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 pnmc5021. File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ************************************************************************* Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of the ) ) National Exchange Carrier Association, Inc.) Revision of Section 69.605 of the ) AAD 96-122 Commission's Rules to Allow Small ) Cost Settlement Companies to Elect ) Average Schedule Settlement Status ) ORDER Adopted: November 27, 1996 Released: December 2, 1996 By the Chief, Common Carrier Bureau: I. INTRODUCTION 1. On September 13, 1993, the National Exchange Carrier Association, Inc. (NECA) filed a petition to initiate a rulemaking proceeding to permit small cost companies to elect average schedule settlement status (Petition). Twenty two parties filed comments supporting the petition. One party, MCI Telecommunications Corporation (MCI), filed comments opposing the petition. Three parties filed reply comments. In this Order, we deny NECA's petition. II. BACKGROUND 2. On December 22, 1982, the Commission adopted a comprehensive system of tariffed charges, generally known as the access charge plan, for the recovery of incumbent local exchange carrier (ILEC) costs associated with the origination and termination of interstate calls. The Commission's access charge rules also required the establishment of an association of exchange carriers to file tariffs and administer revenue pools on behalf of incumbent local exchange carriers. To fulfill this requirment, the ILECs formed NECA. The Commission prescribed a single common line tariff and pooling arrangement administered by NECA but allowed voluntary participation in common tariffs for traffic sensitive elements. In a subsequent proceeding, the Commission allowed exchange carriers to leave the common line pool on a voluntary basis subject to their satisfying certain support requirements. Each company that participates in NECA charges rates appearing in that tariff. In the settlement process, each pool participant receives revenues from the pool to cover its cost of providing service plus a pro rata share of the pool's earnings. NECA pool participants' costs are determined either on the basis of cost studies or average schedule formulas. 3. Prior to the implementation of the Commission's access charge rules, ILEC compensation arrangements were handled through private contractual agreements within the telephone industry. The industry's settlements mechanism based the amount of ILEC compensation on either ILEC cost studies or average schedule formulas that were developed using surrogate cost factors. Those formulas are based on company-specific variables such as the number of access lines or the number of switched interstate minutes. AT&T's divestiture of the Bell Operating Companies effectively eliminated the existing compensation system. To facilitate the implementation of its access charge rules, the Commission incorporated a modified version of the industry's existing average schedule arrangement into its access charge tariff scheme. The Commission defined average schedule companies as telephone companies that participated in average schedule settlements on December 1, 1982. 4. The Commission maintained the average schedule status of these ILECs based on the assumption that these small carriers lacked sufficient financial resources or expertise to justify a requirement that they perform jurisdictionally separated cost studies for determining their compensation in originating and terminating interstate telecommunications services. The average schedule procedure provided the advantage of substantially reducing the costs imposed on small exchange carriers and borne, in part, by interstate ratepayers. While the Commission allowed small carriers to maintain their average schedule status, they were not required to do so. According to the Commission, "any exchange carrier that believes the average schedules do not provide appropriate compensation, however, is entitled to be compensated on a cost basis." 5. In 1987, NECA sought a waiver of Section 69.605(c) of the Commission's rules to provide all exchange carriers with 5,000 or fewer lines the option of electing to be compensated under the average schedule formulas. NECA stated that, prior to December 1, 1982, many exchange carriers had elected cost study treatment because the average schedule formulas did not reflect rapidly increasing costs or because certain states required cost studies for intrastate settlements. The Commission granted NECA's petition. 6. In that proceeding, ICORE, Inc. (ICORE) requested that ILECs be permitted to elect conversion on an annual basis. The Commission denied ICORE's request, stating that: A cost company that receives sufficient depreciation [footnote omitted] will eventually find it profitable, ceteris paribus, to convert to the average schedules because of the concomitant reduction to its rate base. We do not believe that it would be sound to permit exchange carriers to receive the windfall that would result if they were permitted to elect to depreciate plant to the "cross over" point and then receive average schedule treatment [footnote omitted]. The Commission further explained that: For sampling purposes in subsequent years, such an option would also tend to bias downward the cost characteristics of the future universes of average schedule companies. Absent offsetting corrections in subsequent periods, this would result, ceteris paribus, in many small average schedule companies either receiving inadequate compensation or being forced to perform interstate cost studies that would otherwise be unnecessary. The Commission acknowledged that future circumstances might warrant additional opportunities for cost companies to convert to average schedule status. III. POSITIONS OF PARTIES 7. NECA requests that we simplify and reduce the regulatory burden on small telephone companies by revising our rules so that ILECs with fewer than 10,000 access lines may elect to be compensated under the interstate average schedules. NECA posits that "setting the eligibility level at fewer than 10,000 access lines" will ensure that "pool revenue requirement changes are minimal." NECA also proposes to limit the opportunity for switching back and forth by prohibiting any average schedule company that elects cost status from converting back to average schedule status for four years. 8. According to NECA, average schedule status allows ILECs to retain the benefits that accrue from increases in productivity and reductions in expenditure. NECA observes that most states no longer require cost studies to determine intrastate rates. NECA claims that changes in the industry, including a shift to price cap regulation that has left only 7 percent of industry revenue requirements to be recovered under rate-of-return regulation, mean that performing detailed jurisdictional cost separations studies may be an unnecessary financial and administrative burden. NECA states that the "average schedule formulas closely simulate cost company settlements and reasonably reflect interstate access costs" of average schedule ILECs. NECA surmises that "settlements that are based on actual costs . . . will continue to be the preferred method for many telephone companies." 9. Many ILECs state that granting NECA's petition will expand the universe of average schedule companies, strengthen the average schedule settlement process, and extend the benefits of incentive regulation to more ILECs. ILECs also state that granting NECA's petition will relieve small ILECs and their ratepayers of the financial and administrative burdens of conducting detailed cost separations studies and provide regulatory flexibility. Two commenters state that ratepayers would benefit from the cost savings resulting from average schedule status. 10. In opposition, MCI contends that NECA's proposal would permit ILECs to "game the system" and that the four-year limitation would serve as virtually no restriction at all. MCI states that NECA's petition offers no evidence that the average schedule formulas closely and reasonably reflect interstate access costs of average schedule ILECs nor does NECA document the financial impact that would result from allowing cost companies to convert to average schedule status. MCI questions NECA's basis for doubling the eligibility threshold from its prior request for a waiver. MCI claims that NECA has not demonstrated either that changed circumstances in the industry warrant such flexibility or that the proposed rule change is free of potential abuses. Rather than changing the rule, MCI suggests that any ILEC facing special circumstances instead petition the Commission for a waiver. 11. In its reply comments, NECA acknowledges that the average schedule formulas, by definition, allow some average schedule companies to receive settlements that exceed their costs while others receive less than they would on a cost basis. NECA also responds that attempts to quantify and document savings associated with settlement conversions would be speculative, particularly since the effects of conversions are relatively small and likely to be masked by other offsetting charges. NECA further states that eligibility for future conversion opportunities need not be limited to that prior threshold and that allowing companies with up to 10,000 lines to convert would have the same minimal impact as allowing companies with up to 5,000 lines to convert in NECA's 1987 analysis. NECA disagrees with MCI's assessment of the four-year limitation proposal. IV. DISCUSSION 12. Section 69.605(c), which freezes average schedule status as of December 1, 1982, was intended to prevent ILECs from selecting the compensation alternative that at a particular time would maximize the compensation that they receive without corresponding changes in the costs of their operations or the manner in which they conduct those operations. NECA now proposes that we amend our rules to permit any ILEC with no more than 10,000 access lines to change its status from cost to average schedule or average schedule to cost at will with only the limitation that "any average schedule company electing to convert to cost settlements. . . would not be allowed to convert back to average schedule status for four years." 13. NECA's petition thus modifies ICORE's earlier request only with respect to the frequency with which a qualifying ILEC could change its status. For the reasons discussed above, the Commission had denied ICORE's request. We conclude that NECA's proposal does not eliminate those previously stated concerns. In addition, NECA has neither documented harm to small telephone companies that existing rules have caused nor identified benefits to ratepayers that its proposed alternative would produce. Petitions for rulemaking "which plainly do not warrant consideration by the Commission may be denied or dismissed without prejudice to the petitioner." Accordingly, we deny NECA's request for a rulemaking. V. ORDERING CLAUSE 14. Accordingly, IT IS ORDERED that, pursuant to authority delegated under Sections 0.91 and 0.291 of the Commission's rules, 47 C.F.R.  0.91 and 0.291, NECA's Petition for Revision of Section 69.605 of the Commission's rules is DENIED. FEDERAL COMMUNICATIONS COMMISSION Regina M. Keeney Chief, Common Carrier Bureau