CC Docket No. 87-313
CC Docket No. 93-197
Policy and Rules Concerning Rates for Dominant Carriers Revisions to Price Cap Rules for AT&T
Adopted: May 5, 1995; Released: May 18, 1995
July 3, 1995
REPLY COMMENTS DUE:
July 24, 1995
By the Commission:
I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-3 II. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-9 A. AT&T Promotions . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-20 B. AT&T Optional Calling Plans . . . . . . . . . . . . . . . . . . . . . 21-27 C. The "Headroom" Issue . . . . . . . . . . . . . . . . . . . . . . . . 28-31 D. Reclassification of AT&T as a Non-Dominant Carrier . . . . . . . . . . 32 III. DISCUSSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 A. Commission Goals . . . . . . . . . . . . . . . . . . . . . . . . . . 33-35 B. Proposed Revisions to the AT&T Price Cap Plan . . . . . . . . . . . . . 36 Definitional Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . 37-39 Basket 1 Service Categories . . . . . . . . . . . . . . . . . . . . . . . 40-42 Service Category Bands . . . . . . . . . . . . . . . . . . . . . . . . . 43-45 New Services Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . 46-57 C. Limitations on Rate Increases for Basic MTS . . . . . . . . . . . . 58-67 D. Exogenous Costs Issues . . . . . . . . . . . . . . . . . . . . . . . 68-70 IV. COMMENTS: PROCEDURAL RULES . . . . . . . . . . . . . . . . . . . . . 71-74 V. ORDERING CLAUSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 APPENDIX A
2. This Further Notice also asks for comment on a broader range of issues than were raised in either of the earlier Notices in both dockets. Although we will consider the earlier records in these dockets, we invite commenters to supplement the record by addressing all of the issues raised herein. Specifically, we go beyond the earlier proceedings in both dockets to seek comments on our tentative conclusions regarding the regulatory treatment, described in detail below, that we would accord to all AT&T's Basket 1 services.(n3) Our tentative conclusions also address issues raised in AT&T's petition for waiver of the price cap rules, which is pending before the Commission.(n4) In addition, we tentatively conclude that we should revise the treatment of AT&T's exogenous costs to conform to the revisions that we adopted in the LEC Price Cap Performance Review Report and Order.(n5)
3. Price cap regulation is designed to mirror the efficiency incentives found in competitive markets, thus acting as a transitional regulatory scheme until the advent of substantial competition makes price cap regulation unnecessary.(n6) One purpose of the revisions on which we seek comment below is thus to provide a regulatory framework that will better serve the transition to further streamlining of AT&T's price cap services. AT&T has asked the Commission to rule that AT&T is a non-dominant carrier and, accordingly, should be permitted to remove all of its services from price cap regulation.(n7)
5. AT&T may change rates for services within each basket subject only to streamlined scrutiny, provided that the weighted average of all those prices remains below the cap.(n14) Under streamlining, the tariff filing is presumed lawful and may take effect on 14 days' notice without extensive cost support data. If, however, the proposed rate change would push a basket API above the cap, AT&T is required to file the change on the statutory maximum notice period of 120 days and to provide a full cost-based showing for such filings.(n15)
6. Basket 1 is further divided into service categories, or bands.(n16) In the AT&T Price Cap Order the Commission concluded that "banding by service category, rather than by rate element, will give AT&T the flexibility it requires to allocate costs and price efficiently, while still protecting customers from large rate increases and rate churn."(n17) An individual service band index (SBI) is established for each service band. SBIs for all service bands are calculated each year in AT&T's annual price caps filing. In addition, for any price cap tariff filing proposing changes in the rates of service categories, AT&T must calculate an SBI value for each affected service category.(n18)
7. AT&T's Basket 1 historically has included toll services targeted to residential and small business customers. We recently removed AT&T's Basket 1 commercial services from price cap regulation and made them subject to streamlined regulation.(n19) As a result, Basket 1 currently is divided into six service categories, all of which include primarily residential services.(n20) Residential services have been the object of special Commission concern since the beginning of price cap regulation, when it sought to balance concerns for economic efficiency with the need to minimize the possibility of cross-subsidization and predation and to foster competition that would benefit all ratepayers.(n21) The Commission recognized that residential customers are significant users of day, evening, and night/weekend MTS.(n22) The pricing for evening and night/weekend MTS, which are predominantly used by residential customers, originally was subject to an upward band limit of four percent per year.(n23) In addition, we barred AT&T from increasing the average rate paid by residential customers for services in Basket 1 by more than one percent per year relative to the change in the PCI.(n24)
8. An integral part of the price cap plan is a periodic review of the working of the plan to determine whether it is functioning as the Commission intended and in accordance with the Communications Act. Accordingly, the Commission adopted a program that combines ongoing monitoring of the price cap plan with periodic formal reviews. The Commission undertook the first performance review, as scheduled, in 1992.(n25)
9. As a result of that review, the Commission determined that, while overall the price cap plan is achieving its intended goals, some adjustments to the plan might enhance its effectiveness.(n26) Accordingly, the Commission initiated another proceeding to determine whether the price cap plan should be revised in four specific areas.(n27) In particular, the FCC sought comment on whether to remove commercial services, 800 Directory Assistance, analog private line service, and optional callings plans (OCPs) from price caps.(n28) The Commission did not address AT&T's promotional offerings in this proceeding. In the recently released Commercial Services Price Cap Order,(n29) we removed AT&T's commercial services from price caps regulation. In that Order, we stated that "AT&T demonstrates both in its comments and through additional information submitted in the record of this proceeding that there is sufficient evidence to conclude that AT&T's commercial long distance services are subject to substantial competition." We stated that ". . . our analysis rests on considerations of market share, demand responsiveness and supply responsiveness. As the result of this analysis, we conclude that AT&T lacks the ability to exercise unilateral market power in the provision of these services and that there is sufficient competition among providers to justify moving AT&T's commercial services from price caps to streamlined regulation."(n30) We concluded, however, that 800 Directory Assistance should remain under price cap regulation because it ". . . remains a monopoly service and therefore it is necessary to regulate the price for this service to protect consumers."(n31) Further, we concluded that analog private line services should remain under price caps regulation because "none of the parties has presented any evidence that the situation has changed since the Commission's 1991 decision in the Interexchange Proceeding."(n32) We stated that "[t]he Commission concluded that the market for these services was not as competitive as the market for other services offered by AT&T andtherefore required continued oversight under price caps."(n33) We deferred to this consolidated proceeding further consideration of the removal of OCPs from price caps.(n34)
A. AT&T Promotions
11. The Commission was silent in the AT&T Price Cap Order as to the treatment of promotional rates under price caps. After the Commission adopted the price cap rules, AT&T filed a significant number of promotions in which it treated the rates associated with these offerings as rate reductions for purposes of API calculations. MCI Telecommunications Corporation (MCI) and Sprint Communications Company LP (Sprint) sought reconsideration of the AT&T Price Cap Order, requesting clarification of the treatment promotional pricing activities should receive under price caps.(n38) In the Reconsideration Order, the Commission decided to exclude promotional tariffs from the price cap index prospectively. It reasoned that including promotional rates in price caps would give AT&T too much flexibility to change prices within Basket 1, which contained residential and small business rates.(n39) Although the Commission decided to exclude promotions from price caps, it also stated that "as long as a promotional offering does not raise discrimination issues or otherwise fail to comply with the Communications Act, we will not limit AT&T's efforts to generate greater network efficiencies by restricting promotional activity."(n40)
12. In its appeal of the Reconsideration Order, AT&T asked the court to vacate the Commission's decision to exclude promotional offerings from price caps as arbitrary and capricious because the Commission failed to explain adequately its change in the treatment of promotional rates.(n41) The court agreed with AT&T, finding that the Commission's decision to exclude promotional tariffs from the price cap index was not a reasoned decision supported by the record. The court remanded the Reconsideration Order to the Commission with instructions either to show that its action is a clarification of the original Price Cap Order, despite the evidence AT&T presented to the contrary, or to "offer a reasoned explanation of why promotional rates should be treated differently from other rates."(n42)
13. In response, the Commission vacated its prior decision
on this issue and issued the Promotions NPRM in Docket
87-313, in which it tentatively concluded that promotions
should be excluded from price cap regulation prospectively.(n43)
The Commission offered several reasons to support this
proposal. First, a basic purpose of price caps is to assure
a reasonable basic schedule of long distance rates for
ratepayers. Although price cap regulation is designed
to reward efficiency by granting carriers flexibility in
pricing individual services, the Commission had rejected
a price cap system that would have granted AT&T unlimited
flexibility to increase basic schedule rates to offset
promotional rate decreases.(n44) The Commission reasoned that
"[i]f AT&T is allowed to take index credit for promotions,
its actual price index (API) would decrease. As historically
hasbeen the case, AT&T could then increase its API by increasing
general schedule rates." The Commission tentatively concluded
permitting promotional offerings to be used as a basis for raising basic schedule rates, without limitation, would strongly encourage the proliferation of excessive promotional offerings and undercut the efficiency incentives of the price cap program. For example, AT&T could attempt to promote its services to customers of other IXCs with the promise of interim rate cuts or long distance gift certificates, and then protect its revenue stream by increasing rates in the basic MTS schedule for existing customers. . . . In other words, AT&T could offer promotions when it needed to raise general schedule rates to cover its inefficiencies even though price cap regulation is designed to provide an incentive for companies to operate more efficiently.(n45)
The Promotions NPRM further reasoned that "since one of the fundamental purposes of price cap regulation is to put AT&T on a more equal competitive footing with other IXCs, allowing AT&T to insulate itself from revenue losses caused by promotional pricing undercuts one of the basic goals of price cap regulation."(n46) The Commission concluded that "[i]f AT&T operated in a completely competitive market, this issue would be moot because AT&T could not raise general schedule rates without the fear of losing customers to a competitor."(n47)
14. The Commission thus tentatively concluded that "allowing AT&T to offset rate reductions for promotional offerings against increases in the basic rates could undercut the Commission's enforcement mechanism for price cap regulation."(n48) For example, under price cap rules, if AT&T were to file an above-cap tariff, the filing would be subject to full regulatory scrutiny and possible suspension.(n49) The potential problem, however, asdescribed by the Commission in the Promotions NPRM, is that if AT&T were to file a promotional tariff that decreased rates for certain services within Basket 1, the API would be lowered for the duration of the promotion, thus allowing AT&T to raise rates within the basket for other services without exceeding the basket's PCI. When the promotion expired, however, the API would rise and prices for some services within the basket could be left above cap for the period of time between the expiration of the promotion and the next AT&T rate filing that proposed rates above the PCI.(n50) Because the promotion had expired, however, the Commission could not investigate it in order to deter unreasonable, above-cap rates for the basket.(n51)
15. As an alternative, the Commission sought comment
on whether to treat promotional tariffs as either new or
restructured services.(n52) Under price cap regulation, a service
is classified as new if it provides an additional option
to a service, but does not replace the existing service.
Conversely, a service is classified as a restructured
offering if it replaces an existing service.(n53) Rates for
restructured services are immediately incorporated into
the price cap calculations upon effectiveness of the tariff.
Rates for new services, however, are not incorporated
into the price cap calculations until the first annual
price cap tariff filing following completion of the base
period in which they are introduced.(n54) At that point, actual
revenues and demand data for the service are available.
A promotion resembles a new service because it provides
a new option, a discount from the existing basic schedule,
which does not replace the existing service. On the other
hand, a promotion differs from a new service, in that it
restricts the availability to eligible customers and limits
the time during which those customers may subscribe to
the promotion. New services are generally available and
may be ordered at any time. A more significant distinction
is that as a result of the 1992 court of appeals decision,(n55)promotions
are incorporated into price cap calculations immediately
upon effectiveness of the tariff, while new services are
excluded from price caps until AT&T has obtained actual
demand and revenue information concerning the service.
16. Commenters other than AT&T generally supported the Commission's proposals and tentative conclusions as set forth in the Promotions NPRM. They asserted that excluding the value of promotions from API calculations would protect one group of ratepayers from subsidizing the promotions that benefit another group of ratepayers(n56) and would be consistent with the goals of price cap regulation.(n57)
17. In opposing the proposals set forth in the Promotions NPRM, AT&T argued that its promotional tariffs are not different from other types of tariff filings and should be entitled to receive index credit under the Commission's price cap plan.(n58) Moreover, AT&T argued that because none of its promotions has been rejected or suspended for violations of Sections 201(b) and 202(a) of the Communications Act, there is no justification for treating promotional tariffs differently from other price cap tariff filings.(n59) AT&T also disputed the Commission's argument that including promotional tariffs in price caps will create the potential for cross-subsidization,(n60) especially given their short duration.(n61)
18. AT&T further contended that both MCI and Sprint have made extensive use of promotional offerings throughout the time that AT&T has been subject to price caps. AT&T argued that it therefore would be at a competitive disadvantage if the Commission did not permit it to receive index credits for promotions.(n62) Finally, AT&T stated that it is required to disclose certain information about its promotions to the Commission. According to AT&T, it would be impossible to raise the API for its capped services abovethe price cap index at the expiration of a promotion without prompt detection and immediate corrective action by the Commission.(n63)
19. As discussed above, the Commission was initially silent on the issue of promotions. Our decision on the subject in the Reconsideration Order was then remanded by the court of appeals, and we have taken no action following the Promotions NPRM. In the meantime, AT&T has introduced new promotional offerings that expand the general class of discounts offered under the term "promotions." For example, the original class of promotions implemented by AT&T in 1989, which it submitted in a "generic" tariff, consisted of discounts on monthly usage charges.(n64) These promotions were limited to designated services or to customers in specified geographic areas, and were of short duration, in some instances lasting no more than 90 days.(n65)
20. In recent years, however, AT&T has introduced several widely-available mass-market discounts for domestic MTS, such as the current "True USA" and "True Rewards" (the "True promotions"). AT&T reported that, for calendar year 1994, 17 million customers enrolled in the True USA savings plan, and 14 million customers enrolled in the True Rewards program.(n66) In addition, discounted interstate long-distance calls under the True promotions accounted for 53 percent of all minutes of consumer, i.e., Basket 1, traffic on AT&T's network in 1994, whereas in 1993, interstate long-distance usage under discount plans that were in effect in that year accounted for 33 percent of Basket 1 traffic.(n67) The True promotions also attracted an additional 1 million new customers for AT&T in 1994.(n68) The amount of actual discounts off basic schedule domestic MTS rates to customers under the True USA promotion during the month of November 1994, alone,was $265.3 million.(n69) This unprecedented growth in AT&T's promotional activities has caused a major realignment in prices for Basket 1 services, especially basic schedule rates. Basic schedule ratepayers who have not elected a promotional discount plan have generally witnessed steady increases in their rates over the same period of time that AT&T has introduced mass-market promotions for residential customers.(n70)
B. AT&T Optional Calling Plans
Basic MTS: MTS service as it was offered pursuant to AT&T
tariffs in effect before June 7, 1984, the effective date
of the AT&T `Block of Time' plan [citation omitted].
Optional Calling Plan: A supplemental or additional MTS offering which allows customers to take MTS under an alternative, nontraditional pricing mechanism. For example, an OCP may offer service on a distance- insensitive basis or in bulk at reduced rate. An OCP may not involve changes to the rates or rate structure of the underlying basic MTS service.(n72)
22. OCPs are usually designed to attract frequent callers who can take advantage of the discounts and other benefits to reduce their bills.(n73) Examples of OCPs in theReachOut service category include Block-of-Time (such as ReachOut America), AnyHour Saver, and EasyReach service.(n74) MCI, Sprint, and a number of other interexchange carriers also offer discounted residential services that compete with these AT&T offerings.(n75)
23. The price cap system's treatment of OCPs also differs
from that accorded promotions. OCPs are included in a
separate service category (the Reach-Out service category)
from the basic MTS service categories within Basket 1,(n76)
whereas promotions are included in the applicable MTS service
categories. Changes in OCP rates, therefore, are not subject
to the SBI limitations on rate changes in the basic schedule
24. In the OCP NPRM, the Commission tentatively concluded that the ReachOut category of services (i.e., most domestic MTS OCPs) should be removed from Basket 1 because there is substantial competition among providers of discounted residential services. The Commission noted that because rates for these services already appeared to be determined by market forces, not price cap limits, customers were unlikely to be harmed if the Commission made these services subject to streamlined regulation in the tariff review process. Moreover, customers would retain the option of choosing between AT&T's basic schedule or the discounted services of AT&T and other carriers.(n77) The Commission also noted that to the extent that ReachOut services have had larger rate reductions than the standard long distance schedules for which they are substitutes, removal of ReachOut services from Basket 1 might encourage AT&T to target productivity gains to customers for the standard service.(n78)
25. The Commission sought comment on whether the treatment
of OCPs under the AT&T price cap plan should be changed,
and, if so, in what manner. Specifically, the Commission
sought comment on whether it should adjust the API or the
PCI for Basket 1 to reflect the removal of OCPs from Basket
1. As an alternative to removal of OCPs from price cap
regulation, it asked for comment on whether OCPs should
remain subject to price cap regulation, but be placed in
a separate basket.
26. In its initial comments, AT&T supported removing OCPs from Basket 1 "without delay"(n79) in order to gain the pricing flexibility it assertedly needs to respond to market conditions and customer demands.(n80) AT&T also contended that if the Commission adopted new streamlined regulations for OCPs, it should not adjust the API or PCI to eliminate the "headroom" for Basket 1 services that AT&T would gain from this action.(n81) In its reply comments, however, AT&T changed its position, and argued that, because the rates for residential OCPs and basic residential schedule services have been reduced significantly under price cap regulation, both categories of service should be removed from price caps and subject to streamlined regulation.(n82) AT&T also opposed moving OCPs to another basket if they remained under price cap regulation.(n83)
27. Although all commenters agreed that AT&T has maintained a market share for interstate traffic in the low 60 percent range for the past three years,(n84) many commenters expressed doubts that reducing price cap regulation over AT&T would benefitconsumers.(n85) Some commenters expressed concern that AT&T would use the $270 million in headroom that would result from removing OCPS from Basket 1 to raise prices on the remaining services in the basket.(n86)
C. The "Headroom" Issue
29. The headroom that permits these basic rate increases
is, moreover, predicated upon forecasts of the expected
demand for the promotional offerings. Currently, AT&T
forecasts its demand for the life of the promotion at the
time the promotion is filed. An error in this forecast
could permit AT&T to adjust the API downward based on forecasts
for higher demand for a promotion than actually materialize.
In such a situation, AT&T would be able to increase its
basic rates more sharply than if actual demand were used
to calculate the effect of the promotional offering on
the API. Customers of basic schedule service consequently
are charged more for service when AT&T's forecasts for
promotions are higher than actual demand. No mechanism
exists under the price cap rules to correct for any inaccuracies
in forecasted demand, although AT&T has committed from
time to time to "true up" its headroom calculation based
on actual demand.(n90) AT&T, however, is not required to refund
overcharges to customers of basic schedule service.
30. AT&T has increased its basic schedule rates in Basket 1 during the past two years concurrently with the implementation of its True promotion offerings. For example, on December 5, 1994, AT&T implemented an average rate increase in basic schedule MTS rates of 3.9 percent, valued at $274 million.(n91) On December 27, 1994, AT&T also raised rates for optional calling plans, operator/card services, and international MTS (IMTS) within Basket 1 by approximately $260 million.(n92) Increases in AT&T's basic schedule rates are also reflected in studies conducted by Commission staff, which are based on the Bureau of Labor and Statistics's (BLS) consumer price index (CPI) and producer price index (PPI) for interstate toll calls from 1984 through May, 1994. The Commission staff study, released in May, 1994, found that AT&T's basic schedule rates increased by 6.5 percent for calendar year 1993 and 9.3 percent from March 1993 through March 1994, based on the BLS-maintained consumer price index (CPI) for interstate toll services.(n93) A study completed by Commission staff in February, 1995, which addressesAT&T's long distance prices through year-end 1994, finds that the CPI for AT&T's interstate toll calls increased a total of 5.4 percent in 1994.(n94)
31. AT&T has informally objected to the use of the
CPI and PPI as measures of rate changes. AT&T contends
that the indices are not reliable indicators of overall
long distance pricing performance because they do not adequately
reflect the offsetting effect of discount plans.(n95) The Commission
staff study released in February, 1995, for example, states
that the CPI for interstate toll services, as computed
by BLS, overstate the increases in average charges because
the CPI sample underweights discount plans and the PPI
sample excludes discount plans.(n96) It is clear, nonetheless,
that the overall increases in basic schedule rates, when
compared with the significant discounts in AT&T's True
promotions, have created a wide range in prices for Basket
1 residential services. The issue posed below is whether
this realignment in prices to residential subscribers in
the MTS categories, which are not substantially affected
by such price cap mechanisms as the SBI limits and the
residential rate index,(n97) requires revisions to the price
D. Reclassification of AT&T as a Non-Dominant Carrier
33. The Commission's primary goals in applying price cap regulation to AT&T include ensuring just and reasonable long distance rates for ratepayers, without unreasonable discrimination,(n101) as well as promoting the universal availability of such reasonably priced service.(n102) Moreover, the Commission's price cap plan for AT&T is intended to afford AT&T the flexibility to adjust prices to approximate more closelymarginal costs and to encourage innovation and the introduction of new services.(n103) The primary focus of this Further Notice, therefore, is to determine whether the existing price cap plan should be modified to ensure that promotions and Optional Calling Plans (OCPs) advance the Commission's public interest goals. In addition, we seek to adopt a regulatory scheme for promotions and OCPs that will continue to foster greater competitiveness in the interexchange market and to permit us to remove more of AT&T's services from price cap regulation.(n104)
34. To these ends, we seek to reduce regulatory burdens
on AT&T that do not serve the public interest goals of
our price cap plan for AT&T. Moreover, our intention is
to provide AT&T with greater flexibility to respond promptly
to developments in the interstate interexchange marketplace.
We also want to simplify price cap procedures and reduce
periods of delay caused by the tariff review process.
In addition, we seek to ensure that our price cap scheme
for AT&T treats like services in a sensible, consistent
manner. Finally, as discussed below, we seek comment on
the degree of protection that the price cap plan should
afford AT&T subscribers who obtain domestic MTS from basic
35. We tentatively conclude that at the present time
these goals would not be served by removing AT&T's current
Basket 1 promotions and OCPs from price cap regulation.
As discussed below, we tentatively conclude in this Further
Notice that Basket 1 domestic MTS promotions, domestic
MTS OCPs, and basic schedule MTS offerings exhibit substantial
cross-elasticities of demand, and are generally offered
to the same class of customers, i.e., residential customers,
following the removal of AT&T's commercial services from
price cap regulation. The removal of domestic MTS OCPs
and promotions from price caps would thus streamline some
AT&T offerings of domestic MTS for residential customers
and retain price cap regulation for similar offerings to
the same class of customers.(n105) We decline to take such a
step at this time and, contrary to the tentative conclusions
of both the Promotions NPRM and the OCP NPRM, we now tentatively
conclude that the issue of further streamlining of OCPs
and promotions shouldbe considered together with AT&T's
motion for non-dominant status in a separate proceeding.
We believe that the regulatory status of OCPs and promotions
should be considered as part of the larger issue raised
by AT&T's motion: whether all of the services that currently
are included in Basket 1 should be removed from price cap
regulation and afforded streamlined regulatory treatment.
We invite comment on these tentative conclusions.
B. Proposed Revisions to the AT&T Price Cap Plan
37. Definitional Issues. As discussed in the background
section of this Further Notice, no precise definition of
promotions has been included in our price cap rules. It
is clear, however, that the effects of mass-market promotions
were not contemplated when we formulated the baskets and
bands that restrict AT&T's pricing practices. Furthermore,
although we have defined OCPs, the services covered by
this definition are very similar to self-selected promotions
in that OCPs offer a discounted alternative to basic schedule
MTS. Accordingly, we tentatively conclude that self-selected
promotions and OCPs should be treated in the same manner
under our price cap rules. We propose to establish a new
regulatory category for self-selected promotions and OCPs:
"alternative pricing plans" (APPs). The defining characteristic
of an APP is that it offers a self-selected alternative,
i.e., discounted rate, to domestic MTS or other price cap
services provided under basic schedule rates.
38. We also conclude that an APP does not differ from an existing service in the domestic MTS service category, and possibly in the other Basket 1 service categories as well, except in ways related to pricing and terms and conditions affecting pricing. APPs are thus "like" existing domestic MTS services.(n106) Although we have previously rejectedthe notion that only services offering new functional capabilities be treated as "new,"(n107) we believe that our rules for the treatment of new services should not apply to APPs, as we discuss below. For example, we propose allowing AT&T to file an APP on a streamlined basis, without cost support, outside of price cap regulation. A streamlined APP would expire automatically 90 days after its effective date unless AT&T would file a transmittal with actual cost and demand revenues for the initial 90-day period, subject to tariff review and approval, to include the APP as a permanent offering under price cap regulation.(n108)
39. We also tentatively conclude that alternative pricing
plans are, by definition, not restructured services. A
restructured service is one that replaces an existing service,
whereas an APP offers an alternative to an existing service
without replacing it. Moreover, a restructured service
is automatically available to anyone who simply uses basic
schedule MTS, whereas an APP is available only to an eligible
customer who signs up for the service. Under this approach,
we would tentatively conclude that services that AT&T currently
labels "promotions" that automatically change MTS rates
without creating additional options, even if for a limited
period or for limited locations, should be treated as restructures,
not alternative pricing plans, and should be subject to
price cap regulation as soon as the tariff becomes effective.(n109)
In contrast, an alternative pricing plan, such as any
of AT&T's True promotions, does not replace the underlying
basic rate, but rather provides an optional discount off
the basic rate that a customer can "self-select." We seek
comment on these tentative conclusions. We also seek comment
on whether our definition of APPs and the proposed rule
changes guiding the regulatory treatment of APPs outlined
below should be applied to the IMTS and operator/card service
40. Basket 1 Service Categories. In light of our decision
to remove commercial services from price caps and our tentative
conclusions discussed above concerning alternative pricing
plans, we believe it is appropriate to examine the existing
Basket 1 service categories in order to determine whether
any modifications to them are necessary. We tentatively
conclude, for the reasons set forth below, that the four
existing domestic MTS service categories in Basket 1 --
namely, (1) domestic day MTS; (2) domestic evening MTS;
(3) domestic night/weekend MTS; and (4) ReachOut America
-- should be combined as a single service category. If
this restructuring were implemented, AT&T's Basket 1 would
consist of three service categories: (1) domestic MTS,
including all three current time-of-day MTS categories,
OCPs in the existing ReachOut America category covering
domestic MTS and domestic MTS promotions (in other words,
domestic MTS basic schedule services and APPs as discussed
above); (2) operator and credit card services; and (3)
41. We believe that establishing a single domestic MTS
service category to encompass the existing time-of-day
MTS service categories as well as APPs will increase AT&T's
pricing flexibility and better reflect the realities of
the interexchange market. We note, for example, that interstate
access rates, which appear to be a major component of AT&T's
marginal costs of providing service, are not time-of-day-sensitive(n110)
and thus do not track pricing differences among AT&T's
domestic MTS categories. We also observe that removal
of Basket 1 commercial services from price cap regulation
would appear to make our conclusion that residential callers
are the predominant users of evening and night/weekend
MTS equally applicable to day MTS.(n111) There is thus no significant
differentiation by class of customer in the three domestic
MTS service categories. We seek comment on whether a
single domestic MTS category or retention of the day, evening,
and night/weekend structure is appropriate.
42. When we first authorized AT&T to offer optional calling
plans which met an increased net revenues standard, we
recognized the existence of cross-elasticities of demand
in switched services, and the importance of information
about cross-elasticity of demand in the evaluation of OCPs.(n112)
Cross-elasticity of demand between basic schedule domestic
MTS and AT&T's mass-market True promotions is implicit
in the headroom calculations AT&T presents as the result
of these promotional offerings; these reductions in the
API and relevant SBIs involve revenues "foregone" because
of a shift by customers from basic schedule rates to promotional
rates in the domestic MTS service categories,within the
parameters of stabilized base-year demand.(n113) Such evidence
of cross-elasticity of demand between the non-discounted
domestic MTS basic schedule offerings and the services
we have defined above as APPs is not restricted to the
regulatory sphere. A recent news article, for example,
AT&T . . . saw a huge shift among its own customers toward discount calling plans. Company executives say 53 percent of all minutes of consumer traffic on its network last year were discounted calls, a jump from 33 percent in 1993.(n114)
The evidence of cross-elasticity of demand between basic
schedule MTS and APPs argues in favor of a finding that
these services should be classified within the same service
category, much as AT&T's True promotions and basic schedule
offerings co-exist at present within the three domestic
MTS service categories. We thus tentatively conclude that
domestic MTS self-selected promotions and OCPs, i.e., APPs,
are sufficiently substitutable with domestic MTS services
to warrant their inclusion in a single domestic MTS service
category. We seek comment on this tentative conclusion.
43. Service Category Bands. The establishment of a single domestic MTS service category would require modifications to the service category bands applicable to the existing residential service categories. The services currently within Basket 1 that would be merged into a single domestic MTS service category -- namely, time-of-day domestic MTS, ReachOut America, and current domestic MTS promotions -- are currently subject to both upward and downward banding limitations.(n115) Under the downward banding limitation in the current price cap rules, a Basket 1 rate decrease proposed by AT&T that would result in an overall change in a service category rate that is greater than five (5) percent relative to the change in the price cap index (PCI) does not qualify for streamlinedreview.(n116) Under the upward banding limitation in the current price cap rules, any Basket 1 rate increase proposed by AT&T that results in an overall change in a service category rate that is greater than five (5) percent relative to the change in the PCI, or in the case of the domestic evening MTS and domestic night/weekend MTS service categories, greater than four (4) percent relative to the change in the PCI, does not qualify for streamlined review.(n117) Within-band filings are considered to be prima facie lawful, and petitioners seeking suspension of such filings are held to a high burden of proof.(n118)
44. We tentatively conclude that a four-percent ceiling
should be placed on the single domestic MTS service category
band. In the AT&T Price Cap Order, the Commission imposed
a similar four-percent upper limit on the domestic MTS
evening and domestic MTS night/weekend service category
bands because it found that these categories were "predominantly
used by residential callers." The Commission expressed
particular concern that there are "a significant number
of customers residing in non-equal access, rural areas
who have no alternative to turn to should AT&T raise its
evening and night/weekend rates."(n119) We seek comment whether
this reasoning or other reasons for tighter band limits
on the domestic MTS category retain their viability. In
any event, because we believe that the single domestic
MTS service category we propose in this Further Notice
will be used predominantly by residential customers, we
tentatively conclude that a four-percent upper limit is
therefore appropriate. We seek comment on this tentative
45. We further propose to modify the existing five-percent
floor on Basket 1 services with respect to the proposed
single domestic MTS service category. The lower band was
created in the price caps scheme to deter AT&T predatory
conduct. In the AT&T Price Cap Order, the Commission decided
to establish a five-percent floor on price decreases within
the Basket 1 service categories because it believed that
the "threat of predatory pricing is one that is best addressed
in a structural manner as part of price cap regulation."(n120)
The Commission acknowledged that rate decreases below
the lower band limits are not evidence of predatory pricing:
"such below-band reductions as are possible within the
limits of our price cap scheme are more likely to be competitive
than predatory."(n121) We believe that successful predation,
defined as the ability to lower prices below a relevant
measure of costs in order to drive competitors from the
market, is an unlikely occurrence.(n122) In the AT&T Price Cap
Order, the Commission observed that "[p]redatory pricing,
though often alleged, is generally uncommon, and proven
cases are rare. We have, through the structure of AT&T's
service baskets, created conditions under which predation
should be as unlikely in the interexchange telecommunications
market as it is in the economy generally."(n123) We also tentatively
conclude that the possibility of predation presents less
of a concern in an environment where each of the largest
three interexchange carriers offers some form of long distance
promotional discount.(n124) We therefore propose that prices
for the single domestic MTS service category band be allowed
to decrease by greater than five percent. We seek comment
on whether a 15 percent lower limit on the domestic MTS
service category band would be more appropriate while not
significantly increasing the likelihood of predatory pricing.
46. New Services Issues. In proposing to establish
a single domestic MTS service category including the services
we have defined above as APPs, we also propose to modify
our existing new services rules to clarify that these rules
do not apply to APPs. Under our current system, the manner
in which AT&T styles a new discounted offering determines
whether the price cap new services rules apply to the service.
Thus, a new offering classified as an optional calling
plan is subject to new services treatment, while essentiallythe
same offering styled as a promotion is not treated as a
new service but, instead, as a rate change for an existing
service. As explained below, this difference in labels
has significant consequences for price index calculations
without any sound basis for the differing results ensuing
from these calculations. We propose to retain our new
services rules for AT&T services that are "new" in all
respects, i.e., unlike existing services, but to create
new rules to bring new APPs within price cap regulation.
47. As stated in the background section, supra, a new
service is defined as any filing that expands ratepayers'
range of service options within those services subject
to price cap regulation.(n125) New services may be introduced
on 45 days' notice, provided AT&T can demonstrate that
the new service will generate a net revenue increase within
24 months after incorporation of the new service into an
annual price cap tariff or within 36 months after the effective
date, whichever occurs first.(n126) To develop the historical
data needed to perform index calculations for new services,
new services are included in price cap regulation in the
first annual price cap tariff filing after completion of
the base year in which the new service becomes effective.(n127)
AT&T does not receive price cap credit for a new service
that offers a rate reduction, even after the service is
introduced into a price cap basket, because the rate reduction
occurred outside of price caps.
48. The current requirements that new services be filed
on 45 days' notice, supported by a showing that they will
result in a net revenue increase, can severely limit AT&T's
ability to respond promptly to new developments in the
increasingly competitive marketplace in which it offers
its price cap services. We therefore tentatively conclude
that we should not apply our new services rules to APPs.
Instead, we propose to allow AT&T to file alternative
pricing plans initially outside of price caps, as are new
services, but on a streamlined basis, i.e., on 14 days'
notice, without cost support. As discussed more fully
below, we propose to allow AT&T to receive immediate price
cap credit for APPs upon the conclusion of a shortened
90-day initial period, as opposed to the current one-year
base period for new services.
49. We are concerned that basing PCI, API, and SBI calculations
for inclusion of new services into price caps on forecasted,
as opposed to actual, data may result in overstated headroom,
especially when such forecasts can extend over a period
of one year or more. We have also observed that the use
of extended forecasts may also allow AT&Tto ratchet up
forecasted demand by making repetitive filings several
times a year. We tentatively conclude that we should
avoid the use of demand forecasts that are not based on
actual data in connection with the inclusion of APPs into
price caps. We also tentatively conclude that AT&T should
not be required to delay the inclusion of APPs into Basket
1 for up to 18 months. We believe that allowing AT&T to
offer APPs on 14 days' notice and with a shortened 90-day
base period will address effectively AT&T's interest in
greater streamlining. At the same time, requiring the
use of actual demand and cost data upon the conclusion
of ninety-day base period should address our concerns regarding
the possibility that AT&T may ratchet up its forecasted
demand by means of repetitive filings of extended forecasts.
50. We believe that these modified procedures for the
introduction of APPs will therefore effectively streamline
and preserve the integrity of our price cap rules. We
tentatively conclude that this approach would address many
of AT&T's concerns about the inflexibility of applying
our new services rules to discount service plans, while
meeting our concerns about the use of forecasted data in
making price caps calculations. We seek comment on these
tentative conclusions. We also seek comment as to how
the approach to price cap treatment for APPs outlined here
should be applied to AT&T existing, on-going promotional
offerings which fall within the APP definition we have
proposed and are currently under price cap regulation,
such as the "True" promotions.
51. We also propose to maintain our current new service
rules as they apply to new AT&T price cap offerings that
are not APPs. Because such services will presumably be
primarily services that are not "like" already-provided
services, these services are likely to present cost and
demand issues beyond the narrow set of "headroom" issues
we address in this Further Notice. We thus believe that
we should continue to hold such new services outside of
price caps until the first annual price cap tariff filing
after completion of the base year in which the new service
becomes effective in order to gather complete and comprehensive
data on the costs, demand, and revenues associated with
such new services before they are placed within a price
cap basket and thus affect the demand and revenue factors
for that basket.(n128) Moreover, when we instituted price cap
regulation for AT&T, we recognized that new services can
raise complex issues, including discrimination and anticompetitive
behavior, which require careful review.(n129) Tariffs proposing
new services were thus required to be filed on 45 days'
notice, with supporting information and data todemonstrate
compliance with the requirement that such new services
increase net revenues for price cap services.(n130) Because
we believe that such complex issues may remain of potential
great concern at present, AT&T should continue to file
tariffs for new services other than APPs on 45 days' notice
and to make the showing of increased net revenues for new
services currently required under our rules, in order to
minimize any risk of unreasonable discrimination, cross-subsidization
or anticompetitive behavior.
52. We also seek specific comment on the proper price
cap treatment of AT&T's recently introduced 500 service,
which appears not to fall within our proposed definition
of alternative pricing plans. AT&T filed this offering
on 27 days' notice as a streamlined business service, arguing
that such treatment was appropriate because the new service
was primarily designed for and particularly useful to business
customers.(n131) In petitioning against the AT&T tariff introducing
500 service, MCI quoted Section 61.58(c)(5) of our Rules,
which states, in relevant part: "Tariff filings involving
the introduction of a new service within the scope of Section
61.42(g) . . . must be made on at least 45 days' notice."(n132)
MCI interpreted this rule to encompass all new services
tariffs filed by AT&T, and contended that AT&T must adhere
to this rule or obtain a waiver for its tariff to be lawful.(n133)
After the Common Carrier Bureau deferred AT&T's tariff
to 45 days' notice and AT&T submitted cost data which it
represented met the requirements of Section 61.49(g) of
our rules, the service was permitted to take effect without
an investigation.(n134) The potential ambiguity in our Rules
with regard to streamlined versus price cap treatment of
new services is of concern to us. With particular relevance
to 500 service, we now propose to change our rules to
specify that to be subject to streamlined rather than price
cap regulation, the projected demand for such new services
can include only de minimis usage by AT&T's residential
subscribers, (i.e., less than five percent of overall projected
demand within the net revenue test period set forth in
Section 61.49(g)(1)). We seek comment on these tentative
conclusions and proposals.
53. We accordingly propose to change our new service
rules to allow AT&T to file all new APPs on a streamlined
basis, i.e., on 14 days' notice, without cost data, provided
that the APPS are scheduled to expire automatically no
later than 90 days after the initial effective date. The
APPs will be kept outside of price caps during this period;
we will not allow AT&T price cap credit for these new APPs.
On the last business day of the 90-day period, AT&T may
extend the expiration date of the APP for 30 days in order
to permit the conversion of the APP as a permanent offering
under price caps. These revisions would allow AT&T to
continue to provide the APP outside of price caps for the
extended period. Within this thirty-day period, AT&T would
be required to submit tariff revisions on not less than
14 days' notice. The new tariff pages would remove the
expiration date and would be accompanied by supporting
information required to include the service under price
caps. If a longer period is required for review of the
tariff filing by the Common Carrier Bureau, AT&T would
be required to defer tariff revisions introducing the permanent
offering for a period not to exceed 120 days. AT&T would
also be permitted to extend the termination of the APP
during this period. In this way, AT&T would be able to
avoid any interruption in its offering of discounted rates,
pending completion of the Bureau's review of the permanent
54. We caution that we will not allow AT&T to evade the
90-day expiration period for new APPs held outside of price
caps by making insubstantial changes to the rates, terms
and conditions of such APPs and reintroducing them through
such tariff revisions as "new" APPs. We will consider
all relevant indicia in our tariff review process as to
whether APPs are indeed new offerings, including branding,
trademarks, AT&T's identification of APPs to consumers,
and other marketing and marketplace factors.
55. The tariff revisions that propose to include the APP under price caps would be subject to the provisions of Section 61.49 of our Rules. These revisions would be supported by actual demand figures from the 90-day period that the initial APP filing was effective. The rates, terms and conditions of the APP to be subject to price caps may not differ in any material respect from the rates, terms and conditions of the APP as originally introduced outside of price caps. We would allow AT&T immediate index credit on the date that the tariff revisions placing the APP under price caps take effect, based on its representation of the annualized actual demand for the APP, as well as any exogenous cost changes that may relate to the APP.(n135)
56. We also propose to require AT&T to file quarterly
"true-up" reports, i.e., quarterly updates of actual demand
figures, during the initial year that the new APP is incorporated
into price caps, in order to refine its calculations of
the headroom created by the offering. We would allow AT&T
to file rate changes to the new APP during the first year
of price cap regulation by means of a tariff transmittal,
giving 14 days' notice of such changes, but any change
in price cap indices would have to filed on 45 days' notice
and based on historical demand data such as AT&T would
be required to file with the quarterly true-up report.
57. We thus propose changes to Sections 61.3, 61.43-.44,
61.46-.47, 61.49 and 61.58 of our Rules to permit streamlined
treatment for new APPs. We believe that requiring AT&T
to use historical demand, as required for other types of
rate changes under our current price cap rules, will eliminate
the creation of headroom based on demand projections for
promotions. Any increases in the basic schedule rates,
therefore, will be based on actual revenue balancing, not
merely on forecasts of revenue stream, thus providing stability
for basic schedule ratepayers and for AT&T. AT&T will
also benefit from the increased flexibility to file "initially
streamlined" APPs and to receive nearly immediate index
credit for those APPs filed on a permanent basis after
the initial 90-day period. The Common Carrier Bureau would
also retain the ability to defer APP tariff filings, either
upon the initial filing or upon the price cap filing after
the initial 90-day period, if additional information or
review is required, and to suspend or reject such filings
based on applicable legal standards.
C. Limitations on Rate Increases for Basic MTS
59. As a threshold matter, we seek comment on the significance
of the AT&T basic rate schedule for domestic MTS relative
to other rates offered for domestic MTS inthe interexchange
marketplace. We note, for example, that many of AT&T's
discounted offerings, such as the True promotions, are
framed in terms of percentage discounts off the basic rate
schedule at various usage levels. We also seek comment
on the relationship of AT&T's basic rate to the basic rates
of its competitors.
60. Commenters should discuss whether, and, if so, how
our public policy goals, such as the achievement of reasonably
nondiscriminatory, cost-based rates or the promotion of
universal service, should affect our regulatory treatment
of Basket 1 domestic MTS. We address specific issues relating
to discrimination and the cost basis for AT&T's rates below.
We also seek comment as to whether universal service concerns
are implicated in our regulation of AT&T's basic rates.
Although "universal service" is most generally regarded
as a goal pursued through the widespread availability of
reasonably priced local telephone service, some have advocated
that this goal should be expanded to include services made
available through a more technologically advanced communications
infrastructure. We recognize that Section 1 of the Communications
Act, usually regarded as the locus of the universal service
mandate, requires us to regulate so as "to make available,
so far as possible, to all the people of the United States,
a rapid, efficient, Nation-wide, and world-wide wire and
radio communication service with adequate facilities at
reasonable charges, . . . ."(n136) We seek comment on what level
of scrutiny this statutory mandate requires us to undertake
with respect to the basic schedule offerings of the dominant
61. We also seek comment on whether the availability
of local telephone service is affected by increases in
AT&T's basic schedule rates for interstate MTS. We note,
for example, that studies indicate that the majority of
those without telephone service once were subscribers,
but have been disconnected for nonpayment of toll charges.(n137)
We seek comment on the relationship, if any, of increased
basic schedule service rates for domestic MTS with the
disconnection of local telephone subscribers due to nonpayment
of toll charges.
62. AT&T states that it typically does not recover the
incremental costs of providing service to its "low-volume"
basic schedule customers, while its price structure for
its "high-volume" customers has normally exceeded the incremental
costs of providingresidential long-distance service to
them.(n138) According to AT&T, the provision of mass-market
discounts, such as the True promotions, to high-volume
customers and increases in rates for low-volume customers
are justified as a means of rebalancing prices with costs.(n139)
Commenters should discuss the validity of AT&T's arguments
regarding cost recovery for serving "low-volume" customers
of basic schedule offerings vis-a-vis cost recovery for
serving "high-volume" customers of discounted offerings,
and the degree to which "low-volume" customers experience
periods of higher-volume usage which can offset the costs
of providing low volume service in other periods. We also
seek comment on the extent to which the Communications
Act's protections against unreasonable discrimination are
implicated by the cost issues we raise here, i.e., if rate
differences between AT&T's basic schedule services and
its discounted offerings reflect a wider variation than
corresponding cost differences, at what point do such rate
variations become unreasonable?
63. We seek comment on the relative availability of AT&T
discounted offerings as compared to domestic MTS offered
at basic rates. If AT&T's discounted offerings are unavailable
to a significant body of residential customers, then AT&T's
increases in basic rates to these customers may extend
well beyond any AT&T need to recover costs and may demonstrate
a public interest need to curb unrestricted rate increases.
To what extent are AT&T's discounted offerings available
to "high-volume" residential subscribers where the advanced
billing techniques upon which these offerings rely may
not be readily available? Such a lack of availability
could occur in rural areas served by independent telephone
companies, and areas where "equal access" to interexchange
carriers has not been implemented. What proportion of
AT&T's residential customers are located in such areas
are thus affected?
64. We seek comment on whether we should adopt one of
the two following options that will afford varying measures
of protection against basic schedule rate increases. First,
we seek comment on creating a basic rate index to replace
the residential index in Basket 1. The residential PCI
was created as a subindex of the Basket 1 total PCI, and
was calculated for revenue for all the services in Basket
1. It created a separatecap on the amount that residential
services in Basket 1 could increase each year.(n140) The purpose
of the residential PCI was to protect residential services
against price increases which would offset price decreases
for commercial service. The recent streamlining of commercial
services, however, renders this function obsolete. Thus,
we propose to delete the residential PCI from our rules.
65. In place of the residential index, we propose creating
a basic rate index, similar in operation to the residential
index, which would govern increases in basic domestic MTS
service rates to a given percentage per year.(n141) We tentatively
conclude that this percentage should be set at 5 percent,
that is, AT&T would not be able to increase basic rates
by a margin of more than 5 percent per year in relation
to the Basket 1 PCI. We select 5 percent because it is
a reasonably restrained application of indexed increases
in AT&T's basic toll rates in recent years,(n142) and reflects
as well the general limitation we have placed on the pricing
flexibility in price caps service categories.(n143) We seek
comment on these conclusions and proposals.
66. As an alternative to adopting our above proposed basic rate index to protect basic MTS rates, we seek comment on adopting AT&T's "safety net" proposal. AT&T has proposed an option that is predicated on the market for Basket 1 services being segmented among discrete classes of customers.(n144) AT&T requests that the Commission reclassify AT&T as a non-dominant carrier. In return, AT&T states that it will provide low-income and low-volume consumers with a "safety net" of low-usage service plans. This plan would consist of two services: one targeted for low-income users, the other available to all consumers but intended to benefit low-volume users. Prices would remain fixed until 1998. This option offers a measure of built-in protection for low-income and low-volume users. AT&T bases its proposal on its assertion that "[t]here is overwhelmingevidence that the current state of competition in this market fully support[s] the reclassification of AT&T as non-dominant . . . ."(n145)
67. We seek comment on this option generally and whether
such an approach is feasible and desirable without reclassification
of AT&T as a non-dominant carrier.(n146) We also seek comment
on the appropriate price levels for low-income and low-volume
users, respectively. We further seek comment as to the
period that such price levels should remain fixed and what
approach would replace this mechanism after the expiration
D. Exogenous Costs Issues.
68. All carriers subject to price cap regulation file
adjustments to the PCI at the annual price cap tariff filing
and maintain updated PCIs to reflect the effect of midyear
access and exogenous cost changes. Exogenous costs are
costs that change due to changes in laws, regulations,
or rules, or other administrative, legislative, or judicial
changes beyond a carrier's control and not reflected elsewhere
in the price cap formula.(n147) Carriers calculate these adjustments
using the price cap formulas set forth in our rules.(n148) Exogenous
costs are represented by the "z factor."(n149) In addition,
the price cap formula applied to AT&T includes a "y factor,"
which allocates AT&T's access costs among all capped services
in AT&T's price cap baskets.(n150) Changes in access costs are
treated as exogenous costs for AT&T.
69. When it adopted the AT&T price cap plan in 1989, the Commission determined that exogenous costs should result in an adjustment to the PCI to ensure that the price cap formula does not lead to unreasonably high or low rates.(n151) We recentlyrevised our rules for local exchange carriers (LECs) in the LEC Price Cap Performance Review Report and Order(n152) to change the exogenous cost rules applicable to accounting changes. Exogenous treatment is now permitted only for those accounting changes that result in economic cost changes, i.e., that affect the discounted cash flow of the LEC. We concluded that most accounting changes, generally, will have no direct impact on the cash flow choices available to LECs because financial accounting charges are designed primarily to give the financial markets a more accurate portrayal of the financial health of the corporation, and not necessarily to make the company behave differently.(n153) We also concluded that adopting this economic cost standard will narrow the exception that exogenous cost treatment represents to the general principle that, under price caps, cost changes do not flow directly into rate changes.(n154) We ordered the LECs to adjust their PCIs to exclude prospectively any accounting cost changes currently reflected there for which carriers did not incur an economic cost,(n155) for example, the changes in accounting for costs of employee post-retirement benefits other than pensions (commonly know as "other post-retirement employee benefits" or "OPEBs") that are engendered by the Financial Accounting Standards Board's (FASB's) Statement of Financial Accounting Standards-106 (SFAS-106)(n156) and Statement of Financial Accounting Standards-112 (SFAS-112).(n157)
70. We tentatively conclude that we should adopt the
same treatment for exogenous costs for AT&T as we adopted
for LECs in the LEC Price Cap Performance ReviewReport
and Order. We seek comment on this tentative conclusion.
We also seek comment on whether differences between AT&T
and the LECs justify the adoption of different rules governing
the eligibility for exogenous treatment of costs resulting
from changes in accounting procedures, and, if so, what
these rules should be.
72. Pursuant to applicable procedures set forth in Section
1.415 and 1.419 of the Commission's Rules, 47 C.F.R. §§
1.415 and 1.419, interested parties may file comments in
this proceeding on or before July 3, 1995, and reply comments
on or before July 24, 1995. All relevant and timely comments
will be considered by this Commission before final action
is taken in this proceeding. In reaching its decision,
the Commission may take into consideration information
and ideas not contained in the comments, provided that
such information or a writing indicating the nature and
source of such information is placed in the public file,
and provided that the fact of the Commission's reliance
on such information is noted in the Report and Order.
73. To file formally in this proceeding, participants
must file an original and five copies of all comments,
reply comments and supporting comments. If participants
want each Commissioner to receive a personal copy of their
comments, an original and 11 copies must be filed. Comments
and reply comments should be sent to the Office of the
Secretary, Federal Communications Commission, Washington,
D.C. 20554. Comments and reply comments will be available
for public inspection during regular business hours in
the FCC Reference Center (Room 239) at its headquarters
at 1919 M Street, N.W., Washington, D.C.
74. We have determined that Section 605(b) of the Regulatory
Flexibility Act of 1980, 5 U.S.C. § 605(b), does not apply
to this rulemaking proceeding because if promulgated, it
would not have a significant economic impact on a substantial
number of small entities. Although we do not find that
the Regulatory Flexibility Act is applicable to this proceeding,
this Commission has an ongoing concern with the effect
of its rules and regulation on small business and the customers
of the regulated carriers. The Secretary shall send a
copy of this Further Notice of Proposed Rulemaking, including
the Initial Regulatory Flexibility Analysis, to the Chief
Counsel for Advocacy of the Small BusinessAdministration
in accordance with paragraph 603(a) of the Regulatory Flexibility
Act, Pub. L. No. 96- 354, 94 Stat. 1164, 5 U.S.C. § 601
et seq (1981).
FEDERAL COMMUNICATIONS COMMISSION
William F. Caton
Proposed Amendments to the Code of Federal Regulations
` 1. The authority citation for Part 61 continues to read
AUTHORITY: Secs. 1, 4(i), 4(j), 201-205, and 403 of the
Communications Act of 1934, as amended; 47 U.S.C. 151,
154(i), 154(j), 201-205, and 403, unless otherwise noted.
2. Section 61.3 is amended by redesignating paragraphs
(c) through (mm) as paragraphs (d) through (nn), and adding
new paragraph (c) to read as follows:
§ 61.3 Definitions.
* * * * *
§§ 61.3(c) through (ll) are redesignated as follows:
Old section New section
* * * * *
(c) Alternative Pricing Plan (APP). Any deviation from
the basic schedule rates for domestic MTS offered on an
optional basis by an interexchange carrier subject to price
cap regulation pursuant to § 61.41(a)(1) to an eligible
customer who enrolls for the service.
* * * * *
3. Section 61.42 is amended by revising paragraph (b)(1)(i)
through (vi) to read as follows:
§ 61.42 Price cap baskets and service categories.
* * * * *
(b) * * *
(1) * * *
(i) Domestic MTS;
(ii) International MTS; and
(iii) Operator and credit card services.
* * * * *
4. Section 61.43 is amended by revising the section
to read as follows:
§ 61.43 Annual price cap filings required.
Carriers subject to price cap regulation shall submit
annual price cap tariff filings that propose rates for
the upcoming year, that make appropriate adjustments to
their PCI, API, and SBI values pursuant to §§ 61.44 through
61.47, that incorporate the costs and rates of new services
and APPs into the PCI, API, or SBI calculations pursuant
to §§ 61.44(g), 61.45(g), 61.46(b) and (c), and 61.47(b)
through (d). * * *
5. Section 61.44 is amended by revising paragraph (c)
to read as follows:
§ 61.44 Adjustments to the PCI for Dominant Interexchange
(c) The exogenous cost changes represented by the term
"Z" in the formula detailed in paragraph (b) of this section
shall be limited to those cost changes that the Commission
shall permit or require by rule, rule waiver, or declaratory
ruling, and include those caused by :
* * * * *
(2) Such changes in the Uniform System of Accounts, including
changes in the Uniform System of Accounts requirements
made pursuant to § 32.16, as the Commission shall permit
or require be treated as exogenous by rule, rule waiver,
or declaratory ruling.
* * * * *
(5) Such tax law changes and other extraordinary cost
changes as the Commission shall permit or require be treated
as exogenous by rule, rule waiver, or declaratory ruling.
* * * * *
6. Section 61.46 is amended by redesignating paragraphs
(c) through (f) as paragraphs (d) through (g), and adding
new paragraph (c) to read as follows:
§ 61.46 Adjustments to the API.
* * * * *
§ 61.46 is redesignated as follows:
Old section New section
* * * * *
(c) APPs, as defined in § 61.3(c), must be included in
the appropriate API calculations under paragraph (a) of
this section beginning at the date that the tariff revisions
placing the APP under price cap regulation take effect,
and quarterly thereafter until the annual price cap filing
made pursuant to § 61.43 before which the APP has been
effective for the full base year. This index adjustment
requires that the demand for the APP during the initial
90-day period and each quarterly period during the period
before the annual price cap filing made pursuant to § 61.43
before which the APP has been effective for the full base
year must be included in determining the revenues used
in calculating the API.
* * * * *
7. Section 61.47 is amended by redesignating paragraphs
(d) through (h) as paragraphs (e) through (i), adding new
paragraph (d), and revising paragraph (g) to read as follows:
§ 61.47 Adjustments to the SBI; pricing bands.
* * * * *
§ 61.47 is redesignated as follows:
Old section New section
* * * * *
(d) APPs, as defined in § 61.3(c), must be included in
the appropriate SBI calculations under paragraph (a) of
this section beginning at the date that the tariff revisions
placing the APP under price cap regulation take effect,
and quarterly thereafter until the annual price cap filing
made pursuant to § 61.43 before which the APP has been
effective for the full base year. This index adjustment
requires that the demand for the APP during the base period
and each quarterly period during the period before the
annual price cap filing made pursuant to § 61.43 before
which the APP has been effective for the full base year
must be included in determining the revenues used in calculating
* * * * *
(g) * * *
(1) The pricing bands for the domestic MTS service category
shall limit the annual upward pricing flexibility for that
service category, as reflected in its SBI, to four percent,
and the annual downward pricing flexibility to 15 percent,
relative to the percentage change in the PCI for the residential
services basket, measured from the last day of the preceding
(2) Dominant interexchange carriers subject to price cap
regulation shall calculate a composite basic rate for undiscounted
domestic MTS service contained in the residential services
basket. Notwithstanding paragraph (g)(1) of this section,
the annual upward pricing flexibility for this composite
rate shall be limited to five percent, relative to thepercentage
change in the PCI for the residential services basket,
measured from the last day of the preceding tariff year.
8. Section 61.49 is amended by revising paragraphs (c),
(d), and (g)(1) and adding paragraph (g)(3) to reads as
§ 61.49 Supporting information to be submitted with letters
of transmittal for tariffs of carriers subject to price
* * * * *
(c) Each price cap tariff filing that proposes rates above
the applicable band limits established in §§ 61.47(f),
(g)(1), (h) and (i) or above the limit on the basic rate
for undiscounted domestic MTS established in § 61.47(g)(2)
must be accompanied by supporting materials establishing
substantial cause for the proposed rates.
(d) Each price cap filing that proposes service category
rates below applicable band limits established in § 61.47(f),
(g)(1), (h) and (i) of this part must be accompanied by
supporting material establishing that the rates cover the
service category's average variable cost, or equivalently,
that the service category's net additional revenue resulting
from the price change exceeds additional costs.
* * * * *
(g) * * *
(1) A new service introduced by a dominant interexchange
carrier's tariff filing is subject to price cap regulation
when the projected demand for such new service includes
more than de minimis usage by subscribers to the services
described in § 61.42(b)(1), i.e., when such projected usage
constitutes more than five percent of overall projected
demand within the net revenue test period set forth in
this paragraph. * * *
(2) * * *
(3) Accompanying demand and revenue data is not required
for tariffs introducing an APP, as defined in § 61.3(c),
filed on an initial streamlined basis. Tariff revisions
placing APPs under price cap regulation must be accompanied
by actual demand and revenue data for the 90-day period
that the initial APP filing was effective.
* * * *
9. Section 61.58 is amended by revising paragraph (c)(3)
and adding new paragraph (c)(8) to read as follows:
§ 61.58 Notice requirements.
* * * * *
(c) * * *
(3) Tariff filings that will cause any API to exceed its
applicable PCI pursuant to calculations provided for in
§ 61.46 of this part, that will cause any SBI to exceed
its upper banding limitations established in §§ 61.47(f),
(g)(1), (h), and (i) of this part, or that will cause the
basic schedule domestic MTS rate to exceed its limitation
on upward pricing flexibility established in § 61.47(g)(2)
of this part, must be made on at least 120 days' notice,
or such other maximum period of notice permitted by section
203(b) of the Communications Act, regardless of whether
petitions under § 1.773 of the Commission's Rules have
* * * * *
(8) Tariff filings for APPs, as defined in § 61.3(c),
that are initially filed on a streamlined basis must be
made on at least 14 days' notice. Tariff filings to extend
the initial 90-day effective period of an APP that was
filed on a streamlined basis for an additional maximum
of 30 days must be filed on at least one day's notice,
i.e., no later than the 89th day, or the last business
day, whichever is earlier, of the initial 90-day effective
period. Tariff filings that remove the expiration date
of an APP initially filed on a streamlined basis and place
the APP under price cap regulation must be filed on at
least fourteen days' notice, to become effective no later
than 120 days from the date the APP initially was filed
on a streamlined basis.
* * * * *
I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 A. AT&T Promotions. . . . . . . . . . . . . . . . . . . . . . . . . . . 10 B. AT&T Optional Calling Plans. . . . . . . . . . . . . . . . . . . . . 21 C. The "Headroom" Issue . . . . . . . . . . . . . . . . . . . . . . . . 28 D. Reclassification of AT&T as a Non-Dominant Carrier . . . . . . . . . 32 III. DISCUSSION A. Commission Goals . . . . . . . . . . . . . . . . . . . . . . . . . . 33 B. Proposed Revisions to the AT&T Price Cap Plan. . . . . . . . . . . . 36 C. Limitations on Rate Increases for Basic MTS . . . . . . . . . . . . 58 D. Exogenous Costs Issues.. . . . . . . . . . . . . . . . . . . . . . . 68 IV. COMMENTS: PROCEDURAL RULES . . . . . . . . . . . . . . . . . . . . . . 71 V. ORDERING CLAUSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 APPENDIX A
Policy and Rules Concerning Rates for Dominant Carriers,
CC Docket No. 87-313, Order and Notice of Proposed Rulemaking,
8 FCC Rcd 3715 (1993) (Promotions NPRM).
Footnote 2Revision to Price Cap Rules for AT&T, CC Docket No. 93-197, Notice of Proposed Rulemaking, 8 FCC Rcd 5205 (1993) (OCP NPRM). The Commission also proposed a number of other changes to the price cap rules in the OCP NPRM, including whether to remove commercial, 800 Directory Assistance, and analog private line services from price caps. In the Report and Order in CC Docket No. 93-197, 10 FCC Rcd. 3009 (1995) (Commercial Services Price Cap Order) the Commission resolved these issues, removed commercial services from price cap regulation, and deferred the question of the regulatory treatment of OCPs to this proceeding.
Footnote 3 See paras. 4-7-, infra, for an explanation of price caps regulation and Basket 1. Although the earlier proceedings in both dockets involved OCPs, a service category in Basket 1, and promotions for certain Basket 1 services, they did not address all the services in Basket 1.
Footnote 4 AT&T Corp. Petition for Waiver of Price Cap Rules to Allow AT&T to Bring the LDMTS Basic Schedule NPA Volume Discount Option Under Price Caps (filed May 17, 1994) (AT&T Price Cap Waiver Petition).
Footnote 5 Price Cap Performance Review for Local Exchange Carriers, First Report and Order, CC Docket No. 94-1, FCC 95-132 (rel. April 7, 1995) (LEC Price Cap Performance Review Report and Order.
Footnote 6 See id. at ¶ 1.
Footnote 7 See Motion for Reclassification of American Telephone & Telegraph Company as a Nondominant Carrier, CC Docket 79-252 (filed Sept. 22, 1993).
Footnote 8 Policy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87-313, Notice of Proposed Rulemaking, 2 FCC Rcd 5208 (1987) (Price Cap NPRM), Further Notice of Proposed Rule Making, 3 FCC Rcd 3195 (1988) (Further Notice), Report and Order and Second Further Notice, 4 FCC Rcd 2873 (1989) (AT&T Price Cap Order), Erratum, 4 FCC Rcd 3379 (1989), on reconsideration, 6 FCC Rcd 665 (1991) (Reconsideration Order), remanded sub nom. American Telephone and Telegraph Company v. FCC, 974 F.2d 1351, 1353 (D.C. Cir. 1992) (Remand Order). Those services that are not in price caps are subject to streamlined regulation, which reduces their regulatory obligations under Part 61 of the Commission's Rules. Competition in the Interstate Interexchange Marketplace, Report and Order, 6 FCC Rcd 5880 (1991) (Interexchange Order), on reconsideration, 6 FCC Rcd 7569 (1991) (subsequent history omitted).
Footnote 9 Price Cap NPRM, 2 FCC Rcd at 5213.
The three baskets were comprised respectively of: (1) residential
and small business services; (2) "800" number services;
and (3) other business services. Recently the Commission
removed Basket 1 commercial services from price cap regulation.
See note 2, supra. In addition, a number of AT&T services
are excluded from price cap regulation, including: (1)
services offered pursuant to Tariffs 11, 12 and 16; (2)
services subject to below-the-line accounting; (3) international
private line and record carrier services; (4) contract-based
tariffs; and (5) the custom tariff services removed from
price cap regulation pursuant to CC Docket No. 90-132.
See 47 C.F.R. § 61.42 (c). Services subject to below-the-line
accounting are services that AT&T is not able to operate
at a profit, such as KU Band Satellite and Accunet Packet
Services. Custom tariff services are services such as
Software Defined Network that AT&T provides to large business
Footnote 11 See also Price Cap Performance Review for Local Exchange Carriers; Treatment of Video Dialtone Service under Price Cap Regulation, CC Docket No. 94-1, FCC 95-49 (rel. February 15, 1995).
Footnote 12 See Reconsideration Order, 6 FCC Rcd at 665-66, for an explanation of how the price cap index is calculated.
Footnote 13 Exogenous costs are costs that change due to changes in laws, regulations, or rules, or other administrative, legislative, or judicial changes beyond a carrier's control and are not reflected in the GNP-PI. Further Notice, 3 FCC Rcd at 3383 n.738.
Footnote 14 In addition to setting limits on the aggregate rates within each basket, the Commission also instituted rate bands to limit the range within which AT&T could raise or lower individual rate element prices each year while continuing to receive streamlined tariff scrutiny. AT&T Price Cap Order, 4 FCC Rcd at 3077, citing Further Notice, 3 FCC Rcd at 3440.
Footnote 15 See AT&T Price Cap Order, 4 FCC Rcd at 3109-11.
Footnote 16 Baskets 2 and 3 also were divided into service bands or categories. A number of Basket 2 and 3 services were removed from price cap regulation and are now subject to streamlined regulation. As a result, Basket 2 currently contains only 800 Directory Service, and Basket 3 contains analog private line offerings, including analog voice grade private line and terrestrial television transmission service. See 47 C.F.R. § 61.42(a)(2)-(3).
Footnote 17 Id. at 3059.
Footnote 18 See 47 C.F.R. § 61.43 (annual price cap filings required) and 47 C.F.R. § 61.47 (adjustments to the SBI; pricing bands).
Footnote 19 See Commercial Services Price Cap Order, 10 FCC Rcd. at 3011.
Footnote 20 Basket 1 includes the following service categories: (1) domestic day message telecommunications service (MTS); (2) domestic evening MTS; (3) domestic night/weekend MTS; (4) international MTS; (5) operator and credit card service; and (6) ReachOut America (OCPs). See 47 C.F.R. § 61.42(b). ReachOut America was the original OCP that comprised category 6. Currently, most OCPs for domestic MTS are in the ReachOut America service category. See infra at notes 62 & 64 and accompanying text.
Footnote 21 See AT&T Price Cap Order, 4 FCC Rcd at 3051-52, 3059-60; see also Interexchange Order, 6 FCC Rcd at 5908 (noting need for "particular caution" in streamlining residential and small business services).
Footnote 22 AT&T Price Cap Order, 4 FCC Rcd at 3059. We will refer to AT&T's non-discounted pricing in these three bands throughout this Further Notice as the "basic schedule" of residential service rates.
Footnote 23 Id. at 3060; 47 C.F.R. § 61.47(f).
Footnote 24 AT&T Price Cap Order, 4 FCC Rcd at 3060-61; 47 C.F.R. § 61.47(f)(2).
Footnote 25 Price Cap Performance Review for AT&T, Notice of Inquiry, CC Docket No. 92-134, 7 FCC Rcd 5322, 5323 (1992).
Footnote 26 Price Cap Performance Review for AT&T, Report, 8 FCC Rcd 5165 (1993) (AT&T Performance Review Report).
Footnote 27 Revisions to Price Cap Rules for AT&T, CC Docket No. 93-197, Notice of Proposed Rulemaking, 8 FCC Rcd 5205 (1993) (OCP NPRM). In addition, the Commission requested more information from AT&T regarding AT&T's Equipment Failure and Blockage Reports, which track AT&T's service quality and network reliability. The Commission recently adopted a Report and Order on the issues other than OCPs that were raised in the OCP NPRM. See Commercial Services Price Cap Order, FCC 95-18, note 2, supra, in which the Commission resolved these issues and deferred the question of the regulatory treatment of OCPs to this proceeding.
Footnote 28 Streamlined regulation was adopted for Basket 3, except for analog private lines, effective in October 1991. Interexchange Order, 6 FCC Rcd at 5894 and 6 FCC Rcd 7255 (Com.Car.Bur. 1991). Streamlining of Basket 2, except for 800 Directory Assistance, took effect in May 1993 following the successful deployment of the technology for 800 number portability. "Portability" refers to 800 number subscribers' ability to retain their 800 numbers when switching their 800 service from one IXC to another. The Commission ordered local exchange carriers (LECs) to implement technology to make such portability possible no later than March 4, 1993. Interexchange Order, 6 FCC Rcd at 5905-06, citing Provision of Access for 800 Service, CC Docket No. 86-10, 6 FCC Rcd 5421, 5425 (1991). In response to petitions of the Ad Hoc Telecommunications Users Committee and the Financial Services Providers, the Commission granted a three-month delay, until May 1, 1993, for implementing the mandatory 800 data base access. Provision of Access for 800 Service, CC Docket No. 86-10, 7 FCC Rcd 8616 (1992).
Footnote 29 Commercial Services Price Cap Order, 10 FCC Rcd. at 3011.
Footnote 30 Id. at 3014.
Footnote 31 Id. at 3023.
Footnote 32 Interexchange Order, 6 FCC Rcd at 5895.
Footnote 33 Commercial Services Price Cap Order, 10 FCC Rcd. at 3024.
Footnote 34 Id. at 3011.
Footnote 35 On occasion, AT&T's promotions alternatively have provided, among other things, long distance gift certificates or points to be redeemed for merchandise and travel.
Footnote 36 Reconsideration Order, 6 FCC Rcd at 671.
Footnote 37 For example, AT&T offered a discount off Reach Out World service during December 24, 1994 through January 31, 1995 to customers who originate calls from Hawaii. AT&T Communications Tariff F.C.C. No. 2, Transmittal No. 7856 (effective Dec. 24, 1994).
Footnote 38 Reconsideration Order, 6 FCC Rcd at 671.
Footnote 39 The Commission subsequently removed commercial services from price cap regulation. Commercial Services Price Cap Order, 10 FCC Rcd. at 3011.
Footnote 40 Reconsideration Order, 6 FCC Rcd at 670.
Footnote 41 See Remand Order, 974 F.2d at 1353.
Footnote 42 Id. at 1355.
Footnote 43 Promotions NPRM, 8 FCC Rcd at 3717.
Footnote 44 Id. at 3716, citing Reconsideration Order, 6 FCC Rcd at 665-69 (Commission established baskets and bands to limit pricing flexibility).
Footnote 45 Id. at 3716. This reasoning assumes that a rate increase would offset the depressive effect that such an increase would have on demand and that AT&T basic schedule customers would not respond to such increases by switching to another carrier.
Footnote 47 Id.at 3716 & n.14. This reasoning assumes that the existing rates reflected competitive levels.
Footnote 48 Id. at 3716.
See para. 2, supra.
Footnote 50 See47 C.F.R. § 61.49(c), which requires filings that propose rates above the applicable SBI limits to be accompanied by supporting materials establishing substantial cause for the proposed rates.
Footnote 51 Promotions NPRM, 8 FCC Rcd at 3716.
Footnote 52 Id. at 3717.
Footnote 53 See Policy and Rules Concerning Rates for Dominant Carriers, 5 FCC Rcd 6786, 6824-25 (1990).
Footnote 54 See 47 C.F.R. §§ 61.44(g), 61.46(b), and 61.47(b).
Footnote 55 See Reconsideration Order, remanded sub nom. American Telephone and Telegraph Company v. FCC, 974 F.2d 1351, 1353 (D.C. Cir. 1992) (Remand Order).
Footnote 56 Sprint Comments at 2-3; see also GTE Comments at 2.
Footnote 57 GTE Comments at 2.
Footnote 58 AT&T Comments at 10-11.
Footnote 59 Id. at 14-15.
Footnote 60 Id. at 11-12, citing Reconsideration Order, 6 FCC Rcd at 670.
Footnote 61 Id. at 12-13.
Footnote 62 Id. at 16-17 and Exhibit C.
Footnote 63 Id. at 18.
Footnote 64 See, e.g., AT&T Communications, Transmittal Nos. 1431 and 1552, Revisions to Tariff F.C.C. Nos. 1, 2, 4, 7, 9, 11, 13, and 14, 4 FCC Rcd 4475 (Com. Car. Bur. 1989).
Footnote 65 Id.
Footnote 66 See AT&T Posts Earnings Increase, Communications Daily, January 25, 1995, at 3.
Footnote 67 Id.
Footnote 68 See Edmund L. Andrews, No-Holds-Barred Battle For Long-Distance Calls, New York Times, January 21, 1995, at 48.
Footnote 69 See Letter, from M.F. Del Casino, Administrator -- Rates & Tariffs, AT&T, to Acting Secretary, Federal Communications Commission (Dec. 27, 1994).
Footnote 70 See discussion at para. 28, infra.
Footnote 71 By contrast, a typical mass-market promotion offered by AT&T requires enrollment or "self-selection," but does not usually bind a customer to a minimum payment or term of service.
Footnote 72 Guidelines for Dominant Carriers' MTS Rates and Rate Structure Plans, CC Docket No. 94-1235, 59 Rad. Reg. 2d (P&F) 70, 71-2 n.3 (1985) (OCP Guidelines Order).
Footnote 73 OCP NPRM, 8 FCC Rcd at 5205.
Footnote 74 Examples of OCPs offered in other Basket 1 service categories are: international (ReachOut Overseas and USA Direct), operator/card (Card Only Plan 1), and day, evening, and night/weekend (Area Code Calling Plan).
Footnote 75 For example, Sprint offers Sprint Select; MCI offers such plans as Prime Time and Sure-Save.
Footnote 76 The majority of OCPs are offered in the ReachOut service category. AT&T now also offers certain OCPs in the other service categories in Basket 1. See note 72, supra.
Footnote 77 OCP NPRM, 8 FCC Rcd at 5205.
Footnote 78 Id. The PCI is adjusted each year to reflect a 3.0 percent productivity gain. To the extent that the price caps formula results in a lowered PCI, AT&T must reduce rates for Basket 1 each year to remain under the PCI. If OCPs were removed from Basket 1, the reduced rates required as a result of a lowered PCI would affect only the remaining services in the basket, andtherefore could potentially result in proportionally greater rate decreases for these services.
Footnote 79 AT&T Comments at i.
Footnote 80 Id. at 4.
Footnote 81 As discussed in the next section, headroom is the gap between AT&T's Actual Price Index (API) and its price cap index (PCI) ceiling for Basket 1.
Footnote 82 Id. at 9-10.
Footnote 83 Id. at 4.
Footnote 84 Comments regarding OCPs were filed by AT&T, Sprint Communications Company LP (Sprint), WilTel, Inc. (WilTel), the Competitive Telecommunications Association (CompTel), and Pacific Bell and Nevada Bell (Pacific Companies).
Footnote 85 Sprint Comments at 3; Sprint Reply at 2; see also CompTel Comments at 2; WilTel Comments at 3; Pacific Companies Reply at 3-5.
Footnote 86 WilTel Reply at 2.
Footnote 87 See generally 47 C.F.R. §§ 61.44, 61.46.
Footnote 88 For example, as of July 1, 1994, AT&T's headroom under the PCI in Basket 1 amounted to $1.12 billion on an annualized basis. Under Section 61.46(a) of the rules, when AT&T adjusts a rate, the demand component used to calculate the API remains constant at the base year level. AT&T's headroom is thus calculated based on 1993 demand multiplied by rates as of July 1, 1994 for Basket 1 services. AT&T's True promotions accounted for $893.5 million of this annualized headroom. See, e.g., Letter from Thomas H. Norris, Vice President, Regulatory Affairs, AT&T, to Acting Chief, Common Carrier Bureau, Federal Communications Commission (Aug. 15, 1994).
Footnote 89 See notes 80, 97, infra.
Footnote 90 See, e.g., Letter from Thomas H. Norris, Vice President, Regulatory Affairs, AT&T, to Acting Chief, Common Carrier Bureau, Federal Communications Commission (Jan. 15, 1994).
Footnote 91 See AT&T Communications Transmittal Nos. 7824, 7832, 7848, Revisions to Tariff F.C.C. No. 1 (December 5, 1994); see also AT&T Proposes $274 Million in Domestic Price Hikes, Telecommunications Reports, December 12, 1994, at 41.
Footnote 92 AT&T Communications Transmittal No. 7967, Revisions to Tariff F.C.C. No. 1 (Dec. 27, 1994).
Footnote 93 See Trends in Telephone Service (Industry Analysis Div., released May 1994).
Footnote 94 See Trends in Telephone Service, at Table 5 (Industry Analysis Div., released Feb. 1995).
Footnote 95 See Letter of Thomas H. Norris, Vice President, Government Affairs, AT&T, to Chairman, FCC (June 10, 1994) (criticizing use of CPI as indicator of basic schedule rates on grounds that it takes into account only basic schedule rates, and not the offsetting effect of discount plans); Adam Clymer, As Parties Skirmish Over Budget, Greenspan Offers a Painless Cure, New York Times, January 11, 1995, at 1, 18 (testimony by Chairman of Federal Reserve Board before joint meeting of House and Senate Budget Committees that the overall CPI exaggerates annual inflation by 0.5 to 1.5 percentage points because ten-year adjustment period for CPI fails to capture fully such changes as suddenly successful inventions like television sets or the introduction of more sophisticated computers, which reduce prices and enhance efficiency).
Footnote 96 See Trends in Telephone Service, at Table 5 (Industry Analysis Div., released Feb. 1995).
Footnote 97 AT&T is required under current rules to calculate a composite average rate for Basket 1 services purchased by residential customers. This rate may not increase more than one percent relative to the annual percentage change in the Basket 1 PCI. See 47 C.F.R. § 61.47(g).
Footnote 98 See discussion at paras. 12-19 and 23-26, supra.
Footnote 99 See Motion for Reclassification of American Telephone & Telegraph Company as a Nondominant Carrier, CC Docket 79-252 (filed Sept. 22, 1993). This motion is still pending before the Commission.
Footnote 100 See id.
See 47 U.S.C. §§ 201(b), 202(a). In deciding to establish
an incentive-based system of regulation for AT&T, the Commission
found in the AT&T Price Cap Order, for example, that:
price cap regulation is a far better regulatory system
to employ in an environment in transition to full competition
than is rate-of-return . . . . [T]he discipline that
competition brings to a carrier's prices can be employed
in the design of a price cap system to ensure that rates
are just, reasonable, and non-discriminatory.
4 FCC Rcd at 2939-43 (footnotes omitted); see also Promotions NPRM, 8 FCC Rcd at 3716.
Footnote 102 See 47 U.S.C. § 151. In the AT&T Price Cap Order, the Commission referenced its adoption of universal service as one of the four primary goals in the access charge proceeding MTS and WATS Market Structure, 97 FCC 2d 834, 835 (1984), and reconfirmed its commitment to residential customers in adopting price cap regulation. 4 FCC Rcd at 3053-4.
Footnote 103 See id. at 2922-33.
Footnote 104 See id.
Footnote 105 In our decisions to streamline AT&T's commercial services and outbound business services, we were able to differentiate these services from those services remaining in price caps on the basis of, among other things, the class of customers to whom those services were offered, and the demand elasticities among these classes of customers. See Commercial Services Price Cap Order, FCC 95-18 at paras 15, 20-21; Interexchange Order, 6 FCC Rcd at 5887-88.
Services are "like" if they are "functionally equivalent,"
that is, if a customer perceives that the services perform
the same function. See Ad Hoc Telecommunications Users
Com. v. F.C.C., 680 F.2d 790, 797 (1982). Services need
not be "identical" to be functionally equivalent. In the
context of mobile services, for example, the Commission
has held that the "principal inquiry" in determining whether
two services are functionally equivalent involves "evaluating
consumer demand for the service" and "whether changes in
price for the service under examination . . . would
prompt customers to change from one service to the other."
See Implementation of Sections 3(n) and 332 of the Communications
Act; Regulatory Treatmentof Mobile Services, Second Report
and Order, GN Docket No. 93-252, 9 FCC Rcd 1411, 1447-48
See AT&T Price Cap Order
Footnote 107 See AT&T Price Cap Order, 4 FCC Rcd at 3123 n. 1103 (holding that repriced version of already-existing service cannot be considered the same service as the pre-existing one).
Footnote 108 See discussion at para. 46-57, infra.
Footnote 109 For example, under the proposed approach, the Cinco de Mayo "promotion," which offers a discounted MTS rate to anyone who calls from the United States to Mexico on May 5th, would be treated as a restructure of MTS rates for a one-day period.
Footnote 110 The LECs do not charge access rates according to time of day.
Footnote 111 AT&T Price Cap Order, 4 FCC Rcd at 3060.
Footnote 112 OCP Guidelines Order, 59 Rad. Reg. 2d (P&F) at 83.
Footnote 113 See, e.g., Letter from Charles L. Ward, AT&T to Acting Secretary, Federal Communications Commission, at 3 (April 20, 1994) (". . . the larger historic demand of domestic services [as compared to international services] provides greater price cap credit for rate reductions made in those services.")
Footnote 114 Edmund L. Andrews, No-Holds-Barred Battle for Long-Distance Calls, New York Times, January 21, 1995, at 48.
Footnote 115 See Section 61.47 of the Commission's Rules, 47 C.F.R. § 61.47 (adjustments to the service band index; pricing bands).
Footnote 116 See AT&T Price Cap Order, 4 FCC Rcd at 3056; 47 C.F.R. § 61.49(d).
Footnote 117 See id. at 3059-60.
Footnote 118 See Section 1.773 of the Commission's rules, 47 C.F.R. § 1.773.
Footnote 119 See AT&T Price Cap Order, 4 FCC Rcd at 3059-60.
Footnote 120 See AT&T Price Cap Order, 4 FCC Rcd at 3056.
Footnote 121 Id. at 3114.
Footnote 122 See, e.g., Brook Group Ltd. v. Brown & Williamson Tobacco Corp., 113 S. Ct. 2578, 2587-88 (1993).
Footnote 123 AT&T Price Cap Order at 3114.
See John J. Keeler, MCI and Sprint Unveil Deep Discounts,
New Services in Fresh Fight With AT&T, Wall Street Journal,
January 6, 1995, at A3. In addition, a statement attributed
to a Sprint spokeswoman in a recent trade press article
regarding a new marketing campaign initiated by long-distance
carrier LCI International, for example, indicates that:
Sprint follows [the] lead of AT&T and MCI in determining
and setting rates for [the] consumer market. [The spokeswoman
said] "That's our competition and that's who we deal with."
See LCI Charges Big 3 Long Distance Companies Overcharge by $2 Billion Annually, Communications Daily, January 31, 1995, at 1-2 (quoting Sprint Consumer Services Group spokeswoman Juanita Teas).
Footnote 125 See AT&T Price Cap Reconsideration Order, 6 FCC Rcd at 666-67.
Footnote 126 See id.
Footnote 127 See id.; see also 47 C.F.R. §§ 61.42(g), 61.44(g), 61.46(b), 61.47(b).
Footnote 128 See 47 C.F.R. § 61.44(g) (exogenous cost changes to PCI attributable to new services); 47 C.F.R. § 61.46(b) (adjustments to demand weighting used in API calculations); and § 61.47(b) (adjustments to demand weighting used in SBI calculations).
Footnote 129 See AT&T Price Cap Order, 4 FCC Rcd at 3122.
Footnote 130 Id. at 3123-24; see also id. at 3127-28 (rejecting AT&T proposal that we apply streamlined tariff review to new services).
Footnote 131 See AT&T Communications Transmittal No.7698, 10 FCC Rcd 900 (1994) ("Transmittal 7698 Order").
Footnote 132 47 C.F.R. § 61.58(c)(5).
Footnote 133 MCI Petition To Reject Or, In The Alternative, To Suspend And Investigate, AT&T Communications Transmittal No. 7698 (filed Nov. 10, 1994).
Footnote 134 Transmittal 7698 Order, 10 FCC Rcd at 900-01.
Footnote 135 By "annualized" demand, we mean that AT&T would be able to apply demand figures gained from the initial 90-day period by adjusting this actual demand data to correspond to the base year demand used in calculating the API and SBIs. For example, data for the full 90 dayswould multiplied by a factor of 4.05 to calculate the "annual" headroom effect of the APPs' discounted rates.
Footnote 136 47 U.S.C. § 151 (emphasis added).
Footnote 137 See Field Research Corp., Affordability of Telephone Service, Vol. 1, Non-Customer Survey, for GTE/Pacific Bell (Oct. 1993); Chesapeake and Potomac Telephone Co.'s Submission of Telephone Penetration Studies, Docket 850 (D.C. Pub. Service Comm'n., Oct. 1993).
Footnote 138 See Peter K. Pitsch, A Brief History of Competition in the Long Distance Communications Market, at 15-22, attached to Letter from Charles L. Ward, Government Affairs Director, AT&T, to Chief Economist, Office of Plans & Policy, Federal Communications Commission, submitted in CC Docket 79-252 (Sept. 22, 1994); see also Letter from Charles L. Ward to Federal Communications Commission, (April 20, 1994), supra at note 110.
Footnote 139 See Letter from Charles L. Ward, AT&T, to Acting Secretary, Federal Communications Commission, submitted in CC Docket 79-252 (April 20, 1994).
Footnote 140 See AT&T Price Cap Order, 4 FCC Rcd at 3052-53.
Footnote 141 In calculating the basic rate index, we would require AT&T to utilize its non-discounted basic rates and exclude any discounts based on volume, term, "loyalty" (length of service), "win-back" (change from another carrier's service), or other factors, even if these discounts are offered on an automatic, non-"self-selecting" basis.
Footnote 142 See para. 36-37, supra, for a discussion of recent increases in AT&T's basic rates.
Footnote 143 See 47 C.F.R. § 61.47(e)(1).
Footnote 144 Letter of Alex Mandl, AT&T, to the Chairman, Federal Communications Commission, dated October 4, 1994.
Footnote 145 Id.
Footnote 146 We note, for example, that the OCP Guidelines Order permitted a dominant carrier to offer service with minimum monthly charges "as long as it also makes available unbundled basic MTS offerings." OCP Guidelines Order, 59 Rad. Reg. 2d (P&F) at 89.
Footnote 147 Further Notice, 3 FCC Rcd at 3383 n.738.
Footnote 148 See 47 C.F.R. §§ 61.44-61.45.
Footnote 149 See id. §§ 61.44(c), 61.45(d).
Footnote 150 Id. §§ 61.44(d)-(h).
Footnote 151 AT&T Price Cap Order, 4 FCC Rcd at 3002-03, 3017-18.
Footnote 152 Price Cap Performance Review for Local Exchange Carriers, CC Docket No. 94-1, FCC 95-132, (rel. April 7, 1995), (LEC Price Cap Performance Review Report and Order), at paras. 292-320.
Footnote 153 Id. at para. 306.
Footnote 154 Id. at paras. 294-96.
Footnote 155 Id. at paras. 307-10.
Footnote 156 SFAS-106 requires companies to account for OPEBs on an accrual basis beginning December 15, 1992. SFAS-106 also requires companies to book the previously unaccrued OPEB amounts for retirees and active employees as of the date that the company adopts SFAS-106. See id. at para. 276.
Footnote 157 SFAS-112 requires companies to account for such post-employment benefits on an accrual basis beginning December 15, 1993. The Common Carrier Bureau required the LECs to adopt SFAS-112 for regulatory accounting purposes no later than January 1, 1994. Bell Atlantic has sought exogenous treatment of its SFAS-112 costs. See id. at para. 277.