******************************************************** NOTICE ******************************************************** This document was converted from WordPerfect to ASCII Text format. Content from the original version of the document such as headers, footers, footnotes, endnotes, graphics, and page numbers will not show up in this text version. All text attributes such as bold, italic, underlining, etc. from the original document will not show up in this text version. Features of the original document layout such as columns, tables, line and letter spacing, pagination, and margins will not be preserved in the text version. If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) Access Charge Reform for Incumbent ) CC Docket No. 98-77 Local Exchange Carriers Subject to ) Rate-of-Return Regulation ) NOTICE OF PROPOSED RULEMAKING Adopted: May 26, 1998 Released: June 4, 1998 Comment Date: July 17, 1998 Reply Date: August 17, 1998 By the Commission: Table of Contents Paragraph I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 B. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 II. Rate Structure Modifications . . . . . . . . . . . . . . . . . . . . . . . . . 22 A. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 B. Common Line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 C. Local Switching . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 D. Transport Services and the Transport Interconnection Charge (TIC) 61 E. SS7 Signalling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 III. Other Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 A. General Support Facilities Costs . . . . . . . . . . . . . . . . . . . . . . . . . 79 B. Marketing Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 C. Special Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 D. Part 69 Cost Allocation Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 E. Modification of New Services Requirement . . . . . . . . . . . . . . . . . . . 93 IV. Procedural Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 A. Ex Parte Presentations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 B. Paperwork Reduction Act . . . . . . . . . . . . . . . . . . . . . . . . . 97 C. Initial Regulatory Flexibility Act Analysis . . . . . . . . . . . . . . . . . . . 99 D. Notice of Proposed Rulemaking Comment Filing Dates and Procedures 114 V. Ordering Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 I. INTRODUCTION A. Overview 1. In passing the Telecommunications Act of 1996 (1996 Act), Congress sought to establish "a pro-competitive, de-regulatory national policy framework" for the United States telecommunications industry. In this proceeding, as in others implementing the 1996 Act, we seek to unleash the dynamic forces of competition and deregulation in the telecommunications industry to serve the interests of the nation's consumers. We believe that our mandate from Congress directs us to foster the delivery of the benefits of competition to consumers throughout the country, and not only to those living in the most densely populated areas where the seeds of competition in local telecommunications markets may have already begun to take root. 2. Access reform is one of a series of actions that collectively are intended to foster and accelerate the introduction of efficient competition in all telecommunications markets, pursuant to the mandate of the 1996 Act. In the Access Charge Reform Order, we set in motion the forces of competition and deregulation in local telecommunications markets served by incumbent local exchange carriers (LECs) subject to price cap regulation. The 1996 Act, however, expressly provides that "Consumers in all regions of the Nation . . . should have access to telecommunications and information services . . . that are reasonably comparable to those services provided in urban areas and that are available at rates that are reasonably comparable to rates charged for similar services in urban areas." With this Notice of Proposed Rulemaking (NPRM), we commence a further proceeding on access reform to mobilize the same forces to serve the interests of consumers located in those rural and suburban areas that are served by incumbent LECs subject to rate-of-return regulation. The first step in this reform process is to enable these rate-of- return LECs to assess interstate access charges that are more consistent with principles of cost-causation and economic efficiency. Smaller, rate-of-return LECs currently are very concerned that their existing high per-minute rates for interstate access place them at a significant disadvantage in attempting to compete with new access service providers. In particular, these companies fear that the rate structures and levels mandated by our current access charge rules make their most lucrative customers, those that make many long distance calls, especially vulnerable to competing offers from new entrants. These rate-of-return LECs need to be allowed to move their rates to more economically efficient levels. Otherwise, they face the potential loss of customers to less efficient new entrants whose rates are lower than those currently assessed by the incumbent LECs, but higher than the rates these LECs would charge if our access charge rules were reformed. In addition, of course, reductions in interstate access charge per-minute rates should translate into lower per-minute long distance charges for consumers, which benefits both customers and carriers -- customers get more value for their money, and can afford to make more long distance calls, while carriers obtain additional revenues. 3. With this notice, we continue the process of reforming the access charge rate structure for rate- of-return LECs that was begun in the Access Charge Reform Order with the modifications to the transport rate structure, the reallocation of costs in the transport interconnection charge (TIC), and the amendments reflecting the changes necessary to implement universal service. In doing so, we intend to build on the analysis of the access charge rate structure developed in the Access Charge Reform Order. Prior to the adoption of the Access Charge Reform Order, price cap LECs were subject to essentially the same rate structure rules that currently apply to rate-of-return LECs. While rate-of-return LEC costs generally may be higher than price cap LEC costs due to longer loops or lower economies of scale, the two groups of carriers incur costs in the same manner, and similar economic principles should apply. Subject to receiving evidence showing that differences exist between price cap LECs and rate-of-return LECs that require different rules to achieve the goal of fostering an efficient, competitive marketplace, we propose to amend the access charge rules for rate-of-return LECs in a manner similar to that adopted for price cap LECs. 4. We recognize that access reform for the smaller, rate-of-return LECs may raise new or different issues that we did not have to address in our proceeding involving the typically larger, price cap LECs. For this and other reasons, we previously determined that we would address access reform for rate- of-return LECs in a separate proceeding. We further recognize that differences in the circumstances of rate-of-return and price cap incumbent LECs may require different approaches to reform, including a different transition to more economically efficient, cost-based interstate access charges. We seek to ensure that, at the end of the transition, all Americans enjoy the benefits of competition. By varying the transitional mechanisms, we can ensure that the process of getting to those benefits is as smooth as possible. 5. In this notice we propose to reform the access charge rate structure of rate-of-return LECs. We address many of the most fundamental economic inefficiencies in the current structure and will lay a foundation on which to develop further initiatives for rate-of-return LECs, including the rural LECs, most of whom are subject to rate-of-return regulation. In a subsequent phase of this proceeding, we intend to address the very difficult question of when, and how much, additional pricing flexibility should be afforded to rate-of-return LECs. We also intend to address, in a future proceeding, alternative forms of regulation for LECs currently subject to rate-of-return regulation. Such alternative regulatory structures could offer incentives to rate-of-return LECs that are able to become more efficient. 6. The Access Charge Reform Order and the Universal Service Order made the modifications necessary to implement the revisions to the universal service support mechanisms adopted in the Universal Service Order. This notice is not intended to address contentions that some additional costs or services should receive universal service support; those matters will be resolved in the Universal Service proceeding. We note that the Commission has determined that there shall be no change in the existing high cost support mechanisms for rural LECs until January 1, 2001, at the earliest. This means that, in the interim, the amount of universal service support for rural local exchange carriers will be maintained initially at existing levels and should increase in accordance with specified factors, such as inflation, that have historically guided changes in such support. B. Background 1. Telecommunications Act Implementation 7. In the Local Competition Order, the Commission set forth rules to implement section 251 and section 252 of the Communications Act of 1934, as amended. As with all of Part II of Title II of the Communications Act, those sections, and the rules implementing them, seek to remove the legal, regulatory, economic, and operational barriers to telecommunications competition. Among other things, sections 251 and 252 provide entrants with the opportunity to compete for consumers in local markets by constructing new facilities, leasing unbundled network elements, and reselling telecommunication services. The Act, however, places limits on the applicability of sections 251(b) and (c) to smaller incumbent LECs. Section 251(f)(1), for instance, provides for exemption from the requirements in section 251(c) for rural telephone companies under certain circumstances. Moreover, section 251(f)(2) permits LECs with fewer than 2 percent of the nation's subscriber lines to petition for suspension or modification of the requirements in sections 251(b) or (c). 8. In the Universal Service Order, we took steps, following recommendations of a Federal-State Joint Board, to ensure that the support mechanisms necessary to maintain local rates at affordable levels are protected and advanced as local telecommunications markets become subject to the competitive pressures unleashed by the 1996 Act. Specifically, we established explicit support mechanisms to assist users in high-cost areas, low-income consumers, schools, libraries, and rural health care providers. The rules we adopted also provided for the funding of such support. Through the Universal Service Order and the Access Charge Reform Order, we set in place rules that identify and convert existing federal universal service support in the interstate high cost fund, the dial equipment minutes (DEM) weighting program, Long Term Support, Lifeline, and Link-up, to explicit federal universal service support mechanisms for both price cap and rate-of-return LECs. In the Access Charge Reform Order, we further directed that federal universal service support received by incumbent LECs be used to reduce or satisfy the interstate revenue requirement otherwise collected through interstate access charges. 9. In the Access Charge Reform Order, we began the process of reforming access charges for price cap LECs. There, we concluded that implicit subsidies embodied in the existing system of interstate access charges cannot be maintained indefinitely in their current form. We therefore modified the rules governing the interstate access charges of price cap LECs. First, we reformed the current rate structure to bring it more into line with cost-causation principles, phasing out significant implicit subsidies. Specifically, we reduced usage-sensitive interstate access charges by phasing out local loop and other non- traffic-sensitive (NTS) costs from those charges and directing price cap LECs to recover those NTS costs through more economically efficient, flat-rated charges. Second, we set in place a process to move the baseline rate level toward competitive levels by relying in part on emerging competition in local telecommunications markets, spurred by the adoption of the 1996 Act, to help identify the differences between the rates for interstate access services established by price cap LECs and those that competition would set. We also adopted revised rules governing the provision of transport services by both price cap and rate-of-return LECs. These rules included the reallocation of revenues presently recovered through the transport interconnection charge (TIC). These transport revisions responded to the decision of the United States Court of Appeals for the District of Columbia in CompTel v. FCC. Finally, we deferred to a subsequent order the development of detailed rules for implementing the market-based approach for price cap LECs. 10. As noted in the Access Reform NPRM, the Part 69 rules were designed to promote competition in the interstate, interexchange market by ensuring that all interexchange carriers (IXCs) would be able to originate and terminate their traffic over incumbent LEC networks at just, reasonable, and non- discriminatory rates. While the Part 69 rules expressly contemplated competition in the interexchange market, they were not designed to address the potential effects of competition in the local exchange and exchange access market. Indeed, these rules reflected conditions in the telecommunications marketplace in 1983, when the incumbent LEC was the monopoly provider of local exchange and exchange access services. In addition, the Part 69 rules were designed to be consistent with the jurisdictional separations rules that govern the allocation of incumbent LECs' expenses and investment between the interstate and state jurisdictions. Consequently, the Part 69 access charge system likely reflects any jurisdictional cost misallocations mandated by our current separations rules. The Commission has initiated a related proceeding to examine our jurisdictional separations rules in light of the 1996 Act. 11. The Commission has recognized in prior rulemaking proceedings that, to the extent possible, costs of interstate access should be recovered in the same way that they are incurred, consistent with principles of cost-causation. Thus, the cost of traffic-sensitive access services should be recovered through corresponding per-minute access rates. Similarly, NTS costs should be recovered through fixed, flat-rated fees. The Commission has not, however, always adopted rules consistent with this goal. As a result, rate-of-return LECs are required to maintain rate structures that have been widely criticized as economically inefficient. For example, even though the costs of the local loop do not vary with the amount of traffic carried by the loop, rate-of-return LECs are required to recover a portion of those costs through traffic-sensitive carrier common line (CCL) charges imposed on IXCs. Part 69 also mandates per-minute charges for local switching even though a significant portion of local switching costs is associated with ports and appears to be driven by the number of lines or trunks connected to the switch, not by the number of minutes of traffic routed by the switch. Rather than fostering efficient pricing and competition, these mandatory rate structures applicable to rate-of-return LECs inflate usage charges and reduce charges for connection to the network, in essence overcharging high-volume end users in order to reduce rates for low- volume end users. 12. Although these inefficient rate structures might have been sustainable in a local monopoly environment, the introduction of competition from providers operating their own network facilities or leasing network facilities as unbundled network elements may undermine these access rate structures. While the entry of competitors in many rate-of-return LEC service areas may be delayed due to the provisions of section 251(f), entry in these areas will likely occur in time. A competing provider of exchange access services entering a market can use its own facilities, lease unbundled network elements, if permitted, or use special access services of the incumbent LEC to target selectively the incumbent LEC's high-volume end users with efficiently-priced access service offerings. This places the rate-of-return LEC at a regulatorily-imposed disadvantage in competing for the interstate access service associated with high- volume end users, and jeopardizes the source of revenue that permits the rate-of-return LEC to cover its costs of providing service to low-volume end users. At the same time, these inefficient rate structures and implicit support flows create artificial impediments to any new entrants that might seek to serve the subsidized end users, because they must attempt to do so without the benefit of a subsidy. As a result, these access rate structures may inhibit the development of competition in providing access service to low- volume end users. 13. In Section I.B.2, we describe some of the operating characteristics of rate-of-return LECs and the regulatory measures that are in place today to assist such companies. In Section II, below, we outline and seek comment on the revisions we propose to the switched access rate structure for rate-of-return LECs. These proposed revisions affect common line, local switching, transport, the transport interconnection charge, and signalling system-7 (SS7) services. In Section III, we seek comment on some additional issues relating to the regulation of interstate access services of rate-of-return LECs. These include the reallocation of general support facility (GSF) costs to nonregulated billing and collection service, the treatment of marketing expenses, the proposed assessment of a presubscribed interexchange carrier charge (PICC) on interstate special access lines, and the streamlining of the procedures for introducing rate elements other than those required by the access charge rules. 2. Rate-of-Return Overview 14. As we begin the process of access reform for rate-of-return LECs, it may be useful to identify some of the characteristics of rate-of-return LECs. They are not, however, a homogenous group, and their operating conditions vary significantly. 15. The largest rate-of-return LEC serves approximately one million access lines, while the smallest ones serve only a few hundred lines. Rate-of-return LECs serve fewer than eight percent of the total access lines in the country, accounting for approximately nine percent of the revenues. Some rate- of-return LECs receive more than 50 percent of their total revenues from interstate access revenues and universal service support, compared to just over 25 percent for LECs subject to price cap regulation. Many of these rate-of-return LECs serve rural areas, while others may serve suburban areas. Some of the larger rate-of-return LECs may serve both types of communities. They may be concentrated in one area, or may have operations in several states. 16. Rate-of-return LECs often have costs that are higher than those of their price cap brethren. Because they often serve areas that are less densely populated -- especially in rural areas -- they have longer loops and trunking facilities that increase their costs. They may also have higher installation costs due to difficult terrain. In addition, because rate-of-return LECs often serve smaller populations, they are not able to achieve the same economies of scale that larger carriers are able to achieve. In many instances, these LECs receive much of their revenue from one, or just a few, multi-line businesses in their service territory. 17. Rate-of-return LECs may file tariffs based on their own costs, or they may participate in the pooled National Exchange Carrier Association (NECA) common line or traffic sensitive tariffs. Participants in the NECA pools charge rates set by NECA tariffs and recover their costs, including a return on their investment. Some NECA pool members are compensated on the basis of "average schedules" rather than cost. Average schedule recovery reduces the cost to small rate-of-return LECs of conducting separate cost studies by providing compensation based on cost estimates derived from comparable cost companies. 18. Technological advances in the long distance world have created a situation in which distance is much less significant than it has been historically. This means that as long distance prices drop, companies that are heavy users of long distance services are free to locate in rural and suburban areas, stimulating economic growth in those areas. 19. Over the years, the Commission has addressed the cost of serving high-cost areas in a variety of ways. For example, the Commission has allocated more costs than might be reflected by relative use alone to the interstate jurisdiction through the separations process. Allowing incumbent LECs with high- cost loops to assign these additional costs to the interstate jurisdiction has kept local rates lower than they otherwise would have been. Through December 31, 1997, this form of high-cost support was recovered from the larger IXCs directly through a per-line charge. Additional switching costs of certain smaller incumbent LECs were also assigned to the interstate jurisdiction through the weighting of DEM. Through December 31, 1997, these switching costs were recovered through interstate access charges. These mechanisms were replaced on January 1, 1998, by the universal service mechanisms established pursuant to section 254 of the 1996 Act. 20. The Commission also kept the CCL rates charged by NECA common line pool members (many of which are high-cost companies) at levels that reflected what would have been the nationally averaged CCL rate if all incumbent LECs had been required to remain in the common line pool. This program was known as long term support. Through December 31, 1997, the support for this program came from the incumbent LECs that left the NECA common line pool. This funding method was replaced by universal service support on January 1, 1998. 21. Finally, rural rate-of-return LECs and their customers also benefit from other policies. The universal service system will ensure that these carriers and customers are protected from undue rate increases. In addition, rural customers are protected by section 254(g) of the 1996 Act, which requires long-distance carriers to average their interstate toll rates. Rural subscribers thus do not bear the full burden of the high cost of telephone access in rural areas. II. RATE STRUCTURE MODIFICATIONS A. Overview 22. In this section we propose to modify the switched access charge rules for rate-of-return LECs. We propose to adopt modifications similar to the ones we adopted for price cap LECs in our Access Charge Reform Order, unless differences in the market conditions or regulatory paradigms applicable to rate-of-return LECs and price cap LECs require different approaches to realize the underlying public interest objectives of access reform. We seek comment on rate structure rule changes for common line, local switching, and transport. We also seek comment on a proposal to phase out the transport interconnection charge, and on establishing rate structure rules for SS7 signalling services. B. Common Line 1. Background 23. Common line (or loop) costs are the costs associated with the line connecting the end user's home or business with the LEC central office serving that premise. The costs of the loop are divided between the intrastate and interstate jurisdictions, with 25 percent of the costs assigned to the interstate jurisdiction. The costs associated with providing the common line between the end user's premises and the LEC central office are NTS because they do not vary with the amount of usage, or minutes passing over the loop. In the original Access Charge Order, the Commission found that recovering NTS costs through flat monthly charges imposed on end users by incumbent LECs would promote optimal utilization of telecommunications facilities. The Commission decided at that time, however, to limit the amount that could be recovered directly from the end user through end user common line (EUCL) charges, also called subscriber line charges (SLCs). Rate-of-return LECs' SLCs are limited to recovering the lesser of the actual cost of the interstate portion of the local loop, or $3.50 per month for residential and single line business customers, or $6.00 per month for multi-line business customers. These SLC ceilings do not permit most LECs subject to rate-of-return regulation to recover their interstate-allocated common line costs through flat charges. The remaining common line costs are recovered through CCL charges, which are per-minute charges imposed on IXCs. 24. The current CCL charge has been uniformly criticized by both incumbent LECs and IXCs because it discourages efficient use of the switched network and encourages customers to bypass the switched network for uneconomical reasons. The CCL charge is economically inefficient because it requires the LECs to recover a portion of their NTS costs through usage-sensitive charges. The IXCs, in turn, recover most or all of these costs from toll users in the form of per-minute charges, keeping toll rates artificially high and discouraging demand for interstate long distance services. High per-minute toll charges create support flows between different classes of customers. For example, low-volume toll users may not pay the full cost of their loops while high-volume toll users may contribute far more than the total cost of their loops. High-volume toll users, who include significant numbers of low-income customers, effectively support low-volume residential and multi-line business customers. The rate structure currently in place for rate-of-return LECs, therefore, creates support flows between different classes of service and customers. 25. In addition, these implicit subsidies are economically inefficient. Without modifications to the current rate structure, new entrants, which are not subject to these rate structure requirements, would be in a position to target the access traffic of incumbent LECs' most profitable, high-volume end users based on regulatory requirements. A loss of profitable end users would increase the incumbent LECs' costs of providing access service to the rest of their end users. 2. Discussion a. General 26. Modifications Adopted for Price Cap LECs. In the Access Charge Reform Order, the Commission directed price cap LECs to recover more of their common line NTS revenues directly from the end user by increasing the ceilings on SLCs for non-primary residential and multi-line business lines. For primary residential and single-line business lines, however, the Commission declined to increase the SLC ceiling above its existing $3.50 level because an increase in the SLC for these lines might make basic telecommunication service unaffordable for some consumers. The Commission concluded, however, that these universal service concerns were not as great for non-primary residential and multi-line business lines, and, accordingly, adjusted the SLC ceilings on these lines to allow price cap LECs to recover more of their common line costs directly from the end users. Specifically, the Commission permitted price cap LECs to adjust their SLC ceilings on non-primary residential and multi-line business lines to the level necessary to recover their average per-line interstate-allocated common line costs, subject to an inflation-adjusted $9.00 ceiling. The Commission stated that although there might be some disparity between the average SLCs in low- and high-cost areas, the $9.00 SLC ceiling would ensure that SLCs in high-cost areas would be "reasonably comparable" to SLCs in urban areas. 27. To ameliorate any possible adverse impact of an immediate SLC adjustment for non-primary residential lines, the Commission phased in adjustments in the SLC ceilings for these lines. On January 1, 1998, the monthly SLC for customers of price cap LECs was adjusted to the incumbent LEC's average per- line interstate-allocated costs, but may not exceed $1.50 more than the current SLC ceiling. Annually thereafter, the monthly SLC ceiling for these lines will be adjusted for inflation and will increase by $1.00 per line, until the SLC ceiling for non-primary residential lines is equal to the ceiling permitted for multi- line business lines. 28. In addition to adjusting the SLC ceiling for non-primary residential and multi-line business lines, the Commission adopted other common line rate structure modifications in the Access Charge Reform Order that will permit price cap LECs to transition, in a relatively short period of time, from a cost-recovery mechanism that recovers a significant portion of NTS common line costs through per-minute CCL charges to one that recovers these costs through flat-rated charges. To the extent that SLC ceilings prevent price cap LECs from recovering their allowed common line revenues from end users, these LECs will recover the shortfall, subject to a maximum charge, through a presubscribed interexchange carrier charge (PICC). The PICC is a flat, per-line charge assessed on the end-user's presubscribed interexchange carrier. 29. The PICC, which over time will shift revenue recovery from the per-minute CCL charges to a flat-rated charge, was designed to allow price cap LECs to recover the difference between revenues collected through the SLCs and the total revenue permitted for the common line basket. In order to provide price cap LECs and IXCs with adequate time to adjust to the new rate structure, the Commission adopted an approach that will gradually phase in the PICC over time. Specifically, effective January 1, 1998, PICCs for primary residential and single-line business lines are capped at $0.53 per month for the first year. Beginning January 1, 1999, the ceiling on the monthly PICC on primary residential and single-line business lines will be adjusted for inflation and will increase by $0.50 per year until it equals one twelfth of the sum of the annual per-line common line revenues and residual interconnection charge revenues permitted under our price cap rules divided by the projected average number of local exchange service subscriber lines in use during such annual period, less the maximum primary residential and single-line business lines SLC computed pursuant to our rules. 30. In addition, to the extent that the SLC ceilings on all lines and the PICC ceilings on primary residential and single-line business lines prevent recovery of the full common line revenues permitted by the price cap rules, the new rate structure permits price cap LECs to recover the shortfall through a flat-rated, per-line PICC on non-primary residential and multi-line business lines. For the first year, the ceiling on the PICC will be $1.50 per month for non-primary residential lines and $2.75 per month for multi-line business lines. 31. Beginning January 1, 1999, the PICC for price cap non-primary residential and multi-line business lines will be adjusted for inflation and will increase by a maximum of $1.00 and $1.50 per year, respectively, until price cap LECs recover all their permitted common line revenues through a combination of flat-rated SLC and PICCs. As the PICC ceilings on primary residential and single-line business lines increase, the residual per-minute CCL charge will decrease until it is eliminated. After the residual per- minute CCL and residual TIC are eliminated, and as the PICC ceilings for primary residential and single- line business lines increase, price cap LECs will reduce their PICCs on non-primary residential and multi- line business lines by an amount that corresponds to the total increases in PICCs for primary residential and single-line business lines. Reductions will be targeted to the PICCs on multi-line business lines until the PICCs for those lines are equal to the PICCs for non-primary residential lines. Thereafter, price cap LECs will apply the annual reductions to both classes of customers equally until the combined SLCs and PICCs for primary residential and single-line business lines recover the full average per-line common line revenues permitted under our price cap rules, and the additional PICCs on non-primary residential and multi-line business lines no longer recover common line revenues. In the Second Reconsideration Order, we limited the application of the PICC that applies to multi-line business Centrex lines to one-ninth of the PICC plus the difference between the $9.00 SLC and the average interstate cost of the loop (if greater than $9.00), subject to the PICC ceiling. Where customers do not designate a presubscribed interexchange carrier, price cap LECs may collect directly from the customer the PICC that could otherwise be assessed against the presubscribed interexchange carrier. 32. To the extent that PICCs do not recover an incumbent LEC's remaining permitted CCL revenues, price cap LECs will be allowed to recover any such residual common line revenues through per- minute CCL charges assessed on originating access minutes. Price cap LECs may assess an originating CCL charge that, when added to the sum of local switching charges, the per-minute residual TIC, and any per-minute charges related to marketing expenses, does not exceed the sum of local switching charges, the per-minute CCL charge, and TIC assessed on originating minutes on December 31, 1997. To the extent that the originating CCL rate does not recover all the CCL costs, price cap LECs may recover the shortfall through per-minute charges assessed on terminating minutes. 33. In the Access Charge Reform Order, we reassigned certain costs currently recovered through the TIC to specified facilities charges. For price cap LECs, those costs that remain (the "residual TIC") are recovered through the PICC. To the extent that the PICC ceiling prevents recovery of the entire residual TIC, the remaining portion will be collected through a per-minute residual TIC. As the ceilings on the PICCs increase, a larger percentage of the residual TIC will be recovered through the PICC. Beginning with the annual access tariffs that became effective July 1, 1997, price cap productivity reductions reflected in the "X-Factor minus GDP-PI" formula are targeted to the per-minute residual TIC until it is eliminated. For price cap LECs, the per-minute TIC charge should be eliminated in two to three years. As with the residual CCL charge, any residual per-minute TIC will be placed on originating minutes unless the ceilings prevent the price cap LEC from recovering the total TIC revenues permitted under our price cap rules. 34. In our Universal Service Order, we set in place rules that will identify and convert existing federal universal service support in the interstate high cost fund, the DEM weighting program, Long Term Support (LTS), Lifeline, Link Up, and interstate access charges, to explicit competitively neutral federal universal service support mechanisms for both rural and non-rural LECs. We stated that we will provide universal service support to non-rural LECs through a mechanism based on forward-looking economic costs beginning on January 1, 1999. Until the forward-looking mechanism takes effect on January 1, 1999, non-rural carriers will continue to receive high cost loop support at levels determined by existing universal service mechanisms. The existing high-cost support mechanisms for rural LECs will remain unchanged until January 1, 2001, at the earliest. 35. Applicability to Rate-of-Return LECs. We tentatively conclude that we should adopt rate structure modifications for rate-of-return LECs that are similar to those that were adopted for price cap LECs in the Access Charge Reform Order. We conclude that similar modifications are needed to remove implicit subsidies and ensure that charges more accurately reflect the manner in which the costs are incurred, thereby promoting competition. We acknowledge that certain rate-of-return LECs, especially those in rural and insular areas, face different market conditions and incur higher costs than do many price cap LECs. Smaller LECs serving more costly areas, however, will receive universal service support based on their embedded costs until the Commission, with the Universal Service Joint Board's assistance, develops an appropriate model to ensure that rural carriers receive support at a level that will enable them to provide supported services at affordable rates. We tentatively conclude, therefore, that adopting similar modifications to those adopted in the Access Charge Reform Order, along with universal service support provided through the new universal service mechanisms, is a significant step that will improve the efficiency of the rate structures employed by rate-of-return LECs. 36. We seek comment on the applicability of the rate structure modifications adopted for price cap LECs to rate-of-return LECs. We recognize that certain rate-of-return LECs face higher operating and equipment costs attributable to the lack of economies of scale that result from low subscriber density and small exchanges that characterize rural areas. Adopting the same approach for rate-of return LECs, therefore, most likely will not align rates with costs as quickly as it will for price cap LECs. For many rate-of-return companies, especially those located in rural and insular areas, longer loops and difficult terrain result in average loop costs that significantly exceed the average loop costs of price cap LECs. NECA's average per-line interstate revenue requirement for 1997, for example, was more than $10.00 per line, per month, compared with a monthly per-line average of $6.10 for price cap LECs. In addition, if we were to adopt the modifications described below that would direct rate-of-return LECs to recover certain switching, marketing, and residual transport interconnection costs through the common line SLCs and PICCs, per-line common line costs will increase further. 37. Several entities argue that, because of the high common line costs and smaller economies of scale, if we were to adopt the same rate structure modifications that were adopted for price cap LECs, the SLCs for many rate-of-return carriers' multi-line business lines would reach the $9.00 ceiling immediately and would still not recover the average interstate-allocated common line costs for those lines. Several entities have expressed concern that the immediate SLC increases to $9.00 will create a large disparity between SLCs charged by rate-of-return LECs and neighboring price cap LECs, and that under the 1996 Act and applicable state laws, the lower-cost price cap carriers will be able to "cherry pick" the high volume business customers of the higher priced rate-of-return LECs. These entities urge the Commission to grant them pricing flexibility and propose that SLCs be set based on the national average or on the neighboring price cap LEC's average SLC. 38. A SLC ceiling that does not permit rate-of-return LECs to recover all of their interstate- allocated costs from end users would create a shortfall that would have to be recovered through the per- minute CCL charges or through an alternative recovery mechanism. The cost recovery mechanism for price cap LECs contemplates that price cap LECs will be able to recover all of their interstate-allocated common line costs through a combination of SLCs and PICCs, reducing the CCL charge to zero in a relatively short amount of time. Indeed, we expect that for many of the price cap carriers, the CCL charge will be reduced to zero by the year 1999. The price-cap cost recovery mechanism also contemplates that the PICCs assessed on non-primary residential and multi-line business lines will be a short-term, temporary measure to recover residual common line costs until the SLCs and PICCs on primary residential and single- line business lines reach the level necessary to recover the per-line interstate-allocated common line costs for those lines. 39. If rate-of-return LECs were to implement the revised common line rate structure applied to price cap LECs, multi-line business PICCs and CCL charges would remain higher than those of price cap LECs for the foreseeable future, because rate-of-return LEC common line costs are significantly higher than those of price cap LECs. Under this scenario, the SLCs and/or PICCs for many rate-of-return LECs would have to be adjusted to a level that would be higher than the ceilings we adopted for price cap LECs if significant reductions in the CCL rate were desired. These points are illustrated by projections submitted by NECA and the United States Telephone Association (USTA). The data submitted by these parties show that implementing the same common line rate structure adopted for price cap LECs would result in the SLC for multi-line business customers reaching the $9.00 ceiling immediately. Moreover, while the PICCs for multi-line businesses and non-primary residential lines would begin to decrease for price cap LECs by 1999 and 2000 respectively, the NECA and USTA projections suggest that the multi-line business PICCs of rate-of-return LECs would reach $7.07 and $7.64, respectively, by the year 2001 and continue to grow beyond that date. USTA's data suggests that with the SLCs and PICCs at their caps, the CCL per minute rate in 1998 (including common line costs, line port costs, and marketing expenses) would be $0.01 for originating minutes and $0.024 for terminating minutes, assuming a $0.01 ceiling on originating CCL rates (reflecting the existing requirement of section 69.106 of our rules). NECA's CCL calculation, which includes the residual TIC costs in addition to the three costs used by USTA, suggests that the CCL per minute rate would be $0.0230 in 1998, if assessed equally on both originating and terminating minutes. 40. In light of the apparent disparities that may be created by applying the same SLC and PICC ceilings to rate-of-return LECs that were adopted for price cap LECs, we ask interested parties to discuss how we should determine appropriate SLC ceilings. For example, should we adopt a ceiling that is based on the neighboring price cap LEC's average multi-line business SLC, or on the national average? In addition, in some cases, as the non-primary SLC cap increases, the disparity between the $3.50 SLC for primary residential lines and the SLC for non-primary residential lines will most likely be greater for rate- of-return carriers than it is for price cap companies. Would this disparity warrant a different approach for rate-of-return carriers' non-primary residential lines than we adopted for price cap LECs? 41. Interested parties should discuss whether the PICC is an effective cost recovery mechanism for rate-of-return LECs' common line costs and, if so, to what extent the PICCs and CCL charges for rate-of- return LECs should be comparable to those of price cap LECs. If commenters believe that the plan we adopted in the Access Charge Reform Order would not produce the expected economic benefits for rate-of- return LECs and their customers, interested parties should submit alternative plans. For example, should we prescribe higher ceilings for PICCs that would permit rate-of-return LECs to reduce their CCL rates to levels comparable to those of price cap LECs? Alternatively, should we prescribe a maximum CCL charge and eliminate the PICC ceiling to allow rate-of-return LECs to recover the shortfall through flat-rated charges? In addition, in light of the higher common line costs incurred by many rate-of-return LECs, and because, if adopted, other modifications proposed below will require rate-of-return LECs to recover certain switching, marketing, and TIC costs through the common line recovery mechanism, we invite parties to discuss whether we should permit these carriers to recover relatively more of the common line revenue requirement through terminating minutes. Given that local switching per-minute rates will be reduced significantly by the inclusion of DEM weighting in universal service support, we ask interested parties to discuss whether a higher per-minute CCL charge in the short run is unsatisfactory. 42. Interested parties should also discuss the extent to which, for purposes of assessing SLCs and PICCs, residential and business lines should be treated differently. For example, should non-primary residential lines be assessed lower PICCs than multi-line business lines and phased in over time as we did for price cap LECs, or should we permit the SLCs for non-primary residential lines to increase more rapidly than for price cap LECs in order to allow carriers in high-cost areas to reduce their CCL charge more rapidly than would otherwise be possible with phased-in SLC increases? Alternatively, should a uniform PICC be applied to all non-primary residential and business lines to spread the revenue requirement evenly across these classes of customers? 43. In our recent Access Charge Reform Second Order on Reconsideration, we concluded that with respect to the PICC, Centrex customers should be treated similarly to PBX customers, because the two arrangements are functionally equivalent. Accordingly, we granted petitions by USTA, International Communications Association (ICA), and the County of Los Angeles that Centrex lines be assessed PICCs using a line-to-trunk equivalency ratio. We adopted a 9:1 line-to-trunk ratio based on data provided by USTA because we found the 9:1 ratio to be reasonable and administratively simple. We limited the PICC charges that may be assessed on IXCs serving Centrex customers to a line-to trunk equivalency basis except where the multi-line business SLC ceiling does not permit the recovery of all interstate-allocated loop costs from the end user. In those instances, a somewhat greater PICC -- one that includes the difference between the per-line loop cost and the multi-line business SLC cap -- will be assessed on Centrex lines. We seek comment on the applicability of this approach and of the 9:1 ratio to rate-of-return LECs. Parties proposing different ratios should submit data supporting the ratio they propose. 44. We also seek comment on how the 1996 Act will affect the development of competition in areas served by small and rural rate-of-return LECs. Specifically, section 251(f)(1) provides an exemption for certain rural telephone companies from the duties of local exchange carriers enumerated in section 251(c), including but not limited to, the duties to interconnect, to provide access to network elements on an unbundled basis, and to resell telecommunications services. Section 251(f)(2) provides a mechanism by which local exchange carriers with fewer than two percent of the nation's subscriber lines may petition the state for suspension or modification of some of the duties imposed by the Act on local exchange carriers. We ask interested parties to discuss the impact of these sections and the development of competition as they relate to the rate structure and transition mechanism we are proposing. 45. We also seek comment on whether we should adopt one approach for all rate-of-return LECs or whether our approach should vary depending on size, population density, topography, or other factors that may vary among rate-of-return LECs. Are there concerns that are specific to NECA pooling companies that warrant separate treatment? Interested parties should address the specific issues raised and submit proposals for modifications that are consistent with the goals of the 1996 Act. Interested parties should also propose a time frame for adopting modifications to the rate structure. Should modifications adopted become effective immediately or should they be phased in over time? Finally, parties should address the extent to which options proposed affect small business entities, including small incumbent LECs and new entrants. b. Assessment of SLCs and PICCs on Derived Channels 46. Modifications Adopted for Price Cap LECs. The Access Charge Reform Order established separate SLC rates for integrated services digital network (ISDN) service based on the NTS loop costs of Basic Rate Interface (BRI) and Primary Rate Interface (PRI) ISDN service. Based on the record, which indicated that the NTS loop costs of PRI ISDN service, excluding switching costs, reflect a cost ratio of approximately 5:1 compared to the NTS loop costs of single-channel analog service, the Commission established, effective July 1, 1997, a SLC rate for PRI ISDN service equal to five times the incumbent LEC's multi-line business SLC. Similarly, because the record showed that the NTS loop costs of BRI ISDN service, excluding NTS switching costs, when rounded to the nearest half SLC, reflect a 1:1 cost ratio relative to the NTS loop costs of single-channel analog service, the Commission set a SLC rate for BRI ISDN service equal to the price cap LEC's non-primary residential line SLC. 47. Data submitted by the Bell Operating Companies (BOCs) in response to the 1995 ISDN SLC NPRM indicated that line cards and trunk cards for PRI ISDN service in particular constitute a significant portion of the total NTS costs that are dedicated to the provision of service to the subscriber, and that ISDN line cards and trunk cards are many times more expensive than the cards used for standard analog service. We therefore directed price cap LECs to recover the difference between the cost of an ISDN line card and the cost of a line card used for basic, analog service through a separate charge assessed directly on ISDN end users. Price cap LECs are also permitted to assess one PICC for BRI ISDN service and five PICCs for PRI ISDN service. The PICCs assessed on these lines are subject to the same ceilings and increases imposed on non-primary residential and multi-line business lines discussed above. The Access Charge Reform Order limited these provisions to BRI and PRI ISDN service because the record did not contain sufficient information to enable the Commission to determine the relative NTS costs of other derived channel services. 48. Applicability to Rate-of-Return LECs. We propose to adopt similar SLCs and PICCs for ISDN service offered by rate-of-return LECs. We seek comment on this conclusion and invite parties to comment on the impact that assessing SLCs and PICCs on ISDN lines will have on rate-of-return carriers and their customers. Parties should address whether the cost relationship between ISDN and analog service provided by rate-of-return LECs is similar to that of price cap LECs; if they believe it is not, they should submit specific data supporting their position. We recognize that our treatment of ISDN lines will depend on the other common line rate structure modifications discussed above. We therefore invite parties to discuss the relationship between proposed modifications to the common line rate structure and our tentative conclusion to treat rate-of-return LECs' ISDN lines in the manner discussed above. C. Local Switching 1. Background 49. The local switch connects subscriber lines both with other local subscriber lines and with dedicated and shared interoffice trunks. Local switching costs include the costs of analog or digital switching systems and the costs of line ports and trunk ports that connect subscriber lines and interoffice trunks, respectively, to the switch. The interstate portion of these costs is currently recovered through per- minute local switching charges levied on IXCs. 50. The jurisdictional separations process currently allocates local switching costs between the state and interstate jurisdictions on the basis of relative DEM. Smaller incumbent LECs are able to charge lower prices for intrastate services because DEM weighting permits such LECs to assign intrastate switching costs to the interstate jurisdiction. This cost assignment is accomplished by multiplying the qualifying carrier's interstate DEM by a maximum factor of 3.0. Through December 31, 1997, these weighted local switching costs were recovered from IXCs through per-minute access charges for use of the local switch. Since January 1, 1998, rural carriers recover from the new universal service support mechanisms a subsidy corresponding in amount to that generated formerly by DEM weighting. A rate-of- return LEC must exclude from its local switching interstate revenue requirement any high-cost support attributable to DEM weighting. 2. Discussion a. Dedicated Facilities 51. Modifications Adopted for Price Cap LECs. In the Access Charge Reform Order, the Commission found that a portion of the costs of the local switch do not vary with the level of traffic at the switch, but instead are related to the number of lines or trunks associated with the switch. The Commission concluded that when a line-side port is dedicated to a single customer or IXC, the cost recovery mechanism should be through a flat-rated charge on that customer or carrier. The Commission also required price cap LECs to assess a flat-rated trunk port charge on the purchaser of the dedicated trunk terminating at the port. The Commission created a separate, traffic-sensitive rate element for shared trunk ports. Accordingly, the Commission directed that costs associated with line-side ports be removed from the local switching charge and be recovered through common line rates. 52. Common line charges will recover the cost of a line port used to provide basic, analog service, even when the end user has another form of service. For some services, such as ISDN, the cost of a line port is significantly more than the cost of a line port associated with a basic, analog line. Price cap LECs may assess a monthly flat-rated charge directly on end users of such services to recover the additional line port costs associated with those services. 53. The Commission required price cap LECs to conduct cost studies to determine separately the geographically-averaged portion of local switching costs that is attributable to line-side ports and dedicated trunk-side ports to support the port rates in their access tariffs. In addition, the Commission decided that the costs of DS1/voice-grade multiplexing associated with analog local switches should be recovered through the newly-created trunk port rate elements within the traffic sensitive basket. 54. Applicability to Rate-of-Return LECs. We propose to require rate-of-return LECs to reassign all costs for line-side ports from the local switching category to the common line category. These costs would then be recovered through the rate structure adopted in response to our proposals in Section II.B, above. We seek comment on this proposal. We ask if there are any specific factors for rate-of-return LECs that would preclude our adoption of this rate structure change at this time. In addition, we propose to require rate-of-return LECs to conduct cost studies to determine the geographically-averaged portion of local switching costs that is attributable to the line-side ports and to trunk side ports, to be filed with the tariffs implementing these changes. We solicit comment on this cost study proposal. In the alternative, commenters are requested to suggest a substitute mechanism to identify and assign costs to line-side ports or to trunk-side ports. 55. We propose to require rate-of-return LECs to recover dedicated trunk port costs through a flat- rated trunk port charge assessed on the purchaser of the dedicated trunk terminating at the port. We also propose to establish a separate rate element through which rate-of-return LECs can recover on a flat-rated basis the additional costs of DS1/voice grade multiplexers required in conjunction with terminating dedicated trunks at analog switches that were reassigned from the TIC. We ask whether the benefits to be gained from a more efficient, cost-causative rate structure outweigh the burden on rate-of-return LECs of establishing these new rate elements. In addition, we solicit suggestions as to what specific modifications of the Part 69 cost allocation rules we should make to implement any rate structure changes for dedicated local switching facilities. 56. For rate-of-return LECs, we propose to permit a separate, monthly, flat-rated, end-user charge to recover the amount by which the cost of a line port for ISDN, or the cost of a line port associated with other services, exceeds the cost of a line port for basic, analog service. We request comment on this proposal. b. Shared Facilities 57. Modifications Adopted for Price Cap LECs. The Access Charge Reform Order required price cap LECs to recover the costs of shared local switching facilities, including the central processing unit, switching matrix, and shared trunk ports, on a per-minute basis, due to the difficulty in identifying the NTS and traffic-sensitive (TS) portions of the costs of these shared switching facilities, together with the companion difficulty in verifying the accuracy of incumbent LEC studies attempting to make this identification. In addition, the Commission established an optional per message call setup charge, concluding that the collection of a call setup charge should not be mandatory in cases where the price cap LEC determines that the costs of doing so exceed the benefits of establishing such a charge. The Commission stipulated that a price cap LEC choosing to impose a call setup charge may not include in that charge any costs that it recovers through other local switching charges, through charges for dedicated SS7 facilities, or through other signalling charges. 58. Applicability to Rate-of-Return LECs. In conformance with the decision reached in the Access Charge Reform Order, we tentatively conclude that we will adhere to a per-minute rate structure for shared local switching facilities of rate-of-return LECs. Under this approach, the shared trunk ports and any associated DS1/voice grade multiplexers required at analog local switches will be assessed on a per- minute basis, separate from the charge for the switch itself. We seek comment on this tentative conclusion. In particular, we ask whether there are any factors inherent to rate-of-return LECs that should lead us to change this tentative conclusion. 59. We propose to permit, but not require, rate-of-return LECs to establish a call setup charge. Under this proposed revision to Section 69.106, a rate-of-return LEC could elect to establish a separate per-call setup charge assessed on IXCs for all originating interstate calls handed off to the IXC's POP, and on all terminating interstate calls that are received from an IXC's POP, whether or not a call is completed, because at this point the rate-of-return LEC's switches and signalling network have performed their functions and the incumbent LEC has incurred the full cost of its call setup function. We invite comment on this proposal for an optional call setup charge, including specific language to modify our Part 69 cost allocation rules to implement this rate structure change. Moreover, if a rate-of-return LEC elects to recover revenue requirements through a call setup charge, we tentatively conclude that this charge cannot overlap with any other local switching charges, with charges for dedicated SS7 facilities, or with other signalling charges. We request comment on our tentative conclusion prohibiting double recovery for call setup charges by rate-of-return LECs. Commenters also should suggest mechanisms that would prevent any double recovery for rate-of-return LECs. 60. As stated in the Access Charge Reform Order, it would be extremely difficult to segregate the costs of the switch central processing unit and other traffic-sensitive costs into per-message and per-minute portions and to verify that the allocation has been done properly. Therefore, we propose to limit the costs that a rate-of-return LEC may recover through call setup charges to those associated with signalling. We request comment on this proposal to limit cost recovery to signalling. We seek comment on how call setup costs are affected by whether multifrequency (MF) signalling or SS7 signalling is employed. We also request estimates of the percentage of the total costs of a typical call that are represented by call setup costs. D. Transport Services and the Transport Interconnection Charge (TIC) 1. Background 61. Transport services carry interstate switched access traffic between the IXC's POP and the incumbent LEC end office that serves the end user customer. Transport charges are assessed for entrance facilities, direct-trunked transport, tandem-switched transport, and the TIC. We describe the pricing principles for the various segments below, including those changes adopted in the Access Charge Reform Order that are already applicable to rate-of-return LECs. In this section, we consider the remaining transport and TIC issues applicable to rate-of-return LECs. 62. Entrance facilities are dedicated LEC transmission facilities that carry interstate traffic between an IXC's POP and the LEC end office serving the POP (called the serving wire center or (SWC)). Direct-trunked transport facilities are dedicated trunks that carry an IXC's traffic from the LEC end office to the SWC, or between any other two points the customer requests, without switching at an intervening switch. Part 69 requires incumbent LECs to recover the costs of entrance facilities and direct-trunked transport facilities through flat-rate charges assessed on IXCs. These charges may be distance-sensitive, with distance measured as airline miles between the POP and the SWC for entrance facilities or between the SWC and the end office for direct-trunked transport facilities. 63. In contrast to direct-trunked transport, tandem-switched transport uses trunks that are shared among many IXCs and even the incumbent LEC itself to carry traffic between the LEC end office and a tandem switch, which is located between the SWC and the end office. Tandem-switched service is provisioned in three parts: (1) transmission from the end office to the tandem over the shared circuits; (2) the tandem switching function itself; and (3) transmission from the tandem to the SWC over circuits dedicated to specific IXCs. An IXC may use tandem-switched transport either as its primary form of transport in lieu of direct-trunked transport, or to carry traffic that overflows from its direct-trunked transport facilities at peak periods. 64. Today, IXCs have the option of selecting between two pricing plans for tandem-switched transport -- the unitary rate structure or the three-part rate structure. The unitary rate structure assesses IXCs a per-minute rate for the transmission between the SWC and the end office based on the airline miles between those two points. A separate tandem switching charge is also assessed on IXCs under the unitary rate structure. The three-part structure includes: (1) a per-minute charge for transport of traffic over common transport facilities between the LEC end office and the tandem office; (2) a separate per-minute charge for use of the tandem switch; and (3) a flat-rated charge for transport of traffic over dedicated transport facilities between the SWC and the tandem switching office. Mileage, if applicable, is measured between the end office and the tandem switch and between the tandem switch and the SWC. The Access Charge Reform Order directed all incumbent LECs, including rate-of-return LECs, to discontinue the unitary rate structure option, effective July 1, 1998. Beginning with tariffs effective on that date, all incumbent LECs, including rate-of-return LECs, must provide tandem-switched transport under the three- part rate structure. 65. The TIC reflects costs allocated to interstate transport that could not be recovered through facility-based transport rates under the interim transport rate structure rules. Through December 31, 1997, the TIC was a per-minute charge assessed on switched interstate access traffic. The Access Charge Reform Order directed incumbent LECs, including rate-of-return LECs, to make specified cost reallocations from the TIC to other facilities-based rate elements, thereby reducing the amount in the TIC. As explained in the Second Reconsideration Order, since January 1, 1998, incumbent LECs, including rate-of-return LECs, have not been allowed to assess the facilities-related portion of the per-minute TIC on any switched minutes of a competitive access provider that does not use the transport facilities of the incumbent LEC. Incumbent LECs, however, may recover the non-facilities-related portion of the per- minute TIC on all minutes switched by the incumbent LEC at its end office, without regard for whether those minutes are carried on incumbent LEC or competitive transport facilities. 2. Discussion a. Miscellaneous Tandem-Switched Transport Issues 66. Modifications Adopted for Price Cap LECs. Since January 1, 1998, price cap LECs have been required to assess a flat-rated trunk port charge on the purchaser of the dedicated trunk terminated at the trunk port on the SWC side of the tandem switch. Price cap LECs also have been required to establish separate rate elements for multiplexing equipment on each side of the tandem switch to recover multiplexer costs reassigned from the TIC. The rates for multiplexers on the SWC side of the tandem switch are flat rated because they are dedicated to a single IXC. The rates for the multiplexers on the end office side of the tandem switch are per-minute charges because these multiplexers are shared among all users of common transport. These provisions cover DS1/voice grade multiplexers used with analog tandem switches, as well as other multiplexers that are not included in transport rates. 67. Applicability to Rate-of-Return LECs. We tentatively conclude that we should require rate-of- return LECs to recover the costs of trunk ports used to terminate dedicated trunks on the SWC side of the tandem switch through flat-rated charges assessed on the purchaser of the dedicated trunk terminated at that port. This is consistent with the treatment given similar ports on the local switch and is consistent with the dedicated nature of these ports. To ease the burdens of implementing this unbundling, we propose to permit rate-of-return LECs to use the dedicated trunk port rates at the local switch to establish this unbundled charge. With regard to shared facilities at the tandem switch, we tentatively conclude that there is no need to create a separate charge for shared trunk ports on the end-office-side of the tandem switch because this trunk port cost is included in the charge for the tandem switch and there is no reason to charge separately for shared trunk ports in the tandem switching context. We request comment on this analysis and our tentative conclusions. 68. We also propose to require rate-of-return LECs to establish multiplexing elements to recover the multiplexer costs associated with the tandem switch that were reassigned to tandem switching from the TIC in the Access Charge Reform First Reconsideration Order. To simplify the implementation process for rate-of-return LECs, we propose to permit them to use multiplexer rates already established in their special access tariff for similar multiplexers. We request comment on these proposals. b. Outstanding TIC Issues for Rate-of-Return LECs 69. Modifications Adopted for Price Cap LECs. Although the Commission reallocated certain costs from the TIC to facilities-based rates in the Access Charge Reform Order, not all costs could be reallocated to other elements based on the record in that proceeding. Two additional mechanisms will gradually eliminate the residual TIC for price cap LECs. First, price cap LECs will recover revenues now recovered through the TIC through the PICC once the CCL charge has been eliminated, as discussed in Section II.b, above. Second, price cap LECs will target price cap productivity (X-factor) adjustments to the trunking basket's PCI, and therein to the TIC SBI, thus reducing the amounts recovered through the residual TIC and effectively spreading those residual TIC revenues among the universe of access services. 70. Applicability to Rate-of-Return LECs. As with price cap LECs, the reallocation of costs from the TIC to other rate elements will not remove all of the costs from the TIC. For the reasons stated in the Access Charge Reform Order, we believe it is important to eliminate the TIC to avoid its potential to adversely affect competitive developments in the marketplace. Therefore, we propose to incorporate the residual TIC in the common line pricing structure just as we did for price cap LECs. This will put in place a process that will, at different times for different rate-of-return LECs, begin the process of transitioning TIC costs to other rate elements. We ask for comment on this analysis and on our proposal to adopt a similar rate structure to that we employed for price cap LECs. 71. We ask parties to address whether there are additional causes of costs remaining in the residual TIC for rate-of-return LECs that have not been identified previously that would justify further reallocations of costs from the TIC. Parties identifying such costs should indicate the other element(s) to which these additional costs should be reallocated. We invite parties to comment on whether any public policy reasons would support retaining some costs of rate-of-return LECs in the residual TIC indefinitely. We ask parties to address the competitive implications of waiting for completion of a Joint Board review of separations procedures to determine which, if any, of the costs in the TIC reflect the higher cost of providing transport services in less densely populated areas, as compared with the costs underlying transport rates that were derived from special access rates. 72. The Access Charge Reform Order phases the TIC down by targeting certain PCI reductions to reducing the TIC. We ask whether any comparable mechanism exists for rate-of-return LECs that would eliminate the residual TIC in a reasonable time. We ask commenters whether spreading the residual TIC proportionately over the other access elements in a manner comparable to that of targeting price cap productivity reductions to the TIC would be practical. We seek comment on what would be a reasonable time in which to accomplish such a reallocation. We ask parties supporting such an approach to propose cost allocation rules to implement their approach. Parties presenting data to quantify amounts in the residual TIC should include sufficient detail to permit the Commission and interested parties to evaluate the procedures used and to adjust the results, if necessary, to address concerns raised by the record. We seek comment on how these approaches affect small business entities, including small incumbent LECs and new entrants. E. SS7 Signalling 1. Background 73. Signalling System Seven (SS7) is the international standard network protocol currently used to establish and close transmission paths over which telephone calls are carried. SS7 networks consist of high-speed packet switches and dedicated circuits that are separate from, but interconnected with, the telecommunications networks over which telephone calls are carried. Incumbent LECs typically use SS7 networks for three purposes: (1) for call setup; (2) to retrieve information from remote databases, such as billing information that must be obtained from the line information database (LIDB) used to validate calling cards or for collect calling, or information identifying the designated long-distance carrier of a toll-free 800 service subscriber; and (3) to transmit the information and instructions necessary to provide custom local area signalling services (CLASS features), such as automatic call back and caller ID. An SS7 network includes several primary components -- signalling points, signal transport links, and dedicated lines used for access to an incumbent LEC's signalling network (signal links). 74. Under the interim transport rate structure, rate-of-return LECs charge IXCs and other access customers a flat-rated charge assessed on a per-line basis for the use of dedicated facilities to connect to the incumbent LECs' signalling networks. This rate element is composed of two subelements: a flat-rated signalling link charge for the dedicated network access line (DNAL), and a flat-rated signalling transfer point (STP) port termination charge. The majority of other SS7 signalling costs are not recovered through SS7 facility-based charges, including those for: (1) switching messages at the local STP; (2) transmitting messages between an STP and the incumbent LEC end office switch or tandem switch; and (3) processing and formulating signal information at an end office or tandem switch. Thus, once the reallocation of SS7 costs included in the TIC is completed, most, if not all, of these costs will presumably be recovered through the local switching charge. In contrast, incumbent LECs typically assess a per-query charge for the retrieval of information and the transmission of the query to and from databases, such as the 800 and LIDB databases. 75. On March 27, 1996, the Common Carrier Bureau granted Ameritech a waiver to restructure the manner in which it recovers its SS7 costs. The rate structure established by Ameritech pursuant to that waiver recovers costs through four unbundled charges for the various functions performed by SS7 networks: (1) signal link; (2) STP port termination; (3) signal transport; and (4) signal switching. 2. Discussion 76. Modifications Adopted for Price Cap LECs. In the Access Charge Reform Order, the Commission decided to continue the existing rate structure for SS7 costs and to permit price cap LECs to adopt the rate structure for SS7 services that we approved in the Ameritech SS7 Waiver Order. 77. Applicability to Rate-of-Return LECs. We propose to continue the existing rate structure for SS7 cost recovery by rate-of-return LECs, with an optional structure to reflect Ameritech's SS7 rate structure. We invite comment on this proposal. We also solicit additional, alternative SS7 rate structure proposals for rate-of-return LECs. Any comments on this issue should include an assessment of the expense of requiring rate-of-return LECs to install equipment in their networks for metering SS7 traffic. Would the streamlined waiver petition procedure we propose below be preferable as a means to address alternative SS7 rate structures proposed by rate-of-return LECs? 78. We recognize that some call setup is still performed using in-band, MF signalling, rather than out-of-band signalling systems such as SS7. SS7 signalling may be less prevalent for rate-of-return LECs than for price cap LECs. Any determination we make concerning a SS7 rate structure for rate-of-return LECs could be affected by the extent that rate-of-return LEC networks use SS7. We also ask parties to comment on the need for revisions to the cost allocation rules in Part 69 to accommodate the provision of SS7 signalling in accordance with the provisions of the Ameritech SS7 waiver. III. OTHER ISSUES A. General Support Facilities Costs 1. Background 79. In its Part 69 Conformance Order, the Commission amended Part 69 to reapportion, inter alia, General Support Facilities (GSF) investment and expenses among the existing access elements, the interexchange category, and the billing and collection category. The GSF investment category includes assets that support other operations, such as land, buildings, vehicles, as well as general purpose computer investment accounted for in USOA Account 2124. Some rate-of-return LECs use general purpose computer equipment to provide nonregulated billing and collection services to IXCs. The costs of providing interstate billing and collection service are not, however, treated as nonregulated in the Part 64 cost allocation process. Instead, nonregulated interstate billing and collection costs are identified through the Part 36 and Part 69 cost allocation process. 80. Section 69.307 of the Commission's rules states that GSF investment is to be allocated among the billing and collection category, the interexchange category, and the access elements based on the amount of Central Office Equipment (COE), Cable and Wire Facilities (CWF), and Information Origination/Termination Equipment (IO/T) investment allocated to each Part 69 category. This rule appears on its face to provide for an allocation of GSF investment to billing and collection. Because no COE, CWF, or IO/T investment is allocated to the billing and collection category, no GSF investment, and thus no portion of general purpose computer investment, is allocated to the billing and collection category. Similarly, because expenses related to GSF investment are allocated in the same manner as GSF investment, no GSF expenses (including expenses related to general purpose computers) are allocated to billing and collection. To the extent that rate-of-return LECs' costs are underallocated to the billing and collection category, rate-of-return LECs' regulated services are recovering costs associated with unregulated services through interstate access charges. 2. Discussion 81. Modifications Adopted for Price Cap LECs. In the GSF Order, we modified Section 69.307 of our rules to require the use of a general expense allocator to apportion the interstate share of Accounts 2111 (Land), 2121 (Buildings), 2123 (Office equipment), and 2124 (General purpose computers) between: (1) the billing and collection category and (2) all other elements and categories. To determine the amount to be assigned to the billing and collection category, we applied a modified "Big Three Expense Factor" allocator to the interstate investment recorded in these four accounts. In developing the modified allocator, we excluded any account or portion of an account that is itself apportioned based on the apportionment of GSF. Any GSF investment in Account 2110 not allocated to the billing and collection category will be apportioned among the access elements and the interexchange category using the current investment allocator. The interstate portion of Account 6120 (General Support Expenses) will continue to be apportioned among all elements and categories, including billing and collection, based upon the allocation rules contained in section 69.401(a)(2). 82. Applicability to Rate-of-Return LECs. We tentatively conclude that we should modify section 69.307 of our rules for rate-of-return LECs to allocate GSF costs related to billing and collection services to the billing and collection category. As with price cap LECs, we propose to use a general allocator to accomplish this GSF reassignment to the billing and collection category. For those rate-of-return LECs that maintain accounts below the summary account level, we propose to apply the same general allocator to the interstate portion of the four accounts to which it was applied for price cap LECs. Because certain small rate-of-return LECs do not maintain accounts below the summary account level, we seek comment on what adjustments, if any we should make to the allocation procedures to reflect this difference. Therefore, it would be helpful if parties would comment on how many rate-of-return LECs use general purpose computers to provide billing and collection services. We also invite parties to identify any changes that should be made to other access elements as a result of any changes we may make to the GSF allocation procedures. Finally, parties should also address the extent to which these approaches affect large and small rate-of-return LECs differently and how small business entities, including small incumbent LECs and new entrants, will be affected. B. Marketing Expenses 1. Background 83. Prior to 1987, incumbent LEC marketing expenses were allocated between the interstate and intrastate jurisdictions on the basis of local and toll revenues. In 1987, a Federal-State Joint Board recommended that interstate access revenues be excluded from the allocation factor used to apportion marketing expenses between the interstate and intrastate jurisdictions because marketing expenses are not incurred in the provision of interstate access services. The Commission agreed with the Joint Board's recommendation and adopted new procedures that allocated marketing expenses in Account 6610 on the basis of revenues, excluding access revenues. In petitions for reconsideration of the Commission's order, several incumbent LECs argued that the revised separations treatment of marketing expenses would result in a significant, nationwide shift of $475 million in revenue requirements to the intrastate jurisdiction. On reconsideration, the Commission adopted an interim allocation factor for marketing expenses that includes access revenues, pending the outcome of a further inquiry by the Joint Board. 2. Discussion 84. The Commission concluded in the Access Charge Reform Order that price cap LECs' marketing costs that are not related to the sale or advertising of interstate switched access services are not appropriately recovered from IXCs through per-minute interstate switched access charges. We concluded that recovering these expenses from end users instead of from IXCs is consistent with principles of cost-causation to the extent that LEC sales and advertising activities are aimed at selling retail services to end users, and not at selling switched access services to IXCs. Accordingly, pending a recommendation by the Joint Board on a new method of apportioning marketing costs between the intrastate and interstate jurisdictions, the Commission directed price cap LECs to recover marketing expenses allocated to the interstate jurisdiction from end users on a per-line basis. 85. Specifically, price cap LECs are to recover the revenues related to the Account 6610 marketing expenses by increasing the SLCs for multi-line business and non-primary residential lines, subject to the SLC ceilings. To the extent the SLC ceilings prevent full recovery of these amounts, price cap LECs were required to recover marketing costs through equal increases on the PICCs for non-primary residential and multi-line business lines, subject to the PICC ceilings. In the event the PICC ceilings prevent full recovery of these expenses, any residual marketing expenses may be recovered through per- minute charges on originating access service, subject to the ceiling placed on originating minutes. Finally, to the extent price cap LECs cannot recover their remaining marketing expenses through per- minute charges on originating access, any residual may be recovered through per-minute charges on terminating access service. To the extent marketing expenses will be recovered through the SLC, they shall not be included in the base factor portion or considered common line revenues. 86. We tentatively conclude that, for the reasons set forth for price cap LECs in the Access Charge Reform Order, rate-of-return LECs' marketing costs should be recovered through the common line recovery mechanism. We seek comment on this conclusion and ask parties to propose a mechanism comparable to the separate basket created for price cap LECs that will remove marketing expenses from access charges assessed by rate-of-return LECs. Any proposal we adopt will require changes to our Part 69 cost allocation rules. We therefore invite parties to provide language for an amendment to our Part 69 cost allocation rules that affect the recovery of these marketing expenses through the common line cost recovery mechanism discussed above. C. Special Access 1. Background 87. As a result of the new rules adopted in the Access Charge Reform Order, certain multi-line businesses will be paying higher SLCs than they did previously. Similarly, as the PICCs are phased in, IXCs initially will be required to pay higher PICCs for a multi-line business end-user compared to the PICC paid for a primary residential end user or a single-line business end-user. In contrast, users of special access do not pay a SLC. Furthermore, under special access, IXCs do not incur the same local access charges that are incurred by end users using switched access. In light of the most recent changes to the charges incurred by multi-line businesses, including the higher SLC and the new multi-line business PICC, the Commission noted in the Access Charge Reform Order, Further Notice of Proposed Rulemaking (FNPRM) that it may be cost effective for some multi-line businesses that are currently using switched access to purchase instead special access lines. 88. In the FNPRM, we tentatively concluded that we should permit price cap LECs to assess a PICC on special access lines to recover revenues for the common line basket. The special access PICC would be no higher than the PICC that an incumbent LEC could charge for a multi-line business line, and the special access PICC would not recover TIC or marketing expenses. We noted that this proposal would be temporary in nature and would be phased out as the single-line PICC is phased in. We tentatively concluded that allowing LECs to impose such special access PICCs would be necessary to facilitate the transition from current per minute CCL charges to the flat-rate PICC. 89. Parties responding to our FNPRM unanimously opposed assessing PICCs on special access lines. Several of these parties argued that concerns that PICCs assessed on multi-line business lines will lead to migration from switched access to special access are unfounded. Others argued that migration might be a problem but that special access PICCs are not the solution. 2. Discussion 90. We invite parties to comment on whether, if we apply a PICC to special access services offered by price cap LECs, we should apply a PICC to special access services offered by rate-of-return LECs. Parties should comment on the impact of PICCs on special access lines if, as projected by NECA and USTA, the PICCs on rate-of-return LECs' multi-line business lines remain in place for a considerably longer time than they do for price cap LECs'. To the extent parties advocate assessing PICCs on special access lines, we seek comment on how special access connections should be counted for purposes of assessing a "per line" PICC. Parties should also address the extent to which our proposal affects large and small LECs differently and how small business entities, including small incumbent LECs and new entrants, will be affected. D. Part 69 Cost Allocation Rules 91. Under the Part 36 separations rules, certain costs of the incumbent LEC network are assigned to the interstate jurisdiction. For rate-of-return LECs, the Part 69 cost allocation rules allocate these interstate costs among the various access and interexchange services. 92. Throughout this notice, we request comment on the need for changes to our cost allocation rules in conjunction with specific proposals to revise certain rate structure provisions of the Part 69 rules. We now ask whether we should make any other modifications at this time to our cost allocation rules for rate-of-return LECs to accommodate any of those changes, or to update the rules in other respects. Parties making such suggestions should be specific about the reasons the change is needed and include proposed language for revising the cost allocation rules. E. Modification of New Services Requirement 93. Rate-of-return LECs currently must file a petition pursuant to Section 1.3 of the Commission's rules to request a Part 69 waiver for the establishment of one or more new switched access rate elements to accommodate a new service offering to switched access customers. Courts have interpreted the good cause showing specified in Section 1.3 to require petitioners to demonstrate that special circumstances justify a departure from the general rule and that such a deviation will serve the public interest. 94. Prior to adoption of the Access Charge Reform Order, we streamlined the Part 69 waiver process for a price cap LEC wishing to offer a new service. This procedure significantly expedites the prior waiver process pursuant to Section 1.3, and became effective on June 30, 1997. Under Section 69.4(g), a price cap LEC must file a petition that demonstrates one of two criteria: (1) that another LEC has previously obtained approval to establish identical rate elements and that the original petition did not rely upon a competitive showing as part of its public interest justification, or (2) that the new rate elements would serve the public interest. 95. We tentatively conclude that we should adopt the streamlined petition provisions of Section 69.4(g) for rate-of-return LECs. We request comment on this tentative conclusion. In addition, we request suggestions as to any manner in which the procedures or standards of Section 69.4(g) should be modified for rate-of-return LECs. Parties should comment, for instance, on whether a showing of prior approval should be limited to petitions granted to other rate-of-return LECs. IV. PROCEDURAL ISSUES A. Ex Parte Presentations 96. This Notice of Proposed Rulemaking is a permit-but-disclose proceeding and is subject to the permit-but-disclose requirements under Section 1.1206(b) of the rules, 47 C.F.R.  1206(b), as revised. Persons making oral ex parte presentations are reminded that memoranda summarizing the presentation must contain a summary of the substance of the presentation and not merely a listing of the subjects discussed. More than a one or two sentence description of the views and arguments presented is generally required. Other rules pertaining to oral and written presentations are set forth in Section 1.1206(b), as well. B. Paperwork Reduction Act 97. This notice contains either proposed or modified information collections. On April 1, 1997, the Office of Management and Budget (OMB) approved many of our proposed information collection requirements in accordance with the Paperwork Reduction Act. The OMB made one recommendation, suggesting that we try "to minimize the number of new filings that firms must create in order to be compliant with the rules adopted . . . allowing firms to use many of the filings they must create in order to demonstrate that they meet the Telecommunications Act of 1996 requirements for provision of inter-LATA services within their operating regions." The Commission will consider carefully whether the number of required new filings can be minimized by relying to the greatest extent possible on those filings referenced by OMB in its approval. In addition, we request specific suggestions of other methods to minimize the number of required new filings. 98. As part of our continuing effort to reduce paperwork burdens, we invite the general public and OMB to take this opportunity to comment on any additional information collections contained in this notice, not previously approved by OMB, as required by the Paperwork Reduction Act of 1995, Pub. L. No. 104-13. Public and agency comments are due at the same time as other comments on this notice; OMB comments are due 60 days from the date of publication of this notice in the Federal Register. Comments should address: (a) whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information shall have practical utility; (b) the accuracy of the Commission's burden estimates; (c) ways to enhance the quality, utility, and clarity of the information collected; and (d) ways to minimize the burden of the collection of information on the respondents, including the use of automated collection techniques or other forms of information technology. C. Initial Regulatory Flexibility Act Analysis 99. As required by the Regulatory Flexibility Act (RFA), the Commission has prepared this Initial Regulatory Flexibility Analysis (IRFA) of the possible significant economic impact on small entities of the proposals suggested in this Notice of Proposed Rulemaking. Written public comments are requested on the IRFA. Comments and reply comments must be identified by a separate and distinct heading as responses to the IRFA and must be filed on or before July 17 or August 17, 1998 respectively. Parties should address the extent to which our proposals affect large and small incumbent rate-of-return LECs differently and how small business entities, including small incumbent LECs and new entrants, will be affected. The Commission's Office of Public Affairs, Reference Operations Division, will send a copy of this Notice of Proposed Rulemaking, including this IRFA, to the Chief Counsel for Advocacy of the Small Business Administration, in accordance with the Regulatory Flexibility Act. In addition, the Notice of Proposed Rulemaking and IRFA (or summaries thereof) will be published in the Federal Register. 100. Need for, and Objectives of, the Proposed Rules. The Commission's access charge rules for rate-of-return LECs were adopted at a time when interstate access and local exchange services were offered on a monopoly basis. We seek to revise the Commission's access charge rules for LECs subject to rate-of- return regulation to make the rules consistent with the pro-competitive, deregulatory policies contemplated by the Telecommunications Act of 1996. In the 1997 Access Charge Reform Order, we focused on setting in motion the forces of competition and deregulation in local markets served by incumbent local exchange carriers subject to price cap regulation. In this Notice, we propose to modify our rate structure requirements, to the extent possible, to permit rate-of-return LECs to recover costs in a manner that more accurately reflects the way those costs are incurred, identify implicit subsidies, and reduce subsidies by recovering more costs from the cost causer, thereby sending more accurate pricing signals to both consumers and competitors, and facilitating the transformation from a regulated to a competitive marketplace. Specifically, we propose to reduce usage-sensitive interstate access charges by diminishing local loop and other non-traffic sensitive costs and directing rate-of-return LECs to recover those non- traffic sensitive costs through more economically efficient, flat-rated charges. 101. Legal Basis. The proposed action is authorized by Sections 1-4, 201-205, 251, 254, 303(r) and 403 of the Communications Act of 1934, as amended, 47 U.S.C.  151-154, 201-205, 251, 254, 303(r) and 403. 102. Description and Estimate of the Number of Small Entities To Which the Proposed Rules Will Apply. The Regulatory Flexibility Act directs agencies to provide a description of and an estimate, where feasible, of the number of small entities that may be affected by proposed rules, if adopted. The Regulatory Flexibility Act generally defines the term "small entity " as having the same meaning as the term "small business." The term "small business" has the same meaning as the term "small business concern" under the Small Business Act (SBA). Under the SBA, a "small business concern" is one that: (1) is independently owned and operated; (2) is not dominant in its field of operation; and (3) meets any additional criteria established by the Small Business Administration. 103. Because the small rate-of-return LECs that would be subject to these rules are either dominant in their field of operations or are not independently owned and operated, consistent with our prior practice, they are excluded from the definition of "small entity" and "small business concerns." Accordingly, our use of the terms "small entities" and "small businesses" does not encompass small rate-of- return LECs. Out of an abundance of caution, however, for regulatory flexibility analysis purposes, we will consider small rate-of-return LECs within this analysis and use the term "small incumbent rate-of- return LECs" to refer to any rate-of-return LECs that arguably might be defined by SBA as "small business concerns," including consideration of any adverse impact of the rules we adopt and consideration of alternatives that may reduce adverse impacts on such entities. 104. The Small Business Administration has defined a small business for Standard Industrial Classification (SIC) category 4813 (Telephone Communications, Except Radiotelephone) to be small telecommunications entities when they have no more than 1,500 employees at the holding company level. We invite interested parties to discuss the number of telecommunications providers, if any, that can be considered "small entities" within the meaning of the Regulatory Flexibility Act, and whether there is any reason to establish different requirements for small telecommunication providers. Below, we discuss the total estimated number of telephone companies falling within these categories and the number of small businesses in each category, and we then attempt to refine further those estimates to correspond with the categories of telephone companies that are commonly used under our rules. 105. The most reliable source of information regarding the total numbers of certain common carriers nationwide appears to be data the Commission publishes annually in its Telecommunications Industry Revenue report, regarding the Telecommunications Relay Service (TRS). According to data in the most recent report, there are 3,459 interstate carriers. These carriers include, inter alia, local exchange carriers, wireline carriers and service providers, interexchange carriers, competitive access providers, operator service providers, pay telephone operators, providers of telephone toll service, providers of telephone exchange service, and resellers. 106. Telephone Companies Affected. The United States Bureau of the Census (Census Bureau) reports that, at the end of 1992, there were 3,497 firms engaged in providing telephone service, as defined therein, for at least one year. This number contains a variety of different categories of carriers, including incumbent LECs, interexchange carriers (IXCs), competitive access providers, cellular carriers, mobile service carriers, operator service providers, pay telephone operators, personal communication service (PCS) providers, covered specialized mobile radio (SMR) providers, and resellers. It seems certain that some of those 3,497 telephone service firms may not qualify as small entities or small rate-of-return incumbent LECs because they are not independently owned or operated. For example, a PCS provider that is affiliated with an IXC having more than 1,500 employees would not meet the definition of a small business. It seems reasonable to conclude that fewer than 3,497 telephone service firms are small entity telephone service firms or small incumbent rate-of-return LECs because some of them are not independently owned or operated. 107. Wireline Carriers and Service Providers Affected. The Small Business Administration has developed a definition of small entities for telephone communications companies other than radiotelephone (wireless) companies. According to the Small Business Administration's definition, a small business telephone company other than a radiotelephone company is one employing no more than 1,500 persons. The Census Bureau reports that there were 2,321 such telephone companies in operation for at least one year at the end of 1992. All but 26 of the 2,321 non-radiotelephone companies listed by the Census Bureau were reported to have fewer than 1,000 employees. Thus, even if all 26 of those companies had more than 1,500 employees, there would still be 2,295 non-radiotelephone companies that might qualify as small entities or small rate-of-return LECs. We do not have data on the number of carriers that are not independently owned and operated, and thus are unable at this time to estimate with greater precision the number of wireline carriers and service providers that would qualify as small business concerns under the Small Business Administration's definition. Consequently, we estimate that there are fewer than 2,295 small telephone communications companies other than radiotelephone companies that may be affected by the proposed rules, if adopted. 108. Incumbent Local Exchange Carriers Affected. Neither the Commission nor the Small Business Administration has developed a definition of small providers of local exchange service. The most reliable source of information regarding the number of incumbent LECs nationwide appears to be the report that we compiled from the 1997 Telecommunications Relay Service (TRS) Fund worksheets and the Universal Service Fund (USF) worksheets of September, 1997. According to our most recent data, 1,376 companies that provided interstate telecommunications service as of June 30, 1997 reported that they were engaged in the provision of local exchange service. Although it seems certain that some of these carriers are not independently owned or operated, have more than 1,500 employees, or are subject to price cap regulation, we are unable at this time to estimate with greater precision the number of rate-of-return LECs that would qualify as small business concerns under the Small Business Administration's definition. Consequently, we estimate that there are fewer than 1,376 small rate-of-return LECs that may be affected by the proposals in this notice, if adopted. We seek comment on this estimate. 109. Interexchange Carriers. Neither the Commission nor the Small Business Administration has developed a definition of small entities specifically applicable to providers of interexchange services. The closest applicable definition under the Small Business Administration rules is for telephone communications companies other than radiotelephone (wireless) companies. According to the most recent Telecommunications Industry Revenue data, 143 carriers reported that they were engaged in the provision of interexchange services. We do not have data specifying the number of these carriers that are not independently owned and operated or have more than 1,500 employees, and thus are unable at this time to estimate with greater precision the number of interexchange carriers (IXCs) that would qualify as small business concerns under the Small Business Administration's definition. Consequently, we estimate that there are fewer than 143 small entity IXCs that may be affected by the proposed rules, if adopted.. 110. Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements. It is not clear whether, on balance, proposals in this notice would increase or decrease incumbent rate-of- return LECs' administrative burdens. With respect to rate-of-return LECs, we believe that the rate structure reforms that we propose in Sections II and III would require at least one, and possibly several, additional filings, and may reduce some administrative burdens. For example, if we adopt the streamlined petition provisions of 47 C.F.R.  69.4(g) for introduction of new services by rate-of-return LECs, we expect that this would decrease some administrative burdens of rate-of-return LECs. 111. If the rule revisions we propose are adopted, we estimate that these rate-of-return LECs would make one tariff filing to bring their access charges into compliance with the revised rules. We are unable to estimate how extensive each tariff filing would be, on average. We estimate that, on average, it would take approximately two hours per page for the rate-of-return LEC to prepare each tariff filing, at a cost of $35 per hour in professional level and support staff salaries. If we decide to require the filing of a cost study for determining local switching costs attributable to line-side ports and to trunk-side ports, these rate-of-return LECs would file one cost study. We estimate that, on average, it would take approximately 400 hours for the rate-of-return LEC to prepare a cost study, at a cost of $30 per hour in professional level and support staff salaries. Compliance with these tariff and cost study requirements may compel the use of engineering, technical, operational, accounting, billing, and legal skills. 112. Steps Taken to Minimize Significant Economic Impact on Small Entities, and Significant Alternatives Considered. In Sections II and III, for the subscriber line charge, the carrier common line charge, non-traffic sensitive switching costs, the transport interconnection charge, a special access PICC, and general purpose computer costs, we have sought comment on how a number of proposals would affect small entities. These proposals could have varying positive or negative impacts on small entities, including small rate-of-return LECs and new entrants. We seek comment on these proposals and urge that parties support their comments with specific evidence and analysis. 113. Federal Rules that May Duplicate, Overlap, or Conflict with the Proposed Rules. None. D. Notice of Proposed Rulemaking Comment Filing Dates and Procedures 114. 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, no later than July 17, 1998. Interested parties may file replies no later than August 17, 1998. To file formally in this proceeding, participants must file an original and twelve copies of all comments, reply comments, and supporting comments. If participants want each Commissioner to receive a personal copy of their comments, an original plus 16 copies must be filed. In addition, parties must file two copies of any such pleading with the Competitive Pricing Division, Common Carrier Bureau, Room 518, 1919 M Street, N.W., Washington, D.C. 20554. Comments and reply comments will be available for public inspection during regular business hours in the FCC Reference Center, Room 239, 1919 M Street, N.W., Washington D.C. 20554. 115. Parties submitting diskettes should submit them along with their formal filings to the Commission's Office of the Secretary. Submissions should be on a 3.5 inch diskette formatted in an DOS PC compatible form. The document should be saved into WordPerfect 5.1 for Windows format. The diskette should be submitted in "read only" mode. The diskette should be clearly labelled with the party's name, proceeding, type of pleading (comment or reply comment), docket number, and date of submission. 116. Parties may also file informal comments electronically via e-mail . Only one copy of electronically-filed comments must be submitted. The docket number of this proceeding must appear in the subject line, CC Docket No. 98-77. The subject line must also disclose whether an electronic submission is an exact copy of formal comments. Your full name and U.S. Postal Service mailing address must be included in your submission. 117. Comments and replies must comply with Section 1.49 and all other applicable sections of the Commission's Rules. We also direct all interested parties to include the name of the filing party and the date of the filing on each page of their comments and replies. Comments and replies must also clearly identify the specific portion of this Notice of Proposed Rulemaking to which a particular comment or set of comments is responsive. If a portion of a party's comments does not fall under a particular topic listed in the Table of Contents of this notice, such comments must be included in a clearly labelled section at the beginning or end of the submission. 118. Written comments and reply comments by the public on the proposed and/or modified information collections are due July 17 or August 17, 1998 respectively. Written comments must be submitted by the Office of Management and Budget (OMB) on the proposed and/or modified information collections on or before 60 days after the date of publication in the Federal Register. In addition to filing comments with the Secretary, a copy of any comments on the information collections contained herein must be submitted to Judy Boley, Federal Communications Commission, Room 234, 1919 M Street, N.W., Washington, DC 20554, or via the Internet to jboley@fcc.gov and must be submitted to Timothy Fain, OMB Desk Officer, 10236 NEOB, 725 - 17th Street, N.W., Washington, DC 20503 or via the Internet to fain_t@al.eop.gov. V. ORDERING CLAUSES 119. Accordingly, IT IS ORDERED, pursuant to Sections 1-4, 201-205, 251, 254, 303(r) and 403 of the Communications Act of 1934, as amended, 47 U.S.C.  151-154, 201-205, 251, 254, 303(r) and 403, that NOTICE IS HEREBY GIVEN of the rulemaking described above and that COMMENT IS SOUGHT on these issues. 120. IT IS FURTHER ORDERED that the Commission's Office of Public Affairs, Reference Operations Division, SHALL SEND a copy of this Notice of Proposed Rulemaking, including the Initial Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of the Small Business Administration. FEDERAL COMMUNICATIONS COMMISSION Magalie Roman Salas Secretary