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File how2ftp (.txt & .wp) is in directory /pub/Bureaus/Miscellaneous/Public_Notices/ ***************************************************************** ******** FCC 96-58 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) Ameritech Operating Companies ) ) Petition for a Declaratory Ruling ) and Related Waivers ) to Establish a New Regulatory Model ) for the Ameritech Region ) ORDER Adopted: February 14, 1996 Released: February 15, 1996 By the Commission, Chairman Hundt and Commissioner Barrett issuing separate statements: Table of Contents Para. No. I. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . .1 II. Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 A. The Access Charge Rules. . . . . . . . . . . . . . . . . . .5 B. The Modification of Final Judgment . . . . . . . . . . . . 11 C. Similar Proposals by Other LECs. . . . . . . . . . . . . . 12 D. The Customers First Plan . . . . . . . . . . . . . . . . . 16 1. Overview. . . . . . . . . . . . . . . . . . . . . . 16 2. Department of Justice InterLATA Trial . . . . . . . 19 3. State Actions . . . . . . . . . . . . . . . . . . . 20 4. Ameritech's Waiver Requests . . . . . . . . . . . . 25 a. Overview. . . . . . . . . . . . . . . . . . . . . . 25 b. Access Charge Restructuring . . . . . . . . . . . . 27 c. Pricing Flexibility . . . . . . . . . . . . . . . . 34 III. Discussion. . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 A. Legal Standard for Granting a Waiver and Other General Issues 35 1. Positions of the Parties. . . . . . . . . . . . . . 35 2. Discussion. . . . . . . . . . . . . . . . . . . . . 41 B. Special Circumstances: Assessment of the State of Competition45 1. Positions of the Parties. . . . . . . . . . . . . . 45 2. Discussion. . . . . . . . . . . . . . . . . . . . . 61 a. Removal of Barriers to Entry65 b. Emergence of Competition. . 72 C. Public Interest Analysis of Bulk Billing Proposal . . . . . . 83 1. Positions of the Parties. . . . . . . . . . . . . . . . . . . 83 a. General Comments. . . . . . . . . . . . . . . . . . . . . . . 83 b. Carrier Common Line Charge. . . . . . . . . . . . . . . . . . 92 c. Transport Interconnection Charge. . . . . . . . . . . . . . . 98 2. Discussion. . . . . . . . . . . . . . . . . . . . . . . . . .100 a. Overview. . . . . . . . . . . . . . . . . . . . . . . . . . .100 b. NECA Long Term Support. . . . . . . . . . . . . . . . . . . .102 c. Common Line Recovery. . . . . . . . . . . . . . . . . . . . .107 d. Transport Interconnection Charge. . . . . . . . . . . . . . .126 IV. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . .131 V. Ordering Clauses . . . . . . . . . . . . . . . . . . . . . . . . . .133 I. INTRODUCTION 1. Ameritech seeks waivers of the Commission's rules to permit it to use different methods for assessing certain categories of access charges prescribed by our rules, and to allow it greater interstate pricing flexibility. Ameritech presents these waiver requests in the context of its "Customers First Plan," a multi-jurisdictional effort in which, according to Ameritech, it has removed many barriers to local competition (in concert with state regulators), and seeks reduced regulation in return. In the context of Ameritech's proposals, the Illinois Commerce Commission and the Michigan Public Service Commission each have adopted orders seeking to facilitate the development of telecommunications competition in those states, and Ameritech has filed tariffs responding to those state commission orders. Ameritech claims that, given the development of competition in the provision of telecommunications services in Illinois and Michigan, and the steps it has taken to eliminate barriers to such competition, some of our current access charge and pricing rules unfairly disadvantage Ameritech and produce inefficient results. In this order, we address Ameritech's access charge waiver requests; the waiver requests relating to pricing flexibility will be the subject of a future order. 2. Ameritech claims that certain access charges contain subsidy components that result in rates in excess of the costs of providing the underlying services, and that such pricing cannot be sustained in a competitive environment. Although Ameritech favors a comprehensive industry-wide reform of the access charge and jurisdictional separations rules, including an increase in end-user subscriber line charges, it claims that the existing rules impose special hardships upon Ameritech because market conditions in its region differ from conditions in other parts of the country. Therefore, it argues that it needs interim relief from the requirements of the current rules while the Commission explores more comprehensive reform through changes to its rules. Accordingly, Ameritech asks the Commission for permission to implement what it styles as the "Competitively Neutral Recovery of Subsidies" (CNRS). Under this proposal, Ameritech would recover certain costs that are currently included in its per-minute interstate access charges by "bulk billing" interexchange carriers (IXCs) directly for their share of the aggregate amount of those costs. 3. As an interim step, we grant Ameritech's request in part, subject to certain modifications discussed below. We conclude, based on this record, that the removal of barriers to competition and the emergence of competitors in local telecommunications markets in portions of the Chicago and Grand Rapids local access and transport areas (LATAs) within Illinois and Michigan constitute "special circumstances" under the Commission's waiver standard. We determine that Ameritech's requests are properly before us in the context of a waiver request, and that some relief from our access rules is therefore justified to address the special circumstances Ameritech has identified. We permit Ameritech, as it requests, to bulk bill the portion of Ameritech's carrier common line charge that contributes to the NECA Long Term Support fund for high-cost carriers. While bulk billing of common line costs raises some concerns about competitive distortions, we conclude that the public interest would be served by allowing Ameritech, on an interim basis, pending a comprehensive reform of our access charge rules, to recover a portion of its common line costs through a modified form of bulk billing in lieu of the per-minute carrier common line (CCL) charge. Finally, while we decline at this time to allow Ameritech to bulk bill a portion of the transport interconnection charge, we allow Ameritech to reduce that charge on a geographically-deaveraged basis in the Chicago and Grand Rapids LATAs. II. BACKGROUND 4. In its current form, the Customers First Plan affects three jurisdictions: Illinois, Michigan, and the FCC. Ameritech has presented to two state commissions proposals in which it has agreed to unbundle certain services and establish conditions for other providers of local exchange service to interconnect with Ameritech's network. The Illinois and Michigan commissions have issued orders in response to those proposals, and Ameritech has filed tariffs in those states to implement the requirements of the state commission orders. At the FCC, Ameritech seeks waivers to restructure the way it recovers certain access charges from IXCs, in order to redress what Ameritech sees as imbalances in the current system that will become problematic as competition develops. In addition, Ameritech is seeking, with the support of the United States Department of Justice (DOJ), a waiver of the MFJ to offer originating interLATA service on a trial basis in Chicago and Grand Rapids. A. The Access Charge Rules 5. Ameritech provides local exchange telephone services in Illinois, Indiana, Michigan, Ohio, and Wisconsin. Among other things, Ameritech, like other local exchange carriers (LECs), provides access facilities that are used to originate and terminate long- distance services furnished by IXCs. Ameritech's services, known as interstate access services, enable IXCs to originate and terminate interstate long-distance calls and are regulated by this Commission. Part 69 of the Commission's Rules governs the rate structure and pricing of interstate access charges, and prescribes the rate elements for switched access services that must be used in the LECs' tariffs, as well as the method for assessing charges for these services. 6. The waivers requested by Ameritech would affect two of the major switched access charges: (1) the carrier common line (CCL) charge; and (2) the transport interconnection charge. "Common line" is the term in the Part 69 Rules that refers to the facilities that connect subscriber premises and LEC end office switches, also known as "local loops" or "subscriber lines." Local loops are used in common for local exchange, interstate access, and other services. Common line costs are largely non-traffic sensitive: that is, costs do not vary in proportion to the number of calls carried over local loops. The separations rules allocate 25 percent of most LECs' (including Ameritech's) common line costs to the interstate jurisdiction, and 75 percent to the intrastate jurisdiction. Under the Part 69 Rules, LECs recover the portion of the cost of common lines that is allocated to the interstate jurisdiction through two charges: (1) end users pay a flat monthly charge per line called the subscriber line charge (SLC) or end user common line charge; and (2) IXCs pay a per-minute charge called the carrier common line (CCL) charge. The Part 69 access charge rules require a LEC to set the monthly SLC assessed to residential customers and business customers that subscribe to one local exchange service line at $3.50 per month or the actual allocated cost of the loop, whichever is lower. Business customers that subscribe to two or more lines, sometimes referred to as multi-line business customers, are subject to a subscriber line charge that may not exceed $6 per line, or the actual allocated cost of the loop, whichever is lower. 7. The CCL charge is customarily billed by the LEC based upon the IXCs' minutes of use measured at the end office switch. As implemented by Ameritech, the CCL charge is designed to recover four types of costs. First, it recovers the interstate portion of the cost of providing local loops that is not recovered by the SLC paid by end users. Some 63.4 percent of Ameritech's CCL revenues represent amounts needed to cover that cost. Second, the CCL charge recovers the cost of long-term support (LTS) payments remitted by Ameritech to the National Exchange Carrier Association (NECA) to reduce the common line charges of rural and other high cost LECs remaining in the NECA common line pool. These LTS charges make up 22.3 percent of Ameritech's CCL revenues. Third, part of the CCL charge recovers costs associated with public payphones, which constitutes 10.8 percent of Ameritech's CCL revenues. Fourth, Ameritech's CCL charge recovers certain inside wire costs associated with intrabuilding cable. These costs make up the remaining 3.5 percent of Ameritech's CCL revenues. 8. The second charge at issue here is the transport interconnection charge (TIC). Transport charges in access service tariffs recover interstate costs of transmission and tandem switching between end office switches and IXC points of presence. Historically, transport charges were recovered on a per-minute basis, even though many transport facilities were dedicated to the use of individual IXCs. In 1992, the Commission restructured transport rates to make them more economically rational. The new rate structure required LECs to establish flat rates per trunk to recover the non-traffic sensitive cost of certain dedicated transport facilities and to price most transport services based on the pre-existing rates for comparable special access services. These restructured transport rate elements recovered much less revenue than the historic per-minute transport charges. Consequently, the Commission created the transport interconnection charge, initially priced on a residual basis, so that the transport rate restructure per se would not change the amount of revenues recovered by the LECs for transport services, i.e., the restructure was intended to be revenue-neutral to the LECs. The per-minute transport interconnection charge applies to all minutes of access traffic using the LEC switched access network, including traffic passing over LEC transport facilities as well as traffic passing over competitive access providers' transport facilities and interconnected with the LEC switched access network. As with the CCL charge, the TIC is assessed on the basis of IXC minutes measured at the end office switch. 9. The price cap rules in Part 61 of the Commission's Rules give LECs that are subject to price caps, such as Ameritech, a degree of flexibility in establishing the level of some of their access rates. The rules split interstate services into discrete groups called baskets. Price cap carriers have some flexibility in establishing the amount of charges for elements or services that are included in the same basket as long as the actual price index for the basket does not exceed the price cap index for that basket. Pricing flexibility is generally limited by banding rules that establish separate upper and lower pricing bands for each service category within a basket. Local switching and the transport interconnection charge are classified as service categories in the traffic sensitive and trunking baskets, respectively. 10. Our access charge rules further require that the CCL charge, transport inter- connection charge, and most other access charges, be uniform throughout a LEC study area (i.e., that they be geographically averaged). A study area generally comprises all of a LEC's service area within a particular state. The access charge rules originally prohibited any deaveraging of access charges within a study area. In the Special Access Expanded Interconnection Order, however, the Commission authorized LECs to establish a system of traffic density-related rate zones within a study area, with different special access rates in each zone, once a LEC provided as few as one operational cross-connect to a competing special access provider in that study area. LEC central offices in areas with the highest traffic densities were assigned to Zone 1; offices in areas with intermediate degrees of density were assigned to Zone 2; and offices in areas with the lowest density were assigned to Zone 3. The Commission subsequently authorized LECs to use the same zones for purposes of establishing divergent rates in different zones for some transport charges, but not the transport interconnection charge. B. The Modification of Final Judgment 11. Ameritech, as one of the Regional Bell Operating Companies (RBOCs), was barred under the MFJ that settled the antitrust suit brought by the DOJ against AT&T in 1974 from providing communications services that originate in one Local Access and Transport Area (LATA) and terminate in another. The purpose of this restriction was to prevent the RBOCs from using their control over bottleneck local exchange facilities to discriminate among long-distance providers, thereby depriving consumers of a free choice of long-distance providers. The MFJ was recently superseded by the Telecommunications Act of 1996, although the Act prohibits an RBOC from providing in-region interLATA service until it has met specified criteria. C. Similar Proposals By Other LECs 12. Like Ameritech, two other LECs, Rochester Telephone Corporation (Rochester) and the NYNEX Telephone Companies (NYNEX), recently requested waivers to modify their interstate access rate structures in order to respond to increased local competition in their service territories. In those cases, the growth in alternative providers of access and local services was largely the result of steps that the New York Public Service Commission (New York Commission), NYNEX, and Rochester had taken to facilitate local competition. We granted waivers to Rochester in March 1995, and to NYNEX in May 1995. 13. In 1993, Rochester proposed an "Open Market Plan" to restructure its provision of services to end users and other carriers in a manner intended to foster local exchange competition. The New York Commission approved a modified version of the plan in November 1994, and the plan went into effect on January 1, 1995. Under the plan, Rochester restructured to form two subsidiaries: (1) the regulated basic network services firm, which retains the Rochester name, and (2) a lightly regulated retail provider, called Frontier Communications. Under the plan finally approved by the New York Commission, however, Rochester continues to provide interstate access and retail intrastate services on a fully regulated basis. In addition, Rochester is providing unbundled local loops and other functions that resellers need to provide local exchange service and intrastate services at discounted wholesale prices. Competing providers may resell Rochester's local loops and other network functions, or may provide such facilities themselves. Frontier initially offered only Centrex, high-capacity private line, and unregulated voice mail services. Frontier and other retail local service providers are free to provide any service to end user customers currently served by Rochester. 14. In July 1994, Rochester sought certain limited waivers of our access charge rules to harmonize the application of those rules with the plan implemented at the intrastate level. In March 1995, the Commission granted a Part 69 waiver that permits Rochester to adjust the manner in which it collects three types of interstate access charges when another carrier resells Rochester's lines to end users (Rochester Waiver Order). Rochester is permitted to collect, from the reseller instead of the end user, both the SLC and the charge for changing presubscribed long-distance carriers. This reflects the fact that the reseller, not Rochester, will have the direct relationship with the end user. In addition, competing local service providers that purchase Rochester's subscriber lines, but not its local switching services, will be charged a flat-rate CCL charge based on the average level of interstate traffic on Rochester's own subscriber lines. 15. In December 1993, NYNEX filed a petition seeking substantial changes in the manner in which it recovers some of its access charges in the face of increasing competition. The Commission granted a modified version of the requested waiver in May 1995 (NYNEX USPP Order). The Commission found that competitive circumstances in the LATA that includes New York City and the surrounding metropolitan area justified waivers of certain of the access charge rules within that area. In particular, the Commission found that the New York Commission and NYNEX had taken steps to remove significant barriers to the growth of competition in the access and exchange markets. Moreover, competitive service providers are actively offering various services to a greater extent in the New York City area than elsewhere in NYNEX's region or in most parts of the country. As a result of these special circumstances, the Commission concluded that certain access charges -- in particular, the CCL and transport interconnection charges -- create uneconomic incentives for customers to shift traffic from NYNEX's switched network to potentially less efficient competitors, and may stimulate unproductive investment. Therefore, the Commission allowed NYNEX to eliminate the portion of the CCL charge that recovers common line costs associated with interstate calls originated by or terminated to multi-line business customers. NYNEX was authorized to recover those costs through a flat rate charge assessed on all long-distance carriers based on their relative share of presubscribed subscriber lines in the New York City area. We also permitted NYNEX to eliminate the portion of the CCL charge attributable to NYNEX's long-term support payments, and to recover these costs from IXCs based on their respective shares of interstate minutes of use originating and terminating in the area. Finally, we allowed NYNEX to reduce the transport interconnection charge by a greater amount in particular zones in the New York City area than it reduces the charge elsewhere in its region. D. The Customers First Plan 1. Overview 16. On March 1, 1993, Ameritech filed a petition proposing what Ameritech refers to as "Customers First: Ameritech's Advanced Universal Access Plan," which would require regulatory actions by the FCC and state commissions, as well as a waiver of the MFJ by the MFJ court. Ameritech filed voluminous supporting material for its petition in April, 1993. Ameritech originally sought to implement Customers First on a statewide basis in all five states in Ameritech's region -- Illinois, Michigan, Ohio, Indiana and Wisconsin. On April 12, 1995, however, Ameritech filed an update to its plan that narrowed the geographic scope of its proposal to Illinois and Michigan, and presented additional information in support of its request. Ameritech has taken and proposes to undertake a variety of steps that could facilitate competitive entry in the local exchange telephone market. In return, Ameritech seeks various waivers from the FCC, and a waiver from the MFJ court enabling Ameritech to provide interexchange service. Ameritech's proposals are described in greater detail below. 17. Ameritech's waiver petition summarizes its proposals for opening its network to facilitate local exchange competition. Specifically, Ameritech proposes to unbundle the elements of its local exchange and interoffice network, and make these elements available to parties that seek to provide competing local telephone service. The elements that Ameritech would make available for purchase are: local loops, local switching, dedicated transport, common transport, and SS7 call setup. In addition, Ameritech proposes the establishment of reciprocal compensation agreements for terminating local traffic between Ameritech and new providers of local exchange services. Ameritech also states in its Petition that it will offer exchange support functions such as 911, directory assistance, and operator services on a contractual basis to carriers that offer switching. Ameritech would relinquish its role as central office code administrator for its region and would transfer control of number assignment to a third party. Finally, Ameritech asserts that it will guarantee fair pricing of local loops and switching capabilities and nondiscrimination in the provision of the unbundled services. 18. We solicited public comment on Ameritech's Petition and Update. Comments to the Petition were submitted on June 11, 1993 and replies on July 12, 1993. Comments to the Update were submitted on May 16, 1995 and replies on May 31, 1995. 2. Department of Justice InterLATA Trial 19. As part of its initial filing, Ameritech requested that this Commission issue a declaratory ruling that the provision of interexchange service by Ameritech would serve the public interest. On April 3, 1995, after extensive negotiations with Ameritech and discussions with other parties, the DOJ submitted to the U.S. District Court for the District of Columbia a Proposed Order for a trial waiver of the MFJ. Grant of the waiver would have allowed Ameritech to offer interLATA services on a trial basis in the portion of the Chicago LATA that is located in Illinois, and in the Grand Rapids, Michigan LATA. Ameritech would have been permitted to offer this service only through a structurally separate subsidiary, and only after the DOJ determined that no substantial possibility existed that Ameritech's entry would have impeded competition in the interLATA market. On May 31, 1995, we filed an amicus curiae brief with the MFJ court generally supporting the principles of the DOJ Proposed Order. The MFJ court has not acted on Ameritech's request. Because the Telecommunications Act of 1996 supersedes the MFJ, the DOJ waiver process no longer governs the terms of RBOC interLATA entry. 3. State Actions 20. On April 7, 1995, the Illinois Commerce Commission (Illinois Commission) issued an Order addressing both the Customers First tariffs filed by Ameritech as well as related issues that were under review in separate proceedings. The tariffs filed by Ameritech indicated that they would become effective upon Ameritech's receipt of a waiver of the MFJ to provide interexchange service. The Illinois Commission rejected this condition as an improper restraint on its authority to establish regulations for the provision of local exchange service in Illinois. It also rejected Ameritech's unbundling tariff that would have required a party to purchase entire loops. The Illinois Commission found that unbundling sub-elements of loops (such as feeder and distribution plant) upon bona fide request would better serve the public interest because a competing carrier may be capable of replicating part of the local loop and would need to purchase from Ameritech only the portion it cannot replicate. Although the Illinois Commission generally found that subloop unbundling would serve the public interest, it concluded that issues arising out of requests for subloop unbundling would be addressed in a pending rulemaking proceeding on line side interconnection. In addition, the Illinois Commission rejected Ameritech's initial tariff for the pricing of unbundled network elements because the sum of the charges for the unbundled elements would have exceeded the total price of the bundled line providing the same functionalities, thus resulting in a possible price squeeze for competitors. 21. The Illinois Commission generally approved the technical parameters for end- office integration between Ameritech and its competitors. It agreed with Ameritech that Ameritech and new local exchange providers should compensate each other at the same rate for terminating each other's traffic, but rejected Ameritech's proposal to use switched access rates as a basis for such reciprocal compensation because these rates would prevent competitors "from providing local exchange service in a financially viable manner." The Illinois Commission also concluded, contrary to Ameritech's assertions, that a new provider of local exchange service would initially terminate much more traffic on Ameritech's network than Ameritech would terminate on the new local service provider's network. Consequently, even if both carriers paid the same reciprocal compensation rates, new local service providers would end up making substantial net payments to Ameritech, thereby creating the possibility of a price squeeze in which new entrants would be unable to establish competitive prices for local exchange service. The Illinois Commission therefore adopted a reciprocal compensation rate structure based on Ameritech's actual long run service incremental costs for providing termination services. The Illinois Commission also directed Ameritech to tariff interim number portability mechanisms and to participate in an industry task force to develop a long term solution to this problem. Finally, in an interim order for which hearings were consolidated with the Customers First hearings, the Illinois Commission ordered Ameritech to implement intraLATA toll presubscription within one year of the issuance of the order. 22. Ameritech refiled its tariff to comply with the Illinois order on May 22, 1995. The tariff went into effect on one day's notice, and is currently effective, but several parties petitioned the Illinois Commission to begin an investigation. On June 21, 1995, the Illinois Commission initiated an investigation into allegations that certain tariff provisions created a "price squeeze" or were unreasonably discriminatory. If the Illinois Commission determines that any provisions of the tariff are invalid, it will modify those provisions and order refunds to any competitors that purchased services at rates deemed unlawful. 23. The Michigan Public Service Commission (Michigan Commission) addressed many of the issues involved with the Customers First plan in a proceeding that initially focused on establishing interconnection arrangements between Ameritech and US Signal, a new local service provider in Grand Rapids, Michigan. The Michigan Commission granted US Signal's motion to consider in the proceeding other issues involved with local exchange competition in addition to interconnection arrangements. The Michigan Commission found that US Signal, as a competitor to Ameritech, was entitled to interconnect its network with Ameritech's network in a manner comparable to the way independent LECs in neighboring territories interconnect with Ameritech's network. In reaching this decision, the Michigan Commission found unpersuasive Ameritech's attempts to distinguish a carrier operating in an adjacent market from a carrier operating within Ameritech's service area. The Michigan Commission cited with approval testimony from an MCI witness who stated that the same type of transmission link that connects Ameritech with neighboring carriers would also permit Ameritech and US Signal to exchange traffic. 24. The Michigan Commission also ordered Ameritech to unbundle its loops from its switches, concluding that it is unreasonable to expect a new entrant initially to be able to rely on its own facilities to serve all customers in an area. In addition, the Michigan Commission concluded that the pricing of unbundled loops and other network functionalities should be determined by the total service long run incremental cost (TSLRIC) for each functionality. With regard to number portability, the Michigan Commission required Ameritech to offer interim solutions to number portability at a "transitional price" that would be based on incremental costs. Finally, the Michigan Commission found that until it can adopt permanent rules governing interconnection by competitors, the interconnection arrangements between Ameritech and US Signal would be the tariffed terms under which other new state-certified providers of local exchange service could interconnect with Ameritech. Ameritech has filed a tariff to implement the requirements of the Michigan Order, and that tariff is now in effect. 4. Ameritech's Waiver Requests a. Overview 25. The waivers Ameritech requests from this Commission fall into two categories: restructuring of certain access charges, and pricing flexibility. Access charge restructuring refers to the recovery of certain costs, currently embedded in per-minute switched access rates paid by IXCs, through a flat charge on IXCs based on their market shares. To accomplish this, Ameritech seeks waivers of Part 69 of the Commission's Rules to remove certain revenues from the CCL charge and the transport interconnection charge, and to establish new rate elements that would be billed to IXCs by a third party billing agent based on their share of total interstate retail toll minutes, regardless of their use of Ameritech's access services. Ameritech also raised the possibility that these costs could be allocated back to the services to which they belong and recovered outside of per-minute interstate access charges to IXCs. With respect to pricing flexibility, Ameritech requests that its transport and switching services be immediately removed from price cap regulation and that it be permitted to implement rate changes for these services without cost support and on one day's notice. In addition, Ameritech seeks waivers that would permit it to deaverage its switched access services by geographic zones, and to offer term, volume, and growth discounts on various services. 26. Ameritech contends that the removal of legal barriers to local exchange competition on the state level and the unbundling of its network will rapidly produce competition in all aspects of its local exchange and exchange access business. Ameritech maintains that its unbundled network is now vulnerable to bypass by IXCs that can either obtain exchange access from other local carriers (who may be reselling Ameritech's service) or provide their own access by purchasing unbundled functionality from Ameritech. Ameritech argues that because the CCL and TIC are collected based on minutes of use measured at Ameritech's local switches, to the extent that these charges reflect non-cost- based elements, customers will have an incentive to shift to competitors' local switches for access. Under these circumstances, Ameritech argues that IXCs can and will avoid paying per-minute rates for switched access as long as those rates recover costs unrelated to the service. According to Ameritech, bypass of its switched access service to avoid payment of non-cost-based rate elements will have two effects. First, as users who have paid higher rates that include subsidies switch to other carriers whose rates are not required to include such subsidies, the funding base for those subsidies will evaporate. Second, maintenance of the current Part 69 rate elements will encourage entry by carriers that may be less efficient than Ameritech, solely because such carriers need not contribute to the existing subsidy mechanisms. Ameritech states that such inefficient entry would raise the cost to society of providing telecommunications service. Thus, Ameritech argues that the waivers it seeks from the Commission are a necessary corollary to the unbundling taking place at the state level. b. Access Charge Restructuring 27. Ameritech maintains that the network unbundling and interconnection that it proposes in its Customers First Plan and has implemented pursuant to the Illinois and Michigan Orders, has produced, and will continue to produce, increasingly vigorous competition in the provision of switched access. In this competitive environment, Ameritech claims that it will be forced to charge artificially high interstate switched access rates due to Commission regulations that require it to recover certain costs in its switched access rates that are unrelated to the provision of switched access. Specifically, Ameritech identifies several components of its CCL and TIC that it asserts are unrelated to the provision of those services. Ameritech maintains that, in a competitive environment, it would be inefficient and inequitable for it to continue to be the only local carrier to impose these surcharges in its interstate switched access rates. 28. To remedy this alleged competitive imbalance, and pending comprehensive reform of the access charge rules, Ameritech proposes a "bulk billing" mechanism that would require all IXCs that purchase interstate switched access services whether from it or from a competing provider to pay Ameritech (through an independent third party) their proportionate shares of the public policy costs now embedded in these rates, thereby removing these costs from Ameritech's per-minute switched access rates. Ameritech asserts that this mechanism would operate as an interim measure until comprehensive proceedings can be conducted to address these access charge issues. 29. Ameritech argues that the components of its CCL charge that recover a portion of Ameritech's interstate loop costs and fund Ameritech's long-term support contributions to NECA are costs imposed by public policy, and should be recovered through bulk billing because they are not borne by Ameritech's competitors in their rates for switched access. Similarly, Ameritech proposes to split the revenues recovered through the TIC in half, and to label one half the "Switched Transport Surcharge," to continue to be recovered from Ameritech's switched access customers. The other half of the TIC revenues, which Ameritech refers to as the "Public Policy Element," would be recovered through a bulk billing mechanism under Ameritech's plan. Ameritech contends (without providing quantitative support) that the bulk-billed portion of the TIC would recover costs that have been misallocated (or unnecessarily incurred) as a result of regulatory mandates. 30. Under Ameritech's proposal, each IXC with a Carrier Identification Code (CIC) would be billed for a share of the following: (1) the Ameritech loop and LTS revenues formerly recovered in the CCL; (2) TIC revenues that Ameritech calls the Public Policy Element; and (3) the administrative costs incurred in recovering these charges. Each IXC would pay, on a monthly basis, its share of this total amount based on its share of the total interstate switched access minutes originating and terminating in the territory covered by the waiver. Ameritech proposes that, in the first year of implementation, it would calculate the total amount to be collected and would perform the bulk billing itself. In subsequent years, an independent organization, to be established within the first year after the Customers First plan goes into effect, would determine the total amount to be recovered and each carrier's share, and would perform the collection and distribution functions. To calculate each IXC's share of the bulk billing amount, this independent organization would determine the respective IXC's share of the interstate switched retail toll minutes of use (MOU) originated or terminated in the territory covered by the waiver, based on an annual report from each IXC. The independent organization would collect the revenues and remit the total amount to Ameritech each month without providing Ameritech a breakdown of how much each IXC contributed. Ameritech contends that such a bulk payment would prevent it from ascertaining IXCs' proprietary market share data. 31. In calculating the total bulk billing amount for an upcoming year, Ameritech states that it will cap certain components of the bulk billing amount. Specifically, under Ameritech's proposal, the loop costs recoverable through the bulk-billed charge would remain subject to the per-line price cap provided in the price cap rules, and would only vary based on the change in the number of access lines provided by Ameritech. The bulk- billed portion of the TIC would be subject to the same restrictive upper band that the price cap rules apply to the TIC. LTS amounts would be determined by NECA, as they are today. 32. With respect to the entry of new IXCs (such as Ameritech's interexchange affiliate) into the territory covered by the waivers, Ameritech proposes that for the first tariff year after an IXC obtains a CIC and begins providing service, that carrier not be subject to bulk billing. Instead, the new market entrants would be billed the CCL and TIC rates on a per-minute basis, just as they are now. Beginning the following year, the new entrant would participate in the bulk billing arrangement and would be billed monthly based on its market share from the previous year. 33. Ameritech also describes in its Petition an alternative to bulk billing for the recovery of common line costs that it refers to as "allocating costs back to the services to which they belong." Ameritech argues that from an economic perspective, loop costs that are currently recovered through per-minute interstate access charges should be recovered through the flat subscriber line charges paid by end users. According to Ameritech, increasing subscriber line charges to recover these costs would be a superior long-term solution. Bulk billing, however, could be implemented quickly and easily, and would address Ameritech's short-term competitive concerns. c. Pricing Flexibility 34. Ameritech also requests flexibility "to compete on a level playing field" with carriers that it asserts will enter the market in response to Ameritech network unbundling and compete with Ameritech to provide exchange access to IXCs. Ameritech requests waivers to remove its transport and switching services and current interexchange services from price caps, and it requests that the Commission deem these services to be "competitive." In addition, Ameritech seeks permission to: (1) de-average the pricing for these services according to geographic zones; (2) to change the rates for these services on one day's notice without filing cost support information; and (3) to offer contract pricing for these services. Ameritech also proposes to cap the rates for transport, switching, and current interexchange services at the rate of inflation for three years. Ameritech's proposal would have the Commission declare Ameritech's remaining service elements "non-competitive" and would continue to subject these service elements to price caps. The remaining services elements include: (1) the residual carrier common line charge (after the bulk billing elements have been removed); (2) bulk-billed elements; (3) the end user common line charge; and (4) charges for expanded interconnection service. Ameritech also proposes to introduce new, non-mandatory services on 14 days' notice without first receiving a Part 69 waiver for introducing new service elements, and without filing cost support data pursuant to Part 61. The Commission has issued a Notice of Proposed Rulemaking to address issues of LEC pricing flexibility generally, and as noted earlier, this aspect of Ameritech's waiver requests will be the subject of a future order. III. DISCUSSION A. Legal Standard for Granting a Waiver and Other General Issues 1. Positions of the Parties 35. Several commenters assert that the Commission lacks jurisdiction over many of the issues raised in the Petition. They contend that the issues of whether an RBOC may enter the long-distance business and whether the MFJ's restrictions should be waived are antitrust questions, within the jurisdiction of the federal courts. The Organization for the Protection and Advancement of Small Telephone Companies and LDDS Worldcom argue that Ameritech must first pursue its Plan with DOJ and the MFJ Court before requesting waivers from the Commission. Others maintain that the issues surrounding unbundling are largely state issues, and hence also outside the purview of the Commission. 36. Some commenters argue that the Petition is premature or repetitive, because similar issues were considered in the Commission's price cap proceeding, and insufficient time has elapsed for the Commission to assess the effectiveness of these regulations. AT&T argues that Ameritech cannot even begin to support the proposed changes to the price cap formulas. Incumbent LECs endorse the Customers First Plan, arguing that it will lead to the development of a wide variety of economical and high-quality telecommunications services. The Arizona Payphone Association similarly supports Ameritech's requests. These commenters submit that there already is substantial access competition, and that such competition will undoubtedly increase. 37. Several commenters maintain that given the sweeping nature of the Petition, which raises issues of a national scope such as pricing flexibility and recovery of alleged social subsidies, the appropriate forum for considering the Petition and the type of relief sought is a formal rulemaking proceeding. These commenters ask the Commission to address such issues in a manner more efficient than the waiver process, and seek an evidentiary record on the conditions extant in the nation as a whole. Moreover, they note that the Commission is already grappling with most of these issues in various rulemaking proceedings. Others argue that the Petition is procedurally improper. CompTel claims that Ameritech's request for waiver of almost forty rules to effect a broad restructuring of policy, rather than pleading unique and special circumstances justifying a limited waiver, improperly proposes a "new model" of regulation. ALTS contends that Ameritech's extensive waivers (as compared to those requested in the NYNEX USPP Order) can only be granted in a rulemaking proceeding. ICA states that if all of Ameritech's waivers were granted and applied to all RBOCs, the Plan would be the equivalent of a rulemaking. 38. Several commenters object to the use of either a waiver or a rulemaking to address the issues raised by Ameritech's petition. Four of the five state commissions in Ameritech's region propose that the FCC convene a Joint Conference pursuant to Section 410(b) of the Communications Act, with participation limited to the five Ameritech states. These parties argue that such a conference could provide for valuable dialogue in areas such as determination of the competitiveness of services, the streamlined review of tariffs, unbundling, and universal service. The four state commission staffs also urge the FCC to authorize technical conferences to permit Ameritech and the five state commissions to identify and obtain needed information and attempt to negotiate a compromise plan for submission to the FCC. TCG supports the use of informal workshops to resolve issues and suggests that the Ameritech Region Regulatory Committee, which is comprised of the state public utility commissions from the five states served by Ameritech, could conduct such a proceeding. ICA disagrees with such an approach, on the grounds that it represents an asymmetrical strategy to deal with national issues; one that will ultimately disrupt competition on a national basis and will benefit no one but individual companies. The National Rural Telecom Association argues that state authorities have more detailed knowledge of local conditions, and that the Commission should not adopt policies contingent on states adopting policies that encourage intrastate toll competition and abolish the local exchange franchise. GTE and other LECs favor USTA's proposal for reform of the access charge and price cap rules, arguing that the USTA proposal will promote new services, establish a mechanism for adjusting the degree of regulation to match the development of competition in each access market, and preserve universal service. 39. While they generally support the Plan, several LECs argue that it should not be the blueprint for other LEC relief because: (1) access reform and regulatory relief for LECs should proceed without the need for additional removal of barriers to competition as proposed by Ameritech; (2) any LEC unbundling must reflect the specific conditions existing in the various regions, and be based on technical and economic data; and because (3) the extent of unbundling and network integration are largely state matters. The Utilities Telecommunications Council urges the Commission to tailor its decision to the Ameritech region only. 40. Various commenters argue that the Commission should deny Ameritech's petition because of the pending DOJ interLATA trial proposal and the conditions in that proposal. CompTel contends that the Commission should not preempt the DOJ trial by granting waivers of the Commission's rules in the absence of data that Ameritech faces substantial local exchange and exchange access competition. ALTS argues that DOJ's request for an experimental waiver of the interLATA prohibition demonstrates that the Commission should deny the waiver request because DOJ's motion: (1) is not based on the Customer's First Plan Ameritech has presented to the Commission; (2) would create only an experiment subject to termination at DOJ's discretion; and (3) covers only the Chicago and Grand Rapids LATAs. Moreover, ALTS claims that the DOJ's decision to impose conditions of its own design on Ameritech renders the Customers First Plan as proposed moot. AT&T contends that the DOJ's motion presumes that although competition does not exist anywhere in Ameritech's region, competition would be beneficial and should be tested. 2. Discussion 41. Section 1.3 of the Commission's Rules provides the Commission with the authority to grant waivers "if good cause therefor is shown." Courts have interpreted this Rule as requiring petitioners to demonstrate that special circumstances warrant a deviation from the general rule and that such a deviation will serve the public interest. Moreover, the Commission has ample authority to address the issues presented here by ruling on Ameritech's waiver request rather than undertaking a general rulemaking. 42. We conclude that a waiver is the appropriate mechanism for this situation. The requested waivers apply only to one carrier and only to certain areas within two states. Moreover, Ameritech's filings suggest that competition has begun to develop more rapidly in a few areas in the Ameritech region than elsewhere in the country. This geographically- limited showing is more appropriate for a waiver than for a nationwide rulemaking. In addition, for the reasons described below, we conclude that the market conditions in the Chicago and Grand Rapids local telecommunications markets justify granting limited waivers to Ameritech at this time, rather than waiting until we complete broad-based rulemaking proceedings. We find that the pro-competitive benefits likely to result from the grant of these waivers justify our decision to use our waiver authority in this matter. We also note that we have ample authority to grant waivers that are relatively broad in scope, such as the waivers Ameritech requests. 43. We are not deciding the merits of Ameritech's proposals to unbundle its local exchange network, and we express no views regarding specific aspects of the Illinois and Michigan commissions' decisions in this area. Matters addressed by the state commissions are relevant here, as discussed below, only to the extent that the development of competition for intrastate services affects the competitiveness of markets for interstate services. Contrary to the assertion of some commenters, a Federal-State Joint Conference is not necessary to address waivers of the interstate access charge rules. These issues are squarely within our jurisdiction, and state representatives have had opportunities to express their concerns. 44. Finally, we conclude that the Telecommunications Act of 1996, by establishing requirements for RBOC provision of in-region interLATA services, has rendered moot Ameritech's request for a declaratory ruling with respect to MFJ relief and interLATA entry. For similar reasons, we reject the arguments of commenters that the DOJ Proposed Order somehow precludes or counsels against our granting waivers to allow Ameritech to restructure certain access charges. Although Ameritech argues that its evidence of competitive developments and regulatory reforms support both interLATA entry and certain modifications of access charges, we conclude that these are distinct issues and may be addressed separately. The Telecommunications Act of 1996 sets forth the conditions for RBOC interLATA entry in states in which they offer telephone service. Nothing in the Act is inconsistent with our exercise of our authority to waive our rules in this situation. B. Special Circumstances: Assessment of the State of Competition 1. Positions of the Parties 45. In General. Ameritech argues that the requested waivers should be evaluated based on the likelihood that the development of competition in local telecommunications markets that Ameritech currently dominates will accelerate as a result of the unbundling and related actions Ameritech has undertaken as part of the Customers First Plan. Accordingly, Ameritech argues that grant of the waivers would serve the public interest by allowing Ameritech to respond effectively to competitive entry and by deterring inefficient entrants from capturing significant shares of the market. By contrast, according to Ameritech, application of the existing rules would "deny customers the full benefits of competition, frustrate economic efficiency and development and impair universal service." Thus, according to Ameritech, it is contestability, and not actual competition, that is the critical determining factor. Ameritech's economic expert, David Teece, submits that: (1) access services are competitive, and more importantly, contestable; (2) local exchange services are contestable under the Plan; (3) competition in the local exchange will exert competitive pressures on access services; (4) under the terms of the waiver request, Ameritech will have no ability to harm competition in access services; and (5) authorization of the requested waivers will bring greater, more efficient competition to the marketplace. 46. Other LECs agree with Ameritech's assertion that the grant of regulatory relief should not be premised on findings that particular services are subject to effective competition, but rather as part of the creation of a regulatory regime that can adapt to the inevitable development of effective competition. Many LECs join Ameritech in contending that they are already subject to considerable, and increasing, competition. In addition, they predict substantially increased competitive pressure due to the development of alternatives to their own local exchange and switched access service by wireless telephone and cable companies. As a result of the development of competition that has already occurred, some of the LECs conclude that the extensive unbundling and network integration proposed by Ameritech are not even necessary to promote further competition in local exchange markets. 47. IXCs, competitive access providers (CAPs), cable companies, wireless telephone companies, enhanced service providers, end users, and consumer advocacy groups argue that actual competition should be in place in exchange and access markets before the Commission grants relief to Ameritech. In particular, AT&T submits that DOJ's motion does not contain an assessment of the current state of competition in Chicago and Grand Rapids, but rather, contains a list of necessary preconditions for competition, and that DOJ proposes to retain the ability to cancel the waiver if competition does not emerge. CompTel, Allnet, and the Ohio Consumers Counsel argue that local interconnection and unbundling will not necessarily lead to competition (particularly if Ameritech engages in strategic pricing and conduct), and therefore, that waivers should not be granted until competition has actually emerged. In addition, Allnet argues that resale of a monopolist's facilities is not the same as effective competition, and the Illinois Cable Television Association argues that niche entry and potential competition are not the same as effective competition, and therefore, that the Commission should not attach the same weight to resale competition and niche entry as it would to facilities-based competition. Finally, MCI argues that the Commission should consider whether sufficient pricing and costing safeguards are in place, and also contends that nascent competition must be allowed "breathing space" prior to relaxation of regulatory controls. 48. The Indiana, Michigan, Ohio and Wisconsin Commissions suggest that the FCC employ the same criteria that they use to assess competitiveness, including, among other things, consideration of the number and size of unaffiliated service providers, with there being at least one such provider, and the availability of functionally equivalent or substitute service at comparable rates, terms and conditions from unaffiliated providers. Many commenters add that there must be an enforceable, meaningful obligation for LECs to provide essential network services and functions to all competitors, including wireless service providers, on an unbundled and nondiscriminatory basis at reasonable rates. 49. Removal of Barriers to Entry. Ameritech assesses the contestability of its markets by reference to the conditions for competition that are enumerated in the DOJ Proposed Order. Ameritech contends that its compliance with those conditions makes these waivers necessary because large carriers such as AT&T and MCI have filed applications in those states to become certified providers of local exchange services, which will allow them to avoid Ameritech's access charges. Ameritech also argues that the Commission should grant the requested waivers under the same standard the Commission used in the NYNEX USPP Order. 50. According to Ameritech, all of the prerequisites for local exchange and switched access competition identified by the DOJ have been implemented in Illinois and Michigan. In particular, Ameritech submits that it is implementing the pre-waiver requirements enumerated in the DOJ Motion in conjunction with the Illinois and Michigan commissions, including: (1) unbundling loops, ports, and other components of its local network (tariffs are effective in both states); (2) implementing intraLATA toll dialing parity (by April 1996 in both states); (3) permitting resale competition; (4) permitting nondiscriminatory access to poles, conduit space, risers, and telephone closets; (5) interconnecting with the networks of competing local service providers and implementing mutual compensation arrangements for termination of local traffic; (6) sharing its directory assistance information; (7) providing interim number portability and working to develop a long-term solution to the problem; and (8) working to assign central office code administration to independent third parties. Ameritech states that it is entering into interconnection agreements with local exchange carrier competitors that provide for mutual compensation in Michigan at $0.015 per MOU, and in Illinois at $0.005 per MOU for direct routed and $0.0075 per MOU for tandem routed traffic, which are significantly lower than the switched access rates it currently charges IXCs. Ameritech also claims that the members of the Illinois Commerce Commission's Number Portability Workshop have unanimously selected a long-term number portability solution for Illinois, and that the implementation schedule is currently under discussion. 51. Ameritech also argues that the elasticity of demand is very high for its switched access and local exchange services -- that customers will switch to alternative providers of such services in response to relatively small changes in prices. According to Ameritech, 85 percent of Ameritech's access revenues are generated by three large and very sophisticated IXCs that have demonstrated their willingness to use CAPs to provide transport services. Similarly, Ameritech argues that elasticity of supply for such services is high -- that alternative suppliers of such services will quickly respond to relatively small changes in prices by offering competing services. 52. The CAPs and IXCs argue that Ameritech has not fully implemented the measures that are necessary to remove barriers to entry and open local exchange and switched access markets to competition. According to MFS, although Illinois and Michigan have taken actions to authorize competitors and establish conditions for interconnections, "these arrangements have not yet been implemented in either state, and to the best of MFS's knowledge, no competitor has begun to provide basic switched service (other than pure resale of Ameritech services) in either jurisdiction." TCG argues that those arrangements will not be implemented in the next few months because: (a) the Illinois tariff "creates more barriers to competition than it removes," which has caused AT&T, MCI, MFS, and TCG to ask the Illinois Commission to conduct an expedited investigation; and (b) the Michigan tariff is inconsistent with the Michigan order. 53. Competitive Presence. In addition to its arguments concerning the removal of barriers to entry, Ameritech identifies the following facts to demonstrate that competitors are prepared to compete for a substantial percentage of its exchange and access services in Illinois and Michigan:  As of January 15, 1996, seven competitive providers have been certified by the Illinois Commerce Commission to offer local exchange service in Illinois, including AT&T, LCI International, MFS, MCI Metro, and TCG. Similarly, five competitors have been certified as providers of local exchange service in Michigan: US Signal, AT&T, LCI International, Southwestern Bell Mobile Services (Cellular One), and Midwest Fibernet.  According to Ameritech, MFS has installed 7,560 fiber miles of fiber serving 134 buildings in its 124 mile network in Chicago. The current capacity of this network amounts to approximately 10,200-DS1-equivalent circuits. In addition, published reports indicate that MFS is expanding its fiber optic network southward from Chicago into the Naperville area, and north to Deerfield and Northbrook. According to Ameritech, TCG has installed 23,240 fiber miles of fiber serving 114 buildings in its 114 mile network in Chicago. The current capacity of this network is equivalent to 9,700-DS1 circuits. Ameritech also submits that US Signal has constructed 9,680 fiber miles of fiber serving 250 buildings in its 220 mile network in Grand Rapids. The current capacity of this network is equivalent to 4,700 DS1 circuits. Overall, Ameritech claims that as of February 5, 1996, 461 buildings in Chicago and 162 buildings in Grand Rapids are served by at least one competitive access provider.  Collectively, AT&T, MCI Metro, MFS, and TCG have six end-office-capable switches in Chicago, and US Signal has one such switch in Grand Rapids. AT&T has three additional switches planned for Chicago. Ameritech states that all of these switches are digital electronic switches with modular architectures that can easily be expanded to serve additional lines. Many of those switches, for example, are 5ESS switches manufactured by AT&T, which are capable of serving up to approximately 200,000 access lines.  Ameritech alleges that CAPs are offering service in 39 of Ameritech's 283 Illinois wire centers, and in 23 of its 340 Michigan wire centers. These wire centers service customers that account for 34 percent of Ameritech's business in Illinois, and 22 percent of its business in Michigan. CAPs have 10 operational access interconnection arrangements in place in Chicago, and three such arrangements in Grand Rapids.  Existing IXC points of presence are located within 65 of the 283 wire centers in Illinois, giving them access to customers that account for 42 percent of Ameritech's revenue base in Illinois, and in 46 of 340 wire centers in Michigan, providing access to customers that account for 38 percent of its revenues in Michigan.  Cable companies have facilities in 217 of the areas served by Ameritech's 283 wire centers in Illinois. Customers served by these wire centers account for 88 percent of Ameritech's revenue in that state. Cable companies have constructed facilities in the areas served by 146 of Ameritech's 340 wire centers in Michigan, which serve customers that account for 63 percent of the revenues. 54. Many commenters express considerable skepticism about Ameritech's conclusion that the services offered by current and future entrants will rapidly expand so that most of its services will soon be under competitive pressure. Instead, they argue that a huge financial commitment is necessary to establish a competitive provider, and thus, effective competition (in the form of facilities-based competition) will not emerge for a long time. ALTS argues that competition is unlikely to emerge in Chicago and Grand Rapids as quickly as the Commission determined it would develop in New York City because Chicago and Grand Rapids are substantially smaller and have correspondingly lower traffic densities. CompTel argues that, even if CAPs have excess capacity to offer some high capacity services, on a market-wide basis, Ameritech's rivals have the transmission or switching capacity to absorb only a minuscule percentage of Ameritech's business. 55. Emergence of Competition. Ameritech contends that it already faces competition for a significant share of its business, and that those competitors are poised to challenge Ameritech for most of its revenues. Ameritech maintains that the business customers who purchase special access services from its competitors account for a substantial percentage of its revenues through their purchases of Ameritech's exchange services. Therefore, Ameritech argues that the same conditions that the Commission found in LATA 132 in the NYNEX USPP Order are present in Illinois and Michigan. 56. Ameritech submitted promotional materials circulated by AT&T, MCI Metro, MFS, TCG, and US Signal, in Chicago or Grand Rapids, that allegedly show that those companies are positioning themselves as Ameritech's competitors for local telephone services. For example, AT&T sponsored newspaper advertisements that included the statement: "It will take a little time to set things in place but, it is our hope, that in the near future the company that now connects you to people around the world will be able to connect you to people around the corner." Ameritech submitted an advertisement in which TCG referred to itself as "the other local phone company." Ameritech also submitted US Signal promotional materials in which US Signal claims that it is "the first local telephone service competitor Ameritech has ever faced," offers "one stop shopping," and provides descriptions and rates for a full range of telephone services, including business and residential intraLATA services. Ameritech asserts that, in an assessment of whether the local telecommunications market is becoming competitive, the market should be defined to include these and other CAPs, IXCs, cable companies, wireless carriers, and private networks, because they have substantial additional capacity and financial resources, and the Customers First Plan will enable them to enter the market at low cost within one year. 57. Ameritech identifies the following facts to demonstrate that it currently faces substantial competition in Illinois and Michigan.  Ameritech states that it exchanged 6,484,000 minutes of switched local exchange traffic with competitors pursuant to reciprocal compensation agreements in the Chicago and Grand Rapids LATAs in October 1995, and that 9,176,980 such minutes were exchanged in November 1995. In addition, Ameritech has entered into local resale agreements with U.S. Network and MFS, under which those competitors will resell Ameritech's bundled local services in Illinois beginning February 1, 1996.  Ameritech also states that, as of January 15, 1996, 4,482 end-office integration trunks, and 722 direct inward dialing (DID) trunks, have been connected with local exchange competitors in Chicago. Similarly, Ameritech's evidence indicates that 964 end- office integration trunks have been connected in Grand Rapids.  As of October 1995, 59 NXX codes have been assigned to competitors in Chicago. Fifty-eight of these codes have been activated, and twenty-seven of the codes are being used to serve end users, with 630 Ameritech telephone numbers ported to competitors using interim number portability as of January 15, 1996. In Grand Rapids, 2,429 unbundled loops have been sold to US Signal (of which 14.5 percent are residential), and 16 NXX Codes are being used to serve end users, with a total of 5,854 telephone numbers ported to competitors as of January 15, 1996. As of February 5, 1996, local service competitors have placed disconnect orders on behalf of end users of 1,578 lines in Chicago and 6,809 lines in Grand Rapids.  CAPs are providing 41 percent of the DS1-equivalent special access lines used by end users in downtown Chicago, and 48 percent of such lines in Grand Rapids. Ameritech also has submitted evidence indicating that it served just under 53 percent of the market for high capacity services in Chicago as of April 14, 1995.  The price of Ameritech's interstate DS1 access service has fallen by 39 percent in Illinois since 1991, and Ameritech's switched interstate access rates in Illinois have fallen by 12 percent over the same time period. 58. The IXCs and CAPs emphatically disagree with Ameritech's portrayal of competitive local exchange markets, arguing that Ameritech does not face any significant competitors that could constrain its conduct in markets for local exchange and switched access services. In particular, they contend that Ameritech receives 98 to 99 percent of their access payments in Illinois, and only slightly lower percentages in the Chicago and Grand Rapids LATAs. In addition, they argue that CAPs do not have the capacity to compete effectively for most of Ameritech's business, submitting evidence that the CAPs (a) only serve about 285 buildings in Illinois, (b) provide only 5.5 percent of the DS1 and 4.1 percent of the DS3 circuits terminating at AT&T points of presence in Chicago (and even less in Detroit and Grand Rapids), and (c) generally do not have the equipment, "back office capacity" or capital necessary to assume a substantial amount of Ameritech's traffic. 59. Thus, many commenters (particularly the IXCs and CAPs) claim that in no part of its region, not even in the Chicago or Grand Rapids LATAs, does Ameritech face anywhere near the level of competition that the Commission found sufficient to justify waivers in the NYNEX USPP Order. These commenters assert that an overwhelming number of customers who live or work in most of the LATAs within Illinois and Michigan cannot choose an alternative provider, even for special access services. 60. Some parties argue that if any relief is granted, it should be limited to the Chicago and Grand Rapids LATAs. MCI and MFS argue that if any waivers are granted, they must be narrowly tailored to protect the development of competition, and Sprint contends that any relief should be limited to high capacity special access services provided in Chicago and Grand Rapids. The Michigan Commission argues that granting waivers only where the DOJ trial is underway ensures that the necessary nexus is maintained between the existence of real competitive alternatives and a reduction in regulatory oversight. The Ohio Consumers Counsel agrees that any waivers must be limited to markets that have actual, measurable competition. By contrast, Ameritech focuses on contestability, and contends that the waivers should be granted for the entire states of Illinois and Michigan in light of the measures taken in those states to remove barriers to entry. 2. Discussion 61. Overview. Based on the evidence before us, we conclude that Ameritech has demonstrated the necessary special circumstances to justify a limited waiver of our access charge rules in those portions of the Chicago and Grand Rapids LATAs located within Illinois and Michigan. In reviewing requests by LECs to restructure their interstate access charges, we acknowledge that the existing access charge rate structure was developed in a monopoly environment. Economic, technological, and legal conditions have changed since the existing rate structure was developed, and we are committed to reexamining our rules in the near future. In this waiver proceeding, however, we do not examine the validity of the underlying rules from which Ameritech seeks waivers. Instead, we confine ourselves to deciding whether, under the special circumstances presented by Ameritech, continued application of those rules in certain portions of the Ameritech region would serve the public interest. 62. Ameritech, in concert with the Illinois and Michigan commissions, has taken steps to remove the most significant barriers to competitive entry in exchange and access markets, and the Illinois and Michigan commissions are actively working to resolve the remaining issues involving possible barriers to such competition. The evidence also indicates that competitive carriers with substantial capacity and a track record of successful competition in other markets have begun to interconnect with Ameritech's local network within the Chicago and Grand Rapids LATAs, and to offer competing exchange and access services. As a result, Ameritech's interstate access customers in those areas are likely to have alternative sources of supply for local loop and switching services. In order to avoid paying the non- cost-based elements of Ameritech's carrier common line and transport interconnection charges, these IXCs will have incentives unrelated to economic efficiency to seek such alternatives, or to influence end users to do so. 63. Although we cannot predict the exact manner in which competitive markets will develop, we believe that the disparities between costs and prices created by our access charge rules create substantial incentives for uneconomic bypass in markets exposed to competitive entry. As discussed below, when such uneconomic bypass can occur on a large scale, it may encourage potentially inefficient entry seeking to take advantage of the pricing distortions resulting from our access charge rules. These conditions constitute special circumstances that support waivers of our rules regarding Ameritech's recovery of the carrier common line and transport interconnection charges in the Chicago and Grand Rapids LATAs. Ameritech has not, however, demonstrated the necessary special circumstances outside of those LATAs. 64. Our conclusion that Ameritech has demonstrated special circumstances justifying the specific waivers discussed below relating to the carrier common line and transport interconnection charges does not necessarily mean that the same circumstances justify any other relief. In particular, we reach no conclusion regarding the other waivers Ameritech proposed in connection with the Customers First Plan, including waivers to remove transport, switching, and interexchange services from price caps, to apply zone density pricing to those services, and to permit rate changes for these services with no cost support on one day's notice. We intend to address those proposals in a subsequent order. We also emphasize that nothing in this order should be taken as a determination that Ameritech has satisfied any of the requirements of the Telecommunications Act of 1996. Specifically, we reach no conclusion as to whether Ameritech has or has not met the conditions for in-region interLATA entry set forth in Section 271 of the Act. a. Removal of Barriers to Entry 65. We previously have modified our rules to remove barriers to the competitive provision of certain interstate access services, and to foster the development of access competition. In particular, our decisions in the Expanded Interconnection proceeding facilitate the competitive provision of interstate special access service and the transport component of interstate switched access service. Nevertheless, in most parts of the country, entry barriers continue to hamper the development of competition for other components of interstate switched access service, particularly the local switching and common line elements. In some states, statutes or regulations have prohibited parties other than the franchised monopoly LECs from providing switched local exchange service. Because customers use the same local switching and loop facilities for local exchange calling and interstate calling, it is also difficult for competitors to provide the local switching and local loop components of interstate switched access service unless competition for local exchange service is also possible. In most other states, it is difficult for local exchange competition to emerge even in the absence of legal prohibitions because there are no arrangements in place governing the technical and financial aspects of interconnection between competing local networks. 66. Typically, there are also substantial technical and economic barriers to entry in local exchange markets. Most LECs offer local exchange service as a bundled package, rather than offering local loops and local switching on an unbundled basis. Unbundling these services would reduce the investment needed for new competitors to enter the local exchange market by enabling them to combine their own facilities with resold LEC facilities to provide service. Because of these and other regulatory, technical, and economic factors, LECs in most parts of the country continue to exercise market power in the provision of both intrastate local exchange service and the local switching and common line components of interstate switched access service. 67. Removal of Barriers in Illinois. Unlike much of the country, the most significant barriers to entry for local exchange service have been removed in Illinois, which makes possible competition for all components of interstate switched access service as well. The Illinois legislature removed its statutory prohibition against the competitive provision of local exchange service in 1988, and at least seven competitive local exchange service providers have been certified by the Illinois Commission. As part of its Customers First Plan, Ameritech proposed, inter alia, the following: (1) to offer local loops, local switching, SS7, and other services on an unbundled basis; (2) to establish interconnection and joint traffic arrangements with competing local carriers, including mutual compensation for the termination of local traffic; (3) to offer competing providers of local switched service functions such as 911, directory assistance, and operator services; and (4) to divest its responsibilities as central office code administrator and to cooperate in developing number portability solutions. The Illinois Commerce Commission accepted those proposals, and in a number of instances, directed Ameritech to go further in facilitating local exchange competition than Ameritech had proposed. Ameritech has now established unbundled loop charges and reciprocal compensation rates in Illinois. 68. We recognize that many issues relating to local exchange competition remain unresolved before the Illinois Commission. Competing local service providers have challenged the interconnection tariff, arguing that it is anticompetitive and inconsistent with the commission's orders, and the Illinois Commission has initiated an investigation of those tariffs. The Illinois Commission also has initiated rulemaking and other proceedings to address universal service, number portability, and other matters relating to local exchange competition. As discussed below, however, competitive entry is occurring in the Chicago LATA, indicating that entrants have concluded that changes they have seen and expect to see provide a meaningful opportunity for entry. Every step in this implementation process need not have been completed before we conclude that Ameritech and the Illinois Commission have removed the most significant barriers to entry. 69. Removal of Barriers in Michigan. Significant barriers to entry in local telecommunications markets have also been removed in Michigan. The Michigan legislature removed that state's statutory prohibition against the competitive provision of local exchange service in 1991, and took additional steps intended to further competition in 1995. As discussed above, the Michigan Public Service Commission has ordered Ameritech to interconnect with US Signal's network and has specified certain interim interconnection requirements. Pursuant to orders by the Michigan Commission, Ameritech has also filed a tariff permitting the purchase of unbundled loops and switching facilities at prices determined by total service long run incremental costs and ordered Ameritech to offer interim number portability at a "transitional price" based on incremental costs. Ameritech is now offering unbundled loops at relatively low tariffed rates mandated by the Michigan Commission. The Michigan Telecommunications Act of 1995 further clarified the framework for exchange and access competition in Michigan. 70. As is the case in Illinois, significant issues concerning barriers to entry also remain unresolved in Michigan. The Michigan Commission has initiated generic dockets to develop long-term interconnection rules to replace the interim measures in place today. Nonetheless, competitive entry is occurring in Grand Rapids, indicating that entrants have concluded that changes they have seen, and expect to see, in Grand Rapids provide a meaningful opportunity for entry. Therefore, based on the evidence before us, we conclude that significant barriers to entry been removed in the Grand Rapids LATA even though some issues remain unresolved. 71. In sum, the Illinois and Michigan commission orders have established interim frameworks under which competition can develop in local telecommunications markets in those states. The presence of effective tariffs means that competitors can take advantage of those frameworks. We emphasize that our conclusion here regarding Ameritech's interconnection tariffs in Illinois and Michigan is limited to a finding that Ameritech has shown special circumstances that justify a waiver in certain parts of those states. We do not address more generally whether steps such as those that the Illinois and Michigan commissions are taking in rulemaking or tariff review proceedings would justify any other policy changes, nor do we consider the sufficiency of local interconnection tariffs Ameritech has filed, or that it or other LECs might file in other states. b. Emergence of Competition 72. The removal of barriers to entry, by itself, would not be sufficient to provide the requisite special circumstances justifying the waivers sought by Ameritech. The development of the facilities necessary to provide competitive exchange and access services requires significant investment, which makes it unlikely that Ameritech would be exposed to a serious threat of uneconomic bypass that would justify a waiver of our rules until some actual competition has emerged. It would be imprudent for us to conclude that a meaningful opportunity exists to enter and challenge Ameritech effectively for the right to serve potential customers without a demonstration that at least some actual competition is beginning to develop. Moreover, we do not accept Ameritech's contention that the requested waivers are justified solely on the basis of market contestability. 73. On the other hand, it is not necessary to conclude that fully effective competition has developed in the interstate access and local exchange markets to establish that special circumstances exist that justify the limited waiver described below. Under the increasingly competitive environment in certain of Ameritech's service areas, the existing access charge rules create incentives for switching to alternative providers for reasons unrelated to the relative economic merits of competing providers. In an environment where competition has begun to emerge, those incentives could encourage inefficient entry in markets for services where access charges artificially inflate prices and could prevent end users from receiving the full benefits of competition. 74. Emergence of Competition in the Chicago LATA. The record evidence demonstrates that seven potential competitors have received certification as providers of local exchange service in the Chicago LATA. It appears that competitors are originating significant and rapidly increasing amounts of local exchange traffic, as demonstrated by the millions of minutes of traffic exchanged pursuant to reciprocal compensation agreements. In addition, Ameritech has presented evidence that AT&T and other large potential competitors have targeted the Chicago and Grand Rapids areas for large-scale entry into the local exchange market in the near future. 75. Certified competitive local exchange providers have established networks in the Chicago area that provide them with the capability of entering the market for local exchange service without substantial delay. Ameritech has presented evidence that competitors are currently in business within the Illinois portion of the Chicago LATA and have the network capacity to provide a substantial portion of the exchange and access services currently provided by Ameritech. Competitive providers of local exchange service have six switches in place in the Chicago LATA, and AT&T has announced plans to install an additional three switches in the area. The record contains evidence indicating that MFS's network covers a total of 124 miles in the Chicago area, serving 134 buildings, and TCG's network covers 280 miles, serving 114 buildings in the area. 76. Ameritech also submitted evidence demonstrating that it exchanged 6,484,000 minutes of local exchange traffic with competitors in the Chicago and Grand Rapids LATAs pursuant to reciprocal compensation agreements in October 1995, and that 9,176,980 such minutes were exchanged in November 1995. Although, for customer confidentiality and other reasons, Ameritech has not disclosed the percentage of those minutes attributable to each of the two LATAs, it is clear that at least some interconnection is occurring in both places. It is also reasonable to conclude based on the numbers of interconnected facilities that a substantial majority of that traffic is being exchanged in Chicago. The pace at which the total number of minutes is increasing is also evidence of burgeoning competitive entry. In addition, it appears that competitors have activated 59 NXX codes in Chicago, which provide them with approximately 590,000 potential phone numbers. In addition, the evidence indicates that Ameritech has ported 630 numbers to competitors in Chicago as of January 15, 1996. Ameritech has provided evidence that, as of January 15, 1996, 4,482 end-office integration trunks, and 722 DID trunks have been connected with competitors in Chicago. Overall, the evidence presented leads us to conclude that entry is occurring to such an extent that, if the Commission's current rules continue to apply, substantial uneconomic bypass could develop. 77. As many competitors argue, actual competition does in fact remain quite limited -- most customers in most of the Chicago LATA are still unable to choose the services of a competing provider of local exchange services. In addition, as of January 15, 1996, no unbundled loops had been sold in Chicago. This does not, however, negate the showing of special circumstances in the LATA. The investment decisions of actual and potential entrants and their prospective customers are very likely to be affected by the opportunity to bypass the components of Ameritech's per-minute interstate switched access charges that are not related to the costs of providing those services. The evidence in the record demonstrates that competing local service providers in Chicago are interconnecting their facilities with Ameritech's local network. These arrangements provide the additional evidence necessary to demonstrate the likelihood that the components of Ameritech's access charges that are unrelated to the costs of providing the underlying services will cause distortions in the economic incentives of entrants and customers. The fact that, in contrast to Grand Rapids, competitors in Chicago have not yet purchased unbundled loops, is not fatal to our finding. Competitors to incumbent LECs may pursue different strategies for developing a market presence, including resale of bundled LEC facilities, use of unbundled loops, and total bypass of LEC facilities. In a densely populated urban area such as Chicago, where major CAPs have been established for some time, competitors may initially focus their efforts on areas where they already have facilities in place to reach customer premises without relying on resold LEC facilities. The substantial number of end office integration and DID trunks in place, and the substantial and growing number of reciprocal compensation minutes, suggest that competitive entry is beginning in Chicago, and that the absence of purchased unbundled loops may not accurately reflect the state of competition in that LATA. As a result, we conclude that the earlier monopoly environment has eroded to a sufficient degree to justify granting the limited waivers of the Commission's access charge rules described below. 78. Emergence of Competition in the Grand Rapids LATA. In Grand Rapids, US Signal has already entered the local exchange market, and expects to obtain a substantial share of the exchange and access market in that area once it resolves the terms of interconnection with Ameritech. The evidence presented by Ameritech concerning Grand Rapids is consistent with the evidence presented by NYNEX that led us to issue the NYNEX USPP Order. US Signal has a switch in place in the Grand Rapids LATA that should permit it to handle a substantial amount of the LATA's switched traffic. US Signal's network covers 220 miles and serves 250 buildings in the area. 79. As discussed above, Ameritech has submitted evidence that appears to demonstrate that it is exchanging a substantial and increasing amount of local exchange traffic with competitors in Grand Rapids LATAs pursuant to reciprocal compensation agreements. In many other respects, the evidence before us concerning actual competition in the Grand Rapids LATA is comparable to that presented for the Chicago LATA. It appears that competitors have activated 16 NXX codes in Grand Rapids, which provide them with approximately 160,000 possible phone numbers. In addition, the evidence indicates that Ameritech has ported 5,854 numbers to competitors in Grand Rapids as of January 15, 1996. The evidence indicates that US Signal had purchased 2,429 unbundled loops from Ameritech as of January 15, 1996. Similarly, Ameritech's evidence indicates that 964 end- office integration trunks have been connected in Grand Rapids, and US Signal has implemented interconnection arrangements in four central offices in Grand Rapids. 80. As with Chicago, competition clearly remains limited in Grand Rapids. The early stage of competitive development, however, does not negate the showing of special circumstances in the LATA. Once again, the evidence indicates that competing local service providers are interconnecting their facilities with Ameritech's local network, and that the investment decisions of actual and potential entrants and their prospective customers are very likely to be affected by the manner in which our access charge structure modifies economic incentives by distorting the relationship between costs and prices. As a result, we conclude competition has emerged in Grand Rapids to the point that where our access charge structure may interfere with the efficient operation of an emerging competitive market. This could prevent end users from receiving the full benefits of competition and, therefore, we conclude that Ameritech has met its burden of demonstrating that special circumstances justify the waivers described herein in the Grand Rapids LATA. 81. Related Matters. We conclude that LATAs are appropriate boundaries for the waivers we grant today. Limiting relief to geographic areas smaller than LATAs would not be in the public interest because it would result in greater administrative costs and complexity than would be justified by the benefits provided by more narrowly defining the waiver territories. Conversely, the evidence presented by Ameritech in this proceeding does not justify expansion of the relief beyond the two LATAs. Ameritech requests waivers for the entire states of Illinois and Michigan, arguing that because the state commissions have eliminated barriers throughout those states, access services are contestable statewide. Ameritech has been unable, however, to show that a measurable competition for exchange and switched access services is emerging anywhere in Illinois or Michigan outside the Chicago and Grand Rapids LATAs. Specifically, the record evidence does not indicate that competitors with sufficient capacity to divert significant business from Ameritech have interconnected with it and are competing to provide intrastate exchange and switched access services outside of those LATAs. Therefore, it does not appear that competition has begun to emerge in the remainder of Illinois and Michigan. As in the NYNEX USPP Order, the adverse public interest consequences that could result if customers move traffic from Ameritech's network to competitive providers' networks in response to the distorted incentives created by our access charge rules are likely to happen more quickly and to have a greater impact in those LATAs than elsewhere. 82. We also disagree with certain parties' arguments that no waiver should be granted to Ameritech because it has failed to demonstrate that exchange and access competition has developed, even in Chicago and Grand Rapids, to the extent shown by NYNEX in the NYNEX USPP Order. The evidence concerning the removal of barriers to entry and the emergence of competition in the two LATAs is generally comparable to that presented by NYNEX, and the evidence supports the conclusion that competitive activity in Chicago and Grand Rapids is likely to increase significantly in the near future. In short, we conclude that the record evidence in this case shows that new entrants have a realistic opportunity to compete in the Chicago and Grand Rapids exchange and switched access markets, and that several such firms have begun to compete directly with Ameritech in those LATAs. In these circumstances, the continued application of all of our current access charge rules would create a serious risk of significant uneconomic bypass. Accordingly, we believe that the public interest will be better served by granting Ameritech waivers in those areas than by applying the existing rules. In addition, our decision in the NYNEX USPP Order, while providing useful guidance on the factors to consider in evaluating similar proposals, should not be taken as defining an absolute minimum degree of competition that must be demonstrated to justify a waiver. Our inquiry in waiver proceedings must necessarily proceed on a case-by-case basis. C. Public Interest Analysis of the Bulk Billing Proposal 1. Positions of the Parties a. General Comments 83. Ameritech claims in its Petition that bulk billing advances three goals: recovering subsidies and regulatory-related costs in a competitively neutral manner; eliminating price dislocations and distortions; and adjusting rates for competitive services to competitive levels. Ameritech states that the CCL charge and TIC currently recover costs not related to the provision of switched access, but in effect, function as a surcharge on local switching rates. According to Ameritech, this misallocation of costs keeps Ameritech's access rates artificially high compared to local access competitors. Thus, under the current system, competitors may be able to price their access services below Ameritech s rates even if Ameritech is the most efficient carrier. Such inefficient entry could lead to wasteful investment and could harm consumers. To bolster its argument, Ameritech notes that in the NYNEX USPP Order, the Commission found that the CCL charge and the TIC artificially create incentives for IXCs to seek alternative sources of supply for interstate switched access. 84. Some end-user groups, the Information Technology Association of America (ITAA), and the BOCs offer general support for Ameritech's bulk billing proposal as a way to reduce inefficiencies in the current access rate structure, but encourage the Commission to examine access charge reform more broadly. AARP generally supports the bulk billing proposal as a means to reform access charges without raising local residential rates. The General Services Administration commends Ameritech for "fleshing out" a proposal that could serve as an effective interim means of funding public policy subsidies. 85. A number of commenters challenge Ameritech's assessment of the level of misallocated costs in existing access rates. MCI, ALTS, Time Warner, and Cox assert that Ameritech has not offered sufficient information in support of its proposal and its characterization of certain costs as "subsidies," and that Ameritech should be required to provide additional data, such as the underlying costs of its local transport and local loops. State commission commenters and the Ohio Consumers' Counsel similarly press for additional information about Ameritech s method for determining what Ameritech considers to be regulatorily-imposed surcharges on its local switching. 86. Potential local exchange competitors to Ameritech claim that bulk billing, rather than redressing inefficiencies in the current access charge system, would only guarantee Ameritech s monopoly revenue stream and shift Ameritech's costs to its competitors. TCG asserts that bulk billing would preserve Ameritech's "monopoly claim" on subsidy revenues even when customers bypass elements of Ameritech's network, and thereby give Ameritech a competitive advantage. According to Sprint, Ameritech's plan fails to address the need to reduce and narrowly target subsidies in existing access rates and does not address intrastate subsidies. Sprint and Time Warner state that bulk billing would remove incentives for Ameritech to increase its productivity, and claim that, to the extent that the CCL charge and TIC recover excess costs incurred under rate of return regulation or obsolete plant and equipment, Ameritech should write off those costs. Similarly, MCI and MFS argue that competition should be permitted to drive out inefficiencies embedded in Ameritech's current rates, and that Ameritech will have no incentive to operate efficiently if it is guaranteed recovery of costs through a bulk billing mechanism. 87. Ameritech responds that bulk billing would not place competitors at a disadvantage. According to Ameritech, bulk-billed costs would be recovered in a manner that neither encourages nor discourages the purchase of Ameritech or any other carriers' access services. Ameritech acknowledges that bulk billing does not represent a long-term solution to the industry-wide problem of subsidy recovery. Rather, Ameritech advocates bulk billing as an interim response that addresses the threat of inefficient entry while not disturbing existing subsidy flows. 88. Small LECs contend that Ameritech's bulk billing proposal is poorly thought- out, and could undermine the system for ensuring universal service. OPASTCO and Staurulakis also express concern that the Customers First Plan would result in geographic deaveraging of toll rates, which would increase rates in rural areas. Nevertheless, OPASTCO acknowledges that bulk billing might be appropriate for adapting universal service mechanisms to a competitive market, so long as the Commission reviews the proposal in a comprehensive rulemaking. Staurulakis asserts that bulk billing might provide Ameritech with an unfair advantage over carriers whose rates reflect high cost program funding requirements, and thereby create an incentive for customers to bring business to the Ameritech region and to avoid other service areas. 89. Ameritech asserts in response that its bulk billing plan will preserve and strengthen universal service in a competitive environment, and will not affect independent telephone companies. Ameritech explains that the Plan does not interfere with the current Universal Service Fund and Lifeline Assistance charges, which NECA bills directly to IXCs. According to Ameritech, the current access rate system would eventually lead IXCs to reduce the volume of traffic using Ameritech's switching in order to avoid paying for public policy subsidies, leading to a "spiral" which would ultimately destroy the funding base for those subsidies. 90. Several IXCs and the Indiana Utility Consumer Counselor raise questions about the mechanics of the proposed bulk billing mechanism. Sprint and Allnet suggest that the billing agent hired by Ameritech to administer the bulk billing system might not be impartial. Sprint claims that IXCs will be required to establish billing and audit mechanisms to handle the new bulk billing mechanism, and that the process of tracking access payments will become increasingly complex as more LEC-specific access rate structures are permitted. MCI asserts that Ameritech's proposal to use minutes of use as the basis of calculating market share conflicts with the method the Commission allowed in the NYNEX USPP Order. The Indiana Utility Consumer Counselor argues that Ameritech's proposal to base apportionment on market share would benefit Ameritech if and when Ameritech enters the interLATA market, because the annual assessment of market share would lag behind the actual state of the market and would undercharge IXCs with a growing market share, such as Ameritech's interexchange affiliate. 91. Ameritech replies that its proposal would distribute the burden of costs on IXCs in roughly the same allocation as it exists today, and new IXCs will pay their fair share of costs as they enter the business. In response to commenters who attack the mechanics of the bulk billing process, Ameritech asserts that a system based on market share would be more consistent with the existing burden on IXCs than a mechanism based on presubscribed lines. Ameritech states that it will hire an independent billing agent to administer the bulk billing system and collect market share information from carriers, in order to avoid the need for disclosure of competitively sensitive data. b. Carrier Common Line Charge 92. Long Term Support. Commenters acknowledge that NECA long-term support payments represent true subsidies, and generally do not object to Ameritech s proposal to recover them through a bulk billing mechanism. Both AT&T and CompTel, although expressing opposition to most of Ameritech s proposal, specifically acknowledge that LTS payments are subsidies that are appropriately addressed through a bulk billing mechanism. AT&T draws an analogy between Ameritech's proposal to bulk bill LTS costs and the existing mechanism used to recover interstate telecommunications relay service costs. The General Services Administration argues that an increase in the SLC would be the preferred long-term means of recovering subsidies for residents of high cost areas. 93. Common Line Recovery. Potential local service competitors to Ameritech argue that the Ameritech's proposal to bulk bill CCL common line revenues would harm competition. AT&T and Cox claim that Ameritech's own end-user customers would pay only a portion of Ameritech's loop costs, whereas competitors would have to pay all of their own costs plus a portion of Ameritech's costs. According to AT&T, the result would be to "virtually preclude competitive opportunities for a number of exchange functions," because competitors would be unable to undercut Ameritech's artificially-depressed local rates. US Signal explains that its interstate access tariff does not distinguish between subscriber loop facilities it owns and facilities it leases from Ameritech for purposes of billing CCL charges to IXCs. US Signal argues that it is entitled to recover CCL charges when it provides access to IXCs, including situations where it uses unbundled loops purchased from Ameritech, and that as a result, IXCs will be billed for the same costs by Ameritech and US Signal. The American Petroleum Institute asserts that Ameritech's proposal would violate the Commission's 1986 Guidelines Order. 94. In response to those who demand additional information about Ameritech's basis for assessing the level of charges to be bulk billed, Ameritech in three ex parte submissions provides a detailed breakdown of its average loop costs in each state of its region, and the level by which its interstate loop costs exceed the recovery permitted through the SLC. Based on estimated 1995 demand, the CCL bulk billing amount would be $69.9 million in Illinois and $43.6 million in Michigan, and the bulk billed portion of the TIC would be $55.8 million in Illinois and $32.7 million in Michigan. Ameritech denies that bulk billing would guarantee Ameritech recovery of its costs. Ameritech explains that loop costs recovered through bulk billing would be capped at a putative cost per line which would be subject to the current price cap index, and, under Ameritech's modified price cap proposal, would be subject to a supplemental cap at its current level for three years. 95. Two methods for recovering loop costs other than bulk billing are discussed in the record. In its original Petition, Ameritech raises the possibility that, as an alternative to bulk billing, misallocated costs in existing access rates could be "allocated back to the services to which they belong." Ameritech includes similar language in the Update, and states that, although "allocating back" is more desirable from an economic perspective, bulk billing represents an interim solution that can be implemented quickly. In its Update Reply, Ameritech clarifies that it believes that all loop costs ultimately should be recovered directly from end-users through the SLC. 96. Commenters are split on the merits of this approach. AARP argues that increasing the SLC would upset the compromise reached between the FCC and state commissions to apportion loop costs among local and long-distance users, and argues that residential and other end-users would face increased rates. The General Services Administration urges the Commission to "revisit" the SLC cap, but agrees that bulk billing could suffice as an interim measure. NYNEX advocates increasing the SLC as a long-term solution to certain pricing distortions created by the existing switched access charge regime. Southwestern Bell states that, even if the Commission grants Ameritech a waiver to implement is bulk billing plan, the Commission should not foreclose other LECs from proposing other mechanisms for recovering loop costs such as increasing the SLC. 97. AT&T argues that, rather than adopting Ameritech's proposal, the Commission should allow Ameritech to recover the SLC, as well as a flat charge representing the remaining interstate loop costs not recovered by the SLC, from companies that buy Ameritech's unbundled loops. AT&T characterizes such an approach as consistent with the waivers the Commission granted in connection with Rochester s Open Market Plan. Ameritech responds that its provision of unbundled loops is an intrastate offering. Because Ameritech intends to recover all of the costs of the unbundled loop via its intrastate unbundled loop charge, the federal SLC would not apply to unbundled loops. Consequently, as loops are converted to unbundled status, they would be removed from the interstate common line revenue requirement and the bulk-billed costs attributable to common line costs would be reduced. c. Transport Interconnection Charge 98. Several commenters raise specific objections to Ameritech's characterization of 50 percent of the TIC as a "public policy element." The General Services Administration and MFS state that the TIC, regardless of whether it is "correctly" allocated, recovers Ameritech's own costs, and therefore should not be recovered through a "de facto tax on interexchange carriers." Sprint and CompTel argue that Ameritech has not sufficiently explained the basis of its claim that the TIC subsidizes tandem switching costs. CompTel contends that Ameritech's own cost analyses, entered into the record before the Illinois Commerce Commission, show that Ameritech's current tandem switching rate exceeds its tandem switching costs. CompTel also argues that Ameritech has skewed the design of its network to favor direct-trunked traffic over tandem switched traffic, and that Ameritech should not be permitted to impose costs on IXCs that result from Ameritech's own network design and pricing practices. 99. Ameritech responds that its proposal for bulk billing 50 percent of the TIC is "a modest one." Ameritech contends that the TIC was established as a temporary mechanism to recover certain public policy costs associated with transport rates in conjunction with the transition away from the old "equal charge per minute of use" rule. According to Ameritech, the Commission's intent in the Transport docket was that the TIC eventually be recovered from all users of switched transport, including those utilizing non-LEC providers. Ameritech notes that it has already voluntarily reduced its TIC by $59.4 million, and that it would remain responsible for recovering 50 percent of the TIC from its customers under its plan. Consequently, Ameritech argues that it would not be guaranteed recovery of its TIC costs under the bulk billing proposal. 2. Discussion a. Overview 100. As discussed above, we conclude that the competitive conditions in the portions of the Chicago and Grand Rapids LATAs within Illinois and Michigan merit some interim regulatory relief, pending a comprehensive review of access charges. In the following sections, we address the issues raised by Ameritech's bulk billing proposal and discuss why granting limited waivers to Ameritech will better serve the public interest than application of the Commission's rules. We do not address Ameritech's proposals relating to pricing flexibility. We intend to consider those requests in a future order. 101. Artificially high per-minute rates for switched access tend to suppress demand for switched access and long-distance services. Switched access rates that are set above cost also create uneconomic incentives for IXCs to shift traffic from Ameritech's switched network to alternative carriers (or to Ameritech's special access lines, in cases where they would be less efficient than switched access). In the monopoly environment that still persists in most areas of the country, rules that elevate LECs' per-minute switched access rates above economically-efficient levels may be sustainable and serve other policy objectives. In areas such as Chicago and Grand Rapids where competitive providers of access and exchange service have opportunities to grow, however, rules that raise a LEC's per-minute switched access rates above cost-based levels can result in inaccurate price signals to potential market entrants, thereby encouraging inefficient entry and wasteful investment decisions and preventing consumers from enjoying the full benefits of competition. Ameritech's proposal to remove certain charges from its switched access rates and to recover some of these charges in an alternative manner will help align its price of interstate switched access with the cost of providing this service. Such a development is particularly important in areas such as Chicago and Grand Rapids, where competition is most likely to occur and the competitive presence is greatest. Finally, the reduction in Ameritech's switched access rates in these areas should lead to lower overall access costs, stimulate growth in the purchase of access services, and establish a reasonable basis for a competitive access marketplace, thereby helping to maximize consumer welfare. Thus, the public interest will be better served by a grant of a limited waiver than it would by rigid adherence to the existing rules. b. NECA Long Term Support 102. We conclude that Ameritech should be granted a waiver of Commission rules to remove the long-term support component of its CCL rate in the areas covered by this waiver and to recover these revenues through a bulk billing mechanism. As we noted in the NYNEX USPP Order, the long-term support payments do not compensate Ameritech for the costs it incurs in providing switched access. Rather, Ameritech remits these revenues to NECA to contribute to the recovery of interstate common line costs of LECs in the NECA CCL pool. This mechanism ensures that those carriers can charge CCL rates that are no higher than the national average CCL rate, computed on the basis of the CCL costs of all LECs. In the environment now existing in Chicago and Grand Rapids, the present method of collecting long term support revenues hinders Ameritech's ability to compete with carriers that do not bear this cost. All IXCs should be responsible for contributing their share of LTS payments, regardless of which access provider they use, and LTS payments should not alter the competitive balance between competing providers of local exchange service. 103. Commenters agree that long-term support payments represent a subsidy and should be recovered through some type of bulk billing arrangement. Given the competitive circumstances of the Chicago and Grand Rapids LATAs, we find that Ameritech's recovery of long term support payments through per-minute switched access charges is inequitable and inefficient. We conclude that long-term support payments should be recovered through the bulk billing mechanism proposed by Ameritech, subject to the modifications we discuss below. 104. We find that the mechanics of bulk billing as proposed by Ameritech are generally reasonable and we permit the creation of a bulk billing mechanism subject to the adjustments and conditions specified herein. MFS argues that because loop costs are non- traffic sensitive, the Commission should require Ameritech to determine each IXC's market share based on the number of access lines presubscribed to each IXC, as we did with NYNEX's bulk billing proposal. We agree with MFS that the non-traffic sensitive nature of loop costs is an important consideration in the allocation of loop costs. However, in the context of ascertaining market share for bulk billing of NECA long-term support revenues, the measuring factor (minutes of use or number of presubscribed access lines) is less significant than it would be in other contexts. The total amount of Ameritech's LTS payments is determined by NECA and therefore will not be affected by the allocation method used in Ameritech's bulk billing mechanism. We conclude that, for purposes of this waiver, Ameritech's proposed method for allocating bulk billed costs among IXCs is reasonable. Allocating these costs on the basis of switched access minutes of use is a reasonable method, as IXCs currently pay these charges through switched access rates that are assessed based on minutes of use. Accordingly, we will permit Ameritech to establish each IXC's share of the bulk billed charges based on each IXC's interstate switched minutes of use provided to end users and originating or terminating in the portion of the Chicago and Grand Rapids LATAs within Illinois and Michigan. 105. We also determine that Ameritech's proposal to fund an independent billing organization is an acceptable mechanism for collecting bulk billed funds. We are persuaded that this arrangement will prevent Ameritech from ascertaining proprietary market share data from its competitors. We direct Ameritech to ensure that the billing agent is in place no later than the end of the first year of bulk billing (as Ameritech proposes), and sooner if possible. To enhance the independence of this entity, we direct Ameritech to work with IXCs and competitive local service providers in the establishment or selection of the entity, and we expect Ameritech to report periodically to our staff regarding the implementation of this billing process. 106. Finally, we modify that aspect of Ameritech's bulk billing proposal that would require IXCs to report their total interstate switched minutes of use in the territories subject to the waiver annually. As proposed by Ameritech, each IXC would pay a portion of the bulk billed charges based on its market share from the previous year. We agree with the Indiana Utility Consumer Counselor that reporting market share on an annual basis could create an unnecessary and unacceptable lag time. This lag could result in undercharging an IXC whose market share is increasing, such as a newly-created interexchange subsidiary of Ameritech, and overcharging an IXC whose market share is diminishing. Therefore, we conclude that IXCs operating in the Chicago and Grand Rapids LATAs should provide updated information to the independent organization no less frequently than quarterly. The billing agent should recalculate each IXC's monthly share of bulk-billed costs on the basis of this updated information. c. Common Line Recovery 107. Overview. The CCL charge also recovers a portion of Ameritech's interstate loop costs. Pursuant to our Part 36 and Part 69 rules, Ameritech each year calculates its common line revenue requirement on the basis of its forecasted loop costs for that year. Twenty-five percent of this annual common line revenue requirement is then assigned to the interstate jurisdiction according to the jurisdictional separations rules. The multi-line business SLC is determined by dividing this interstate revenue requirement, on a per-month basis, by the total number of subscriber lines in the Ameritech region. Although the majority of Ameritech's loop costs that have been assigned to the interstate jurisdiction are now recovered directly from local subscribers through the SLC, the residential SLC is capped at $3.50 per line per month, which does not fully recover the costs of Ameritech's residential loops. The remaining loop costs, although they are not traffic sensitive, are recovered on a minutes- of-use basis through the CCL charge paid to Ameritech by IXCs. Ameritech argues that, like its long term support payments, common line costs recovered through the CCL represent a regulatorily-imposed surcharge on Ameritech's per-minute switched access rates assessed on the traffic of most end-user customers. Therefore, Ameritech proposes that this element also be removed from the per-minute CCL charge. 108. We conclude that Ameritech has demonstrated that, under the special circumstances present in the Chicago and Grand Rapids LATAs, and subject to certain conditions, the public interest would, on an interim basis, be served by the removal of the costs of common line recovery from Ameritech's per-minute switched access rates assessed on IXCs in those LATAs. We therefore grant Ameritech a waiver to remove its interstate common line costs from the CCL charge applicable to minutes originating or terminating in the two affected LATAs, and to recover those costs through a modified bulk billing mechanism. Such a waiver, similar to the one we granted to NYNEX in the NYNEX USPP Order, would eliminate a pricing distortion that, in the increasingly competitive environment in the waiver territories, could stimulate uneconomic entry and divert traffic from Ameritech to less-efficient competitors. 109. Treatment of Common Line Costs. We have long recognized that the per- minute recovery of local loop costs leads to price distortions. The recovery of non-traffic sensitive local loop costs through a usage charge on interexchange carriers tends to shift cost recovery onto high-volume long-distance users, thereby artificially suppressing demand for long-distance services. In addition, IXCs currently pay more, in usage-sensitive CCL charges, to serve customers with higher usage levels than they pay to serve other customers, even though Ameritech's costs to provide loops to those high-volume users are not higher than for low-volume users. 110. The removal of the common line recovery element from the per-minute CCL charge would create significant public interest benefits. In a competitive environment like that developing in Chicago and Grand Rapids, other carriers that can charge access rates that more closely reflect the cost of providing service may be able to price their per-minute switched access services below those of Ameritech. Such price variations would result solely from the regulatory process, rather than from any underlying differences between the carriers' cost structures. Competitors might find it profitable to enter the access market even when those competitors experience higher costs than Ameritech, because Ameritech's access rates are inflated above the level that would reflect its costs, and its ability to respond to the presence of competitors by lowering its usage-sensitive rates closer to cost is limited. Such inefficient entry would lead to wasteful investment and distorted pricing. Moreover, as higher-volume users abandon Ameritech purely to avoid paying rates that reflect an access rate structure that shifts costs from long-distance to residential users, the funding base for that mechanism will erode. Ameritech might be forced to increase its per-minute CCL charge in order to recover its costs, thus increasing the access charges paid by IXCs and possibly forcing those IXCs to increase their long-distance rates. 111. These distorted incentives generally have not resulted in significant deleterious consequences in the past because of the presence of other barriers to competition. The current access rate structure was established in an environment in which incumbent LECs held a monopoly -- often legally-enforced -- on providing local exchange service, including local loops and switching. Legal, technical, and economic barriers effectively precluded potential competitors from challenging the local switching and loop elements of incumbent LECs' interstate switched access offerings, so that competitive entry into this segment of the access market has been extremely limited. Such an environment persists in much of the country. As described in detail above in our discussion of special circumstances, however, competition for a wide array of services, including the local switching and loop elements of interstate switched access, has begun to develop in parts of Illinois and Michigan. With other barriers to entry eliminated, pricing distortions created by the federal access charge structure will exert far greater importance upon carriers' investment decisions and ultimate consumer welfare than they have previously. Under these circumstances, we conclude that the removal of interstate loop costs from the CCL charge paid by IXCs serving customers in the Chicago and Grand Rapids LATAs will better serve the public interest than application of the existing rules. 112. Bulk Billing. We conclude that granting Ameritech a waiver to recover the portion of its common line costs currently recovered through per-minute interstate access charges through a bulk-billed charge on IXCs, with certain technical modifications, would better serve the public interest than the continued operation of the current rules. Bulk billing would address the problem of inefficient entry created by application of the existing method for recovering common line costs to the areas covered by the waiver, because Ameritech's per-minute interstate switched access rates would more closely track Ameritech's costs of providing switched access. Moreover, bulk billing could be implemented relatively easily and without creating substantial additional burdens on other carriers. 113. Bulk billing based on interstate switched minutes of use provided to end users would allow recovery of interstate loop costs to be allocated among IXCs in the same relative proportions, initially, as under the existing rules. As discussed above in the context of Ameritech's waiver request for its long-term support payments, we believe that an allocation among IXCs based on minutes of use is a reasonable mechanism of determining relative market share for bulk billing purposes. We also incorporate herein our conclusions above that the independent billing agent proposed by Ameritech would be sufficiently impartial, and that the billing agent should assess monthly bulk-billed charges to IXCs on the basis of quarterly market share data. With the implementation of bulk billing, Ameritech's per- minute interstate switched access rates would be reduced to a point that more closely reflects Ameritech's actual costs of providing access, thus allowing competition to develop on the basis of more rational pricing and investment decisions. 114. Ameritech's bulk billing proposal does raise competitive concerns, however, and even Ameritech admits that bulk billing is not a long-term industry-wide solution to the problems engendered by the effects of nascent competition on the current access rate structure. These concerns, however, are not fatal to the proposal, subject to the modifications discussed below. First, bulk billing of the common line recovery element of the CCL charge would alleviate incentives for inefficient entry, but would not address the more fundamental problem -- the recovery of non-traffic sensitive loop costs from end users on a usage basis (indirectly, through long-distance rates). Bulk billing would merely shift existing misallocated loop costs from per-minute access rates to a bulk-billed charge. We do not believe that this characteristic justifies rejection of Ameritech's proposal. To the extent that bulk billing is an appropriate interim measure that, in Ameritech's case, would serve the public interest, we should not refuse to grant a waiver because certain broader industry-wide problems remain to be addressed. 115. Second, unlike long-term support, the common line recovery component of the CCL charge recovers Ameritech's own costs. Ameritech's bulk billing mechanism as proposed therefore effectively would require IXCs to pay a portion of Ameritech's loop costs even when they completely bypass Ameritech's loops. In addition, because Ameritech would be able to recover a portion of its costs for loops that have been bypassed by competing providers, Ameritech would have a greater assurance of a revenue stream than under the current system. Currently, Ameritech recovers its interstate common line costs not recovered through the SLC through a per-minute CCL charge based solely on minutes passing through Ameritech switches, while under Ameritech's proposal Ameritech would recover these costs even for traffic that totally bypasses the Ameritech network. As a result, Ameritech's incentives to operate efficiently could be reduced. Under Ameritech's proposal, even when an IXC's end users switch from using Ameritech loops to an alternative facilities-based providers' loops, that IXC would not see a decrease in its bulk-billed costs on an incremental basis, because the minutes passing over the competitor's loop would still be counted in determining that IXC's bulk-billed charge. These IXCs would therefore have incentives to use Ameritech loops even when Ameritech is not the lowest-cost loop provider. Ameritech's proposal to remove the cost of unbundled loops sold to competitors from the interstate common line revenue requirement has no relevance to this competitive concern regarding facilities-based bypass. Thus, we reject Ameritech's proposal to include all retail toll minutes sold to end users in the waiver territories in the calculation of bulk-billed charges. 116. Instead, we require that the bulk-billed charge for the recovery of common line costs be calculated solely on the basis of traffic originated or terminated over loops that Ameritech sells to end users. This change is consistent with the bulk billing mechanism we recently permitted NYNEX to implement. The recovery of common line revenues associated with both unbundled and bundled loops sold to resellers will be addressed in the context of a separate Part 69 waiver petition Ameritech has filed on that subject. 117. Finally, under Ameritech's bulk billing proposal, competing providers of local telephone service to residential and single-line business customers would have to recover all of their loop costs through the rates they charge end users and/or IXCs, whereas Ameritech's flat subscriber line charges for these customers would be, in effect, subsidized by the recovery of a portion of Ameritech's loop costs directly from IXCs. With the limitations we have placed on Ameritech's bulk billing mechanism, however, this distortion should be no greater than it is today. Our requirement that Ameritech assess bulk-billed charges based only on traffic passing over Ameritech loops means that when an IXC's end-user customer switches from Ameritech to a facilities-based competitor, that IXC's bulk-billed charge will decrease, because the switched access minutes attributable to that end-user customer will be removed from Ameritech's bulk billing calculation. Competing local service providers could recover their loop costs in a cost-causative manner, or, if they wish, in the same manner as Ameritech: with flat rates to residential and single-line business end-users set somewhat below cost, and the remainder recovered through per-minute access charges to IXCs. Assuming that Ameritech and the competing local service provider have equivalent cost structures, the reduced bulk-billed charge from switching to the competitor will mirror the difference between the "subsidized" SLC charged by Ameritech and the competitor's charge to recover the full interstate cost of the loop. As a result, the bulk billing mechanism will give IXCs no different incentives than exist today in choosing either Ameritech or competing providers of interstate access. While, as noted earlier, bulk billing raises some concerns about competitive distortions, we conclude that, as an interim measure, pending a more comprehensive reform of our access charge rules, bulk billing under the conditions we have described better serves the public interest than the existing rules by reducing incentives for inefficient entry. 118. We grant Ameritech substantial flexibility in implementing this bulk billing mechanism. Specifically, we allow Ameritech to decide whether to allocate bulk-billed common line costs among IXCs on the basis of minutes of use (as Ameritech proposes), presubscribed lines (as we permitted NYNEX to do in the NYNEX USPP Order), or interstate access revenues received by Ameritech from the respective IXCs. Although a minutes of use allocator more closely tracks the existing distribution among IXCs, a presubscribed line allocator would more closely mimic the effect of increasing the subscriber line charge, especially if IXCs flow through the charge to their customers on a flat per-line basis. 119. The independent billing agent will be required to assess the bulk-billed charges to IXC based on data collected no less frequently than quarterly. Because we are requiring Ameritech to use only minutes passing over Ameritech loops in determining the bulk-billed charge, Ameritech's bulk billing revenues will decrease as traffic shifts from Ameritech to facilities-based competitors. This restriction will help ensure that bulk billing would only give Ameritech a reasonable opportunity to recover its costs, and would not guarantee Ameritech recovery of its full monopoly revenue stream, as some commenters suggest. Ameritech must also, as it proposes, cap the costs recoverable through bulk billing on a per-line basis, so that any annual increase in the total level of bulk-billed recovery would be attributable solely to growth in the number of lines provided by Ameritech. Even if Ameritech's per-line loop costs increase over time, Ameritech will be limited to recovering a total amount through bulk billing equivalent to the cost per line during the first year in which bulk billing is put into effect. As competitors enter the access market, Ameritech's rates will be subject to market pressures, and Ameritech will be required to increase its productivity while keeping rates at reasonable levels in order to retain its current customers and to obtain new business. Moreover, we accept Ameritech's commitment to remove the cost of loops sold to competitors from its interstate CCL revenue requirement. 120. Therefore, the monthly bulk-billed charges on IXCs will be determined by the following calculations. For each state, Ameritech should first determine the total annual amount to be recovered. To determine this amount, Ameritech should divide the base factor portion overflow in the state by the CCL revenue requirement for that state to determine the percentage of the total per-minute CCL rate that recovers common line costs in that state. This percentage should be multiplied by the per-minute regional CCL rate, calculated as under the status quo, to obtain the per-minute common line recovery element, which should then be multiplied by the total number of interstate switched toll minutes passing over Ameritech common lines in the waiver territories in that state to determine the total amount to be recovered through bulk billing in that state. Ameritech would then allocate the total bulk-billed amount among IXC on the basis of those IXCs' market share based on presubscribed lines, minutes, or gross revenues. 121. Implementation Issues. Ameritech must continue to include its waiver-area lines and minutes of use in its calculations of the per-minute CCL charges for the areas not subject to this order. This condition is necessary to protect customers elsewhere in the Ameritech region. Although Ameritech's loop costs vary from state to state, Ameritech currently has one averaged CCL charge for its entire region. Areas such as the Chicago LATA, which generally have higher densities (and thus lower loop costs) than elsewhere in Illinois, tend to bring down the average loop cost and the per-minute CCL charge. Thus, this requirement should prevent undue increases in the CCL rates paid by customers outside the LATAs subject to this waiver. 122. For the purpose of adjusting the price cap index (PCI) for the common line basket, we direct Ameritech to determine the growth factor based on the number of bundled loops it provides, excluding all unbundled loops. The PCI is adjusted through the growth factor to account for the cost reductions resulting from increased usage over a fixed number of common lines. If we were to permit the growth factor to include Ameritech's unbundled loops, any growth in usage on the unbundled loops would be attributed to Ameritech. Such incentives are inappropriate when the traffic traversing common lines is being handled by a competing carrier. Moreover, Ameritech cannot measure the traffic on unbundled loops it has sold to competing local exchange providers. Including those loops in the calculation of the growth factor would either show those loops as having no traffic, or would require competitors to report to Ameritech the minutes passing over unbundled loops they had purchased. 123. Other Issues Raised by Commenters. Contrary to some parties' arguments, Ameritech has presented sufficient data to support a waiver to alter the recovery of the common line component of its CCL charge. With its ex parte filings, Ameritech has provided sufficiently-detailed information about its average loop costs and CCL charge rates on which to base the grant of a waiver. Ameritech need not make any additional showing of the level of "subsidy" embedded in CCL rates to justify a waiver. As we have stated above, the recovery of non-traffic sensitive loop costs in per-minute access rates charged to IXCs inherently shifts a cost burden from lower-volume users to higher-volume users, and from end users who make predominantly local calls to those who are heavy long-distance users. There is no uncertainty about the origin of the costs recovered through the CCL charge, unlike, for example, the transport interconnection charge. Of course, when Ameritech files a tariff implementing this waiver, it will be required to provide the requisite cost support data, including information demonstrating that the revenues associated with bulk billing do not exceed the amount by which the CCL charge is reduced, and that all applicable price cap restrictions are satisfied. 124. We decline to adopt AT&T's alternative proposal to allow Ameritech to recover its loop costs from companies that purchase unbundled loops. AT&T's suggestion departs substantially from Ameritech's waiver request, and the record before us is insufficient to consider such a proposal. As we concluded in the Rochester Waiver Order, the model described by AT&T may be a reasonable method for recovering CCL charges from parties that purchase unbundled loops but no switching from the LEC. AT&T's proposal, however, appears not to address the problem identified by Ameritech: the uneconomic effects of recovering common line costs through the per-minute CCL assessed on all access customers, not only purchasers of unbundled loops. Although AT&T raises some intriguing issues, we choose not to explore them in this waiver proceeding. 125. In response to the American Petroleum Institute's argument that Ameritech's proposal for the recovery of common line costs is inconsistent with the 1986 Guidelines Order, we note that in the NYNEX USPP Order we specifically concluded that the criteria in the Guidelines Order are no longer controlling with respect to our decision to grant or to deny a waiver to recover some non-traffic sensitive costs in an alternative manner. We see no reason to find otherwise in the context of Ameritech's Petition. As we found in the NYNEX USPP Order, regulatory and market conditions have changed substantially in recent years, to the point at which the Guidelines Order should no longer apply. d. Transport Interconnection Charge 126. Ameritech's final request for a bulk billing waiver involves the transport interconnection charge. The TIC was established on an interim basis as part of the Commission's efforts to implement a more cost-based structure for switched transport pricing. We established the TIC initially at a residual level to provide the LECs with revenue neutrality during the shift from the "equal charge per minute of use" rate structure mandated by the MFJ court at divestiture to the more cost-based interim transport rate structure. We have acknowledged our uncertainty about the nature of the costs recovered through this charge, and have asked parties to provide estimates of the breakdown of costs now embedded in the TIC. 127. Ameritech provides little support for its claim that 50 percent of the TIC represents a "public policy element." In its Update, Ameritech refers generally to "inefficiencies" created by the equal charge structure, and claims that the TIC includes costs that should be allocated to tandem switching rates. We conclude that this showing does not provide a sufficient basis to allow Ameritech to bulk bill 50 percent of the TIC. In the context of the CCL charge, we have agreed to permit Ameritech to bulk bill IXCs for certain costs whose level and origins are well-established. By contrast, Ameritech's "Public Policy Element" of the TIC represents an arbitrarily-defined component of a rate element that was originally established on a residual basis, rather than to recover the costs of providing any specific service. Numerous parties have submitted comments in the Transport proceeding on the nature of revenues recovered by the TIC. Ameritech fails to address that record or to offer any detailed analysis that would lead us to accept its characterization of the TIC in this waiver proceeding. We recently rejected a request by NYNEX to bulk bill the TIC, on the grounds that NYNEX had not provided convincing information about the composition of the TIC. Based on the current record, we decline at this time to grant Ameritech a waiver to implement its specific proposal to bulk bill an arbitrary percentage of the TIC. 128. Although we reject Ameritech's request for bulk billing of part of the TIC, we recognize that the TIC was originally established at a residual, rather than a cost-based, level, and that it is likely that the TIC includes some revenues not attributable to the costs of providing transport services. In a competitive environment, the presence of the TIC in Ameritech's rates may artificially inflate Ameritech's switched transport prices and create inefficient incentives for carriers to bypass Ameritech's transport network, especially in high- density areas. Ameritech also seeks a waiver to establish different TIC rates in different geographic zones. Unlike bulk billing, deaveraging would not force carriers to pay an imperfectly-understood portion of Ameritech's rates regardless of whether they purchase switched transport from Ameritech. Such a waiver would, however, address the concerns Ameritech raises about competitive distortions created by the TIC, because Ameritech would be able to respond to the growing competition in Chicago and Grand Rapids by lowering its TIC rate in those areas. 129. Geographic deaveraging of the TIC would create significant public interest benefits. The TIC includes some revenues related to transport costs, which we have already found are lower in higher-density zones. To the extent that the transport interconnection charge recovers revenues related to the costs of other access elements or other telecommunications services, these costs also are likely to be lower in zones with a more dense concentration of traffic. Geographic deaveraging would therefore allow Ameritech to move its prices towards cost in Chicago and Grand Rapids, reducing incorrect pricing signals that could trigger entry by competitors that may be less efficient than Ameritech. Moreover, the densest zones represent the areas in which competition is likely to grow most rapidly. By permitting Ameritech to move its prices towards cost in those areas that have the densest traffic patterns and are open to competitive entry, we will enable Ameritech to minimize distortions in the total switched access per-minute rate that have the greatest adverse impact. 130. With the implementation of the Customers First Plan at the state level, competitive service providers will be able to use Ameritech's unbundled loops to bypass some of Ameritech's switched access services. Therefore, Ameritech is likely to be under some competitive pressure to reduce its per-minute transport interconnection charge in high-density zones. Permitting Ameritech to deaverage this charge would enable Ameritech to target rate reductions to the zone in which customers are most likely to bypass its switched services in favor of potentially less efficient services. We conclude that the public interest would be served by giving Ameritech the flexibility to respond in this way to the market conditions that exist in Chicago and Grand Rapids, which, in the previous section of this order, we found constitute special circumstances. This waiver is comparable to the waiver we granted to NYNEX in the NYNEX USPP Order. 131. We therefore conclude that the public interest will be served by permitting Ameritech to reduce the TIC on a geographically-deaveraged basis for the Chicago and Grand Rapids LATAs. Ameritech may establish four separate rate elements within the interconnection charge category, one for each of the three density pricing zones in the LATAs covered by the waiver, and a baseline element for usage outside the two affected LATAs. In order to ensure that other customers are not harmed by Ameritech's reduction of the TIC in the waiver area, Ameritech's geographic deaveraging of the TIC will be subject to three conditions. First, Ameritech may not raise any interconnection charge rate above the interconnection charge rate that is in its tariff on the day before the tariff implementing this aspect of the waiver takes effect. Thus, Ameritech will not be able to raise the rate for any interconnection charge element to offset a reduction in the rate for another interconnection charge element. Second, Ameritech may not, once it lowers the rate for any interconnection charge element, thereafter raise the rate for that element. This will prevent Ameritech from alternatively raising or lowering the rate for one element deliberately to undermine a rival's business plan. Third, because some of the revenues recovered through the interconnection charge are transport-related, we believe it necessary to establish a floor below which the rate for the interconnection charge may not go. Therefore, we conclude that the rate for any interconnection charge must be sufficient to recover the share of fully-allocated tandem switching costs that are included in the interconnection charge. IV. CONCLUSION 130. The steps that Ameritech has taken thus far in conjunction with the Illinois and Michigan commissions have significantly increased the opportunities for competitors to offer exchange and access services in competition with Ameritech. These steps, however, have also created a situation where application of certain of the Commission's rules would no longer be in the public interest. Continuing to require Ameritech's compliance with such rules might create uneconomic incentives and interfere with the efficient operation of an increasingly competitive market. In addition to preventing such unwanted distortions, the waivers we grant today should help achieve the Commission's goal of facilitating fair and efficient competition. Such competition will ultimately generate significant consumer benefits, including speedier technological innovation, increased carrier responsiveness and quality of service, and lower overall price levels. We recognize that the transformation from monopoly to fully competitive markets will not take place overnight. We also realize that the steps taken thus far will not result in the immediate arrival of fully-effective competition. Accordingly, the Commission and state regulators must continue to ensure against any anticompetitive abuse of residual monopoly power, and to protect consumers from the unfettered exercise of that power. As anticompetitive concerns recede in the face of competition, the Commission will continue to remove unnecessary regulatory restraints. 132. We conclude that granting Ameritech waivers as described above will better serve the public interest than will the continued application of our existing rules. Ameritech has demonstrated that, as a result of the actions of Ameritech, state regulators, and competitors, special circumstances exist in portions of the Chicago and Grand Rapids LATAs within Illinois and Michigan. Under these conditions, limited waivers of some of our access charge rules for these areas are justified. We note that Ameritech has expressly characterized the Customers First Plan as interim in nature. As the telecommunications industry continues to evolve, we believe that there is a need for comprehensive access reform to consider more broadly issues such as those raised by Ameritech in this proceeding. Given the special circumstances described by Ameritech, however, we conclude that granting Ameritech the relief described herein represents an appropriate response to Ameritech's interim proposal. V. ORDERING CLAUSES 133. Accordingly, IT IS ORDERED, pursuant to Section 4(i) of the Communications Act, 47 U.S.C. 154(i), and Section 1.3 of the Commission's Rules, 47 C.F.R. 1.3, that the Ameritech Operating Companies' Petition for Waivers to Establish a New Regulatory Model for the Ameritech Region IS GRANTED IN PART subject to the limitations and conditions described herein; and 134. IT IS FURTHER ORDERED that the Ameritech Operating Companies' Petition for a Declaratory Ruling IS DENIED. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary APPENDIX A -- LIST OF COMMENTERS Comments on 1993 Petition Alliance for Public Technology Board Members (Alliance for Public Technology) Allnet (Allnet) Association for Local Telecommunications Service (ALTS) American Petroleum Institute (American Petroleum Institute) American Association of Retired Persons (AARP) Arizona Payphone Association (Arizona Payphone Association) AT&T (AT&T) Bell Atlantic (Bell Atlantic) BellSouth (BellSouth) Citizens for a Sound Economy (Citizens for a Sound Economy) Competitive Telecommunications Association (CompTel) GTE (GTE) Illinois Commerce Commission (Illinois Commerce Commission) Illinois Cable Television Association (Illinois Cable TV Association) Independent Data Communications Manufacturers Association, Inc. (IDCMA) Independent Coin Payphone Association (Independent Coin Payphone Association) Independent Telecommunications Network (Independent Telecommunications Network) Indiana Utility Consumer Counselor (Indiana Utility Consumer Counselor) Indiana/Michigan/Ohio/Wisconsin commissions (Indiana/Michigan/Ohio/Wisconsin) Information Technology Association (ITAA) Information Industry Association (Information Industry Association) International Communications Association (International Communications Association) LCI (LCI) LDDS (LDDS) McCaw (McCaw) MCI (MCI) MFS (MFS) Michigan Public Service Commission (Michigan PSC) National Rural Telecom Association (National Rural Telecom Association) National Telephone Cooperative Association (National Telephone Cooperative Association) National Consumers League (National Consumers League) Newspaper Association of America (Newspaper Association of America) North American Telecommunications Association (North American Telecommunications Association) Northern Telecom (Northern Telecom) NYNEX (NYNEX) Barbara O'Connor & Henry Geller (O'Connor & Geller) Office of the Consumers' Counsel of Ohio (Ohio Consumers Counsel) Organization for Protection and Advancement of Small Telephone Companies (OPASTCO) Pacific Bell and Nevada Bell (Pacific Bell) Kenneth Robinson, Attorney (Robinson) Southwestern Bell (Southwestern Bell) Sprint (Sprint) John Staurulakis, Inc., on behalf of Indiana Exchange Carrier Association, Michigan Exchange Carriers Association, and Wisconsin telephone company clients (Staurulakis) Teledial America (Teledial) Teleport Communications Group (TCG) Utilities Telecommunications Council (Utilities Telecommunications Council) WilTel (WilTel) Reply Comments on 1993 Petition Ad Hoc Telecommunications Users Committee (Ad Hoc Reply) American Association of Retired Persons (AARP Reply) Ameritech (Ameritech Reply) AT&T (AT&T Reply) Bell Atlantic (Bell Atlantic Reply) BellSouth (BellSouth Reply) Citizens for a Sound Economy (Citizens for a Sound Economy Reply) Cox Enterprises Inc. (Cox Reply) Fleet Call (Fleet Call Reply) General Services Administration (GSA Reply) GTE (GTE Reply) Illinois Cable Television Association (Illinois Cable TV Association Reply) Illinois Commerce Commission (Illinois Commerce Commission Reply) Illinois/Indiana/Michigan/Ohio/Wisconsin commissions (Illinois/Indiana/Michigan/Ohio/Wisconsin Reply) Indiana Office of Utility Consumer Counselor (Indiana Office of Utility Consumer Counselor Reply) International Communications Association (International Communications Association Reply) McCaw (McCaw Reply) MCI (MCI Reply) MFS (MFS Reply) North American Telecommunications Association (North American Telecommunications Association Reply) Office of the Consumers' Counsel of Ohio (Ohio Consumers Counsel) Ohio/Indiana/Wisconsin commissions (Ohio/Indiana/Wisconsin Reply) Teleport Communications Group (TCG Reply) Comments on 1995 Update Allnet (Allnet Update) Association for Local Telecommunications Services (ALTS Update) AT&T (AT&T Update) Bell Atlantic Telephone Companies (Bell Atlantic Update) Competitive Telecommunications Association (CompTel Update) General Services Administration (GSA Update) Indiana/Michigan/Ohio/Wisconsin commission staff (Indiana/Michigan/Ohio/Wisconsin Staff Update) LDDS WorldCom (LDDS Update) MCI Telecommunications Corporation (MCI Update) MFS (MFS Update) Michigan Public Service Commission (Michigan PSC Update) Southwestern Bell (Southwestern Bell Update) Sprint (Sprint Update) Telecommunications Resellers Association (Telecommunications Resellers Association Update) Teleport Communications Group (TCG Update) Time Warner Communications Holdings (Time Warner Update) United States Telephone Association (USTA Update) US Signal (US Signal Update) Reply Comments on 1995 Update Ameritech (Ameritech Update Reply) AT&T (AT&T Update Reply) MCI (MCI Update Reply) MFS (MFS Update Reply) Teleport Communications Group (TCG Update Reply) Separate Statement of Chairman Reed E. Hundt Re: In the Matter of Ameritech Operating Cos. Petition for a Declaratory Ruling and Related Waivers to Establish a New Regulatory Model for the Ameritech Region February 14, 1996 Today's decision provides further evidence of the need for a comprehensive review of our access charge system. Our access charge regime, which was established more than a decade ago when local telephone service was widely assumed to be a natural monopoly, cannot survive the movement toward competition in the local telecommunications market. The issue of common line recovery has been a prominent focus of our Rochester, NYNEX and Ameritech orders. The reason for this is relatively straightforward. In each of these cases, the LECs, with the support, encouragement and oversight of their state commissions, took steps to unbundle and open local networks to make those networks more accessible to providers of competing services. In each case, the LEC concluded that it needed to alter the way in which certain access charges are assessed in order to respond effectively to expected competition from new entrants. Under our current access charge rules, monthly rates to residential and single line business customers are subsidized by charging a portion of the common line costs to long distance callers through the carrier common line charge (CCLC). However, unbundling the loop and the switch allows large customers to avoid the subsidy charge by simply buying switching service from someone other than the LEC. As Ameritech has pointed out, this creates an artificial incentive for customers to drop Ameritech's switching services. Our order today mitigates that incentive. What is also apparent, however, is that the traditional means of funding subsidies will likely not be sustainable as competition arrives. The record here suggests that we cannot continue to subsidize the price paid by a customer for a local loop by raising the costs paid by purchasers of switching or other elements. See Order at para. 109-120. As reflected in the portion of our order addressing the Transport Interconnection Charge, the entry of new competitors into individual local markets, such as Chicago, or even submarkets such as the Chicago "Loop", will put pressure on access rates that are averaged across broad geographic areas, such as an entire state. What should also be apparent is that, while this order at least partially addresses the problem of encouraging inefficient entry for the purpose of bypassing subsidy collection, we also need to address the fact that subsidizing services provided to some customers by raising the prices that customers pay for other services raises barriers to entry. Competitors seeking to serve the subsidized customers must not only beat the LEC on cost, but must also beat the subsidy. Finally, we need to examine the net effects of these subsidies. Consumers pay bills for both local and toll service each month, and studies show that it is the aggregate monthly bill that determines subscribership. The record in this proceeding indicates that, in Illinois, the interstate common line subsidy collected through the CCLC is about 43 cents per line. However, when this amount is offset by the CCLC charges paid by a hypothetical average customer on long distance traffic, the average customer saves only about 13 cents per month. The collection mechanism used to fund this small subsidy, however, fundamentally affects the incentives for investment. See Order at para. 109. These distortions have the potential to affect the pace and scope of competition, and to limit the potential for economic growth and new job opportunities that competition may bring. We need to look carefully to see whether there are other means of recovering these costs that impose fewer economic distortions. We need to take a serious look at these questions. It is my intention that we do so when we undertake a comprehensive review of our access charge system. Until we complete such a review, however, this order is in the public interest. Separate Statement of Commissioner Andrew C. Barrett RE: Ameritech Operating Companies' Petition for a Declaratory Ruling and Related Waivers to Establish a New Regulatory Model for the Ameritech Region On March 1, 1993, the Ameritech Operating Companies ("Ameritech") filed with the Commission its "Customers First" petition, which sought regulatory relief from certain access charge requirements in exchange for actions by Ameritech intended to facilitate local exchange competition. Specifically, the rule waivers Ameritech requested fell into two categories: restructuring certain access charges and interstate access service pricing flexibility. The Ameritech Customers First Plan is a multi-jurisdictional effort in which, according to Ameritech, it has removed many barriers to local telephone competition (in concert with state regulators), and seeks reduced regulation in return. Ameritech's proposal and request is similar to petitions filed by the Rochester Telephone Corporation ("Rochester") and the NYNEX Telephone Companies ("NYNEX"). We granted limited waivers to Rochester in March 1995 and to NYNEX in May 1995. In this order, we grant Ameritech's request in part, subject to certain modifications. We conclude, based on the record, that the removal of barriers to competition and the emergence of competitors in local telecommunications markets in portions of the Chicago, Illinois and Grand Rapids, Michigan local access and transport areas ("LATAs") constitute "special circumstances" under the Commission's waiver standard. Ameritech's requests are properly before the Commission in the context of a waiver request and, clearly, some relief from our access charge rules is justified to address the special circumstances Ameritech has identified. The waiver order permits Ameritech, as it requests, to "bulk bill" the portion of Ameritech's carrier common line charge that contributes to the National Exchange Carrier Association ("NECA") Long Term Support fund for high-cost carriers. While bulk billing of common line costs raises some concerns about competitive distortions, we conclude that the public interest would be served by allowing Ameritech, on an interim basis, pending comprehensive reform of our access charge rules, to recover a portion of its common line costs through a modified form of bulk billing in lieu of the per-minute carrier common line charge ("CCLC"). Further, while we decline, at this time, to allow Ameritech to bulk bill a portion of the transport interconnection charge, we allow Ameritech to reduce that charge on a geographically-deaveraged basis in the Chicago and Grand Rapids LATAs. While I support the Commission's decision to grant Ameritech some measure of relief from our access charge rules, as I did for Rochester Telephone and NYNEX, I write separately to emphasize that the rapidly changing local exchange and exchange access markets demand comprehensive access charge reform. The record in this proceeding, I believe, demonstrates that local exchange competition has begun to take root in portions of Ameritech's region. Moreover, as we implement the provisions of the Telecommunications Act of 1996 with respect to further opening of the local loop, access charge reform takes on critical importance. In this vein, I also view our implementation of a permanent price cap plan for local exchange carriers as a high priority. While the new telecommunications legislation charges the Commission with numerous, significant rulemaking actions, I believe that there are other actions that the Commission must necessarily undertake if full competition in telecommunications services is to occur. -----