NOTICE ********************************************************* NOTICE ********************************************************* This document was originally prepared in Word Perfect. If the original document contained-- * Footnotes * Boldface & Italics --this information is missing in this version The document format (spacing, margins, tabs, etc.) is changed too. If you need the complete document, download the Word Perfect version. For information about downloading documents (FTP) see file how2ftp. File how2ftp (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ***************************************************************** ******** Before the FEDERAL COMMUNICATIONS COMMISSION FCC 95-427 Washington, D.C. 20554 In the Matter of) ) Motion of AT&T Corp. to be ) Reclassified as a Non-Dominant Carrier ) ORDER Adopted: October 12, 1995 Released: October 23, 1995 By the Commission: Commissioners Barrett, Ness and Chong issuing separate statements. Paragraph Number I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. BACKGROUND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 A. The Competitive Carrier Proceeding. . . . . . . . . . . . . . 3 B. Subsequent Proceedings. . . . . . . . . . . . . . . . . . . . 8 1. AT&T Price Cap Regulation. . . . . . . . . . . . . . . . 8 2. The Interexchange Competition Proceeding . . . . . . . . 9 C. Effects of Reclassifying AT&T as Non-Dominant . . . . . . . . 10 III. AT&T'S SUBMISSIONS SEEKING RECLASSIFICATION AS A NON- DOMINANT CARRIER. . . . . . . . . . . . . . . . . . . . . . . . . . 14 IV. ANALYSIS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 A. Definition of the Relevant Product and Geographic Market and the Standard for Assessing Market Power . . . . . . . . . . . . . 19 B. Classification of AT&T. . . . . . . . . . . . . . . . . . . . 35 1. Summary. . . . . . . . . . . . . . . . . . . . . . . . 35 2. Assessment of AT&T's Market Power. . . . . . . . . . . . 38 a. General Characteristics of the Interstate, Domestic, Interexchange Market . . . . . . . . . . . . . . . 40 (1) Pleadings. . . . . . . . . . . . . . . . . . 40 (a) Market Share. . . . . . . . . . . . . . 40 (b) Supply Elasticity. . . . . . . . . . . . . . 45 (c) Demand Elasticity . . . . . . . . . . . 53 (d) AT&T's Cost Structure, Size, and Resources. . . . . . . . . . . . . . . . . . 55 (2) Discussion . . . . . . . . . . . . . . . . . 57 (a) Supply Elasticity. . . . . . . . . . . . . . 57 (b) Demand Elasticity. . . . . . . . . . . . . . 63 (c) Market Share . . . . . . . . . . . . . . . . 67 (d) AT&T's Cost Structure, Size, and Resources. . . . . . . . . . . . . . . . . . 73 b. Specific AT&T Service Groupings. . . . . . . . . . 74 (1) Residential Services Pricing . . . . . . . . 75 (2) Business and 800 Services. . . . . . . . . . 88 (3) Operator Services and Calling Cards. . . . . 90 (4) Analog Private Line and 800 Directory Assistance 100 (5) Service to Alaska and Hawaii . . . . . . . 107 (6) Other Services . . . . . . . . . . . . . . 116 c. Summary of Findings and Conclusion . . . . . . . 138 3. Other Arguments Raised As To Why AT&T Should Not Be Declared Non-Dominant. . . . . . . . . . . . . . . . . 143 a. Geographic Rate Averaging. . . . . . . . . . . . 144 b. Bundling of Customer Premises Equipment. . . . . 147 c. Procedural Issues . . . . . . . . . . . . . . . 150 d. Miscellaneous Issues . . . . . . . . . . . . . . 156 e. RBOC Entry Into the Interexchange Market . . . . 161 V. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 VI. ORDERING CLAUSES. . . . . . . . . . . . . . . . . . . . . . . . . 169 APPENDIX A APPENDIX B APPENDIX C I. INTRODUCTION 1. On September 22, 1993, AT&T Corporation (AT&T) filed a motion with this Commission to be declared non-dominant under Part 61 of the Commission's rules and regulations. On April 24, 1995, AT&T filed an ex parte submission to supplement and update its original motion. As explained below, we find that the record evidence demonstrates that AT&T lacks market power in the interstate, domestic, interexchange market, and accordingly, we grant its motion to be reclassified as a non-dominant carrier with respect to that market. 2. We defer consideration of AT&T's request to be reclassified as non-dominant in its provision of all international services because that category of services requires a different market analysis. We also announce our intention to initiate a new proceeding to consider whether our regulation of interstate, domestic, interexchange services needs to be reexamined in light of our conclusions here regarding the state of that market and our reclassification of AT&T as non-dominant. II. BACKGROUND A. The Competitive Carrier Proceeding 3. Between 1979 and 1985, the Commission conducted the Competitive Carrier proceeding, in which it examined how its regulations should be adapted to reflect and promote the increasing competition in telecommunications markets. A major purpose of the Competitive Carrier rulemaking was to reduce or eliminate the application of economic regulation to new competitive entrants, since such entrants would improve market performance as rivals to AT&T and other incumbent, monopoly providers of telecommunications services and should not be viewed as potential monopolists requiring the same degree of economic regulation. 4. In a series of orders, the Commission distinguished two kinds of carriers -- those with market power (dominant carriers) and those without market power (non-dominant carriers). The Commission gradually relaxed its regulation of non-dominant carriers because it concluded that non-dominant carriers could not charge rates or engage in practices that contravene the requirements of the Communications Act of 1934 as amended (Act), since affected customers always had the option of taking service from a dominant carrier whose rates, terms and conditions for interstate service remained subject to close scrutiny by the Commission. The Commission concluded, however, that AT&T, as a dominant carrier, should be subject to the "full panoply" of then-existing Title II regulation. 5. Fifteen years ago, in its First Report and Order, the Commission defined a dominant carrier to be a carrier that "possesses market power." In determining whether a firm possessed market power, the Commission focused on certain "clearly identifiable market features," including "the number and size distribution of competing firms, the nature of barriers to entry, and the availability of reasonably substitutable services," and whether the firm controlled "bottleneck facilities." With respect to the relevant market within which to assess a carrier's market power, the Commission stated in a footnote that it was treating all carriers as single-output firms for purposes of analysis and that a firm's classification as dominant would apply to all its services. 6. In the First Report and Order, the Commission found that "AT&T, including its 23 associated telephone companies and its Long Lines Department, dominates the telephone market by any method of classification." The Commission gave three reasons supporting this finding. First, it noted that AT&T controlled local access facilities for over 80 percent of the nation's phones. Second, the Commission found that AT&T had an "overwhelming" market share of the message toll service (MTS) and wide area telecommunications service (WATS) market and that "the growing demand for long-distance telephone service and the current difficulties of entering this market . . . confer substantial market power upon AT&T." Third, the Commission observed that AT&T's revenues for private line services were more than thirteen times the combined private line revenues of specialized common carriers. In the First Report and Order, the Commission also found to be dominant Western Union, domestic satellite carriers (Domsats), Domsat resale carriers, and miscellaneous common carriers (MCCs) that relayed video signals by terrestrial microwave links. Finally, it found to be non-dominant all other resale carriers and specialized common carriers that provide voice and data services in direct competition with established telephone carriers, and it specifically named MCI Telecommunications Corporation (MCI) and Southern Pacific Communications Company (a predecessor of Sprint Communications Company, L.P. (Sprint)) as being among the specialized common carriers that it was classifying as non-dominant. 7. In the Commission's Fourth Report and Order, issued just before implementation of the AT&T divestiture, the Commission elaborated on its definition of market power, citing the definitions of Areeda and Turner, and of Landes and Posner. Areeda and Turner define market power as "the ability to raise prices by restricting output," while Landes and Posner define it as "the ability to raise and maintain prices above the competitive level without driving away so many customers as to make the increase unprofitable." The Commission also defined the relevant product and geographic markets that it would apply in assessing the market power of the carriers covered by the Competitive Carrier proceeding. The Commission found that, for those carriers, "all interstate, domestic, interexchange telecommunications services comprise a single relevant product market with no relevant submarkets." It further found that "there is a single national relevant geographic market (including Alaska, Hawaii, Puerto Rico, U.S. Virgin Islands, and other U.S. offshore points)." The Commission stated in a footnote, however, that it was not considering in that proceeding the appropriateness of applying this market definition in assessing the market power of AT&T. Rather, the Commission left this determination to a separate proceeding. That same day, the Commission issued a notice of inquiry (NOI) that addressed the issue of assessing AT&T's market power, but subsequently closed that docket without issuing an order. B. Subsequent Proceedings 1. AT&T Price Cap Regulation 8. In 1989, the Commission adopted a new price cap regulatory regime for AT&T that was intended to encourage AT&T to provide service more efficiently by capping rates, not profits. Under this scheme, AT&T's services were divided into three baskets: residential and small business services, 800 toll-free services, and all other business services. The Commission explained that residential and small business services were placed in a separate basket, "so that AT&T will not be able to raise prices for these services in order to lower prices for services that larger business customers use." In order further to protect residential customers, the Commission created separate service categories for day, evening, and night/weekend MTS, and subjected evening and night/weekend categories to an upward band increase of only four percent per year. In addition, it prohibited AT&T from raising the average residential rate per minute by more than one percent per year above the price cap index (PCI). Several AT&T services targeted to large business customers, including its Tariff 12, Tariff 15, and Tariff 16 services, were not placed under price cap regulation. 2. The Interexchange Competition Proceeding 9. In 1990, the Commission commenced the Interexchange Competition proceeding to examine the state of competition in the interstate long-distance marketplace, and to assess the efficacy of existing regulation in light of this competition. In two orders issued in that proceeding in 1991 and 1993, the Commission recognized that interstate interexchange competition had increased. In assessing the level of competition, the Commission considered the following primary factors: (1) demand elasticity; (2) supply elasticity (and in particular the supply capacity of existing competitors); (3) the relationship of AT&T's prices to its price cap; (4) AT&T's market share; (5) relative cost structures of AT&T and its competitors; and (6) AT&T's size and resources. The Commission found that business services (except analog private line) and 800 services (except 800 directory assistance) had become "substantially competitive" and, accordingly, streamlined its regulation of those AT&T services. In analyzing business and 800 services, the Commission did not address the relevant product and geographic market nor whether AT&T possessed market power within the relevant market. The Commission stated: To implement the regulatory changes we adopt here, we need not address whether, in strict economic terms, all domestic interstate, interexchange services continue to comprise a single product market. Contrary to the arguments of AT&T and MCI, the existence of one market does not require either that we treat all services in that market identically for regulatory purposes, or that we find all services in that market equally competitive before adopting regulatory changes for one subset of services. Thus, for example, in the price cap proceeding, we adopted price cap regulation for many, but not all, of AT&T's services. We then divided those services subject to price cap regulation into three separate baskets, in part to avoid cross-subsidies between groups of services that we recognized might be subject to differing levels of competition. We also did not apply precisely the same regulation to the services in the three baskets. In January 1995, the Commission issued an order that streamlined the regulation of AT&T's commercial services for small business customers. C. Effects of Reclassifying AT&T as Non-Dominant 10. As a dominant carrier, AT&T is subject to price cap regulation for nonstreamlined services, and to more specific tariffing and Section 214 requirements than non-dominant carriers. The price cap regulatory regime groups AT&T's domestic services into three baskets and requires that the weighted average of rates for services within a basket remain below the applicable PCI. Four categories of AT&T's services are subject to price cap regulation: (1) residential long distance service (including international MTS); (2) operator services; (3) 800 directory assistance; and (4) analog private-line service. Under the current tariffing requirements, AT&T must, depending on the type of tariff at issue, file a tariff on either 14, 45 or 120 days' notice instead of the one-day notice required of non- dominant carriers. Tariffs for streamlined services must be filed on 14 days' notice. 11. AT&T also is required to obtain specific prior Commission approval in order to construct a new line, extend a line, or acquire, lease or operate any line. The Commission has simplified this process for AT&T. AT&T files an annual "blanket" Section 214 application for all construction planned for the year. Any additional, unplanned project that will cost more than $2 million to construct requires a separate formal application. The application must include a statement showing how the proposed construction will serve the public interest. For additional, unplanned construction projects under $2 million, AT&T may file an informal application under which the addition is presumed lawful. Nevertheless, AT&T has not received the broader comprehensive blanket Section 214 authority granted to non-dominant carriers in the Competitive Carrier proceeding. AT&T also must obtain Section 214 approval before it may discontinue, reduce or impair service. 12. Our declaration here that AT&T is non-dominant will have several effects. First, AT&T will be freed from price cap regulation for its residential, operator, 800 directory assistance, and analog private-line services. Second, pursuant to our tariff filing rules for non-dominant carriers, AT&T will be allowed to file tariffs for all of its domestic services on one day's notice, and the tariffs will be presumed lawful. AT&T will also no longer have to report or file carrier-to-carrier contracts. Third, several Section 214 requirements will either be reduced or eliminated by declaring AT&T non-dominant. AT&T will automatically be authorized to extend service to any domestic point, and to construct, acquire, or operate any transmission lines, as long as it obtains Commission approval for the use of radio frequencies. AT&T will also only have to report additional circuits to the Commission on a semi-annual basis. Further, requests to discontinue or reduce service will be deemed granted after 31 days unless a party or the Commission objects. Fourth, as a non-dominant carrier not subject to price cap regulation, AT&T will not have to submit cost-support data now required for above-cap and out-of-band filings, or the additional information it is now required to submit with tariff filings for new services and services subject to price caps. Fifth, declaring AT&T non-dominant will release AT&T from some annual reporting requirements, including requirements that it file several ARMIS-like reports, an annual financial report, a depreciation rate report, an annual rate-of-return report, and a report on access minutes. 13. Declaring AT&T non-dominant will not remove AT&T from regulation. Like other non-dominant carriers, AT&T will still be subject to regulation under Title II of the Act. Specifically, non-dominant carriers are required to offer interstate services under rates, terms and conditions that are just, reasonable and not unduly discriminatory (Sections 201-202), and non-dominant carriers are subject to the Commission's complaint process (Sections 206-209). Non-dominant carriers also are required to file tariffs pursuant to our streamlined tariffing procedures (Sections 203, 205) and to give notice prior to discontinuance, reduction or impairment of service. III. AT&T'S SUBMISSIONS SEEKING RECLASSIFICATION AS A NON- DOMINANT CARRIER 14. On September 22, 1993, AT&T filed its motion requesting that it be reclassified as a non-dominant carrier and regulated in the same manner as its interexchange competitors. AT&T states that it seeks no change in the Commission's rules, but only to be reclassified as a non-dominant carrier under the existing rules. AT&T states that market conditions have changed dramatically since it was classified as dominant and that it no longer meets the criteria for dominance we established in our previous orders. Specifically, AT&T argues that it no longer owns or controls any bottleneck facilities. It further argues that its largest facilities-based competitors, MCI and Sprint, are no longer "infants" that lack maturity, but rather have billions of dollars in revenues and have enough readily available capacity to constrain AT&T's market behavior and thus make monopoly pricing by AT&T unprofitable. 15. Subsequently, on April 24, 1995, AT&T filed an ex parte submission supplementing and updating materials it previously filed in support of its motion for reclassification as a non-dominant carrier. Among other things, AT&T asserts that technological advances, enormous network capital expenditures, and infusions of foreign capital have given its competitors sufficient excess capacity to absorb one-third of AT&T's switched traffic within ninety days, and almost two-thirds within one year, with only modest expense. AT&T also argues that customers have more competitive choices in every market segment, and customers are taking advantage of these additional choices as evidenced by their willingness to switch carriers. 16. AT&T argues that continuing to regulate it as a dominant carrier imposes direct costs on carriers and customers, and does not facilitate a competitive market for interstate, domestic, interexchange services. AT&T claims that, despite loss of market power, it continues to be subjected to "burdensome and unequal" regulation that unfairly advantages its competitors and deprives consumers of price reductions and innovative service offerings. Regulation of AT&T as a dominant carrier, it argues, also wastes Commission resources that instead could be utilized in areas where regulation may be more appropriate, such as the opening up of local exchange and foreign markets. 17. On September 21, 1995, AT&T filed an ex parte letter in which AT&T specifies certain actions that it voluntarily commits to undertake to address concerns raised in the record regarding the effects of reclassifying AT&T. AT&T maintains in its letter that these concerns are "misplaced" because "for the most part" they "have no logical connection to AT&T's regulatory classification," and, insofar as they implicate important policy issues, "they apply with equal force to all interexchange carriers and have nothing to do with market power." Nevertheless, AT&T sets forth in the letter various voluntary commitments, which it describes as "transitional provisions," that are intended to allay these concerns, pending the Commission's review of its current scheme for regulating interexchange carriers. In that regard, AT&T renews its request that the Commission commence an examination of the interexchange industry "to consider whether appropriate rules for all carriers should be adopted." The commitments AT&T proffers in its letter concern: analog private line service, 800 directory assistance service, service to and from Alaska, Hawaii, and other regions subject to the Commission's rate integration policy, tariff filings that would result in geographically deaveraged rates, tariff filings that implement changes to contract tariffs that are adverse to customers of those tariffs, service to low-income and other customers, and resolution of disputes with reseller customers. Numerous parties filed ex parte letters in response, which are described below. 18. In response to a letter from the Common Carrier Bureau seeking clarification of AT&T's September 21, 1995 ex parte letter, AT&T filed an ex parte letter on October 5, 1995 in which it clarified a number of its voluntary commitments relating to its low-income and low-volume safety net plans, tariff filings that implement contract tariff changes that are adverse to customers of those tariffs, 800 directory assistance and analog private line services, and dispute resolution guidelines for disputes arising between AT&T and its reseller customers. TRA filed an ex parte letter supporting the safeguards for resellers that were described in AT&T's October 5, 1995 ex parte clarification letter. IV. ANALYSIS A. Definition of the Relevant Product and Geographic Market and the Standard for Assessing Market Power 19. A dominant carrier is defined as a carrier that possesses market power, and a non-dominant carrier is defined as a carrier not found to be dominant (i.e., one that does not possess market power). Accordingly, in order to determine whether AT&T should now be classified as a non-dominant carrier, we must assess whether AT&T possesses market power. Preliminary to that assessment, however, we must: (1) identify the relevant product and geographic markets for assessing AT&T's market power; and (2) determine how to assess whether, within that market, AT&T has market power. 20. With respect to the definition of the relevant market, AT&T, citing the Fourth Report and Order, maintains that the Commission has repeatedly found that "interstate, domestic, interexchange services" is the relevant market for assessing an interexchange carrier's market power for the purpose of determining whether a firm should be declared dominant. AT&T contends that the Commission must grant AT&T's motion if we find that AT&T lacks market power in the overall market for interstate, domestic, interexchange telecommunications services, even if we find that AT&T still may have the ability to control the price of discrete services within the defined market. Although no party specifically disputes AT&T's contentions regarding the relevant market and the standard for assessing market power, numerous parties nonetheless argue that AT&T has the ability to control prices of discrete services and therefore should not be reclassified as non-dominant. 21. We agree with AT&T that in this case we should use the "all interstate, domestic, interexchange services" market definition adopted in the Fourth Report and Order. While the Commission has never explicitly applied the market definition articulated in the Fourth Report and Order to AT&T in the context of the Competitive Carrier proceeding, we believe that it is appropriate to do so here. 22. As noted above, the Commission stated in the First Report and Order that it was treating all interexchange carriers as single-output firms for purposes of classifying firms as dominant or non-dominant. The Commission affirmed that approach in the Fourth Report and Order by adopting a product market definition of "all interstate, domestic, interexchange services . . . with no relevant submarkets." The Commission also there defined a "single national relevant geographic market (including Alaska, Hawaii, Puerto Rico, U.S. Virgin Islands, and other U.S. offshore points)." As noted above, this definition was applied in classifying all of AT&T's competitors as non-dominant carriers. We see no basis for determining whether AT&T is non-dominant under a different standard than that used for classifying its competitors. 23. An examination of the supply side of interexchange services also leads us to conclude that AT&T's dominance or non-dominance should be evaluated in the context of this market definition. Substitutability of demand is generally used in the first instance to define a relevant product market, but supply substitutability is also a well-accepted consideration in market definition. In this instance, while consumers do not view residential and business services, for instance, as substitutable, it is clear that there is no significant difference between the interexchange facilities used to provide these services. Thus, in light of this supply substitutablilty, it is reasonable and appropriate to include all domestic, interstate, interexchange services in the market for evaluating AT&T's dominance. We note that the Commission used a similar analysis in assessing the competitive effects of the merger of AT&T and McCaw Cellular Communications, Inc., a decision that was upheld by the D.C. Circut. Consequently, we believe it is appropriate for us to evaluate AT&T's market power using this definition as well. 24. Having defined the relevant geographic and product market, we also must determine the standard, established by the Competitive Carrier orders, for assessing whether a carrier possesses market power within the relevant market. More specifically, we must examine whether, under the Competitive Carrier decisions, the Commission should reclassify AT&T as non-dominant if the record demonstrates that AT&T lacks market power in the overall relevant product market, even if we find that AT&T has the ability to control the price of one or more discrete services; or alternatively whether, under the Competitive Carrier decisions, the Commission should retain AT&T's dominant classification if we find that AT&T has the ability to control the price of one or more discrete services within the relevant market, even if AT&T lacks market power in the overall interstate, domestic, interexchange market. 25. The Commission has never definitively concluded, either in its rules or in the Competitive Carrier orders, that a carrier must demonstrate that it lacks the ability to control the price of every service that it provides in the relevant market before the Commission can classify that carrier as non-dominant. Indeed, Section 61.3(o) of our regulations states only that a dominant carrier is defined as a "carrier found by the Commission to have market power (i.e., the power to control prices)." We believe, in light of the evidence in this case and the state of competition in today's interstate, domestic, interexchange telecommunications market, we should assess whether AT&T has market power by considering whether AT&T has the ability to control price with respect to the overall relevant market. 26. As our analysis below demonstrates, AT&T does not have the ability unilaterally to control prices in the overall interstate, domestic, interexchange market. The record indicates that, to the extent AT&T has the ability to control price at all, it is only with respect to specific service segments that are either de minimis to the overall interstate, domestic, interexchange market, or are exposed to increasing competition so as not to materially affect the overall market. As our Interexchange Competition orders and the evidence in this case indicate, most major segments of the interexchange market are subject to substantial competition today, and the vast majority of interexchange services and transactions are subject to substantial competition. Accordingly, we believe that assessing AT&T's market power by an "all-services" standard (i.e., requiring AT&T to establish that it lacks the ability to control price in all service segments), would result in a situation where the economic cost of regulation outweighs its public benefits. 27. The cost of dominant carrier regulation of AT&T in this context includes inhibiting AT&T from quickly introducing new services and from quickly responding to new offerings by its rivals. This occurs because of the longer tariff notice requirements imposed on AT&T, which allow AT&T's competitors to respond to AT&T tariff filings covering new services and promotions even before AT&T's tariffs become effective. The longer notice requirements imposed on AT&T thus also reduce the incentive for AT&T to initiate price reductions. In addition, to the extent AT&T were to initiate such strategies, AT&T's competitors could use the regulatory process to delay, and consequently, ultimately thwart AT&T's strategies. Furthermore, such regulation imposes compliance costs on AT&T and administrative costs on the Commission. Accordingly, we believe that in order to promote continued competition in the interstate, interexchange market, and to avoid applying regulation whose costs outweigh its benefits, it is appropriate to assess whether AT&T possesses market power not under an all-services approach, but rather on the basis of whether AT&T possesses market power in the overall relevant market. 28. We recognize that there are instances where the Commission has made statements that could be viewed as suggesting that the Competitive Carrier regime contemplates an all-services approach to assessing a carrier's market power. One such statement occurs in a footnote to the First Report and Order, where the Commission stated that "carriers are eligible for streamlined regulatory procedures only if they are not dominant in the provision of any services." Because the only carriers eligible for streamlined treatment at that time were non-dominant carriers, it could be argued that, by this statement, the Commission expressed an intention that carriers should be eligible for non-dominant status only if they were not dominant in any service. 29. Also, in the Competitive Carrier Further NPRM, the Commission stated that the "practical result of . . . [its] conservative methodological approach [in the First Report and Order] was to remove some unnecessary regulatory burdens from resale carriers, but only if those carriers were also not dominant in the provision of any other communications service." The Commission also there stated that, under the First Report and Order, it is apparent that a carrier may be classified as dominant in a market even if it has only limited market power in that market, and fleeting market power at that. In such a case the costs resulting from the imposition of regulation may be significantly greater than the benefits for consumers, if any, from that regulation. In another proceeding regarding spectrum allocation, the Commission stated in a footnote that "[i]n the Competitive Carrier rulemaking we generally treated all carriers as single output firms. Thus, firms that are dominant in one service were treated as dominant for all services." Finally, in the Notice of Inquiry in the AT&T Long-Run Regulation proceeding, the Commission stated: Implementation of alternative regulatory practices in Competitive Carrier Rulemaking was limited to carriers lacking market power. It may be that we can look to market forces to check all of AT&T's rates and, thereby, its facilities decisions only if AT&T lacks market power in all of its services. However . . . . [a] combination of market forces and regulation of some of AT&T's services may make it desirable to implement alternative regulation of other AT&T services before AT&T lacks market power in all of its services. 30. We conclude that the foregoing statements, none of which is codified in the Commission's rules, do not constitute an uncodified rule permitting us to classify AT&T as non-dominant only if we find that AT&T lacks the ability to control the price of every tariffed service in the relevant product market. In McElroy Electronics Corp. v. FCC, the D.C. Circuit stated that the Commission's rules must be stated clearly. In light of the court's reasoning in McElroy, we believe that the Commission's statements in Competitive Carrier described above are insufficient to establish a clear rule pursuant to which AT&T was provided notice that it must satisfy an all-services standard in order to be classified as non- dominant. Moreover, we do not believe that language in other proceedings that may be viewed as characterizing the Competitive Carrier standard as an all-services standard is binding as a matter of law. It is at most a policy with which, for the reasons discussed below, we do not now agree. 31. We note, however, that, even assuming that the Commission's various references to an all-services standard were sufficient to constitute either a policy or a rule promulgated under Competitive Carrier, we believe that the facts of this case warrant either a departure from that policy or a waiver of that rule. 32. It is well-established that the Commission may depart from prior policies as long as it provides a reasoned explanation for doing so. The Commission consistently has stated that when the economic costs of regulation exceed the public interest benefits, the Commission should reconsider the validity of continuing to impose such regulation on the market. At the time we issued the First Report and Order, AT&T controlled bottleneck facilities and was virtually the only supplier of interexchange services. Thus, under 1981 market conditions, AT&T's market power in one segment of the market could have dramatically affected the performance of all market segments. As explained below, however, the interexchange market enjoys substantial competition today. Even though AT&T may be able to control the price of a small number of services, as we discuss below, the vast majority of interexchange services and transactions are subject to substantial competition. Moreover, as a result of divestiture, AT&T no longer owns bottleneck local access facilities. Thus, we believe that assessing market power by an all-services standard within the context of today's interexchange market would result in a situation where the economic cost of regulation would outweigh its public benefits. Under such regulation, AT&T would be subject to excessive regulatory costs and would be hindered in its ability to respond to moves by its competitors. As a result of the longer tariff notice requirements imposed on AT&T, AT&T would have less incentive and ability to initiate pro-competitive strategies. To the extent AT&T were to initiate such strategies, AT&T's competitors could use the regulatory process to delay, and consequently, ultimately thwart AT&T's strategies. Accordingly, even if it could be demonstrated that the Competitive Carrier cases establish a policy that favors an all-services approach to assessing market power, we believe, for the reasons articulated above, that it is appropriate to depart from that policy in this case. 33. It also is well-established that the Commission has authority to waive its rules if there is good cause to do so. In order to justify a waiver, the Commission must find that application of generally applicable rules would not be in the public interest in the particular circumstances under consideration. The Commission, in waiving the rule, "must explain why deviation [from the rule] better serves the public interest and articulate the nature of the special circumstances to prevent discriminatory application and to put future parties on notice as to its operation." In the present situation, if an all-services rule did exist, we believe good cause exists to waive it in light of AT&T's position in the interstate, domestic, interexchange market and the facts of this case. Specifically, our analysis below demonstrates that to the extent AT&T possesses any market power at all, it is only with respect to specific service segments that are either de minimis relative to the overall interstate, domestic, interexchange market, or exposed to increasing competition so as to not materially affect the overall market. We believe that, in such a situation, the costs of continuing to subject all of AT&T's interstate, domestic, interexchange services to dominant carrier regulation, outweigh the benefits of that regulation. The costs of the dominant carrier regulation of AT&T include inhibiting AT&T from either quickly introducing new services or responding quickly to new offerings by its rivals. In addition, such regulation imposes compliance costs on AT&T and administrative costs on the Commission. These costs, especially when viewed in light of the voluntary commitments made by AT&T to alleviate concerns with respect to specific services, persuade us that the public interest would be better served by waiving any all-services rule in classifying AT&T rather than by applying it. Accordingly, we conclude that there would be good cause to waive such a rule if it actually were in place. 34. Accordingly, we find that the appropriate relevant product and geographic market for assessing whether AT&T possesses market power, for purposes of the Competitive Carrier proceeding, is the interstate, domestic, interexchange telecommunications services market. Moreover, we conclude that we should assess whether AT&T has market power in that relevant market by considering whether AT&T possesses market power in the overall market for interstate, domestic, interexchange services. B. Classification of AT&T 1. Summary 35. In this section we conclude that AT&T has demonstrated that it should be reclassified as non-dominant in the overall interstate, domestic, interexchange telecommunications market. In assessing whether the record supports such reclassification, we first address whether AT&T possesses market power in the overall interstate, domestic, interexchange market. Based on this analysis, we conclude that, while the long-distance marketplace is not perfectly competitive, AT&T neither possesses nor can unilaterally exercise market power within the interstate, domestic, interexchange market taken as a whole. 36. After finding that AT&T lacks market power in the relevant market, we then consider certain issues raised in the record regarding effects of reclassifying AT&T as non- dominant. We conclude, for reasons given herein, that none of the issues raised warrants a finding that AT&T properly is classified as dominant under our Competitive Carrier regime. Rather, we find that the record supports reclassifying AT&T as non-dominant in the overall, interstate, domestic, interexchange market, and conclude that we should grant AT&T's motion to be reclassified as non-dominant in that market. 37. We note that this determination is not based upon the voluntary commitments offered by AT&T in its September 21, 1995 Ex Parte Letter (as clarified in its October 5, 1995 Ex Parte Letter), but on the economic information in this record regarding AT&T's position in the overall relevant market. In addition, we agree with AT&T that a number of the concerns raised by resellers and other parties in this proceeding are not based on claims that AT&T continues to possess market power in the relevant geographic and product market. As noted at different points in this order, we also agree with AT&T and TRA that we should commence a proceeding to consider whether, in light of our conclusion that AT&T is not dominant in this market, modifications to our existing regulatory scheme for interexchange carriers will advance our public interest goals more effectively. To the extent that parties are suggesting that, even if we conclude that AT&T is no longer dominant, we should defer granting AT&T's motion until we have completed this industry-wide proceeding, we decline that suggestion. We note, moreover, that AT&T's voluntary commitments are intended to serve as "transitional" arrangements that will address the concerns raised by these parties in the short run. We believe that these voluntary commitments proffered by AT&T may alleviate these policy concerns during this period of regulatory transition. We, therefore, accept all of AT&T's commitments, and order AT&T's compliance with those commitments. We note that AT&T's failure to comply with its commitments may result in the imposition of fines or forfeitures upon AT&T (pursuant to Section 503(b) of the Act) or a revocation of its radio licenses (pursuant to Sections 312(a) of the Act). In addition, we will reject as unreasonable on its face any tariff filing that contravenes AT&T's commitments. 2. Assessment of AT&T's Market Power 38. In this section we assess whether AT&T possesses market power in the overall interstate, domestic, interexchange market. Applying well-accepted principles of antitrust analysis, the following discussion first focuses on: (1) AT&T's market share; (2) the supply elasticity of the market; (3) the demand elasticity of AT&T's customers; and (4) AT&T's cost structure, size and resources. Our analysis of AT&T's market power thus begins with an assessment of these general characteristics of the interstate, domestic, interexchange market. We then address arguments raised by commenters that AT&T has the ability to control the price of specific services within the overall relevant market. The issues we address relate to: (1) AT&T's residential services pricing; (2) AT&T's business and 800 toll-free services; (3) AT&T's operator and calling card services; (4) AT&T's analog private line and 800 directory assistance services; and (5) AT&T's service to and from Alaska and Hawaii. 39. We find that AT&T neither possesses nor can exercise individual market power within the interstate, domestic, interexchange market as a whole. While we acknowledge that AT&T may still be able to control the price of a few discrete services, we do not find that this justifies a finding that AT&T possesses market power in the overall relevant market. a. General Characteristics of the Interstate, Domestic, Interexchange Market (1) Pleadings (a) Market Share 40. Numerous commenters argue that AT&T's market share of the long-distance market (60 percent measured in terms of minutes in 1993) is prima facie evidence that AT&T remains dominant in the long-distance market. Sprint points out that a 60 percent market share alone generates a Herfindahl-Hirschman index (HHI) of 3600 -- twice as high as the level (1800) set by the Department of Justice (DOJ) as defining a "highly concentrated market." Several commenters also assert that the other 40 percent is divided among 500 carriers -- many of which are resellers, who either primarily or exclusively resell AT&T's services. TRA adds that most of AT&T's "hundreds of competitors" are switchless resellers that control only two percent of the interstate market. Ad Hoc IXCs note that AT&T's market share is over four times that of its nearest competitor, MCI. 41. In its initial reply comments, AT&T argues that the steady decline of its market share of interstate switched minutes is wholly inconsistent with its retaining market power. Relying on the First Interexchange Competition Order, AT&T claims that the Commission has found that a substantial market share "is not wholly incompatible with a highly competitive market." AT&T also contends that the fact that the rate of decline in AT&T's market share is less than it was in the years immediately following divestiture, proves that competition in long-distance has matured because sharp changes in market shares in a competitive environment are unusual. AT&T argues that its declining market share coupled with consumers' increasing willingness to switch carriers (i.e, high churn rate) further demonstrate its lack of market power. 42. In its April 24, 1995 Ex Parte Filing, AT&T contends that market share alone is not a valid measure of market power in any aspect of the interexchange market because: (a) competitors' excess capacity constrains AT&T's ability to restrict output; and (b) AT&T's aggregate share does not reflect the extraordinary amount of consumer "churn" currently occurring in the marketplace. Thus, AT&T argues that market share figures based solely upon output -- rather than on total available capacity -- distort the importance of market share as an indicator of market power. 43. AT&T asserts that none of the opposing commenters attempts to refute any of the key facts showing that AT&T lacks market power under the criteria the Commission has established in this proceeding. Moreover, AT&T argues that the Commission has long recognized, and no commenter in this proceeding has disputed, that market share is the least important and least reliable indicator of market power, especially in markets with high supply and demand elasticities. NYNEX and US West agree that market share alone is not a determinative measure of market power, and NYNEX suggests that the Commission should consider a number of factors, including ease of market entry, presence of alternative supply sources, demand for services from alternative carriers, and substitutability of services. CSE argues that facilities-based competition is vigorous and that even large size, large market share, and high profits can be consistent with the existence of vigorous competition because the competitive process tends to reward firms that do a better job of creating value for customers at lower cost. 44. IDCMA argues that a significant portion of AT&T's arguments consist of academic theory intended to prove that AT&T lacks the ability to act anti-competitively. IDCMA asserts that the Supreme Court made clear in the Kodak case that decisions about market power must be based on "economic realit[ies] of the market at issue," rather than unsupported speculation or abstract theories. (b) Supply Elasticity 45. AT&T contends that, because supply is elastic, it cannot possess or exercise market power. In support, AT&T argues that: (1) network capacity has continued to expand; (2) carriers other than MCI and Sprint have increased their network capacity through new construction, acquisition, or both, and have also increased the diversity of their offerings; and (3) MCI, Sprint, and other interexchange carriers have introduced a plethora of highly successful offerings designed for and marketed to residential customers, which increase their visibility and reinforce the nature and scope of choices available to consumers. 46. In its 1993 motion, AT&T argues that its competitors have more than enough readily available capacity to constrain AT&T's market behavior and inhibit it from charging excessive rates. AT&T asserts that in 1993 there were: (1) more than 500 long-distance carriers providing service in the United States, 394 of which provided equal access service in at least one state; (2) nine carriers that purchased equal access in, and served, at least 45 states; (3) 81 regional carriers that served at least four states; and (3) at least twelve interexchange carriers serving every state. AT&T also claims that its competitors had about one and a half times the amount of fiber as AT&T. 47. In its April 1995 ex parte submission, AT&T claims that: MCI and Sprint alone can now absorb fifteen percent of AT&T's total 1993 switched demand at no incremental network capital cost; within 90 days MCI, Sprint and LDDS/WilTel, using their existing equipment, could take nearly one-third of AT&T's switched traffic; and within twelve months AT&T's largest competitors could absorb another 31 percent of AT&T's total switched traffic (making a total of almost two-thirds), by using currently lit fiber and adding switched ports, at a cost of about $660 million. According to AT&T, the factor limiting supply expansion is not the availability of transport facilities, but rather the availability of sufficient switched ports from the manufacturers. AT&T asserts that these facts show that AT&T cannot control the supply of interexchange services and that there are no barriers to entry into the long-distance market. 48. AT&T further argues that numerous facilities-based and other carriers, in addition to AT&T, provide residential, international MTS, and operator services. AT&T contends that, because excess capacity controlled by facilities-based carriers could be used to provide virtually any type of long-distance service, no interexchange carrier can charge supra- competitive rates for any service. 49. AT&T also asserts that equal access is available on over 97 percent of the telephone lines in the country, and claims there are 458 carriers who purchase access, with nine serving 45 or more states, and with 126 regional carriers serving four or more states. AT&T further asserts that its chief rivals -- Sprint, MCI and LDDS -- are "thriving." 50. Some parties, such as API and CSE, agree that excess capacity constrains AT&T. CSE also asserts that resellers are viable competitors in the long-distance market. 51. Most commenters, however, challenge AT&T's excess capacity contentions. Sprint argues that the possession of fiber in the ground by AT&T's competitors does not automatically mean that they have "excess" capacity that can mitigate AT&T's market power. According to Sprint, fiber (especially dark fiber) is only one element needed to provide interexchange service. Sprint contends that it is a costly and time-consuming project to supplement billing, customer service, and switching systems to accommodate large numbers of customers who might leave AT&T because of unreasonable prices. Sprint further contends that, because AT&T could readily decrease its prices, it would be very risky for other interexchange carriers to make the investment needed to accommodate large additional traffic volumes which might not materialize. Sprint thus concludes that the fact that interexchange carriers other than AT&T may have fiber in the ground cannot be considered an absolute constraint on AT&T's pricing. TRA asserts that, because AT&T, MCI and Sprint all benefit from price stability, none of the carriers would benefit from a price war. TRA therefore argues that the excess capacity in the interexchange industry upon which AT&T places so much reliance in arguing that it lacks market power is essentially irrelevant because no carrier will undertake the actions necessary to exploit that excess capacity. 52. The Joint Bell Companies maintain that almost all of the more than 500 long- distance carriers alluded to in AT&T's initial pleading are resellers; that few carriers other than AT&T, MCI, and Sprint have facilities-based networks covering significant geographic areas, and that by any measure (revenue, capital, and other standards), AT&T dwarfs these companies combined. They further argue that continued entry by resellers is evidence that AT&T is holding prices sufficiently above the competitive level so as to make reseller entry profitable. They assert that MCI and Sprint are "the only other players worth serious consideration." They further assert that the existence of excess capacity does not mean that AT&T is not the dominant firm, that AT&T's market power is constrained, or that AT&T's ability to charge excessive rates is inhibited. The Joint Bell Companies argue that the continued presence of, in their view, only three national, facilities-based interexchange carriers more than a decade after divestiture, proves that there are significant barriers to market entry. They maintain that excess capacity does nothing to upset this oligopolistic market structure, and that such excess capacity, as well as other network economics, are actually obstacles to competition, rather than assurances of it. (c) Demand Elasticity 53. AT&T maintains that a high own-price elasticity of demand for long-distance services prevents AT&T from possessing or exercising market power. AT&T argues that churn data are a key indicator of the demand responsiveness of the market and the inability of any single carrier to exercise market power. According to AT&T, consumers changed carriers 18 million times in 1993 and 27 million times in 1994. AT&T estimates that, of the 27 million changes in 1994, over 19 million were by customers who made only one change during the year. Thus, according to AT&T, about one in five residential customers changed carriers at least once last year. Finally, AT&T states that for 1995, consumer churn is running at an annual rate of 30 million carrier changes. 54. IDCMA contends that AT&T's churn argument is misleading with respect to business customers. IDCMA points out that the churn rate for business services is substantially less than residential churn because switching carriers in the business sector is far more difficult and costly than switching carriers for residential services. IDCMA adds that most business customers obtain long-term service contracts that may include severe early termination penalties. TRA argues that many resellers have entered into long-term contracts with AT&T because of a perceived necessity, deriving from business customer demands for an "AT&T product," owing to AT&T's dominance in the market, rather than its ability to offer more competitive terms and conditions than its competitors. Sprint argues that the number of consumers who believe that AT&T is the best in terms of overall satisfaction suggests that those customers do not perceive the services of competitors to be equivalent substitutes to AT&T's services. The Joint Bell Companies assert that neither churn among residential customers, nor the advertising campaigns that prompt it, prove that the interexchange market is competitive. The Joint Bell Companies argue that firms not competing on price often shift their efforts to attracting customers through advertising, because increasing price/cost margins makes gaining a new customer relatively profitable. They further argue that advertising may make the market less competitive by differentiating products. (d) AT&T's Cost Structure, Size, and Resources 55. Several commenters argue that AT&T is dominant simply by virtue of its lower costs, sheer size, superior resources, financial strength, and technical capabilities. A number of commenters argue that AT&T's size and usage requirements permit it to enjoy a substantial competitive advantage over its rivals in the form of volume and term discounts with local exchange carriers (LECs) and competitive access providers (CAPs). They further argue that because most non-dominant carriers do not have the traffic volumes to support dedicated transport facilities -- and thus must buy more of the higher-priced switched transport services -- AT&T, in the absence of dominant carrier regulation, could use this cost advantage to adopt anticompetitive pricing strategies. LDDS argues that, due to AT&T's existing collocation agreements with LECs, AT&T has enjoyed reduced mileage charges for special access facilities between the LECs' serving wire centers and its points of presence. WilTel argues that, because AT&T purchases over half of all interstate access, it retains unparalleled power to extract discriminatory price concessions from access providers. WilTel concludes that AT&T has "effective economic control" of local bottleneck facilities and that this is evidence of AT&T's dominant position in the marketplace. Consequently, WilTel argues that interexchange carriers who lack the same market power will be at a competitive disadvantage relative to AT&T if AT&T is reclassified as non-dominant. 56. AT&T responds that its alleged access cost advantages provide no basis for denying AT&T's motion. AT&T asserts that the Commission considered and rejected these claims in the First Interexchange Competition Order. AT&T also argues that the recent changes to the local transport rules were exceedingly modest and will only allow AT&T to participate in the substantial savings that would have been available to it under cost-based pricing. AT&T further contends that its evidence and methodologies concerning prices, costs, price/cost margins and other pricing trends, are accurate and appropriate, and that AT&T has in fact passed through to consumers reductions in LEC access charges. (2) Discussion (a) Supply Elasticity 57. It is well-established that supply and demand elasticities are properly considered in assessing whether a firm has market power in the relevant product and geographic markets. The Commission explained in the First Interexchange Competition Order that there are two factors that determine supply elasticities in the market. The first is the supply capacity of existing competitors: supply elasticities tend to be high if existing competitors have or can easily acquire significant additional capacity in a relatively short time period. The second factor is low entry barriers: supply elasticities tend to be high even if existing suppliers lack excess capacity if new suppliers can enter the market relatively easily and add to existing capacity. 58. We find that, in the interstate, domestic, interexchange market, supply is sufficiently elastic to constrain AT&T's unilateral pricing decisions. In making this determination, we find that "AT&T's competitors have enough readily available excess capacity to constrain AT&T's pricing behavior -- i.e., that they have or could quickly acquire the capacity to take away enough business from AT&T to make unilateral price increases by AT&T unprofitable." 59. AT&T asserts, and no one disputes, that MCI and Sprint alone can absorb overnight as much as fifteen percent of AT&T's total 1993 switched demand at no incremental capacity cost; that within 90 days MCI, Sprint, and LDDS/WilTel, using their existing equipment, could absorb almost one-third of AT&T's total switched capacity; or that within twelve months, AT&T's largest competitors could absorb almost two thirds of AT&T's total switched traffic for a combined investment of $660 million. Thus, AT&T's competitors possess the ability to accommodate a substantial number of new customers on their networks with little or no investment immediately, and relatively modest investment in the short term. We therefore conclude that AT&T's competitors have sufficient excess capacity available to constrain AT&T's pricing behavior. 60. Sprint's argument that AT&T's competitors would not make the necessary investment to accommodate large additional traffic, resulting from a price increase by AT&T, because AT&T could immediately decrease its prices, is inapposite. Sprint assumes that a one-time massive capital investment would be necessary for AT&T's competitors to begin adding customers. The issue, however, is not whether Sprint and MCI could and should expand their networks so they can serve all of AT&T's customers within a short time frame. Rather, the issue is whether, in the short term, Sprint and MCI have sufficient available excess capacity to add a significant number of new customers. The evidence shows that Sprint and MCI can add significant numbers of new customers with their existing capacity and add incrementally to this capacity as new customers are added to their networks. 61. In general, entry into the interstate long-distance market is not prohibited by regulation. Although facilities-based entry into long-distance requires a substantial initial network investment, resellers have avoided these sunk costs by leasing the excess capacity of existing facilities-based carriers. In addition, some resellers grow to become regional or even national facilities-based competitors (such as ALC/Allnet and WorldCom, formerly LDDS/WilTel). Such entry can put downward pressure on price if AT&T attempts to charge a supra-competitive price. 62. We find unpersuasive the arguments that interexchange carriers other than AT&T, MCI, and Sprint are too small to exert competitive pressure. In 1994 those other carriers accounted for 17.3 percent of interstate interexchange revenues, which is approximately equal to MCI's revenues. In addition, the commenters fail to provide any evidence about the relative size of each of these other carriers. Finally, the commenters fail to provide any evidence that these companies could not expand to serve additional AT&T customers should AT&T attempt to charge a supra-competitive price. In fact, these carriers have increased their share from 11.8 percent in 1991 to 17.3 percent in 1994, thus demonstrating their ability to attract and serve new customers. (b) Demand Elasticity 63. The record in this proceeding indicates that residential customers are highly demand-elastic and will switch to or from AT&T in order to obtain price reductions and desired features. AT&T's studies show that as many as twenty percent of its residential customers, representing nineteen percent of annual revenue to AT&T, change interexchange carriers at least once a year. This high churn rate among residential consumers -- approximately 30 million changes are expected in 1995 -- demonstrates that these customers find the services provided by AT&T and its competitors to be very close substitutes. 64. The largest interexchange carriers continually promote various discount plans, which meet the needs of customers with different calling patterns (e.g., volume discounts, calling circles, postalized rates) and offer cash awards to entice residential consumers to switch carriers. These carriers have also spent significant resources to market and advertise their services and prices to residential customers. One study offered by AT&T indicates that AT&T's advertising increased 85 percent between 1989 and 1992 to $1.6 billion. We believe that these facts, along with the high churn rate among consumers, suggest that AT&T lacks the ability to raise its price unilaterally above competitive levels in the provision of long-distance residential services. We reject the argument that high advertising expenditures by long-distance carriers indicate a lack of competition. The fact that AT&T and its competitors advertise their discount plans, and not their basic schedule rates, demonstrates that advertising is not inconsistent with aggressive price competition. Similarly, that competing carriers' products are slightly differentiated is also not inconsistent with substantial competition, since the carrier may be designing calling plans to target specific groups of consumers. 65. We also find, consistent with the First Interexchange Competition Order, that business customers are highly demand-elastic. In that order, the Commission discussed in detail the high demand elasticities of business telecommunications users. Specifically, the Commission found that business customers "routinely request proposals from carriers other than AT&T and accord full consideration to these proposals." Furthermore, we found that business users consider the offerings of AT&T's competitors to be similar in quality to AT&T's offerings. Purchasers of business services, the Commission found, were also more sophisticated and knowledgeable about the products they buy and often make decisions based on advice from consultants and in-house telecommunications experts about the service offerings and prices that are available to them. While TRA argues that in the resale context certain business customers prefer only an "AT&T product," despite the ability of AT&T's competitors to offer more competitive terms and conditions, this does not mean that AT&T has the ability to control price. In addition, evidence in the record indicates that in 1994, AT&T supplied only 25.6 percent of the approximately $4.4 billion in services that were resold, and that by 1996, AT&T will supply only 20.3 percent of the approximately $5.6 billion services that are resold. Consequently, TRA's summary assertion is not sufficient to cause us to depart from our findings in the First Interexchange Competition Order. Accordingly, we affirm our findings in the First Interexchange Competition Order that business customers are highly demand-elastic. The willingness of business and residential customers to switch long-distance providers is evidence of a lack of market power on the part of AT&T. 66. In concluding that residential and business customers are demand elastic, we do not discount the significance of AT&T's goodwill or consider it to be of no marketing value to AT&T. As the Commission stated in the First Interexchange Competition Order, "[i]n any market in which relatively new entrants compete against one or more established incumbents, goodwill is bound to play a role, in some cases a prominent role." That does not mean, however, that AT&T has market power or that residential and business customers are demand inelastic. Particularly where business customers tend to be sophisticated and residential customers show high churn rates, the significance in the marketplace of name recognition and historic goodwill is reduced. (c) Market Share 67. AT&T's steadily declining market share for long-distance services also supports the conclusion that AT&T lacks market power in the relevant market. At the time of the Competitive Carrier First Report and Order, AT&T had approximately 90 percent of the overall long-distance industry revenues. From 1984 to 1994, AT&T's market share, in terms of both revenues and minutes, fell from approximately 90 percent to 55.2 and 58.6 percent in terms of revenues and minutes respectively. 68. Although several parties argue that AT&T's overall market share of 60 percent is inconsistent with a finding that AT&T lacks market power, we disagree. It is well- established that market share, by itself, is not the sole determining factor of whether a firm possesses market power. Other factors, such as demand and supply elasticities, conditions of entry and other market conditions, must be examined to determine whether a particular firm exercises market power in the relevant market. As we noted in the First Interexchange Competition Order, "[m]arket share alone is not necessarily a reliable measure of competition, particularly in markets with high supply and demand elasticities." 69. Our determination fifteen years ago in the First Report and Order that AT&T possessed market power rested on several market characteristics, including the facts that AT&T controlled, through its ownership of the Bell Operating Companies, local access facilities for over 80 percent of the nation's phones, and that AT&T was virtually the only supplier of all interexchange services. While divestiture removed AT&T's control over local bottleneck facilities, the interstate, interexchange market was still in its infancy and therefore did not support a finding of non-dominance for AT&T. 70. Today, conditions in the market are far different. First, AT&T has not controlled local bottleneck facilities for over ten years. Second, AT&T faces at least two full- fledged facilities-based competitors. Both MCI and Sprint have nationwide networks that are capable of offering most consumers an alternative choice of services relative to AT&T. In addition, there is at least one other nationwide facilities-based provider (WorldCom, formerly LDDS/WilTel), which primarily serves the business market and could enter the residential market segment, and dozens of regional facilities-based carriers. There are also several hundred small carriers that primarily resell the capacity of the largest interexchange carriers. We believe that the significant excess capacity and large number of long-distance carriers limits any exercise of market power by AT&T. 71. Third, virtually all customers today, including resellers, have numerous choices of equal access carriers employing facilities or resale, or both. Equal access was mainly implemented by the local exchange carriers between 1984 and 1989. In 1984, equal access was not available. Major competitors such as MCI and Sprint did not have equal access in a majority of central offices until 1989. By 1994, equal access was available in 97 percent of the central offices, and was available to all long-distance carriers. Taken together, these changes in market conditions warrant our reconsideration and reevaluation of AT&T's classification. 72. The behavior of the market between 1984 and 1994 suggests intense rivalry among AT&T, MCI and Sprint. Moreover, we note that AT&T's market share fell approximately 33 percent between 1984 and 1994. The fact that the rate of decline of AT&T's market share has decreased during the last five years is not an indication of market power. Rather, it may simply reflect the fact that, since 1990, most customers, including resellers, have had dozens of choices of equal access carriers, and that AT&T's competitors no longer have the advantage of lower access costs that enabled them to underprice AT&T and capture market share. Accordingly, we find the decline in AT&T's market share suggests that AT&T no longer possesses market power. (d) AT&T's Cost Structure, Size, and Resources 73. Several parties claim that AT&T retains market power simply by virtue of its lower costs, sheer size, superior resources, financial strength, and technical capabilities. We do not find that these advantages, by themselves, confer market power on AT&T. As we observed in the Interexchange Competition proceeding, the issue is not whether AT&T has advantages, but "whether any such advantages are so great to preclude the effective functioning of a competitive market." It is not surprising that an incumbent would enjoy certain advantages, including resource advantages, scale economies, long-term relationships with suppliers (including collocation agreements), and ready access to capital. Such advantages, however, do not a fortiori indicate that AT&T has a lower cost structure that can give it an unfair competitive advantage over its competitors. As we discussed in the First Interexchange Competition Order, in comparing cost structures of competing carriers, it is not enough simply to look at access or transport costs. The fact that "AT&T may pay lower transport charges than a competitor in a particular LATA . . . does not mean that its overall transport cost structure is lower than those of its competitors." Moreover, such advantages, if they do exist, do not indicate that AT&T has the ability to control price. Volume and term discounts, for example, are expressly permitted by the Commission so that firms can take advantage of their size. That AT&T is in a position to obtain volume and term discounts from CAPs and LECs does not necessarily confer market power on AT&T. Indeed, there is no evidence that the advantages enjoyed by AT&T with regard to volume and term discounts give AT&T the power to sustain prices profitably above the competitive level. As we noted in the First Interexchange Competition Order, the "competitive process itself is largely about trying to develop one's own advantages, and all firms need not be equal in all respects for this process to work." Nothing in the record in this proceeding demonstrates otherwise. Accordingly, we do not find that AT&T's size or cost structure constitutes persuasive evidence of market power. b. Specific AT&T Service Groupings 74. As we have stated above, AT&T's ability to control the price of individual services within the overall relevant market is not the determining factor in assessing AT&T's dominance in the interstate, domestic, interexchange market. Nonetheless, a number of parties on the record have raised arguments regarding AT&T's alleged market power with respect to specific services. Accordingly, we now examine AT&T's provision of a number of individual services, to assess their effect on AT&T's overall market power. (1) Residential Services Pricing (a) Pleadings 75. Several commenters have argued that trends in prices since 1990 indicate that residential services have not become more competitive and that they may have become less competitive. The Joint Bell Companies claim that there has been a steady upward price trend since 1990 "based on the average price per minute for basic service," and that AT&T, MCI and Sprint have engaged in "lock-step" pricing with six increases in three years. IDCMA asserts that, since AT&T first filed its motion, AT&T has continued to increase prices. Considering both basic rates and discounts, the Joint Bell Companies argue that price-cost margins have risen since 1990, which they claim is indicative of a reduction in competition. In a similar analysis, they claim that AT&T's gross margins (defined as net sales less cost of goods sold divided by net sales) increased between 1984 and 1994. They claim that this increase in profitability is reflected in an increase in AT&T's earnings per share over the same time period. The Joint Bell Companies further argue that AT&T's actual residential price index (API) remained close to or at the Basket 1 price cap index (PCI) over the four years following the imposition of price caps, despite the fact that AT&T's productivity savings exceeded its X-factor, and that MCI and Sprint immediately matched any AT&T increase in residential prices. This, they assert, demonstrates both that AT&T has market power and that residential services exhibited oligopolistic collusion. Finally, as evidence of the lack of competition among AT&T, MCI, and Sprint, the Joint Bell Companies claim that announcements by AT&T of price increases leads to increases in the stock price not only of AT&T, but also of MCI and Sprint. 76. AT&T acknowledges that basic rates have increased, but contends that, after accounting for discounts, AT&T's average revenue per minute, in nominal terms, has decreased. AT&T also claims that the lock-step increases in basic rates are due to the fact that Basket 1 price caps keep prices below cost to low volume customers, and that asymmetric regulation of AT&T creates the artifact of price leadership for basic rates. CSE also asserts that alternative reasons exist for similarity in price changes for AT&T, MCI, and Sprint. CSE notes that AT&T raised its rates after companies nationwide adopted accrual accounting for various retirement benefits. While MCI and Sprint followed suit and increased prices, CSE argues that this makes sense if these companies also changed their accounting method. With respect to the increase in the price-cost margin, AT&T argues that it should be expected that prices would be above marginal cost in a market with high fixed costs. AT&T further claims that, between 1991 and 1994, its average revenue per minute decreased faster than did the average per-minute cost of interstate switched access service. AT&T contends that this comparison shows that overall, its prices have declined by more than the amount of the access charge reductions implemented by the local exchange carriers during this period. 77. The LEC Joint Commenters note, however, that many discount plans are not offered ubiquitously, forcing customers in some rural areas to pay the higher basic rate. (b) Discussion 78. AT&T's pricing of residential services also supports our conclusion that AT&T lacks market power. Our analysis of the record indicates that, between 1991 and 1995, AT&T's best available discounted residential rates for customers with monthly bills over $10.00 fell between 15 and 28 percent, in nominal terms, depending on usage patterns. The record also indicates that MCI and Sprint frequently initiate new discount plans and that AT&T responds. 79. In addition, it appears that an increasing percentage of AT&T's residential customers are selecting discount plans rather than paying AT&T's basic rates. Although the record does not indicate the exact number of AT&T's residential customers who are on discount plans, the Commission has previously noted that, in 1993, discount plans accounted for 33 percent of Basket 1 traffic, while in 1994, calls under AT&T's True Promotions plans accounted for 53 percent of Basket 1 traffic. The size of this increase strongly suggests that the number of customers on discount plans has increased. With respect to the conflicting evidence over whether or not all access cost reductions were passed through to consumers, we find that AT&T presented the only study that specifically isolated domestic interstate revenues. It found that, between January 1991 and December 1994, the total reduction in AT&T's rates exceeded the total reduction in access charges. Further, Taylor and Zona's argument that AT&T's earnings per share increase demonstrates that AT&T has market power is inconclusive for the domestic interstate market, since earnings per share includes profits for all of AT&T's services and products, including equipment sales. 80. Both the decrease in prices for discount plans and the increasing number of customers choosing discount plans over basic residential rates strongly suggest that AT&T unilaterally cannot raise and sustain prices profitably above a competitive level for residential services. That MCI and Sprint often lead in offering promotional discounts is further evidence of the rivalry among the three largest interexchange carriers and of AT&T's lack of market power. 81. We note that concerns expressed about recent increases in basic schedule interstate long distance rates are not based on claims that AT&T has the power unilaterally to raise prices for this service. Rather, the commenters assert that AT&T, MCI and Sprint have coordinated their price changes and that AT&T is the price leader. We acknowledge that the record demonstrates that, since 1991, basic schedule rates for domestic residential service have risen approximately sixteen percent (in nominal terms), with much of the increase occurring since January 1, 1994. Moreover, each time AT&T has increased its basic rate, MCI and Sprint have quickly thereafter matched the increase. In addition, studies in the record, including one submitted on behalf of AT&T, suggest that, if price cap regulation is removed for Basket 1 services, basic residential rates will rise even further. 82. AT&T maintains that lock-step increases in basic residential rates occur because these rates are below cost for low-volume users (i.e., those customers who spend between zero and $3.00 per month in long-distance calls). We believe that, to the extent price caps have kept basic schedule rates below cost, an increase in basic schedule rates is not inconsistent with finding that AT&T lacks the power to control price. In addition, we are not persuaded by the Joint Bell Companies' argument that AT&T has individual market power based on the fact that AT&T's API has remained close to the PCI over a four-year period. As the Joint Bell Companies concede, each time that AT&T raised its basic rates, MCI and Sprint quickly matched the increase. Thus, to the extent that prices would rise if the Basket 1 price cap were removed, this is not evidence of AT&T's individual market power, but perhaps of tacit price coordination. In addition, we note that the Basket 1 API has been below the PCI by at least one percentage point for approximately 12 of the 14 months since August 1994. Further, beginning in early 1995, the Basket 1 API began to drop steadily below the PCI, and that the API is currently 6.2 percent below the PCI. To the extent this trend continues, this would appear to undercut the Joint Bell Companies' argument. Similarly, Dean MacAvoy's argument that AT&T has raised basic rates between 1991 and 1994 and that such price increases lead to the increase in the value of AT&T, MCI, and Sprint stock is not evidence that AT&T possesses unilateral market power. At most, it suggests that there may be tacit price coordination among AT&T, MCI and Sprint. 83. We find that the evidence in the record is conflicting and inconclusive as to the issue of tacit price coordination among AT&T, MCI, and Sprint with respect to basic schedule rates or residential rates in general. For example, as noted, certain evidence shows that the lock-step increases may be due to the fact that price caps have kept basic schedule rates below cost, and that any price leadership by AT&T is a function of the current asymmetric regulatory scheme. To the extent, however, that tacit price coordination may be occurring, the Commission would view this as a matter of serious concern. We believe, however, that this problem, to the extent it may exist, is a problem generic to the interexchange industry and not specific to AT&T. We thus believe these concerns are better addressed by removing regulatory requirements that may facilitate such conduct, such as the longer advance notice period currently applicable only to AT&T, and by addressing the potential issues raised by these concerns in the context of the proceeding we intend to initiate to examine the interstate, domestic, interexchange market as a whole. Because they relate to the industry as a whole, these issues do not preclude our concluding that AT&T lacks the power to raise residential prices unilaterally above competitive levels. Thus, the evidence regarding residential pricing supports our finding that AT&T lacks market power. 84. Finally, we recognize that increases in AT&T's basic residential rates may occur. While not relevant to our determination of whether AT&T meets our definition of non-dominance, we note that AT&T has voluntarily committed to institute two optional calling plans designed to mitigate the impact of such rate increases. Under the plan for low-income customers, AT&T will offer for three years a calling plan that allows low-income residential customers to place one hour of interstate direct dial service at a rate frozen at 15 percent below current basic schedule rates. These customers also may enroll in AT&T's other discount programs. Qualification criteria for customers on this plan will be those established by state public utility commissions for implementing the Commission's Lifeline and Link-up programs. AT&T will extend this offer to customers who participate in the state aid program used to determine qualification in the Lifeline or Link-up in that state, to areas in a state not currently covered by an approved Lifeline or Link-up plan. This plan should ameliorate any potential "rate shock" for low-income customers. 85. AT&T also has voluntarily committed to offer an optional plan that would be targeted to serve low-volume residential customers but that will be available to all. AT&T will offer for three years an interstate direct dial service for low-volume residential consumers that allows them to purchase calling at guaranteed rates. For the first year, callers will pay $3.00 per month for the initial 20 minutes at any time during the day, and calling in excess of the first 20 minutes will be priced on a postalized basis at the rate of $0.25 per minute for peak (Day period) calling and $0.15 per minute for off-peak (Evening and Night/Weekend period) calling. During the second year, the service will be priced at $3.00 for the initial 20 minute period and no higher than $0.27 per minute for peak and $0.16 per minute for off- peak overtime calling. During the third year, the service will be priced no higher than $3.25 for the initial 20 minute period and no higher than $0.27 per minute for peak calling and $0.16 per minute for off-peak overtime calling. AT&T will notify its customers of the availability of these plans through a bill message every third month when their usage in that month is below $10. In addition, AT&T will develop a consumer outreach program that will include, among other things, the following: (i) AT&T will implement a national and local public information program notifying the public of the availability of these offers; (ii) AT&T will inform the consumer advocates participating on the AT&T Consumer Panel and other national and local consumer groups of the availability of these offers; (iii) AT&T will train its customer service representatives on the provisions of these offers and insure their understanding of the application of these offers to a customer's particular calling pattern. 86. AT&T further has committed to file changes to its average residential interstate direct dial services on not less than five business days' notice, if those changes: (1) increase rates more than 20 percent in a single year for customers making greater than $2.50 in calls per month; or (2) increase the average monthly charges more than $.50 per month in a single year for customers making less than $2.50 in calls per month. This determination will be made on the basis of average per minute charges separately for the Day, Evening and Night/Weekend time periods and determining the impact on customers of the proposed change by comparing the existing and proposed price over all minutes of use levels. Such tariff transmittals will be clearly identified as affecting the provisions of this commitment. While we believe the risk of losing significant market share to its competitors will effectively deter AT&T from proposing such rate changes, we note that the Commission has authority to defer the effective date of such changes for the maximum statutory period of 120 days and to suspend the charges for the full five-month period in order to conduct a full investigation if AT&T were to propose such increases. In addition, AT&T has committed to offer for a period of three years an interstate optional calling plan that will provide residential consumers a postalized rate of no more than $0.35 per minute for peak calling and $0.21 per minute for off-peak. 87. With respect to these plans, AT&T states that, in the event of significant change in the structure of the interexchange industry including a significant reprice or restructure of access rates, AT&T may file tariff changes to these plans on not less than five business days' notice. We note that, in considering the effects of such changes on AT&T's commitment to the postalized rate, we will take into account the fact that $0.35 per minute for peak calling and $0.21 per minute for off-peak are greater than the current basic schedule rates. AT&T further states that this commitment does not apply to services provided via access service obtained from a new entrant to a local access market, unless those access rates are comparable to those charged by the incumbent local exchange access provider. (2) Business and 800 Services (a) Discussion 88. AT&T incorporated its pleadings from the Interexchange Competition proceeding into its motion requesting reclassification as a non-dominant carrier. As noted above, the Commission in the Interexchange Competition proceeding found that business services (except analog private line) and 800 services (except for 800 directory assistance) had become "substantially competitive" and, accordingly, streamlined its regulation of those AT&T services. In January 1995, the Commission issued an order that streamlined the regulation of AT&T's commercial services for small business customers after finding that AT&T lacked market power with respect to these services. 89. After reviewing the record established in the Interexchange Competition proceeding and our orders where we found business services to be substantially competitive, we find that the facts that supported our finding of substantial competition also support a finding that AT&T lacks market power with respect to these streamlined services. In addition, we note that, in the 1995 AT&T Price Cap Order, we specifically found that AT&T lacks market power with respect to commercial services for small businesses. (3) Operator Services and Calling Cards (a) Pleadings 90. AT&T asserts that effective competition exists for all services which comprise the interstate, domestic, interexchange market, and that the evidence in the record with regard to operator services justifies classifying AT&T as a non-dominant carrier. Citing numerous technological, marketplace, legal and regulatory factors, AT&T asserts that "[e]very aspect of service in this segment is subject to vigorous competition," and that AT&T's market share of calling card services fell from over 75 percent in 1986 to about 64 percent in 1994. AT&T further asserts that with respect to operator-handled calls, competition reduced AT&T's share by nearly 10 percent from 1993 through 1994. 91. Several commenters dispute AT&T's assertions and contend that AT&T remains dominant in the operator services market segment. These commenters argue that AT&T retains a significant majority of the operator services market segment, that AT&T has proprietary calling cards and billing and collection arrangements with LECs that provide it with an unfair competitive advantage, and that any change in AT&T's dominant carrier status should be deferred pending resolution of other relevant regulatory proceedings. More specifically, CNS cites its previous argument from the 1991 Interexchange Competition proceeding that AT&T retains as much as 90 percent of interexchange operator services. Other commenters suggest other market share estimates of 64 percent and 65 percent or more. PhoneTel also argues that as of November 1993, no studies indicate a significant reduction of AT&T's market dominance. 92. These and other commenters argue that AT&T has exploited its market dominance by introducing proprietary card issuer identifier (CIID) calling cards and has persuaded millions of AT&T and LEC calling card holders to shift to CIID cards. Oncor claims that it and other non-dominant competitors must often react to the market pressures created by AT&T's CIID cards in ways, such as by increasing rates, that result in increased dominance by AT&T. MCI claims that AT&T's CIID cards have enabled it to coerce premise owners into presubscribing their payphones to AT&T because AT&T can validate both LEC and its own calling cards while competitors cannot validate the millions of AT&T proprietary CIID cards. Oncor notes that AT&T currently is the presubscribed long- distance carrier for 65 percent or more of public phone locations. CNS and others claim that AT&T has used anticompetitive calling card strategies to harm other operator services providers (OSPs) for which the Commission formally admonished AT&T. CNS further argues that AT&T has billing and collection agreements with independent LECs that are often unavailable, or are available at less favorable terms, to other interexchange carriers. 93. Sprint argues that, before the Commission grants AT&T's motion, it must remove the remaining barriers to entry to operator services. Sprint suggests that this objective can be accomplished by adopting a billed party preference system. CNS and Oncor, however, assert that adoption of billed party preference would further strengthen AT&T's already dominant position. PhoneTel, Sprint, and MCI argue that any change in AT&T's dominant carrier status in the operator services market segment should await resolution of the billed party preference proceeding. 94. AT&T disputes the assertions that AT&T's proprietary calling cards and billing and collection arrangements provide it with an unfair competitive advantage. It argues that the Commission has found proprietary cards actually promote customer choice. AT&T further argues that its competitors have admitted that intense competition exists in long- distance today with numerous customer choices for all services. AT&T maintains that competition in operator services, just as in all other interexchange services, has been fostered by technological advances, marketplace forces, and regulatory and legal actions. In particular, AT&T notes that the Commission has adopted measures so that callers may use access codes to reach the carrier of their choice for operator service calls, regardless of the carrier to which the phone is presubscribed. In addition, AT&T asserts that the Commission now requires that all interexchange carriers be given the same access to billing and validation data for LEC calling cards as is provided to AT&T. (b) Discussion 95. There is evidence in the record that AT&T's operator services face increasing competition from other OSPs and from providers of prepaid calling cards, and that AT&T's market share of operator services has declined significantly in recent years. The record also shows that AT&T's proprietary calling card may have given AT&T an advantage in obtaining payphone presubscriptions, but that AT&T's share of calling card minutes has not differed significantly from its share of total interstate minutes. We conclude, based on this record, that AT&T's competitive position in the provision of calling card and other operator services does not create market power in the overall interstate, domestic, interexchange telecommunications market. 96. The commenters argue at length that AT&T's use of the proprietary CIID card gives it unfair competitive advantages. We previously have found, however, that there are benefits associated with the use of proprietary cards, such as promoting the "important public interest of. . . consumer choice in the presubscription environment." Pursuant to requirements adopted in Phase I of the Billed Party Preference proceeding, AT&T today "no longer market[s] its proprietary cards using a 0+ message" to gain a competitive advantage with public phone presubscriptions. We also note that the record in a related proceeding shows that by 1992 MCI and Sprint, together, had issued over 32 million proprietary cards. 97. We disagree with the arguments of Sprint, MCI, and PhoneTel that the Commission should defer consideration of AT&T's status as a dominant carrier until the Billed Party Preference proceeding is resolved. The Commission recently sought comment in that proceeding on a suggestion by various parties that the Commission require OSPs to provide rate branding to callers from public phones, and that it should establish benchmarks for OSP rates as an alternative to implementing billed party preference. The reclassification of AT&T as a non-dominant carrier would not affect the Commission's ability to consider and resolve these and other outstanding issues in the Billed Party Preference docket, nor would it limit the remedies available to the Commission in that proceeding. 98. With regard to CNS's argument that AT&T has negotiated advantageous billing and collection agreements with LECs that are often unavailable at the same terms to other OSPs, we note that third-party billing and collection arrangements are no longer regulated under our rules. As the largest OSP, whether dominant or not, AT&T logically must look to that which is most efficient: contracting out its billing and collection functions, or performing that work in-house. Having the option of doing its own billing and collection understandably gives AT&T some advantage in negotiating favorable contracts with LECs. In addition, groups of smaller OSPs have the supplemental option of pooling their resources and setting up clearinghouses to handle the billing and collection for their combined operator services operations. 99. Finally, we note that the Commission has closely monitored operator services in recent years, and the primary problems that we have observed in this market segment have not involved AT&T. Rather, it appears that, to the extent this market is not performing efficiently, this is due to OSPs that charge extremely high rates to unknowing payphone customers. We note that the Commission is moving aggressively to address these problems. For example, the Commission recently issued an order to show cause against an OSP that was the subject of numerous complaints, and we are currently investigating other carriers, none of which is AT&T. More generally, the Commission, in the Billed Party Preference proceeding, will be considering various ways to prevent payphone customers from unknowingly being charged unanticipated rates. Moreover, to the extent that there are problems in this market segment, they do not appear attributable to AT&T. (4) Analog Private Line and 800 Directory Assistance (a) Pleadings 100. AT&T claims that, upon implementation of number portability, the Commission found that 800 services were subject to substantial competition and accordingly streamlined the regulation of those services. In response, commenters point out that AT&T retains its monopoly position in the 800 directory assistance market, and they assert that the Commission itself acknowledges as much. AT&T has not specifically addressed the issue of 800 directory assistance in any of its pleadings. 101. With respect to analog private line service, TRA asserts that within a twelve month period culminating a few months after the Commission adopted further streamlined regulation of AT&T's business services, AT&T proposed a series of dramatic increases in its rates for analog private line service, which inflated some charges by as much as 500 percent. TRA further asserts that despite opposition from a number of its largest customers, AT&T repeatedly declined to moderate these rate increases. Finally, TRA notes that AT&T recently imposed a variety of new rate increases on analog private line service that bring the total rate increases to almost 1000 percent. IDCMA asserts that AT&T's share of private line service market segment by the end of 1994 was 72 percent, dwarfing the ten percent share of AT&T's nearest competitor. IDCMA further asserts that the HHI for this service is a high 5320 and that this demonstrates that the segment is highly concentrated. (b) Discussion 102. The Commission recently declined to streamline its regulation of AT&T's analog private line and 800 directory assistance services. In the Second Interexchange Competition Order, the Commission adopted streamlined regulations for 800 services because of the implementation of 800 number portability, but declined to streamline regulation of 800 directory assistance because that service would not be affected by number portability and therefore would continue to be a monopoly service provided by AT&T. We expressed concern that elimination of price cap restraints for this service would lead to higher prices. 103. With respect to 800 directory assistance service, AT&T has presented no evidence to cause us to change our view that AT&T retains the ability to control prices for this service offering, since it currently is the sole provider of this service. Nevertheless, we do not foresee a significant danger that AT&T will raise substantially the price of this service to the detriment of consumers should the Commission declare AT&T non-dominant in the overall long-distance market. Other entities have indicated a desire to offer competitive directory assistance services, and such new entry would act to restrain any exercise of market power by AT&T. In addition, we note that, in 1994, AT&T's revenues from 800 directory assistance service represented a mere .07 percent (0.0007) of AT&T's total revenues for that year. This amount is so small and insignificant, compared with AT&T's total revenue, as to be de minimis. 104. With respect to analog private line service, the Commission in its 1995 AT&T Price Cap Order declined to remove analog private line services from price caps based on our finding four years earlier that eliminating price cap restraints could lead to higher prices for these services, while adequate substitutes were not available to all users of analog private line services. The Commission, however, noted that analog private line services are being used less frequently as analog private line customers are migrating to digital and virtual private line services. 105. While we recognize that AT&T may have the ability to raise the price of analog private line service above competitive levels, the use of this analog service is declining with the advent of new digital technology and, hence, AT&T's position is unlikely to continue for a sustained period of time. We believe that the analog private line service segment, like 800 directory assistance service, is so small and insignificant relative to the overall interstate, domestic, interexchange market (accounting for only .02 percent (0.0002) of AT&T's total interstate revenues) as to be de minimis. More specifically, we conclude that the record will not support a finding that the absence of close substitutes for these two discrete services demonstrates that AT&T possesses market power in the interstate, domestic, interexchange market. 106. Finally, we note that, for a period of three years, AT&T has voluntarily committed, with respect to 800 directory assistance service and its interstate analog private line service, to limit any price increases for these services to a maximum increase in any year of no more than the increase in the consumer price index. AT&T also has voluntarily committed, for a period of three years, to file such tariff changes increasing the prices for these services on not less than five business days' notice, and to identify clearly such tariff transmittals as affecting the provisions of this commitment. We believe that these commitments effectively address any concerns raised with respect to AT&T's provision of 800 directory assistance and analog private line services. (5) Service to Alaska and Hawaii (a) Pleadings 107. The State of Alaska (Alaska) contends that AT&T should remain classified as dominant in the provision of interstate, domestic, interexchange service to and from Alaska. Alaska notes that the Commission has taken the position that there is one geographic market for interstate, domestic, interexchange telecommunications services. Alaska argues that, if AT&T is reclassified as a non-dominant carrier based on the nature of the market in the Lower 48 states, the Commission will have to reverse its policy on the single geographic market for telecommunications services, because AT&T retains market power and should remain dominant in Alaska. Alaska expresses concern that, given the unique requirements of the Alaska market, any reduction in AT&T's obligation to serve could leave Alaska without service or the benefits of rate integration. The Alaska PUC similarly urges the Commission to maintain AT&T's obligations to provide service to Alaska on the same terms and conditions as throughout the rest of the nation. The State of Hawaii (Hawaii) maintains that the effects of granting AT&T's motion on rate integration, geographic averaging, and universal service have not been adequately addressed in the record. Hawaii expresses concern about the effects on rate integration, because, according to Hawaii, AT&T previously has asserted that it is not required to offer certain services to Hawaii at integrated rates. Hawaii claims that AT&T has also raised questions about the feasibility of continuing to offer MTS and WATS at geographically averaged rates. Finally, Hawaii and Alaska urge the Commission to ensure that the current tariff review procedures regarding geographic deaveraging of rates are not altered if AT&T is classified as non-dominant. 108. ATA, the City of Anchorage (Anchorage), and GCI raise issues related to the merger of AT&T and Alascom. ATA and GCI contend that any declaration of non-dominant status for AT&T should not be applied to AT&T/Alascom. ATA argues that, without the designation of a dominant carrier and its obligation to serve, many communities in Alaska would be left without access to intrastate or interstate service. GCI also claims that, upon AT&T's purchase of Alascom, AT&T/Alascom will have control over monopoly bottleneck facilities in Bush, Alaska. Anchorage contends that the Alaska market is a duopoly, with Alascom and GCI moving their rates in unison with little benefit to the consumer. 109. In response to the AT&T September 21, 1995 Ex Parte Letter and the AT&T October 5, 1995 Ex Parte Letter, Alaska, Hawaii and LEC Joint Commenters express concerns that AT&T's voluntary commitments do not ensure geographically averaged rates. GCI asks the Commission to confirm that AT&T must comply with all requirements imposed on Alascom and AT&T by the Market Structure Order and the Alascom Authorization Order. (b) Discussion 110. The Commission has long supported the policies of geographic rate averaging for interstate, domestic, interexchange services, and of rate integration between the contiguous forty-eight states and various noncontiguous U.S. regions, including Alaska, Hawaii, Puerto Rico and the U.S. Virgin Islands. We remain committed to these policies. 111. We do not believe that our reclassification of AT&T threatens our policies of geographic averaging and rate integration. Our rate integration policy was established with the introduction of satellite technology in the domestic telecommunications market in 1972. In the Domsat II order, the Commission concluded that the distance-insensitive nature of the cost of those facilities provided a sound economic basis to support the integration into the domestic rate pattern of communications services between noncontiguous points and the forty-eight contiguous states. The Domsat II order required any carrier that provided domestic satellite service between the contiguous forty-eight states and various noncontiguous U.S. states and territories to do so pursuant to a plan to integrate its rates and services. The Commission also specifically required AT&T to offer such services. 112. In the early 1980s, the Commission extended various competition-promoting policies to noncontiguous points. For instance, the Commission extended its Competitive Carrier policies to those points. Shortly thereafter, the Commission commenced an inquiry to evaluate its rate integration policy for noncontiguous points in light of its new competitive policies. In 1985, the Commission terminated this inquiry with respect to Hawaii, Puerto Rico, and the Virgin Islands. The Commission concluded, based on the comments received on that notice of inquiry, "that existing rate integration policies and competition in the provision of service to these three points are compatible." The Commission noted, however, that the comments on the notice of inquiry "offered no consensus concerning the compatibility of rate integration and competitive policies in the Alaska interstate telecommunications market." The Commission, therefore, established a Joint Board for a recommendation on any changes necessary to harmonize rate integration and competition in the Alaska interstate market. 113. Between 1986 to 1992, the Joint Board on numerous occasions solicited comments, data, and proposals regarding the Alaska interstate market structure. In these orders inviting comments, the Commission reaffirmed the continuing obligation of AT&T to maintain integrated rates for Alaska. In 1993, the Joint Board recommended that the Commission adopt a new market structure. As part of its recommendations, the Joint Board "recommended that AT&T be responsible for providing Alaskan customers with interstate MTS at the same integrated rate levels and under the same terms and conditions available to other AT&T customers in the rest of the nation." The Joint Board's rate integration recommendation for interstate services to and from Alaska was not based on AT&T's dominant classification, but rather on AT&T's existing rate integration obligations. In its Market Structure Order, the Commission adopted the Joint Board's recommendations, including the recommendation to require AT&T to provide integrated rates for interstate services to and from Alaska. Because AT&T's rate integration obligations were not premised on its dominant carrier classification, we conclude that AT&T's reclassification does not affect the continuing effectiveness and validity of those orders. 114. In addition, even if those orders would not continue to remain in effect, AT&T has voluntarily committed to continue to comply with the Commission's orders regarding rate integration, and has committed to comply with all the obligations and conditions set forth in the Alascom Authorization Order, the Market Structure Order, and the Final Recommended Decision. Finally, AT&T has committed to file any tariff containing a geographically deaveraged rate on five business days' notice. 115. We believe that our outstanding orders, together with AT&T's explicit commitments, adequately address concerns that granting AT&T's motion will lead to the loss of both rate integration for residents of Alaska, Hawaii and other locations and geographically averaged rates. We remain committed to the policies of rate integration and geographic averaging. At the same time, we recognize that these policies originally were developed for an interstate, domestic, interexchange market that bears little resemblance to the current market. Accordingly, we intend to examine in our upcoming review of this market the implication of the changes in the interexchange market for our rate integration and geographic averaging policies. (6) Other Services (a) Pleadings 116. A number of parties who resell AT&T services take issue with AT&T's characterization of the long distance industry as competitive and with AT&T's claim that it lacks market power. They claim that AT&T is uniquely positioned to engage in anticompetitive behavior that inhibits resale, and they allege a pattern of behavior by AT&T that is contrary to our policies promoting resale. They suggest that the Commission adopt a set of safeguards designed to ensure that, when AT&T implements tariff changes that may adversely impact resellers, resellers have adequate opportunity to review and challenge the changes before the tariff goes into effect. 117. Several commenters argue that AT&T has engaged in a pattern of anticompetitive conduct specifically focused on the resale industry, and that such conduct precludes a public interest finding supporting the deregulatory measure requested by AT&T. For example, some commenters state that AT&T has refused or attempted to refuse to permit the resale of certain Tariff 12 Options in violation of our resale policies. 118. A number of parties dispute whether AT&T truly lacks market power when dealing with resellers. TRA contends that AT&T, with its sixty percent market share and non-dominant status, could engage in predatory pricing strategies, as well as other strategies, such as making design changes that render competitors' products incompatible with the customer's product system, thereby raising the costs of competitors and driving them out of the market. TRA also expresses concern about the risk of tacit collusion among AT&T, MCI, and Sprint. TRA characterizes these carriers as "oligopolists" controlling 88 percent of the interexchange market. TFG alleges that, because resellers need AT&T more than AT&T needs the resellers, and because of AT&T's large resources, AT&T can evade Commission policies, knowing that resellers have little choice but to accede to AT&T's demands. Affinity disputes AT&T's characterization of easy entry in the long distance market through resale. ETS contends that the fact that the Commission has had to suspend, investigate and sometimes reject AT&T's tariff filings is evidence of AT&T's anticompetitive behavior and market power. 119. Several resellers express concern that allowing AT&T to file tariff revisions on one day's notice may threaten the continued viability of the resale market. PSE and NEWS contend that because the "filed rate doctrine" dictates that tariff terms and conditions prevail over any inconsistent language in a contract, AT&T can unilaterally modify or abrogate a reseller's service arrangement at any time by filing an adverse tariff. PSE and NEWS argue that, absent a 14-day notice period, such a revision would take effect with no opportunity for affected customers, resellers, or Commission staff to block it. PSE and NEWS further contend that despite resale mandates, and the increasing level of competition in the interstate marketplace, AT&T has repeatedly used the power of preemptive tariff filing to revise unilaterally or abrogate long-term deals to the disadvantage of resellers and even AT&T's commercial customers. 120. CNSUG and GE Capital Exchange contend that we should grant AT&T's motion only if we adopt safeguards designed to protect resellers from termination of service offerings on short notice. They contend that we should require AT&T to: give advance notice to customers of any tariff filing that materially alters negotiated agreements; gain the consent of all such affected customers before making such a filing, with such filing being effective on at least 14 days' notice; treat any lack of such consent to a proposed tariff change as prima facie evidence of its unlawfulness; allow any affected customer that has not consented, either to terminate its service arrangement without liability or to enforce the unchanged term; and provide a reasonable period of rate stability to permit service migration if the customer chooses to terminate its service agreement. 121. The Ad Hoc Telecommunications Users Committee (Ad Hoc Committee) contends that allowing AT&T to file tariff revisions regarding long-term service arrangements on less than 14 days' public notice would violate the Act's provision for pre-effectiveness review of tariff revisions. Ad Hoc Committee argues that, while the market would eventually punish a company that makes a practice of breaching its contracts, such corrections provide no timely relief for wronged parties, who require more than one day to assure themselves that any tariff revisions accurately reflect the bargains struck with the carrier. Therefore, Ad Hoc Committee argues, it is important for customers to have 14 days to review tariff revisions actually filed before they become effective. TRA also would retain the requirement that AT&T obtain prior approval under Section 214 of the Act before discontinuing service. 122. Some commenters further propose that the Commission require AT&T to make a special showing to support any tariff changes that will modify long-term contracts. IBM suggests that any tariff that abrogates provisions of a long-term contract should be treated as unreasonable, unless AT&T showed that "drastically changed circumstances" had made the contract terms inconsistent with the public interest. API would require AT&T to justify alterations of existing long-term contracts by a "substantial cause" showing, and would make any abrogation of an AT&T commitment not to modify its rates, terms and conditions per se unlawful under Sections 201(b) and 205 of the Act. 123. Several parties also state that the complaint process under Section 208 of the Act fails to provide prompt and effective relief to resellers harmed by AT&T's practices. TFG contends that the Commission does not have the resources to address in a timely manner the large number of complaints against AT&T. TFG adds that litigation is not a viable alternative to the tariff review process because of the high costs of litigation. PSE and NEWS maintain that enforcement proceedings are not adequate because such proceedings have limited remedies, and that Section 208 complaints are far more resource-intensive than the tariff review process. TRA believes that granting AT&T's petition will nullify many of the Commission's mechanisms for enforcing the Act. 124. In response, AT&T reiterates that the interstate interexchange marketplace is competitive and disputes assertions made by the commenters about AT&T's treatment of resellers. AT&T describes as "fanciful" claims that AT&T has been able to prevent resale of its Tariff 12 and SDN services. AT&T states that at least nine Tariff 12 options are being resold and that there are at least 80 resellers of its SDN services. 125. AT&T also argues that the pendency of lawsuits does not establish the validity of the specific facts or legal claims alleged therein. AT&T argues that even if the resellers' claims were true, those claims would not warrant a finding that AT&T has market power. AT&T argues that services that are the subject of resellers' complaints compete with comparable offerings of MCI, Sprint, and other carriers, among which the Commission has found competition to be thriving. AT&T has estimated that it will provide only 20.3 percent of the services that are resold in 1996, down from 25.6 percent in 1994. 126. AT&T argues that competitive market forces will fully protect consumers and business customers from anticompetitive behavior by any interexchange carrier, because these forces drive all carriers to either act reasonably or face mass defection by their customers to other carriers. AT&T contends that maintenance of the current dominant/non-dominant dichotomy makes no sense, because regulatory requirements that apply differently to AT&T and its competitors harm consumers, and handicap AT&T's ability to compete effectively across the entire market. 127. AT&T argues generally that "advance tariff review procedures and other constraints serve only to provide competing firms with a 'regulatory forum to challenge and delay' each other's service and pricing innovations, resulting in the protection of competitors rather than consumers." It claims that such constraints impede competition and impose costs on users. As an example, AT&T explains that, when it files a tariff revision aimed at competing with other carriers' new services, competing non-dominant carriers can challenge the AT&T offering before the Commission during the 45-day notice period. Meanwhile, the competing carriers can then duplicate AT&T's proposed offering on only one day's notice, before AT&T's offering emerges from the tariff review process. In this way, AT&T asserts, consumers are "deprived of prompt action by AT&T to reduce prices or introduce innovative programs that save consumers real dollars. AT&T notes that many states have eliminated such regulatory differences. Moreover, AT&T contends that our consideration of the tariff-related conditions suggested by commenters, such as a 14-day notice period, is impermissible in this proceeding because such conditions do not address the issue of whether AT&T meets the Commission's test for non-dominance. 128. CSE supports AT&T's claims regarding substantial competition in the interexchange market and argues that resale carriers are viable competitors in that market. CSE maintains that, even if AT&T were found guilty of the transgressions alleged by the resellers, it is not clear why classifying AT&T as non-dominant would enhance AT&T's ability to engage in the allegedly anticompetitive practices. CSE argues that, in any event, the Commission need not apply the full panoply of dominant carrier regulations to address and correct limited transgressions. (b) Discussion 129. We have closely considered the commenters' claims that AT&T possesses market power with respect to resellers and that its alleged anticompetitive behavior toward resellers demonstrates the existence of such market power. According to AT&T's calculations, which are the only evidence in the record, AT&T had only 25.6 percent of the resale market segment in 1994. By 1996, AT&T estimates that its share will have dropped to only 20.3 percent of the approximately $5.6 billion in services that will be resold. Thus it appears that adequate alternative sources of supply exist for resellers that do not wish to take service from AT&T. Moreover, AT&T's small and shrinking market share represents persuasive evidence that AT&T lacks market power in this market segment. Thus, consistent with our earlier findings regarding the structure and performance of the overall, interstate, domestic, interexchange market, we conclude that the record in this proceeding will not support a finding that AT&T can exercise unilateral market power over the resale industry. 130. The opposing commenters assert that AT&T does not now act reasonably with regard to resellers, even under dominant carrier regulation, and will act more unreasonably if freed from such regulation. To support these contentions, they describe various pending disputes between AT&T and certain resellers. AT&T, however, disputes many of the facts alleged by the commenters in support of their claims. For example, although the opposing commenters claim that AT&T refuses to allow resale of SDN services and certain Tariff 12 options, AT&T contends that those services are currently offered by resellers. We think it significant that prohibitions against unjust and unreasonable rates, practices, and discrimination in Sections 201(b) and 202(a) of the Act apply equally to dominant and non- dominant carriers. The status of AT&T as either a dominant or non-dominant carrier, therefore, does not alter its obligation to comply with those sections of the Act. 131. Several commenting parties suggest that, even if we find AT&T to be non- dominant, we should require AT&T to abide by certain tariffing requirements that are not part of the regulatory scheme that we apply to non-dominant carriers. After consideration of all of these proposals, we conclude that the measures suggested by the commenters should not be adopted as part of our determination that AT&T is non-dominant. Most prominent among the proposals advanced by the commenters is the notice period before tariff revisions can take effect. The commenters generally favor a notice period longer than the one-day notice period applicable to non-dominant carriers, particularly for revisions to long-term or contract-based arrangements. We have previously held that advance scrutiny of the interstate tariffs of non- dominant carriers is unnecessary, and that post-effective tariff review and our complaint process provide adequate means of redress. We will be reexamining these conclusions as they apply to all interexchange carriers in a new proceeding, but, pending the outcome of that proceeding, we are not persuaded that we should treat AT&T differently from other non- dominant carriers. We also note that, contrary to suggestions by some commenters, nothing in the Act requires pre-effectiveness tariff review. 132. With respect to concerns that customers will not have sufficient opportunity to ensure that AT&T accurately implements in its contract tariffs the underlying contractual agreements, we note that AT&T is already obliged to file contract tariffs that reflect the terms of the underlying agreements. AT&T is also required by Sections 201 and 202, respectively, to offer service pursuant to rates, terms and conditions that are just, reasonable and not unduly discriminatory. In enforcing Sections 201 and 202 with respect to contract tariff services, we have the authority to require the filing of the underlying contract to ensure that the contract tariff comports with that agreement. In complaint and enforcement proceedings, we will carefully scrutinize AT&T's contract tariff practices to ensure that its contract tariffs accurately reflect the underlying agreements reached between AT&T and its customers. 133. Certain commenters raise issues implicating the "substantial cause" test. The "substantial cause" test holds that tariff revisions altering material terms and conditions of a long-term service tariff will be considered reasonable only if the carrier can make a showing of substantial cause for the revisions. In response to concerns of IBM and API that AT&T be required to justify any changes to contract-based tariffs, we note that we recently affirmed the applicability of the "substantial cause" test to tariff revisions that alter material terms and conditions of a long-term contract, and we clarified that this test applies to any unilateral tariff modification by non-dominant as well as dominant carriers. Accordingly, if AT&T files a modification to a contract-based tariff, we will take into account that the original tariff terms were the product of negotiation and mutual agreement, and we will consider on a case- by-case basis, in light of all the relevant circumstances, whether a substantial cause showing has been made. We will apply the substantial cause test in this way in any post-effective tariff investigation, pursuant to Section 205, and in complaint proceedings. We also will consider, on a case-by-case basis, whether to allow customers to terminate contracts without liability. 134. Finally, we note that AT&T has voluntarily committed to implement certain measures that are designed to address criticisms of its business practices that resellers have raised in this proceeding and elsewhere. AT&T represents that the following reflects an agreement with the Telecommunications Resellers Association, and AT&T has committed to comply with this agreement: As a general practice, AT&T grandfathers both existing customers and subscribed customers (i.e., customers who have submitted a signed order for service) when it introduces a change to a term plan (including Contract Tariffs, term plans under Tariffs 1, 2, 9, and 11, Tariff 12 Options and Tariff 15 CPPs), and it commits to continue that process. In exceptional cases, however, grandfathering may not be appropriate either because: (1) a change is necessitated by typographical errors, a service inadvertently priced below costs, rate changes where no individual rates (post-discount) are increased, or other comparable circumstances, or (2) the change is necessary to bring clarity to a non- rate term or condition, where it is necessary to treat all customers alike (such as a change to the provisions for how orders are processed, but not including changes to the body of Contract Tariffs, Tariff 12 Options or Tariff 15 CPPs). In such circumstances, AT&T commits for a twelve-month period to offer its customers the following additional protections not required of non-dominant carriers: - where AT&T makes any change to an existing term plan, AT&T will afford the affected customers 5 days meaningful advance notice of the tariff filing to give the customer the opportunity to object; provided, however, that for changes to discontinuance with or without liability, deposits and advance payments, or transfer or assignment of service, AT&T will file on 14-days' notice. (AT&T would have the unaffected right to change underlying tariff rates -- such as a general change to SDN rates -- unless the term plan protected the customer from such changes.) Where the affected customer(s) agrees to the revision, AT&T will note that agreement in its transmittal letter and file the change on 1 day's notice. Where the affected customer objects to the change, AT&T will file the change with the Commission on 6 days' notice. With respect to the 14 or 6 days notice filings, the substantial cause test will be applicable to the same extent as it is today. 135. AT&T has also voluntarily committed to report to the Common Carrier Bureau and to the Telecommunications Resellers Association Executive Board, on a quarterly basis, its performance in processing reseller orders. This commitment is for a term of one year. In addition, for at least twelve months, AT&T will provide a single point of contact to receive reseller complaints not resolved through the first point of contact, the AT&T account manager. Finally, AT&T represents that it has agreed with the Telecommunications Resellers Association to establish alternative dispute resolution procedures: AT&T is willing to establish a quick, efficient, commercially-oriented process for resolving disputes with its reseller customers. AT&T is willing to enter into mutually agreeable private party arbitration agreements with these parties. AT&T is also willing to develop with the Telecommunications Resellers Association Executive Board a model two-way Arbitration Agreement. AT&T would be willing to enter into such an agreement with any of its reseller customers for resolution of commercial disputes between the reseller and AT&T under the following guidelines: a) The Arbitration Agreement would be based on the United States Arbitration Act and the Commercial Arbitration Rules of the American Arbitration Association. b) The Arbitration Agreement would bind each party to arbitration as the exclusive remedy for any covered claims that arise in the period covered by the agreement. The covered period initially would be twelve months, but the reseller will be permitted to end the covered period earlier by providing at least 30 days prior written notice. c) Covered claims would include all claims between the parties relating to tariffed services, the carrier-customer relationship between the parties, or competitive practices, except claims that a tariff provision or practice is unlawful under the Communications Act would not be covered claims. Covered claims would include, for example, claims that AT&T has misapplied or misinterpreted its tariffs, that the customer has failed to comply with its tariff obligations, or that either party has engaged in unlawful competitive practices such as misrepresentation or disparagement. d) The Arbitration Agreement would provide for a 90 day arbitration process, unless the parties agree to a longer period. 136. MCI argues that AT&T's commitment in its September 21, 1995 letter to grandfather, at its discretion, existing customers adversely affected by unilateral contract changes (permitting them to receive AT&T performance on the same terms and conditions as the original contract), or allowing them to terminate their agreements with AT&T without liability if they pay under utilization charges, is "patently anti-consumer." We note, however, that AT&T's October 5, 1995 Ex Parte Letter clearly addresses the concerns raised by MCI. We believe that the commitments proffered by AT&T in its October 5, 1995 Ex Parte Letter contribute to addressing the tariff-related concerns raised by the commenters in this proceeding, and we therefore order AT&T to comply with these voluntary commitments. 137. We also note that some of the tariff-related issues raised by commenting parties transcend the scope of this proceeding. For example, questions concerning the application of the filed rate doctrine to contract tariffs may arise with respect to carriers other than AT&T. We intend to examine these and other questions in the context of our review of our regulatory scheme governing the interstate, domestic, interexchange industry. c. Summary of Findings and Conclusion 138. Under our Competitive Carrier paradigm, a carrier is to be declared dominant only if it possesses market power in the relevant product and geographic market. Conversely, a carrier qualifies as non-dominant if it lacks market power in the relevant market. In the Fourth Report and Order, the Commission defined market power alternatively as the "ability to raise and maintain price above the competitive level without driving away so many customers as to make the increase unprofitable," and as the "'ability to raise prices by restricting output.'" In the Fourth Report and Order, the Commission further found that the relevant product market for assessing whether a carrier was dominant was the market for "all interstate, domestic, interexchange telecommunications services," and that there were no relevant submarkets. As discussed above, we are applying that market definition here. Also, as discussed, we are deciding whether to grant AT&T's motion to be declared non- dominant, on the basis of whether AT&T still possesses market power in the overall market for interstate, domestic, interexchange telecommunications services. Under this standard, a finding that a carrier possesses some ability to raise and maintain prices for one or more discrete services does not require that the carrier be classified as dominant. 139. Applying this standard to the record in this proceeding leads us to conclude that AT&T lacks market power in the relevant market -- that is, the overall market for interstate, domestic, interexchange telecommunications services. In arriving at this conclusion, we have applied well-accepted principles of economics and antitrust analysis. More specifically, we have examined such market structure factors as supply elasticity, demand elasticity, market share, and trends in market share. In addition, we have considered other indicia of market conduct and performance, including price levels and trends in prices over time. 140. We believe that our analysis of these general market characteristics supports a finding that AT&T lacks market power in today's market for interstate, domestic, interexchange telecommunications services. This finding is also supported by evidence in the record concerning market conduct and performance, including levels in prices and trends in prices over time. 141. We conclude, in light of the fact that business, 800 and residential services constitute the vast majority of the interstate, domestic, interexchange services market, that the market-structure characteristics and the indicia of market conduct and performance all indicate that AT&T lacks market power in the relevant product and geographic market. Accordingly, we find that AT&T lacks market power in the interstate, domestic, interexchange telecommunications market. 142. We acknowledge that there is evidence in the record indicating that AT&T may have the ability to control prices with respect to certain narrow, specific services having de minimis revenues (specifically, 800 directory assistance and analog private line) when compared to total industry revenues. That does not mean, however, that AT&T has market power in the domestic, long-distance market as a whole. Moreover, we believe AT&T's voluntary commitments will effectively restrain AT&T's exercise of any market power it may have with respect to these narrow service segments. We similarly recognize that AT&T's proprietary calling card may have given AT&T an advantage in obtaining payphone presubscriptions. We conclude, however, that in light of AT&T's decreasing market share of operator services, and the substantial increase in the use of prepaid calling cards, any market power AT&T may possess in the operator services market will not materially affect its power to control prices in the overall interstate long-distance market. We likewise do not believe that the concerns raised about the possible effects on rate integration of reclassifying AT&T as non-dominant constitute evidence of AT&T's market power. As discussed above, our policy of rate integration will not be affected by our reclassification of AT&T. Finally, with respect to AT&T's possible market power with respect to resellers, we find that AT&T's small and shrinking market share constitutes persuasive evidence that AT&T lacks market power in this market segment. We further find that AT&T's activities with respect to resellers do not constitute persuasive evidence that AT&T has power to control prices in the overall interstate, long-distance market. 3. Other Arguments Raised As To Why AT&T Should Not Be Declared Non- Dominant 143. In this section, we address various arguments raised in the record that do not relate directly to the question of whether AT&T possesses market power, but rather concern possible effects of declaring AT&T non-dominant. More specifically, we address the following issues: (1) whether reclassifying AT&T will lead to geographic rate deaveraging; (2) whether reclassifying AT&T will result in its anticompetitively bundling of CPE with long distance services; (3) whether the reclassification of AT&T must be done within the context of a rulemaking; and (4) whether the Commission should impose various conditions on AT&T before it reclassifies it as non-dominant. We conclude that none of the concerns articulated by the parties justifies the continued regulation of AT&T as a dominant carrier. a. Geographic Rate Averaging (1) Pleadings 144. LEC Joint Commenters assert that the Commission, in numerous orders, has stated that its tariff review process provides sufficient insurance that toll rates will be geographically averaged. They note that the Commission has stated that "any [AT&T] filing that proposed geographically deaveraged rates would be subject to the full 90-day notice period . . . [b]ased on these safeguards, we do not believe that specific regulation requiring geographic toll rate averaging are necessary." LEC Joint Commenters further argue that, because many AT&T discount plans are not offered ubiquitously, some rural areas are forced to pay the higher basic rate, while other customers can take advantage of the discount plans. This disparity, LEC Joint Commenters assert, amounts to geographic toll rate deaveraging. Thus, LEC Joint Commenters urge the Commission to mandate geographic toll rate averaging, and to propose specific rules to enforce its policy in favor of geographic toll rate averaging in cases where carriers are entitled to streamlined tariff review. LEC Joint Commenters further urge the Commission to ensure that AT&T's discount plans and promotions are offered to all customers in all geographic areas, regardless of AT&T's dominant status. 145. LEC Joint Commenters maintain that the Commission should reaffirm its commitment to enforcing its fundamental policy against rate deaveraging, and should require nationwide availability of optional calling plans. They further argue that the Commission should require AT&T to continue to serve rural areas without degrading service unless it obtains consent under Section 214, and that the Commission should adopt rules, where necessary to compensate for streamlining the tariff review process and relaxing other common carrier requirements, in conjunction with its decision on AT&T's request for reclassification as a non-dominant carrier. (2) Discussion 146. Although the Commission has never adopted specific regulations requiring geographic toll rate averaging, we have endorsed a strong policy favoring geographically averaged rates. As LEC Joint Commenters note, the Commission has indicated it would closely scrutinize any AT&T tariffs that proposed to deaverage rates. LEC Joint Commenters are concerned that the one-day notice period that would apply to AT&T tariff filings if AT&T were declared non-dominant would be insufficient to prevent AT&T from placing geographically deaveraged toll rates into effect. We note, however, that AT&T has made certain voluntary commitments with respect to geographic rate averaging. Specifically, AT&T has committed to file any new tariffs that depart from its traditional approach to geographic averaging for interstate residential direct dial services (e.g., geographically specific tariffs) on five business days' notice, and to identify clearly such tariff transmittals as affecting this commitment. This commitment will continue for three years, unless the Commission adopts rules addressing this issue for all carriers or there is a change in federal law addressing this issue. As noted above, in the meantime, we intend to examine, in the proceeding to be initiated, this policy in light of changes in the interstate, domestic, interexchange market since the time that policy was originally established. b. Bundling of Customer Premises Equipment (1) Pleadings 147. MCI and IDCMA argue that, if AT&T is declared non-dominant, AT&T will bundle equipment with services in an anticompetitive manner. These commenters argue that, if tariff regulation of AT&T is diminished, AT&T, in order to offset reduced interexchange service revenues, will have an incentive to tie CPE purchases to interexchange service purchases, and that this will exclude and disadvantage competing CPE suppliers. IDCMA argues that AT&T has sought to "lock in" CPE sales by adopting a strategic pricing program. IDCMA also contends that, because transmission service represents almost 80 percent of a customer's overall cost of establishing and maintaining a network, AT&T's ability to offer special discounts on transmission services gives customers an incentive to use AT&T as their system integrator. IBM asserts the importance of maintaining nonstructural safeguards to protect the CPE and enhanced services marketplaces and expresses concern that, if AT&T is reclassified as a non-dominant carrier, these safeguards will no longer be imposed on AT&T. Finally, MCI argues that, if AT&T is allowed to bundle equipment with interexchange services, it would be able to offer anticompetitively low prices to particular customers by discounting equipment prices to levels unavailable to other customers. 148. AT&T responds that separate and distinct regulatory obligations, including Commission rules preventing bundling, will continue to apply to AT&T and to all other interexchange carriers even if AT&T is declared non-dominant. AT&T further asserts that these issues need not be addressed in the present proceeding as there is no basis for adopting additional rules that apply only to AT&T. (2) Discussion 149. We reject as inapposite the argument that reclassification of AT&T as a non- dominant carrier will enable it to bundle equipment with services in an anticompetitive manner. As AT&T notes, Commission rules preventing bundling of CPE and basic services will continue to apply to AT&T and to all other interexchange carriers even if AT&T is declared non-dominant. Thus, the argument has no bearing on the question of whether we should reclassify AT&T as a non-dominant carrier. c. Procedural Issues (1) Pleadings 150. CNS argues that, because AT&T was declared dominant in a rulemaking proceeding, and because other determinations of non-dominance have been done in rulemaking proceedings, the Commission therefore can only reclassify AT&T as a non- dominant carrier in a rulemaking proceeding. It also argues that this issue "is too important to be decided without the publication of notice in the Federal Register." AT&T argues that this motion is not a request for rulemaking and only entails a declaratory ruling. AT&T also notes that it has not requested any rule changes that would require a rulemaking proceeding. UTC urges the Commission to treat AT&T's motion as a petition for rulemaking and to initiate a full investigation. It claims that a full investigation may reveal: (1) whether there are any AT&T services that are not subject to competition for which regulation would be necessary; and (2) whether the foreseeable evolution of the interexchange market may alter existing competitive conditions, for example through mergers, such that reclassification of AT&T would not be appropriate. API, however, argues that the Commission already possesses a sufficient record to resolve the issue of AT&T's regulatory status. IDCMA requests that a two-year deregulatory moratorium be placed on AT&T if the Commission grants AT&T's motion, to allow the Commission to gather information about the marketplace and the impact of reclassifying AT&T in this market. NYNEX adds that, if AT&T is classified as non-dominant for interexchange service, then the Commission should also declare that all other providers of long-distance service are non-dominant and subject to streamlined regulation. ACTA and Ad Hoc IXCs claim that the Commission may not relax its regulation of AT&T until it undertakes a cost-benefit analysis. Finally, BellSouth claims that because AT&T is making certain voluntary commitments, it is not truly being reclassified as a non-dominant carrier, but as a "semi-dominant" carrier, subject to price regulation and tariff filing requirements somewhere between those applied to dominant and non-dominant carriers. It thus argues that the Commission must institute a rulemaking if it wishes to create a new classification under which to regulate AT&T. (2) Discussion 151. This is not a rulemaking proceeding. Rather, AT&T's motion amounts to a request for a declaratory ruling that AT&T should no longer be classified as a dominant carrier within the Commission's existing rules and policies. The fact that we declared AT&T dominant in the rulemaking proceeding that established our generic Competitive Carrier rules and policies does not make that declaration a rule. First, it is not codified in our rules. Second, while portions of the First Report and Order are in the nature of uncodified rules, the decision to declare AT&T dominant was an application of the rules and policies adopted in the First Report and Order to a specific entity, AT&T. The declaration of dominance regarding AT&T was an adjudicative decision, not a rule of general applicability. In any event, we note that we have in fact received broad public comment on AT&T's request. Thus, we reject UTC's call for a "full investigation" through a rulemaking proceeding, as we already have a full and adequate record before us. 152. We reject IDCMA's request that a two-year moratorium be placed on AT&T's reclassification. As previously discussed, we find, based on the record evidence, that AT&T lacks market power in the interstate, domestic, interexchange market. In addition, as previously discussed, AT&T has offered voluntary commitments that are intended to serve as "transitional" arrangements that will address concerns raised in the record about the short term. We believe these commitments may alleviate these concerns during this period of regulatory transition. More importantly, we intend to initiate a proceeding to consider whether, in light of our conclusion that no carrier is dominant in the domestic long-distance market, we need to modify our existing regulatory scheme for interexchange carriers. 153. We likewise reject the argument of ACTA and Ad Hoc IXCs that we cannot reclassify AT&T until we have completed a cost-benefit analysis. In this proceeding, we are simply considering whether AT&T still possesses market power in the domestic long-distance market; no cost-benefit analysis is required here, since that analysis was conducted in the Competitive Carrier orders. 154. In the Fifth Report and Order, the Commission stated that, if BOCs were allowed to provide long-distance services, "we would regulate the BOCs' interstate, interLATA services as dominant until we determine what degree of separation, if any, would be necessary for BOCs or their affiliates to qualify for nondominant regulation." As BOCs are currently prohibited from providing long-distance services by the MFJ, we have made no determination about the degree of separation, if any, needed for BOCS and their affiliates to be declared non-dominant. This issue is beyond the scope of this proceeding and we therefore reject NYNEX's argument that, if AT&T is declared to be a non-dominant carrier, we should declare all providers of long-distance services to be non-dominant. 155. We also reject BellSouth's claim that AT&T's voluntary commitments create a "semi-dominant" carrier classification that can be created only via rulemaking. As stated above, our conclusion that AT&T is non-dominant is not based upon the voluntary commitments offered by AT&T in its September 21, 1995 Ex Parte Letter (as clarified in its October 5, 1995 Ex Parte Letter), but on the economic information in this record regarding AT&T's position in the overall relevant market. The voluntary commitments assuage concerns raised in the record about the impact of AT&T's reclassification pending our further examination of the state of the interexchange market. AT&T's independent voluntary commitments do not, however, create a new carrier classification. d. Miscellaneous Issues (1) Pleadings 156. MCI argues that reclassification of AT&T as a non-dominant carrier should be subject to certain conditions. These conditions include: (1) "general availability" requirements, whereby each tariffed AT&T product must be available to users other than the customer for whom the offering was designed; (2) prohibitions on resale restrictions by AT&T; (3) a requirement that AT&T unbundle transmission services and equipment; (4) a prohibition against AT&T's use of patent rights to impede long-distance competition; and (5) a requirement that AT&T obtain access services under the same terms and conditions as its competitors. 157. CSE dismisses the claim that AT&T's actual or claimed ownership of patents could inhibit competition. Assuming AT&T does hold patents in crucial equipment, CSE argues that there is a maximum amount customers are willing to pay for long-distance service produced using the patented equipment or process and that AT&T cannot use its control over patents to gain monopoly profits in excess of those associated with the patents themselves. 158. MCI responds that AT&T has the power to extract license payments and thereby erect competitive barriers for its smaller competitors. MCI contends that because competitors cannot escape the cost burdens imposed, AT&T's ability to exercise patent rights so as to raise competitors' cost, amounts to de facto control in the affected market. 159. IDCMA argues that, as a condition to deregulating AT&T, the Commission should: (1) require AT&T to comply with all regulations currently applicable to AT&T; and (2) require AT&T to comply with all applicable nonstructural safeguards, such as network information disclosure, customer proprietary network information, cost allocation and affiliate transaction rules. AT&T argues in response that the obligations IDCMA references "will apply, or not, irrespective of AT&T's classification so they do not raise any issues that need to be addressed here." (2) Discussion 160. We do not believe it necessary or desirable to impose the proposed conditions on AT&T. Reclassification of AT&T will have the effects described in paragraph 12 above. The existing Commission decisions and regulations that will continue to apply to a non- dominant AT&T (which include, inter alia, the referenced nonstructural safeguards), as well as the complaint and enforcement processes, are adequate to prevent AT&T from engaging in the kinds of practices that the proposed conditions are aimed at preventing. In addition, as AT&T states, the referenced currently applicable rules will continue to apply to a non-dominant AT&T, as will the Computer II requirements, including those regarding the unbundling of basic and enhanced services. We also find no basis for concluding that AT&T patents should preclude us from finding AT&T non-dominant. Even assuming the validity of AT&T's patents, no party has shown that these patents have had or will have any material effect on the functioning of a competitive market. e. RBOC Entry Into the Interexchange Market (1) Pleadings 161. The Joint Bell Companies, CSE and Ameritech argue that the Commission should not grant AT&T's motion. Rather, they urge us to act on the RBOCs' rulemaking petition to allow RBOC entry into the long-distance market. WilTel disagrees with the Joint Bell Companies' comments, arguing that the proper regulatory response to AT&T's motion is to allow local exchange carriers into the interexchange market. WilTel argues that the Commission should instead preserve regulatory safeguards that have permitted competition to develop. Sprint counters that the issues raised by the RBOCs are outside the scope of the instant proceeding and are irrelevant until the MFJ is revised. (2) Discussion 162. We agree with Sprint that the arguments made by the RBOCs are beyond the scope of this proceeding. Indeed, this Commission lacks the authority to address the RBOCs' request to enter the interstate long-distance market. Furthermore, the decision on whether RBOCs should be allowed into the long-distance market is not relevant to the issue of whether AT&T should be classified as non-dominant. V. CONCLUS ION 163. In light of the above, we conclude that AT&T has demonstrated that it lacks market power in the overall interstate, domestic, interexchange market, and accordingly we grant AT&T's motion for reclassification as a non-dominant carrier. We also accept all of the voluntary commitments stated by AT&T in its September 21, 1995 Ex Parte Letter (and clarified in its October 5, 1995 Ex Parte Letter), and order AT&T's compliance with those commitments as stated in its letters. We note that AT&T's failure to comply with its commitments may result in the imposition of fines or forfeitures upon AT&T (pursuant to Section 503(b) of the Act) or a revocation of its licenses (pursuant to Section 312(a) of the Act). In addition, we will reject as unreasonable on its face any tariff filing that contravenes AT&T's commitments. AT&T remains bound by the Act and our rules, and the Commission remains committed to enforcing those rules through our investigation and complaint procedures. 164. Our reclassification of AT&T as non-dominant will result in the removal of all of its domestic residential services from Basket 1, 800 directory assistance service from Basket 2, and analog private line service from Basket 3, leaving AT&T's international services in Basket 1. Consequently, adjustments will have to be made to AT&T's API, PCI, and certain SBIs for Basket 1. We delegate authority for making the necessary adjustments to the Common Carrier Bureau. 165. Our decision in this Order relieves AT&T of the reporting requirements now imposed on dominant carriers. AT&T will instead be subject to the same minimal reporting requirements that apply to non-dominant interstate common carriers. Currently, interstate common carriers with annual revenues in excess of $100 million are required to report their total annual revenues and their total investment. This report allows the Commission to track market shares on an annual basis. We expect that, in the absence of the more detailed information we have collected in the past from AT&T, this information may need to be slightly augmented in order to provide us with the information we will need to ensure that the industry continues to be highly competitive. We delegate to the Chief, Common Carrier Bureau, the task of determining what additional information should be collected from interexchange carriers, and of establishing an appropriate reporting requirement subject to approval by the Office of Management and Budget under the Paperwork Reduction Act. We expect any such requirement to be limited and non-burdensome. 166. AT&T's share of interstate calling is published quarterly and has provided a useful indication of the rapidly increasing competition in the interstate market. We believe this information should continue to be available until the Common Carrier Bureau has determined what additional information, if any, should be collected from interexchange carriers. Accordingly, we direct AT&T to continue to report its interstate access minutes as it has done since 1986. 167. In order to ensure an orderly transition, this Order will be effective 30 days after its release. 168. Finally, as noted above, we intend to initiate a new proceeding to identify specific areas of the interstate, domestic, interexchange market that may raise policy concerns, and if there are any, to seek comment on possible remedies. In addition, we will closely monitor all of the areas where AT&T has made voluntary commitments. To the extent necessary or appropriate, we will institute proceedings to continue to protect consumers. VI. ORDERING CLAUSES 169. Accordingly, it is HEREBY ORDERED that AT&T's motion for reclassification as a non-dominant carrier in the market for interstate, domestic, interexchange telecommunications services under Part 61 of our rules is hereby GRANTED. 170. IT IS FURTHER ORDERED that AT&T shall comply with the commitments contained in its September 21, 1995 ex parte letter from R. Gerard Salemme, Vice President- Government Affairs, to Kathleen M.H. Wallman, Chief, Common Carrier Bureau, Federal Communications Commission (and clarified in AT&T's October 5, 1995 ex parte letter from R. Gerard Salemme, Vice President-Government Affairs, to Kathleen M.H. Wallman, Chief, Common Carrier Bureau, Federal Communications Commission), and which are summarized in this Order in Appendix C. 171. IT IS FURTHER ORDERED that AT&T's motion for reclassification as a non- dominant carrier in all international markets under Part 61 of our rules is hereby DEFERRED. 172. IT IS FURTHER ORDERED that this Order will become effective 30 days after its release. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary