******************************************************** NOTICE ******************************************************** This document was converted from WordPerfect to ASCII Text format. Content from the original version of the document such as headers, footers, footnotes, endnotes, graphics, and page numbers will not show up in this text version. All text attributes such as bold, italic, underlining, etc. from the original document will not show up in this text version. Features of the original document layout such as columns, tables, line and letter spacing, pagination, and margins will not be preserved in the text version. If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) CC Docket 98-104 1998 Annual Access ) Tariff Filings ) MEMORANDUM OPINION AND ORDER Adopted: December 1, 1998 Released: December 1, 1998 By the Commission: Commissioner Furchtgott-Roth issuing a statement. I. INTRODUCTION 1. On June 16, 1998, incumbent local exchange carriers (LECs) filed their 1998 annual access tariffs, scheduled to take effect on July 1, 1998. On June 29, 1998, the Common Carrier Bureau (Bureau) released an Order finding that many of the tariff filings raised substantial questions of lawfulness, and accordingly suspended those tariffs for one day, initiated an investigation and imposed on the LECs an accounting order. Subsequently, the Bureau designated issues for investigation with respect to the tariffs filed by Southwestern Bell Telephone Company (SWBT), Nevada Bell, and The Southern New England Telephone Company (SNET). 2. The area designated for investigation relates to key changes to the Commission's access charge rules adopted by the Commission in the Access Charge Reform Order. The Access Charge Reform Order significantly shifted the recovery of common line revenues between per-minute and flat charges, and between interexchange carriers (IXCs) and end-users. Because of these important changes in the Commission's rules, the Bureau closely scrutinized the methods used by the LECs to develop their common line rates in their proposed annual access tariff revisions. 3. On August 31, 1998, SWBT and SNET filed direct cases responding to the issues designated for investigation. On September 17, 1998, AT&T and MCI filed comments, to which the LECs filed rebuttals. 4. We have reviewed the direct cases, comments, and replies filed in response to the 1998 Annual Access Designation Order. Based on our examination of the LECs' tariffs, the direct cases, comments, and the replies, we find sufficient evidence to require SNET to change the common line rates included in its 1998 annual access tariff. In addition, we find that SWBT and Nevada Bell have made revised tariff filings that correctly calculate their maximum permitted carrier common line (CCL) rates and properly incorporate their non-primary residential line counts. Below, we discuss in detail all the issues designated for investigation in the 1998 Designation Order. II. NON-PRIMARY RESIDENTIAL LINE COUNTS 1. Background 5. Before January 1, 1998, the access charge rules allowed price cap LECs to recover their permitted common line revenues through a combination of a flat-rated subscriber line charge (SLC) and a per-minute CCL charge. Permitted common line revenues not recovered in the SLC were recovered through the CCL charge assessed on the IXCs. 6. The Access Charge Reform Order modified common line revenue recovery. As of January 1, 1998, common line revenues are recovered through: (1) a SLC assessed on end-users; (2) a flat, per-line charge assessed on the IXC to whom the access line is presubscribed, referred to as the presubscribed interexchange carrier charge (PICC); and (3) a per minute CCL charge assessed on IXCs. The PICC recovers common line revenues that exceed the SLC ceiling, subject to a ceiling of its own. The per- minute CCL charge will be phased out as SLC and PICC ceilings increase, and will be eliminated when all permitted common line revenues can be recovered through flat-rated charges. 7. The SLC cap for primary residential lines is the lesser of the per-line average common line costs allocated to the interstate jurisdiction and $3.50. The Access Charge Reform Order set the SLC cap for non-primary residential lines for the year beginning January 1, 1998, at the lesser of the per-line average common line costs allocated to the interstate jurisdiction and $5.00. The PICC was capped for the year beginning January 1, 1998, at $1.50 per month for non-primary residential lines and $0.53 per month for primary residential lines. 8. Each non-primary residential line thus represents up to $2.47 per month in permitted revenues that may be recovered through flat charges instead of through the CCL. If a LEC fails to identify all of its non-primary lines, the CCL charge will be overstated and interexchange carriers will be overcharged. 9. The price cap LECs implemented the changes required by the Access Charge Reform Order with mid-year access reform tariff filings that became effective January 1, 1998. In the Access Charge Reform Tariffs Designation Order, the Bureau designated for investigation the line counts for primary and non-primary residential lines reported by all price cap LECs. It observed that the non-primary line counts were lower than various published estimates and lower than some price cap LECs' public statements. It therefore required those LECs to identify the number of lines in each of the following categories: (1) primary residential lines; (2) single-line business lines; (3) non-primary residential lines; and (4) Basic Rate Interface - Integrated Services Digital Network (BRI-ISDN) lines. 10. In the Access Charge Reform Tariffs Investigation Order, the Commission calculated the percentages of non-primary residential lines to total residential lines reported by the price cap LECs and compared those percentages with (1) data collected by the Commission staff, (2) independent studies, and (3) price cap LECs' public statements. Where the Commission found the percentage reported by a price cap LEC to be unreasonably low, it used those three data sources to prescribe a higher count. 11. In the 1998 annual price cap access tariff filings, a number of LECs reported substantial increases in non-primary residential line penetration ratios. The price cap LECs' annual access tariff filings reported non-primary residential line penetration ratios ranging from a low of 2.19 percent to a high of 15.7 percent. In light of the importance of accurate non-primary residential line counts to the calculation of common line rates, and the apparent inconsistencies in penetration ratios reported by the LECs, the Bureau suspended for one day the price cap LECs' 1998 annual access tariff filings and imposed an accounting order. Subsequent to the release of the 1998 Annual Access Suspension Order, several price cap LECs refiled their tariffs, increasing their non-primary residential line penetration ratios. Based on these filings, over half of all price cap LECs reported non-primary residential line penetration rates of ten percent or more. In addition, several price cap LECs replaced their non-primary residential line definitions with definitions based on service address, or "location," effective January 1, 1999. These carriers indicated that these changes would, in the future, substantially increase their non-primary line penetration rates from the rates reported in their 1998 annual filings. Accordingly, the Bureau reconsidered on its own motion its decision in the 1998 Annual Access Suspension Order to suspend and investigate the tariff filings of several LECs. The Bureau designated for investigation the common line rates of SNET, SWBT, and Nevada Bell because of continuing questions concerning these LECs' non-primary residential line counts. 2. SNET'S Common Line Rates a. Background 12. In its 1998 annual access tariff filing, SNET reported a 1997 non-primary residential line penetration ratio of 6.88 per cent. Other price cap LECs with similarly low initial penetration ratios either rechecked the application of their non-primary line definitions to their data and later reported higher penetration ratios or replaced earlier line definitions with new definitions and projected higher ratios based on the application of these new definitions. Unlike these LECs, SNET neither rechecked the application of its non-primary line definition nor replaced that definition. It, instead, continued to assert that 6.88 percent was the correct penetration ratio for its 1997 base period. 13. Applying an initial test of reasonableness in the 1998 Annual Access Designation Order, the Bureau noted that SNET's 1997 non-primary line penetration ratio fell far below the simple weighted average of the non-primary line penetration levels for all price cap LECs (including SNET) of 10.39 percent as of July 1, 1998. The Bureau also noted that SNET serves urban areas in Connecticut which the Bureau assumed should correlate with higher percentages of non-primary residential lines. Because SNET continued to report non-primary line penetration rates that were much lower than expected, the 1998 Annual Access Designation Order designated for investigation the common line rates included in SNET's 1998 annual access tariff filing. 14. Based upon the 1997 line data included in SNET's annual access filing for 1998 and the Bureau's expectations for those data in light of the industry average, the Bureau sought comment on its tentative conclusion that, in reporting a non-primary residential line ratio of 6.88 percent for 1997, SNET had underrepresented the number of such lines for the assessment of SLCs and PICCs and the calculation of the CCL in the 1998 tariff year. The Bureau, first, ordered SNET to provide information concerning the manner in which SNET made its non-primary residential line counts. Second, the Bureau required SNET to separate its line data by the number of lines in each of four specified categories. Third, the Bureau directed SNET to submit copies of any public documents or other public comments made by SNET or on its behalf regarding the number of primary residential and single line business lines and non-primary residential and BRI-ISDN lines in its service area. Finally, SNET was required to support with pertinent and verifiable evidence any arguments it might have to justify its relatively low percentage ratios of non- primary residential and BRI-ISDN lines to the total of its primary residential, single line business, non- primary residential and BRI-ISDN lines. SNET filed its direct case on August 29, 1998; AT&T filed comments on September 15, 1998; and SNET filed a rebuttal on September 25, 1998. b. Discussion 15. Based on the rules and the record before us, we find sufficient evidence to require SNET to change the common line rates in its 1998 annual access tariffs that are based upon its 1997 base period non- primary residential line count and related penetration ratio. 16. In calculating its common line rates for the 1998 tariff year, SNET used a 6.88 percent non- primary line penetration ratio based upon what it submits were "actual" line counts for calendar year 1997. In its direct case and rebuttal filings, SNET explained how it calculated its non-primary residential lines, provided additional data on those counts and related ratios, and furnished copies of public statements regarding those counts. SNET also argued that its non-primary line counts were low because it does not promote the use of such lines by its customers, because of several characteristics of its internal systems, and because of certain economic aspects of its service area. 17. Based on the record data submitted by SNET and other evidence in the record, we find that it was not reasonable for SNET to use a 1997 base period penetration ratio of 6.88 percent to develop the common line rates for its 1998 annual access filing. Accordingly, we require SNET to revise its common line rates to reflect a non-primary line penetration ratio of not less than 7.77 percent for the 1997 base period. 18. SNET, in its direct case, reports that its non-primary line penetration ratio grew from 6.12 percent in January, 1997, to 7.77 percent in December, 1997. That change represents an annual growth rate in excess of 20 percent. In light of these increasing monthly penetration ratios during 1997 and the related annual growth rate, we find that SNET's declared 6.88 percent average non-primary residential line penetration ratio for 1997 to be an unreasonably low estimate for the 1997 base year, particularly when that ratio is to be used to calculate end user common line rates for the 1998 tariff year. 19. In this investigation, SNET submitted data showing that its non-primary line penetration ratio in the last month of 1997 was 7.77 percent. Based on the rapid 1997 growth in penetration, we find that the December 1997 penetration ratio of 7.77 more fairly and accurately represents the base year 1997 penetration ratio for non-primary residential lines than SNET's average for the entire year. We note that prescription of a 7.77 percent ratio for 1997 should represent no hardship for SNET because its actual penetration rate has continued to grow beyond that percentage. By July of 1998, the first month of the 1998 access tariff year, that penetration ratio stood at 8.87 percent. In addition, SNET reports that it achieved these higher penetration rates without the aid of any special advertising or other marketing efforts. 20. We reject AT&T's suggestion that we use the Additional Line Study (ALS) as a starting point for our investigation of SNET's 1997 non-primary residential line count and related ratio. The Bureau used the 1995 data in the ALS to develop surrogate 1996 penetration ratios and, on that basis, prescribed 1996 ratios for use by certain LECs in revising their 1997 annual access tariff filings. Reliance on such 1995 data (even with the adjustments suggested by AT&T), however, is not appropriate to develop surrogates for 1997 penetration ratios. Accordingly, we decline to prescribe a 1997 penetration ratio for SNET based on the ALS that we employed in our investigation of the 1997 annual access tariffs. 21. Accordingly, we prescribe a 7.77 percent non-primary residential line penetration ratio for use in calculating SNET's common line rates for the 1998 tariff year and we require SNET to make appropriate tariff changes, rate adjustments, and customer refunds to reflect that prescription. Raising this penetration ratio should result in the recovery of more revenues through SLCs and PICCs, but should not change SNET's total common line revenues for the 1998 tariff year. To ensure that the maximum allowable common line revenues remain unchanged, the relevant rate inputs must be calculated using a weighted average of the increased non-primary residential lines and the decreased primary lines. If SNET performs this calculation correctly, its CCL revenues should fall. We direct SNET to make this calculation for the period January 1, 1999, through June 30, 1999, and to calculate and disburse appropriate refunds for the period July 1, 1998, through December 31, 1998. 22. We therefore order SNET to make refunds for any overcharges in SLCs, PICCs, or residual per-minute rates that resulted from the unreasonable penetration ratio reported for the 1997 base year in its 1998 annual access tariff filing. 23. In light of the record evidence of SNET's recent non-primary line penetration ratios, we also expect that SNET's penetration ratio for the 1998 base year will be even higher than 7.77 percent. When SNET makes its 1999 annual access tariff filings, the Commission staff again will review the reasonableness of the penetration ratios submitted by SNET and the other price cap LECs. 3. SWBT's and Nevada Bell's Common Line Rates a. Background 24. In filing their 1998 annual tariff submissions, Southwestern Bell Telephone Company (SWBT) and Nevada Bell raised their non-primary line penetration ratios and reclassified some residential lines from primary to non-primary. 25. The 1998 Annual Access Designation Order designated for investigation the common line rates of SWBT and Nevada Bell. The Bureau tentatively concluded that SWBT and Nevada Bell improperly increased their maximum permitted common line revenues as a result of the residential line reclassification by failing to properly adjust their revenue inputs due to a change in their primary and non-primary residential line counts. The Bureau sought comment on this issue. The Bureau also tentatively concluded that SWBT and Nevada Bell did not follow the correct procedure for recalculating relevant rate inputs using a weighted average of the increased non-primary lines and decreased primary lines. In their submissions, SWBT and Nevada Bell also calculated their common line revenue requirement using a weighted average of the end user common line (EUCL) charge also called the SLC and increased their maximum permitted common line revenues. The Bureau stated that "if this is done correctly, CCL revenues should fall because LECs now collect a portion of this revenue through flat-rated charges assessed on the higher number of non-primary lines." The Bureau, therefore, sought comment on the common line revenue requirement calculations of SWBT and Nevada Bell. b. Discussion 26. We find that SWBT and Nevada Bell correctly calculated their maximum permitted CCL rates and properly adjusted their tariff filings to incorporate their annual non-primary line count. Nevada Bell (Transmittal No. 254) and SWBT (Transmittal No. 2728) refiled their 1998 annual tariff filings on September 15, 1998, and September 28, 1998, respectively. SWBT and Nevada Bell used the Bureau's methodology to compute a weighted average of the EUCL charge and the PICC to calculate their common line revenue requirement. Consistent with our observation in the 1998 Annual Access Designation Order, SWBT's maximum permitted CCL rates decreased using the Bureau's weighted average methodology. Nevada Bell's maximum permitted CCL rates increased by a de minimis amount. This increase is due to the methodology Nevada Bell used to distribute marketing costs pursuant to the Bureau's instructions rather than an incorrect application of the Bureau's weighted average methodology. We, therefore, conclude our investigation of SWBT and Nevada Bell because the designated issues related to whether SWBT and Nevada Bell properly adjusted their tariff filings to incorporate their non-primary line count have been resolved. III. ORDERING CLAUSES 27. Accordingly, IT IS ORDERED, that, pursuant to Sections 4(i), 4(j), 201(b), 202(a), 203(a), 204(a), 205, and 403 of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 154(j), 201(b), 202(a), 203(a), 204(a), 205, and 403, The Southern New England Telephone Company SHALL FILE REVISED RATES to be effective January 1, 1999, and SHALL ISSUE REFUNDS, plus interest, for the period from July 1, 1998, through December 31, 1998, reflecting adjustments to the number of its non-primary residential lines as prescribed in Section II of this Memorandum Opinion and Order. Within sixty (60) days of the release of this Memorandum Opinion and Order, The Southern New England Telephone Company IS ALSO ORDERED to submit to the Common Carrier Bureau for review its plans for issuing these refunds and such plans shall be subject to approval by the Bureau pursuant to our delegation of authority under Section 0.291 of the Commission's rules, 47 C.F.R.  0.291. Those refunds shall be calculated in accordance with the requirements of Section II of this Memorandum Opinion and Order. 28. IT IS FURTHER ORDERED, that the investigation and accounting order imposed by the Common Carrier Bureau in CC Docket No. 98-104 with respect the local exchange carriers specified in Appendix A for the designated issues as discussed herein IS TERMINATED. FEDERAL COMMUNICATIONS COMMISSION Magalie Roman Salas Secretary APPENDIX A List of Parties Filing Pleadings Direct Cases and Rebuttals Filed by Local Exchange Carriers Southwestern Bell Telephone Company (SWBT) August 31, 1998 Direct Case September 25, 1998 Rebuttal The Southern New England Telephone Company August 31, 1998 Direct Case September 25, 1998 Rebuttal Comments and Oppositions to the Direct Case AT&T Corp. (AT&T) September 17, 1998 Comments/Oppositions MCI Telecommunications Corporation (MCI) September 17, 1998 Comments/Oppositions SEPARATE STATEMENT OF COMMISSIONER HAROLD FURCHTGOTT-ROTH Re: 1998 Annual Access Tariff Filings, CC Docket 98-104 While I join in today's Order, I take the opportunity to express my continued concern with the Commission's micromanagement of LECs' seemingly anachronistic regulatory factors under our price cap rules. It seems overly cumbersome to require that LECs identify and keep track at all times of the exact number of primary residential lines, single-line business lines, non-primary residential lines, and Basic Rate Interface - Integrated Services Digital network lines. This type of detailed information required under our current price cap rules by these tariffs is inordinate and should be reduced, possibly in the context of providing further pricing flexibility for dominant LECs in general. I continue to await anxiously the opportunity to address more fully these issues and the circumstances under which dominant LECs should be accorded a simpler form of price cap regulation. I believe we should at least consider even further deregulation so that these cumbersome regulations are unnecessary. I encourage all interested parties to urge the Commission to use this year's first biennial review to revise its rules and regulations regarding tariff filings and uniform system of accounts to eliminate as many of these regulations as possible. In addition, I write separately to express my concern with the Commission's decision- making process. This item has a five-month statutory deadline of today, but was not circulated until one week ago. I am becoming increasingly concerned that the Commission's internal procedures that typically limit the majority of Commissioners' input until after an item has been fully drafted and presented is not only precluding full consideration of important issues by the entire Commission in a timely manner, but ultimately delaying the decision-making process. Indeed, in such a rushed environment, the Commission may not be having an opportunity to fully appreciate the broader ramifications of their actions, which may cause further delay in subsequent Orders dealing with related issues. I look forward to working with my colleagues to attempt to rectify this situation.