbundled; i.e., a LEC's competitors may obtain access to the local loop directly, without purchasing local switching or other services; (3) intrastate expanded interconnection is available through tariff or contract; (4) there is number portability for use by competitors, i.e., end users are able to switch local service providers and retain their current telephone number; (5) competing LECs have been authorized and/or have become operational; (6) there is some mechanism for the LEC and its competitors to compensate each other for completing telephone calls originated on each other's networks; (7) competitors have access to directory assistance and 911 databases; and (8) competitors are or have announced plans to collocate in wire centers which account for 40 percent of the incumbent LEC's business lines or 60 percent of its interstate access revenues. See NYNEX March 3 Letter at 4.

Footnote 248 NYNEX March 3 Letter at 4.

Footnote 249 NYNEX March 3 Letter at 4.

Footnote 250 NYNEX March 3 Letter at 4.

Footnote 251 NYNEX March 3 Letter at 4.

Footnote 252 NYNEX March 3 Letter at 4.

Footnote 253 First Report and Order, paras. 219-22.

Footnote 254 See Section 61.44(b) of the Commission's Rules, 47 C.F.R. 61.44(b).

Footnote 255 First Report and Order, paras. 343-44.

Footnote 256 First Report and Order, paras. 343-46; AT&T Performance Review, 8 FCC Rcd at 5169 (paras. 32-33).

Footnote 257 AT&T Performance Review, 8 FCC Rcd at 5169 (para. 33).