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Transport. Effective July 1, 1998, the unitary rate structure option for tandemswitched transmission is eliminated and the costs of tandemswitched transmission must be recovered through the existing threepart rate structure. For price cap LECs, a new flatrated monthly charge recovers the NTS costs of tandem switching attributable to dedicated ports. A new perminute rate element recovers the costs of multiplexers used between tandem switch DS1 port interfaces and the DS3 circuits used to transport traffic from tandem to end offices. For all incumbent LECs, the formula used to compute the tandemswitched transport rate is based on actual usage of the circuit, rather than an assumed 9000 minutes of use per month.  X$4?64. For all incumbent LECs, certain costs currently recovered through the TIC are reassigned to specified facilities charges, including tandemswitching rates. For price cap LECs, those costs of the TIC that remain (the "residual TIC") are recovered through the PICC. To the extent that the PICC ceiling prevents recovery of the entire residual TIC through the flatrated PICC, the remaining portion will be collected through a perminute residual TIC. As the ceilings on the PICCs increase, a larger percentage of the residual TIC will be recovered through the PICC. Beginning in July 1997, price cap reductions will be targeted to the perminute residual TIC until it is eliminated. We expect that the perminute TIC charge will be eliminated in two to three years. Residual perminute TICs shall be assessed only on incumbent LEC transport customers, and therefore shall no longer be assessed on competitive access providers (CAPs) that interconnect with the LEC switched network at the end office."''60*((aa%"Ԍ X4ԙ@65. SS7 Signalling. Price cap LECs may, but are not required to, adopt a rate structure for SS7 signalling that unbundles SS7 signalling functions, as was permitted in the  X4Ameritech SS7 Waiver Order.7 yOM'ԍ Ameritech Operating Companies Petition for Waiver of Part 69 of the Commission's Rules to Establish  {O'Unbundled Rate Elements for SS7 Signalling, Order, 11 FCC Rcd 3839 (1996) (Ameritech SS7 Waiver Order).  X4A66. Retail Marketing Expense. Price cap LECs may no longer recover certain marketing expenses through perminute access charges assessed on IXCs. These expenses are recovered from end users through perline charges on second and additional residential lines and multiline business lines, subject to ceilings on SLCs. Any residual shall be recovered through the PICCs on these lines and then through perminute charges on originating access, subject to the exception described in Section III.A, below.  X 4 !J:\ACCESS.REF\ORDER\I.AJR! #J:\ACCESS.REF\ORDER\IIIA.CF#   J  III. RATE STRUCTURE MODIFICATIONS ă  X ' A. Common Line  X '1. ` ` Overview  X4B67. In the 1983 Access Charge Order, the Commission established a comprehensive mechanism for incumbent LECs to recover the costs associated with their provision of accessJ  XS4service required to complete interstate and foreign telecommunications. 8&S" yO&'ԍ MTS and WATS Market Structure, CC Docket No. 7872, Third Report and Order, 93 F.C.C. 2d 241  {O'(1983) (Access Charge Order), modified, 97 F.C.C. 2d 682 (1983) (Reconsideration Order), further modified, 92  {O'F.C.C. 2d 834 (1984) (Second Reconsideration Order), aff'd in principal part and remanded in part sub nom.  {O'NARUC v. FCC, 737 F.2d 1095 (D.C. Cir. 1984), cert. denied, 469 U.S. 1227 (1985).  The access plan distinguished between traffic sensitive costs and NTS costs incurred by an incumbent LEC to provide interstate access service An incumbent LEC's NTS costs of providing interstate access, or costs that do not vary with the amount of usage, include the common line, or "local  X4loop," which connects an end user's home or business to a LEC central office.d9 {O'ԍ See, e.g., Access Charge Order, 93 FCC 2d at 26869.d  X4C68. In the Access Charge Order, the Commission emphasized that its long range goal was to have incumbent LECs recover a large share of the NTS common line costs from end users instead of carriers, and to recover these costs on a flatrated, rather than on a usage  X4sensitive, basis.?: {O#'ԍ Id. at 268269.? The Commission recognized, however, that a sudden increase in the flat rates imposed by LECs on end users could have a detrimental effect on universal service. For this reason, the rules adopted in 1983 apportioned charges for common line costs between a monthly flatrated enduser SLC and a perminute CCL charge assessed to the IXCs. The SLC is based on average interstateallocated common line costs, which the incumbent LEC"*4 :0*((aa""  X4may average over an entire region or over a study area,;& yOy'ԍ A "study area" is usually an incumbent LEC's existing service area in a given state. The study area  {OA'boundaries are fixed as of November 15, 1984. MTS and WATS Market Structure: Amendment of Part 67 of the  {O 'Commission's Rules and Establishment of a Joint Board, Decision and Order, 50 Fed. Reg. 939 (1985 Lifeline  {O'Order). depending on how it files its interstate tariff. These charges currently are the lesser of the perline average common line costs allocated to the interstate jurisdiction or $3.50 per month for residential and singleline  X4business users, and $6.00 per month for multiline business users.< yO" 'ԍ Revenues permitted under our price cap rules for common line services may be significantly different from the interstate allocated costs assigned to the common line access element by our Part 36 and Part 69 cost allocation rules. For each price cap basket, the rates allowed are determined based on price cap formulas, without reference to interstate allocation of costs. We measure the earnings of price cap carriers by comparing revenues to interstate allocated costs. See 47 C.F.R.  61.45(c), 65.702, & 69.104. The data indicate that only two study areas served by price cap LECs, (Bell Atlantic in the District of Columbia, and GTE in Minnesota) have interstateallocated common line costs that are less than the current $3.50 SLC. These two study areas  {O'represent less than two percent of subscriber lines nationwide. See Supporting Material filed with 1996 Annual  {Od'Access Tariff Filing, filed with Commission on April 2, 1996. (1996 LEC Annual Access Tariff Forecast Data.)  yO.'This LEC forecast data were used by LECs to set SLC rates that became effective on July 1, 1996.  Any remaining common line revenues permitted under our price cap rules are recovered by incumbent price cap LECs through perminute CCL charges assessed on the IXCs, and are ultimately recovered by IXCs  Xv4from endusers through long distance toll charges.=vR  yOy'ԍ The data indicate that incumbent price cap LECs recover approximately 10.4 billion dollars in total common line revenue. Approximately $7 billion of the common line costs are recovered through the SLC, and approximately $3.4 billion are recovered through the CCL charge. Thus, incumbent price cap LECs recover  {O'approximately onethird of their common line costs through perminute CCL charges. 1996 LEC Annual Access  {O'Tariff Forecast Data.  XH4D69. Because common line and other NTS costs do not increase with each additional minute of use transmitted over the loop, the current perminute CCL charge that recovers loop costs represents an economically inefficient costrecovery mechanism and implicit subsidy. A rate structure that recovers NTS costs through perminute charges creates an incentive for customers to underutilize the loop by requiring them to pay usage rates that significantly exceed the incremental cost of using the loop. Additionally, a rate structure that forces high volume customers to pay significantly more than the cost of the facilities used to service them is not sustainable in a competitive environment because highvolume customers can migrate to a competitive LEC able to offer an efficient combination of flat and perminute charges, even if the competitive LEC has the same or higher costs than the incumbent LEC.  XK4E70. The FederalState Universal Service Joint Board stated, in its Recommended  X64Decision, that primary residential and singleline business lines are essential to the provision"6=0*&&aa"  X4of universal service,> yOy'ԍ FederalState Joint Board on Universal Service, CC Docket No. 9645, Recommended Decision, 12 FCC  {OA'Rcd 87, 132133 (rel. Nov. 8, 1996) (Joint Board Recommended Decision). and that current rates for local services are generally affordable based  X4on subscribership levels.T?\" {O'ԍ Id. at 154. The Joint board noted that "[s]ubscribership levels, while not dispositive on the issue of affordability, provide an objective criterion to assess the overall success of state and federal universal service  {ON'policies in maintaining affordable rates." Id.T The Joint Board also concluded that the SLC, as a charge assessed directly on local telephone subscribers, has an impact on universal service concerns such as  X4affordability,;@F {O 'ԍ Id. at 472.; and recommended that the Commission leave the current SLC ceilings in place  X4for primary residential and singleline business lines.?A\ {O- 'ԍ Id.at 463. See also Separate Statement of FCC Commissioner Rachelle B. Chong, (dissenting from the Joint Board's recommendation that the Commission should lower the SLC for primary residential and singleline  {O'business lines). Id. at 556.? In our companion Universal Service  X4Order, consistent with that recommendation, we conclude that we should not raise the current  Xz4$3.50 SLC ceiling on primary residential and singleline business lines.WBz  {O''ԍ Universal Service Order, Section XII.C.W  XL4F71. We adjust the SLC ceilings for multiline business lines and residential lines beyond the primary connection. Adjusting the SLC ceilings for multiline business lines and nonprimary residential lines will permit incumbent LECs to recover directly from end users more of the common line revenues permitted under our price cap rules for those lines and will reduce the amount of NTS costs related to these lines that are currently recovered through CCL charges. Where the SLC ceilings do not allow the incumbent LEC to recover its price cap common line revenues through enduser charges, the remaining, or "residual" amount will be recovered through flat, perline charges assessed to each customer's presubscribed interexchange carrier. This presubscribed interexchange carrier charge, or "PICC", will increase gradually until the incumbent price cap LECs' full interstateallocated common line revenues permitted under our price cap rules are recovered through a combination of flatrated SLCs and PICCs. To the extent that the flatrated charges do not recover, during the initial phase, the full interstateallocated common line revenues permitted under our price cap rules, incumbent LECs may continue to assess the IXCs a perminute CCL charge based on the costs not recovered through flatrated charges. This perminute charge, however, will be generally much lower than today's CCL charge and will be eliminated once all common line revenues are recovered through a combination of SLCs and PICCs. " B0*&&aa"Ԍ X'v 2.` `  Subscriber Line Charge  X4  X'` ` a. Background  X4G72. In the NPRM, we proposed to increase the ceiling on the SLC for second and additional lines for residential customers, and for all lines for multiline business customers, tov  Xv4the perline loop costs assigned to the interstate jurisdiction.:Cv yO'ԍ NPRM at  65.: Alternatively, we proposed to eliminate the ceiling for multiline business customers and for residential connections beyond the primary connection, especially where the incumbent LEC has entered into interconnection  X14agreements and taken other steps to lower barriers to actual or potential local competition.3D1X {O: 'ԍ Id.3  X 4We sought comment on these proposals.:E  yO'ԍ NPRM at  65.: We also invited parties to comment on whether any changes that we adopt to the ceiling on SLCs for incumbent price cap LECs should be extended to incumbent rateofreturn LECs, and on the relationship of any such changes to the  X 4Joint Board Recommended Decision.3F z {O'ԍ Id.3 We sought comment on whether to establish a transition mechanism for this increase if the ceilings on SLCs for multiline business lines and residential lines beyond the primary connection are increased and whether such a transition  X4could be implemented consistent with section 254, the Act's universal service provision.?G  {OO'ԍ Id. at  66.? We sought comment on whether geographic averaging of SLCs is an implicit subsidy that is inconsistent with the requirements of section 254(e), and thus on whether we are required to  XM4deaverage SLCs.?HM {O'ԍ Id. at  67.?   X' ` ` b.  Discussion  X4  X4H73. The Commission has had the longstanding goal of ensuring that all consumers  X4have affordable access to telecommunications services.IZ0  {O!'ԍ See, e.g., MTS and WATS Market Structure, Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, CC Docket Nos. 7872, 80286; Decision and Order, FCC 85643 (rel. Dec. 27, 1985). In its Recommended Decision, the Joint Board stated that current rates for local telephone services are generally affordable and that the SLC, as a charge assessed directly on local telephone subscribers, has an impact on"R I0*&&aa("  X4universal service concerns such as affordability.dJ {Oy'ԍ Joint Board Recommended Decision, 12 FCC Rcd at 472.d The Joint Board further recommended that the Commission maintain the current SLC ceilings for primary residential and singleline  X4business lines,;KZ {O'ԍ Id. at 463.; and we adopt that recommendation in our companion Universal Service  X4Order.ZL {OZ'ԍ Universal Service Order at Section XII.C.Z Numerous parties in this proceeding argue that we should raise or eliminate the SLC ceiling on all lines to permit LECs to recover the full interstate allocated costs of the local  X4loop from endusers.MB~ {O 'ԍ See, e.g., GTE Service Corporation (GTE) Comments at 2629, Reply at 2021; Southwestern Bell Telephone Company (SWBT) Comments at 3738; Cincinnati Bell Telephone Company (Cincinnati Bell) Comments at 67; AT&T Corporation (AT&T) Comments 5154, Reply at 2526; Frontier Corporation (Frontier) Comments at 4, 57; Sprint Corporation (Sprint) Comments at 1115; 5051; Ad Hoc Telecommunications Users Committee (Ad Hoc) Reply at 4; General Services Administration/United States Department of Defense (GSA/DOD) Comments at 911, Reply at 5, 7; TeleCommunications, Inc. (TCI) Comments at 10; Reply at 45; Time Warner Communications Holdings, Inc. (Time Warner) Comments at 45; WorldCom, Inc. (WorldCom) Comments at 3031. This would increase the average SLC for all residential and singleline  Xz4business lines from $3.50 per month to $6.10 per month.Nz  yO'ԍ As discussed below, the data indicate that nationwide, the average interstate allocation of common line  {O{'costs is $6.10 per line. 1996 LEC Annual Access Tariff Forecast Data. We conclude that it would be inappropriate to make significant changes to the SLC cap for primary residential and singleline business lines. Primary residential and singleline business lines are central to the provision of universal service. Because of concerns about affordability, and in light of the significant changes that are still underway in this proceeding, in the federal universal service support proceeding, and possible future changes to the separations process, we conclude that the current SLC for these lines should not be raised. Consistent with the Joint Board's  X 4recommendation and our conclusion in the Universal Service Order, therefore, the ceiling on the SLC for primary residential and singleline business lines will remain at $3.50 or the permitted price cap common line revenues per line, whichever is less.  X4I74. With regard to multiline users, the Joint Board suggested in its Recommended  Xj4Decision that universal service support should not be extended to nonprimary residential lines and multiline business lines because it found that cost of service is unlikely to be a factor  X>4that would cause multiline users not to subscribe to telephone service.gO> {O"'ԍ Joint Board Recommended Decision, 12 FCC Rcd 87 at 133.g Subsequently, the state members of the Joint Board filed a report with the Commission in which they proposed that we retain high cost support for all lines served in high cost study areas during a transition"tO0*&&aa"  X4to a forwardlooking cost methodology.zP yOy'ԍ State Members Report on the Use of Cost Proxy Models at 3 (dated Mar. 26, 1997).z Consistent with that proposal, we adopt, in our  X4Universal Service Order, a modified version of the existing highcost support system and continue support for all residential and business connections in areas currently receiving high  X4cost support until at least January 1, 1999.dQX {O'ԍ Universal Service Order at Section IV.D and VII.D.d We therefore continue to provide high cost support for nonprimary residential and multiline business lines at this time, by allocating a  X4lower portion of these costs to the intrastate jurisdiction than would otherwise be the case.[R {O* 'ԍ Universal Service Order at Section VII.D.[ In that order, we also express our concern, however, that providing universal service support for nonprimary residential and multiline business lines in highcost areas may be inconsistent with our longterm universal service goals, and that overly expansive universal service support mechanisms potentially could harm all consumers by increasing the expense of  X 4telecommunications services for all.ZS | {OI'ԍ Universal Service Order at Section IV.D.Z We state that we will continue to evaluate the Joint Board's recommendation to limit universal service support to primary residential connections  X 4and businesses with single connections.`T  {O'ԍ Universal Service Order at Section IV.D. `  X 4J75. We conclude here that it is necessary to adjust the ceilings on the interstate SLCs on both nonprimary residential and multiline business lines in order to create a rate structure that supports our longterm universal service goals, is procompetitive, and is sustainable in a competitive local exchange market. Section 254 of the Act requires that all consumers have access to basic telephone service at just, reasonable, and affordable rates that are comparable  XM4among different regions of the nation.CUM yO'ԍ 47 U.S.C.  254(b)(3).C This section of the Act also requires that universal service support be achieved through support mechanisms that are "specific, predictable, and  X4sufficient."CV0  yO'ԍ 47 U.S.C.  254(b)(5).C Because universal service concerns about ensuring affordable access to basic telephone services are not as great for nonprimary residential and multiline business lines as they are for primary residential and singleline business lines, we must take action to remove the implicit subsidies contained in our current interstate access charges. Thus, we are adopting a rate structure that will permit LECs to recover greater amounts of their costs on a flatrated basis from end users and to reduce the amount of revenues they must recover through perminute access charges. Our initial implementation improves upon the current rate structure because it reduces subsidies by recovering more costs from the cost causer. It also"~ V0*&&aa" creates a rate structure that is more procompetitive than the existing one by providing for greater flatrated recovery of NTS costs. Without these modifications, new entrants, which are not subject to the noncostcausative rate structure requirements, would be in a position to target the incumbent LECs' most profitable, highvolume customers based on regulatory requirements. A loss of profitable customers would increase the incumbent LECs' costs of providing service to the rest of their customers, especially to those in highcost areas. Consistent with our universal service goal of ensuring that all consumers receive affordable rates that are comparable in different parts of the nation, however, the SLC adjustments will be subject to ceilings to prevent enduser customers in highcost areas from paying SLCs that are significantly higher than in other parts of the country.  X 4K76. In virtually all cases, current SLC ceilings do not permit incumbent LECs to  X 4recover their average perline interstateallocated common line costs.W"  yOe 'ԍ The data indicate that only two study areas served by price cap LECs, (Bell Atlantic in the District of Columbia, and GTE in Minnesota) have interstateallocated common line costs that are less than the current  {O'$3.50 SLC. These two study areas represent less than two percent of subscriber lines nationwide. See 1996 LEC  {M'Annual Access Tariff Forecast Data.Ŀ As a result of the existing SLC ceilings, which have been in place for the past decade, incumbent LECs must recover the shortfall through usagesensitive CCL charges assessed on IXCs. The IXCs in turn recover most or all of these costs from toll users in the form of perminute charges, keeping toll rates artificially high and discouraging demand for interstate long distance services. The high perminute toll charges also create support flows between different classes of customers. For example, because enduser customers vary widely in their use of interstate long distance services, lowvolume toll users do not pay the full cost of their loops while highvolume toll users contribute far more than the total cost of their loops. In addition highvolume toll users, who include significant numbers of lowincome customers, effectively  X4support nonprimary residential and multiline business customers.X$ {Oi'ԍ  See Robert W. Crandall, Universal Service Subsidies and Consumer Welfare: Long-distance Access  {O3'Charges," Brookings Institution (April, 1997), Table 1, (showing that roughly 30 percent of households with income under $10,000 spend more on long-distance calls than do 50 percent of the households with income over $75,000).  X4L77. In order to create a rate structure that supports our longterm universal service goals, is procompetitive, and is sustainable in a competitive market, we modify our rate structure requirements to permit incumbent LECs to recover costs in a manner that more accurately reflects the way those costs are incurred. Because common line costs do not vary with usage, these costs should be recovered on a flatrated instead of on a perminute basis. In addition, these costs should be assigned, where possible, to those customers who benefit from the services provided by the local loop. Accordingly, the SLC ceilings for nonprimary residential and multiline business lines will be adjusted generally to a level that permits incumbent LECs to recover, directly from the end user, their average perline interstate"  X0*&&aa"  X4common line revenues.4YX yOy'ԍ As discussed in Section IV.D, below, in addition to the average perline interstateallocated common line costs, price cap LECs may include, in the SLC for nonprimary residential and multiline business lines, certain marketing expenses attributable to these lines.4  X4M78. For multiline business lines, the SLC will be adjusted to recover the average perline interstateallocated common line costs beginning July 1, 1997. To the extent incumbent price cap LECs, mostly in rural areas, have common line costs that significantly exceed the national average, we establish a ceiling on SLCs for multiline business lines of $9.00, adjusted annually for inflation. To ameliorate any possible adverse impact of adjustments in SLC ceilings for nonprimary residential lines, we adopt an approach that will gradually phase in adjustments in the SLC ceilings for these lines. The SLC for nonprimary residential lines will be adjusted initially beginning January 1, 1998. For the first year, beginning January 1, 1998, the SLC ceiling for nonprimary residential lines will be adjusted to the incumbent LEC's average perline interstateallocated costs, but may not exceed $1.50 more than the current SLC ceiling. Beginning January 1, 1999, the monthly SLC ceiling for these lines will be adjusted for inflation and will increase annually by $1.00 perline, until the SLC ceiling for nonprimary residential lines is equal to the ceiling permitted for multiline business lines.  X4N79. The data indicate that the long term ceilings we are establishing will permit  Xy4incumbent price cap LECs to recover their average perline common line revenuesiZ\y yO'ԍ As discussed in Section III.A.3. below, when the multiline PICC no longer recovers common line  {O'revenues, the calculation of the SLC will be changed from one based on interstate allocated costs to one based on  {O'common line revenues permitted under our price cap rules.i from 99  Xb4percent of their nonprimary residential and multiline business lines.f[b  {O'ԍ See 1996 LEC Annual Access Tariff Forecast Data.f For the few incumbent price cap LECs that have common line costs in certain study areas that exceed the ceiling, the ceiling will serve as an economic safeguard for those customers who would otherwise pay  X4significantly higher SLCs.q\Z yOl'ԍ The data indicate that twelve study areas served by three price cap LECs (GTE, U S West, and Citizens Utilities) have average common line costs that exceed $9.00. These areas represent less than two percent of  {O'subscriber lines nationwide. See 1996 LEC Annual Access Tariff Forecast Data.q We conclude that maintaining a ceiling for nonprimary residential and multiline business customers in highcost areas is a reasonable response to a legitimate universal service concern because, consistent with section 254(b)(3), it ensures that these customers have access to telecommunication services at rates that are comparable to  X4rates charged for similar services in urban areas.C]  yO2$'ԍ 47 U.S.C.  254(b)(3).C  X4O80. We believe that the approach we adopt should prevent widespread discontinuance"!P ]0*&&aa" of lines by multiline customers. The record indicates that nationwide, the average interstate allocation of common line costs is only $6.10 per line, and that for more than half of multi X4line business lines, the interstate common line costs are below the existing $6.00 ceiling.`^ {OK'ԍ See 1996 LEC Annual Access Tariff Forecast Data.` Therefore, when the SLC ceiling is adjusted July 1, 1997, more than half of multiline business lines will see no immediate increase in their SLC. The $5.00 SLC ceiling for nonprimary residential lines for the first year is a net increase of $1.50 per month and the gradual increase, if any, in subsequent years, is designed to allow these customers time to adjust to the new rate structure. Moreover, we expect the rate structure modifications we adopt in this order to benefit the majority of multiline customers through reductions in perminute long  X14distance rates. Thus, for many customers, the access restructuring will lead to an overall reduction in their telephone bill. We also note that, because we are adjusting the SLC on nonprimary residential lines only to a level that recovers the average interstate allocated costs attributable to the line, to the extent that a customer chooses not to purchase an additional line because of the SLC increase, it is because the benefits of the second line to that customer are less than the average cost of the line.  X4P81. Many parties contend that adjusting the SLC ceiling for nonprimary residential  Xy4lines and multiline business lines will affect economic development in rural areas._yZ {O'ԍ See, e.g., Harris, Skrivan & Associates, LLC (Harris, Skrivan & Associates) Comments at 6; TCAInc.Telecommunications Consultants (TCA) Comments at 4; GVNW Inc./Management (GVNW) Comments at 7; John Staurulakis, Inc. (Staurulakis) Comments at 79; Western Alliance Comments at 2224; ITCs, Inc. (ITC) Comments at 3; National Exchange Carrier Association, Inc. (NECA) Comments at 13, Reply at 79; Rural Telephone Coalition (Rural Tel. Coalition) Comments at 8; Pennsylvania Internet Service Providers Comments at 89; Commercial Internet Exchange Association (CIEA) Comments at 13; Reply at 10. To respond to this concern, with the limited exception of cost allocation to new elements, discussed in Section V, below, we are limiting application of the rate structure modifications we adopt in this Order to incumbent price cap LECs only. Most consumers in rural areas are served by small rateofreturn LECs that are not affected by the SLC adjustment we are adopting. We will review rate structure modifications affecting small, rural carriers in a separate proceeding when we address access charge reform for those carriers. To the extent there are incumbent price cap LECs that serve highcost areas of the country and have common line costs that exceed the national average, we are maintaining a ceiling on the SLCs for these lines to ensure that subscribers do not pay rates that greatly exceed the national  X4average.` yO"'ԍ We will address access charge modifications as they apply to rateofreturn rural LECs in proceeding later  {O"'this year. See Section V.A, below.  Xe4Q82. We are not persuaded by arguments that an upward adjustment to a SLC ceiling that was set over a decade ago, and that has never been adjusted for inflation, would violate"N". `0*&&aa4" section 254(b)'s requirement that consumers in all regions of the nation have affordable access to telecommunications and information services at rates that are reasonably comparable to  X4those services provided in urban areas.aZ {OK'ԍ See, e.g., ITC Comments at 3; Rural Tel. Coalition Comments at 8, Reply at 11; TDS Telecommunications Corporation (TDS) Comments at 34, Reply at 4; Western Alliance Comments at 23; TCA Comments at 34. The data indicate that if the SLC ceilings for business and residential lines had been adjusted annually for inflation since they became effective in 1984 and 1989, respectively, the $6.00 business SLC ceiling would have increased by 1996 to $9.00 per line, and the $3.50 residential and singleline business SLC ceiling  Xv4would have increased to $4.39 per line.bv {O 'ԍ Calculations are based on Consumer Price Index for "All Items," Trends in Telephone Service, Table 6, (March 28, 1997). Thus, for multiline business customers, the SLC ceiling we adopt today is not significantly different from what it would have been, if it had been adjusted for inflation annually. Moreover, to adopt a ceiling lower than $9.00 would effectively create an additional impermissible subsidy for a class of customers not enumerated by Congress in section 254 of the 1996 Act as beneficiaries of fundamental universal service goals. We find that the $9.00 ceiling we adopt today strikes a reasonable balance between our desire to establish a more efficient interstate access charge rate structure consistent with our longterm universal service goals in a competitive local exchange environment, and the need to avoid precipitous rate increases to consumers in high cost areas. Although SLCs in some areas may ultimately be lower than SLCs in highcost areas, we conclude that $9.00  X4SLCs remain "reasonably comparable" to those in urban areas.cXD yO'ԍ In Section IV.D, below, we conclude that price cap LECs may recover certain marketing expenses through the SLC on nonprimary residential and multiline business lines. That, however, does not affect the SLC ceilings for these lines.  Xb4R83. We are also not persuaded that we should maintain the current SLC ceiling for nonprimary residential lines because of claims that incumbent LECs will be unable to identify second lines for purposes of billing different SLCs to these lines. Additional telephone lines are a wellestablished telecommunications product marketed by LECs. This product is supported by a marketing and billing infrastructure that will enable LECs to distinguish nonprimary residential lines for purposes of billing different SLCs. We note that we are not defining "primary" or "nonprimary" lines in this Order. In a further notice of proposed rulemaking in the Universal Service proceeding, we will address this issue, and release an order defining "primary"and "nonprimary" residential lines by the end of the  X4year.Xdd  {O#'ԍ Universal Service Order at Section IV.D.X  Xe4S84. We are unpersuaded by arguments that we should forgo these changes on the"e# d0*&&aaq" grounds that increasing the SLC ceilings for nonprimary residential lines will create undue incentives for subscribers to order their primary lines from the incumbent LEC and their additional lines from competitors. The changes we adopt in this Order are intended to permit incumbent LECs to move their prices for nonprimary residential and multiline business lines toward more economically efficient levels by substantially reducing implicit subsidies flowing between different classes of customers. Once these subsidies are eliminated and the new universal service regime is fully implemented, incumbent LECs will be able to recover their common line costs from customers through a rate structure that accurately reflects the manner in which these costs are incurred, and through a targeted, portable universal service contribution where necessary. At that point, both incumbent LECs and new entrants should be able to compete efficiently in the local exchange market. Subscribers, therefore, should not have an incentive to use other carriers for their additional lines unless a competitor is operating more efficiently and can offer local exchange service at a lower rate than the incumbent LEC is able to offer. Indeed, the ability of a competitive local exchange carrier to offer local exchange service at a lower rate is precisely the type of competition envisioned by the 1996 Act: it will encourage the incumbent LEC to reduce its costs of providing service in order to meet or beat the prices of its competition.  Xb4T85. To address the concerns of some commenters that charging a higher SLC for second and additional residential lines will encourage subscribers to order their additional line from competitors, we will permit LECs to charge competitors the higher SLC when the competitor provides a customer with a second line through resale of an incumbent LEC offering. If prior to the development of full competition, we find that disparity between SLC charges on primary and additional residential lines becomes a significant problem, we will reexamine this issue in conjunction with further reforms we adopt in an upcoming order.  X4U86. Certain incumbent LECs have requested that any rule that increases the SLC  X4ceiling for nonprimary residential lines should be optional for LECs.e {O 'ԍ See, e.g., Bell Atlantic Telephone Companies and NYNEX (BA/NYNEX) Comments at 3334; Pacific Telesis (PacTel) Reply at 22; Citizens Utilities Company (Citizens Utilities) Comments at 2829. We adopt this proposal in part and will not require LECs to charge a higher SLC for nonprimary residential lines. Thus, if an incumbent LEC finds that charging higher SLCs leads to a large number of disconnections, it is free to charge less. To the extent price cap LECs choose to charge a SLC that is less than the maximum allowed, however, they may not recover these foregone revenues through the PICC or CCL charges. This restriction is consistent with our current  X 4price cap rules, which prevent LECs from transferring SLC costs to the CCL charge.@f " yO"'ԍ 47 C.F.R.  69.104.@   X4V87. Several incumbent price cap LECs argue in favor of deaveraging SLCs, stating that an averaged SLC creates crosssubsidies between highcost and lowcost areas, in" $f0*&&aaH"  X4violation of section 254 of the Act.g {Oy'ԍ See, e.g., U S West Comments at 56; Ameritech Comments at 1213; BellSouth Comments at 32; GTE Comments at 3031. We will resolve this issue, along with issues concerning the timing and degrees of geographic deaveraging, pricing flexibility, and ultimate deregulation in an upcoming order.  X' _3.` ` Carrier Common Line Charge  Xv' ` ` a. Background  XH4W88. Because we are retaining the $3.50 ceiling on SLCs for primary residential and singleline business customers, virtually all price cap LECs will be unable to recover, through the SLC, all of their common line revenues permitted under our price cap rules. In the_ NPRM, we sought comment on possible revisions to the current CCL charge structure that would allow incumbent price cap LECs to recover these NTS common line costs in a way that reflects the way costs are incurred. We proposed a recovery mechanism suggested by the  X 4Joint Board in its Recommended Decisiondh " {O'ԍ Joint Board Recommended Decision, 12 FCC Rcd at 474.d that would permit incumbent LECs to recover common line costs not recovered from SLCs through a flat, perline charge assessed against  X4each enduser's presubscribed interexchange carrier.Gi yO'ԍ NPRM at  5963.G The Joint Board suggested that the Commission allow incumbent LECs to collect the flatrated charge directly from end users  Xd4who have not selected a primary interexchange carrier ("PIC.")fjdD {OY'ԍ Joint Board Recommended Decision, 12 FCC Rcd 87 at 474.f We sought comments on this approach and also invited parties to discuss any potential problems created when enduser customers have selected PICs, but use other IXCs for Internet, fax, interexchange, or other  X4interstate services by "dialingaround" the PIC.k yO'ԍ NPRM at  60. Customers are able to "dialaround" their presubscribed interexchange carrier by dialing 10XXX before their area code and 7digit exchange number.  X4X89. We also sought comment on several alternative approaches to the perminute recovery of interstate NTS loop costs proposed by the Competition Policy Institute (CPI), including a "bulk billing" method that would assess a charge against the IXC based upon its percentage share of interstate minutes of use or revenues, a "capacity charge," a "trunk port  X4charge," and a "trunk port and line port" charge.>l.  {Ot$'ԍ Id. at  61> We invited parties to comment on whether any changes that we adopt to the recovery of interstate NTS local loop costs for price"~% l0*&&aa" cap LECs should be extended to rateofreturn LECs, and on the relationship of interstate  X4NTS loop cost recovery to the universal service mechanisms proposed in the Joint Board  X4Recommended Decision. We asked parties to address how such an extension to rateofreturn  X4LECs would affect small business entities, especially small incumbent LECs.9m {O8'ԍ Id.9  X4Y90. Additionally, we asked parties to address whether an alternative mechanism for recovering common line costs currently recovered through the CCL charge would be necessary if we were to eliminate the SLC ceiling for certain lines. We asked interested parties to address the extent to which any proposed alternative recovery mechanism for recovering common line costs currently recovered through the CCL charge would affect small business entities, including small incumbent price cap LECs and new entrants. We also sought comment on whether section 254(g) precludes an IXC from charging its customers the flat, perline monthly rate assessed on that line if the amount of that charge varied among customers in different areas within a state or among customers in different states, and if so, whether conditions exist sufficient to require us to forbear from the application of section  X 4254(g) to IXC recovery of flatrate CCL charges.Fn Z {O'ԍ Id. at  6263.F  X}'  ` ` b. Discussion   XO4Z91. The $3.50 SLC ceiling for primary residential and singleline business customers prevents most incumbent price cap LECs from recovering, through enduser charges, all of the  X!4common line revenues permitted under our price cap rules.@o! {O'ԍ See n.32, above.@ To the extent that common line revenues are not recovered through SLCs, incumbent LECs will be allowed to recover these revenues through a PICC, a flat, perline charge assessed on the enduser's presubscribed interexchange carrier.  X4[92. We adopt the Joint Board's recommendation that incumbent LECs may collect directly, from any customer who does not select a presubscribed carrier, the PICC that could  X4otherwise be assessed against the presubscribed interexchange carrier. Assessing the PICC directly against end users that do not presubscribe to a long distance carrier should eliminate the incentive for customers to access longdistance services solely through "dialaround" carriers in order to avoid paying longdistance rates that reflect the PICC. Several parties argue that this type of billing arrangement will create administrative difficulties because it will require LECs to prorate charges for both the end user and the IXC when a customer leaves an IXC in the middle of the billing cycle. To avoid any potential administrative difficulties resulting from customers leaving their presubscribed interexchange carriers in the middle of a"&~o0*&&aa" billing cycle, we will permit LECs to assess the full PICC at the beginning of each billing cycle.  X4\93. We recognize that this flat, perline PICC will not prevent customers from "dialing around" their presubscribed long distance carrier to obtain interstate service. Collecting a PICC from a customer, however, in and of itself, creates no incentive for a customer to presubscribe to one carrier and use "dialaround" service of another. If the presubscribed carrier is an efficient competitor, it should be able to offer usagebased rates comparable to the prices of a competitor, thus eliminating any artificial benefits of "dialaround" capability. A combination of lower perminute long distance rates and attractive longdistance pricing packages that reward customers for increasing their usage of the presubscribed interexchange carrier's services should also help deter customers from using separate longdistance carriers for various services solely because of regulation. There is customer contact value in being a customer's presubscribed interexchange carrier. Regulators have long concluded that the convenience of making a longdistance call by simply dialing  X 4"1+" conveys certain advantages.rp  {O 'Ѝ See, e.g., Local Competition Order, 11 FCC Rcd at 15511.r And the advantages of "1+" dialing will only increase if, as many predict, we move to a world in which "onestop shopping" for a multiplicity of services becomes the primary paradigm for provision of telecommunication services. We conclude that the record does not support a finding that assessing a charge on the presubscribed carrier will artificially encourage "dialaround" traffic to such a degree that we should not adopt access charge modifications that will move substantially toward efficient pricing for common line elements and lower usage charges for longdistance service. If evidence appears to us that our rules do substantially contribute to undue use of "dialaround" capabilities to circumvent presubscribed interexchange services, we stand ready to revisit this  X4issue at a later time.  X4]94. The rate structure we are adopting calls for the singleline PICC ultimately to recover the difference between revenues collected through the SLC and the perline common line revenues for primary residential lines and singleline business lines permitted under our  Xe4price cap rules.qXeZ yOp'ԍ As discussed in Section III.B, below, line port costs will be reassigned from the local switching rate element to the common line rate element. As discussed in Section III.D, price cap LECs may also recover residual TIC revenues through PICCs. In order to provide incumbent LECs and IXCs with adequate time to adjust to this rate structure change, we cap the PICC for primary residential and singleline business lines at $0.53 per month for the first year, beginning January 1, 1998, and establish ceilings on increases thereafter. We note that the monthly $0.53 PICC is approximately equal to the current presubscribed perline charges that are assessed to IXCs for the Universal Service" 'zq0*&&aa"  X4Fund and Lifeline Assistance plan,r yOy'ԍ IXCs currently pay $0.0991 for the Lifeline Assistance and $0.4380 for the Universal Service Fund, a total of $0.5371. NECA Transmittal No. 729, F.CC. Tariff No. 5, (filed Nov. 15, 1996). which are being eliminated in our Universal Service  X4Order.js  {O'ԍ See Universal Service Order, at Sections VII.C and XIII.F.j Beginning January 1, 1999, the ceiling on the monthly PICC on primary residential and singleline business lines will be adjusted for inflation and will increase by $0.50 per year until the sum of the SLC plus the flatrated PICC is equal to the price cap LEC's permitted common line revenues per line. In no event shall the sum of the singleline SLC and PICC exceed the sum of the maximum allowable multiline SLC and multiline PICC.  Xc4^95. Sprint asserts that if LECs recover NTS common line costs through deaveraged  XL4rates assessed on IXCs, we must forbear from applying section 254(g))tXL yO 'ԍ Section 254(g) requires that "rates charged by providers of interexchange telecommunications services to rural and high cost areas shall be no higher than the rates charged by each such provider to its subscribers in urban areas." 47 U.S.C.  254 (g).) to the extent it requires an IXC to average geographically any flat charges an IXC passes on to its  X 4customers.Nu  {O'ԍ See, e.g., Sprint Reply at 27.N WorldCom asserts that IXCs should be permitted to recover their costs in any manner the market will allow, and that unless the Commission forbears with respect to the application of section 254(g) to these costs, IXCs that operate nationally will be forced to average together numerous subscribers' loop costs, and thus use longdistance rates as a  X 4vehicle for crosssubsidies that run counter to the overall policies of section 254(b) and (c).Bv d  yO'ԍ WorldCom Comments at 34.B We conclude that the information in the record before us does not demonstrate that we are  X4required, by section 10(a) of the Act,=w  yO9'ԍ 47 C.F.R.  160.= to forbear from enforcing section 254(g) as it relates to the manner in which IXCs recover their costs.  XO4_96. Section 10(a) of the 1934 Act requires the Commission to forbear from applying any regulation or provision of the Communications Act of 1934 if: (1) enforcement of that provision is unnecessary to ensure that the relevant charges and practices are just and reasonable and not unjustly or unreasonably discriminatory; (2) enforcement of that provision is unnecessary to protect consumers; and (3) forbearance from applying such provision or  X4regulation is consistent with the public interest.3x  {O$'ԍ Id.3 We conclude that, on the basis of the current record, IXCs have not demonstrated that forbearance of section 254(g) is warranted at this time. "(x0*&&aa("Ԍ X4ԙ`97. We find that establishing a broad exception to section 254(g) to permit IXCs to pass through flatrated charges on a deaveraged basis may create a substantial risk that many subscribers in rural and highcost areas may be charged significantly more than subscribers in other areas. Accordingly, we cannot conclude that enforcing our rate averaging requirement is unnecessary to ensure that charges are just and reasonable. In addition, because assessing subscribers flatrated charges on a deaveraged basis could lead to significantly higher rates for subscribers in highcost areas, we find no basis in this record to conclude that it is unnecessary to enforce section 254(g) to ensure protection of consumers or to protect the public interest. In contrast, IXCs cite no countervailing public interest considerations but merely make broad, unsupported assertions of the need to deaverage rates in light of the varying PICC amounts expected to be assessed by incumbent LECs. We also note that IXCs now pay access charges that often vary from location to location and from incumbent LEC to incumbent LEC, and still maintain geographically averaged rates. We therefore conclude that, based on the record before us, the IXCs have not met the test set forth in section 10(a) of the Act, and forbearance of section 254(g) is not warranted.  X4a98. We note that we will continue to examine the issue of whether conditions exist that require us to forbear from application of section 254(g) as it relates to recovery of the PICC costs from subscribers. We will resolve this and other specific issues concerning the timing and degrees of pricing flexibility and ultimate deregulation in an upcoming order.  X4b99. To the extent that the SLC ceilings on all lines and the PICC ceilings on primary residential and singleline business lines prevent recovery of the full common line revenues permitted by our price cap rules, incumbent price cap LECs may recover the shortfall through  X4a flatrated, perline PICC on nonprimary residential and multiline business lines.yX yOQ'ԍ As discussed in Sections III.D and IV.D, price cap LECs may also recover residual TIC revenues and certain marketing expenses through PICCs on nonprimary residential and multiline business lines, subject to the ceilings described below. The incumbent LECs will calculate this additional charge by dividing residual permitted common line revenues by the number of nonprimary residential and multiline business lines served by the LEC. For the first year, the ceiling on the PICC will be $1.50 per month for nonprimary residential lines and $2.75 per month for multiline business lines. To the extent that these PICCs do not recover an incumbent LEC's remaining permitted CCL revenues, incumbent LECs will be allowed to recover any such residual common line revenues through perminute CCL charges assessed on originating access minutes. The perminute charges shall be calculated based on forecasts of originating access minutes as currently provided in our  X 4rules.Fz  yO#'ԍ  47 C.F.R.  69.105.F  X4c100. We generally will not permit incumbent LECs to recover residual common line")xz0*&&aak" revenues through perminute CCL charges assessed on terminating access minutes, because terminating minutes are not likely to be subject to as much competitive pressure as originating  X4access minutes. As discussed in Section III.D, below, we are similarly adopting a rule that requires that incumbent LECs be allowed to recover certain residual transport interconnection charge costs through access charges assessed on originating minutes. In placing these various residual costs on originating minutes only, however, we do not want to destroy the salutary effects of our access charge reforms by creating higher prices for originating minutes than exist under our current access charge rules. To the extent, therefore, that the sum of local switching charges, the perminute CCL charge, the perminute residual TIC, and any per X14minute charges related to marketing expensesJ{1 {O 'ԍ See Section IV.D, below.J exceed the current sum of local switching charges and the perminute CCL charge and TIC assessed on originating minutes, the excess may be recovered through charges assessed on terminating minutes. We emphasize that any such amounts recovered through charges assessed on terminating minutes would be temporary and would be phased out as the nonprimary residential SLC ceilings and the PICC ceilings are adjusted, and in any event, no later than July 1, 2000.  X4d101. Beginning January 1, 1999, the PICC will be adjusted for inflation and will increase by a maximum of $1.00 per year for nonprimary residential lines and $1.50 per year for multiline business lines, until incumbent LECs recover all their permitted common line revenues through a combination of flatrated SLC and PICCs. These increases will cease as the PICCs on primary residential and singleline business lines recover more of the common line revenues permitted under price cap rules. In addition, as the incumbent price cap LECs increase their PICCs for primary residential and singleline business lines, they shall reduce the amount recovered from the residual perminute CCL charges and reduce their PICCs on nonprimary residential and multiline business lines by a corresponding amount in accordance with the procedures described below. While the plan we adopt today does not eliminate, even on a flatrated basis, transitional higher rates for business users, it redistributes collection from a very few highvolume users to business users generally. This will permit the charges to be sustainable while we finish refining access charges and implement a forwardlooking costbased universal service mechanism for rural, insular, and high cost areas. We also acknowledge that our plan will require customers with multiple telephone lines to contribute, for a limited period, to the recovery of common line costs that incumbent LECs incur to serve singleline customers. We conclude that this aspect of the plan is a reasonable measure to avoid an adverse impact on residential customers.  X4e102. As the PICC ceilings on primary residential and singleline business lines increase, the residual perminute CCL charge will decrease until it is eliminated. After the residual perminute CCL is eliminated, incumbent LECs shall make further reductions due to the increase in the PICC ceilings for primary residential and singleline business lines, first to the PICCs on multiline business lines until the flatrated PICCs for those lines are equal to"#*Z{0*&&aa!" the flatrated PICCs for nonprimary residential lines. Thereafter, incumbent LECs shall apply the annual reductions to both classes of customers equally until the combined SLC and PICCs for primary residential and singleline business lines recover the full average perline common line revenues permitted under our price cap rules, and the additional flatrated PICCs on nonprimary residential and multiline business lines no longer recover common line  X4revenues.|  yO'ԍ As discussed in Sections III.D and IV.D, below, the PICC will recover TIC revenues and certain marketing expenses in addition to common line revenues. Therefore, multiline PICCs may continue to recover noncommon line revenues, even though SLCs and PICCs for primary residential and singleline business lines recover the average perline common line revenues permitted under our price cap rules. If the incumbent LEC's perline common line revenues permitted by our price cap rules exceed the SLC ceiling for nonprimary residential lines and multiline businesses, the flatrated charges will continue to apply to those lines so that the sum of the SLCs and  XH4flatrated charges is equal to the permitted common line revenues. Once the multi-line PICC no longer recovers any common line revenues, the calculation of the SLC will be changed  X 4from the average per-line interstate allocation of revenue requirementB}  yO{'ԍ 47 C.F.R.  69.104(c)B to the average per-line common line revenues permitted by our current price cap rules. With this change, the LEC will not be able to recover more than the average per-line common line revenues permitted under our price cap rules from any access line. We note that at least one party contends that under our current rules, certain price cap carriers could be required to charge negative carrier common line charges, if the revenues recovered through the SLC, which continues to be  X4developed on a costofservice basis, exceed the PCI for the common line basket.~@ {O'ԍ See Letter from Albert Shuldiner, Counsel for Aliant Communications Co. to William F. Caton, Acting Secretary, FCC, April 30, 1997. This adjustment to the calculation of the SLC will solve any such problem.  XK4f103. We are concerned that assessing PICCs on multiline business lines may create an artificial and undue incentive for some multiline customers to convert from switched access to special access to avoid the multiline PICC charges. A migration of multiline customers to special access could significantly reduce the amount of revenue that could be recovered through perminute charges, and would result in higher PICCs for the nonprimary residential and multiline business lines remaining on the switched network. We tentatively conclude that we should therefore apply PICCs to purchasers of special access lines as well. The NPRM, however, may not have provided sufficient notice to interested parties that we might apply certain rate structure modifications to special access lines. We therefore seek comment on this issue in Section VII.A, below.  XN4g104. We reject claims that a flatrated, perline recovery mechanism assessed on IXCs"N+~0*&&aa4"  X4would be inconsistent with section 254(b)@ yOy'ԍ 47 U.S.C.  254(b).@ which requires "equitable and nondiscriminatory  X4contribution to universal service" by all telecommunications providers.XX yO'ԍ Sprint Comments at 1516; AT&T Reply at 2829.X The PICC is not a universal service mechanism, but rather a flatrated charge that recovers local loop costs in a costcausative manner. Numerous commenters responding to the NPRM support a flatrated  X4cost recovery mechanism,H {O= 'ԍ See, e.g., United States Telephone Association (USTA) Comments at 5556; BA/NYNEX Comments at 3536; BellSouth Comments at 68, Reply at 1011; PacTel Comments at 64, Reply at 21; U S West Comments at 54; Citizens Utilities Comments at 2728; Roseville Telephone Company (Roseville Tel.) Comments at 4, 8; Rural Tel. Coalition Comments at 6, Reply at 9; Competitive Telecommunications Association (CompTel) Comments at 29; Cable and Wireless, Inc. (Cable & Wireless) Comments at 10; Excel Telecommunications, Inc. (Excel) Comments at 11; LCI International Telecom Corp. (LCI) Comments at 2021, Reply at 6; MCI Telecommunications Corporation (MCI) Comments at 77; Public Service Commission of the District of Columbia (District of Columbia Commission) Comments at 34; South Dakota Public Utilities Commission (South Dakota Commission) Comments at 3; National Association of Regulatory Utility Commissioners (NARUC) Comments at 13; National Cable Telephone Association, Inc. (NCTA) Comments at 26; American Communications Services, Inc. Reply at 17.H and we conclude that the PICC is preferable to the other proposals made in the NPRM. We agree with MCI and the Minnesota Independent Coalition that proposals based on the number of trunks or ports that an IXC purchases from the incumbent LEC may encourage IXCs to use fewer trunks or ports than are needed and thereby have an adverse effect on service quality. We decline to adopt the bulk billing approach set out in the NPRM, as well as Ameritech's proposed Loop/Port Recovery charge and the approach proposed by the Competition Policy Institute, because these mechanisms are substantially affected by usage and do not reflect the NTS manner in which common line costs are incurred. The Alliance for Public Technology's proposed "facilities charge," which is a hybrid system that accounts both for level of use and intensity of use by all telecommunication carriers that use the local network, is flawed because it is based partly on usage and is complex and administratively burdensome. A costrecovery mechanism that recovers common line costs through flatrated charges imposed on enduser customers and IXCs is an administratively simple mechanism. Further, under our plan, interstate common line access charges will become more closely aligned with allocated interstate costs than they would be under any of the alternative proposals.  X4h105. The plan we describe above should move us from the pricing scheme that has been in place for more than a decade to a flatrated pricing scheme that seeks to promote competition, while balancing universal service considerations. We recognize that the modifications we adopt in this Order do not eliminate all the existing support flows. The modifications, however, do move to eliminate subsidies built into the current rate structure, to an extent that is compatible with preserving the universal service goals of providing support to primary residential and singleline business and to customers in highcost areas pursuant to the",J 0*&&aa" mandate of section 254. As we set final support levels for universal service, address any legal issues related to the transition from embedded to forwardlooking economic costs, and factor in the development of competition, we will identify and deal with any remaining legal issues relating to the recovery of these revenues. In addition, the plan we are adopting allows incumbent price cap LECs to recover costs in the manner that reflects the way in which they are incurred. We believe that this realignment of rates with costs will reduce the perminute access charges assessed on IXCs and benefit consumers through lower longdistance rates, as well as create a procompetitive local exchange market in which LECs will be able to compete more efficiently.  X ' _4.` ` Common Line PCI Formula  X '` ` a. Background  X 4i106. When we adopted price cap regulation in 1990, we established a separate common line basket in order to balance the price cap goal of economically efficient prices with_ important goals, such as universal service, that were reflected in common line rates prior to the adoption of price caps. Because common line costs are nontraffic sensitive, growth in demand leads to a reduction in average perminute common line charges. Therefore, in the  XK4LEC Price Cap Order, we established a price cap index ("PCI") formula for the price cap basket that differed from the PCI formula we established for the other three baskets, to ensure  X4that carrier common line charges declined as common line demand increased.] {O'ԍ LEC Price Cap Order, 5 FCC Rcd at 6793, 6795.] Specifically, we added a term, "g/2," to the common line PCI formula, to represent half the growth in  X4demand per line in the prior year.Z {O'ԍ LEC Price Cap Order, 5 FCC Rcd at 6795. The Commission did not adopt a common line formula based on an average of the perline and perminute approaches, because in some circumstances, this would have  {O'produced the anomalous result of CCL rates increasing in response to increases in demand. Id. at 6795. The  {OX'mathematics of the common line formula are explained in detail in Appendix E of the LEC Price Cap Order, 5 FCC Rcd at 694244. This adjustment was made because we originally concluded that both LECs and IXCs have the ability to influence common line growth, and  X4that both LECs and IXCs should benefit from increases in demand.W {O'ԍ LEC Price Cap Order, 5 FCC Rcd at 6795. W  X4j107. In the LEC Price Cap Performance Review, we found that incumbent LECs in fact have little influence over perminute common line demand, and tentatively concluded that  Xi4we should remove the "g" term from the common line formula,ei {O$'ԍ LEC Price Cap Performance Review, 10 FCC Rcd at 9079. e because including an industrywide moving average XFactor in the common line formula might tend to double"R-4 0*&&aaN"ԫ X4count demand growth. We sought comment, in the Price Cap Fourth Further NPRM, whether to apply the same PCI formula to the common line basket that we use for the other  X4baskets if we were to adopt a TFPbased XFactor.= {OM'ԍ Id. at 13680. = We also invited comment on whether we could eliminate g/2 from the common line formula if we retain a separate common line  X4formula.dZ {O'ԍ Price Cap Fourth Further NPRM, 10 FCC Rcd at 1368. d In this Order, we adopt a plan that should quickly convert the CCL charge from a perminute charge to a flatrated perline charge assessed on interexchange carriers. We also revise the common line formula to reflect the phase out of the CCL charge.  XJ'` ` b. Discussion  X 4k108. We conclude that the separate common line PCI formula should be eliminated, and that the PCI formula for the trafficsensitive and trunking baskets should be used for the  X 4common line basket, once trafficsensitive CCL charges have been eliminated. In this Order, we have reduced substantially trafficsensitive CCL charges, and replaced them with the perline PICC. The remaining trafficsensitive CCL charges imposed by incumbent price cap LECs will be reduced and then eliminated over the next two or three years. Once common line costs are recovered solely through perline charges, increased minutes will not affect common line recovery. Therefore, when the trafficsensitive CCL charges have been eliminated, it will no longer be necessary to ensure that CCL rates decline as perminute demand increases. Incumbent price cap LECs that no longer assess perminute CCL charges  X64will use the same PCI formula for the common line basket as they use for the trafficsensitive and trunking baskets.  X4l109. In the LEC Price Cap Order, we established "g/2" as the common line PCI formula because we believed that because both LECs and IXCs contributed to encouraging common line demand growth, both LECs and IXCs should share in the benefits of common  X4line demand growth.W {OK'ԍ LEC Price Cap Order, 5 FCC Rcd at 6795.W In the LEC Price Cap Performance Review, we tentatively concluded that IXCs contributed more to common line demand growth, but declined to revise the common line formula at that time because we were contemplating eliminating the common  Xk4line PCI formula completely, and because we did not wish to create unnecessary rate churn.ik~ {O!'ԍ LEC Price Cap Performance Review, 10 FCC Rcd. at 907980.i To avoid unnecessary rate churn here, we decide to retain "g/2" while carriers continue to charge perminute CCL charges.  X4m110. We revise sections 61.45(c) and 61.46(d), which govern the common line PCI".0*&&aa" and API, respectively, to reflect our revisions to the common line rate structure in the common line PCI formula. First, we redesignate section 61.45(c) as 61.45(c)(1) and adopt a new section 61.45(c)(2) that requires price cap LECs to use the separate common line formula only while they continue to charge perminute CCL charges. Section 61.45(c)(2) also states that the common line PCI will be governed by the same PCI formula LECs use for the trafficsensitive and trunking baskets. Second, we redesignate section 61.46(d) as 61.46(d)(1), and amend section 61.46(d)(1) to recognize that LECs now impose PICC charges as well as CCL charges on IXCs. We also adopt a new section 61.46(d)(2) to govern PICC charges once perminute CCL charges have been phased out. These revisions are set forth in Appendix C of this Order.  X ' & 5.XAssessment of SLCs and PICCs on Derived Channels (#  X '` ` a.  Background (#  X 4n111. Integrated services digital network (ISDN) services permit digital transmission  X4over ordinary local loops through the use of advanced hardware and software.  yO 'ԍ In order for a LEC to provide ISDN, it must have a digital switch in the central office serving the customer, and substitute an ISDN line or trunk card for the standard cards that would otherwise be used in the central office with the loop facilities serving the customer. The customer also must use special ISDNcapable customer premises equipment. ISDN offers& data transmission at higher speeds and with greater reliability than standard analog service. Most incumbent LECs currently offer two types of ISDN service, Basic Rate Interface (BRI) service and Primary Rate Interface (PRI) service. BRI service allows a subscriber to obtain two voicegradeequivalent channels and a signalling/data channel over an ordinary local loop,  X4which generally is provided over a single twisted pair of copper wires.^ yO~'ԍ The two voicegradeequivalent channels, which are called bearer or B channels, can be used for voice local exchange service or for data transmission at speeds up to 64 kbps. The third channel is a 16 kbps data  yO'channel, called the delta or D channel, which is used for signalling and packet data services. The Bell Atlantic Telephone Companies Petition for Waiver of Section 69.104 of the Commission's Rules in Connection with  {O'ISDN Services (filed Feb. 10, 1995) at 4 n.8 (Bell Atlantic Waiver Petition).^ PRI service allows subscribers to obtain 23 voicegradeequivalent channels and one data signalling channel over  X4two pairs of twisted copper wires."b  yO 'ԍ In the case of PRI ISDN, the 23 B channels and the D channel can transmit voice or data at speeds up to 64 kbps. When a customer has more than one PRI connection at a given location, all of the B channels can share a single D channel, permitting the customer to obtain 24 voicegradeequivalent channels for each PRI  {OZ"'connection after the first one. Bell Atlantic Waiver Petition at 4, n.8 BRI service generally is used by individuals and small businesses, and PRI service generally is used by larger businesses. LEC services other than"/L 0*&&aa"  X4ISDN use derived channel technology to provide multiple channels over a single facility.&  yOy'ԍ For example, NYNEX Telephone Companies (NYNEX) uses derived channel technology to provide FLEXPATH service, which provides a customer with 24 digital voicegradeequivalent trunk channels over a T1 facility between a suitably equipped central office and a digital PBX. PBX Conversion Service, another NYNEX offering, provides digital trunking capability, with up to 24 trunk access lines, between a customer's digital PBX and an analogtodigital interface located at the central office switch. NYNEX's Data Over Voice service  yOa'provides customers with a voicegrade channel and a data channel over a single copper pair. Memorandum Opinion and Order, NYNEX Telephone Companies Revisions to Tariff F.C.C. No. 1, 7 FCC Rcd 7938 n.11  {O'(Com. Car. Bur. 1992), aff'd on recon., 10 FCC Rcd 2247 (1995).   Several other LECs provide similar services  {O'using derived channel technology. See, e.g., Cincinnati Bell Comments at 6.& The LECs also use derived channel technologies within their networks, for example, to provide customers with individual local loops. In such situations, the end user has not generally requested derived channel service and thus most likely is not aware that the LEC is using this technology.  Xv4o112. On May 30, 1995, we released a Notice of Proposed Rulemaking seeking  X_4comment on the application of SLCs to ISDN and other derived channel services._ yO'ԍ End User Common Line Charges, CC Docket No. 9572, Notice of Proposed Rulemaking, 10 FCC Rcd  {Ot'8565 (1995) (ISDN SLC NPRM). In that  XH4NPRM, we noted that our current rules, which assess one SLC per derived channel, may  X14discourage efficient use of ISDN services,1  yO'ԍ Section 69.104 of the Commission's rules, 47 C.F.R.  69.104, provides for a monthly per line charge for end users that subscribe to local exchange service, stating that surcharges shall be assessed for each line between the customer's premises and a Class 5 Office that is or may be used for local exchange transmissions. In 1992, NYNEX which had been charging a SLC for each of the voicegradeequivalent channels provided on a T1 facility, filed a tariff in which it proposed to assess only one SLC for each T1 facility used to provide a customer with certain services, even though the T1 facility provided that customer with up to 24 voicegradeequivalent channels. The Common Carrier rejected the Transmittal, finding that it did not comply with the commission's Part 69 rules governing assessment of SLCs. The Commission affirmed the Bureau's conclusion that Section 69.104 of the rules requires assessment of a SLC for each derived channel. Memorandum Opinion and Order, NYNEX Telephone Companies Revisions to Tariff F.C.C. No. 1, 7 FCC Rcd 7938,  2 (Com. Car.  {O'Bur. 1992) aff'd on recon., 10 FCC Rcd 2247 (1995).  and we sought comment on several options, ranging from continuation of the current rules applying one SLC to each derived channel to  X 4requiring LECs to assess one SLC per each pair of copper wires or each physical facility.I X {O 'ԍ ISDN SLC NPRM at  21.I Other options presented in the NPRM included: (1) basing the application of SLCs on a ratio of the average LEC cost of providing a derived channel service, including the trunk or line card costs, to the average cost of providing an ordinary local loop or T1 facility; (2) applying one SLC for every two derived channels; (3) reducing the number of SLCs applied to derived channel services while increasing slightly the SLC rates; or (4) giving LECs flexibility concerning the number of SLCs they assess for derived channel services, at the same time"y00*&&aa"  X4adjusting the price cap rules to prevent an increase in CCL charges.T {Oy'ԍ Id. at  2223, 2730, 3234.T  X4p113. In addition to the comments filed in response to the ISDN SLC NPRM, several  X4BOCs provided data on the relative NTS costs of single and derived channel services.HZ yO'ԍ In their responses, three of the BOCs, BellSouth, NYNEX, and Southwestern Bell, asked for confidential treatment of portions of the information submitted. NYNEX publicly filed the information we requested, but submitted as confidential additional information that contained more detailed cost data. The confidential data were not necessary to perform our analysis, and the following tables only include data that was filed on the public record. We have returned to the respective companies data for which confidential treatment was sought.H The cost data included information about all NTS cost components, including components located in the central office, such as line cards. As shown in Table 1 below, the cost data indicates that the ratio of NTS loop costs of BRI ISDN to standard analog service is approximately 1 to 1. The ratio of NTS loop costs of PRI ISDN to standard analog service, excluding NYNEX's data, is approximately 5 to 1. As shown in Table 2, NYNEX's data appear to be outliers because the ratios of its outside plant and NTS costs for PRI ISDN to standard analog service are almost twice those of other incumbent LECs. NYNEX's data, therefore, are excluded from the calculation of the average ratio for PRI ISDN to standard analog service. " 1 0*&&aa "  X' IdTABLE 1 ă  X' Ratio of costs of standard analog service to BRI ISDN service T ddx !ddx2 T  z  V  5y Outside Plant (loop only) costsV All NTS costsz q  V_  Ameritech_ 1:1.07_ 1:1.45q q  Bell Atlantic _ 1:1.01 _ 1:1.36q q  NYNEXq _ 1:0.85q _ 1:1.23q q   Pacific Bell _ 1:1.05 _ 1:1.13q q q  US WestS _ 1:0.80S _ 1:1.07q q   _ _ q   S  _c  Average ratio of costsNc 1:0.96*Nc 1:1.24*  c XN4  X 4Id TABLE 2 ă  X' Ratio of costs of standard analog service to PRI ISDN service ^ !ddx2 A(2 ^          + Outside Plant (loop only) costs  Outside Plant (loop only) costs (excluding NYNEX data) All NTS costs All NTS costs (excluding NYNEX data) !    Ameritech 1:5.68 1:5.68 1:8.9 1:8.9! !  Bell Atlantic 1:4.13 1:4.13 1:15.80 1:15.80! !  NYNEX: 1:10.94: excluded: 1:27.74: excluded! !  Pacific Bell[ 1:4.67[ 1:4.67[ 1:8.70[ 1:8.70! ! : US West| 1:5.33| 1:5.33| 1:10.60| 1:10.60! ! [         ! :  |   Average ratio of costs" 1:6.5*" 1:4.95*" 1:15.13*" 1:10.5*:    X"4  X#4*Averages may differ due to rounding.q(#  X%4q114. We incorporated by reference, in the current proceeding, all pleadings filed in"%20*&&aa#"  X4response to the 1995 ISDN SLC NPRM, as listed in Appendix A of that order. {Oy'ԍ All pleadings filed in response to the 1995 ISDN SLC NPRM will be so noted. In the NPRM for the current proceeding, we invited comments on the effect of the 1996 Act on determining how many SLCs should be applied to ISDN services. We also sought comment on whether mandatory rate structures or rate caps should be prescribed for ISDN service or  X4other derived channel services.:Z yO'ԍ NPRM at  70.:  Xv' b.` ` Discussion  XH4 r115. Consistent with the goal of this Order of realigning cost recovery in a manner that more closely reflects the manner in which those costs are incurred, we conclude that we should establish separate SLC rates for ISDN service based on the NTS loop costs of BRI and PRI ISDN service. We agree with the majority of commenters that a SLC for ISDN service equal to a SLC for singlechannel analog service multiplied by the number of derived channels exceeds the NTS costs of ISDN service and therefore artificially discourages efficient use of ISDN. We find that basing ISDN SLCs on relative costs is most likely to assign costs of ISDN service to customers who subscribe to, and benefit from, that service. Further, we find that the current SLCperderived channel rule requires LECs to assess charges that are not related to the NTS costs of the service provided.  XK4X` hp x (#%'0*,.8135@8:%0*&&B%"  {O'costs of modern digital switches is actually predominantly [traffic sensitive]." MTS and WATS Market Structure, Order on Reconsideration and Supplemental Notice of Proposed Rulemaking, 3 FCC Rcd 5518, 5526 (1988). In performing this analysis, therefore, the Commission did not indicate that it gave specific consideration to the costs associated with of line ports and dedicated trunk ports. These components must be provisioned in a 1:1 ratio with lines and trunks, respectively, and their costs do not vary with traffic levels. We have the authority and obligation, independent from the Joint Board, to":z0*&&aa" establish appropriate rate structures for recovering the costs the jurisdictional separations  X4process allocates to the interstate jurisdiction.\zj {O'ԍ E.g., 47 U.S.C. 151, 152, 154(ij).\ We take steps today to address the fact that the costs of line ports and dedicated trunk ports are more properly recovered for Part 69 purposes from the Common Line and DirectTrunked Transport rate elements as NTS charges, instead of from the traffic sensitive Local Switching element. We will, however, examine any jurisdictional separations issues presented by NTS switching costs in our upcoming separations NPRM.  XH4135. Costs may vary for shared local switching facilities according to the number of  X14lines connected, or the traffic over those lines.$1 j {O'Ѝ Compare Cable & Wireless Comments at 1213 and Citizens Utilities Comments at 30 and GSA/DOD  {O'Comments at 4 and Texas Commission Comments at 1112 with BellSouth Comments, Attachment 2 at 14.$ In the former case, the costs of the shared facility may be recovered in the most costcausative manner by imposing a proportionate share of the costs on each line while, in the latter case, usagesensitive charges may better reflect cost causation. With respect to such shared local switching facilities, including the switching matrix and shared trunk ports, we gave states flexibility in our interconnection  X 4proceeding to establish either perminute usage charges, or flatrated charges, as appropriate.m h j {O'ԍ Local Competition Order at  81018.m In the access context, however, we will continue to require price cap incumbent LECs to recover the costs of shared local switching facilities, including the central processor, switching matrix, and shared trunk ports, on a perminute basis. On the basis of the information in the record before us, it would be difficult to identify the NTS and trafficsensitive portions of the costs of shared switching facilities and to verify the accuracy of LEC studies attempting to do  X44so.@4 j yO'ԍ MCI Comments at 8082.@ Therefore, until we gain more experience with rate structures for unbundled network elements that are implemented pursuant to Sections 251 and 252 and that segregate these costs into trafficsensitive and NTS components, we will continue to adhere to the current, perminute rate structure for shared switching facilities. "; 0*&&aa "Ԍ X' 2.` ` Traffic Sensitive Charges  X4136. In the NPRM, we sought comment on several alternative rate structures for recovery of usagesensitive local switching costs. Specifically, we sought comment on whether the Commission should require or permit LECs to establish a separate charge for call setup, and if so, whether the charge should be levied on all call attempts, or only completed  Xv4calls.Avj yO'ԍ NPRM at  7576.A We also sought comment on whether the Commission should require or permit incumbent LECs to establish peak and offpeak pricing structures for shared local switching  XH4facilities,AHXj yOQ 'ԍ NPRM at  7778.A and whether the existing perminute rate structure adequately reflects the manner  X14in which trafficsensitive local switching costs are incurred.:1j yO 'ԍ NPRM at  79.:  X '` ` a. Call Setup Charges  X 4137. Among price cap carriers today, most call setup is performed with outofband  X 4signalling, generally using the SS7 signalling network.Z xj yO'Ѝ Ameritech comments that it uses SS7 for over 95 percent of its customers, that its use of SS7 is increasing, and that other large incumbent LECs probably have comparable figures. Ameritech Comments at 16.  {Ow'For a more detailed description of the operation of the SS7 signalling network, see Section III.E. In light of the widely varying  X 4estimates of the costs of call setup in the record,$ j yO'Ѝ While Sprint estimates that call setup costs represent approximately two to six percent of the costs of a typical call (Sprint Reply at 14), PacTel estimates that it costs five times more to set up a call than it does to provide a minute of use (PacTel Comments at 68). Using the industry average call duration cited by the California Commission (Reply at 3) of 3.86 minutes, call setup charges would represent a much larger percentage of the total costs of a typical call than Sprint estimates.$ we conclude that these costs may be more  X4than a de minimis portion of the costs of local switching. The record indicates that these call  X{4setup charges are incurred primarily on a percall rather than a perminute basis."{J j {Ov'Ѝ E.g., Excel Comments at 12; TRA Comments at 37; Ameritech Comments at 15; PacTel Comments at 69; Citizens Utilities Comments at 30; Frederick & Warinner Comments at 67; Minnesota Independent Coalition Comments at 15; Alabama Commission Comments at 8; California Commission at 23; Texas Commission at 14; TCI Comments at 12. By requiring recovery the costs of call setup on a perminute basis, our current rate structure mandates an implicit subsidy running from customers that make lengthy calls to those that make many shortduration calls. Therefore, we find that we should not continue to require the price cap LECs to recover costs of call setup from perminute local switching charges. "<40*&&aa"Ԍ X4138. Accordingly, we will revise Section 69.106 of our rules@j yOy'ԍ 47 C.F.R. 69.106.@ to permit, but not to require, price cap LECs to establish a separate percall setup charge assessed on IXCs for all calls handed off to the IXC's point of presence (POP). As noted earlier, because an incumbent LEC originating an interstate call incurs call setup costs even if the call is not completed at the called location, we permit these LECs to recover call setup charges on all originating interstate calls that are handed off to the IXC's POP, and on all terminating calls that are received from an IXC's POP. With respect to originating call attempts, we agree with the California Commission that, when the call is handed off to the IXC's POP, the incumbent LEC's switches and signalling network have performed their functions and the  X14incumbent LEC has incurred the full cost of call setup.K1Xj yO: 'ԍ California Commission Reply at 2.K We also permit incumbent LECs to impose a setup charge for terminating calls received from an IXC's POP, whether or not that call is completed at the called location, because the incumbent LEC signalling network in either case must perform its setup function.  X 4139. We conclude that the call setup charge should not be mandatory because some  X 4incumbent LECs may determine that call setup costs either are in fact de minimis or are otherwise outweighed by the costs of the network and operations support systems (OSS) upgrades necessary to install measurement and billing systems. In such cases, it would be economically inefficient to mandate a separate callsetup charge because the costs of collecting the charge might exceed the revenue collected from the charge itself. We are aware that, by making the callsetup charge permissive only, we may allow certain incumbent LECs' rate structures to continue to subsidize shortduration calls. We nevertheless conclude that we should not mandate separate collection of a callsetup charge in cases where the LEC determines that the costs of eliminating this subsidy exceed the benefits to be gained. In contrast, we find that those incumbent LECs that either have or obtain the ability to implement a callsetup charge should have the flexibility to adopt this costcausative rate structure.  X~4140. No party disputes the fact that incumbent LECs incur costs of call setup for call attempts, in addition to completed calls. Some parties, however, argue that call setup charges should be assessed only on completed calls in order to reduce customer confusion. We anticipate that consumer confusion will be minimal, however, because the call setup charge we permit will be imposed on IXCs, not end users. We find it unlikely that IXCs would choose to pass this charge along to their customers in the form of a separate charge per call attempt. For instance, IXCs today generally charge their customers for completed long"=0*&&aa"  X4distance calls even though they incur access charges for many uncompleted calls as well.Fj yOy'Ѝ IXCs today incur access charges for originating access minutes of use from the time when the originating LEC hands a call off to the IXC's POP, regardless of whether the call is completed at the called location. 47  {O 'C.F.R. 69.2(a). As a result, originating access minutes of use are approximately seven percent greater than  {O'originating conversation minutes of use. IXCs today do not generally choose to bill their customers directly for access minutes of use charged by the LEC for uncompleted calls or for the interval before the called party  {Oe'answers. See Federal Communications Commission, Com. Car. Bur., Industry Analysis Division, Telecommunications Industry Revenue: TRS Fund Worksheet Data, 8, fig. 3 (Estimates of Toll Rates and Access Costs per Conversation Minute) (Dec. 31, 1996).  X4141. Other commenters state that setup charges imposed on call attempts will result in charges being imposed on a caller that has not received service. LCI asserts that "customers do not expect to pay for uncompleted call attempts, and the carriers are not entitled to recover  X4their costs of uncompleted call attempts,"Bj yO'ԍ LCI Comments at 26 n.41.B citing the Commission's decision in VIA USA,  Xx4Ltd.TZxf j {O'Ѝ In VIA USA, the Commission stated as a factual matter that, "in the system as currently structured by facilitiesbased carriers, customers do not expect to pay for an uncompleted call. Nor do carriers expect to be compensated." 10 FCC Rcd 9540, 9545 (1995) (emphasis added).T The text cited from that order, however, addresses only customer expectations that have arisen because our current rules make no explicit provision for the recovery of costs of an uncompleted call. We now find that a call setup charge, assessed to an IXC, should not be prohibited because a rate structure that recovers some switching costs through a percall setup charge on all call attempts is more costcausative than one limited to the recovery of costs only from completed calls.  X 4142. Still other commenters argue that, if we permit call setup charges to be imposed for call attempts, we will, at best, open the door to unauditable billing errors or, at worst, facilitate incumbent LEC fraud and duplicity. These commenters argue that the incumbent LEC will be able to generate additional revenue, or degrade the service of IXC competitors, by blocking calls at its own switch. Based on this record, we conclude that these concerns are not wellfounded. By permitting a setup charge only for originating call attempts that are handed off to the IXC's POP, we minimize the originating incumbent LEC's incentive to engage in this type of activity because the incumbent LEC will receive no compensation for calls blocked at its own switch. In addition, incumbent LECs have compelling incentives to deliver interstate calls to an IXC's POP. As competition develops for local service, it appears doubtful that an incumbent LEC would find it advantageous to block deliberately interstate calls placed by their end user customers. Such practices would encourage entry by new competitors and increase the interest of affected end users in finding a more reliable service provider. We also find it unlikely that either originating or terminating incumbent LECs would intentionally risk the collection of often significant perminute access charge revenues"> 0*&&aa" on a completed longdistance call in order to collect additional, much smaller percall setup charges. Finally, we know of no significant allegations of degraded service quality attributable to the very similar current regime, under which incumbent LECs collect at least a full minute of originating access revenues on uncompleted calls delivered to the IXC's POP. We are prepared, however, to investigate claims that an incumbent LEC is blocking calls in an intentional or discriminatory manner.  X_4143. Several large business customers that make substantial numbers of shortduration calls, such as those associated with credit card authorization, automatic teller machine operation, or other transactionoriented data transfers, argue that imposing a call setup charge will be disruptive to their businesses and may force them to use alternatives to the public  X 4switched network. j yO| 'Ѝ CompuServe/Prodigy Comments at 2529, Reply at 1112; Bankers Clearing House Comments at 78; Ad Hoc Comments at 1920, Reply at 34. These commenters are the primary beneficiaries of the subsidy that is implicit in the current recovery of call setup costs on a perminute basis, running from customers that make lengthy calls to those that make many shortduration calls. The existing rate structure may well have encouraged users who make many short duration calls to use the publicswitched network in inefficient ways. Rate structures that are aligned with cost causation, on the other hand, should encourage economicallyefficient use of the telecommunications network. Transactionoriented users of the network may be motivated to develop more economically efficient processing methods, with resulting economic benefits. Because this group of IXC customers may need time to adjust to the new rate structure, however, incumbent LECs choosing to impose a percall setup charge on IXCs may do so, at the earliest, in their access tariff filings effective July 1, 1998. This gives a customer over one year to make any necessary adjustments. This time should be sufficient to mitigate any  X4potential disruptive effects of this rate structure change.i  j yO'Ѝ Our experience with Ameritech's tariffed unbundled SS7 signalling charges indicates that a call setup charge, if implemented, may in fact be relatively small. For call setup purposes, Ameritech has established separate signalling rate elements for SS7 call setup for both directtrunked and tandemswitched traffic. The first of these, the "ISDN User Part (ISUP) Signal Formulation Charge," is a "per signalling message charge for the formulation of the ISUP message at end offices and tandems" in the amount of .06 ($0.0006) per message assessed for both directtrunked and tandemswitched traffic. The second, the "Signal Transport Charge," is a "persignalling message charge for the transmission of signalling data between the local STP and an end office SP/SSP" in the amount of .012 ($0.00012) per message. The third, the "Signal Switching Charge" is a "per signalling message charge for switching an SS7 message at the local STP" in the amount of .025 ($0.00025) per message. The Signal Transport Charge and the Signal Switching Charge are assessed on directtrunked traffic only. For tandem switched traffic, the "Signal Tandem Switching Charge" is a "per signalling message charge for the bundled provision of multiple instances of signal switching and signal transport for the situation in which tandem routed facilities are provided to the end office" in the amount of .055 ($0.00055). The Signal Tandem Switching charge incorporates three instances of transport and two instances of switching at the STP. Both the Signal Switching and the Signal Tandem Switching rate elements include the costs of measuring device and  {Ox%'billing system changes. See Ameritech Operating Companies Tariff FCC No. 2, Tariff Transmittal No. 982, filed"x%0*&&G%" July 5, 1996.i"?X0*&&aa"Ԍ X4ԙ144. MCI asserts that there may be costs of call setup in addition to those associated  X4with signalling,=Xj yO'ԍ MCI Comments at 82.= such as a portion of the switch central processor costs.@j yO'ԍ MCI Comments at 8283.@ We limit the costs that an incumbent LEC may recover through call setup charges, however, to those associated with signalling because we agree with MCI that it would be extremely difficult to separate the costs of the switch CPU and other trafficsensitive costs into permessage and  X4perminute portions and to verify that the allocation has been done properly.3xj {O 'ԍ Id.3  X_4145. Several commenters caution that, if we permit a call setup charge, we should also ensure that the charge does not overlap with any SS7related charges now permitted or  X14developed in this proceeding.1 j {O'Ѝ E.g., AT&T Reply at 29; Bankers Clearing House Comments at 45; Ad Hoc Comments at 2325; TCI Comments at 1213. Because call setup is one function of the SS7 network, some  X 4of these costs may already be recovered through the current Part 69 SS7 rate elements.@ d j yO/'ԍ 47 C.F.R. 69.125.@ Currently, Section 69.125 of our rules permits LECs to recover from IXCs only (1) a flatrated signalling link charge for the Dedicated Network Access Line (DNAL); and (2) a flat  X 4rated Signal Transfer Point (STP) port termination charge.@ j yOz'ԍ 47 C.F.R. 69.125.@ While these elements recover the costs of some dedicated SS7 facilities, they do not include the usagebased signalling costs of call setup, including the costs incurred to switch messages at the local STP, to transmit messages between an STP and the incumbent LEC's end office or tandem switch, and to  Xy4process or formulate signal information at an end office or tandem switch.y j yO'Ѝ Neither section 69.125 nor any of our other signallingrelated cost recovery rules, discussed below, provide for recovery of the costs of these functions. As a result, these costs are recovered through perminute charges assessed on completed calls. 47 C.F.R. 69.106. As discussed below, LECs choosing to adopt a separate SS7 signalling rate elements, similar to those established by Ameritech under waiver, may recover a large part of their call setup costs through that mechanism.  XK4146. Currently, the setup costs of certain calls may be recovered through database  X44query charges, either for the line information database (LIDB)@44j yO%'ԍ 47 C.F.R. 69.120.@ or the 800 database.B4j yO'ԍ 47 C.F.R. 69.118.B In"4@X0*&&aa" addition, incumbent LECs recover some costs associated with the provision of certain signalling information necessary for third parties to offer tandem switching through the  X4"signalling for tandem switching" rate element.@Xj yO'ԍ 47 C.F.R. 69.129.@  X4147. Imposing a call setup charge for interexchange calls should not overlap with any of these existing rate elements. Nevertheless, we clarify that an incumbent LEC choosing to impose a call setup charge may not include in that charge any costs that it continues to recover either through other local switching charges, through charges for dedicated SS7 facilities, or through other signalling charges. In this Order, we also permit incumbent LECs to adopt a more detailed SS7 rate structure, modeled on that currently used by Ameritech  X 4under waiver.\^ j {O'Ѝ Ameritech Operating Companies Petition for Waiver of Part 69 of the Commission's Rules to Establish  {O}'Unbundled Rate Elements for SS7 Signalling, Order, 11 FCC Rcd 3839 (Com. Car. Bur. 1996) (Ameritech SS7  {OG'Waiver Order). See Section III.E.\ This SS7 rate structure may permit LECs to recover a significant portion of their call setup costs without an additional call setup charge. Given estimates in the record that SS7 is used to provide signalling for more than 95 percent of the large LECs'  X 4customers, j yO'Ѝ Ameritech Comments at 16. Ameritech states that, "SS7 technology is currently used for more than 95% of customers in the Ameritech network. This figure is probably comparable for other large [incumbent LECs.]" we conclude that, in the ordinary case, a price cap LEC will not need to use both the optional SS7 rate structure and a separate call setup charge to recover the costs of call setup. We recognize, however, that some call setup is still performed using inband, multifrequency (MF) signalling, rather than outofband signalling systems. Because SS7 charges will not recover costs of call setup using MF signalling, we do not prohibit the use of both SS7 and call setup charges. We caution LECs adopting both the optional SS7 rate structure and an additional call setup charge, however, that cost support filed with access tariffs must clearly indicate the allocation of individual costs of call setup between these two recovery mechanisms; the same costs cannot be doublerecovered using both mechanisms.  X'` ` b. Peak and OffPeak Pricing  X4148. We conclude that we should not now mandate a peakrate pricing structure for local switching. The record reflects significant practical difficulties that may make it difficult or impossible to establish and enforce a rational, efficient, and fair peakrate structure as a matter of regulation. For example, the record outlines a variety of difficulties that incumbent LECs will confront in determining peak and offpeak hours with any degree of certainty, based on geographic, usertype, service, and other variations. Moreover, peak usage periods may shift over time as usage patterns change, and as competitors enter the market. Based on"7Af 0*&&aa" these difficulties, some incumbent LECs may find it too costly or too difficult to develop, implement, and maintain a peakrate structure that will allow them to capture all or most of the benefits this structure could offer.  X4149. We do recognize the possible efficiency of a peakrate structure.Zj {O'ԍ Local Competition Order at  755.Z Accordingly, we will consider whether LECs should have the flexibility to develop such peak and offpeak rate structures for local switching on a permissive basis when we consider other issues of rate structure flexibility in a subsequent Report and Order that we will adopt in this proceeding.  X1' C.Transport  X 4150. Transport service is the component of interstate switched access consisting of  X 4transmission between the IXC's point of presence (POP) and LEC end offices.9^ Zj {O'Ѝ Transport Rate Structure and Pricing, Third Memorandum Opinion and Order on Reconsideration and  {O'Supplemental Notice of Proposed Rulemaking, 10 FCC Rcd 3030, 3033 (1994) (Third Transport Reconsideration  {O'Order).9 Currently, incumbent LECs offer two basic types of interoffice transport services. The first, directtrunked transport, uses dedicated circuits for transport between a LEC end office and the LEC serving wire center, or between any other two points the directtrunked transport customer requests. The second, tandem switched transport, uses common transport facilities to connect the end office to a tandem switch. Common transport circuits may be used to transmit the individual calls of many IXCs and even the incumbent LEC itself. Transport circuits dedicated to a particular access customer connect the tandem switch to the serving wire center. Dedicated entrance circuits carry traffic between the IXC POP and the serving wire center, whether the IXC uses directtrunked transport or tandemswitched transport.  X4151. In the NPRM, we expressed concern that some of our current Part 69 rulessj {O 'ԍ See, e.g., 47 C.F.R. 69.110, 69,111, 69.112, 69.124.s may require LECs to recover transport costs through rate structures that do not reflect accurately the way these costs are incurred. We sought comment on possible revisions to  X4many of these rate elements.Ej yOm 'ԍ See NPRM at  8095.E "B0*&&aa"Ԍ X'_ 1.` ` Entrance Facilities and DirectTrunked Transport (#`  X'` ` a. Background  X4152. Entrance facilities are dedicated circuits that connect an access customer's POP with the LEC's serving wire center. Directtrunked transport facilities are dedicated trunks _that carry an access customer's traffic from the LEC end office to the serving wire center  X_4without switching at the tandem switch. In the First Transport Order, we mandated an interim rate structure under which entrance facilities and direct trunked transport are priced on  X34a flatrated basis, which may be distance sensitive.3j {O 'Ѝ Transport Rate Structure and Pricing, Report and Order and Further Notice of Proposed Rulemaking, 7  {Ov 'FCC Rcd 7006, 70167017 (1992) (First Transport Order); see also 47 C.F.R. 69.110. Initial rate levels for directtrunked transport and entrance facilities were presumed reasonable if they were set equal to the rates for corresponding special access service components (special access service and special access  X 4channel termination, respectively). $j {O'Ѝ Transport Rate Structure and Pricing, First Memorandum Opinion and Order on Reconsideration, 8 FCC  {O'Rcd 5370, 5375 (1993) (First Transport Reconsideration Order). In the NPRM, we tentatively concluded that, because directtrunked transport and entrance facilities appear to be dedicated to individual customers, a flatrated pricing structure accurately reflected the way LECs incur the costs of these  X 4facilities.: j yO'ԍ NPRM at  86.: We sought comment on this tentative conclusion and on whether incumbent LECs should be permitted to offer transport services differentiated by whether the LEC or the  X{4IXC is responsible for channel facility assignments (CFAs).X{j yO<'Ѝ A channel facility assignment is the actual designation of the routing that a circuit takes within the incumbent LEC network. This assignment may be made either by an IXC purchasing a dedicated circuit, or the incumbent LEC itself. We also sought comment on whether any rules in addition to the interim rules are necessary to govern rate levels for these  XM4services.:M0 j yO.'ԍ NPRM at  86.:  X'` ` b. Discussion  X4153. We conclude that both entrance facilities and directtrunked transport services should continue to be priced on a flatrated basis and that charges for these services may be  X4distancesensitive. In the First Transport Order, we found that such a flat charge would facilitate competition in the directtrunked transport market and encourage incumbent LECs to"C 0*&&aa"  X4make efficient network decisions.Yj {Oy'ԍ First Transport Order, 7 FCC Rcd at 7022.Y For the same reasons, and because this pricing structure is reflective of the manner in which incumbent LECs incur the costs of provisioning these facilities, we confirm that the interim rate structure the Commission adopted for these facilities should be made final.  X4154. U S West and Sprint make a persuasive showing that, as carriers expand their use of fiberoptic ring architecture and other modern network designs, transport costs should become less distance sensitive because LECs may transport a call along any one of many  XH4paths to its destination based on transient network traffic levels.HZj yOS 'Ѝ As Sprint explains, LECs are moving toward ring configurations in response to customer demands for the increased service reliability gained from this architecture's route diversity and selfhealing qualities. "With the ring configuration, the tandemrouted traffic and directtrunked traffic will all be moving in the same ring, and the distance traversed will simply be a function of the provisioning path selected by the LEC for individual traffic. Utilization of available bandwidth between two nodes at any point in time will become a higher priority in the economic determinant of cost than the distance between the two nodes." Sprint Comments at 24. We conclude, however, that we need not amend our Part 69 rules now to reflect the decreasing sensitivity of transport costs to distance. Our rules permit, but do not mandate, the use of distance sensitive transport charges. Therefore, if an incumbent LEC determines that its transport costs have become less distance sensitive, it may reduce or eliminate the distancesensitivity of its directtrunked transport rates. For two reasons, we expect that incumbent LECs will adjust their rates to reflect any change in the distance sensitivity of transport costs. First, as U S West states, ring architecture will be most prevalent, and therefore, will reduce the distance sensitivity of rates  X4most dramatically, in densely populated areas.Ij {O'ԍ See U S West Reply at 30.I When an incumbent LEC obtains authority to deaverage access rates geographically, therefore, it may choose to offer a less distancesensitive pricing structure in more densely populated areas than it does in less densely populated areas. Such a structure would properly reflect the reduced distance sensitivity of the incumbent LEC's costs in more densely populated areas. Second, as competition develops, incumbent LECs will come under increasing market pressures to maintain rates that reflect the nature of the costs underlying the service. If they choose not to do so, we expect that new market entrants will develop competitive service offerings at prices more reflective of underlying costs.  X4155. We decline Ameritech's request in its comments for immediate flexibility to offer new technologies to switched access customers without obtaining a Part 69 waiver or  X|4passing a public interest test.P|d j {O$'ԍ See Ameritech Comments at 1718.P In our Third Report and Order in the Price Cap Performance  Xg4Review for Local Exchange Carriers (Price Cap Performance Review Third Report and"gD 0*&&aaq"  X4Order), adopted along with the NPRM in this proceeding, we eliminated the need for a Part 69 waiver for new services, and instead required incumbent LECs to file a petition demonstrating that introduction of the new service would be consistent with the public  X4interest.j {O6'Ѝ NPRM at  309310 (contained within the Third Report and Order portion of that item). The rule changes implementing this procedure will become effective on June 30, 1997. Such petitions will give LECs that desire to do so the opportunity to make their  X4cases and receive the requested flexibility.K"j {Oy'ԍ See 47 C.F.R. 69.4(g).K This procedure significantly streamlined the prior waiver process, and we conclude that the public interest will not suffer if we do not grant incumbent LECs additional immediate flexibility in this area as part of our basic rate structure modifications. We will give further consideration to Ameritech's request for additional flexibility to offer new technologies to switched access customers as part of our assessment of other aspects of pricing flexibility in a subsequent Report and Order in this proceeding.  X 4156. We also will consider whether LECs should be permitted to offer directtrunked transport services that are differentiated by whether the incumbent LEC or the transport customer is responsible for performing channel facility assignments in connection with our evaluation of other forms of pricing flexibility in a subsequent Report and Order in this proceeding. As MCI argues in its comments, it is unclear whether rates for directtrunked transport where the LEC controls the CFA should be higher or lower than the rates that apply  Xd4where the IXC controls the CFA.@dj yO'ԍ MCI Comments at 8485.@ Although the LEC may be able to make more efficient use of its network facilities when it controls the CFAs itself, this efficiency benefit may be offset by the additional costs the LEC incurs in performing the CFA function. We agree with MCI that an incumbent LEC may be able to increase its network efficiency by retaining or assuming control of CFAs, particularly if an IXC orders a relatively large amount of transport capacity. In those cases, however, rate differentiation based on CFA control appears to be the functional equivalent of a volume discount. As a result, we will consider this issue, along with other pricing flexibility issues, in a subsequent Report and Order planned in this docket.  X4157. In its comments, USTA requests that we forbear under Section 10 of the  X~4Communications Act=~Dj yOs!'ԍ 47 U.S.C. 160.= from regulating services in the interexchange basket, special access,  Xg4collocated directtrunked transport, and directory assistance.Agj yO#'ԍ USTA Comments at 3548.A We will address USTA's request along with other pricing flexibility issues, in a subsequent Report and Order planned in this docket."9Ed 0*&&aaE"Ԍ X'ԙ_ 2.` ` TandemSwitched Transport (#`  X'` ` a. Background  X4158. Tandemswitched transport uses trunks that are shared among many IXCs and the LEC itself to carry traffic between the end office and a tandem switch. The tandem switch _routes IXC traffic onto an appropriate dedicated trunk that runs between the tandem  X_4switch and the serving wire center.X_j yO'Ѝ An end office local switch may also serve as a tandem switch with certain software upgrades. Therefore, the tandem switching office is also often an end office in its own right. Similarly, an IXC typically uses a large end office, upgraded with additional trunking capacity to handle the IXC's traffic, as its serving wire center. An IXC may use tandemswitched transport either as its primary form of transport in lieu of directtrunked transport, or to carry traffic that overflows from its directtrunked transport facilities at peak periods. In 1982, the  X 4Modification of Final Judgment (MFJ) established an interim rule that required, until September 1, 1991, BOC charges to IXCs to be "equal, per unit of traffic" of a given type transported between end offices and facilities of the IXCs within an exchange area or within  X 4reasonable subzones of an exchange area.  j {Op'Ѝ United States v. American Tel. and Tel. Co., 552 F. Supp. 131, 23334 (AT&T Consent Decree,  {O:'Appendix B, Section B(3)), aff'd sub nom. Maryland v. United States, 460 U.S. 1001 (1983).   X 4159. The Commission replaced the "equal charge" rule in 1993 with an interim rate structure for tandemswitched transport. This interim structure allows IXCs to choose between two rate structures for the purchase of tandemswitched transport. Both options provide for a perminute tandem switching charge. Under the first option, an IXC may elect to pay "unitary" perminute charge for transmission of traffic from the end office, through the tandem switching office, to the serving wire center. This charge may be distance sensitive, with distance measured in airline miles from the end office to the serving wire center. Under the second option, the "threepart rate structure," in addition to the charge for the tandem switch, an IXC may elect to purchase transmission on a bifurcated basis, with the end officetotandem portion charged on a perminute basis, and the tandemtoserving wire center  X4portion charged as directtrunked transport facilities, i.e., on a flatrated basis. Under the threepart rate structure, both portions of the transmission charge may be distance sensitive  X4based on the airline mileage to the tandem office.mDj {O 'ԍ See First Transport Reconsideration Order, 8 FCC Rcd at 5372.m  Xi4160. In adopting the interim rate structure, the Commission stated that initial directtrunked and tandemswitched transport rates would be presumed reasonable if set based on"RF0*&&aa4"  X4special access rates in effect on September 1, 1992 using a DS3 to DS1j yOy'Ѝ A DS1 line is capable of transmitting 24 voice conversations, each digitally encoded at 64 kilobits per second, for a total capacity of 1.544 megabits per second. A DS3 line has 28 times the capacity of a DS1. rate ratio of at least  X49.6 to 1.dZ j {O'Ѝ First Transport Order, 7 FCC Rcd at 7029. Special access customers use a dedicated trunk running between the customer's premises and the IXC's POP, thereby bypassing the LEC's switched network facilities altogether. This service is primarily used by large volume users in densely populated areas.d Perminute tandemswitched transport rates were presumed reasonable if set using a weighted average of DS1 and DS3 rates reflecting the relative numbers of circuits of each type in use in the tandemtoend office link, and assuming circuit loading of 9000 minutes of  X4use per month per voicegrade circuit.?Bj {O 'ԍ Id. at 703637.?  Xv4161. Under the interim rate structure, whether a tandemswitched transport customer elects to purchase tandemswitched transport under the unitary or the threepart rate structure, the LEC imposes a separate, perminute charge on the tandemswitched transport customer for use of the tandem switch. The Commission set this charge initially to recover only twenty percent of the tandem revenue requirement, in order to: (1) protect small IXCs that use tandemswitched transport as their primary transport mechanism from substantial increases in  X 4tandemswitched transport rates; j {Oq'Ѝ See Competitive Telecommunications Ass'n v. FCC, 87 F.3d 522, 52627 (D.C. Cir. 1996) ("CompTel"). (2) ensure that the interim rate structure did not "endanger the availability of pluralistic supply in the interexchange market" that had developed under the  X 4equal charge rule;Y f j {O'ԍ First Transport Order, 7 FCC Rcd at 7008.Y and (3) allow IXCs a transitional period to reconfigure their networks to eliminate inefficiencies that had developed under the equal charge rule and to prepare for a  X4fully costbased rate structure.< j {O9'ԍ Id. at 7016.< Unlike the directtrunked and tandemswitched transport rates, which are set using overhead loadings based on special access, the tandem switching rates used higher overhead loadings applicable to switched access.  X44162. As part of the interim rate structure, the Commission also created the TIC to recover on a perminute basis from all switched access customers the difference between the Part 69 transport revenue requirement and the revenues projected to be recovered under the  X4interim rate structure.B j {O*#'ԍ Id. at 7038.B The TIC was explicitly intended to make the transition to the interim  X4rate structure revenue neutral.3j {O%'ԍ Id.3 Among other possible costs, the TIC recovers the remaining"G0*&&aan" 80 percent of the tandemswitching revenue requirement.  X4163. Portions of the interim transport rate structure were recently remanded to the  X4Commission by the United States Court of Appeals for the District of Columbia Circuit.Ej {O4'ԍ CompTel, 87 F.3d 522.E With respect to tandemswitching rates and the TIC, the Court ordered us either to implement a costbased rate structure or offer a "rational and nonconclusory analysis in support of [our]  Xv4determination that an alternative structure is preferable."AvZj {O 'ԍ Id. at 536.A With respect to overhead loadings, the Court ordered us either to substantiate that our current method of allocating overhead is costbased, choose a method that is, or provide a reasoned explanation of our decision to  X14pursue a noncostbased system.31j {O 'ԍ Id.3  X 4164. In the NPRM, we sought comment on several alternative rate structures for tandemswitched transport service facilities, including: (a) maintaining the interim rate structure, which permits the IXCs to choose between the two pricing alternatives above; (b) eliminating the unitary rate option and requiring the IXCs to purchase tandemswitched transport under the threepart rate structure; or (c) developing another, different rate  X4structure.E~j yO'ԍ NPRM at  8788, 91.E We also sought comment on whether, in conjunction with any of these pricing options, we should apply to tandem switching any of the options for local switching discussed above, including whether we should establish separate flatrated charges for the dedicated ports on the serving wire center side of the tandem or other NTS components of the tandem switch, and whether usagebased or flat rates more accurately reflect shared tandemswitching  X4costs.@j yO'ԍ NPRM at  89.@ We also sought comment on whether, in conjunction with any of these options, we should permit or require peak load pricing for usagebased charges for tandemswitched transport service, and on whether any portion of tandemswitched transport costs should be recovered from directtrunked transport customers.  X'` ` b. Overview of Rate Structure and Rate Level Changes  X|4165. In this section, we summarize the changes we make to the tandemswitched transport rate structure and rate levels below. We conclude that we should require incumbent LECs to implement a costbased rate structure for tandemswitched transport in four stages over a two year transition period. Unlike our previous transition plans, however, we set forth today, for the first time, the details of a final, costbased transport rate structure. We have" H0*&&aa"" long recognized that noncost based rate structures can, among other dangers, (1) threaten the longterm viability of the nations's telephone systems; (2) distort the decision whether to use alternative telecommunications technologies; and (3) encourage "uneconomic bypass" of the  X4public switched telecommunications network, raising rates for all.j {O4'Ѝ MTS and WATS Market Structure, Third Report and Order, 93 F.C.C.2d at 251252.  X4166. Until today, however, we have limited ourselves to interim transport rate structure plans, such as the equal charge rule and the interim rate structure described above. While the interim rate structure increased the costbased nature of our transport rate structure, it also included significant noncostbased elements. We have not, until today, laid out a clear transition plan that describes all the steps necessary to achieve costbased transport rates. As a result, although all carriers have no doubt been aware of our intention to move to a costbased rate structure, they have been able only to react to our transitional steps, announced piecemeal. Because we have not announced a definite and detailed end state a final, costbased rate structure we have afforded carriers little opportunity to plan, adjust, and develop their networks in preparation for such a rate structure, despite our lengthy period of "transition." Accordingly, because of the potential magnitude of the rate impact of these changes, we conclude that a fourstep implementation over a twoyear period will minimize the risk of rate shock and allow transport customers to adjust while we move as expeditiously  Xb4as possible to costbased transport rates as required by the CompTel decision.  X64167. The first step will occur in incumbent LEC access tariffs to become effective on January 1, 1998. In those tariffs, incumbent price cap LECs must establish new rate elements for recovery of the costs of DS3/DS1 and DS1/voicegrade multiplexers used in conjunction with the tandem switch. The rate element for the dedicated multiplexers on the serving wire center side of the tandem will recover these costs on a flatrated basis, while the rate element for the multiplexers on the end office side of the tandem will be assessed per minute of use. In addition, incumbent price cap LECs must establish in those tariffs a flatrated charge to recover the costs of dedicated trunk ports on the serving wire center side of the tandem. None of our existing rate elements currently recovers the costs of either these multiplexers or these dedicated trunk ports. Accordingly, we conclude that those costs are currently recovered through the TIC, and that incumbent price cap LECs must reduce the TIC to reflect the recovery of these costs through the new rate elements. Also on January 1, 1998, all incumbent LECs must take the first of three annual steps to reallocate to the tandemswitching rate element tandem switching revenues currently being recovered through the TIC. In tariffs filed to be effective on that date, we require incumbent LECs to reallocate one third of the portion of the tandem switching revenue requirement that they currently recover through the TIC, excluding signalling and dedicated port costs that we reallocate elsewhere, to the tandem switching rate element.  X#4168. The second step will occur in incumbent LEC tariffs to become effective July 1,"#IZ0*&&aa!" 1998. At that time, all incumbent LECs must eliminate the unitary pricing option for tandem switched transport. Instead, incumbent LECs will be required to provide tandemswitched transport under a threepart rate structure as follows: (1) a perminute charge for transport of traffic over common transport facilities between the LEC end office and the tandem office; (2) a perminute tandem switching charge; and (3) a flatrated charge for transport of traffic over dedicated transport facilities between the serving wire center and the tandem switching office. Incumbent LECs will continue to impose separate multiplexing and port charges established on January 1, 1998, as complementary to the threepart rate structure.  X14169. The third and fourth steps will consist of the reallocation of the remaining portion of the tandemswitching revenue requirement currently recovered through the TIC to the tandemswitching rate element. All incumbent LECs are to reallocate one half of the remaining portion of tandemswitching revenue requirement recovered through the TIC to the tandemswitching rate element in access tariffs to become effective January 1, 1999, and the final portion of the tandemswitching revenue requirement to the tandemswitching rate element in access tariffs to become effective on January 1, 2000. Before performing this reallocation, price cap incumbent LECs must account for Xfactor reductions to the tandemswitching revenues permitted under price caps that have occurred since the TIC was created, as described in Section III.C.2.d, below.  X4'` ` c. Rate Structure  X4170. Multiplexing Costs. As discussed above, we direct incumbent LECs to establish separate rate elements for the multiplexing equipment on each side of the tandem switch. LECs must establish a flatrated charge for DS1/DS3 multiplexers on the serving wire center side of the tandem, imposed prorata on the purchasers of dedicated DS3 trunks on the serving wire center side of the tandem, in proportion to the amount of DS3 trunking capacity purchased by each customer. Unlike DS3 rates, rates for DS1 dedicated trunks already  X~4include a portion of the DS1/DS3 multiplexer needed for transport.^~j {O'ԍ First Transport Order, 7 FCC Rcd at 7028 n.85.^ Multiplexing equipment on the end office side of the tandem shall be charged to users of common end officetotandem transport on a perminute of use basis. These multiplexer rate elements must be included in the LEC access tariff filings to be effective January 1, 1998.  X 4171. We sought comment in the NPRM on the claim that: XThe TIC . . . includes the two additional multiplexers needed in order to multiplex a DS3 circuit down to a DS1 level before switching at the tandem, and then back up to DS3 afterward for transmission to an end office. To the extent that analog tandem switches exist, two additional DS1/[voicegrade] multiplexers are needed to achieve the voicegrade interface with the tandem"#JZ0*&&aa!"  X4switch.j yOy'Ѝ NPRM at  106. It is also possible to combine the DS3/DS1 and DS1/voicegrade functions into a single multiplexer.  None of our existing rate elements explicitly recovers the costs of these multiplexers, and we conclude that these costs are currently recovered as part of the TIC. Accordingly, we establish two rate elements for multiplexers used on the serving wire center side of the tandem switch. The first will recover the costs of DS3/DS1 multiplexers used by purchasers of dedicated DS3 transport trunks from the serving wire center to the tandem switch, and may be levied only on purchasers of such DS3 transport. The second will recover the costs of DS1/voicegrade multiplexers used on the serving wire center side of analog tandem switches, and should be levied on purchasers of DS1 or greater capacity dedicated transport from the tandem switch to the serving wire center in proportion to the transport capacity purchased on that route. Like serving wire centerside trunks and trunk ports, both DS3/DS1 and DS1/voicegrade multiplexers on the serving wire center side of the tandem switch are dedicated to individual customers. Accordingly, flatrated NTS charges for these multiplexers are appropriate.  X4172. On the end office side of the tandem switch, we establish two additional rate elements. The first will recover the costs of DS3/DS1 multiplexers used on the end office side of the tandem switch. This rate element will be a perminute charge imposed on each IXC purchasing common transport on the end officetotandem link. This charge will be calculated based on actual minutes of use of the common transport circuits and will be assessed on IXCs in a 1:1 ratio with minutes of use of common transport. As with common transport trunks, because these multiplexers are shared among all users of common transport, trafficsensitive, perminute charges are appropriate. The second rate element should be assessed only at analog tandems, to recover in a similar manner the costs of DS1/voicegrade multiplexers needed at these analog tandems.  X4173. Price cap LECs must reallocate revenues currently being recovered through the TIC to these rate elements and begin recovery of multiplexing costs using these rate elements in their access tariffs to become effective January 1, 1998.  X74174. Dedicated Tandem Switch Trunk Port Costs. Price cap incumbent LECs must establish a separate rate element for dedicated trunk ports used to terminate dedicated trunks on the serving wire center side of the tandem switch. LECs incur the costs of these ports on an NTS basis, but currently must recover their costs through perminute charges for the tandem switch. Because we have allocated 80 percent of tandemswitching costs to the TIC, these port costs may currently be recovered through either perminute tandemswitching charges, or the perminute TIC. We now take this opportunity to establish a separate rate element for these costs. Price cap LECs must establish a flatrated element for dedicated""K 0*&&aa " trunk ports on the serving wire center side of the tandem, assessed on the purchaser of the dedicated trunk terminated at that port. This rate element shall be a flatrated charge assessed on the carrier purchasing the dedicated trunk terminated at that port, and must be also be included in tariff filings to become effective January 1, 1998.  X4175. ThreePart Rate Structure. We also direct all incumbent LECs to discontinue the unitary rate structure option for the transmission component of tandemswitched transport, effective July 1, 1998. In their access tariffs that take effect on July 1, 1998, incumbent LECs will be required to provide tandemswitched transport under a threepart rate structure as follows: (1) a perminute charge for transport of traffic over common transport facilities between the LEC end office and the tandem office; (2) a perminute tandem switching charge; and (3) a flatrated charge for transport of traffic over dedicated transport facilities between the serving wire center and the tandem switching office. This three part rate structure reflects the manner in which the incumbent LEC incurs the costs of providing each component of tandemswitched transport. By establishing a perminute, trafficsensitive rate for the shared common transport trunks and the tandem switch, incumbent LECs will recover these costs from each IXC in proportion to its use. The incumbent LEC, in contrast, incurs the costs of the dedicated serving wire centertotandem trunk on an NTS basis because, like other dedicated trunks, the LEC must provision the trunk for the exclusive use of one IXC. Once this capacity is dedicated, the cost of the trunk does not vary with the amount of traffic transmitted by the IXC.  X4176. The threepart rate structure may cause some tandemswitched transport customers to increase their use of directtrunked transport relative to tandemswitched transport. As discussed above, making this rate structure change effective on July 1, 1998, will provide tandemswitched transport customers that currently take service under the unitary rate structure with notice of this change sufficient to enable them to adjust their networks to provide service in the most efficient way possible, and to mitigate any sudden effect on rates such a change could have if implemented on shorter notice. In order to encourage transport customers to increase the efficiency of their transport networks quickly, we will require incumbent LECs to waive certain nonrecurring charges until six months after the threepart rate structure becomes mandatory. Therefore, from the effective date of this Order until six months after the effective date of tariffs eliminating the unitary pricing option for tandemswitched transport, the incumbent LECs shall not assess any nonrecurring charges for service connection when a transport customer converts trunks from tandemswitched to directtrunked  X4transport or orders the disconnection of overprovisioned trunks.j {OV"'Ѝ This waiver is similar to the one we ordered when we adopted the interim rate structure. First Transport  {O #'Order, 7 FCC Rcd at 7038.  X!4177. When we replaced the equal charge rule in 1991, we stated three principles that would guide our efforts to develop the transport rate structure: (1) to encourage efficient use""L$0*&&aa " of transport facilities by allowing pricing that reflects the way costs are incurred; (2) to avoid interference with the development of interstate access competition; and (3) to facilitate full  X4and fair interexchange competition.'\j {OK'Ѝ First Transport Order, 7 FCC Rcd at 7009. We reiterated these principles in the First Transport  {O'Reconsideration Order, 8 FCC Rcd at 5372, and the Third Transport Reconsideration Order, 10 FCC Rcd at 3035.' In 1991, we stated that the interim rate structure was a reasonable first step toward achieving these goals, because it was more costbased than the  X4equal charge rule.Yj {OA 'ԍ First Transport Order, 7 FCC Rcd at 7016.Y Even from its inception, however, we have recognized that the interim rate structure represents significant compromises that cause it to fall substantially short of  Xv4these goals in many ways.v~j {O 'Ѝ See First Transport Order, 7 FCC Rcd at 7016, 702122; Third Transport Reconsideration Order, 10 FCC Rcd at 304748.  XH4178. First, the unitary rate option does not accurately reflect the manner in which LECs incur costs in providing tandemswitched transport and, therefore, does not provide maximum incentive for IXCs to use transport facilities efficiently. IXCs may order, and LECs must provide, dedicated transport links with NTS costs on the serving wire centertotandem route with no assurance that the trafficsensitive, perminute revenues collected will cover the NTS costs of the link. As we stated at the time, the unitary rate structure was intended as an interim measure to allow IXCs time to prepare for a fully costbased transport  X 4rate structure.j j {O0'ԍ Third Transport Reconsideration Order, 10 FCC Rcd at 3048.j IXCs have now had well over a decade since divestiture to so prepare. We  X4agree with the CompTel decision that it is time to bring this period of preparation to a close  X{4as expeditiously as possible without causing severe disruption to carriers.H{j j {O'ԍ CompTel, 87 F.3d at 530.H  XM4179. Second, by bundling the dedicated and common portions of the transmission component of tandemswitched transport into a single, endtoend perminute charge, the unitary rate structure inhibits the development of competitive alternatives to incumbent LEC tandemswitched transport. While we have required incumbent LECs to provide the collocation, signalling, and unbundled network elements necessary for new entrants to compete with incumbent LECs without having to replicate the incumbent LEC's interoffice  X4transport network,^ j {Op#'Ѝ See Local Competition Order; Expanded Interconnection with Local Telephone Company Facilities,  {O:$'Memorandum Opinion and Order, 9 FCC Rcd 5154 (1994); Expanded Interconnection with Local Telephone  {O%'Company Facilities, Transport Phase II, Third Report and Order, 9 FCC Rcd 2718 (1994). we have not corrected the noncost based aspects of our tandemswitched transport rate structure that reduce incumbent LEC rates for tandemswitched transport"M"0*&&aa" services. Several commenters have noted that the tandemswitched transport market, despite  X4our efforts, is subject only to limited competition.j {Ob'ԍ E.g., Letter from David Sieradzki, Counsel for WorldCom, Inc., to William F. Caton, Acting Secretary,  yO,'FCC, February 25, 1997, Encl. at. 4. Moreover, several competitive entrants have stated that they have the capability and desire to offer some or all of the components of tandemswitched transport on a competitive basis, but that the present, unitary rate structure  X4inhibits the development of competition in this area. &"j {Ow'Ѝ E.g., Teleport Comments at 1314; ALTS Reply at 22. After the comment period closed in this proceeding, Teleport and CompTel proposed a compromise tandemswitched transport rate structure that would (1) retain the unitary rate structure for the transmission component of tandemswitched transport; (2) prohibit incumbent LECs from deaveraging TIC charges within a state for a five year transition period; and (3) provide that IXCs and CLECs that do not use transport facilities supplied by the incumbent LEC would be exempt from  {Oa 'paying the TIC for any switched access traffic carried over those facilities. See Ex Parte Letter from James M. Smith and Robert C. Atkinson to Hon. Reed E. Hundt, April 16, 1997. Teleport and CompTel characterize this third element of their proposal as the "most important." Exempting IXCs and CLECs that do not use transport facilities supplied by the incumbent LEC from paying the TIC for any switched access traffic carried over those  {O'facilities would be consistent with a recent Colorado Commission arbitration ruling. See TCG Colorado Petition for Arbitration Pursuant to 252(b) of the Telecommunications Act of 1996 to Establish an Interconnection  {O'Agreement with U S West, Docket No. 96A329T, Decision Regarding Petition for Arbitration, Decision No.  yO'C961186 (adopted Nov. 5, 1996). In that decision, the Colorado Commission stated that, X[I]f [U S West] provides all or part of the transport of an interstate call from the end office to the IXC, then [U S West] is entitled to collect its interstate rates, including [TIC]. If, however, [U S West] is not providing the transport of a call from an endoffice switch to an IXC, then [U S West] may not apply its switched access transport rates, including the [TIC], to those calls. We reject arbitrary splits of revenues. In jointly provisioned switched access services, each company will develop and apply its tariffed rates to the portion of service it provides.   {O'Id. at  I.O.7. Clarifying this position on reconsideration, the Colorado Commission stated, "[t]he [TIC] shall be applied on a pro rata basis determined from the proportional distance between the [Teleport] tandem and the end {Oy'office of [U S West]." TCG Colorado Petition for Arbitration Pursuant to 252(b) of the Telecommunications  {OC'Act of 1996 to Establish an Interconnection Agreement with U S West, Docket No. 96A329T, Order Denying Applications for Rehearing, Reargument, or Reconsideration, Decision No. C961344 (adopted Dec. 18, 1996), at  I.B.1.4. In addition, each component of tandemswitched transport is not equally susceptible to competitive entry; it is relatively easier for a new entrant to compete to provide the dedicated serving wire centertotandem link than it would be to compete to provide either the tandem switch itself or the myriad common transport end officetotandem links. Thus, in order to permit the fullest development of competitive alternatives to incumbent LEC networks, we need to unbundle reasonably segregable components of incumbent LEC transport services and price them in the manner in which costs are incurred.  X 4180. Third, the interim rate structure does not best promote "full and fair" interexchange competition. The unitary rate structure has facilitated the growth of small IXCs" N0*&&aaJ " to compete with larger carriers. It has achieved this, however, by requiring incumbent LECs to price facilities with NTS costs on a perminute, traffic sensitive basis, in order to allow small IXCs to offer interexchange services at rates comparable to those offered by larger carriers without regard to whether the charges paid by the small IXCs cover the costs of the facilities that they use. While this structure has protected "pluralistic supply in the  X4interexchange market,"]j {O'ԍ See First Transport Order, 7 FCC Rcd at 7007.] our rules should promote competition, not protect certain competitors. We have recently concluded that no carrier is dominant with respect to  X_4domestic, interexchange services._Zj {Oj 'Ѝ Motion of AT&T to be Reclassified as a NonDominant Carrier, Order, 11 FCC Rcd 3271 (1995). Therefore, to the extent that we designed the interim rate structure to facilitate the growth of small IXCs in competition with AT&T, we find that such protective rules are no longer necessary. In a competitive market, we believe that we should strive to make our rate structure rules consistent with costcausation principles, so long as those principles do not conflict with other statutory obligations, such as universal service. As  X 4the CompTel decision stated, "attempt[ing] to recover costs from IXCs that did not cause those costs to be incurred would impart the wrong incentives to both actual and potential providers of local transport, thereby inducing them to offer an inefficient mix of dedicated,  X 4[directtrunked transport], and tandemswitched service."" j {OF'Ѝ CompTel, 87 F.3d at 530531. Even though directly addressing the TIC and not the unitary rate structure, the Court's remarks are apposite because the unitary rate structure does not recover the costs of tandemswitched transport in the way that those costs are incurred and therefore results in the recovery of some costs of the transmission component of tandemswitched transport through the TIC. Because rules that do not reflect costcausation may cause IXCs to order an inefficient mix of transport services, such rules artificially raise the costs of providing interexchange services. Rules properly reflecting costcausation, in contrast, will benefit LECs, IXCs, and consumers alike by encouraging competitors to provide service using facilities efficiently. In adopting the interim rate structure, we cited AT&T's estimate that the efficiency benefit to consumers of costbased  X4pricing and competition could reach $1 billion annually.Yj {O'ԍ First Transport Order, 7 FCC Rcd at 7016.Y Our adoption of the threepart rate structure is intended to permit consumers the benefits of even greater service efficiency.  X4181. We therefore adopt the threepart structure as the final tandemswitched transport rate structure because this structure most closely reflects the manner in which LECs incur the costs of each component of the overall tandemswitched transport service. When combined with our actions with respect to the TIC, our adoption of actual minutes of use as the appropriate factor for determining perminute rates for common transport circuits, and our allocation of the full cost of the tandemswitch to the tandemswitching rate elements, we expect that this structure will benefit LECs, IXCs, competitive providers of access services, and consumers. Tandemswitched transport facilities are sized to accommodate peak traffic"9Oh 0*&&aa+" loads, including overflow traffic from IXCs using directtrunked transport facilities. Several commenters have stated that, until now, these overflow customers have not borne the full costs of these facilities because overflow customers pay only the same perminute  X4transmission charges applicable to other IXCs.j {O4'Ѝ E.g., TCI Comments at 16, Reply at 1314. See also ACC Long Distance Comments at 1415; Telco Communications Group Comments at 67. The threepart rate structure will require the IXC purchasing tandemswitched transmission facilities to pay the full NTS costs of the dedicated serving wire centertotandem link, without regard for the amount of traffic transported. This benefit, in turn, will substantially increase IXC incentives to use tandemswitched transport efficiently for overflow traffic.  X14182. Some commenters argue that we should retain the unitary rate structure because tandemswitched transport, as a service, has traditionally been offered on an endtoend basis. We agree that the transmission component of tandemswitched transport has in fact been  X 4offered on an endtoend basis, but only pursuant to the requirements of the MFJ and our interim rate structure rules as part of a transition to costbased rates. We find, however, that  X 4the transmission component of tandemswitched transport is not, in fact, provisioned by the incumbent LEC on an endtoend basis. Purchasers of directtrunked transport purchase an endtoend service; they purchase from the incumbent LEC transport capacity between two end points. Tandemswitched transport customers, in contrast, purchase use of the tandem switch to route traffic to their POP. By virtue of their decision to choose tandemswitched transport, these customers specifically obligate the LEC to transport their traffic between the serving wire center and the tandem serving a particular end office or group of end offices and to perform the tandem switching function. Because they cause the incumbent LEC to incur the costs of transmitting their traffic between the serving wire center and the tandem, tandemswitched transport customers should, as a matter of costcausation, pay the costs of reaching the tandem. In providing tandemswitched service, incumbent LECs must provision two separate circuits with distinctly different cost characteristics one dedicated, and one shared. Tandemswitched service, therefore, is not provisioned on an endtoend basis between the end office and serving wire center, but in three parts: (1) transmission from one "end," the end office, to the tandem; (2) the tandem switching function itself; and (3) transmission from the tandem to the other "end," the serving wire center. Just as the tandemswitched transport customer pays a separate charge for the tandem switch, the tandemswitched transport customer should pay separately for the two distinct transmission components.  X 4183. Other commenters argue that the threepart rate structure will create LEC incentives to engage in inefficient network reconfiguration, placing tandems far from end  X4offices and serving wire centers simply to increase tandemswitched transport revenues.L"j {O$'ԍ E.g., Sprint Comments at 22.L These commenters further argue that, if we adopt the threepart rate structure, we need to" P0*&&aaH" control this incentive by establishing a process for review of the incumbent LECs' tandem deployment decisions. Based on this record, we conclude that these commenters' fears are not well founded. An incumbent LEC would likely incur substantial costs to reconfigure placement of its tandem switches specifically to disadvantage IXC users of tandem switched transport. Because we expect the three part rate structure to catalyze the development of competition, we conclude that the incumbent LEC would not be likely to incur such costs. Although the incumbent LEC might be able to increase its tandemswitched transmission revenues in the short term to reflect inefficient routing, as more efficiently configured competitors enter the market, the LEC would not be able to sustain such artificially inflated rates and would then need to incur additional costs to reconfigure its network efficiently. Because, under our new competitive paradigm, a multitude of investment opportunities, including wireless services, video, and interLATA toll, may emerge for incumbent LECs, we agree with Ameritech that "[s]uch misspent capital outlays and inefficient network  X 4configuration simply would not make good business sense."@ j yON'ԍ Ameritech Reply at 29.@  X 4184. Moreover, the redeployment of tandem switches affects network efficiency with respect to both the incumbent LEC's own local and toll traffic, as well as intrastate and  Xy4interstate access.JyXj {O'ԍ See Ameritech Reply at 29.J Therefore, inefficient network reconfiguration would cause harm both to tandemswitched transport customers and to the incumbent LEC itself. Any additional transport revenues that the incumbent LEC generated through inefficient network reconfiguration would be at least partially offset by the additional costs of transporting the LEC's own traffic in similarly inefficient ways. As discussed above, as competition develops in the local market, we expect that a LEC would be reluctant to take steps to decrease its own efficiency.  X4185. Some commenters argue that we should retain the unitary rate structure because directtrunked transport and tandemswitched transport circuits often travel along the same routes using the same physical facilities. These commenters argue, therefore, that it would be unfair or discriminatory to require tandemswitched transport users to purchase transmission based on airline mileage from the end office to the tandem to the serving wire center, while users of directtrunked transport are permitted to purchase the same route on the basis of airline mileage from end office to the serving wire center directly. Other commenters argue that we should require the LECs to offer both types of transport based on actual route miles, revealing actual LEC network efficiencies and inefficiencies.  X4186. We disagree with both of these proposed modifications. An IXC purchasing directtrunked transport requires the incumbent LEC to provide transport service between the end office and the serving wire center. Because the LEC must route directtrunked transport"!Q0*&&aa% " traffic between only these two points, our rate structure requires the IXC to pay only for the airline mileage between those two points, reflecting the direct mileage route between the locations in the incumbent LEC network designated by the access customer. In contrast, an IXC purchasing tandemswitched transport purchases use of the access tandem switch and therefore requires the incumbent LEC to provide service between the serving wire center and the tandem, and between the tandem and the end office. Under the three part rate structure, the tandemswitched transport customer, like the directtrunked transport customer, pays for the direct mileage between the locations in the incumbent LEC network designated by the customer for tandemswitched transport, the serving wire center to tandem, and the tandem to the end office. Because the IXC has chosen to make use of the LEC tandem switching facilities, it should pay explicitly for the transport necessary to reach the tandem. The directtrunked transport customer, in contrast, does not make use of the tandem switching facilities; even if the LEC routes directtrunked transport traffic through the tandem office, this traffic is not switched at the tandem. While the incumbent LEC may choose to route directtrunked traffic through the tandem office based on its own assessment of whether it is economically efficient to do so, the directtrunked transport customer pays only for direct mileage between the locations it designated in the network.  Xb4187. We are not persuaded by arguments that we should retain the unitary pricing structure because the incumbent LEC, and not the tandemswitched transport customer, has selected the tandem location and, consequently, the tandemswitched transport customer should not pay for the direct mileage to and from the tandem location. The incumbent LEC equally chooses the locations of the serving wire center and end office, and yet access customers routinely pay mileage charges to and from those locations, rather than between the end points of the access service the POP and the end user location. Similarly, we find that the threepart rate structure does not discriminate against IXCs using tandemswitched transport. As discussed above, the tandemswitched transport customer, unlike the direct X4trunked transport customer, requires the incumbent LEC to route its traffic to the tandem, and so should pay the costs of reaching the tandem. In addition, an IXC operating efficiently often may choose to locate its POP at or close to the tandem, if the tandemswitching office also can function as the serving wire center, thus eliminating virtually all of the dedicated transport costs of the tandemtoserving wire center link. While such an arrangement may be the most efficient transport architecture for tandemswitched transport, our current unitary pricing structure does not reflect the underlying costs of tandemswitched transport transmission facilities and so does not encourage efficient transport architectures.  X 4188. The introduction of more modern network architectures, such as Synchronous Optical Network (SONET) rings, does not alter our conclusion that the threepart rate structure most closely approximates the nature of costs associated with each component of tandemswitched transport. WorldCom, for instance, asserts that the "pyramid" diagram"#R0*&&aa!"  X4included in the NPRM as Figure 1 is outdatedZj yOy'ԍ NPRM at  24 (diagram follows the paragraph).Z and submits a diagram illustrating interoffice  X4tandemswitched transport in a ringbased network.FXj yO'ԍ WorldCom Reply at iii.F WorldCom states that the multiple routing options and the reduced distance sensitivity of transport costs in a SONET  X4environment compel retention of the unitary rate structure.Bj yOT'ԍ WorldCom Reply at 2931.B We conclude, however, that the differences WorldCom identifies do not support retention of the unitary rate structure because, even in a ringbased network, the threepart rate structure treats directtrunked and tandemswitched transport consistently. In a fiberoptic or ringbased network, dedicated, directtrunked transport circuits are given a constant, and exclusive, time slot assignment on a large, timedivision multiplexed fiberoptic cable. The incumbent LEC routes traffic for the IXC purchasing the direct trunk into the dedicated circuit or time slot, where it is received elsewhere on the ring or in the network at the serving wire center. The direction or precise routing of the signal around the ring is irrelevant for purposes of the rate structure because the transport is priced on an airlinemileage basis between the two end points. Capacity dedicated to a particular IXC, however, is not available to the LEC for other purposes.  X 4189. SONET ring architecture offers the LEC the capability to transport large traffic volumes with redundant routing options, but it does not alter the fundamental nature of tandemswitched transport. Tandemswitched transport is functionally very different from directtrunked transport because, by definition, the incumbent LEC must route an IXC's tandemswitched traffic through the tandem switch serving a particular end office. Whether using a SONET ring or not, the LEC must route its tandemswitched traffic into one of many shared common transport circuits or time slots allocated for transport between the end office  X4and the tandem switch, and onto a second dedicated circuit or time slot for transport between the serving wire center and the tandem. Despite parties' arguments to the contrary, the precise routing of the traffic to the tandem, including the direction it may take around a SONET ring, is irrelevant to the rate structure because IXCs purchase transport under the threepart rate structure based on airline mileage to the tandem.  X~4190. As discussed in connection with directtrunked transport, above, ring network architectures may cause incumbent LECs transport costs to become less distance sensitive. Because our rate structure permits, but does not require, transport rates to be distance sensitive, LECs remain free to establish less distance sensitive transport rates to reflect the changing nature of these costs.  X4191. We also decline Teleport's suggestion to establish a flatrated charge for the tandem switch, tied to the amount of dedicated capacity each IXC's serving wire centerside"Sx0*&&aa" trunk ports provide. While the costs of these dedicated trunk ports are NTS, the record before us does not reflect that all of tandemswitching costs are similarly NTS. Rather, we conclude at this time that the costs of tandem switching likely vary, as do those of local switching, on a trafficsensitive basis. In light of this conclusion, we find that it would be unreasonable to permit the incumbent LEC to recover all of its tandemswitching costs through flatrated charges. As with the local switch, until we gain more experience with rate structures for unbundled network elements that are implemented pursuant to Sections 251 and 252 and that segregate switching costs into trafficsensitive and NTS components, we will continue to adhere to the current, perminute rate structure for shared switching facilities.  X 4192. We also decline to adopt in full suggestions that we (1) retain the unitary pricing structure for tandemswitched transport, while (2) exempting IXCs and competing LECs that do not use the transport facilities supplied by the incumbent LEC from paying the TIC and (3) preventing the incumbent LEC from deaveraging the TIC within a state during a five year  X 4transition period. j {O7'Ѝ See Letter from James M. Smith, President, CompTel, and Robert C. Atkinson, Senior Vice President, Teleport Communications Group Inc., to Hon. Reed E. Hundt, Chairman, FCC, April 16, 1997. We are modifying our rules to prohibit incumbent LECs from assessing any perminute residual TIC charge on any switched minutes of CAPs that interconnect with  X4the incumbent LEC switched access network at the end office.<"j yOc'ԍ Section III.D.2.b.< In doing so, we adopt a position substantially similar to the second enumerated point, above, which Teleport and  Xb4CompTel characterize as the "most important" feature of this proposal.bj {O'Ѝ See Letter from James M. Smith, President, CompTel, and Robert C. Atkinson, Senior Vice President, Teleport Communications Group Inc., to Hon. Reed E. Hundt, Chairman, FCC, April 16, 1997. In addition, we are also taking other measures that will reduce substantially or eliminate the TIC in an expeditious manner. We decline, however, to adopt the other two suggestions. As explained in more detail above, the unitary rate structure is not costbased in that it requires incumbent LECs to recover costs incurred on an NTS basis through perminute charges and inhibits the development of competition by bundling reasonably segregable components of tandemswitched transport together and pricing them in a manner that does not reflect cost causation. We conclude that our new paradigm of promoting efficient competition requires that incumbent LECs adopt a costbased transport rate structure and that entrants providing transport facilities in competition with the incumbent LEC not pay the TIC.  Xe4193. Although in their comments in this proceeding the incumbent LECs virtually unanimously favor the threepart rate structure as most consistent with principles of costcausation, we recognize that incumbent LECs may face competition from competitors that are not limited to the threepart rate structure we adopt for incumbent LECs today. As such competition develops, the incumbent LEC may wish to respond by offering tandemswitched" T 0*&&aa" transport on a unitary pricing basis. We will address issues relating to when incumbent LECs should have the flexibility to offer a unitary tandemswitched transport rate structure in connection with our discussion of other pricing flexibility issues in a subsequent Report and Order that we will adopt in this proceeding.  X4194. Peak and OffPeak Pricing. As with the local switch, we conclude that we should not mandate a peakrate pricing structure for the tandem switch or common transport at this time. Many of the same practical difficulties with establishing, verifying, and enforcing a rational, efficient, and fair peakrate structure exist in the context of the tandem switch. We will consider whether incumbent LECs should have the flexibility to develop such peak and offpeak rate structures for local switching on a permissive basis when we consider other issues of rate structure flexibility in a subsequent Report and Order that we will adopt in this proceeding.  X '` ` d. Rate Levels  X4195. Allocation of 80 Percent of the Tandem Switching Revenue Requirement to the  X}4TIC. In establishing the interim transport rate structure, we required incumbent LECs to base their initial tandem switching charge on 20 percent of the interstate tandemswitching revenue requirement. In remanding this portion of the interim rate structure to us, the D.C. Circuit directed us either to implement a costbased tandem switching rate or offer a rational and nonconclusory analysis in support of our determination that an alternative structure is preferable.  X4196. Based on the record in this proceeding, we reallocate much of the remaining 80 percent of the tandem switch revenue requirement back to the tandem switching rate elements in three steps. We conclude that this action is most consistent with costcausation, and with the general approach we are taking in this Order regarding pricing issues. We do not require all of the 80 percent to be reallocated to tandem switching rates because the tandemswitching revenue requirement includes, not only the costs of the tandem switch, but other costs, such as SS7 signalling costs and tandem port costs, which we are requiring to be reallocated elsewhere.  X4197. Furthermore, if we required the price cap LECs to reallocate, dollarfordollar, the entire portion of the tandem switching revenue requirement that we reallocated to the  X4original TIC in the First Transport Order, we would deny tandemswitched transport customers the continuing benefits of past Xfactor reductions in the revenues permitted under price caps. Therefore, in order to preclude recovery of tandem switching costs in excess of the current revenues permitted under price caps, we direct price cap incumbent LECs first to account in the following manner for the effects of "GDPPI minus Xfactor" reductions to the  Xp$4original portion of the tandem switching revenue requirement allocated to the TIC in the First  X[%4Transport Order. Each price cap LEC first should calculate the percentage of its total"[%U0*&&aae#" original TIC that represented the 80 percent reallocation of its tandem switching costs when the TIC was created. It should then calculate this percentage of its current TIC, which represents the extant portion of the reallocated tandem switching costs. It is this extant portion that the price cap LECs should reallocate to tandem switching as described in the next paragraph.  Xv4198. In access tariff filings to become effective on January 1, 1998, incumbent LECs must identify the portion of the tandemswitching revenue requirement currently in the TIC that they reallocate to each rate element, including, as applicable, SS7 signalling, tandem port costs, or other rate elements. They must then reallocate one third of the tandem switching revenue requirement remaining in the TIC to the tandem switching rate element. Effective January 1, 1999, incumbent LECs shall reallocate approximately one half of the remaining amount of the tandem switching revenue requirement in the TIC to the tandem switching rate elements. Effective January 1, 2000, incumbent LECs shall reallocate any portion of the tandem switching revenue requirement remaining in the TIC to the tandem switching rate element. This threestep implementation of this change permits IXCs time to adjust their use of various incumbent LEC transport services, but sets a definite end date in the near future,  Xy4thus responding to the CompTel decision's concerns regarding the length of the transition to a costbased transport rate structure.  X64199. Some commenters argue that, rather than reallocating revenues from the TIC to other rate elements, we should reinitialize tandemswitched transport rates to levels reflecting long run incremental costs, making reallocation of TIC revenues to other transport rate elements unnecessary. We have decided in this Order, however, not to reinitialize access rates based on forwardlooking cost principles. We have instead determined that the first step in access reform is to make the current system as economically efficient as is possible within the limits of current ratemaking practices. Thus, the focus of this portion of this proceeding is on the development of costcausative rate structure rules. While we are taking several prescriptive steps using existing ratemaking methods to reduce initial baseline rates, we are generally adopting a marketbased approach, with a prescriptive backdrop, to move rates over time to levels reflecting forwardlooking economic costs. We disagree with those commenters  X94that argue that the Local Competition Order requires us immediately to prescribe rate levels  X$4for access elements based on longrun incremental costs. The Local Competition Order  X4addressed, inter alia, the pricing of unbundled network elements. While unbundled network elements may be used to provide interstate access services, their availability at TELRICbased prices does not compel adoption of similar rates for access services. We intend instead to rely on the availability of unbundled network elements to place marketbased downward pressures on access rates, subject to a prescriptive backstop. We will further address questions related to reinitialization to TELRIC rate levels in connection with our discussion of the prescriptive  X#4approach to access reform.C#j {O&'ԍ See Section IV.B.2.C"#VZ0*&&aa!"Ԍ X4ԙ200. Use of Switched Access Overhead Loadings for Initial Tandem Switching Rates. In setting rates, the interim transport rate structure derived both directtrunked transport rates and tandemswitched transmission rates using relatively low overhead loadings applicable to special access. Tandem switching rates, in contrast, were set using relatively higher switched access overhead loadings. As a result, the tandem switching revenue requirement became relatively high, in comparison to other transport rate elements.  Xa4201. Several commenters in this proceeding contend that our use of special access overheads in setting direct trunked transport rates was inappropriate because, while special access is used almost exclusively in high density, generally urban areas, directtrunked transport and, to an even greater extent, tandemswitched transport are used in less dense  X 4areas.^ j {O~ 'ԍ See, e.g., BellSouth Comments at 77, 80.^ In these less dense areas, overhead costs associated with transport may be higher than those associated with special access in urban areas. Some commenters have argued that we should either (1) equalize the overhead loading factors for all transport options by directing that the difference in transport rates is equal to the difference in the long run incremental cost of each transport option (DS3, DS1, and tandemswitched transport); or (2) otherwise ensure that transport customers pay an equal dollar amount of overhead per unit of  X{4traffic transported.J{Zj yO'ԍ Cable & Wireless Comments at 19.J  XM4202. We conclude that we need to make no change to the overheads attributed to tandem switching. As discussed above, we have decided not to base access prices directly at this time on incremental cost studies, but instead to make significant changes in existing ratemaking practices as the first step in access reform. Our current methods allocate overhead in a reasonable, costbased manner. In consultation with the Joint Board on Jurisdictional Separations, the Commission established procedures for allocating overhead expenses between  X4the state and interstate jurisdictions.;Zj {O^'Ѝ See, e.g., 47 C.F.R. 36.192, separating Corporate Operations Expenses, USOA Accounts 6710 and 6720, on the basis of the separation of the Big Three Expenses: Plant Specific Expenses, Plant NonSpecific Expenses, and Customer Operations Expenses.; Our Part 69 cost allocation rules in turn allocated interstate direct investment to broad categories, including Central Office Equipment (with respect to both local switching and tandem switching) and Carrier Cable and Wire Facilities (with respect to special access, directtrunked transport, and tandemswitched transport  Xg4transmission facilities).Mg j yO$#'ԍ 47 C.F.R. 69.305 69.306.M Other investment, including overhead, was allocated among these categories in proportion to the dollar amounts of net direct investment allocated to these"PW0*&&aaN"  X4categories.@j yOy'ԍ 47 C.F.R. 69.309.@ Similarly, direct expenses, where possible, were allocated to the category to  X4which the expenses are related.LXj {O'ԍ E.g., 47 C.F.R. 69.401.L Other expenses, including overheads, are allocated on the same basis as other investment, according to relative dollar amounts allocated to the various  X4categories.@j yOV'ԍ 47 C.F.R. 69.411.@ The Commission has stated that initial allocation of overheads based on relative costs closely approximates an economically efficient method assuming that the elasticity of  X4demands for the various outputs is not too dissimilar.u zj {O 'ԍ See, e.g., First Transport Order, 7 FCC Rcd at 7030 n.91.u  X_4203. Our Part 69 cost allocation rules, therefore, established category revenue requirements that included overheads allocated generally based on relative costs. Once these initial revenue requirements were established, our Part 69 rules permitted incumbent LECs to recover all costs assigned to each category through the rate elements established for that  X 4category.> X j yO'ԍ Since 1991, of course, the amounts recovered by price cap LECs have been subject to the price cap formulae. For all incumbent LECs, however, the relative allocation of overheads was originally established under costofservice regulation by the Part 69 cost allocation rules.> The incumbent LECs were permitted to assign overhead costs among the category rate elements in any way that is just and reasonable and not unreasonably  X 4discriminatory.F  , j yO'ԍ 47 U.S.C. 201202.F We find that it is reasonable to have set overhead loadings for tandem switching consistently with the overhead loadings for local switching, and disagree with those parties that argue that there is no cost justification for the current allocation of overheads to the tandem switch. The direct costs of both kinds of switching are fundamentally the same in that both types of switches are comprised of ports and a switching matrix. By contrast, the direct costs of transmission consist of outside plant and circuit equipment and certain central office equipment. So long as consistent overhead loading methodologies were used across switching functions, and across transmission functions, we find that a reasonable crossover is established for access customers between directtrunked transport and tandemswitched transport. As competition develops, we can also rely on market forces to pressure incumbent LECs to allocate overheads among rate elements in economically efficient ways. We address issues concerning the use of special access prices to initialize directtrunked transport rates in the interim rate restructure below in our discussion of the TIC.  X4204. We also decline to adopt a requirement for equalized overhead loadings. Overhead loadings are used to assign costs that do not qualify as the direct costs of a"|X 0*&&aa" particular service. Reasonable definitions of direct costs often leave in the overhead category costs that might reasonably be deemed attributable to a given service. Thus, if all of a carrier's costs are classified as either "direct costs" or "overheads," the overhead category will likely include costs that should not necessarily apply uniformly to all services. As a result, we think it desirable not to adopt a policy that is too specific and too rigid, and that might not permit recognition of legitimate differences in costing definitions. Furthermore, in a competitive market, it would be mere happenstance if different products or services of a single company recovered uniform amounts of overhead. If we were to require equalized overhead loadings, we would be interfering with the market discipline on which we are primarily relying. We might, for example, prevent an entrant from realizing a reasonable profit opportunity based on a rigid overhead loading requirement.  X 4205. In determining that our existing cost allocation rules reasonably allocated overhead to the initial tandem switching rate element and that we thus need not change the overheads currently attributed to tandem switching, we recognize that the D.C. Circuit in  X 4CompTel remanded the overhead issue to the Commission for further explanation and stated that the "cost allocation to the tandem switch" under the existing allocation rules "is, by the  X{4Commission's own estimation, grossly excessive."H {j {O'ԍ CompTel, 87 F.3d at 533.H The court did not provide a cite for its characterization of the Commission's "estimation," but the court may have been referring to  XM4the agency's finding in the First Transport Order that "most, but not all, of the interstate  X84tandem revenue requirement is attributable to tandemswitched transport."M 8Zj yOC'ԍ 7 FCC Rcd at 7062 (emphasis added).M The Commission in that order also identified only one category of costs having to do with SS7 technology  X 4that appeared to be misallocated to tandem switching.3 j {O'ԍ Id.3 Elsewhere in this Order, we have  X4taken steps to address that misallocation of SS7 costs.D|j {O 'ԍ See Section III.D.2.D That correction having been made,  X4 we find that our existing rules reasonably allocate overhead to tandem switching for the reasons discussed above.  X4206. Use of actual minutes of use rather than an assumed 9000 minutes of use. For tandemswitched transport rates to be presumed reasonable, the interim rate structure requires incumbent LECs to set perminute tandemswitched transport rates using a weighted average of DS1 and DS3 rates reflecting the relative numbers of circuits of each type in use in the tandemtoend office link, and assuming circuit loading of 9000 minutes of use per month per  X&4voicegrade circuit.\&j {O%'ԍ First Transport Order, 7 FCC Rcd at 703637.\ Based on the record before us, we find that continued use of this 9000"&Y0*&&aa" minutes of use assumption is no longer reasonable. Many commenters state that their actual traffic levels are substantially lower than 9000 minutes of use per month. Some incumbent LECs, particularly smaller LECs in rural areas, indicate that their actual traffic levels may be as low as 4000 minutes of use per month per voicegrade circuit. Accordingly, we conclude that rates for the common transport portion of tandemswitched transport must be set using a weighted average of DS1 and DS3 rates reflecting the relative numbers of DS1 and DS3 circuits in use in the tandemtoend office link, and using the actual voicegrade switched access common transport circuit loadings, measured as total actual minutes of use, geographically averaged on a studyareawide basis, that the incumbent LEC experiences based on the prior year's annual use. Incumbent LECs that deaverage their transport rates  X 4under our existing zonebased deaveraging rulesJ j {O 'ԍ See 47 C.F.R. 69.123.J may similarly deaverage the actual minutes of use figures that they use to calculate perminute common transport rates.  X 4207. Our assumption that voicegrade common transport circuits experience uniform loadings of 9000 minutes of use was initially based on 1983 data submitted in the original  X 4MTS and WATS Market Structure proceeding. Zj {O'Ѝ MTS and WATS Market Structure, Memorandum Opinion and Order, 97 F.C.C.2d at 862. In using this assumption as part of the interim rate structure, we stated that, "[t]he 9000 minutes per circuit per month standard  X{4serves as a convenient starting point in the context of a shortterm, interim rate structure."i{j {O'ԍ First Transport Reconsideration Order, 8 FCC Rcd at 5377.i We rejected at that time requests to develop a loading factor for small LECs that would reflect their actual, substantially lower circuit loading levels, stating that, "the benefits to be obtained from use of more individualized loading factors are outweighed by the benefits of the administrative convenience of a uniform loading factor and of avoiding verification  X4difficulties."3~j {O7'ԍ Id.3 Given the new competitive paradigm embodied in the 1996 Act, we conclude that this assumption must give way to charges based on actual usage levels. The same  X4conversion factor is not appropriate for each incumbent LEC.?j yO'ԍ U S West Reply at 32.? Because the 9000 minute assumption appears to have substantially overstated the actual traffic levels on many circuits, we now conclude that the current rate structure is unlikely to recover the full costs of common transport. Costs that properly should be recovered from common transport rate elements may currently be recovered through TIC revenues. Because the 9000 minutes of use loading factor has contributed, possibly significantly, to the level of the noncostbased TIC, we find that continued use of this factor is no longer reasonable.  X"4208. We therefore direct incumbent LECs to develop common transport rates based""Z0*&&aa"" on the relative numbers of DS1 and DS3 circuits in use in the tandemtoend office link, and using actual voicegrade circuit loadings, geographically averaged on a studyareawide basis, that the incumbent LEC experiences based on the prior year's annual use. As discussed above, incumbent LECs that deaverage their transport rates under our existing zonebased deaveraging rules may similarly deaverage the actual minutes of use figures that they use to calculate perminute common transport rates. As they develop transport rates based on actual minutes of use, we require incumbent LECs to use any increase in common transport revenues to decrease the TIC. These rates must be included in the LEC access tariff filings effective January 1, 1998.  X 4209. We disagree with commenters arguing that the actual number of minutes a  X 4circuit is in use is irrelevant in a ratesetting context.V j {O| 'ԍ See, e.g., WorldCom Reply at 35.V These commenters argue that rates should be set based on forwardlooking cost studies using Commissiondetermined "efficient" traffic levels, which they argue may be far higher than either the actual traffic levels, or the 9000 minutes of use assumption. As explained elsewhere, we are not taking the general approach of prescribing rates at forward looking economic costs, and we decline to make an exception in this instance. We are instead reforming access charges so that they more closely reflect the costs imposed by individual access customers. We also do not find it necessary to employ different principles here to ensure that incumbent LECs face sufficient incentives to design their networks to achieve efficient usage levels. LECs subject to price cap regulation already have only limited ability to raise rates to cover the costs of inefficient network designs, and are able to benefit from increased profits as their efficiency improves. In addition, as competition develops for local service, all incumbent LECs will face increasing pressure to provide service as efficiently as possible.  X' _D.Transport Interconnection Charge (TIC)  X'1.` ` Background  Xe4210. Under our Part 36 separations rules, certain costs of the incumbent LEC network are assigned to the interstate jurisdiction. The Part 69 cost allocation rules allocate these costs  X74_among the various access and interexchange services, including transport. In the First  X"4Transport Order,V"Zj {O-!'ԍ First Transport Order, 7 FCC Rcd 7006.V we restructured interstate transport rates for incumbent LECs. The restructure created facilitybased rates for dedicated transport services based on comparable special access rates as of September 1, 1991, derived perminute tandemswitched transport transmission rates from those dedicated rates, established a tandem switching rate, and established a TIC that initially recovered the difference between the revenues from the new facilitybased rates and the revenues that would have been realized under the preexisting"![0*&&aa% " "equal charge rule." Under the equal charge rule, which arose from the AT&T divestiture of  X4the BOCs,nj {Ob'ԍ United States v. American Tel. and Tel. Co., 552 F. Supp. 131.n the BOCs were required to charge a perminute, distancesensitive rate for their transport offerings, regardless of how the underlying costs were incurred. The TIC was intended as a transitional measure that initially made the transport rate restructure revenue neutral for incumbent LECs and reduced any harmful interim effects on small IXCs caused by  X4the restructuring of transport rates.\Zj {O'ԍ First Transport Order, 7 FCC Rcd at 703840.\ Approximately 70 percent of incumbent LEC transport revenues are generated through TIC charges, or approximately $3.1 billion, according to  X_4USTA.G_j yO 'ԍ USTA Comments, Attachment 11.G  X14211. The TIC is a perminute charge assessed on all switched access minutes, including those of competitors that interconnect with the LEC switched access network through expanded interconnection. In the NPRM, we sought comment on how to reduce and eliminate the TIC in a manner that fosters competition and responds to the D.C. Circuit's  X 4CompTel remand. We sought comment on different methods of recovering the costs currently recovered by the TIC, including: (1) giving the incumbent LECs significant pricing flexibility and allowing market forces to discipline the recovery of the TIC, either alone or in conjunction with a phaseout of the TIC; (2) quantifying and correcting all identifiable cost misallocations and other practices that result in costs being recovered through the TIC; (3) combining the above approaches, for example, by addressing directly the most significant and readilycorrected misallocations, and then relying on a marketbased approach to reduce what remains of the TIC; (4) providing for the termination of the TIC over a specified time, such as three years. We specifically sought comment on the possible reassignment of costs based on several explanations for the amounts in the TIC. The NPRM also sought comment on how the resolution of the issues surrounding the TIC would be affected by decisions on universal service, by the level of any residual costs, and by the adoption of either the marketbased or prescriptive approach to access reform.  X' 2.` ` Discussion  Xg4212. As a perminute charge assessed on all switched access minutes, including those of competing providers of transport service that interconnect with the LEC switched access network through expanded interconnection, the TIC adversely affects the development of competition in the interstate access market. First, as discussed more fully below, some of the revenues recovered through the TIC should be recovered through other switched access elements, including transport rates other than the TIC. The TIC, as currently structured, provides the incumbent LECs with a competitive advantage for some of their interstate"\|0*&&aa" switched access services because the charges for those services do not recover their full costs.  X4At the same time, the incumbent LECs' competitors using expanded interconnection"j yOb'Ѝ Under our expanded interconnection rules and policies, competitors may interconnect with the incumbent LEC's facilities at the end office and supply their own transport. For a more detailed discussion of expanded  {O'interconnection, see Expanded Interconnection with Local Telephone Company Facilities, Memorandum Opinion and Order, 9 FCC Rcd at 5157. must pay a share of incumbent LEC transport costs through the TIC. Second, all other things being equal, the usagerated TIC increases the perminute access charges paid by IXCs and longdistance consumers, thus artificially suppressing usage of such services and encouraging customers to explore ways to bypass the LEC switched access network, particularly through the use of switched facilities of providers other than the incumbent LEC that may be less economically efficient than incumbent LECs.  X14213. As we noted in the NPRM, our goal is to establish a mechanism to reduce and eliminate the TIC in a manner that fosters competition and responds to the D.C. Circuit's remand. To that end, we below identify several costs included in the TIC that should be reallocated to other access elements. We conclude, however, that on the present record, we cannot immediately eliminate the TIC entirely through these reassignments. We establish a mechanism that should substantially reduce the remaining TIC over a short, but reasonable period. In addition, we will in the near future refer a broad range of separations issues to a Joint Board for purposes of determining whether certain costs currently allocated to the interstate jurisdiction and recovered through the TIC more properly should be allocated to the intrastate jurisdiction. Finally, we establish the means by which the remaining TIC amounts are to be recovered.  X' ` ` a. Reallocation of costs in the TIC  X4  X4214. The record in response to the NPRM clearly establishes that some costs in the TIC should be reallocated to other access elements. USTA, in conjunction with the incumbent LECs, submitted extensive comments setting forth an incumbent LEC consensus explanation of the causes for the sums in the TIC and estimates of the amounts associated  X4with each explanation.Oj yO'ԍ USTA Comments, Attachments 10 and 11.O While the current rulemaking record will not permit us to prescribe specific amounts that individual incumbent LECs must shift from the TIC to specific access rate elements, it does permit us to direct incumbent LECs to make certain cost reallocations and to require them to calculate the appropriate level of the reallocation in the supporting materials filed with the tariffs implementing the changes. Below, we discuss each of the identified causes of costs being included in the TIC and the extent to which costs should be reallocated to other access elements or categories. "]B0*&&aa"Ԍ X4215. In this Order, we do not address certain rate structure issues relating to incumbent LECs subject to rateofreturn regulation. These LECs account for relatively few  X4access lines.!j {OK'Ѝ As of December 31, 1995, larger, reporting local exchange carriers (i.e., those with revenues of at least $100 million) account for 92.6 percent of the total presubscribed lines. Federal Communications Commission,  {O'CCB, Industry Analysis Division, Preliminary Statistics of Common Carriers, Tbl. 2.3, Total Presubscribed Lines for all Local Exchange Companies (July 1996). Thus, small local exchange carriers account for 7.4 percent of the presubscribed lines.! In some instances we direct price cap LECs to allocate costs to new rate elements that do not currently exist for rateofreturn LECs. We anticipate that we will propose similar rate elements in the forthcoming notice of proposed rulemaking addressing rate structure issues for incumbent LECs subject to rateofreturn regulation. Recognizing the expense and difficulties of modifying billing systems, we conclude that, until the rate structure issues are resolved for rateofreturn companies, the costs allocated to new elements and any residual TIC revenues may continue to be recovered by the incumbent LECs that are not subject to price cap regulation through perminute TIC rates assessed on both originating and terminating access.  X 4216. As their primary challenge to the incumbent LEC proposals to reallocate costs from the TIC, several parties argue that we should use forwardlooking cost principles, or TELRIC, in determining how much to shift from the TIC to other access categories. Some parties advocating the use of such forwardlooking cost standards assert that any costs not meeting these forwardlooking cost standards should be eliminated from the TIC, and the incumbent LECs should not be permitted to recover those amounts. One group of consumer advocates proposes that we need not complete TELRIC studies before substantially reducing the TIC because BA/NYNEX has already proposed, as part of their access charge reform compromise plan, to eliminate up to 80 percent of the TIC pending a determination of  X4"service related" costs by the Commission.VZ|j {OJ'Ѝ See Letter from Brian R. Moir, Esq., Counsel to the International Communications Association, to William F. Caton, Acting Secretary, FCC, April 16, 1997; Letter from G.R. Evans, Vice President, Federal Regulatory Affairs, NYNEX, to William Caton, Acting Secretary, FCC, April 4, 1997.V We conclude, however, that immediate, widespread, prescriptive action is not necessary to pressure access rates toward marketbased levels. Instead, we have determined that the most appropriate first step towards access reform is to make the current rate structure as economically efficient as possible within the limits of past ratemaking practices. These practices include setting rates based on interstateallocated  X4costs, subject to price cap constraints for most large carriers.Ej {O!'ԍ See Section I, above.E As we discuss more fully in Section IV, below, we intend in the future to rely primarily on market forces, with a prescriptive backdrop, to move rates toward forwardlooking economic cost. Therefore, because we currently are not prescribing a forwardlooking cost method for access reform, we will require reassignment of certain TIC revenues based on an analysis of the separated,"N^0 0*&&aa4" booked costs already recovered through the TIC.  X4217. SS7 costs. Based on the record before us, we conclude that SS7 costs that are recovered by the TIC should be removed from the TIC and allocated to the trafficsensitive basket. The record demonstrates that these costs are related to the signalling function and should be recovered through local switching or signalling rate elements. The costs to be removed are the costs of signal transfer points (STPs) that were included in the tandemswitching category for jurisdictional separations purposes and the cost of the link between the end office and the STP that is used only for SS7 signalling. The incumbent LECs shall distribute the STP costs reallocated from the TIC to local switching or, if the incumbent LEC has established an unbundled signalling rate structure, to appropriate SS7 elements, in tariffs filed to be effective January 1, 1998. The incumbent LEC shall distribute the costs of the link between the local switch and the STP that are included in the TIC to local switching or, if provided, to the callsetup charge. This change means that the incumbent LECs' SS7 prices will reflect the full cost of providing SS7 signalling and provide the proper price signals to developers of new services utilizing SS7. We decline to adopt the suggestion of US West that we reallocate SS7 costs to services in the trunking basket. As we conclude below in conjunction with our consideration of the SS7 rate structure, the costs being reallocated are appropriately included in the trafficsensitive basket.  X64218. Tandem switching costs. Several parties argue that the tandem switching rate must be set to reflect the cost of providing the service. In the preceding section, we modified the existing tandemswitched transport rate structure and revised certain of the pricing rules applicable to elements of tandemswitched transport to establish a costbased structure and to  X4respond to the court remand in CompTel v. FCC. The revised pricing rules applicable to tandem switching include two separate elements a flatrated port charge to be assessed when a port is dedicated to a single customer and a per minute charge to be assessed for the trafficsensitive portion of the tandem switch. In three approximately equal annual steps, beginning January 1, 1998, we require reallocation of all tandemswitching revenues currently allocated to the TIC to the tandemswitching rate element. As a result of this modification, the total revenues recovered through the tandem switching rates will, subject to price cap limits, increase to the level of costs assigned to the interstate jurisdiction by the separations process at the end of our plan. Equivalent changes to the amounts recovered through the TIC must be made to ensure that overrecovery does not occur. After this adjustment, in  X4accordance with the CompTel remand, and to facilitate the development of economicallyefficient competition for tandemswitching services, the TIC will not recover any costs that are attributable to tandem switching.  X"4219. DS1/voicegrade multiplexer costs. We conclude that the costs of DS1/voice""_0*&&aa "ԫ X4grade multiplexing j yOy'Ѝ DS1 transport trunks need to be demultiplexed into individual voicegrade circuits before being switched at analog end office switches. DS1/voicegrade multiplexers perform this function. associated with analog local switches should be reassigned to the newly created trunk ports category within the traffic sensitive basket. Analog switches require a voicegrade interface on the trunkside of the end office switch. Our separations rules assign the costs of DS1/voicegrade multiplexers to the cable and wire category. The costs of these multiplexers associated with switched access were originally included in the Part 69 transport revenue requirement. The revised transport rules adopted in 1992 established transport rates based on DS1 switch interfaces, and thus the rates did not include the costs of DS1/voicegrade multiplexers. The costs of the DS1/voicegrade multiplexers are, therefore, included in the TIC. Therefore, the costs associated with DS1/voicegrade multiplexing associated with analog local switches should be reassigned to the trunk ports category within the traffic sensitive basket, to be considered in conjunction with the development of appropriate rates for trunk ports, in tariffs filed to become effective January 1, 1998. This will make recovery of the costs necessary to use an analog switch port equivalent to the recovery of digital switch port costs, in which the multiplexing function is included in the port itself.  X 4220. Host/remote trunking costs. We agree with the parties that allege that the costs of host/remote links not recovered by the current tandemswitched transport rates should be included in the tandemswitched transport category. The record reflects that the rates for carrying traffic between the host and a remote switch, for which the tandemswitched transport rates, both fixed and per mile, are assessed, do not recover the full costs of this transmission service. These charges for host/remote service are in addition to charges that an IXC is assessed for either directtrunked transport, or tandemswitched transport, between the serving wire center and the host end office. This reassignment will ensure that these transmission costs will be recovered from those using the transmission facilities, and must be included in tariff filings to become effective January 1, 1998. We reject NECA's suggestion that we include these costs in local switching on the theory that remote facilities are installed when it is more cost effective to do that than it is to install a new switch at the remote location. That would require all users of local switching to pay for these host/remote transmission facilities. Imposing the host/remote transmission cost on the users of host/remote facilities is more cost causative and will facilitate the development of access competition. ` `  X94221. Additional multiplexers associated with tandem switching. Based on the record before us, we conclude that an IXC's decision to utilize tandemswitched transport imposes the need for additional multiplexing on each side of the tandem switch. The revised tandemswitched transport rate structure provides for these multiplexers. For price cap LECs, recovery of the costs associated with the multiplexers should, therefore, be shifted from the TIC to the tandemswitched transport category as of January 1, 1998, as explained in Section III.C. This realignment of costs helps ensure that tandemswitched transport rates are cost  X"4based, as required by the CompTel decision, and facilitates competitive entry for those""`  0*&&aa " services.  X4222. Use of actual minutes of use rather than an assumed 9000 minutes of use. The data in the record provided by USTA and other incumbent LECs support a finding that for many incumbent LECs, especially those serving less densely populated areas, the assumed 9000 minutes of use per circuit is far higher than actual minutes of use. A tandemswitched transport rate derived by dividing the cost of a circuit by an assumed usage level does not recover the costs of the circuit when the actual usage is below that level. The costs not recovered through tandemswitched transport rates based on our current 9000 minutes of use assumption are being recovered through the TIC. In the preceding section, we conclude that the pricing of tandemswitched transport transmission should be based on the actual average minutes of use on the shared circuits and that such pricing would produce a costbased rate. Accordingly, costs should be removed from the TIC equal to the additional revenues realized from the new tandemswitched transport rates when it is implemented in accordance with the rate structure established in Section III.C.  X4223. Central Office Equipment (COE) Maintenance Expenses. The record in this proceeding demonstrates that allocating COE maintenance expenses on the basis of combined COE investment produces misallocations of these expenses among access services. USTA correctly traces this problem to the Part 36 separations rules; the problem is then tracked in our Part 69 cost allocation rules. Under our current rules, COE maintenance expenses are  X!4allocated among separations categories, and then access services, based on the combined investment in the three categories of the COE plant being maintained Central Office  X4Switching, Operator Systems, and Central OfficeTransmission rather than on the individual investment in each of those categories. As a result, a portion of the expense of maintaining local switches and operator systems is recovered in rates for common line, transport, and  X4special access even though those do not utilize any local switching or operator systems.C!j yO+'ԍ BellSouth Comments at 78.C Correcting this misallocation through changes to Part 36 would require referral to a FederalState Joint Board and therefore could not be done in this proceeding. The misallocation can, however, be corrected by modifying section 69.401 of our rules to provide that the COE expenses assigned to the interstate jurisdiction should be allocated on the basis of the allocation of the specific type of COE investment being maintained, and we make the correction here. This will shift some costs to local switching from common line and transport, and result in more costbased rates. This shift must be reflected in tariff filings to be effective January 1, 1998. We also plan to refer the underlying separations issue to a Joint Board for its recommendation.  X!4224. Separationsrelated causes. Several incumbent LECs argue that a substantial portion of the TIC can be traced to decisions separating costs between the interstate and intrastate jurisdictions. As explained by USTA and incumbent LECs, the largest portion of"#aX!0*&&aa!" the amounts recovered by the TIC results from the differences in the jurisdictional separations  X4allocation procedures for message (i.e., switched) services and special access services, and from the consequent effects of the Commission's decision to use special access rates to establish transport transmission rates when the Commission restructured transport rates. The current jurisdictional separations process separates the costs of message services based on average cost factors; costs of DS1 and DS3 special access services, in contrast, are separated using unit costing methods. Because of the differences in these separations methodologies, special accessderived rates reflect the costs of transport in areas in which special access services are most often offered (urban, higher density areas), and do not reflect the costs of transport in rural, less dense areas. Another alleged separationsrelated cause of the amounts in the TIC is the use of circuit termination counts in the separations process to allocate costs between special access and switched services before they are allocated between federal and state jurisdictions. This practice appears to allocate costs disproportionately to switched services. The incumbent LECs assert that the use of direct costing methods would assign many of these costs to local and intrastate services and to interstate services other than  X 4transport." j yO"'ԍ If the Joint Board on Jurisdictional Separations takes action to address this issue, we will then consider what corresponding reallocations should be made.  X{4225. We find that some of the remaining costs recovered by the TIC result from at least two different causes: (1) the separations process assigned costs differently to private line  XM4and message (i.e., switched) services, resulting in costs allocated to special access being lower than those allocated to the message category, even though the two services use comparable facilities rates for directtrunked transport and the transmission component of tandemswitched transport, which are switched services, therefore, do not recover the full amount of separated costs; and (2) the cost of providing transport services in less densely populated areas is higher than that reflected by transport rates derived from those special access rates. The existing record is inadequate to permit us to identify more costs that could clearly be reallocated to interstate services. Furthermore, the record indicates that some residual TIC costs may be appropriately allocated to intrastate services. Because we will soon be considering a Notice of Proposed Rulemaking to refer to a Joint Board questions regarding separations, we will leave the determination of the ultimate allocation of the remaining costs recovered by the TIC until the conclusion of that proceeding.  X$4226. Incumbent LEC parties generally contend that special access rates provided an acceptable initializing pricing level for transport transmission services in geographic areas where significant amounts of special access services are provided, but do not reflect the cost of providing transport service in lowdensity areas in which special access services are not as"b "0*&&aaQ"  X4widespread.#j {Oy'Ѝ See, e.g., USTA Comments at 65; GTE Comments at 38; Aliant Comments at 3. See also Cable & Wireless Comments at 2122. We recognize that rates for directtrunked transport and for the transmission component of tandemswitched transport, because they were established based on special access rates, do not reflect the full cost of providing transport services in highercost, rural areas. Because none of our other facilitiesbased rate elements recover costs reflecting this differential, we conclude that the additional costs of rural transport currently are recovered through the TIC. On the basis of the current record, however, we are unable to quantify these cost differentials. Moreover, based on differences in network architectures, population density variations, topography, and other factors that vary among LECs, we find that transport cost differentials are also likely to vary greatly among incumbent LECs and among study areas served by the same incumbent LEC. We do not believe, however, that we need to quantify these differences in this Order to ameliorate this distortion caused by the current rate structure, because the requirements set forth in the next paragraph will address this issue.  X 4227. If an incumbent LEC deaverages its transport rates, either by implementing zone X 4density pricing under our rules@$ "j yO'ԍ 47 C.F.R. 69.123.@ or by waiver, the underlying predicate is that the costs in lowdensity areas are higher than those in higherdensity areas. The rates it sets for the different areas should reveal a cost differential of at least that magnitude between lowdensity and highdensity areas served by that LEC. When an incumbent LEC deaverages transport rates, therefore, we require it to reallocate additional TIC amounts to facilitiesbased transport rates, reflecting the higher costs of serving lowerdensity areas. The reallocation we require here will permit incumbent LECs, in deaveraging their transport rates, to achieve costbased transport rates while ensuring that a significant portion of costs reflecting the geographic cost difference are removed from the TIC. Each incumbent LEC must reallocate costs from the TIC each time it increases the deaveraging differential. We find that any incumbent LEC that has already deaveraged its rates must move an equivalent amount from the TIC to its transport services. Under any of these scenarios, the costs shall be reassigned to directtrunked transport and tandemswitched transport categories or subcategories in a manner that reflects the way deaveraging is being implemented by the incumbent LEC. We do not require incumbent LECs that average their transport rates to make a similar reallocation at this time, because of the difficulty in determining the amount to be reallocated.  X74228. Price Cap Implementation issues. For purposes of phasing out the TIC, we are keeping the TIC in its own service category in the trunking basket. The reallocation of costs from the TIC to other access elements will require price cap LECs to adjust their price cap indices (PCIs) and service band indices (SBIs) to reflect the new revenue streams. To accomplish these reallocations, price cap LECs shall make exogenous adjustments to their PCIs and SBIs that are targeted to the indices in question, rather than applying the exogenous" c$0*&&aaH" adjustment proportionately across all categories in the affected price cap basket. Thus, when a reallocation occurs within a price cap basket, only the affected SBIs will be adjusted. When the reallocation affects service categories in more than one basket, however, the affected PCIs and SBIs must be adjusted. The upward or downward adjustment to the PCIs and upper SBIs shall be calculated as the percentage of the revenues being added or subtracted from a basket or category, divided by the total revenues recovered through the basket or category at the time of the adjustment. For example, if ten percent of the revenues are being reallocated from a service category, the category upper SBI will be reduced by ten percent. If that revenue amount is only three percent of the PCI for the basket, the PCI is reduced by three percent.  X ' ` ` b. Treatment of Remaining Costs Recovered by the TIC  X 4 ` `   X 4229. Residual TIC reduction plan. After the costs identified above have been reallocated to other access services, some costs will continue to be recovered by the TIC. While it is desirable to eliminate the TIC as soon as possible by shifting the costs recovered by the TIC to facilitiesbased rates, referring separations questions to a Joint Board is the best means of reaching that ultimate objective, as we noted earlier. Even as we make this referral, we will require incumbent LECs to target to the TIC price cap reductions arising in any price cap basket as a result of the application of the "GDPPI minus Xfactor" formula until the  XM4perminute TIC is eliminated, as many parties have suggested.%Mj {O'Ѝ See, e.g., PacTel Comments at 72; Sprint Comments at 29,52; Ameritech Reply at 3233; BA/NYNEX  {O'Comments at 38. These parties submit that this targeting will permit incumbent LECs to manage the reduction in revenues recovered by the TIC, while reducing the amount at issue in the TIC. Sprint states that, using a targeting approach, we would not need to address the cost allocation issues raised by Part 36 and Part  X469.@&$j yO'ԍ Sprint Reply at 1718.@ Targeting these price cap reductions to the TIC reduces the TIC over a reasonable period, thereby ultimately substantially reducing what is widely recognized to be an inefficient aspect of the access rate structure. We require pricecap LECs to begin these targeted Xfactor reductions to the TIC in tariff filings to become effective July 1, 1997.  X~4230. Targeting PCI reductions to the perminute TIC will not change the overall revenue levels that our price cap mechanisms permit incumbent LECs to receive. We have reallocated those costs that the record shows are clearly related to other facilitiesbased elements. The upcoming separations proceeding may provide additional data that will permit us to reallocate more costs to facilitiesbased rate elements, or to the intrastate jurisdiction. The approach we take is a reasonable response to the D.C. Circuit's remand directive, and establishes a plan that should substantially reduce the TIC within a reasonable period, pending review of the jurisdictional separations process. " d&0*&&aaH"Ԍ X4231. We reject ALTS' allegation that targeting the productivity factor to the TIC undercuts the rationale for the "just and reasonable" status of all pricecap rates, which ALTS contends is dependant on the widespread application of the Xfactor. The targeting approach that we adopt will eliminate anticompetitive aspects of the TIC, which promotes inefficient entry into the transport market by imposing some transport costs on IXCs that do not cause the costs to be incurred. In addition, by spreading current TIC revenues across all price cap PCIs and SBIs, our targeting method does not offer TIC revenues special insulation against the pressures of the competitive marketplace, as would some proposals to bulkbill the TIC to IXCs. We also decline to adopt the approach of spreading the remaining costs recovered by the TIC proportionately among all transport services, as proposed by State Consumer  X 4Advocates.U' j yO 'ԍ State Consumer Advocates Comments at 3437.U That approach might, because of the unknown nature of the costs that will remain in the TIC, result in an excessive reallocation to transport.  X 4232. The D.C. Circuit instructed us to revise our transport rate structure rules to be more consistent with costcausation principles. There is conflicting evidence in the record concerning the nature of the costs contained within the residual TIC; these costs may be traffic sensitive or NTS and may be associated with common line, transport or switching services. BA/NYNEX states, without explanation, that the costs in the TIC are NTS in  Xb4nature.(bXj yOk'Ѝ BA/NYNEX Reply at 3940. USTA and many incumbent LECs proposed recovering the remaining TIC  {O3'costs through a bulk billing mechanism based on an IXC's share of presubscribed lines or revenues. See, e.g., USTA Comments at 66; BA/NYNEX Comments at 38; PacTel Comments at 72; SNET Reply at 2728. This proposal to use presubscribed lines is consistent with treating the remaining costs recovered by the TIC as NTS costs. To the extent that some portion of the residual TIC has its origin in the methods used to separate cable and wire facilities between the regulatory jurisdictions, it seems likely that BA/NYNEX is partially correct in this assertion. The evidence, however, does not clearly resolve this issue.  X4233. If the costs remaining in the residual TIC are NTS, as BA/NYNEX suggests, then trafficsensitive recovery could artificially raise perminute rates for interstate access. These higher perminute access rates could distort the market for interstate toll services by artificially suppressing demand for interstate toll services and by encouraging users that efficiently could make use of the network to instead seek other alternatives. Conversely, if costs remaining in the residual TIC are usagesensitive, flatrating may also create a distortion by encouraging inefficient overuse of interstate toll services. Because the limited evidence in the record suggests that at least some amount of the residual TIC represents NTS costs, and because we wish to see that consumers enjoy the benefits of usage of the network to the greatest extent possible, we find that we should err, if at all, on the side of NTS recovery of these costs. For elements not demonstrably reflecting usagesensitive costs, therefore, we" e (0*&&aa" find, on balance, compelling policy arguments in favor of flatrated pricing because usagesensitive recovery of any NTS costs artificially suppresses demand for interexchange calling by inflating perminute rates. In the absence of definitive evidence as to the nature of the residual TIC amounts, we conclude that the public interest would be better served by imposing these costs on IXCs on a flat perline basis, rather than on a perminute basis.  Xv4234. Accordingly, we seek to migrate the current usagebased charges into flatrated charges as quickly as possible consistent with avoiding shortterm market distortions. We do that by: (1) on July 1, 1997, drawing down the perminuteofuse residual TIC charge by targeting the price cap productivity (Xfactor) adjustment to the trunking PCI and, specifically, the TIC SBI, thus effectively spreading those residual TIC revenues, which otherwise would be recovered exclusively on a minute of use basis, among the universe of (both trafficsensitive and NTS) access services and moving TIC recovery closer to flatrated recovery; (2) starting in January 1998, recovering remaining residual TIC revenues through PICC charges each year, subject to the PICC cap; and (3) drawing down any remaining residual perminute TIC revenues each July by targeting the annual XFactor adjustments to those revenues.  Xb4235. The targeting of price cap productivity reductions to the TIC will be accomplished in the following manner. Because the price cap LECs will not have reallocated facilitiesbased costs contained in the TIC before they file tariffs to be effective July 1, 1997, we first direct the price cap LECs to compute their anticipated "residual" TIC amount by excluding revenues that are expected to be reassigned on a costcausative basis to facilitiesbased charges in the future, pursuant to the transition plan described in this Order. To determine TIC amounts so excluded, NYNEX, BellSouth, U S West, and Bell Atlantic shall  X4use the residual TIC percentage estimates contained in USTA's ex parte letter filed May 2,  X41997, to compute their respective anticipated residual TICs.S)Zj yO%'Ѝ These percentages are as follows: NYNEX, 77.63 percent; BellSouth, 56.93 percent; U S West, 59.14  {O'percent; and Bell Atlantic, 63.96 percent. See Letter from Linda Kent, Associate General Counsel, USTA, to William F. Caton, Acting Secretary, filed May 2, 1997.S SBC Communications shall use  X4the cost data for SWBT, Pacific Bell, and Nevada Bell contained in its ex parte letter filed  X4April 24, 1997 to estimate its residual TICs.j*Zj yO'Ѝ These percentages, calculated from TIC data supplied, are: SWBT, 69.11 percent; Pacific Bell and  {O'Nevada Bell combined, 53.52 percent. See Letter from Todd F. Silbergeld, Director Federal Regulatory, SBC Communications, Inc., to William F. Caton, Acting Secretary, April 24, 1997.j Each remaining price cap LEC shall estimate a "residual" TIC in an amount equal to 55 percent of its current TIC revenues. For these remaining price cap LECs, we find that this 55 percent level represents a reasonable, but conservative estimate. The 55 percent level corresponds approximately to the lowest residual TIC percentage identified in the record, and three of the price cap LECs that submitted data on the record are within a few percentage points of this level. We therefore find that residual" f *0*&&aa" TIC estimates at the 55 percent level for companies that have not developed actual percentage estimates on the record will be reasonable, but will also minimize the risk that we will eliminate facilitiesbased TIC costs with targeted Xfactor price cap reductions.  X4236. The "GDPPI minus X" adjustments LECs ordinarily would apply to each of their price cap indices (i.e. revenues) for the July 1, 1997, annual filing shall be applied by LECs to reduce their calculated anticipated "residual" TIC revenues. For tariffs to become effective July 1, 1997, the price cap LECs shall calculate the annual price cap reduction resulting from the application of the productivity adjustment to each basket other than the interexchange basket, and shall sum the dollar effects of the adjustment. If the effect is to reduce PCIs, the dollar amount shall be targeted completely to the trunking basket PCI and the TIC SBI, without changing the PCIs or SBIs for any other basket or service category. The percentage reduction in the PCI and SBI shall equal the ratio of the total dollar effect of the price cap annual adjustment to the dollar value of the PCI and SBI, respectively. If the effect of the productivity adjustment would increase the PCIs, the PCIs shall be adjusted in their usual fashion, and no targeting to the TIC shall occur. This avoids exacerbating an already inefficient aspect of the access rate structure.  Xb4237. Price cap LECs will begin reallocation of facilitiesbased TIC components on January 1, 1998. At that time, the price cap LECs should all have actual cost data reflecting the facilitiesbased components of the TIC. If, at that time, any price cap incumbent LEC determines that its use of the applicable residual TIC estimate, above, resulted in more PCI reductions being targeted to the interconnection charge in its tariff filing to become effective on July 1, 1997, than were required to eliminate the perminute interconnection charge, then that price cap LEC shall make necessary exogenous adjustments to its PCIs and SBIs to reverse the effects of the excess targeting.  X4238. For tariff filings to become effective July 1, 1998, and annually in July thereafter, all price cap LECs will have actual cost data reflecting the facilitiesbased components of the TIC and will be able to target reductions to actual anticipated residual perminute TIC amounts without resort to the percentage estimates prescribed above. For these filings, "GDPPI minus X" adjustments similar to those described above shall be targeted to the trunking basket PCI and the TIC SBI to reduce residual perminute TIC amounts recovered through perminute originating and terminating access charges.  X4239. To avoid the adverse effects of perminute pricing of costs that may be NTS, we require price cap LECs to recover residual TIC amounts not otherwise eliminated by targeted Xfactor reductions, described above, through the flatrated PICC to the extent the PICC is below its ceiling. In order to ensure that primary residential and single line business subscribers do not pay more than their fair share of the residual TIC, however, we prohibit price cap LECs from charging a PICC on primary residential or singleline business lines that recovers TIC revenues that exceed residual TIC revenues permitted under our price cap rules"Q%g*0*&&aae#" divided by the total number of access lines. As the PICC caps increase each year, more of the residual TIC charge can be included in the flatrated PICC. Any residual TIC amounts that cannot be recovered through the PICC shall be recovered on a perminute basis from originating traffic, subject to a cap on perminute originating access charges, as explained in  X4Section III.A, above.E+j {O'ԍ See para. 100, above.E If this cap is exceeded, the residual TIC shall be recovered through perminute terminating switched access rates. Although a portion of the residual TIC will be recovered through PICC charges, the TIC will remain in the trunking basket. Therefore, to ensure that excess headroom is not created in the trunking basket, price cap LECs shall include the TIC revenues received from the flatrated PICC in calculating the API for the trunking basket and the SBI for the TIC.  X 4240. The policies adopted when the TIC was created require incumbent LECs to assess the TIC on all minutes that interconnect with the incumbent LEC switched access network, including minutes that transit a CAP's transport network without using any  X 4incumbent LEC transport facilities. As we noted in the NPRM,:, Zj yO'ԍ NPRM at  97.: and as some commenters  X 4assert,y- j {OB'ԍ See, e.g., Teleport Comments at 3032; Time Warner Comments at 1213, 15.y if the incumbent LEC's transport rates are kept artificially low and the difference is recovered through the TIC, competitors of the incumbent LEC pay some of the incumbent LEC's transport costs. In a recent arbitration between Teleport and US West, the Colorado Commission has precluded US West from imposing the TIC on competitors for the portion of  XK4transport that U S West does not provide..K|j {Ox'Ѝ See TCG Colorado Petition for Arbitration Pursuant to 252(b) of the Telecommunications Act of 1996  {OB'to Establish an Interconnection Agreement with U S West, Docket No. 96A329T, Decision Regarding Petition  {O 'for Arbitration, Decision No. C961186 (adopted Nov. 5, 1996); TCG Colorado Petition for Arbitration Pursuant  {O'to 252(b) of the Telecommunications Act of 1996 to Establish an Interconnection Agreement with U S West, Docket No. 96A329T, Order Denying Applications for Rehearing, Reargument, or Reconsideration, Decision No. C961344 (adopted Dec. 18, 1996), at  I.B.1.4; Letter from Judith Herrman, Manager, Federal Regulatory  yO0'Affairs, Teleport Communications Group, to Richard Lerner, Competitive Pricing Division, FCC, April 11, 1997. á We find that our current policy, which requires competitive entrants to pay the TIC even in cases where it provides its own transport, is inconsistent with the procompetitive goals of the 1996 Act. We therefore modify our rules to permit incumbent LECs to assess any perminute residual TIC charge only on minutes that utilize incumbent LEC transport facilities, and not on any switched minutes of CAPs that interconnect with the incumbent LEC switched access network at the end office.  X4241. Other Approaches. We reject alternative methods for recovering the TIC that were proposed in the record. The majority of the incumbent LEC parties supported recovering any remaining costs in the TIC by bulk billing such amounts to IXCs based on"~h .0*&&aa"  X4each IXC's share of revenues, or presubscribed lines./j {Oy'ԍ See, e.g., USTA Comments at 66; BellSouth Comments at 1314; PacTel Comments at 72. Other incumbent LECs proposed  X4establishing "public policy" elements to recover the residual TIC.0Zj {O'ԍ See, e.g., U S West Comments at 7173; SWBT Reply at 11; GTE Comments at 39, 4144. These approaches would insulate TIC costs from the pressures of the competitive market and guarantee incumbent LECs the recovery of these amounts, even where such costs have resulted from inefficiencies that the competitive market but not regulators detected and otherwise would eliminate. This would be inconsistent with the development of an efficient competitive market. Our resolution of the TIC will allow LECs a reasonable opportunity to recover their costs, without providing a guarantee. We also reject the idea of spreading the remaining costs recovered by  XH4the TIC proportionately over all transport services, as suggested by AARP, et al. As we noted earlier, some of the remaining costs in the TIC may implicate certain Commission decisions separating costs between the federal and state jurisdictions and thus may be related to services other than transport. We, therefore, believe that awaiting further consideration by a Joint Board is a more practical means of ultimately resolving the TIC issue.  X 4242. Some parties have requested that a portion of the costs recovered by the TIC  X 4should be considered to be universal service costs.{1 j {OF'ԍ See, e.g., WITA Comments at 8; Texas Public Utility Counsel Comments at 21.{ We do not find this argument persuasive. Elsewhere in this Order, we have reallocated the TIC's identifiable cost components. On the basis of the record before us, we cannot clearly associate the remaining TIC revenues with any particular facilities or services. The parties arguing that these costs are related to universal service have not made any clear showing as to the source of these costs or demonstrated why they believe that these TIC revenues are either costs of universal service that should be recovered from the universal service fund or constituent costs of supported services.  X4243. We have analyzed the effect of the reallocation of TIC costs and the new recovery procedures on small business entities, including small LECs and new entrants, and find that the changes will facilitate the development of a competitive marketplace by moving incumbent LEC rates toward costbased levels and by eliminating the ability of incumbent LECs to assess the TIC on switched access minutes that do not use incumbent LEC transport facilities. These pricing revisions may create new opportunities for small entities wishing to enter the telecommunications market. "9i~10*&&aa"Ԍ X' 'J:\ACCESS.REF\ORDER\III-BCD.RRC' $J:\ACCESS.REF\ORDER\IIIE.PLG$    vE.SS7 Signalling  X' 1.` ` Background  X4244. SS7 is a network protocol used to transmit signalling information over common  X4channel signalling networks. As described in greater detail in the NPRM, signalling networksv  Xv4like SS7 establish and close transmission paths over which telephone calls are carried.B2vj yO'ԍ NPRM at  12325.B Signalling networks are also used to retrieve information from remote data bases to enable credit card and collect calling. SS7 systems are also used to transmit information needed to  X14provide custom local area signalling services like automatic call back.v31Xj {O: 'ԍ See Ameritech SS7 Waiver Order, 11 FCC Rcd at 3841 (1996).v  X 4245. An SS7 network consists of several primary components signalling points, signal transport links, and dedicated lines used for access to an incumbent LEC's signalling network (signal links). Signalling points are nodes in an SS7 network that originate, transmit, or route signalling messages. There are three principal types of signalling points: service switching points (SSPs), service control points (SCPs), and signalling transfer points (STPs). An SSP is a switch that can originate, transmit, and receive messages for call setup and database transactions. An SCP serves as a database that stores and provides information used in the routing of calls, such as the line information database (LIDB) used to validate calling cards or the database that identifies the designated longdistance carrier for tollfree service. An STP is a specialized packet switch that performs screening and security functions and switches SS7 messages within the signalling network.  X4246. Signal transport links are facilities dedicated to the transport of SS7 messages within the incumbent LEC's signalling network. Finally, dedicated network access lines (DNALs) consist of dedicated circuits that transmit queries between the incumbent LEC's signalling network and the signalling networks of other individual carriers, such as IXCs. A carrier's DNAL is connected to an incumbent LEC's signalling network through a port on an incumbent LEC's STP.  XN4247. Under the interim transport rate structure, incumbent LECs charge IXCs and other access customers a flatrated charge (dedicated signalling transport) under Part 69 for the use of dedicated facilities used to connect to the incumbent LEC's signalling network. This rate element has two subelements a flatrated signalling link charge for the dedicated  X4network access line (dedicated signalling line) and a flatrated STP port termination charge.@4j yO$'ԍ 47 C.F.R.  69.125.@ Most other signalling costs, such as costs for switching messages at the STP and transmitting"jz40*&&aa%" messages within the signalling network, are not recovered through facilitybased charges and thus most, if not all, of these costs are embedded in the TIC or in the local switching charge and recovered through perminuteofuse charges. Retrieval of information from databases for  X4tollfree calls and LIDB databases, however, is charged on a perquery basis.@5j yO4'ԍ 47 C.F.R.  69.120.@  X4248. In the NPRM, we solicited comment on whether the Commission should revise its rate structure for SS7 services to reflect the SS7 rate structure implemented by  X_4Ameritech.;6_Xj yOh 'ԍ NPRM at  127.; In March, 1996, the Commission granted a waiver to Ameritech, allowing it to  XH4restructure its recovery of SS7 costs through four unbundled charges.i7Hj {O 'ԍ Ameritech SS7 Waiver Order, 11 FCC Rcd 3839 (1996).i These charges correspond to various functions performed by signalling networks: signal link, STP port termination, signal transport, and signal switching.  X 4249. The Ameritech waiver was granted to allow Ameritech to realign its charges for SS7 services more closely with the manner in which such costs are incurred. Unbundling of SS7 services from transport and local switching ensures that transport and local switching customers do not pay for SS7 services they do not use. Unbundling also enables Ameritech to offer SS7 services to competing providers of local exchange and exchange access services  Xy4without requiring the purchase of other elements that the competitors do not need.=8yzj yO'ԍ 11 FCC Rcd at 3853.= In support of its waiver petition, Ameritech noted that it had received numerous customer requests for such unbundling. It also explained that it had deployed equipment necessary for measuring thirdparty usage of its SS7 networks, enabling the company to bill its SS7 services  X4separately from its switched access services.=9 j yO'ԍ 11 FCC Rcd at 3848.=  X4250. The NPRM also requested comment on whether incumbent LECs should be allowed to impose separate charges for ISDN User Part (ISUP) messages and Transaction  X4Capabilities Application Part (TCAP) messages.;:j yO !'ԍ NPRM at  135.; ISUP messages are used to set up and take down calls. For example, ISUP messages include the initial address message used to establish  X4and close the transmission path used to carry a telephone call.@;* j yOn$'ԍ 11 FCC Rcd at 384142.@ TCAP messages, on the other hand, are used to carry information between SSPs that support particular services, such"|k ;0*&&aa" as toll free services, LIDB services and certain custom local area signalling services (CLASS)  X4like automatic call back.3<j {Ob'ԍ Id.3 We noted that differentiation between charges for ISUP and TCAP messages may be economically justified because TCAP messages tend to be shorter in  X4average length and place lower demands on the signalling network that ISUP messages.;=Zj yO'ԍ NPRM at  135.;  X4251. The NPRM also requested comment regarding the appropriate placement of SS7 signalling elements in price cap baskets. Currently, STP port termination rates and charges  X_4for the signalling link, or DNAL, are placed in the trunking basket.`>_j yO 'ԍ 47 C.F.R.  61.42(d)(3); NPRM at  128, 130.` Because both services are dedicated to particular SS7 customers, rates for these elements are flatrated. We requested comment on whether the STP port termination charge should be placed in its own service category in the trafficsensitive basket. We noted that interconnectors can provide their own signalling link, exposing that service element to some measure of competition. The STP port termination, on the other hand, is relatively insulated from competitive pressures because it is part of the incumbent LEC's STP and must be purchased from the incumbent LEC under existing network architecture.  X '  X'  2.` ` Discussion  Xb4252. As we noted in the Ameritech SS7 Waiver Order, the removal of SS7 costs from the local switching and transport interconnection charge rate elements would benefit access customers that pay for these services but do not actually use an incumbent LEC's signalling services. It would also benefit alternative local service providers by enabling them to purchase separate SS7 services from incumbent LECs to support their provision of competing  X4local exchange or exchange access services.=?zj yO'ԍ 11 FCC Rcd at 3853.= Unbundling the individual SS7 components into separate charges would further promote efficiency by ensuring that signalling charges more accurately reflect the costs of providing such services. Competitive service providers  X4could limit their signalling costs by purchasing only the signalling elements they need.3@ j {Og 'ԍ Id.3 Despite these benefits, however, we are reluctant to impose on incumbent LECs the cost burden of installing metering or other equipment needed to measure third party usage of"~l@0*&&aa"  X4signalling facilities./AXj yOy'ԍ Bell Atlantic and NYNEX estimate the cost of installing facilities to measure SS7 usage ranges between $15 million and $40 million. BA/NYNEX Comments at 40. Sprint estimates that the cost would run between $15 million and $20 million. Sprint Comments at 31. / In granting Ameritech a waiver to implement its unbundled SS7 rate structure, we noted that Ameritech had previously installed the equipment and other facilities  X4needed to meter independent signalling usage.@Bj yOk'ԍ 11 FCC Rcd at 384445.@ Although we encourage actions that would promote disaggregation and unbundling of SS7 services, we will not require incumbent LECs to implement such an approach and incur the associated equipment costs of doing so. The record indicates that, as a general matter, the costs of mandating the installation of metering  Xv4equipment may well exceed the benefits of doing so.Cvxj yO 'ԍ USTA Comments at 37; BA/NYNEX Comments at 40; PacTel Comments at 73; GTE Comments at 53.  XH4253. Instead, we will permit incumbent LECs to adopt unbundled signalling rate structures at their discretion and acquire the appropriate measuring equipment as needed to implement such a plan. Specifically, incumbent LECs may implement the same unbundled  X 4rate structure for SS7 services that we approved in the Ameritech SS7 Waiver Order.D j yO'ԍ A carrier could adopt the Ameritech rate structure pursuant to 47 C.F.R. 69.4(g), which permits a carrier to implement rate structures previously approved by the Commission for other carriers. We recognize, however, that other signalling rate structures may achieve the same benefits that are available under the Ameritech rate structure. Hence, an incumbent LEC may implement an unbundled signalling rate structure that varies from the approach implemented in the  X 4Ameritech SS7 Waiver Order by filing a petition demonstrating that the establishment of new  X4rate elements implementing such a service is consistent with the public interest.GE` j yO'ԍ 47 C.F.R.  69.4(g).G We note, however, that variations in signalling rate structures among incumbent LECs could impose burdens on IXCs if IXCs must adapt to a diverse range of unbundled signalling rate  XQ4structures.JFQ j {O'ԍ See Sprint Comments at 31.J We anticipate that, if incumbent LECs choose to adopt unbundled rate structures for their SS7 network services, they will evaluate how the implementation of these plans will  X#4affect their prospective customers.G# j yOV!'ԍ Sprint suggests that an industry forum may be appropriate to develop an optimum rate structure for unbundled signalling services. Sprint Comments at 31.  X4254. With respect to rate differentiation between ISUP and TCAP messages, the  X4NPRM expressed the concern that imposing rate differentiation may be inconsistent with rate"mG0*&&aan"  X4structure simplicity.;Hj yOy'ԍ NPRM at  135.; Several c ommenters indicate that the costs of implementing rate  X4differentiation would exceed the benefits of such an approach.tIXj yO'ԍ MCI Comments at 89; Time Warner Comments at 17; CompTel Comments at 3132.t We further note that commenters offered little, if any, general support for the adoption of rate differentiation. Accordingly, to avoid unnecessary complexity and to avoid the imposition of unnecessary regulatory costs, we will not impose a rate differential between ISUP and TCAP messages.  Xv4 255. With respect to the placement of SS7 rate elements in price cap baskets, we have previously recognized that the signalling link and the STP port termination are not subject to  XH4the same level of competition. As noted in the Ameritech SS7 Waiver Order, STP port termination is provided only by incumbents while the signalling link can be provided by SS7  X 4customers themselves or by other alternative providers.VJ j yO'ԍ 11 FCC Rcd at 3859. NPRM at  130.V Comments filed in this proceeding  X 4also acknowledge this competitive disparity.UK xj yO.'ԍ MCI Comments at 8788; AT&T Reply at 3334.U Although Ameritech discounts the risk that STP port termination charges would be used to offset price reductions for the signal link, it nevertheless acknowledges the existence of the competitive differential we suggested in the NPRM. Other commenters argue that the competitive disparity is sufficient to justify concerns that price cap LECs would adjust their rates to account for the competitive differential. Accordingly, we will establish a new STP port termination rate element in the trafficsensitive basket. Placing these SS7 services in different price cap baskets will ensure consistency with the Commission's general approach of maintaining elements with similar competitive characteristics in the same service baskets.  X' $J:\ACCESS.REF\ORDER\IIIE.PLG$ $J:\ACCESS.REF\ORDER\IIIF.PLG$ F.Impact of New Technologies  X4256. The NPRM requested comment regarding the rate structure treatment of new technologies that enable new telecommunications services and, by enhancing the productivity of telecommunications facilities, lower prices for services in the future. These technologies, which we describe in greater detail in the NPRM, include synchronous optical networks (SONET), Asynchronous Transfer Mode (ATM) switching, and advanced intelligent networks (AIN). We invited commenters to recommend specific rate structure rules that would reflect the manner in which incumbent LECs incur costs when providing services utilizing such new  XP4technologies.;LPj yO $'ԍ NPRM at  139.;  X"4257. As a general matter, the Commission is reluctant to adopt detailed rules""nL0*&&aa"" governing rate structures for recovering the cost of deploying advanced technologies. We  X4note that, in the Price Cap Third Report and Order, we adopted rules that permit price cap LECs to petition the Commission for the establishment of one or more switched access rate  X4elements to accommodate new services.`Mj {O6'ԍ Price Cap Third Report and Order at  30910.` Under these rules, petitioners must demonstrate either of the following: 1) that the new rate elements would be in the public interest; or 2) that another LEC has previously obtained approval to establish identical rate elements and that the original petition did not rely upon a competitive showing as part of its public interest  Xa4justification.ANaZj yOl 'ԍ 47 C.F.R.  69.4(g).A Because technological advancements emerge rapidly, the adoption of uniform rate structures corresponding to particular technologies may slow investment in the development of newer technologies or improvements in current technologies. Indeed, as a general matter, incumbent LECs oppose the adoption of uniform rate structures for new technologies, suggesting that strict uniform rules in this regard could inhibit development of such technologies. Accordingly, we will refrain from adopting in this Order specific rate structures with respect to SONET, AIN, or other new technologies. As noted above, however, our rules already accommodate rate element adjustments that may be needed on an ad hoc basis when technological advancements justify such modifications. As particular new technologies become used on a widespread basis, we can always consider whether there is a need for a uniform rate structure at that point.  XM' $J:\ACCESS.REF\ORDER\IIIF.PLG$ #J:\ACCESS.REF\ORDER\IVA.JSL# #Xj\  P6G;9XP#   L IV. BASELINE RATE LEVELS \  X' A.XPrimary Reliance on a MarketBased Approach (# With A Prescriptive Backdrop and the  X'Adoption of Several Initial Prescriptive Measures  X' 1.` ` Background  X4258. In the NPRM, we established a goal of encouraging efficient competitors to enter local exchange access markets so that incumbent LECs would face substantial competition for  Xg4 the entire array of interstate access services.;Ogj yO 'ԍ NPRM at  140.; As a particular service becomes subject to substantial competition from new providers, we proposed to remove that service from price  X94cap and tariff regulation.;P9zj yOd#'ԍ NPRM at  149.; We sought comment on two general approaches for a transition to reliance on substantial competition to ensure that interstate access charges are closely related to forwardlooking economic costs: a "marketbased" approach and a "prescriptive" approach. " o P0*&&aa#" Under a marketbased approach, we would permit market forces to operate as competition emerges, allowing an incumbent to change its prices in response to competitive entry. To that end, we proposed a twophase approach in which incumbent LECs would be permitted certain pricing flexibility upon a showing that meaningful competitive entry is possible within a particular local exchange and exchange access market, followed by a further relaxation of  X4price cap regulation when meaningful actual competition developed within the market.;Qj yO'ԍ NPRM at  140.; We did not propose, however, to abandon the possibility of using the prescriptive tools at our disposal in the event that competition does not develop in some places.  X14259. As an alternative to the proposed marketbased approach, we also sought comment on a prescriptive approach, under which incumbent LECs would be required to change their prices for some or all exchange access services using specific measures adopted by the Commission to more accurately ensure that access charges are closely related to the  X 4economic costs of providing interstate access services.;R Xj yO'ԍ NPRM at  141.; We also invited comment whether  X 4the two approaches could be merged in some fashion.;S j yOW'ԍ NPRM at  144.; We emphasized that our ultimate goal under any approach, whether marketbased, prescriptive or combined, is to remove from price cap regulation LEC services that are subject to substantial competition. Instead of price cap regulation, we expect eventually to rely on the operation of competitive local markets to prevent incumbent LECs from exercising market power, and thereby to protect consumers.   X44260. In this section, we endorse the use of a marketbased approach generally. Our marketbased approach will retain the protection afforded by price cap regulation, while relaxing particular restrictions on incumbent LEC pricing as competition emerges, thereby permitting the development and operation of competitive markets, which will maximize the efficient allocation of telecommunications services and promote consumer welfare. This section also explains how, if competition fails to emerge over time for certain access services in particular geographic areas, we will ensure that the rates for those services reflect the forwardlooking economic costs of providing the services. In the NPRM, we sought comment on a number of specific issues concerning the timing and degrees of pricing flexibility and ultimate deregulation. We recognize that we must attend carefully to this task of granting incumbent LECs increased pricing flexibility commensurate with competitive developments, and we will resolve these issues of timing and degree in detail in a subsequent report and order in this docket, where we can more fully discuss these matters.  X4261. Elsewhere in this Order, we adopt or propose several measures that work within our current price cap structure to lower baseline access charge rate levels consistent with"pxS0*&&aa" evidence that the revised rate levels better reflect the underlying costs of providing interstate access services. In Section IV.C below, we order an exogenous cost reduction to reflect the completion of the amortization of equal access costs. In Section IV.D, we order reallocation of certain marketing and retail expenses and discuss the reallocation of GSF costs. We issue  X4a further notice on GSF costs in Section VII. In the companion Price Cap Fourth Report and  X4Order, which we also adopt today, we modify our current price cap plan by adopting a single productivity offset (XFactor) of 6.5 percent and eliminating sharing while maintaining the lowend adjustment.  X5' 2.` ` Discussion  X 4262. The Commission's objective is the one set forth in the 1996 Act "opening all  X 4telecommunications markets to competition."LT j {Oi 'ԍ Joint Explanatory Statement.L Therefore, we must ensure that our own regulations do not unduly interfere with the development and operation of these markets as competition develops. If we successfully reform our access charge rules to promote the operation of competitive markets, interstate access charges will ultimately reflect the forwardlooking economic costs of providing interstate access services. This is so, in part, because Congress established in the 1996 Act a costbased pricing requirement for incumbent LECs' rates for interconnection and unbundled network elements, which are sold by carriers to other carriers. As we have recognized, interstate access services can be replaced with some  X84interconnection services or with functionality offered by unbundled elements.MU8Zj {OC'ԍ E.g., NPRM  89, 170.M Because these policies will greatly facilitate competitive entry into the provision of all telecommunications services, we expect that interstate access services will ultimately be priced at competitive levels even without direct regulation of those service prices.  X4263. We decide that adopting a primarily marketbased approach to reforming access charges will better serve the public interest than attempting immediately to prescribe new rates for all interstate access services based on the longrun incremental cost or forwardlooking economic cost of interstate access services. Competitive markets are superior mechanisms for protecting consumers by ensuring that goods and services are provided to consumers in the most efficient manner possible and at prices that reflect the cost of production. Accordingly, where competition develops, it should be relied upon as much as possible to protect consumers and the public interest. In addition, using a marketbased approach should minimize the potential that regulation will create and maintain distortions in the investment decisions of competitors as they enter local telecommunications markets. Finally, under the 1996 Act, implicit universal service subsidies, wherever possible, are to be made explicit and"qU0*&&aak"  X4supported by all carriers on an equitable and nondiscriminatory basis.=Vj yOy'ԍ 47 U.S.C. 254.= To the extent that any implicit subsidies remain in interstate access charges because it was not feasible to identify them or make them explicit, our marketbased approach will have the effect of making those implicit subsidies subject to being competed away as competitors offer comparable services at prices that do not include the subsidies. In addition, we note that the rate structure changes we adopt today go a long way towards achieving such ends because the inefficiency produced by distortions in markets "rises as a quadratic function of the relative  X_4price distortion."OW_Xj {Oh 'ԍ Scherer & Ross, supra., at 662.O Therefore, the first steps made toward removing distortions caused by our regulations will produce the greatest benefits.  X 4264. The marketbased approach to access charge reform that we adopt will not, as some parties assert, expose customers of interstate access services to the unfettered exercise of  X 4market power.QX j {O'ԍ Appendix B, Section IV.A., infra.Q We will continue to maintain the current mechanisms upon which we rely  X 4to ensure that rates for these services are "just and reasonable,"=Y |j yO'ԍ 47 U.S.C. 201.= and not unjustly or  X 4unreasonably discriminatory.=Z j yO{'ԍ 47 U.S.C. 202.= Instead of exposing customers to harm, we expect that permitting incumbent LECs certain kinds of pricing flexibility in response to the development of competition will allow prices for interstate access services to adjust in ways that reflect the underlying economic costs of providing those services without moving outside the range of rates that are just and reasonable. This process of relaxing regulation as competition develops, and ultimately deregulating services subject to effective competition, is well established. For example, many of the types of pricing flexibility discussed in the NPRM are similar to forms of pricing flexibility we have in the past accorded incumbent LECs and IXCs  X4facing increased competition in markets for particular services.[&j {OS'ԍ See, e.g., Expanded Interconnection with Local Telephone Company Facilities, CC Docket No.91141,  {O'Report & Order & Notice of Proposed Rulemaking, 7 FCC Rcd 7369 (1992) (geographic deaveraging); AT&T  {O'Communications (Revisions to Tariff FCC No. 12), CC Docket No. 87568, Memorandum Opinion & Order, 4FCC Rcd 4932 (1989).  X4265. Economic teaching also leads to the conclusion that rates for interstate access services will generally move toward the forwardlooking economic cost of providing such services in response to increased competition in local exchange and exchange access"r [0*&&aa"  X4markets.\j {Oy'ԍ See, e.g., Dennis W. Carlton & Jeffrey M. Perloff, Modern Industrial Organization 9293 (2d ed. 1994) In addition, competition will do a better job of determining the true economic cost of providing such services. As competitive entry becomes increasingly possible, IXCs that now purchase interstate switched access services from incumbent LECs will be able to bypass those services where the prices (interstate access charges) do not reflect the economic costs of providing the underlying services. Those IXCs can do this by entering the local markets themselves as local exchange service providers, thereby selfproviding interstate access services for their new local exchange service customers. They can also seek out competitive providers of comparable services. As customers choose providers other than incumbent LECs as their local providers, interstate access services will come to be priced competitively. Incumbent LECs will have to respond to competitors' offerings with lowerpriced access services of their own in order to retain customers that would otherwise switch to competitors' networks, further increasing the effect of competition on overall access charge payments.   X 4 266. The 1996 Act has created an unprecedented opportunity for competition to develop in local telephone markets. It also has provided this Commission with tools for opening markets to competition, and for implementing our marketbased relaxation of regulation so that interstate access charges reflect forwardlooking economic costs. We recognize, however, that competition is unlikely to develop at the same rate in different locations, and that some services will be subject to increasing competition more rapidly than  X44others.,] 4Zj yO?'ԍ The observation that competitive entry will occur in some places, and for some services, more rapidly  {O'than others is a corollary to the rule that firms in competitive markets seek to maximize their profits. See, e.g.,  {O'Carlton & Perloff, supra, at 89. To maximize profits, firms naturally seek out those customers and services on which they can generate the most profits. Therefore, some customers are naturally more desirable than others at any given point in time. As competitors attempt to gain the patronage of the customers offering the greatest profit opportunities, they offer lowerpriced or more desirable services. These actions have the effect of reducing over time the profitability of serving those particular customers and, as this occurs, the relative profitability of serving other customers or offering other services increases. Therefore, competitors begin seeking to serve these other customers, and entry occurs in new places, or for new services. , Accordingly, we anticipate that competition will drive rates for some interstate access services toward more economically efficient levels more rapidly in some areas than rates for other services or in other areas. Where competition develops, we will provide incumbent LECs with additional flexibility, culminating in the removal of incumbent LECs' interstate access services from price regulation where they are subject to sufficient competition to ensure that the rates for those services are just and reasonable, and are not unjustly or unreasonably discriminatory.  X|4 267. We also recognize, however, that there will be areas and services for which competition may not develop. Therefore, we shall retain many of the existing safeguards afforded by our price cap regulation, including the productivity offset (XFactor), which"Ns. ]0*&&aa" requires incumbent LECs to adjust their access charges to reflect changes in the economic cost of providing service. In addition, we also adopt a prescriptive "backstop" to our marketbased approach that will serve to ensure that all interstate access customers receive the benefits of more efficient prices, even in those places and for those services where competition does not develop quickly. To implement our backstop to marketbased access charge reform, we require each incumbent price cap LEC to file a cost study no later than February 8, 2001, demonstrating the cost of providing those interstate access services that remain subject to price cap regulation because they do not face substantial competition. The Commission will require submission of such studies before that date if competition is not developing sufficiently for our market-based approach to work. Studies should identify and quantify forwardlooking costs, shortrun and longrun, that are incremental to providing each such service, and also costs that are common as between various services. These studies are required only for noncompetitive services; as stated above, we do not intend to regulate prices of services that are subject to substantial competition.  X 4 268. We have chosen this date in order to give competition sufficient time to develop substantially in the various markets for interstate exchange access services. We have also chosen this date to permit us and all interested parties to take into account the effects of implementing the substantial changes that we adopt in this Order and that we will be adopting elsewhere to satisfy the universal service goals in section 254. By this date, we also expect to have additional regulatory tools by which to assess the reasonableness of access charges. We may, for example, be able to establish benchmarks based on prices for the interstate access services for which competition has emerged, and use the prices actually charged in competitive markets to set rates for noncompetitive services and markets. Carriers could be required either to set their rates in accordance with the benchmarks or to justify their rates using their cost studies.   X4 269. We anticipate that the procompetitive regime created by the 1996 Act, and  X|4implemented in the Local Competition Order and numerous state commission decisions, will generate competition over the next few years. Further, it would be imprudent to prejudge the effectiveness of those measures at creating competitive local markets. Rather than ignore or interfere with the effects of this developing competition on prices for interstate access services, we find that the public interest is best served by permitting emerging competition to affect access charge rate levels. In addition, the experience we gain from observing the effects of emerging competition on interstate access services will permit us more effectively and efficiently to implement any prescriptive measures that may be needed in the future to ensure that interstate access services remaining subject to regulation are priced in accordance with the forwardlooking economic cost of providing those services.  X#4 270. Economic logic holds that giving incumbent LECs increased pricing flexibility will permit them to respond to competitive entry, which will allow prices to move in a way"j$t]0*&&aa""  X4that they would not have moved were the pricing restrictions maintained.^j {Oy'ԍ E.g., JeanJaques Laffont & Jean Tirole, Creating Competition Through Interconnection: Theory and  {OC'Practice, 10 J. Reg. Econ. 22756 (1996). This can lead to better operating markets and produce more efficient outcomes. Deregulation before competition has established itself, however, can expose consumers to the unfettered exercise of monopoly power and, in some cases, even stifle the development of competition, leaving a  X4monopolistic environment that adversely affects the interests of consumers._$j {Oy'ԍ See, e.g., Jean Tirole, The Theory of Industrial Organization 230 (1988). Therefore, it is important that we design our marketbased approach carefully. We must, among other things, decide which, if any, of the rules setting forth specific competitive triggers and corresponding flexibility as proposed in the NPRM we should adopt. We will resolve these issues in the subsequent report and order in this docket.  X 4271. As set forth in the summary of comments appended to this order, AT&T cites to  X 4Farmers Union Central Exchange, Inc. v. FERC` j {Oj'ԍ 734 F.2d 1486, 1508 (D.C. Cir.) (Farmers Union), cert. denied, Williams Pipe Line Co. v. Farmers  {O4'Union Central Exchange, Inc., 469 U.S. 1034 (1984). for the proposition that "[r]eliance on competitive forces to constrain exchange access rates, particularly in the presence of strong indications that market forces will not produce the intended results, would be arbitrary and capricious and contravene the Commission's statutory duty to ensure just, reasonable, and  X 4nondiscriminatory rates."Oa j {Ol'ԍ Appendix B, Sec. IV.A., infra. O We disagree with AT&T's assertion. In Farmers Union, FERC had stated in its relevant order that ratemaking for oil pipelines should be used solely to prevent price gouging, and had interpreted the Congressional mandate of "just and reasonable" rates as requiring that rates be kept within the zone of commercial reasonableness, not public  XO4utility reasonableness.QbOj {O'ԍ Farmers' Union, 734 F.2d at 1492.Q Under this interpretation, FERC had concluded that it would rely  X84primarily on market forces to keep rates reasonable.3c86 j {O'ԍ Id.3  X 4272. The court in Farmers Union recognized that "[m]oving from heavy to lighthanded regulation... can be justified by a showing that... the goals and purposes of the statute will be accomplished through substantially less regulatory oversight," but objected to FERC's failure to establish that its new approach would satisfy the "just and reasonable"  X4standard.<d j {O)%'ԍ Id. at 1510.< The court rejected FERC's position that oil pipeline ratemaking should protect"uZ d0*&&aa" only against "egregious exploitation and gross abuse" as being inconsistent with the mandate  X4that Congress had established for FERC.<ej {Ob'ԍ Id. at 1502.< The court concluded that FERC had not shown  X4that market forces were sufficient to rely upon in setting reasonable rates.<fZj {O'ԍ Id. at 1508.<  X4273. We reject AT&T's argument that our marketbased approach to access charge  X4reform is analogous to FERC's conduct at issue in Farmer's Union. Our access charge and price cap rules are designed to ensure that access charges remain within the "zone of  Xa4reasonableness"<gaj {O 'ԍ Id. at 1502.< defining rates that are "just and reasonable,"@ha~j yO 'ԍ 47 U.S.C.  201(b).@ and our marketbased approach will also be designed to implement this statutory requirement. It will not remove incumbent LECs from regulation immediately, but will implement deregulation in steps, as competitive conditions warrant. Throughout the transition to deregulation in the face of substantial competition, we will maintain many safeguards against unjust or unreasonable rates, such as the price cap indices. We will deregulate incumbent LEC services only when it is reasonable to conclude that competition has developed to such an extent that the market  X 4will ensure just and reasonable rates.eiZ j yO'ԍ Such marketbased regulation of prices has been upheld where the market being relied upon is sufficiently competitive and the regulator maintains its authority to step in to ensure that rates remain just and  {O'reasonable. Elizabethtown Gas Co. v. FERC, 10 F.3d 866, 87071 (D.C. Cir. 1993).e  X4274. Second, our marketbased approach is an eminently reasonable method for pursuing our goal of promoting competition and ensuring the economically efficient pricing of interstate access services. As competition emerges, the marketbased approach will permit access charges to move towards the levels that will prevail in competitive markets. During the transition to competitive markets, access services not subject to competition will remain subject to price cap regulation, and we will eventually prescribe rates for those services at forwardlooking economic cost levels, to ensure that all consumers reap the benefits of  X4economicallyefficient prices. Unlike the FERC regulation at issue in Farmers Union, our marketbased approach to promoting the development of competitive markets and economicallyefficient pricing will not be based on "largely undocumented reliance on market  X4forces...."sj0 j {O#'ԍ AT&T Comments at 48 (citing Farmers Union, 734 F.2d at 1508).s Instead, we will design our approach so that deregulation occurs only when the reliability of market forces can be fully determined with respect to a particular service.  X4Finally, we observe that FERC's mandate in Farmers Union was one of rate regulation due to"v j0*&&aa"  X4market failure and concern over monopoly power.Qkj {Oy'ԍ Farmers' Union, 734 F.2d at 1508.Q In light of the 1996 Act, our mandate is no longer strictly or solely one of rate regulation. Congress has stated its desire to establish  X4"a procompetitive, deregulatory national policy framework."LlZj {O'ԍ Joint Explanatory Statement.L Our marketbased approach will be designed to coincide with and promote this objective.  X4275. Price Squeeze Concerns Are Adequately Addressed. Several parties have argued that current access charge rate levels create the conditions for an anticompetitive price squeeze  Xa4when a LEC affiliate offers interexchange services in competition with IXCs.Qmaj {O 'ԍ Appendix B, Section IV.A, infra. Q A price squeeze, as the term is used by these parties, refers to a particular, welldefined strategy of predation that would involve the incumbent LEC setting "high" prices for interstate exchange access services, over which the LEC has monopoly power (albeit constrained by regulation), while its affiliate is offering "low" prices for longdistance services in competition with the other longdistance carriers. Because interstate exchange access services are a necessary input for longdistance services, these parties argue that an incumbent LEC can create a situation where the relationship between the LEC's "high" exchange access prices and its affiliate's "low" prices for longdistance services forces competing longdistance carriers either to lose money or to lose customers even if they are more efficient than the LEC's affiliate at providing longdistance services. It is this nonremunerative relationship between the input prices and the affiliate's prices, and not the absolute levels of those prices, that defines a price squeeze. In the most extreme case, a price squeeze involves a monopolist setting input prices that are actually higher than its prices in the output market.  X4276. Price cap regulation of access prices limits the ability of LECs to raise the prices of the input services. Commenters raising price squeeze concerns argue, however, that a LEC's interexchange affiliate will still be in a position to implement a price squeeze by setting longdistance rates close to the rates for access services, thereby forcing IXCs to charge belowcost rates to retain customers. They argue that LECs' interexchange affiliates have lower costs of providing interexchange services because of their affiliation with monopoly providers of interstate access services, and not as a result of being more efficient. According to these commenters, the relevant economic costs of providing interstate interexchange services will be lower for the LEC affiliate offering interexchange services than for competing IXCs because it only has to recover the true economic cost of providing the interstate access services (since the owners of the LEC and its interexchange affiliate will want the two entities to maximize their joint profits), whereas the IXCs will be forced to pay interstate access charges that are above the true economic cost of providing the underlying services."w~m0*&&aa"Ԍ X4ԙ277. Absent appropriate regulation, an incumbent LEC and its interexchange affiliate could potentially implement a price squeeze once the incumbent LEC began offering inregion, interexchange toll services. Although no BOC affiliate may offer such services at this time, GTE, SNET, Sprint and other incumbent LECs do have affiliates offering such services. The incumbent LEC could do this by raising the price of interstate access services to all interexchange carriers, which would cause competing inregion carriers to either raise their retail rates to maintain their profit margins or to attempt to maintain their market share by not raising their prices to reflect the increase in access charges, thereby reducing their profit margins. If the competing inregion, interexchange providers raised their prices to recover the increased access charges, the incumbent LEC's interexchange affiliate could seek to expand its market share by not matching the price increase. The incumbent LEC affiliate could also set its inregion, interexchange prices at or below its access prices. Its competitors would then be faced with the choice of lowering their retail rates for interexchange services, thereby reducing their profit margins, or maintaining their retail rates at the higher price and risk losing market share.  X4278. We conclude that, although an incumbent LEC's control of exchange and exchange access facilities may give it the incentive and ability to engage in a price squeeze,  Xb4we have in place adequate safeguards against such conduct. The Fifth Competitive Carrier  XM4Report and OrderRn^Mj {O'ԍ Policy and Rules Concerning Rates for Competitive Common Carrier Services and Facilities  {O'Authorizations Therefor, CC Docket No. 79252, Fifth Report & Order, 98 FCC 2d 1191, 1198 9 (1984) (Fifth  {OZ'Competitive Carrier Report and Order).R requirements aid in the prevention and detection of such anticompetitive  X84conduct. In our recent InRegion Interexchange Order we decided to retain the Fifth  X#4Competitive Carrier Report and Order separation requirements for incumbent LEC provision  X4of inregion interLATA services.o&j {O'ԍ Regulatory Treatment of LEC Provision of Interexchange Services Originating in the LEC's Local  {Ow'Exchange Area and Policy and Rules Concerning the Interstate, Interexchange Marketplace, Second Report and Order in CC Docket No. 96-149 and Third Report and Order in CC Docket No. 96-61, __ FCC Rcd ____,  {O 'FCC97-142 (Apr. 18, 1997) (Dom/Nondom R&O) These requirements apply both to BOCs and to other incumbent LECs. In addition, as discussed in that order, BOC interexchange affiliates are  X4subject to the safeguards set forth in section 272 of the Act.3pj {Om'ԍ Id.3  X4279. The Fifth Competitive Carrier Report and Order separation requirements have been in place for over ten years, and independent (nonBOC) incumbent LECs have been providing inregion, interexchange services on a separated basis with no substantiated complaints of a price squeeze. Under these separation requirements, incumbent LECs are required to maintain separate books of account, permitting us to trace and document improper allocation of costs and/or assets between a LEC and its longdistance affiliate, as well as to"Axn p0*&&aa" detect discriminatory conduct. In addition, we prohibit joint ownership of facilities, which further reduces the risk of improper allocations of the costs of common facilities between the  X4incumbent LEC and its interexchange affiliate, as discussed at length in the InRegion  X4Interexchange OrderJqj {O6'ԍ Id. 16369.J and the NonAccounting Safeguards Order (addressing the Act's prohibition of BOC joint ownership with its interexchange affiliate pursuant to Section  X4272).ZrZj {O'ԍ Implementation of the NonAccounting Safeguards of Sections 271 and 272 of the Communications Act of  {Of '1934, as amended, First Report and Order and Further Notice of Proposed Rulemaking, FCC 96489 15962  {O0 '(Dec. 24, 1996) (NonAccounting Safeguards Order), on recon., FCC 9752 (Feb. 19, 1997), recon. pending,  {O 'CCDocket No. 96149, petition for summary review in part denied and motion for voluntary remand granted sub  {O 'nom., Bell Atlantic v. FCC, No.971067 (D.C. Cir. filed Mar. 31, 1997), petition for review pending sub nom.,  {O 'SBC Communications v. FCC, No. 971118 (D.C. Cir. filed Mar. 6, 1997) (held in abeyance pursuant to court order filed May 7, 1997).Z As we also discussed at length in those orders, the prohibition on jointlyowned facilities also helps to deter any discrimination in access to the LEC's transmission and switching facilities by requiring the affiliates to follow the same procedures as competing interexchange carriers to obtain access to those facilities. Finally, our requirement that incumbent LECs offer services at tariffed rates, or on the same basis as requesting carriers  X 4that have negotiated interconnection agreements pursuant to section251=s j {Ou'ԍ Id. 164.= reduces the risk of a price squeeze to the extent that an affiliate's longdistance prices would have to exceed their costs for tariffed services.  X 4280. Current conditions in markets for interexchange services give us comfort that an anticompetitive price squeeze is unlikely to occur as a result of our decision not to prescribe immediately access charge rates at forwardlooking economic cost levels. If an incumbent LEC does attempt to engage in an anticompetitive price squeeze against rival longdistance providers, the provisions of the Act should permit new entrants or other competitors to seek out or provide competitive alternatives to tariffed incumbent LEC access services. For  X84example, under the provisions of section251,Ct88 j yO!'ԍ 47 U.S.C. 251(c)(3).C a competitor will be able to purchase unbundled network elements to compete with the incumbent LEC's offering of local exchange access. Therefore, so long as an incumbent LEC is required to provide unbundled network elements quickly, at economic cost, and in adequate quantities, an attempted price squeeze seems likely to induce substantial additional entry in local markets. Accordingly, there should be a reduced likelihood that an incumbent LEC could successfully employ such a strategy to obtain the power to raise longdistance prices to the detriment of consumers.  X4281. Furthermore, even if a LEC were able to allocate improperly the costs of its"y t0*&&aa" affiliate's interexchange services, we conclude that it is unlikely that the LEC's interexchange  X4affiliate could engage successfully in predation.uj {Ob'ԍ See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 589 (1986) ("[P]redatory pricing schemes are rarely tried, and even more rarely successful."). At least four interexchange carriers AT&T, MCI, Sprint, and LDDS WorldCom have nationwide, or nearnationwide, network  X4facilities that cover every LEC's region.v"j {O'ԍMotion of AT&T Corp. to be Reclassified as a NonDominant Carrier, 11 FCC Rcd 3271, 3304 60-61 (1996). These are large, wellestablished companies with millions of customers throughout the nation. It is unlikely, therefore, that one or more of these national companies can be driven from the market with a price squeeze, even if effectuated by several LECs simultaneously, whether acting together or independently. Even if it could be done, it is doubtful that the LECs' interexchange affiliates would later be able to raise, and profitably sustain, prices above competitive levels. As Professor Spulber has observed, "[e]ven in the unlikely event that [LECs' interexchange affiliates] could drive one of the three large interexchange carriers into bankruptcy, the fiberoptic transmission capacity of that carrier would remain intact, ready for another firm to buy the capacity at distress sale  X 4and immediately undercut the [affiliates'] noncompetitive prices."w |j {O'ԍ Daniel F. Spulber, Deregulating Telecommunications, 12 Yale J. Reg. 25, 60 (1995).  X 4282. Finally, in addition to our regulations and the provisions of section 251 of the  X 4Act, the antitrust laws also offer a measure of protection against a possible price squeeze.x2 j {Of'ԍ Beginning with Judge Learned Hand's opinion in United States v. Aluminum Co. of America (Alcoa), 148 F.2d 416, 43738 (2d Cir. 1945), a specific body of precedent has developed under federal antitrust law defining situations where a price squeeze can be actionable as a form of monopolization or attempted monopolization under Section 2 of the Sherman Act. 15 U.S.C. 2. Under this precedent, a price squeeze can violate the antitrust laws where (1)a firm has monopoly power with respect to an "upstream" product; (2)it sells that product at "higher than a 'fair price,'"; (3)the product is a necessary input for the product being sold by other firms in competition with the monopoly or its affiliate in a "downstream" market; and (4) the monopolist offers the "downstream" product at a price so low that (equallyefficient) competitors cannot match the price and still  {O'earn a "living profit." Alcoa, 148 F.2d at 43738. Over time, courts have developed several tests for determining when the relationship between the two prices is sufficiently adverse to competitors that it constitutes  {O:'an anticompetitive price squeeze. See, e.g., Bonjorno v. Kaiser Aluminum & Chem. Corp., 752 F.2d 802, 80809  {O'(3d Cir. 1984), cert.denied, 477 U.S. 908 (1986); Ray v. Indiana & Mich. Elec. Co., 606 F.Supp. 757, 776  {O'(N.D. Ind. 1984), aff'd, 758 F.2d 1148 (7th Cir. 1985). Although we believe it would not serve the public interest for us knowingly to permit a price squeeze to occur, and to rely entirely on the adequacy of antitrust law remedies to protect the public, we take comfort in the fact that such remedies exist should an anticompetitive price"bzx0*&&aa"  X4squeeze occur in spite of the safeguards we have adopted.5y~j yOy'ԍ Because the rates charged by LEC interexchange affiliates will not be regulated, we do not believe that a court would reject a price squeeze claim under the antitrust laws on the grounds that "'normally' a price squeeze  {O 'will not constitute an exclusionary practice in the context of a fully regulated monopoly." Town of Concord v.  {O'Boston Edison Co., 915 F.2d 17 (1st Cir.1990) (J. Breyer), cert. denied, ___ U.S. ___, 111 S.Ct. 1337 (1991). Indeed, the court in that case explicitly declined to address the "special problem" posed by a price squeeze allegation against a firm regulated in the input market and undercutting rivals' prices in the unregulated market  {O-'where inputs are used. Id. at 29.5 In particular, although a price squeeze engaged in by several LECs, particularly if it involved more than one of the BOCs or GTE, could have a significant impact on interexchange competitors, we believe that the antitrust laws will act as a strong backstop to our own enforcement process so that the risk of  X4such concerted activity is sufficiently limited.mzj {Oc 'ԍ See NonAccounting Safeguards Order FCC 97142 70.m  Xv4283. Other Concerns Raised by Commenters. Several commenters raised concerns that our marketbased approach to access charge reform might permit incumbent LECs to engage in cross subsidization, either between competitive and noncompetitive services, or  X34between interstate access services and other services such as video distribution.Z{3j {O'ԍ See Appendix B, Section IV.A, infra.Z No evidence has been presented, however, indicating any likelihood that current price cap regulation, which is designed, in part, to prevent cross subsidization, might become less effective under a marketbased approach to access charge reform. Those price cap regulations will remain in place until there is sufficient competition to prevent an incumbent LEC from charging rates that are not just and reasonable. Therefore, we find that the record does not contain substantial evidence that a marketbased approach to access charge reform is any less likely than current regulation to permit incumbent LECs to engage in unreasonable cross subsidization with their interstate access charges.  XM4284. Finally, several commenters based their support for a marketbased approach, in part, on arguments that it would reduce, or minimize, administrative burdens. Other commenters, on the other hand, opposed a marketbased approach on the grounds that it would increase administrative burdens. Based on the record before us, however, we cannot reach a conclusion as to the relative administrative burdens of the two approaches. Some parts of our proposed marketbased approach, such as grants of increased pricing flexibility as competitive conditions warranted, were modeled on waivers that we have granted within the context of our current price cap plan and would likely be necessary even if we had adopted a primarily prescriptive approach to access charge rate level reform. Similarly, some parts of a prescriptive approach, such as annual changes in price cap calculations, will necessarily be a part of our marketbased approach. Accordingly, we can see no basis in this record for concluding that a marketbased approach to access charge reform will be any more or less"P{2 {0*&&aa4" burdensome than any other alternative.  X' #J:\ACCESS.REF\ORDER\IVA.JSL# "J:\ACCESS.REF\ORDER\IVB.SS" 3B.Prescriptive Approaches  X' 1.` ` Prescription of a New XFactor     Xv'` ` a. Background  XH4285. In the NPRM, we observed that the Commission had initiated a rulemaking  X14proceeding in the Price Cap Fourth Further NPRM to examine a number of proposals for 3revising the productivity offset component of the XFactor, and to consider related issues such  X 4as eliminating sharing obligations and the lowend adjustment mechanism.)|~ j yO~ 'ԍ NPRM at  233. With respect to the productivity offset, we invited comment on, among other things, basing it on total factor productivity (TFP). TFP is the ratio of an index of a firm's total outputs to an index of  {O'its total inputs. NPRM at  233 n.300, citing Price Cap Fourth Further NPRM, 10 FCC Rcd at 1266371. With respect to sharing, we noted that, although sharing tends to blunt the efficiency incentives otherwise created by the price cap plan, it also serves beneficial functions, and we invited comment on eliminating sharing and  {Oh'establishing other mechanisms to serve those functions. NPRM at  233 n.301, citing Price Cap Fourth Further  {O2'NPRM, 10 FCC Rcd at 1267680. ) We invited  X 4parties to discuss in this proceeding whether the record developed pursuant to the Price Cap  X 4Fourth Further NPRM justified increasing the productivity offset, and specifically invited comment on the effects of a forwardlooking cost of capital and economic depreciation on  X 4total factor productivity (TFP) measurement.}\ j {Ol'ԍ NPRM at  233. GTE notes that, while the XFactor received considerable attention in the Price Cap  {O6'Fourth Further NPRM proceeding, the discussion did not focus on the effects of the 1996 Act. GTE Comments at 57.   X'` ` b. Discussion  XQ4286. The commenters generally repeat arguments made in the Price Cap Fourth  X<4Further NPRM proceeding. For reasons explained in detail in our companion Price Cap  X'4Fourth Report and Order, we conclude that we should prescribe an XFactor on the basis of total factor productivity studies, the difference between LEC input price changes and input price changes in the economy as a whole, and the 0.5 percent consumer productivity dividend (CPD). In the companion order we find that this results in an XFactor prescription of 6.5 percent. "|2 }0*&&aa@"Ԍ X' 2.` ` Other Prescriptive Approaches  X'` ` a. Background  X4287. In the NPRM, we sought comment on four options for a prescriptive approach:  X4reinitializing price cap indices (PCIs) to economic costbased levels;B~j yO'ԍ NPRM at  22327.B reinitializing PCIs to levels targeted to yield no more than an 11.25 percent rate of return, or some other rate of  X_4return;B_Xj yOh 'ԍ NPRM at  22830.B adding a policybased mechanism similar to the CPD to the XFactor;B_j yO 'ԍ NPRM at  23132.B or  XH4prescribing economic costbased rates.BHxj yOq'ԍ NPRM at  23638.B We have decided above to rely primarily on a marketbased approach, and impose prescriptive requirements only when market forces are inadequate to ensure just and reasonable rates for particular services or areas. We will determine the details of our marketbased approach in a future Order. In that Order, we will also discuss in more detail what prescriptive requirements we will use as a backstop to our  X 4marketbased access charge reform. j yO'ԍ In Section IV.A of this Order, we state that we will require incumbent price cap LECs to file forwardlooking economic cost studies on or before February 8, 2001. In this Section, we explain why we have decided not to adopt any specific prescriptive mechanism in this Order.  X'` ` b. Rate Prescription  Xb4288. Background. We sought comment on prescribing new interstate access rates because simply reinitializing PCIs would not necessarily compel incumbent LECs to establish  X64reasonable rate structures.;6` j yOG'ԍ NPRM at  236.; We also noted, however, that prescribing access rates on a TSLRIC basis could raise common cost allocation issues to a much greater extent than did  X4TELRIC pricing for unbundled network elements.; j yO 'ԍ NPRM at  237.;  X4 289. Discussion. In Section IV.A, above, we explain why we can and should rely primarily on market forces to cause interstate access rates to move toward economic cost levels over the next several years. Prescribing TSLRICbased access rates would be the most direct, uniform way of moving those rates to cost. But, precisely because of its directness and"} 0*&&aa" uniformity, rate regulation can only be, at best, an imperfect substitute for market forces. Regulation cannot replicate the complex and dynamic ways in which competition will affect the prices, service offerings, and investment decisions of both incumbent LECs and their competitors. A marketbased approach to rate regulation should produce, for consumers of telecommunications services, a better combination of prices, choices, and innovation than can be achieved through rate prescription. A marketbased approach, with continued price cap regulation of services not subject to substantial competition and with the prescriptive backstop described in Section IV.A, is thus consistent both with the procompetitive, deregulatory goals of the 1996 Act and with our responsibility under Title II, Part I of the Communications Act to ensure just and reasonable rates.  X 4!290. Furthermore, immediate prescription of TSLRICbased rates would not necessarily move rates to those levels faster than the marketbased approach and prescriptive backstop developed in Section IV.A. Some parties that favor a prescriptive approach have asserted that setting access rates immediately at TSLRIC levels would reduce incumbent LEC  X 4revenues by $10 billion or more.] j {O 'ԍ See NPRM at  7 and sources cited therein.] Were we to make such a rate prescription, we would consider phasing in rate reductions of that magnitude over a period of years, in order to avoid  Xy4the rate shock that would accompany such a great rate reduction at one time.yZj {O'ԍ See Investigation of Special Access Tariffs of Local Exchange Carriers, CC Docket No. 85166, Phase I and Phase II, Part 1, FCC 84524, 57 Rad.Reg. 2d 188, 209 (released Nov. 9, 1984). Finally, because we have adopted a more efficient rate structure for interstate switched access services, it is not necessary to prescribe new rates in order to achieve efficient rate structures, as TRA and TCI recommend. Accordingly, we will not prescribe TSLRICbased access rates at this time.  X'` ` c. Reinitialization of PCIs on a RateofReturn Basis  X4"291. Discussion. We reject reinitialization on the basis of any rate of return at this time. As a general matter, the parties advocating a rateofreturn based reinitialization do not provide any persuasive reason for adopting that particular approach. They favor reinitialization largely because they believe interstate access charges should be lower than they are now. As explained above, however, we are adopting a primarily marketbased approach to rate level adjustments. The prescriptive backstop to that approach will be based on TSLRIC cost studies and, most likely, applied to geographically deaveraged rates. That approach is more likely to result in rates that are aligned with economic costs than would reinitialization to a particular rate of return on an embedded cost rate base.  X4#292. Moreover, because the basic theory of our existing price cap regime is that the prospect of retaining higher earnings gives carriers an incentive to become more efficient, we" ~0*&&aaH" believe that rate of returnbased reinitialization would have substantial pernicious effects on  X4the efficiency objectives of our current policies.\Bj yOb'ԍ Ad Hoc's suggestion that we require a PCI reinitialization based on the currentlyauthorized 11.25 percent rate of return while administratively simpler than some other ways of changing rate levels would undermine productivity incentives by imposing the greatest penalties (rate reductions) on those carriers that had improved their efficiency the most. Reinitialization to another rate of return level, as API suggests, could, in  {O'addition, require resolution of complex and timeconsuming issues. See, e.g., Represcribing the Authorized Rate of Return for Interstate Services of Local Exchange Carriers, CC Docket No. 89624, 5 FCC Rcd 7507 (1990) (taking about a year to resolve all relevant issues raised in prescribing the currentlyauthorized 11.25 percent rate of return).\ In this regard, we have often expressed concern in past price cap orders that maintaining links between rate levels and a carrier's achieved rate of return would undercut the efficiency incentives price cap regulation was  X4designed to encourage. In the LEC Price Cap Order, we rejected a socalled "automatic stabilizer" adjustment to the price cap index that like reinitialization would have permanently adjusted index levels downward in the event that carriers achieved earnings  Xa4above a certain rate of return.aj {O'ԍ LEC Price Cap Order, 5 FCC Rcd at 6803. We adopted instead a sharing mechanism that made onetime earningsrelated adjustments to PCI levels to ensure that carriers would "share" significant productivity gains in a given year with ratepayers, but would not be penalized by permanent downward adjustments to the track that the PCI otherwise would have taken. We have found that even the sharing mechanism tends to blunt efficiency incentives, and, in part for that reason, we are removing the sharing mechanism as well in Section IV of our  {O'companion Price Cap Fourth Report and Order. ġ Similarly, in our 1995 LEC Price Cap Performance Review  XL4Order, we cited as a disadvantage of AT&T's "Direct Model" method of determining the PCI formula's "XFactor" the fact that "a target rate of return is a critical factor in measuring  X 4productivity."s N j {O'ԍ LEC Price Cap Performance Review Order, 10 FCC Rcd at 9034. s And although we sought comment in the Access Reform NPRM on the question of rate of returnbased reinitialization of the price cap indices, we once again expressed concern that such action "could have a negative effect on the productivity incentives  X 4of the LEC price cap plan."< j yOn'ԍ NPRM at  230. < We, of course, have authority to change our methods and theories of regulating LEC rates when we believe the purposes of the Communications Act would be better served by doing so. However, we find that, given our consistently critical past statements about rate of returnbased adjustments to price caps, a decision now to reinitialize PCIs to any specified rate of return would further undermine future efficiency incentives by making carriers less confident in the constancy of our regulatory policies.  X<4$293. In declining to reinitialize PCIs on the basis of carriers' rates of return, we reject GSA/DOD's suggestion that access rates have been excessive merely because the earnings of most price cap carriers have exceeded 11.25 percent, and, in some cases, by substantial amounts. When the Commission adopted price cap regulation, it specifically permitted price"p0*&&aaC" cap carriers to earn in excess of 11.25 percent in order to encourage them to become more  X4productive.Wj {Ob'ԍ LEC Price Cap Order, 5 FCC Rcd at 6787.W The Commission also concluded that complaints alleging excessive earnings relative to costs will not lie as long as the carrier is in compliance with the sharing  X4mechanism.WZj {O'ԍ LEC Price Cap Order, 5 FCC Rcd at 6836.W In addition, we found in the LEC Price Cap Performance Review Order that access rates declined substantially under price cap regulation from 1991 to 1994, in spite of  X4the increases in earnings to which GSA/DOD alluded.yZj yO, 'ԍ We found that the cumulative effect of price cap regulation from 1991 to 1994 was approximately $5.9  {O 'billion. LEC Price Cap Performance Review Order, 10 FCC Rcd at 898687. We do not know for certain, but believe that the benefits to access customers would have been smaller under rateofreturn regulation.y Furthermore, the vastly different  Xx4results among companiesxj {O7'ԍ See, e.g., 1996 Annual Access Filings, 11 FCC Rcd 7564 (Com.Car.Bur. 1996). show that the incentive plan we have for cost reduction (price caps) largely is working as predicted, whereas a rateofreturnbased scheme would have cost much in terms of inefficiency.  X '_ ` ` d. Reinitialization of PCIs on a TSLRIC Basis  X '` `  i. Background  X 4%294. In the NPRM, we sought comment on reducing price cap PCIs by an amount equal to the difference between the incumbent LECs' PCIs and the revenues that would be _produced by rates set at TSLRIC levels. We noted that a TSLRICbased PCI reinitialization might be preferable to a TSLRICbased rate prescription because it would not require us to  Xd4prescribe common cost allocations.;dj yO'ԍ NPRM at  223.; We also sought comment on whether or to what extent we could rely on TELRIC studies developed for pricing unbundled network elements, and whether we should initiate joint board proceedings to rely on state commissions to evaluate  X4the incumbent LECs' TELRIC studies.B0 j yO'ԍ NPRM at  22425.B  X4` `  ii. Discussion  X4&295. We have decided not to require incumbent LECs to reinitialize PCIs on a TSLRIC basis at this time. As we discuss in Section IV.A above, we expect market forces to develop as a result of the 1996 Act and to drive access rate levels to forwardlooking economic costs. Furthermore, the record in this proceeding is unclear on whether there is an"~ 0*&&aa" accurate and convenient method for determining TSLRIC for purposes of reinitializing PCIs at this time. Specifically, it is unclear whether the TELRIC studies used to develop unbundled  X4network element prices can be used for access services.Uj {OK'ԍ Universal Service Order at  245. U  X'_` ` e. PolicyBased XFactor Increase  Xv4` `  i. Background  XH4'296. In the NPRM, we observed that we adopted a consumer productivity dividend (CPD) to assure that some portion of the benefits of the incumbent LECs' increased _productivity growth under price cap regulation would flow to ratepayers in the form of reduced rates. We sought comment on establishing a policybased mechanism similar to the  X 4CPD to force access rates to costbased levels.C Zj yO'ԍ NPRM at  23132. C  X '` `  ii.Discussion  X4(297. Discussion. We do not require a policybased XFactor increase at this time for the same reason we do not require a TSLRICbased PCI reinitialization; we expect market forces to control access charges effectively in a less intrusive manner.  X64)298. BellSouth and GTE oppose increasing the CPD as an arbitrary and confiscatory  X4measure.Zj yO'ԍ BellSouth Comments at 49; GTE Comments at 7778.Z SNET claims that increasing the XFactor merely because the price cap LECs have earned too much, or simply to drive rates down, is essentially an abandonment of price cap regulation, because it would punish incumbent LECs for their efficiency gains made under  X4the price cap regime.gzj {O'ԍ SNET Reply at 2324. See also BA/NYNEX Reply at 3233.g BA/NYNEX and GTE contend that the XFactor should be chosen to reflect reasonably expected incumbent LEC productivity growth rather than to achieve a  X4specific rate reduction.S j yOi 'ԍ BA/NYNEX Reply at 30; GTE Reply at 2627.S We emphasize that we have done nothing in this Order to increase  X4the XFactor. In our companion Price Cap Fourth Report and Order, we prescribe a new XFactor of 6.5 percent, but this prescription is based on detailed studies of LEC productivity  Xi4growth and input price changes.bij {O$'ԍ Price Cap Fourth Report and Order, Section III.E. b We decline to increase the CPD,ei. j {O'ԍ Price Cap Fourth Report and Order, Section III.D.5.e and we reject a"iZ0*&&aa"  X4proposal to set the XFactor to target an industry average rate of return of 11.25 percent.bZj {O 'ԍ Price Cap Fourth Report and Order, Section III.B. b Thus, none of our actions in either this Order or our companion Order can properly be characterized as an abandonment of price cap regulation, or as motivated merely by a desire to drive rates down.  X' "J:\ACCESS.REF\ORDER\IVB.SS" #J:\ACCESS.REF\ORDER\IVC.MGS# C. Equal Access Costs  Xv4  X_' 1.` ` Background  X14*299. In the NPRM, we solicited comment on whether to require incumbent price cap LECs to make an exogenous cost decrease to one or more of their PCIs to account for the  X 4completion of the amortization of equal access costs on December 31, 1993.. j yO'ԍ NPRM at  293. We note that through the years, this issue has been referred to as "equal access network reconfiguration" or EANR costs. This is a misnomer, which we correct today. "Equal access" is the provision of exchange access to all interexchange carriers on an unbundled, tariffed basis that is equal in type, quality, and  {O'price to that provided to AT&T and its affiliates. Equal Access and Network Reconfiguration Costs,  {O'Memorandum Opinion and Order, 50 Fed. Reg. 50910 (rel. Dec. 9, 1985) at  18 (Equal Access Cost Order). "Network Reconfiguration" costs are those investments and expenses incurred in connection with structurally  {OT'conforming the predivestiture AT&T network with the LATA boundaries mandated by the MFJ. Id. Issues  {O'underlying network reconfiguration costs were resolved in the Equal Access Cost Order and have not been raised  {O'since. See Id. at  22..  X 4+300. Under court order, the BOCs and GTE were required to provide equal access. j {OL'ԍ See United States v. AT&T, 552 F. Supp. 131, 233 (D.D.C. 1982); United States v. GTE Corp., 603 F.Supp. 730, 745 (D.D.C. 1984). This conversion, estimated at more than $2.6 billion, was largely completed by 1990, and  X 4involved both capital and noncapital expenditures. Under the Equal Access Cost Order, incumbent LECs were required to identify separately the incremental capital investments and the incremental noncapitalrelated expenses associated with the implementation of equal  Xd4access. The Equal Access Cost Order directed that the capital investments, which it estimated to comprise approximately 55 percent of the $2.6 billion, be treated pursuant to ordinary  X84accounting and ratemaking principles."8 j {O "'ԍ Equal Access Cost Order, 50 Fed. Reg. at 50914,  32 ("[W]e believe that the capital cost of equal access service is best measured in the traditional manner whereby the cost of investments are recovered over their useful lives. This is best accomplished by using FCC prescribed depreciation lives for the classes of property associated with equal access."). The Commission determined that the remaining 45 percent of the expenditures which were noncapitalized equal access expenses required"! 0*&&aa#" special treatment: X[W]e are concerned that these expenditures will cause irregular and substantial fluctuations in revenue requirements associated with equal access. Because they are extraordinary, are for the greatest part expected to be incurred over the next few years, and, therefore, are likely to be distortive of financial results and rate requirements, we find that these equal access expenses should be deferred  X_4and amortized.l_j {O'ԍ Equal Access Cost Order, 50 Fed. Reg. at 5091415,  33. l  The Commission ordered that these equal access expenses be separately identified and recorded, and that they be written off over a period of eight years, ending December 31,  X 41993.i Zj {O'ԍ Equal Access Cost Reconsideration Order, at 437  25. i In the reconsideration of the Equal Access Cost Order, the Commission found that the specific termination date of the eight year amortization of these expenses would "shorten  X 4the period during which the unamortized balances are entitled to earn a rate of return."h j {Ot'ԍ Equal Access Cost Reconsideration Order, at 437  25.h It is clear that the LECs' rateofreturn (ROR) rates included revenue recovery for both capitalized  X 4expenditures (recovered through the ordinary depreciation process) and noncapitalized  X4expenses (recovered through the special amortization process).a~j {O'ԍ LEC Price Cap Order, 5 FCC Rcd at 6808,  180.a It is also clear that at the time the amortization was imposed, the Commission envisioned an end to the recovery for the  Xd4amortized expenses and a subsequent decrease in ROR rates.idj {O%'ԍ Equal Access Cost Reconsideration Order, at 437  25. i  X64,301. In converting to price cap regulation, the Commission found that equal access conversion was, in large part, completed and that the associated costs, which included both the capitalized expenditures and the amortized expenses, were embedded in the existing rates. As such, the Commission refused to grant LECs an exogenous increase for equal access costs,  X4finding that these costs were already accounted for in the existing rates.aj {O- 'ԍ LEC Price Cap Order, 5 FCC Rcd at 6808,  180.a The Commission also based its decision to deny an exogenous increase on its concern that exogenous treatment of equal access expenditures would create inappropriate incentives for the LECs to inflate the amounts spent on equal access. The Commission noted the difficulty of reviewing equal access costs, as well as the risk that incumbent LECs might willfully or inadvertently shift switched access costs into the proposed equal access category in order to benefit from the"g4 0*&&aa"  X4requested exogenous increase.j {Oy'#X PP#э LEC Price Cap Order, 5 FCC Rcd at 6808,  180.#Xj P9XP#  X4  X' 2.` ` Discussion  X4-302. We find that an exogenous cost decrease to account for completion of the  amortization of equal access noncapitalized expenses is necessary and appropriate. Although we have addressed this issue in the past and declined to act, we now find that an exogenous decrease is merited. We recognize our decision departs from our past decisions that have declined to impose an exogenous decrease for the completed recovery of these costs. As discussed below, our decision today reverses those decisions and is based on an extensive  X 4record from this, and prior proceedings.C Zj yO% 'ԍ In addition to the comments received in this proceeding, our record is supplemented by commentary from interested parties in a number of prior proceedings, including comments filed in connection with the  {O'following orders: LEC Price Cap Order, 5 FCC Rcd 6786 (1990); LEC Price Cap Reconsideration Order, 6  {O'FCC Rcd 2637 (1991); Commission Requirements for Cost Support Material To Be Filed with 1994 Annual  {OI'Access Tariffs, 9 FCC Rcd 1060; 1994 First Annual Access Tariff Order, 9 FCC Rcd 3705; Second 1994 Annual  {O'Access Order, 9 FCC Rcd 3519; 19931996 Annual Access Tariff Filings, CC Docket Nos. 93193 and 9465, Memorandum Opinion and Order, FCC 97139 (rel. April 17, 1997).C Our decision today aligns our treatment of the completion of the amortization of equal access costs with two other similar amortizations that were ordered under ROR regulation and carried over into price cap regulation, namely, the exogenous decrease imposed for the completion of the amortization of depreciation reserve  X 4deficiencies,a j {O'ԍ LEC Price Cap Order, 5 FCC Rcd at 6808,  173.a and the exogenous decrease imposed for the completion of the amortization of  X 4inside wire costs. 4 j {O'ԍ LEC Price Cap Reconsideration Order, 6 FCC Rcd at 26732674,  7882 (imposing exogenous cost decrease for the completion of amortization of inside wire costs). We are convinced that this treatment is the proper method to ensure that ratepayers are not paying for costs that have already been completely recovered.  Xb4.303. The need for an exogenous adjustment to account for the expiration of the equal access expense amortization stems from the different ways in which rates are established under ROR regulation, on the one hand, and price cap regulation, on the other hand, and from the Commission's decision to establish initial price cap levels at the outset of price cap  X4regulation on the basis of existing RORderived rates.o j yOE"'#X PP#э#X PP# Under ROR regulation, rates for a particular service are determined annually by a calculation from the  yO #'ground up of the companyspecific costs associated with the provision of that service. Expenses generally are recovered in their entirety through rates in the year in which they are incurred. Asset costs generally are capitalized and recovered over the assets' useful lives through rates that are designed to reflect the annual depreciation expenses associated with the assets and a return on the undepreciated (remaining) portion of the"e%0*&&k%" assets. Under price caps, rates are not developed each year through a "ground up" calculation of company yOX'specific costs. Instead, rates are set according to a formula that measures the incremental change in costs each  {O 'year as reflected (a) in the movement of surrogates (i.e., GDPPI minus X) for socalled "endogenous" costs  yO'over which the carrier can exercise some control, and (b) in the companyspecific measurement of certain "exogenous" cost changes that are not reflected in the "GDPPI minus X" variable and are beyond the carriers' control.o When converting from ROR"B0*&&aaf" regulation to price cap on regulation January 1, 1991, the Commission needed to select a set of "baseline" rate levels to which the price cap index of incremental cost changes would be tied. For that purpose, we chose the RORdeveloped rates that were in effect on July 1,  X41990.Bj X 4ԍ#Xj P9XP# #X PP#LEC Price Cap Order, 5 FCC Rcd at 6814,  230.#x@ iX@#  The Commission found that, in general, those rates served as an appropriate starting point for measuring subsequent incremental cost changes under price cap regulation, because  X4they "reflect[ed] the reasonable operation of ROR regulation."gj {O1'ԍ#X PP# Id. at  232.g   X_4/304. In two respects, however, the Commission recognized that existing rates did not reflect equilibrium RORderived rates, but rather reflected special corrective adjustments that we had ordered previously. In particular, the Commission noted that existing rates had embedded within them costs associated with Commissionordered "onetime" amortizations of  X 4depreciation reserve deficiencies and inside wiring costs.H j {O9'#X PP#э#X PP# See Price Cap Further Notice of Proposed Rulemaking, 3 FCC Rcd at 341923  413420. The depreciation reserve deficiency amortization was a "onetime correction device" ordered by the Commission to address the fact that the depreciation rates prescribed by the Commission had significantly overstated the useful  {O'lives of LEC assets. The Commission temporarily raised LEC rates to recover that deficiency. Price Cap  {O]'Further Notice, 3 FCC Rcd at 342122,  41718. The inside wiring amortizations provided a mechanism for LECs to recover from regulated ratepayers investments in activities that were regulated at the time the  {O'investments were made, but which the Commission had deregulated on a goingforward basis. Id., 3 FCC Rcd at 342223,  419420. Had ROR regulation continued, the rates subject to these amortizations would have been reduced when the amortizations were completed. To ensure that ratepayers under price caps would not be required permanently to bear these temporary Commissionordered, RORderived rate adjustments, we directed LECs to make downward exogenous cost adjustments to their price cap indices upon the expiration  X4of those amortizations.j {O '#X PP#э #X PP#LEC Price Cap Order, 5 FCC Rcd at 6808,  173; LEC Price Cap Reconsideration, 6 FCC Rcd at 267374,  7880.   Xb40305. Similarly, the Commission ordered amortization of equal access expenses, which also were reflected in baseline rates at the outset of price cap regulation. Under normal ROR ratemaking principles, those expenses which, for the most part, already had been incurred"40*&&aa" before price cap regulation was initiated would have been recovered in the BOCs' rates the same year they were incurred and would no longer have been reflected in rates at the time  X4price caps were instituted. However, as explained supra, the Commission required the carriers to amortize these extraordinary expenses over eight years because of the potential fluctuations  X4in revenue requirements associated with equal access.j {O'#X PP#э  #X PP#Equal Access Cost Order, 50 Fed. Reg. at 5091415,  33 (1985).  Thus these expenses remained embedded within BOC rates at the outset of price caps even though, for the most part, the  Xx4extraordinary expenses themselves were no longer being incurred.  XJ41306. The specific question of whether the completely amortized equal access expenses should be treated exogenously has been presented to the Commission on a number of  X 4occasions.h Zj {O' 'ԍ See, e.g., LEC Price Cap Reconsideration, 6 FCC Rcd at 2667,  66 n.77; Commission Requirements for  {O 'Cost Support Material To Be Filed with 1994 Annual Access Tariffs, 9 FCC Rcd 1060, 1063,  2122 (rel. Feb.  {O'18, 1994) (1994 Annual Access TRP); First 1994 Annual Access Charge Order, 9 FCC Rcd 3705, 373037311 at  {O' 5456 (rel. June 24, 1994); Second 1994 Annual Access Charge Order, 9 FCC Rcd 3519, 35353536 at  3638 (rel. June 24, 1994).h In the past, procedural impediments arising from our rules, as well as the lack of an adequate record, convinced us to decline to impose such treatment at that time. For example, when AT&T raised the issue of downward adjustment for completed amortization of equal access expenses in an annual access charge tariff proceeding, the Common Carrier Bureau found that the issue was beyond the scope of the proceeding because it would require  X 4a substantive change to the price cap rules.k j {Ol'ԍ 1994 Annual Access TRP, 9 FCC Rcd at 1063,  2122. k Similarly, in response to AT&T's and MCI's  X4revisiting the question in both the First 1994 Annual Access Charge Order and the Second  X}41994 Annual Access Charge Order, the Commission found that exogenous treatment would require a rule change to section 61.45(d) of the Commission's rules. Because no LEC had filed for a waiver of section 61.45(d), the Common Carrier Bureau found that the issue was  X:4not properly presented for investigation.\:j {O'#X PP#э See First 1994 Annual Access Charge Order, 9 FCC Rcd at 3731; Second 1994 Annual Access Charge  {OY'Order, 9 FCC Rcd at 3536. See also 19931996 Annual Access Tariff Filings, CC Docket Nos. 93193 and 9465, Memorandum Opinion and Order, FCC 97139 (rel. April 17, 1997), at  82.  X 42307. In denying the requests for procedural reasons, the Commission supported its decisions with various rationales. In some instances, these rationales appear now not to have been considered to a sufficient degree. In addressing equal access costs in the orders adopting  X4price cap regulation, the Commission focused primarily on the question of whether future equal access investments and expenses should be treated exogenously because equal access" 0*&&aa"  X4had been compelled by regulatory (or judicial) order.Zj {Oy'#X PP#э#X PP# LEC Price Cap Order, 5 FCC Rcd at 6808  180181. The amortization requirement had applied only to courtordered conversion to equal access by the BOCs. The Commission, however, had also had required independent LECs to convert to equal access upon bona fide request.  We concluded, subject to consideration of waiver requests, that we should not accord exogenous cost treatment to such  X4future equal access conversion costs, because of concerns that exogenous cost treatment would  X4create disincentives to implement equal access in an efficient manner.j {OV'#X PP#э #X PP#See LEC Price Cap Reconsideration, 6 FCC Rcd at 266667,  66. We did not focus in  X4detail on the logically distinct question of whether equal access expenses that were already  X4embedded within baseline BOC rates pursuant to the temporary "onetime" amortizations (and thus raised no question with respect to future incentives) should be removed through  X_4exogenous adjustments when the amortizations expired._|j {O 'ԍ#X PP# See LEC Price Cap Reconsideration, 6 FCC Rcd at 2667 n.77. In several subsequent orders addressing BOC tariff filings implementing our price cap rules, we rejected contentions that we order downward exogenous cost adjustments to the carriers' price cap indexes to account for the expiration of the equal access cost  {O'amortizations. See, e.g., 1994 Annual Access TRP, 9 FCC Rcd at 1063,  2122. We did so primarily on  {O'procedural grounds i.e., that the treatment of such amortizations had already been decided in the price cap  {Oz'rulemaking proceeding and that a tariff proceeding was not the proper vehicle for changing that treatment. Id.  {OD'See also First 1994 Annual Access Charge Order, 9 FCC Rcd at 3731; Second 1994 Annual Access Charge  {O'Order, 9 FCC Rcd at 3536; 19931996 Annual Access Tariff Filings, CC Docket Nos. 93193 and 9465, Memorandum Opinion and Order, FCC 97139 (rel. April 17, 1997), at  82. Instead, we relegated that issue to  XH4a footnote, which denied exogenous cost treatment on the basis of a skeletal analysis that makes no reference to our treatment of the depreciation reserve deficiency and inside wiring amortizations. In the footnote, it is clear that the Commission was not distinguishing between capitalized costs, which were properly treated as depreciated expenses, and noncapitalized  X 4expenses, which were actually amortized per the Commission's own requirement.  X j {O'ԍ LEC Price Cap Reconsideration, 6 FCC Rcd at 2667,  66 n.77 ("We also decline to adopt MCI's  {O'suggestion to treat BOC equal access costs in the same way we do amortizations") (emphasis added).  The Commission framed the issue of a downward adjustment in terms of whether the completion of depreciation required a downward adjustment, querying "whether the BOCs will experience any cost change in 1994 [at the completion of the amortization] that stems from factors beyond their control." In support of its implicitly negative answer, the Commission analogized to the absence of a price cap index change when a piece of equipment is fully depreciated, or when a carrier increased or decreased the speed with which it recovered  XK4investments.pKj {O"'ԍ LEC Price Cap Reconsideration, 6 FCC Rcd at 2667,  66 n.77. p The Commission found that, "[b]ased on a meager factual record presented on the issue of equal access expense, we are reluctant to depart from our practice of not adjusting"4F0*&&aa"  X4PCI levels to reflect levels of cost recovery."oj {Oy'ԍ LEC Price Cap Reconsideration, 6 FCC Rcd at 2667,  66 n.77.o  X43308. The Commission's analysis at that time was incomplete. The Equal Access Cost  X4Order and the Equal Access Cost Reconsideration Order explicitly recognized two components of equal access costs capitalized, which were to be depreciated, and non X4capitalized, which were extraordinary and were to be amortized over a set period.UZj {O'ԍ Equal Access Cost Order, at  33. U The Commission established different treatment for these two sets of costs based on policy reasons, and ordered an amortization schedule for the noncapitalized costs. The Commission's establishment of this schedule was beyond the incumbent LECs' control. The Commission's analogy to the lack of exogenous treatment for equipment depreciation and changes in the tempo of recovery should have only applied to the capitalized portion of the equal access costs.  X 44309. The Commission explicitly stated in the LEC Price Cap Order that completed amortizations of depreciation reserve deficiencies require an exogenous downward  X 4adjustment. j {OJ'ԍ LEC Price Cap Order, 5 FCC Rcd at 6808,  173 (discussing exogenous treatment of expiration of amortizations to correct depreciation reserve deficiencies). The Commission found that such an adjustment was necessary to ensure that ratepayers were not paying for a cost that no longer existed. Analytically, the amortized portion of equal access expenses should have been treated in the same fashion as the amortized depreciation reserve deficiency costs. The Commission's imposition of a downward exogenous adjustment for the completion of inside wire amortizations further supports our finding today that an exogenous decrease is appropriate and necessary for the  X#4completion of the amortization of equal access noncapitalized expenses.v#Fj {O'ԍ LEC Price Cap Reconsideration, 6 FCC Rcd at 267374,  7882.v  X45310. We reject our prior analysis of amortized equal access costs and accord the expiration of equal access cost amortizations the same exogenous cost treatment given to the amortizations of the depreciation reserve deficiencies and inside wiring costs. Both of those amortizations were given exogenous cost treatment when they expired because they reflected temporary, onetime treatment of costs under ROR regulation that, due to the midstream switch to price cap regulation, would have become permanent (even though the costs already had been recovered) absent an exogenous cost adjustment. The same is true for equal access cost amortizations.  X&46311. Because this is a rulemaking, we do not face the same procedural impediments"&0*&&aa"  X4as in some of our prior decisions, as explained supra. We determine that the record from this proceeding allows us to make a reasoned decision on this issue. We find that an exogenous decrease is necessary in order to adjust the price caps for the completed recovery of the specified equal access noncapitalized expenses that we required be amortized over an eightyear period. Because the current price cap index includes an expense that has now been completely recovered, the price cap should be adjusted downward to account its recovery. Simply stated, we find that ratepayers should not be forced to pay for a cost that, were it not for the way price cap regulation occurred in this instance, they would no longer be paying. By imposing a downward exogenous adjustment to adjust the PCI for the complete recovery of specific equal access expenses through amortization, we will avoid unfairly imposing a subsidy burden on ratepayers. Our decision in this matter will align charges more closely to costs.  X 47312. Several commenters have argued that they continue to incur costs as a part of the provision of equal access. These ongoing costs are not at issue in the present proceeding. As explained above, the costs at issue were a set of costs that the Commission determined should be amortized for policy reasons. These costs were extraordinary and, if allowed to be imposed in the normal fashion, would have resulted in huge rate fluctuations. We consider the ongoing costs of providing equal access as part of the normal costs of providing telephone service. Exogenous treatment of these costs is unnecessary. In response to BellSouth's contention that the record is inadequate for us to make a decision about an exogenous  X4decrease, we find that the current record provides a sufficient basis for our decision.Dj yO'ԍ BellSouth Comments at 87.D Furthermore, we note that in the past, the record may have been sufficient, but, as explained above, the Commission's analysis was incorrect.  X48313. TCA and GCI are concerned about how the Commission will treat cost recovery  X4for LECs that convert to equal access in the future.QXj yO'ԍ TCA Comments at 56; GCI Comments at 8.Q As we stated in the LEC Price Cap  X4First Report and Order, LECs that have not received a bona fide request for equal access at the time they become subject to price cap regulation may request a waiver for special  Xk4treatment of those special conversion costs when the time arises.kj {O 'ԍ See LEC Price Cap First Report and Order, 4 FCC Rcd 2873, 3190 at  657.  X=49314. We hereby direct price cap LECs to make a downward exogenous adjustment to the traffic sensitive basket in the Annual Access Tariff filing that takes effect on July 1, 1997 to account for the completed amortization of equal access expenses. "z0*&&aa"Ԍ X' #J:\ACCESS.REF\ORDER\IVC.MGS# #J:\ACCESS.REF\ORDER\IVD.KLS#    HD. Correction of Improper Cost Allocations  X' 1.` ` Marketing Expenses  X' ` ` a. Background  Xv4:315. Prior to 1987, incumbent LEC marketing expenses were allocated between the interstate and intrastate jurisdictions on the basis of local and toll revenues. In 1987, aH FederalState Joint Board recommended that interstate access revenues be excluded from the allocation factor used to apportion marketing expenses between the interstate and intrastate jurisdictions because marketing expenses are not incurred in the provision of interstate access  X 4services.<\ j yO| 'ԍ Amendment of Part 67 (New Part 36) of the Commission's Rules and Establishment of a FederalState  {OD 'Joint Board, CC Docket No. 86297, Recommended Decision and Order, 2 FCC Rcd 2582 (1987) (Marketing  {O'Expense Recommended Decision).< The Commission agreed with the Joint Board's recommendation and adopted new procedures that allocated marketing expenses in Account 6610 on the basis of revenues  X 4excluding access revenues. X j yOr'ԍ MTS and WATS Market Structure, Amendment of Part 67 (New Part 36) of the Commission's Rules and Establishment of a FederalState Joint Board, CC Docket Nos. 7872, 80286, and 86297, Report and Order, 2 FCC Rcd 2639 (1987).  In petitions for reconsideration of the Commission's order, several incumbent LECs argued that the revised separations treatment of marketing expenses would result in a significant, nationwide shift of $475 million in revenue requirements to the  X4intrastate jurisdiction." j yOM'ԍ MTS and WATS Market Structure, Amendment of Part 67 (New Part 36) of the Commission's Rules and Establishment of a Joint Board, CC Docket No. 7872, 80286, and 86297, Memorandum Opinion and Order on Reconsideration and Supplemental Notice of Proposed Rulemaking, 2 FCC Rcd 5349, 5350 (1987)  {O'(Marketing Expense Reconsideration Order). On reconsideration, the Commission adopted for marketing expenses an interim allocation factor that includes access revenues, pending the outcome of a further  Xb4inquiry by the Joint Board.b j {O 'ԍ Marketing Expense Reconsideration Order, 2 FCC Rcd at 5353. See also 47 C.F.R.  36.372.  X44;316. In the NPRM, we stated that some of the difference between the price cap LECs' interstate allocated costs and forwardlooking costs may be traced to past regulatory practices that were designed to shift some costs from the intrastate jurisdiction to the interstate  X4jurisdiction in order to further universal service goals.; j yO(#'ԍ NPRM at  249.; We observed that the Commission's  X4decision in the Marketing Expense Reconsideration Order to allocate intrastate marketing"0*&&aa"  X4costs to the interstate jurisdiction was an example of such past regulatory practices.;j yOy'ԍ NPRM at  249.; We asked parties to comment on the extent to which the difference between price cap LECs'  X4interstate allocated costs and forwardlooking costs is a result of such decisions.;Xj yO'ԍ NPRM at  254.;  X'4 ` ` b. Discussion  Xv4<317. Under current separations procedures, approximately 25 percent of price cap  X_4LECs' total marketing expenses are allocated to the interstate jurisdiction.C_j yO 'ԍ 1996 ARMIS Access Report.C We agree with4 parties that contend that, because marketing expenses generally are incurred in connection with promoting the sale of retail services, those expenses for the most part should be recovered from incumbent LEC retail services, which are found predominantly in the intrastate jurisdiction. Pursuant to section 410(c) of the Act, however, the Commission must refer any rulemaking proceeding regarding the jurisdictional separation of common carrier property and expenses between interstate and intrastate operations to a FederalState Joint  X 4Board.N xj yO'ԍ 47 U.S.C.  410(c). As noted above, when the Commission reconsidered its decision to exclude interstate access revenues from the allocation factor used to apportion marketing expenses between the interstate and intrastate jurisdictions and adopted an interim allocation factor based on both local revenues and interstate access revenues, it referred the issue back to the FederalState Joint Board in CC Docket No. 80286 to  {O'recommend a permanent solution. Marketing Expense Reconsideration Order, 2 FCC Rcd at 5353.N We intend to initiate a proceeding to review comprehensively our Part 36 jurisdictional separations procedures in the near future. We will refer this issue to the FederalState Joint Board in CC Docket No. 80286 for resolution as part of that comprehensive review. We therefore do not reallocate these costs between the interstate and intrastate jurisdictions at this time.  X44=318. In the Marketing Expense Recommended Decision, the Joint Board stated that the inclusion of access revenues in the allocation factor for marketing expenses is unreasonable  X4because incumbent LECs do not actively market or advertise access services.j* j {O'ԍ Marketing Expense Recommended Decision, 2 FCC Rcd at 2589.j Although parties contested the accuracy of this statement on reconsideration, the Commission did not assess incumbent LEC claims that the decision to exclude access revenues in the allocator for marketing expenses was based on an inaccurate perception of the extent to which LECs actively market or advertise exchange access services. The Commission instead referred marketing expense issues back to the Joint Board, with specific instruction to the parties to identify any Account 6610 marketing activities that are related to access services and any such"~ 0*&&aa" activities that are related to a specific jurisdiction. We continue to recognize that some expenses recorded in Account 6610 may indeed be incurred in the provision of interstate access service, and that this is an issue that must be addressed by the Joint Board when it examines the appropriate allocation factor for marketing expenses. We note, however, that  X4the Commission did not find in the Marketing Expense Reconsideration Order that the Joint  X4Board's initial conclusion in the Marketing Expense Recommended Decision that incumbent LECs do not market or advertise access services to be inaccurate.  XL4>319. We conclude that price cap LECs' marketing costs that are not related to the sale or advertising of interstate switched access services are not appropriately recovered from IXCs through perminute interstate switched access charges. Pending a recommendation by the Joint Board on a new method of apportioning marketing costs between the intrastate and interstate jurisdictions, we direct price cap LECs to recover marketing expenses allocated to the interstate jurisdiction from end users on a perline basis, for the reasons we discuss below.  X 4?320. Recovering these expenses from end users instead of from IXCs is consistent with principles of costcausation to the extent that price cap LEC sales and advertising activities are aimed at selling retail services to end users, and not at selling switched access services to IXCs. Recovery on a perline basis, while perhaps not precisely reflective of the manner in which marketing costs are incurred, is preferable to the current rule requiring price cap LECs to recover their marketing expenses through perminute access charges. A price cap LEC's retail marketing costs are not caused by usage of switched access services, and its efforts to sell additional lines, vertical features, and other retail services would only indirectly cause an increase in switched access usage. Perminute recovery of retail marketing costs thus distorts prices in the long distance and local markets in the same way as does perminute recovery of other NTS costs.  X4@321. In the past, price cap LEC retail marketing may have focused on the sale of optional vertical features such as call waiting and caller ID, and on features and services designed for business customers. As local competition develops, we would expect that sales expenses would be driven by the price cap LEC's need to respond to competition. In any case, it is beyond our jurisdiction to reassign retail marketing costs to retail services on a truly costcausative basis. There is probably a relationship, however, between the number of lines purchased by an end user, particularly a business user, and the amount of effort a price cap LEC expends to sell services and features to that end user. Furthermore, as parties have observed in the record in this proceeding, price cap LECs actively market second lines to  X 4residential customers.Z j {OA#'ԍ CompuServe/Prodigy Comments at 14; America OnLine Reply at 12. See also Letter from Bruce K. Cox, Vice President, Government Affairs, AT&T, to William F. Caton, Acting Secretary, Federal Communications Commission, March 19, 1997. We conclude, therefore, that the most efficient and costcausative method legally available to this Commission at this time for recovery of price cap LEC retail"!0*&&aa " marketing costs allocated to the interstate jurisdiction is to charge those end users to whom the price cap LECs' marketing is directed multiline business and nonprimary residential line end users. We further note that by not permitting price cap LECs to recover these costs from primary residential and singleline business customers, we avoid potential universal  X4service concerns that weigh against increasing charges on these end users.j {O'ԍ See Section III.A.2, supra; see also Section V.B of the Universal Service Order.Ğ  Xv4A322. Moreover, continued recovery of interstateallocated marketing expenses in perminute switched access charges would raise competitive concerns. Increasingly, IXCs will be competing with incumbent, price cap LECs in the provision of local exchange and exchange access services. By permitting incumbent, price cap LECs to recover from IXCs through interstate switched access charges their costs of marketing retail services, these potential competitors are forced to bear the incumbent, price cap LECs' costs of competing with the IXCs. Assigning recovery of marketing costs to end users, on the other hand, subjects these costs to the competitive pressures of the market.  X 4B323. Marketing expenses are currently recovered through all interstate access rate elements and the interexchange category in proportion to the investment originally assigned to  Xy4these elements and categories by the Part 69 cost allocation rules.FyZj yO'ԍ 47 C.F.R.  69.403.F Special access and interexchange services are purchased by, and marketed to, retail customers. It is therefore appropriate to allow rates for those services to continue to include recovery of marketing  X44expenses.4j {O'ԍ For example, in the SNFA Order, we found that certain marketing expenses incurred to provide customer contact operations, service order processing, and the billing and administration of special access services are properly included in special access rates. Investigation of Special Access Tariffs of Local Exchange Carriers, CC  {O)'Docket No. 85166, Phase I; Phase II, Part 1; and Phase III, Part 1, FCC 9742 (rel. Feb. 14, 1997) (SNFA  {O'Order). Marketing expenses must be removed from all other rate elements by means of downward exogenous adjustments to the PCIs for the common line, traffic sensitive, and trunking baskets. With respect to the trunking basket, the exogenous adjustment shall not reflect the amount of any Account 6610 marketing expenses allocated to special access services. The service band indices (SBIs) within the trunking basket shall be decreased based on the amount of Account 6610 marketing expenses allocated to switched services included in each service category to reflect the exogenous adjustment to the PCI for the trunking basket.  X|4C324. After performing the appropriate downward exogenous adjustments described above to the PCIs in the common line, traffic sensitive, and trunking baskets, price cap LECs may recover the revenues related to the Account 6610 marketing expenses removed from these baskets by increasing the SLCs for multiline business and nonprimary residential lines. "0*&&aa" To prevent enduser charges from exceeding levels we have established earlier in this  X4Order,Qj {Oy'ԍ See Section III.A.2, supra.Q the amount of marketing expenses to be recovered from multiline business and nonprimary residential lines in their SLCs shall be limited by the ceilings we establish for these  X4SLCs in this Order.qj {O'ԍ In future years, these ceilings shall rise as set forth in Section III.A.2, supra. To the extent these ceilings prevent full recovery of these amounts, price cap LECs may recover these costs by increasing equally both the nonprimary residential line PICC and the multiline business PICC, not to exceed the ceilings on the PICC for non Xv4primary residential and multiline business lines.Qvj {O* 'ԍ See Section III.A.3, supra.Q In the event the PICC ceilings prevent full recovery of these expenses, any residual may be recovered through perminute charges on originating access service, subject to its ceiling. Finally, to the extent price cap LECs cannot recover their remaining marketing expenses through perminute charges on originating access,  X 4any residual may be recovered through perminute charges on terminating access service.v j {O`'ԍ See Section VI.C, infra, for a discussion of terminating access.v Although these marketing expenses will be recovered through the SLC, they shall not be included in the base factor or considered common line revenues. To prevent price cap LECs from recovering these expenses from access services, we are establishing a separate basket for these marketing expenses.  X4D325. We reject, however, AT&T's assertion that recovery of interstateallocated marketing expenses through interstate access charges violates the wholesale pricing provisions  Xb4contained in section 252(d)(3) of the Act."b'j yO:'ԍ AT&T Comments at 6667. AT&T identifies and quantifies inappropriate retail expenses embedded in current interstate switched access rates based on the requirements of section 252(d)(3) and the criteria for  {O'wholesale rate cost studies outlined in the Local Competition Order. See Local Competition Order, 11 FCC Rcd at 15958. Section 252(d)(3) establishes a pricing standard for the wholesale provision of retail offerings to other carriers that resell the LEC retail  X44services.X4 j yO'ԍ 47 U.S.C.  252(d)(3). Section 252(d)(3) provides that wholesale rates will be determined on the basis of retail rates, excluding the portion attributable to marketing, billing, collection, and other costs that will be avoided by the LEC. Section 252(d)(3) does not apply to the pricing of interstate access, which is not a retail service. "1 0*&&aa"Ԍ X'_ 2.` ` General Support Facilities  X'` ` a. Background  X4E326. In the NPRM, we sought comment on other possible cost misallocations that may contribute to the difference between embedded costs and forwardlooking costs allocated  Xv4to_ the interstate jurisdiction.;vj yO'ԍ NPRM at  254.; AT&T suggests that the allocation of embedded general support facilities (GSF) costs, including general purpose computer expenses, among access  XH4categories is one such misallocation.HXj {OQ 'ԍ For a more detailed background on GSF misallocation issues, see Section VII.B, infra. This allocation, AT&T contends, results in the inappropriate support of LECs' billing and collection service, which is a nonregulated,  X 4interstate service, through regulated access charges.  j yO'ԍ In 1986, the Commission found that the market for billing and collection service was sufficiently competitive that it was not necessary to require LECs to provide that service as a tariffed common carrier  {OE'service. The Commission did not, however, preempt state regulation of billing and collection services. See  {O'Detariffing of Billing and Collection Services, CC Docket No. 8588, 102 FCC 2d 1150 (1986) (Billing and  {O'Collection Detariffing Order) recon. denied, 1 FCC Rcd 445 (1986). The Commission later decided to treat billing and collection costs as regulated for accounting purposes because such treatment was less likely to misallocate these costs between the interstate and intrastate jurisdictions. Separation of Costs of Regulated Telephone Service from Costs of Nonregulated Activities, Report and Order, CC Docket No. 86111, 2 FCC Rcd  {O'1298, 1309 (1987) (Joint Cost Order).  AT&T estimates that $124 million of expenses recovered in interstate access support the nonregulated billing and collection  X 4category.R j yO_'ԍ AT&T Comments at 6768, Appendix E at 2.R Of the $124 million, $60.1 million is included in interstate switched carrier access, and $20.5 million is in interstate special access, with the remainder recovered by the  X 4SLC.H R j yO'ԍ AT&T Comments Appendix E at 2.H  X4F327. The GSF investment category in Part 36 includes assets that support other operations, such as land, buildings, vehicles, as well as general purpose computer investment  Xb4accounted for in USOA Account 2124.Fbj yO 'ԍ 47 C.F.R.  36.111.F Some incumbent LECs use general purpose computers to provide nonregulated billing and collection services to IXCs. Part 69 allocates GSF investment among the billing and collection category, interexchange category, and the access elements based on the amount of Central Office Equipment (COE), Cable and Wire Facilities (CWF), and Information Origination/Termination Equipment (IO/T) investment"r0*&&aa"  X4allocated to each Part 69 category.Cj yOy'ԍ 47 C.F.R.  69.307(c).C Because no COE, CWF, or IO/T investment is allocated to the billing and collection category, no investment in general support facilities, and thus no portion of general purpose computer investment, is allocated to the billing and collection category. Likewise, because expenses related to GSF investment are allocated in the same manner as GSF investment, no GSF expenses, including expenses related to general purpose computers, are allocated to the billing and collection category. To the extent that costs are underallocated to the billing and collection category, incumbent LECs' regulated services recover through interstate access charges costs associated with nonregulated provision of billing and collection services.  X '` ` b. Discussion  X 4G328. We agree with AT&T and WorldCom that the current allocation of GSF costs enables incumbent LECs to recover through regulated interstate access charges costs caused by the LECs' nonregulated billing and collection functions. By shifting some costs from interstate access services to the nonregulated billing and collection category, we would move interstate access rates closer to cost. The NPRM, however, may not have provided sufficient notice to interested parties that we would change in the allocation of LEC interstate costs between regulated interstate services and nonregulated billing and collection activities. We therefore seek comment on this issue in Section VII.B below.  X4 #J:\ACCESS.REF\ORDER\IVD.KLS# !J:\ACCESS.REF\ORDER\VA.CF! _  V. ACCESS REFORM FOR INCUMBENT ă  X4V  RATEOFRETURN LOCAL EXCHANGE CARRIERS ă  X' A. Background  X4H329. In the NPRM we concluded that, with limited exceptions, the scope of this proceeding should be limited to incumbent price cap LECs because these carriers face the potential of significant competition in the interstate exchange access market due to the new  Xe4duties and obligations imposed upon them by the 1996 Act.AeXj yOn'ԍ NPRM at  5052.A We proposed limited exceptions that would subject all incumbent LECs to the rules addressing allocation of universal service support to the interstate revenue requirement, discussed in Section VI.D, below, and to the reforms to the transport rate structure, including the TIC, discussed in sections III.D., above. We invited comment on these tentative conclusions on the scope of this proceeding. We also sought comment on whether we should apply our proposed changes to the common line rate structure to rateofreturn incumbent LECs and whether we should update Part 69 access rules in light of various developments. We further invited comment on the effect of these proposals and tentative conclusions on small business entities, including"!0*&&aa&"  X4small incumbent LECs and new entrants.:j yOy'ԍ NPRM at  53.: We also noted that we would address access  X4reform for rateofreturn carriers in a separate proceeding in 1997.:Xj yO'ԍ NPRM at  52.:  X' B.Discussion  X4I330. We conclude that, with the limited exceptions discussed in Sections III.D and  Xv4VI.D, the scope of this proceeding should be limited to price cap incumbent LECs.Xvj yO 'ԍ These incumbent LECs are the seven Regional Bell Operating Companies (Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Bell, SBC, US West), Citizens, Frontier, GTE, Aliant (formerly Lincoln), SNET, and United/Central. Price  X_4cap regulation governs almost 91 percent of interstate access charge revenues_j yO'ԍ Universal Service Fund Data Collection, CC Docket No. 80286, Universal Service Fund 1996 Submission of 1995 Study Results by NECA, Oct. 1, 1996. and more than  XH492 percent of total incumbent LEC access lines.|H` j yOY'ԍ Data based on LECs' 1995 and 1996 Annual Access Tariffs filed with the Commission.| Currently, all ten of the incumbent LECs with more than two million access lines and 13 of the 17 nonNECA incumbent LECS with  X 4more than 50,000 access lines are subject to price cap regulation.| j yO'ԍ Data based on LECs' 1995 and 1996 Annual Access Tariffs filed with the Commission.| Therefore, even though this proceeding applies only to price cap incumbent LECs, it will nonetheless affect the vast majority of all access lines and interstate access revenues.  X 4J331. Small and rural LECs will most likely not experience competition as fast as incumbent price cap LECs. We do not expect small and rural LECs generally to face significant competition in the immediate future because, for the most part, the high cost/ lowmargin areas served by these LECs are unlikely to be the immediate targets of new entrants or competitors. Moreover, as we noted in the NPRM, all nonprice cap incumbent LECs may be exempt from, or eligible for a modification or suspension of, the interconnection and  X44unbundling requirements of the 1996 Act.34 j yOe 'ԍ For example, section 251(f)(1) exempts rural telephone companies from the requirements of section 251(c)(2) until the rural telephone company has received a bona fide request for interconnection, services, or network elements, and the state commission determines that the exemption should be terminated. In addition, section 251(f)(2) permits LECs with fewer than two percent of the nation's subscriber lines to petition a state commission for a suspension or modification of any requirements of sections 251(b) and (c).3 By contrast, all incumbent LECs that are ineligible for section 251(f) exemption, suspensions, or modifications are incumbent price cap"00*&&aa"  X4LECs.^j {Oy'ԍ See, e.g., USTA Holding Company Report 1996. ^  Because the latter incumbent LECs must fulfill the section 251(b) and (c) duties to provide interconnection and unbundled elements to new entrants, they are likely to face significant competition in the interstate exchange access market before the small and midsized rateofreturn incumbent LECs face such competition.  X4K332. We recognize that small and rural rateofreturn LECs face unique circumstances and that a few of these carriers may now have, or may soon receive, bona fide requests for interconnection. Although all rateofreturn carriers may not be completely insulated from competitive pressures, we are not persuaded by arguments that delaying the initiation of an access reform proceeding for these carriers until later this year will have a detrimental impact on their viability. A separate proceeding for small and rural rateofreturn LECs will provide us with the opportunity to conduct a comprehensive review of the circumstances and issues unique to these carriers.  X 4L333. We do not agree that Citizens Utilities should be exempt from some of the rules we adopt in this order for price cap companies. The decisions we reach here accommodate many of the concerns that Citizens Utilities, as well as a number of other price cap LECs that serve rural areas, voices in its pleadings. Although Citizens Utilities arguably may face different circumstances than other price cap LECs that serve larger urban and suburban populations, Citizens has indicated, by electing price cap regulation, that it believes it can achieve a higher rate of productivity than smaller rateofreturn LECs and that price cap regulation is more beneficial to it than rateofreturn regulation. Citizens Utilities has not demonstrated that the modifications we are adopting in this proceeding would necessarily affect it differently than other price cap LECs. If Citizens Utilities believes that it cannot remain financially viable as a price cap carrier under the revised access charge regime, it may petition for a waiver of the rule that makes its decision to elect price cap regulation  X4irreversible.1ZZj {O'ԍ In the LEC Price Cap Order, the Commission stated that a LEC's decision to elect price cap regulation is irrevocable. Policy and Rules concerning Rates for Dominant Carriers, CC Docket No. 87313, Second Report and Order, 5 FCC Rcd 6786, 6819 (1990).1  X|4M334. We reject Centennial's suggestion that we adopt access reform modifications for  Xe4all incumbent LECs but then grant waivers for small, rural LECs whose special circumstances warrant different accommodations. For the most part, rateofreturn LECs face a common set of complex issues, different than those faced by price cap LECs, that are better addressed in a separate proceeding. In that proceeding, we will address any differences that may exist between large and small rateofreturn carriers.  X4  X4N335. We therefore limit application of the rules we adopt in this proceeding to the"|0*&&aak" incumbent price cap LECs, with limited exceptions. Because rateofreturn LECs will collect revenues from the new universal service support mechanisms, we address allocation of universal service support to the interstate revenue requirement for all incumbent LECs in  X4Section VI.D. In addition, because rateofreturn incumbent LECs' transport rates were  X4subject to the rules that were remanded by the court in CompTel v. FCC,Lj {O'ԍ CompTel v. FCC, 87 F.3d 522.L the changes to the TIC that we adopt in Section III.D. pursuant to the court's remand, except for changes that require reallocation of costs to newlycreated rate elements, will also apply to rateofreturn incumbent LECs. Finally, in order to prevent double recovery of the costs associated with providing access services to new entrants through the sale of unbundled network elements, we conclude in Section VI.A, below, that our exclusion of unbundled network elements from Part 69 access charges applies to all incumbent LECs.  X ' !J:\ACCESS.REF\ORDER\VA.CF! #J:\ACCESS.REF\ORDER\VIA.PLG# :@ 3VI. OTHER ISSUES \  X 'A.Applicability of Part 69 to Unbundled Elements  X' 1.` ` Background  X{4  Xd4O336. In the NPRM, we requested comment regarding the potential application of Part 69 access charges to unbundled network elements purchased by carriers to provide local  X84exchange3 services or exchange access services.:8Zj yOC'ԍ NPRM at  54.: We tentatively concluded that unbundled network elements should be excluded from such access charges. We noted that the 1996 Act allows telecommunications carriers to purchase access to unbundled network elements and to use those elements to provide all telecommunications services, including originating and  X4terminating access of interstate calls.3j {Ow'ԍ Id.3 We further noted that the 1996 Act requires purchasing carriers to pay costbased rates to incumbent LECs to compensate them for use of  X4the unbundled network elements.4|j {O'ԍ Id. 4 Accordingly, we tentatively concluded that the requesting carrier paying costbased rates to the incumbent LEC would have already compensated the incumbent LEC for the ability to deploy unbundled network elements to provide originating  Xi4and terminating access.3ij {O(#'ԍ Id.3 "R0*&&aa!"Ԍ X'  2.` ` Discussion  X4P337. We will adhere to our tentative conclusion to exclude unbundled network  X4elements from Part 69 access charges. This conclusion applies to all incumbent LECs.|j yO4'ԍ Although our rule applies to all incumbent LECs, we note that small LECs (those with fewer than two percent of the nation's subscriber lines) may petition the appropriate state commission for a suspension or modification of the unbundling requirements of the 1996 Act. 47 U.S.C.  251(f)(2). In addition, a rural telephone company is exempt from the obligation to provide access to unbundled network elements until it has  {OT'received a bona find request for unbundled elements. 47 U.S.C.  251(f)(1). See also, Local Competition Order, 11 FCC Rcd at 1611.| As  X4we noted in the Local Competition Order, payment of costbased rates represents full  X4compensation to the incumbent LEC for use of the network elements that carriers purchase.>Bj yO 'ԍ 11 FCC Rcd at 15864.> We further noted that sections 251(c)(3) and 252(d)(1), the statutory provisions establishing the unbundling obligation and the determination of network element charges, do not compel  XJ4telecommunications carriers using unbundled network elements to pay access charges.3Jj {O'ԍ Id.3 Moreover, these provisions do not restrict the ability of carriers to use network elements to  X 4provide originating and terminating access.3 d j {O1'ԍ Id.3 Allowing incumbent LECs to recover access charges in addition to the reasonable cost of such facilities would constitute double recovery because the ability to provide access services is already included in the cost of the access facilities themselves. Excluding access charges from unbundled elements ensures that unbundled elements can be used to provide services at competitive levels, promoting the  X 4underlying purpose of the 1996 Act.H j {OP'ԍ See 11 FCC Rcd at 15682.H If incumbent LECs added access charges to the sale of unbundled elements, the added cost to competitive LECs would impair, if not foreclose,  X{4their ability to offer competitive access services.cZ{ j yO'ԍ There would be serious questions about the wisdom of a marketbased approach to access reform as  {O|'advocated by some incumbent LECs, see, e.g., Ameritech Comments at 38; Cincinnati Bell Comments at 13, if incumbent LECs could impose access charges on the use of unbundled network elements.c The availability of access services at competitive levels is vital to the general approach we adopt in this Order, which relies on the growth of competition, including from competitors using unbundled network elements, to  X64move overall access rate levels toward forwardlooking economic cost. X6j yO#'ԍ Were we to allow the assessment of access charges by incumbent LECs for access services provided by carriers over unbundled network elements, we would be compelled to take a more prescriptive approach to the rate level issue.  In addition, we"60*&&aa" note that excluding unbundled network elements from access charges benefits small entities seeking to enter the local service market by ensuring that they can acquire unbundled elements at competitive prices.  X4Q338. We disagree with suggestions offered by some commenters that access charges should be imposed on unbundled elements because costbased rates for such elements would  Xv4not recover universal service support subsidies built into the access charge regime.gvj {O'ԍ PacTel Comments at 5557. See also GVNW Comments at 5.g Although our plan to implement comprehensive universal service reform is not fully implemented, we believe excluding access charges from the sale of unbundled elements will not dramatically affect the ability of price cap LECs to fulfill their universal service obligations. First, competitors using unbundled network elements to provide interstate services will contribute to universal service requirements pursuant to section 254. Carriers receive no exemption from their obligation to contribute to universal service by using unbundled network elements. Second, rate structure modifications adopted in this Order including reallocation of TIC costs, adoption of a mechanism to phase out the TIC, and raising multiline SLCs should reduce the impact on price cap LECs of excluding the recovery of TIC costs in the sale of unbundled network elements. Third, if unbundled network element prices are geographically deaveraged, LECs will receive higher prices when they sell unbundled network elements that embody higher costs. Fourth, because the difference between the level of access charges and the forwardlooking economic costs of network elements may include more than universal service support, imposing access charges on the sale of unbundled network elements could recover from market entrants substantially more than amounts used to support universal service. Accordingly, we are not persuaded by suggestions that the universal service obligations of price cap LECs compel the imposition of access charges on the purchase of unbundled network elements by requesting carriers.  X4R339. Although, in the Local Competition Order, we allowed application of certain noncostbased access charges (the CCLC and a portion of the TIC) to unbundled elements, we limited the duration of such application to a transition period ending June 30, 1997 even if  Xg4access and universal service reform were not completed by the end of the transition period.>gZj yOr'ԍ 11 FCC Rcd at 15866.> The transition period was limited in order to minimize the burden on competitive local service providers seeking to use unbundled network elements to offer the competitive services that the 1996 Act sought to promote. The interim application of certain access charges was also limited to noncostbased charges because such charges, unlike facilitiesbased charges, were more likely to include subsidies for universal service. All facilitiesbased charges were completely excluded from unbundled network elements to prevent double recovery by incumbent LECs of the costs of these facilities when they are purchased by competitive carriers."!0*&&aa% "Ԍ X4ԙS340. We are also unpersuaded by suggestions that access charges should be imposed on unbundled elements because provision of competitive service by rebundling the same network elements used by the incumbent LEC to provide access is equivalent to resale of a  X4retail service.Yj yO4'ԍ BellSouth Comments at 13; PacTel Reply at 810.Y First, in the Local Competition Order, we recognized major differences between competition through the use of unbundled network elements and competition through resale of an existing retail service offered by an incumbent LEC. We explained, for example, that an entrant relying on unbundled elements rather than resale has the flexibility to offer all telecommunications services made possible by using network elements but also assumes the risk that end users will not generate sufficient demand to justify the investment. The entrant using a resale strategy, however, is limited to offering the retail service itself without the  X 4attendant investment risk.A Xj yO% 'ԍ 11 FCC Rcd at 1566768.A Thus, we reject the notion that the rebundling of network  X 4elements is equivalent to resale. Second, although we concluded in the Local Competition  X 4Order that IXCs must continue to pay access charges to incumbent LECs for access services when the end user is served by a competitive carrier reselling the incumbent LEC's retail services, our conclusion was based on the resale provisions of the 1996 Act which limit resale to retail services offered to subscribers or other customers who are not telecommunications  X4carriers.Fj yO/'ԍ 47 U.S.C.  251(c)(4)(A).F The resale provision does not apply to nonretail services, including access  X4services, that may be offered using the same facilities.Axj yO'ԍ 11 FCC Rcd at 1598283.A Unlike the provision of local exchange services, access services are not services that LECs provide directly to end users on a retail basis. To impose access charges on the sale of unbundled elements would contravene the terms of the resale provision by effectively treating exchange access as a service provided on a retail basis.  X' #J:\ACCESS.REF\ORDER\VIA.PLG# #J:\ACCESS.REF\ORDER\VIB.BEG#  xB.Treatment of Interstate Information Services  X' \ 1. ` ` Background  X4 T341. In the 1983 Access Charge Reconsideration Order, the Commission decided that,  X4xalthough information service providersj yO="'ԍ The term "enhanced services," which includes access to the Internet and other interactive computer networks, as well as telemessaging, alarm monitoring, and other services, appears to be quite similar to the term "information services" in the 1996 Act. "Enhanced services" are defined in  64.702(a) of our rules: "For the  {O$'purposes of this subpart, the term enhanced services shall refer to services, offered over common carrier transmission facilities used in interstate communications, which employ computer processing applications that act"_%0*&&c%" on the format, content, code, protocol, or similar aspects of the subscriber's transmitted information; provide the subscriber additional different, or restructured information; or involve subscriber interaction with stored information." The 1996 Act defines "information services" as offering the capability for "generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications." 47 U.S.C.  153(20). For purposes of this order, providers of enhanced services and providers of information services are referred to as ISPs. (ISPs) may use incumbent LEC facilities to originate"@0*&&aa."  X4and terminate interstate calls, ISPs should not be required to pay interstate access charges.&@j yO'ԍ MTS and WATS Market Structure, Memorandum Opinion and Order, Docket No. 7872, 97 FCC 2d  {O'682, 71122 (Access Charge Reconsideration Order). See also Amendments of Part 69 of the Commission's  {O 'Rules Relating to Enhanced Service Providers, CC Docket No. 87215, Order, 3 FCC Rcd 2631 (1988) (ESP  {OM 'Exemption Order). In recent years, usage of interstate information services, and in particular the Internet and  X4other interactive computer networks, has increased significantly.". j yO 'ԍ The number of U. S. households with Internet access more than doubled over the past year, and approximately 38.7 million Americans over the age of 18 have accessed the Internet at least once. Jared  {OA'Sandberg, "U.S. Households with Internet Access Doubled to 14.7 Million in Past Year, Wall Street Journal, October 21, 1996, at B11. Although the United States has the greatest amount of Internet users and Internet traffic, more than 175 countries  X4are now connected to the Internet.j yOm'ԍ Network Wizards Internet Domain Survey, January 1997, available on the World Wide Web at  yO5'. As usage continues to grow, information services may have an increasingly significant effect on the public switched network.  X_4U342. As a result of the decisions the Commission made in the Access Charge  XJ4Reconsideration Order, ISPs may purchase services from incumbent LECs under the same intrastate tariffs available to end users. ISPs may pay business line rates and the appropriate subscriber line charge, rather than interstate access rates, even for calls that appear to traverse  X 4state boundaries. pj {O('ԍ ESP Exemption Order, 3 FCC Rcd at 2631 nn.8, 53. To maximize the number of subscribers that can reach them through a local call, most ISPs have deployed points of presence. The business line rates are significantly lower than the equivalent  X 4interstate access charges, given the ISPs' high volumes of usage.? j yOk'ԍ CIEA Comments at 56.? ISPs typically pay incumbent LECs a flat monthly rate for their connections regardless of the amount of usage they generate, because business line rates typically include usage charges only for outgoing traffic.  X}4 V343. In the NPRM, we tentatively concluded that ISPs should not be required to pay interstate access charges as currently constituted. We explained that the existing access charge system includes noncostbased rates and inefficient rate structures. We stated that there is no"QZ0*&&aa" reason to extend such a system to an additional class of customers, especially considering the potentially detrimental effects on the growth of the stillevolving information services industry. We explained that ISPs should not be subjected to an interstate regulatory system designed for circuitswitched interexchange voice telephony solely because ISPs use  X4incumbent LEC networks to receive calls from their customers.;j yO'ԍ NPRM at para 288.; We solicited comment on the narrow issue of whether to permit incumbent LECs to assess interstate access charges on  Xv4ISPs.3vXj {O 'ԍ Id.3 In the companion Notice of Inquiry (NOI), we sought comment on broader issues  Xa4concerning the development of information services and Internet access.aj {O 'ԍ See In the Matter of  Usage of the Public Switched Network by Information Service and Internet Access  {O 'Providers, CC Docket No. 96263, Notice of Inquiry, FCC 96488 (rel. December 24, 1996) (NOI).  X3' 2. ` ` Discussion  X 4 W344. We conclude that the existing pricing structure for ISPs should remain in place, and incumbent LECs will not be permitted to assess interstate perminute access charges on  X 4ISPs. We think it possible that had access rates applied to ISPs over the last 14 years, the pace of development of the Internet and other services may not have been so rapid. Maintaining the existing pricing structure for these services avoids disrupting the stillevolving  X4information services industryFj {O'ԍ See, e.g., CompuServe/Prodigy Comments at 11; Information Industry Association Comments at 4; Minnesota Internet Services Trade Association Reply at 1. and advances the goals of the 1996 Act to "preserve the vibrant and competitive free market that presently exists for the Internet and other interactive  Xd4computer services, unfettered by Federal or State regulation."Cdj yO'ԍ 47 U.S.C.  230(b)(2).C  X64X345. We decide here that ISPs should not be subject to interstate access charges. The access charge system contains noncostbased rates and inefficient rate structures, and this Order goes only part of the way to remove rate inefficiencies. Moreover, given the evolution in ISP technologies and markets since we first established access charges in the early 1980s, it is not clear that ISPs use the public switched network in a manner analogous to IXCs. Commercial Internet access, for example, did not even exist when access charges were established. As commenters point out, many of the characteristics of ISP traffic (such as large numbers of incoming calls to Internet service providers) may be shared by other classes of business customers.  XP4Y346. We also are not convinced that the nonassessment of access charges results in"P0 0*&&aah" ISPs imposing uncompensated costs on incumbent LECs. ISPs do pay for their connections to incumbent LEC networks by purchasing services under state tariffs. Incumbent LECs also receive incremental revenue from Internet usage through higher demand for second lines by consumers, usage of dedicated data lines by ISPs, and subscriptions to incumbent LEC Internet access services. To the extent that some intrastate rate structures fail to compensate incumbent LECs adequately for providing service to customers with high volumes of incoming calls, incumbent LECs may address their concerns to state regulators.  XH4 Z347. Finally, we do not believe that incumbent LEC allegations about network  X14congestion warrant imposition of interstate access charges on ISPs.R1j {O 'ԍ See, e.g., USTA Comments at 8182.R The Network Reliability and Interoperability Council has not identified any service outages above its reporting threshold attributable to Internet usage, and even incumbent LEC commenters acknowledge that they can respond to instances of congestion to maintain service quality standards. Internet access does generate different usage patterns and longer call holding times than average voice usage. However, the extent to which this usage creates congestion depends on the ways in which incumbent LECs provision their networks, and ISPs use those networks. Incumbent LECs and ISPs agree that technologies exist to reduce or eliminate whatever congestion exists; they disagree on what pricing structure would provide incentives  Xb4for deployment of the most efficient technologies.bZj yOm'ԍ SWBT Comments at 20; PacTel Reply at 26; Internet Access Coalition Reply at 1112; America OnLine Reply at 79. The public interest would best be served by policies that foster such technological evolution of the network. The access charge system was designed for basic voice telephony provided over a circuitswitched network, and even when stripped of its current inefficiencies it may not be the most appropriate pricing structure for Internet access and other information services.  X4[348. Thus, in our review of the record filed in response to the NOI, we will consider solutions to network congestion arguments other than the incumbent LECs' recommendation that we apply access charges to ISPs' use of circuitswitched network technology. We intend rather to focus on new approaches to encourage the efficient offering of services based on new network configurations and technologies, resulting in more innovative and dynamic  Xg4services than exist today. In the NOI, we will address a range of fundamental issues about the Internet and other information services, including ISP usage of the public switched  X;4network. ;j yO"'ԍ In particular, we requested data about alleged network congestion, rates paid by ISPs today, alternative  {Of#'network access technologies, and additional services desired by ISPs. NOI at  313317.  The NOI will give us an opportunity to consider the implications of information services more broadly, and to craft proposals for a subsequent NPRM that are sensitive to the complex economic, technical, and legal questions raised in this area. We therefore conclude" 0*&&aa" that ISPs should remain classified as end users for purposes of the access charge system.  X' #J:\ACCESS.REF\ORDER\VIB.BEG# #J:\ACCESS.REF\ORDER\VIC.PLG#    C.Terminating Access  X'  X4 \349. In the NPRM, we requested comment regarding the regulation of terminating access. We noted that, unlike originating access, the choice of an access provider for terminating access is made by the recipient of the call. The call recipient generally does not pay for the call and, therefore, is not likely to be concerned about the rates charged for terminating access. We suggested that neither the originating caller nor its longdistance service provider can exert substantial influence over the called party's choice of terminating  X 4access provider.; j yO 'ԍ NPRM at  271.; Thus, even if competitive pressures develop at the originating end as new entrants offer alternatives, the terminating end of a longdistance call may remain a  X 4bottleneck, controlled by the LEC providing access for a particular customer.3 Xj {O'ԍ Id.3 We also recognized, however, that excessive terminating access charges could furnish an incentive for IXCs to enter the access market in order to avoid paying excessive terminating access  X 4charges.@ j {OB'ԍ Id. at  272.@  Xy' v1.` ` Price Cap Incumbent LECs  XK' ` ` a. Background  X4]350. We requested comment on various alternative special methods for regulating the terminating access rates of price cap LECs. For instance, we sought comment on whether tov establish a ceiling on the terminating access rates of price cap LECs equal to the forwardlooking economic cost of providing the service. We suggested alternative methods for measuring forwardlooking economic cost, including reference to prices in reciprocal compensation arrangements for the transport and termination charges of telecommunications under sections 251(b)(5) and 252(d)(2) or a requirement that terminating rates be based on a  X|4TSLRIC study or other acceptable forwardlooking costbased model.;||j yO 'ԍ NPRM at  274.;  XN4  ` ` b. Discussion  X 4^351. We believe that new entrants, by purchasing unbundled network elements or providing facilitiesbased competition, will eventually exert downward pressure on originating"  0*&&aa#" access rates assessed by incumbent LECs. We agree that excessive terminating access rates could encourage longdistance companies to avoid the payment of such charges by seeking to become the local exchange and exchange access provider for end user customers. These market developments, however, would not fully address the concerns expressed in the NPRM and reflected in comments with respect to the ability of incumbent LECs to charge unreasonable rates for terminating access.  X_4_352. We are also not convinced that a significant competitive impact would   result from changes in calling patterns between pairs of callers. Commenters have not described any realistic way that users, by changing their calling patterns, could experience savings  X 4attributable to differing levels of terminating access charges paid by IXCs.4 j yO 'ԍ We question whether switching carriers would have an immediate impact on the overall cost of longdistance calls between discrete pairs of callers. A local access provider's terminating access charges are spread across an IXC's customer base. As a practical matter, alterations in calling behavior, unless done on a massive scale across the IXC's customer base, are not likely to have an immediate or predictable impact on the bills of two callers seeking to reduce the cost of their longdistance calls to each other. 4 Although one commenter points to high termination charges in foreign countries as affecting the market for  X 4overseas calls originating in the United States,J xj yO'ԍ TCI Comments, Attachment A at 4.J such results are less likely to occur for domestic calls, which are much less expensive than international calls and are subject to  X 4geographic rate averaging and rate integration requirements.? j yOw'ԍ NPRM at n. 357.? Thus, we are reluctant to base our approach on the expectation that a significant proportion of callers will implement such a strategy.  Xb4`353. Accordingly, we are establishing regulatory requirements that will address the potential that incumbent LECs could charge unreasonable rates for terminating access. Specifically, we are adopting rules in this Order that, for price cap LECs, will limit recovery of TIC and common line costs from terminating access rates for a limited period, and then eliminate any recovery of common line and TIC costs from terminating access. Under this approach, beginning January 1, 1998, price cap LECs will recover common line and residual TIC revenues through a new flat charge, subject to a ceiling. Remaining common line and residual TIC revenues will then be first recovered through originating access rates, subject to a ceiling. Any remaining common line and residual TIC revenues may then be recovered through terminating rates. As the caps on SLCs applicable to nonprimary residential lines and the PICC are raised, none of these residual revenues will be recovered through terminating access charges. When the increased SLCs and PICCs are fully implemented,  XN4 recovery of these costs will be more susceptible to competitive forces because IXCs could seek to influence the end user's choice of its provider of local service, and the end user's choice of service provider will determine whether the incumbent LEC is able to recover these" 0*&&aa" costs from the end user.  X4a354. In addition, pending full recovery of all common line and residual TIC costs in flat rate SLCs and PICCs, this approach will put downward pressure on terminating access rates by lowering the overall service revenues derived from terminating access charges. Because competitive pressure is more likely to develop on the originating end of a longdistance call, we can rely to a greater extent on competitive forces to ensure just and reasonable rates under this approach by moving recovery of certain revenues from terminating access to originating access. By stripping terminating access rates of CCL and residual TIC charges and, pending full implementation of the new flat charges, placing more of the burden of TIC recovery on originating access rates, we reduce potential excesses in terminating access charges while exposing the CCL and residual TIC recovery to competitive pressures in the originating access market.  X 4b355. The NPRM described proposals linking terminating rates to originating rate  X 4levels or shifting costs from terminating to originating access charges.; j yO 'ԍ NPRM at  276.; Some commenters support limiting price cap LEC terminating access rates to the level of the LEC originating  Xy4access rates.byXj yO'ԍ BA/NYNEX Comments at 42; Ohio Commission Comments at 12.b If originating access charges are lowered because of competition, the ceiling on terminating access rates would be lowered as well, placing downward pressure on terminating rates. This approach, however, would not substantially affect terminating access rates where originating access rates have not responded to competitive inroads. Moreover, linking an incumbent LEC's terminating access rate to its own originating rate could reduce the incumbent LEC's incentive to lower its originating access rates. Thus, we decline to adopt this method of regulating terminating access rates.  X4c356. The NPRM requested comment on the possibility of eliminating all charges for terminating access by shifting the burden of recovering all costs currently recovered in  X4terminating access rates to originating access charges.; j yO,'ԍ NPRM at  276.; We decline to adopt this approach because a complete shift of terminating access costs to originating access conflicts with one of the basic objectives of this proceeding to ensure that charges for access services reflect the  XN4manner in which the costs of providing those services are incurred. Switching costs, for example, should continue to be recovered in part from terminating access charges because those costs are traffic sensitive and are related to the volumes of both originating and terminating traffic. Moreover, we emphasize that, as discussed in Section III.A, the rate structure we are adopting, which will replace perminute recovery of the CCL charge and the TIC with flat rate charges, helps to achieve our goal of ensuring that charges for access"x 0*&&aa" services reflect the manner in which costs are incurred. Our requirement that incumbent LECs recover a greater portion of common line and TIC costs in originating access rates pending full implementation of flatrated charges will address concerns about the reasonableness of terminating access charges while providing price cap LECs sufficient latitude to recover the reasonable costs of deploying their facilities to provide terminating access services.   X_4d357. The NPRM also discussed the alternative of requiring price cap LECs to establish end user charges for terminating access. This approach would place direct responsibility for the cost of terminating access on the recipient of terminating access services and would expose terminating access to competitive pressures. We noted that wireless companies already charge called parties for receiving calls and requested comment on how we might implement a system of end user charges in the context of access reform and whether its implementation would increase the number of uncompleted calls due to a reluctance by called  X 4parties to accept the charges.;  j yO7'ԍ NPRM at  275.; We agree with commenters that such a change could prove  X 4disruptive to consumers of wireline services.  Xj yO'ԍ Ameritech Comments at 54; LCI Comments at 19; California Commission Comments at 1718. After review of the record, which produced few, if any, advocates of such an approach, we conclude that we should not mandate at this time this change in current pricing practices for wireline service.   XK' 2.` ` NonIncumbent LECs  X'` ` a. Background hhC (#h  X4e358. In the NPRM, we requested comment about whether to impose ceilings on the  X4terminating access rates of nonincumbent LECs.; j yOq'ԍ NPRM at  280.; We stated in the NPRM that our policy  X4since the Competitive Carrier Proceeding,! xj {O'ԍ In the Competitive Carrier Proceeding, we established a comprehensive framework for determining whether carriers are dominant or nondominant, classified then existing classes of carriers as either dominant or nondominant, and promulgated general definitions providing that a carrier will be nondominant in the absence  {OD 'of a Commission finding of market power. Competitive Carrier First Report and Order, 85 FCC 2d at 51 (promulgating 47 C.F.R.  61.15(A)(2)).! has consistently been that a carrier is non X4dominant unless the Commission makes or has made a finding that it is dominant.;, j yO#'ԍ NPRM at  277.; We  X4noted that, since the Competitive Carrier Proceeding, new entrants into the exchange access market have been presumptively classified as nondominant because they have not been shown" 0*&&aa"  X4to exercise significant market power in their service areas.0< j {Oy'ԍ Policy and Rules Concerning Rates for Competitive Common Carrier Services and Facilities  {OC'Authorizations Therefor, CC Docket No. 79252, Notice of Inquiry and Proposed Rulemaking, 77 FCC 2d 308  {O '(1979) (Competitive Carrier NPRM); First Report and Order, 85 FCC 2d 1 (1980) (First Report and Order);  {O'Further Notice of Proposed Rulemaking, 84 FCC 2d 445 (1981) (Competitive Carrier Further NPRM); Second Further Notice of Proposed Rulemaking, FCC 82187. 47 Fed. Reg. 17,308 (1982); Second Report and Order, 91  {Oi'FCC 2d 59 (1982) (Second Report and Order); Order on Reconsideration, 93 FCC 2d 54 (1983); Third Further Notice of Proposed Rulemaking, 48 Fed. Reg. 28,292 (1983); Third Report and Order, 48 Fed. Reg. 46,791  {O'(1983); Fourth Report and Order, 95 FCC 2d 554 (1983) (Fourth Report and Order), vacated, AT&T Co. v.  {O'FCC, 978 F.2d 727 (D.C. Cir. 1992), cert. denied, MCI Telecommunications Corp. v. AT&T Co., 509 U.S. 913 (1993); Fourth Further Notice of Proposed Rulemaking, 96 FCC 2d 922 (1984); Fifth Report and Order, 98 FCC  {OW '2d 1191 (1984) (Fifth Report and Order); Sixth Report and Order, 99 FCC 2d 1020 (1985) (Sixth Report and  {O! 'Order), vacated, MCI Telecommunications Corp. v. FCC, 765 F.2d 1186 (D.C. Cir. 1985) (collectively referred  {O 'to as the Competitive Carrier proceeding).0 At the same time, we stated that competitive LECs may possess market power over IXCs needing to terminate calls because the LEC controlling the terminating local loop is the only access provider available to the  X4IXC seeking to terminate a longdistance call on that particular loop.@ j {O8'ԍ Id. at  279.@ We solicited comment on several alternatives, including whether we should use incumbent LEC terminating access rates as a benchmark to determine the reasonableness of competitive LEC terminating rates. We invited commenters to offer other approaches including, for example, whether we should establish a presumption of reasonableness if the competitive LEC's terminating access  XH4rate is no higher than the incumbent LEC's rate in the same geographic market.@H^ j {OW'ԍ Id. at  280.@  X '` ` b. Discussion  X 4 f359. We recently noted that the test in deciding whether to apply dominant carrier  X 4regulation to a class of carriers is whether those carriers have market power.& j {Ov'ԍ Regulatory Treatment of LEC Provision of Interexchange Services Originating in the LEC's Local  {O@'Exchange Area and Policy and Rules Concerning the Interstate, Interexchange Marketplace, CC Docket Nos. 96 yO '149 and 9661, Second Report and Order in CC Docket No. 96149 and Third Report and Order in CC Docket  {O'No. 9661, FCC 97142 at  12 (rel. April 18, 1997) (Dominant/NonDominant Order). As we  X 4discussed in the Dominant/Nondominant Order, in determining whether a firm possesses market power, the Commission has previously focused on certain wellestablished market features, including market share, supply and demand substitutability, the cost structure, size or  X{4resources of the firm, and control of bottleneck facilities.\{j {O $'ԍ Dominant/NonDominant Order at  93. See also Implementation of NonAccounting Safeguards of Sections 271 and 272 of the Communications Act of 1934 and Regulatory Treatment of LEC Provision of  {O%'Interexchange Services Originating in the LEC's Local Exchange Area, Notice of Proposed Rulemaking, FCC"%0*&&%"  {O'No. 96308, CC Docket No. 94149 at  133 (rel. July 18, 1996). Competitive LECs currently have"{Z0*&&aa" a relatively small market share in the provision of local exchange and exchange access service. Nonetheless, at first blush, there is a concern that a competitive LEC may have market power over an IXC that needs to terminate a longdistance call to a customer of that particular competitive LEC. Therefore, we sought comment on whether and to what extent we should regulate the terminating access charges of competitive LECs.  Xv4g360. We conclude, based on the record before us, that nonincumbent LECs should be treated as nondominant in the provision of terminating access. Although an IXC must use the competitive LEC serving an end user to terminate a call, the record does not indicate that competitive LECs have previously charged excessive terminating access rates. Nor have commenters provided evidence demonstrating that competitive LECs are, in fact, charging excessive terminating rates. Indeed, the record suggests that the terminating rates of  X 4competitive LECs are equal to or below the tariffed rates of incumbent LECs.d Zj yO'ԍ Spectranet Comments at 7; TCI Comments, Attachment A at 6.d In addition, the record does not show that competitive LECs distinguish between originating and terminating access in their offers of service. Therefore, it does not appear that competitive LECs have structured their service offerings in ways designed to exercise any market power over terminating access. Accordingly, the concerns expressed in the NPRM about the ability of competitive LECs to exercise market power in the provision of terminating access are not substantiated in the record.  X44h361. Further, as competitive LECs, which have a small share of the interstate access market, attempt to expand their market presence, the rates of incumbent LECs or other  X4potential competitors will constrain the terminating access rates of competitive LECs.j yO'ԍ ALTS Comments at 29; American Communications Services Reply at 21; ICG Telecom Group Reply at 23. Specifically, competitive LECs compete with incumbent LECs whose rates are regulated. The record indicates that longdistance carriers have established relationships with incumbent LECs for the provision of access services, and new market entrants are not likely to risk damaging their developing relationships with IXCs by charging unreasonable terminating  X4access rates.Bj {O 'ԍ See WinStar Comments at 56; TCI Comments, Attachment A at 9; Cox Communications Reply at 45. This is especially true with respect to competitive access providers seeking to maintain or expand their access transport, special access, or other services apart from switched  Xe4access.Lej yO#'ԍ ALTS Comments, Attachment B at 14.L  X74i362. In addition, we believe that overcharges for terminating access could encourage"7d 0*&&aa+" access customers to take competitive steps to avoid paying unreasonable terminating access charges. If, for example, a competitive LEC consistently overcharged an IXC for terminating access, the IXC would have an incentive to enter a marketing alliance with another competitive LEC in the same market or in other geographic markets where the overcharging competitive LEC seeks to expand. Although high terminating access charges may not create a  X4disincentive for the call recipient to retain its local carrier (because the call recipient does not  Xx4pay the long distance charge), the call recipient may nevertheless respond to incentives offered by an IXC with an economic interest in encouraging the end user to switch to another local carrier. Such an approach could have particular impact when the IXC has significant brand recognition among consumers. Moreover, as noted in the NPRM, excessive terminating access charges could encourage IXCs to enter the access market in an effort to win the local  X 4customer.; j yO 'ԍ NPRM at  272.; We believe that the possibility of competitive responses by IXCs will have a constraining effect on nonincumbent LEC pricing.  X 4j363. Thus, we will not adopt at this time any regulations governing the provision of  X 4terminating access provided by competitive LECs." Xj yO'ԍ We are examining in a separate proceeding whether tariffing of rates for access services provided by  {O|'competitive LECs is necessary to assure that such rates are reasonable. See Petitions Requesting Forbearance of Hyperion Telecommunications, Inc. (CCB/CPD No. 96462) and Time Warner Communications (CCB/CPD No. 96902). Because competitive LECs have not charged unreasonable terminating access rates, and because they are not likely to do so in the future, competitive LECs do not appear to possess market power. Thus, the imposition of regulatory requirements with respect to competitive LEC terminating access is unnecessary. We similarly find no reason to adopt a presumption of reasonableness where a competitive LEC's terminating access rates are less than its rates for originating access or less than the incumbent LEC's terminating access rates. Instead, if we need to examine the reasonableness of competitive LEC terminating access rates in an individual instance, we can do so taking into account all relevant factors including relationships to other rates. Thus, if an access provider's service offerings violate section 201 or Section 202 of the Act, we can address any issue of unlawful rates through the exercise of our authority to investigate and adjudicate  X4complaints under section 208.=Bj yO'ԍ 47 U.S.C.  208.= On the basis of the current record, we conclude that reliance on the complaint process will be sufficient to assure that nonincumbent LEC rates are reasonable. We emphasize that we will not hesitate to use our authority under section 208 to take corrective action where appropriate.  X;4k364. We will be sensitive to indications that the terminating access rates of competitive LECs are unreasonable. The charging of terminating access rates above originating rates in the same market, for example, may suggest the need to revisit our" 0*&&aa" regulatory approach. Similarly, terminating rates that exceed those charged by the incumbent LEC serving the same market may suggest that a competitive LEC's terminating access rates are excessive. If there is sufficient indication that competitive LECs are imposing unreasonable terminating access charges, we will revisit the issue of whether to adopt regulations governing competitive LEC rates for terminating access.  Xv' 3.` ` "Open End" Services  XH4l365. In some cases, an IXC is unable to influence the end user's choice of access provider for originating access services because the end user on the terminating end is paying for the call. For example, charges for the "open end" originating access minutes for 800 or 888 services are paid by the recipient of the call. Consequently, the Commission has treated incumbent LEC originating "open end" minutes as terminating minutes for access charge  X 4purposes.K j yON'ԍ 47 C.F.R.  69.105(b)(1)(iii).K The NPRM solicited comment on whether such regulatory treatment should be retained for "open end" services under which terminating access rates serve as originating  X 4access rates, and whether this approach should be extended to competitive LECs.; Xj yO'ԍ NPRM at  281.;  Xy4m366. We continue to believe that "open end" originating minutes should be treated as terminating minutes for access charge purposes. Although few comments were filed regarding this issue, commenters addressing this matter advocate retention of the current regulatory  X44approach.W4j yO'ԍ ACTA Comments at 24; WorldCom Comments at 93.W By continuing to treat "open end" originating minutes as terminating minutes for access charge purposes, we recognize that access customers have limited ability to influence the calling party's choice of access provider. Accordingly, access charges for these "open end" minutes will be governed by the requirements we adopt in this Order applicable to terminating access provided by incumbent LECs. Thus, residual common line charges and the perminute TIC will not be recovered through "open end" originating minutes except to the extent such recovery is permitted under the rules described in Section III.A of this Order.  X|' #J:\ACCESS.REF\ORDER\VIC.PLG# #J:\ACCESS.REF\ORDER\VID.KLS#    D.Universal ServiceRelated Part 69 Changes  XN4n367. In the NPRM, we recognized that, because of the role that access charges have played in funding and maintaining universal service, it is critical to implement changes in the access charge system together with complementary changes in the universal service system. In this section, we address the manner in which incumbent LECs must adjust their interstate  X4access charges to reflect the universal service support mechanisms adopted in the Universal  X4Service Order."x0*&&aa%"Ԍ X'ԙ 1.` ` Background  X4o368. In November 1996, pursuant to Section 254 of the Act, the FederalState Universal Service Joint Board issued its recommendations to the Commission for reforming our system of universal service so that universal service is preserved and advanced, but in a manner that permits the local exchange and exchange access markets to move from monopoly  Xv4to competition.`vj {O'ԍ Joint Board Recommended Decision, 12 FCC Rcd 87.` In our Universal Service Order, we are adopting most of the Joint Board's recommendations relating to the support of rural and high cost areas.  X34p369. Section 254 of the Act requires that any federal universal service support  X 4provided to eligible carriers be "explicit"@ Zj yO' 'ԍ 47 U.S.C.  254(e).@ and recovered on an "equitable and  X 4nondiscriminatory basis"@  j yO'ԍ 47 U.S.C.  254(d).@ from all telecommunications carriers providing interstate  X 4telecommunications service. In our companion Universal Service Order, we agree with the Joint Board that these programs must be replaced with universal service support mechanisms  X 4that satisfy section 254.e! zj {O'ԍ See Section III of the Universal Service Order.e  X4q370. Currently, there are three mechanisms designed expressly to provide support for high cost and small telephone companies: the Universal Service Fund (high cost assistance  Xf4fund),M"f j {O#'ԍ 47 C.F.R.  36.601 et seq.M the Dial Equipment Minutes (DEM) weighting program,C#fj yO'ԍ 47 C.F.R.  36.125(b).C and Long Term Support  XO4(LTS)._$O. j yO.'ԍ 47 C.F.R.  69.105, 69.502, 69.603(e), 69.612._ An incumbent LEC is eligible for high cost assistance from the current Universal Service Fund if its embedded loop costs exceed 115 percent of the national average loop cost.  X!4This program is funded entirely by IXCs.%! j yO 'ԍ Each IXC with at least .05 percent of presubscribed lines nationwide contributes to the fund an amount based on the number of its presubscribed lines. 47 C.F.R.  69.116. DEM weighting assistance is an implicit support mechanism that permits LECs with fewer than 50,000 access lines to apportion a greater proportion of these local switching costs to the interstate jurisdiction than larger LECs may allocate. Finally, the existing LTS program supports carriers with higherthan average subscriber line costs by providing carriers that are members of the NECA pool with enough"%0*&&aaK" support to enable them to charge IXCs only a nationwide average CCL interstate access rate.&j yOb'ԍ Prior to 1989 all LECs were required to participate in a pool of carrier common line costs and revenues. Beginning in April 1989, LECs were permitted to withdraw from the pool, but LECs with below average CCL charges that choose to exit the pool are required to contribute enough so that LECs remaining in the pool would be able to charge the same industry average CCL rates they would have charged if the pool were still mandatory  {O'for all LECs. See MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, CC Docket Nos. 7872, 80286, Report and Order, 2 FCC Rcd 2953 (1987). LTS payments reduce the access charges of smaller, rural incumbent LECs participating in the loopcost pool by raising the access charges of nonparticipating incumbent LECs.  X4r371. In the NPRM, we sought comment on whether incumbent LECs' access charges must be adjusted to reflect elimination of LTS contribution requirements and receipt of explicit universal service funds in order to prevent incumbent LECs from being compensated  XH4twice for providing universal service.;'HBj yO;'ԍ NPRM at  244.; We proposed a downward exogenous cost adjustment for price cap incumbent LECs to reflect elimination of LTS contribution requirements and any revenues received from any new universal service support mechanisms, and sought comment on how interstate costs must also be reduced to account for explicit universal service  X 4support.B( j yOo'ԍ NPRM at  24546.B  X ' 2.` ` Discussion  X4s372. In our companion Universal Service Order, we conclude that a carrier will continue to receive universal service support based upon the existing LTS, high cost, DEM weighting mechanisms, until the carrier begins to receive support based upon forwardlooking  XM4economic cost.g)Mb j {O`'ԍ See Section VII.D of the Universal Service Order.g In the following sections, we will discuss the manner in which incumbent LECs must reduce their interstate access charges to reflect the elimination of the obligation to contribute to LTS, increase their interstate access charges to permit recovery of the new universal service obligation, and, to the extent necessary, adjust their interstate access charges to account for any additional universal service funds received under the modified universal service mechanisms. " )0*&&aa"Ԍ X'` ` a. Removal of LTS Obligation from Interstate Access Rates  X4t373. In our companion Universal Service Order,g*j {OK'ԍ See Section XII.B of the Universal Service Order.g we agree with the Joint Board that LTS payments constitute a universal service support mechanism that is inconsistent with the Act's requirement that support be collected from all providers of interstate  X4telecommunications services on an equitable and nondiscriminatory basis@+Zj yO'ԍ 47 U.S.C.  254(d).@ and be available  Xx4to all eligible telecommunications carriers.J,xj {O 'ԍ See 47 U.S.C.  254(e).J In that order, we conclude that LTS should be removed from the interstate access charge system. We provide, instead, for recovery of  XJ4comparable payments from the new federal universal service support mechanisms.p-J|j {Ow'ԍ See Sections VII and XII.B of the Universal Service Order.p  X 4u374. Currently, only incumbent LECs that do not participate in the NECA CCL tariff (nonpooling incumbent LECs) make LTS payments and only incumbent LECs participating  X 4in the NECA CCL tariff receive LTS support.T. j {O'ԍ See 47 C.F.R.  69.105(b)(3)(4).T Nonpooling incumbent LECs' contributions to the common line pool are set annually based on the total projected amount of LTS, converted to a monthly payment amount. Nonpooling incumbent LECs recover the revenue necessary for their LTS contributions through their CCL charges. We agree with commenters that argue that, to the extent we do not reduce interstate access revenues by the amount of LTS contribution currently recovered in the rates, incumbent LECs will double recover. We therefore conclude that incumbent LEC interstate access charges must be reduced to reflect elimination of the obligation to contribute to LTS.  X4v375. Because payments from the existing LTS mechanism will cease on January 1, 1998, incumbent LECs should no longer contribute to the existing LTS fund after that date. For price cap LECs, which were requested to stop participating in the NECA Common Line tariff before coming under price cap regulation, LTS contributions were included in the common line revenue requirement when the PCI for the common line basket was  X4established.Q/j {O!'ԍ See 47 C.F.R.  69.501(a).Q We conclude that price cap LECs must make a onetime downward exogenous adjustment to the PCI for the common line basket to account fully for the elimination of their LTS obligations. This exogenous adjustment shall be made in a manner consistent with"~2 /0*&&aa"  X4section 61.45 and other relevant provisions of the Commission's rules.?0j yOy'ԍ 47 C.F.R.  61.45.?  X4w376. Nonpooling, rateofreturn LECs recover their LTS contributions in the common  X4line revenue requirement.M1Xj {O'ԍ See 47 C.F.R.  69.501(a).M Because current LTS contributors will no longer be making such contributions after January 1, 1998, their CCL charges should be adjusted to account for this change. Rateofreturn LECs that formerly made LTS contributions should recompute their common line revenue requirements based on the elimination of their LTS obligations, and  X_4adjust their CCL charges accordingly.T2_j {O 'ԍ See 47 C.F.R.  69.105(b)(4)(ii).T  X14x377. We note that the replacement of LTS with comparable support from the new universal service support mechanisms requires us to amend the NECA Common Line tariff rules, which establish the CCL for pooling members at the average of price cap LECs' CCL  X 4charges.P3 |j {O'ԍ See 47 C.F.R.  69.105(b)(2).P Under the current LTS support system, NECA annually projects the common line revenue requirement, including an 11.25 percent return on investment, for incumbent LECs  X 4that participate in the common line pool.4Z j yO}'ԍ The actual rate of return that pooling companies earn on a monthly basis is determined by the total rate  {OE'of return that the pool earns, i.e., the difference between the total costs that the pooling companies submit and the total amount of revenue in the pool, as a percentage of all pooling companies' total common line investment. NECA then computes the total amount of LTS support needed by subtracting the amount pooling carriers will receive in CCL revenues and SLCs from the pool's projected revenue requirement, after removing pay telephone costs and revenues. Our rules currently provide that the NECA CCL tariff be set to recover the average  Xb4of price cap LECs' CCL charges.P5b0 j {OC'ԍ See 47 C.F.R.  69.105(b)(2).P If we were to retain this rule, our decision eliminating LTS obligations for price cap LECs and requiring them to reduce their CCL charges accordingly would automatically reduce the CCL revenues of NECA pool members. Further, reductions would occur as price cap LECs implemented our decisions in Section III of this Order, which restructures the common line rate structure for price cap LECs to recover common line costs through flatrated charges instead of the perminute CCL charge. Because  X4we have deferred consideration of access reform for nonprice cap LECsM6 j {OK#'ԍ See Section V.B, supra.M and did not seek comment on this issue in the NPRM, we must address this issue in a future proceeding that undertakes access reform for small, nonprice cap LECs. "T 60*&&aa("Ԍ X'ԙ` ` b. Recovery of New Universal Service Obligations (#  X4y378. In the Universal Service Order, we conclude that assessment of contributions for the interstate portion of the high cost and lowincome support mechanisms shall be based  X4solely on enduser interstate revenues,x7j {O'ԍ See Sections VII, VIII, and XIII.F of the Universal Service Order.x and that assessment of universal support for eligible schools, libraries, and rural health care providers shall be based on interstate and intrastate  Xx4total enduser revenues.t8xZj {O 'ԍ See Sections X, XI, and XIII.F of the Universal Service Order.t As to the manner in which carriers may recover their contributions  Xa4to the universal service fund, in our Universal Service Order we conclude that carriers may  XL4recover universal service contributions via interstate mechanisms.e9Lj {O 'ԍ See Section XII of the Universal Service Order.e In this Section, we address the manner in which incumbent price cap LECs may recover their universal service contributions. We address nonprice cap LECs' recovery of universal service contributions in  X 4Section XIII.F of the Universal Service Order.  X 4z379. Price cap LECs may treat their contributions to the new universal service mechanisms, including high cost and lowincome support and support for eligible schools,  X 4libraries, and health care, as exogenous changes to their price cap indices (PCIs).h: ~j {O'ԍ See Section XIII.F of the Universal Service Order.h Because the only interstate revenues that will serve as the basis for assessing universal service contributions in 1998 will be enduser revenues, we find that price cap LECs recovering their universal service obligation through interstate access charges must recover those contributions in the baskets for services that generate enduser interstate revenues. Because price cap LECs do not recover revenues from end users of services in all baskets, the exogenous adjustment should not be acrosstheboard. The baskets containing enduser interstate services are the  X 4common line, interexchange, and trunking baskets.c;X j yO'ԍ The enduser charges assessed on services in the common line basket are recovered through the SLC; in the interexchange basket, enduser charges are recovered through perminute toll charges; and in the trunking basket, end user charges are recovered through special access service provided directly to end users.c Price cap LECs electing to recover their universal service obligation through interstate access charges must therefore apply the full amount of the exogenous adjustment among these three baskets on the basis of relative size of enduser revenues. We note, however, that the tandemswitched transport, interconnection  X4charge, and tandem switch signalling service categories]<0 j yO#'ԍ 47 C.F.R.  61.42(e)(2)(v), (vi), and (vii).] in the trunking basket do not recover enduser interstate revenues. In order to prevent recovery from customers of these services, the service band indices (SBI) for these service categories should not be increased to" <0*&&aa" reflect the exogenous adjustment to the PCI for the trunking basket. To reflect the exogenous adjustment to the trunking basket PCI, price cap LECs should, instead, increase the SBIs for  X4the remaining service categories in the trunking basket_=j yOK'ԍ The four remaining service categories in the trunking basket are as follows: (1) voice grade entrance facilities, voice grade directtrunked transport, voice grade dedicated signalling transport, voice grade special access, WATS special access, metallic special access, and telegraph special access services; (2) audio and video service; (3) high capacity flatrated transport, high capacity special access, and DDS services; and (4) wideband  {Ok'data and wideband analog services. See 47 C.F.R.  61.42(e)(2)(i), (ii), (iii), (iv). _ based on the relative enduser interstate revenues generated in each service category.  X4{380. In 1999, the percentage of price cap LECs' revenues that will be assessed for universal service support may increase as a result of the anticipated increases in high cost, lowincome support and support for schools, libraries, and health care in 1999. Price cap LECs shall therefore perform an upward exogenous adjustment to the PCIs for the common line, interexchange, and trunking baskets in the same manner as the exogenous adjustment performed in 1998, to reflect any change in the assessment rate in 1999.  X '` ` c. Adjustments to Interstate Access Charges to Reflect Additional  X 'Support from the Modified Universal Service Mechanisms (#  X 4|381. In our Universal Service Order, we conclude that the federal universal service mechanism should support 25 percent of the difference between the forwardlooking economic  X{4cost of serving the customer and the appropriate revenue benchmark.i>{zj {O'ԍ See Section VII.C.6 of the Universal Service Order.i We further conclude in that order that 25 percent approximates the portion of the cost of providing the supported network facilities that would be assigned to the interstate jurisdiction, and that, by funding these interstate costs, we will ensure that federal implicit universal service support is made  X4explicit. Consistent with our decision in the Universal Service Order to fund only interstate costs through the federal universal service fund, we direct incumbent LECs to use any universal service support received from the new universal service mechanisms to reduce or satisfy the interstate revenue requirement otherwise collected through interstate access charges.  X4}382. NonRural Carriers. In our Universal Service Order, we conclude that, until a forwardlooking economic cost methodology takes effect on January 1, 1999, nonrural carriers will continue to receive high cost assistance and LTS amounts based on the existing  Xk4universal service mechanisms.i?k j {O(#'ԍ See Section VII.D.1 of the Universal Service Order.i As there will be no change until January 1, 1999 to the support nonrural incumbent LECs currently receive as high cost and LTS support, we conclude that it is not necessary at this time to determine the manner in which nonrural carriers should adjust their interstate access charges to reflect a difference in universal service"&?0*&&aa" support. We will address this issue prior to the January 1, 1999, effective date of the forwardlooking cost mechanisms for nonrural carriers.  X4~383. Rural Carriers. In our Universal Service Order, we conclude that rural carriers,  X4as defined in section 153(37) of the Act,K@j {O'ԍ See 47 U.S.C.  153(37).K shall continue to receive support based on  X4embedded costs for at least three years.iAZj {O'ԍ See Section VII.D.2 of the Universal Service Order.i Beginning on January 1, 1998, rural carriers shall receive high cost loop support, DEM weighting assistance, and LTS benefits on the basis of the modified support mechanisms.  X34384. In our Universal Service Order, we adopt modified perline support mechanisms for providing support comparable to the LTS support received under the existing mechanisms. Beginning on January 1, 1998, we will allow a rural carrier's annual LTS support to increase from its support for the preceding calendar year based on the percentage of increase of the  X 4nationwide average loop cost.iB j {Ov'ԍ See Section VII.D.2 of the Universal Service Order.i Rural, nonprice cap LECs should continue to apply any revenues received from the modified universal service support mechanisms that replace current LTS amounts to the accounts to which they are currently applying LTS support.  X}4385. We also decide in the Universal Service Order that, from January 1, 1998 through December 31, 1999, rural carriers shall calculate their high cost support using the current high cost formulas. We conclude that no adjustment to rural incumbent LECs' interstate access charges is necessary at this time because incumbent LECs will continue to use the existing high cost formulas to determine high cost support. As we determine in that order, however, beginning January 1, 2000, rural carriers shall receive high cost loop support for their average loop costs that exceed 115 percent of an inflationadjusted nationwide average loop cost. The inflation adjusted nationwide average cost per loop shall be calculated by multiplying the 1997 nationwide average cost per loop by the percentage in change in  X4Gross Domestic Product Chained Price Index (GDPCPI) from 19971998.ICZ~j {O'ԍ See Section VII.D.2 of the Universal Service Order. The inflation adjusted nationwide average loop cost for the year 2000 shall be calculated in the following manner: 1998 GDPCPI X 1997 nationwide average loop cost = 2000 inflation adjusted nationwide average loop cost. I We conclude that rural, nonprice cap LECs should continue to apply any revenues received from the modified universal service support mechanism that replace amounts received under the current high cost support system to the accounts to which they are currently applying high cost support.  X&4386. Finally, in our Universal Service Order, we adopt the Joint Board's"&C0*&&aa" recommendation that a subsidy corresponding in amount to that generated formerly by DEM  X4weighting be recovered from the new universal service support mechanisms.eDj {Ob'ԍ See Section VII of the Universal Service Order.e Beginning on January 1, 1998 and continuing until permanent mechanisms for them become effective, rural carriers will receive DEM weighting assistance calculated as follows: assistance will equal the difference between the 1996 weighted DEM factor and the unweighted DEM factor multiplied by the annual unseparated local switching revenue requirement. As with comparable LTS and high cost support, rural, nonprice cap LECs should continue to apply any support received from the modified universal service support mechanisms that replaces existing DEM weighting amounts to the accounts to which they are currently applying DEM weighting assistance.  X 4387. Currently, the high cost and DEM weighting support mechanisms shift a portion of the intrastate revenue requirement to the interstate jurisdiction in order to permit LECs to recover a greater percentage of their costs from the interstate jurisdiction. Some nonprice cap LECs are concerned that, to the extent that support from the modified universal service mechanisms is not applied to the intrastate jurisdiction, an intrastate revenue shortfall will  X4occur.YEZj {O'ԍ See, e.g., Roseville Tel. Comments at 16.Y In the Universal Service Order, we conclude that, until universal service support is based on forwardlooking economic cost, carriers should continue to receive amounts from the new universal service mechanisms comparable to existing high cost and DEM weighting support. In that order, we do not alter the existing revenueshifting mechanisms in place for  X64the current high cost support and DEM weighting at this time.gF6j {O'ԍ See Section VII.D of the Universal Service Order.g Thus, no intrastate revenue shortfall will occur, because no revenue requirement is being shifted back to the intrastate jurisdiction.  X' #J:\ACCESS.REF\ORDER\VID.KLS# #J:\ACCESS.REF\ORDER\VIE.MGS# E. Part 69 Allocation Rules  X' 1.` ` Background  X~4388. In the NPRM, we solicited comment on whether it would be appropriate for incumbent price cap LECs to be relieved of complying with Subparts D and E of Part 69 of our rules, which address the allocation of investments and expenses to the access rate  X94elements.;G9~j yOh#'ԍ NPRM at  294.; ""G0*&&aa""Ԍ X' 2.` ` Discussion  X4389. We conclude that at this time we should maintain our Part 69 cost allocation rules. In this Report and Order, we have instituted a phasing out of the CCL charge. Until the perminute CCL charge is phased out completely and multiline PICCs do not recover any  X4common line revenues,BHj {O'ԍ See Section III.A.B price cap LECs will need to use these rules to calculate the SLC. Therefore, we decline to eliminate the cost allocation rules at this time. We note that we may revisit this issue when these rules are no longer needed to calculate the SLC.  X1' #J:\ACCESS.REF\ORDER\VIE.MGS# #J:\ACCESS.REF\ORDER\VIF.MGS# vF. Other Proposed Part 69 Changes  X ' 1.` ` Background  X 4390. In the NPRM, we sought comment on revisions necessary to update Part 69 and vconform it to the 1996 Act. In the NPRM, we made several proposals that we thought necessary to bring Part 69 current, including: eliminating the rules that provide for a "contribution charge" that may be assessed on special access and expanded interconnection; removing the rule and sections referencing the rule that establishes the equal access rate element; and removing the rule and sections referencing the rule that establishes a rate element for costs associated with lines terminating at "limited pay telephones"; and changing the definition of "Telephone Company" to mean incumbent LEC. We also sought comment on whether rate elements and subelements established pursuant to waiver should be  X4incorporated into Part 69.CIZj yO'ԍ NPRM at  295299.C  X' 2.` ` Discussion  X4391. The passage of the 1996 Act and the subsequent enactment of implementing regulations requires that we update and revise various sections of Part 69. Sections 69.4(f) and 69.122 of our rules provide for a "contribution charge" that may be assessed on special access and expanded interconnection. These sections are inconsistent with section 254 as  XN4amended by the 1996 Act, which requires, inter alia, that such carrier contributions be equitable and nondiscriminatory. Furthermore, our rules governing the contribution charge merely allow a LEC to try to justify this charge in the expanded interconnection context. No party has even attempted to justify such a charge in more than four years. Given this and the relevant amendments in the 1996 Act, we find that there is no need for this rate element. We conclude that sections 69.4(f) and 69.122 of our rules, which provide for a "contribution charge" that may be assessed on special access and expanded interconnection, should be deleted. "!I0*&&aa&"Ԍ X4ԙ392. Under Part 69, we required carriers to eliminate any separate equal access charge  X4by January 1, 1994.AJj yOb'ԍ 47 C.F.R.  69.4(d).A We conclude, therefore, that section 69.4(d), which established the equal access rate element for a limited duration, should be deleted because of the expiration of the designated time period. Similarly, we conclude that section 69.107, which governs the computation of the equal access rate element charges, and sections 69.308 and 69.410, which concern allocation of costs to that rate element, should be deleted because the designated time period for separate equal access rate elements has expired. We conclude that references to  X_4these deleted sections should also be removed from Part 69.K_Xj yOh 'ԍ Section 69.309 refers to section 69.308 and section 69.411 refers to section 69.410.  To ensure consistency, a new section, designated as section 69.3(3)(12), should be added and should read as follows: "Such a tariff shall not contain any separate carrier's carrier tariff charges for an Equal Access element." Similarly, we conclude that section 69.205, which concerns transitional premium charges for IXCs and others should be deleted because the designated transition period for these charges has expired.  X 4393. Section 69.103 requires incumbent LECs to establish a separate rate element for  X 4costs associated with lines terminating at "limited pay telephones."L j yO@'ԍ We note that few, if any, payphone service providers offer this type of service today. Sections 69.303(a), 69.304(c), 69.307(c), and 69.406(a)(9) concern the allocation of costs to this rate element. Section 276 of the Act and the implementing regulations require a new per call compensation  Xb4plan, which requires, inter alia, that incumbent LECs remove all payphone costs from access  XM4charges.MMxj yOv'ԍ Implementation of the Pay Telephone Reclassification and Compensation Provisions of the Telecommunications Act of 1996, Report and Order, CC Docket No. 96128, FCC 96388 (rel. Sep. 20, 1996)  {O'(Payphone Order), recon., FCC 96439 (rel. Nov. 8, 1996) (Payphone Reconsideration Order), appeal docketed  {O'sub nom., Illinois Public Telecommunications Ass'n v. FCC and United States, Case No. 961394 (D.C. Cir., filed Oct. 17, 1996). This new compensation plan, as well as the payphone dialing parity  X64requirements,SN6, j {O'ԍ Payphone Order at  291293.S have eliminated the need for sections 69.103, 69.303(a), 69.304(c), 69.307(c), and 69.406(a)(9). We conclude that these sections should be deleted.  X4394. We conclude that codifying previouslygranted Part 69 waivers is not necessary  X4at this time. Under the Price Cap Performance Review Third Report and Order, a party seeking to introduce a new service may do so by filing a petition showing that the new  X4service is in the public interest.;O j yO%'ԍ NPRM at  309.; Once that petition for a new service has been granted, carriers seeking to introduce the same service with the same rate structure may do so under"N O0*&&aa"  X4expedited procedures.;Pj yOy'ԍ NPRM at  310.; This streamlined alternative for introducing new services should resolve past difficulties encountered with the Part 69 waiver process. The proposed codification of previouslygranted waivers is thus unnecessary. We therefore decline to codify previouslygranted Part 69 waivers into our rules.  X4395. NECA and TCA have requested that the Commission extend to all rateofreturn companies, the right to offer new services based on an expedited process, which requires,  X_4inter alia, a showing that the new service is in the public interest. In the Third Report and Order, we granted to incumbent price cap LECs the right to introduce new services under a  X34streamlined procedure.CQ3Xj yO< 'ԍ NPRM at  309310.C We will address the request of NECA and TCA when we take up access reform for rateofreturn companies in the near future.  X 4396. In the NPRM, we solicited comment on whether we should adopt regulatory requirements to govern rates for terminating access offered by competitive LECs. In Section  X 4VI.C., supra, we conclude that we will not adopt such regulatory requirement at this time. For the same reasons, we find it unnecessary to apply any of our Part 69 regulations to competitive LECs. We therefore conclude that Section 69.2(hh), which currently defines "Telephone Company" by reference to Section 3(r) of the 1934 Act, should be changed to read as follows: "`Telephone Company' or `local exchange carrier' as used in this Part means an incumbent local exchange carrier as defined in section 251(h)(1) of the 1934 Act as amended by the 1996 Act." There is no indication in the record that competitive LECs have exercised any degree of market power in provision of terminating access or other access services. By definition, nondominant carriers do not exercise market power. Further, nondominant carriers possess a negligible share of the current access market and they will be competing with incumbent LECs whose rates are subject to regulation. As a practical matter, the rates of the incumbent LECs will serve as a constraint to some degree on the pricing and practices of nondominant LECs. We therefore find on this record that it is sufficient to rely on the Section 208 complaint process to assure compliance with the Act by competitive LECs, and that we should not apply Part 69 to them. To the extent that our definitions or our application of Part 69 needs in the future to be expanded to encompass LECs other than incumbent LECs, we can revisit this issue.  X$4 #J:\ACCESS.REF\ORDER\VIF.MGS# $J:\ACCESS.REF\ORDER\VIIA.MGS$     vVII. FURTHER NOTICE OF PROPOSED RULEMAKING ă   X' A. PICCs for Special Access Lines  X 4397. In this Further Notice of Proposed Rulemaking, we seek comment on our proposalv to allow incumbent local exchange carriers to impose a PICC on special access lines."!Q0*&&aa&"Ԍ X4ԙ 1.` ` Background   X4398. As discussed in Section III.A., in most cases, the $3.50 SLC ceiling for primary residential and singleline business customers does not allow recovery through the SLC of the average perline common line revenues permitted under our price cap rules. Similarly, in certain service areas, the $6.00 SLC for multiline business lines is insufficient to recover the average perline revenues permitted by price cap regulation. To alleviate this shortfall, we are instituting a number of changes, including raising the ceiling on the SLC for multiline  XH4business and second and additional residential lines.RHj {O 'ԍ See Section III.A. for additional revisions to the recovery of common line revenues. Although this increase in the SLC will recover some of the shortfall, other measures are needed to allow recovery of the common line revenues permitted under our rules.  X 4399. Therefore, we have permitted LECs to recover common line revenues not recovered from the SLC by assessing flat, perline charges on the enduser's presubscribed interexchange carrier. Specifically, we are permitting LECs to assess a PICC on all lines, subject to ceilings which will be increased each year. To the extent that the revenues from SLCs and PICCs on primary residential lines and singleline business lines are insufficient to recover the full common line revenues permitted by our price cap rules for these lines, or the multiline SLCs are at their ceilings, incumbent LECs shall recover the difference by assessing an additional PICC on nonprimary residential and multiline business lines. To the extent that these PICCs do not recover an incumbent LEC's remaining permitted CCL revenues, incumbent LECs generally shall recover any such residual common line revenues through perminute CCL charges assessed on originating access minutes.  X4400. As a result of our new rules, certain multiline businesses will be paying higher SLCs than they do now. Similarly, as the PICCs are phased in, IXCs initially will be required to pay higher PICCs for a multiline business end user compared to the PICC paid for a primary residential end user or a singleline business end user.  Xe4401. In contrast, users of special access do not pay a SLC. Furthermore, under special access, IXCs do not incur the same local access charges that are incurred by end users using switched access. In light of our most recent changes to charges incurred by multiline businesses, including the higher SLC and the new multiline business PICC, it may be cost effective for some multiline businesses that are currently using switched access to purchase instead special access lines.  X 4402. We are concerned that these facts could lead to the migration of certain businesses from the public switched network to special access, which would result in a decrease in projected revenue from multiline SLCs. As a result PICCs for all remaining switched access lines will necessarily increase to make up for the loss of revenue."#ZR0*&&aa!"Ԍ X'ԙ 2.` ` Proposal  X4403. We tentatively conclude that we should permit price cap LECs to assess a PICC on special access lines to recover revenues for the common line basket. The special access PICC would be no higher than the PICC that an incumbent LEC could charge for a multiline business line. Under our proposal, the special access PICC would not recover TIC or marketing expense.  XH4404. We acknowledge that our proposal is a departure from established Commission practice that special access will not subsidize other services. Although our proposal is a subsidy, it is temporary in nature and will be phased out as the singleline PICC is phased in. We tentatively conclude that our proposal is necessary for our transition from the perminute CCL charge to the flat PICC to work.  X 4405. We invite parties to comment on this proposal. We also seek comment on how special access connections should be counted for purposes of assessing a "per line" PICC. Parties should also address the extent to which our proposal affects large and small LECs differently and how small business entities, including small incumbent LECs and new  Xb4entrants, will be affected.sSbj {O'ԍ See Regulatory Flexibility Act, 5 U.S.C.  601 et seq.s  X44406. Consistent with our approach to reform the interstate access charge regime, however, we tentatively conclude that the scope of this proceeding should be limited to  X4incumbent price cap LECs. As discussed in Section V., supra, we have limited the scope of  X4access reform, with some limited exceptions, to price cap incumbent LECs. TXZj yO'ԍ These incumbent LECs are the seven Regional Bell Operating Companies (Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, SWBT, U S West), Citizens, Frontier, GTE, Aliant (formerly Lincoln), SNET, and United/Central.  Similarly, we limit the scope of this NPRM. To the extent necessary, we will instead address the effect of these issues on rateofreturn carriers in our separate access reform proceeding for rateofreturn carriers in 1997. In that proceeding, we will have the opportunity to conduct a comprehensive review of the circumstances unique to these carriers. We seek comment on this tentative conclusion regarding the scope of this proceeding. We also invite parties to identify any changes that should be made to other access elements as a result of this proposed change.  X"' $J:\ACCESS.REF\ORDER\VIIA.MGS$ $J:\ACCESS.REF\ORDER\VIIB.KLS$    B. General Support Facilities Costs  X4407. As discussed in Section IV. D above, the current allocation of GSF costs enables incumbent LECs to recover through regulated interstate access charges costs associated with"zT0*&&aa%" the LECs' nonregulated billing and collection functions. In this section, we seek comment on proposed changes in the allocation of price cap LECs' interstate costs between regulated interstate services and nonregulated billing and collection activities.  X4 1.` ` Background  Xv4408. The costs that incumbent LECs recover through interstate access charges are determined by a multistep process. Incumbent LECs first record their investment costs and booked expenses in the accounts prescribed by the Commission's Part 32 Uniform System of  X14Accounts (USOA).FU1j {O 'ԍ See 47 C.F.R. Part 32.F They next divide the recorded investment and expenses between regulated and nonregulated services pursuant to Part 64 of the Commission's rules. Incumbent LECs then divide regulated expenses and investment costs between the state and interstate jurisdictions pursuant to the separations procedures prescribed in Part 36 of the  X 4Commission's rules.FV Zj {O'ԍ  See 47 C.F.R. Part 36.F Finally, in accordance with our Part 69 access charge rules, the LEC apportions its regulated interstate costs among the interstate access and interexchange service  X 4categories.FW j {OD'ԍ See 47 C.F.R. Part 69.F  Xy4409. Because the Part 69 access charge rules are applied at the end of this multistep process, they are written to accommodate the accounts defined by the USOA and the cost categories prescribed by the Separations Manual. In 1987, the Commission revised its access  X44charge rules1XZ4~j yOc'ԍ Amendment of Part 69 of the Commission's Rules and Regulations, Access Charges, To Conform It With Part 36, Jurisdictional Separations Procedures, CC Docket No. 87113, Report and Order, 2 FCC Rcd 6447  {O'(1987) (Part 69 Conformance Order).1 in response to the Commission's comprehensive revision of both the USOAIYX4j yO'ԍ Revision of the Uniform System of Accounts and Financial Reporting Requirements for Class A and Class B Telephone Companies (Parts 31, 33, 42, and 43 of the FCC's Rules), CC Docket No. 78196, Report and Order, FCC 86221 (rel. May 15, 1986) (creating Part 32 of the Commission's rules).I  X4and the Separations Manual.`ZZ j yO 'ԍ MTS and WATS Market Structure, Amendments of Part 67 (New Part 36) of the Commission's Rules and Establishment of a FederalState Joint Board, CC Docket Nos. 7872, 80286, and 86297, Report and Order,  {O"'2 FCC Rcd 2639 (1987). See Part 36 of the Commission's rules, 47 C.F.R. Part 36.` In its Part 69 Conformance Order, the Commission amended Part 69 to reapportion regulated interstate costs, including General Support Facilities (GSF) investment expenses, among the existing access elements.  X4410. As discussed in Section IV.D above, the GSF investment category in Part 36"Z0*&&aa$" includes assets that support other operations, such as land, buildings, vehicles, as well as  X4general purpose computer investment accounted for in USOA Account 2124.J[j {Ob'ԍ See 47 C.F.R.  36.111.J Some incumbent LECs use general purpose computer equipment, which is included in the GSF  X4investment category, to provide nonregulated billing and collection services to IXCs.\Zj yO'ԍ In 1986, the Commission found that the market for billing and collection service was sufficiently competitive that it was not necessary to require LECs to provide that service as a tariffed common carrier  {OV'service. The Commission did not, however, preempt state regulation of billing and collection services. See  {O 'Detariffing of Billing and Collection Services, CC Docket No. 8588, 102 FCC 2d 1150 (1986) (Billing and  {O 'Collection Detariffing Order); recon. denied, 1 FCC Rcd 445 (1986). The Commission later decided to treat billing and collection costs as regulated for accounting purposes because it found that such treatment was less likely to misallocate these costs between the interstate and intrastate jurisdictions. Separation of Costs of Regulated Telephone Service from Costs of Nonregulated Activities, Report and Order, CC Docket No. 86111,  {O '2 FCC Rcd 1298, 1309 (1987) (Joint Cost Order). The costs of providing interstate billing and collection service are not, however, treated as nonregulated in the Part 64 cost allocation process. Instead, nonregulated interstate billing and collection costs are identified through the Part 36 and Part 69 cost allocation process. The separations process allocates these costs to the various separations categories based on the  XH4separations of the three largest categories of expenses, i.e., plant specific expenses, plant non X34specific expenses, and customer operations expenses.H]32 j yO'ԍ These three largest categories, or the "Big Three Expenses," are the combined expense groups comprising: (1) Plant Specific Operations Expense, Accounts 6110, 6120, 6210, 6220, 6230, 6310, and 6410; (2) Plant Nonspecific Operations Expenses, Accounts 6510, 6530, and 6540; and (3) Customer Operations Expenses, Accounts 6610 and 6620. 47 C.F.R.  69.2(e). The "Big Three Expense Factors" are the ratios of the sum of Big Three Expenses apportioned to each element or category to the combined Big Three Expenses. 47 C.F.R.  69.2(f).H  X 4411. In its comments in response to the NPRM, AT&T refers to the allocation of embedded GSF expenses, including general purpose computer expenses, among access categories as a misallocation resulting in an implicit crosssubsidy of incumbent LECs' nonregulated billing and collection services. This allocation, AT&T contends, results in the inappropriate support through regulated access charges of LECs' billing and collection service, which is a nonregulated, interstate service. AT&T estimates that $124 million of expenses  X{4recovered in interstate access support the nonregulated billing and collection category.R^{j yO 'ԍ AT&T Comments at 6768, Appendix E at 2.R Of the $124 million, AT&T states that $60.1 million is included in interstate switched access, and  XM4$20.5 million is in interstate special access, with the remainder recovered by the SLC.H_M:j yO8$'ԍ AT&T Comments Appendix E at 2.H "6_0*&&aa"Ԍ X' 2.` ` Proposal  X4412. The failure of Part 69 to assign general purpose computer costs to the billing and  X4collection category can be traced to our decision in the Part 69 Conformance Order to use an  X4investmentbased allocator to apportion general support facilities (GSF) investment.]`j {O'ԍ Part 69 Conformance Order, 2 FCC Rcd at 6452.] As discussed in Section IV.D above, Section 69.307 of the Commission's rules apportions GSF investment among the billing and collection category, the interexchange category, and the access elements based on the amount of Central Office Equipment (COE), Cable and Wire Facilities (CWF), and Information Origination/Termination Equipment (IO/T) investment  X34allocated to each Part 69 category.Ca3Zj yO> 'ԍ 47 C.F.R.  69.307(c).C This rule appears on its face to provide for an allocation of GSF investment to billing and collection. Because no COE, CWF, or IO/T investment is allocated to the billing and collection category, however, no GSF investment, and thus no portion of general purpose computer investment, is allocated to the billing and collection category. Similarly, because expenses related to GSF investment are allocated in the same manner as GSF investment, no GSF expenses (including expenses related to general purpose computers) are allocated to billing and collection. Price cap LECs' costs allocated to the  X4interstate billing and collection category are estimated to be approximately $480 million.Cbj yO-'ԍ 1996 ARMIS Access Report.C  Xd4413. As discussed in Section V of the Access Reform Order, we limit the scope of access reform, with some limited exceptions, to price cap incumbent LECs. Consistent with our approach to reform the interstate access charge regime, we tentatively conclude that our proposed changes to the allocation of GSF investment will apply only to price cap LECs. We will address the misallocation of rateofreturn LECs' interstate costs between regulated interstate services and nonregulated billing and collection activities in our separate access reform proceeding for rateofreturn carriers in 1997, which will provide us with the opportunity to conduct a comprehensive review of the circumstances unique to these carriers. We seek comment on this tentative conclusion regarding the scope of this proceeding.  X4414. To the extent that incumbent LECs' costs are underallocated to the billing and collection category, incumbent LECs' regulated services are recovering through interstate access charges costs associated with unregulated services. We therefore tentatively conclude that price cap incumbent LECs' general purpose computer costs attributable to billing and collection should not be recovered through regulated access charges. We seek comment on two options for reassigning these costs to the billing and collection category.  X4415. Under the first option, a price cap LEC would study the uses of the general"zb0*&&aa" purpose computer assets recorded in Account 2124 to determine the percentage of investment  X4in that account that is used for billing and collection activities.cj {Ob'ԍ Investment in general purpose computer equipment is recorded in Account 2124. See 47 C.F.R.  32.2124. That percentage, multiplied  X4by the ratio of the dollar amount in Account 2124 to the dollar amount in Account 2110,d"j {O'ԍ Investment in land and support assets is recorded in Account 2110. See 47 C.F.R.  32.2110. which accumulates the total GSF investment, would be applied to the interstate portion of Account 2110 to determine a dollar amount that represents general purpose computer assets used for interstate billing and collection activities. The dollar amount so identified would be attributed directly to the billing and collection category. The remainder of the interstate portion of Account 2110 shall be apportioned among the access elements and the interexchange category using the current investment allocator. General purpose computer  X14expenses recorded in Account 6124 would be treated in a similar fashion to Account 2124.e1j {O'ԍ General purpose computers expenses are recorded in Account 6124. See 47 C.F.R.  32.6124. The interstate portion of Account 6124 would be allocated between (a) the billing and collection category and (b) all other elements and categories using the percentage derived for Account 2124. The remainder of Account 6120 (GSF expense) would be apportioned based  X 4on current GSF allocators.f Fj {O'ԍ General support expenses are recorded in Account 6120. See 47 C.F.R.  32.6120. Appropriate downward exogenous cost adjustments would be made to all price cap baskets.  X4416. Two objections are commonly raised to the use of special studies to make regulatory cost allocations. First, such studies are said to be costly. We recognize that there are costs attached to a special study approach. We note, however, that price cap LECs may already be required to study the use of computer investment in Account 2124 as part of the process of allocating that investment between regulated and nonregulated activities pursuant to the Part 64 joint cost rules. Second, it may be claimed that permitting price cap LECs to use special studies gives them too much discretion and that regulators are unable to ascertain the validity of the studies. To remedy this concern, we propose that each price cap LEC add to its cost allocation manual (CAM) a new section entitled "Interstate Billing and Collection." That section would describe: (1) the manner in which the price cap LEC provides interstate billing and collection services, and (2) the study it uses to determine the portion of Account 2124 investment that it attributes to the billing and collection category. The special study would then be subject to the same independent audit requirements as other regulated and nonregulated cost allocations. In addition, to obtain an independent certification of the validity of the procedures adopted by the price cap LEC, we would instruct the independent auditors to examine the design and execution of the study during the first independent audit following the addition of the billing and collection section to the CAM and to report their conclusions on the validity of the study. " f0*&&aa"Ԍ X4ԙ417. Under the second option, we would modify Section 69.307 of our rules to require use of a general expense allocator to allocate the interstate portion of Account 2110 between: (1) the billing and collection category, and (2) all other elements and categories.  X4We propose to use the "Big Three Expense" allocator used elsewhere in Part 69,Kgj {O4'ԍ See 47 C.F.R.  69.2(f).K excluding, however, any account or portion of an account that is itself apportioned based on the apportionment of GSF to avoid circularity. The GSF investment not allocated to the billing and collection category would then be apportioned among the access elements and the interexchange category using the current investment allocator. This would ensure that GSF costs are allocated among all access categories, including the billing and collection category. The interstate portion of Account 6120 would be apportioned among all elements and categories based on the overall apportionment of GSF investment. This option covers only price cap incumbent LECs that provide interstate billing and collection using regulated assets. Carriers that acquire billing and collection services from unregulated affiliates through affiliate transactions or from third parties would continue recording their expenses for acquiring such  X 4services in Account 6623,Kh Zj {O'ԍ See 47 C.F.R.  32.6623.K which is already apportioned to the billing and collection category.  Xy4418. We invite parties to comment on the feasibility of these two options and propose alternative methods for reassigning general purpose computer costs to the billing and collection category. Parties should also address the extent to which either option affects large and small LECs differently and how small business entities, including small incumbent LECs  X4and new entrants, will be affected.sij {O'ԍ See Regulatory Flexibility Act, 5 U.S.C.  601 et seq.s We invite parties to identify any changes that should be made to other access elements as a result of any changes we may make to the GSF allocation procedures.  X4 $J:\ACCESS.REF\ORDER\VIIB.KLS$ $J:\ACCESS.REF\ORDER\VIII.JSL$ #Xj P9XP#  VIII. FINAL REGULATORY FLEXIBILITY ANALYSIS ă  X4419. As required by the Regulatory Flexibility Act (RFA),Fj~j {O'ԍ See 5 U.S.C.  603.F an Initial Regulatory  X|4Flexibility Analysis (IRFA) was incorporated in the NPRM in this proceeding.Bk|j yO="'ԍ NPRM at 32137.B The Commission sought written public comments on the proposals in the NPRM, including the IRFA. The Commission's Final Regulatory Flexibility Analysis (FRFA) in this Order (the First Report and Order in this Access Charge Reform proceeding) conforms to the RFA, as"7k0*&&aa!"  X4amended.klZj {Oy'ԍ See 5 U.S.C.  604. The Regulatory Flexibility Act, 5 U.S.C.  601 et. seq., was amended by the "Small Business Regulatory Enforcement Fairness Act of 1996" (SBREFA), which was enacted as TitleII of the Contract With America Advancement Act of 1996, Pub.L. No. 104121, 110 Stat. 847 (1996) (CWAAA). k We provide this summary analysis to provide context for our analysis in this FRFA. To the extent that any statement contained in this FRFA is perceived as creating ambiguity with respect to our rules or statements made in preceding sections of this Order, the rules and statements set forth in those preceding sections shall be controlling.  X' A.Need for and Objectives of this First Report and Order  X_4420. The Telecommunications Act of 1996 requires incumbent LECs to offer interconnection and unbundled elements on an unbundled basis, and imposes a duty to establish reciprocal compensation arrangements for the transport and termination of calls. The Commission's access charge rules were adopted at a time when interstate access and local exchange services were offered on a monopoly basis, and in many cases are inconsistent with the competitive market envisioned by the 1996 Act. This proceeding is being conducted to revise the Commission's access charge rules to make them consistent with the Telecommunications Act of 1996.  X'v B.Summary of Significant Issues Raised by the  Xy'Public Comments in Response to the IRFA  XK4421. Only one party, Rural Tel. Coalition, commented on the IRFA contained in the NPRM. Rural Tel. Coalition disagrees with our conclusion that rules applying only to price vcap LECs will not affect nonprice cap LECs in a way that requires analysis under the RFA. According to Rural Tel. Coalition, the decisions made in this Order will "prejudge and  X4prejudice" a later rulemaking addressing access charge reform for nonprice cap LECs.Qmj yO'ԍ Rural Tel. Coalition Comments at 4, 32.Q In addition, Rural Tel. Coalition argues that nonprice cap LECs, which include small incumbent LECs, will be injured if the access reform issues addressed in this Order are not implemented for them as well as pricecap LECs. Finally, Rural Tel. Coalition argues that the Commission impermissibly determined that small incumbent LECs are not small businesses within the  X|4meaning of the RFA.=n|zj {O 'ԍ Id. at 3235.=  XN4422. Rather than attempt to enact "one size fits all" access charge reform that would risk not fully accounting for the special circumstances of rateofreturn and other nonprice cap LECs, we have chosen to address those LECs separately in a proceeding in which we may better focus on their needs. We do not agree with Rural Tel. Coalition that our decisions"  n0*&&aa" in this Order will "prejudge and prejudice" our consideration of the issues in a subsequent rulemaking. Although we may often find that the public interest concerns are similar for large and small carriers, our analysis will begin anew, and will address all relevant factors. Moreover, where the special circumstances faced by small incumbent LECs justify different treatment than is accorded price cap LECs in this Order, we will be better able to explain and address those concerns in a separate proceeding. For the reasons set forth in Section V above, we also disagree with Rural Tel. Coalition that small incumbent LECs may be injured by the delay involved in conducting separate rulemakings. Finally, although we are not persuaded on the basis of this record that our prior practice of finding incumbent LECs not subject to  X14regulatory flexibility analysis (because they are not small businesses) has been incorrect,;o(1j {O 'ԍ See Implementation of the Local Competition Provisions of the Telecommunications Act of 1996, First  {Ot 'Report and Order, 11 FCC Rcd 15499 132830 (1996) (Local Competition Order), motion for stay denied,  {O> 'Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, Order, 11 FCC Rcd  {O '11754 (1996), partial stay granted, Iowa Utilities Board v. FCC, No. 963321, 1996 WL 589204 (8th Cir. 1996).; we have fully performed an RFA analysis for small incumbent LECs in this Order, including consideration of any adverse impact of the rules we adopt and consideration of alternatives that may reduce adverse impacts on such entities.  X ' C.Description and Estimate of the Number of  X 'Small Entities To Which the Rules Will Apply:  Xy4423. The RFA generally defines "small entity " as having the same meaning as the  Xb4terms "small business," "small organization," and "small governmental jurisdiction."?pbj yO'ԍ 5 U.S.C. 601(6).? In addition, the term "small business" has the same meaning as the term "small business concern" under the Small Business Act unless the Commission has developed one or more definitions  X4that are appropriate for its activities.qHj yO'ԍ 5 U.S.C.  601(3) (incorporating by reference the definition of "small business concern" in 15 U.S.C. 632). A small business concern is one which: (1) is independently owned and operated; (2) is not dominant in its field of operation; and (3)  X4satisfies any additional criteria established by the Small Business Administration (SBA).rj yO@'#] PP#э Small Business Act, 15 U.S.C.  632 (1996).  X4424. Pursuant to 5 U.S.C.  601(3), the statutory definition of a small business applies "unless an agency after consultation with the Office of Advocacy of the Small Business Administration and after opportunity for public comment, establishes one or more definitions of such term which are appropriate to the activities of the agency and publishes such definition(s) in the Federal Register." SBA has developed a definition of small business for Standard Industrial Classification (SIC) category 4813 (Telephone Communications, Except"N0 r0*&&aaN" Radiotelephone). We first discuss the number of small businesses falling within this category, and then we attempt to refine further our estimate to correspond with the categories of telephone companies that are commonly used under our rules.  X4425. Consistent with our prior practice, our use of the terms "small entities" and "small businesses" does not encompass "small incumbent LECs." We use the term "small incumbent LECs" to refer to any incumbent LECs that arguably might be defined by SBA as  X_4"small business concerns."Vs_j {O'ԍ See 13 C.F.R. 121.210 (SIC 4813).V Because the small incumbent LECs subject to these rules are either dominant in their field of operations or are not independently owned and operated, they are, consistent with our prior practice, excluded from the definition of "small entity" and  X 4"small business concerns."t Zj {O% '#] PP#э See Local Competition Order, 11 FCC Rcd at 15499 132830, 1342. Out of an abundance of caution, however, for regulatory flexibility analysis purposes, we will consider small incumbent LECs within this analysis and use the term "small incumbent LECs" to refer to any incumbent LECs that arguably might be  X 4defined by the SBA as "small business concerns."5u j {Or'ԍ Id. 5  X 'x` ` 1. Telephone Companies, Except  X'` `  Radiotelephone Companies (SIC 4813)  Xb4426. Total Number of Telephone Companies Affected. The United States Bureau of the Census ("the Census Bureau") reports that, at the end of 1992, there were 3,497 firms  X64engaged xin providing telephone services, as defined therein, for at least one year. v6~j {Oe'ԍ United States Department of Commerce, Bureau of the Census, 1992 Census of Transportation,  {O/'Communications, and Utilities: Establishment and Firm Size, at Firm Size1-123 (1995) (1992 Census).  This number contains a variety of different categories of carriers, including local exchange carriers, interexchange carriers, competitive access providers, cellular carriers, mobile service carriers, operator service providers, pay telephone operators, personal communications services providers, covered specialized mobile radio providers, and resellers. It seems certain that some of those 3,497 telephone service firms may not qualify as small entities or small  X4incumbent LECs because they are not "independently owned and operated."Cwj yO7!'ԍ 15 U.S.C.  632(a)(1).C For example, a PCS provider that is affiliated with an interexchange carrier having more than 1,500 employees would not meet the definition of a small business. It seems reasonable to conclude that fewer than 3,497 telephone service firms are small entity telephone service firms or small incumbent local exchange carriers. "9j w0*&&aaE"Ԍ X4427. According to the Telecommunications Industry Revenue: Telecommunications  X4Relay Service Fund Worksheet Data (TRS Worksheet), there are 2,847 interstate carriers.  X4These carriers include, inter alia, local exchange carriers, wireline carriers and service  X4providers, interexchange carriers, competitive access providers, operator service providers, pay  X4telephone operators , providers of telephone toll service, providers of telephone exchange  X4service, and resellers.  Xe4 428. Wireline Carriers and Service Providers. The SBA has developed a definition of small entities for telephone communications companies other than radiotelephone (wireless) companies. According to the SBA's definition, a small business telephone company other  X" 4than a radiotelephone company is one employing no more than 1,500 persons.Ox" j yO 'ԍ 13 CFR  121.201, SIC Code 4812. O The Census Bureau reports that, there were 2,321 such telephone companies in operation for at least one  X 4year at the end of 1992.]y Xj {O'ԍ 1992 Census, supra, at Firm Size1-123.] All but 26 of the 2,321 nonradiotelephone companies listed by the Census Bureau were reported to have fewer than 1,000 employees. Thus, even if all 26 of those companies had more than 1,500 employees, there would still be 2,295 nonradiotelephone companies that might qualify as small entities or small incumbent LECs. We do not have information on the number of carriers that are not independently owned and operated, and thus are unable at this time to estimate with greater precision the number of wireline carriers and service providers that would qualify as small business concerns under the SBA's definition. Consequently, we estimate that there are fewer than 2,295 small telephone communications companies other than radiotelephone companies.  X4429. Incumbent Local Exchange Carriers. Neither the Commission nor the SBA has developed a definition for small incumbent providers of local exchange services (LECs). The closest applicable definition under the SBA rules is for telephone communications companies  X4other than radiotelephone (wireless) companies.Mzj yOf'ԍ 13 CFR  121.201, SIC Code 4813.M The most reliable source of information regarding the number of LECs nationwide is the data that we collect annually in connection  X4with the TRS Worksheet. According to our most recent data, 1,347 companies reported that  X4they were engaged in the provision of local exchange services.Q{^zj {O 'ԍ Federal Communications Commission, CCB, Industry Analysis Division, Telecommunications Industry  {O}!'Revenue: TRS Fund Worksheet Data, Tbl. 1 (Average Total Telecommunications Revenue Reported by Class of  {OG"'Carrier) (December1996) (TRS Worksheet). Q We do not have information on the number of carriers that are not independently owned and operated, nor what carriers have more than 1,500 employees, and thus are unable at this time to estimate with greater precision the number of incumbent LECs that would qualify as small business concerns under SBA's definition. Consequently, we estimate that there are fewer than 1,347 small incumbent",{0*&&aa" LECs.  X'v` ` 2. Information Service Providers and  X'` `  Competitive hhCLECs Are Not Affected  X4430. In Section VIII.B of the NPRM, we sought comment on whether to continue to exempt enhanced service providers (which we now refer to as information service providers, vor ISPs) from any requirement to pay access charges. Because we decide to retain the ISP exemption, and do not permit LECs to impose access charges on ISPs at this time, we conclude that the RFA does not require us to consider the effects of any proposed rules on ISPs that fall within the definition of a small entity. Instead, as set forth in Section VI.B above, we find that the proceeding commenced with the Notice of Inquiry issued contemporaneously with the NPRM is the appropriate forum to address the fundamental  X 4questions about ISP usage of the public switched network.|z j {ON'ԍ See In the Matter of  Usage of the Public Switched Network by Information Service and Internet Access Providers, Notice of Inquiry, CC Docket No. 96263, __ FCC Rcd _____ (1996), __ Fed. Reg. _____ (Released December 24, 1996) (NOI). In the NOI, we sought comment on broader issues concerning the development of information services and Internet access. The information provided will give us the data we need to make further reasonable and informed decisions regarding Internet access and other information services, and, if necessary, to craft proposals for a subsequent Notice of Proposed Rulemaking that are sensitive to the complex economic, technical, and legal questions raised in this area.  Similarly, we sought comment in Section VIII.A of the NPRM on whether the public interest would be served by regulating interstate terminating access services offered by competitive (nonincumbent) LECs. Because we conclude that the public interest would not be served by imposing any regulations on competitive LECs' interstate terminating access offerings at this time, we conclude that the RFA does not require us to consider the effects of any proposed rules on competitive LECs that fall within the definition of a small entity.  X'x D.` ` Summary Analysis of the Projected Reporting, (#`  X'` ` Recordkeeping, and Other Compliance Requirements  X4 431. In Section V.A above, we adopt changes to transport interconnection charge  X4(TIC) rate structures and transport rate structures to comply with the court order in CompTel  X4v. xFCC.\} j {Og 'ԍ CompTel v. FCC, 87 F.3d 522 (D.C.Cir. 1996).\ These changes will affect all incumbent LECs, including small incumbent LECs, and will require small incumbent LECs to make one or more tariff filings reflecting the new rate structures, which will involve the use of legal skills, and possibly accounting, economic, and financial skills.  X;4432. As set forth in Section VI.D above, incumbent LECs, including small incumbent LECs, must reduce their interstate access charges to reflect the elimination of those former"$}0*&&aa" universal service obligations that are being replaced with new universal service obligations, increase their interstate access charges to reflect their new universal service obligations, and, to the extent necessary, adjust their interstate access charges to account for any additional universal service funds received under the modified universal service mechanisms. This will require small incumbent LECs to make one or more tariff filings, which will involve the use of legal skills.  X_'x E.` ` Burdens on Small Entities, and Significant (#`  XH'` ` Alternatives Considered and Rejected  X 4 433. Sections III.CD: Transport/TIC Rate Structure Changes. As set forth in Sections III.CD above, we adopt a new tandemswitched transport rate structure and rate xlevels that replace the interim rate structure in place prior to today. In addition, we adjust the TIC to reflect the changes made by the new tandemswitched transport rate structure and rate levels. Unlike before, we adopt for the first time a final, costbased rate structure, which should reduce and minimize uncertainty for those small businesses and small incumbent LECs whose businesses involve these services. Moreover, the new rate structure and rate levels are more closely related to the costs of providing the underlying services, which should minimize the economic impact of these rules on small businesses and small incumbent LECs by  XM4minimizing the adverse impacts that can accompany noncost based regulation.R~Mj {O'ԍ See Section III.C.2.b supra.R  X4434. We also adopt a transition plan that will have the effect of giving small businesses and small incumbent LECs the opportunity to plan, adjust, and develop their networks with a minimum of disruption for them and their customers. Finally, as set forth in Section III.CD above, we find that the reallocation of TIC costs and the new recovery procedures will facilitate the development of competitive markets. This is because incumbent LEC rates will move toward costbased levels and incumbent LECs will no longer have the ability to assess TICs on switched access minutes that do not use their transport facilities. These pricing revisions may create new opportunities for small entities, including small business and small incumbent LECs wishing to enter local telecommunications markets.  X94435. Section V: Access Reform for Incumbent RateofReturn Local Exchange  X$4Carriers. Our decision to limit access charge reform, with certain specified exceptions, to price cap LECs, which do not include small businesses or small incumbent LECs, should mitigate the potential that access charge reform could have a significant economic impact on any small incumbent LECs. This is because the Commission will address in a separate proceeding the common set of complex issues faced by nonprice cap LECs, which are different than those faced by price cap LECs. Moreover, as discussed above in Section V, we find that small incumbent LECs are unlikely to face imminent harm as a result of the continued application of our current access charge rules because all nonprice cap incumbent"#Z~0*&&aa!" LECs may be exempt from, or eligible for a modification or suspension of, the interconnection and unbundling requirements of the 1996 Act.  X4436. Section VI.A: Applicability of Part 69 to Unbundled Elements. As a result of the exclusion of unbundled elements from Part 69 access charges, described in Section VI.A above, incumbent LECs, including small incumbent LECs, may receive reduced overall levels of interstate access charges as competitors enter local markets using unbundled network elements. They will, however, receive payment for those unbundled network elements pursuant to interconnection agreements under Section 251 of the Act. Moreover, to the extent that small incumbent LECs receive universal service support through interstate access charges, such funding will continue to be received without regard to any loss of revenue from interstate access charges. This is because all universal service support received by small incumbent LECs will be received from the new Universal Service Fund, established in a separate order released today. Finally, we note that section 251 of the Act contains provisions expressly designed to take into account the special circumstances of small incumbent LECs, including those that qualify as rural LECs, with respect to interconnection obligations.  X{4437. Our decisions in Section VI.A above to exclude unbundled elements from the application of Part 69 access charges is likely to facilitate the development of competitive markets. This is because prices for unbundled elements will reflect the costs of those elements, and will not impose on competitors additional charges unrelated to the costs of elements being purchased. Accordingly, as set forth in Section VI.A above, competitors using unbundled elements will contribute to universal service on an equitable and nondiscriminatory basis instead of paying implicit subsidies to incumbent LECs (whether in addition to, or in place of, explicit universal service mechanisms). These decisions may create new opportunities for small entities, including small businesses and small incumbent LECs, wishing to enter local telecommunications markets.  X~4438. Section VI.C: Terminating Access Services Offered by NonIncumbent LECs. As set forth in Section VI.C above, we find that treating new entrants as dominant carriers subject to regulation of their terminating access services until we find otherwise would impose unnecessary regulation, including potentially increased regulatory burdens on small businesses. Instead of imposing such burdens, we find that the imposition of regulatory requirements with respect to competitive LEC terminating access is unnecessary in the absence of some stronger record evidence that competitive LECs have in the past charged unreasonable terminating access rates, or are likely to do so in the future. If there is sufficient indication that competitive LECs are imposing unreasonable terminating access charges, we will revisit this issue. ""~0*&&aa "Ԍ X4439. Section VI.D: Universal Service Related Part 69 Changes. As set forth in Section VI.D.2.a above, we require that LECs that contribute to the Long Term Support (LTS) program and LECs that receive LTS payments revise their tariffs to reflect the fact that the LTS program is being replaced with explicit support from the new Universal Service Fund  X4implemented pursuant to the Universal Service Order adopted today. This will require small incumbent LECs to make one or more tariff filings. The new Universal Service Fund will facilitate the transition to competitive markets while maintaining specific, predictable and sufficient support for universal service as required under section 254 of the Act. Accordingly, the required changes in LECs' tariff filings, including those in tariffs filed by small incumbent LECs, are part of an overall mechanism designed to minimize the economic impact of the 1996 Act on small businesses and small incumbent LECs. The other universal service related changes that we adopt in this Order affect only pricecap LECs, which do not include any small businesses or small incumbent LECs.  X ' F.` ` Report to Congress  X4440. The Commission shall include a copy of this FRFA, along with this Order, in a  X}4report to be sent to Congress pursuant to SBREFA.E}j yO'ԍ 5 U.S.C. 801(a)(1)(A).E A copy of this FRFA (or a summary thereof) will also be published in the Federal Register.  X84 $J:\ACCESS.REF\ORDER\VIII.JSL$ "J:\ACCESS.REF\ORDER\IX.BEG"  IX. PROCEDURAL ISSUES ă "!X0*&&aa"Ԍ X' ! A.Paperwork Reduction Act  X4441. On April 1, 1997, the Office of Management and Budget (OMB) approved all of our proposed information collection requirements in accordance with the Paperwork Reduction  X4Act.j {O'ԍ Notice of Office Management and Budget Action, OMB No 30600760 (Apr. 1, 1997). The OMB made one recommendation, suggesting that we try "to minimize the number of new filings that firms must create in order to be compliant with the rules adopted . . . allowing firms to use many of the filings they must create in order to demonstrate that they meet the Telecommunications Act of 1996 requirements for provision of interLATA services within their operating regions." The recommendation of OMB primarily affects proposals that were not adopted in this Order, but will be the subject of a future Report and Order. At that time, the Commission will consider carefully whether the number of required new filings can be minimized by relying to the greatest extent possible on those filings referenced by OMB in its approval. Furthermore, in this Order, although we have made certain adjustments, we have minimized the paperwork burden where possible. For example, the first inflation adjustment will be done in January 1, 1999, but the next one will not be done until July 1, 2000. This schedule will minimize the number of filings and paperwork burden associated with necessary adjustments for inflation.  Xb4442. In the course of preparing this Order, we have decided to modify several of the information collection requirements proposed in the NPRM. For example, price cap local exchange carriers must make a downward exogenous adjustment to the price cap index for the common line basket to account fully for the elimination of their LTS obligations by December  X416, 1997 to be effective January 1, 1998.OZj {O'ԍ See Section VI.D., supra.O We conclude that these modifications constitute a new "collection of information," within the meaning of the Paperwork Reduction Act of 1995, 44 U.S.C.  35013520. These modifications are subject to OMB review and the Commission has requested emergency approval of these modifications to ensure that the requirements may be effective on June 16, 1997. In addition, we will seek final OMB approval for these modifications.  Xe4443. The Further Notice of Proposed Rulemaking contains either a proposed or modified information collection. As part of its continuing effort to reduce paperwork burdens, we invite the general public and the ! OMB to take this opportunity to comment on the information collections contained in the Further Notice of Proposed Rulemaking, as required by the Paperwork Reduction Act of 1995, 44 U.S.C.  35013520. Public and agency comments are due at the same time as other comments on the Further Notice of Proposed Rulemaking; OMB comments are due 60 days from date of publication of the Further Notice of Proposed Rulemaking in the Federal Register. Comments should address: (a) whether the proposed collection of information is necessary for the proper performance of"!0*&&aa% " the functions of the Commission, including whether the information shall have practical utility; (b) the accuracy of the Commission's burden estimates; (c) ways to enhance the quality, utility, and clarity of the information collected; and (d) ways to minimize the burden of the collection of information on the respondents, including the use of automated collection techniques or other forms of information technology. "0*&&aaQ"Ԍ X' l$B.Initial Regulatory Flexibility Act Analysis  X4444. Pursuant to the Regulatory Flexibility Act (RFA),PZj {OK'ԍ 47 U.S.C.  603. The RFA, see 5 U.S.C.  601 et seq., has been amended by the Contract With America Advancement Act of 1996, Pub. L. No. 10421, 110 Stat. 847 (1996) (CWAAA). Title II of the CWAAA is the "Small Business Regulatory Enforcement Fairness Act of 1996" (SBREFA).P the Commission has prepared the following initial regulatory flexibility analysis (IRFA) of the expected impact on small entities of the policies and rules proposed in the Further Notice of Proposed Rulemaking (Further Notice). Written public comments are requested on the IRFA. These comments must be filed in accordance with the same filing deadlines as comments on the rest of the Further Notice, but they must have a separate and distinct heading designating them as responses to the regulatory flexibility analysis. The Secretary shall cause a copy of the Further Notice, including the initial regulatory flexibility analysis, to be sent to the Chief Counsel for Advocacy of the Small Business Administration in accordance with Section  X 4603(a) of the RFA.@ j yO'ԍ 47 U.S.C.  603(a).@  X 4445. Reason for action. The Commission has revised its interstate access charge rules to make them consistent with the Telecommunications Act of 1996. As discussed in Section VII.A of the Further Notice, multiline business customers will pay a higher subscriber line charge as a result of access charge reform, while special access customers do not pay such a charge. In addition, as the PICCs are phased in IXCs will be required to pay a substantially higher PICC for a multiline business end user compared to the PICC paid for a primary residential end user or singleline business end user. An IXC serving multiline business customers through special access can avoid paying the PICCs. As discussed in Section VII.B, the current allocation of general support facilities expenses enables incumbent LECs to recover through regulated interstate access charges costs caused by the LECs' nonregulated billing and collection functions.  X4446. Objectives. In Section VII.A, by proposing to allow LECs to impose a subscriber line charge on special access customers, we seek to prevent a decrease in projected revenue from multiline subscriber line charges and PICCs caused by the migration of certain multiline business customers from the public switched network to special access. In Section VII.B, we seek to revise the Commission's current allocation of price cap LECs' interstate costs between regulated interstate access services and nonregulated billing and collection activities to move interstate access rates closer to cost, consistent with the 1996 Act's new competitive paradigm. l$  X4447. Legal Basis. The proposed action is supported by Sections 4(i), 4(j), 201205, 208, 251, 252, 253, and 403 of the Communications Act of 1934, as amended, 47 U.S.C. "z0*&&aak" 154(i), 154(j), 201205, 208, 251, 252, 253, 403.  X4448. Description, potential impact and number of small entities affected. For purposes of this Further Notice, the Regulatory Flexibility Act defines a "small business" to be the same as a "small business concern" under the Small Business Act (SBA), 15 U.S.C.  632, unless the Commission has developed one or more definitions that are appropriate to its  Xv4activities.vj {O'ԍ See 5 U.S.C.  601(3) (incorporating by reference the definition of "small business concern" in 15 U.S.C.  632). Under the SBA, a "small business concern" is one that: (1) is independently owned and operated; (2) is not dominant in its field of operation; and (3) meets any additional  XH4criteria established by the SBA.H"j {O 'ԍ 15 U.S.C.  632. See, e.g., Brown Transport Truckload, Inc., v. Southern Wipers, Inc., 176 B.R. 82 (N.D. Ga. 1994). The Small Business Administration has defined a small business for Standard Industrial Classification (SIC) category 4813 (Telephone Communications, Except Radiotelephone) to be a small entity that has no more than 1500  X 4employees.A |j yO0'ԍ 13 C.F.R.  121.201.A  X 4449. Total Number of Telephone Companies Affected. The proposals in Sections VII.A and VII.B of this Further Notice, if adopted, would affect all LECs that are regulated by the Commission's price cap rules. Currently, 13 incumbent LECs are subject to price cap regulation. We tentatively conclude that all price cap carriers have more than 1500 employees and, therefore, are not small entities.  XM4450. Reporting, record keeping and other compliance requirements. It is not clear whether, on balance, all proposals in this Further Notice would increase or decrease incumbent LECs' administrative burdens.  X4451. We believe that the reforms proposed in Section VII.A of this Further Notice would require price cap LECs (not small entities) to make at least one tariff filing, and possibly several additional filings, but otherwise should not affect their administrative burdens. The reforms proposed in Section VII.B of the Further Notice may require price cap LECs (not small entities) to study the uses of the general purpose computer assets recorded in Account 2124 to determine the percentage of investment in that account that is used for billing and collection activities, but otherwise should not affect their administrative burdens.  X94452. Federal rules which overlap, duplicate or conflict with this proposal. None.  X 4453. Any significant alternatives minimizing impact on small entities and consistent"  0*&&aa"  X4with stated objectives. In Sections VII.A and VII.B of this Further Notice, we limit the scope of our proposals to incumbent price cap LECs, thereby not affecting small entities. We seek comment on these proposals and urge that parties support their comments with specific evidence and analysis.  X' C.Further Notice of Proposed Rulemaking Comment Filing Dates  X_4454. Pursuant to applicable procedures set forth in Section 1.399 and 1.411 et seq. of  XJ4the Commission's rules, 47 C.F.R. Sections 1.399, 1.411 et seq., interested parties may file comments in response to the Further Notice of Proposed Rulemaking, including comments ont he information collection requirements, no later than June 26, 1997 with the Secretary, Federal Communications Commission, Washington D.C. 20554. Interested parties may file replies no later than July 11, 1997, except that reply comments on the information collection requirements are due no later than July 28, 1997. To file formally in this proceeding, participants must file an original and twelve copies of all comments, reply comments, and supporting comments. If participants want each Commissioner to receive a personal copy of their comments, an original plus 16 copies must be filed. In addition, parties should file two copies of any such pleading with the Competitive Pricing Division, Common Carrier Bureau, Room 518, 1919 M Street, N.W., Washington, D.C. 20554. Comments and reply comments will be available for public inspection during regular business hours in the FCC Reference Center, Room 239, 1919 M Street, N.W., Washington D.C. 20554.  X 4455. Parties submitting diskettes should submit them along with their formal filings to the Office of the Secretary. Submissions should be on a 3.5 inch diskette formatted in an DOS PC compatible form. The document should be saved in WordPerfect 5.1 for Windows format. The diskette should be submitted in "read only" mode. The diskette should be clearly labelled with the party's name, proceeding, type of pleading (comment or reply  X4comment), docket number, and date of submission.  Xi4456. You may also file informal comments electronically via email . Only one copy of electronically-filed comments must be submitted. You must put the docket number of this proceeding in the subject line (see the caption at the beginning of this Notice, or in the body of the text if by Internet). You must note whether an electronic submission is an exact copy of formal comments on the subject line. You also must include your full name and Postal Service mailing address in your submission.  X 4457. Comments and replies must comply with Section 1.49 and all other applicable sections of the Commission's rules. We also direct all interested parties to include the name of the filing party and the date of the filing on each page of their comments and replies. Comments and replies must also clearly identify the specific portion of this Notice of Proposed Rulemaking to which a particular comment or set of comments is responsive. If a portion of a party's comments does not fall under a particular topic listed in the Table of"U%0*&&aae#" Contents of this Notice, such comments must be included in a clearly labelled section at the beginning or end of the filing.  X4458. Written comments by the public on the proposed and/or modified information collections are due July 28, 1997. Written comments must be submitted by the Office of Management and Budget (OMB) on the proposed and/or modified information collections on or before 60 days after date of publication in the Federal Register. In addition to filing comments with the Secretary, a copy of any comments on the information collections contained herein should be submitted to Judy Boley, Federal Communications Commission, Room 234, 1919 M Street, N.W., Washington, DC 20554, or via the Internet to jboley@fcc.gov and to Timothy Fain, OMB Desk Officer, 10236 NEOB, 725 17th Street, N.W., Washington, DC 20503 or via the Internet to fain_t@al.eop.gov.  X ' %6X. ORDERING CLAUSES Đ\  X4459. Accordingly, IT IS ORDERED, pursuant to Sections 14, 10, 201205, 251, 254, 303(r), and 410(a) of the Communications Act of 1934, as amended, and Section 601 of the Telecommunications Act of 1996, 47 U.S.C.  151154, 160, 201205, 251, 254, 303(r), 410(a), and 601, that the ORDER IS ADOPTED.  X4460. IT IS FURTHER ORDERED that the provisions in this Order will be effective June 17, 1997. We anticipate this date will be at least thirty days after publication of the rules in the Federal Register. If publication of the rules is delayed, however, we find good cause under 5 U.S.C.  553(d)(3) to make the rules effective less than thirty days after publication, because the local exchange carriers subject to price cap regulation must file tariffs by June 16, in order for them to be effective on July 1, 1997, as required by Section 69.3 of the Commission's rules, 47 C.F.R.  69.3. In addition, to ensure that the local exchange carriers subject to price cap regulation have actual notice of these rules immediately following their release, we are serving those entities by overnight mail. The collections of information contained within are contingent upon approval by the Office of Management and Budget.  X 4461. IT IS FURTHER ORDERED that the waiver petitions of Bell Atlantic, Pacific Bell, GTE, Cincinnati Bell, U S West, and BellSouth discussed in Section III.A.5., regarding Section 69.104 as applied to ISDN service ARE DISMISSED.  X 4462. IT IS FURTHER ORDERED that the rulemaking proceeding in CC Docket No. 9572 IS TERMINATED.  X#4463. IT IS FURTHER ORDERED, pursuant to Sections 14, 10, 201205, 251, 254, 303(r), and 701 of the Communications Act of 1934, as amended, 47 U.S.C.  151154, 160, 201205, 251, 254, 303(r), and 601, that NOTICE IS HEREBY GIVEN OF the rulemaking"Q%0*&&aae#" described above and that COMMENT IS SOUGHT on these issues.    X4 hhCFEDERAL COMMUNICATIONS COMMISSION  X 4 hhCWilliam F. Caton  X 4 hhCActing Secretary "{J:\ACCESS.REF\ORDER\IX.BEG" " 0*&&aa "  X'   !J:\ACCESS.REF\ORDER\APPXA! U APPENDIX A   X'\ List of Commenters in CC Docket Nos. 96262, 941, 91213 ă ACC Long Distance Corp. (ACC Long Distance) Ad Hoc Telecommunications Users Committee (Ad Hoc) AirTouch Communications, Inc. (AirTouch) Alabama Public Service Commission (Alabama Commission) Alaska Telephone Association Aliant Communications Co., formerly Lincoln Telephone (Aliant) Allied Communications Group, Inc. (Allied) Alliance for Public Technology ALLTEL Telephone Services Corporation (ALLTEL)  X 4American Association for Adult and Continuing Education, et al.  X 4American Assocation for Retired Persons, et al. (AARP, et al.) America OnLine, Inc. (America OnLine) American Library Association American Petroleum Institute (API) America's Carriers Telecommunication Association (ACTA) Ameritech Association for Local Telecommunications Services (ALTS) AT&T Corp. (AT&T)  X 4Bankers Clearing House, et al.  X4Bell Atlantic Telephone Companies and NYNEX (BA/NYNEX) BellSouth Corporation, BellSouth Telecommunications, Inc. (BellSouth) Cable & Wireless, Inc. (Cable & Wireless) [People of the State of] California and the Public Utility Commission of the State of California (California Commission) California Cable Television Association Cathey, Hutton and Associates Centennial Cellular Corporation Cincinnati Bell Telephone Company (Cincinnati Bell) Citizens for a Sound Economy Foundation (CSE) Citizens Utilities Company (Citizens Utilities) Commercial Internet Exchange Association (CIEA) Communications Workers of America (CWA) Competition Policy Institute Competitive Telecommunications Association (CompTel) CompuServe, Inc. and Prodigy Services Corporation (CompuServe/Prodigy) Consumer Project on Technology (Consumer Project) [Public Service Commission of the] District of Columbia (District of Columbia Commission)  XW%4Evans Telephone Company, et al. (Evans, et al.)"W%0*&&aa&"ԌExcel Telecommunications, Inc. (Excel) Florida Public Service Commission (Florida Commission) Frederick & Warinner, L.L.C. (Frederick & Warinner) Frontier Corporation (Frontier) General Communication, Inc. (GCI) General Services Administration/United States Department of Defense (GSA/DOD) Gallegos Family Network (Gallegos) Gray Panthers GVNW Inc./Management (GVNW) GTE Service Corporation (GTE) Harris, Skrivan & Associates, LLC (Harris, Skrivan & Associates) ICG Telecom Group, Inc. (ICG) Illinois Commerce Commission (Illinois Commission) Illuminet Independent Telephone & Telecommunications Alliance Information Industry Association Interactive Services Association International Communications Association (Intl. Comm. Ass'n) Internet Access Coalition ITCs, Inc. (ITC) IXC Long Distance, Inc. Kansas Corporation Commission (Kansas Commission) LCI International Telecom Corp. (LCI) MCI Telecommunications Corporation (MCI)  X4Media Access Project, et al. (MAP, et al.) Microsoft Corporation (Microsoft) Minnesota Independent Coalition Missouri Public Service Commission (Missouri Commission) National Association of Regulatory Utility Commissioners (NARUC) National Cable Television Association, Inc. (NCTA) National Exchange Carrier Association, Inc. (NECA) New York State Department of Public Service (New York Commission) Newspaper Association of America Northern Arkansas Telephone Company [Commonwealth of] Northern Marianna Islands (Northern Marianna Islands) [Public Utilities Commission of] Ohio (Ohio Commission) Ohio Consumers' Counsel [Public Utility Commission of] Oregon (Oregon Commission) Ozarks Technical Community College Pacific Telesis Group (PacTel) Pennsylvania Internet Service Providers Personal Communications Industry Association (PCIA)"S%0*&&aae#"ԌPuerto Rico Telephone Company (Puerto Rico Tel.) [Jon] Radoff (Radoff) Roseville Telephone Company (Roseville Tel.) Rural Telephone Coalition (Rural Tel. Coalition) Rural Telephone Finance Cooperative Rural Utilities Service SDN Users Association Inc. (SDN Users Association) Serviceoriented Open Network Technologies, Inc. (SONETECH) South Dakota Public Utilities Commission (South Dakota Commission) Southern New England Telephone Company (SNET) Southwestern Bell Telephone Company (SWBT) Spectranet Interactive, Inc. (Spectranet) Sprint Corporation (Sprint) State Consumer Advocates [John] Staurulakis, Inc. (Staurulakis) TCA, Inc.Telecommunications Consultants (TCA) TDS Telecommunications Corporation (TDS) Telco Communications Group, Inc. (Telco Communications Group) TeleCommunications, Inc. (TCI) Telecommunications Resellers Association (TRA) Teleport Communications Group Inc. (Teleport) Tennessee Regulatory Authority (Tennessee Commission) [Public Utility Commission of] Texas (Texas Commission) Texas Office of Public Utility Counsel (Texas Public Utility Counsel) Time Warner Communications Holdings, Inc. (Time Warner) United States Telephone Association (USTA) U S West, Inc. (U S West) Washington Independent Telephone Association (WITA) Washington Utilities and Transportation Commission (Washington Commission) Lyman C. Welch Western Alliance WinStar Communications, Inc. (WinStar) WorldCom, Inc. (WorldCom)" 0*&&aa"  X' List of Replies in CC Docket Nos. 96262, 941, 91213 ă ACC Long Distance Corp. (ACC Long Distance) Ad Hoc Telecommunications Users Committee (Ad Hoc) Alarm Industry Communications Committee [State of] Alaska (Alaska Commission) Aliant Communications Co., formerly Lincoln Telephone (Aliant) Alliance for Public Technology ALLTEL Telephone Services Corporation (ALLTEL)  X14American Association for Adult and Continuing Education, et al.  X 4American Assocation for Retired Persons, et al. (AARP, et al.) America OnLine, Inc. (America OnLine) American Communications Services, Inc. American Petroleum Institute (API) Ameritech Arch Communications Group, Inc. (Arch Communications) Association for Local Telecommunications Services (ALTS) AT&T Corp. (AT&T)  Xf4Bankers Clearing House, et al. Bell Atlantic Telephone Companies and NYNEX (BA/NYNEX) BellSouth Corporation, BellSouth Telecommunications, Inc. (BellSouth) [People of the State of] California and the Public Utility Commission of the State of California (California Commission) Colorado Library Education and Healthcare Telecommunications Coalition Commercial Internet Exchange Association (CIEA) Competitive Telecommunications Association (CompTel) CompuServe, Inc. and Prodigy Services Corporation (CompuServe/Prodigy) Consumer Project on Technology (Consumer Project) Cox Communications, Inc. (Cox) General Communication, Inc. (GCI) General Services Administration/United States Department of Defense (GSA/DOD) Georgia Public Service Commission (Georgia Commission) Consumers' Utility Counsel Division, (Georgia) Governor's Office of Consumer Affairs (Georgia Consumers' Utility Counsel) GVNW Inc./Management (GVNW) GTE Service Corporation (GTE) State of Hawaii (Hawaii Commission) ICG Telecom Group, Inc. (ICG) Internet Access Coalition IXC Long Distance, Inc. LCI International Telecom Corp. (LCI) Maine Public Utilities Commission (Maine Commission)"W%0*&&aae#"ԌMCI Telecommunications Corporation (MCI)  X4Media Access Project, et al. (MAP, et al.) Minnesota Independent Coalition Minnesota Internet Services Trade Association National Cable Television Association, Inc. (NCTA) National Exchange Carrier Association, Inc. (NECA) [Public Utilities Commission of] Ohio (Ohio Commission) Ohio Consumers' Counsel Pacific Telesis Group (PacTel) Personal Communications Industry Association (PCIA) PSINet, Inc. (PSINet) Puerto Rico Telephone Company (Puerto Rico Tel.) Roseville Telephone Company (Roseville Tel.) Rural Telephone Coalition (Rural Tel. Coalition) Southern New England Telephone Company (SNET) Southwestern Bell Telephone Company (SWBT) Sprint Corporation (Sprint) State Consumer Advocates TDS Telecommunications Corporation (TDS) Telco Communications Group, Inc. (Telco Communications Group) TeleCommunications, Inc. (TCI) Teleport Communications Group Inc. (Teleport) Texas Association of Broadcasters Texas Office of Public Utility Counsel (Texas Public Utility Counsel) Time Warner Communications Holdings, Inc. (Time Warner) United States Telephone Association (USTA) U S West, Inc. (U S West) WorldCom, Inc. (WorldCom) !h J:\ACCESS.REF\ORDER\APPXA! "0*&&aa"  X'   I. 1 1. a.(1)(a) i) a) I. A. 1. a.(1)(a) i) a) (J:\ACCESS.REF\ORDER\TOCCMMNT.BEG( U APPENDIX B  X4*{COMMENT SUMMARY dj yOb'ԍ Comments arranged with reference to sections of the Order.d    X4  X4  Table of Contents Paragraph(#\  XH4III.Rate Structure Modifications`"(#1  X14A.` ` Common Line`"(#1  X 4` ` 2. Subscriber Line Charge`"(#1  X 4` ` 3. Carrier Common Line Charge``"(#11  X 4` ` 4. Common Line PCI Formula``"(#22  X 4` ` 5. Assessment of SLCs on Derived Channels``"(#24  X 4B.` ` Local Switching``"(#33  X 4` ` 1. NonTraffic Sensitive Charges``"(#33  X4` ` 2. Traffic Sensitive Charges``"(#38  Xy4C.` ` Transport(#` ``"(#50  Xb4` ` 1. Entrance Facilities and DirectTrunked Transport``"(#50  XK4` ` 2. Tandem Switched Transport``"(#54  X44D.` ` Transport Interconnection Charge (TIC)(#` ``"(#76  X4` ` 1. Causes and Possible Reassignment of Amounts in the TIC``"(#77  X4` ` 2. MarketBased Approaches`!(#108  X4` ` 3. Approaches that Eliminate or Phase Out the TIC`!(#118  X4E.` ` SS7 Signalling(#` `!(#131  X4F.` ` Impact of New Technologies`!(#136 ` ` (#`  X4IV.XBaseline Rate Levels(#  X|4XA.X` ` Primary Reliance on a MarketBased Approach With Adoption of (#` ` ` Several Initial Prescriptive Measures`!(#138  XN4B.` ` Prescriptive Approaches(#` `!(#159  X74` ` 1. Prescription of a New XFactor`!(#159  X 4` ` 2. Rejection of Certain Prescriptive Approaches  *xxX`!(#162  X 4C.` ` Equal Access Costs(#` `!(#176  X4D.` ` Correction of Improper Cost Allocations(#` `!(#179  X4` ` 1. Marketing Expenses`!(#179  X 4` ` 2. General Support Facilities`!(#182  X"4V.XAccess Reform For Incumbent RateofReturn Local Exchange Carriers(#`!(#182 ` ` "#X0*&&aa%"Ԍ X4VI.XOther Issues(#`!(#186  X4A.` ` Application of Part 69 to Unbundled Elements(#` `!(#186  X4B.` ` Treatment of Interstate Information Services(#` `!(#190  X4C.` ` Terminating Access`!(#208  X4` ` 1. Incumbent LECs`!(#208  X4` ` 2. NonIncumbent LECs`!(#210  Xv4XD. X` ` Universal ServiceRelated Part 69 Changes(#` `!(#212  X_4E.` ` Part 69 Allocation Rules(#` `!(#223  XH4F.` ` Other Proposed Part 69 Changes(#` `!(#226  X ' (J:\ACCESS.REF\ORDER\TOCCMMNT.BEG( &J:\ACCESS.REF\ORDER\IIIACOM.CF&  III. RATE STRUCTURE MODIFICATIONS ă  X ' A.Common Line  X '2.` `  Subscriber Line Charge  X41. Raising or eliminating the SLC cap on nonprimary residential lines and multiline  X{4business lines. Several commenters, including incumbent LECs, IXCs, and cable companies support the proposal to raise or eliminate the SLC cap for multiline business customers and for residential lines beyond the primary connection to the level necessary to recover the full  X84perline loop costs assigned to the interstate jurisdiction.ZD8j {O'ԍ See, e.g., Ameritech Comments at 1112; American Carriers Telecommunication Association (ACTA) Comments at 7; Telecommunications Resellers Association (TRA) Comments at 3435; Association for Local Telecommunications Services (ALTS) Comments at 2425; Teleport Communications Group Inc. (Teleport) Comments at 2425, Reply at 1416; Time Warner Communications Holdings, Inc. (Time Warner) Comments at  {O'8; TeleCommunications, Inc. (TCI) Comments at 10. See also BellSouth Corporation and BellSouth Telecommunications, Inc. (BellSouth) Comments at 6970 (stating that if the Commission does not provide universal support for second lines, SLC cap for unsupported lines should be removed, giving incumbent LECs  yO-'the flexibility to raise the SLC on those lines). Z Several incumbent LECs are not opposed to raising the SLC for multiline businesses, but are opposed to increasing the SLC  X 4for nonprimary residential lines._" j {O'ԍ See, e.g., United States Telephone Association (USTA) Comments at 56; Bell Atlantic Telephone Companies and NYNEX (BA/NYNEX) Comments at 33; U S West, Inc. (U S West) Comments at 5657; Southern New England Telephone Company (SNET) Comments at 35; Pacific Telesis Group (PacTel) Comments at 6, 63._ BA/NYNEX states that raising the SLC cap for multiline  X4business lines is an appropriate, but small step towards correct recovery of NTS costs.B j yOb"'ԍ BA/NYNEX Comments at 33.B Ad Hoc supports increasing the SLC cap for multiline business and nonprimary residential lines as long as users of those lines do not pay more than the costs the incumbent LEC incurs to"N 0*&&aa}"  X4provide those lines.{j yOy'ԍ Ad Hoc Telecommunications Users Committee (Ad Hoc) Comments at 1011; Reply at 4.{ SWBT, PacTel and GSA/DOD support raising the SLC to recover NTS common line costs, but argue that because loop costs are the same for residential and business  X4lines, there is no economic justification for imposing different SLCs for these lines.Xj yO'ԍ Southwestern Bell Telephone Company (SWBT) Comments at 12; PacTel Comments at 6162; General Services Administration/United States Department of Defense (GSA/DOD) Comments at 11.  X42. Several LECs opposing the proposal to raise the SLC on nonprimary residential lines contend that in addition to imposing new charges on the enduser, this method of cost recovery would be administratively burdensome, because no practical way exists to identify  X_4second residential lines or lines into second homes.z"_j {O 'ԍ See, e.g., USTA Comments at 56, Reply at 33; BA/NYNEX Comments at 33; BellSouth Comments at 69; PacTel Comments at 63, Reply at 21; Cincinnati Bell Telephone Company (Cincinnati Bell) Comments at 78; National Exchange Carrier Association, Inc. (NECA) Reply at 78; Rural Telephone Coalition (Rural Tel. Coalition) Reply at 1213.z BA/NYNEX argues that charging different SLCs on second lines would require information collection and verification  X14procedures that are not in place today.B1j yO|'ԍ BA/NYNEX Comments at 33.B Other parties also argue that eliminating or raising the  X 4SLC cap on additional residential lines will create the incentive for customers to "game" the system by reporting their additional lines under different names or by obtaining additional  X 4lines from competitors to avoid paying an additional SLC. " * j {O'ԍ See, e.g., PacTel Comments at 63, Reply at 2122; Cincinnati Bell Comments at 7; John Staurulakis, Inc. (Staurulakis) Comments at 8; NECA Comments at 13; Roseville Telephone Company (Roseville Tel.) Comments at 910; Minnesota Independent Coalition Comments at 13; Washington Independent Telephone Association (WITA) Comments at 5; Illinois Commerce Commission (Illinois Commission) Comments at 9. BA/NYNEX, PacTel, and Citizens Utilities argue that if the Commission adopts a costrecovery mechanism that raises  X 4the SLC on second residential lines, it should be optional. X j yO'ԍ BA/NYNEX Comments at 3334 (arguing that those LECs that choose not raise SLCs on additional residential lines should retain their CCL recovery); PacTel Reply at 22; Citizens Utilities Company (Citizens Utilities) Comments at 2829.  X43. Most nonprice cap LECs and several state commissions and consumer groups oppose increasing or eliminating the SLC cap for multiline business lines and for residential  Xb4lines beyond the primary connection. "b4j {OG#'ԍ See, e.g., Staurulakis Comments at 89; GVNW Inc./Management (GVNW) Comments at 67, Reply at 6; Roseville Tel. Comments at 910; Harris, Skrivan & Associates, LLC (Harris, Skrivan & Associates) Comments at 6; ITCs, Inc. (ITC) Comments at 3; WITA Comments at 5; State Consumer Advocates Comments at 2122;  yO%'Rural Tel. Coalition Comments at 78; Reply at 1213; Public Utilities Commission of Ohio (Ohio Commission)"% 0*&&%"  {O'Comments at 3, Reply at 3; Public Utility Commission of Texas (Texas Commission) Comments at 67;  yOZ'Minnesota Independent Coalition Comments at 1213; TDS Telecommunications Corporation (TDS) Comments  yO"'at 34, 2021, Reply at 4; Georgia Public Service Commission (Georgia Commission) Reply at 1213; Missouri Public Service Commission (Missouri Commission) Comments at 3; Western Alliance Comments at 2224; Commercial Internet Exchange Company (CIEA) Comments at 13, Reply at 911; Competition Policy Institute Comments at 18; Microsoft Corporation (Microsoft) Comments at 5. Rural carriers and Internet providers are concerned"bB 0*&&aa3" about the potential negative impact that raising or eliminating the SLC cap on second and additional residential lines and multiline business lines will have on rural areas. These commenters argue that by reducing demand for additional access lines, this proposal would  X4have a negative impact on Internet usage and economic growth in rural areas. Bj {O 'ԍ See, e.g., Harris, Skrivan & Associates Comments at 6; TCA Telecommunications Corporation (TCA) Comments at 4; GVNW Comments at 7; Staurulakis Comments at 79; Western Alliance Comments at 2224; ITC Comments at 3; NECA Comments at 13, Reply at 79; Rural Tel. Coalition Comments at 8; Pennsylvania Internet Service Providers Comments at 89; CIEA Comments at 13; Reply at 10. TCA asserts that a reduction in demand for additional access lines will increase the cost of remaining lines,  X4placing an additional burden on the Universal Service fund.=  j yO2'ԍ TCA Comments at 4.= Parties opposed to raising the SLC cap also argue that, especially in light of the Universal Service Joint Board's recommendation not to support multiline business lines and residential lines beyond the primary connection, raising SLCs for these lines will make them unaffordable in rural communities, violating section 254(b) which requires that all consumers have access to rates  X 4and services that are "reasonably comparable" with those provided in urban areas. j {OO'ԍ See, e.g., ITC Comments at 3; Rural Tel. Coalition Comments at 8, Reply at 11; TDS Comments at 34,  yO'Reply at 4; Western Alliance Comments at 23; TCA Comments at 34.   X 4 4. Frontier, Sprint, and AT&T contend that raising the SLC cap only for additional residential lines and multiline business lines will not solve the problem of uneconomic  X 4recovery of loop costs.  j yOM'ԍ Frontier Corporation (Frontier) Comments at 68; Sprint Corporation (Sprint) Comments at 1112, 17;  yO'AT&T Corp. (AT&T) Reply at 27. These IXCs and other commenters, including LECs, consumer groups, and wireless and cable companies, urge the Commission to raise or eliminate the SLC caps on all lines, thus permitting LECs to recover all of the interstate allocated costs of the  Xy4local loop from endusers."y6j {O`"'ԍ See, e.g., GTE Service Corporation (GTE) Comments at 2629; SWBT Comments at 3738; Cincinnati Bell Comments at 67; AT&T Comments 5154, Reply at 2526; Frontier Comments at 4, 57; Sprint Comments at 1115; 5051; Ad Hoc Reply at 4; GSA/DOD Comments at 911, Reply at 5, 7; TCI Comments at 10; Time Warner Comments at 45; WorldCom, Inc. (WorldCom) Comments at 3031. Some of these parties argue that because IXCs do not cause the costs associated with the local loop, assigning any portion of the costs associated with the"b 0*&&aa "  X4loop to the IXCs is economically inefficient.j {Oy'ԍ See, e.g., AT&T Comments at 5154, Reply at 28; Frontier Comments at 5; Sprint Comments at 11. Sprint contends that raising the SLC cap for  X4residential users is unlikely to have a significant effect on subscribership.@Zj yO'ԍ Sprint Comments at 12.@ WorldCom states that a subscriber loop is a fixed facility dedicated to the end user and that once the loop has been ordered and installed, the incumbent LEC incurs no additional costs for additional traffic  X4passing over that loop.Ej yO? 'ԍ WorldCom Comments at 2829.E X(#  Xv45. Several parties that oppose raising the SLC cap argue that the common line is a joint and common or shared cost that should be recovered from IXCs and other service  XH4providers, as well as from the end user.5ZHzj {Os'ԍ See, e.g., American Association for Adult and Continuing Education, et al. Comments at 13, Reply at 78; Georgia Commission Reply at 11; Rural Tel. Coalition Reply at 45; National Association of Regulatory Utility Commissioners (NARUC) Comments at 3, 13.5 The Texas Public Utility Counsel disagrees with  X14Sprint's assertion that raising the SLC cap will have minimal effect on subscribership.~1j yO~'ԍ Texas Office of Public Utility Counsel (Texas Public Utility Counsel) Reply at 410.~ State consumer advocates and the Oregon Commission favor eliminating the SLC entirely and  X 4allowing all common line costs to be recovered from the IXCs. , j {O'ԍ See, e.g., State Consumer Advocates Comments at 2427; Texas Public Utility Counsel Comments at 11, Reply at 15; Public Utility Commission of Oregon (Oregon Commission) Comments at 45.  X 46. USTA and J. Staurulakis argue that because the common line revenue requirement is a much larger percentage of total costs for rateofreturn LECs than it is for most price cap LECs, any changes in the SLC cap adopted for price cap LECs should not be extended to  X4rateofreturn LECs.^ j yO'ԍ USTA Comments at 5657; Staurulakis Comments at 78.^ Roseville argues that any change to the SLC should be optional for  Xy4rateofreturn LECs.yj {O@'ԍ Roseville Tel. Comments at 910. See also Minnesota Independent Coalition Comments at 5 (arguing that any change to the CCL rate structure should be optional).  XK47. The Illinois Commission, U S West, and Pennsylvania Internet Service Providers  X44argue that if the Commission raises the SLC cap, the increase should be phased in over time.4pj yOU$'ԍ Illinois Commission Comments at 10; U S West Comments at 5355; Pennsylvania Internet Service Providers Comments at 1112. "40*&&aa"  X4WorldCom and Ad Hoc oppose any transition period for a rate structure change.\j yOy'ԍ WorldCom Comments at 32; Ad Hoc Comments at 1112.\ Ad Hoc states that because an increase in the SLC for second and additional residential lines and multiline business lines would not result in service disruptions, a transition period is not  X4needed and would delay implementation of an efficient common line rate structure.CXj yO'ԍ Ad Hoc Comments at 1112.C GVNW  X4asserts that a threeyear transition period would not be sufficient in a number of cases.=j yO= 'ԍ GVNW Comments at 7.=  Xv48. Geographic Deaveraging of the SLC. The Illinois Commission and several  Xa4incumbent LECs argue in favor of allowing LECs to deaverage SLCs..Zaxj yO 'ԍ Illinois Commission Comments at 10; U S West Comments at 56, Reply at 28; Ameritech Comments at 1213, Attachment B at 19; BellSouth Comments at 32; GTE Comments at 3031; PacTel Comments at 6263.  {O'See also Sprint Comments at 17, 42.. They argue that an averaged SLC creates crosssubsidies between highcost and lowcost areas, in violation of the 1996 Act and that deaveraging the SLC is economically efficient and consistent with costcausation principles. Several of these parties state that the Commission should permit SLC deaveraging to the same extent that unbundled network elements or network access lines are  X 4deaveraged, i.e., within the same geographic areas.Z j yO9'ԍ Illinois Commission Comments at 1011; Ameritech Comments at 12; BA/NYNEX Comments at 46,  {O'n.105. See also ALLTEL Comments at 11 (supporting geographic deaveraging of SLC based on a minimum of three pricing zones). Sprint contends that LECs should be  X 4required to deaverage the SLC.D j yOF'ԍ Sprint Comments at 17, 42.D BA/NYNEX and US West argue that geographic  X 4deaveraging should be optional.h L j yO'ԍ BA/NYNEX Comments at 34; U S West Comments at 56, Reply at 28.h The Ohio Commission argues that although it may be necessary to deaverage the SLC based on differing loop costs among the individual service areas in an incumbent LEC's service territory, the deaveraged rates must not exceed the  X}4current SLC caps.T!}j yO 'ԍ Ohio Commission Comments at 5, Reply at 5.T  XO49. The Washington Utilities and Transportation Commission and BA/NYNEX argue  X84that section 254(e) does not require deaveraged SLC rates."8lj yOU$'ԍ Washington Utilities and Transportation Commission (Washington Commission) Comments at 5; BA/NYNEX Comments at 34. State Consumer Advocates and the New York Commission argue that geographic averaging of the SLC is not an implicit"!"0*&&aa "  X4subsidy that is inconsistent with the requirements of section 254(e).#j yOy'ԍ State Consumer Advocates Comments at 4849; New York State Department of Public Service (New  yOA'York Commission) Comments at 78. BA/NYNEX explains that rates should not be considered subsidized simply because they are averaged, because any  X4rate that is not developed on a customerspecific basis involves averaging.B$ j yO'ԍ BA/NYNEX Comments at 34.B BA/NYNEX also states, however, that if the SLC is deaveraged, it should be subject to the existing $6.00 and  X4$3.50 caps.B%j {O 'ԍ Id. at 46, n. 105.B The Washington Commission states that deaveraged rates may be appropriate in  X4the future, if adequate universal service mechanisms are in place.N&Bj yO 'ԍ Washington Commission Comments at 5.N  X_4 10. Several commenters oppose deaveraging the SLC.'X_j yO'ԍ See, e.g., Minnesota Independent Coalition Comments at 14; TDS Comments at 3, 20; Rural Tel. Coalition Reply at 10; State of Hawaii (Hawaii Commission) Reply at 3, 1214; Pennsylvania Internet Service Providers Comments at 1213. These parties argue that deaveraging the SLC violates the "comparable services and comparable rates" requirement of section 254 and will increase local rates in highcost areas or increase the burden on the Universal Service Fund. The Texas Public Utility Counsel argues that deaveraging rates is  X 4inconsistent with market practices and the social policy embodied in the 1996 Act.V( j yO'ԍ Texas Public Utility Counsel Comments at 13.V It argues further that deaveraging SLC costs would complicate the calculations of Universal Service subsidies and make it more difficult for long distance companies to maintain geographically  X 4averaged rates, as required by section 254(g).:) j {O'ԍ Id. at 14.: Time Warner agues that the Commission should not permit geographic deaveraging of SLCs at this time because it will give incumbent  X4LECs opportunity to engage in anticompetitive conduct.F*j yOU'ԍ Time Warner Comments at 89.F  XK' 3.` ` Carrier Common Line Charge  X4 11. Most commenters agree that the perminute CCL charge is economically inefficient because it does not reflect the way in which underlying loop costs are incurred and sends incorrect signals into the marketplace, encouraging inefficient use of"*0*&&aa"  X4telecommunications services and uneconomic bypass of incumbent LEC facilities.+j {Oy'ԍ See, e.g., Ameritech Comments at 9; BA/NYNEX Comments at 32; PacTel Comments at 5864, Reply at 21; SWBT Comments at 3536; Rural Tel. Coalition Comments at 6; ACC Long Distance Corp. (ACC Long Distance) Comments at 1011; AT&T Comments at 5154, Reply at 2526; MCI Telecommunications Corporation (MCI) Comments at 77; LCI International Telecom Corp. (LCI) Comments at 2021; WorldCom  yO'Comments at 2829; Frontier Comments at 4; NECA Comments at 10; Ad Hoc Comments at 811; Time Warner Comments at 24; Winstar Communications (WinStar) Comments 35; Teleport Comments at 2224; GSA/DOD Comments at 78; Competition Policy Institute Comments at 17; California Cable Television Association Comments at 10; NARUC Comments at 1112; Public Service Commission of the District of Columbia (District of Columbia Commission) Comments at 34; U.S. Department of Justice (DOJ) Comments at  {O '11, 1415. But see, Evans Telephone Company, et al. (Evans, et al.) Comments at 45 (stating that current mix of recovery mechanisms is an appropriate compromise). BellSouth states that recovering more common line costs through NTS perline charges "would greatly enhance economic welfare primarily because it would reduce the marginal cost of interstate  X4longdistance calls and therefore would greatly expand interstate longdistance calling.",Z, j {O'ԍ See Letter from Robert T. Blau, BellSouth, to Mr. William F. Caton, Acting Secretary, FCC (filed April 25, 1997) at Attachment 1: "EconomicallyEfficient Access Reform" by Robert W. Crandall, The Brookings Institution, at 1. Some commenters state that the CCL charge functions as an implicit crosssubsidy from long  X4distance access to local service, and from highvolume users to lowvolume users.s-N j yO'ԍ WorldCom Comments at 30; Ameritech Comments at 9; GTE Comments at 18, 26.s Although most parties agree that the CCL charge structure should be revised so that incumbent LECs are no longer required to recover any of the NTS costs of the loop from IXCs on a trafficsensitive basis, they disagree on the best approach to use for assessing that charge.  X 4 12. Flat PerLine Charge. Many commenters, including both price cap and nonprice cap incumbent LECs, IXCs, and some state commissions support recovering all common line costs or the common line costs not recovered through the SLCs through a flat, perline charge  X 4assessed against the customer's PIC..B j {Of'ԍ See, e.g., USTA Comments at 5556; BA/NYNEX Comments at 3536; BellSouth Comments at 68, Reply at 1011; PacTel Comments at 64, Reply at 21; U S West Comments at 5455; Citizens Utilities Comments at 2728; Roseville Tel. Comments at 4, 8; Rural Tel. Coalition Comments at 6, Reply at 9; CompTel Comments at 29; Cable & Wireless, Inc. (Cable & Wireless) Comments at 10; Excel Telecommunications, Inc. (Excel) Comments at 11; LCI Comments at 2021, Reply at 6; MCI Comments at 77; District of Columbia Commission Comments at 34; South Dakota Public Utilities Commission (South Dakota Commission) Comments at 3; NARUC Comments at 13; National Cable Television Association, Inc. (NCTA) Comments at 26; American Communications Services, Inc. Reply at 17. Several of these parties also support the proposal to  X 4bill the customer directly in cases where the customer has not chosen a PIC.8/Z j {OY$'ԍ See, e.g., USTA Comments at 5556, Reply at 32; BA/NYNEX Comments at 36; U S West Comments at 5455; Citizens Utilities Comments at 2728; Roseville Tel. Comments at 8; WorldCom Comments at 37; District of Columbia Commission Comments at 34; Ad Hoc Reply at 45.8 Supporters of" /0*&&aa~ " this approach state that converting the common line charge to a perline flat charge paid by the customer's IXC is administratively simple and will allow IXCs to recover their costs  X4through a variety of pricing plans, as the market will allow.0j {OK'ԍ See, e.g. BA/NYNEX Comments at 3536; BellSouth Comments at 68 and Attachment 2 at 2122, Reply at 11; Roseville Tel. Comments at 8; State Consumer Advocates Reply at 6; NARUC Comments at 13. USTA and BA/NYNEX state that recovering the common line costs through a flat, perline charge paid by the IXCs will improve economic efficiency and will rebalance rates so that highvolume customers do not  X4overpay, and lowusage customers do not underpay, for interstate use of the local loop.e1"j yO` 'ԍ USTA Comments, Attachment 1 at 7; BA/NYNEX Comments at 35.e BA/NYNEX, SWBT, and U S West support the flat, perline charge but argue that if the Commission adopts such a rate structure, it would need to adjust the price cap formula because the existing formula assumes the ability of the LECs to apply usagebased rates to  X14recover network costs that are largely nontraffic sensitive.s21j yO'ԍ BA/NYNEX Comments at 36; SWBT Comments at 5859; U S West Comments at 55.s The Rural Telephone Coalition and Minnesota Independent Coalition assert that a flatrated, nontraffic sensitive common line  X 4charge would be feasible for rateofreturn LECs.3 Bj yO'ԍ Rural Tel. Coalition Comments at 7; Minnesota Independent Coalition Comments at 6.  X 4 13. Several parties support the proposal to recover common line costs through a flat, perline charge assessed against the PIC but are opposed to permitting LECs to bill endusers  X 4who have not selected a PIC.4 j {O*'ԍ See, e.g., Cincinnati Bell Comments at 910; Puerto Rico Telephone Company (Puerto Rico Tel.) Comments at 1013; Rural Tel. Coalition Comments at 67. Cincinnati Bell argues that billing end users who have not selected a PIC would create administrative difficulties because it would require the LEC to prorate charges for both the end user and the IXC when the customer leaves an IXC in the  Xb4middle of a billing cycle.H5b, j yO?'ԍ Cincinnati Bell Comments at 9.H NARUC suggests that if a customer uses another carrier for other services, a per line charge could be divided among all carriers using the common line on the  X44basis of relative use by the carrier.?64 j yO'ԍ NARUC Comments at 13.? NARUC opposes any solution that would effectively  X4impose additional flat charges on the enduser.:7L j {O"'ԍ Id. at 12.:  X4 ` `   X4 14. Others commenters state that they support the proposal to assess IXCs a flat, perline charge as a secondbest approach in the event the Commission declines to increase or eliminate the SLC cap, or if increasing the SLC is insufficient to allow incumbent LECs to"70*&&aae"  X4recover all of their interstate loop costs .8j {Oy'ԍ See, e.g., Ad Hoc at 1113, Reply 45; Cincinnati Bell Comments at 9, Reply at 57; Sprint Comments at 14; WorldCom Comments at 3033; Time Warner Reply at 28. PacTel advocates recovering residual loop costs not recovered from an increase in the SLC through bulk billing IXCs on the basis of  X4presubscribed lines.e9Z"j {O'ԍ PacTel Comments at 6, 64. See also SWBT Reply at 89 (arguing that CCL remaining after adjustments for universal service, LTS, payphone, marketing expense and reallocations to reduce the TIC should be recovered on a flatrated basis billed to IXCs on a presubscribed line basis as a "public policy element").e TCI supports the proposal to assess IXCs a flat, perline rate as a  X4 temporary measure, stating that to ensure economic efficiency, common line costs should be  X4directly assigned to the SLC.J:Dj yO 'ԍ TCI Comments at 1011; Reply 45J  Xv415. The Competition Policy Institute and AARP et al. argue that the common line costs should be recovered from all telecommunications providers including wireless, enhanced  XJ4service, and "dial around" providers based on the amount of carriage.;Jj {O'ԍ Competition Policy Institute Comments at 1417; American Association for Retired Persons, et al.  {O'(AARP, et al.) Comments at 1314. Similarly, Alliance for Public Technology proposes that the carrier common line charge and subscriber line charge be replaced with a "common facilities" charge imposed on all telecommunication  X 4carriers who use the local network to deliver services.W< 0 j yO'ԍ Alliance for Public Technology Comments at 5.W PacTel opposes the proposals made by Competition Policy Institute and Alliance because they would require a usagesensitive  X 4charge.= j {OH'ԍ PacTel Reply at 22. See also Personal Communications Industry Association (PCIA) Reply at 4 (stating that Alliance's facility charge proposal is inconsistent with the costcausative principles set forth in the NPRM).  X 4X (#  X 4 16. Parties opposed to the flat, perline charge assessed on IXCs argue that recovering common line costs on a flatrate basis from IXCs will allow IXCs to pass the cost on to customers as higher rates, reducing demand for long distance service. They further argue that this type of cost recovery will distort the market by encouraging IXCs to bypass the switched network using competitive access providers and by creating a disincentive for IXCs to  X64compete for lowvolume long distance users.t>6j {O"'ԍ See, e.g., GTE Comments at 29; GSA/DOD Comments at 910, Reply at 6.t Other parties argue that the proposal imposes an additional administrative burden on LECs and does not adequately address the problem of">0*&&aa"  X4"dialing around" the switched network.?j yOy'ԍ ALLTEL Comments at 11; Illinois Commission Comments at 67; Ameritech Comments at 1011; ACTA Comments at 6. AT&T and Sprint claim that assessing a flat, presubscribed line charge on IXCs would not eliminate the inefficiencies or the implicit cross X4subsidies embedded in the CCL charge.U@ j yO'ԍ AT&T Reply at 28; Sprint Comments at 1516.U These carriers assert that a flatrated perline recovery mechanism would force IXCs to subsidize other service providers, including LECs, wireless carriers, ISPs, and resellers that originate or terminate traffic over the loop but are not subject to the charge. They contend that this would be inconsistent with section 254(b) which requires "equitable and nondiscriminatory contribution to universal service" by all  X_4telecommunications providers.XA_j yO 'ԍ AT&T Reply at 2829; Sprint Comments at 1516.X Sprint asserts that a flatrated charge assessed on IXCs will force IXCs to adopt twopart tariffs to avoid being undercut by the usagebased rates of carriers that rely on 10XXX dialaround traffic for their business, but that would not be  X 4assessed common line charges.@B @j yO 'ԍ Sprint Comments at 16.@   X 417. Alternative Recovery Methods. Several state commissions and incumbent nonprice  X 4cap LECs support the proposal to recover the CCL charge through bulk billing.C j {OX'ԍ See, e.g., Ohio Commission Comments at 4; Florida Public Service Commission (Florida Commission) Comments at 2; Illinois Commission Comments at 7; Alaska Telephone Association Comments at 10; ALLTEL Comments at 12; Frederick & Warinner, L.L.C. (Frederick & Warinner) Comments at 4; GVNW Comments at 6; Harris, Skrivan & Associates Comments at 6; Roseville Tel. Comments at 8; Puerto Rico Tel. Comments at 1112; WITA Comments at 45. The Oregon Commission, ACTA, and the Florida Commission favor recovering the interstate portion of loop costs through a capacity charge assessed on carriers based upon the number of switch  X4trunk ports purchased from the incumbent LEC.D j yO'ԍ Oregon Commission Comments at 45; ACTA Comments at 5; Florida Commission Comments at 2. The Missouri Commission, the Texas Commission, and the Alabama Commission favor the proposal to assess common line charges based on the number of trunk port and line port connections an IXC has to the switched  XM4network.EMj yO!'ԍ Missouri Commission Comments at 3; Texas Commission Comments at 45; Alabama Public Service Commission (Alabama Commission) Comments at 6. NECA requests flexibility for pool members to recover the CCL charge through  X64either a perline charge and/or a bulk billing method.>F6jj yOQ$'ԍ NECA Comments at 10.> Specifically, NECA proposes a method allowing the pool members to charge a nationwide average CCL perline rate and"F0*&&aa"  X4bulk bill any residual amount.VGj {Oy'ԍ Id. See also NECA Reply at 67.V   X418. Cable & Wireless, MCI, Teleport, and others oppose the bulk billing, capacity charge, and trunk port charge alternatives because they are based on minutes of use and do  X4not accurately reflect costs.(HZZj {O'ԍ See, e.g., Cable & Wireless Comments at 10; MCI Comments at 77; Sprint Comments at 1314; Teleport Comments at 28; People of the State of California and the Public Utility Commission of the State of California (California Commission) Comments at 4.( ACTA asserts that bulk billing causes operational and  X4administrative problems.=I|j yO 'ԍ ACTA Comments at 6.= According to Teleport and GCI, bulk billing ensures total recovery for the LEC because the LEC receives the same revenues whether it faces no competition or  X_4substantial competition.qJ_ j yO'ԍ Teleport Comments at 28; General Communication, Inc. (GCI) Reply at 10.q Several commenters oppose these alternative recovery mechanisms  XH4because they are based on historical usage or revenue data.KHj yO'ԍ Sprint Comments at 13; ALTS Comments at 2425, Reply at 23; American Communications Services, Inc. Reply at 17. Sprint argues that if a cost recovery mechanism is based on historical usage or revenue data, an interexchange carrier that is losing market share will be penalized, while a carrier whose market share is growing will  X 4receive a windfall.@L j yO'ԍ Sprint Comments at 13.@  X 419. The Minnesota Independent Coalition and TCA argue that a capacity charge based on trunks is not feasible for smaller LECs because most IXCs serving smaller LECs do not  X 4use dedicated trunks.sM j yO'ԍ Minnesota Independent Coalition Comments at 67; TCA Comments at 3.s MCI and the Minnesota Independent Coalition argue that imposing NTS costs based on the relative number of trunks or ports may encourage IXCs to use fewer  Xy4trunks or ports than are needed, leading to adverse impacts on service quality.lNyj yO>'ԍ Minnesota Independent Coalition Comments at 7; MCI Comments at 77.l  XK420. Ameritech proposes to recover common line costs via a Loop/Port recovery charge that it would assess as a single, aggregate charge per carrier on IXCs based upon their  X4percentage share of state or regionwide interstate retail revenues.bOZj yOr$'ԍ Ameritech Comments at 910. Ameritech states that it would initially set its LPR at the revenues from the CCL charge, less payphone and longterm support, plus lineside port costs from local switching plus the  {O&'information charge, and would transition the LPR to cost over 5 years. Id.b Sprint and Time Warner"O0*&&aa" oppose Ameritech's proposal, stating that such an approach would insulate incumbent LECs  X4from the forces of competition.\Pj yOb'ԍ Sprint Reply at 1213; Time Warner Reply at 1617.\ According to Sprint, long distance carriers entering the local market through unbundled network elements or their own facilities or that purchased access from new entrants would be required to pay Ameritech regardless of the extent to which they  X4utilized Ameritech's loops or switching.@QXj yO'ԍ Sprint Reply at 1213.@ Time Warner states that Ameritech's proposal ensures the survival of the local loop bottleneck by eliminating opportunities for lowcost new  Xv4entrants to compete in the provisioning of local loops.ERvj yO 'ԍ Time Warner Reply at 1617.E  XH421. Impact of 254(g) on Carrier Common Line Charge Recovery. Excel and the Alaska Commission argue that section 254(g) does not impose any limitations on the Commission's authority to assess flatrated CCL charges on IXCs because the section pertains  X 4to rates charged to "subscribers" or the ultimate enduser, not other carriers.qS xj yO.'ԍ Excel Comments at 11; State of Alaska (Alaska Commission) Reply at 34;q The majority of commenters responding to this inquiry argue that section 254(g) prohibits IXCs from passing  X 4their flatrated charges through to end users on a deaveraged basis.STZ j {O'ԍ See, e.g., State Consumer Advocates Comments at 4951; Rural Tel. Coalition Comments at 2730; Minnesota Independent Coalition Comments at 89,11; Harris, Skrivan & Associates Comments at 7; TDS Comments at 3, 1920, Reply at 21; Alaska Commission Reply at 34; Hawaii Commission Reply at 2.S USTA argues that although the flatrate CCL charged to the IXCs should be deaveraged by customer and by region to be consistent with costcausation principles, it will not conflict with section 254(g) because IXCs can average any disparate flatrate CCL charges into their rate structure as they  X{4have averaged disparate perminute CCL charges.U{* j {OV'ԍ USTA Comments, Attachment 1 at 78, Reply at 33. See also Tennessee Regulatory Authority (Tennessee Commission) Comments at 3. Sprint and WorldCom argue that  Xd4forbearance from Section 254(g) would be warranted.VVd j yO'ԍ Sprint Reply at 27; WorldCom Comments at 34.V Sprint asserts that if incumbent LECs continue to recover NTS costs, particularly common line costs, from the IXCs and these costs are recovered through deaveraged rates charged to the IXCs, forbearance from section 254(g)  X4would be warranted because of the magnitude and variability of these costs.=Wj yO"'ԍ Sprint Reply at 27.= WorldCom argues that IXCs should be free to recover subscriber loop costs assessed by incumbent LECs through a flat charge per line or through any other rate recovery mechanism the long distance"W0*&&aa"  X4market will allow.EXj yOy'ԍ WorldCom Comments at 3435.E WorldCom argues further that unless the Commission forbears with respect to application of section 254(g), IXCs will be forced to average common line costs and recover them through long distance ratesa crosssubsidy that runs counter to the overall  X4policies of section 254(b) and (c).3YXj {O'ԍ Id.3 Several parties oppose forbearance.Zj yOV'ԍ Harris, Skrivan and Associates Comments at 7; Minnesota Independent Coalition Comments at 11; Rural Tel. Coalition Comments at 2830.  X' 4.` ` Common Line PCI Formula  X_4 22. Incumbent LECs argue that TFP incorporates growth into the XFactor, and that  XH4retaining the current separate common line formula would tend to doublecount growth.[ HBj yO;'ԍ USTA Comments in Price Cap Fourth Further NPRM at 4445; GTE Comments in Price Cap Fourth  {O'Further NPRM at 4142; Southwestern Bell Comments in Price Cap Fourth Further NPRM at 3536; BellSouth Comments in Price Cap Fourth Further NPRM at 42; Bell Atlantic Comments in Price Cap Fourth Further NPRM at 14; Frontier Comments in Price Cap Fourth Further NPRM at 10; Ameritech Comments in Price Cap  {O]'Fourth Further NPRM at 89; Lincoln Telephone (Lincoln) Comments in Price Cap Fourth Further NPRM at 15; U S West Comments in Price Cap Fourth Further NPRM at 2526; NYNEX Comments in Price Cap Fourth Further NPRM at 29; PacTel Comments in Price Cap Fourth Further NPRM at 15; USTA Reply in Price Cap Fourth Further NPRM at 2728; U S West Reply in Price Cap Fourth Further NPRM at 34; Frontier Reply in Price Cap Fourth Further NPRM at 56; Ameritech Reply in Price Cap Fourth Further NPRM at 3. Some of those incumbent LECs assert that a separate common line formula might impede  X 4certain access reforms that they support.\ j yO'ԍ NYNEX Comments in Price Cap Fourth Further NPRM at 31; Ameritech Reply in Price Cap Fourth Further NPRM at 3; USTA Reply in Price Cap Fourth Further NPRM at 28. Lincoln claims that common line demand growth output would be reflected as common line output growth in a TFP calculation, and so would  X 4transfer the benefits of demand growth to IXCs.r] nj yO 'ԍ Lincoln Reply in Price Cap Fourth Further NPRM at 910 and Attachment A.r Sprint and AT&T maintain that the Commission must retain a separate common line formula, regardless of how the XFactor is  X 4calculated.^ j yOm 'ԍ Sprint Comments in Price Cap Fourth Further NPRM at 12; AT&T Comments in Price Cap Fourth Further NPRM at 43. AT&T argues that a separate common line formula is necessary to avoid giving more revenues to the LECs with the highest common line costs, and to recognize the IXCs'  X4role in promoting common line demand growth.__Vj yO$'ԍ AT&T Reply in Price Cap Fourth Further NPRM at 5760._ AT&T also asserts that the LECs' claims"_0*&&aal"  X4of doublecounting growth have not been adequately substantiated.:`j {Oy'ԍ  Id. at 59.:  X423. Southwestern Bell argues that the g/2 term should be removed from the common line formula because common line minutes of use grow more quickly than number of access lines. Southwestern Bell asserts that flat CCL charges would reduce incumbent LECs'  X4revenue growth by about 0.5 percent per year.a"Zj yO'ԍ SWBT Comments at 5859. According to Southwestern Bell, for the incumbent price cap LECs, CCL minutes of use grew at an average annual rate of 6.8 percent from 1991 to 1995, while access lines grew at an  {O( 'average of 3.0 percent. Id. at 59. See also BA/NYNEX Comments at 36; U S West Comments at 55; USTA Reply, Attachment 3 at 910.   X_' 5.` ` Assessment of SLCs on Derived Channels  X1424. Pleadings filed in response to the ISDN SLC NPRM.bX1Dj yO&'ԍ Comments filed in response to our ISDN SLC NPRM, End User Common Line Charges, CC Docket No. 9572, Notice of Proposed Rulemaking, 10 FCC Rcd 8565 (1995), will be referred to as ISDN Comments and ISDN Reply. Only one commenter, AT&T, favors retaining the current approach for PRI ISDN service. AT&T does not support assessing a SLC per derived channel for BRI service, but instead favors assessing a SLC for  X 4each BRI facility. All of the other parties, including the other IXCs, oppose it. ISDN users, LECs, and equipment manufacturers argue that retaining the current rule will deter ISDN  X 4deployment, and will discourage development of new technologies.c  d j yO'ԍ America Online Incorporated, CompuServe Incorporated, GE Information Services, Inc., and Prodigy  {O'Services Company (America Online) ISDN Comments at 810 (citing U.S. Industrial Outlook 1994, U.S. Department of Commerce at 251, January 1994, and citing Bell Atlantic Waiver Petition at 78, which estimates that requiring a SLC per derived channel would reduce demand for BRI service by about 60 percent and demand  {O'for PRI service by about 35 percent). See also Cable & Wireless ISDN Comments at 34; Microsoft Corporation  yO'(Microsoft) ISDN Comments at 4; West Virginia University ISDN Comments at 1; TCA ISDN Comments at 4;  yO'Information Technology Industry Council (ITIC) ISDN Reply at 3; Roseville Tel. ISDN Reply at 4; Northern  yOQ'Telecom Inc. (Nortel) ISDN Reply at 5; The Bell Atlantic Telephone Companies (Bell Atlantic) ISDN Reply at 3. Almost all of the LECs, user groups, equipment manufacturers, IXCs, and other commenters support a rule that  X4would assess a SLC for each pair of copper wires,d8j {O{!'ԍ See, e.g., Roseville Tel. ISDN Comments at 2; TCA ISDN Comments at 1; Tennessee Commission ISDN Comments at 23. or a SLC for each ISDN facility.BeZj {O#'ԍ  See e.g., Ameritech ISDN Comments at 2; BellSouth ISDN Comments at 45; Cincinnati Bell ISDN  yO$'Comments at 3, 6; NTCA ISDN Comments at 12; NYNEX ISDN Comments at 16; SWBT ISDN Comments at 3; USTA ISDN Comments at 2; 3Com Corp. ISDN Reply at 6.B "e0*&&aa8" Some commenters express a preference for one of these approaches, but urge the Commission  X4to adopt one or the other of the two options.fXj yOb'ԍ GTE ISDN Comments at 910; ITIC ISDN Comments at 2; NTCA ISDN Comments at 2; Northern Arkansas Telephone Company ISDN Comments at 24; CIEA ISDN Reply at 1; 3Com Corporation ISDN Reply at 67. Some parties further assert that, if the Commission fails to adopt a rule that assesses a SLC per copper pair or per service, it should adopt a rule based on the actual nontrafficsensitive costs of providing derived channel  X4services compared to costs of providing conventional local loops.EgZj yO= 'ԍ Rural Tel. Coalition ISDN Comments at 45; American Petroleum Institute (API) ISDN Comments at 6.  {O 'See also Northern Arkansas Telephone Company ISDN Comments at 23 (suggesting that assessing 7 or 8 SLCs for PRI service might be reasonable, based on costs).E Numerous trade groups, ISDN users, and LECs assert that a SLC per pair of copper wires or a SLC per facility approach would encourage use of advanced services, such as ISDN, that offer numerous  X_4potential benefits.:hB_ j yO'ԍ America Online ISDN Comments at ii, 13; ITIC ISDN Comments at 34; Center for Democracy and Technology ISDN Comments at 3; National Public Radio ISDN Comments at 34; Microsoft ISDN Comments at 2; Pacific Bell ISDN Comments at 12; TCA ISDN Comments at 3. Some parties assert that ISDN will set the new telecommunications standard, competing with, or even replacing, plain old telephone service (POTS).  {O:'Pacific Bell ISDN Comments at 3; ITIC ISDN Comments at 3. See also Northern Arkansas Telephone Company ISDN Comments at 34; Center for Democracy and Technology ISDN Comments at 3. Others describe ISDN as a significant but interim step in the development of an advanced communications network. Microsoft ISDN Comments at 2; TCA ISDN Comments at 34.:  X1425. The parties also assert that assessing a SLC per facility or pair of copper wires would best reflect the underlying purpose of the SLC, which is to recover nontrafficsensitive  X 4loop costs.CiX j yO'ԍ Roseville Tel. ISDN Comments at 2; USTA ISDN Comments at 9; NYNEX ISDN Comments at 3; BellSouth ISDN Comments at 45; Pacific Bell ISDN Comments at 45; Roseville Tel. ISDN Reply at 3 (asserting that any charge beyond one SLC per service overrecovers nontrafficsensitive costs).C Some parties also assert that charging a SLC per facility is consistent with the Commission's goals of eliminating unreasonable discrimination and undue preferences among rates for interstate services, using the local network efficiently, preventing uneconomic bypass,  X 4and preserving universal service.j 4j yO'ԍ USTA ISDN Comments at 8; Roseville Tel. ISDN Comments at 2; Cable & Wireless ISDN Reply at 2. Others argue that this approach is administratively  X 4simple,k j yO"'ԍ GTE ISDN Comments at 910; SWBT ISDN Comments at 34; TCA ISDN Comments at 2; ITIC ISDN Comments at 12. that it will reduce the opportunity for uneconomical pricing by competitors,Fl j yOt$'ԍ USTA ISDN Comments at 1516.F and" l0*&&aau "  X4that it will reduce the likelihood of migration from switched access to dedicated service.ymj yOy'ԍ API ISDN Comments at 4; Microsoft ISDN Comments at 3; USTA ISDN Comments at 14.y  X426. Many parties, including LECs and ISDN users, argue that any method for  X4assessing SLCs should be based on the costs of providing ISDN service.nXj yO'ԍ U S West ISDN Comments at 4; California Bankers' Clearing House ISDN Comments at 34;Texas Commission ISDN Comments at 6. Some parties that support a costbased approach contend that assessing one  {OT'or two SLCs are adequate to recover nontrafficsensitive line costs of derived channel services. See Pacific Bell ISDN Comments at 4; Rochester Telephone Corp. ISDN Comments at 3; TCA ISDN Comments at 2; Tennessee Commission ISDN Comments at 34.  Parties opposing the proposal to assess SLCs for derived channel services based on the cost ratio allege that  X4such an approach is too complicated,oX j yOH 'ԍ USTA ISDN Comments at 12 (urging that it would be difficult to break down average subscriber loop costs without doing the same for other categories of subscribers); AT&T ISDN Comments at 67; GTE ISDN Comments at 17. and that the potential benefits of this approach are  Xv4outweighed by the substantial effort required to make such a cost comparison.,pXv* j yOQ'ԍ America Online ISDN Comments at 67 (the Commission has discretion to balance strict costcausation with the need to avoid imposing costs on new technologies that could undermine the economic viability of those technologies); Time Warner ISDN Comments at 5. , Others object that the proposal set forth in the ISDN SLC NPRM would not take into account the relevant costs. Some companies assert that ISDN service does not increase the average loop  X14costs.q$1J j {O,'ԍ SWBT ISDN Comments at 9. But see Bell Atlantic Comments at 45 and n.13 (recognizing that PRI  {O'ISDN service may increase common line costs). See also Tennessee Public Service Commission ISDN Comments at 3 (digital upgrades should be considered to be normal part of network evolution, and extra SLCs  yO'should not be assessed as a result of such normal network upgrades). Others contend that the additional costs incurred to provide ISDN service are  X 4switching costs rather than common line costs.r" 6j {O'ԍ TCA ISDN Comments at 5 and Time Warner ISDN Comments at 5. See also NYNEX ISDN Comments at 89; Sprint ISDN Reply at 12 (U S West proposal improperly includes nonloop plant costs such as line cards, and SLCs are based on average costs rather than servicespecific costs. U S West's proposal would necessitate a fundamental reworking of the Commission's Part 69 rules).   X 427. Few parties commented on our proposal to impose a SLC for every two derived channels. Those who did generally opposed it for many of the same reasons they opposed assessing a SLC per derived channel. For example, parties asserted that such a rule would bear no relationship to the cost of providing service, and would discourage subscription to  X4derived channel services.Bs j yOa%'ԍ SWBT ISDN Comments at 9.B "s0*&&aal"Ԍ X4ԙ28. Several parties also filed comments regarding other modifications to access  X4charges and our price cap rules.-tZj {Ob'ԍ See, e.g., SWBT ISDN Comments at 3, 10; Roseville Tel. ISDN Comments at 4; MCI ISDN Comments at 5; NYNEX ISDN Comments at 5; USTA ISDN Comments at 1213; Time Warner ISDN Comments at 4; America Online ISDN Reply at 8; Pacific Bell ISDN Comments at 5, 7.- In addition, NYNEX asserts that the Commission should not apply the rule we adopt to derived channel technologies that are not apparent to the end  X4user and that are exclusively in the LEC's network infrastructure.Duj yOV'ԍ NYNEX ISDN Comments at 14.D NYNEX claims that it would be impossible to identify the subscribers served by such technology, and that it would be inappropriate to treat those subscribers differently.  X_429. The BOCs subsequently provided data on the relative nontrafficsensitive costs of  XH4single and derived channel services, in response to our request for information.;vHzj yOs'ԍ In their responses, three of the BOCs, BellSouth, NYNEX, and SWBT, asked for confidential treatment of portions of the information submitted. NYNEX publicly filed the information we requested, but submitted as confidential additional information that contained more detailed cost data. The confidential data were not necessary to perform our analysis, and the following tables only include data that was filed on the public record. We have returned to the respective companies data for which confidential treatment was sought.;  X14As shown in Table 1 below, the cost data submitted in response to the ISDN SLC NPRM indicates that the ratio of NTS loop costs of BRI ISDN to standard analog service is approximately 1 to 1. The ratio of NTS loop costs of PRI ISDN to standard analog service, excluding NYNEX's data, is roughly 5 to 1. As shown in Table 2, NYNEX's data appear to be outliers and are therefore excluded from the calculation of the average ratio for PRI ISDN to standard analog service because the ratios of its outside plant and NTS costs for PRI ISDN to standard analog service are almost twice those of other incumbent LECs. "* v0*&&aa"  X' IdTABLE 1 ă  X' Ratio of costs of standard analog service to BRI ISDN service ^A(2 addx ^ : z   V  5y Outside Plant (loop only) costsV All NTS costsz q  V_  Ameritech_ 1:1.07_ 1:1.45q q  Bell Atlantic _ 1:1.01 _ 1:1.36q q  NYNEXq _ 1:0.85q _ 1:1.23q q   Pacific Bell _ 1:1.05 _ 1:1.13q q q  US WestS _ 1:0.80S _ 1:1.07q q   _ _ q   S  _c  Average ratio of costsNc 1:0.96*Nc 1:1.24*  c XN4  X 4Id TABLE 2 ă  X' Ratio of costs of standard analog service to PRI ISDN service ^ addx ( ^           + Outside Plant (loop only) costs  Outside Plant (loop only) costs (excluding NYNEX All NTS costs All NTS costs (excluding NYNEX data) !    Ameritech 1:5.68 1:5.68 1:8.9 1:8.9! !  Bell Atlantic 1:4.13 1:4.13 1:15.80 1:15.80! !  NYNEX: 1:10.94: excluded: 1:27.74: excluded! !  Pacific Bell[ 1:4.67[ 1:4.67[ 1:8.70[ 1:8.70! ! : US West| 1:5.33| 1:5.33| 1:10.60| 1:10.60! ! [         ! :  |   Average ratio of costs" 1:6.5*" 1:4.95*" 1:15.13*" 1:10.5*:    X"4  X#4*Averages may differ due to rounding.q(# "%v0*&&aa#"  X430. GTE and MCI filed comments, and America Online, NYNEX, Pacific Bell, Southwestern Bell, and US West filed reply comments in response to the cost data. Several of those parties contend that cost ratios should not be used to determine the number of SLCs to be assessed for derived channel services, because SLCs currently are set at arbitrary levels,  X4and do not reflect the actual costs of providing any particular service.wj yO'ԍ GTE ISDN Comments regarding cost data at 3; America Online ISDN Reply regarding cost data at 2; NYNEX ISDN Reply regarding cost data at 34. Several parties also contend that, even if we decide to assess SLCs for derived channel services based on the relative nontrafficsensitive costs of those services, we should not include switching costs  X_4such as trunk or line cards in our assessment of costs.x_ j yO0 'ԍ GTE ISDN Comments regarding cost data at 4; America Online ISDN Reply regarding cost data at 2; ISDN NYNEX Reply regarding cost data at 34. They argue that a costbased ratio would be complex to develop, and would create substantial and unnecessary recordkeeping  X14burdens.y1xj yOZ'ԍ GTE ISDN Comments regarding cost data at 47; NYNEX ISDN Reply regarding cost data at 4; SWBT ISDN Reply regarding cost data at 3. Many parties also assert that the cost data demonstrate that there is no difference between the nontrafficsensitive loop costs for standard analog service and BRI service, and that there is not a significant difference in the nontrafficsensitive loop costs between  X 4standard analog service and PRI service,fzD j yOm'ԍ GTE ISDN Comments regarding cost data at 810; America Online ISDN Reply regarding cost data at 2 (any difference between providing PRI service and single channel service "is not large and principally is attributable to the fact that PRI ISDN is provided using two twisted copper pairs" rather than one); SWBT ISDN Reply regarding cost data at 34 (urging the Commission to assess one SLC per service as an interim rule,  {O'pending a separate proceeding on access charge reform). Accord Pacific Bell ISDN Reply regarding cost data at  {OW'34. See also U S West ISDN Reply regarding cost data at 12 (urging the Commission to bifurcate the treatment of BRI and PRI service, and to issue a decision immediately that would require LECs to assess no more than one SLC for BRI service).f or between digital PBX trunks and PRI service.{ j yOy'ԍ MCI ISDN Comments regarding cost data at 2; NYNEX ISDN Reply regarding cost data at 4.  X 431. Comments filed in response to the Access Reform NPRM. Comments filed in the current proceeding are consistent with those filed in response to the ISDN SLC NPRM. The  X4majority of commenters support a rate structure that assesses one SLC per ISDN facility,|"lj {O 'ԍ See, e.g., USTA Comments at 56, Reply at 34; Ameritech Comments at 13; PacTel Comments at 65; GTE Comments at 33; Cincinnati Bell Comments at 8; Sprint Comments at 18; API Comments at 3032; Compuserve Comments at 1921, Reply at 9; Microsoft Comments at 7; PSINet Reply at 11; CIEA Comments at 12, Reply at 12; Alarm Industry Communications Committee Reply at 13. or"V|0*&&aa8"  X4per pair of copper wires.}j yOy'ԍ ACTA Comments at 7; Frontier Comments at 7, n.12; Alarm Industry Communications Committee Reply at 13. State Consumer Advocates, argues that assessing SLC based on pairs of wires would inhibit the introduction of new technologies and service because LECs would have a financial  X4incentive to keep customers on conventional service.U~ j yO'ԍ State Consumer Advocates Comments at 6466.U TDS recommends assessing one SLC  X4charge on a BRI ISDN line and no more than two SLCs on a PRI ISDN line.=j yO 'ԍ TDS Comments at 22.= Ad Hoc argues that although assessing SLCs based on derived channels should recover the costs of providing such channels, the Commission has not provided sufficient information to determine whether a ratio of 1.24 to 1 for BRI, and 10.5 to 1 for PRI accurately reflect the costs of  XH4those services.CH@j yO9'ԍ Ad Hoc Comments at 1314.C PacTel argues that ISDN service is not an interstate service and, therefore,  X14not within the Commission's jurisdiction.A1j yO'ԍ PacTecl Comments at 65.A  X 432. Those commenters that oppose assessing a SLC per derived channel argue that imposing one SLC per channel discourages demand for advanced services and inhibits  X 4technological development. ` j {O'ԍ See, e.g., SWBT Comments at 13; TCA Comments at 4; ACTA Comments at 7; CompTel Comments at 2930; Interactive Services Association Comments at 3. USTA states that the current multiple SLC rule imposes disproportionate burdens of cost recovery on ISDN users and that changing to a single SLC  X 4per facility would be consistent with the objectives of this proceeding.K j yO'ԍ USTA Comments at 56, Reply at 34.K  Xy' &J:\ACCESS.REF\ORDER\IIIACOM.CF& (J:\ACCESS.REF\ORDER\IIIBCCOM.RRC( _B.Local Switching  XK' 1.` ` NonTraffic Sensitive Charges  X4 33. The majority of commenters agree with our tentative conclusion that costcausative principles indicate that costs associated with line cards, lineside ports, and those trunk ports _associated with dedicated transport should be recovered through flatrated"J 0*&&aa+"  X4charges.NZj {Oy'ԍ See, e.g., CompTel Comments at 31; USTA Comments, Attachment 1 at 8; AT&T Comments at 55; LCI Comments at 21; PacTel Comments at 66; Rural Tel. Coalition Comments at 9; Alabama Commission Comments at 78; Florida Commission Comments at 2; Texas Commission Comments at 8; TCI Reply at 7.N Several incumbent LECs argue that there is no need to codify specific rate elements for local switching costs and, instead, advocate flexibility in the rate structure for  X4local switching.}j {Om'ԍ See, e.g., USTA Reply at 3435; SNET Comments at 37; BA/NYNEX Comments at 39.} BA/NYNEX amplifies this argument by stating that it may be both difficult to quantify the NTS portion of local switching costs, and burdensome to separately  X4charge for trunk ports based on the type of transport used by an IXC.?|j yO 'ԍ BA/NYNEX Reply at 35.? BellSouth claims that an adequatelysized universal service fund could replace all implicit support currently provided through interstate access charges that recover NTS costs, thereby reducing the carrier common line charge to zero and recovering fully the NTS portion of local switching  XH4charges.aH j {O'ԍ BellSouth Reply at 10; see also USTA Reply at 34.a The Georgia Commission argues that the assertion that NTS local switching costs are related to the provision of universal service is tantamount to saying that most costs are related to universal service and that the USF should not be the first place to look for recovery  X 4of any cost element.I j yOR'ԍ Georgia Commission Reply at 21.I  X 4!34. Several small LECs and the State Consumer Advocates argue that changes to the rate structure to recover NTS local switching costs on a NTS basis should be left to the Joint  X 4Board on Separations. . j yO'ԍ Frederick & Warinner Comments at 5; Harris, Skrivan & Associates Comments at 6; State Consumer Advocates Comments at 3132. These commenters state that local switching costs formerly were recovered through a combination of TS and NTS charges and that new Parts 32 and 36, when adopted, consolidated these mechanisms because of difficulties in separating the TS and NTS  Xb4costs of digital switches.b j {O'ԍ E.g., Frederick & Warinner Comments at 56; Harris, Skrivan & Associates Comments at 6. Therefore, these commenters argue that, if part of the costs of local switching are to recovered through NTS flatrated charges, the Joint Board should first  X44expand Part 36 and 69 categories related to NTS local switching equipment.4j yO!'ԍ Frederick & Warinner Comments at 5; State Consumer Advocates Comments at 3132. Otherwise, the inconsistent treatment of some local switching costs as TS for purposes of Part 36 but NTS for purposes of Part 69 would improperly transfer costs from the interstate to the intrastate"0*&&aa"  X4jurisdictions.[j yOy'ԍ State Consumer Advocates Comments at 3132.[  X4"35. U S West, Sprint and other commenters argue that to the extent that NTS line X4side costs are attributable to the end user, they ought to be recovered from end users. ZXj {O'ԍ  See, e.g., U S West Reply at 29; Sprint Comments at 18; Illinois Commission Comments at 11; SWBT Comments at 8; AT&T Reply at 29 (line cards that terminate a subscriber's loop should be flatrated and charged to the subscriber via the SLC).  Others, such as TCI, favor an increased SLC, but support a PICbased charge as a secondbest  X4option for recovering NTS local switching costs.RZzj {O 'ԍ TCI Reply at 7; see also BellSouth Reply at 1112 (the mere possibility, speculative at best, that per line charges assessed on IXCs will encourage "dialaround" services, is insufficient reason for the Commission not to establish per line NTS recovery of NTS costs); Sprint Reply at 1213.R Ameritech and ALLTEL propose that NTS local switching costs be recovered by a charge assessed on IXCs on the basis of  X_4interstate retail service revenues or minutes of use.Z_j yO'ԍ Ameritech Comments at 14; ALLTEL Comments at 12.Z Sprint responds that such proposals do not recover these costs on a costcausative basis, and insulate the incumbent LEC from  X14competition.@1, j yO'ԍ Sprint Reply at 1213.@ TCI maintains that the cost of the trunk side ports dedicated to an individual  X 4IXC varies directly with the number of trunks dedicated to that IXC.= j yO'ԍ TCI Comments at 12.= TCI also states, however, that the costs of trunk ports associated with dedicated transport need to be recovered through a separate rate element because an IXC may use a trunk port supplied by  X 4the incumbent LEC without using the incumbent LEC's dedicated transport.3 L j {O'ԍ Id.3  X 4#36. MCI notes that identifying TS and NTS costs of local switching is not simple, and supports adoption of the proposed rate structure only if cost studies allocating costs between  Xy4TS and NTS can be performed.yj {O 'ԍ MCI Comments at 8182; see also BA/NYNEX Reply at 35 (it may be difficult to quantify the NTS portion of these costs). The record reflects widely varying estimates of the portion of local switching costs that are NTS. USTA estimates that the NTS portion of local  XK4switching costs ranges from 6% for analog switches to 51% for modern, digital switches.LK8j yO4$'ԍ USTA Comments, Attachment 2 at 31.L ALLTEL reports that NTS local switching costs make up 31 percent of its interstate local"40*&&aa."  X4switching revenue requirement.@j yOy'ԍ ALLTEL Comments at 12.@ SWBT claims NTS local switch costs could be recovered  X4through a flat charge of $0.35 a month per line.=Xj yO'ԍ SWBT Comments at 8.= Sprint, in contrast, estimates that onethird of local switching costs are NTS, and that recovering those costs directly from end users  X4would add $0.80 per month to end user bills. j yOT'ԍ Sprint Comments at 18. In developing this estimate, Sprint used a TELRIC cost study of its New Jersey operations and assumed that the resulting data were representative of price cap LECs as a whole. Sprint estimates that, if end users were charged directly $0.80 monthly for local switching, this change would save IXCs $1.365 billion annually. Cable & Wireless reports that, based on data submitted by NYNEX, at least 49 percent of the local switching costs are NTS for modern  X4switches.Mj yO'ԍ Cable & Wireless Comments at 1213.M  X_4$37. Cable & Wireless and other commenters state that many components of the local switch, such as the central processing portion of the switch, switch fabric, and the trunkside ports that are not associated with dedicated transport, are shared. These commenters assert  X 4that these shared facilities should be priced on a usagesensitive basis. ` j yO+'ԍ Cable & Wireless Comments at 1213; Citizens Utilities Comments at 30; GSA/DOD Comments at 4. BellSouth, however, states that in addition to the costs of line cards and the main distribution frame, many other  X 4switching costs, e.g., the cost of the switching matrix, depend substantially on the number of  X 4lines rather than usage. j yOx'ԍ BellSouth Comments, Attachment 2 at 14 (Haring and Rohlfs, "Economic Perspectives on Access Charge Reform"). The Texas Commission disagrees, noting that while growth in the number of dedicated lines or trunks attached to the switch does cause the central processing  X 4unit to grow in size, it is usage of these lines or trunks that cause costs. H j {O'ԍ Texas Commission Comments at 1112; see also USTA Comments, Attachment 2 at 31 (notes that the determination of which switch to install is clearly a trafficsensitive decision). The Rural Tel. Coalition states that, because small carriers lack economies of scale and scope, rural switching  X{4costs are higher per minute or per line than urban switching costs.N{j yO 'ԍ Rural Tel. Coalition Comments at 10.N "d20*&&aaZ"Ԍ X'w 2.` ` Traffic Sensitive Charges  X4%38. Many IXCs, consumer groups, ESPs, and LECs oppose the establishment of a  X4mandatory call setup charge. Zj {O4'ԍ E.g., Cable & Wireless Comments at 1315; Sprint Comments at 19; Bankers Clearing House Comments at 34; CompuServe/Prodigy Comments at 2529, Reply at 1112; USTA Comments, Attachment 1 at 8, Comments at 57, Reply at 35.  Collectively, they raise two primary concerns: (1) the costs of  X4wcall setup are de minimis or difficult to separate from other TS costs;rj {O? 'ԍ E.g., Cable & Wireless Comments at 1315; Teleport Comments at 22.r (2) the costs of measuring, tracking and billing for call setup would outweigh the costs of the call setup  Xx4itself.x|j {O 'ԍ E.g., Cable & Wireless Comments 14; Sprint Comments at 19; Teleport Comments at 22; Bankers Clearing House Comments at 34.  XJ4&39. AT&T argues that a such a mandatory charge would be inconsistent with the rate structure the Commission mandated for the local switching unbundled network element (UNE) because no call setup charge has been established as part of the unbundled local switching rate  X 4structure at either the state or federal level.K j yO'ԍ AT&T Comments at 56, Reply at 30.K In addition, AT&T argues that a separate rate element is unnecessary because many of the costs of call setup are now allocated to signalling, and the signalling rate structure proposed in the NPRM includes signalling message  X 4charges for all calls. f j yO'ԍ AT&T Reply at 29. Although Ameritech favors the creation of a call setup charge, it asserts that over 95% of its calls are set up using SS7 technology.  X4'40. Cable & Wireless asserts that percall setup costs are too small relative to the other TS costs of local switching to justify a new and separate rate element; therefore, any  Xd4economic inefficiency resulting from collection on a perminute basis is de minimis and would  XO4be offset by increased complexity in the rate structure.>ZO j {O'ԍ Cable & Wireless Comments at 13. See also Bankers Clearing House Reply at 3 (Call setup costs associated with call attempts are trivial, because outofband signalling permits the likelihood of call completion to be evaluated before a transmission path is established).> LCI states that the current perminute recovery mechanism has not been controversial in the past, and that imposing a call setup charge on call attempts would result in charges being assessed on a caller who has not  X 4received any service.@ j yO$'ԍ LCI Comments at 2526.@ LCI states that, in addition to the LEC's setup costs, the IXC also incurs transport costs associated with call attempts that are not recovered explicitly from the"p0*&&aa"  X4calling party.3j {Oy'ԍ Id.3  X4(41. MCI opposes a separate call setup charge, asserting that it is unclear at best which part of the TS portion of local switching costs are sensitive to call attempts and which part is sensitive to minutes of use. In addition to signalling, MCI hypothesizes that some part of the cost of the central processor may be sensitive to call attempts. Any attempt to separate TS costs into permessage and perminute categories could involve arbitrary assumptions and,  X_4therefore, MCI argues that TS costs of local switching should be left as perminute charges.=_Zj yOj 'ԍ MCI Comments at 82.= MCI states, however, that any call setup charge the Commission does adopt should be assessed only on completed calls because, otherwise, the incumbent LEC will be able to charge for calls blocked by its own switch and will have reduced incentives to ensure quality  X 4service on its network.o j {O'ԍ MCI Comments at 83; see also Bankers Clearing House Reply at 4.o  X 4)42. Several large corporate consumers of telecommunications services oppose the imposition of a call setup charge because they assert that the charge would cause churn and would be disruptive to consumers, especially banks with automatic teller machines and  X4businesses that accept credit cards.|j yO'ԍ CompuServe/Prodigy Comments at 2529, Reply at 1112; Bankers Clearing House Comments at 78; Ad Hoc Comments at 1920, Reply at 34. In addition, Bankers Clearing House argues that neither IXCs nor other third parties have the capability to track or audit call attempts, so assessment  Xb4of setup charges based on call attempts raises the potential for unauditable billing errors.Qbj yO'ԍ Bankers Clearing House Comments at 34.Q  X44*43. Several state commissions, incumbent LECs, and others favor the creation of a separate call setup charge. The costs of call setup, these parties argue, do not vary with the length of a call, so a per call charge, rather than the current perminute recovery of these  X4costs, would be more consistent with costcausation principles.u"d j {O 'ԍ E.g., Excel Comments at 12; TRA Comments at 37; Ameritech Comments at 15; PacTel Comments at 69; Citizens Utilities Comments at 30; Frederick & Warinner Comments at 67; Minnesota Independent Coalition Comments at 15; Alabama Commission Comments at 8; California Commission at 23; Texas Commission at 14; TCI Comments at 12.u In addition, under the current, perminute recovery mechanism, long holdtime calls subsidize short calls and  X4uncompleted calls.MN j yO%'ԍ PacTel Comments at 68, Reply at 23.M Two years ago, the California Commission established mandatory call"0*&&aa1" setup charges intrastate switched access, imposing charges on originating attempts that are  X4handed off to the IXC's POP, and on terminating completions.sj yOb'ԍ California Commission Comments at 6, Reply at 23; PacTel Comments at 68.s The California Commission states that this structure is appropriate because, at the point the call is handed off to the IXC's  X4POP, the LEC switch has performed its function and the LEC has incurred the setup cost.KXj yO'ԍ California Commission Reply at 2.K In addition, the California Commission reports that, under this structure, it has not  X4encountered problems with LEC duplicity in generating deliberate incompletions.Mj yO& 'ԍ California Commission Reply at 23.M  X_4+44. Several parties advocate recovery of call setup costs through a separate signalling rate element. Frederick & Warinner argues that, by performing call setup prior to dedicating a trunk to the call, LECs require fewer transport trunks; this efficiency should be passed along to IXCs in the form of lower access charges. Frederick & Warinner, therefore, suggests that we refer this issue to the Joint Board on Separations so that call setup expenses currently assigned to Central Office Equipment (COE) Category 3 and Interexchange Circuit Equipment Category 4.23 can be reassigned to a separate COE category designed to identify and recover  X 4all SS7 call setup charges. xj yO'ԍ Frederick & Warinner Comments at 6 (these equipment categories are defined at 47 C.F.R. 36.125,  {O'36.126(b)(2)(iii)). See also TCI Comments 1213, Reply at 9.  X4,45. A number of the parties that favor the principle of a separate call setup charge  Xy4assert that the Commission should permit, but not require, such a charge."yj {O'ԍ E.g., USTA Comments, Attachment 1 at 8, Comments at 57, Reply at 35; BA/NYNEX Comments at 39; BellSouth Comments at 71; PacTel Reply at 23 (PacTel does "not insist" that a call setup charge be mandatory); U S West Comments at 58; Competition Policy Institute Comments at 19; Georgia Commission Reply at 2122; Illinois Commission Comments at 1112. They argue that flexibility will allow incumbent LECs to establish rate structures that are responsive to market  XK4conditions.cK j {O'ԍ E.g., BA/NYNEX Comments at 39; USTA Comments at 57.c Competition Policy Institute argues that separate call setup charges may be  X44appropriate in light of the increasingly "bursty" use of the network.V4N j yO3!'ԍ Competition Policy Institute Comments at 19.V The Georgia Commission argues that the multiplicity of opinions on this issue points to a need for  X4flexibility,Fj yO$'ԍ Georgia Commission at 2122.F while the Illinois Commission suggests that flexibility will allow incumbent LECs to evaluate whether, and to what extent, such revision to the rate structure would be"n0*&&aa"  X4more efficient than the structure currently in place.Gj yOy'ԍ Illinois Commission at 1112.G U S West supports the establishment of a call setup charge as a permissive rate structure, but cautions that the charge would require billing system changes, would affect different IXCs differently, and may be too small to merit  X4a separate rate element.?Xj yO'ԍ U S West Reply at 29.?  X4-46. There is general agreement that LECs incur call setup costs for both completed calls and call attempts. Among commenters favoring a permissive or mandatory call setup charge, however, opinion is split as to whether the charge should be imposed on call attempts. Those parties favoring charges only for completed calls generally argue that this structure would (1) avoid the administrative burden and customer confusion associated with developing  X 4a tracking, metering and billing system for call attempts;x j {O'ԍ E.g., Alabama Commission Comments at 8; Texas Commission Comments at 14.x and (2) deny incumbent LECs the  X 4incentive to increase revenues by blocking calls at their own switch.I zj {O.'ԍ E.g., MCI Comments at 83.I Those parties favoring charges for all call attempts generally argue that this structure would most closely reflect cost X 4causation principles. j {O'ԍ E.g., Ameritech Comments at 15; CompuServe/Prodigy Comments at 29; Citizens Utilities Comments at 30.  X '` ` a. Peak and OffPeak Pricing  Xy4.47. Many commenters, including most IXCs, oppose the creation of either a permissive or a mandatory peakrate structure, because the complexity of creating and  XK4implementing such a structure outweighs any benefits to be gained.RKf j {Ob'ԍ See, e.g., AT&T Comments at 5657.R These commenters generally argue that: (1) it is impossible to determine peak and offpeak hours with any degree of certainty because peak hours vary with region of the country, type of service, type  X4of user, rate zone, technological advances, and other factors; j {O 'ԍ See, e.g., CompTel Comments at 31; Cable & Wireless Comments at 14; LCI Comments at 27; MCI Comments at 83; ALTS Comments at 24; ACC Long Distance Comments at 14; Sprint Comments at 1920. (2) peak pricing structures  X4would not send efficient market signals, would disadvantage competitors, and would have a de  X4minimis impact on usage patterns and incumbent LEC network design because less than 15%  X4of RBOC traffic is interstate access;uR j yO%'ԍ AT&T Reply at 30; CompTel Comments at 31; ACC Long Distance Comments at 14.u (3) no state commissions have established a peak"0*&&aaK"  X4pricing rate structure;Aj yOy'ԍ CompTel Comments at 31.A (4) peak hours may continue to shift over time as competitors enter  X4the market and as the use of telecommuting, the Internet, and other data services increase;^Xj yO'ԍ Cable & Wireless Comments at 14; LCI Comments at 27.^ and (5) necessary changes to carrier metering and billing systems may outweigh any benefits  X4to be gained.j {OT'ԍ Bankers Clearing House Reply at 56; Citizens Utilities Comments at 30. But see Excel Comments at 12 (necessary changes to CABS are justified by the public policy benefits of a rate structure change).  X4/48. Other commenters, including most incumbent LECs, support a rate structure under which LECs would be permitted, but not required, to price local switching on a peak rate basis. These commenters acknowledge the difficulties cited above, among others, but generally agree that, in principle, economic welfare benefits could be obtained from a peak  X14rate structure by diverting traffic, and associated TS costs, from peak to nonpeak hours.1Bj {O$'ԍ E.g., GTE Reply, Appendix D at 15; USTA Comments, Attachment 1 at 8; TCI Comments at 13. Accordingly, these commenters advocate a permissive approach under which incumbent LECs would have the ability to develop peak and offpeak pricing structures on an optional basis in  X 4response to local conditions and subject to the limitations of their billing systems.  j yOq'ԍ USTA Comments at 5758, Reply at 35; Ameritech Comments at 1617; BA/NYNEX Comments at 40; BellSouth Comments at 71; U S West Comments at 5859, Reply at 2930; Citizens Utilities Comments at 30; Frederick & Warinner Comments at 7; Minnesota Independent Coalition Comments at 16; TDS Comments at 24; Competition Policy Institute Comments at 20; Georgia Commission Reply at 2122; Illinois Commission Comments at 1112; TCI Comments at 13, Reply at 10; Time Warner Comments at 1112.  At least one commenter argues that such an approach would be consistent with our recent  X 4interconnection decisions. j {O'ԍ Frederick & Warinner Comments at 7 (citing Local Competition Order,  756757).Ē  X4049. Only Excel supports establishment of a mandatory peak rate structure, arguing that such a structure would more accurately apportion costs among users and would more  Xb4accurately reflect the incremental costs of additional network capacity during peak hours.?bj yO) 'ԍ Excel Comments at 12.? "K0*&&aa"Ԍ X' C.Transport  X' 1.` ` Entrance Facilities and DirectTrunked Transport (#`  X4150. The majority of commenters supported our tentative conclusion that flatrate  X4charges are appropriate for entrance facilities and directtrunked transport service.j {O'ԍ See. e.g., AT&T Comments at 59; Excel Comments at 13; MCI Comments at 84; Ameritech Comments at 18; BA/NYNEX Comments at 41; BellSouth Comments at 71; PacTel Comments at 69; U S West Reply at 30; Citizens Utilities Comments at 30; NECA Comments at 34; Alabama Commission Comments at 9; California Commission Comments at 6; Illinois Commission Comments at 12; Sprint Comments at 21; TCI Comments at 14, Reply at 11. Those  commenters addressing this subject agree that the costs of dedicated directtrunked transport and entrance facilities are incurred on a flatrate basis. Both PacTel and the California Commission note that, in California's Open Access Network Architecture and Development Proceeding, the parties reached consensus that costs of entrance facilities and directtrunked  X 4transport should be recovered through flatrate charges.| zj {OE'ԍ PacTel Comments at 69; California Commission Comments at 6. See Rulemaking on the Commission's Own Motion to Govern Open Access to Bottleneck Services and Establish a Framework of Network Architecture Development of Dominant Carrier Networks; and Investigation on the Commission's Own Motion into Open  {O'Access and Network Architecture Development of Dominant Carrier Networks, CPUC Docket No. R.9304003/I.9304002, Consensus Costing Principles/Basic Network Functions; OANAD Cost Methodology  yO1'Workshops, Filed Aug. 23, 1995 by California Telecommunications Coalition. Texas, also, has adopted flatrates for these facilities. Texas Commission Comments at 15. Several commenters assert that the costs of directtrunked transport and entrance facilities vary with distance traversed and that  X 4rates for these facilities should be distance sensitive. j {O['ԍ See, e.g., AT&T Comments at 60; MCI Comments at 84; Ameritech Reply at 29; U S West Reply at 30; Texas Commission Comments at 15. TCI supports distance sensitive flatrate charges for directtrunked transport, although it argues in favor of flat rate charges for  X 4entrance facilities, apparently without a distancesensitive component.J j yO'ԍ TCI Comments at 14, Reply at 11.J  X4251. Some parties advocate certain adjustments in the rate structure for directtrunked transport and entrance facilities. U S West and Sprint both suggest that, as carriers expand their use of fiberoptic ring architecture, the current distancesensitive charges for directtrunked transport should be replaced with "perring" rates because ring architecture makes  X44transport costs less distance sensitive in densely populated areas.V4j yO#'ԍ Sprint Comments at 21; U S West Reply at 30.V U S West argues, therefore, that incumbent LECs should have the flexibility to restructure their rates to reflect"80*&&aa"  X4this change.?j yOy'ԍ U S West Reply at 30.? Ameritech agrees that the current rates for entrance facilities and directtrunked transport are properly structured, but argues that carriers should have the flexibility to offer switched access customers new technologies, such as SONET, without obtaining a Part  X469 waiver or passing a public interest test.FXj yO'ԍ Ameritech Comments at 1718.F SWBT asserts that tariff and rate structure distinctions between special access, directtrunked transport, and entrance facilities should be eliminated because these distinctions cannot survive in a competitive environment and cause  Xv4complex billing arrangements for shared use facilities.vj {O 'ԍ SWBT Comments at 1415. See also Ameritech Comments at 18 (arguing that pricing flexibility applicable to special access should be extended to functionally equivalent switched transport services). USTA proposes more sweeping change, arguing that the Commission forbear from regulating collocated directtrunked transport because this service meets the requirements of Section 10 of the Communications  X14Act.A1Bj yO$'ԍ USTA Comments at 3548.A  X 4352. There is considerable division among commenters as to whether incumbent LECs should be permitted to offer transport services differentiated by whether the LEC or the IXC is responsible for channel facility assignments (CFAs). MCI opposes such a differentiation for two reasons. Initially, MCI notes that, while the incumbent LECs claim they can achieve network savings by retaining control of CFAs, IXC provision of CFAs should save the LEC the costs of performing this function. Therefore, it is unclear whether costs should be greater or lower when the IXC performs the CFA. Secondly, MCI argues that, once the LEC enters the interexchange market, it could impute to itself a lower transport charge by providing the  XK4CFA to its interexchange subsidiary.@Kj yO'ԍ MCI Comments at 8485.@ SWBT offers two additional reasons why CFA control should not be the basis for rate differentiation: (1) CFA control responsibilities may vary among LECs; and (2) rate differentiation based on CFA control may become untenable with respect to newer technologies, such as SONET architecture and ATM, which rely less heavily on particular dedicated channels. Currently, SWBT states that CFA control may indicate  X4whether a facility is dedicated or shared.>b j yO 'ԍ SWBT Comments at 62.> ACTA also opposes pricing differentiation, arguing that the purchase of an incumbent LEC circuit is a simple business transaction and the  X4purchasing IXC should be able to select where the purchased circuit resides.> j yOM$'ԍ ACTA Comments at 10.> " 0*&&aa"Ԍ X4453. TCI and the Washington Commission support giving the incumbent LECs the flexibility to differentiate directtrunked transport rates based on whether the customer or the LEC performs CFA functions, as long as the LEC supports the differential with forwardlooking cost data and, in the case of the Washington Commission, as long as it does not  X4needlessly complicate the access tariff.sj yO'ԍ TCI Comments at 14, Reply at 1112; Washington Commission Comments at 6..s  Xv' 2.` ` TandemSwitched Transport (#`  XH'` ` a. Rate Structure  X 4554. Except for AT&T, IXC commenters addressing the issue generally support the  X 4unitary rate structure and argue that the Commission should retain this pricing option. Xj {O 'ԍ E.g., Cable & Wireless Comments at 1517; CompTel Comments at 2426, Reply at 1113; MCI Comments at 8586; TRA Comments at 37. These commenters argue that the unitary rate structure should remain available because:  X 4(1) access transport, as a service, has traditionally been offered on an endtoend basis;J j yO8'ԍ Cable & Wireless Comments at 16.J (2) the unitary rate structure promotes full and fair interexchange competition by allowing IXCs  X 4time to prepare their networks for fully costbased pricing;M Bj yO'ԍ Cable & Wireless Comments at 1516.M (3) the partitioned rate structure, if required, (a) could provide incentives for incumbent LECs to engage in inefficient network reconfiguration, because access customers have no control over incumbent LEC decisions on  Xb4the location of tandems, but would be required to pay for access based on these decisions;{bj {O'ԍ Cable & Wireless Comments at 16; see also Texas Commission Comments at 17.{ and (b) would necessitate new rules regulating incumbent LEC tandem deployment  X44decisions;M4d j yOI'ԍ Cable & Wireless Comments at 1617.M (4) AT&T, by virtue of divestiture, inherited POPs in close proximity to a significant number of tandem switches and would therefore enjoy a significant legacy  X4advantage over competitors;J j yO 'ԍ Cable & Wireless Comments at 17.J (5) "common" and "dedicated" circuits often travel on the same facilities and along the same transmission routes, making disparate rate structures  X4inappropriate;N j yO $'ԍ CompTel Comments at 25, Reply at 11.N (6) elimination of the unitary structure would raise the price of tandemswitched transport in relation to directtrunked transport and would therefore discriminate"0*&&aae"  X4against smaller IXCs;Nj yOy'ԍ CompTel Comments at 26, Reply at 13.N and (7) the unitary rate structure is the only structure consistent with  X4the TSLRIC methodology of estimating costs.UXj yO'ԍ CompTel Reply at 1213; TRA Comments at 37.U  X4655. TRA additionally argues that the current rate structure, which allows IXCs to choose between the threepart and the unitary rate structure, is most consistent with the principles that costs should be recovered in the way that they are incurred, and from the cost  Xv4causer.=vj yO 'ԍ TRA Comments at 37.= Telco Communications Group requests that we explicitly allocate some common transport costs to dedicated transport rates because common transport facilities are sized to handle peak overflow loads from large carriers that use directtrunked transport for most  X14traffic.U1xj yOZ'ԍ Telco Communications Group Comments at 67.U  X 4756. Sprint states that the Commission should retain the unitary rate structure because the threepart rate structure would give incumbent LECs the incentive to route traffic  X 4inefficiently by placing tandems far from IXC POPs.S j yO'ԍ Sprint Comments at 2223, Reply at 1516.S Sprint argues that the term "direct trunking" is a misnomer because modern "hub and spoke" or "ring" network architecture often causes direct trunked circuits to travel along the same transmission routes and facilities as  X4tandem switched transport circuits.Pj yO'ԍ Sprint Comments at 23, Reply at 1415.P It would therefore be unfair to require users of tandemswitched transport to pay for the route through the tandem, while allowing directtrunked  Xb4transport users to pay based on airline miles between the EO and SWC.3b( j {O;'ԍ Id.3 According to Sprint, the threepart rate structure would skew interexchange competition in favor of AT&T, which has sufficient traffic to justify direct trunking to individual EOs, and in favor of the BOCs, which could take advantage of their own direct trunking to many of their end  X4offices.P j yOq!'ԍ Sprint Comments at 2223, Reply at 16.P Sprint suggests that the Commission address the problem of underutilized circuits on the tandemtoSWC route by allowing incumbent LECs to size trunk bundles between the  X4two points to achieve a reasonable utilization factor.=J j yO$'ԍ Sprint Reply at 15.= "0*&&aa"Ԍ X4857. WorldCom states that the Commission should not revisit any of the transport rate  X4structure issues, other than those remanded by the Court.?j yOb'ԍ WorldCom Reply at 26.? WorldCom offers the following principles, however, if we do decide to reexamine these issues: First, the rate structure should treat dedicated and common transport consistently because both services use the same network facilities. Traffic on dedicated circuits and common circuits travels physically on the same large multiplexed transmission pipe. Routing, most frequently, is identical. Therefore, WorldCom states that it would be unreasonably discriminatory for the Commission to make detailed changes to the rate structure or pricing of tandemswitched transport without making  XH4parallel changes to the pricing of dedicated transport.BHXj yOQ 'ԍ WorldCom Reply at 2728.B Second, rate structure decisions should be based on the current forwardlooking view of the interoffice network. Large capacity fiber optic facilities, including SONET rings, have made transmission costs less distance sensitive. Therefore, WorldCom states that the triangular, "pyramid" diagram the Commission included in the notice is outdated. Because routing is within the sole control of the incumbent LEC and may vary based on momentary traffic loads, the transport customer should pay for transport based on airline miles between the two end points. Pricing of a service on an other than endtoend basis could penalize users of that service for decisions  X4outside of their control.Bj yO)'ԍ WorldCom Reply at 2932.B Third, the Commission should use forwardlooking cost methodologies in setting rates. Tandem switching rates based on fully allocated, embedded  Xb4costs are in conflict with the Local Competition Order and with the price cap structure. Therefore, the Commission should reinitialize rates based either on a forwardlooking cost  X64study or on the proxy prices adopted in the Local Competition Order.B6xj yO_'ԍ WorldCom Reply at 3334.B In light of these three principles, WorldCom states that it favors retaining the unitary rate structure, and  X 4disagrees with arguments that tandemswitched transport is currently underpriced.? j yO'ԍ WorldCom Reply at 26.?  X4958. Most incumbent LECs, AT&T, and some state commissions advocate elimination  X4of the unitary rate structure for tandemswitched transport.j yO!'ԍ AT&T Comments at 5960, Reply at 3233; USTA Comments at 60; Ameritech Comments at 1920, Reply at 29; BA/NYNEX Comments at 41, Reply at 3638; BellSouth Comments at 73; PacTel Comments at 70; SWBT Comments at 1314; U S West Comments at 5960; Citizens Utilities Comments at 31; GTE Reply at 24; SNET Reply at 2931; NECA Comments at 3, Reply at 23, Puerto Rico Tel. Comments at 1516; Florida Commission Comments at 3. These commenters generally argue that: (1) flat rates for the dedicated SWCtotandem link accurately reflect the manner"H 0*&&aa"  X4in which the LEC incurs costs for this facility;j yOy'ԍ AT&T Comments at 5960; Ameritech Reply at 29; BellSouth Comments at 73; SWBT Comments at 14, 64; U S West Comments at 5960; Florida Commission Comments at 3. (2) perminute rates for the shared tandem X4toEO link correspond to the manner in which the LEC incurs the costs of that facility;] j yO'ԍ AT&T Comments at 5960; U S West Comments at 5960.] (3) mileage charges based on the length of each specific link ordered by a transport customer will  X4encourage carriers to order facilities that minimize routing distances;;j yO 'ԍ AT&T Reply at 33.; (5) the threepart rate structure will increase IXC incentives to order efficiently sized transport facilities, thereby increasing network efficiency, conserving trunk and switch capacity, and reducing the current  Xv4level of underutilized facilities;kv@j yOg 'ԍ BA/NYNEX Comments at 41; Ameritech Reply at 31; SWBT Reply at 15.k (6) the unitary rate structure is not competitively neutral, but was designed to avoid significant changes in the costs of transport for small LECs visa XH4vis large ones;BHj yO'ԍ BA/NYNEX Reply at 3637.B (7) the unitary rate structure prices tandemswitched transport below cost, thereby (a) creating a subsidy paid by large IXCs that use directtrunked transport to small  X 4IXCs that use tandemswitched transport;B ` j yO+'ԍ U S West Reply at 3031.B and (b) disadvantaging competitive access providers (CAPs) because they cannot compete with the incumbent LEC's artificially low  X 4tandemswitched transport rates; j {O'ԍ BA/NYNEX Reply at 3637; see also ALTS Comments at 22; Teleport Comments at 14, Reply at 1112. and (8) the unitary rate structure hurts incumbent LECs because the unrecovered costs of the excess mileage are contained in the TIC, making the  X 4incumbent LEC's usagebased switched access charges less competitive.? j yO'ԍ BA/NYNEX Reply at 37.? AT&T  X 4additionally argues that rate shock will not be a problem if prices are set to TELRIC.; j yOj'ԍ AT&T Reply at 32.;  Xy4:59. In addition, SNET argues that AT&T's purported competitive advantage based on the locations of its inherited POPs has been mitigated substantially by the widespread  XK4availability of collocation and the presence of many alternative transport providers.>Kj yO"'ԍ SNET Reply at 2931.> Ameritech and U S West state that, even if the Commission mandates the threepart rate structure, it would be too costly to relocate tandems inefficiently to increase transport revenue. Instead, tandems are located to maximize overall network efficiency, generally by placing"20*&&aa"  X4them near high concentrations of end users and carriers.\j yOy'ԍ Ameritech Reply at 2930; U S West Reply at 3031.\ Inefficient tandem placement  X4would also affect the incumbent LEC's own routing of intraLATA toll and local traffic.CXj yO'ԍ Ameritech Reply at 2930.C  X4;60. CAPs and CLECs generally support the threepart rate structure, arguing that (1) distancesensitive charges should be based on actual miles, rather than airline miles, reflecting  X4actual LEC network efficiencies or inefficiencies;;j yO& 'ԍ ALTS Reply at 22.; (2) the unitary rate structure is not cost Xv4based and inhibits competition;Wvxj yO 'ԍ ALTS Reply at 22; Teleport Comments at 1314.W and (3) the unitary rate structure discriminates against directtrunked transport users by allowing tandemswitched transport users to purchase dedicated transport facilities in connection with tandemswitched transport at prices  X14unavailable to others.B1j yO'ԍ Teleport Comments at 13.B In addition, Teleport states that, unlike directtrunked transport, tandemswitched transport is not a single service and does not use a single transmission pathway. Users of tandemswitched transport pay two switching charges and should therefore  X 4pay the cost of reaching each switch.> j yO5'ԍ Teleport Reply at 8.>  X 4<61. Some commenters state that, because tandemswitched transport facilities are sized to handle peakload overflow traffic from large IXCs that otherwise use directtrunked transport facilities, some costs of tandemswitched transport should properly be imposed on  Xy4directtrunked transport customers.zy( j yOR'ԍ ACC Long Distance Comments at 1415; Telco Communications Group Comments at 67.z SWBT opposes this argument, noting that, such a servicespecific charge would drive users of directtrunked transport to alternate providers,  XK4driving up the rates for small IXCs that remain.KK j yO'ԍ SWBT Comments at 63, Reply at 15.K SWBT supports recovery of some tandem X44switching costs from a competitively neutral public policy element.>4H j yO-!'ԍ SWBT Comments at 63.>  X4=62. TCI supports a rate structure that unbundles the components of tandemswitched  X4transport and permits purchase of needed components from the lowestcost supplier.Jj yOx%'ԍ TCI Comments at 15, Reply at 12.J TCI"h0*&&aa" states that the costs of the dedicated SWCtotandem link are NTS, and should be recovered  X4on a flatrated basis.:j yOb'ԍ TCI Reply at 13.: TCI states, however, that the costs of the common transport EOtotandem link vary, not with minutes of use, but with the trunk capacity attached to the tandem,  X4sized as necessary to carry peak traffic levels.JXj yO'ԍ TCI Comments at 16, Reply at 13.J Therefore, the costs of this common transport should also be recovered as a flat rate, capacitybased charge tied to the proportion  X4of dedicated transport the IXC has provisioned on the SWCtotandem link.Mj yO& 'ԍ TCI Comments at 16, Reply at 1314.M TCI explains that this structure: (1) would be administratively more simple and efficient than the current structure; and (2) would reflect, more accurately than the current system, the costs of providing tandemswitched transport by automatically allocating to overflow users the costs of  X14the peak capacity made necessary by the overflow traffic.M1xj yOZ'ԍ TCI Comments at 16, Reply at 1314.M TCI would base these charges on airline mileage between the EO and the SWC as a check on the incumbent LEC's ability to choose routing that either increases IXC costs, or discriminates between its own IXC affiliate  X 4and unaffiliated IXCs.M j yO'ԍ TCI Comments at 17, Reply at 1415.M  X 4>63. With respect to the tandem switch itself, MCI supports establishment of a combination of flatrated and usage sensitive charges, stating that the tandem switch and the local switch are not substantially different and therefore should have the same rate structure. Many commenters state that the dedicated trunk port on the SWC side of the tandem should be priced on a flatrate basis and charged to the user of the dedicated trunk because these  XK4costs are incurred in an NTS manner.Kj yO'ԍ AT&T Comments at 60, Reply at 33; Ameritech Comments at 20; SWBT Comments at 1314; Teleport Comments at 1920, Reply at 1112. BellSouth disagrees with this position, however, stating that there are minimal NTS costs associated with tandem switching and arguing against mandatory disaggregation of tandem switching costs into NTS and TS components.  X4BellSouth, instead, argues in favor of LEC flexibility to disaggregate as they wish.C j yO 'ԍ BellSouth Comments at 73.C  X4?64. For many of the same reasons as those opposing a peak and offpeak rate structure for the local switch, several commenters state that they oppose a mandatory peak" 0*&&aaK"  X4rate structure for tandemswitched transport.j yOy'ԍ MCI Comments at 8586; AT&T Comments at 60, Reply at 33; Cable & Wireless Comments at 17; CompTel Comments at 28; SWBT Comments at 63; U S West Comments at 60. These commenters primarily state that: (1)  X4peak rate pricing would have a de minimis impact on the usage patterns and incumbent LEC  X4network design decisions because less than 15% of the BOC interstate traffic is access;A j yO'ԍ CompTel Comments at 28.A and (2) it would be impossible to determine peak and offpeak hours with any degree of certainty or consistency because peak hours vary with the region of the country, type of service, type of  X4user, rate zone, and other factors.Vj yO 'ԍ CompTel Comments at 28; SWBT Comments at 63.V  Xa4@65. Several commenters suggest that LECs should have the flexibility to implement a  XJ4peak rate structure on a permissive basis.J@j {O;'ԍ E.g., Ameritech Comments at 19; BellSouth Comments at 73; Georgia Commission Reply at 27; Texas Commission Comments at 1617. The Texas Commission states that peak and offpeak pricing would allow the LEC to recover a portion of the larger tandem switching  X 4capacity necessitated by overflow traffic from large IXCs.M j yOg'ԍ Texas Commission Comments at 1617.M The Georgia Commission indicates that the peak rate structure should be optional for both LECs and their customers, and that LECs should not be permitted to offer peak and offpeak pricing until after the  X 4proposals have received regulatory review and approval.I * j yO'ԍ Georgia Commission Reply at 27.I Excel states that tandem switching  X 4services, like local switching, should be subject to peak and offpeak pricing.? j yO+'ԍ Excel Comments at 13.?  X4A66. Teleport states that the Commission could achieve the economic efficiency benefits of a peak rate structure without resorting to timeofday pricing by establishing a flatrate pricing structure for the tandem switch, without disaggregating the costs into TS and NTS components. Teleport supports the establishment of flatrated port charges as reflective of the way LECs incur the costs of dedicated tandem trunk ports. According to Teleport, however, the Commission should carefully examine the portion of tandem switching cost that is arguably TS to determine whether the costs of separate measurement and billing merit the development of separate rate elements for those costs. According to Teleport, tandem switch ports are purchased to provide the purchaser with the ability to place a certain amount of traffic on the switch at its peak period; a flatrate tandemswitching charge tied to port capacity would therefore reflect the costs of the tandem switch, which is sized to handle peak"J 0*&&aa("  X4load traffic.Uj yOy'ԍ Teleport Comments at 1920, Reply at 1112.U  X4B67. Several commenters request that we update our tandem switched transport rate structure to include the cost of appropriate multiplexing equipment used providing tandem X4switched transport.OXj yO'ԍ USTA Comments at 60; GTE Reply at 24.O  Xv'` ` b. Rate Levels  XH4C68. Allocation of 80 percent of the tandem switching revenue requirement to the TIC. Both incumbent LECs and CAPs support reallocation from the TIC to tandem switching rates  X 4the 80% of tandem switching costs currently recovered through the TIC.  j yO'ԍ Ameritech Comments at 1819; BellSouth Comments at 74; U S West Comments at 65; ALTS Reply at 22; Teleport Comments at 18. Ameritech states that the Commission should accomplish this reallocation by increasing the price cap indices for tandemswitched transport to reflect the full amount of the tandem costs. Ameritech states  X 4that this action would be consistent with the Court's remand of the CompTel case.C  @j yO'ԍ Ameritech Comments at 19.C Sprint, on the other hand, opposes allocating TIC costs to transport rates, but instead favors setting all  X 4rates for transport facilities at TELRICbased prices within five years.@  j yO,'ԍ Sprint Comments at 26.@  X}4D69. SS7 signalling costs. BellSouth states that tandem rates should be revised downward to reflect removal of the 20% of the CCS/SS7 charge that was assigned to the tandem and, at the same time, all CCS/SS7 costs should be assigned to new, signalling rate  X:4elements.C :` j yOK'ԍ BellSouth Comments at 74.C  X 4E70. Overhead loadings on the tandemswitch.  Cable & Wireless states that, in this proceeding, the Commission should equalize the overhead loading factors for all transport options by directing that the difference in transport rates is equal to the difference in the LRIC of each option (DS3, DS1, and TST). In doing so, the Commission would (1) ensure that all access customers pay the same dollar amount of overhead per unit of traffic; and (2)  X4increase the competitive neutrality of the rate structure.J  j yO<%'ԍ Cable & Wireless Comments at 19.J The Commission, in contrast," 0*&&aa" should not provide for an equal percentage of overhead per unit cost of transport because  X4doing so would place small IXCs, which use proportionately more TST, at a disadvantage.3j {Ob'ԍ Id.3  X4F71. WorldCom also supports LEC cost studies that would be used to justify  X4reinitialization of tandem switching rates.BZj yO'ԍ WorldCom Comments at 55.B WorldCom states that we should use the "lowest of the low" methodology in order to ensure that the incumbent LECs do not discriminate unreasonably in the allocation of overheads (or, for TSLRIC/TELRIC studies, the allocation of forwardlooking common costs). Under this methodology, the Commission would require the incumbent LECs to demonstrate that the allocation of overhead loadings or common costs to the tandem switching rate is no greater than the allocation of overhead loadings or common costs to the comparable transport service to which the lowest amount of overhead or common  X 4costs have been allocated.E j yO'ԍ WorldCom Comments at 5556.E The Commission, in enforcing this requirement, could examine the allocation of overheads or common costs to both tandem switching an other specific  X 4transport services.B zj yO'ԍ WorldCom Comments at 56.B  X 4G72. CompTel argues that the Commission should prescribe TSLRIC rates for all  X4access services. j {OK'ԍ CompTel Comments at 16; see also American Communications Services, Inc. Reply at 2021 (advocating  {O'reinitialization of tandem switching rates based on the Local Competition Order proxy of $0.0015 per minute). Recognizing that a "flashcut" to TSLRIC rates may be infeasible for all access charges, CompTel states that the Commission should establish priorities, prescribing TSLRIC rates first for those access elements that are least subject to the market discipline of competition. In allocating common costs, CompTel argues that the Commission should adopt a "reverse Ramsey" pricing method. Under this method, CompTel argues that we should allocate a relatively small portion of common costs to those access elements that are least subject to competitive market forces, while maintaining access rate elements that may be  X4subject to competitive pressures at current levels for the present.Af j yO 'ԍ CompTel Comments at 17.A  X4H73. Use of weighted average DS3/DS1 rates and 9000 minutes of use per month  X4assumption.  AT&T and other commenters state that the Commission should set rates for tandem switching and tandemswitched transport transmission facilities at TELRIC levels" 0*&&aa"  X4established by state commissions in accordance with the Local Competition Order.Sj yOy'ԍ AT&T Comments at 59; CompTel Reply at 3; S These commenters state that use of TELRIC rate levels will make the benchmark DS3 to DS1  X4benchmark ratios unnecessary.>Xj yO'ԍ AT&T Comments at 59.>  X4I74. Many commenters state that the Commission should no longer require carriers to assume 9000 minutes of use per month when setting perminute rates for shared transport  Xx4circuits.xj yO 'ԍ U S West Reply at 32; ALLTEL Comments at 1213; GVNW Comments at 7, Reply at 78; Harris, Skrivan & Associates Comments at 6; Minnesota Independent Coalition Comments at 16. Some of these commenters favor the use of actual minutes of use.ux@j {Oi 'ԍ E.g., GVNW Reply at 78; Harris, Skrivan & Associates Comments at 6. u ALLTEL, for example, states that it estimates the usage of tandemswitched trunks at approximately  XJ44000 MOU per month.CJj yO'ԍ ALLTEL Comments at 1213.C U S West favors retaining the 9000 minute of use assumption, but  X34permitting LECs to develop its own unique conversion factor if it so chooses.?3b j yOF'ԍ U S West Reply at 32.? Sprint, in contrast, states that the 9000 MOU assumption is reasonably attainable because the use of  X 4tandemtoEO circuits is largely within the LEC's control.@ j yO'ԍ Sprint Comments at 27.@ If the LEC chooses to provision these facilities so as to obtain a lower utilization, the LEC's access customers should not bear  X 4the costs of this decision.@ j yO 'ԍ Sprint Comments at 27.@ Similarly, if the IXC wishes to order additional facilities, it  X 4should be permitted to do so at an additional cost.@ j yO'ԍ Sprint Comments at 27.@  X4J75. Relationship with market based/prescriptive approach. Sprint opposes any premature relaxation of the Commission's rate structure rules, arguing instead that the market Xf4based approach gives incumbent LECs too much pricing flexibility too soon.@fj yO!'ԍ Sprint Comments at 27.@ Sprint notes, however, that the Commission should permit densitybased deaveraging of directtrunked  X84transport rates immediately.C82j yO%'ԍ Sprint Comments at 2829.C According to Sprint, because there is a much greater demand for special access in highdensity areas than there is in lowdensity areas, directtrunked"!0*&&aa%" transport rates, which are based on special access rates, understate the true cost of direct X4trunked transport in less dense areas.Cj yOb'ԍ Sprint Comments at 2829.C Geographic deaveraging of these rates would allow  X4LECs to establish costbased rates in each density zone.C Xj yO'ԍ Sprint Comments at 2829.C  X' (J:\ACCESS.REF\ORDER\IIIBCCOM.RRC( 'J:\ACCESS.REF\ORDER\IIIDCOM.DLS' D.Transport Interconnection Charge (TIC)  X4  Xv4K76. The issues presented by the existence of the TIC generated substantial comment from all segments of the telecommunications industry. The comments are organized below into three broad groups: (1) causes and possible reassignment of sums in the TIC; (2) approaches that rely on market forces to address any amounts remaining in the TIC after some amounts are reallocated; and (3) approaches that would eliminate or phase out some or all of the TIC.  X ' 1.` ` Causes and possible reassignment of amounts in the TIC  X 4L77. General. USTA and incumbent LECs assert that, to the extent TIC costs can be identified and attributed to specific services, those costs should be recovered from those  X{4services.!"{j {O'ԍ See, e.g., USTA Comments, Attachment 10 at 9; PacTel Comments at 6; BA/NYNEX Comments at 3637; Aliant Comments at 2; SNET Reply at 2728; Frontier Comments at 9; ALLTEL Reply at 8; TCA Comments at 4; Minnesota Independent Coalition Comments at 17; Alaska Telephone Association Comments at 9; Harris, Skrivan & Associates Comments at 6.  Minnesota Independent Coalition, however, argues that costs that may be easily  Xd4identifiable and correctable for large LECs may not be for small LECs.Y"dj yO'ԍ Minnesota Independent Coalition Comments at 17.Y  X64M78. Time Warner argues that the TIC was explicitly designed to make all IXCs pay for tandemswitched transport even though some IXCs only use the tandem switch for overflow traffic. According to Time Warner, the TIC distorts competition for switched  X4transport service, and it should not be a surprise that little competition has developed there.J#b j yO 'ԍ Time Warner Comments at 1213. J Time Warner argues that the Commission must require that the costs associated with the TIC are paid by cost causers and recovered in the manner in which they are incurred, which will require substantial revision to the TIC. Accordingly, Time Warner argues that those costs that can be reasonably attributed to other elements must be so assigned, and that this approach is" #0*&&aak"  X4most consistent with CompTel v. FCC.H$j yOy'ԍ Time Warner Comments at 1213.H TRA also supports the identification of cost misallocations and other practices that cause costs to be assigned to the TIC and reassigning  X4such costs to various access services and other nonregulated activities, as appropriate.=%Xj yO'ԍ TRA Comments at 36.=   X4N79. ALTS and ACSI contend that the Commission should quantify and eliminate all  X4readily correctable cost misallocations in its current access tandem switching regime.P&j yO( 'ԍ ALTS Comments at 26; ACSI Reply at 21.P Teleport also favors an approach in which obvious misallocated costs are reallocated. Teleport, however, would require incumbent LECs to produce for public review a complete report of the costs currently included in switched access and the proportion and type of costs assigned to the TIC. Until this report is analyzed, it will not be possible to identify whether the TIC contains truly "lost" costs, or, rather, costs that have "conveniently" been placed in  X 4the only switched access rate element immune from competition.E' xj yO.'ԍ Teleport Comments at 3032.E  X 4O80. Some consumer groups and consumer advocates recommend identifying  X 4misallocated costs and moving them to the appropriate cost element.( j {Oy'ԍ See, e.g., AARP, et al., Comments at 17; Texas Public Utility Counsel Comments at 16; State Consumer Advocates Comments at 36. State Consumer Advocates believe that all remaining costs represent a portion of joint and common costs and  X4should be recovered by increasing all of the transport rate elements.U)b j yO'ԍ State Consumer Advocates Comments at 3437.U  Xd4P81. Several state commissions also agree that costs should be reallocated. The Washington Commission is in favor of eliminating the TIC and reassigning costs according to causation. The Washington Commission states that it has eliminated the state equivalent of the TIC, finding that there was no need for it once the company's other transport and  X4switching rates were set to provide appropriate revenue levels.N* j yO 'ԍ Washington Commission Comments at 7.N In a similar manner, the Illinois Commission argues that embedded costs currently recovered by the TIC should be reassigned to other rate elements to the extent cost causation can be established, and the incumbent LECs should be given any additional flexibility needed to raise prices within the price cap framework for those rate elements to which costs have been reassigned. The Illinois" *0*&&aa("  X4Commission believes that the entire TIC can be reallocated in this manner.P+j yOy'ԍ Illinois Commission Comments at 1213.P The Georgia Commission states that the FCC must (1) verify the costs that have been loaded onto the TIC; (2) verify the amount of those costs that should be recoverable on a goingforward basis and ensure that the unrecovered amounts resulted purely from regulatory restriction, not competitive pressures; and (3) conduct any restructuring in order to establish costbased rates  X4that avoid anticompetitive pricing.N,Xj yO'ԍ Georgia Commission Comments at 32. N The Ohio Commission argues that only after incumbent LECs have demonstrated the cost amounts currently in the TIC should any costs be reallocated to tandem switching. In addition, the Ohio Commission states that it is up to state commission to decide how the intrastate portions of TICrelated charges should be  X14recovered.I-1j yO 'ԍ Ohio Commission Reply at 56. I   X 4Q82. On the other hand, several parties argue that not all costs should be reallocated. Sprint, for example, argues that revenue requirements other than the TELRIC of tandem switching that are assigned to the TIC under current rules should be left in the TIC and  X 4phased out.=. xj yO'ԍ Sprint Reply at 18.= WorldCom asserts that incumbent LEC allegations as to the "costs" of common transport recovered through the TIC are incorrect. WorldCom states that to truly reset transport rates based on costs would require a forwardlooking cost study to reinitialize rates for both common and dedicated transport and that mere shifting of TIC costs to other rate  Xb4elements is inadequate.?/bj yO'ԍ WorldCom Reply at 34.? WorldCom also argues that rates based on forwardlooking costs will not be revenue neutral, and incumbent LECs should not be guaranteed recovery of all  X44residual costs.?04j yO}'ԍ WorldCom Reply at 38.?  X4R83. Several parties address the possible relationship of the TIC to universal service. WITA argues that the TIC is an implicit support mechanism for rateofreturn LECs that should be included in the federal universal service support mechanism for rateofreturn  X4LECs.=1( j yO"'ԍ WITA Comments at 8.= The Texas Public Utility Counsel argues that increased levels of universal service  X4support should be used to offset the amount of the TIC that is earmarked for phaseout.V2 j yO%'ԍ Texas Public Utility Counsel Comments at 21.V Time Warner, on the other hand, argues that the Commission should not attempt to transfer"H 20*&&aa" costs currently recovered through the TIC to universal service because there is no evidence supporting such a decision. Such a decision would be inconsistent with the Joint Board's recommendation that universal service funding should be determined on a forwardlooking  X4cost basis.b3j yO4'ԍ Time Warner Comments at 15; Time Warner Reply at 2122. b  X4S84. Several parties address the need to adjust PCIs and SBIs if reallocation of TIC costs are permitted or required. BellSouth and BA/NYNEX, for example, state that if the Commission authorizes reassignment of TIC costs, it must permit incumbent LECs to adjust the TIC SBI and other relevant SBIs to ensure they have an opportunity to recover the  X14reassigned costs.e41Xj yO: 'ԍ BellSouth Comments at 81 n.141; BA/NYNEX Comments at 37. e In a similar vein, Aliant advocates exogenous cost increases for specific service categories in the trunking basket so that incumbent LECs can recover TIC costs to the  X 4extent the market permits.?5 j yO'ԍ Aliant Comments at 3.?  X 4T85. Tandem Switching Costs. USTA and the majority of the incumbent LECs assert that the tandem switching revenue requirement being recovered through the TIC should be  X 4reassigned and recovered through tandem switching rates.?6Z xj {O'ԍ See, e.g., USTA Comments at 61; BellSouth Comments at 75; GTE Comments at 36; PacTel Comments at 71; SWBT Comments at 910; Citizens Utilities Comments at 31; ALLTEL Comments at 13; Puerto Rico Tel. Comments at 17; Roseville Tel. Comments at 1112; Sprint Comments at 28.? USTA estimates this component  X4of the TIC to be $400 million, or 12.93% of total industry TIC revenues.G7j yO'ԍ USTA Comments, Attachment 11.G Ameritech  X{4contends that this reassignment would be consistent with CompTel v. FCC and would allow incumbent LECs to increase their tandem switching rates to economically rational levels given  XO4available market substitutes.F8O* j yO*'ԍ Ameritech Comments at 1819.F NECA states that the tandemswitching costs currently assigned to the TIC can be identified and could be assigned to the tandemswitching rate element, thereby reducing the TIC and increasing tandemswitching revenue for NECA  X 4trafficsensitive pool members by $15.1 million.B9  j yOu!'ԍ NECA Comments at 5 n.15.B  X4U86. Cable & Wireless contends that 80 percent of the interstate tandem switching  X4revenue requirement was allocated to the TIC, as distinguished from interstate tandem  X4switching costs. Cable & Wireless asserts that state commissions have found that the incumbent LEC's LRIC of tandem switching is far below even the 20 percent rate that the"J 90*&&aa" Commission set and that it is therefore doubtful that any of the TIC should be allocated to  X4tandem switching on a forwardlooking cost basis.J:j yOb'ԍ Cable & Wireless Comments at 20.J Cable & Wireless alleges that the tandemswitching revenue requirement consists, in large part, of overhead and subsidies placed on tandem switching during the "equal charge" era. Cable & Wireless asserts that the Commission should not ignore actual cost data showing tandemswitching costs to be far less  X4than the revenue requirement indicates.J;Xj yO'ԍ Cable & Wireless Comments at 21.J  X_4V87. Sprint urges that the Commission not reassign the balance of the tandem switching revenue requirement from the TIC to the tandem switching rate element. It contends that a tandem switching rate that recouped the entire revenue requirement might reduce tandem switching revenues for incumbent LECs because these rates would be so high that the use of tandem switching would be uneconomic for IXCs. In addition, Sprint asserts that the existing tandem switching rates reflect a much higher than reasonable allocation of overhead costs. The tandem switching rate should, according to Sprint, be based on TELRIC  X 4costs and should be similar to today's tandem switching charges.=< j yOW'ԍ Sprint Reply at 18.=  X4W88. SS7 costs. USTA and incumbent LECs contend that the Commission should identify the portion of the tandem revenue requirement that recovers the costs of SS7 signal transfer points ("STPs") and the costs of the links between service switching points ("SSPs") and STPs. These costs are associated with providing FGD service and are currently recovered as part of the TIC. USTA asserts that they should be recovered through existing SS7 rate  X4elements.=xj {OH'ԍ See, e.g., USTA Comments at 61; GTE Comments at 36; SWBT Comments at 910; Citizens Utilities Comments at 31; NECA Comments at 78. USTA estimates this component of the TIC to be $58.7 million, or 1.89 percent  X4of total industry TIC revenues.G>j yO'ԍ USTA Comments, Attachment 11.G BellSouth asserts that the FCC should remove from the TIC the portion of common channel signaling costs that are booked to Category 2 tandem  X4switching and that these costs should be recovered through new rate elements.F?b j yO 'ԍ BellSouth Comments at 7576.F U S West argues that the costs associated with SS7 signalling should be recovered through transport  X4charges.B@ j yOO$'ԍ U S West Comments at 65.B " @0*&&aa"Ԍ X4X89. TandemSwitched Transport Transmission Rate Setting. Most incumbent LECs support a modified tandemswitched transport transmission rate structure that includes: (1) assessment of the SWCtoaccess tandem portion as dedicated transport (which includes the cost of DS3/DS1 multiplexing at the tandem office) measured from the SWC to the access tandem; (2) assessment of the access tandemtoend office portion as tandemswitched transport measured from the access tandem to end office; and (3) the assessment of a multiplexer charge between the access tandem and end office. Incumbent LECs generally assert that the TIC includes the costs of the Commission having adopted a less efficient interim transport rate structure. USTA and incumbent LECs argue that the rates for tandemswitched transport transmission must be increased to reflect the costs of this revised rate  X 4structure, thereby shifting costs from the TIC.A j {O 'ԍ See, e.g., USTA Comments at 60; BellSouth Comments at 77; Citizens Utilities Comments at 3132. According to USTA, these changes will result in rates that more accurately capture a LEC's actual costs of providing tandemswitched  X 4transport service.>B Zj yO'ԍ USTA Comments at 60.>  X 4Y90. Many incumbent LECs also argue that the 9000 MOU assumption should be eliminated in favor of actual MOU levels, contending that actual usage is far less than 9000  X4MOUs. Among the estimates of actual usage are: U S West, 5700;ECj yO-'ԍ U S West Comments at 6667.E NECA, approximately  X{44500;BD{zj yO'ԍ NECA Comments at 8 n.22.B GTE, 5300;=E{ j yO6'ԍ GTE Comments at 38.= and ALLTEL, approximately 4000.CF{j yO'ԍ ALLTEL Comments at 1213.C NECA states that it would develop a MOU figure that more closely corresponds to the actual rural, lowusage  XM4characteristics of its trafficsensitive pool members, and base its tariff rates on that figure.BGM* j yO('ԍ NECA Comments at 8 n.22.B Minnesota Independent Coalition asserts that the assumed monthly usage of 9000 MOU per  X4transport circuit is unrealistic for low volume, rural routes.YH j yO 'ԍ Minnesota Independent Coalition Comments at 16.Y  X4Z91. WorldCom asserts that actual fill factors, in MOUs per month, on a given transmission facility, are irrelevant; rather, the fill factors that would represent efficient  X4network deployment are far more relevant.?IJ j yO%'ԍ WorldCom Reply at 35.? "I0*&&aa1"Ԍ  X4[92. HostRemote Trunking Rate. USTA and incumbent LECs state that for service to a remote switch, the tandemswitched transport transmission fixed and per mile/per MOU charge applies for transport between the host and remote switch, but that only a portion of the host/remote revenue requirement is recovered through these rates. They state that the difference is included in the TIC. USTA argues that the costs specific to host/remote transport that are in the TIC should be included in the tandemswitched transport rates  Xa4because those rate elements are currently applied to host/remote connections.JZaj {O'ԍ See, e.g., USTA Comments at 6162, Attachment 10 at 4; BellSouth Comments at 77; U S West Comments at 6566; Citizens Utilities Comments at 32; GTE Comments at 37; Minnesota Independent Coalition Comments at 16.  USTA estimates this component of the TIC at $160.5 million, or 5.17 percent of total TIC  X34revenues.GK3j yO 'ԍ USTA Comments, Attachment 11.G  X 4\93. NECA submits that incumbent LECs install hostremote facilities because these facilities are cheaper than installing a separate end office switch at the remote location. Because the hostremote transport facilities are not dedicated to any particular user, NECA contends that the costs should be removed from the TIC and assigned to the local switching  X 4element.=L zj yO'ԍ NECA Comments at 6.= NECA states that assigning these revenues, instead, to the costs of tandem X4switched transport would disproportionately raise tandem switched transport rates.BM j yOM'ԍ NECA Comments at 6 n.18.B  Xd4]94. DS1/voicegrade multiplexer costs. USTA and incumbent LECs state that analog switches do not have direct DS1 interfaces and, as such, require a combination of trunk unit ports and a DS1/voice grade multiplexing function to take the traffic to the DS0 level to be switched. Incumbent LECs state that in the analog switching environment, the costs of multiplexing from the DS1 to DS0 level have been assigned primarily to transport, while in the digital switching environment, this function is incorporated in the switch and is assigned to local switching. They assert that the costs of these analog multiplexers were not included in the special access formulas used to derive switched transport rates and are thus included in the TIC. USTA contends that these analog multiplexer costs should be associated with the  X4switching function and assigned to the Local Switching category.Nj {O"'ԍ See, e.g., USTA Comments at 62; BellSouth Comments at 7778; PacTel Comments at 71; U S West Comments at 66; GTE Comments at 36. NECA states that assigning analog multiplexing costs to the local switching rate element would make the assignment of analog multiplexing costs consistent with the assignment of costs associated"i N0*&&aa"  X4with this function in digital switches.?Oj yOy'ԍ NECA Comments at 56.? USTA indicates that analog switches account for  X4approximately 25 percent of the RBOC lines in service.iPXj {O'ԍ USTA Comments, Attachment 10 at 9.  See also ARMIS 4307.i USTA estimates the "Analog End Office Trunk Switch Ports" component of the TIC at $138.4 million or 4.46 percent of total  X4TIC revenues.GQj yOV'ԍ USTA Comments, Attachment 11.G   X4^95. Cable & Wireless asserts that the costs of analog multiplexers are imposed by directtrunked transport customers; therefore the costs should be built into the directtrunked transport rate elements, or a separate DS1:DS0 multiplexing element should be added for  XH4directtrunk transport customers.RHzj {Os'ԍ Cable & Wireless Comments at 21. See also Citizens Utilities Comments at 32 (supporting assignment to directtrunked transport). ` `  X 4_96. Use of special access rates to establish DirectTrunked Transport Rates. USTA and many incumbent LECs contend that the TIC results in large part from the fact that the transport rate restructure order repriced switched transport services based on special access highcap rates despite the fact that, in the past, switched access and special access rates were  X 4derived very differently.S j {OE'ԍ See, e.g., USTA Comments at 6265; BellSouth Comments at 80; GTE Comments at 38.  X4`97. USTA explains that the local transport equal charge rates were derived from a revenue requirement that was the result of the Commission's Part 36 and 69 cost allocation rules on investments and expenses. This mandated cost allocation process predominantly used general categorizing and averaging of costs across geographic areas, technologies, services,  X64and jurisdictions.rT6f j {OM'ԍ See, e.g., GTE Comments at 38; Citizens Utilities Comments at 32. r Plant investment was the primary driver because expenses generally followed the allocation of the plant. Because there were basically only two rate elements for switched local transport (the perminute termination charge and the perminute facility charge), the rates could deviate very little, if at all, from the rate levels resulting from the cost allocation rules. Special access rates, on the other hand, were more heavily based on a unit investment approach which more specifically identified the actual plant used for each service. The unit investments were then used as a basis for loading overheads. In addition, under the cost allocation process, high capacity facilities could be directly assigned to the special access" T0*&&aa"  X4category.AUj yOy'ԍ USTA Comments at 6364.A  X4a98. USTA therefore asserts that when the transport rate restructure set switched transport rates based on special access rates, the TIC represented the difference in revenues between the two pricing schemes and the differences in the costing methodologies used for each service in the past. The TIC, therefore, represents the averaging of costs across technologies, geographies, services, and jurisdictions that were inherent in the old cost  X_4allocation rules that determined the equal charge rates.AV_Xj yOh 'ԍ USTA Comments at 6364.A According to USTA, a detailed direct cost approach demonstrates that the cost allocation rules assign more investment to transport than is actually used in providing the service. The difference in costs is currently in the TIC, even though the costs are actually incurred to provide local services, intrastate  X 4services, and/or interstate services other than local transport.>W j yO'ԍ USTA Comments at 65.> USTA estimates this "transport averaging, cost allocations, and cost recovery" component of the TIC at $1.16  X 4billion, or 37.27 percent of the total TIC revenues.GX xj yO'ԍ USTA Comments, Attachment 11.G ` `  X 4b99. USTA and incumbent LECs argue that changes to this structure will require Joint Board action, and that until such action can be taken, these TIC components should be removed from the perMOU TIC rate and should be bulkbilled to IXCs based on interstate  Xb4revenues or minutes.>Ybj yO'ԍ USTA Comments at 66.> ` `  X44c100. USTA alleges that part of the TIC also represents circuit equipment and cable and wire facilities serving longer haul traffic that have an embedded Part 36 cost many times greater than that based on a special access costing methodology. According to USTA, the cost of hauling traffic to scattered local switches in remote areas is much greater than that of hauling the same amount of traffic in larger cities at special access rates. The cost difference  X4is part of the TIC.Zj {O !'ԍ See, e.g., USTA Comments at 65; BellSouth Comments at 80; GTE Comments at 38. Citizens Utilities argues that circuit termination costs could be directly assigned for jurisdictional purposes, but that Part 36 requires that circuit equipment be  X4allocated to categories based on average cost per termination.L[* j yOn$'ԍ Citizens Utilities Comments at 33.L USTA estimates that the investment in interexchange cable and wire is $37.4 million, or 1.21 percent of the total TIC"| [0*&&aa"  X4revenues.G\j yOy'ԍ USTA Comments, Attachment 11.G  X4d101. U S West contends that the cost of interexchange facilities per unit of traffic in sparsely populated areas is several times more than the cost of exchange facilities in densely populated areas. U S West argues that this is part of the reason why special access is less expensive per unit of traffic than transport, and accounts for most of the TIC not attributable  Xv4to other factors listed in U S West's comments.E]vXj yO 'ԍ U S West Comments at 6970.E NECA argues that many of its pool participants do not have highcapacity DS1 or DS3 special access services throughout their service areas because they have no customers that require these services. NECA submits that the areas without demand for DS1 or DS3 special access services have higher transport costs than those areas that do have these services. NECA suggests that the Commission discontinue its reliance on specialaccess transport rates as a surrogate for local transport costs; NECA  X 4would then develop costbased transport rates and file them in access tariffs.=^ j yO'ԍ NECA Comments at 7.= Aliant asserts that a significant portion of the TIC results from the fact that special access is primarily an urban service while switched transport is primarily a rural service. Aliant states that approximately 77 percent of Aliant's DS1 special access revenue is located in Lincoln, Nebraska, while 79 percent of Aliant's tandemswitched transport and 58 percent of Aliant's  Xy4DS1 directtrunked transport revenue is located outside of Lincoln.?_yxj yO'ԍ Aliant Comments at 3.?  XK4e102. Cable & Wireless argues that special access is generally less costly than directtrunked transport because special access, unlike directtrunked transport, generally is limited in use to lowcost urban areas. Cable & Wireless contends that the additional costs of direct X4trunked transport should be removed from the TIC.M`j yO'ԍ Cable & Wireless Comments at 2122.M  X4f103. Central Office Equipment Maintenance Expenses. USTA and incumbent LECs argue that the Part 36 and Part 69 rules overstate the assignment of COE maintenance  X4expenses to the TIC.aj {O!'ԍ See, e.g., USTA Comments at 6263; BellSouth Comments at 78; U S West Comments at 6869; Citizens Utilities Comments at 33; GTE Comments at 38. USTA states that by separating COE maintenance expenses on the basis of the combined COE investment, a mismatch occurs to the extent that the expenses associated with maintaining the investment are apportioned differently than the investment being maintained. This results in a portion of COE maintenance expense for local and"g a0*&&aa" operator switches being allocated in Part 69 to Common Line, Transport, and Special Access,  X4where there is no switch investment to maintain.Cbj yOb'ԍ BellSouth Comments at 78.C USTA estimates COE Maintenance  X4Misallocations at $101.8 million, or 3.28 percent of the TIC.LcXj yO'ԍ USTA Comments, Attachment 11 at 1.L According to USTA, a more costcausative approach would be to separate the central office expenses based on the  X4separation of the investment being maintained.Ldj yO= 'ԍ USTA Comments, Attachment 10 at 7.L  Xv4g104. To accomplish this modification, USTA proposes to modify sections 36.321 and  X_469.401(b).Le_xj yO 'ԍ USTA Comments, Attachment 10 at 7.L USTA states that COE switching expenses should be assigned to the Transport elements based on a relationship of interstate tandem switching investment assigned to the Transport element to total Part 69 interstate switching investment, with the remainder being assigned to local switching. According to USTA, COE operator expenses should be assigned to information, interexchange and operator transfer elements based on the relative relationships from assignment of the operator investment to these elements. By using the abovedescribed approaches, USTA states that costs will be removed from the common line,  X 4access and transport elements and will be reassigned to the switching element.Nf j yOw'ԍ USTA Comments, Attachment 10 at 8. N USTA claims, however, that these changes will require Joint Board action and, until such action can be taken, these TIC components should be removed from the perMOU TIC rate and should  Xy4be bulkbilled to IXCs based on interstate revenues or minutes.Agyj yO'ԍ USTA Comments at 6263.A   XK4h105. Cable & Wireless argues that, to the extent that these costs are not related to facilitiesbased transport, they should be moved out of the TIC and, to the extent that they are  X4NTS, they should be recovered as part of the perline or perport local switching costs.Jh( j yO'ԍ Cable & Wireless Comments at 22.J  X4i106.  Use of Circuit Terminations in Separating Costs Between Private Line and  X4Message Services. USTA asserts that Part 36.126 assigns interexchange trunk investment to message joint, interstate private line, and intrastate private line categories and allocates these costs based on the average cost per circuit termination. USTA states that the costs in interexchange circuit equipment categories, except message joint, are jurisdictionally pure and could be directly assigned to jurisdictions if it were permitted by the Part 36 Rules. For the" h0*&&aa" message joint investment classification, traffic usage factors determine the final jurisdictional allocation. USTA states that the distribution of costs to categories and jurisdictions based on  X4direct identification would reduce the TIC by reassigning costs to intrastate and interstate.ij yOK'ԍ USTA Comments, Attachment 10 at 6; BellSouth Comments at 7879; U S West Comments at 6768; Citizens Utilities Comments at 33. USTA estimates that the use of circuit Termination Counts misallocates $630.66 million to the  X4TIC, or 20.33 percent of the TIC.Lj j yOu'ԍ USTA Comments, Attachment 11 at 1.L  Xv4j107. Frederick & Warinner argues that differences in the definition of circuit terminations when allocating costs between switched and special access contribute to the TIC, resulting in costs being overallocated to message trunking facilities and underallocated to special access. Frederick & Warinner proposes an "equivalent termination count" be used for message circuit equipment in COE Category 4.23 in order to more appropriately reflect how  X 4CO transmission costs are incurred.Ok j yOd'ԍ Frederick & Warinner Comments at 89.O Frederic & Warinner generated an "equivalent termination count" based on the ratio of tariffed rates. Using the ratio of NECA's DS1 channel termination rate to the DS0 channel termination rate gives a weighting of 5.2. According to Frederick & Warinner, changing terminations in this way would (1) allocate more costs to special access and less to switched access; (2) bring special access rates closer to those determined by LRIC cost studies; (3) reduce the message toll costs being allocated to various transport elements; and (4) increase the tandemswitched termination rate (using special access rates divided by assumed MOU), thereby reducing the revenue requirement to  XK4be collected in the TIC.NlK@j yO<'ԍ Frederick & Warinner Comments at 10.N  X' 2.` ` MarketBased Approaches  X4k108. The incumbent LECs generally support continued recovery of all remaining sums in the TIC after reassigning any identifiable TIC costs to other services. USTA and incumbent LEC parties state that, to a large extent, the TIC reflects costs that the separations  X4and access charge rules assign to interstate local transport.Omj {O+!'ԍ See, e.g., USTA Comments at 59.O While USTA and incumbent LEC parties state that it is possible to identify the cause of only a portion of the costs  X|4included in the TIC,ln|b j {O$'ԍ See, e.g., USTA Comments at 59; Sprint Comments at 28.l this does not suggest that only a portion of the TIC should be"| n0*&&aa"  X4recovered in a postaccess reform environment.>oj yOy'ԍ USTA Comments at 58.> Ameritech asserts that a large part of the  X4TIC contributes to the incumbent LECs' ability to maintain affordable basic exchange rates.@pXj yO'ԍ Ameritech Reply at 32.@ Incumbent LEC parties assert that the TIC represents actual costs that have been assigned to the interstate jurisdiction, and that companies are entitled to recovery of the amount currently  X4assigned to the TIC.qZj {O= 'ԍ See, e.g., BA/NYNEX Reply at 39; PacTel Comments at 72; NECA Comments at 4 n.11; SNET Comments at 3940; GVNW Comments at 8; Alaska Telephone Association Comments at 9; Western Alliance Comments at 2122.  Evans et al. submits that rateofreturn LECs are recovering jurisdictionally interstate, actual transport costs under the current system, and that any changes to the rate structure must allow continued recovery of the actual, defined revenue  Xa4requirement.Mra j {O'ԍ Evans, et al., Comments at 4.M Roseville Tel. states that the remaining TIC costs result from Part 36 rules and should be reassigned to the Interstate Special Access, Interstate Local Switching and  X34intrastate jurisdictions.Ks3j yO'ԍ Roseville Tel. Comments at 1112.K  X 4l109. ALTS and ACSI argue that once readilycorrectable misallocations are removed,  X 4marketbased forces should be relied upon to reduce any remaining TIC.[t , j yO'ԍ ALTS Comments at 26; ACSI Reply Comments at 21. [ Spectranet asserts that the need for a transition period applies as much to new entrants as it does for incumbent LECs because the immediate flashcutting of access rates to LEC cost will undermine the  X 4basis upon which new entrants were planning to enter the local exchange business.Cu j yO'ԍ Spectranet Comments at 4.C  X{4m110. Several parties allege that a FederalState Joint Board pursuant to section 410(c) is required before the TIC can be fully eliminated. NARUC states that solving the TIC issue  XM4requires Joint Board action prior to action by the FCC.>vML j yOJ 'ԍ NARUC Comments at 7.> USTA and incumbent LEC parties assert that many of the changes necessary to eliminate the TIC will require Joint Board  X4action.nwj {O#'ԍ See, e.g., USTA Comments at 6263; GTE Comments at 39. n Frontier states that the FCC should promptly convene a Joint Board to address these"nw0*&&aa"  X4issues on a schedule that coincides with the timetable for proposed phaseout of the TIC.Gxj yOy'ԍ Frontier Comments at 9 n.17. G Until such action can be taken, these incumbent LEC parties argue that the remaining TIC components should be removed from the perMOU TIC rate and should be bulkbilled to  X4IXCs based on interstate revenues or minutes.yXj {O'ԍ See, e.g., USTA Comments at 6263; PacTel Comments at 72; SNET Reply at 2728; Alaska Telephone Association Comments at 9. Ameritech asserts that the remainder of the TIC should be billed to interstate providers of telecommunications services in a competitively  X4neutral manner on a flatrate basis.@zj yO 'ԍ Ameritech Reply at 32.@ Roseville Tel. asserts that the remaining portion of the TIC should be recovered through a "Separations Cost" rate element, at least until a Joint Board reforms the separations rules. Roseville Tel. states that this will allow recovery of properlyincurred costs by an explicit mechanism applied equally to all costcausers (i.e., users  X14of interstate access services).H{1Bj yO$'ԍ Roseville Tel. Comments at 12.H NECA and TDS contend that incumbent LECs should continue to collect the balance of the TIC through a smaller TICtype charge or through alternative collection arrangement such as bulkbilling. They state that this charge would  X 4continue to be collected pending Joint Board action to change the separations rules.T| j yOo'ԍ NECA Comments at 7; TDS Comments at 2324.T  X 4n111. BA/NYNEX states that there are two interim solutions to sums remaining in the TIC pending separations changes. First, residual TIC amounts could be recovered from IXCs based on their proportionate share of LEC interstate access minutes. Second, LECs could recover any residual TIC on a perpresubscribed line basis to the IXCs. For price cap purposes, any TIC residual should be in the trunking basket and LECs should be allowed to target price cap reductions to this element. Pending separations changes, these mechanisms would be easy to administer, would not unduly burden the IXCs and would enable the LEC to  X4reduce the amounts at issue through targeting of price cap reductions.B}b j yO0'ԍ BA/NYNEX Comments at 38.B BA/NYNEX asserts that the remaining costs recovered through the TIC are primarily NTS and, therefore, should be recovered through a flatrate charge. According to BA/NYNEX, such flat rate charges would resemble the charges states have adopted for UNEs, would reduce the arbitrage problem, because incumbent LECs would no longer have to charge high perminute rates compared to the rates for UNEs, and would, when combined with the rates for local telephone lines and the EUCL charge, come close to the UNE rates for local loops and switches in" }0*&&aa"  X4many instances.D~j yOy'ԍ BA/NYNEX Reply at 3940. D  X4o112. Several incumbent LECs propose specific mechanisms to recover any remaining TIC costs. U S West recommends that TIC costs that cannot be reassigned to other access rate elements, or are not reassigned pursuant to separations reform, be recovered, at least in part, through increased end user common line charges. U S West also suggests that we establish a separate fund similar to the universal service fund, with IXCs contributing to the fund on a flatrate basis equal to their percentage share of switched access MOU. U S West  XH4further recommends revising the price cap rules to establish a formula for a flatrated TIC.EHXj yOQ 'ԍ U S West Comments at 7173.E SWBT proposes establishing a "Public Policy" rate element containing the costs associated with providing transport facilities and services to lowvolume, rural areas and a significant  X 4portion of tandem switching costs.; j yO'ԍ SWBT Reply at 11.;  X 4p113. In a similar vein, GTE proposes permitting incumbent LECs to recover any  X 4remaining TIC costs through a flatrate "regulatory policy cost recovery" charge.D xj yO'ԍ GTE Comments at 39, 4144.D Under GTE's proposal, incumbent LECs would submit separationsbased cost studies to the FCC showing the amount of marketing expense erroneously assigned to the interstate jurisdiction under existing FCC rules and residual TIC revenue requirement remaining after reallocation of  Xb4specific costs to other rate elements.=bj yO'ԍ GTE Comments at 42.= Under GTE's plan, incumbent LECs would make corresponding adjustments to their newlycreated "Network Services basket" PCI to reflect removal of marketing expenses and reassignment of TIC costs to other access elements. GTE's regulatory policy cost charge would be assessed on a bulkbilled basis to all telecommunication carriers that purchase interstate switched access, transport and network facilities used to provide interstate services from incumbent LECs. GTE asserts that the  X4method is fair because it charges all carriers using incumbent LEC networks.=j yO! 'ԍ GTE Comments at 43.= GTE submits that the regulatory policy charge should be capped at its initial value for one year, although an incumbent LEC would be permitted to charge less than the initial value. GTE argues that the regulatory policy charge should not be subject to price cap regulation because it is an explicit subsidy recovery and not representative of specific services provided to customers. Annual adjustments to the regulatory policy charge would be limited to the changes in costs allocated"e( 0*&&aa"  X4to the interstate jurisdiction that are being recovered by this charge.=j yOy'ԍ GTE Comments at 44.=  X4q114. Teleport states that once the review of incumbent LEC switched access costs has been completed, the Commission will be able to determine what costs, if any, should remain in the TIC, and how any unrecovered costs can be recovered. Teleport recommends that any residual amounts be recovered through a uniform surcharge on all related rate elements  Xv4subject to competition, which will ensure that the charges are cost based.EvXj yO 'ԍ Teleport Comments at 3233.E Subsequently, Teleport clarified that it believed that the TIC should not be assessed on carriers that do not  XH4use incumbent LEC transport facilities.Hj yO 'ԍ Letter from Judith Herrman, Manager, Federal Regulatory Affairs, Teleport, to Richard Lerner, Competitive Pricing Division, April 11, 1997. Sprint and Time Warner also recommend that the Commission preclude incumbent LECs from assessing the TIC on traffic that is carried to or from incumbent LEC end offices on the facilities of a competitor because that would require  X 4CAPs to pay for the costs of their competitors' services. @j yO'ԍ Sprint Comments at 30; Time Warner Comments at 15; ACC Long Distance Comments at 12.   X 4r115. Time Warner argues that the Commission should reject incumbent LEC proposals to establish a separate recovery mechanism, such as bulk billing, to preserve incumbent LEC revenue requirement recovery because they would reinstate the largely discredited rate base, rateofreturn regulatory structure and its associated harmful  Xy4incentives.Dyj yO'ԍ Time Warner Reply at 22. D  XK4s116. Several parties commented on pricing flexibility as a vehicle to address costs in the TIC. Aliant argues that after incumbent LECs shift TIC amounts into the appropriate existing or new rate elements, LECs should have the flexibility to shift any remaining TIC amounts into Transport and Tandem Switched zones, noting that this would allow the market  X4to determine if these costs are recoverable.?` j yO 'ԍ Aliant Comments at 3.? Cable & Wireless states that TIC deaveraging would be acceptable once the charge is purged of inappropriate costs, provided that deaveraging is based on differences in the remaining costs. Cable & Wireless argues that incumbent LECs should not be allowed to recover revenue via the TIC in order to ensure  X4revenueneutrality in a regulatory environment intended to be devoid of implicit subsidies.J j yO4%'ԍ Cable & Wireless Comments at 22.J " 0*&&aa" If deaveraging is permitted, Cable & Wireless contends that the Commission should ensure that all incumbent LECs deaverage in a consistent manner using geographic zones demarcated by actual cost differences, e.g., cost differences for an efficient local exchange provider using forwardlooking technology. Cable & Wireless notes that every study area may not include all zone types, and there may be a need for more than three zones to minimize residual  X4averaging within zones.Mj yO'ԍ Cable & Wireless Comments at 2223.M To the extent that directtrunked transport rates understate the costs of transport in lessdense areas because they are based on special access rates in highdensity areas, Sprint states that the Commission could allow densitybased deaveraging of direct XH4trunked transport rates without the constraints that presently exist.@HXj yOQ 'ԍ Sprint Comments at 29.@  X 4t117. TCA argues that incumbent LECs should be given greater flexibility to add rate  X 4elements or change rates as portions of the TIC are more clearly identified.< j yO'ԍ TCA Comments at 4.< On the other hand, TRA opposes giving the incumbent LECs any significant flexibility as part of any  X 4associated transition.= xj yO'ԍ TRA Comments at 36.=  X '  X '3.` ` Approaches that Eliminate or Phase Out the TIC  Xy4u118. Several parties contend that the TIC should be eliminated totally, or that any TIC amounts remaining after making any reallocations warranted by the record should be eliminated. MCI contends that there is no reason for the TIC once access cost elements are  X44set to recover economic cost.=4j yO'ԍ MCI Comments at 87.= MCI argues that the TIC is an uneconomic, unnecessary, makewhole charge that should be eliminated. Moreover, MCI alleges that there is no basis for reallocating some of the TIC amount and renaming the rest the "public policy" rate  X4element, which will force new entrants to pay an indefensible subsidy to their competitors.:j yO8'ԍ MCI Reply at 29.: MCI argues that Part 36 allocates incumbent LEC expenditures, not costs. MCI suggests that it is likely incumbent LEC spending is not at the economically efficient level, given the current absence of effective competition and the price cap plan that does not effectively pass through to ratepayers changes in incumbent LEC costs. MCI states that the Hatfield model indicates that the incumbent LECs' spending is approximately $10 billion above their true"|( 0*&&aa"  X4costs.;j yOy'ԍ MCI Reply at 27. ; Furthermore, MCI contends that the Hatfield model shows that incumbent LECs are  X4not charging less than cost to provide local service.=Xj yO'ԍ MCI Reply at 2728.=  X4v119. AT&T recommends eliminating the TIC immediately, suggesting that phasing  X4the TIC out over some period might be inconsistent with the court's mandate in CompTel v.  X4FCC. AT&T also asserts that the 1996 Act requires access to be priced at TELRIC levels, and contends that anything other than an immediate elimination of the TIC would violate that  Xc4requirement.Acj yO 'ԍ AT&T Comments at 5759.A AT&T also argues that the TIC should be eliminated immediately because: (1) the current perminute TIC raises long distance rates above economic levels and restricts  X54long distance usage, to the detriment of consumers ;P5xj {O^'ԍ Accord WorldCom Comments at 65. P (2) the 1996 Act requires the  X 4Commission to remove implicit subsidies from access, and to price access at TELRIC;^ j {O'ԍ Accord MCI Comments at 86; LCI Comments at 28.^ (3) the TIC is anticompetitive and inconsistent with the Act's competitive goals because (a) it guarantees incumbent LECs recovery of transport "costs," even when their networks are not  X 4used;n j {O&'ԍ Accord Sprint Comments at 2930; Teleport Comments at 14 n.8. n and (b) it distorts competition by allowing incumbent LECs to price transport facilities below cost and thus below competitors' prices; and (4) the Court of Appeals has admonished the Commission to move expeditiously to a costbased alternative or provide a reasoned explanation of why a departure from costbased ratemaking is necessary, and no  X}4such justification exists here.>}. j yO\'ԍ AT&T Reply at 3031.>  XO4w120. CompTel asserts that the TIC should immediately be set to zero because by definition, it does not include any costs that will not be recovered by TSLRICbased rates for  X!4other access elements.=! j yO 'ԍ CompTel Reply at 2.= Similarly, LCI argues that access charges should be priced using TELRIC method, and that the TIC should be eliminated as a non costbased residual revenue  X4stream that is at odds with the movement to costbased pricing.=N j yO#'ԍ LCI Comments at 28.= NCTA also argues that the"0*&&aa"  X4TIC should be eliminated immediately.Aj yOy'ԍ NCTA Comments at 3, 27.A Telco Communications Group advocates reassigning the easily identifiable costs to facilitybased elements and phasing out the balance of the TIC. The TIC allows the incumbent LECs to price access below cost and recover the shortfall, regardless of whether the incumbent LEC provides transport facilities to the carrier paying the TIC or not. As a result, Telco Communications Group says a collocated transport provider must meet or beat the incumbent LEC prices and  Xv4pay the TIC as well.SvXj yO 'ԍ Telco Communications Group Comments at 5.S TRA contends that costs in excess of forwardlooking economic costs  X_4should be eliminated.=_j yO 'ԍ TRA Comments at 36.=  X14x121. ACC Long Distance contends that the TIC should be eliminated over a well  X 4defined period of no more than three years.M xj yOC'ԍ ACC Long Distance Comments at 12. M Excel favors reassigning readily identifiable and quantifiable costs and prescriptively phasing out the remainder of the TIC over no more  X 4than three years.B j yO'ԍ Excel Comments at 1314.B  X 4y122. Ad Hoc supports the Commission's proposal to identify and reallocate costs in the TIC to the extent possible, and to either permit incumbent LECs to write off the remaining TIC costs, or to require incumbent LECs to treat those costs as they treat other  Xy4residual costs.Cyj yO'ԍ Ad Hoc Comments at 2729.C LCI argues that incumbent LECs should not be permitted to assess the TIC on terminating traffic because it is not costbased since there are no TELRICbased costs to  XK4recover.=K( j yO$'ԍ LCI Comments at 20.= ITC asserts that the TIC should be viewed as a support mechanism and eliminated  X44as part of the USF proceeding.<4 j yO'ԍ ITC Comments at 4.<  X4z123. The California Cable Television Association argues that any transport costs recovered by the TIC should be recovered through the transport element with the noncost  X4subsidy portion prescriptively phased.aH j yO$'ԍ California Cable Television Association Comments at 12.a Time Warner argues that incumbent LECs should be given a limited opportunity to recover costs in the TIC that are unassignable to other"0*&&aa" elements, such as amortizing them over a fiveyear period through proportionate allocation to  X4interstate switched access rate elements.Gj yOb'ԍ Time Warner Comments at 14. G TCI argues that the Commission should base all rates for transport facilities on forwardlooking costs and phase out the recovery of other TIC cost, which approach, according to TCI, would be most consistent with the Court's remand. If the Commission wishes to allow the incumbent LECs continued recovery of any portion of legacy costs, it should do so through a PICbased rate element, which would be phased out  Xv4over time by transferring these costs to the SLC.=vXj yO 'ԍ TCI Comments at 20.=  XH4{124. The Oregon Commission states that any remaining costs should be phased out.JHj yO 'ԍ Ohio Commission Comments at 56.J The Alabama Commission generally supports a solution in which costs would be reassigned to the transport facility elements to correct identifiable misallocations. The remaining revenue shortfall should be shifted to a separate fund or account, recovered on a competitively neutral basis, and phased out over a reasonable period of time. The Alabama Commission states that  X 4the TIC is an implicit subsidy that must be eliminated under the 1996 Act.Q xj yO'ԍ Alabama Commission Comments at 1011. Q  X 4|125. The Texas Public Utility Counsel supports reassigning to transport facility rate elements those portions of the TIC that can be identified, including the TELRIC of the element plus a reasonable allocation of forward looking common costs, and shifting the remaining revenue shortfall to a specially identified account to be recovered on a competitively neutral basis and phased out over time. Increased levels of universal service  X44support should be used to offset the amount of the TIC that is earmarked for phaseout.V4j yO'ԍ Texas Public Utility Counsel Comments at 21.V The Texas Public Utility Counsel argues that the Commission should eliminate unnecessary  X4economic cost recovery.Vj yOO'ԍ Texas Public Utility Counsel Comments at 16.V To the extent that there are uneconomic costs embedded in the  X4TIC, AARP, et al. argues that they should be eliminated.( j {O 'ԍ AARP, et al., Comments at 17. See also State Consumer Advocates Comments at 36. AARP, et al. states that using  X4reductions in the rate of return to reduce the TIC is reasonable.O j {OE#'ԍ AARP, et al., Comments at 17. O  X4}126. USTA and most incumbent LECs assert that the TIC should not be phased out, contending instead that any costs remaining in the TIC after reallocation should be bulkbilled"L 0*&&aa" to the IXCs based on interstate revenues or minutes until reform of the separations process is completed. These parties argue that all incumbent LECs are entitled to full and complete recovery of the TIC amount because the TIC represents actual, real costs that have been  X4assigned to the interstate jurisdiction by the Commission's rules.i"j {O4'ԍ See, e.g., USTA Reply at 3637; BellSouth Reply at 1314; U S West Comments at 6364; SWBT Reply at 12; Aliant Comments at 2; SNET Reply at 2728; ALLTEL Reply at 8; Puerto Rico Tel. Reply at 1112; Rural Tel. Coalition Reply at 1315; TCA Comments at 4; TDS Comments at 23; Western Alliance Comments at 22.i Puerto Rico Tel. asserts that the Commission is under no obligation to phase out the TIC based on the CompTel remand, and in fact, cannot ignore the real costs underlying the TIC in the guise of access  Xv4charge reform.Mvj yO 'ԍ Puerto Rico Tel. Comments at 1617.M  XH4~127. Minnesota Independent Coalition argues that there is no basis for assuming that certain investment costs included in the TIC should be removed because of imprudence or because such investments are no longer used or useful. Minnesota Independent Coalition contends that this issue cannot be determined on an industrywide basis using assumptions that may be wholly inaccurate in the case of individual LECs, but must be determined on a  X 4companybycompany basis.Y Bj yO'ԍ Minnesota Independent Coalition Comments at 17.Y Several incumbent LECs contend that failure to allow recovery would constitute a breach of the regulatory contract, a denial of fundamental due  X 4process, and a Fifth Amendment taking.x j yO*'ԍ Roseville Tel. Comments at 10; Minnesota Independent Coalition Comments at 17.x  Xy4128. Ameritech asserts that a phase out of the TIC should only be mandated: (1) over  Xb4a sufficiently long period of time (e.g., five years) to permit incumbent LECs and state commissions to manage the revenue loss; (2) if the Commission adopts the marketbased approach to access reform, which would give the incumbent LECs sufficient pricing flexibility to manage the revenue loss; and (3) the Commission permits price cap LECs to target mandatory price cap reductions to the TIC during the phaseout period. In addition, Ameritech says states should conduct proceedings to permit incumbent LECs to recover the intrastate portions of the loop and line port costs from end user rates or state universal service  X4fund subsidies, because these facilities currently are partially subsidized from the TIC.Cb j yO!'ԍ Ameritech Reply at 3233.C The Illinois Commission proposes that to the extent that it is not possible to reallocate the entire TIC to appropriate rate elements, rate reductions required by the price cap mechanism should" 0*&&aa"  X4be focused on the TIC until it is phased out.Mj yOy'ԍ Illinois Commission Comments at 13.M  X4129. Several incumbent LECs concur with Ameritech on targeting price cap reductions to the TIC until the TIC is phased out, although disagreeing with Ameritech's idea to phase out the TIC over a fixed number of years. For example, PacTel suggests that, if the Commission continues to use a productivity factor, it could include a new "productivity offset" where the productivity factor could be targeted to the remaining TIC, gradually  X_4eliminating it over a number of years.h_Xj {Oh 'ԍ PacTel Comments at 72; See also BA/NYNEX Comments at 38.h Sprint also proposes to target all of the price cap productivity adjustment at the TIC until it is eliminated. Sprint states that a price cap productivity adjustment would eliminate the TIC in five years or less for all but three price cap LECs, without having to explore in detail the cost components of the TIC, or possibly  X 4revise Parts 36 and 69.f j yO'ԍ Sprint Comments at 29, 51, Exhibit 8; Sprint Reply at 1718.f Sprint indicates that the TIC would be eliminated within 7 years for the other 3 price cap LECs. Sprint states that it may be possible to phase out the TIC immediately if increases in explicit universal service subsidies to price cap LECs, with  X 4offsetting reductions in the interstate access charges, are large enough.= zj yO'ԍ Sprint Reply at 17.= During the phase out, Sprint contends that the TIC should continue to be recovered on a perminute basis, instead of using bulkbilling mechanisms based on presubscribed lines or retail IXC revenues. Recovery in bulk would insulate the incumbent LECs from competition because they would  Xb4recover the TIC even if LEC competitors provided the access.=b j yO'ԍ Sprint Reply at 19.=  X44130. ALTS argues that the Commission should not adopt Sprint's proposal to phase out the TIC by applying the productivity factor against it only. ALTS argues that such targeting would undercut the rationale for the "just and reasonable" status of all pricecap rates, which is the widespread application of the Xfactor. According to ALTS, there are no sound policy reasons for Sprint's approach. Instead, the TIC should be curing identifiable  X4cost misallocations and reducing the remainder via competition in the tandem market.;j yO !'ԍ ALTS Reply at 24.; ALTS states that a longterm phase down of any remaining costs in the TIC is a fallback  X4option.>* j yOn$'ԍ ALTS Comments at 26.> "| 0*&&aa"Ԍ X' 'J:\ACCESS.REF\ORDER\IIIDCOM.DLS' (J:\ACCESS.REF\ORDER\IIIE-COM.PLG( E.SS7 Signalling  X4131. A number of commenters support adopting the Ameritech rate structure for  X4general application to all price cap LECs.zj yO4'ԍ TCI Comments at 2223; Time Warner Comments at 1617; Illuminet Comments at 24.z TCI argues that an unbundled SS7 rate structure would allow customers and market entrants to obtain access efficiently by purchasing only the SS7 network functions they require. TCI further supports flatrated charges for signal links  Xv4and STP port termination.=vXj yO 'ԍ TCI Comments at 22.= Although Time Warner supports adoption of the Ameritech rate structure, it cautions against the creation of overly detailed rules, suggesting that detailed rules  XH4for SS7 services are unnecessary.EHj yO 'ԍ Time Warner Comments at 17.E AT&T supports adoption of the Ameritech rate structure but acknowledges that some LECs lack facilities to measure SS7 usage which justifies  X 4delaying implementation of the unbundled rate structure.> xj yOC'ԍ AT&T Reply at 3334.> MCI supports the concept of an unbundled SS7 rate structure, but argues that rates for particular subelements could be more  X 4costbased than the Ameritech rate structure.= j yO'ԍ MCI Comments at 87.= Illuminet also supports general use of the Ameritech rate structure, but urges the Commission to impose strict tariff requirements to ensure that rates are just and reasonable. As for specific elements, Illuminet, like TCI, favors flatrated charges for signal links and STP port termination because they reflect specific SS7  X4functions dedicated to specific customers.Dj yO'ԍ Illuminet Comments at 24.D  Xb4132. Generally, incumbent LECs oppose mandating the implementation of the Ameritech SS7 rate structure. BellSouth and GTE oppose a specific rate structure for signalling because it would require the acquisition and deployment of equipment to measure  X4usage of SS7 services.W( j yO'ԍ BellSouth Comments at 81; GTE Comments at 53.W In addition, BellSouth argues that the Ameritech rate structure does not provide adequate flexibility to address the use of future signalling services, such as  X4advanced intelligent networks (AIN).C j yOX"'ԍ BellSouth Comments at 82.C Similarly, Bell Atlantic and NYNEX oppose mandating the Ameritech SS7 rate structure because they, too, lack the ability to track costs  X4associated with the use of disaggregated SS7 services.MH j yO%'ԍ Bell Atlantic/NYNEX Comments at 40.M If the Commission imposes an"0*&&aa" unbundled structure similar to Ameritech's, Bell Atlantic and NYNEX request that the Commission allow recovery of all direct costs incurred to enable billing for specific rate  X4elements. They estimate this cost would range between $15 million and $40 million.j {OK'ԍ Id. at 40 n.95. See also USTA Comments at 66 and Reply at 37. Sprint estimates that the cost of metering equipment would run between $15 million and $20 million. Sprint Comments at 31. Other RBOCs echo similar concerns regarding equipment requirements to measure unbundled SS7  X4services.T"j yOw'ԍ PacTel Comments at 73; SBC Comments at 15.T Ameritech itself argues against a general requirement that its SS7 rate structure be implemented for all price cap LECs. It contends that its rate structure may not be appropriate on an industrywide basis and that use of the Ameritech SS7 rate structure should be  X_4permissive.n_j {O 'ԍ Ameritech Comments at 23. See also US West Comments at 7374.n  X14133. Other commenters caution against mandating the Ameritech rate structure. CompTel suggests that Ameritech's SS7 structure may be appropriate in the future, but should not be mandated now because carriers lacking necessary metering equipment would have to develop measuring capabilities that would place significant financial and operational burdens  X 4on smaller carriers.D Dj yO'ԍ CompTel Comments at 3132.D Similarly, Worldcom argues that the high costs associated with measurement and billing facilities outweigh the benefits of adopting Ameritech's rate structure  X 4on an industrywide basis.B j yO,'ԍ Worldcom Reply at 3941.B  Xy4134. Generally, commenters choosing to discuss the ISUP/TCAP issue do not favor the imposition of separate charges for ISUP and TCAP messages. They expressed concern that the cost of implementing such an approach and monitoring message lengths with sufficient particularity would not justify the benefits to be derived from the proposed rate  X4differentiation.td j yO2'ԍ MCI Comments at 89; Time Warner Comments at 17; CompTel Comments at 3132.t AT&T suggests rate differentiation between ISUP and TCAP messages  X4should be permissive.> j yO 'ԍ AT&T Comments at 61.>  X4135. With respect to the treatment of signalling rate elements in price cap baskets, both MCI and AT&T advocate placing STP port termination in the trafficsensitive basket while leaving the signalling link in the trunking basket. These commenters argue that STP port termination is not subject to competitive provision which justifies placement in different" 0*&&aa"  X4baskets.Uj yOy'ԍ MCI Comments at 8788; AT&T Reply at 3334.U AT&T contends that incumbent LECs have an incentive to respond to competitive  X4pressures in their signal link business by raising the level of the STP port charge.>Xj yO'ԍ AT&T Reply at 3334.> Ameritech, on the other hand, opposes shifting STP port charges to the trafficsensitive basket, arguing that any concern that STP port charges would be used to offset price reductions for the signal link is unfounded. Increases in the STP port termination charge, Ameritech contends, would encourage its customers to find other means to interconnect with  Xv4the incumbent LEC's network.Fvj yO 'ԍ Ameritech Comments at 2425.F  XH' (J:\ACCESS.REF\ORDER\IIIE-COM.PLG( (J:\ACCESS.REF\ORDER\IIIF-COM.PLG( F.Impact of New Technologies  X 4136. Incumbent LECs oppose the adoption of specific or detailed rate structures for recovery of costs associated with new technologies. According to USTA, a mandated rate structure would create a disincentive for LECs to invest in the development of new  X 4technologies.b xj {O'ԍ USTA Reply at 37. See also PacTel Comments at 73.b Ameritech cautions against the adoption of rate structures, arguing that fast  X 4changing technology will render detailed rate structures outdated.C j yOy'ԍ Ameritech Comments at 25.C BellSouth advocates general rate structure guidelines rather than specific rules because flexibility will promote  X4greater customer service choices.Cj yO'ԍ BellSouth Comments at 83.C GTE also opposes new rate structures for advanced technologies because detailed regulation would impair the ability of incumbent LECs to  Xb4respond to competition from competitive LECs that also deploy new technologies.=b* j yO='ԍ GTE Comments at 53.=  X44137. Other commenters support the development of costcausative rate structures for certain technologies. AT&T favors adoption of a rate structure for SONET, recommending that this technology be priced on a flat, distancesensitive basis. AT&T also advocates the  X4establishment of permessage charges to recover the costs of AIN databases.A j yOZ"'ԍ AT&T Comments at 6263.A ALTS agrees that costcausative rate structures for SONET and AIN should be adopted because these  X4technologies are sufficiently mature to permit identification of their costs.;J j yO%'ԍ ALTS Reply at 25.; Other" 0*&&aa" commenters, however, oppose the adoption of rate structures for new technologies, arguing that the deployment of a new technology to provide access services should lower the costs of providing access and promote efficiency. These commenters argue that new technologies merely change the cost of providing a traditional service and do not justify the adoption of  X4corresponding rate structures.j yO'ԍ Spectranet Comments at 6; TCI Comments at 24; Illinois Commerce Commission Comments at 14.  Xv' (J:\ACCESS.REF\ORDER\IIIF-COM.PLG( &J:\ACCESS.REF\ORDER\IVACOM.JSL& H#Xj\  P6G;9XP#L IV. BASELINE RATE LEVELS \  XH' A.XPrimary Reliance on a MarketBased Approach With   *xxX  X1'Adoption of Several Initial Prescriptive Measures (#  X 4138. Nearly all commenters agree that competition in markets for local exchange services, including exchange access services, is likely to produce lower interstate access Hprices. There is sharp disagreement, however, about the extent to which competition has developed, or will soon develop, to the point where it can be relied on to produce lower access charges. It is this disagreement that is largely responsible for parties' differing positions concerning the advisability of adopting either a marketbased or a prescriptive approach to access charge reform.  XK4139. Support for a MarketBased Approach. DOJ and most LECs support a marketbased approach to reform of access charge rate levels. DOJ comments that a marketbased approach will permit a more gradual transition to costbased access charges, which will permit a more orderly and appropriate treatment of issues concerning universal service support and  X4jurisdictional separations.@Xj yO'ԍ DOJ Ex Parte at 1721.@ DOJ also recommends that the Commission adopt a prescriptive backdrop to its marketbased reform. Incumbent LECs argue that market forces are more  X4reliable and more precise than regulation for aligning rates with costs.j yO\'ԍ Alaska Tel. Assoc. Comments at 25; Aliant Comments at 34; Ameritech Reply at 38; BA/NYNEX Comments at 24; BellSouth Comments at11, 1416, 2829; Cincinnati Bell Comments at 1213; GTE Comments at 1921; Independent Telephone and Telecommunications Alliance Comments at 5; PacTel Comments at 1117; SNET Comments at 23, 67; TDS Comments at 2832; USTA Comments at 3234; and US West Comments at 2029. They also argue that the efficient operation of competitive markets requires that incumbent LECs be given the pricing flexibility embodied by the marketbased approach sooner rather than later.  Xg4140. Most incumbent LECs combine their support for a marketbased approach with opposition to a prescriptive approach to reforming access charge rate levels. Several incumbent LECs and other parties contend that the prescriptive approach is less likely than the"9 0*&&aa!"  X4marketbased approach to result in economically efficient rates.MZj {Oy'ԍ See, e.g., Ameritech Comments at 4849, Attachment B at 4; BA/NYNEX Comments at 2; BellSouth Comments at 41; Illinois Commission Comments at 2325; CSE Comments at 45; Cincinnati Bell Comments at 13; GTE Comments at 74; SNET Comments at 23; American Communications Reply at 26.M Some incumbent LECs also argue that a static prescriptive approach would not reflect fluctuations in supply and demand  X4as a competitive market would.Xj yOm'ԍ BellSouth Comments at 1415; USTA Comments, Attachment 1 at 15; BellSouth Reply at 2830;  yO5'Ameritech Reply at 7, 19 and Attachment 1 at 16 ; USTA Reply, Attachment 1 at 1011, Attachment 2 at 46; Attachment 3 at 7.  Some commenters maintain that the prescriptive approach  X4would result in inefficient rates, and thus skew potential competitors' entry decisions.v  j yOv 'ԍ Ameritech Comments at 49; PacTel Comments at 5; ALTS Comments at 2122; Ohio Commission Reply at 67; USTA Reply at 1011; US West Reply at 710. US West speculates that AT&T and MCI are seeking to limit entry into the local exchange market, in order to delay BOC entry into the longdistance market. US West Reply at 89. v Cincinnati Bell opposes the prescriptive approach because it could result in more rapid rate  X4reductions than would occur in a competitive market.I j yO0'ԍ Cincinnati Bell Comments at 13.I Citizens Utilities argues that the prescriptive approach would discourage use of unbundled network elements and retard the  X_4development of competition.L_ j yO'ԍ Citizens Utilities Comments at 15.L  X14141. Several commenters claim that the prescriptive approach is essentially an abandonment of price cap regulation, because it would punish incumbent LECs for efficiency  X 4gains made under the price cap regime." j yO'ԍ Ameritech Comments, Attachment B at 2223; BA/NYNEX Comments, Attachment 1 at 4; USTA Comments at 12; PacTel Comments at 30; US West Comments at 4546; BA/NYNEX Reply, Attachment 1 at  {OV'2, 56; GTE Reply at 41. See also BellSouth Comments, Attachment 2 at 25 (observing generally that reducing profits too much might adversely affect efficiency incentives). Some incumbent LECs argue that the Commission determined that the initial price cap rates were reasonable, and that there is no basis to reverse  X 4that finding now. j {O'ԍ GTE Reply at 4041; PacTel Reply at 12; SWBT Reply at 21, citing LEC Price Cap Order, 5 FCC Rcd at 681417. BA/NYNEX argues that the prescriptive approach would be substantially similar to rateofreturn regulation, with recurring rate cases needed to recalculate forwardlooking costs in light of further technological improvements. BA/NYNEX argues further that  X4this would vitiate price cap regulation and create a disincentive for future investment.vVj {O$'ԍ BA/NYNEX Comments, Attachment 1 at 7. See also BellSouth Reply at 36.v Some incumbent LECs assert that the prescriptive approach unreasonably discourages"y 0*&&aa}"  X4incumbent LECs' investment in their networks."j yOy'ԍ Ameritech Comments at 49; BA/NYNEX Comments, Attachment 1 at 3; BellSouth Comments at 4142; Ameritech Reply, Attachment A at 11; BA/NYNEX Reply at 1516; PacTel Reply, Testimony of Bruce Egan at 2425 (Egan Aff.); USTA Reply at 78, 1112, and Attachment 1 at 12; US West Reply at 7; USTA Reply,  {O'Attachment 1 at 910. See also American Association for Adult and Continuing Education, et al. Reply at 911. AT&T replies that, because price cap LECs would still be able to increase their profits by increasing their productivity growth, price cap  X4regulation and its incentives for investment would remain in effect.;j yO5'ԍ AT&T Reply at 18.; Competition Policy Institute argues that the opening of exchange access markets to competition means that lower rates of return are unlikely to stifle innovation, because competitive pressure will spur  X4innovation.YBj yO 'ԍ Competition Policy Institute Comments at 2425.Y  X_4142. According to BellSouth, if access rates do not comport with marketbased levels, it is because of regulatory policies rather than incumbent LEC inefficiency. BellSouth  X14opposes the prescriptive approach because it does not address those regulatory policies.1j {O'ԍ BellSouth Comments at 15. See also USTA Comments, Attachment 2 at 1219; US West Reply at 56; USTA Reply, Attachment 1 at 34. Similarly, several parties assert that we cannot adopt a prescriptive approach unless we  X 4establish a joint board to increase the allocation of costs to the intrastate jurisdiction.+ , j yO'ԍ BA/NYNEX Comments at 2123 and Ex. 2; PacTel Comments at 3132; Illinois Commission Comments at 2526; Harris, Skrivan & Associates Comments at 3; Oregon Commission Comments at 23; TDS Comments  {Op'at 28; Evans, et al. Comments at 1011; API Reply at 1718; Ohio Commission Reply at 23; Time Warner Reply at 2223. The Tennessee Commission advises against a "rush to judgment" in this proceeding before a joint board can review separations changes. Tennessee Commission Comments at 23. +  X 4143. Local exchange carriers generally argue that they already face substantial  X 4competition, particularly for exchange access services.Z j {OM'ԍ E.g., Ameritech Comments at 3335; BellSouth Reply at 2024; GTE Comments at 1017; PacTel Comments at 1115; SWBT Comments at 3334; SNET Comments at 1115; USTA Reply at 30; and U S West Comments at 2223. In addition, they argue that competition will develop first, and most rapidly, for the very customers that generate the  X4majority of exchange access minutes.j {OA"'ԍ E.g., BA/NYNEX Reply at 2226; Cincinnati Bell Comments at 1520; and U S West Reply at 3638. In particular, they argue that barriers to entry are quite low in local markets, particularly for the provision of exchange access services, now that"y 0*&&aac"  X4unbundled network elements are available to competitors at costbased rates.j yOy'ԍ BA/NYNEX Comments at 13; BellSouth Commenst at 2327; SNET Reply at 23, 67; and USTA Comments at 3234. BellSouth states that, regardless of whether the market today is sufficient to restrain access prices, we  X4should still incorporate market principles into the regulatory regime.C j yO'ԍ BellSouth Reply at 2728.C  X4144. Opposition to a MarketBased Approach. Several parties argue that market  X4forces will not be adequate to drive access rates to forwardlooking cost in the near future.b j yO 'ԍ ACC Long Distance Comments at 9; AT&T Comments at 2021; ACTA Comments at 20; America OnLine Comments at 1112; Competition Policy Institute Comments at 911; SDN Users Association Comments at 12; Internet Access Coalition Comments at 89; NCTA Comments at 21; LCI Comments at 817; CompTel Comments at 1315; Excel Comments at 79; Florida Commission Comments at 7; California Cable Television Association Comments at 1011; Tennessee Commission Comments at 4; Texas Public Utility Counsel Comments at 45; TRA Comments at 618; Washington Commission Comments at 78; API Reply at 24, 1215; AT&T Reply at 48; GCI Reply at 34; IXC Long Distance, Inc. Reply at 34; Ohio Consumers Counsel Reply at 78;  {Oh'Sprint Reply at 2021; TCI Reply at 2022; Telco Communications Group Reply at 3. See also Frontier Comments at 1011; GSA/DOD Comments at 19; State Consumer Advocates Comments at 53; Texas Commission Comments at 2324 (supporting prescriptive approach in short term, followed by a transition to a marketbased approach). TCI recommends a prescriptive approach for incumbent LECs and forbearance for competitive LECs, and describes this as a "combination" approach. TCI Comments at 2527.  AT&T and MCI argue that the provisions of the 1996 Act require that explicit and implicit crosssubsidies have to be removed from interstate access charges, and that this must be done  XJ4more quickly than can occur under a marketbased approach to access charge reform.XJj yO'ԍ AT&T Comments at 6371; MCI Comments at 4243.X Intl. Comm. Ass'n also argues that the local exchange and exchange access markets are not competitive, and that we cannot rely on unbundled network elements to drive rates down as  X 4long as some of our Part 51 rules are stayed.N jj yO 'ԍ Intl. Comm. Ass'n Comments at 24. N The Missouri Commission and AT&T argue  X 4that competition will be slow to develop, particularly with respect to terminating access.a j yO'ԍ Missouri Commission Comments at 45; AT&T Reply at 67.a Ad Hoc favors a prescriptive approach, because it ensures that prices will be reduced to  X 4forwardlooking economic costs regardless of the presence or absence of competition.B j yO!'ԍ Ad Hoc Comments at 37. B TDS asserts that both the prescriptive and the marketbased approach would increase Commission control over incumbent LEC pricing decisions, and therefore neither are likely to result in" 0*&&aa"  X4efficient pricing.@j yOy'ԍ TDS Comments at 2931.@  X4145. Longdistance carriers, which are the customers of switched access services, argue that competition in local markets largely does not exist today. In addition, they argue that entry into local markets, which have historically been characterized by monopoly provision of services, will take much longer than will LEC entry into longdistance markets, where many customers are accustomed to switching carriers and the operational support  X_4systems and procedures for switching carriers are well developed. AARP et al. notes that BellSouth and US West have advocated a prescriptive approach based on TELRIC in interconnection proceedings in other countries, because competition in those countries is not  X 4sufficient to drive rates to cost.M Xj {O% 'ԍ AARP et al. Comments at 717.M According to AARP et al., BellSouth has also argued in foreign proceedings that the incumbent has an inherent advantage over new entrants because  X 4of factors such as name recognition and customer inertia.K j {O'ԍ AARP et al. Reply at 2122.K  X 4146. Some IXCs and other parties argue that incumbent LECs will fight competitive  X 4entry as long as they can. |j yO'ԍ ACC Long Distance Comments at 49; AT&T Comments, Attachment A at 2021; IXC Long Distance,  {O'Inc. Comments at 34; AARP et al. Reply at 78; TCI Reply at 2223. In its reply, IXC Long Distance, Inc. alleges several specific instances in which SWBT and GTE have engaged in anticompetitive conduct to delay interconnection. IXC Long Distance, Inc. Reply at 49. GTE denies that any litigation it has initiated was a ploy to delay interconnection. GTE Reply at 35. ACC Long Distance claims it has experienced "repeated delays" in obtaining physical collocation. ACC Long Distance Reply at 56. According to LCI and MCI, incumbent LECs are filling  X4interconnection orders slowly and that this is preventing the development of competition.R j yO;'ԍ LCI Comments at 15; MCI Reply at 3233. R LCI provides a list of service ordering and provisioning procedures that it claims are necessary for local exchange competition to develop, and considers these procedures to be a  XO4prerequisite for any marketbased reforms.O j {O'ԍ LCI Reply at 3 and Attachment. See also AT&T Reply at 1415; CompTel Reply at 45; Sprint Reply at 1920 and Attachment; WorldCom Reply at 19. LCI maintains that the incumbent LECs' control of the local networks gives them a competitive advantage, and that the policies adopted in the  X!41996 Act and the Local Competition Order will not lead to competition unless the  X 4Commission enforces its rules and properly manages the transition to competition.? j yO$'ԍ LCI Comments at 812.? LCI doubts that resale will lead to competition, because setting wholesale prices at retail minus"p0*&&aa" avoided costs does not permit a new entrant to be profitable enough to construct its own  X4facilities, and because such wholesale pricing is above forwardlooking economic cost.Zj {Ob'ԍ LCI Comments at 1213. See also ALTS Reply at 1112 (resale followed facilitiesbased competition in interexchange market, so resale is less likely than facilitiesbased competition to provide competitive pressure in access market). MCI maintains that incumbent LECs are using nonrecurring charges as a means of  X4discouraging competitive entry.Cj yOV'ԍ MCI Reply at 3334.C AT&T also criticizes incumbent LECs for failing to  X4provide dialing parity and adequate access to operations support systems.>zj yO 'ԍ AT&T Reply at 1012.> According to  X4LCI, the incumbent LECs' local switches do not permit all interconnectors equal access._ j {OH 'ԍ LCI Comments at 13. See also AT&T Reply at 10._ AT&T asserts that the prohibition against interconnectors using unbundled network elements for access unless they have also won the local customer creates an unreasonable barrier to  XH4entry and will ultimately limit the development of local competition.<Hj yO'ԍ AT&T Reply at 89.< GTE replies that it  X14provides nondiscriminatory access to its operational support systems.:1, j yO'ԍ GTE Reply at 35.:  X 4147. AT&T cites to Farmers Union Central Exchange, Inc. v. FERC j {Op'ԍ 734 F.2d 1486, 1508 (D.C. Cir.) (Farmers Union), cert. denied, Williams Pipe Line Co. v. Farmers  {O:'Union Central Exchange, Inc., 469 U.S. 1034 (1984). for the proposition that "[r]eliance on competitive forces to constrain exchange access rates, particularly in the presence of strong indications that market forces will not produce the intended results, would be arbitrary and capricious and contravene the Commission's statutory  X 4duty to ensure just, reasonable, and nondiscriminatory rates."> j yOr'ԍ AT&T Comments at 48.> PacTel challenges the  X4relevance of Farmers Union, arguing that the mandate Congress gave FERC was regulatory, whereas Congress in the 1996 Act stated that competition rather than regulation should be  Xf4used to set rates for telecommunications services.@fj yO!'ԍ PacTel Reply at 1416.@  X84148. Support for a Combination of MarketBased and Prescriptive Measures. ICG recommends four years of phasedin access charge reductions, while competitive LECs construct facilitiesbased networks. After this period, ICG suggests that some form of a" 80*&&aa"  X4marketbased approach would be reasonable.@j yOy'ԍ ICG Comments at 1517.@ A number of parties, including several state  X4commissions, advocate similar approaches.VXXj yO'ԍ Ad Hoc Comments at 46; Competition Policy Institute Comments at 914; Frontier Comments at 1011; NCTA Comments at 2024; Alabama Commission at 1113; District of Columbia Commission Comments at 13; Florida Commission Comments at 5; Texas Commission at 2326; NARUC Comments at 10; MCI Reply at 25.V The District of Columbia Commission recommends that we retain authority to reimpose regulatory control after we permit some pricing flexibility, in case the competitive conditions that warranted granting the pricing  X4flexibility change.Xxj yO 'ԍ District of Columbia Commission Comments at 3.X  Xv4149. WorldCom suggests using a combination of "carrots" and "sticks" to induce the incumbent LECs to facilitate local competition. WorldCom's "carrot" to induce such compliance would be the promise of future pricing flexibility, and the "stick" would be the  X14threat of prescriptive rate changes.1j {O'ԍ WorldCom Comments at 7273. See also Ameritech Comments, Attachment B at 2223; American Communications Reply at 67, 1516. Specifically, WorldCom would give incumbent LECs until January 1, 1999, to implement unbundled network element requirements, and then  X 4impose prescriptive requirements.E b j yO'ԍ WorldCom Comments at 8991.E USTA argues that the prescriptive approach should be  X 4used, if at all, only if there is considerable evidence that current market forces are insufficient  X 4to reform the current access market.N j yOx'ԍ USTA Comments, Attachment 1 at 15. N On the other hand, BellSouth opposes using the prescriptive approach as a "backstop" to a marketbased approach, because it does not believe  X 4the Commission can specify a set of circumstances that indicate a market failure.F j yO'ԍ BellSouth Comments at 1617.F  Xy4150. The California Commission supports a marketbased approach in competitive areas, and a prescriptive approach in areas that are "not sufficiently competitive." The California Commission would define a competitive market as one where a serving wire center is providing unbundled elements to at least one competitor unaffiliated with the incumbent  X4LEC, provided the incumbent meets the other proposed Phase 1 criteria.Qj yO"'ԍ California Commission Comments at 710.Q AT&T maintains that the growth of competition resulting from the availability of unbundled network elements will be slower in rural areas, and so the marketbased approach would be less effective in"0*&&aa"  X4rural areas than in urban areas.Aj yOy'ԍ AT&T Comments at 4748.A  X4151. Competition Policy Institute recommends imposing prescriptive measures simultaneously with marketbased regulatory reforms. In addition to increasing the XFactor and reinitializing PCIs, Competition Policy Institute suggests that the Commission: (1)  X4facilitate the provision of unbundled elements;xXj yO'ԍ Specifically, Competition Policy Institute recommends the following: (1) eliminating the application of access charges to unbundled network elements; (2) monitoring state pricing decisions regarding unbundled network elements for consistency with TELRIC pricing standards; (3) minimize logistical barriers to the provisioning of unbundled network elements; (4) requiring subloop unbundling; (5) establishing an expedited complaint process available to unbundled network element purchasers; (6) periodic performance audits or surveys of the RBOCs' provisions of unbundled network elements; and (7) additional deaveraging of unbundled network element prices. Competition Policy Institute Comments at 26.  (2)adopt a time frame for a transition of access charges to economic cost; and (3)annually review the progress of access charges toward economic cost, with the possibility of imposing additional prescriptive rate reductions  XH4if required.Hj {O'ԍ Competition Policy Institute Comments at 2527. See also GSA/DOD Comments at 1315, 2025;  {O['GSA/DOD Reply at 1317; NTIA Letter at 4. AT&T argues that since whatever benefits of permitting incumbent LECs additional pricing flexibility do not relate to the levels of access charges, if the Commission insists on permitting additional pricing flexibility, it could do so in conjunction with the  X 4prescriptive approach.A j yO'ԍ AT&T Comments at 21. A  X 4152. Price Squeeze Concerns. Some IXCs and AARP et al. are concerned that BOCs might crosssubsidize longdistance service with access revenues when they are permitted to enter the longdistance market pursuant to section 271, or engage in a price squeeze, unless  X4we adopt a prescriptive approach.BZ j yO'ԍ ACC Long Distance Comments at 9; AT&T Comments at 1317 and Attachment A at 12, 20; Telco Communications Group Comments at 24; MCI Comments at 1011, 14, 41; and Attachment at 1213; Excel  {OW'Comments at 45; AARP et al. Comments at 910; LCI Reply at 34.B  Xd4153. A number of incumbent LECs deny that any prescriptive measures are needed to prevent price squeezes because it is almost impossible to engage in a price squeeze  X64profitably.X6j yO#'ԍ Ameritech Comments at 48; ALTS Reply at 1819; Ameritech Reply at 2223; BA/NYNEX Reply at 13; GTE Reply at 36; PacTel Reply at 19; US West Reply at 10; USTA Reply at 3132, Attachment 1 at 18, Attachment 3 at 13. Moreover, the Communications Act or Commission regulations adequately"60*&&aa"  X4protect against price squeezes.m"j {Oy'ԍ Ameritech Reply at 22; BellSouth Comments at 18, citing 47 U.S.C.  272(e)(3), 201, 202, 272(d); ALTS Reply at 1718, 21; BA/NYNEX Reply at 1213 and Attachment 1 at 2; GTE Reply at 3536; PacTel Reply at 2021; SWBT Reply at 3234; USTA Reply at 31 and Attachment 3 at 12; US West Reply, Attachment A at 45.m BellSouth also claims that, as long as it sets prices below "general market levels  X4or the costs of a firm's competitors," it has not legally engaged in a price squeeze.j {O5'ԍ BellSouth Comments at 18, citing Brooke Group v. Brown & Williamson, 509 U.S. 209, 223 (1993). See  {O'also USTA Reply, Attachment 1 at 17. US West argues that the relevant factor for determining whether a carrier has committed a price  X4squeeze is not the price level, but the margin between price and cost. j {Oc 'ԍ US West Reply, Attachment A at 4, citing United States v. Aluminum Company of America, 148 F.2d 416 (2nd Cir. 1945). Alternatively, ALTS asserts that incumbent LECs have sufficient funds to finance price squeezes regardless of  Xv4whether we adopt a prescriptive approach to access reform.; vh j yO'ԍ ALTS Reply at 17.; USTA argues that AT&T  X_4presents a similar threat of crosssubsidization of local service with longdistance revenues.L _ j yO'ԍ USTA Reply, Attachment 1 at 1516.L USTA also alleges that AT&T is seeking to limit competitive entry into the longdistance  X14market.I 1 j yOj'ԍ USTA Reply, Attachment 1 at 18.I Ameritech asserts that prescribing access rates that are too low might place  X 4competitive LECs that rely on unbundled network elements in a price squeeze.C  j yO'ԍ Ameritech Reply at 2223.C  X 4154. CrossSubsidization Concerns. MCI argues that price cap regulation by itself does not eliminate incumbent LEC incentives to engage in anticompetitive crosssubsidization  X 4that might occur under a marketbased approach.L j yO'ԍ MCI Comments, Attachment at 1013.L NCTA advocates a prescriptive approach  X 4to protect against incumbent LEC crosssubsidization of video or other new services.= 8j yO 'ԍ NCTA Comments at 9.= Similarly, many commenters argue that excessive access charges enable incumbent LECs to  X{4crosssubsidize any present or future competitive service.3X{j yO#'ԍ AT&T Comments, Attachment A at 9; Ad Hoc Comments at 3941; GSA/DOD Reply at 15; TCI Reply at 2324. CompTel argues that the Section 254(k) prohibition against crosssubsidization requires the Commission to prescribe TSLRICbased rates. CompTel Reply at 10.3 The Texas Commission asserts"{0*&&aa" that it would be difficult to craft accounting rules to prevent incumbent LECs from cross X4subsidizing with respect to multiple services in multiple geographical areas.Mj yOb'ԍ Texas Commission Comments at 2526.M  X4155. The Georgia Commission recommends that whatever approach we adopt enable the incumbent LEC to recover all its prudently incurred costs rather than trying to shift costs to the intrastate jurisdiction. The Georgia Commission asserts that our first priority should be to facilitate competitive entry, and that price level regulation should be limited to monopoly services, to ensure that monopoly service prices are not too high or used to crosssubsidize  XH4competitive services.JHXj yOQ 'ԍ Georgia Commission Reply at 57.J  X 4156. Relative Administrative Burdens of the Possible Approaches. Some parties argue that determining the extent of competition for each relevant market under the marketbased approach would be more burdensome than any of the requirements of the prescriptive  X 4approach.e j yOp'ԍ Excel Comments at 910; Florida Commission Comments at 45.e Cable & Wireless argues that the litigation surrounding the Phase 1 and Phase 2 determinations, the different negotiated agreements that will be adopted in each state, and the  X 4results of the court's review of the Local Competition Order, will result in a "patchwork" of  X4different regulatory requirements, which would increase uncertainty in the market.xj {O'ԍ Cable & Wireless Comments at 2526. See also Intl. Comm. Ass'n Comments at 23; Kansas Commission Comments at 78.  Xf4157. A few parties maintain that the prescriptive approach would be unreasonably  XO4burdensome.XOj yO'ԍ Illinois Commission Comments at 2325; BellSouth Comments at 42; PacTel Comments at 2829; ALTS Reply at 1516; Ameritech Reply, Attachment A at 10; GTE Reply at 42; PacTel Reply at 1314; USTA Reply at 12. Teleport argues that a prescriptive approach might require annual reviews to  X84verify that access rates were in fact moving towards costs.B8 j yO'ԍ Teleport Reply at 3132.B ACC Long Distance denies that a prescriptive approach would be burdensome because it maintains that the Commission has  X 4substantial experience with such regulation.G  j yO="'ԍ ACC Long Distance Reply at 6.G A number of commenters assert that the prescriptive approach would increase regulatory control over the market, and therefore be"0*&&aa"  X4inconsistent with the 1996 Act.0Zj yOy'ԍ BellSouth Comments at 41; PacTel Comments at 5; USTA Comments at 1112; TDS Comments at 2931; SWBT Comments at 2324; US West Comments at 4445; Aliant Comments at 34; Citizens Utilities  {O 'Comments at 15. See also SNET Comments at 26.0 AT&T replies that both the prescriptive and marketbased approaches would retain price cap regulation initially, and so there is no reason to call one  X4more regulatory than the other.;j yOm'ԍ AT&T Reply at 18.;  X4158. Prescriptive Measures Tailored for Insular or HighCost Areas. The Northern Marianna Islands support the prescriptive approach because it would enable the Commission to tailor access charge reforms to the unique circumstances faced in insular or highcost areas  Xa4such as the Northern Marianna Islands.Vazj yO 'ԍ Northern Marianna Islands Comments at 1112.V Alternatively, the Alaska Telephone Association argues that a marketbased approach would better reflect local economic conditions, and so  X34can be tailored to reflect the concerns of both large and small incumbent LECs.U3 j yO'ԍ Alaska Telephone Association Comments at 2.U  X 4 &J:\ACCESS.REF\ORDER\IVACOM.JSL& %J:\ACCESS.REF\ORDER\IVBCOM.SS%  B.Prescriptive Approaches  X ' 1.` ` Prescription of a New XFactor  X 4159. According to USTA, productivity estimates based on historical studies overstate  X4the productivity potential of pricecap LECs under competition.?j yO'ԍ USTA Comments at 19. ? According to USTA, as incumbent LECs lose customers to competition, their output will decline, and as a result their measured productivity will decline. Therefore, USTA recommends basing the XFactor on a fiveyear moving average of the TFP, so that reductions in productivity resulting from  X64competition would be reflected in the XFactor.?6* j yO'ԍ USTA Comments at 20. ? USTA claims that the TFP differential (TFP of LECs minus TFP for US economy as whole) is 2.7 percent, and will decrease by 0.4 percentage points each year if the Commission adopts USTA's recommendations for  X4restructuring the CCL charge and the TIC. j {O\"'ԍ USTA Comments at 21. See also USTA Reply at 4142; US West Comments at 4649; SWBT Reply at 37. Most incumbent LECs support USTA.j yO$'ԍ BA/NYNEX Comments at 5860; BellSouth Comments at 50 n.93; SNET Comments at 2830; U S West Comments at 4649; Aliant Reply at 34; BellSouth Reply at 4142; SNET Reply at 2425. "l0*&&aa" BA/NYNEX argues that productivity growth will decrease as a result of competition unleashed by the 1996 Act, and so basing the XFactor on a fiveyear moving average TFP  X4would likely overstate future achievable productivity.j j {OK'ԍ BA/NYNEX Comments at 59. See also U S West Comments at 46j Alternatively, BA/NYNEX argues that we could rely on a fixed TFPbased XFactor for a short period of time, until Bell  X4competition will enable us to deregulate incumbent LECs completely.]!Zj yO'ԍ BA/NYNEX Comments at 59; BA/NYNEX Reply at 2930. ] GTE and SNET contend that growth in competition and recovering more costs through flat rather than usage  Xv4sensitive rates, will likely depress measured TFP growth.U"vj yO 'ԍ GTE Comments at 5758; SNET Reply at 2526.U  XH4160. AT&T notes that it recommended at least 8.8 percent in its pleadings filed in  X14response to the Price Cap Fourth Further NPRM.#1zj yO\'ԍ AT&T Comments at 70. In its reply, AT&T increases its XFactor recommendation to 9.0 percent, on the bases of updated data. AT&T Reply at 35 and Attachment G. Several commenters recommend setting the XFactor at 9.9 percent, on the basis of the pleadings of the CARE Coalition filed in  X 4response to the Price Cap Fourth Further NPRM proceeding.$ j yO'ԍ API Comments at 2728; ICA Comments at 4; WorldCom Comments at 91; API Reply at 18. Ad Hoc also recommends  X 4increasing the XFactor for the reasons it explained in its comments in the Price Cap Fourth  X 4Further NPRM.% b j {O'ԍ Ad Hoc Comments at 70; Ad Hoc Reply at 714. Ad Hoc also replies that its Price Cap Fourth Further  {O'NPRM pleadings discredited USTA's XFactor studies. Ad Hoc Reply at 914. MCI also supports increasing the XFactor to 9.9 percent, but only for five  X 4years, after which MCI argues that the XFactor should be based on TFP.=& j yO5'ԍ MCI Comments at 25.= A number of price cap LECs maintain that the XFactors recommended by AT&T and MCI greatly exceed  X4their actual productivity growth under price cap regulation.'N j yO'ԍ BellSouth Comments at 50; BA/NYNEX Reply at 2729; SWBT Reply at 3739; Aliant Reply at 3. USTA has identified several purported computational and methodological errors in AT&T's, MCI's, and Ad Hoc's X Xj4Factor proposals in its pleadings filed in response to the Price Cap Fourth Further NPRM.g(jj {O 'ԍ USTA Reply at 4244. See also BA/NYNEX Reply at 3031.g Ad Hoc recommends making any fundamental changes to price cap regulation in the price cap  X>4proceeding, and focusing on access reform in this proceeding.>)>pj yO_$'ԍ Ad Hoc Reply at 78.> According to GTE, AT&T and Ad Hoc maintain that incumbent LECs' interstate productivity is greater than their"')0*&&aa%" intrastate productivity, and included in their XFactor recommendations an interstate TFP adjustment to account for this alleged difference in productivity. GTE further opposes any interstate TFP adjustment, because there incumbent LECs provide interstate and intrastate services using the same network, and so it would make no economic sense to assume that  X4interstate productivity is greater than intrastate productivity.=*j yO'ԍ GTE Reply at 2728.=  Xv4 161. PacTel and Aliant propose setting the XFactor equal to GDPPI.`+vXj yO 'ԍ PacTel Comments at 4142; Aliant Comments at 8. ` Sprint argues that the Commission should discontinue the use of the current productivity factor for all baskets except common line, once all access charges have been reduced to geographically  X14deaveraged TELRIC levels.B,1j yO 'ԍ Sprint Comments at 53. B AT&T anticipates that access reform would increase  X 4productivity growth, because reducing rates to costbased levels would stimulate demand.>- xj yOC'ԍ AT&T Reply at 3536.>  X ' 2.` ` Rejection of Certain Prescriptive Approaches  X '` ` a. Rate Prescription  X4162. TRA and TCI recommend prescribing access rates because reinitializing PCIs  Xy4would not guarantee that the LECs' rate structures would be reasonable..yj {O2'ԍ TCI Comments at 3031; TRA Comments at 23. See also Washington Commission Comments at 8; AT&T Reply at 2425. Similarly, CompTel asserts that only a TSLRICbased rate prescription can ensure that access rates are at  XK4costbased levels.@/Kb j yO^'ԍ CompTel Reply at 811.@  X4163. AT&T argues that a new rate prescription would not necessarily be burdensome, because four access rate elements account for most of the incumbent LECs' access revenue: the perminute local switching charge, the perminute tandem switching and common transport rate elements, and the dedicated transport elements. According to AT&T, it would be easy to reprice these four charges at forwardlooking economic levels on the basis of existing  X4TELRIC data.V0 j yOM$'ԍ AT&T Comments at 2224; AT&T Reply at 1718.V Alternatively, AT&T argues that, even if a reinitialization were burdensome," 00*&&aa"  X4the benefits of TELRICbased access rates would outweigh those administrative burdens.>1j yOy'ԍ AT&T Reply at 1718.> USTA asserts that the rate prescription suggested by AT&T would recreate rateofreturn regulation, and that its detrimental effects would outweigh the administrative benefits alleged  X4by AT&T.S2Xj yO'ԍ USTA Reply at 47 and Attachment 2 at 50. S PacTel argues that every error in the estimation of costs used to set prices (both over and underestimation) will work to the advantage of entrants since they can choose in each individual case whether to pay for the facilities or resell the services and pay the below Xv4cost access charges.@3vj yO 'ԍ PacTel Comments at 36.@ The Florida Commission recommends against adopting prescriptions that would preclude incumbent LECs from lowering prices where competitive conditions  XH4warrant it.M4Hxj yOq'ԍ Florida Commission Comments at 45.M  X 4164. AT&T denies that adopting a TSLRIC pricing standard would create a serious common cost allocation problem, because both unbundled network elements and access rate  X 4elements correspond to network facilities to a great extent.A5 j yO'ԍ AT&T Comments at 2425.A The Texas Commission argues that it would be easy to develop a reasonable overhead loading factor based on the ratio of overhead costs to revenues, and that use of a single overhead loading factor eliminates the  X 4need to develop common cost allocation factors.M6 j yO'ԍ Texas Commission Comments at 2829.M AirTouch observes that TSLRIC raises common cost allocation issues, and maintains that we must take into account the extent of competition and the different demand elasticities of different services when we address these common cost allocation issues. AirTouch questions whether "a minute is a minute" pricing is  XK4necessarily the best means to allocate common costs.x7K( j {O$'ԍ AirTouch Comments at 79. See also Ameritech Reply, Attachment A at 10.x Similarly, API argues that the common cost allocation to any particular service should be limited to the amount of common  X4costs that could be recovered in a competitive market.=8 j yO 'ԍ API Comments at 26.= State Consumer Advocates argue that any forwardlooking economic cost method should permit incumbent LECs to recover a reasonable allocation of joint and common costs, including joint and common costs associated  X4with the local loop.[9J j yO$'ԍ State Consumer Advocates Comments at 713, 5455.[ "90*&&aa"Ԍ X'` ` b. Reinitialization of PCIs on a RateofReturn Basis  X4165. A number of incumbent LECs argue that reinitializing indexes on the basis of  X4earnings would adversely affect the efficiency incentives of price cap regulation.p:j yO4'ԍ USTA Comments at 17; BellSouth Comments at 4748; USTA Reply at 4647.p In particular, PacTel and USTA note that the Commission has criticized earningsbased PCI adjustments in the past, and is contemplating eliminating sharing, because sharing is based on  Xv4earnings, in the Price Cap Fourth Further NPRM.e;vXj yO 'ԍ PacTel Comments at 3738; USTA Reply, Attachment 2 at 43. e Frontier asserts that represcribing the authorized rate of return would leave other causes of uneconomic access charges  XJ4unaddressed.B<Jj yO 'ԍ Frontier Comments at 13.B GSA/DOD argues that, contrary to the incumbent LECs, the Commission did not want to sever rates from costs when it adopted price cap regulation, because it retained the  X 4sharing requirement.c= xj {OE'ԍ GSA/DOD Reply at 1213. See also MCI Reply at 78.c Ad Hoc argues that reinitializing rate levels at 11.25 percent, or some other rate of return, would be administratively easy, and that the rate structure rule revisions contemplated in Section III of the NPRM are adequate to ensure that prices of individual  X 4services are efficient.E> j yO'ԍ Ad Hoc Comments at 4145. E API maintains that it is important to reduce rates to cost as soon as possible, and so recommends represcribing the authorized rate of return and reinitializing PCIs  X 4on that basis.w? j {O'ԍ API Comments at 27; API Reply at 89, 18. See also CPI Comments at 23.w  X{4166. USTA opposes represcribing the authorized rate of return, because the 1996 Act has created uncertainty regarding the incumbent LECs' cost of capital, and because interest  XM4rates have not changed greatly over the past 10 months.A@M, j yO*'ԍ USTA Comments at 1617.A USTA also claims that no one has provided adequate reason to reduce the authorized rate of return, and predicts that the cost of  X4capital would increase as the competition faced by incumbent LECs increases.KA j yO 'ԍ USTA Reply, Attachment 13 at 38.K USTA asserts that represcribing the authorized rate of return would adversely affect small incumbent  X4LECs.ABL j yO#'ԍ USTA Comments at 1617.A MCI contends that its submission in the Preliminary Rate of Return Inquiry supports"B0*&&aa"  X4reducing the authorized rate of return to 10 percent.=Cj yOy'ԍ MCI Comments at 25.= USTA claims that MCI bases its  X4represcription recommendation on incorrect calculations.PDXj yO'ԍ USTA Reply at 4748 and Attachment 13.P BA/NYNEX maintains that there is no basis in this record for represcribing the authorized rate of return, and argues that a  X4represcription proceeding would be burdensome.EEj yOT'ԍ BA/NYNEX Comments at 2526.E PacTel cites the Preliminary Rate of  X4Return Inquiry NPRM for the Commission's observation that rate of return prescriptions have little relevance to price cap carriers, and argues that they do not trigger decreases in the price  Xz4cap indices.Fzxj {O 'ԍ PacTel Comments at 4344, citing Public Notice, Common Carrier Bureau Sets Pleading Schedule in Preliminary Rate of Return Inquiry, 11 FCC Rcd 3651 (Com.Car.Bur., Accounting and Audits Div., 1996).  XL4167. GSA/DOD recommends represcribing the authorized rate of return and reinitializing PCIs on that basis, because it believes earnings of carriers under price cap  X 4regulation has been excessive.[G j yO'ԍ GSA/DOD Comments at 1315; GSA/DOD Reply at 910.[ BA/NYNEX opposed a rateofreturnbased reinitialization  X 4in its comments,GH b j yO'ԍ BA/NYNEX Comments at 2427. G but revised its position in an ex parte statement submitted on April 4, 1997. In particular, BA/NYNEX stated that it reached agreement with AT&T on a comprehensive proposal on universal service and access reform that includes, among other  X 4things, a reinitialization based on a rateofreturn of 11.25 percent.I j yOg'ԍ Letter from G.R. Evans, Vice President, Federal Regulatory Affairs, NYNEX, to William Caton, Secretary, FCC, April 4, 1997. USTA denies that incumbent LECs have overearned under price cap regulation, and asserts that the incumbent  X4LECs' "economic rate of return" was 8.75 percent from 1991 to 1995.5JBJ j {O'ԍ USTA Comments at 18 and Attachment 4; USTA Reply at 46. See also SWBT Reply at 41. USTA claims that the current rateofreturn prescription of 11.25 percent is an accounting measure rather than an economic measure, and therefore inherently less accurate, because accounting rates of return are based on accounting rather than economic depreciation, book values rather than economic values, and accrued revenues and expenses rather than cash flows. USTA Comments, Attachment 4 at 2. USTA bases its determination of the economic rate of return on values of certain categories of telecommunications equipment as collected by the Bureau of Economic Analysis (BEA), and on dividend payments of the incumbent price cap LECs. USTA Comments, Attachment 4 at 5 and Schedule 1. 5 According to SWBT, arguments for decreasing the rate of return are based on nonforwardlooking"TJ0*&&aa}"  X4accounting measures that do not accurately measure the incumbent LECs' cost of capital.>Kj yOy'ԍ SWBT Reply at 4345.> GTE asserts that the authorized rate of return is too low to reflect the risks faced by  X4incumbent LECs now that they face competition.=LXj yO'ԍ GTE Comments at 77.= Ad Hoc argues that services subject to effective competition should be removed from price cap regulation, and that the authorized rate of return should be lowered to reflect the lower risk associated with the services that  X4remain subject to price cap regulation.@Mj yO& 'ԍ Ad Hoc Comments at 70.@  X_' ` ` d. Reinitialization of PCIs on a TSLRIC Basis  X14168. Some incumbent LECs argue that reinitializing PCIs using TSLRIC would be  X 4equivalent to abandoning price cap regulation in an arbitrary and confiscatory manner.N xj yOC'ԍ PacTel Comments at 39; GTE Comments at 7576; USTA Reply at 4647 and Attachment 2 at 43, 48. Similarly, BellSouth and BA/NYNEX contend that reinitializing PCIs at TELRIC or TSLRIC  X 4levels would destroy price cap regulation by recreating the link between rates and costs.O j yO'ԍ BellSouth Comments at 45; BellSouth Reply at 3031; BA/NYNEX Comments, Attachment 1 at 89.  {Om'See also USTA Reply, Attachment 3 at 17. BellSouth and USTA claim that price cap regulation has worked very well, and there is no  X 4justification for eliminating it.XP b j yO'ԍ BellSouth Reply at 3134; USTA Reply at 1213.X BellSouth also notes that the Commission rejected proposals  X 4to revert to costofservice regulation in the LEC Price Cap Performance Review Order.Q j {OJ'ԍ BellSouth Reply at 32, citing LEC Price Cap Performance Review Order, 10 FCC Rcd at 8973.  X{4169. Ad Hoc recommends reinitializing PCIs to equate with the aggregation of  Xd4revenues from individual services priced at TSLRIC.@Rd j yO'ԍ Ad Hoc Comments at 70.@ Although API supports TSLRIC, it opposes reinitializing indices on a TSLRIC basis because of the time needed to conduct a  X64TSLRIC study.=S6j yO!'ԍ API Comments at 27.= The Florida Commission argues that we could require incumbent LECs to begin reducing their access rates gradually while we are conducting cost studies necessary to  X4calculate TSLRIC levels.KTj yO]%'ԍ Florida Commission Comments at 5.K MCI maintains that we must "reinitialize" APIs and SBIs, as well"4T0*&&aa"  X4as PCIs, to ensure that rates under price cap regulation are at economic costbased levels.@Uj yOy'ԍ MCI Comments at 1924.@  X4170. A number of parties argue that proxy models provide only hypothetical and averaged costs, and therefore are not representative of the costs incurred by actual individual  X4carriers, and in particular the costs incurred by small carriers.[V\Xj {O'ԍ Evans, et al. Comments at 56; TDS Reply at 1014; Rural Tel. Coalition Reply at 1617; Minnesota  {Ow'Independent Association Reply at 6; USTA Reply at 14. See also PacTel Comments at 3637; PacTel Reply at 1011; PacTel Reply, Egan Aff. at 2324; BA/NYNEX Reply at 14. [ According to USTA, unless rates are based on actual network costs, rates will not reflect accurately the opportunity costs  Xv4of using the network.`Wv|j yO 'ԍ USTA Reply, Attachment 2 at 2324, Attachment 3 at 1. ` According to PacTel, the proxy models are designed to calculate differences in the costs of serving different geographic areas, not actual costs. Because no one has proposed deaveraging access rates on the basis of Census Block Groups, as measured in the proxy models, PacTel claims that there is no reason to base access rates on the results  X 4of the proxy models.xX j {O'ԍ PacTel Comments at 3334. See also Rural Tel. Coalition Reply at 1517.x Similarly, the Texas Commission questions whether TSLRIC proxy models would produce accurate companyspecific costs, as opposed to industrywide averaged costs. The Texas Commission, therefore, supports TELRIC as a pricing standard for access  X 4rates.MY j yO$'ԍ Texas Commission Comments at 2627.M PacTel contends that the proxy models do not place sufficient weight on traffic volume, which PacTel asserts influences costs more than population density or other factors  X 4reflected in the models.kZ . j yO'ԍ PacTel Comments at 3435; PacTel Reply, Egan Aff. at 2627.k Southwestern Bell claims that the network assumed by the Hatfield  X4model could not be used to provide service.;[ j yO'ԍ SWBT Reply at 25.; Southwestern Bell also claims that it has not  Xy4been able to replicate the results of the Hatfield Model reported by MCI.n\yN j {Ox'ԍ SWBT Reply at 2527. See also USTA Reply, Attachment 3 at 6. n  XK4171. Airtouch observes that TSLRIC raises common cost allocation issues, and maintains that we must take into account the extent of competition and the different demand elasticities of different services when we address these common cost allocation issues. Airtouch questions whether "a minute is a minute" pricing is necessarily the best means to  X4allocate common costs.x]j {O%'ԍ AirTouch Comments at 79. See also Ameritech Reply, Attachment A at 10.x Similarly, API argues that the common cost allocation to any"r]0*&&aa" particular service should be limited to the amount of common costs that could be recovered in  X4a competitive market.=^j yOb'ԍ API Comments at 26.= On the other hand, the Texas Commission argues that it would be easy to develop a reasonable overhead loading factor based on the ratio of overhead costs to revenues, and that use of a single overhead loading factor eliminates the need to develop  X4common cost allocation factors.M_Xj yO'ԍ Texas Commission Comments at 2829.M State Consumer Advocates argue that any forwardlooking economic cost method should permit incumbent LECs to recover a reasonable allocation of  Xv4joint and common costs, including joint and common costs associated with the local loop.[`vj yO 'ԍ State Consumer Advocates Comments at 713, 5455.[ AT&T denies that adopting a TSLRIC pricing standard would create a serious common cost allocation problem, because both unbundled network elements and access rate elements  X14correspond to network facilities to a great extent.Aa1xj yOZ'ԍ AT&T Comments at 2425.A  X 4172. Some state commission oppose the FCC's proposal to place responsibility for cost studies on state commissions, because it would create excessive demands on scarce state  X 4commission resources.b j yO'ԍ Illinois Commission Comments at 2324; Kansas Commission Comments at 56; Oregon Commission Comments at 34; Georgia Commission Reply at 45. The Kansas Commission argues that state commissions do not have  X 4expertise in reviewing interstate costs.Lc ` j yO'ԍ Kansas Commission Comments at 56.L The Florida and Oregon Commissions question  X 4whether we have authority under the Communications Act to adopt this proposal.d j {OH'ԍ Florida Commission Comments at 9; Oregon Commission Comments at 4. See also BellSouth Comments at 4647; NCTA Comments at 22. The Florida and Georgia Commissions question whether the FCC would permit different pricing  Xy4standards for interstate access to be adopted in different states.leyJ j yOt'ԍ Florida Commission Comments at 9; Georgia Commission Reply at 45.l The Texas Commission  Xb4recommends giving states the option of reviewing incumbent LEC cost studies.Mfbj yO 'ԍ Texas Commission Comments at 2728.M Rather than this Commission directing the states to conduct cost studies, the California Commission recommends permitting state commission to permit the cost studies that they have already  X4begun, and relying on the results of those studies.Rgjj yO8%'ԍ California Commission Comments at 1213.R"g0*&&aa "Ԍ X4ԙ` ` e. PolicyBased XFactor Increase  X4173. Cable and Wireless supports increasing the XFactor in equal increments over a  X4fiveyear period to drive rates to TSLRIC levels.hj {O4'ԍ Cable and Wireless Comments at 2829. See also NCTA Comments at 2122; WorldCom Comments at 91. MCI suggests increasing the CPD for each price cap LEC for five years, by the ratio of that carrier's PCI to its API, to eliminate  X4that carrier's headroom.=i"j yO` 'ԍ MCI Comments at 28.= A number of commenters recommend increasing the XFactor in addition to requiring a reinitialization, to ensure that access rates remain at longrun  X_4incremental cost levels.j"_j {O 'ԍ AT&T Comments at 6970; ACTA Comments at 21; GSA Reply at 1415. See also WorldCom Comments at 91 (increasing XFactor is necessary to reflect incumbent LEC productivity growth); TRA Comments at 23 (recommending an XFactor increase following prescription of new access rates); CPI Comments at 2325 (reinitialize indices and increase the XFactor prior to permitting any marketbased reforms). Frontier opposes relying exclusively on an increased XFactor to  XH4force access rates to cost, because it would not affect current rates.BkHj yO'ԍ Frontier Comments at 13.B Frontier, alternatively, argues that any XFactor would doublecount the TSLRICbased reinitialization it supports, and so recommends eliminating the XFactor from the price cap formula after the  X 4reinitialization.Gl , j yO'ԍ Frontier Comments at 12 n.22.G  X 4174. BellSouth claims that the current 0.5 percent CPD has "outlived its usefulness," and BellSouth and GTE oppose increasing the CPD as an arbitrary and confiscatory  X 4measure.Zm j yO'ԍ BellSouth Comments at 49; GTE Comments at 7778.Z SNET claims that increasing the XFactor merely because the price cap LECs have earned too much, or simply to drive rates down, is essentially an abandonment of price cap regulation, because it would punish incumbent LECs for their efficiency gains made under  Xb4the price cap regime.gnbL j {O_'ԍ SNET Reply at 2324. See also BA/NYNEX Reply at 3233.g BA/NYNEX and GTE contend that the XFactor should reflect reasonably expected incumbent LEC productivity growth rather than to achieve a specific rate  X44reduction.So4j yO"'ԍ BA/NYNEX Reply at 30; GTE Reply at 2627.S  X4175. SNET argues that increasing the XFactor to force access rates down would not result in a more competitive market, and that treating all price cap carriers the same would"no0*&&aa" disregard fundamental differences in scale and scope, and differences in regional economics between small and midsized elective price cap incumbent LECs on one hand, and the RBOCs  X4and GTE on the other.Apj yOK'ԍ SNET Comments at 2830.A PacTel argues that increasing the XFactor would force access rates down in both urban and rural areas, and so would discourage competitive entry in rural  X4areas.qXj yO'ԍ PacTel Comments at 40. PacTel claims to be more subject to harm from the productivity factor than any other LEC because a few highly competitive central offices account for over 75 percent of its traffic, leaving it highly reliant on intraLATA toll services. According to PacTel, intraLATA toll services have become increasingly competitive in California, leaving it unable to invest in its network because of artificial productivity  {O 'factors. Id. PacTel argues that the price reductions caused by the productivity factor perversely apply productivity reductions, which are supposed to replicate competition, to services where  Xv4prices have already fallen because of actual competition.Drv j yO1'ԍ PacTel Comments at 4142. D PacTel recommends resolving price cap issues in other pending proceedings rather than using price cap regulation as a  XH4device to lower access rates to levels PacTel considers confiscatory.@sHj yO'ԍ PacTel Comments at 39.@  X ' %J:\ACCESS.REF\ORDER\IVBCOM.SS% &J:\ACCESS.REF\ORDER\IVCCOM.MGS& C. Equal Access Costs  X 4176. AT&T, NCTA, Sprint, and WorldCom recommend a exogenous cost decrease to  X 4remove equal access costs from the incumbent price cap LECs' PCIs.tZ * j yO'ԍ AT&T Comments at 6869; NCTA Comments at 28; Sprint Comments at 59; WorldCom Comments at  {Ox'94. See also New York Commission Comments at 1 (supporting the removal of equal access costs from access charges). AT&T estimates that  X 4equal access costs constitute an annual $110 million dollar subsidy for the LECs.u  L j yO'ԍ AT&T Comments, Appendix F (using 1990 Annual Interstate Access Filings of BOCs, AT&T calculates 1990 revenue associated with noncapitalized equal access expenditures and converts to a present day annual revenue estimate by comparison to difference between initial Traffic Sensitive Basket price cap index to 1996 Traffic Sensitive Basket price cap index). AT&T argues that the Commission previously found that failure to make a downward adjustment would be unfair to ratepayers and perpetuate an implicit crosssubsidy. In light of this, AT&T argues that the Commission should now make a downward adjustment to account for the completion of the amortization of those costs. Sprint argues that without such an adjustment, incumbent LECs would be able to impose charges for other rate elements to recover costs that simply no longer exist. Sprint contends that most of the equal access costs are in the local switching basket, requiring that basket's price cap index to be reduced. To the extent that other baskets were affected, Sprint contends that the appropriate PCI reductions"4u0*&&aa4"  X4should be made.@vj yOy'ԍ Sprint Comments at 59.@ The Georgia Commission recommends that the Commission verify whether equal access costs continue to be reflected and, if so, make the appropriate  X4adjustments to account for these costs.IwXj yO'ԍ Georgia Commission Reply at 41.I  X4177. The BOCs argue that there should be no exogenous cost decrease to account for  X4completion of the amortization of equal access costs.xj yO& 'ԍ Ameritech Comments at 5455; BA/NYNEX Comments at 66; PacTel Comments at 2425; SWBT Comments at 62; USTA Comments at 85. BellSouth argues that, given the Commission's decision not to grant an exogenous increase for these costs during price cap  X_4initialization, it would be unfair to require an exogenous decrease now.ly_@j {OP'ԍ BellSouth Comments at 88. See also BA/NYNEX Comments at 66.l PacTel and USTA argue that price cap regulation has historically treated equal access costs as endogenous. According to PacTel and USTA, it would be arbitrary to change that treatment for some equal  X 4access costs and not others.zz j {O'ԍ PacTel Comments at 2425; USTA Comments at 49. See also SWBT Reply at 43.z USTA, Ameritech, and SWBT argue that the Commission has addressed this matter before and correctly concluded that no exogenous treatment was  X 4warranted.{ d j {O'ԍ See, e.g., USTA Comments at 85; Ameritech Comments at 55; SWBT Reply at 41. BellSouth argues that just as in the LEC Price Cap Performance Review Order, 10 FCC Rcd at 90949095, there is insufficient support for requiring LECs to make an  X 4exogenous decrease based on the complete amortization of equal access costs.C| j yOg'ԍ BellSouth Comments at 87.C USTA and SWBT argue that LECs continue to incur new equal access costs that have not been recovered, such as when a LEC must purchase equal access software for a new digital  X{4switch.P}{ j yO'ԍ USTA Comments at 49; SWBT Reply at 42.P  XM4178. TCA argues that some small LECs have not received a bona fide request to convert to equal access. TCA contends that when these LECs make the conversion, they  X!4should be allowed the same treatment of their equal access costs as other LECs.>~!j yO"'ԍ TCA Comments at 56.> Similarly, GCI raises the issue of those LECs that have not converted to equal access. GCI recommends that these LECs be allowed to recover their costs through the Local Switching rate element,"~0*&&aa"  X4rather than a general allocation.<j yOy'ԍ GCI Comments at 8.<  X' &J:\ACCESS.REF\ORDER\IVCCOM.MGS& &J:\ACCESS.REF\ORDER\IVDCOM.KLS& ` D.Correction of Improper Cost Allocations  X' 1.` ` Marketing Expenses  Xv4179. Incumbent LECs and AT&T agree that marketing expenses are inappropriately  X_4allocated to the interstate jurisdiction."_Xj {Oh 'ԍ See, e.g., SWBT Comments at 89; AT&T Comments at 6667, Appendix D; cf. GTE Comments at 42 (proposing that incumbent LECs prepare separationsbased cost studies to show the amount of marketing expense erroneously assigned to the interstate jurisdiction to be used to compute the separations and TICrelated components of a regulatory policy charge). USTA notes that the net effect of the Commission's` decision to include access revenues in the allocation factor for marketing expenses in the  X14Marketing Expense Reconsideration Orderk1Bj {O$'ԍ Marketing Expense Reconsideration Order, 2 FCC Rcd at 5353.k was to allocate approximately 26 percent of  X 4incumbent LECs' total marketing expenses to the interstate jurisdiction.L j yO'ԍ USTA Comments, Attachment 2 at 25.L USTA argues that incumbent LECs must be afforded an opportunity to recover the interstate portion of marketing expenses, which it estimates to be $2.2 billion for price cap LECs and $2.4 billion  X 4for all incumbent LECs.U d j yO'ԍ USTA Comments at 7980, Attachment 16 at 4.U SWBT estimates that $100 million of its marketingrelated costs are allocated to interstate services and recommends that marketing costs be recovered through  X 4a public policy element until separations reform can be completed.? j yON'ԍ SWBT Comments at 89.? Based on 1995 data, GTE estimates that the separations process allocates $84.6 million of its marketing expenses  X{4to the interstate jurisdiction.9{ j yO'ԍ GTE Reply at 8.9  XM4180. AT&T estimates that inappropriate end user retail expenses recovered through interstate switched carrier access total $840.2 million approximately $575 million in direct retail expenses including marketing and customer service costs, and $265 million in indirect  X4retail expenses including general support, corporate operations, and uncollectible revenue.>j yO#'ԍ AT&T Comments at 66.> AT&T argues that because access is a wholesale service, not a retail service, this implicit" 0*&&aaE"  X4subsidy contained in access charges is improper for three reasons.!Zj {Oy'ԍ AT&T Comments at 6667; cf. New York Commission Comments at 3 (arguing that retail costs allocated to the interstate jurisdiction that are avoided when competitors resell incumbent LECs' services should be reflected in lower access charges).! First, recovery of retail  X4expenses through access charges violates section 252(d)(3) of the Act,Cj yO'ԍ 47 U.S.C.  252(d)(3).C which states that wholesale rates will be determined on the basis of retail rates, excluding the portion attributable to marketing, billing, collection, and other costs that will be avoided by the  X4LEC.Azj yO 'ԍ AT&T Comments at 6667.A Second, inclusion of retail costs in access charges violates the fundamental principle that services that should be priced at their longrun incremental cost, resulting in cross Xv4subsidies from access charges to other services.>v j yO1'ԍ AT&T Comments at 67.> Finally, inclusion of retail costs in access charges violates costcausation principles, which state that retail costs should be borne by  XH4those who cause them, i.e., retail end users.>Hj yO'ԍ AT&T Comments at 67.>  X 4181. AT&T and WorldCom propose that, pending separations reform that reallocates retail marketing costs to the intrastate jurisdiction, the Commission reassign recovery of such  X 4costs from interstate access charges to end users.Z * j {O'ԍ AT&T Comments at 53; WorldCom Comments at 71; see also Letter from Bruce K. Cox, Vice President, Government Affairs, AT&T, to William F. Caton, Acting Secretary, Federal Communications Commission, March 19, 1997. AT&T's proposal would recover these costs from business lines and nonprimary residential lines, but not from primary residential  X 4lines. L j yO'ԍ Letter from Bruce K. Cox, Vice President, Government Affairs, AT&T, to William F. Caton, Acting Secretary, Federal Communications Commission, March 19, 1997. The Rural Tel. Coalition opposes recovery of such costs from end users.L j yO'ԍ Rural Tel. Coalition Reply at 56.L USTA contends that, until the separations rules are changed, incumbent LECs should continue to recover these costs in current access prices and that the marketing expense allocated to  X{4common line should remain in common line.>{4j yO`"'ԍ USTA Comments at 80.> "d!0*&&aaZ"Ԍ X' 2.` ` General Support Facility Costs  X4182. AT&T and WorldCom assert that the Commission should not permit incumbent LECs to recover in access charges the costs caused by the LECs' detariffed billing and collection functions, including those arising from use of GSF and computer costs in providing  X4those functions.j yO'ԍ AT&T Comments at 67, Reply at 34; WorldCom Comments at 71 (proposing that the costs of nonregulated services be removed from the TIC). According to AT&T's study, $124 million of expenses recovered in  Xv4interstate access support the nonregulated billing and collection category.Mv j yOG 'ԍ AT&T Comments at 6768, Appendix E.M Of the $124 million, $60.1 million is included in interstate switched carrier access, and $20.5 million is in  XH4interstate special carrier access, with the remainder recovered by the SLC.IHj yO 'ԍ AT&T Comments, Appendix E at 2.I WorldCom recommends that the Commission correct the Part 32 USOA rules for regulated costs and Part 64 allocation rules to remove this investment from access charges, and should require  X 4corresponding reductions in the TIC.B @j yO'ԍ WorldCom Comments at 71.B  X ' &J:\ACCESS.REF\ORDER\IVDCOM.KLS& $J:\ACCESS.REF\ORDER\VACOM.CF$  X '_ V. ACCESS REFORM FOR INCUMBENT ă  X 4V  RATEOFRETURN LOCAL EXCHANGE CARRIERS ă  Xy4183. The majority of commenters agree generally with our conclusion to limit the  Xb4scope of this proceeding to price cap LECs.Zbj {O'ԍ  See, e.g., Alaska Telephone Association Comments at 3; Frederick & Warinner Comments at 3; NECA Comments at 2; TCA Comments at 2; Sprint Comments at 9; WITA Comments at 2; GSA/DOD Comments at 13. Many parties are concerned, however, about the impact decisions made in this proceeding may have on some rateofreturn LECs, and urge the Commission to consider the needs of small to midsized and rural rateofreturn  X4incumbent LECs when adopting proposals in this proceeding.!Z j {O'ԍ See, e.g., Staurulakis Comments at 2; GCI Comments at 14, Reply at 56; Alaska Telephone Association Comments at 3; Rural Tel. Coalition Comments at 23; TDS Comments at 67; GVNW Comments at 4, Reply at 3; Western Alliance Comments at 13.!  X4184. Cincinnati Bell, ALLTEL, and ITTA oppose delaying access reform for non X4price cap LECs.j yO%'ԍ Cincinnati Bell Comments at 2; ALLTEL Comments 3, 57, Reply at 3; ITTA Comments at 4. Centennial states that it prefers that the Commission apply its access""0*&&aa"  X4reforms to all incumbent LECs, subject to an appropriate waiver for small, rural LECs whose special circumstances warrant special accommodation, but that at a minimum, the Commission  X4should apply all of its access reforms to all Tier 1 LECs.Wj yOM'ԍ Centennial Cellular Corporation Comments 23.W Centennial argues that a large, Tier 1 LEC, such as PRTC, that already faces active competition from competitive carriers  X4should not be exempt from the new access reform rules.;Xj {O'ԍ Id. at 67.;  Xx4185. Many commenters stress the need for immediate or prompt access reform for rateofreturn LECs. They contend that rateofreturn LECs are facing increasing competitive  XJ4pressures and need the ability to respond to changes in the market.Jj {O 'ԍ See, e.g., ALLTEL Comments at 3, 57, Reply at 3; Cincinnati Bell Telephone Comments at 2 3; Roseville Tel. Comments at 67, Reply at 410; GVNW Comments at 4; ITTA Comments at 4. Roseville and Frontier  X34recommend that the Commission distinguish between rural and nonrural carriers.j3Dj yO('ԍ Roseville Tel. Comments at 2; Frontier Comments at 56 n. 10.j Frontier argues that smaller price cap carriers are more similarly situated to nonprice cap rural carriers than they are to nonrural carriers and urges the Commission to temporarily exempt all rural  X 4LECs, price cap and nonprice cap, from the rules adopted in this proceeding.I j yOs'ԍ Frontier Comments at 56 n. 10.I Citizens contends that some of the approaches proposed in the NPRM are not appropriate for price cap  X 4LECs that primarily serve rural areas and have a low proportion of business lines.Z d j yO'ԍ Citizens Utilities Comments at 36, 1314.Z Other commenters assert that rural LECs have a lower percentage of lowcost/highmargin customers, that their access charge revenues represent a higher percentage of their total revenues than they do for the average regional BOC, and that the loss of even a small number of customers can result in a much higher proportionate loss of revenue when compared to the  XM4markets of typical price cap LECs.gM j {O'ԍ See, e.g., GVNW Comments at 34; ALLTEL Comments at 15.g  X4186. For these reasons, some commenters argue that nonprice cap LECs need  X4 regulatory flexibility and the option of adopting the rate structure changes required for price X4cap LECs in this proceeding.#Z j {O(#'ԍ See, e.g., Aliant Reply at 45; ALLTEL Comments at 4, 8, Reply at 34; Minnesota Independent Coalition Comments at 2; ITTA Comments at 4; TDS Comments at 1012, 16, Reply at 46; NECA Comments at 910, Reply at 6; Roseville Tel. Comments at 2.# NECA, for example, states that because NECA pool carriers' rates represent a wide variety of markets with disparate cost characteristics, the Commission"#0*&&aa" should permit these carriers to have the regulatory flexibility to select and implement rate structure changes adopted in this proceeding pending completion of the separate rateofreturn  X4proceeding.Lj yOK'ԍ NECA Comments at 910, Reply at 6.L  X'#Xj P9XP# $J:\ACCESS.REF\ORDER\VACOM.CF$ 'J:\ACCESS.REF\ORDER\VIA-COM.PLG' :@ VI. OTHER ISSUES \  Xv' A.Application of Part 69 to Unbundled Network Elements  XH4187. Several incumbent LECs disagree with our tentative conclusion to exclude from unbundled network elements the application of Part 69 access charges. PacTel argues that access charges should not be excluded from the sale of unbundled network elements because such charges include subsidies for universal service. Competitors, PacTel argues, will have an economic incentive to purchase unbundled elements to avoid access charges, undermining support for universal service until an explicit universal service funding mechanism is  X 4adopted.g Xj {O'ԍ PacTel Comments at 5557. See also GVNW Comments at 5.g SBC contends that the Commission has recognized legitimate costs that are recovered through access charges. Recovery of these costs will be reduced if the Commission allows purchasers of unbundled elements to pay substantially less on a per minute basis than they would through interconnection arrangements. SBC estimates that excluding access charges from the sale of unbundled network elements could jeopardize its recovery of $705 million in end user common line loop costs and $683 million in switched access costs based  X44on SBC's 1996 switched access demand levels.@4j yO'ԍ SBC Comments at 5152.@ USTA contends prices for unbundled elements should include access charges to ensure embedded costs assigned to the interstate jurisdiction are recovered to the extent network elements are used to provide interstate  X4services.Azj yO'ԍ USTA Comments at 5455.A  X4188. Other incumbent LEC commenters argue that rebundling network elements is equivalent to offering access services and justifies the imposition of access charges. BellSouth, for example, contends that access charges should apply to competitors that rebundle network elements because rebundled elements constitute an underlying retail service  Xe4and access charges are applicable when services are purchased for retail sale.Ce j yO #'ԍ BellSouth Comments at 13.C PacTel suggests that access customers will perceive unbundled elements as a substitute for access service. By excluding access charges from the sale of unbundled elements, PacTel contends, the Commission would sanction a violation of Section 202(a) of the Communications Act" $0*&&aa""  X4which prohibits unreasonable discrimination in charges for similar services.ej {Oy'ԍ PacTel Reply at 810. See also GVNW Comments at 45.e  X4189. Smaller LECs whose rates are set under rateofreturn regulation advocate the imposition of access charges on unbundled network elements because a substantial portion of  X4their revenues are derived from state and interstate access charges.Zj yO'ԍ Frederick and Warriner Comments at 4 (stating that 60% of revenues generated by small LECs it represents are derived from state and interstate access charges). Roseville Telephone argues that, absent the imposition of access charges on the sale of unbundled network elements, incumbent LECs will not recover the costs of their underlying facilities because TELRIC prices will not recover costs attributable to federalstate separations policies and a  XH4portion of the incumbent LEC's embedded costs.PHj yO 'ԍ Roseville Telephone comments at 1314.P  X 4190. IXCs support the Commission's tentative conclusion to exclude unbundled network elements from Part 69 access charges. Excel agrees with the Commission's rationale that carriers purchasing unbundled elements at costbased rates have already compensated incumbent LECs for the ability to originate and terminate calls, rendering further  X 4compensation unnecessary.> Bj yO'ԍ Excel Comments at 7.> Sprint also supports the exclusion of access charges from unbundled network elements, arguing that adding access charges to costbased prices for unbundled elements would undermine the procompetitive purpose of the 1996 Act. To the extent prices for unbundled elements do not recover universal service costs, Sprint argues that the Commission should remove implicit subsidies from access charges and have all service providers contribute to universal service through a competitively neutral funding  X44mechanism.<4j yO'ԍ Sprint Reply at 7.< Sprint also challenges the view of LEC commenters that rebundling network elements is the equivalent of offering a retail service. According to Sprint, when elements are used to originate and terminate calls, the purchaser of the unbundled elements, rather than the incumbent LEC, is offering exchange services using those facilities. Imposing access charges on unbundled elements, Sprint argues, would be similar to having the purchaser of an automobile pay rental fees in addition to the purchase price simply because the automobile is  X4used for transportation whether it is purchased or leased.9b j {O"'ԍ Id. at 6.9 "% 0*&&aa"Ԍ X' 'J:\ACCESS.REF\ORDER\VIA-COM.PLG' &J:\ACCESS.REF\ORDER\VIBCOM.BEG& B.Treatment of Interstate Information Services   X4 191. Noncostbased rates. ISPs, consumers, and several consumer groups applaud the Commission's tentative conclusion to not require ISPs to pay access charges and urge us  X4to make it our final decision.zj {O'ԍ See, e.g., American Library Association Comments at 1; MAP, et al. Comments at 3; Radoff Comments at 1; Lyman C. Welch Comments at 1; Colorado Library Education and Healthcare Telecommunications Coalition Reply at 1; Gallegos Comments at 2; California Commission Reply at 7; NCTA Comments at 2; America OnLine Comments at 4; CIEA Comments at 3; CompuServe\Prodigy Comments at 4; Information Industry Association Comments at 12; Internet Access Coalition at 1013; Microsoft Comments at 34; Minnesota Internet Services Trade Association Comments at 1; Newspaper Association of America Reply at 1; Alarm Industry Communications Committee Reply at 1. These commenters state that the current access charge framework consists of noncostbased rates, that it was designed to address rate discrimination in the interexchange market, as well as to preserve subsidy flows between local and long  Xa4distances services. They argue that this regime should not be extended to ISPs.a j {O'ԍ See, e.g., America OnLine Comments at 9; Internet Access Coalition Comments 1013; American Library Association Comments at 1; NCTA Reply at 1011. Internet Access Coalition states that there is no justification for requiring ISPs to pay charges designed to recover the cost of network features and functions that were designed for voice traffic,  X 4features that ISPs neither want nor need.^ d j yO1'ԍ Internet Access Coalition Comments at 6.^  X 4192. Consumer groups and other commenters assert that the imposition of noncostbased access fees would diminish consumer use of the Internet and other information  X 4services. j {Oe'ԍ See, e.g., MAP, et al. Comments at 34; Ozarks Technical Community College Comments at 1; Colorado Library and Healthcare Telecommunications Coalition Reply at 1; Gallegos Comments at 2; CompuServe\Prodigy Reply at 4; PSINet Reply at 910; Alarm Industry Communications Committee Reply at 46. We received over 300,000 comments from consumers via our electronic mailbox. These commenters overwhelmingly oppose the imposition of access charges on ISPs. Most insist that many consumers will be unable to afford using the Internet if ISPs are required to pay access charges and those charges are then passed on to consumers. MAP, et al., claims that usagebased fees might be passed on to consumers, which could diminish total use of the Internet and especially limit use by lowerincome  X4citizens.Jnj {O 'ԍ MAP, et al. Comments at 4.J  Xf4193. America OnLine states that access charges are inappropriate for ISPs, regardless of whether they consist of noncostbased rates or are priced at forwardlooking costs. America OnLine contends that no matter how access charges are established, they do not and"8&0*&&aa`"  X4should not apply to ISPs because ISPs are not carriers.Lj yOy'ԍ America OnLine Reply at 6. L America OnLine states that as providers of information services, ISP fall squarely outside of the definition of  X4"telecommunications carriers" as defined in the 1996 Act.3Xj {O'ԍ Id.3 Several commenters claim that ISPs are endusers of telecommunications services, and the manner in which they use the local  X4network supports the conclusion that they are end users rather than carriers.j {O? 'ԍ Id. at 5; see also, Information Industry Association Comments at 3; Internet Access Coalition Comments at 1013; Pennsylvania Internet Service Providers Comments at 21.  Xv4194. Most LECs and a few other commenters call for the imposition of access charges  X_4on ISPs._Dj yOT'ԍ BA/NYNEX Comments at 64; PacTel Comments at 74; SONETECH Comments at 19; USTA Comments at 83; U S West Comments at 83; GTE Comments at 18; GCI Comments at 8. They state that ISPs currently do not pay for their portion of local exchange  XH4switching facilities assigned to the interstate jurisdiction.~Hj {O'ԍ See, e.g., U S West Reply at 42; BA/NYNEX Comments at 64; USTA Comments at 82.~ BA/NYNEX states that current usage levels can only be accommodated on the circuit switched network by continuous investment in more network capacity, however, LECs are not recovering their investment  X 4under the current pricing structure for ISPs.r . j {O'ԍ BA/NYNEX Comments at 62; see also, PacTel Comments at 7677.r Some LECs acknowledge that the current framework of access charges should not be applied to ISPs, but rather, ISPs should be charged usagesensitive "reformed" access charges which do not contain noncostbased  X 4subsidies. j {O/'ԍ PacTel Reply at 6; see also, USTA Comments at 84; AT&T Comments at 7172.  X4195. PacTel contends that ISPs are not like other business customers, because they do not use local business lines for a mix of originating and terminating calls, and, thus, do not  Xb4pay outbound usage charges.@bR j yOe'ԍ PacTel Reply at 2728.@ PacTel further claims that ISPs' current service architectures, while using business lines, look strikingly like the other common carriers' serving arrangements prior to the divestiture of AT&T. According to PacTel, ISPs gain access to LEC loops and switches in order to offer services to end users across all major population centers, just as IXCs do. Further, ISPs do not terminate calls, but provide connection to the  X4Internet or online services.3j {O%'ԍ Id.3"'t0*&&aa"Ԍ X4ԙ196. Implicit subsidy for ISPs. USTA and several LECs claim that current flat rate pricing schemes for ISPs create an implicit subsidy for ISPs, because the flat rate charges  X4ISPs pay fail to pay for the network resources they use.j {OM'ԍ USTA Comments at 8283; See, e.g., U S West Comments at 8384; GVNW Comments at 15; ACTA Comments at 2430.  X4197. Compuserve and Prodigy state that the rates for flatrated business lines used by ISPs already cover their costs, and in some jurisdictions, they provide a subsidy for below  Xx4cost local exchange residential services.Lx"j yOK 'ԍ CompuServe/Prodigy Comments at 12.L Compuserve and Prodigy assert that regional BOC (RBOC) studies underestimate the revenues the RBOCs are currently receiving from ISP use  XJ4of business lines.<ZJj {O 'ԍ Id. CompuServe/Prodigy states that it now pays the LECs almost $36 million on an annual basis for the approximately 85,000 local business lines it employs to make available its services to subscribers (85,000 lines x $35 per month per line x 12 months = $35,700,000).<  X 4198. Several ISPs and consumer groups point to the increase in LEC revenues due to  X 4increased demand for new telecommunications services associated with ISPs. j {O'ԍ See, e.g., Consumer Project Reply at 3; Internet Access Coalition Comments at 15; America OnLine Comments at 79; CIEA Reply at 35. Most significantly, commenters cite the increase in consumer demand for second lines. Internet Access Coalition refers to an ETI Study [need cite] which found that increased revenue from residential second lines used primarily or exclusively to access online services exceeds the increased incumbent LEC costs attributable to the growth of these services by a factor of six X4toone.Q. j yOq'ԍ Internet Access Coalition Reply at 78.Q Internet Access Coalition challenges PacTel's conclusion that the costs of second lines exceed the flat rate charged by Pacific Bell for those lines. Internet Access Coalition states that several incumbent LECs, including PacTel, have, in other forums, expressly  XM4attributed their recent high earnings to the surge in demand for second lines.4M j {O'ԍ Id. 4   X4199. Network congestion. Several commenters, most of them incumbent LECs, claim that current network congestion problems are the result of the current pricing policies which  X4allow ISPs to pay flat rates for usage sensitive services.zP j {O#'ԍ See, e.g., USTA Comments at 8182; GVNW Comments at 15; GCI Comments at 9.z USTA states that congestion caused by ISPs raises network reliability concerns and delays the introduction of new"(0*&&aan"  X4technologies.=j yOy'ԍ USTA Comment at 82.= GCI claims that usage charges set at the proper level should encourage an economically appropriate level of usage and should help alleviate network congestion caused by users who remain online for long periods of time.  X4200. ISPs and consumer groups insist that accounts of network congestion are greatly  X4exaggerated by the LECs.Xj {O'ԍ See, e.g., Consumer Project Comments at 1; America OnLine Comments at 1314; CompuServe/Prodigy Comments at 14; Internet Access Coalition Comments at 13; PSINet Comments at 8. Internet Access Coalition states that the studies presented by the Bell Operating Companies (BOCs) were based on isolated, worstcase situations, and therefore, the studies fail to give an accurate picture of the impact of data traffic on the BOC  XH4networks.SHj yO 'ԍ Internet Access Coalition Comments at 13.S Commenters claim that the switch problems which occur in a small number of central offices can be resolved with the technologically simple solutions that the incumbent  X 4LECs routinely use when endusers other than ISPs create similar congestion anomalies.f Bj {O 'ԍ Id. at 14; see also America OnLine Reply at 10.f PSINet asserts that the BOCs were in a position to anticipate increased network traffic because of an increase in the demand for (1) second lines and other services by consumers  X 4and (2) business lines by ISPs.k j {OZ'ԍ PSINet Reply at 78; see also, America OnLine Reply at 12.k PSINet contends that ILECs have been selling excess capacity for several years, and they should have been reinvesting in their networks, making them more responsive to their Internet customers and better able to handle increase in Internet  X4traffic.>f j yO'ԍ PSINet Reply at 78.>  Xb4201. Incentive to switch to packetswitched network. Some LECs contend that without usage charges for the lines connecting the ISPs to their customers, ISPs have little incentive to use services and technologies that lessen the load on the trafficsensitive portion of the current switched network or to divert Internet traffic from the circuitswitched local  X4network to more efficient packetswitched networks. j {O 'ԍ See, e.g., BA/NYNEX Comments at Attachment 1: Crandall Affidavit at 1415; PacTel Reply at Attachment 1, Parker Affidavit at 6. ACTA states that radically reformed, rational, costbased access charges borne by ISPs and other users of the telecommunications infrastructure will provide incentives to improve and optimize today's telecommunications infrastructure and stimulate investment which will assure an adequate supply of capacity and")P 0*&&aaK"  X4services.@j yOy'ԍ ACTA Comments at 27. @ SONETECH states that it is natural for ISPs to be CLECs and IXCs, and that  X4access charges would act as an incentive for ISPs to move in that direction.CXj yO'ԍ SONETECH Comments at 34.C  X4202. America OnLine urges the Commission to reject LEC statements which suggest that ISPs have incentives to use inefficient services and facilities that will persist as long as  X4the Commission refrains from imposing its access charge rules.Ij yO& 'ԍ America OnLine Reply at 1315.I America OnLine and Internet Access Coalition state that ISPs know that their customers want higher speed access to the Internet and other online services and to the extent that incumbent LECs, or any other entity, offer an efficient, reliable and economic means to provide ISPs' product to the  X14consumer, ISPs have every incentive to use it to the ultimate benefit of the public.a1xj {OZ'ԍ Id.; Internet Access Coalition Reply at 11.a America OnLine states that the ISP market is extremely competitive and every provider has powerful market incentives to offer the most reliable, costeffective, efficient and quality service it  X 4can.I j yO'ԍ America OnLine Reply at 1315.I  X 4203. CPT claims that usagebased charges on basic voice service and ISDN calls from residential users, and usagebased charges for the unbundled loop undermine the LECs' incentives to deploy technologies that solve congestion problems. Collecting usage fees through the circuit switched netowrk then becomes highly profitable and technologies which  Xb4eliminate the rationale for those charges would threaten this profit center.Fbj yO'ԍ Consumer Project Reply at 6.F CPT proposes that the Commission should leave the pricing of basic voice services as is, and require LECs to eliminate the usage charges on higher bandwidth residential digital services like ISDN, if  X4the call is terminated using the new packet switched service.3* j {O'ԍ Id.3  X4204. Discrimination. PacTel argues that by not requiring ISPs to pay access charges.  X4the Commission discriminatorily grants a preference in rates to ISPs.C j yOG#'ԍ PacTel Comments at 7475.C PacTel states that ISPs are not like regular business customers, that they are more like IXCs because of the way"*L 0*&&aae"  X4their customers connect with them.=j yOy'ԍ PacTel Reply at 27.=   X4205. CIEA claims that the mere difference in the payment mechanisms for ISPs and IXCs does not show discrimination in favor of ISPs. CIEA explains that IXCs use different aspects of the local exchange network that ISPs and their Internet customers do not use. For example, outdialing, 911 service, and directory assistance services are used by IXCs, but are not required by ISPs. CIEA states that IXCs have more rights and privileges in interconnecting with the local exchange than ISPs do. Furthermore, states CIEA, IXCs and ISPs pay LECs in different ways because all users of the PSTN pay in different ways, based  X14on their pattern of use.<1Xj yO: 'ԍ CIEA Reply at 68.<  X 4206. America OnLine contends that requiring ISPs to pay access charges would constitute discrimination because other endusers are not required to pay access charges. Internet Access Coalition agrees, stating that treating ISPs like other endusers is not discriminatory since ISPs are endusers. Internet Access Coalition states that ISPs use business lines solely to receive incoming calls, and, thus, they don't pay originating call fees, just like numerous other business customers such as call centers, mail order providers, radio  Xy4talk shows, and many financial institutions.Syj yO'ԍ Internet Access Coalition Reply at 1011.S  XK4207. Anticompetitive acts by LECs. Several commenters have expressed a concern that assessing access charges on ISPs will lead LECs to engage in anticompetitive  X4activities.xj yOH'ԍ Consumer Project Reply at 3; CIEA Comments at 8; CompuServe/Prodigy Comments at 15; Internet Access Coalition Comments at 1920; PSINet at 910; SONETECH at 4. Compuserve and Prodigy state that RBOCs function not only as the dominant providers of access upon which the independent ISPS are dependent to reach their customers,  X4but are also competitors to the independent ISPs in providing information services.Lj yOr'ԍ CompuServe\Prodigy Comments at 15.L CompuServe\Prodigy contend that any access charges collected by the parent RBOC from its affiliated ISP merely represents an intracorporate transfer among RBOC affiliates with no real overall economic effect to the RBOC or its affiliate. Independent ISPs, however, would  X4have to absorb any increase in access charges to stay in business.3` j {O#'ԍ Id.3  Xg4208. PacTel counters that the Commission has extensive rules ensuring that the largest"g+ 0*&&aa" LECs, the BOCs, provide interconnection to thirdparty ISPs that is comparable, including identical prices, to the interconnection that they provide to their own enhanced service operations. Furthermore, states PacTel, the Commission has extensive accounting rules and other safeguards to ensure against LEC crosssubsidies to support their enhanced services  X4operations.Pj yO'ԍ PacTel Reply at Parker Affidavit p. 5.P  Xv' &J:\ACCESS.REF\ORDER\VIBCOM.BEG& 'J:\ACCESS.REF\ORDER\VIC-COM.PLG' C.Terminating Access  XH' 1.` ` Incumbent LECs  X 4209. Several IXCs and other commenters supported limiting terminating access rates to forwardlooking economic cost. Those advocating that the Commission hold terminating access rates to TSLRIC levels cite the absence of competitive pressures on the terminating access provider. They contend that even as originating access services become more competitive, price cap LECs will retain the ability to exercise market power over terminating access, justifying a prescriptive approach that would limit terminating access rates to forward X4looking cost.Xj yO'ԍ CompTel Comments at 19; Cable & Wireless Comments at 31; ACTA Comments at 23; LCI Comments at 3; TCI Comments at 36; Allied Communications Comments at 3; WorldCom Comments at 92. They also emphasize the likelihood of continued ILEC dominance in the  Xy4provision of access services in the foreseeable future.}yj yO'ԍ AT&T Comments Appendix A at 18; LCI Comments at 3; Cable & Wireless Comments at 31.} A number of commenters support the development of TSLRIC studies as a basis for establishing costbased rates for terminating  XK4access.K@j {O<'ԍ See, e.g.,TRA Comments at 3839; California Commission Comments at 17; LCI Reply at 67.  X4210. According to incumbent LECs and other commenters, however, sufficient competitive forces exist to constrain the prices charged for terminating interstate access service. For example, USTA challenges the fundamental premise that, because the called party is not paying for the call, terminating access charges are shielded from downward market pressures. Thus, according to these commenters, if a LEC overprices terminating access relative to originating access, a pair of callers in repeated communications would have  X4an incentive to alter their pattern of calls to favor the lowerpriced alternative.lj yO"'ԍ USTA Comments Attachment 3 at 12; TCI Comments, Attachment A at 4.l Other commenters argue that the availability of unbundled network elements and interconnection arrangements will act as a constraint on potentially excessive terminating access charges as"e,b 0*&&aa% "  X4alternative access providers offer competitive services.rj yOy'ԍ USTA Comments at 67; Ameritech Comments at 53; BA/NYNEX Comments at 42. r High terminating rates, these commenters argue, will encourage IXCs to purchase unbundled network elements to complete  X4longdistance calls themselves.Xj yO'ԍ USTA Comments at 67; Ameritech Comments at 5253; BA/NYNEX Comments at 42; SNET Comments at 54; BellSouth Reply at 40; SWBT Reply at 4647.  X' 2.` ` NonIncumbent LECs  Xv4211. Competitive LECs urge the Commission to refrain from imposing any direct regulation of their terminating access charges. They contend that competitive LECs lack the kind of market power that would enable them to charge IXCs excessive terminating access  X14rates.l1j yO'ԍ ALTS Comments at 29; American Communications Services Reply at 21.l Competitive LEC negotiations with IXCs, they explain, have resulted in terminating access charges equal to or below the terminating access rates contained in incumbent LEC  X 4tariffs. @j {O'ԍ TCI Comments, Attachment A at 6 (citing Comments of Spectranet International, Inc., CC Docket No. 92262 at 7). Commenters assert that IXCs are sophisticated customers with bargaining leverage over competitive LECs and will take necessary actions to discourage excessive charges for  X 4terminating access.d j yO 'ԍ Spectranet Comments at 78; ICG Telecom Group Reply at 23.d Other commenters argue that competitive LECs, like incumbent LECs, will restrain their terminating access charges to lower the incentive for IXCs to purchase  X 4unbundled network elements to provide their own local access. * j yO'ԍ ACC Long Distance Reply at 10; Cox Communications Reply at 45; Spectranet Comments at 78. Spectranet argues that initial dependence of competitive LECs on large volume customers will discourage unreasonable terminating access rates because high rates would entice IXCs to substitute  Xb4terminating special access for these users.Cb j yO'ԍ Spectranet Comments at 8.C Competitive LECs also express the concern that strict regulation of their terminating access rates would impose an additional burden on their  X44ability to enter the market and compete successfully.a4J j yO/!'ԍ Time Warner Comments at 4950; WinStar Comments at 56.a  X4212. Other commenters favor regulation of the terminating access rates of competitive LECs, suggesting that bottleneck control of the called party's loop necessitates some level of"-0*&&aa"  X4regulation.wj yOy'ԍ AT&T Comments at 63; WorldCom Comments at 92; Ohio Commission Comments at 12.w Although incumbent LECs argue that regulation of terminating access is unnecessary, they contend that any regulation of incumbent LEC terminating access should entail equivalent regulatory treatment of competitive LECs because they hold the same degree  X4of market power with respect to the loops they control.Xj yO'ԍ USTA Comments at 67; BA/NYNEX Comments at 42; BellSouth Comments at 86; PacTel Comments at 74; Rural Telco Coalition Comments at 2324.  X' 'J:\ACCESS.REF\ORDER\VIC-COM.PLG' &J:\ACCESS.REF\ORDER\VIDCOM.KLS& D.Universal ServiceRelated Part 69 Changes  X_4213. Many parties note that the Commission must carefully coordinate access charge  XH4reform and universal service reform.Hj {O 'ԍ See, e.g., Arch Communications Reply at 1; Alaska Telephone Association Comments at 7; TDS Comments at 27, Reply at 7; Texas Commission Comments at 30; Washington Commission Comments at 9. Commenters agree generally that, in order to prevent double recovery and remove implicit subsidies, access charges must reflect receipt of universal  X 4service support above current levels. j {O'ԍ See, e.g., Arch Communications Reply at 1; AT&T Comments at 65; Cable & Wireless Comments at 28, n.33 (asserting that the portion of current rates that is universal service subsidy must be separated from rates to  {Og'comply with the Universal Service proceeding); California Commission Comments at 1314; Internet Access Coalition Comments at 6; PacTel Comments at 50; PCIA Comments at 34, Reply at 23; Sprint Comments at 54; TCI Reply at 2829. Other parties argue, however, that double recovery is unlikely, especially for rural carriers for whom revenues will be insufficient to maintain  X 4service in high cost areas, even if access charges remain unchanged. j {O['ԍ See, e.g., Alaska Telephone Association Comments at 7; Western Alliance Comments at 1920. Several nonprice cap incumbent LECs argue that it is premature to address the issue of potential double recovery, particularly for small, rural, rateofreturn LECs, until the details of the universal service fund mechanism are established and the Commission has assessed the cumulative impact of the  X4universal service, access reform, and separations proceedings.$P j {O'ԍ See, e.g., Evans, et al. Comments at 3; Puerto Rico Tel. Comments at 2021; TCA Comments at 45;  {O['TDS Comments at 26, 28, Reply at 7; Western Alliance Comments at 1920; see also American Communications Services, Inc. Reply at 89 (asserting that Commission should defer access reform until universal service and separations reform are adopted).  Xb4214. The Alabama and Texas Commissions express concern that reducing interstate access rates to reflect universal service revenues will divert funds traditionally used to support intrastate high costs to offset interstate rates, which may only be accomplished by a"4.<0*&&aaz"  X4recommendation of a FederalState Joint Board.mj yOy'ԍ Alabama Commission Comments at 14; Texas Commission Comments at 30.m These Commissions conclude that a separate component is necessary within the universal service fund that will replace the explicit  X4subsidy reflected in the common line elements of interstate access.Xj yO'ԍ Alabama Commission Comments at 14 (proposing separate components for both highcost assistance for intrastate services and interstate common cost recovery); Texas Commission Comments at 3031. The Ohio Commission notes that any downward adjustment of interstate access rates must be based only on the  X4interstate revenues received through the universal service fund mechanism.[Xj yO 'ԍ Ohio Commission Comments at 11 (assertign that, if intrastate revenues are used to assess contributions and used to distribute assistance to recipients of universal service support, incumbent LECs that are net beneficiaries of support should be permitted to make downward adjustments to intrastate costs).[  Xv4215. BA/NYNEX contend that, to the extent universal service payments are intended to cover shortfalls in intrastate payments, a downward adjustment of interstate access rates would in effect be doublecounting and would take away the revenue support that the LEC  X14had just received from the universal service fund.B1j yO'ԍ BA/NYNEX Comments at 61.B Thus, any adjustment to access charges must reflect only the portion of universal service support that covers shortfalls in interstate  X 4cost recovery.B ` j yO'ԍ BA/NYNEX Comments at 61.B  X 4216. Several commenters contend that universal service funds should not be used to  X 4reduce interstate costs recovered through access charges. j {O_'ԍ See, e.g., Ameritech Reply at 34 (opposing attempt to require the recipient carrier to use universal service  {O)'funds for reducing access charges); Western Alliance Comments at 20; WITA Comments at 9; see also State Consumer Advocates Reply at 15 (arguing that TIC, interstate transport and interstate switched access are not  {O'services that the Joint Board has designated for universal service support); but see BA/NYNEX Reply at 67 (arguing that certain funds that LECs receive from the new universal service fund may be used to offset current revenues from interstate access services). These parties argue that neither universal service fund subsidies that keep local exchange rates below cost nor "support funds" that compensate carriers for the discounted portion of the rates for telecommunications services provided to schools, libraries, and rural health care providers, may be used to reduce  Xb4costs recovered through interstate access charges.Qbnj {O"'ԍ See, e.g., Ameritech Reply at 34.Q Thus, a universal service support  XK4payment should not result in a per se decrease in interstate access charges unless it is specifically identified as replacing identified means of cost recovery that had previously been"6/0*&&aa"  X4afforded by access charges. Zj {Oy'ԍ See, e.g., Puerto Rico Tel. Comments at 19; TDS Reply at 7 (arguing that any offset for interstate access revenues to prevent double recovery must match support from the new mechanism that it is designed to replace).  ALLTEL asserts that, because the LTS and DEM weighting mechanisms are the only components of the proposed universal service plan that have direct relationship to access, other universal service support components are designed to offset cost of providing local service in high cost areas and, as such, do not require a corresponding  X4reduction in access rates.@j yO? 'ԍ ALLTEL Comments at 14.@  Xv4217. According to the Washington Commission, a possible approach to preventing double recovery is to adopt a presumption that any revenues obtained from the universal service fund would be offset against recovery claimed from access charges, and incumbent LECs would bear the burden of establishing to the regulatory authority that additional  X 4recovery was appropriate.N zj yOE'ԍ Washington Commission Comments at 9.N NARUC asserts that incumbent LECs should have the burden of demonstrating that double recovery will not occur through the combination of restructured  X 4access charges and universal service support. j {O'ԍ NARUC Comments at 8; but see TDS Comments at 28 (no reason to presume federal universal service support causes overrecovery unless it is subtracted from whatever interstate cost allocations are then in effect). TCI argues that incumbent LECs should not be permitted to adjust their price cap indices upwards to permit recovery of their contributions payments unless, at a minimum, they can show that they are actually funded by interstate  X 4switched access charges.: d j yO'ԍ TCI Reply at 30.:  Xy4218. Several incumbent LECs argue that, to the extent that LECs will have to contribute to any new universal service support mechanism, access charge reduction that would occur as a result of receiving universal service support above current levels must be  X44offset by the amount the LEC has to contribute to the universal service fund.4 j {O'ԍ See, e.g., BA/NYNEX Comments at 61; BellSouth Comments at 53, n.99; PacTel Comments at 49. According to PacTel, any exogenous downward adjustment to price cap indices is appropriate to reflect any additional revenues received from the new universal service fund, provided the adjustment is made only to the extent that there is a net revenue increase to the LEC, and the decrease is offset with an exogenous upward adjustment to reflect the extent to which the LEC is unable  X4to pass its own contributions through to its customers.@ j yO$'ԍ PacTel Comments at 49.@ BellSouth contends that unless the Commission establishes a surcharge recovery mechanism to recover LEC contributions to the"00*&&aa(" new universal service fund, then LECs must recover their contributions through an access  X4charge mechanism, such as a per line charge assessed to IXCs.Dj yOb'ԍ BellSouth Reply at 7, n.11D  X4219. Many of the parties commenting on the issue support the Commission's proposal to account for the receipt of explicit universal service revenues, including LTS, through an  X4exogenous cost adjustment to the price cap indices of incumbent LECs.Xj {O'ԍ See, e.g., ACTA Comments at 22; California Commission Comments at 1314; Internet Access Coalition Comments at 6; Sprint Comments at 54; Texas Commission Comments at 30; TCI Comments at 34, Reply at 29. TCI argues that incumbent LECs will double recover if price caps are not adjusted to recognize the  X_4elimination of LTS support obligations.Z_j {O 'ԍ TCI Reply at 2930; see also ALLTEL Comments at 14 (arguing that once LTS and DEM weighting and transitioned to the high cost universal service fund, there should be a corresponding dollarfordollar reduction in associated access rates). Many incumbent LECs, however, agree that the Commission must remove LTS payments from access charges and recommend that these costs be removed from the CCL charge to comply with the 1996 Act requirement that universal  X 4service support payments be explicit. j {O'ԍ See, e.g., U S West Comments at 53; see also Ameritech Comments at 5051, Reply at 34; BellSouth Comments at 68.  X 4220. Many commenters further propose that price cap LECs should be required to offset access charges by the amount of any increase in universal support payments above current universal service funding, and apply this reduction to the CCL or any new mechanism  X 4that replaces it.! . j {O'ԍ See, e.g., ACTA Comments at 22 (arguing that CCL charges should be reduced to the extent that recovery of LTS from other sources is not offset by a SLC cap reduction); California Commission Comments at 1314 (asserting that CCL charges should be reduced to the extent universal service funding is directed to support highcost loops); SWBT Comments at 6 (maintaining that CCL charges should be reduced by the amount of high cost support incumbent LECs receive from the new universal service fund).! Other commenters offer more specific proposals for applying adjustments to particular baskets or service categories in a particular order. For example, BellSouth recommends that universal service funds first be applied to reducing the CCL charge, then to the TIC service category in the trunking basket, and finally to the local switching service  XK4category in the traffic sensitive basket.FKj yO!'ԍ BellSouth Comments at 5354.F Alternatively, Sprint suggests that, if the Commission adopts Sprint's proposal to access reform by eliminating the CCL charge and reducing access rates to TELRICbased prices, the required reductions in the price cap index be applied first to the TIC and then to the difference between current rates and TELRICbased rates for traffic sensitive switching and transport. If the Commission does not eliminate the"1p0*&&aaw" CCL charge, however, Sprint proposes that incumbent LECs should be required to apply their incremental universal service revenues against the price cap indices for both the CCL charge and TIC in equal proportions until both elements are eliminated, and then against rates for  X4trafficsensitive local switching and transport.Cj yO4'ԍ Sprint Comments at 5455.C  X4221. Several nonprice cap LEC parties assert that there is no need to adjust interstate costs for rateofreturn ILECs to reflect universal service revenues because double recovery is  X_4unlikely._Xj {Oh 'ԍ See, e.g., Alaska Telephone Association Comments at 7; Western Alliance Comments at 20. For example, WITA asserts that there is no double recovery if the receipt of funds is based on a benchmark that is calculated on a national average revenue per line, including revenue generated from access services because it is only the cost of local service in  X 4excess of the benchmark that is funded through the USF mechanism.| j {O'ԍ WITA Comments at 9; see also Cathey, Hutton and Associates Comments at 4 (asserting that recovery will not be "double" but will only alter the amount of costs recovered from access rates versus the amount of costs recovered from the new universal service fund mechanism because access rates will be calculated into the benchmark revenues to be used to offset proxybased universal service costs); Western Alliance Comments at 21  {O'(arguing that, because the proxy models in Universal Service proceeding have deleted DEM weighting and LTS, there is no need to subtract the universal service support payments paid to rural LECs from the interstate costs used to develop rural LECs' access charges). Evans, et al. notes that, because the present system limits universal service payments to loop costs not included under the interstate gross allocator and makes the offsetting cost reduction to intrastate costs,  X 4any new universal service fund system should continue to offset intrastate costs.L . j {O'ԍ Evans, et al. Comments at 3.L The Minnesota Independent Coalition contends that either local service rates or universal service  X 4revenues must necessarily increase if access charges paid by IXCs decrease.Y j yO'ԍ Minnesota Independent Coalition Comments at 18.Y  X{4222. Several parties commented on the way in which nonprice cap LECs' interstate access charges should be adjusted to account for removal of implicit LTS subsidies and any increase in explicit universal service support revenues. Most commenters favoring a downward exogenous cost adjustment for price cap LECs' price cap indices also support a  X4similar downward adjustment to nonprice cap LECs' access rates.mP j {O "'ԍ See, e.g., PCIA Comments at 34; Sprint Comments at 54, n.23.m   USTA and several other nonprice cap LECs assert that rateofreturn companies should be permitted to use funding from any new universal service support mechanisms to offset existing explicit universal"20*&&aaw"  X4service requirements before reducing any Part 69 rates.j {Oy'ԍ See, e.g., GVNW Comments at 12; Puerto Rico Tel. Reply at 8; TDS Comments at 27; USTA Comments at 69. USTA argues that Part 69 rate  X4reductions, i.e., decreases in the level of this implicit support mechanism, should only take place to the extent that new universal service revenues exceed existing explicit universal  X4service requirements.l"j {O'ԍ See, e.g., Puerto Rico Tel. Reply at 8; USTA Comments at 69.l Roseville Tel. supports allowing nonprice cap LECs to continue to use universal service revenues to offset intrastate revenue shortfalls and, for any universal service support greater than the amount currently received (including LTS), use that to reduce  Xx4the CCL charge and then the SLC.Hxj yO 'ԍ Roseville Tel. Comments at 16.H Should the Commission reduce interstate costs to reflect revenues received from any new universal service support mechanism to the extent allocated to the interstate jurisdiction, however, Roseville Tel. cautions that intrastate rates will have to  X34be raised to address the shortfall that is currently covered by universal service support.H3Dj yO('ԍ Roseville Tel. Comments at 16.H  X 4223. According to NECA, the Commission should clarify that, absent changes in the separations rules, interstate revenue requirements would continue to be determined as they are  X 4today.> j yO\'ԍ NECA Comments at 14.> NECA further advocates that the Commission adopt Part 69 rule changes that treat new universal service amounts allocated to the interstate access elements, including DEM  X 4weighting and LTS, as revenue streams in the development of interstate access rates.A d j yO'ԍ NECA Comments at 1415.A NECA proposes that revenues from the new universal service fund be used to offset the pool common line revenue requirement, in a manner similar to the way the SLC offsets CCL  Xd4rates.>d j yO 'ԍ NECA Comments at 15.> In developing its trafficsensitive local switching rates, NECA would consider all revenue projected for its common line pooling members, as well as any proxybased amounts  X64for pooling companies that are allocated to interstate common line.6 j {Ok 'ԍ NECA Comments at 15; see also TDS Comments at 27 (arguing that LTS should continue to be treated as an interstate revenue stream for the NECA Common Line pool). In addition, NECA argues that the Commission should clarify that the perline rural transition highcost support amounts from the new universal service fund should continue to be treated as an intrastate expense adjustment recovered from the interstate jurisdiction to help keep intrastate rates"30*&&aa"  X4affordable. j {Oy'ԍ NECA Comments at 15; see also Evans, et al. Comments at 3 (asserting that any new universal service support system should continue to offset intrastate costs). NECA notes that this may require Part 36 rule changes to ensure matching of the expense adjustment with the level of federal universal service funding ultimately  X4adopted.D "j yO'ԍ NECA Comments at 15, n.46.D  X' &J:\ACCESS.REF\ORDER\VIDCOM.KLS& &J:\ACCESS.REF\ORDER\VIECOM.MGS& E. Part 69 Allocation Rules  Xv4224. In the NPRM, we solicited comment on whether it would be appropriate for incumbent price cap LECs to be relieved of complying with Subparts D and E of Part 69 of our rules, which address the allocation of investments and expenses to the access rate  X14elements.; 1j yO'ԍ NPRM at  294.;  X 4225. Many of the commenters recommend that the Commission eliminate Subparts D  X 4and E.  Bj yO'ԍ Ameritech Comments at 56; BA/NYNEX Comments at 60; BellSouth Comments at 88; GTE Comments at 4647. GTE argues that the allocation rules are outdated and unnecessarily inhibit the introduction of new services and technologies, thereby limiting incumbent LECs' ability to  X 4respond to competition.  j {O 'ԍ GTE Comments at 4647. See also BA/NYNEX Comments at 60 (elimination of sharing mechanism under marketbased approach will allow Commission to eliminate onerous cost allocation rules). GTE argues that the cost allocation rules, which are predicated on rate base regulation, serve no purpose in GTE's proposed access regime, which includes a simplification of price baskets and an elimination of sharing requirements and low end  Xy4adjustments.=y j yO'ԍ GTE Comments at 47.= BellSouth contends that it does not use the cost allocation rules for  Xb4ratemaking, and instead uses them only for internal purposes.b j yO'ԍ BellSouth Comments at 88 (although BellSouth uses cost allocation rules to develop exogenous cost data internally, this data can be calculated in other ways). BellSouth acknowledges that the cost allocations rules are necessary to complete the ARMIS reports, but contends that with a marketbased approach to access reform, neither the ARMIS reports nor the cost allocation  X4rules are necessary.Cj yO#'ԍ BellSouth Comments at 88.C  X4226. TCI recommends that, commensurate with its suggested hybrid"4l0*&&aaE" market/prescriptive approach to access reform, the Commission should retain the cost allocation rules until there is substantial competition on a servicebyservice basis in a defined geographic market. TCI urges the Commission to proceed cautiously in lifting this type of regulation, contending that premature regulatory flexibility could have anticompetitive  X4consequences due to the incumbent LECs' existing market power.^j {O'ԍ TCI Comments at 40. See also TCI Reply at 26.^ The Georgia Commission contends that the Commission should verify and analyze costs prior to moving to a transitional phase of marketbased or prescriptive approach. If the Part 69 rules aid in that  X_4process, the Georgia Commission argues that they should be retained.H_Zj yOj 'ԍ Georgia Commission Reply at 43H  X1' &J:\ACCESS.REF\ORDER\VIECOM.MGS& &J:\ACCESS.REF\ORDER\VIFCOM.MGS& F.Other Proposed Part 69 Changes  X 4227. The commenters generally agree with the majority of our specific proposals  X 4concerning Part 69 revisions.Z j {O'ԍ See, e.g., Ameritech Comments at 56; BellSouth Comments at 8890; Sprint Comments at 60; WorldCom comments at 94 (supporting Commission's proposal that clarifies that Part 69 access charge rules apply to incumbent LECs and not to CLECs). Sprint contends that the NPRM's proposed revisions are non X 4controversial and should be adopted.@ j yO'ԍ Sprint Comments at 60.@ Ameritech favors incorporating the previouslygranted  X 4waivers into Part 69.C j yO 'ԍ Ameritech Comments at 56.C  X4228. Some commenters expressed dissatisfaction with various parts of our Part 69 proposals. For example, BellSouth objects to the proposal that "Telephone Company" be defined as "incumbent LEC" as set out in section 252(h)(1) of the 1996 Act because it believes that Part 69 should apply to all LECs, not just incumbent LECs. BellSouth argues  X44that until forbearance determinations are made, all LECs remain subject to the Part 69 rules.C4, j yO'ԍ BellSouth Comments at 89.C BellSouth also opposes the proposal to codify the various Part 69 waivers previously granted, arguing that the waiver orders are sufficiently explanatory, the alternative rate structures are  X4too cumbersome to describe, and the end result would be more, rather than less, regulation.C j yO\"'ԍ BellSouth Comments at 90.C  X4229. GCI suggests modifications to our proposal to eliminate those sections connected to the equal access rate element. GCI contends that some LECs have not fully recovered equal access costs. GCI also notes that in some areas, such as the Alaska bush, where"5L 0*&&aa" facilitiesbased interexchange competition has been prohibited, many LECs have not yet implement equal access. To account for these concerns, GCI recommends that section 69.107, which allows carriers to establish a separate equal access rate element, be eliminated. GCI contends that sections 69.308 and 69.410 should be modified to provide that the costs be assigned to the Local Switching element. GCI also recommends that we retain both the reference to section 69.308 found in section 69.309, and the reference to section 69.410 found in section69.411. GCI contends that recovery through the Local Switching element is  X_4preferable to the general allocation that would otherwise be applicable.,Z_j {O'ԍ GCI Comments at 8. See also TCA Comments at 56 (equal access rate elements should not be removed because some small LECs who have not received a bona fide request to convert should be allowed same treatment of their equal access costs as other LECs).,  X14230. Ameritech suggests that Part 69 be changed to permit LECs the flexibility to  X 4introduce new switched access rate elements without the current barriers.G j yO'ԍ Ameritech Comments at 42, 56.G TCA and NECA recommend that rateofreturn LECs be allowed to introduce new services though the  X 4expedited process established for incumbent LECs in the Third Report and Order. zj yO'ԍ TCA Comments at 6; NECA Comments at 14 (referencing Access Reform Third Report and Order,  309310).  X 4231. In response to our request for additional revisions, many commenters suggested  X 4that the Part 69 rules be completely eliminated. j yO*'ԍ USTA Comments at 48; Ameritech Comments at 56; BA/NYNEX Comments at 60; BellSouth  yO'Comments at 88; GTE Comments at 4647; NECA Reply at 10; SNET Reply at 14. Many of the LECs argue that Part 69 rules are unnecessarily restrictive, inhibiting the LECs' abilities to respond to competition, impairing their ability to introduce new services, or failing to account for changes in  Xb4technology.b* j yO='ԍ GTE Comments at 47; SNET Comments at 1920; SNET Reply at 14; Internet Access Coalition Comments at 5; NECA Reply at 10; NARUC Comments at 5. USTA recommends as part of the marketbased Phase I approach, the Commission should replace the current Part 69 rules with streamlined rules that would address the recovery of the CCL, TIC, and depreciation reserve deficiency without codifying specific  X4rate elements. j {OP!'ԍ USTA Comments at 48. See also USTA Reply at 26 (simplification of price baskets and elimination of Part 69 rules will enhance LECs' economic efficiency). USTA also recommends that Part 69 should be retained for rateofreturn companies, but modified in a separate proceeding to reflect the recovery of the CCL and  X4TIC.>j yO|%'ԍ USTA Comments at 48.> NECA argues that Part 69 rules needlessly increase administrative expense.lj yO'ԍ NECA Reply at 10 (elimination or simplification of rules is sound administrative practice irrespective of level of competition)."6 0*&&aaw"Ԍ &J:\ACCESS.REF\ORDER\VIFCOM.MGS& "7 0*&&aaM"  X' q  I. A. 1. a.(1)(a) i) a) I. A. 1. a.(1)(a) i) a) $J:\ACCESS.REF\ORDER\APPC.ARG$ #XP P9XP#"* APPENDIX C Final Rules  AMENDMENTS TO THE CODE OF FEDERAL REGULATIONS  X4 \  X' PART 61 TARIFFS  X_41. The authority citation for Part 61 continues to read as follows: Authority: Secs. 1, 4(i), 4(j), 201205, and 403 of the Communications Act of 1934, as amended; 47 U.S.C. 151, 154(i), 154(j), 201205, and 403, unless otherwise noted.  X 42. Section 61.3 is amended by revising paragraph (f) to read as follows:  X ' w61.3XX` ` Definitions (#` * * * * *  XK4(f) Basket. Any class or category of tariffed service or charge: w X` ` (1) * * *(# * * * * *  X43. Section 61.42 is amended by revising paragraphs (d) and (e) as follows:  X}' H61.42` ` Price cap baskets and service categories.  XO4* * * * * Ð X84 (d) * * * X` ` (1) A basket for the common line interstate access elements as described in H69.115, 69.152, 69.154, and 69.157, and that portion of the interstate access element described in 69.153 that recovers common line interstate access revenues;(# X` ` (2) A basket for traffic sensitive switched interstate access elements;(# X` ` (3) A basket for trunking services as described in  69.110, 69.111, 69.112, 69.114, 69.125(b), and 69.155, and that portion of the interstate access element"R%80*&&aa&" described in 69.153 that recovers residual interconnection charge revenues;(# X* * *(# X` ` (6) A basket for the marketing expenses described in 69.156, including those recovered through End User Common Line charges and Presubscribed Interexchange Carrier charges.(# X` ` (e)(1) The traffic sensitive switched interstate access basket shall contain such services as the Commission shall permit or require, including the following service categories:(# ` ` X (i) Local switching as described in 69.106(f);(# XX` ` (ii) Information, as described in 69.109;(#` XX` ` (iii) Data base access services;(#` XX` ` (iv) Billing name and address, as described in 69.128 of this chapter;(#` XX` ` X (v) Local switching trunk ports, as described in 69.106(f)(1);(# XX` `  (vi) Signalling transfer point port termination, as described in 69.125(c).(#` X` ` (2) * * *(# XX` `  (vi) Interconnection charge, as recovered in 69.153 and69.155 of this chapter.(#` * * * * *  X 44. Section 61.45 is amended by revising paragraph (b), revising paragraph (c) and redesignating it as subparagraph (c)(1), adding new subparagraph (c)(2), adding subparagraph (d)(1)(ix), and adding paragraphs (i), (j), (k), and (l) to read as follows: " 90*&&aa"Ԍ X'  61.45` ` Adjustments to the PCI for local exchange carriers.  X'  X4 * * * * * (b) Adjustments to local exchange carrier PCIs for the baskets designated in 61.42(d)(2), (3), (4), (5), and (6) shall be made pursuant to the formula set forth in 61.44(b), and as further explained in 61.44(e), (f), (g), and (h). X` ` (1) Notwithstanding the value of X defined in 61.44(b), the X value applicable to the baskets specified in 61.42(d)(2), (3), and (6) shall be 4.0%, or 4.7%, or 5.3%, as the carrier elects.(# * * * * * X` ` (c)(1) Subject to paragraphs (c)(2) and (e) of this section, adjustments to local exchange carrier PCIs for the basket designated in 61.42(d)(1) shall be made pursuant to the following formula: (# * * * X` ` (2) The formula set forth in paragraph (c)(1) shall be used by a local exchange carrier subject to price cap regulation only if that carrier is imposing a carrier common line charge pursuant to 69.154 of this chapter. Otherwise, adjustments to local exchange carrier PCIs for the basket designated in 61.42(d)(1) of this chapter shall be made pursuant to the formula set forth in 61.44(b), and paragraphs (i) and (j) of this section, and as further explained in 61.44(e), (f), (g), and (h).(# X(d) * * *(# ` ` (1) * * * ` `  (ix) the completion of amortization of equal access expenses.(# * * * * * X` ` (i)(1) Notwithstanding the provisions of paragraphs (b) and (c), and subject to the limitations of paragraph (j), price cap local exchange carriers that are recovering interconnection charge revenues through perminute rates pursuant to 69.124 or 69.155 shall target, to the extent necessary to eliminate the recovery of any residual interconnection charge revenues through perminute rates, any PCI reductions associated with the baskets designated in 61.42(d)(1) and (2) that result from the application of the formula in 61.44(b), as further explained in 61.44(e), (f), (g),"Q%:0*&&aae#" and (h), to the PCI for the basket designated in 61.42(d)(3), with no adjustment being made to the PCIs for the baskets designated in 61.42(d)(1) and (2) as a result of the application of the formula in 61.44(b). These reductions are to be made after the adjustment is made to the PCI for the basket designated in 61.42(d)(3) resulting from the application of the formula in 61.44(b), as further explained in 61.44(e), (f), (g), and (h).(# X` ` (2) Notwithstanding the provisions of paragraphs (b) and (c), and subject to the limitations of paragraph (j), price cap local exchange carriers that are recovering interconnection charge revenues through perminute rates pursuant to 69.155 shall target, to the extent necessary to eliminate the recovery of any residual interconnection charge revenues through perminute rates, any PCI reductions associated with the basket designated in 61.42(d)(6) that result from the application of the formula in 61.44(b), as further explained in 61.44(e), (f), (g), and (h), to the PCI for the basket designated in 61.42(d)(3), with no adjustment being made to the PCIs for the basket designated in 61.42(d)(6) as a result of the application of the formula in 61.44(b). This reduction is to be made after any adjustment made pursuant to subparagraph (i)(1).(# X` ` (3) Through December 31, 1997, the reduction in the PCI for the basket designated in 61.42(d)(3) that results from subparagraph (i)(1) shall be determined by dividing the sum of the dollar effects of the PCI reductions that would have applied to the baskets designated in 61.42(d)(1) and (d)(2) except for the provisions of subparagraph (i)(1) by the dollar amount associated with the PCI for the basket designated in 61.42(d)(3), and multiplying the PCI for the basket designated in 61.42(d)(3) by one minus the resulting ratio.(# X` ` (4) Effective January 1, 1998, the reduction in the PCI for the basket designated in 61.42(d)(3) that results from subparagraphs (i)(1) (and (i)(2) shall be determined by dividing the sum of the dollar effects of the PCI reductions that would have applied to the baskets designated in 61.42(d)(1), (d)(2), and (d)(6), except for the provisions of subparagraphs (i)(1) and (i)(2), by the dollar amount associated with the PCI for the basket designated in 61.42(d)(3), and multiplying the PCI for the basket designated in 61.42(d)(3) by one minus the resulting ratio.(# (j) In determining the extent of the targeting that shall occur pursuant to subparagraphs (i)(1) and (i)(2), local exchange carriers shall compute their anticipated residual interconnection charge amount by excluding revenues that are expected to be reallocated to costcausative facilitiesbased charges in the future. To determine interconnection charge amounts so excluded in connection with the July 1, 1997 tariff filings, the local exchange carriers listed below shall use as an estimate of the residual interconnection charge revenues the specified residual interconnection charge percentage: NYNEX, 77.63 percent; BellSouth,"Q%;0*&&aae#" 56.93 percent; US West, 59.14 percent; Bell Atlantic, 63.96 percent; Southwestern Bell Telephone, 69.11 percent; and Pacific Bell and Nevada Bell, 53.52 percent. Each remaining price cap local exchange carrier shall estimate a residual interconnection charge in an amount equal to 55 percent of its current interconnection charge revenues. For subsequent tariff filings in which the PCI reductions are to be targeted to the interconnection charge, these initial estimates shall be adjusted to reflect the actual amounts that have or will be reallocated. If the use of these estimates results in more PCI reductions being targeted to the interconnection charge than required to eliminate the perminute interconnection charge, the local exchange carrier shall make the necessary exogenous adjustments to reverse the effects of the excess targeting. (k) The calculation of the PCI for the basket designated in 61.42(d)(3) shall include any residual interconnection charge revenues recovered pursuant to 69.153 and 69.155. (l) The calculation of the PCI for the basket designated in 61.42(d)(6) shall include any marketing expense revenues recovered pursuant to 69.153 and 69.156.  Xb45. Section 61.46 is amended by revising paragraph (d) and redesignating it as subparagraph (d)(1), adding new subparagraph (d)(2), revising paragraph (e) and redesignating it as subparagraph (e)(1), adding new subparagraph (e)(2), and adding paragraphs (g) and (h) as follows:  X' v 61.46 Adjustments to the API * * * * * X` ` (d)(1) Subject to subparagraph (d)(2) of this section, and in connection with any price cap tariff proposing changes to rates for services in the basket designated inv 61.42(d)(1), the maximum allowable carrier common line (CCL) charges shall be computed pursuant to the following methodology:(#  X hCCLMOU = CLMOU * (1 + % change in CL PCI) (EUCLMOU + PICCMOU) * 1 / (1 +(g/2)) where  X!hCCLMOU = the sum of each of the proposed Carrier Common Line rates multiplied by its corresponding base period Carrier Common Line minutes of use, divided by the sum of all types of base period Carrier Common Line minutes of use,(# "Q%<0*&&aa#"Ԍ XhCLMOU = the sum of each of the existing maximum allowable Carrier Common Line rates multiplied by its corresponding base period Carrier Common Line minutes of use, plus each existing maximum allowable End User Common Line (EUCL) rate multiplied by its corresponding base period lines, plus the common line portion of each existing maximum allowable Presubscribed Interexchange Carrier Charge (PICC) multiplied by its corresponding base period lines, divided by the sum of all types of base period Carrier Common Line minutes of use,(#  X1hEUCLMOU = maximum allowable End User Common Line rates multiplied by base period lines, and divided by the sum of all types of base period Carrier Common Line minutes of use, (#  X hPICCMOU = the common line portion of maximum allowable Presubscribed Interexchange Carrier charge rates multiplied by base period lines, and divided by the sum of all types of base period Carrier Common Line minutes of use, and(#  Xb4g =` ` X the ratio of minutes of use per access line during the base period to  XK4minutes of use per access line during the previous base period, minus 1. (# X` ` (2) The formula set forth in subparagraph (d)(1) of this section shall be used by a local exchange carrier subject to price cap regulation only if that carrier is imposing a perminute carrier common line charge pursuant to 69.154 of this chapter. Otherwise, adjustments to local exchange carrier APIs for the basket designated in 61.42(d)(1) of this chapter shall be made pursuant to the formula set forth in paragraph (a) of this section. (# X` ` (e)(1) In addition, for the purposes of paragraph (d), "Existing Carrier Common Line Rates" shall include existing originating premium, originating nonpremium, terminating premium and terminating nonpremium rates; and "End User Common  X7hLine Rates" used to calculate the CLMOU and the EUCLMOU factors shall include, but not be limited to, Residential and Single Line Business rates, Centrex rates, and the Special Access surcharge.(# X` ` (2) For purposes of paragraph (d), "each existing Presubscribed Interexchange Carrier Charge" shall include all the charges specified in 69.153 of this chapter.(# * * * * * (g) The calculation of the API for the basket designated in 61.42(d)(3) shall include any residual interconnection charge revenues recovered pursuant to 69.153 and 69.155."Q%=0*&&aa5$"Ԍ(h) The calculation of the API for the basket designated in 61.42(d)(6) shall include any marketing expense revenues recovered pursuant to 69.153 and 69.156.  X46. Section 61.47 is amended by adding paragraph (i) and (j), and subparagraph (g)(7) as follows:  X_' v61.47` ` Adjustments to the SBI; pricing bands. * * * * * X` ` (g)(7) The initial level of the local switch trunk ports service category designated in 61.42(e)(1)(v) shall be established to include those costs identifiedv pursuant to 69.106(f)(1). This level shall be assigned a value of 100 and, thereafter must be adjusted as provided in paragraph (a) of this section, subject to the banding restrictions of paragraph (e).(# * * * * * X` ` (i)(1) Through December 31, 1997, notwithstanding the requirements of paragraph (a), if a local exchange carrier is recovering interconnection charge revenues through perminute rates pursuant to 69.124 or 69.155, any reductions to the PCI for the basket designated in 61.42(d)(3) resulting from the application of the provisions of 61.45(b) and (i)(1) shall be directed to the SBI of the service category designated in 61.42(e)(2)(vi).(# X` ` (2) Effective January 1, 1998, notwithstanding the requirements of paragraph (a), if a local exchange carrier is recovering interconnection charge revenues through perminute rates pursuant to 69.155, any reductions to the PCI for the basket designated in 61.42(d)(3) resulting from the application of the provisions of 61.45(b), (i)(1), and (i)(2) shall be directed to the SBI of the service category designated in 61.42(e)(2)(vi).(# X` ` (3) Through December 31, 1997, the SBI reduction required by subparagraph (i)(1) shall be determined by dividing the sum of the dollar amount of any PCI reduction required by 61.45(i)(1) and from the application of 61.45(b) to the basket described in 61.42(d)(3) by the dollar amount associated with the SBI for the service category designated in 61.42(e)(2)(vi), and multiplying the SBI for the service category designated in 61.42(e)(2)(vi) by one minus the resulting ratio.(# X` ` (4) Effective January 1, 1998, the SBI reduction required by subparagraph (i)(2) shall be determined by dividing the sum of the dollar amount of any PCI"Q%>0*&&aae#" reduction required by 61.45(i)(1) and (i)(2), and from the application of 61.45(b) to the basket described in 61.42(d)(3) by the dollar amount associated with the SBI for the service category designated in 61.42(e)(2)(vi), and multiplying the SBI for the service category designated in 61.42(e)(2)(vi) by one minus the resulting ratio.(# (j) The calculation of the SBI for the service category designated in 61.42(e)(2)(vi) shall include any residual interconnection charge revenues recovered pursuant to 69.153 and 69.155.  X 47. Section 61.48 is amended by adding paragraph (k) to read as follows:  X ' x61.48` ` Transition rules for price cap formula calculations. (#` * * * * *  X4(k) Marketing expenses. In the January 1, 1998 price cap tariff filing, local exchange carriers shall establish the marketing expense basket designated in 61.42(d)(6) with an initialx PCI and API level of 100. The initial value of 100 for the PCI and API for marketing expenses shall correspond to the marketing expenses described in 69.156(a).  X' PART 69 ACCESS CHARGES  X48. The authority citation for part 69 continues to read as follows: Authority: 47 U.S.C. 154(i) and (j), 201, 202, 203, 205, 218, 254, and 403.  X~49. Section 69.1(c) is revised to read as follows:  XP' v69.1 Application of access charges. * * * * * (c) The following provisions of this part shall apply to telephone companies subject to price cap regulation only to the extent that application of such provisions is necessary tov develop the nationwide average carrier common line charge, for purposes of reporting pursuant to 43.21 and 43.22 of this chapter, and for computing initial charges for new rate elements:  69.3(f), 69.106(b), 69.106(f), 69.106(g), 69.109(b), 69.110(d), 69.111(c), 69.111(g)(1), 69.111(l), 69.112(d), 69.114(b), 69.114(d), 69.125(b)(2), 69.301 through 69.310, and 69.401 through 69.412. The computation of rates pursuant to these provisions by telephone companies subject to price cap regulation shall be governed by the price cap rules"S%?0*&&aae#" set forth in part 61 of this chapter and other applicable Commission Rules and orders.  X4 10. Section 69.2 is amended by revising paragraph (hh) to read as follows:  X' 69.2XX` ` Definitions. (#` (hh) "Telephone company" or "local exchange carrier" as used in this Part means an incumbent local exchange carrier as defined in section 251(h)(1) of the 1934 Act as amended by the 1996 Act.  X 4 11. Section 69.4 is amended by deleting paragraphs (d) and (f), and subparagraph (b)(1), by revising paragraph (b), and by adding paragraph (h) as follows:  X ' v69.4` ` Charges to be filed. * * * * * (b) Except as provided in 69.4(c), (e), and (h), and in 69.118, the carrier's carrier charges for access service filed with this Commission shall include charges for each of thev following elements: ` ` (1) [Deleted]. * * * * * (h) In addition to the charges specified in paragraph (b), the carrier's carrier charges for access service filed with this Commission by price cap local exchange carriers shall include charges for each of the following elements: ` ` (1) presubscribed interexchange carrier; ` ` (2) perminute residual interconnection; ` ` (3) dedicated local switching trunk port; ` ` (4) shared local switching trunk port; ` ` (5) dedicated tandem switching trunk port; ` ` (6) line port costs in excess of basic, analog service; and"Q%@0*&&aae#"ԌX` ` (7) multiplexers associated with tandem switching.(#  X4 12. Section 69.103 is deleted.  X4 13. Section69.104 is renamed as follows. Paragraphs (a) and (e) are revised as follows:  X_' 69.104` ` End user common line for nonprice cap incumbent local exchange  XH'carriers. (a) This section is applicable only to incumbent local exchange carriers that are not subject to price cap regulation as that term is defined in 61.3(x) of this Chapter. A charge that is expressed in dollars and cents per line per month shall be assessed upon end users that subscribe to local exchange telephone service or Centrex service to the extent they do not pay carrier common line charges. A charge that is expressed in dollars and cents per line per month shall be assessed upon providers of public telephones. Such charge shall be assessed for each line between the premises of an end user, or public telephone location, and a Class 5 office that is or may be used for local exchange service transmissions. * * * * * (e) The monthly charge for each residential and single line business local exchange service subscriber shall be the charge computed in accordance with 69.104(c), or $3.50, whichever is lower. * * * * *  X|4 14. Section 69.105 is renamed as follows. Subparagraphs (b)(7) and (b)(8) are deleted, and paragraph (a) is revised to read as follows:  X7'  69.105 Carrier common line for nonprice cap local exchange carriers. (a) This section is applicable only to local exchange carriers that are not subject to price cap regulation as that term is defined in 61.3(x) of this Chapter. A charge that is expressed in dollars and cents per line per access minute of use shall be assessed upon all interexchange carriers that use local exchange common line facilities for the provision of interstate or foreign telecommunications services, except that the charge shall not be assessed upon interexchange carriers to the extent they resell MTS or MTStype services of other common carriers (OCCs). * * * * *"Q%A0*&&aae#"Ԍ  X415. Section 69.106 is amended by revising paragraphs (a) and (b), and by adding paragraphs (f) and (g) as follows:  X' 69.106 Local switching. (a) Except as provided in  69.118, charges that are expressed in dollars and cents per access minute of use shall be assessed by local exchange carriers that are not subject to price cap regulation upon all interexchange carriers that use local exchange switching facilities for  X14the provision of interstate or foreign services. (b) The per minute charge described in paragraph (a) shall be computed by dividing the projected annual revenue requirement for the Local Switching element by the projected annual access minutes of use for all interstate or foreign services that use local exchange switching facilities. * * * * * (f) Except as provided in 69.118, price cap local exchange carriers shall establish rate elements for local switching as follows: X` ` (1) Price cap local exchange carriers shall separate from the projected annual revenues for the Local Switching element those costs projected to be incurred for ports (including cards and DS1/voicegrade multiplexers required to access end offices equipped with analog switches) on the trunk side of the local switch. Price cap local exchange carriers shall further identify costs incurred for dedicated trunk ports separately from costs incurred for shared trunk ports.(# XX` `  (i) Price cap local exchange carriers shall recover dedicated trunk port costs identified pursuant to subparagraph (f)(1) through flatrated charges expressed in dollars and cents per trunk port and assessed upon the purchaser of the dedicated trunk terminating at the port.(#` XX` `  (ii) Price cap local exchange carriers shall recover shared trunk port costs identified pursuant to subparagraph (f)(1) through charges assessed upon purchasers of shared transport. This charge shall be expressed in dollars and cents per access minute of use. The charge shall be computed by dividing the projected costs of the shared ports by the historical annual access minutes of use calculated for purposes of recovery of common transport costs in 69.111(c).(#` X` ` (2) Price cap local exchange carriers shall recover the projected annual"Q%B0*&&aae#" revenues for the Local Switching element that are not recovered in subparagraph (1) through charges that are expressed in dollars and cents per access minute of use and assessed upon all interexchange carriers that use local exchange switching facilities for the provision of interstate or foreign services. The maximum charge shall be computed by dividing the projected remainder of the annual revenues for the Local Switching element by the historical annual access minutes of use for all interstate or foreign services that use local exchange switching facilities.(# (g) On or after July 1, 1998, a price cap local exchange carrier may recover signalling costs associated with call setup through a call setup charge imposed upon all interstate interexchange carriers that use that local exchange carrier's facilities to originate or terminate interstate interexchange or foreign services. This charge must be expressed as dollars and cents per call attempt and may be assessed on originating calls handed off to the interexchange carrier's point of presence and on terminating calls received from an interexchange carrier's point of presence, whether or not that call is completed at the called location. Price cap local exchange carriers may not recover through this charge any costs recovered through other rate elements.  XK416. Section 69.107 is deleted.  X417. Section 69.111 is amended by deleting paragraphs (b) and (f), revising paragraphs (a), (c), (d), (e), and (g), and adding paragraph (l) to read as follows:  X' 69.111 Tandem-Switched Transport and Tandem Charge.  X4 X` ` (a)(1) Through June 30, 1998, except as provided in paragraph (l), below, tandem-switched transport shall consist of two rate elements, a transmission charge and a tandem switching charge.(# X` ` (2) Beginning July 1, 1998, except as provided in paragraph (l), below, tandem-switched transport shall consist of three rate elements as follows:(# XX` `  (i) A perminute charge for transport of traffic over common transport facilities between the incumbent local exchange carrier's end office and the tandem switching office. This charge shall be expressed in dollars and cents per access minute of use and shall be assessed upon all purchasers of common transport facilities between the local exchange carrier's end office and the tandem switching office.(#` XX` `  (ii) A perminute tandem switching charge. This tandem switching charge shall be set in accordance with paragraph (g), excluding multiplexer and"Q%C0*&&aae#" dedicated port costs recovered in accordance with paragraph (l), and shall be assessed upon all interexchange carriers and other persons that use incumbent local exchange carrier tandem switching facilities.(#` XX` `  (iii) A flatrated charge for transport of traffic over dedicated transport facilities between the serving wire center and the tandem switching office. This charge shall be assessed as a charge for dedicated transport facilities provisioned between the serving wire center and the tandem switching office in accordance with 69.112 of this part.(#`  (b) [Deleted.] X` ` (c)(1) Through June 30, 1998, tandem-switched transport transmission charges generally shall be presumed reasonable if the telephone company bases the charges on a weighted per-minute equivalent of direct-trunked transport DS1 and DS3 rates that reflects the relative number of DS1 and DS3 circuits used in the tandem to end office links (or a surrogate based on the proportion of copper and fiber facilities in the interoffice network), calculated using the total actual voicegrade minutes of use, geographically averaged on a studyareawide basis, that the incumbent local exchange carrier experiences based on the prior year's annual use. Tandem-switched transport transmission charges that are not presumed reasonable generally shall be suspended and investigated absent a substantial cause showing by the telephone company.(# XX` `  (2) Beginning July 1, 1998:(#` ` `  (i) Except in study areas where the incumbent local exchange carrier has implemented density pricing zones as described in section 69.124, perminute common transport charges described in subparagraph (a)(2)(i) shall be presumed reasonable if the incumbent local exchange carrier bases the charges on a weighted per-minute equivalent of direct-trunked transport DS1 and DS3 rates that reflects the relative number of DS1 and DS3 circuits used in the tandem to end office links (or a surrogate based on the proportion of copper and fiber facilities in the interoffice network), calculated using the total actual voicegrade minutes of use, geographically averaged on a studyareawide basis, that the incumbent local exchange carrier experiences based on the prior year's annual use. Tandem-switched transport transmission charges that are not presumed reasonable shall be suspended and investigated absent a substantial cause showing by the incumbent local exchange carrier.(# XX` ` X (ii) In study areas where the incumbent local exchange carrier has implemented density pricing zones as described in section 69.124,"Q%D0*&&aae#" perminute common transport charges described in subparagraph (a)(2)(i) shall be presumed reasonable if the incumbent local exchange carrier bases the charges on a weighted per-minute equivalent of direct-trunked transport DS1 and DS3 rates that reflects the relative number of DS1 and DS3 circuits used in the tandem to end office links (or a surrogate based on the proportion of copper and fiber facilities in the interoffice network), calculated using the total actual voicegrade minutes of use, averaged on a zonewide basis, that the incumbent local exchange carrier experiences based on the prior year's annual use. Tandem-switched transport transmission charges that are not presumed reasonable shall be suspended and investigated absent a substantial cause showing by the incumbent local exchange carrier.(# X` ` (d)(1) Through June 30, 1998, the tandem-switched transport transmission charges may be distance-sensitive. Distance shall be measured as airline distance between the serving wire center and the end office, unless the customer has ordered tandemswitched transport between the tandem office and the end office, in which case distance shall be measured as airline distance between the tandem office and the end office.(# X` ` (2) Beginning July 1, 1998, the perminute charge for transport of traffic over common transport facilities described in subparagraph (a)(2)(i) may be distancesensitive. Distance shall be measured as airline distance between the tandem switching office and the end office.(# X` ` (e)(1) Through June 30, 1998, if the telephone company employs distance-sensitive rates:(# XX` `  (i) A distance-sensitive component shall be assessed for use of the transmission facilities, including intermediate transmission circuit equipment between the end points of the interoffice circuit; and(#` XX` `  (ii) A nondistance-sensitive component shall be assessed for use of the circuit equipment at the ends of the interoffice transmission links.(#` X` ` (2) Beginning July 1, 1998, if the telephone company employs distancesensitive rates for transport of traffic over common transport facilities, as described in subparagraph (a)(2)(i):(# XX` `  (i) A distance-sensitive component shall be assessed for use of the common transport facilities, including intermediate transmission circuit equipment between the end office and tandem switching office; and(#` "Q%E0*&&aae#"ԌXX` `  (ii) A nondistance-sensitive component shall be assessed for use of the circuit equipment at the ends of the interoffice transmission links.(#` (f) [Deleted.] X` ` (g)(1) The tandem switching charge imposed pursuant to subparagraph (a)(1) or (a)(2)(ii), as applicable, shall be set to recover twenty percent of the annual part 69 interstate tandem revenue requirement plus one third of the portion of the tandem switching revenue requirement being recovered through the interconnection charge recovered by 69.124, 69.153, and 69.155, excluding multiplexer and dedicated port costs recovered in accordance with paragraph (l).(# X` ` (2) Beginning January 1, 1999, the tandem switching charge imposed pursuant to subparagraph (a)(2)(ii) shall be set to recover the amount prescribed in subparagraph (g)(1) plus one half of the remaining portion of the tandem switching revenue requirement then being recovered through the interconnection charge recovered by 69.124, 69.153, and 69.155, excluding multiplexer and dedicated port costs recovered in accordance with paragraph (l).(# X` ` (3) Beginning January 1, 2000, the tandem switching charge imposed pursuant to subparagraph (a)(2)(ii) shall be set to recover the entire interstate tandem switching revenue requirement, including that portion formerly recovered through the interconnection charge recovered in 69.124, 69.153, and 69.155, and excluding multiplexer and dedicated port costs recovered in accordance with paragraph (l).(# X` ` (4) A local exchange carrier that is subject to price cap regulation as that term is defined in 61.3(x) of this Chapter shall calculate its tandem switching revenue requirement as used in this paragraph by dividing the tandem switching revenue requirement that was included in the original interconnection charge by the original interconnection charge, and then multiplying this result by the annual revenues recovered through the interconnection charge, described in 69.124, as of June 30, 1997.(# * * * * * (l) In addition to the charges described above, price cap local exchange carriers shall establish separate charges for multiplexers and dedicated trunk ports used in conjunction with the tandem switch as follows: X` ` (1) Local exchange carriers must establish a trafficsensitive charge for DS3/DS1 multiplexers used on the end office side of the tandem switch, assessed on purchasers of common transport to the tandem switch. This charge must be expressed"Q%F0*&&aae#" in dollars and cents per access minute of use. The maximum charge shall be calculated by dividing the total costs of the multiplexers on the end officeside of the tandem switch by the serving wire center side of the tandem switch by the projected annual access minutes of use calculated for purposes of recovery of common transport costs in paragraph (c), above. A similar charge shall be assessed for DS1/voicegrade multiplexing provided on the endoffice side of analog tandem switches.(# XX` `  (2)(i) Local exchange carriers must establish a flatrated charge for dedicated DS3/DS1 multiplexing on the serving wire center side of the tandem switch provided in conjunction with dedicated DS3 transport service from the serving wire center to the tandem switch. This charge shall be assessed on interexchange carriers purchasing tandemswitched transport in proportion to the number of DS3 trunks provisioned for that interexchange carrier between the serving wire center and the tandemswitch.(#` XX` `  (ii) Local exchange carriers must establish a flatrated charge for dedicated DS1/voicegrade multiplexing provided on the serving wire center side of analog tandem switches. This charge may be assessed on interexchange carriers purchasing tandemswitched transport in proportion to the interexchange carrier's transport capacity on the serving wire center side of the tandem.(#` X` ` (3) Price cap local exchange carriers may recover the costs of dedicated trunk ports on the serving wire center side of the tandem switch only through flatrated charges expressed in dollars and cents per trunk port and assessed upon the purchaser of the dedicated trunk terminating at the port.(#  X|418. Section 69.122 is deleted.  XN419. Section 69.123 is amended by adding paragraph (f) to read as follows:  X ' v69.123` ` Density pricing zones for special access and switched transport. (#` * * * * * X` ` (f)(1) An incumbent local exchange carrier that establishes density pricing zones under this section must reallocate additional amounts recovered under thev interconnection charge prescribed in section 69.124 to facilitiesbased transport rates, reflecting the higher costs of serving lowerdensity areas. Each incumbent local exchange carrier must reallocate costs from the interconnection charge each time it increases the differential between prices in density zones two and one or between three"Q%G0*&&aae#" and one.(# X` ` (2) Any incumbent local exchange carrier that has already deaveraged its rates on the date these rules become effective must reallocate an amount equivalent to that described in subparagraph (1) from the interconnection charge prescribed in section 69.124 to its transport services.(# X` ` (3) Price cap local exchange carriers shall reassign to directtrunked transport and tandemswitched transport categories or subcategories interconnection charge amounts reallocated under subparagraph (1) or (2) in a manner that reflects the way density pricing zones are being implemented by the incumbent local exchange carrier.(#  X 420. Section 69.124 is amended by revising paragraph (a) and subparagraph (b)(1), and by deleting subparagraph (b)(2) to read as follows:  X '  69.124` ` Interconnection charge. (#` (a) For telephone companies not subject to price cap regulation, an interconnection charge expressed in dollars and cents per access minute shall be assessed upon all interexchange carriers and upon all other persons using the telephone company local transport network. X` ` (b)(1) For telephone companies not subject to price cap regulation, the interconnection charge shall be computed by subtracting entrance facilities, tandemswitched transport, directtrunked transport, and dedicated signalling transport revenues from the Part 69 transport revenue requirement, and dividing by the total interstate local transport minutes.(# X` ` (2) [Deleted](# X(c) [Deleted](#  X 421. Section 69.125 is amended by revising paragraph (a) to read as follows:  X'  69.125` ` Dedicated Signalling Transport. (a) Dedicated signalling transport shall consist of two elements, a signalling link charge and a signalling transfer point (STP) port termination charge. * * * * * "Q%H0*&&aae#"Ԍ X422. Section 69.126 is revised as follows:  X' 69.126` ` Nonrecurring charges. As of the effective date of the First Report and Order in Access Charge Reform, CC Docket No. 96262, FCC 97158, 12 FCC Rcd ___ (1997), incumbent local exchange carriers shall not assess any nonrecurring charges for service connection when an interexchange carrier converts trunks from tandem-switched transport to direct-trunked transport or when an interexchange carrier orders the disconnection of overprovisioned trunks, until six months after the effective date of the tariffs eliminating the unitary pricing option for tandemswitched transport.  X 423. New Subpart C is added beginning with section 69.151:  X ' SUBPART C COMPUTATION OF CHARGES FOR PRICE CAP LOCAL  X 'EXCHANGE CARRIERS  Xy' 69.151` ` Applicability. This subpart shall apply only to telephone companies subject to the price cap regulations set forth in Part 61 of this chapter.  X'  69.152` ` End user common line for price cap local exchange carriers. (a) A charge that is expressed in dollars and cents per line per month shall be assessed upon end users that subscribe to local exchange telephone service or Centrex service to the extent they do not pay carrier common line charges. A charge that is expressed in dollars and cents per line per month shall be assessed upon providers of public telephones. Such charge shall be assessed for each line between the premises of an end user, or public telephone location, and a Class 5 office that is or may be used for local exchange service transmissions. (b) Except as provided in paragraphs (d)-(i), the maximum single line rate or charge shall be computed: X` ` (1) by dividing one-twelfth of the projected annual revenue requirement for the End User Common Line element by the projected average number of local exchange service subscriber lines in use during such annual period, only so long as a perminute carrier common line charge is assessed or the multiline PICC defined in 69.153 recovers common line revenues.(# X` ` (2) by dividing onetwelfth of the projected annual revenues permitted for the"Q%I0*&&aae#" common line basket under the Commission's price cap rules, as set forth in Part 61 of this chapter, by the projected average number of local exchange service subscriber lines in use during such annual period, if no perminute carrier common line charge is assessed and the multiline PICC defined in 69.153 does not recover any common line revenues.(# X` ` (3) Provided, however, that the charge for each local exchange service subscriber line shall not exceed $9.00 as adjusted by the inflation factor computed under paragraph (k).(# (c) The charge for each subscriber line associated with a public telephone shall be equal to the monthly charge computed in accordance with paragraph (b). X` ` (d)(1) Through December 31, 1997, the monthly charge for each primary residential or single line business local exchange service subscriber line shall be the charge computed in accordance with paragraph (b), or $3.50, whichever is lower.(# X` ` (2) Beginning January 1, 1998, the maximum monthly charge for each primary residential or single line business local exchange service subscriber line shall be the charge computed in accordance with paragraph (b), or $3.50, whichever is lower.(# X` ` (e)(1) Through December 31, 1997, the monthly charge for each nonprimary residential local exchange service subscriber line shall be the charge computed in accordance with paragraph (b), or $3.50, whichever is lower.(# X` ` (2) Beginning January 1, 1998, the maximum monthly charge for each nonprimary residential local exchange service subscriber line shall be the lower of:(# ` `  (i) the maximum charge computed in accordance with paragraph (b); or XX` `  (ii) $5.00. On January 1, 1999, this amount shall be adjusted by the inflation factor computed under paragraph (k), and increased by $1.00. On July 1, 2000, and in each subsequent year, this amount shall be adjusted by the inflation factor computed under paragraph (k), and increased by $1.00.(#` X` ` (3) Where the local exchange carrier provides a residential line to another carrier so that the other carrier may resell that residential line to a residence that already receives a primary residential line, the local exchange carrier may collect the nonprimary residential charge described in paragraph (e) from the other carrier.(# (f) Except as provided in paragraphs (n) and (o), the charge for each primary residential local exchange service subscriber line shall be the same as the charge for each"Q%J0*&&aae#" single line business local exchange service subscriber line. (g) A line shall be deemed to be a residential subscriber line if the subscriber pays a rate for such line that is described as a residential rate in the local exchange service tariff. (h) [reserved] (i) A line shall be deemed to be a single line business subscriber line if the subscriber pays a rate that is not described as a residential rate in the local exchange service tariff and does not obtain more than one such line from a particular telephone company.  X 4 (j) No charge shall be assessed for any WATS access line. X` ` (k)(1) On January 1, 1999:(# XX` `  (i) The ceiling for multiline business subscriber lines under subparagraph (b)(3) will be adjusted to reflect inflation as measured by the change in GDPPI for the 18 months ending September 30, 1998.(#` XX` `  (ii) The ceiling for nonprimary residential subscriber lines under subparagraph (e)(2)(ii) will be adjusted to reflect inflation as measured by the change in GDPPI for the 12 months ending September 30, 1998.(#` X` ` (2) On July 1, 2000, the ceiling for multiline business subscriber lines and nonprimary residential subscriber lines will be adjusted to reflect inflation as measured by the change in GDPPI for the 18 months ending on March 31, 2000.(# X` ` (3) On July 1 of each subsequent year, the ceiling for multiline business subscriber lines and nonprimary residential subscriber lines will be adjusted to reflect inflation as measured by the change in GDPPI for the 12 months ending on March 31 of the year the adjustment is made.(# X` ` (l)(1) Beginning January 1, 1998, local exchange carriers shall assess no more than one end user common line charge as calculated under the applicable method under paragraph (e) for Basic Rate Interface integrated services digital network (ISDN) service.(# X` ` (2) Local exchange carriers shall assess no more than five end user common line charges as calculated under paragraph(b) for Primary Rate Interface ISDN service.(# (m) In the event the local exchange carrier charges less than the maximum end user"Q%K0*&&aae#" common line charge for any subscriber lines, the local exchange carrier may not recover the difference between the amount collected and the maximum from carrier common line charges or PICCs. (n) Through December 31, 1997, the End User Common Line charge for a residential subscriber shall be 50% of the charge specified in  69.152(b) and (d) if the residential local exchange service rate for such subscribers is reduced by an equivalent amount, provided that such local exchange service rate reduction is based upon a means test that is subject to verification. (o) Subparagraphs (1) and (2) are effective through December 31, 1997. X` ` (1) The End User Common Line charge for residential subscribers shall be reduced to the extent of the state assistance as calculated in subparagraph (2) of this section, or waived in full if the state assistance equals or exceeds the residential End User Common Line charge under the circumstances described below. In order to qualify for this waiver, the subscriber must be eligible for and receive assistance or benefits provided pursuant to a narrowly targeted telephone company lifeline assistance program, requiring verification of eligibility, implemented by the state or local telephone company. A state or local telephone company wishing to implement this End User Common Line reduction or waiver for its subscribers shall file information with the Commission Secretary demonstrating that its plan meets the criteria set out in this section and showing the amount of state assistance per subscriber as described in subparagraph (2). The reduction or waiver of the End User Common Line charge shall be available as soon as the Commission certifies that the state or local telephone plan satisfies the criteria set out in this subsection and the relevant tariff provisions become effective.(# ` `  (2)(i) The state assistance per subscriber shall be equal to the difference between the charges to be paid by the participating subscribers and those to be paid by other subscribers for comparable monthly local exchange service, service connections and customer deposits, except that benefits or assistance for connection charges and deposit requirements may only be counted once annually. In order to be included in calculating the state assistance, such benefits must be a single telephone line to the household's principal residence.(#` XX` ` (ii) The monthly state assistance per participating subscriber shall be calculated by adding the amounts calculated in subparagraphs (2)(ii)(A) and (B). (#` ` `  (A) The amount of the monthly state assistance per participating subscriber for local exchange service shall be calculated by dividing the"Q%L0*&&aae#" annual difference between charges paid by all participating subscribers for residential local exchange service and the amount which would have been charged to non-qualifying subscribers for comparable service by twelve times the number of subscribers participating in the state assistance program. Estimates may be used when historic data are not available.(# XX` ` X (B) The amount of the monthly state assistance for service connections and customer deposits per participating subscriber shall be calculated by determining the annual amount of the reductions in these charges for participating subscribers each year and dividing this amount by twelve times the number of participating subscribers. Estimates may be used when historic data are not available.(# (p) Through December 31, 1997, in connection with the filing of access tariffs pursuant to  69.3(a), telephone companies shall calculate for the association their projected revenue requirement attributable to the operation of  69.104(n) through (o). The projected amount will be adjusted by the association to reflect the actual lifeline assistance benefits paid in the previous period. If the actual benefits exceeded the projected amount for that period, the differential will be added to the projection for the ensuing period. If the actual benefits were less than the projected amount for that period, the differential will be subtracted from the projection for the ensuing period. Through December 31, 1997, the association shall so adjust amounts to the Lifeline Assistance revenue requirement, bill and collect such amounts from interexchange carriers pursuant to  69.117 and distribute the funds to qualifying telephone companies pursuant to  69.603(d).  X' 69.153` ` Presubscribed interexchange carrier charge (PICC). (a) A charge expressed in dollars and cents per line may be assessed upon the subscriber's presubscribed interexchange carrier to recover the common line revenues permitted under the price cap rules in Part 61 of this chapter that cannot be recovered through the end user common line charge established under 69.152, residual interconnection charge revenues, and certain marketing expenses described in 69.153(a). In the event the ceilings on the PICC prevent the PICC from recovering all the residual common line, residual interconnection charge revenues, and marketing expenses, the PICC shall recover all residual common line revenues before it recovers residual interconnection charge revenues, and all residual interconnection charge revenues before it recovers marketing expenses. (b) If an enduser customer does not have a presubscribed interexchange carrier, the local exchange carrier may collect the PICC directly from the end user. "Q%M0*&&aae#"Ԍ(c) The maximum monthly PICC for primary residential subscriber lines and singleline business subscriber lines shall be the lower of: X` ` (1) One twelfth of the sum of annual common line revenues and residual interconnection charge revenues permitted under our price cap rules divided by the projected average number of local exchange service subscriber lines in use during such annual period, minus $3.50; or(# X` ` (2) $0.53. On January 1, 1999, this amount shall be adjusted by the inflation factor computed under subparagraph (e), and increased by $0.50. On July 1, 2000, and in each subsequent year, this amount shall be adjusted by the inflation factor computed under subparagraph (e), and increased by $0.50.(# (d) To the extent that a local exchange carrier cannot recover its full common line revenues, residual interconnection charge revenues, and those marketing expense revenues described in 69.156(a) permitted under price cap regulation through the recovery mechanisms established in 69.152, 69.153(c), and 69.156(b) and (c), the local exchange carrier may assess a PICC on multiline business subscriber lines and nonprimary residential subscriber lines. X` ` (1) The maximum monthly PICC for nonprimary residential subscriber lines shall be the lower of:(# ` `  (i) One twelfth of the annual common line, residual interconnection charge, and 69.156(a) marketing expense revenues permitted under our price cap rules, less the maximum amounts permitted to be recovered through the recovery mechanisms under 69.152,69.153(c), and 69.156(b) and (c), divided by the total number of projected nonprimary residential and multiline business subscriber lines in use during such annual period; or(#` ` `  (ii) $1.50. On January 1, 1999, this amount shall be adjusted by the inflation factor computed under subparagraph (e), and increased by $1.00. On July 1, 2000, and in each subsequent year, this amount shall be adjusted by the inflation factor computed under subparagraph (e), and increased by $1.00.(#` X` ` (2) If the maximum monthly PICC for nonprimary residential subscriber lines is determined using paragraph (d)(1)(i), the maximum monthly PICC for multiline business subscriber lines shall equal the maximum monthly PICC of nonprimary residential subscriber lines. Otherwise, the maximum monthly PICC for multiline business lines shall be the lower of:(# XX` `  (i) One twelfth of the annual common line, residual interconnection"Q%N0*&&aae#" charge, and 69.156(a) marketing expense revenues permitted under our rules, less the maximum amounts permitted to be recovered through the recovery mechanisms under 69.152, 69.153(c) and (d)(1)(i), and 69.156 (b) and (c), divided by the total number of projected multiline business subscriber lines in use during such annual period; or(#` XX` `  (ii) $2.75. On January 1, 1999, this amount shall be adjusted by the inflation factor computed under subparagraph (e), and increased by $1.50. On July 1, 2000, and in each subsequent year, this amount shall be adjusted by the inflation factor computed under subparagraph (e), and increased by $1.50.(#` (e) For the PICC ceiling for primary residential subscriber lines and singleline business subscriber lines under subparagraph(c)(2), nonprimary residential subscriber lines under subparagraph (d)(1)(ii), and multiline business subscriber lines under subparagraph (d)(2)(ii): X` ` (1) On January 1, 1999, the ceiling will be adjusted to reflect inflation as measured by the change in GDPPI for the 12 months ending September 30, 1998.(# X` ` (2) On July 1, 2000, the ceiling will be adjusted to reflect inflation as measured by the change in GDPPI for the 18 months ending on March 31, 2000.(# X` ` (3) On July 1 of each subsequent year, the ceiling will be adjusted to reflect inflation as measured by the change in GDPPI for the 12 months ending on March 31 of the year the adjustment is made.(# X` ` (f)(1) Local exchange carriers shall assess no more than one PICC as calculated under the applicable method under subparagraph (d)(1) for Basic Rate Interface integrated services digital network (ISDN) service.(# X` ` (2) Local exchange carriers shall assess no more than five PICCs as calculated under subparagraph(d)(2) for Primary Rate Interface ISDN service.(#  X ' 69.154` ` Perminute carrier common line charge. (a) Local exchange carriers may recover a perminute carrier common line charge from interexchange carriers, collected on originating access minutes and calculated using the weighting method set forth in paragraph (c). The maximum such charge shall be the lower of: X` ` (1) the perminute rate that would recover annual common line revenues permitted less the maximum amounts allowed to be recovered under 69.152 and"Q%O0*&&aae#" 69.153; or(# X` ` (2) the sum of the local switching, carrier common line and interconnection charge charges assessed on originating minutes on December 31, 1997, minus the local switching charges assessed on originating minutes.(# (b) To the extent that paragraph (a) does not recover from interexchange carriers all permitted carrier common line revenue, the excess may be collected through a perminute charge on terminating access calculated using the weighting method set forth in paragraph (c). (c) For each Carrier Common Line access element tariff, the premium originating Carrier Common Line charge shall be set at a level that recovers revenues allowed under paragraphs (a) and (b). The nonpremium charges shall be equal to .45 multiplied by the premium charges.  X ' 69.155` ` Perminute residual interconnection charge. (a) Local exchange carriers may recover a perminute residual interconnection charge on originating access. The maximum such charge shall be the lower of: X` ` (1) the perminute rate that would recover the total annual residual interconnection charge revenues permitted less the portion of the residual interconnection charge allowed to be recovered under 69.153; or(# X` ` (2) the sum of the local switching, carrier common line and residual interconnection charges assessed on originating minutes on December 31, 1997, minus the local switching charges assessed on originating minutes, less the maximum amount allowed to be recovered under 69.154(a).(# (b) To the extent that paragraph (a) prohibits a local exchange carrier from recovering all of the residual interconnection charge revenues permitted, the residual may be collected through a perminute charge on terminating access. (c) Any charge assessed pursuant to paragraph (a) or (b) shall be assessed only upon minutes utilizing the local exchange carrier's local transport service.  X!' 69.156` ` Marketing expenses. (#` (a) Local exchange carriers shall recover marketing expenses that are allocated to the common line and traffic sensitive baskets, and the switched services within the trunking basket pursuant to 32.6610 and 69.403 of this Chapter."Q%P0*&&aae#"Ԍ(b) The expenses described in paragraph (a) may be recovered from nonprimary residential subscriber lines, by increasing the end user common line charge described in 69.152(e). The amount of marketing expenses permitted to be recovered in this manner shall be the total marketing expenses described in paragraph (a) divided by the sum of nonprimary residential lines and multiline business lines. In no event shall the end user common line charge for these lines exceed the lower of the ceilings established in 69.152(b)(3) and (e)(2)(ii). (c) The expenses described in paragraph (a) may be recovered from multiline business subscriber lines, by increasing the end user common line charge described in 69.152(b). The amount permitted to be recovered in this manner shall be the total marketing expenses described in paragraph (a) divided by the sum of nonprimary residential lines and multiline business lines. In no event shall the end user common line charge for these lines exceed the ceiling established in 69.152(b)(3). (d) In the event that the ceilings set forth in paragraphs (b) and (c), and 69.153(d) prevent a local exchange carrier from recovering fully the marketing expenses described in paragraph (a), the local exchange carrier may recover the remainder through a perminute assessment on originating access minutes, so long as the charge for originating access does not exceed the amount defined in 69.155(a)(2) less the maximum permitted to be recovered under 69.155(a). (e) In the event that the ceilings set forth in paragraphs (b), (c) and (d), and 69.153(d) prevent a local exchange carrier from recovering fully the marketing expenses described in paragraph (a), the local exchange carrier may recover the remainder through a perminute assessment on terminating access minutes. (f) The amount of marketing expenses that may be recovered each year shall be adjusted in accordance with the price cap rules set forth in Part 61.  X7' 69.157` ` Line port costs in excess of basic, analog service. To the extent that the costs of ISDN line ports, and line ports associated with other services, exceed the costs of a line port used for basic, analog service, local exchange carriers may recover the difference through a separate monthly end user charge.  X 4  X!424.#Xj P9XP# Subpart C Computation of Transition Charge, sections 69.20169.205, is deleted.  X#425.#Xj P9XP# Section 69.303 is amended by deleting paragraph (a) and redesignating paragraph (b) as section 69.303. "Q%Q0*&&aae#"Ԍ X426.#Xj P9XP# Section 69.304 is amended by deleting paragraph (c).  X427. Section 69.305 is amended by revising paragraphs (b) and (d), and adding paragraph (e) to read as follows:  X' v69.305` ` Carrier cable and wire facilities (C&WF). * * * * * (b) Carrier C&WF, other than WATS access lines, not assigned pursuant to paragraphs (a), (c), or (e) of this section that is used for interexchange services that use switchingv facilities for origination and termination that are also used for local exchange telephone service shall be apportioned to the local Transport elements. * * * * * (d) All Carrier C&WF that is not apportioned pursuant to paragraphs (a), (b), (c), and (e) of this Section shall be assigned to the Special Access element. (e) Carrier C&WF that is used to provide transmission between the local exchange carrier's signalling transfer point and the local switch shall be assigned to the local switching category.  X428. Section 69.306 is amended by revising paragraphs (c), (d), and (e) to read as follows:  X' v69.306` ` Central Office Equipment (COE). * * * * * (c) COE Category 2 (Tandem Switching Equipment) that is deemed to be exchange  XN4equipment for purposes of the Modification of Final Judgment in United States v Westernv  X74Electric Co. shall be assigned to the tandem switching charge subelement and the interconnection charge element. COE Category 2 which is associated with the signal transfer point function shall be assigned to the local switching category. COE Category 2 which is used to provide transmission facilities between the local exchange carrier's signalling transfer point and the database shall be assigned to the Line Information Database subelement at 69.120(a). All other COE Category 2 shall be assigned to the interexchange category. (d) COE Category 3 (Local Switching Equipment) shall be assigned to the Local Switching element except as provided in paragraph (a) of this section; and that, for telephone companies subject to price cap regulation set forth in Part 61 of this chapter, lineside port costs shall be assigned to the Common Line rate element."Q%R0*&&aae#"Ԍ(e) COE Category 4 (Circuit Equipment) shall be apportioned among the interexchange category and the Common Line, Transport, and Special Access elements. COE Category 4 shall be apportioned in the same proportions as the associated Cable and Wireless Facilities; except that any DS1/voicegrade multiplexer investment associated with analog local switches and assigned to the local transport category by this rule shall be reallocated to the local switching category.  X_429. Section 69.307 is amended by deleting paragraph (c).  X1430. Section 69.308 is deleted.  X 431. Section 69.309 is amended to read as follows:  X ' 69.309` ` Other investment. Investment that is not apportioned pursuant to 69.302 through 69.307 shall be apportioned among the interexchange category, the billing and collection category and access elements in the same proportions as the combined investment that is apportioned pursuant to 69.303 through 69.307.  X432. Section 69.401 is amended by revising paragraph (b) to read as follows:  X' v69.401` ` Direct Expenses. * * * * * (b) Plant Specific Operations Expenses in Accounts 6210, 6220 and 6230, shall be apportioned among the interexchange category and access elements on the basis of thev apportionment of the investment in Accounts 2210, 2220, and 2230, respectively; provided that any expenses associated with DS1/voicegrade multiplexers, to the extent that they are not associated with an analog tandem switch, assigned to the local transport category by this subsection shall be reallocated to the local switching category; provided further that any expenses associated with common channel signalling included in Account 6210 shall be assigned to the local transport category. * * * * *  X#4 33. Section 69.406 is amended by deleting subparagraph (a)(9).  XQ%4!34. Section 69.410 is deleted."Q%S0*&&aae#"Ԍ X4ԙ"35. Section 69.411 is amended to read as follows:  X' 69.411` ` Other Expense. Except as provided in 69.412, 69.413, and 69.414, expenses that are not apportioned pursuant to 69.401 through 69.409 shall be apportioned among the interexchange category and all access elements in the same manner as 69.309 Other investment.  X 4#36. Section 69.501 is amended by deleting paragraph (a).  X 4$37. Section 69.502 is amended to read as follows:  X 4  69.502 Base factor allocation . Projected revenues from the following shall be deducted from the base factor portion to determine the amount that is assigned to the Carrier Common Line element: (a) End User Common Line charges, less any marketing expense revenues recovered through end user common line charges pursuant to 69.156; (b) Special Access surcharges; and (c) The portion of frozen perline support that carriers receive pursuant to  54.303 that is attributable to LTS payments received prior to January 1, 1998.  X|4%38. Section 69.611 is deleted. $ J:\ACCESS.REF\ORDER\APPC.ARG$ "|T0*&&aa"  X4   "  " #Xj\  P6G;9XP#  `(#kMay 7, 1997  b4PS Statement of  b4 Commissioner James H. Quello   X'\RE: FEDERALSTATE JOINT BOARD ON UNIVERSAL SERVICE (CC Docket No. 9645), ACCESS CHARGE REFORM (CC Docket No. 96262), and PRICE CAP PERFORMANCE REVIEW FOR LOCAL EXCHANGE  Xj 'CARRIERS (CC Docket No. 941).  xToday, the Commission has established rules to implement the Universal Service provisions of  xthe Telecommunications Act of 1996, as well as rules to restructure the access charge system  X 4 xpwhile also initiating reductions in the levels of those access charges. I have believed throughout  xmy participation in the debates regarding universal service and access reform that, as much as  xpossible, we should seek to ensure that consumers experience the benefits of our actions. To this  xEsame end, we should try to avoid the possibility that total bills for groups of consumers could  x8increase as a result of implementing new universal service programs and moving into a new  X4access charge regime.  Xm4 Universal Service  X?4 x" This Commission now has taken steps to establish processes for the administration of universal  xservice funds in a way that allows the commitments represented in this section of the 1996  xVTelecommunications Act to be fulfilled. We have labored to develop a reasonable plan that will  xprovide necessary and sufficient funds for schools and libraries as well as other universal service  xprograms. We also have sought to avoid collection of funds beyond those legitimately needed  xto help make new and important services available to students and teachers in inner city, suburban  xand rural schools from Takoma Park, D.C., to Tacoma, Washington, from McAllen, Texas to Mackinac Island on the Upper Peninsula of Michigan.  xWe have achieved this balance by establishing funding necessary to begin the program at a  xIreasonable level, with a provision that allows schools and libraries to begin the program January  x81, 1998. By this time, we would hope that participating groups will have had the opportunity  xto develop their plans. Our decision to start the program with lower funding in the first six  xmonths, increasing in the following years, gives the program early constraint, with flexibility at  xlater periods when greater demand is likely to develop. As a result, I believe this decision  xprovides for new universal service funding within the limits of what consumers around the country are willing to pay.  x The issue of what consumers are prepared to pay has been a very difficult one. The need for our  xattention to the issue, however, has been clearly expressed in many ways. It has required the  x_Commission to balance the need for programs involved in universal service that are critically"s'U0*((z%"  ximportant to the future of this country with their cost. In this respect, this universal service  xproceeding is one of the most important decisions in this agency's history. At the same time, we  xhave heard a consistent message from around the country that consumers and businesses are not  xEnecessarily willing to pay for these services through higher total bills for telecommunications services.  xWith respect to funding for health care subsidies, we have endeavored to make sure that rural,  xnonprofit health care facilities have sufficient funding to meet the needs for providing services  xEin communities that otherwise might not have the same resources that are available in urban communities.  xThere also are many other policy and market issues that will need to be resolved in a new  xuniversal service environment. For instance, I believe it remains to be seen how cable and  xwireless industries will continue to develop to play a greater role in the telecommunications  xhservices that will meet future universal service needs. As these developments occur, the  xCommission may continue to monitor the equity of contribution and recovery of universal service  xfunds by paging services as well as the extent to which wireless services in general should contribute for intrastate services.  XK4 Access Reform  xThe Commission's actions today on access reform involve two components: (1) several structural  x3changes that will cause access components to move to more reasonable categories and to become  xVsubject to competition where possible; and (2) reductions in the current level of access charges,  xlargely accomplished through revision of the productivity and sharing mechanism in LEC price caps.  x@Where this decision changes the structure of end user charges, as in our treatment of business and  xresidential customers, and consumers with second or multiple lines, I believe our decisions should  Xe4 xbe and are characterized by balance. As a result of this necessary reform of the access  x<payment structure, charges should remain within reasonable bounds and should help to promote the development of competition and consumer benefits.  xI also believe this Commission would be remiss in our regulatory duties to the American public  xand responsibilities to our licensees if we were to restructure universal service without  xcconcurrently engaging in access charge reform. We have talked about this step for quite some  xVtime. Many parties have expressed their views in a very public fashion as to whether or not this  x<step is warranted, or to what degree access charges should be reduced. I believe that this step  x/to restructure and reduce the level of access charges is the right thing to do and this is the right time to do it.  x&The consumers and users of telecommunications services are the intended beneficiaries of today's  xactions regarding access reform. Now that these decisions are adopted, I believe it will become  X#'4 x#clear that we have done our best to ensure that consumers do not bear the burden of "#'V0*((%"  ximplementing the new universal service program and access charge reform. Our actions also  x+represent a fundamental part of the Commission's effort to facilitate competition in the local  x/exchange marketplace, in this case by reducing access charges paid to LECs by interexchange carriers.  xThe primary vehicle for this reduction is the decision to change the existing combinations of  xproductivity factors, or "xfactors", and sharing options to a single productivity factor of 6.5%  xEaccompanied by no sharing obligation. As a result, this decision continues the Commission's  xefforts to move away from the lingering remnants of rate of return regulation for local exchange  xcarriers. Today's decision will complete the movement of price cap LECs away from the sharing obligations that were part of the past system.  X 4Looking to the Future I want to emphasize that today's actions represent a first step in many respects.  xIConcerning universal service, this is not a day to declare victory. There is much left to be done  xby the Commission, the states, temporary and permanent fund administrators, school districts,  xlibraries, health care facilities, parties developing cost models, and telecommunications companies  xIseeking to provide services and enter new markets. This is definitely an important day, but the  xhreal effort is just beginning. That effort will require investment, planning, training in using  xIservices, and community, professional, and corporate involvement, and it will only be successful  x/after the continuing involvement, in community after community, by the many parties who have so diligently participated in this proceeding.  xThe Commission's action to increase the productivity factor not only results in reduced access  xcharges in the first year, but also in further reductions in access charges in subsequent years. In  xanother respect, it may very well become necessary very soon for the Commission to consider  xhhow to supplement today's decision to allow for pricing flexibility by LECs as competition  xIdevelops to a greater level in the local marketplace. One possible way to provide that flexibility  x might be through relaxing the 6.5% productivity factor where LECs can meet criteria to demonstrate sufficient competition.  xAt the same time, later steps might also include the potential for checks and balances in the event  xthat competition in the local exchange marketplace does not develop as soon as some seem to  xZexpect. Once again, down the road the Commission may need to consider more specific measures  xRto ensure that the platforms necessary for competition truly are available. It is my hope that those steps won't be necessary.  xcFinally, some parties have warned recently that any actions by this Commission to lower access  x&charges may cause LECs to seek to raise local phone rates. That matter will become an issue for  xstate commissions, and it is my hope that they will respond to any efforts to raise local rates by  xensuring that consumers ultimately benefit from federal and state actions to implement the Telecommunications Act of 1996 and any related decisions. " "#'W0*((%"    "    " ` `  hhCq#Xj\  P6G;9XP#pp  *May 7, 1997 #Xj\  P6G;9XP#  X'? Separate Statement of %Commissioner Susan Ness  Xv4 \  V14Re: Universal Service; Access Reform; Price Cap Review  X 4 Today we reach another milestone in our efforts to secure for consumers the myriad benefits made possible by the Telecommunications Act of 1996. We are steadfastly fulfilling the tasks assigned to us by Congress in a manner that will prove the wisdom and realize the vision of this landmark legislation. Our pursuit has many facets. We must eliminate impediments to competition, ensure fair rules of engagement for all market participants, safeguard the interests of residential consumers, especially those with limited incomes and those in high cost areas, promote economic efficiency, and lower prices to consumers. Today's orders represent substantial progress on all these fronts. Much of what we are doing is driven by law and by economics. But the results of our decisions have a human face: XWill a poor family in Appalachia be able to summon the police or fire department in an emergency?(# XWill a critically ill patient in a remote region of Montana have her tumor quickly and accurately diagnosed?(# XWill a curious highschool freshman have an opportunity to view Thomas Jefferson's valedictory letter, in his own aged but still powerful hand? (# XWill an elderly widow be less hesitant to break her loneliness with longer and more frequent calls to her greatgrandchildren? (# Today brings us closer to a day when these questions can all be answered "yes." Fifteen months after enactment of the Telecommunications Act, the transition to a new industry paradigm remains far from complete. The road is not straight, or smooth, or free from peril. But a steady course and a shared determination can bring us to the desired destination. We still have far to travel to resolve issues of support for highcost areas. I believe we have a sound plan and a clear timetable for implementation, but we still face two main"(X0*0*0*&" obstacles. The proxy models, already impressive feats of cost engineering, still require further refinement before they can reliably be used to target federal cost support. And a new consensus must be achieved before support essential to maintain affordable telephone service in highcost states can be drawn from states with lesser need, as I believe the Congress of the  X4United States clearly intended. In the meantime, we can make only incremental changes in the implicit subsidies that currently support the highcost services provided by large price cap telephone companies. For the smaller rural companies, change will come even more gradually. This is consistent with Congress's expectation that competition would arrive more quickly in the cities and the suburbs. In the interim, we recognize that rural economies must not face unnecessary dislocations. The need to avoid harmful dislocations, while also encouraging beneficial change, is crucial to much of what we are doing in the access reform and price cap orders. We are implementing many changes that will help to ensure an orderly transition from monopoly to fair and efficient competition. In particular, the recovery of more costs through flatrated charges instead of usagesensitive charges will reduce the exposure of incumbent telephone companies to "cherrypicking" by new entrants, even as they also expand the range of customers likely to be offered competitive alternatives. Completion of the conversion to a threepart rate structure for tandemswitched transport will eliminate a historical artifact, but allow time for affected carriers to adjust. The new Xfactor more accurately reflects the productivity gains that can reasonably be expected from price cap carriers, while avoiding radical reduction of telephone company access revenues and proposals that would have unfairly penalized those companies that have most assiduously conducted themselves in accordance with the incentives we deliberately created. We prefer to rely on marketplace forces rather than regulation to drive investment decisions and price reductions. Some will fault us for not acting more aggressively; others will complain that we are too heavyhanded. My own view is that each decision, and all of the many issues in these orders, has been approached with balance and sensitivity, fairness and principle. Not everyone will be satisfied. But no one can say that we have not read the law, considered economic theories and business realities, consulted our consciences, and sought to achieve as much fairness as is humanly possible. I readily confess that I cannot muster the same passion for restructuring the arcane and impenetrable Transport Interconnection Charge as for devising a completely new regime to provide discounts for schools and libraries to access telecommunications and information services. Though I am fully committed to full realization of all of the universal service provisions, the SnoweRockefellerExonKerry provisions reflect an especially bold vision. "#'Y0*((%" For our part, we have used our creativity to harness the magic of competition to reduce the costs of the support program, created incentives to ensure only prudent use of supported services, targeted discounts to minimize the danger of a widening gap between information haves and havenots, and sought at every turn to maintain our commitment to competitive neutrality. Even more important, we have sought to leave crucial decisions in the hands of educators and librarians, scattered throughout the country, rather than in the hands of Washingtonbased administrators. And, best of all, we have arranged a smooth takeoff that will avoid creating unsustainable financial burdens on carriers and consumers, allowing competition and growth and declining prices rather than rate increases to supply the necessary funds. In this area, as in the others addressed by today's orders, we have applied all our energy, and all our skill, to make the best decisions, based on our current knowledge and the law. A continuing commitment to constructive dialogue by all interested parties telephone companies, long distance companies, wireless companies, small businesses, large businesses, residential consumers, state regulators, and members of Congress is critical to continued progress. At the end of the day, fairness to all parties and demonstrable benefits to consumers are the standards by which we will all be judged. "4Z0*((D"  \4 "    " Ԋ` `  hhCqpp  *#Xxjp P7XP#May 7, 1997  ]' %6Separate Statement of  Commissioner Rachelle B. Chong\  \H4 Re:XIn the Matter of Access Charge Reform, Price Cap Performance Review for Local Exchange Carriers, Transport Rate Structure and Pricing, End User Common Line  \ 4Charges, First Report and Order, CC Docket Nos. 96262, 941, 91213, 9572.(# The Commission's access charge system has been a constant landmark in the telecommunications regulatory landscape during the past decade. Charges imposed by this access charge regime were unduly high, because these access charges were part of the funding mechanism for our patchwork quilt "system" of universal service funding. With the passage of the Telecommunications Act of 1996 ("1996 Act"), however, the days of the current access charge system became numbered. The 1996 Act directed the Commission to create a universal service program that makes sense in a competitive  \44marketplace. 4Z yO'ԍX47 U.S.C. Section 254 (e)(requiring that any universal service support "be explicit and sufficient to achieve the purposes of this section").(# Thus, it is appropriate and necessary for the Commission to do a thorough overhaul of our access charge regime in concert with implementation of the new universal service system ordered by the 1996 Act. To the extent possible, implicit subsidies must be identified and removed from access charges, and a sensible transition made to a market forces system where access charges are based on forwardlooking economic cost. While I believe that today's decision generally finds the right balance in creating an improved access charge system, I write separately to explain our actions and comment on some aspects of our decision.  \e4In this order, we direct that federal universal service support received by incumbent local exchange telephone carriers be used to reduce the interstate revenue requirement otherwise collected through interstate access charges. Thus, interstate implicit support will be identified and removed from interstate access charges, and instead we will provide universal service support through an explicit support mechanism ordered in our companion  \4Universal Service decision. The existence of universal service support subsidies within access charges, however, only partially explains why access charges create distortions in the marketplace and vast economic inefficiencies. Other culprits which drive access charges up for interexchange carriers include the current rate structures and pricing levels of our access charge system. These overly high charges are eventually passed through to long distance consumers in the"h$[  0*0*0*"" form of a higher per minute usage rate. This overly high usage rate unduly suppresses demand for long distance services.  Our actions today both in this docket and the price cap proceeding should bring about a significant drop in access charges and create favorable conditions for competitive entry into the access market. I strongly supported efforts to push the inflated access rates downwards closer towards forwardlooking economic cost. While some parties demanded immediate deep cuts in access charges, we have chosen a more measured approach for the transitional period. First, we create a framework to remove distortions and inefficiencies in the current rate structures and levels, by attempting to ensure that the rates for access are more reflective of the way that costs are actually incurred. Second, we will move residual costs that were traditionally recovered on a perminute basis into a more efficient flatrate charge system that will result in lower per minute usage rates. During the early years of our transition, we have targeted business and multiline residential customers to bear the greater share of the burden, in order to keep rates affordable to single line residential and single line business customers. My one major concern about today's approach is the impact that these increased flat rate charges will have on small business consumers during the early years of the transition. Because the Commission has decided to protect single line customers from any rate increases, the new flat rate charges fall disproportionately upon the shoulders of multiline customers and may have a disparate impact on small businesses who may not be able to afford these costs. I have advocated lessening the impact of the new subscriber line charge levels and flat charges on small businesses, particularly those who do not make many long distance calls and will not experience the full benefits of lower per minute calling rates that will be realized by large businesses with high call volumes. While I believe we cushioned the impact on small businesses to some extent, I acknowledge that some small businesses with low volume calling patterns may see some rate increases. While unfortunate, this is the price we pay for protection of the single line customers.   \ 4 In sum, we have adopted what I believe to be a balanced and fair approach to access charge restructuring, universal service, and price cap adjustments. We have attempted to accomplish a massive overhaul to both the access charge and universal service systems with the least amount of disruption to consumers. Nevertheless, it is unfortunate but inevitable that there will be some discombobulation as we make a transition to a more competitive marketplace. Ultimately, however, I am confident that the journey to the new competitive world mandated by the 1996 Act will be worthwhile for consumers, as costs flow where they should, and rates readjust to where the market drives them.