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T iT ?$- "- $ 33 ---'--- @d---'--- ----'--- H +2 rU S West per line BFP RR<7N..3. 3.<37<<---'--- ---'--- ----'--- { 2 Forecast)%%"%"---'--- ---'---  2 u$5.00%%%%2 0u$5.25%%%%2 u$5.50%%%%2 u$5.75%%%%2 u$6.00%%%%2 u$6.25%%%%2 u$6.50%%%%2 u$6.75%%%%2 xu$7.00%%%%2 u$7.25%%%%2 hu$7.50%%%%---'--- ---'---   2 ?90%% 2 92%% 2 +94%% 2 96%% 2 98%%---'--- ---'--- ---'  '  ' G G ::G  U U p p               , ,  G G   G G   G :  :: :G  G : :: UU pp           , ,  G G  : : : : :   :   :!!ii]>i  ssHs$ s} } \ R }  b . 7  7  b K8 v  K8 !!r]{ #M2PP#   U S West per line BFP RR bM@  #>2PP#   Forecast _Jy#>2PP#   $5.00 _Jy#>2PP#   $5.25 _Jy#>2PP#   $5.50 _Jy#>2PP#   $5.75 _Jy2#>2PP#   $6.00 _JyL#>2PP#   $6.25 _J4yg #>2PP#   $6.50 _JO y #>2PP#   $6.75 _Jj y #>2PP#   $7.00 _J y #>2PP#   $7.25 _J y #>2PP#   $7.50 \GHd#>2PP#   90 \GQm#>2PP#   92 \G[w #>2PP#   94 \Ge #>2PP#   96 \Go#>2PP#   98 Y!j"UUUUUUUUUUUUU ,,,888EEEQQQaaaqqq*YY!!+vƚZ!Q " (   '  Arial -Arial%--"Systemn-'- -'- - "- $dCCdd "- "---'--- Cd d  CndnCdC7d7CdCdCcdcCdC,d,CdC---'---  "-d CCdd "-ddPd P dnPndPd7P7dPdPdcPcdPd,P,dPddCddTTCC---'--- !!---'--- Gd---'--- [yM- "-  T#  - "- $ 5      $$T$TiT?T$$#$#8#- "- $---'--- Gd---'--- ----'--- L% (2 v1Sprint per line BFP RR73 33. 3.<37<<---'--- ---'--- ----'--- & 2 FForecast)%%"%"---'--- ---'---  2 u$5.00%%%%2 u$5.25%%%%2 Ou$5.50%%%%2 u$5.75%%%%2 u$6.00%%%%2 |u$6.25%%%%2 u$6.50%%%%2 Du$6.75%%%%2 u$7.00%%%%2 u$7.25%%%%2 qu$7.50%%%%---'--- ---'---   2 ?90%% 2 92%% 2 /94%% 2 96%% 2 98%%---'--- ---'--- ---'  '  '{88 ||   HH        X X        8 88 8 8 88 ||   HH        X X      88 8 8   8   8 8!!l  l @ l      z m zA Nm z  -  y    ~ R & Z R ~  9 Z XL  , XL !!p[?} v#M2PP#   Sprint per line BFP RR bMJ T #>2PP#   Forecast _Jy#>2PP#   $5.00 _Jy #>2PP#   $5.25 _JyM#>2PP#   $5.50 _J\y#>2PP#   $5.75 _Jy#>2PP#   $6.00 _Jy #>2PP#   $6.25 _J* y] #>2PP#   $6.50 _Jm y #>2PP#   $6.75 _J y #>2PP#   $7.00 _J y)#>2PP#   $7.25 _J:ym#>2PP#   $7.50 \GHd#>2PP#   90 \GVr#>2PP#   92 \Gd #>2PP#   94 \Gp #>2PP#   96 \G~#>2PP#   98 @j"UUUUUUUUUUUUU ,,,888EEEQQQaaaqqq*@@+vƚ@Q " (   '  ArialŁ-Arial --"Systemn-'- -'- - "- $c77cc "- "---'--- 7cc 7dcd7c7.c.7c7c7^c^7c7)c)7c7---'---  "-c 77cc "-ccOcOcdOdcOc.O.cOcOc^O^cOc)O)cOcc7ccMM77---'--- !!---'--- ;c---'--- OwL- "-BV4M[B- "- $-3BW B-$V$AVk~VA4M$Mb4MI84M[$F[p[F$- "- $---'--- ;c---'--- ----'--- L (2 v  NYNEX per line BFP RR<7<773. 3.<37<<---'--- ---'--- ----'--- }{ 2 Forecast)%%"%"---'--- ---'---  2 zt$5.00%%%%2 t$5.25%%%%2 Et$5.50%%%%2 t$5.75%%%%2 t$6.00%%%%2 tt$6.25%%%%2 t$6.50%%%%2 ?t$6.75%%%%2 t$7.00%%%%2 t$7.25%%%%2 ot$7.50%%%%---'--- ---'---   2 >90%% 2 92%% 2 (94%% 2 96%% 2 98%%---'--- ---'--- ---'  '  '{{{{{{{{{{{{{:: ||   AA        I I        : :: : : :: ||   AA        I I      :: : : :   : :!!gX , g <, gX V*Vo.  oC o.   ^ 2 ^  w M ! w K ! w M  %  u  @p l  @p !!p[* \#M2PP#    NYNEX per line BFP RR bM?  #>2PP#   Forecast _Jw#>2PP#   $5.00 _Jw#>2PP#   $5.25 _JwI#>2PP#   $5.50 _JXw#>2PP#   $5.75 _Jw#>2PP#   $6.00 _Jw #>2PP#   $6.25 _J wP #>2PP#   $6.50 _J_ w #>2PP#   $6.75 _J w #>2PP#   $7.00 _J w#>2PP#   $7.25 _J$wW#>2PP#   $7.50 \GEa#>2PP#   90 \GMi#>2PP#   92 \GUq #>2PP#   94 \G] y #>2PP#   96 \Gd#>2PP#   98  j"UUUUUUUUUUUUU ,,,888EEEQQQaaaqqq*  +ƚ jM 5 .   '  Arial-Arial-Arial--"Systemn-'- -'- - "- $ "- "---'---  TT{{---'---  "-  "-TT{{{{{}{}[{[:{:{---'--- !!---'--- ---'--- 0- "-f}[- "- $$f$Qf{fQ}$}x}h}x[$[p[F[ $----'--- ---'--- ----'--- PD .2 nGTE Actual per-line BFP RRA37<.3.3. 3.<37<<2 xand FCC Forecast.333<<33 ....---'--- ---'--- ----'---  2 :Forecast)%%"%"---'--- ---'---  2 p$5.00%%%%2 $5.50%%%%2 5$6.00%%%%2 $6.50%%%%2 $7.00%%%%2 \$7.50%%%%2 $8.00%%%%---'--- ---'---  ArialT- 2 1991/92-ArialT- 2 1992/93-ArialT- 2 r1993/94-ArialT- 2 Q1994/95-ArialT- 2 /1995/96-ArialT- 2 1996/97-ArialT- 2 1997/98----'--- ----'--- ` j ArialT-2 V}Dollars per line per month----'--- ---'--- -- -'  '  '  88     XX            8 88 8   8 88    XX       88 a a a V V a # # a   a a!!V*V`5 5`   Z  V y V M * y V # O #  # . . !!t_; -#M2PP#   GTE Actual per-line BFP RR jU B J #M2PP#   and FCC Forecast bMo > q #>2PP#   Forecast _J}#>2PP#   $5.00 _J} #>2PP#   $5.50 _J}S#>2PP#   $6.00 _Jh}#>2PP#   $6.50 _J}#>2PP#   $7.00 _J}+ #>2PP#   $7.50 _J@ }s #>2PP#   $8.00 [ZFI#>2PP#  1991/92[ZF}H#>2PP#  1992/93[ZFKH#>2PP#  1993/94[ZFm I#>2PP#  1994/95[ZF ; I#>2PP#  1995/96[ZF  H#>2PP#  1996/97[ZF H#>2PP#  1997/98tZ_5j#>2PP#   Dollars per line per month   !!!"""###$$$%%%&&&'''((()))***+++,,,---...///000111222333444555666777888999:::;;;<<<===>>>???@@@AAABBBCCCDDDEEEFFFGGGHHHIIIJJJKKKLLLMMMNNNOOOPPPQQQRRRSSSTTTUUUVVVWWWXXXYYYZZZ[[[\\\]]]^^^___```aaabbbcccdddeeefffggghhhiiijjjkkklllmmmnnnooopppqqqrrrssstttuuuvvvwwwxxxyyyzzz{{{|||}}}~~~ " h,, 8:89:%/9:.9:9:9:9:9:9:9:9:9:9: 9:9:ʃ: ʃ: ʃ: ʃ: ʃ:* ʃ:( ʃ:( ʃ:8ʃ:8ʃ:8ʃ:8ʃ:8ʃ:8ʃ:# ##ʃ: -2)ʃ:2ʃ:xʃ:xʃ:xʃ:nʃ:tʃ:ss<]ʃ:ZҀʃ:ʃ:ʃ:lʃ: lʃ:-2߀ lʃ:#0 lʃ:( lʃ:* lʃ:( lʃ:8lʃ: /lʃ:.lʃ:.kʃ:kʃ:kʃ:kʃ:kʃ:kʃ:kʃ:kʃ:kʃ:;: ;: <;: <;: /)<;: <;: <;: <;: <;: <y7;:  (VB(;:  44;: </;:$ <A;:8<$;:8<$;:# ##<$;: -2)<i_;:2<0;:x<[ s;:x v [d v;:x mm;:n;:t;:ss<];:Z҅ k;: k;: k;: k;:k;:-2߀ k;:#0 k;:% k;:8k;:K8k:8:wut } s { r y q { r p r q s q srt su ujw jxh xh y jyjlBl@h@h X4"C yO'#C\  P6Q/P#$Federal Communications Commission`(#xFCC 97403   yxxdddy"  X` hp x (#%'0*,.8135@8:   {O'ԍE.g., Aliant Direct Case at 2; Bell Atlantic Direct Case at 4.u The ten percent standard required LECs to provide explanatory information regarding a wide variety of factors that affected their forecasts. Therefore, this standard proved extremely useful as an informationgathering device, prompting explanatory statements regarding a large number of potentially significant forecasting errors. We agree that errors in the BFP revenue requirement or enduser demand forecasts individually do not necessarily  Xi4lead to errors in the perlineĠBFP revenue requirement forecast. A LEC that does not meet the ten percent standard with respect to its BFP revenue requirement or enduser demand forecasts, therefore, may nevertheless show no statistically significant bias toward understatement of its perline BFP revenue requirement. "&>0*&&PP"Ԍ X4ԙ$37. ` ` To determine whether the LECs have consistently underestimated their perline BFP revenue requirement, we use a threestep analysis, consisting of increasingly more robust statistical testing techniques described below and in the Statistical Appendix. Initially, we graph the magnitude and direction of the differences between actual and forecasted perline BFP revenue requirement for each year since 1991 to confirm that underestimation errors significantly outnumber overestimation errors. Secondly, we conduct a nonparametric sign test to determine whether chance alone could explain the frequency with which the forecasts were below actual perline BFP revenue requirements. Finally, we determine for each LEC whether the mean of its 1991/921996/97 forecasts is so significantly below the mean of its 1991/921996/97 actuals as to warrant our prescription of a reasonable perline BFP revenue requirement forecast for the 1997/98 tariff year.  X '` `   (2)` GGraphical Analysis (#  X 4%38. ` ` AT&T and MCI assert in this proceeding that the price cap LECs have consistently understated their BFP revenue requirement forecasts since 1991. Most of the price cap LECs submitted actual and forecasted perline BFP revenue requirement data for  Xy4each tariff year between 1991/92 and 1996/97, giving us a total of 75 observations.}? y  yO'ԍSeven BOCs and four of the independent price cap LECs each provided six years of data, for a total of 66 observations. Frontier provided only four years of data for Rochester Telephone because data from 1991 and 1992 no longer exist for that company. GTE provided only five years of data for its companies. Thus, the total is 75.} These yearly data show that, the vast majority of the time, these price cap LECs, in the aggregate, underestimate their perline BFP revenue requirement, with underestimates occurring in 58 of these 75 observations. We have reproduced below (in Figures 1 and 2) graphical analyses of the price cap carriers errors using actual and projected perline BFP revenue requirement data, adjusted as discussed above.  X4!$PKdd (  yP'ԎX?0*&&PP33P"!PX  X4$(#(#(#(#!3"$&39. ` ` The BOCs, collectively, have underestimated their perline BFP revenue requirement in 34 of the 42 observations reflected in the record before us, and the remaining price cap carriers have underestimated their perline BFP revenue requirement in 23 of the remaining 33 observations. Because the data show that the price cap LECs, in general, and the BOCs, in particular, have underestimated their perline BFP revenue requirement much more often than they have overestimated it, we conclude that we should proceed with further analysis to determine the magnitude of this potential problem. Xe?0*&&PP 33P"!PX  X44Ahx9Edd h h(  yP'Ԏ$(#(#(#(#4A'#$  X'` `   (3)GThe Sign Test  X4'40. ` ` We would expect that in any one year a LEC's forecast, based on unbiased forecasting techniques and accounting for all reasonably knowable factors, will differ from the actual perline BFP revenue requirement due to the occurrence or absence of purely chance events, such as weather phenomena, other natural or manmade disasters, equipment failures, and other similar occurrences. In addition, some of the yearly error may be attributable to the limitations inherent in the LEC's forecasting techniques. By definition, however, an unbiased forecasting technique will show no propensity either to underestimate or to overestimate the perline BFP revenue requirement. We conclude that these chance events are equally likely to create an error of a given magnitude in either direction, positive or negative, from the actual perline BFP revenue requirement. In conducting the sign test, we assume that the probability that a LEC would underestimate its perline BFP revenue requirement in any given year is .50 (fifty percent). Therefore, the probability that a LEC would overestimate its perline BFP revenue requirement in any given year is also .50 (assuming that the probability that the LEC's forecast will be precisely correct is negligible). Using these reasonable assumptions and the sign test, we can calculate the probability that a LEC using unbiased forecastingX"?0*&&PP!39'#YAx9hX  X4techniques,@  yOy'ԍIn this section, we use the word "bias" in its statistical sense. A biased estimate results from the use of a forecasting method that itself creates distortions in the value of the estimate. An unbiased estimation process is considered desirable because, if repeated many times, an unbiased estimation process will generate estimates the mean of which will approach the mean of the actual population being estimated. We do not indicate with the term "bias" an intent on the part of any LEC deliberately to create understated perline BFP revenue requirement forecasts beyond the LEC's intent to use the forecasting techniques in question. would experience the actual pattern of under and overestimates that we observe  X4over these six years."A@  {O'ԍThe sign test is discussed in greater detail in the Statistical Appendix. For an additional description, see  yO 'John E. Freund et. al., Elementary Business Statistics: The Modern Approach, 56468 (6th ed. 1993)."  X4(41. ` ` As illustrated in the statistical appendix, U S WEST, Southwestern Bell, GTE, NYNEX, Sprint, and BellSouth all have underestimated their perline BFP revenue requirement in at least five of the last six tariff years. Under the assumptions described above, the probability that a LEC using unbiased forecasting techniques would underestimate  X_4its perline BFP revenue requirement for six consecutive years is less than two percent.B _  yO'ԍThere are two outcomes (overestimate or underestimate) possible each year over the course of six years.  yOr'Therefore, there are 64 possible permutations of these outcomes (26). Thus, the probability that the LEC would underestimate its BFP revenue requirement every year for six years, assuming that both outcomes are equally likely each year, is 1 out of 64, or approximately 1.56 percent. The probability that a LEC would underestimate its perline BFP revenue requirement in five out  X14of the six years we are reviewing in this investigation is less than ten percent.!CX1  yOd'ԍThe probability is 6 out of 64, or approximately 9.38 percent. Thus, the probability that a LEC would underestimate its perline BFP revenue requirement in at least five of the past six years is 7 out of 64, or approximately 10.94 percent.!  X 4)42. ` ` Aliant, SNET, Bell Atlantic, Ameritech, and PacTel underestimated their perline BFP revenue requirement in four out of six years. The probability that a LEC, using unbiased forecasting techniques would underestimate its perline BFP revenue requirement in  X 4four of the past six years is approximately 23 percent.hDX   yO'ԍThe probability of zero, one, two, or three out of six forecasts being above the actual level is 42/64, or approximately 65.63 percent. Similarly, the probability that a LEC would understate its perline BFP revenue requirement forecast in four out of six cases is 15 out of 64, or approximately 23.43 percent.h The remaining LEC's (Frontier)  X 4forecasting errors fall evenly over and under its actual perline BFP revenue requirements.E   yO"'ԍAlthough its data are unavailable for tariff years 1991/92 and 1992/93, the record indicates that Rochester Telephone has underestimated its perline BFP revenue requirement twice and overestimated it twice since tariff year 1993/94. In addition, Bell Atlantic's Direct Case showed that it had underestimated its perline BFP revenue requirement for three of the last six years. In response to AT&T's Opposition, Bell Atlantic corrected its actual (but not its forecasted) BFP revenue requirements as suggested by AT&T. These corrections changed the sign of one of Bell Atlantic's errors. " :E0*&&PPu "Ԍ X4ԙ*43. ` ` Because the results of the sign test indicate that virtually all of the price cap LECs have underestimated their perline BFP revenue requirement far more often than they have overestimated it, we conclude that, as a group, the price cap LECs forecasts may exhibit a systematic downward bias. We recognize that the sign test may have some limitations. For example, by failing to take into account the magnitude of any errors, even relatively accurate forecasts could fare poorly against the sign test, if they fell consistently to one side of the actual level by even a minimal amount. So, although the sign test provides a reliable preliminary indicator that the forecasts of the price cap LECs, as a group, likely show a downward bias, we will supplement it with another common statistical testing method the difference in the means test.  X '` `   (4)GThe Difference in the Means Test  X 4+44. ` ` We recognize that the development of perline BFP revenue requirement forecasts is an inexact process. Whether the LEC uses a "bottomup" approach by forecasting the performance of individual factors that affect the perline BFP revenue requirement, or a trendbased approach, using past growth to indicate likely future performance, we could not reasonably expect the LECs' forecasts to correspond precisely to the actual perline BFP revenue requirements eventually revealed by the historical data. As discussed above, however, we reasonably would expect a LEC making unbiased forecasts of its perline BFP revenue requirement to err in such a manner that its forecasts may sometimes be less than the actual perline BFP revenue requirement, and sometimes be greater than the perline BFP revenue requirement. If the LECs' projections were unbiased estimators of the actual perline BFP revenue requirement, the LEC's forecasts should tend to center around the actual perline BFP revenue requirements, with the errors balancing each other out. In other words, over time, we conclude that the mean perline BFP revenue requirement, forecasted using unbiased estimators, should approach the mean actual perline BFP revenue requirement.  X|4,45. ` ` The statistical appendix shows each price cap LEC's forecasted, and adjusted, actual perline BFP revenue requirement for tariff years 1991/92 through 1996/97, and the  XN4difference between the two figures.FN  yO'ԍIn conducting the difference in the means test, we have used the same adjusted data we used for the sign test, above. Qualitatively, some of the LECs' estimates, particularly those that sometimes overestimate the perline BFP revenue requirement and sometimes underestimate the perline BFP revenue requirement, appear consistent with our conclusion that the mean forecasting error, over time, should approach zero. To measure whether the difference between the mean forecast and mean actual perline BFP revenue requirement is statistically significant, or whether the difference may instead be attributed merely to chance, we will test these data using a difference in the means test. The test methodology is described more fully in the statistical appendix. "" F0*&&PP "Ԍ X4-46. ` ` Because we have a relatively small data sample, we assume a t distribution.  X4The t distribution is similar to the bellshaped curve of a normal distribution, but is somewhat flatter, reflecting the lower degree of confidence associated with small samples. As discussed above, we conclude that a LEC, using unbiased forecasting techniques and accounting for all knowable factors affecting its perline BFP revenue requirement in the coming year, is equally likely to create an error of a given magnitude in either direction, positive or negative, from  Xz4the actual perline BFP revenue requirement. The t distribution reflects this fact.  XN4.47. ` ` The difference in the means test we apply here is a onetailed test using a 90 percent confidence interval (permitting us to reach conclusions concerning the difference in  X 4the means at the .10 level of significance).G  yO 'ԍWe use a onetailed test because we only want to test whether the mean of forecasts is significantly below the mean of actuals. Determining a reasonable confidence interval can be a difficult judgment. Given the limited number of data points we have here, however, we conclude that this confidence interval is reasonable. Although this is the Commission's first analysis of the price cap LECs' perline BFP revenue requirements using techniques of statistical analysis, the Common Carrier Bureau has evaluated other LEC forecasts in the  X 4context of annual access tariff investigations using a 90 percent confidence interval.H   {O~'ԍSee, e.g., Annual 1988 Access Tariff Filings, Memorandum Opinion and Order, 3 FCC Rcd 1281, 1305 (Com. Car. Bur. 1987). Because this investigation represents our first statistical evaluation of the price cap LECs perline BFP revenue requirement forecasts under price cap regulation, we are conservative in our evaluation of the reasonableness of these LECs' forecasts, consistent with the fact that the burden of proof rests with the price cap LECs in this investigation. Thus, in our judgment, a 90 percent confidence interval reasonably assures that, if a LEC fails this test, the failing result will not be due to chance. This confidence interval, therefore, provides a high degree of confidence that the LECs failing this test show a statistically significant downward bias in their perline BFP revenue requirement forecasts, while not requiring such a high level of confidence that we would be unlikely to capture genuine downward bias. Therefore, a 90 percent confidence interval permits the LECs a reasonable margin for error, but protects ratepayers and IXCs from the danger that a higher confidence interval would fail to detect actual bias in the LECs' forecasting practices, which ultimately affect rate levels. In future years, if further investigation of the LECs' forecasts becomes necessary, we will have a greater amount of data, and may find it appropriate to revise the size of this confidence interval.  X&4/48. ` ` The difference in the means test indicates, at the .10 level of significance, that the forecasting errors of US WEST, Southwestern Bell, NYNEX, Bell Atlantic (South), Sprint, and GTE have not arisen by chance, but are the result of some bias present in the"zH0*&&PP"  X4forecasting techniques of these LECs.IH  yOy'ԍIn applying the difference in the means test to determine at .10 level of significance whether the  {OA'difference in the means is statistically significant, we used the t distribution, which is appropriate for data  {O 'samples of less than 30. With six observations (five degrees of freedom), the critical t is 1.476, indicating that, in repeated, random sampling, we would expect the mean forecast to be less than the mean actual perline BFP  {O'revenue requirement by less than 1.476 standard deviations 90 percent of the time. If the calculated t for a  {Og'particular LEC is less than the critical t, this difference is statistically significant at the .10 level., i.e., not attributable to chance. The testing methodology and results are set forth in greater detail in the statistical appendix.  X'` `   (5)GExplanations and Forecasts Offered by Individual LECs  X4049. ` ` Because the forecasts filed by US WEST, Southwestern Bell, GTE, NYNEX, Bell Atlantic (South), and Sprint have failed both the sign test and the difference in the means test, we conclude that their forecasting techniques underestimate the perline BFP revenue requirement in a statistically significant manner. As such, we conclude that these LECs' tariff year 1997/98 forecasts are likely to be the product of biased forecasting techniques. Nevertheless, we conclude that we should not automatically reject as unreasonable the provisions relating to the BFP revenue requirement forecast contained in the tariff filings of these LECs. Instead, we will again examine the reasons offered by those LECs for their forecasting errors to determine whether these LECs have offered any explanation that would tend to negate our conclusion that biased forecasting techniques have resulted in a statistically significant pattern of underestimating of the perline BFP revenue requirement. We will use this information, coupled with our independent evaluations of the LECs' likely perline BFP revenue requirement for tariff year 1997/98, to determine whether the tariff year 1997/98 forecasts appear reasonable.  XK'` `  G i.hh}U S WEST  X4150. ` ` U S WEST attributes its forecasting errors, in general, to faulty budget estimates. For example, for tariff years 1992/93 and 1993/94, U S WEST states its BFP revenue requirement forecast error was primarily the result of its understated budget projections. Similarly, for tariff years 1994/95 through 1996/97, U S WEST cites significant  X4increases in its investment in loop plant installed to serve customers.MJ  yOJ 'ԍU S WEST Direct Case at 78.M  X4251. ` ` We find U S WEST's explanations unpersuasive in judging whether a downward bias likely exists in its tariff year 1997/98 forecast. While budgeting errors and increased investment in loop plant may in fact have caused U S WEST's repeated underestimating of its BFP revenue requirement, U S WEST has provided no indication that its current forecast is likely to be less biased than its past forecasts. Although U S WEST"7h J0*&&PP" attributes its error in part to the fact that it "has been even more successful than it budgeted in  X4reducing expenses,"KK  yOb'ԍU S WEST Direct Case at 8.K we conclude that the effect of this success, if any, would have caused USWEST's actual perline BFP revenue requirement to be closer to its understated forecasts, thereby mitigating, not amplifying, other errors. While USWEST repeatedly cites unprecedented growth in loop plant, cable and wire, and circuit investment over the past several years, it nevertheless developed its tariff year 1997/98 BFP revenue requirement  Xv4forecast based on the unsupported assumption that "growth [will] return to historical levels.":LvX  {O 'ԍId.: Similarly, although U S WEST attributes part of its error since 1994 to its sales of certain  XH4exchanges, which have taken longer than expected to complete,:MH  {O 'ԍId.: USWEST gives no indication that it has used this information to adjust its tariff year 1997/98 forecast. Under such circumstances, and in light of USWEST's history of repeatedly, significantly underestimating its BFP revenue requirement, we conclude that USWEST's tariff year 1997/98 forecast is unreasonable.  X 4352. ` ` USWEST indicates in its direct case that, until 1993, it developed its BFP revenue requirement forecast by processing its budget forecasts through its Part 36 Model and  X4Part 69 Model.LN|  yO'ԍU S WEST Direct Case at 16.L In 1994, USWEST states that it changed its budget forecasting process to prepare budgets at a higher level of detail, necessitating certain changes in its BFP revenue requirement forecasting methodology. Instead of forecasting directly from the models, USWEST instead used the Part 36 Model and the Part 69 Model to develop preliminary actual BFP revenue requirement data for the immediately preceding calendar year. It then applied a forecasted growth rate, developed using its new budget forecasting process, to the model data. USWEST states in its Direct Case that "[t]he change in methodology in 1994 was driven by a change in business practices and was not intended as an attempt to change BFP forecasting methods. It is not apparent at this time that the 1994 change in BFP  X4forecasting methodology altered 1997 tariff year projections in any way.":O   {O~'ԍId.: Our examination of USWEST's perline BFP revenue requirement forecasts shows no significant change in the performance of its perline BFP revenue requirement forecasting methods, and we accept USWEST's representations to this effect.  XN'` `  G ii.hh}Southwestern Bell  X 4453. ` ` In its direct case, SBC offered explanations for the persistent underestimation" O0*&&PP"" of the perline BFP revenue requirements of Southwestern Bell. SBC states that Southwestern Bell performs a Cable and Wire Study and a Circuit Equipment Study to categorize facility investment between looprelated and trunkrelated costs, and to identify privatelinerelated  X4and specialaccessrelated costs.FP  yO4'ԍSBC Direct Case at 5.F The percentage of costs these studies allocate to the loop  X4has a significant impact on the interstate BFP revenue requirement.:QX  {O'ԍId.: These studies currently are updated on a monthly basis although, prior to August, 1993, Southwestern Bell updated  Xv4the Cable and Wire Study only biannually.:Rv  {O 'ԍId.: SBC concedes that Southwestern Bell underestimated the looprelated costs these studies ultimately allocated to the BFP revenue requirement by between $22 million and $40 million for each tariff year between 1992/93 and  X141996/97, inclusive.BS1|  {O^'ԍId. at 67.B This error alone accounted for between onethird (1996/97) and virtually all (1993/94 and 1994/95) of Southwestern Bell's BFP forecasting error in these tariff years. Nevertheless, Southwestern Bell's tariff year 1997/98 BFP revenue requirement forecast was developed using the same methodology that SBC admits has consistently understated the per X 4line BFP revenue requirement in the past.AT   {O'ԍId. at 23.A  X 4554. ` ` In preparing its BFP revenue requirement forecasts, a carrier may reasonably rely on Cable and Wire and Circuit Equipment studies that have forecast loop costs accurately in the past. SBC concedes, however, that it has generated forecasts using these studies that have consistently understated these items for the past five tariff years. Similarly, while we recognize that Southwestern Bell's BFP revenue requirement forecasts are based in part on budgeting decisions that have not been finalized for the second half of the tariff year at the time of filing, we find that it is not reasonable for SBC to continue to rely on consistently understated budget estimates that repeatedly generate low BFP revenue requirement forecasts. Therefore, we find that SBC's continued reliance on these studies in developing Southwestern Bell's forecasts is unjustified. Accordingly, we conclude that Southwestern Bell's BFP revenue requirement forecast for tariff year 1997/98. is unreasonable in that it is likely to show a downward bias in the same manner as its previous forecasts.  X|4655. ` ` SBC's reliance on other sources of Southwestern Bell's errors for individual tariff years does not provide a basis for altering this conclusion. For instance, in tariff year 1991/92, Southwestern Bell's BFP revenue requirement forecast was low allegedly because of"NT0*&&PPh"  X4"larger investments associated with facility upgrades than projected."@U  {Oy'ԍId. at 6.@ For tariff year 1992/93, Southwestern Bell states that its forecast did not include actual costs of "righttouse fees associated with the advancement of network interconnection requirements" and "corporate  X4relocation costs.":VZ  {O'ԍId.: For tariff year 1995/96, Southwestern Bell cites "an accumulation of items  X4that resulted in operating expenses higher than amounts reflected in the forecast."@W  {OA 'ԍId. at 7.@ SBC does not assert that any of these costs were unforeseeable, and we are therefore skeptical that they could not have been included in the BFP revenue requirement forecast. Similarly, SBC and PacTel were beginning the merger process early in 1996, well before the BFP revenue  XH4requirement forecasts needed to be finalized.XH~  {Ow'ԍSee, e.g., News Release, "SBC Communications Inc. and Pacific Telesis Group Announce Merger Agreement; Creates Nation's Second Largest Telecommunications Company" (San Francisco, Apr. 1, 1996). The probable effects of a successful merger on Southwestern Bell's BFP revenue requirement could have been anticipated in the tariff year 1996/97 filing. Similarly, the probability of a flood should have been incorporated into  X 4Southwestern Bell's BFP revenue requirement forecasts throughout this period.sY@   yO'ԍSBC provides no information on the precise dollar impact of the 1993 midwestern flood. The flood, however, affected only a small portion of Southwestern Bells' service area and, based on information provided in the record, explains significantly less than half of Southwestern Bell's tariff year 1992/93 error. SBC Direct Case at 6. Accordingly, even if we were to make an adjustment for this flood, Southwestern Bell would nevertheless continue to fail our statistical tests. While the information in the record is insufficient for us to determine whether Southwestern Bell's forecasts incorporate the probabilities of floods or any other natural phenomena, we observe that Southwestern Bell's perline BFP revenue requirement forecasts substantially understated the perline BFP revenue requirement even in years without floods.s The effects of both of these events on the BFP revenue requirement, however, appear to have been  X 4relatively small.CZ   {Of'ԍId. at 6, 8.C  X '` `  G iii.hh}GTE  Xy4756. ` ` GTE indicates that, because of changes to its budgeting process for tariff year 1997/98, it has changed from a budgetoriented, bottomup forecast methodology to a "two XK4year trend," calculated by study area.G[Kr  yOn#'ԍGTE Direct Case at 13.G GTE concedes that its forecast is not consistent with the historical trend, because GTE recognized a decrease in its BFP revenue requirement of 5.3 percent overall between 1995 and 1996. GTE developed its 1997/98 forecast by projecting"[0*&&PP" continued decline at that rate.  X4857. ` ` The 1997 Designation Order required each price cap LEC to "calculate its actual interstate BFP revenue requirement for calendar years 19911996 and associated tariff  X4years (beginning with the 19911992 tariff year)."Y\  {O'ԍ1997 Designation Order at  17.Y Each price cap LEC did so, with the exception of GTE. GTE reports in its direct case, without explanation, that information  Xx4concerning its tariff year 1996/97 actual BFP revenue requirement is "not available."V]xZ  yO 'ԍGTE Direct Case at Exhibit A8, p. 2.V Since filing its direct case, GTE has provided the Commission with no additional explanation or information concerning its tariff year 1996/97 perline BFP revenue requirement, either in its  X34rebuttal, or on an ex parte basis. Given GTE's disregard of the information requirements set  X 4forth in the 1997 Designation Order, for purposes of this Order, we tested the performance of GTE's forecasting methods using only the five data points (tariff years 1991/92 through  X 41995/96) that GTE provided. Even after adjusting the critical t statistic for this smaller data sample, GTE's forecasts fall outside of the 90 percent confidence interval.  X 4958. ` ` GTE offers sparse explanation of its consistently low BFP revenue requirement forecasts, stating only that "[d]uring the period of 19911996, GTE used forecasted budget data in the preparation of it projected interstate BFP revenue requirements. With the wide geographic area GTE serves and the changes in economic conditions and/or acts of nature, there were variances between the budget data and the actual interstate BFP revenue  X<4requirement results."F^<  yO'ԍGTE Direct Case at 5.F While we agree that diverse conditions in GTE's large number of study areas could make GTE's BFP revenue requirement, and its forecasts, more volatile, we cannot agree that such conditions explain the consistent and substantial understatement observed since 1991. While volatility could contribute to the large magnitude of GTE's forecasting errors, it does not explain the fact that GTE's forecasts are consistently low.  X4:59. ` ` We have indicated in this and other proceedings our belief that it is difficult to  X4forecast accurately the BFP revenue requirement based on only two years of data.d_Zz  yO'ԍ1997 Annual Access Tariff Filings, CC Docket No. 97149, Memorandum Opinion and Order, DA 97 {O '1350 (Com. Car. Bur., rel. June 27, 1997), at  21 (1997 Suspension Order); 1996 Annual Access Tariff Filings, Memorandum Opinion and Order, 11 FCC Rcd 7564, 7594 (Com. Car. Bur. 1996).d We find such a forecasting technique to be particularly suspect when used by a LEC to extrapolate a yeartoyear change in the BFP revenue requirement that is relatively "large" compared to the magnitude of the changes experienced by that LEC in other years and by other LECs. Especially in light of the fact that none of the LECs under investigation here have recorded such a large decline two years in a row since 1991, and in light of GTE's history of repeated,"(_0*&&PP" substantial understatement of its BFP revenue requirement, we find that GTE's perline BFP revenue requirement forecast for tariff year 1997/98 is likely again to show a downward bias, despite its revisions to its forecasting methodology. In addition, as discussed below, our forecast of GTE's tariff year 1997/98 monthly perline BFP revenue requirement differs substantially from GTE's forecast.  Xv'` `  G iv.hh}Bell Atlantic North (NYNEX)  XH4;60. ` ` Our analysis of the data indicates that NYNEX's perline BFP revenue requirement forecasts have understated its actual perline BFP revenue requirement in a statistically significant manner since 1991. In explaining this error, Bell Atlantic asserts that in tariff years 1992/93, 1993/94, 1994/95, and 1995/96 NYNEX underestimated "expenses and  X 4other taxes."f`  yOe 'ԍBell Atlantic Direct Case, Detailed Responses at 78.f Bell Atlantic explains that "[a] major contributing factor to the under[estimates] was significant increases in actual operating expenses due to force reduction  X 4and service improvement initiatives."Aa X  {O'ԍId. at 10.A According to Bell Atlantic, NYNEX's work force plans were either not available, or preliminary, in February of each of these years, when NYNEX developed its BFP revenue requirement forecasts, causing "more potential variability  Xy4around meeting the actual expense target in the projected tariff period.":by  {O'ԍId.:  XK4<61. ` ` We agree that the preliminary nature of NYNEX's plans in February could make forecasting the BFP revenue requirement more difficult. We conclude, however, that, while the preliminary nature of NYNEX's plans could increase the standard error of NYNEX's forecasts by increasing the uncertainty of its forecasts, this fact cannot explain the repeated, statistically significant understatement of NYNEX's perline BFP revenue requirement we observe here. Instead, we conclude that NYNEX's consistent understatement of its perline BFP revenue requirement over this period indicates the use of biased forecasting techniques.  X4=62. ` ` For example, in tariff year 1993/94, Bell Atlantic states that NYNEX forecasted its BFP revenue requirement using a twoyear growth rate that failed to capture a special pension enhancement booked in the second quarter of 1994, and that caused "an  XN4under[estimate] in expenses and other taxes."@cN|  {O{"'ԍId. at 8.@ For tariff year 1994/95, Bell Atlantic states that $83 million of NYNEX's $99 million error occurred because this special pension  X 4enhancement offer (already underway in the second quarter of 1994) continued into tariff year" c0*&&PP"  X41994/95, which "increased expenses.":d  {Oy'ԍId.: Bell Atlantic offers no explanation for NYNEX's inability to account for expenses attributable to a pension enhancement offer that had already been implemented.  X4>63. ` ` On behalf of NYNEX, Bell Atlantic also cites, for tariff year 1991/92, adjustments to its revenue requirement forecast for the anticipated effects of exogenous adjustments, such as the completion of inside wire amortizations in Massachusetts and Rhode  Xa4Island.deaZ  yOl 'ԍBell Atlantic Direct Case, Detailed Responses at 7.d This explanation fails to persuade us either that NYNEX's BFP revenue requirement forecasting techniques are reasonable, or that they do not exhibit a downward bias. In developing its BFP revenue requirement, NYNEX could have chosen to account for this factor and probably could have developed highly accurate estimates of the actual impact.  X 4?64. ` ` NYNEX's tariff year 1996/97 perline BFP revenue requirement forecast came closer than any other forecast during this period to its actual perline BFP revenue requirement, overstating the actual figure by a small amount. In explanation, however, Bell Atlantic indicates that, for 1996/97, NYNEX developed its forecast based on a small change in its rate base from 1994 to 1995. Bell Atlantic explains that "this resulted in a small forecasted decrease in rate base which did not fully reflect the much larger change in rate  Xd4base that occurred from 1995 to 1996."@fd  {O'ԍId. at 8.@ Bell Atlantic does not indicate the reasons for this decline, that it expects NYNEX's rate base to continue to decline, or that the decline was attributable to factors that it could not have incorporated into its BFP revenue requirement forecasts.  X4@65. ` ` In its direct case, Bell Atlantic indicates that, for tariff year 1991/92, NYNEX forecasted its BFP revenue requirement by applying a normalized 1990/1991 growth rate to its 1991 budget to forecast the 1992 budget. It then added forecasted budget data from the second half of 1991 and the first half of 1992 to generate a test period budget, which it then processed according to the Part 36 and 69 rules. Since tariff year 1992/93, NYNEX has used a methodology similar to Bell AtlanticSouth's, that forecasts the BFP revenue requirement by  Xg4extrapolating the growth experienced in the past two years.egg|  yO!'ԍBell Atlantic Direct Case, Detailed Responses at 19.e  X94A66. ` ` Bell Atlantic does not indicate that NYNEX changed forecasting methodologies in order to increase the accuracy of its forecasts, or to correct for any inherent bias, and our examination of its perline BFP revenue requirement data reveals no observable improvement"  g0*&&PP" in NYNEX forecasts after 1991. Instead, because NYNEX's past forecasts show a statistically significant bias toward understatement of the perline BFP revenue requirement, we find that NYNEX's perline BFP revenue requirement forecast for tariff year 1997/98 is likely again to show a downward bias. Therefore, we prescribe a perline BFP revenue requirement forecast for NYNEX that is reasonable in light of the past performance of its perline BFP revenue requirement since 1991.  X_'` `  G v.hh}Bell Atlantic South (Bell Atlantic)  X14B67. ` ` Our analysis indicates that Bell Atlantic has understated its perline BFP revenue requirement forecast in a statistically significant manner. Based upon the actual and projected monthly perline BFP revenue requirements filed in its direct case, Bell Atlantic appeared to have an accurate and unbiased forecasting method. In its opposition, however, AT&T charged that Bell Atlantic had been incorrectly calculating its Total Other Taxes  X 4figure.Uh  yO7'ԍAT&T Opposition at Appendix B, p. 1.U Correcting this Total Other Taxes calculation, AT&T asserts that Bell Atlantic's actual BFP revenue requirement should be approximately $11 million to $33 million higher  X4for each tariff year.OiX  {O'ԍId. at Appendix B, p. 3.O  Xb4C68. ` ` In rebuttal, Bell Atlantic provides corrected BFP revenue requirement data, which significantly increase the disparity between its forecasted and actual perline BFP  X44revenue requirements.Vj4  yO'ԍBell Atlantic Rebuttal at Appendix B.V While Bell Atlantic asserts that its forecasts remain reasonable after calculating Total Other Taxes correctly, our test of the difference between its mean actual and mean forecasted perline BFP revenue requirement shows a significant downward bias in the forecasts.  X4D69. ` ` We conclude that Bell Atlantic's forecasts show a downward bias because Bell Atlantic has developed its forecasts since 1991 using substantially understated estimates of Total Other Taxes. Because it has corrected for this error, and because Bell Atlantic's past forecasts have generated reasonably unbiased forecasts, except for the effects of this error, we conclude that Bell Atlantic's forecasting methodology is likely to generate a reasonable projection of its actual perline BFP revenue requirement for tariff year 1997/98. We therefore direct Bell Atlantic, in conjunction with its January 1, 1998, access tariff filing, to recompute its tariff year 1997/98 perline BFP forecast, and issue any necessary refunds, using its existing methodology and the corrected BFP revenue requirement data contained in its rebuttal. " zj0*&&PP"Ԍ X'` `  G vi.hh}Sprint  X4E70. ` ` In its direct case, Sprint offers no explanation for its consistent understatement  X4of its perline BFP revenue requirement since tariff year 1992/93.k  yO4'ԍOnly in tariff year 1991/92 did Sprint's forecast exceed its actual perline BFP revenue requirement. Instead, Sprint states that it "does not have at its disposal the level of resources and time required [to] gather the  X4detailed information necessary" to explain its BFP revenue requirement forecasting errors.QlX  yO'ԍSprint Direct Case at Exhibit 3.Q Instead, Sprint states that it considers the Commission's information requirement to be  X_4"unnecessarily stringent.":m_  {O 'ԍId.:  X14F71. ` ` Sprint alleges that, despite its consistent understatement of its perline BFP revenue, it has allocated appropriate amounts of the BFP revenue requirement to the CCL charge, because it exceeded the $6.00 MLB monthly EUCL cap each year since 1991. While this cap has limited Sprint's ability to inflate improperly its common line revenues over this period, the MLB EUCL cap does not serve to ensure that Sprint's forecasting methods are unbiased. In addition, while Sprint's perline BFP revenue requirement exceeds the former $6.00 cap, it does not exceed the current $9.00 cap. Therefore, as with the other price cap LECs, any bias present in Sprint's perline BFP revenue requirement forecasting techniques is now of increased importance.  XK4G72. ` ` Sprint indicates that, through tariff year 1995/96, it used a bottomup forecasting methodology identical to that used before it elected price cap regulation. Specifically, it states that it subjected test year budget data to its "Part 36 and 69 systems" to  X4produce a budgeted BFP revenue requirement.Qnz  yO1'ԍSprint Direct Case at Exhibit 7.Q After 1995, Sprint changed its budgeting process, so that it no longer generated monthly budget data used for this process. For tariff years 1996/97 and 1997/98, Sprint states that it has used a twoyear trendbased forecasting  X4methodology.:o   {O|'ԍId.: Sprint states, however, that "since the process was performed at the individual Sprint level, some companies chose to trend pervious years' actual data, while  X4others chose to trend previous years' filing data.":p  {O"'ԍId.:  Xe4H73. ` ` Sprint does not indicate that it changed forecasting methodologies in order to increase the accuracy of its forecasts, or to eliminate any downward bias, and our examination"N!. p0*&&PP" of its perline BFP revenue requirement data reveals no observable improvement in Sprint's tariff year 1996/97 forecast. Because Sprint's past forecasts, including its tariff year 1996/97 forecast, show a statistically significant bias toward understatement of the perline BFP revenue requirement, we find that Sprint's perline BFP revenue requirement forecast for tariff year 1997/98 is likely again to show a downward bias, despite its revisions to its forecasting methodology. Accordingly, we reject Sprint's perline BFP revenue requirement forecast for tariff year 1997/98, and prescribe a forecast that is reasonable, in light of the performance of Sprint's actual, perline BFP revenue requirement since 1991.  X1'` ` e. Prescription of BFP Revenue Requirement Forecasts (#  X '` `   (1)GUse of Autoregressive Analysis to Develop Prescriptions  X 4I74. ` ` In the past, the Commission has not prescribed any particular methodology for the LECs to use in developing their perline BFP revenue requirement forecasts because it has recognized that the LECs might reasonably employ a variety of methods to develop these forecasts. Indeed, in this proceeding the LECs were given ample opportunity to provide information to justify their forecasting methodologies. The Communications Act requires that the LECs' charges, including those based on the BFP revenue requirement and enduser  XK4demand forecasts, be "just and reasonable."GqK  yO'ԍ47 U.S.C. 201(b).G  X4J75. ` ` The Communications Act empowers us, in such a case, "to determine and prescribe what will be the just and reasonable charge, or the maximum or minimum, or  X4maximum and minimum, charge or charges" these LECs are permitted to impose.GrX  yO'ԍ47 U.S.C. 205(a).G We therefore prescribe, below, the perline BFP revenue requirement to be used by these five LECs in calculating their EUCL charges, CCL charges, and PICCs for the 1997/98 tariff year. The use of these prescribed perline BFP revenue requirements will produce just and reasonable charges.  Xe4K76. ` ` In light of our analysis above, we conclude that the use of a prescriptive remedy with respect to the perline BFP revenue requirement calculations of these five LECs is necessary and appropriate in this case, even though the Commission has not, in the past, prescribed in advance any particular methodology for use by the LECs' in preparing their BFP  X 4revenue requirement forecasts.s   yO#'ԍ1997 Annual Access Tariff Filings, CC Docket No. 97149, Memorandum Opinion and Order, DA 971350 (Com. Car. Bur., rel. June 27, 1997), at  21. We continue to believe that there are many different methods that could produce reasonable forecasts for individual LECs, and that it would be""@s0*&&PP" counterproductive for us to prescribe the use of any particular methodology. In fact, the LECs whose forecasts we accept in this proceeding have used a wide variety of forecasting  X4techniques, as was permitted by the 1997 TRP.t  yOK'ԍMaterial to be Filed in Support of 1997 Annual Access Tariff Filings, Tariff Review Plans, DA 97593 (rel. Mar. 21, 1997),  8.  X4L77. ` ` We conclude, however, that we must prescribe forecasts of the perline BFP revenue requirement for the tariff year 1997/98 for the LECs that have consistently made significant underestimates of their perline BFP revenue requirement in previous tariff periods and have given us no satisfactory explanation why their estimates for the 1997/98 tariff year do not also underestimate their perline BFP revenue requirement. For four of the LECs that fall into this category, we apply an autoregressive method to develop the forecasts upon which we base our prescription for the tariff year 1997/98. Because GTE failed to supply adequate data to apply this autoregressive method, we combine simple arithmetic and geometric averages of its past perline BFP revenue requirements to develop a forecast for the tariff year 1997/98. Although Bell Atlantic's past forecasts have consistently underestimated its BFP revenue requirement, the source of its past underestimates has been identified and we order Bell Atlantic to calculate and file a forecast for the tariff year 1997/98 based on a corrected version of its forecasting methodology. These prescribed forecasts will serve as the basis for calculating refund liability for the period July 1, 1997 through December 31, 1997. LECs are permitted to adjust these prescribed forecasts for the period January 1, 1998 through June 30, 1998 to allow for any January 1, 1998 reductions in the number of EUCL charges actually levied on customers with ISDN lines. Finally, we agree with parties contending that, in addition to the impact an inappropriately low forecast of perline BFP revenue requirement has on permitted common line revenues in any given tariff year, a consistent, significant underestimation of the perline BFP revenue requirement increases common line revenues for all future years above what our price cap rules would otherwise permit. These parties have failed to provide, however, a reasonable quantification of this secondary effect and we decline to prescribe a reduction in LEC PCIs in this Order.  X~4M78. ` ` We conclude that we should use autoregressive forecasting. Autoregressive forecasting is used commonly to forecast future values of a variable, when the value of that variable depends, not on time, but on past values of the same variable. When applied to data that exhibit such a correlation over time, autoregressive analysis will forecast the next value in the series based on that correlation. Conversely, when applied to data that show only random fluctuations, the results of an autoregressive analysis closely approximate the arithmetic mean of the data. For data that exhibit random fluctuations, we find that a forecast that approximates the arithmetic mean is the most reasonable forecast available for the next member of the series. Accordingly, we conclude that autoregression provides a forecasting tool that accounts for intertemporal correction present in the data and, in cases where random fluctuations are present, provides an unbiased estimate of the central tendency of the perline""# t0*&&PP " BFP revenue requirement series.  X4N79. ` ` The forecasting methods we use in developing our prescriptions produce reasonable perline BFP revenue requirement forecasts for these LECs, consistent with Section  X4201(b) of the Communications ActGu  yO'ԍ47 U.S.C. 201(b).G and, therefore, reasonable charges as well. Therefore, we require US WEST, Southwestern Bell, NYNEX, Sprint, and GTE to adjust their perline BFP revenue requirement forecasts in accordance with the prescriptions below, so that just and reasonable charges can be put in place.  X14O80. ` ` Southwestern Bell, U S WEST, NYNEX, and Sprint. In prescribing the perline BFP revenue requirement for use by US WEST, Southwestern Bell, NYNEX, and Sprint, we seek to employ the forecasting method that is most likely to produce reasonable results for tariff year 1997/98. To this end, we rely primarily on a simple autoregressive forecasting technique, where each year's perline BFP revenue requirement is a function of the previous year's value.  X4P81. ` ` Providing a reasonable forecast based on six points of data is, at best, a difficult task that is made more difficult by our lack of access to data regarding future LEC business and construction plans. Examination of LECs' per-line BFP revenue requirements shows that some LECs' revenue requirements exhibit a positive correlation between successive values, while others appear to fluctuate randomly over time. For those LECs whose per-line BFP revenue requirement has followed an upward trend, we intend to prescribe a per-line BFP revenue requirement that approximates the upward movement over time. To the extent that a LEC's per-line BFP revenue requirements appear to fluctuate randomly, we conclude that a prescription based on some measure of per-line BFP revenue requirement's central tendency is likely to result in unbiased forecast. As discussed more fully below, we rely primarily on a simple autoregressive forecasting technique, where each year's per-line BFP revenue requirement is a function of the previous year's value. In addition, we include forecasts based on a variety of other techniques to check the validity of our prescription.  XO4Q82. ` ` In our forecasting, we rely on the adjusted, "series 2" actual calendaryear BFP revenue requirement data submitted by the price cap LECs, further adjusted for certain additional onetime expenses detailed in the statistical appendix (such as depreciation revisions for U S WEST), and calendar year line counts, to compute adjusted actual perline BFP revenue requirement data on a calendar year basis. To prescribe perline BFP revenue requirement forecasts for tariff year 1997/98 for U S WEST, Southwestern Bell, NYNEX, and Sprint, we subject these data to autoregressive analysis.  X"4R83.` ` Our forecasts based on the autoregressive method are shown in the table below. The LEC forecasts are shown at the bottom of the table. To support the reasonableness of our"#$Xu0*&&PP!" forecasts, we include in the table an estimate of the perline BFP revenue requirement for tariff year 1997/98 based on a simple linear extrapolation of any trend in each LEC's past actual perline BFP revenue requirement, and the arithmetic mean of the same data. As discussed above, a forecast based on an autoregressive model should approximate a linear extrapolation of any trend that exists, and in the absence of a trend should approximate the arithmetic mean. The simple linear trend regressions show that adjusted perline BFP revenue  Xv4requirements for Southwestern Bell and USWEST exhibited statistically significant trends.ivv  yO'ԍFor additional discussion, see the statistical appendix.i For these LECs the forecast produced by the autoregressive technique are lower than those produced using a simple linear trend, but are well above the arithmetic mean. In contrast, the autoregressive model produced forecasts for NYNEX and Sprint that are nearly equal to the arithmetic mean. Visual inspection of the actual perline BFP revenue requirements of these  X 4LECs, as adjusted for changes in our rules, reveals no real pattern or trend.w X  yO 'ԍGraphical representations of all of these companies' data are included in the statistical appendix. We conclude that the autoregressive method, using available data, provides reasonable forecasts of perline BFP revenue requirement for the tariff year 1997/98 for US WEST, Southwestern Bell, NYNEX, and Sprint. c ddx!(y%; vc   "" p X'}^ Nynex)GTE*Sprint9^SouthwesternmUS Westya Xx4n a-aala@@@@@P XO' FCC Autoregression  (AutoForecast a planeaichaj a lefth cjljdljljldkjlkaj;lkjlkjjlkj;lkj;lkj;lkj;lkj;klj;lkj;lkj;lkj;lkj;lkj;lkj;lkj Prescription) 8l$6.48 8na8$6.56 8Z$6.53 8$7.38  @' poX!!(prescription)!n-lpon-l ""  X' FCC Trend Forecast l$6.72 na$6.58 Z$6.72 $7.24  "" n-l X' FCC Calendar Year Arithmetic  Mean kl$6.39 knak$6.55 kZ$5.96 k$6.10 ZpBnB-BBlB1 ""  X0' LEC Forecast )l$5.92 )+$6.21 )$6.41 )Z$5.75 )$6.56     X4S84. ` ` Accordingly, we direct US WEST, Southwestern Bell, NYNEX, and Sprint to recalculate their EUCL charges, CCL charges, and PICCs for tariff year 1997/98, using the forecasts shown on the first line of the table above. For LECs subject to our prescription that tariff EUCL charges on a studyarea basis, we direct them to recalculate their EUCL charges, CCL charges, and PICCs, by increasing each study area's forecasted perline BFP revenue requirement by the ratio of our companywide prescription, shown above, to the LEC's filed 1997/98 forecast, shown on the last line of the table above. These LECs must then issue a refund, including interest, to each IXC operating in its region, computed by multiplying the difference in the CCL rate by the number of minutes each IXC originated from or terminated to that LEC between July 1 and December 31, 1997. Refunds shall be computed on the basis"!%w0*&&PP"" of daily compounded interest using interest rates specified by the United States Internal Revenue Service.  X4T85.  ` ` Prescription for GTE. The 1997 Designation Order required each price cap LEC to demonstrate that its projection of tariff year 1997/98 enduser demand was reasonable by providing trend analyses using actual numbers of lines and the natural logarithm of the number of lines, as reported in ARMIS, if available. That order required the LECs to develop  Xa4these trends using calendar year linecount data from 19911996.Yxal {O'ԍ1997 Designation Order at  33.Y All of the price cap LECs provided us with calendar year enduser demand data, except GTE. Without explanation,  X34GTE disregarded this requirement of the 1997 Designation Order and failed in its direct case to provide the required calendar year line counts.  X 4U86. ` ` The autoregressive forecasting technique that we used to develop perline BFP revenue requirement prescriptions for US WEST, Southwestern Bell, NYNEX, and Sprint relies on the use of calendar year perline BFP revenue requirement data that have been adjusted for the effects of Commission rule changes on the BFP revenue requirement since 1991. Because GTE did not file calendar year line count data in its direct case, we have been  X}4unable to compute such calendar year perline BFP revenue requirement data for GTE.y~}Zl {O'ԍIn response to a staff request, GTE filed, ex parte, calendaryear line count data. SeeĠLetter from F.G. Maxson, Director Regulatory Affairs, to William F. Caton, Acting Secretary, Federal Communications Commission, (filed Nov. 21, 1997). We reject these calendaryear data, however, as unreliable. As discussed  {O'more fully in the statistical appendix, in many cases, the line count for a particular tariff year (e.g., 1994/95),  {O'filed in GTE's direct case, is greater than the line counts filed ex parte for both surrounding calendar years (e.g., 1994 and 1995). We consider this result to be highly unlikely, especially when repeated several times in the series. As discussed, GTE's perline BFP revenue requirement forecasts have evidenced a downward bias, and we have therefore rejected GTE's tariff year 1997/98 forecast. Accordingly, we must select an alternative method of prescribing a forecast for GTE. In doing so, we will use a method that represents the most reasonable forecast available based on this record.  X4V87. ` ` As discussed more fully in the statistical appendix, because GTE has prevented us from determining its adjusted, calendaryear perline BFP revenue requirements, we rely instead on the three tariffyear perline BFP revenue requirement values contained in the record for which the Commission's rules remained constant. During these three tariff years,  X4GTE's actual perline BFP revenue requirement decreased slightly.zl yO"'ԍThe actual perline BFP revenue requirements for tariff years 1993/94, 1994/95 and 1995/96 are $7.57, $7.44, and $7.18, respectively. With only three data points, however, we are unable to determine whether the slight decrease over this period represents a slight downward trend that may continue, or whether the series is relatively"i& z0*&&PPd" stable, showing no trend, with the slight downward slope occurring by chance. If this downward slope continued as a trend, a prescription based on the geometric average growth rate would represent a reasonable estimate of the tariff year 1997/98 value. If, on the other hand, the series shows no trend, the arithmetic mean would represent a reasonable estimate of the value of the next member of the series.  Xv4W88. ` ` We have computed projections based on both the geometric average growth rate and the arithmetic mean of this series and adjusted for changes to the Commission's treatment of payphone and OB&C expenses. Because we cannot determine from only three data points whether GTE's perline BFP revenue requirements show a trend, however, we cannot conclusively reject either forecast. In this case, therefore, we conclude that a reasonable estimate of GTE's perline BFP revenue requirement for tariff year 1997/98 is the average of these two forecasts. We have computed this average and we direct GTE to use the resulting $7.26 perline BFP revenue requirement forecast for tariff year 1997/98.  X 4X89. ` ` We direct GTE to recalculate its EUCL charges, CCL charges, and PICCs for tariff year 1997/98, using this Commissionprescribed forecast. To do so, we direct GTE to recalculate its EUCL charges, CCL charges, and PICCs, by increasing each study area's forecasted perline BFP revenue requirement by the ratio of its companywide prescription to its filed 1997/98 forecast. GTE must then issue a refund, including interest, to each IXC operating in its region, computed by multiplying the difference in the CCL rate by the number of minutes each IXC originated from or terminated to that LEC between July 1 and December 31, 1997. Refunds shall be computed on the basis of daily compounded interest using interest rates specified by the United States Internal Revenue Service.  X4Y90.  ` ` ISDN Lines. The Access Charge Reform Order revised the Commission's treatment of integrated services digital network (ISDN) lines, reducing the number of EUCL  X4charges assessed on these derived channel services.e{l {O'ԍAccess Charge Reform Order at  11122.e Specifically, the Access Charge Reform  X4Order reduced the number of EUCL charges assessed on primary rate interface (PRI) ISDN lines from twentyfour to five, and reduced the number of EUCL charges assessed on basic  XT4rate interface (BRI) ISDN lines from two to one.J|TZl yO_'ԍ47 C.F.R. 69.152(l).J With these changes taking effect on January 1, 1998, we have not adjusted our prescriptive perline BFP revenue requirement forecasts to account for this change. Such an adjustment, if made to rates applied in the period July 1, 1997 through December 31, 1997, would overstate the proper perline BFP revenue requirement, and is not required to compute these LECs' refund liability for that period.  X!4Z91. ` ` For the period January 1, 1998, through June 30, 1998, our review of the"!'|0*&&PP2 " record indicates that the impact on the perline BFP revenue requirement of this change to the treatment of ISDN lines will be relatively small. Bell Atlantic, for example, indicates that this change affects NYNEX's perline BFP revenue requirement by approximately two  X4cents.e}l yO4'ԍBell Atlantic Direct Case, Detailed Responses at 27.e This twocent adjustment appears to be one of the greatest impacts reflected in the record. USWEST, for example, indicates that this change to the treatment of ISDN lines  X4requires an adjustment of only 4500 lines, out of millions in its region.L~Xl yO'ԍU S WEST Direct Case at 22.L Nevertheless, if the carriers for which we prescribe perline BFP revenue requirement levels in this proceeding have not already adjusted their enduser demand forecasts to account for the effects of the changes to the treatment of ISDN lines to reflect a tariffyear average demand level, and if  X14adjustments to enduser demand levels are needed, 1l yO 'ԍBell Atlantic indicates that Bell Atlantic South has never reported PRI ISDN lines on a voicegrade  {O'equivalency basis and, therefore, requires no change to its end user demand forecast. Id.  we permit these LECs to make an adjustment to our prescriptions to reflect, on a goingforward basis, effective January 1, 1998, the revised treatment of ISDN lines.  X '` `   (2)` GRejection of Other Proposals (#  X 4[92. ` ` Some of the LECs challenge the assumption that the BFP revenue requirement and EUCL demand are variables that can be forecast more accurately once historical data are modified to eliminate the impacts of past rule changes and other variables. We disagree. As discussed in the statistical appendix, for some LECs, the adjusted series 2 BFP revenue requirement data show a strong trend. In any case, the autoregressive analysis we use in this order does not depend on the presence of a trend in the data to provide reasonable results. Nevertheless, autoregression permits us to account for, and take advantage of, any trend present in the data in developing our prescriptions.  X4\93. ` ` The price cap LECs have indicated that they have used in the past some form  X4of either trend forecasting, or "bottomup" forecasting.Bl {O'ԍFor a further discussion of these forecasting techniques, see 1997 Designation Order at  2829. In developing our prescriptive BFP revenue requirement forecasts for tariff year 1997/98, we decide not to rely on a "bottomup" approach. The record before us contains insufficient data to permit us to develop and test such a forecasting method, because a "bottomup" forecasting method relies on individual LEC budget forecasts, details of company business plans, service models, and other highly specific data that the Commission is illequipped to assess. Moreover, even if we were to require the LECs to submit sufficient data, such an approach still depends upon the reliability of the LECs' budgeting and other forecasts on an individualcomponent basis. Southwestern Bell and USWEST used a bottomup forecasting method to develop their estimates, and" (0*&&PP" both have cited errors stemming from the fact that their financial information for the upcoming year is not wellenough developed to permit unbiased forecasting when the BFP revenue requirement forecasts are prepared for the upcoming year. While GTE this year has switched to a forecast based on the twoyear BFP revenue requirement trend, it developed all of its prior BFP revenue requirement forecasts using a bottomup forecasting methodology with poor results.  X_4]94. ` ` We conclude that the shortcomings of Southwestern Bell's, U S WEST's, and GTE's forecasts likely stem from these LECs' use of these poorlydeveloped budget data, and that we would be unlikely to develop more accurate forecasts using these data than did the LECs themselves. We are now several months into the current tariff year, and these LECs may now possess budget information that is more accurate and welldeveloped than that upon which they based their June forecasts. We will base our prescriptions, however, on the LECs' perline BFP revenue requirement on information that was available to the LECs at the time they developed their June forecasts, and we will not to make use of any updated budget data  X 4that may exist. l {O 'ԍIn any event, the record in this proceeding is now closed. Although ex parte presentations are  {O'permitted, 1997 Designation Order at  82, no LEC has submitted any additional data that may exist. To do otherwise would confer an advantage on the very LECs that we have found to have proposed forecasts that are consistently and inappropriately low. Furthermore, the limited time available to us to complete tariff investigations does not allow us to extend the process of gathering and adjusting data.  X44^95. ` ` The Commission has concluded in the past with respect to trendbased forecasting that it is difficult to develop an accurate forecast based only on two years of  X4data.$l yO'ԍ1996 Annual Access Tariff Filings, Memorandum Opinion and Order, 11 FCC Rcd 7564, 7594 (Com. Car. Bur. 1996). LECs using such a forecasting method, in general, extrapolate to the tariff year ahead the percentage change in the BFP revenue requirement experienced in the last two periods for which actual data are available. The record indicates that some LECs have produced  X4relatively unbiased forecasts using this method, and we do not here prohibit its use.U|l {O'ԍE.g., Aliant Direct Case at 5.U Nevertheless, this method remains vulnerable to significant error if unexpected or onetime events were to cause a large change in the most recent yeartoyear change in the BFP revenue requirement. In such a case, the LEC's extrapolation would be based on a growth rate not representative of that to be expected in the future. GTE's tariff year 1997/98 forecast, based on its extrapolation of a large drop in its BFP revenue requirement between 1995 to 1996, provides such an example, in that its resulting tariff year 1997/98 forecast departs substantially from historical growth rates. Because of our concerns with the reliability of this method, we decline to base our prescriptions in this order on a twoyear trendbased forecast." )0*&&PP"Ԍ X4ԙ_96. ` ` Several parties suggest that we modify our rules to permit the use of pastyear actual BFP revenue requirement and enduser demand data in computing the perline BFP  X4revenue requirement.l {OK'ԍE.g., Ameritech Direct Case at 4; Bell Atlantic Direct Case at 6; Sprint Direct Case at 4. These parties argue that such a method would remove the uncertainty and controversy associated with forecasting from the calculation of the perline BFP revenue requirement, and would streamline the calculation process. The Price Cap Performance Review, Fourth Report and Order, recently considered this issue and rejected the use of historical data in developing EUCL and CCL rates, deciding instead to continue to rely on  X_4forecasted data.Z_Zl {Oj 'ԍPrice Cap Performance Review for Local Exchange Carriers, CC Docket No. 941, Fourth Report and Order in CC Docket No. 941 and Second Report and Order in CC Docket No. 96262, FCC 97159 (rel. May 21, 1997) at  17172. We will consider this issue further, if at all, on reconsideration in that proceeding.  X 4`97. ` ` We also decline to adopt AT&T's proposal to require the LECs to forecast the BFP revenue requirement and enduser demand levels based on a trendline of past calendar  X 4year data.G |l yO'ԍAT&T Opposition at 14.G While such a method may produce reasonable results, we conclude, as discussed above, that there are many reasonable methods of forecasting the perline BFP revenue requirement. We also decline to require the LECs to include an "error correction" adjustment  X 4to their forecasts to correct for the revenue effects of any error in the prior year.: l {Od'ԍId.: While the price cap LECs' forecast of the BFP revenue requirement is still based on rateofreturn principles, this calculation is not used directly to determine permitted common line revenues. Instead, common line revenues permitted under price caps are adjusted each year for changes to the PCI. Adjustments to the BFP revenue requirement forecast to account for errors in the prior year, therefore, would not necessarily correct for any resulting impact on common line rates or revenues.  X4a98. ` ` Finally, we decline to use the analyses submitted by AT&T and MCI in their oppositions. Both AT&T and MCI analyze the LECs' BFP revenue requirement forecasts, purporting to demonstrate that these forecasts have historically understated the total BFP revenue requirement. MCI and AT&T conclude, based on analyses using regression and average growth rates, that this historical pattern is likely to continue in tariff year 1997/98. We conclude that there are two problems with these analyses. First, as discussed above, it is the perline BFP revenue requirement forecast, and not the BFP revenue requirement or end"*0*&&PPq"ԫuser demand forecasts individually, that affects the determination of EUCL and CCL  X4charges.l yOy'ԍAT&T does not challenge the LECs' line count forecasts in its opposition. MCI concedes that the LECs' line count forecasts since 1991 have been "relatively accurate." MCI Opposition at 7. Therefore, an analysis of the BFP revenue requirement, separately from an analysis of the LECs' line counts, is of limited value. Second, by using unadjusted data in their analyses, AT&T and MCI have failed to correct for Commission rule changes and other factors that affect the apparent historical growth rate.  Xv'` `   (3)GAdjustment to BaseYear Common line Revenues  XH4b99.` ` In this section we consider some parties' arguments that we reduce LEC PCIs to remove the residual impact of inappropriately low forecasts on total permitted common line revenues in subsequent years. We conclude that, although there is likely to be some impact, the parties have provided no convincing quantification of the permanent upward effect of inappropriately low forecasts on permitted common line revenues, and we decline to order an reduction to LEC PCIs at this time.  X 4c100. ` ` The record in this proceeding is not sufficient to permit us to calculate the cumulative effects of this understatement on the current perminute CCL. The maximum  Xy4CCL charge is determined, in part, by aggregate baseperiod common line basket revenues.Wy7l yOa'ԍ47 C.F.R. 61.45(c), 61.46(d).W Thus, any increase in aggregate common line revenues is carried forward into the following year, further increasing future CCL charges and aggregate common line revenues in the  X44future. 4l yO'ԍThe effect discussed here differs from the situation where a LEC reports a perline BFP revenue requirement that is biased downward. In such a case, increases in CCL charges are offset, in part, by decreases in EUCL rates. In this case, past gains from underestimating perline BFP revenue requirements are the starting point for calculating CCL charges, and has no effect on EUCL charges. As discussed above, a price cap LEC may increase its total common line basket revenue if it submits forecasts of perline BFP revenue requirements that are biased downward, if the pricecap LEC's EUCL charge is below the EUCL cap, and if it experiences growth in average perline minutesofuse that is at least half of the growth experienced the previous year. When used by a price cap LEC that routinely develops unbiased perline BFP revenue requirement forecasts, the price cap formula adjusts the CCL rate in a manner intended to generate the balance of the common line revenues permitted under price caps not recovered from EUCLs, including the revenue increases associated with growth in average perline minutesofuse under the "balanced 5050" formula.  XN4d101. ` ` In its opposition, AT&T asserts that, by repeatedly understating their perline BFP revenue requirements, the LECs have systematically inflated their CCL rates since"7+0*&&PP"  X41991.Ll yOy'ԍAT&T Opposition at 15 n.24.L We agree that a LEC that has consistently understated its perline BFP revenue requirement over the course of several years has also consistently and correspondingly inflated its maximum CCL rate. Each year, the price cap LEC uses its prior year's total common line revenues as the starting point in computing its CCL rate. If the price cap LEC, by understating its perline BFP revenue requirement, inflates its aggregate common line revenues in a given year, the price cap formula automatically builds this inflation into its CCL rate for the upcoming year. A price cap LEC that repeatedly understates its perline BFP revenue requirement, therefore, compounds the increase to its aggregate common line revenues every year. As the effects of this overstatement compound each year, the maximum CCL charge becomes increasingly inflated, generating revenues that will exceed the common line revenues intended to be permitted under price caps.  X 4e102. ` ` US WEST, Southwestern Bell, GTE, Sprint, NYNEX, and Bell Atlantic all have repeatedly understated their perline BFP revenue requirement, in a statistically significant manner since the advent of price cap regulation, and the effects of this understatement are now incorporated into the CCL rates of these LECs. AT&T, in its opposition, submits certain calculations of the amount it believes that it has overpaid in CCL  Xy4charges since 1991 because of the LECs' understatement of their BFP revenue requirements.OyXl yO'ԍAT&T Opposition at Appendix E.O This calculation, however, does not accurately state the amount by which the LECs' current common line revenues permitted under price caps may be overstated because of any past downward bias in the LECs' perline BFP revenue requirement forecasts. Contrary to AT&T's assertion, the CCL rate is recalculated each year, according to the formula contained in  X4section 61.46(d)(1) of the Commission's rules.Ll yO'ԍ47 C.F.R. 61.46(d)(1).L Any analysis of the cumulative effects of these price cap LECs' understatement of their perline BFP revenue requirements would need to proceed from this formula, taking into account both any CCL revenue increase, and any EUCL revenue foregone, that is attributable to a downward bias in the LECs' perline BFP revenue requirement forecasts.  X|' B.` ` Equal Access Exogenous Cost Changes  XN' ` ` 1.  Background  X 4f103.` ` In the 1988 Equal Access Cost Reconsideration Order, the Commission ordered equal access expenses to be capitalized and recovered (amortized) over eight years, instead of" ,x0*&&PP"  X4being recovered as an operating expense in the year the expense was incurred.(l {Oy'ԍEqual Access Reconsideration Order at 437  25. Equal access expenses are the costs that the LECs  {OC'incurred in order to provide equal access, i.e., one plus dialing for presubscribed customers of interstate  {O 'interexchange carriers, as required by the Modification of Final Judgment and the Commission. See Access  {O'Reform First Report and Order, at n. 409.  This amortization permitted the recovery of the capitalized expense, including an allowance for the cost of capital, in eight equal installments. Under the rateofreturn (ROR) regulatory regime applicable to all LECs in 1988, LECs were allowed to increase their annual permitted regulated revenues by the amount of the annual amortization. Under that rateofreturn regulatory framework, after LECs had been permitted the opportunity to earn this annual fixed amount for eight years (ending on December 31, 1993), allowable annual regulated revenues would have been reduced by the annual amortization amount. When price cap regulation was initiated on January 1, 1991, the annual amortization expense for equal access was incorporated into the total revenues permitted for the traffic sensitive basket. Thus, the revenues LECs were allowed to receive, and the prices they were allowed to charge at the inception of price caps, were higher than they otherwise would have been by the amount of  X 4the annual amortization expense for equal access. In the Access Reform First Report and  X 4Order, the Commission found that the annual revenue effect of the equal access amortization  X 4should be removed from LEC rates because the amortization period had long since expired.n l {O+'ԍ See Access Reform First Report and Order, at  311.n The Commission therefore required price cap LECs to make a downward exogenous adjustment to the traffic sensitive basket to account for the completion of the amortization of  X}4equal access costs.$}Jl {Ox'ԍ Access Reform First Report and Order at  314. The exogenous adjustments are adjustments to the price cap indices that LECs are required to make for changes to costs in providing access services that are  {O 'beyond the control of the company and that are not reflected in the annual inflation adjustment. See 47 C.F.R.  61.45. The Commission stated that such an adjustment would ensure that  Xf4ratepayers are not paying charges based upon costs that have already been fully recovered.if6 l {OM'ԍ Access Reform First Report and Order at  302.i  X!4g104.` ` In their 1997 annual access tariff filings, the majority of price cap LECs determined the exogenous adjustment by first identifying the dollar amount of the equal access amortization that was included in setting the initial price cap index in 1991. They then reduced this amount by the percentage by which the price cap index (PCI) for the traffic sensitive basket had been reduced from the initiation of price cap regulation to June 30, 1997,  X4i.e, an average of 20%. If they had adjusted for both the decline in the PCI and the increase in demand, their downward exogenous adjustment would have been significantly greater, rather than 20% lower, than the original upward exogenous adjustment. Thus, the LECs have"- 0*&&PP" made only twothirds of the downward adjustment needed to remove fully from current rates the impact of the original upward adjustment. The benefit the LECs will receive from the third not removed will continue to grow every year as demand growth exceeds the decline in the price cap indices. Aliant, in contrast, determined the amount of equal access costs to be removed by determining the initial amortization and then increased that amount to account for the change in total revenue for the traffic sensitive basket between the initiation of price caps and the present.  XH4h105.` ` In the 1997 Suspension Order, the Bureau set for investigation the question whether LECs had completely removed these equal access expenses from their rates, as  X 4required by the Access Reform First Report and Order.Y l {O 'ԍ 1997 Suspension Order at  36.Y  The Bureau questioned whether most LECs had removed completely equal access exogenous cost expenses because, after they calculated these expenses, they had reduced this amount by the amount of the PCI change in the traffic sensitive basket between the initiation of price cap regulation and June 30, 1997. The Bureau suggested that LECs may need to adjust the PCI by the percentage change in base period revenue ("R") from the date each LEC made its first annual access price cap  X4filing through June 30, 1997.rZl yO'ԍBase period revenue is revenue earned in the prior calendar year.r In addition, the Bureau tentatively concluded that the documentation of the unadjusted equal access expense provided by   Ameritech and SNET  Xf4indicated that they may have improperly implemented the requirements of the Access Reform  XQ4First Report and Order. The Bureau also stated that it was not persuaded that Aliant's exogenous cost adjustment, which appears to have included the "R" adjustment, was correctly calculated or fully supported.  X4i106.` ` In the 1997 Designation Order, the Bureau tentatively concluded that LECs should make a revenue adjustment to the amortized equal access expenses, as opposed to the LECs' proposed PCI adjustment, in order to remove amortized equal access expenses  X4completely from current rates.Zl {OO'ԍ 1997 Designation Order at  41.Z The Bureau tentatively found that a revenue adjustment is reasonable in this case because it recognizes that price cap indices are adjusted to reflect the  X4average basket price and a component of that price reflects equal access amortization.Z|l {O 'ԍ 1997 Designation Order at  41.Z The Bureau tentatively concluded that this revenue adjustment also recognizes that as demand has grown over time, the revenue recovered through this equal access amortization component of  XA4price has grown correspondingly.ZAl {O%'ԍ 1997 Designation Order at  41.Z Therefore, in order to remove fully the revenues being collected today associated with the amortized equal access costs, the Bureau tentatively"*.0*&&PP""  X4concluded that the LECs must account for this demand growth.Zl {Oy'ԍ 1997 Designation Order at  41.Z  X4j107.` ` The Bureau sought comment on the "R" adjustment used by Aliant and proposed by AT&T, particularly their use of growth rates in LECs' local switching revenue to  X4calculate the exogenous cost adjustment.ZZl {O'ԍ 1997 Designation Order at  42.Z The Bureau also sought comment on whether  X4removal of equal access costs is similar to reversal of sharing obligations.Hl {O* 'ԍ 1997 Designation Order at  42. Sharing refers to the requirement that LECs earning greater than specified levels share a portion of those earnings with ratepayers in the next tariff year through reduced rates.  {O 'Sharing was eliminated by the Commission in the Price Cap Performance Review for Local Exchange Carriers;  {O 'Access Charge Reform, CC Docket Nos. 941, 96262, FCC 97159 (adopted May 7, 1997; released May 21,  {OP '1997) (X Factor Order). When LECs have incurred sharing obligations for a tariff year under our prior price cap rules, they first lowered the PCI to implement sharing at the beginning of the tariff year and then raised the PCI at the beginning of the next tariff year to reverse the effect of the sharing obligation. This reversal is accompanied by an exogenous PCI increase.  In addition, parties were asked to address whether the Commission should prescribe the particular methodology for removing equal access noncapitalized expenses or whether the Commission should allow LECs to use any reasonable method that completely removes the amortized  X14equal access expenses from their rates.Z1 l {O'ԍ 1997 Designation Order at  42.Z  X 4k108.` ` Finally, the Bureau directed U S WEST, SWBT, Bell Atlantic, NYNEX, GTE, Ameritech, BellSouth, Frontier, Aliant, Nevada Bell, Pacific Bell, Rochester, and SNET to submit data on the local switching revenue of their traffic sensitive basket as reflected in their  X 4initial price cap filings.Z l {O'ԍ 1997 Designation Order at  43.Z The Bureau concluded that these data would allow the Commission to calculate the revenue change for each of these companies from the dates they made their  X4initial price cap filings through June 30, 1997.Z l {Oa'ԍ 1997 Designation Order at  43.Z  Xb' ` ` 2.  Discussion  X44l109.` ` We determine first that removal of equal access amortization from LEC rates will be accomplished by an exogenous adjustment to each LECs' PCI because an exogenous adjustment is the mechanism established in the rules for adjusting the PCI for changes other"/0*&&PP"  X4than inflation and the Xfactor.l yOy'ԍThe Xfactor is the required annual adjustment to price cap indices to reflect targeted changes in  {OA'productivity. See 47 C.F.R.  61.45(d). As explained in further detail below, we conclude that this exogenous adjustment should also take into account the growth in revenues that has occurred since 1991.  X4m110.` ` Generally, under price cap regulation, a cap is applied to each unit of traffic so that as demand grows the LECs' revenue also grows by the amount of the capped price multiplied by each additional unit of traffic. Since demand has grown, the increase in the PCI incorporated into price caps in 1991 to permit LECs to recover the amortization expense for equal access now permits the LECs to recover a far greater increase in annual revenue than the annual amortization amount specified in 1988. This is because the portion of the price cap that permitted recovery of the appropriate amount of the equal access amortization in 1991 has been applied to each unit of traffic, and has permitted an increase in revenues as traffic has increased. Therefore, in order to eliminate fully the impact of the equal access amortization, we must reduce the price cap to a level that will remove from current revenues all revenues attributable to the initial increase in the PCI to reflect the equal access  X 4amortization expense.x "l yOz'ԍ For example, suppose an exogenous cost increase of $10 million in a price cap basket occurred in 1991. If revenues for this basket were $100 million, the percentage change in the PCI because of this exogenous cost change would be 10%. Now, in 1997, if traffic had increased by 500% then basket revenues would be $500 million and the revenues attributable to the initial exogenous increase would be $50 million. We note that the per unit price of some services in this basket could fall. Thus, to remove fully the effects of the exogenous cost increase, we should remove 10 percent of $500 million, which is $50 million, not the original cost increase of $10 million. In that way, the current price cap will be set at the same level it would have been had the amortization been completed before the initiation of price cap regulation.  XK4n111.` ` The general mechanism for removing this level of revenues is to determine the percentage by which revenues were increased on account of the equal access amortization in  X41991 and then adjust the PCI to achieve the same percentage reduction of current revenues.xb l yO0'ԍ If the effect of the equal access amortization adjustment was, for example, to increase by 1% the initial level of annual revenues allowed under price caps, then to remove the adjustment now so that future price cap permitted annual revenues are unaffected by the amortization adjustment, permitted annual revenues have to be reduced by the same 1%. Similarly, the average price (PCI) LECs can charge under price caps should be reduced by the same 1%. This is equivalent because revenue is simply price times quantity. Of course, the dollar amount of the annual revenue reduction is greater than the initial annual revenue adjustment, since the revenue from the adjustment grows with demand over time.  Accordingly, we will require LECs to adjust their 1997/1998 access rates by this mechanism. This mechanism is what the Bureau has used in other instances to make adjustments to the price cap in a way that will completely eliminate the effect of prior adjustments. For"00*&&PP" instance, the Bureau has used this mechanism to impose, and subsequently remove, the sharing obligations of LECs subject to sharing under our price cap rules. This mechanism permits LECs to increase their PCIs after the completion of sharing to the levels at which  X4they would have been absent sharing.;@l yO4'ԍ For example, assume that a LEC has incurred a sharing obligation of $5 and that its annual revenues are $1000. At the beginning of the price cap tariff year, the Bureau requires the LEC to make an exogenous downward adjustment to its average price (PCI) of 5/1000, or 0.5%. The effect of this is to reduce the LEC's annual regulated revenues by $5 (0.5% of $1000.) A year later, at the beginning of the next price cap tariff year, the Bureau orders the LEC to make an exogenous upward adjustment to its PCI of 0.5%. The downward and upward adjustments to the PCI and revenues are the same 0.5%, but if the LEC's annual regulated revenues have grown over the last year to $1100, the dollar amount of the allowed increase is greater than the required decrease ($5.50 vs. $5).; In the same way, a PCI reduction now that takes into account revenue increase will eliminate completely the impact of the inclusion of equal access amortization expenses in the price cap.  X_4o112.` ` We are not persuaded that the LECs' proposals in this tariff filing would have the effect of removing the annual revenue effect of equal access amortization costs in a manner that results in just and reasonable rates. LECs, with the exception of Aliant, would remove the effect of equal access amortization by reducing their PCIs by less than the original dollar amount of the initial amortization adjustment. They obtain this result by multiplying the original dollar amount by their current PCI (which reflects all of the adjustments to average prices for inflation and the Xfactor since the beginning of price caps). The current PCI is less than the 1991 PCI, and thus, reduces the dollar amount to be taken out of price caps. They would then reduce their PCIs by the ratio of this amount divided by current  X4revenues.xl yO'ԍ For instance, suppose original equal access costs totalled $10 million; the current PCI for the traffic sensitive basket is 80; and the PCI for the traffic sensitive basket in 1991 was 100. The LECs propose to adjust the $10 million of equal access costs by the change in the PCI from 1991 to 1997 (100 to 80). Their adjustment reduces the equal access costs from $10 million to $8 million. In order to remove these costs from price caps, LECs propose to divide the adjusted amount of $8 million by 1997 revenues in the traffic sensitive basket, as per the rules describing removals of exogenous costs from the price cap index.  We reject this approach. Not only does it fail to account for the growth in demand during this period and, therefore, not remove fully equal access costs, but it actually reduces the PCI by an amount lower than the original amortization. The Figure in Appendix D illustrates the revenue impact of the LECs' proposed mechanism for removing equal access costs and the R adjustment that we require here.  X4p113.` ` We also reject U S WEST's argument that the Commission should permit the adjustment to remove equal access amortization from LEC rates to be reduced by the amount of the PCI reduction since the initiation of price caps, as the LECs proposed in their tariff filings, because of the delay by the Commission in addressing this issue. The impact of the delay has been that U S WEST and other price cap LECs have had the ability to charge"10*&&PP" higher rates during this delay in excess of the amount of equal access costs entitled to amortization. This excess recovery does not justify reducing the amount of the adjustment to terminate this amortization. To the contrary, LECs have benefitted by this delay and will not be harmed by now setting rates at the correct level. We also reject the LECs' argument that the adjustment should be modified for those LECs that priced below cap. The existence of such headroom does not suggest that demand failed to grow between the inception of price caps and June 30, 1997, such that an "R" value adjustment is not needed. The fact that some LECs may have been priced below cap as a voluntary matter does not justify modifying the  XH4exogenous adjustment at issue here."Hl {O 'ԍ The existence of "headroom" (i.e., a difference between the cap and the prices charged) would indeed be relevant if we were making the LECs refund the monies they obtained in earlier years as a result of the error we are now correcting. It is to their benefit, not detriment, that we are giving the correction only prospective application.  X 4q114.` ` In addition, we reject BellSouth's argument that the equal access adjustment should not reflect growth because the costs subject to the amortization do not change with demand. As explained above, the portion of the LECs' price cap index attributable to the equal access amortization has permitted the LECs to recover increasing amounts as demand has increased. We also reject Bell Atlantic and Ameritech's proposal that the only reasonable starting point for an "R" value adjustment would be the 1993 tariff year, or the date on which LECs set their equal access rates to zero. This proposal does not capture revenue growth in 1991 and 1992, and thus, a portion of the increase in LEC price cap revenues attributable to the initial incorporation of equal access amortization expenses into the PCIs would remain in current rates.  X4r115.` ` In order to make the "R" adjustment, we direct LECs to identify the dollar amount of equal access exogenous costs as filed in their tariffs at the inception of price cap regulation. LECs must then multiply this amount by the ratio of the sum of 1997 traffic sensitive and trunking basket revenues to the sum of 1991 traffic sensitive and transport  X4basket revenues.&l yO$'ԍ Delta Z= 1991 Equal Access Exogenous cost amount ' 1997 traffic sensitive + trunking basket revenues  yO'` `    1991 traffic sensitive + transport basket revenues& The resulting dollar amount represents the exogenous cost change for the equal access amortization of noncapitalized costs. This approach accounts for the restructure of the 1991 traffic sensitive and transport baskets in 1994 into the traffic sensitive and  X|4trunking baskets.| l {O7"'ԍ See In the Matter of Transport Rate Structure and Pricing, CC Docket No. 91213, 7 FCC Rcd 7006  {O#'(1994) (Transport Restructuring Order). Thus, the services included in the 1991 traffic sensitive and transport baskets correspond to the services in the 1997 traffic sensitive and trunking baskets. The equal access rate element is included in these composite baskets, and therefore, the percentage  X74that it increased the revenues of the composite basket (i.e., traffic sensitive and transport"72f 0*&&PP"  X4services) in 1991 is the same as the percentage decrease of revenues (i.e., from traffic sensitive and trunking services) in 1997.  X4s116.` ` We have considered other options, such as the use of local switching revenues in 1991 and 1997 as adjustment factors, and the use of traffic sensitive revenues in a two step procedure establishing revenue growth before and after the completion of the equal access amortization and transport basket restructuring. We reject the first option, however, because local switching revenues were not representative of traffic sensitive basket revenue growth. We reject the second option because it does not reflect accurately the reduction in traffic  X34sensitive basket revenues after the implementation of the Transport Restructuring Order. After the restructuring, traffic sensitive basket revenues decreased because some service categories were moved to the new trunking basket. Thus, 1997 traffic sensitive basket revenues were less than they would have been without restructuring.  X 4t117.` ` We recognize that the Commission has not required an "R" value adjustment to the PCI to reflect the end of the amortization of some costs. In addition, the Commission has not previously prescribed a specific methodology for price cap LECs to use when adjusting rates in recognition of the completion of a particular amortization. As noted above, in the  Xf4Access Reform First Report and Order, the Commission decided to align its treatment of the expiration of equal access amortizations with the expirations of the depreciation reserve  X:4deficiency and inside wiring amortizations.k:l {O'ԍ Access Reform First Report and Order, at  302. k In that Order, the Commission had before it the question whether any exogenous cost reduction should be required to reflect the end of the equal access cost amortization. The Commission decided to order such a reduction, looking to the depreciation reserve deficiency and inside wiring amortizations, where it had directed price cap LECs to make downward exogenous adjustments to their PCIs but had not specified  X4how that reduction would be accomplished.Zl {O'ԍ LEC Price Cap Order, 5 FCC Rcd at 6808,  173; LEC Price Cap Reconsideration Order, 6 FCC Rcd at 26732674,  7882. In none of the three orders did the Commission address or analyze the issue of whether price cap LECs should be required to  X4make an "R" adjustment to the PCI to reflect the completion of the amortizations.l {O'ԍ LEC Price Cap Order, 5 FCC Rcd at 6808,  173; LEC Price Cap Reconsideration Order, 6 FCC Rcd at 26732674,  7882. Price cap LECs simply made an exogenous cost decrease to their PCIs, without making an "R" value adjustment, and the rates were permitted to go into effect without suspension and investigation or specific consideration of this issue. The Commission also did not require an "R" value adjustment for the removal of payphone costs from the CCL charge coincident with"=30*&&PP"  X4the deregulation of LEC payphones in 1996.l {Oy'ԍ See In the Matter of Implementation of the Pay Telephone Reclassification and Compensation of the  {OC'Telecommunications Act of 1996, CC Docket No. 96128, 11 FCC Rcd 21233 (1996). Like the inside wiring and depreciation reserve deficiency decisions, the Commission did not specifically address the desirability of making an "R" value adjustment to account for the removal of payphone costs from regulated  X4accounts.$l {O'ԍ See In the Matter of Implementation of the Pay Telephone Reclassification and Compensation of the  {OZ'Telecommunications Act of 1996, CC Docket No. 96128, 11 FCC Rcd 21233 (1996).  X4u118.` ` With regard to the completion of the Other Post Employment Benefits (OPEB) amortization, the Bureau was presented with the issue of whether price cap LECs should be  X_4required to adjust the reversal of OPEB costs to account for revenue growth._l {O 'ԍ In the Matter of 1995 Annual Access Tariff Filings of Price Cap Carriers, DA 951631, 11 FCC Rcd  {OZ'5461, 5471 (1995) (1995 Suspension Order). The Bureau concluded that it would not require the LECs to make an "R" adjustment for the removal of OPEB costs in their 1995 annual access tariff filings, because the Commission had not  X 4specifically required such an adjustment in the First Report and Order.g l {O'ԍ1995 Suspension Order, 11 FCC Rcd at 5471.g We do not view this decision of the Bureau as constituting a determination that carriers should not be required to make "R" adjustments when making exogenous adjustments. Rather, it appears to have been based on the fact that the Commission had not specifically required an "R" adjustment. Further, we do not view prior instances of adjustment to price caps to account for the end of  X 4amortizations, or the payphone deregulation decision, as governing our differing decision today. Because these orders do not address directly whether an "R" adjustment is appropriate  X{4or inappropriate, we do not view the references in the Access Reform First Report and Order to the inside wiring and depreciation reserve amortizations as precluding an "R" adjustment here. We therefore conclude, for the reasons given above, that an "R" adjustment is necessary here to remove completely the effects of the initial inclusion of the equal access cost  X!4amortization in the PCI.!n l {O@'ԍ See e.g., Motor Vehicles Mfrs. Ass'n v. State Farm Mutual Automobile Ins. Co., 463 U.S. 29, 414 (1983) (an agency changing course must supply a reasoned analysis for the change).  X4v119.` ` We also reject arguments that we may not lawfully require LECs to make an "R" adjustment absent a rulemaking. Section 61.45(d) of the Commission's rules expressly anticipated that further guidance in the form of a "rule, rule waiver, or declaratory ruling" would be provided by the Commission as discrete exogenous adjustments became necessary. Further, we may lawfully make interpretations of price cap rules and requirements, including Section 61.45(d) pertaining to exogenous adjustments, in the context of declaratory rulings in"4 0*&&PP" tariff investigations. Although our determinations here will have precedential effect, we are not required to conduct a rulemaking to determine that carriers must make an "R" adjustment  X4for the 199798 access year in order to remove fully their equal access costs from the PCI.l {OK'ԍ See e.g., SEC v. Chenery, 332 U.S. 194, 203 (1947) (an agency may proceed by ad hoc litigation or rulemaking).  X4w120.` ` Accordingly, we require U S WEST, SWBT, Bell Atlantic, NYNEX, GTE, Ameritech, BellSouth, Frontier, Nevada Bell, Pacific Bell, Rochester, and SNET to revise their rates to reflect the removal of equal access expenses in accordance with the methodology prescribed herein. This prescription will lead to just and reasonable rates. We also require these LECs to issue refunds, computed by multiplying the difference in the LECs' proposed exogenous cost change for equal access amortization and the Commission's determination of this amount by onehalf, which represents the period between July 1 and December 31, 1997. Interest shall be computed on the basis of interest rates specified by the United States Internal Revenue Service.  X ' ` ` 3. SNET's Calculation of the Initial Equal Access Exogenous Cost  X 'Revenue Requirement (#  Xy' ` `  a.GBackground  XK4x121.` `  In the 1997 Designation Order, the Bureau found that SNET is the only price cap LEC that included equal access expenses from prior periods, excluding the 1990 period,  X4in calculating its initial equal access exogenous cost revenue requirement.Z"l {O'ԍ 1997 Designation Order at  44.Z SNET states that it accurately estimated its equal access exogenous cost adjustment because the Commission's instructions for completing the 1990 annual access tariff filings required LECs to include equal access expenses from prior periods, but not from the "current" period, which at that time was the 1990 period. The Bureau directed SNET to identify the specific part of the instructions for completing the 1990 annual access tariff filings that permitted SNET to  X4include equal access expenses from prior periods, but not from the 1990 period.Zl {O'ԍ 1997 Designation Order at  44.Z The Bureau also asked SNET and other parties to discuss how SNET's adjustment should be  Xg4treated in calculating the exogenous cost reduction required in the Access Reform First Report  XR4and Order.ZRFl {OI#'ԍ 1997 Designation Order at  44.Z  X&' ` `  b.GDiscussion "50*&&PP"Ԍ X4y122.` ` SNET is the only LEC that has continued to charge for equal access costs on a per line basis. Because SNET has removed its equal access costs based on growth in the number of lines, we find that SNET did not understate its equal access exogenous cost adjustment. We therefore conclude that SNET reported the correct amortized noncapitalized  X4equal access costs to be removed from the PCI. DZ"z yO'ԍAlthough AT&T initially questioned SNET's computation of its amortized noncapitalized equal access  {O'costs, AT&T subsequently stated that SNET in its Direct Case had explained AT&T's initial concerns. See AT&T Opposition to Direct Cases at n. 34. D  Xv'` ` 4.  Ameritech's Equal Access Amortization Revenue Requirement  XH'` `   a. GBackground  X 4z123.` ` In the 1997 Designation Order, we sought comment on whether Ameritech calculated accurately the equal access amortization revenue requirement associated with the  X 4total equal access revenue requirements through the use of internal separations data.Z l {O'ԍ 1997 Designation Order at  45.Z The Bureau directed Ameritech to explain how it used its separations information system data to determine the portion of the equal access costs that was amortized, and to document fully the data, assumptions, and methodologies that were used to calculate the equal access costs that  X4were amortized.Z|l {O'ԍ 1997 Designation Order at  45.Z  Xd' ` `  b. GDiscussion  X64{124.` ` We determine that, to be consistent with the methodology it used to set its price caps, Ameritech must use projected data to determine the amount of amortized equal access costs included in price cap rates. When Ameritech determined the amount of non X4capitalized expenses to establish its initial price cap equal access rate, it used the projected equal access revenue requirement. Thus, rates that are currently in Ameritech's traffic sensitive PCI are based on those projections and not on actual noncapitalized equal access costs. Ameritech now attempts to reduce its traffic sensitive PCI by the amount of actual equal access costs. Because, however, the equal access rates in Ameritech's PCI are based on projected equal access costs, we direct Ameritech to remove projected equal access costs from its traffic sensitive PCI rather than actual equal access costs. This approach will produce more consistent and verifiable results.  X"' C.` ` Other Billing and Collection Exogenous Cost Increases (#` " 60*&&PP"Ԍ X'` ` 1. Introduction  X4  X4|125.` ` Effective May 1, 1997, the Commission changed the separations rulesl {OK'ԍ See OB&C Order, 12 FCC Rcd 2679 (1997). Our jurisdictional separations rules are codified as Part 36 of our rules. Carriers commonly refer to that part as the Separations Manual.  X4applicable to Other Billing and Collection (OB&C) Expense. "l yO'ԍ OB&C expenses include expenses, such as salary and administrative expenses, associated with the preparation of customer bills, other than carrier access charge bills. Included in this classification are the expenses incurred in the preparation of monthly bills, initial and final bills, the application of service orders to billing records and other miscellaneous items. 47 C.F.R. 36.380(a). The OB&C Order revised these rules to replace the complicated allocation procedures, which relied on user and message counts, with a simple allocation procedure based on a fixed interstate allocation factor of 33 percent or 5 percent, depending on whether the price cap ILEC performs any end user billing  Xa4on behalf of IXCs.Oa l {O'ԍ Id. at 1317.O  X34}126.` ` Section 61.45 of the our rules requires price cap ILECs to file adjustments to  X 4the PCI for each basket as part of their annual price cap tariff filing.K l yOi'ԍ 47 C.F.R.  61.45(a).K Such adjustments shall include exogenous cost changes, including those caused by changes in our separations  X 4rules.P , l yO'ԍ 47 C.F.R.  61.45(d)(iii).P As part of their annual price cap tariff filings, the price cap ILECs filed exogenous adjustments to reflect the change in our separations rules.  X 4~127.` ` In order to determine the level of its exogenous adjustment, each company  X4calculated its interstate OB&C Expense in the base periodY l yO'ԍ47 C.F.R.  61.3(e) and 61.45(c).Y using the separations rules in place prior to May 1, 1997 ("former rules") and compared that result to the interstate OB&C Expense calculated, for the same period, using the new fixed allocation factor of either 33% or 5% ("new rules"). The difference between these two amounts formed the basis for the exogenous change. Each company then flowed that difference through its Part 36 and Part 69  X4modelsL l {O"'ԍ See Pacific Bell Direct Case, Attachment OBC8; U S WEST Direct Case, Exhibit 23; GTE Direct Case, Exhibit C4. to determine the exogenous cost's effect on each of the four price cap baskets (i.e., common line, traffic sensitive switched, trunking, and interexchange, as well as on the billing" 70*&&PP"  X4and collection category.l {Oy'ԍ Detariffing of Billing and Collection Services, 102 F.C.C.2d 1150, recon. denied, 1 FCC Rcd 445 (1986). When that process is complete, most of the costs that are shifted to the interstate jurisdiction by the change in our OB&C Expense separations rules are allocated, pursuant to the Part 69 rules, to the billing and collection category and recovered  X4through detariffed charges for nonregulated activities.7\"l yO'ԍ 47 C.F.R.  69.407(d). There may be a direct effect on the common line basket if a company was  {OV'allocating less than 5 percent of its total OB&C Expenses prior to the May 1, 1997 effective date of the OB&C  {O 'Order.7 The remainder of the cost shift, however, is recovered through access charges. This occurs because the rule changes, together with the allocation procedures prescribed by other separations rules, produce not only a direct increase in interstate OB&C Expense but also an increase in other interstate costs and expenses, termed "secondary or trailing effects." Specifically, because OB&C Expense is part  XH4of an allocation factor (i.e., "Big Three Expenses")LHFl yO?'ԍ 47 C.F.R.  36.112(a).L used in separating certain investment costs and expenses that are recovered through access charges, an increase in interstate OB&C Expense indirectly raises other interstate costs and expenses that are assigned to access elements, resulting in an increase in access charges.  X 4128.` ` In this section of the Order, we compare the interstate assignment under our former rules to the interstate assignment under our new rules in order to calculate the magnitude of the exogenous change. If the interstate assignment is understated under the former rules, the exogenous change is overstated under our new rules and it results in an increase in access charges. The analysis below examines in detail the calculations of the interstate OB&C Expense under both the former rules and the new rules as well as the manner in which the companies flow the exogenous change through our Part 69 rules.  X'X` ` 2. Background (#  X4129.USW ARMIS` ` The 1997 Suspension Order found that U S WEST's OB&C exogenous adjustment of $845,145, which U S WEST claimed was necessary in order to recover the two months of OB&C costs between May 1 and July 1, 1997, raises substantial questions of  X4lawfulness.el {O5!'ԍ 1997 Suspension Order at 4748, 51.e The Bureau also questioned whether other aspects of U S WEST's treatment of OB&C Expense are lawful. In particular, the Bureau noted that U S WEST's ARMIS Report 4304 shows that its allocation factors (i.e., the relative usage measurements it is required to use as a basis for allocating OB&C Expense among service categories and between the"i8h 0*&&PPq"  X4intrastate and interstate jurisdictions) are inconsistent with its allocation of that expense.Zl {Oy'ԍ 1997 Suspension Order at  51.Z  X4130.` ` In the 1997 Suspension Order, the Bureau also stated that GTE had not adequately explained why it accounts for more than half of the total OB&C exogenous cost amounts claimed by all ILECs in the April filings. The Bureau found that this anomaly raises  X4substantial questions of lawfulness.HZl {O'ԍ Id. at 52.H  Xa4131.` ` The Bureau also found a disparity between the portion of billing revenues that Pacific Bell had allocated to the interstate jurisdiction and the portion of billed toll messages that it had attributed to interstate services. The Bureau noted that Pacific Bell's data submission shows that the share of these toll messages attributed to interstate calls declined by more than 66 percent between the end of calendar year 1994 and the end of calendar year 1995 even though its corresponding interstate revenues (from billing and collection services provided to IXCs) increased slightly during that same year. The Bureau stated that Pacific Bell had not explained how such a precipitous decline in billed interstate messages could have occurred at a time when the associated revenues were increasing. In addition, the Bureau found that Pacific Bell may have overstated its exogenous cost changes by basing its analysis  X{4on calendar year 1995 data instead of calendar year 1996 data.H{l {O'ԍ Id. at 53.H  XM4 132.` ` In the 1997 Designation Order, the Bureau directed GTE, Pacific Bell, and U S WEST to explain the process by which they separate OB&C Expense between the intrastate and interstate jurisdictions. Because calculation of an exogenous change requires a comparison of separations procedures used in 1990 (the base year for initializing price caps) with separations procedures used in 1996 (the base year for the 1997 annual access charge  X4filings), the Bureau required the companies to explain and document this separations process for calendar years 1990 and 1996. Further, the Bureau required them to explain and document this process for the intervening years, 1991 through 1995, to provide a basis for  X4evaluating the reasonableness of their transition from 1990 procedures to 1996 procedures.b~l {O'ԍ 1997 Designation Order at  5061.b  Xi4133.` ` To facilitate its analysis of that process, the Bureau also directed these companies to explain and document the process by which they separate the corresponding revenues, Carrier Billing and Collection Revenues. The Bureau explained that, although the jurisdictional separations of those revenues did not affect the companies' claimed exogenous changes because those revenues are non-regulated, the Bureau intended to use the associated" 90*&&PP"  X4jurisdictional allocation factors, i.e., the message counts used for separating such revenues, as a basis for evaluating the message counts used for separating the message toll portion of OB&C Expense. The Bureau stated that this evaluation procedure seems reasonable given that the companies apparently used message counts as a basis for separating both revenues  X4and expenses.Nl {O'ԍ Id. at  50.N  Xx4  134.` ` With respect to GTE only, the Bureau designated for investigation the issue of apportionment of customer services expenses among OB&C Expense and other expense categories because GTE's Category 3 expense appear to be anomalously high and its Category 1 expense appear to be anomalously low compared to the other large ILECs. With respect to Pacific Bell, U S WEST, and GTE, the Bureau designated four other basic issues for investigation: (1) the apportionment of OB&C Expense among Message Toll and other service classes; (2) the separation of Message Toll Expense between the intrastate and interstate jurisdictions; (3) the apportionment of interstate OB&C Expense among access charge elements and categories; and (4) the calculation of the exogenous cost change caused  X 4by the rule change.b Zl {O'ԍ 1997 Designation Order at  5061.b  X{'` ` 3. Apportionment of Customer Services Expenses Among Separations  Xd'Categories by GTE (#  X64135.` ` The separations rules require carriers to segregate most customer services  X4expenses (i.e., all expenses recorded in Account 6620 except those attributed to Telephone Operator Expense and Published Directory Listing) among three expense categories: Category 1, Local Business Office Expense; Category 2, Revenue Accounting Expense; and Category 3,  X4All Other Customer Services Expense.Il yOy'ԍ 47 C.F.R. 36.376.I In the 1997 Designation Order, the Bureau required GTE to explain and document the methodology it used, during the period 1990 through 1996, to distribute customer services expenses among these three categories. In particular, the Bureau required GTE to explain why Category 3, All Other Customer Services Expense, grew rapidly during that period, increasing from 18 percent to 28 percent of total customer services  Xk4expense.k|l {O!'ԍ 1997 Designation Order at  53. The Bureau obtained GTE's expense data from the FCC ARMIS 4304 Report (199096), Rows 7300 and 7310, for GTE. The Bureau also required GTE to explain why Category 1, Local Business Office Expense, declined rapidly during that period, decreasing from 60 percent to 47 percent of total"T:0*&&PPN"  X4customer services expense.l {Oy'ԍ 1997 Designation Order at  53. The Bureau obtained GTE's expense data from the FCC ARMIS Report 4304 (199096), Rows 7220 and 7310, for GTE. The Bureau observed that these changes suggest that the 1996 Category 3 expense may mistakenly include a portion of Local Business Office Expense that GTE had properly assigned to Category 1 in 1990.  X4136.` ` An inappropriate assignment of Category 1 expenses to Category 3 would overstate the OB&C exogenous cost change. Specifically, Category 3 is separated on the  Xv4basis of Category 1 and Category 2 (OB&C) expenses combined.Lv"l yOI 'ԍ 47 C.F.R.  36.382(a).L Because Category 3 is separated based on the Category 2 expenses, an overstatement in Category 3 would result in an overstatement of the OB&C exogenous cost change. The direct effect of the separations change is to increase the interstate share of Category 2 expenses. The separations change also has an indirect effect because the larger the level of expenses in Category 3, the larger the total exogenous cost change, including secondary effects, resulting from the OB&C separations change.  X ' ` `  a.GDiscussion  X 4  X4137.` ` In this section of the Order, we require GTE to reassign its Category 1 and Category 3 customer services expense in proportion to the RBOCs' average Category 1 and Category 3 assignments for calendar year 1996. As discussed in more detail below, requiring GTE to reassign its Category 1 and Category 3 customer services expenses and prescribing an RBOC average allocator of GTE's Category 1 and Category 3 customer services expenses is  X4necessary for three reasons. First, GTE fails to support its assertion that the decrease in Category 1 expenses over the same time period is due to a consolidation of customer service operations as well as a new IXC contract removing the cap on uncollectibles. Second, GTE fails to support its assertion that the growth in Category 3 customer services expenses between 1990 and 1996 is due to appropriately assigned expenses and an increase in public telephone commissions. Finally, GTE fails to provide sufficient data to enable us to make a prescription by using GTEspecific data.  Xe4` `  G(1)hh}Category 1 Expense  X74 138.` ` Although GTE asserts that Category 1 expenses decreased as a result of consolidation of customer service centers, this assertion is inconsistent with its statement that  X 4this same consolidation substantially increased customer service expenses. Moreover, as noted above, GTE improperly assigned those increasing customer service expenses to Category 3 instead of Category 1. Further, GTE fails to provide any documentation to support its assertion that Category 1 expenses declined due to consolidation. GTE does not" ;0*&&PPH"  X4identify, for example, the magnitude of any of these consolidationrelated changes, i.e., the related decrease in Category 1 expense or the related increase in Category 3 expense. It therefore is unclear whether, after all these customer service expenses are properly classified in Category 1, the net effect of the consolidation was to increase or decrease Category 1  X4expense. Accordingly, GTE's showing is insufficient to establish that this consolidation explains the decline in Category 1 expense.  Xa4139.` ` We also are not convinced by GTE's argument that Category 1 expenses declined partly due to the decrease in IXC uncollectibles. GTE does not identify the size of the reduction in uncollectibles. Nor does GTE identify the amount of uncollectibles incurred in 1996. GTE's showing therefore fails to explain why Category 1 expense decreased 23  X 4percent in that calendar year.h l yO~ 'ԍ FCC ARMIS Report 4304 (19951996) Row 7220, for GTE.h Further, because GTE states that the decrease in uncollectibles began in 1996, this change cannot explain the 9 percent decrease in Category 1  X 4expense that occurred in the prior year.n Xl yO'ԍ FCC ARMIS Report 4304 (19941995) Row 7220, for GTE.n GTE thus does not demonstrate that the reduction in uncollectibles is primarily responsible for the decrease in Category 1 expense from 60 percent to 47 percent of total customer services expense between 1990 and 1996.  X{4140.` ` For these reasons, we find that GTE's showing regarding the changes to Category 1 and Category 3 customer services expenses between 1990 and 1996 does not  XM4adequately address the concerns raised by the Bureau in the 1997 Designation Order. As the  X84Bureau noted in the 1997 Designation Order, GTE's Category 3 assignment in 1996 was  X#4unusually large compared to that of the RBOCs.[#l {O'ԍ 1997 Designation Order at  53.[ In that year, the share of customer services expense that GTE assigned to Category 3 was more than double the largest Category 3 share assigned by any RBOC. Whereas the Category 3 expenses for individual RBOCs ranged from .03 percent to 13 percent of the total customer services expense, GTE's Category  X43 expense was 28 percent of total customer services expenses.zl yO'ԍ FCC ARMIS Report 4304 (1996), Rows 7300 and 7310, for Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, U S WEST, and GTE. Further, during the same year, GTE assigned an unusually low share of customer services expense to Category 1. Whereas that share ranged from 70 percent to 82 percent for individual RBOCs, GTE's share  X4was only 47 percent.l yO#'ԍ FCC ARMIS Report 4304 (1996), Rows 7220 and 7310, for Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, U S WEST, and GTE. Because GTE's response fails to explain these anomalies, we are not persuaded that GTE properly classified its 1996 Category 1 and Category 3 expenses. "T<* 0*&&PPh"Ԍ X4ԙ` `  G(2)hh}Category 3 Expense  X4141.` ` Except for public telephone commissions, GTE misassigned customer service administration expenses to Category 3 expense because these expenses are enduser service expenses that must be assigned to Category 1 subcategories: EndUser Order Processing,  X4EndUser Payment and Collection, and EndUser Billing Inquiry. l yO'ԍ47 C.F.R. 36.377(a)(1) through (a)(3). Category 1, Local Business Office Expense, also includes four other subcategories: Interexchange Carrier Service Order Processing, Interexchange Carrier Payment and Collection, Interexchange Carrier Billing Inquiry; and Coin Collection and Administration. 47 C.F.R. 36.377(a)(4) through (a)(7). These customer service administration expenses are Category 1 expenses, regardless of whether such services are provided in English or Spanish, because our rules do not distinguish customer services  XH4provided in other languages.<Hl {O 'ԍ Id.< Moreover, these customer service administration expenses are Category 1 expenses, even though the expenses in question are incurred in decentralized "local" offices or, in GTE's case, in consolidated offices serving customers at a regional or national level because the rules applicable to these three types of Category 1 expenses do not  X 4limit such expenses to costs incurred in offices located near the customers served.< Bl {O'ԍ Id.< The rules applicable to enduser billing inquiry expense, for example, do not distinguish between local and regional service centers. Instead, these rules simply state that this subcategory  X 4"includes expenses related to handling end users' inquiries concerning their bills."O l yO,'ԍ 47 C.F.R. 36.377(a)(3).O  Xy4142.` ` Although Category 1 is titled "Local Business Office Expense," this title does not exclude service expenses incurred outside a customer's local calling area. Rather, the title uses the descriptive term "local" because carriers have traditionally provided these customer services in their local business offices. If carriers now perform some of these services outside the local area, their remote facility provides the same customer service function and thus constitutes, for separations purposes, an extension of the local business office functions. We therefore find that GTE should have assigned these expenses to Category 1 instead of Category 3.  X4143.` ` GTE claims that the increase in Category 3 expense between 1990 and 1996 is due partly to an increase in public telephone commissions, but GTE does not quantify the magnitude of that increase in commissions. GTE does show, however, that the total amount"|=d 0*&&PP"  X4of these commissions at the end of the 19901996 period was $31.5 million,l yOy'ԍ Letter from W. Scott Randolph, DirectorRegulatory Matters, GTE to William F. Caton, FCC, at 11,  yOA'dated September 26, 1997. which is only  X4onehalf the size of the $62 million increase in Category 3 expense that occurred during that same period. GTE thus fails to demonstrate that an increase in these commissions had a significant effect on the level of Category 3 expense.  X4` `  G(3)hh}Prescription  X_4144.` ` We require GTE to reassign its Category 1 and Category 3 customer services expense in proportion to the RBOCs' average Category 1 and Category 3 assignments for calendar year 1996. We are using this approach because, as explained above, GTE fails to justify its assignments and does not provide us with the data necessary to make a prescription  X 4with GTEspecific data. The 1997 Designation Order required GTE to provide detailed  X 4information to support its Category 1 and Category 3 assignments.[ l {O'ԍ 1997 Designation Order at  53.[ In addition, after GTE filed its direct case, the Bureau staff requested additional information from GTE on these  X 4assignments./X l yO#'ԍLetter from W. Scott Randolph, DirectorRegulatory Matters, GTE to William F. Caton, FCC, at 1, dated September 18, 1997; Letter from W. Scott Randolph, DirectorRegulatory Matters, GTE to William F. Caton, FCC, at 2, 9, and 11, dated September 26, 1997./ Despite these repeated requests, GTE did not provide sufficient data from which we can make a prescription. Specifically, GTE provided no data that quantify  X4Category 3 expenses associated with consolidation activities.%Xl yO'ԍLetter from W. Scott Randolph, DirectorRegulatory Matters, GTE to William F. Caton, FCC, at 1, dated September 18, 1997; Letter from W. Scott Randolph, DirectorRegulatory Matters, GTE to William F. Caton, FCC, at 11, dated September 26, 1997.% In addition, GTE failed to provide data on the increase in public telephone commissions. Further, GTE did not file any data that documents the alleged decrease in Category 1 expenses due to consolidation. Finally, GTE provided no data regarding the decrease in uncollectibles due to the renegotiation of a contract which GTE indicates is also responsible for the decrease in Category 1.  X4145. GTE SIZE ` ` Because GTE provided no data regarding the magnitude of these individual decreases and increases in Categories 1 and 3 expenses, it is not possible to quantify the misallocation to its 1996 Category 1 and Category 3 expenses relying solely on GTE's 1996 data. Accordingly, we prescribe for GTE a reassignment of its Category 1 and Category 3 customer services expense in proportion to the RBOCs' average Category 1 and Category 3 assignments for calendar year 1996. It is reasonable to reassign these expenses by using an RBOC average because we would expect that if GTE had appropriately assigned its Category"g> 0*&&PPq" 1 and Category 3 expenses, the relative proportions would be similar to those of the RBOCs. We find this to be case because the RBOCs are similar in operating size to GTE. The RBOCs operating revenues, for example, range from $8 billion (Pacific Telesis) to $14 billion  X4(BellSouth) with GTE having almost $13 billion in operating revenues.l yO4'ԍ FCC ARMIS Report 4301 (1996) Row 1090 for Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, U S WEST, and GTE. Similarly, the RBOCs have Total Billable Access Lines in the range of 14 million (Southwestern Bell) to  X4almost 22 million (BellSouth) while GTE has approximately 17 million. l yO^ 'ԍ FCC ARMIS Report 4301 (1996) Row 2150 for Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, U S WEST, and GTE.  X_4146.` ` We find that prescribing expense assignments on the basis of an RBOC average, as we do in this Order, is consistent with our authority under Section 205(a) of the Communications Act. Section 205(a) provides in pertinent part that, whenever "after full opportunity for hearing, . . . the Commission shall be of opinion that any charge . . . of any carrier or carriers is or will be in violation of any of the provisions of this Act, the Commission is authorized and empowered to determine and prescribe what will be the just  X 4and reasonable charge."G xl yO'ԍ47 U.S.C.  205(a).G Courts have consistently found in the Act a Congressional intent to  X 4grant us broad discretion in "selecting methods . . . to make and oversee rates."F l {Ow'ԍMCI Telecommunications Corp. v. FCC, 675 F.2d 408, 413 (D.C. Cir. 1982) (quoting Aeronautical  {OA'Radio v. FCC, 642 F.2d 1221, 1228 (D.C. Cir. 1980), cert. denied, 451 U.S. 920 (1981)). See also Western  {O 'Union Int'l v. FCC, 804 F.2d 1280, 1292 (D.C. Cir. 1986) ("The FCC's judgment about the best regulatory tools  yO'to employ in a particular situation is . . . entitled to considerable deference from the generalist judiciary."); MTS and WATS Market Structure, CC Docket No. 7872, Phase I, Third Report and Order, 93 FCC 2d 241, 259 (1983) ("[A] prescribed rate is just and reasonable for purposes of Section 205(a) if it represents the best approximation of a rate that satisfies all statutory requirements that this Commission is capable of devising within a reasonable period of time."). In doing  X 4so, we may make any "reasonable selection from the available alternatives."_ l {On'ԍMCI Telecommunications, 675 F.2d at 413._ Rather than insisting upon a single regulatory method for determining whether rates are just and reasonable, courts and other federal agencies with rate authority similar to our own evaluate whether an established regulatory scheme produces rates that fall within a "zone of  XK4reasonableness."&Kl {O"'ԍSee, e.g., FERC v. Pennzoil Producing Co., 439 U.S. 508, 517 (1979); AT&T v. FCC, 836 F.2d 1386,  {On#'1390 (D.C. Cir. 1988) (quoting Jersey Cent. Power & Light v. FERC, 810 F.2d 1168, 1177 (D.C. Cir. 1987)).  {O8$'See also Wisconsin v. FPC, 373 U.S. 294, 309 (1963); FPC v. Natural Gas Pipeline Co., 315 U.S. 575, 58586 (1942). For rates to fall within the zone of reasonableness, the agency rate order must constitute a "reasonable balancing" of the "investor interest in maintaining financial"4?0*&&PP" integrity and access to capital markets and the consumer interest in being charged non X4exploitative rates." l {Ob'ԍJersey Cent. Power & Light, 810 F.2d at 117778. See Pennzoil Producing, 439 U.S. at 517 (to fall within the zone of reasonableness, rates must be neither "less than compensatory" nor "excessive.").   X4147.` ` Our discretionary authority to prescribe rates based on averaging is directly  X4supported by the Supreme Court's decision in the Permian Basin Area Rate Cases.E"l yOw'ԍ390 U.S. 747 (1968).E In that decision, the Court upheld the Federal Power Commission's (FPC) decision to depart from its former practice of determining the reasonableness of natural gas producers' rates by examining  Xa4the costs of each company on a casebycase basis.Eal {O 'ԍId. at 76870.E The Court found that the FPC's decision to prescribe maximum area rates for interstate natural gas sales based on composite cost data obtained from published sources and from producers through a series of cost  X 4questionnaires, fell within the "zone of reasonableness" required by the Natural Gas Act.c\ Dl {O'ԍId. at 76874. The Court noted that Congress had entrusted the regulation of the natural gas industry to the "informed judgment of the Commission," and stated that "a presumption of validity therefore attaches to each  {O'exercise of the Commission's expertise."  Id. at 767. c The Court emphasized that the Natural Gas Act had conferred upon the FPC broad responsibilities to regulate interstate distribution of natural gas and that prescribing rates based on composite industry data was a valid exercise of the FPC's discretionary authority under the Act: X[T]he "legislative discretion implied in the rate making power necessarily extends to the entire legislative process, embracing the method used in reaching the legislative determination as well as that determination itself." It follows that ratemaking agencies are not bound to the service of any single regulatory formula; they are permitted, unless their statutory authority otherwise plainly indicates, "to make the pragmatic adjustments which may be called for by  X4particular circumstances."[m^h  {O'ԍId. at 77677 (citations omitted). The Court cited as precedent Los Angeles Gas Co. v. Railroad  {O'Comm'n, 289 U.S. 287, 304 (1933); San Diego Land & Town Co. v. Jasper, 189 U.S. 439, 446 (1903); FPC v.  {Oe 'Natural Gas Pipeline Co., 315 U.S. 474, 586 (1942).m]   X4148.` ` In light of our broad discretion to select appropriate regulatory tools for ratemaking purposes, we have, on other occasions, made rate prescriptions based in part on an industrywide average or mean. Our decision in this investigation to make rate prescriptions on the basis of RBOCs average expense assignments is consistent, for example, with the"@ 0*&&PP" methodologies we used to (1) establish a unitary rate of return for ILECs' interstate access  X4services,l {Ob'ԍRate of Return Represcription Order, 5 FCC Rcd at 7507508. In prescribing the ILECs' rate of return in the rate of return represcription proceeding, we (1) determined the cost of debt by calculating the average embedded cost of debt among the seven regional holding companies (RHCs) and (2) established the ILECs' capital structure by determining the average embedded capital structure of the RHCs. Furthermore, the discounted cash flow method that we used to calculate the cost of equity established a single estimate of that cost  {OL'for the entire ILEC industry. Id. at 7508.  (2) create a productivity factor for price cap ILECs,Dl yO'ԍPolicy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87313, Second Report and Order, 5 FCC Rcd 6786, Appendix C (1990). The price cap scheme adopted in this Order adjusts the maximum prices that ILECs may charge for their interstate services using a productivity factor ("XFactor") that is based on data measuring the industrywide average performance of the ILECs. The validity of this methodology was  yO 'reaffirmed in our Price Cap Performance Review for Local Exchange Carriers, First Report and Order, CC  yO 'Docket No. 941, 10 FCC Rcd 8961, 9027 (1995). ģ (3) determine the  X4reasonableness of deprec iation rates for price cap ILECs;z l yO?'ԍSimplification of the Depreciation Prescription Process, CC Docket No. 92296, Report and Order, 8 FCC Rcd 8025, 8050 (1993). In determining whether a ILEC's depreciation rates are presumptively reasonable, three factors are considered: the projected life of plant, the future net salvage value of plant, and a survivor curve. The Commission uses an industry average to develop ranges for two of the three factors, the projected life of plant and future net salvage value. These ranges are based on intervals of one standard deviation around the industrywide mean value of the projected life of plant and future net salvage of plant underlying existing  {O'depreciation rates. Id. at 8050. and (4) prescribe direct costs for  X4physical collocation service.I\l {Oj'ԍLocal Exchange Carriers' Rates, Terms, and Conditions for Expanded Interconnection Through Physical  {O4'Collocation for Special Access and Switched Transport, CC Docket No. 93162, FCC 97208, Second Report and Order at paras 124264, released June 13, 1997.I  X4149.` ` We conclude that the methodology we are using for the purpose of prescribing RBOC average expense assignments ensures that GTE's rates fall within a zone of reasonableness. We adopt this approach after making a "reasonable selection from the  XH4available alternatives."aH"l {O'ԍ MCI Telecommunications, 675 F.2d at 413.a We considered reassigning GTE's Category 1 and Category 3 expenses by using, as a surrogate for 1996, GTE's assignment to Categories 1 and 3 as reflected in prior years' ARMIS reports. However, one problem with using companyspecific data in this case is that GTE's ARMIS data for prior years reveal that GTE possibly has misallocated Category 1 and Category 3 Expenses for several years. ARMIS data for the period 1990 through 1995 show that the share of customer services expenses assigned to Category 3 exceeded the corresponding average share reported by RBOCs in every year and the percentage by which GTE's Category 3 share exceeded the RBOC average varied greatly. In 1993, GTE's share exceeded the RBOC average by 65 percent, the smallest difference for"A0*&&PP8" any year in the period. In 1995, GTE's share exceeded the RBOC average by 186 percent,  X4the largest difference for any year in the period.l yOb'ԍ FCC ARMIS Report 4304 (1990 through 1995), Rows 7300 and 7310, for Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, U S WEST, and GTE. Hence, although the differences varied greatly, GTE's Category 3 share far exceeded the RBOC average Category 3 share throughout the period. Similarly, ARMIS data show that GTE's Category 1 assignment was below the  X4RBOC average in each year of that period. l yOu'ԍ FCC ARMIS Report 4304 (1990 through 1995), Rows 7220 and 7310, for Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, U S WEST, GTE.  Xv4150.GTE SMALLS` ` Another problem with using companyspecific data in this case is that GTE SMALLSmuch of the prior years' data are difficult to compare to 1996 ARMIS data. In the earlier half of the 19901996 period, GTE did not file ARMIS reports for many smaller study areas because their study area annual revenues were under the ARMIS reporting threshold. Consequently, even if the misassignment of Category 1 and Category 3 expenses had not occurred during one of those earlier years, it would be difficult to rely on that year's data for purposes of making a corrective adjustment to 1996 data.  X 4151.` ` We therefore require GTE to reassign these expenses by calculating the RBOC average Category 1 and Category 3 assignments as a percentage of Category 1 and Category 3 combined, for calendar year 1996. The RBOC average customer service expense that was assigned to Category 1 as a percentage of Category 1 and Category 3 combined in calendar  Xb4year 1996 was 91 percent.BXbxl yO'ԍ FCC ARMIS Report 4304 (1996) Rows 7220 and 7300, for Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, and U S WEST. The percentage was calculated by summing Row 7220 for the RBOCs divided by the sum of Row 7220 and Row 7300 for the RBOCs.B The RBOC average customer service expense that was assigned to Category 3 as a percentage of Category 1 and Category 3 combined in calendar year 1996  X44was 9 percent.BX4l yO}'ԍ FCC ARMIS Report 4304 (1996) Rows 7220 and 7300, for Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, and U S WEST. The percentage was calculated by summing Row 7300 for the RBOCs divided by the sum of Row 7220 and Row 7300 for the RBOCs.B Accordingly, we require GTE to assign 91 percent of its total Category 1 and Category 3 expenses to Category 1 and 9 percent of its total Category 1 and Category 3 expenses to Category 3. GTE must recalculate its rates to reflect this reassignment and calculate the appropriate refunds.  X' ` ` 4 . Apportionment of OB&C Expense Among Service Classes  X4152.` ` After assigning a portion of customer services expenses to Category 2, Revenue  X|4Accounting Expense, which includes OB&C Expense, carriers must apportion in the"|B 0*&&PP" separations process all Category 2 expense among three categories: Message Processing  X4Expense, Carrier Access Charge Billing and Collecting Expense, and Other B&C Expense.Ll yOb'ԍ 47 C.F.R. 36.378(b).L Carriers must then allocate the OB&C Expense among five service classes based on the relative number of users of those services. These service classes consist of Message Toll,  X4Exchange, Directory Advertising, Private Line, and TWX.Xl yO'ԍ 47 C.F.R. 36.380(b). Because carriers no longer provide TWX service, they now allocate OB&C Expense among only four of the five prescribed service classes. To determine the number of users, carriers are required to count an individual customer once for each of these services  Xv4that is used.<vl {O 'ԍ Id.< A majority of customers, for example, are counted both as message toll users and as exchange users.  X1'` `   a.GMessage Toll User Counts  X 4153.` ` Because, under the former separations rules, carriers allocated OB&C Expense among Part 36 service categories based on user counts, the accuracy of these counts affected the accuracy of the separated interstate cost assignment and, in that way, the accuracy of calculated exogenous adjustments. If message toll user counts were understated during the period used to calculate the interstate OB&C Expense under our former rules, the resulting exogenous cost change is likely overstated because the results from the new separations rules are not affected by user counts. Specifically, an understatement of message toll users reduces the amounts of OB&C Expense that the companies allocate to message toll billing expense, a substantial portion of which is allocated to the interstate jurisdiction. In addition, the understatement increases the amounts these ILECs allocate to exchange billing expense, none of which is allocated to the interstate jurisdiction. Consequently, if the companies miscount message toll users in this way, their reported interstate assignment under our former rules  X4(i.e., using user counts) is understated. The interstate assignment under our former rules is compared to the interstate assignment under our new rules in order to calculate the magnitude of the exogenous change. If the interstate assignment is understated under the former rules, the exogenous change is overstated.  X~4154.` ` In the 1997 Designation Order, the Bureau observed that the share of user counts attributed to Message Toll by GTE and U S WEST appeared to vary significantly from the corresponding shares reported by other RBOCs. The Bureau noted that both GTE and U S WEST's message toll user count share decreases exceeded the other RBOCs' decreases for  X$41996 and 1995 respectively.f$Bl {O%'ԍ 1997 Designation Order at  54 and 60.f The Bureau directed GTE, Pacific Bell and U S WEST to provide their user counts for Message Toll and other service classes; to explain how those" C0*&&PP" counts were determined over the period 1990 through 1996; and to explain any discrepancies that exist between those counts and those reported in ARMIS or those used when calculating  X4interstate costs to initialize price cap indices.ql {OK'ԍ 1997 Designation Order at  51(a)(c), 54 and 60.q  X4  X' ` `  G(1)hh}Discussion  Xv4155.` ` The rules require carriers to allocate OB&C Expense to the Message Toll  X_4service class based on the relative number of customers using that service.J_Zl yOj 'ԍ47 C.F.R. 36.380(b).J To make this  XH4allocation, an ILEC must count all customers billed for toll messages. This requirement notwithstanding, the record reveals that GTE, Pacific Bell, and U S WEST do not count all of their message toll customers. Specifically, these ILECs fail to count message toll customers served by IXCs using an ILEC's invoiceready billing service.  X 4156.` ` The resulting understatement of message toll users reduces the amounts of OB&C Expense that GTE, Pacific Bell and U S WEST allocate to message toll billing expense, a substantial portion of which is allocated to the interstate jurisdiction. In addition, the understatement increases the amounts these ILECs allocate to exchange billing expense, none of which is allocated to the interstate jurisdiction. Consequently, this error understates  Xd4their reported interstate assignment under our former rules (i.e., using user counts). The interstate assignment under our former rules is compared to the interstate assignment under our new rules in order to calculate the magnitude of the exogenous change. Since the interstate assignment is understated under the former rules, the exogenous change is overstated as well.  X4 157.` ` We require GTE, Pacific Bell, and U S WEST to recalculate their OB&C expense by using the average percentage of message toll users among the RBOCs to determine the message toll portion of OB&C Expense. We make this prescription because, as explained above, GTE, Pacific Bell, and U S WEST understate their message toll user counts between 1990 and 1996 and fail to provide us with the information needed to determine their  Xi4total message toll user counts. The 1997 Designation Order required GTE, Pacific Bell, and U S WEST to provide detailed support for their message toll counts between 1990 and 1996. By failing to provide any data on the number of toll customers served by IXCs using a ILEC's invoiceready billing service, the record does not contain a significant portion of the data necessary to determine interstate OB&C Expense.  X4158.` ` Because GTE, Pacific Bell, and U S WEST did not provide all the data on the number of message toll customers, it is not possible to quantify the misallocation of their OB&C Expense using data from these companies. We believe that prescribing the RBOC"!D0*&&PP2 " average percentage of message toll users as an allocator of OB&C Expense yields the best estimate of the share of message toll users for GTE, Pacific Bell, and U S WEST. There are several reasons why we would expect that, if these companies had counted all of their message toll customers, the share of message toll users would be similar to the other RBOCs. First, as explained above, these companies are similar in operating size to the RBOCs, both in  X4terms of revenues and number of access lines.Nl {O'ԍSee supra at para. 145.N Second, despite wide variation among the  Xv4RBOCs regarding the number of originating toll calls per exchange customer,vZl yO 'ԍThe RBOCs range of total originating toll calls (intra and interstate) per exchange customer is 543 to 1047 per year. GTE reports 803 originating toll calls per exchange customer, U S WEST reports 640, and Pacific Bell reports 1254. FCC ARMIS Report 4304 (1996) Row 7244 for Bell Atlantic, BellSouth, NYNEX, Southwestern, GTE, U S WEST, and Pacific Bell. FCC ARMIS Report 4308 (1996) col. (ed) plus (eg) for Bell Atlantic, BellSouth, NYNEX, Southwestern, GTE, U S WEST, and Pacific Bell. the share of customers' bills containing at least one toll call is remarkably similar among the RBOCs. The individual RBOC shares of message toll users (excluding Ameritech, Pacific Telesis and U S WEST) are in a narrow range of 43.94 percent (Bell Atlantic) to 45.68 percent (Southwestern  X 4Bell) with an average of 44.94 percent in 1996. l yO'ԍ FCC ARMIS Report 4304 (1996) Rows 7240 and 7241 for Bell Atlantic, BellSouth, NYNEX, and Southwestern Bell. We observe that the average share of message toll user counts for the RBOCs is nearly the same as the industrywide average of  X 444.96 percent (excluding Ameritech, GTE, Pacific Telesis, Puerto Rico, and U S WEST).=X b l yO'ԍ FCC ARMIS Report 4304 (1996) Rows 7240 and 7241 for Total Industry. We excluded Ameritech for reasons discussed above. We excluded Puerto Rico because its 1996 user count data are anomalous, showing the number of toll users to exceed the number of exchange users.=  X 4159.` ` The proximity of the message toll shares to 50 percent indicates that nearly all RBOC exchange customers are making at least one toll call, thereby qualifying as a toll  X4user. l yO'ԍ This occurs because 100 percent counts each user twice once for the local exchange and once for the toll. This implies that additional calls have little effect on the share of message toll users because such calls are most likely made by customers who have already made at least one toll  Xb4call. Hence, despite the variation in number of originating toll calls per exchange user that is shown in traffic data submitted by GTE, Pacific Bell, and U S WEST, we expect that, if they  X44had counted all users, their message toll user shares would be similar to the other RBOCs.  X4160.` ` As explained above, we find that making a rate prescription on the basis of an industry average is consistent with our authority under Section 205(a) of the Communications Act because courts have consistently found in the Act a Congressional intent to grant us broad discretion in "selecting methods . . . to make and oversee rates," provided that we make a"E0*&&PP" "reasonable selection of available alternatives" and prescribe rates that fall within a "zone of reasonableness." We find that the methodology we are using for the purpose of prescribing message toll user counts will produce rates that fall within a zone of reasonableness.  X4161.` ` We make this prescription after making a "reasonable selection of available alternatives." We considered estimating message toll user counts by assuming that the number of toll users equals the number of exchange users. That assumption would result in message toll users being assigned at nearly 50 percent of the OB&C expense for these  XH4companies.Hl yO 'ԍ FCC ARMIS Report 4304 (1996), Rows 7240 through 7247, for GTE, Pacific Bell, and U S WEST. The assumption is unrealistic, however, because some exchange users do not use message toll service.  X 4162.` ` We also considered basing our prescription on the basis of user counts that these carriers reported for prior years. In light of the errors in the 1996 data, however, we will not rely on earlier data that may be based on the same faulty methodologies used in producing the 1996 user counts. It is unclear, for example, to what extent the invoiceready  X 4counting problem existed in prior years because none of these carriers show the user and interstate message counts that were billed through invoiceready billing in earlier years.  Xy4Another problem, with regard to GTE, is that many of its smaller study areas did not file data in the first few ARMIS reporting years, making verification of the accuracy of prior years'  XK4data difficult.MKXl {OT'ԍ See supra para. 150.M  X4 163.` ` Accordingly, as explained above, we find that the most reasonable approach is to use the average RBOC message toll count (after excluding Ameritech, Pacific Telesis, and  X4U S WEST, all of which have anomalous data)( l yO'ԍAMER USERS Ameritech's user counts exhibit numerous anomalies during the period 19901996. Its reported user counts for Illinois Bell and Ohio Bell, for example, decreased by 98 percent and 91 percent, respectively, between 1995 and 1996. Moreover, Indiana Bell reported that the percentage of users attributable to Message Toll remained constant at 44.04 percent in 1994, 1995, and 1996, an anomaly that indicates Indiana Bell did not update its user counts in 1995 and 1996. The Bureau directed Ameritech to refile its 1994 through 1996 ARMIS 4304 Reports in order to correct those data or, if that is not feasible, to note that user counts during that period are incorrect. Letters from Fatina Franklin, Chief, Competitive Safeguards Branch, Accounting and Audits Division, Common Carrier Bureau of the FCC, to Roy Nonnenmann of Ameritech, dated July 3 and October 2, 1997. Although these problems in Ameritech's reported user counts seemed to cast doubt on the accuracy of its 1997 tariff filing, we here determine that Ameritech did not overstate its OB&C Expense exogenous cost increase, either because it made offsetting errors elsewhere in its calculations or because it substituted unreported allocation factors for the faulty allocation factors reported in its 1996 ARMIS Report. We therefore find no reason to add Ameritech to this portion of the investigation that addresses OB&C exogenous cost change. as a basis for estimating the percentage of total users attributable to message toll users because we do not have firmspecific invoiceready toll user counts. The RBOC average (excluding Ameritech, Pacific Telesis, and U S"F0*&&PP"  X4WEST) was 44.94 percent in 1996.Xl yOy'ԍ FCC ARMIS Report 4304 (1996), Rows 7240 and 7241, Bell Atlantic, BellSouth, NYNEX, and Southwestern Bell. The percentage is calculated by summing Row 7240 for these companies divided by the sum of Row 7241 for these companies. We therefore require GTE, Pacific Bell and U S WEST, in recalculating their exogenous cost changes, to increase the message toll user counts in any study area in which those counts constitute less than 44.94 percent of the study area's total user counts. In such study areas, the number of message toll users shall be determined by the following formula: the number of message toll users equals the total number of non X4messagetoll users (i.e., total number of users less the original number of message toll users)  Xx4divided by 1.225.f~xl yO 'ԍ This simplified formula was derived from the following formula: Where X equals revised message toll user count,  ~i y ! &dddd~ddÏ& XFUNC X over FUNC {(total~user~count~less~original~message~toll~user~count)~+~X}~=~44.94%d{2 PQPd{2 PQPd{2 PQP&.X7:(n:total:user<:count:less9:original:message :toll) :user :count:)%:X44J.t94%x: ߝf Once a revised number of message toll users is determined for a particular study area, GTE, Pacific Bell and U S WEST shall use that number (together with the 1996 user counts for other services) in determining the shares of OB&C expense attributable to the following prescribed service categories: message toll, exchange, private  X 4line, and directory advertising. . l yO'ԍ As noted earlier, ILECs no longer provide TWX service, which is the fifth prescribed service category. This requirement mandates that, in study areas where the message toll share is raised to a level of 44.94 percent, the shares reported for the other three service classes must be reduced.  X 4  X '` `   b.GSubstitution of Direct Assignment for Prescribed Allocation  X '` `  GFactor  X{4164.` ` Section 36.1(c) of the rules sets forth the general principle that plant investment must be separated based on direct assignment, rather than an allocation procedure, when  XM4possible.LM l yO'ԍ 47 C.F.R.  36.1(c). L The Commission stated, however, that this general rule was not meant to create a general invitation to use direct assignment at the convenience, and to the benefit, of the filing  X4carrier.tN l {O"'ԍ See Memorandum Opinion and Order, 8 FCC Rcd at 1563 (1993).t In the 1997 Designation Order, the Bureau stated that U S WEST may have incorrectly substituted direct assignment for the prescribed allocation procedure applicable to OB&C Expense. The Bureau noted that U S WEST apparently assigned directly a portion of"G0*&&PP]"  X4OB&C Expense to the intrastate jurisdiction prior to categorizing that expense.^l {Oy'ԍ 1997 Designation Order at  51(i).^  X'  X4 165.` ` The Commission must determine how U S WEST used direct assignment for purposes of determining its interstate OB&C Expense under both the former and new rules. If the company does not treat direct assignment consistently under the former and new rules, the OB&C exogenous adjustment may be overstated because the majority of the directly assigned expenses are intrastate in nature.   XH' ` `  G(1)hh}Discussion  X14  X 4166.` ` As noted above, Section 36.2(e) of the rules requires direct assignment of costs associated with services or plant billed to another company. The record indicates that U S WEST used direct assignment under the former rules when it determined the jurisdictional separation of OB&C Expenses incurred by U S WEST for billing services provided by other ILECs. Therefore, for purposes of establishing the interstate assignment under the former rules, we find that U S WEST reasonably used direct assignment. This finding resolves a  X4concern that the Bureau raised regarding an apparent anomaly in U S WEST's ARMIS data.Zl {O'ԍ In the 1997 Designation Order, the Bureau noted that U S WEST's OB&C allocation factors, reported on Row 7252 of FCC ARMIS 4304 Report, does not match its allocation of OB&C Expense, reported on Row  {O-'7251 of that report. See supra at para. USW ARMIS5. This inequality occurs because U S WEST allocated OB&C Expense, net of the direct assignment amount, based on user counts and then added the direct assignment amount back in to Row 7252 for reporting purposes in its FCC ARMIS 4304, which does not provide a separate line for reporting such directly assigned amounts.  Xb4167.` ` We find that U S WEST violates the rules contained in Section 36.2 of our rules, however, by failing to assign directly OB&C Expenses for charges paid to other ILECs for billing services when it determines the interstate assignment under the new rules (effective May 1, 1997). To calculate an exogenous change, it is necessary to compare the separations result obtained from the former allocation procedures with that obtained from the new allocation procedures. In calculating the effect of the new allocation procedures on interstate OB&C Expense, U S WEST does not use direct assignment. Instead, U S WEST allocates to the interstate jurisdiction onethird of all OB&C Expense, including onethird of the billing expenses it had been directly assigning under the former rules. This allocation procedure violates Section 36.2(e) which, as U S WEST concedes, requires carriers to assign directly to a jurisdiction any expense already identified properly, in bills rendered by another carrier, as jurisdictionally correct.  X74168.` ` U S WEST's inconsistent use of direct assignment results in an overstated exogenous cost increase. This occurred because, whereas U S WEST had directly assigned" H0*&&PP"  X4only 8 percent of the directly assignable expenses to interstate under the former rules,l yOy'ԍ Letter from G. Michael Crumling, Executive DirectorFederal Regulatory, U S WEST, to Cindy Schieber, FCC, at 2, dated September 12, 1997. it  X4unreasonably allocates 33 percent of those expenses to interstate under the new rules.t l yO'ԍ U S WEST must assign costs before applying the 33 percent factor.t We therefore direct U S WEST to recalculate its exogenous changes based on directly assigning such expenses prior to the application of prescribed allocation procedures to the remaining costs in the base period as well as in the postseparationschange period.  Xv' ` ` 5. Separation of Message Toll Billing Expense  XH4169.INSTRUCTION` ` The former separations rules required carriers to allocate the Message Toll portion of OB&C Expense between jurisdictions based on the relative number of intrastate  X 4and interstate toll messages.4Z l yO{'ԍ 47 C.F.R.  36.380(b)(1). These rules also require, where telegram service is offered, that telegram messages are to be included in the message count and treated as exchange service, which is entirely intrastate in  {O 'nature. Id.4 These counts are important because, if interstate toll messages are understated, interstate OB&C Expense under the former rules will be too small. Because we here calculate the total exogenous change by comparing the interstate assignment under the former rules with the interstate assignment under the new rules, under which the results are not affected by the relative number of toll messages, the lower the interstate assignment under the former rules, the higher will be the OB&C exogenous cost change.  Xy4170.INSTRUCTION` ` In the 1997 Designation Order, the Bureau directed GTE and Pacific Bell to provide toll message counts for calendar years 1990 through 1996 and to explain how they counted these toll messages. The Bureau required them to also provide message counts for  X64any toll messages that were excluded from reported toll message counts.g6l {O'ԍ 1997 Designation Order at  51(d)(f).g They were further required to explain why the interstate share of billed toll messages changed greatly between  X41990 and 1996.Hd l {O'ԍ Id. at  55.H The Bureau stated that it sought this information because, at the end of that period, the interstate shares reported by GTE and Pacific Bell were far below those reported by any other RBOC. Whereas the other RBOCs attributed on average 46.6 percent of billed toll messages to interstate calls for the calendar year 1996, GTE and Pacific Bell  X4attributed only 8.7 percent and 4.4 percent, respectively, to such calls. l yOS$'ԍ FCC ARMIS Report 4304 (1996), Row 7252, for Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, and U S WEST. "IN 0*&&PP"Ԍ X4 ` `  Ga.hh}Discussion  X4171. TEST ` ` We find that GTE and Pacific Bell incorrectly counted their billed toll messages, choosing to exclude those messages associated with their invoiceready billing services. As will be explained below, these unjustified omissions resulted in overstated exogenous cost changes. Although both carriers subsequently submitted revised message toll counts, a number of unexplained anomalies and data problems exist that cast doubt on the reliability of those revised counts. We find, for example, that even after they include the missing invoiceready message counts, these companies' interstate shares of billed toll messages for 1996 remain far below the corresponding interstate shares reported by other RBOCs. Moreover, while GTE and Pacific Bell argue that the IXC's takeback of billing and collection functions is largely responsible for the decrease in their interstate shares of billed toll messages, they do not show that these takebacks had a significant effect on the number of toll messages billed on behalf of IXCs. Further, although Pacific Bell claims that its unusually low interstate share of billed toll messages is partly the result of the unique calling pattern of California, Pacific Bell does not quantify the effect of such a difference on that interstate share. Nor does Pacific Bell explain why the interstate share of completed toll calls originating in California was 35.5 percent, more than double the revised interstate share that it reports for billed toll messages. In addition, GTE and Pacific Bell do not support their claim that, for certain years, it is reasonable that the interstate share of billed toll messages moved in the opposite direction of the interstate share of billing revenues. We find that unusual relationship is largely, if not entirely, explained by their unreasonable practice of omitting the invoiceready messages. Furthermore, neither GTE nor Pacific Bell adequately explains how and when it updated its message counts for the period 1990 through 1996 even though the  X4Bureau required this explanation in the 1997 Designation Order.  X4172.` ` In view of the failure of GTE and Pacific Bell adequately to explain these  X4anomalies and to provide required information, we find that we cannot reasonably rely on their revised 1996 message toll counts as a basis for correcting the separation of message toll billing expense. We therefore prescribe surrogate allocation factors that are derived partly from the data of other comparable ILECs.  X"4` `  G (1)hh}Initial Message Toll Counts  X4173.` ` The former separations rules do not distinguish between toll messages billed through invoiceready billing service and toll messages billed through messageready billing service. As explained above, the rules require carriers to allocate the Message Toll portion of OB&C Expense based on the relative number of intrastate and interstate billed toll messages. In order to make this determination, we find that a toll message billed on behalf of an IXC must be counted regardless of how many other billing functions the ILEC is providing to that IXC. "S%J0*&&PPr#"Ԍ X4174.` ` We reject the claims of GTE and Pacific Bell that the decreases in their interstate shares of billed toll messages in 1995 and 1996 are attributable primarily to the IXCs' takeback of billing functions. We find that the primary reason for the decreases in their interstate shares of billed toll messages was their practice of selectively counting billed toll messages. GTE and Pacific Bell count IXC toll messages when billed through messageready billing service but not when billed through invoiceready billing service. Contrary to the rules, GTE and Pacific Bell exclude those invoiceready messages despite the fact that they concede that such messages continued to appear on their customers' bills after an IXC had switched to invoiceready billing. GTE and Pacific Bell therefore fail to show that the IXCs' migration from one billing service to the other caused a reduction in the number of toll messages billed on behalf of IXCs.  X 4175.` ` We also reject the arguments of GTE and Pacific Bell that invoiceready messages should not be considered when separating Message Toll billing expense because invoiceready billing does not involve the recording, rating, and accumulation functions and, therefore, has a minimal effect on OB&C Expense. While it is true that such messages have only a minimal effect on billing expense, this is also true for all billed messages including those that GTE and Pacific Bell choose to count.  XK4176.` ` Moreover, in CC Docket 80286 the Joint Board determined,Kl {O'ԍ Recommended Decision, 11 FCC Rcd 12543, 1256012563 (1996). and the  X44Commission concurred,h4Zl {O?'ԍ OB&C Order, 12 FCC Rcd at 26846 (1997). h that OB&C Expense predominantly consists of expenses that have little or no relationship to relative usage measurements, such as the counts of billed messages  X4or service users.l yO'ԍFurther, the Commission found that OB&C expenses largely consists of postage. With regard to Bell Atlantic, for example, the Commission found that the majority of OB&C expense is comprised of postage.  {O3'(Order on Reconsideration, 11 FCC Rcd 4087, 4092 (1996)). Individual billed messages generally have no effect on postage because the weight of customer bills is usually under two ounces, the trigger point for a higher postage rate.  Indeed, the Commission's decision to replace the former separations rules with fixed allocation factors was based largely on this lack of a costcausative relationship  X4between billing expense and all feasible measurements of relative usage.il {O' 'ԍ OB&C Order, 12 FCC Rcd at 268586 (1997). i Consequently, the individual messages associated with messageready service have only a minimal effect on OB&C Expense. While it is true that this billing service involves message recording, rating, and accumulation, those billing functions are provided by computers. Under the separations rules, the computer costs are assigned to General Support Facilities and the associated"|K0 0*&&PP"  X4expenses are generally assigned to Plant Specific Operations Expenses.` l {Oy'ԍSee 47 C.F.R.  36.111 and 36.310.` Accordingly, many if not most of the "billing expenses" incurred by those particular billing functions are not pertinent because the rules exclude them from OB&C Expense.  X4177.` ` The accuracy of the interstate share of billed toll messages, as determined under the former rules, affects the accuracy of exogenous cost calculations because that interstate share is used to separate a portion of OB&C Expense, as discussed above. When that interstate share is understated, as is the case for both GTE and Pacific Bell, the interstate assignment of OB&C Expense is too low. An understatement of the interstate assignment prior to the rule change unnecessarily raises the exogenous cost effect of replacing that low interstate assignment with the 33 percent interstate assignment prescribed under the new rules. For example, increasing the interstate allocation from 7 percent to 33 percent would cause a greater increase in interstate expenses than a change from 25 percent to 33 percent. Consequently, the errors of GTE and Pacific Bell in counting billed toll messages result in an overstatement of their exogenous cost changes.  X4` `  G >(2)hh}Revised Message Toll Counts  Xb4178.` ` In order to correct the interstate allocation of message toll billing expense submitted by GTE and Pacific Bell, we must have reasonably accurate counts of 1996 intrastate and interstate toll messages, including those associated with invoiceready billing.  X4The Bureau directed both carriers to submit these data.^ Zl {O('ԍ 1997 Designation Order at  51(f).^ Pacific Bell submitted new toll message counts for 1996, which raised the interstate share of billed toll messages from the 4 percent share used in its tariff filing to 14 percent. Similarly, GTE submitted revised data  X4that increased its interstate share of billed toll messages from 9 percent to 22 percent.f Xl yOu'ԍ CONF  Letter from W. Scott Randolph, DirectorRegulatory Matter, GTE, to William F. Caton, FCC, at 3, dated September 26, 1997. This figure is partially based on intrastate and interstate invoiceready message counts provided in the letter. GTE seeks confidential treatment of these message counts.f Data submitted by GTE and Pacific Bell for 1990 through 1996, however, exhibit a number of anomalies that cast doubt on the completeness of their revised billed toll message counts.  X|4` `  G(a)hh}Comparison of Revised Counts and Counts of Other ` `  Ghh}RBOCs  X74179.` ` One anomaly is that the interstate shares of these revised counts are far below  X 4those reported by all RBOCs, i.e., all other RBOCs except Ameritech which is excluded" L  0*&&PP"  X4because its data are seriously deficient.7 b l {Oy'ԍ Ameritech's message counts, like its user counts discussed supra at note AMER USERS68, exhibit numerous anomalies during the period 19901996. It appears likely that Ameritech's interstate shares of toll messages and billing revenues should be positively related. Ameritech's data shows that these interstate shares were negatively related, however, in 1991, 1994, and 1996. In 1994, for example, its interstate share of toll messages decreased 30 percent while its interstate share of billing revenues increased. Moreover, in 1992, its interstate share of toll messages remained constant (at 35.6 percent) while its interstate share of billing revenues decreased. FCC ARMIS Report 4304 (19911996), Rows 4031 and 7252 for Ameritech. Although these problems in Ameritech's reported message counts seemed to cast doubt on the accuracy of its 1997 tariff filing, we determined that Ameritech did not overstate its OB&C Expense exogenous cost increase, either because it made offsetting errors elsewhere in its calculations or because it substituted unreported allocation factors for the faulty allocation factors reported in its 1996 ARMIS Report. We therefore find no reason to add Ameritech to this part of the investigation addressing exogenous cost changes.7 Whereas GTE's and Pacific Bell's revised data show their 1996 interstate shares of billed toll messages are 22 percent and 14 percent, respectively, the other RBOCs (with the exception of Ameritech) have interstate shares that  X4are 49 percent on average and, individually, are at least 45 percent.  l yO^'ԍ FCC ARMIS Report 4304 (1996) Row 7252, for Bell Atlantic, BellSouth, NYNEX, Southwestern Bell, and U S WEST. Hence, all of these other RBOCs have interstate shares that are double that of GTE and triple that of Pacific Bell.  Xv4` `  G(b)hh}Impact of California's Unique Calling Pattern  XH4180.` ` The Bureau directed GTE and Pacific Bell to explain why such large differences exist between their interstate shares of billed toll messages and those of the other  X 4RBOCs._Z J l yO'ԍ We note, however, that the Bureau referred to even larger differences that existed before GTE and Pacific Bell increased their interstate shares of billed toll messages by including the message counts associated  {O'with invoiceready billing. See Designation Order at  55._ Pacific Bell states that these differences are partly explained by the historically high volumes of intraLATA toll occurring in California, which increases the intrastate share  X 4of billed toll messages.Q ll yO 'ԍ Pacific Bell Direct Case at 52.Q Pacific Bell does not quantify, however, the extent to which these differences can be explained by California's unique toll calling patterns. Nor does GTE quantify such an effect with respect to its own operations in California. We find that such large differences cannot be adequately explained by the relatively high number of intrastate toll calls that GTE and Pacific Bell encounter in their California operations. Traffic data submitted by Pacific Bell show that, in 1996, the interstate share of its completed originating toll calls was 35.5 percenttwo and onehalf times the 14 percent interstate share calculated using the invoiceready messages submitted. Similarly, 1996 traffic data submitted by GTE show that the interstate share of its completed originating toll calls (for all study areas including California) is 49 percentmore than twice the 22 percent interstate share calculated"M0*&&PP"  X4using the invoiceready messages submitted.7l yOy'ԍ CALC  FCC ARMIS Report 4308 (1996), Table IV, columns (ed), (ee), and (eg), for GTE and Pacific Bell. The percentage of interstate originating toll calls completed is calculated as follows from the 4308. The numerator is column (ee), InterLATA Toll Calls Completed, from Table IV Telephone Calls. The denominator is column (ed), IntraLATA Toll Calls Completed, plus column (eg), Total InterLATA Toll Calls Completed. Column (ed) may include a small amount of IntraLATA interstate corridor traffic. 7  X4` `  G(c)hh}Impact of IXCs' Takeback  X4181.POSITIVE REL` ` GTE and Pacific Bell also suggest that the differences between their interstate shares of billed toll messages are largely due to the IXCs' takeback of all billing functions  Xv4for their highvolume business and residential customers.ivxl yO 'ԍ Pacific Bell Direct Case at 52; GTE Direct Case at 30.i GTE and Pacific Bell do not quantify, however, the effect of this development on billed toll messages. In particular, they  XH4do not show that such a takeback significantly reduces the number of toll messages appearing on their customer bills. When Pacific Bell's count of billed toll messages for 1996 (including both IXC messages and Pacific Bell messages) is revised to include the missing invoiceready messages, this toll message count is 10 percent greater than the count that Pacific Bell  X 4reported for 1990. l yO'ԍ FCC ARMIS Report 4304 (1990 and 1996) , Row 7252, for Pacific Bell; Pacific Bell Direct Case at Attachment OBC4. Similarly, after revising GTE's 1996 billed toll messages to include invoiceready messages provided for that year, we find that GTE's billed toll messages  X 4increases substantially between 1990 and 1996. ` l yO'ԍ FCC ARMIS Report 4304 (1990 and 1996), Row 7252, for GTE. Letter from W. Scott Randolph, DirectorRegulatory Matter, GTE, to William F. Caton, FCC, at 3, dated September 26, 1997. This apparent growth in both Pacific's and GTE's billed toll messages is inconsistent with the results that would be expected if takebacks had greatly reduced billed IXC toll messages. These data suggest that, for the most part, takebacks took the form of a partial resumption of billing functions, which caused IXC toll messages to continue to appear on Pacific Bell and GTE bills.  X44182.` ` Further, the claim that IXC takebacks substantially reduce the interstate shares of billed toll messages is contradicted, at least for certain takebacks occurring in 1995, by Pacific Bell's statement that the takebacks in that year took the form of a migration to invoiceready billing service. Specifically, in explaining why its interstate share of billed toll  X4messages declined by 66 percent in that year,[ l {OA#'ԍ 1997 Designation Order at  56.[ Pacific Bell states that this decline was due to  X4AT&T's migration from messageready to invoiceready billing service.RJ l yO%'ԍ Pacific Bell Direct Case at 53.R Because Pacific"N0*&&PP"  X4Bell prints invoiceready messages on its customer bills,vl yOy'ԍ Pacific Bell Direct Case at 48; SBC letter filed July 3, 1997, at 2.v that response appears to reveal that the decline was due not to the IXCs' resumption of all billing functions but, rather, to Pacific Bell's decision to exclude invoiceready messages from message counts.  X4` `  G(d)hh}Comparison of Billed Messages and Billing Revenues ` `  Xv4183.` ` If the IXC takebacks had caused substantial reductions in billed toll messages, as is suggested, the takebacks would have greatly reduced interstate billed toll messages,  XH4while also reducing interstate billing service revenues. It therefore seems unlikely that these two factors would move in opposite directions, as sometimes occurs in the data of GTE and Pacific Bell for the 19901996 period. For this reason, the Bureau required GTE to explain  X 4why the interstate share of billed toll messages declined by 52 percent in calendar year 1995,  X 4while the interstate share of Carrier Billing and Collection Revenues increased. Xl {O'ԍ 1997 Designation Order at  56. The Bureau obtained these data from FCC ARMIS Report 4304 (1995), Rows 4031 and 7252, for GTE. GTE claims there is no correlation between these billed messages and billing revenues. The decline in the interstate share of billed toll messages, GTE explains, was primarily the result  X 4of the IXCs' takeback of billing and collection functions.O l yO'ԍ GTE Direct Case at 30.O GTE contends that the message counts used in allocating message toll billing expense include "the billable, toll messages that  X}4appear on customer bills" and states that no toll message counts were excluded.I}Bl yOp'ԍ GTE Direct Case at 23.I In response to further questions from Bureau staff, however, GTE concedes that it excluded invoiceready messages when separating message toll billing expense, but included those  X84messages when separating the associated revenues.8l yO'ԍ Letter from W. Scott Randolph, DirectorRegulatory Matter, GTE, to William F. Caton, FCC, at 4, dated September 18, 1997.  X 4184.` ` We conclude that, excluding these invoiceready messages from the interstate share of billed toll messages, demonstrates that the absence of a correlation between the interstate share of billed toll messages and the interstate share of billing revenues is partly, if not entirely, explained by the inconsistent methods GTE used in separating billing expenses and revenues. It nonetheless is unclear to what extent its counting error explains the absence of correlation between the interstate share of billed toll messages and the interstate share of billing revenues because GTE does not quantify the shortfall in interstate toll message counts. Although the Bureau directed GTE to identify all excluded message counts such as the"iO* 0*&&PP"  X4invoiceready messages for 1994 and 1995, GTE's submissions do not contain these data.^l {Oy'ԍ 1997 Designation Order at  51(f).^ Absent this information, we cannot determine what portion of the 52 percent decline is explained by the unidentified invoice ready message counts.  X4185.` ` Similarly, the Bureau required Pacific Bell to explain why its reported interstate share of billed messages declined by 66 percent between calendar years 1994 and 1995, while there was an increase in the share of Carrier Billing and Collection Revenues attributed to the  X_4billing of interstate calls._Zl {Oj 'ԍ Id. at  56. The Bureau obtained these data from FCC ARMIS Report 4304 (19941995), Rows 4031 and 7252, for Pacific Bell. As discussed above, Pacific Bell concedes that it excludes invoiceready messages when separating message toll billing expense, but includes those messages when separating the associated revenues. Pacific Bell submitted interstate and intrastate invoiceready message counts for 1996, but states that it is unable to determine the jurisdictional nature of invoiceready message counts for any year during the period 1990 X 41995.` l yOQ'ԍ Pacific Bell Direct Case at Attachment OBC4.` Hence, it does not meet the Bureau's requirement that such data also be provided for  X 4calendar years 19901995.^ Dl {O'ԍ 1997 Designation Order at  51(f).^  X 4186.` ` In addition, the Bureau directed GTE to explain why it attributed only 8.7 percent of the 1996 toll message counts to interstate messages, while attributing 45 percent of  Xy4Carrier Billing and Collection Revenues to the billing of interstate calls.yl {O'ԍ 1997 Designation Order at  56. The Bureau obtained these data from FCC ARMIS Report 4304 (1996), Rows 4031 and 7252, for GTE. As explained above, the inclusion of missing interstate invoiceready messages raises the interstate share of  XK4GTE's toll message counts to 22 percent, K0 l yO,'ԍ Letter from W. Scott Randolph, DirectorRegulatory Matter, GTE, to William F. Caton, FCC, at 3, dated September 26, 1997. a level that is still far below the 45 percent interstate assignment that GTE reports for billing revenues. Consequently, GTE's revision of its toll message counts still leaves a large gap between these two interstate shares that is not adequately explained. This large remaining difference strongly suggests that the revised  X4interstate message toll count is still understated for 1996. Indeed, GTE's total message toll count (both intrastate and interstate) may be understated for that year. Although GTE claims that the IXCs' takebacks substantially reduced its billed toll messages during the 19901996 period, its revised unseparated message toll count for 1996 is well below the corresponding"P 0*&&PP"  X4count reported four years earlier for 1992 (1.502 billion). c!l yOy'ԍ FCC ARMIS Report 4304 (1992) Row 7252, for GTE.c Moreover, GTE subsequently revised that 1992 number to 1.454 billion, while cautioning that it excludes some study  X4areas. i"Xl yO'ԍ GTE Direct Case at 22 and Exhibit C2, pp. 910.i  X4187.` ` Other data problems also cast doubt on the reliability of GTE's revised message counts. It is unclear, for example, whether invoiceready messages are missing from the 1992 count because GTE does not provide invoiceready messages counts for calendar years 1990 X_41995, despite the Bureau's requirement that it provide these data.^#_l {O 'ԍ 1997 Designation Order at  51(f).^ Moreover, GTE concedes that its 1993 message counts also are incorrect. Although GTE reports the 1992 and 1993 toll message counts in its ARMIS Report 4304 as the allocation factors that were used in separating message toll billing expense, GTE states in its direct case that it used constant message counts from a prior year as the basis for separating this expense. GTE does not  X 4identify the prior year.I$ zl yO'ԍ GTE Direct Case at 23.I  X 4` `  G(e)hh}Counting Methodologies  X4188.` ` Although the Bureau directed GTE to explain the assumptions and  Xy4methodologies that were used to count billed toll messages,^%y l {O4'ԍ 1997 Designation Order at  51(e).^ GTE fails to provide an adequate explanation. GTE does not describe the methodology that was used to extract this information from its various billing systems. Moreover, GTE does not explain the frequency of message counts or the extent to which they are based on sampling. GTE does not explain, for example, when any of its message counts were performed for calendar years 19901994. GTE submits that the message counts for these years were measured in a time period that "was a representative prior period and differed between study areas and regions of the  X4country."I&l yO% 'ԍ GTE Direct Case at 22.I GTE fails to define, however, "a representative period." It should be noted that for one study area, the same measurements apparently were used for five years. That is, GTE acknowledges that the 1995 counts for a Michigan study area are based on data  X4"representative of 1991."I', l yOp$'ԍ GTE Direct Case at 22.I Moreover, in 1996, for all but one study area, GTE fails to measure message counts for its GTE Telephone Operating Companies (GTOC) and instead"|Q '0*&&PP" simply relies on its 1995 figures. For two of its GTE System Telephone Companies (Contel), GTE relies on 1995 figures rather than 1996 message counts. For the remaining Contel companies, GTE states that it updated the counts "to reflect the impact of the IXC  X4take-back."I(l yO4'ԍ GTE Direct Case at 22.I It is unclear whether these updates were derived from new message counts or, instead, from the application of various adjustment factors to the counts for prior years.  Xv4189.` ` The Bureau directed GTE to explain why its interstate share of billed toll messages increased from approximately 17 percent to 37 percent between calendar years 1990  XH4and 1992.)HXl {OQ 'ԍ 1997 Designation Order at  56. The Bureau obtained these data from FCC ARMIS Report 4304 (199092), Row 7252, for GTE. GTE asserts that this change was due to an expansion of its EAS areas, which apparently reduced the number of intrastate toll messages, thereby increasing the portion of  X 4toll messages attributed to interstate.I* l yO}'ԍ GTE Direct Case at 30.I This assertion is unsupported, however, because GTE fails to identify the number of EAS service areas or the location of these areas. Moreover, GTE does not quantify the effect of that change on intrastate toll messages.  X 4190.` ` The Bureau also directed Pacific Bell to explain the assumptions and  X 4methodologies that it used in counting billed toll messages during the period 19901996.b+ Bl {O'ԍ 1997 Designation Order at  5556.b As discussed earlier, Pacific Bell acknowledges that its message counts exclude billed toll  Xy4messages associated with its invoiceready billing service.X,yl yO'ԍ Pacific Bell Direct Case at 48.X Pacific Bell submits that it obtained these message counts from its billing systems, which show not only the billed  XK4messages but also the jurisdictional nature of those messages.Z-Kd l {O`'ԍ Id. at 4647. Pacific Bell identifies the names of the billing systems used. It states that the message counts for toll messages billed on behalf of IXCs (interLATA messages) are obtained from the Flexible Account Billing System, which produces the bills that it sends to IXCs for billing and collection services. Pacific Bell states that it obtained the message counts for its own billed intraLATA toll messages from the Customer Record  {O'Information System since 1992 and from the MA9 Report prior to that year. Id.Z The billed messages, Pacific Bell states, include toll messages together with nontoll messages such as nonrecurring charges, monthly charges, and charges for voice mail, paging, internet, and directory publishing services. Pacific Bell does not explain, however, the methodology that was used in counting the billed toll messages. Presumably, it used a software program to do the counting but it does not describe such a program. It does not explain, for example, how a program distinguished between billed toll messages (which must be included in the prescribed allocation factor) and nontoll messages (which must be excluded from that factor). No"R-0*&&PP" explanation is provided as to how a program distinguished between billed toll messages that are associated with its invoiceready billing service and those that are associated with other billing services.  X4191.` ` Further, Pacific Bell does not explain whether the message counts in any year were based on a sample and, if so, how that sampling was done. Also unexplained is how frequently the message counts were updated. Pacific Bell seems to imply that message counts  X_4were performed at least annually, because it states that these counts vary year to year.A._l {O'ԍId. at 51.A It does not state, however, whether any of these annual variations is due to annual updatings of message counts for the entire study area or only a portion of the study area. Nor does Pacific Bell state whether any of the annual variations is due not to new measurements but, rather, to the application of adjustment factors (based on various assumptions) to the prior year's message counts. It is unclear whether Pacific Bell made such adjustments in developing the message counts associated with billing services other than invoiceready service. With regard to the message counts associated with invoiceready service, however, Pacific Bell acknowledges that "some estimation techniques were used on the message counts" in order to  X4estimate the interstate share of those messages.C/Zl {O'ԍ Id. at 51.C This was necessary, Pacific Bell claims, because it has no readily available actual detail on the number of invoiceready messages  Xb4identified by jurisdiction before 1996.C0bl {O'ԍ Id. at 47.C Pacific Bell does not explain why that detail is sufficient for 1996 but not for prior years. We therefore find that Pacific Bell, like GTE, does not adequately explain the assumptions and methodologies used in developing interstate and intrastate toll message counts for calendar years 19901996.  X4` `   (3)GPrescription of Surrogate Allocation Factors  X4192.` ` In light of the failure of GTE and Pacific Bell to support their revised message toll counts, we require them to reallocate Message Toll billing expense to the interstate jurisdiction using surrogate interstate allocation factors that we developed from their reported traffic data and from data submitted by comparable LECs. To estimate the interstate shares of Message Toll billing expense that GTE and Pacific Bell should have under the former separations rules, we adjusted their reported interstate shares of completed originating toll calls using an adjustment factor based on an RBOC average. In particular, we reduced those interstate shares by the average percentage by which the 1996 interstate billed message shares  X 4of other RBOCs (excluding Ameritech and Pacific Bell) are below their interstate shares for completed originating toll calls. It is reasonable to require GTE and Pacific Bell to adjust their message toll counts by the RBOC average because we would expect that their interstate"S~00*&&PP" share of billed toll messages would have been similar to the other RBOCs had they counted all of their billed toll messages. We find this to be the case because GTE and Pacific Bell  X4are similar in operating size to other RBOCs.P1l {OK'ԍ See supra at para. 145.P  X4193.` ` We derived the surrogate allocation factor partly from the 1996 intrastate and interstate completed originating toll calls reported by GTE and Pacific Bell. GTE identified 49.0 percent of these toll calls as interstate and Pacific Bell identified 35.5 percent as  X_4interstate.2_Zl yOj 'ԍ FCC ARMIS Report 4308 (1996), Table IV, columns (ed), (ee), and (eg), for GTE and Pacific Bell.  {O2 'For the specific calculation see supra at note 272. We recognize that the completed originating toll calls include calls completed by IXCs, which likely billed some portion of their toll calls on their own. If this were the case,  X14the interstate share of these toll calls likely exceeds the interstate share of such calls that were billed by GTE and Pacific Bell. Consequently, we estimated the interstate shares of toll calls billed by GTE and Pacific Bell by making downward adjustments to their reported interstate shares of completed originating toll calls. Specifically, we reduced the 35.5 percent and 49.0 percent figures by 23.5 percent, the average percentage by which the 1996 interstate billed  X 4message shares of other RBOCs (excluding Ameritech and Pacific Telesis) are below their  X 4interstate shares for completed originating toll calls.C3 l yO 'ԍ To obtain the 23.5 percent average for the five large ILECs, the interstate share of billed toll messages (ARMIS 4304) for those carriers as a group was divided by the interstate share of completed originating toll calls (ARMIS 4308), and this result was subtracted from one. FCC ARMIS Report 4304 (1996), Row 7252 (col. b divided by col. d), for Bell Atlantic, BellSouth, NYNEX, Southwestern Bell, and U S WEST. FCC ARMIS Report 4308 (1996), Table IV, for Bell Atlantic, BellSouth, NYNEX, Southwestern Bell, and U S WEST.C We believe that this 23.5 percent downward adjustment is reasonable not only because it is an average for the other RBOCs,  Xy4but also because the variation in data for those carriers is not unreasonably large.4y, l yOV'ԍ The differences between the interstate share of billed toll messages and the interstate share of completed originating toll calls for the RBOCs ranged between 12 percent (U S WEST) and 33 (NYNEX) percent. To obtain the percent for each company, the interstate share of billed toll messages (ARMIS 4304) for each company was divided by the interstate share of completed originating toll calls (ARMIS 4308), and this result was subtracted from one. The range 12 to 33 percent seems reasonably small in comparison to Pacific Bell's differential of 60 percent between its interstate share of billed toll messages (14 percent) and its interstate share of completed originating toll call (35.5 percent). FCC ARMIS Report 4304 (1996) Row 7252, for Bell Atlantic, BellSouth, NYNEX, Southwestern Bell, and U S WEST. FCC ARMIS Report 4308 (1996) Table IV, columns  yO!'(ed), (ee), and (eg), for Bell Atlantic, BellSouth, NYNEX, Southwestern Bell, and U S WEST.  This adjustment results in interstate allocation factors of 37.5 percent for GTE and 27.2 percent for Pacific Bell. Accordingly, we direct GTE to correct its exogenous cost change by allocating 37.5 percent of the Message Toll portion of OB&C Expense to the interstate jurisdiction. We direct Pacific Bell to correct its exogenous cost change by allocating 27.2 percent of the"T40*&&PP" Message Toll portion of OB&C Expense to the interstate jurisdiction.  X4194.` ` As explained above, we find that making a rate prescription on the basis of an industry average is consistent with our authority under Section 205(a) of the Communications Act because courts have consistently found in the Act a Congressional intent to grant us broad discretion in "selecting methods . . . to make and oversee rates," provided that we make a "reasonable selection of available alternatives" and prescribe rates that fall within a "zone of reasonableness."  X14195.` ` We make this prescription after reviewing a "reasonable selection of available alternatives." We considered basing our prescription on the basis of message counts that these carriers reported for prior years. However, as noted above, neither GTE nor Pacific Bell provided data and accompanying support that would permit us to calculate their total billable toll message counts. For example, neither carrier provides the interstate message toll counts that were billed through invoiceready billing in earlier years. As noted above, another problem, with regard to GTE, is that many of its smaller study areas did not file data in the first few ARMIS reporting years, making verification of the accuracy of prior years' data  Xy4difficult.P5yl {O'ԍ See supra at para. 150.P  XK' ` ` 6. Apportionment of OB&C Expense Among Access Elements  X4196.` ` Part 69 of the Commission's rules requires that the interstate Revenue Accounting Expense attributable to End User Common Line access billings shall be assigned to the Common Line element. Part 69 further requires that the remaining interstate Revenue Accounting Expenses that are not assigned to other access elements shall be assigned to the  X4Billing and Collection category.I6Zl yO'ԍ 47 C.F.R.  69.407.I In the 1997 Designation Order, the Bureau stated that GTE, Pacific Bell, and U S WEST may have miscalculated their proposed exogenous changes by incorrectly apportioning Revenue Accounting Expense among the Part 69 access elements and categories. The Bureau therefore required GTE, Pacific Bell, and U S WEST to provide  Xg4work papers showing how they determined these expense assignments.^7gl {O 'ԍ 1997 Designation Order at  52(b).^ These carriers have satisfied this requirement. Based on our analysis of their work papers, we find they have allayed our concern.  X ' ` ` 7. Calculation of Exogenous Change In Interstate Expenses  X4197.` ` There are several other factors that effect the magnitude of the companies'"U|70*&&PP" OB&C exogenous cost adjustments including: the base period used by the companies to calculate the adjustment; the request for recovery of expenses incurred prior to the adjustment; and the user counts reported for 1990, the year in which price cap indices were initialized. The base period proposed by the companies will affect the magnitude of the exogenous change because the year selected provides the data for the interstate assignment under the former rules. If the interstate assignment of OB&C expenses in the year selected is lower  Xv4than in other years, the corresponding exogenous change will be higher.O8vl {O'ԍ See supra at para 169.O The request for recovery of costs incurred prior to the effective date of the OB&C exogenous cost change will likewise increase the magnitude of the exogenous change. Finally, it is important to determine whether accurate user counts were used to separate OB&C expenses in 1990 and therefore whether the level of interstate OB&C Expense used for purposes of initializing price caps was accurate. If incorrect user counts were used, the interstate OB&C Expense embedded in the rates of price cap ILECs may be incorrect.  X ' ` `  a. G Base Period Used By GTE  X 4  X4198.` ` In the 1997 Designation Order, the Bureau required GTE to explain why it used the 12 months ending in June 1996, rather than calendar year 1996, for purposes of calculating the exogenous changes associated with the separations rule change for OB&C Expense. The Bureau also required GTE to calculate the exogenous change using calendar  X64year 1996 data rather than the twelve months ended June 1996.i96Zl {OA'ԍ 1997 Designation Order at  52(b) and 58.i  X'` `  G(1)hh}Discussion  X4  X4199.` ` We require GTE to use calendar year 1996 data for the purpose of calculating its OB&C exogenous cost change. GTE's decision to assign both the ARMIS reports and the exogenous cost calculations to the same staff members does not exempt it from our rules, which define the base period as the 12month period ending six months prior to the effective  X~4date of annual price cap tariffs.J:~l yO'ԍ 47 C.F.R.  61.3(e).J For the 1997 tariff period, that would be calendar year 1996. Accordingly, we order GTE to include in its compliance filing, calculations of its OB&C exogenous cost change using calendar year 1996 data.  X"' ` `  b.GBase Period Used by Pacific Bell  X 4  X4200.` ` In the 1997 Designation Order, the Bureau found that Pacific Bell may have overstated its exogenous cost changes by using the wrong base period. The Bureau required"V|:0*&&PP" Pacific Bell to explain why it used 1995 data rather than 1996 data for purposes of calculating the exogenous changes associated with the separations rule change for OB&C Expense.  X'` `  G(1)hh}Discussion  X4  X4201.` ` As explained above, Section 61.3(e) defines the base period as the 12month period ending 6 months prior to the effective date for the annual price cap tariffs. We therefore require Pacific Bell to use calendar year 1996 data, together with the modifications required herein, for purposes of calculating the exogenous change.  X ' ` `  c.GU S WEST Request for Retroactive Adjustment  X 4  X 4202.` ` The Bureau directed U S WEST to explain why it asserts that an OB&C exogenous adjustment of $845,145 is needed to recover additional interstate expenses incurred  X 4during the twomonth period between May 1 and July 1, 1997.[; l {O7'ԍ 1997 Designation Order at  60.[  X'` `  G(1)hh}Discussion  Xy4  Xb4203.` ` We conclude that U S WEST may not include in its 1997/1998 access rates its OB&C costs for May and June 1997. As a general principle, when a carrier files its annual access tariff with the Commission, it projects the dollar amount of its rates on a prospective  X4basis for the next twelvemonth period.Q<Zl {O('ԍ See 47 C.F.R.  61.43.Q Any exogenous adjustments to the PCI for that 12  X4month period must be submitted as part of the price cap LEC's annual access tariff filing.U=l {O'ԍ See 47. C.F.R.  61.45(a).U U S WEST's argument that it did not file in May, in contrast to other LECs, in order to spare the agency the administrative burden of its filing does not persuade us that we should take the unusual step of allowing recovery of these past costs. The Commission has recently ruled  X4that LECs cannot recover amounts that they could have charged but failed to do so. >~l {O'ԍIn re 800 Data Base Access Tariffs and the 800 Service Management System Tariff and Provision of  {O'800 Services, Order on Reconsideration (rel. April 14, 1997) (800 Data Base Order).  In the  X4800 Data Base Order, the Commission relied on the Supreme Court decision FPC v.  X~4Tennessee Gas Co., which held: XThe company having initially filed the rates and either collected an illegal return or failed to collect a sufficient one must, under the theory of the [Natural Gas] Act, shoulder the hazards incident to its actions including not only the refund of any illegal gain but also its losses where its filed rate is found to be" W>0*&&PP"  X4inadequate.?$l {Oy'ԍ FPC v. Tennessee Gas Co., 371 U.S. 145, 15253 (1962). The Commission also stated that section 4(d) of the Natural Gas Act, 15 U.S.C. 717(c) is similar to section 203(b) of the Communications Act, and that section 4(e) of the Natural Gas Act, 15 U.S.C. 717 is similar to section 204(a) the Communications Act.  {O'American Television Relay, Inc., 67 FCC.2d 703, 711 n.13 (1978).   X4204.` ` We believe that U S WEST could have recovered these costs by submitting an earlier tariff filing, as other LECs did. We conclude that it may not now make an exogenous adjustment in its annual access filing to recover 14 months of additional costs during the 19971998 tariff year. We, therefore, direct U S WEST to reduce its OB&C exogenous costs by $845,145.  XH'` `   d.GMessage Toll User Counts of U S WEST  X1'  X 4205.` ` In the 1997 Designation Order, the Bureau directed U S WEST to provide  X 4corrected message toll user counts for calendar year 1990.[@ l {Oj'ԍ 1997 Designation Order at  61.[ The Bureau observed that U S WEST's ARMIS figures for that year mistakenly show that message toll users constituted  X 4approximately 99 percent of the total number of billed users.gA Fl yO'ԍFCC ARMIS Report 4304 (1990), Row 7241, for U S WEST.g The Bureau directed U S WEST to explain whether it used these incorrect counts in calculating its interstate OB&C Expenses when initiating price caps.  X{4206.` ` In its direct case, U S WEST explains that, due to a clerical mistake, its 1990  Xd4user counts for ARMIS reporting purposes are in error.LBdl yO'ԍU S WEST Direct Case at 30.L As a result of the error, the counts represent a total of the user counts for the twelvemonth period, rather than a representative average. U S WEST states that this ARMIS clerical mistake and did not flow through to the separations process and was, therefore, not used to assign costs in 1990 when U S WEST converted from cost of service to price cap regulation. We find that U S WEST's explanation  X4is reasonable.KCXf l yO 'ԍThe Bureau directed U S WEST to correct the numbers reported in its 1990 FCC ARMIS 4304. Letter from Fatina Franklin, Chief, Competitive Safeguards Branch, Accounting and Audits Division, Common Carrier Bureau of the FCC, to Mike Crumling of U S WEST, dated October 2, 1997.K  X' ` ` 8. Refunds  X4207.` ` GTE, Pacific Bell, and U S WEST shall refund with simple interest, the"X C0*&&PP" difference between the rates charged to its customers for Other Billing and Collection and the rates required by this section. Interest shall be computed on the basis of interest rates specified by the United States Internal Revenue Service.  X' III.CASH WORKING CAPITAL FOR CERTAIN RATE OF RETURN CARRIERS  X_' A.` ` Background  X14208.` ` We here consider issues relating to the 1997 access tariffs of certain rateofreturn LECs. One of the components of the interstate rate base is an allowance for cash working capital. LECs need this allowance to pay for the operating expenses that are incurred prior to the receipt of sales revenues. Generally, cash working capital is computed by determining the revenue lag and the expense lag and multiplying the difference by the carrier's average daily expenses. Revenue lag is the average number of days between the date a service is provided and the date associated revenues are collected. Expense lag is the average number of days between the date a service is provided and the date the expenses associated with the service are paid. The Commission's rules permit carriers to compute their cash working capital by using either a full leadlag study, the "Simplified Formula Method,"  XK4or the "Standard Allowance Method."ODKl {O'ԍ  See 47 C.F.R.  65.820(d). O The Commission has previously recognized a 15day net lag period as an acceptable standard for calculating cash working capital for Class B  X4carriers.EZl yO('ԍ Amendment of Part 65 of The Commission's Rules to Prescribe Components of the Rate Base and Net Income of Dominant Carriers, CC Docket No. 86497, Order on Reconsideration, 4 FCC Rcd 1697 (1989). Those carriers seeking to establish a longer net lag period must compute their cash  X4working capital using either a full leadlag study or the Simplified Formula Method.F, l {Oi'ԍ   Id. at 1698. Using the Standard Allowance Method, a carrier would apply the standard 15day lead or lag to its cash operating expense to determine its cash working capital. Using the Simplified Formula Method, a carrier first computes its weighted average revenue lag days and weighted average expense lag days using the formula described in Section 65.820(e). Second, the carrier computes the weighted net lag days by deducting the weighted average expense lag days from the weighted average revenue lag days. Third, the carrier computes the percentage of a year represented by the weighted net lag days. Finally, the carrier computes its cash working capital by multiplying its interstate cash operating expenses by the percentage of a year represented by the  {O'weighted net lag days. See 47 C.F.R.  65.820(e). In conducting a full leadlag study, a carrier would look at all of its cash expenses and measure from the time the expenses are incurred to the time the expenses are paid. Similarly a carrier would look at all of its revenues and measure from the time service is provided to the time the revenues are received. The carrier would then net the expense and revenue lags to calculate the net composite revenue lag. To determine its cash working capital needs, the carrier would multiply the net revenue lag by the daily cash expenses.  X4209.` ` In the 1997 Suspension Order, the Bureau suspended and initiated an"YF0*&&PP" investigation of the annual access tariffs of PRTC, Concord, and Chillicothe. The Bureau found that these LECs had not provided a sufficient explanation for their cash working capital net lag periods. Specifically, the Bureau found that these LECs either: (1) had not provided a leadlag study and calculated a net lag period that appeared to exceed 15 days; or (2) had conducted a leadlag study, but had calculated a net lag period significantly above the  X4industry average.UGl {O'ԍ See 1997 Suspension Order at  67.U In a separate order, the Bureau suspended and set for investigation the proposed cash working capital requirement of Roseville because it found that its proposed cash working capital calculations resulted in a net lag period that exceeded the industry  XH4average.HHZl {OS 'ԍ See 1997 Annual Access Filings, CC Docket No. 97149, Order, DA 971413 (Com. Car. Bur. July 7, 1997).  X 4210.` ` In the 1997 Designation Order, the Bureau found that although PRTC,  X 4Concord, and Chillicothe had submitted ex parte filings in support of their leadlag studies,  X 4the material was insufficient to explain their proposed net lag periods.YI l {OU'ԍ 1997 Designation Order at  29. Y The Bureau therefore required PRTC, Concord, Chillicothe, and Roseville to submit the leadlag studies  X 4used to determine their proposed net lag periods.3J Fl {O'ԍ Id.3   X 4X` hp x (#%'0*,.8135@8:319.GTE contends that AT&T and MCI are not correct in their argument that GTE has consistently underestimated its BFP revenue requirement and has consequently imposed improperly inflated CCL charges on IXCs. GTE contends that its variance of 1.5 percent from actual is a reasonable margin of error for projecting interstate BFP revenue  XH4requirement.CHDC yO='ԍGTE Rebuttal at 3.C GTE also argues that AT&T's proposal to use actual results instead of projections is irrelevant to this investigation.  X ' B.Equal Access Exogenous Cost Changes  X ' 1.Contentions of the Parties  X 4?320.Bell Atlantic opposes the adoption of the 1997 Designation Order's tentative conclusion that more than the actual amount of equal access costs should be removed from  X{4rates by adjusting the actual amount upward based on growth in demand.|{C {O'ԍBell Atlantic Direct Case at 7; see also, Ameritech Direct Case at 6.| Bell Atlantic  Xd4argues that the Access Charge Reform Order merely directed LECs to make a downward adjustment to account for the completed amortization of equal access expenses; it did not  X84include any requirement to augment the removal of equal access costs by demand growth.Q8f C yOO'ԍ Bell Atlantic Direct Case at 7.Q If the Commission were to require an adjustment to reflect growth in demand, any such adjustment should be based on total basket revenues, and not just local switching revenues as  X4proposed by AT&T.P C yO!'ԍBell Atlantic Direct Case at 8.P  X4@321.U S WEST states that the "R" adjustment proposed by AT&T and used by Aliant  X4is an inappropriate method for the removal of equal access cost recovery from the PCI.L C yO%'ԍU S WEST Direct Case at 23.L "0*&&PP" US WEST explains that "R" values are base period revenues (previous year's demand multiplied by the current rate) used for spreading exogenous costs to baskets and adjusting the  X4PCI.LC yOK'ԍU S WEST Direct Case at 23.L U S WEST states that costs for equal access cost recovery (which do not change with demand) are associated with a particular time period and will be adjusted in the price cap  X4model through an exogenous change.LXC yO'ԍU S WEST Direct Case at 24.L According to U S WEST, this exogenous adjustment  X4does not have a direct relationship to "R" values.LC yO& 'ԍU S WEST Direct Case at 24.L U S WEST explains that if a carrier is priced to its cap, then exogenous costs would have some impact on revenues and  X_4correspondingly on "R".L_xC yO 'ԍU S WEST Direct Case at 24.L If a carrier prices below the cap, it states, then the impact of  XH4exogenous adjustments on "R" values is uncertain.LHC yO'ԍU S WEST Direct Case at 24.L  X 4A322.According to SBC, the regulatory objective of the removal of noncapitalized  X 4equal access costs is to remove from prices the level of costs reflected in prices.Q C yOL'ԍSBC Companies Direct Case at 42.Q Most LECs argue that an "R" adjustment would remove more costs than are actually recovered and  X 4would penalize price cap LECs.  ( C yO'ԍBell Atlantic Direct Case at 10; SNET Direct Case at 8; SBC Companies Direct Case at 4243; Ameritech Direct Case at 6; U S WEST Direct Case at 23.. Bell Atlantic further states that in the 1993 tariff year, the separate rate element for equal access costs was set at zero, and cost recovery occurred  X 4through other elements in the traffic sensitive price cap basket.R! C yO'ԍBell Atlantic Direct Case at 89.R If the Commission were to require an "R" value adjustment, Bell Atlantic and Ameritech contend that the only reasonable starting point would be the start of such recovery in 1993, because prior to that date, equal access recovery was only augmented by the growth in lines, which grew at a much slower  XK4rate than the growth in the interstate local switching revenues.|"KC {O !'ԍBell Atlantic Direct Case at 9; see also, Ameritech Direct Case at 7.| Bell Atlantic explains that at the start of price caps, equal access costs were collected as a separate perline rate element, and growth in local switching revenues had no impact on the total amount collected for that  X4rate element.P#C yOY%'ԍBell Atlantic Direct Case at 8.P Bell Atlantic contends that it would be arbitrary to require that the removal"2#0*&&PP" of those costs from rates should reflect a factor for growth in local switching revenues for the  X4period when such growth was irrelevant to the rate element.P$C yOb'ԍBell Atlantic Direct Case at 8.P  X4B323.Many LECs state that a PCI adjustment is a reasonable means by which to  X4ensure the full removal of amortized equal access expenses from current rates.%XC yO'ԍBellSouth Direct Case at 10; SNET Direct Case at 7; Ameritech Direct Case at 67; U S WEST Direct Case at 2324. Ameritech states that, in removing costs from price cap rates or indices, recognition must be given to the fact that the PCI has already operated to, in effect, remove a substantial portion of the costs  X_4that were included in price cap rates.L&_C yO 'ԍAmeritech Direct Case at 6.L Ameritech contends that the essence of price cap regulation is to substitute the PCI for an annual examination of a carrier's costs and to assume, via the Xfactor, that a certain fraction of a carrier's cost will, or should be,  X 4eliminated through a carrier's own efficiency enhancing efforts.L' @C yO 'ԍAmeritech Direct Case at 6.L U S WEST states that past exogenous cost changes simply adjusted the PCI to reflect the original dollar impact on a goingforward basis when the adjustments were made close to the time when the adjustment  X 4should have been made.L( C yOV'ԍU S WEST Direct Case at 24.L   X 4C324.Generally, most LECs contend that the removal of amortized equal access  X4expenses from current rates is not similar to the reversal of sharing.)` C yO'ԍBell Atlantic Direct Case at 10; SNET Direct Case at 9; SBC Companies Direct Case at 43; BellSouth Direct Case at 11; Frontier Direct Case at 78; Ameritech Direct Case at 6; U S WEST Direct Case at 24. BellSouth explains that the amount of the excess return is directly related to the amount of revenues achieved over  Xb4time, and the amount of revenues grow over time with growth in demand.M*b C yO'ԍBellSouth Direct Case at 11.M BellSouth maintains that the amount to be removed in recognition of the completion of the amortization of equal access is a cost which was fixed at the outset of price cap regulation and did not  X4change with demand.M+H C yO"'ԍBellSouth Direct Case at 11.M Bell Atlantic explains that in the context of sharing, the "R" adjustment is intended to adjust the sharing amount so that the impact on price caps when sharing is reversed is the same as the impact on the caps when sharing was put into indices a"+0*&&PP"  X4year earlier, thereby assuring that sharing is a onetime adjustment.,C {Oy'ԍBell Atlantic Direct Case at 10; see also, SNET Direct Case at 8; SBC Companies Direct Case at 42; Ameritech Direct Case at 6; U S WEST Direct Case at 23.  X4D325.Several LECs state that the equal access exogenous cost change is analogous to the exogenous change required by the Commission to recognize the completion of the  X4amortization of depreciation reserve deficiencies and inside wiring costs.-"C {Ow'ԍBellSouth Direct Case at 11; see also, Ameritech Direct Case at 7; U S WEST Direct Case at 24; Bell Atlantic Direct Case at 7. BellSouth and Bell Atlantic argue that the exogenous changes for these amortizations were based upon the base period level of costs, and no adjustment was made for the change in demand from the  X_4beginning of price caps.o._|C yO 'ԍBellSouth Direct Case at 11; Bell Atlantic Direct Case at 78.o BellSouth asserts that there is no rationale for requiring the  XH4exogenous change for the equal access amortization to be treated any differently./H C {O'ԍBellSouth Direct Case at 11; see also, U S WEST Direct Case at 24; Ameritech Direct Case at 7; Frontier Direct Case at 78. U S WEST argues that the lag in resolution of this issue makes it appropriate to reduce the equal  X 4access cost recovery amount by the change of the PCI at the time the liability was incurred.L0 f C yO1'ԍU S WEST Direct Case at 24.L Several LECs make a similar argument with respect to the amortization of OPEB costs. Specifically, they maintain that the Bureau rejected a revenue growth adjustment to the exogenous removal of OPEB costs stating, "since the Commission did not specifically require the LECs to follow the approach advocated by AT&T and MCI, we will not require the LECs  X 4to 'trueup' the reversal of OPEB amounts."1 C {ON'ԍSBC Companies' Direct Case at 41, citing 1995 Annual Access Tariff Filings of Price Cap Carriers,  {O'Memorandum Opinion and Order Suspending Rates, 11 FCC Rcd 5461 (1995); see also, Bell Atlantic at 7. SBC argues that there is no basis in the record or any precedent to justify using a different methodology for the removal of equal access  Xy4costs other than that used for the removal of OPEB costs.2yR C {O|'ԍSBC Companies' Direct Case at 41; see also, Bell Atlantic Direct Case at 7; .  XK4E326.As indicated above, the LECs argue that the Commission may not require price cap LECs to make an Rfactor adjustment in connection with the 1997 annual access tariff  X4filings.3C yO#'ԍFrontier Direct Case at 7; SNET Direct Case at 8; SBC Companies Direct Case at 41; BellSouth Direct Case at 11. Frontier states that although the Commission expressly reserved the right to require  X4future Rfactor adjustments in the 1995 Annual Access Order, it did not do so in either the"<30*&&PP"  X4Access Charge Reform or Price Cap Reform orders.K4C yOy'ԍFrontier Direct Case at 8.K Specifically, in the 1995 Annual  X4Access Order, the Bureau stated that "the Commission will have the opportunity to review the method for reversing such adjustments in connection with its consideration of the petitions for  X4reconsideration of the Price Cap Performance Review for Local Exchange Carriers."5XC {O'ԍIn the Matter of 1995 Annual Access Filings of Price Cap Carriers, DA 951631, 11 FCC Rcd 5461, 547172 (1995). SBC, Frontier, U S WEST, and Bell Atlantic assert that if the Commission wishes to require the use of the Rfactor adjustment, it may do so only prospectively and only after conducting a  X|4properly noticed rulemaking proceeding.6|C yO 'ԍFrontier Direct Case at 9; Bell Atlantic Direct Case at 41; U S WEST Direct Case at 25; SBC Companies Direct Case at 42.  XN' 2. Oppositions   X 4F327.MCI argues that the current PCI must be set to ensure that today's rates for traffic sensitive basket services are no higher than if the equal access amortization rate  X 4element had not been part of the switched access basket on January 1, 1991.F7 C yO'ԍMCI Opposition at 10.F MCI contends that an "R" value adjustment is required to remove fully the amortized equal access expenses  X 4from LEC rates.F8 C yO'ԍMCI Opposition at 10.F MCI maintains that mathematically, adjusting the current indices to remove fully the effects of extraordinary costs reflected in the initial price cap indices is the  X4same as a sharing reversal.F9* C yOq'ԍMCI Opposition at 11.F MCI further explains that the composition of the traffic sensitive basket differs from the composition of the switched access basket at the inception of price cap regulation; therefore, unadjusted "R" values cannot be used to compute deltaZ or  XQ4the exogenous cost change.F:Q C yO'ԍMCI Opposition at 11.F MCI argues that LECs should be required to compute deltaZ by multiplying the equal access amortization amount included in the initial price cap index by the ratio of 1996 local switching service category revenues to 1991 local switching service  X 4category revenues.F; J C yO#'ԍMCI Opposition at 11.F  X4G328. AT&T states that although the LECs (with the exception of Ameritech) properly calculated the amount of noncapitalized equal access costs that entered price caps, they";0*&&PPe" inappropriately reduced these amounts by the PCI change since January 1, 1991 and failed to  X4apply the "R" value trueup.G<C yOb'ԍAT&T Opposition at 18.G As a result, AT&T argues that all of the LECs, except one, have substantially understated the exogenous adjustment required to remove equal access costs from their PCIs.  X4H329.AT&T also contends that the LECs' arguments against an "R" value trueup are  Xv4meritless.G=vXC yO 'ԍAT&T Opposition at 18.G AT&T provides two such examples: 1) Ameritech states that PCI deflation via the Xfactor adjustment means that a substantial portion of equal access costs have been eliminated from the LECs' PCIs through normal operation of the price cap formula; and 2)  X14BellSouth maintains that equal access was a fixed cost that did not grow from year to year.G>1C yO 'ԍAT&T Opposition at 19.G AT&T asserts that Ameritech's statement is true but irrelevant; it does not obviate the need for the trueup, since whatever equal access revenues have been reduced by the operation of  X 4the Xfactor have increased due to growth in demand volumes.H? xC yO'ԍ AT&T Opposition at 19.H As to BellSouth's statement, AT&T also states that whether or not equal access costs have grown, because of increased demand, the LECs have been able to recover more revenues over time stemming  X 4solely from the inclusion of the equal access cost amortization in their PCIs.H@ C yO`'ԍ AT&T Opposition at 20.H Because volume growth is not reflected in the Xfactor adjustment, AT&T maintains that the downward exogenous adjustment must reflect current demand, in order to ensure complete  Xb4removal of those equal access costs still remaining in the LECs' PCIs.HAbC yO'ԍ AT&T Opposition at 20.H  XK4  X44I330.AT&T further argues that in accordance with established Commission requirements, the LECs must use a revenue growth adjustment to remove fully the impact of  X4previous periods' costs.HB( C yO'ԍ AT&T Opposition at 20.H AT&T states that this equal access exogenous cost adjustment is analogous to the removal of previous periods' exogenous cost adjustments for which the Commission has required the LECs to true up the basket revenues to account for basket  X4revenue growth.HC C yO*$'ԍ AT&T Opposition at 21.H AT&T maintains that the current basket revenues include the net impact of PCI changes and volume growth since January 1, 1991 and allow removal of the full"H C0*&&PPB"  X4amount of equal access costs.HDC yOy'ԍ AT&T Opposition at 21.H  X4J331.In addition, AT&T and MCI state that the LECs' arguments that the imposition of any "R" value trueup would constitute an impermissible retroactive rulemaking, are  X4meritless.qEXC {O'ԍ AT&T Opposition at 23; see also, MCI Opposition at 1213.q AT&T contends that in the Access Charge Reform Order, the Commission  X4directed the removal of equal access costs and left implementation details to the Bureau.HFC yO* 'ԍ AT&T Opposition at 23.H  Xx4Moreover, the 1995 Suspension Order recognizes that express Commission authority is not needed to require an "R" trueup, especially where the Commission's order requiring the downward exogenous adjustment does not state that the same exact dollar amounts originally  X54included in the PCIs are to be removed.qG5zC {O`'ԍ AT&T Opposition at 23; see also, MCI Opposition at 1213.q  X 4K332.AT&T and MCI maintain that the LECs' contention that the Commission has not required "R"adjustments for completion of amortizations of depreciation reserve and inside wiring is inapposite, because the completion of those amortizations was reflected in annual downward exogenous adjustments. AT&T states that there have been no such annual  X 4adjustments for equal access costs; thus, an "R" value trueup is required to remove the full impact of the completion of equal access amortization as an end adjustment. AT&T further states that making the "trueup" adjustment based on the local switching band revenue growth is appropriate because equal access costs remained in the LECs' local switching band since  XO4January 1, 1991.KHO C yO 'ԍ AT&T Opposition at 2324.K According to AT&T, the trueup adjustment will provide a more accurate adjustment as compared to traffic sensitive basket revenues, because a major portion of the LECs' traffic sensitive basket revenues were moved to the trunking basket, when that basket  X 4was created in 1994 as part of the local transport restructure.HI C yOW'ԍ AT&T Opposition at 24.H  X4L333.AT&T also argues that the LECs' PCIs are overstated by $60.7 million due to  X4their failure to make the "R" trueup and their inappropriate PCI deflation.HJ, C yO"'ԍ AT&T Opposition at 24.H AT&T states that the Commission should therefore require the LECs to adjust their January 1, 1991 equal access amortization costs by the percentage their local switching band revenues have grown" J0*&&PP"  X4since January 1, 1991, and then remove those amounts from their current PCIs.HKC yOy'ԍ AT&T Opposition at 24.H  X' 3. Replies  X4M334.U S WEST argues that it correctly calculated the adjustment to remove equal  X4access cost recovery from its access charges.JLXC yO'ԍ U S WEST Rebuttal at 13.J Specifically, U S WEST states that it determined the noncapitalized portion of the equal access expense as of yearend 1990,  X_4which was immediately prior to implementation of the first price cap rates.JM_C yO 'ԍ U S WEST Rebuttal at 13.J It then added to that amount an 11.25% return on the average deferred interstate balance and grossed up that  X14return for taxes.JN1xC yOZ'ԍ U S WEST Rebuttal at 13.J This sum was then reduced to reflect the reduction in its local switching  X 4PCI (approximately $4.8 million) since the time rates came under price caps.JO C yO'ԍ U S WEST Rebuttal at 13.J  X 4N335.U S WEST argues that under the price cap regime, LECs' prices are disconnected from their costs, and making the "R" adjustment would unnecessarily bring the two together  X 4again. JP C yO'ԍ U S WEST Rebuttal at 14.J U S WEST further contends that attributing revenue growth to costs incurred years  X 4before is a meaningless concept with no basis in reality.wQ ( C {O'ԍ U S WEST Rebuttal at 14; see also, Bell Atlantic Rebuttal at 5.w U S WEST states that under price caps, "R" is a function of rates and demand; prices no longer have a direct relationship to  Xy4costs.JRy C yO'ԍ U S WEST Rebuttal at 14.J In implementing similar exogenous changes (e.g., inside wire amortization and the depreciation reserve deficiency amortization), U S WEST maintains that price cap LECs have removed the costs at the level that they were initially incurred, without adjusting them for the  X64growth in "R".S6J C {O1!'ԍ U S WEST Rebuttal at 15; see also, BellSouth Rebuttal at 67; Frontier Rebuttal at 23; SBC Companies Rebuttal at 89; Bell Atlantic Rebuttal at 56. U S WEST further argues that when the Commission ordered the removal of the equal access amortization, it specifically stated that it would "accord the expiration of equal access cost amortizations the same exogenous cost treatment given to the amortizations"S0*&&PP"  X4of the depreciation reserve deficiencies and inside wiring costs."TC {Oy'ԍ U S WEST Rebuttal at 16, citing Access Charge Reform Order at  310; see also, BellSouth Rebuttal at 7.  X4O336.U S WEST then contends that adjusting the exogenous change to reflect PCI  X4reductions is necessary to maintain the separation between prices and costs.uU"C {O'ԍ U S WEST Rebuttal at 16; see also, Ameritech Rebuttal at 56.u It explains that although the costs at issue played some role in the development of the rates in effect when price caps took effect, that connection has become attenuated over time, as PCI reductions  Xv4brought about reductions in the LECs' rates, without regard to the changes in their costs.JVvC yO 'ԍ U S WEST Rebuttal at 16.J US WEST claims that there is no way to measure this attenuation with any precision, but the  XH4intervening PCI changes provide a reasonable proxy.uWHDC {O='ԍ U S WEST Rebuttal at 16; see also, Ameritech Rebuttal at 56.u U S WEST notes that the Commission accepted the same sort of adjustment in its filing to remove payphone costs from  X 4the CCL charge.JX C yO'ԍ U S WEST Rebuttal at 17.J  X 4P337.The LECs maintain that there is a distinct difference between sharing reversals and the removal of costs, with the most relevant precedent being the rejection of an "R"  X 4adjustment for the removal of OPEB costs from PCIs.Y f C {O'ԍ SBC Companies Rebuttal at 9; see also, Bell Atlantic Rebuttal at 56; Ameritech Rebuttal at 6. Ameritech explains that since sharing clearly involves a specific dollar amount of revenue that must be shared with access customers, it is appropriate to make an "R" adjustment when sharing is reversed to make sure  Xy4that the same amount of revenue is added back to the indices.JZy C yO"'ԍ Ameritech Rebuttal at 6.J Ameritech states that in this case, costs are not directly related to revenuesespecially in the price cap regimetherefore,  XK4no "R" adjustment is appropriate.J[K C yO'ԍ Ameritech Rebuttal at 7.J  X4Q338.Bell Atlantic states that AT&T continues to claim erroneously that any growth adjustment should be based only on the local switching band, yet elsewhere in its opposition,  X4AT&T acknowledges that its proposed adjustment should be based on basket revenues.N\C yO$'ԍ Bell Atlantic Rebuttal at 6.N By isolating local switching growth, Bell Atlantic argues that AT&T ignores the slower growing"\0*&&PP"  X4local transport revenues, which were part of the same basket prior to restructure.N]C yOy'ԍ Bell Atlantic Rebuttal at 6.N If the Commission requires a demand adjustment, Bell Atlantic maintains that it should be based on  X4total basket revenues and not just local switching revenues as AT&T claims.N^XC yO'ԍ Bell Atlantic Rebuttal at 6.N  X' 1.SNET's Calculation of the Initial Equal Access Exogenous Cost Revenue  X'Requirement (#  X_' a.  Contentions of the Parties  X14R339.SNET states that it adjusted its equal access cost by multiplying the equal access  X 4revenue requirement by the ratio of the current (i.e., June 30, 1997) traffic sensitive PCI over  X 4the initial 1991 traffic sensitive PCI.H_ C yO'ԍ SNET Direct Case at 7.H According to SNET, this adjustment accounted for the significant reduction in its local switching prices and revenues driven by the application of the  X 4Commission's annual productivity offsets ("Xfactors").H` xC yO'ԍ SNET Direct Case at 7.H SNET contends that it should not be required to increase its original equal access exogenous cost requirement by revenue  X 4growth without an offsetting adjustment for its PCI reductions since 1991.a C {Ob'ԍ SNET Direct Case at 8; see also, U S WEST Direct Case at 23; Ameritech Direct Case at 7.   X{4S340.In response to AT&T's allegation that SNET understated its equal access exogenous cost adjustment by approximately $2.1 million, SNET claims that the discrepancy between SNET's 1990 Cost of Service No. 5 Report (COS5) and its stated exogenous cost can be explained by its specific circumstances relative to its equal access mandate and the  X4manner in which SNET completed the 1990 report.HbC yOj'ԍ SNET Direct Case at 4.H SNET explains that its initial equal access implementation expenses were limited to the conversion of lines served by then X4existing stored program control offices.Hc* C yO 'ԍ SNET Direct Case at 5.H Offices without stored program control lines were not part of this equal access implementation. SNET then states that even though expenses associated with this mandated equal access conversion of stored program control lines were amortized over an eightyear period ending December 31, 1993, expenses were no longer" c0*&&PP("  X4incurred for this initial conversion after 1988.dC yOy'ԍ SNET Direct Case at 5. SNET notes that 100 percent of its stored program control lines had been converted as of March 31, 1988. SNET contends that thereafter costs associated with the conversion of nonstored program controlled lines to equal access were  X4expensed in the year in which they were incurred.Ie C yO'ԍ SNET Direct Case at 6. I  X4T341.SNET explains that the calculation of its initial equal access exogenous cost revenue requirement included only equal access expenses from prior periods, because only those costs associated with its initial equal access conversion were amortized at the initiation  X_4of price caps, and therefore needed to be taken out of the PCI in accordance with the Access  XJ4Charge Reform Order.IfJC yO 'ԍ SNET Direct Case at 6. I The equal access costs associated with its overall modernization program that were expensed in the year in which they were incurred were entered as "current"  X 4period in the COS5.Ig @C yO'ԍ SNET Direct Case at 6. I SNET states that it complied with the instructions for completing the COS5 by reporting the amortized expenses mandated by the Commission for initial equal access conversion of its stored program control offices as well as the directly expensed costs associated with the conversion of its nonstored program control offices on the "current"  X 4period line of the COS5.Ih C yOC'ԍ SNET Direct Case at 6. I  X' b.  Replies  X}4  Xf4U342.SNET states that its 1997 annual access tariff filing is correct in that all amortized noncapitalized expenses associated with its initial equal access conversion, completed in 1988, have been reflected in the calculation of its initial equal access exogenous  X!4cost revenue requirement upon the initiation of price cap regulation.Ei!` C yO2'ԍ SNET Rebuttal at 5.E SNET contends that the Commission ordered the removal of amortized equal access expenses, not expenses that were directly expensed in the year in which they were incurred and were part of the normal  X4cost of doing business.Ej C yO}"'ԍ SNET Rebuttal at 5.E  X' 2.Ameritech's Equal Access Amortization Revenue Requirement " j0*&&PP"Ԍ X' a.  Contentions of the Parties  X4V343.In response to the directive to explain and document fully how Ameritech used its separations information system data to determine the portion of equal access costs that were amortized, Ameritech states that the total equal access cost recovery amount included in its preprice cap rate was based on the total equal access revenue requirement filed as part of  Xv4its 1990 annual access filing and appearing in the COS5 report.MkvC yO'ԍ Ameritech Direct Case at 8.M Since that report did not have detail to determine the noncapitalized portion of those costs, Ameritech claims that it  XH4obtained actual data from its separations system.MlHXC yOQ 'ԍ Ameritech Direct Case at 8.M The data collected from its separations  X14system shows that the actual noncapitalized portion was 36% of total equal access costs.Vm1C yO 'ԍ Ameritech Direct Case at Exhibit 10.V   X ' b.  Oppositions  X 4W344.With respect to Ameritech's calculation of its equal access amortization costs, AT&T argues that Ameritech has failed to calculate properly the amounts of equal access amortization costs that were reflected in its baseline equal access rates at the outset of price  X4caps in 1991.HnxC yO'ԍ AT&T Opposition at 25.H AT&T states that, in its Direct Case, Ameritech fails to justify its calculation  Xy4of the revenue requirement associated with the amortized equal access expenses.HoyC yO2'ԍ AT&T Opposition at 25.H AT&T maintains that the price cap LECs' initial equal access rates were based on the equal access  XK4revenue requirements filed as part of the LECs' 1990 annual tariff filings in the COS5.KpKC yO'ԍ AT&T Opposition at 2526.K AT&T argues that Ameritech used one data source to calculate its total equal access revenue requirement and a separate source (labeled "Separations Information System (7/906/91)") or  X4point in time to calculate its "noncapitalized" revenue requirement. Hq( C yO'ԍ AT&T Opposition at 26.H AT&T contends that the data values reported from the "Separations Information System" do not appear to agree with the data on the COS5. AT&T argues that Ameritech does not justify the use of this source and does not dispute that the reported COS5 data formed the basis for its preprice  X4cap equal access rates, its initial rates under price caps, and its price cap indices.Hr C yO%'ԍ AT&T Opposition at 27.H "H r0*&&PP"Ԍ X4X345.AT&T further states that Ameritech divides its actual noncapitalized equal access expenses for the 1990 tariff period by its COS5 projected total equal access revenue requirement to determine the amount of noncapitalized expenses used to establish its initial  X4price cap equal access rate.HsC yO4'ԍ AT&T Opposition at 27.H According to AT&T, Ameritech's use of "actual" data is not a reliable mechanism for computing the noncapitalized equal access expenses which entered Ameritech's price cap rate, because its rate was based on revenue requirement projections  Xv4made well in advance of the availability of actual results.HtvXC yO 'ԍ AT&T Opposition at 27.H AT&T states that its calculations show that Ameritech has understated its equal access exogenous cost adjustment by  XH4approximately $1 million.wu HC yO 'ԍ AT&T Opposition at 28. AT&T states that it recalculated Ameritech's net revenue requirement using only COS5 data and that the equations AT&T used are identical to the formulas used by the majority of the LECs to separate their COS5 data into its component noncapitalized and capitalized accounts. AT&T Opposition at 28. w  X ' c.  Replies  X 4Y346.Ameritech maintains that AT&T incorrectly insists that it was improper for it to use actual data to determine the amount of noncapitalized equal access costs included in pre X 4price cap rates.Jv C yO?'ԍ Ameritech Rebuttal at 7.J Ameritech states that the total equal access revenue requirement forecast filed as part of its 1990 annual access tariff filing and appearing in the COS5 Report did not  X4have sufficient detail to determine the noncapitalized portion of those costs.Jw` C yO'ԍ Ameritech Rebuttal at 7.J Ameritech explains that the actual data obtained from its separation system showed that the actual non Xb4capitalized portion of equal access costs was 35.68% of total equal access costs.Jxb C yO'ԍ Ameritech Rebuttal at 7.J Ameritech states that that percentage was then applied to the forecast amount to determine the  X44percentage of the forecast amount that represented noncapitalized equal access costs.Jy4 C yOe 'ԍ Ameritech Rebuttal at 8.J  X' C.Other Billing and Collection  X' 1. Contentions of GTE Regarding Apportionment of Customer Services  X'Expenses Among Categories (#  X4 "y0*&&PP("Ԍ X4Z347.GTE states that the rapid growth in its Category 3 expense is primarily due to an increase in customer service administration expense. One reason for this increase, GTE explains, was the centralization of the management of customer "contact care centers" and the consolidation of those centers. GTE states that it opened a national, multilingual, customer service center which assists all GTE customers requiring service in Spanish or an Asian language. According to GTE, another reason for the increase in customer service administration expense, was its increase in company official telecommunication charges. GTE explains that, following the consolidation of its customer care centers, its managers  XH4experienced a need for greater internal communications.zHC yO 'ԍ Letter from W. Scott Randolph, DirectorRegulatory Matters, GTE to William F. Caton, FCC, at 1, dated  yO 'September 18, 1997.Ľ GTE further states that the rapid  X14increase in Category 3 expense is also due to an increase in public telephone commissions.{1 C yO 'ԍ Letter from W. Scott Randolph, DirectorRegulatory Matters, GTE to William F. Caton, FCC, at 1,  yO 'dated September 18, 1997.ľ  X 4 [348.GTE attributes the rapid decline in its Category 1 expense to two changes. The first change was the consolidation of customer service centers. GTE claims that this  X 4consolidation reduced customer service expenses such as billing inquiry and service order  X 4processing expenses.A| xC yO'ԍ GTE Direct Case at 28.A  X4\349.The second change, GTE states, was the decision by IXCs to take back certain billing functions that GTE had been performing on their behalf which also caused a decrease in Category 1 expense. GTE claims that this development caused a decrease in IXC payment  XM4and collection expense, which is a Category 1 expense.F}MC yO'ԍ GTE Direct Case at 28.F In response to additional questions from Bureau staff members, however, GTE states that the IXCs' take back was not the  X4primary cause for this decrease in IXC payment and collection expense.~C yOh'ԍ Letter from W. Scott Randolph, DirectorRegulatory Matters, GTE to William F. Caton, FCC, at 2, dated  yO0'September 26, 1997. Rather, the  X4primary cause was the renegotiation of a contract with a major IXC.3 C {O 'ԍ Id.3 That new contract,  X4GTE states, removed the cap that had been placed on uncollectibles by the old contract.3 C {O$#'ԍ Id.3  X4According to GTE, this change caused a reduction in IXC uncollectibles beginning in 1996.3C {O%'ԍ Id.3"0*&&PPn"Ԍ X' Ù  2.Contentions of the Parties Regarding Apportionment of OB&C Expense  X'Among Service Classes (#  X4]350.GTE asserts that its message toll user counts decreased relative to the user counts for other services partly as a result of the creation in 1996 of new EAS routes in several  X4states.@C yO'ԍ GTE Direct Case at 29.@ GTE further asserts that the decline is attributable in part to the IXCs' "takeback"  Xv4of billing and collection functions that GTE had been performing on their behalf.@vXC yO 'ԍ GTE Direct Case at 29.@ U S WEST also claims that its message toll user counts decreased due to the IXCs' takeback of  XH4billing and collection functions.EHC yO 'ԍ U S WEST Direct Case at 35.E Pacific Bell contends that it develops user counts by  X14counting a customer as a user for each class of service shown on the customer's bill.I1xC yOZ'ԍ Pacific Bell Direct Case at 44.I  X 4^351.GTE MESSAGESIn response to additional questions from Bureau staff members, Pacific Bell, GTE and U S WEST explain that they generally did not count message toll users if the users' toll calls were handled by large IXCs, which primarily purchase "invoiceready" billing service  X 4from Pacific Bell, GTE and U S WEST." C yOw'ԍ Letter from B. Jeannie Fry, DirectorFederal Regulatory, SBC Communications Inc. to William F. Caton,  yO?'FCC, at 1, dated October 3, 1997; Letter from W. Scott Randolph, DirectorRegulatory Matters, GTE, to William  yO'F. Caton, FCC, at 7, dated September 26, 1997; Letter from BB Nugent, Executive DirectorFederal Regulatory,  {O'U S WEST, to William F. Caton, FCC, at 2, dated September 25, 1997. With invoiceready billing service, the IXCs must  X 4perform several billing functions on their own. C yOJ'ԍ Letter from W. Scott Randolph, DirectorRegulatory Matters, GTE to William F. Caton, FCC, at 5, dated September 26, 1997; Pacific Bell Direct Case at 48. They capture the recording information  X4from their own switches, rate the calls, and accumulate this billing information by month.3J C {O'ԍ Id.3 At the end of each month, the IXCs transfer to Pacific Bell, GTE and U S WEST the completed invoices, which are already preformatted and ready for printing. Pacific Bell,  XK4GTE and U S WEST then print the invoices and insert them into their end user bills.3KC {O!'ԍ Id.3 The companies acknowledge that IXC toll messages thus appear on the end user bills that are  X4printed and mailed by these companies.3nC {O<%'ԍ Id.3 Pacific Bell, U S WEST, and GTE all calculated"0*&&PP" their message toll user counts by determining the number of toll messages handled on their own interexchange networks, together with the IXC toll messages billed through other billing services such as messageready billing, wherein they not only print bills but also rate, record,  X4and accumulate the IXC toll messages. C yO4'ԍ Letter from W. Scott Randolph, DirectorRegulatory Matters, GTE to William F. Caton, FCC, at 5 and 7,  yO'dated September 26, 1997; Letter from BB Nugent, Executive DirectorFederal Regulatory, U S WEST to  yO'William F. Caton, FCC, at 2, dated September 25, 1997; Letter from B. Jeannie Fry, DirectorFederal  yO'Regulatory, SBC Communications Inc. to William F. Caton, FCC, at 1 dated October 3, 1997.  X4   X' 3.Contentions of US WEST Regarding the Substitution of Direct Assignment  Xv'for Prescribed Allocation Factor (#  XH4_352.U S WEST submits that it directly assigns OB&C Expense that is incurred for billing services provided to U S WEST by other ILECs. U S WEST further submits that this  X 4use of direct assignment is required by Section 36.2(e).  C yO{'ԍ U S WEST Direct Case at 2627. The rule states that "[c]osts associated with services or plant billed to another company which have once been separated under procedures consistent with general principles set forth in this part, and are thus identifiable as entirely interstate or state in nature, shall be directly assigned to the appropriate operation and jurisdiction." U S WEST explains that independent ILECs charge it for performing billing functions associated with various settlement plans. The bills issued to U S WEST designate the jurisdiction for each charge,  X 4enabling U S WEST to then book the resulting expenses (i.e., payments for each charge) as wholly interstate or intrastate. These billed charges are associated with traffic between the ILEC and U S WEST's serving territory. U S WEST contends that these expenses fit the criteria established by the Section 36.2(e) because the expenses are directly associated with a  X{4jurisdiction already identified by another company that is subject to the separations rules.I{C yO'ԍ U S WEST Direct Case at 2627. I  XM' 4.Contentions of the Parties Regarding Separation of Message Toll Billing  X6'Expense (#  X4 `353.GTE and Pacific Bell claim that the unusually low interstate shares of billed toll messages reported for 1995 and 1996 are attributable primarily to decreasing demand for their billing services. Specifically, they assert that the largest IXCs decided to takeback certain  X4billing and collection functions that these ILECs had been providing to IXCs.M( C {O"'ԍ GTE Direct Case at 30; Pacific Bell Direct Case at 5253. Pacific Bell notes that, although the decline in the interstate share of billed toll messages is primarily attributable to the IXC "takeback," that interstate share was low throughout the 19901996 period due to calling patterns within the San Francisco, Los Angeles, Sacramento and San Diego LATAs. Pacific Bell states that intraLATA toll carried endtoend by Pacific Bell accounted for at least twothirds of billed messages during that period. Pacific Bell Direct Case at 52.M Although"0*&&PP" GTE does not identify these functions, Pacific Bell explains that the IXCs migrated from a  X4messageready billing service to an invoiceready billing service. XC yOb'ԍ GTE indicates only that a takeback occurred. GTE Direct Case at 30. Pacific Bell states that, for certain large business customers, the IXCs took back all billing and collection functions. Pacific Bell Direct Case at 52.  Pacific Bell states that the migration by AT&T alone is largely responsible for the 66 percent decline in Pacific Bell's  X4interstate share of billed messages that occurred in 1996.IC yOT'ԍ Pacific Bell Direct Case at 53.I  X4a354.GTE and Pacific Bell submit that these two types of billing services are very different. When providing messageready billing service, they receive messages from an IXC on a daily or weekly basis and then accumulate the messages, calculate taxes, and format the  XH4information for the end user bills.dHxC yOq'ԍ GTE Rebuttal Case at 6; Pacific Bell Direct Case at 4748.d Pacific Bell argues that large IXCs generally use this  X14type of billing service only for their casual and nonsubscription customers.S1C yO'ԍ Pacific Bell Direct Case at 4748. S For most IXC  X 4customers, i.e., the presubscribed residential customers, the large IXCs now use invoiceready  X 4billing, which requires IXCs to perform several billing functions on their own.dZ C yON'ԍ Pacific Bell, for example, states that AT&T substituted invoiceready billing service for messageready billing service, causing Pacific Bell's interstate share of billed messages (net of the invoiceready messages) to  {O'decrease by 66 percent in 1995. See, Pacific Bell Direct Case at 53.d They capture recording information from their switches, rate the calls, and accumulate the billing  X 4information by month.j C yOB'ԍ GTE Rebuttal Case at 6; Pacific Bell Direct Case at 4748.j With that information, the IXCs create preformatted invoices, which are transferred electronically, once every billing cycle, to the ILECs and are ready for  X 4printing.3 J C {O'ԍ Id.3   X{4b355.GTE and Pacific Bell state that, when developing allocation factors for message  Xd4toll billing expense, they exclude some IXC toll messages that appeared on customer bills.dC yO 'ԍ Letter from W. Scott Randolph, DirectorRegulatory Matter, GTE, to William F. Caton, FCC, at 4, dated September 18, 1997; Pacific Bell Direct Case at 4748. Specifically, they count the IXC toll messages if they were billed through messageready billing but not if they were billed through invoiceready billing. The invoiceready messages should not be considered, they assert, because the cost of invoiceready billing service is"40*&&PP"  X4minimally affected by the number of messages appearing on customer bills.dC yOy'ԍ GTE Rebuttal Case at 9; Pacific Bell Direct Case at 4748.d That cost is most affected, Pacific Bell further asserts, by the number of customer bills mailed out and the  X4number of IXC pages included in the bills .LXC yO'ԍ Pacific Bell Direct Case at 4748.L GTE further argues that invoiceready billing service does not include the recording, rating, and accumulation functions that messageready  X4billing service usually involves.AC yO= 'ԍ GTE Rebuttal Case at 6.A  Xv4c356.AT&T argues that this practice of selectively excluding IXC toll messages from billed message counts is inconsistent with the former separations rules. AT&T argues that there is no provision in those rules that excludes any billed toll messages from the message  X14counts used in separating the Message Toll portion of OB&C Expense.P1xC yOZ'ԍ AT&T Opposition to Direct Cases at 30.P AT&T observes that, because the interstate share of the excluded toll messages is considerably higher than the interstate share of the included toll messages, this error caused OB&C exogenous costs to be  X 4overstated.@ C {O'ԍ Id. at 31.@  X ' 5.Contentions of the Parties Regarding the Calculation of Exogenous Change in Interstate Expenses(#  X4  Xy4d357.GTE states that it used data for the 12 months ending June 1996 primarily because of its administrative and resource limitations. GTE claims that it was not feasible to wait for the results of calendar year data on a study area basis. GTE argues that it attempted to calculate as many of the exogenous costs as possible in the fourth quarter of 1996, and that a full calendar year of data was unavailable for that year when GTE made its calculations. GTE contends that this was necessary to calculate its exogenous costs for its April 1, 1997 annual price cap filing in the fourth quarter of 1996, because the same group that develops that data is also directly involved in developing the ARMIS reports, which are due at  X4approximately the same time of the year.CC yO !'ԍ GTE Direct case at 3233.C  X4  X4e358.Pacific Bell argues that it should be permitted to use 1995 data for purposes of calculating the OB&C exogenous change based on Sections 61.3(e), 61.45(a) and 61.45(c) of the rules. Pacific argues that 61.3(e) defines the base period used in 61.45(c) as the 12month period ending six months prior to the effective date of annual price cap tariffs. Pacific Bell"N* 0*&&PP" also argues that Section 61.45(a) requires that it maintain updated PCIs to reflect midyear  X4exogenous cost changes.LC yOb'ԍ Pacific Bell Direct Case at 5354.L Pacific argues that it is required to use a 1995 base period because it made a midyear exogenous cost change that took effect between July 1, 1996 and June 30, 1997. Pacific Bell states that it filed a letter updating its price caps but did not file a transmittal letter and cost support at that time because it was not revising rates or regulations in the tariff and because the Bureau indicated it did not want data filed for midyear exogenous cost changes until such time as the ILEC filed its revised tariff. Pacific filed its  X_4tariff including the OB&C adjustment on July 1, 1997.3_XC {Oh 'ԍ Id.3  XH4  X14f359.U S WEST reasons that it could have filed the exogenous changes on May 1, the effective date for the new separations rules, and begun collecting the increased interstate assignment at that time. U S WEST claims it did not do so in order to spare the FCC the  X 4administrative burden of two separate filings. C {O'ԍ U S WEST Direct Case at 3536. U S WEST revised the amount requested to $1.4 million. Id., Exhibit  yOQ'22, at 1. Ĺ MCI and AT&T, however, argue that the proposed exogenous increase represents a retroactive rate increase that is prohibited by the  X 4filed rate doctrine.v DC yO'ԍ MCI Opposition to Direct Cases at 14; AT&T Opposition to Direct Cases at 32.v MCI further argues that, "U S WEST made a decision to forego recovering revenues that it was permitted to recover by the Commission's rules, and cannot  X4now recoup these revenues."vC yO'ԍ MCI Opposition to Direct Cases at 14.#XP\  P6QXP#v AT&T states that U S WEST is attempting to recover 14  Xy4months of increased OB&C costs during a 12 month period.Pyd C yO'ԍ AT&T Opposition to Direct Cases at 33.P  XK' III.Cash Working Capital for RateofReturn Carriers  X44  X4 A.  Concord  X4  X4g360.Concord asserts that its study is still accurate notwithstanding that it used 1993 data because its operating conditions have not, with limited exceptions, changed substantially  X4since the preparation of the study.L C yOf#'ԍ Concord Direct Case at 1.L According to AT&T, Concord's leadlag study is fatally  X4flawed because it was conducted using outdated data.I C yO%'ԍ AT&T Opposition at 36.I "0*&&PP5"Ԍ X' ę B.Chillicothe   X' 1. Contentions of the Parties   X4h361.Chillicothe's leadlag study is based on 1990 calendar year data. Chillicothe analyzes data for the entire 1990 calendar year where it is administratively feasible to conduct such an analysis. Chillicothe uses data from a "representative three month period" in 1990 in  X_4cases where Chillicothe asserts the full year analysis would be administratively burdensome.M_C yO'ԍ Chillicothe Rebuttal at 3.M Chillicothe contends that the 1990 data is still current and that it has not experienced a  X14dramatic change in revenues or expenses since it last conducted its leadlag study.P1XC yO: 'ԍ Chillicothe Direct Case at 5.P In addition, Chillicothe seeks an allowance to account for the time it spends waiting for payment  X 4to trueup data from prior NECA settlement processes.  C yO'ԍ The NECA pool is designed to benefit small carriers with higher costs. Our rules require the LECs, on a monthly basis, to report to NECA their revenue, expense and investment data. NECA uses this data to  {O,'compute each LECs monthly pool shares. See 47 C.F.R.  69.605. Because LECs do not have complete data available when they first report to NECA, the LECs initially report estimated data. In the following months, the LECs are required to trueup data by reconciling their estimates with actual results. To ensure the accuracy of the reconciliation process, and because, even the best accounting procedures sometimes fail to prevent errors, NECA procedures allow the LECs twentyfour months to reconcile and correct previously submitted data. Thus, in each monthly "settlement cycle," LECs report estimated data for the current month as well as adjusted data  yO'for the preceding twentyfour months.  Accordingly, Chillicothe uses a leadlag study that includes an adjustment for a large late payment from the April 1990 NECA settlement process to trueup prior period data that significantly increases Chillicothe's  X 4NECA revenue lag. C yO)'ԍ To trueup its data, a LEC reconciles its estimated data with actual results. To calculate this NECA revenue lag, Chillicothe analyzes data not only from 1990 but also analyzes data from the prior two years, 1989 and 1988, to take prior  X4period adjustments into account.PJ C yO'ԍ Chillicothe Direct Case at 2.P Using this analysis, Chillicothe calculates a lag for its NECA allowance of 194 days.  XK4i362.According to AT&T, Chillicothe's leadlag study is unacceptable because it uses  X44outdated data.I4C yO"'ԍ AT&T Opposition at 36.I AT&T also disputes the 194 days that Chillicothe contends is necessary for the NECA settlement process. Instead, AT&T asserts that the process should take no more"j0*&&PP"  X4than 60 days.OC {Oy'ԍ  AT&T Opposition at 38.O  X' 2. Replies  X4  X4j363.In its rebuttal, Chillicothe contends that AT&T neglects to consider the annual  X4trueup to adjust a carrier's NECA monthly settlement.YZC {O'ԍ Chillicothe Rebuttal at 6.Y Chillicothe further contends that its NECA settlement process is not unique because all participating companies first settle on a preliminary estimate, then true up that data during the year based on actual cost data, and continue to make adjustments as needed to finalize settlement with respect to the service  X14period.=1C {O 'ԍ Id..= Chillicothe asserts that this annual trueup is a significant factor in determining its  X 4NECA allowance leadlag period.< ~C {OI'ԍ  Id.< Chillicothe further contends that the 60day period that  X 4AT&T develops is inaccurate for blanket application to all NECA participants.A C {O'ԍ Id at 6.A With respect to the months used in its leadlag study, Chillicothe contends that the Commission in creating the simplified formula, contemplates that carriers would use a period of less than one  X 4year as part of the simplification process.A C {O'ԍ Id at 3.A With respect to the age of the study, Chillicothe  X 4asserts that it would be impractical and onerous for it to conduct the study more frequently.B 4 C {O'ԍ Id. at 5.B  X4  Xy' C.Roseville  XK' 1. Contentions of the Parties  X4k364.Based on its leadlag study using primarily 1994 data, Roseville asserts that its  X4composite net lag is 49 days. X C yO}!'ԍ Roseville uses 1994 data to compute all of its individual revenue lags except the individual revenue lag for its NECA settlement amount. For its NECA settlement amount revenue lag, Roseville uses data from April 1994 through March 1995.  With respect to its NECA allowance, Roseville states that it analyzes three time periods: (1) service midpoint to end of service period, which is an average of 30 days; (2) end of service period to deposit which is an additional 30 days; and"0*&&PP" (3) a review of the two previous calendar years to take into account prior period  X4adjustments.SC yOy'ԍ Roseville Direct Case at 1617.S On this basis, Roseville calculates a lag of 82 days. Roseville contends that its settlement process with NECA is not unique because all participating companies first settle on a preliminary estimate, then true that data up during the year based on actual cost data, and continue to make adjustments as needed to finalize settlement with respect to the service  X4period.CoC {O'ԍ Id. at 17.C Roseville further asserts that a change in cost data for one company has an impact  Xx4on each NECA pool member's final settlement for any given service month.KxC yO* 'ԍ Roseville Rebuttal at 8.K Finally, Roseville states that the Commission should not automatically assume that a study supporting a greater lag than 15 days is invalid and should instead be prepared to accept net lag periods which accurately reflect a company's operating expense but differ from the Commission's  X 4standard.Z C {O^'ԍ See Roseville Direct Case at 4. Z   X 4l365.Based on its calculations, AT&T asserts that Roseville overstates its cash working capital requirement by $1,475,195. To calculate this amount, AT&T, calculates a 62.3 composite revenue lag, by developing comparable lag days using only Roseville's Rate of Return Regulated Interstate Access (ROR I/S Access) numbers. AT&T divides Roseville's ROR I/S Access amount by 365 to arrive at its computation of Roseville's daily cash expenses. AT&T then divides Roseville's filed cash working capital allowance by AT&T's calculation of daily cash expenses to arrive at 62.3 comparable lag days. To determine Roseville's alleged excess cash working capital first, AT&T multiplies its computation of daily cash expenses by 15 days to arrive at its calculation of a 15day cash working capital allowance for Roseville. Then, AT&T subtracts this figure from Roseville's filed cash working capital allowance to arrive at the alleged excess of $1,475,195.  X' 2. Replies  X4m366.In its response, Roseville contends that it does not overstate its cash working capital needs. Instead, according to Roseville, AT&T miscalculates Roseville's composite revenue lag and corresponding cash working capital needs because AT&T understates  Xg4Roseville's interstate expenses and daily expenses.Wg#C {O;"'ԍ See Roseville Rebuttal at 45.W Roseville asserts that its composite net revenue lag should be 49 days and its corresponding total interstate cash working capital needs should be $1,942,621.  X ' D.PRTC " 0*&&PP"Ԍ X'ԙ 1. Contentions of the Parties  X4  X4n367.PRTC seeks an allowance in its calculation of its cash working capital calculations to account for the time involved in waiting to receive revenues which were  X4delayed as result of Puerto Rico's dispute resolution process. In the 1997 Designation Order, the Bureau directed PRTC to explain fully the dispute process referenced in its Petition, the number of disputes PRTC handled in the 1994 calendar year, the length of time needed to resolve each dispute that year, the total amount of revenue associated with all disputes in that  XJ4year, and the percentages of total revenue that this amount reflected in that year.JC {O 'ԍ 1997 Designation Order at  65 citing PRTC Petition at 34. We requested that PRTC provide this information for the 1994 calendar year because PRTC's leadlag study references that year. In its  X34Direct Case, PRTC describes the procedures mandated by the Puerto Rico Government.3"C yO 'ԍ According to PRTC, in general, a subscriber has 15 days from receipt of a bill to pay or raise objections and request an investigation; once an objection is made PRTC has 60 days to complete an investigation and  {O'notify the subscriber of the results. See PRTC Direct Case at 24, citingĠPuerto Rico, Title 27, Chapter 17,   {O`'262  et seq. If the outcome is adverse to the subscriber, PRTC has 10 days to return the paid amount or credit  {O*'the account. Id. If the outcome is unfavorable, the customer has 10 days to pay the bill or contest the decision  {O'before a regional representative. Id The representative then has 20 days to reach a decision. If the customer  {O'objects to the representative's decision, PRTC has 90 days to appoint an outside attorney to act as arbitrator. Id  {O'If the dispute is resolved, the customer then has 20 days to pay the debt or work out a payment plan. Id If the customer still has a dispute, he or she may appeal the decision within 20 days to the Superior Court of Puerto  {O'Rico. Id  PRTC estimates that it had 1.6 million contacts involving disputes or claims from end users in 1994, but states that each contact could involve multiple disputes or claims. According to PRTC, the revenue involved in the disputes was $20,702.942 which is approximately 2.3  X 4percent of PRTC's billed revenue for 1994.H C yOP'ԍ PRTC Direct Case at 4.H PRTC further maintains that, as a result, the dispute process may take anywhere from 90 to 120 days for sums less than $100 and between  X 430 and 45 days from sums over $100.C X C {O'ԍ Id.at 34.C  X{4o368.In the 1997 Designation Order, the Bureau also required PRTC to document and  Xf4explain the 143day expense lag for payments in lieu of taxes (PILOT). fXfC yO!'ԍ Payment in Lieu of Taxes "PILOT" expense refers to a payment made by PRTC to the government of Puerto Rico. PRTC pays two types of PILOT expense. One mimics property taxes paid by nongovernment owned corporations and the other mimics gross receipts taxes paid by nongovernment owned corporations.f According to PRTC, it calculates the expense lag for PILOT based upon the interstate settlement schedule from NECA and the number of days that a portion of settlement dollars remains in a reserve"8 0*&&PP"  X4fund for payments in lieu of taxes to the Puerto Rico government.BC {Oy'ԍ Id at 5. B Specifically, PRTC states that it determines total PILOT lag days based upon the total number of days that   PILOT funds remain idle for each month of the year.  X4p369.AT&T alleges that PRTC fails to provide a detailed analysis of the time necessary to resolve disputes and that PRTC made inconsistent statements regarding the  Xv4length of time needed for dispute resolution.IvZC yO 'ԍ AT&T Opposition at 36.I AT&T notes that PRTC said both: (1) that disputes involving less than $100 were resolved on average between 90 and 120 days and (2) data was unavailable to determine the length of time required to settle each case on a per  X14dispute basis.<1C {O 'ԍ Id.<    X ' 2. Replies  X 4q370.In response to AT&T's claims regarding the paucity of dispute resolution information supplied, PRTC asserts that in light of its detailed description of the dispute handling process mandated by Puerto Rico law, further details regarding the perdispute time for settlement will not provide meaningful information for additional analysis of PRTC's lead X{4lag study.F{|C yO'ԍ PRTC Rebuttal at 2.F "6 0*&&PP"  X' 9   @C-D-@ APPENDIX D Đl  X4 :AO  ddeanr3.pcx ( C yO'#C\  P6Q/P#ю: Impact of Price Caps and Growth on Revenues  yO'from an Exogenous Adjustment#d{2 PQˏP#:$(#(# A $ A  A  A  A  A  A  A  A  A  A  A  A  A  A  A  A  A  A  A   Xh (#(#In the above figure, assume that in 1991 LEC rates were adjusted upward from P1 to  XhP1*. LEC revenues increase by the difference between P1 and P1* multiplied by Q1 (the 1991 demand for lines and minutes). This is the rectangle labeled "a" in Figure 1. By 1997, price  Xhcaps has reduced P1 to P2 , and the difference between P2 and P2* has shrunk proportionately. Demand has grown more than prices have fallen, however, and the revenue attributable to the  X|hdifference between P2 and P2* has increased (rectangles "b" and "c"). The LECs opposing the R adjustment advocate reducing revenues by only rectangle "b". The R adjustment mechanism would reduce revenues by the full amount of revenue attributable to the original exogenous adjustment (rectangles "b" and "c").