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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) Access Charge Reform ) CC Docket No. 96-262 ) Price Cap Performance Review for Local ) CC Docket No. 94-1 Exchange Carriers ) ) Interexchange Carrier Purchases of Switched ) Access Services Offered by Competitive Local ) CCB/CPD File No. 98-63 Exchange Carriers ) ) Petition of U S West Communications, Inc. ) for Forbearance from Regulation as a Dominant ) CC Docket No. 98-157 Carrier in the Phoenix, Arizona MSA ) ) FIFTH REPORT AND ORDER AND FURTHER NOTICE OF PROPOSED RULEMAKING Adopted: August 5, 1999 Released: August 27, 1999 NPRM Comment Date: October 29, 1999 NPRM Reply Comment Date: November 29, 1999 By the Commission: Commissioner Ness issuing a statement; Commissioner Furchtgott-Roth approving in part, concurring in part, dissenting in part, and issuing a statement. Table of Contents Paragraph I. Introduction 1 II. Background and Summary 8 A. Price Cap Regime 8 B. Pricing Flexibility 14 C. Summary 19 1. Pricing Flexibility 19 2. Modifications to Rate Structure 27 3. CLEC Access Charges 31 III. New Services 34 A. Background 34 B. Discussion 37 IV. Removal of Interstate Inter- and IntraLATA Toll Services From Price Cap Regulation 45 A. Introduction 45 B. Background 46 C. Discussion 53 1. Price Cap LEC Ability to Exploit Market Power 53 2. Removal of Services from Price Caps and Relaxation of Tariff Requirements 56 V. Geographic Deaveraging of Rates for Trunking Basket Services58 A. Background 58 B. Discussion 59 VI. Pricing Flexibility Based on a Competitive Showing 67 A. Background 67 B. Geographic Scope of Relief 71 C. Phase I and Phase II Pricing Flexibility 77 1. General Approach 77 2. Phase I Triggers for Special Access and Dedicated Transport Services 81 3. Phase I Triggers for Other Switched Access Services108 4. Phase I Relief 122 5. Phase II for Special Access and Dedicated Transport141 D. Price Cap Issues 158 1. Revision of Price Cap Indices 158 2. Low-End Adjustment Mechanism 160 3. Common Line Basket Issues 169 E. Procedural Issues 170 1. Special Access and Dedicated Transport Services170 2. Treatment of Proprietary Data 176 3. Other Switched Access Services 178 F. U S West Forbearance Petition 179 VII. CLEC Access Charges 180 A. Background 180 B. AT&T's Petition for Declaratory Ruling 186 VIII. Notice of Proposed Rulemaking 190 A. Geographic Deaveraging for Switched Access Services 190 B. Phase II Pricing Flexibility for Switched Service 200 1. Triggers 201 2. Relief 204 C. Switching Issues 207 1. Local Switching 207 2. Tandem-Switched Transport 223 D. Price Cap Issues 226 1. Common Line Issues 226 2. Reorganization of Baskets and Bands 234 3. Inflation Measure 235 E. CLEC Access Charges 236 1. Background 236 2. Discussion 239 IX. Procedural Issues 258 A. Final Regulatory Flexibility Analysis 258 B. Initial Regulatory Flexibility Act Analysis 268 C. Paperwork Reduction Act 279 D. Filing Comments 281 X. Ordering Clauses 284 APPENDIX A APPENDIX B I. INTRODUCTION 1. In this Order, we revise the rules that govern the provision of interstate access services by those incumbent local exchange carriers (ILECs) subject to price cap regulation (collectively, "price cap LECs") to advance the pro-competitive, de-regulatory national policies embodied in the Telecommunications Act of 1996 (1996 Act). With these revisions, we continue the process the Commission began in 1997, with the Access Reform First Report and Order, to reform regulation of interstate access charges in order to accelerate the development of competition in all telecommunications markets and to ensure that our own regulations do not unduly interfere with the operation of these markets as competition develops. 2. In the Access Reform First Report and Order, the Commission adopted a primarily market-based approach to drive interstate access charges toward the costs of providing these services. The Commission envisioned that this approach would enable it to give carriers progressively greater flexibility to set rates as competition develops, until competition gradually replaces regulation as the primary means of setting prices. In this Order, the Commission fulfills its commitment to provide detailed rules for implementing the market-based approach, pursuant to which price cap LECs would receive pricing flexibility in the provision of interstate access services as competition for those services develops. 3. The pricing flexibility framework we adopt in this Order is designed to grant greater flexibility to price cap LECs as competition develops, while ensuring that: (1) price cap LECs do not use pricing flexibility to deter efficient entry or engage in exclusionary pricing behavior; and (2) price cap LECs do not increase rates to unreasonable levels for customers that lack competitive alternatives. In addition, these reforms will facilitate the removal of services from price cap regulation as competition develops in the marketplace, without imposing undue administrative burdens on the Commission or the industry. 4. Specifically, this Order grants immediate pricing flexibility to price cap LECs in the form of streamlined introduction of new services, geographic deaveraging of rates for services in the trunking basket, and removal, upon implementation of toll dialing parity, of certain interstate interexchange services from price cap regulation. We also establish a framework for granting price cap LECs greater flexibility in the pricing of all interstate access services once they satisfy certain competitive criteria. In Phase I, we allow price cap LECs to offer contract tariffs and volume and term discounts for those services for which they make a specific competitive showing. In Phase II, we permit price cap LECs to offer dedicated transport and special access services free from our Part 69 rate structure and Part 61 price cap rules, provided that the LECs can demonstrate a significantly higher level of competition for those services. 5. We address additional pricing flexibility proposals in the Notice of Proposed Rulemaking (Notice) portion of this item. We seek comment on proposals for geographic deaveraging of the rates for services in the common line and traffic-sensitive baskets. We also invite comment on the appropriate triggers for granting Phase II relief for services in the common line and traffic-sensitive baskets, as well as for the traffic-sensitive parts of tandem-switched transport service. 6. In addition to adopting rules to implement the market-based approach to access reform, we take this opportunity to re-examine the rate structure for the local switching service category of the traffic-sensitive basket. Accordingly, in the Notice, we seek comment on a number of proposed changes to the rate structure so that it better replicates the operation of a competitive market. Generally, we invite parties to discuss proposed revisions to our rules that would require price cap LECs to develop capacity-based local switching charges rather than per- minute charges. We also solicit comment on whether the traffic-sensitive price cap index (PCI) formula should be modified. For the same reasons that we consider revising the local switching rate structure, we also seek comment on whether similarly to revise the rate structure for tandem- switched transport. 7. Finally, we deny a petition for declaratory ruling filed by AT&T requesting that the Commission confirm that interexchange carriers (IXCs) may elect not to purchase switched access services offered under tariff by competitive local exchange carriers (CLECs). We decline to address AT&T's concerns in a declaratory ruling; however, we find that AT&T's petition and supporting comments suggest a need for the Commission to revisit the issue of CLEC access rates. Therefore, in the Notice, we initiate a rulemaking regarding the reasonableness of these charges and whether the Commission might adopt rules to address, by the least intrusive means, any failure of market forces to constrain CLEC access charges. II. BACKGROUND AND SUMMARY A. Price Cap Regime 1. Background 8. To recover the costs of providing interstate access services, incumbent LECs charge IXCs and end users for access services in accordance with our Part 69 access charge rules. Part 69 establishes two basic categories of access services: special access services and switched access services. Special access services do not use local switches; instead they employ dedicated facilities that run directly between the end user and the IXC's point of presence (POP). Switched access services, on the other hand, use local exchange switches to route originating and terminating interstate toll calls. The Commission has not prescribed specific rate elements in Part 69 for special access services. Part 69 does establish specific switched access elements and a mandatory switched access rate structure for each element. 9. Interoffice transmission services, known as transport services, carry interstate switched access traffic between an IXC's POP and the end office that serves the end user customer. Incumbent LEC transmission facilities that carry switched interstate traffic between an IXC's POP and the incumbent LEC end office serving the POP (this office is called the serving wire center, or SWC), are known as entrance facilities. Incumbent LECs currently offer two types of interstate switched transport service between a SWC and an end user's end office. Under the first service, direct-trunked transport, calls are transported between the SWC and the end office by means of a direct trunk, a dedicated facility, that does not pass through an intervening switch. The second service, tandem-switched transport, routes calls from the SWC to the end office through a tandem switch located between the SWC and the end office. Traffic travels over a dedicated circuit from the SWC to the tandem switch and then over a shared circuit, which carries the calls of many different IXCs, from the tandem switch to the incumbent LEC end office. Incumbent LEC tandem switches and end office switches switch interstate traffic between the transport trunks carrying traffic to and from the IXC POPs and the end users' local loops. 10. Charges for special access services generally are divided into channel termination charges and channel mileage charges. Channel termination charges recover the costs of facilities between the customer's premises and the LEC end office and the costs of facilities between the IXC POP and the serving wire center. Channel mileage charges recover the costs of facilities (also known as interoffice facilities) between the serving wire center and the LEC end office serving the end user. 2. Price Caps 11. In 1990, the Commission replaced rate-of-return regulation for the BOCs and GTE with an incentives-based system of regulation that encourages companies to: (1) improve their efficiency by developing profit-making incentives to reduce costs; (2) invest efficiently in new plant and facilities; and (3) develop and deploy innovative service offerings. The price cap plan is designed to replicate some of the efficiency incentives found in fully competitive markets and to act as a transitional regulatory scheme until actual competition makes price cap regulation unnecessary. 12. Under the original price cap plan, interstate access services were grouped into four different baskets: the common line, traffic-sensitive, special access, and interexchange baskets. In the Second Transport Order, the Commission combined transport and special access services into the newly created trunking basket. Each basket is subject to a price cap index (PCI), which caps the total charges a LEC may impose for interstate access services in that basket. The PCI is adjusted annually by a measure of inflation minus a "productivity factor," or "X-Factor." A separate adjustment is made to the PCI for "exogenous" cost changes, which are changes outside the carrier's control and not otherwise reflected in the price cap formula. 13. Within the traffic-sensitive and trunking baskets, services are grouped into service categories and subcategories. Rate revisions for these services are limited by upper and, in the original price cap plan, lower pricing bands established for that particular service. Originally, the pricing band limits for most of the service categories and subcategories were set at five percent above and below the Service Band Index (SBI). In 1995, however, the Commission increased the lower pricing bands to ten percent for those service categories in the trunking and traffic- sensitive baskets and 15 percent for those services subject to density zone pricing. These pricing bands give price cap LECs the ability to raise and lower rates for elements or services as long as the actual price index (API) for the relevant basket does not exceed the PCI for that basket, and the prices for each category of services within the basket are within the established pricing bands. Together, the PCI and pricing bands restrict a price cap LEC's ability to offset price reductions for services that are subject to competition with price increases for services that are not subject to competition. B. Pricing Flexibility 14. When it adopted the LEC Price Cap Order in 1990, the Commission required price cap LECs to offer all interstate special and switched access services at geographically averaged rates for each study area. Since that time, the Commission has taken significant steps to increase the LECs' pricing flexibility and ability to respond to the advent of competition in the exchange access market. In the Special Access and Switched Transport Expanded Interconnection Orders, the Commission permitted LECs to introduce density zone pricing for high capacity special access and switched transport services in a study area, provided that they could demonstrate the presence of "operational" special access and switched transport expanded interconnection arrangements and at least one competitor in the study area. The Commission also permitted price cap LECs to offer volume and term discounts for special access and switched transport services upon specific competitive showings. 15. Subsequently, the Commission eliminated the lower service band indices, concluding that this action would lead to lower prices and encourage LECs to charge rates that reflect the underlying costs of providing exchange access services. The Commission found that the PCI and upper pricing bands adequately control predatory pricing and that greater downward pricing flexibility would benefit consumers both directly through lower prices and indirectly by encouraging only efficient competitive entry. 16. In that same order, the Commission also relaxed the procedures for introducing new switched access services, in response to arguments that new services and technologies do not fit the Part 69 rate structure requirements. The Commission prescribed the original rate structure for introducing new switched access services in 1983. At that time, incumbent LECs were required to file a Part 69 waiver each time they wanted to introduce a new rate element for switched access service that did not conform to the prescribed switched access rate structure. A Part 69 waiver required incumbent LECs to demonstrate that "special circumstances warrant deviation from the general rule and that such deviation will serve the public interest." Incumbent LECs also had to comply with the "new services" test, which required an incumbent LEC to demonstrate that its tariffed rates for new services would recover no more than the carrier's direct costs of providing the service, plus a reasonable amount of overhead, and no less than the carrier's direct costs of providing the service. Finally, incumbent LECs were directed to file their tariffs introducing a new service on at least fifteen days' notice and to incorporate the new service into the appropriate price cap basket and indices within six to eighteen months after the new service tariff became effective. 17. The Commission found that the Part 69 rate structure imposed a costly, time- consuming, and unnecessary burden on incumbent LECs and significantly impeded the introduction of new services. Accordingly, the Commission modified the Part 69 rate structure rules to permit an incumbent LEC to introduce a new service by filing a petition based on a "public interest" standard that is easier to satisfy than the general standard applicable to waivers of the Commissions rules. In addition, under the new rules, once an initial incumbent LEC has satisfied the public interest requirement for establishing new rate elements for a new switched access service, another incumbent LEC may file a petition seeking authority to introduce an identical new service, and its petition will be reviewed within ten days of the release of a Public Notice. The LEC may introduce the new rate element following the ten-day period, unless the Common Carrier Bureau (the Bureau) informs the LEC before that time that its new service does not qualify for "me too" treatment. 18. The Commission also recognized that additional modifications to the Part 69 rate structure could increase consumer choice, streamline regulation, and increase consumer welfare by increasing incentives for innovation. The Commission, therefore, sought comment on whether to permit price cap LECs to establish new switched access rate elements without prior approval. The Commission also invited comment on whether to eliminate the new services test and permit LECs to offer new services free from price cap regulation. In the Access Reform First Report and Order, the Commission deferred resolution of these issues, as well as other issues concerning the timing and degree of pricing flexibility, to a future report and order. C. Summary 1. Pricing Flexibility 19. Since the release of the Access Reform First Report and Order, we have re-examined the record generated in response to the Access Reform NPRM and the Price Cap Second FNPRM; we have observed competition develop in the marketplace; and we have invited parties to update and refresh the record relating to access charge reform to reflect any changes that may have taken place since May 1997. In addition, we have received and reviewed several petitions (and the associated records) from BOCs seeking pricing flexibility in the form of forbearance from dominant carrier regulation in the provision of certain special access and high capacity services. Although our current price cap regime gives LECs some pricing flexibility and considerable incentives to operate efficiently, significant regulatory constraints remain. As the market becomes more competitive, such constraints become counter-productive. We recognize that the variety of access services available on a competitive basis has increased significantly since the adoption of our price cap rules. Therefore, in response to changing market conditions, we grant price cap LECs immediate flexibility to deaverage services in the trunking basket and to introduce new services on a streamlined basis. We also remove certain interstate interexchange services from price cap regulation upon implementation of intra- and interLATA toll dialing parity, and we establish a framework for granting price cap LECs further pricing flexibility upon satisfaction of certain competitive showings and seek comment on additional flexibility for certain switched access services. a. Immediate Regulatory Relief 20. As discussed above, the original rate structure for interstate switched transport services required price cap LECs to charge averaged rates throughout a study area. The Commission subsequently found that this requirement forced LECs to price above cost in the high-traffic, lower-cost areas where competition is more likely to develop. In the Switched Transport Expanded Interconnection Order, therefore, the Commission created a density zone pricing plan that allows some degree of deaveraging of rates for switched transport services. The Commission concluded that relaxing the pricing rules in this manner would enable price cap LECs to respond to increased competition in the interstate switched transport market. 21. Although the density zone pricing plan afforded some pricing flexibility to price cap LECs, it contained several constraints, such as the increased scrutiny applicable to plans with more than three zones. We now conclude that market forces, as opposed to regulation, are more likely to compel LECs to establish efficient prices. Accordingly, for purposes of deaveraging rates for services in the trunking basket, we eliminate the limitations inherent in our current density zone pricing plan and allow price cap LECs to define the scope and number of zones within a study area, provided that each zone, except the highest-cost zone, accounts for at least 15 percent of the incumbent LEC's trunking basket revenues in the study area and that annual price increases within a zone do not exceed 15 percent. In addition, we eliminate the requirement that LECs file zone pricing plans prior to filing their tariffs. 22. We also permit price cap LECs to introduce new services on a streamlined basis, without prior approval. Generally, we modify the Commission's rules to eliminate the public interest showing required by Section 69.4(g) and to eliminate the new services test (except in the case of loop-based new services) required under Sections 61.49(f) and (g). These modifications will eliminate the delays that now exist for the introduction of new services as well as encourage efficient investment and innovation. 23. Certain interstate interexchange services provided by price cap LECs are found in the interexchange basket, including interstate intraLATA services and certain interstate interLATA services called "corridor services." In this Order, we allow price cap LECs to remove from the interexchange basket, and, hence, price cap regulation, their interstate intraLATA toll services and corridor services, provided the price cap LEC has implemented intra- and interLATA toll dialing parity in all of the states in which it provides local exchange service. The presence of competitive alternatives for these services, coupled with implementation of dialing parity, should prevent price cap LECs from exploiting over a sustained period any market power may possess with respect to these services and thus warrants removal of these services from price cap regulation. b. Relief that Requires a Competitive Showing 24. In addition, we adopt a framework for granting further regulatory relief upon satisfaction of certain competitive showings. Relief generally will be granted in two phases and on an MSA (Metropolitan Statistical Area) basis. To obtain Phase I relief, price cap LECs must demonstrate that competitors have made irreversible, sunk investments in the facilities needed to provide the services at issue. For instance, for dedicated transport and special access services, price cap LECs must demonstrate that unaffiliated competitors have collocated in at least 15 percent of the LEC's wire centers within an MSA or collocated in wire centers accounting for 30 percent of the LEC's revenues from these services within an MSA. Higher thresholds apply, however, for channel terminations between a LEC end office and an end user customer. In that case, the LEC must demonstrate that unaffiliated competitors have collocated in 50 percent of the price cap LEC's wire centers within an MSA or collocated in wire centers accounting for 65 percent of the price cap LEC's revenues from this service within an MSA. For traffic-sensitive, common line, and the traffic-sensitive components of tandem-switched transport services, a LEC must show that competitors offer service over their own facilities to 15 percent of the price cap LEC's customer locations within an MSA. Phase I relief permits price cap LECs to offer, on one day's notice, volume and term discounts and contract tariffs for these services, so long as the services provided pursuant to contract are removed from price caps. To protect those customers that may lack competitive alternatives, however, LECs receiving Phase I flexibility must maintain their generally available, price cap constrained tariffed rates for these services. 25. To obtain Phase II relief, price cap LECs must demonstrate that competitors have established a significant market presence (i.e., that competition for a particular service within the MSA is sufficient to preclude the incumbent from exploiting any individual market power over a sustained period) for provision of the services at issue. Phase II relief for dedicated transport and special access services is warranted when a price cap LEC demonstrates that unaffiliated competitors have collocated in at least 50 percent of the LEC's wire centers within an MSA or collocated in wire centers accounting for 65 percent of the LEC's revenues from these services within an MSA. Again, a higher threshold applies to channel terminations between a LEC end office and an end user customer. In that case, a price cap LEC must show that unaffiliated competitors have collocated in 65 percent of the LEC's wire centers within an MSA or collocated in wire centers accounting for 85 percent of the LEC's revenues from this service within an MSA. Phase II relief permits price cap LECs to file tariffs for these services on one day's notice, free from both our Part 61 rate level and our Part 69 rate structure rules. 26. Because our ultimate goal is to continue to foster competition and allow market forces to operate where they are present, we also seek comment in the Notice on additional pricing flexibility for common line and traffic-sensitive services. First, we consider permitting price cap LECs to deaverage rates for services in the common line and traffic-sensitive baskets in conjunction with identification and removal of implicit universal service support in interstate access charges and implementation of an explicit high cost support mechanism. We also invite parties to comment on how we should define zones for purposes of deaveraging. In addition, we seek comment on which rate elements may be deaveraged and whether deaveraging should be subject to subscriber line charge (SLC) and presubscribed interexchange carrier charge (PICC) caps or any other constraint. We also seek comment on the appropriate Phase II triggers for granting greater pricing flexibility for traffic-sensitive, common line, and the traffic-sensitive components of tandem-switched transport services. 2. Modifications to Rate Structure 27. The Notice also seeks comment on certain price cap regulation issues. Specifically, consistent with the Access Reform First Report and Order's efforts to reform access charges so costs are recovered in a manner that reflects how they are incurred, we seek comment on adopting a capacity-based rate structure for local switching. The local switch, which consists of an analog or digital switching system and line and trunk cards, connects subscriber lines both with other local subscriber lines and with dedicated and common interoffice trunks. As discussed in more detail below, prior to the Access Reform First Report and Order, the interstate allocated portion of these costs was recovered entirely through per-minute charges assessed on IXCs. 28. Recognizing that a significant portion of these costs (i.e., the costs associated with line cards and trunk ports) do not vary with usage, however, the Commission determined that such non-traffic-sensitive costs should be recovered on a flat-rated, rather than usage sensitive, basis. Accordingly, consistent with principles of cost-causation and economic efficiency, the Commission directed price cap LECs to reassign all line-side port costs from the Local Switching rate element to the Common Line rate element and to recover these costs through the common line rate elements, including the SLC and flat-rated PICC. Because the record in that proceeding was not adequate, however, to determine whether and to what extent the remaining local switching costs were traffic-sensitive or non-traffic-sensitive, LECs continue to recover these costs through traffic-sensitive charges. 29. We take this opportunity to re-examine the local switching rate structure to determine whether it reasonably reflects the manner in which price cap LECs incur costs. In the Notice, we invite comment on whether and to what extent we should modify further our price cap rules for the traffic-sensitive basket to reflect a capacity-based local switching rate structure. 30. We also invite parties to discuss proposed revisions to our rules for the common line basket, and we consider redefining the price cap baskets and pricing bands. Specifically, we solicit comment on whether to increase the "g" factor in the common line PCI formula and whether we should revise the baskets so that services with flat rates are not placed in the same basket as services with traffic-sensitive rates. In addition, we seek comment on our tentative conclusion that the inflation measure in the PCI formula should be consistent with the measure defined by the Bureau of Labor Statistics (BLS). 3. CLEC Access Charges 31. In the Access Reform NPRM, the Commission sought comment on whether CLECs have market power in the provision of terminating access services and whether to regulate these services. In the Access Reform First Report and Order, the Commission decided to treat CLECs as non-dominant in the provision of terminating access service, because they did not appear at that time to possess market power. The Commission stated, however, that it would revisit the issue of regulating CLEC terminating access rates if there were sufficient indications that CLECs were imposing unreasonable terminating access charges. 32. On October 23, 1998, AT&T filed a petition for declaratory ruling requesting that the Commission confirm that, under existing Commission rules and policies, an IXC may elect not to accept service at a price chosen by the CLEC. In its petition, AT&T alleges that some CLECs impose switched access charges significantly higher than those charged by the ILEC competitors in the same area. AT&T points to a Commission pronouncement in the Access Reform First Report and Order that "terminating rates that exceed those charged by the ILEC serving the same market may suggest that a CLEC's terminating access rates are excessive," thereby warranting Commission regulation. 33. In this Order, we deny AT&T's petition. We find, however, that the record developed in response to AT&T's petition suggests the need for the Commission to revisit the issue of CLEC access rates. Accordingly, in the accompanying Notice, we initiate a rulemaking to determine the reasonableness of CLEC access rates and whether the Commission might adopt rules to address, by the least intrusive means, any failure of market forces to constrain CLEC access charges. III. NEW SERVICES A. Background 34. In 1983, the Commission prescribed a rate structure for switched access services in Part 69 of its rules. Originally, when an incumbent LEC wanted to offer a new switched access service, and the rate element or elements for that new service did not fit into the prescribed switched access rate structure, the LEC was required to obtain a waiver of Part 69 pursuant to Section 1.3 of the Commission's rules. In 1996, the Commission adopted Section 69.4(g) of its rules, which relaxed the switched access rate structure rules for price cap LECs. Under Section 69.4(g), a price cap LEC is no longer required to demonstrate that "special circumstances" warrant a Part 69 waiver; instead, it need only file a petition showing that the proposed new rate element would be in the "public interest," or that another LEC previously has established the same rate element. 35. In addition, a price cap LEC filing a tariff for a new service must comply with the new services test, which requires the LEC to show that its new service rates will recover no more than the carrier's direct costs of providing the service, plus a reasonable level of overheads, and no less than the carrier's direct costs of providing the service. Those tariffs must be filed on at least fifteen days' notice. Finally, the LEC is required to incorporate its new services into the appropriate price cap basket and indices within six to eighteen months after the new service tariff takes effect, in conjunction with the carrier's annual access tariff filing. 36. In the December 1996 Access Reform NPRM, the Commission invited comment on three proposals for further relaxation of its new service rules to create incentives for price cap LECs to introduce services using new technologies: (1) enabling price cap LECs to establish new switched access rate elements without prior approval; (2) eliminating the new services test; and (3) permitting price cap LECs to offer new services outside of price cap regulation. In the Access Reform First Report and Order, the Commission deferred consideration of pricing flexibility issues, including these new service issues, to a future Order. Bell Atlantic later proposed removing new services from price cap regulation "immediately," and the Commission invited comment on Bell Atlantic's proposal. Subsequently, the Commission granted a petition to forbear from enforcing Part 69 rate structure requirements with respect to new service tariffs filed by any incumbent LEC serving more than 50,000 access lines, but less than two percent of the nation's access lines. B. Discussion 37. We find that the record supports permitting incumbent LECs to introduce new services on a streamlined basis. The Commission adopted price cap regulation in part to encourage price cap LECs to innovate, and to develop new services. Thus, to the extent that our new service rules impede the introduction of new services, they undermine one of the Commission's goals in adopting price cap regulation. The new service rules clearly delay the introduction of new services, because the Commission needs time to review Section 69.4(g) public interest showings, and price cap LECs need time to prepare the cost support showing required by the new services test. Moreover, it is not clear that the new services rules provide any benefits that justify such delay. By definition, a new service expands the range of service options available to consumers. Thus, the introduction of a new service does not by itself compel any access customer to reconfigure its access services and so cannot adversely affect any access customer. Because new services may benefit some customers, and existing customers can continue to purchase existing services if they find the new service rate structure or rate level unattractive, we conclude that it serves the public interest to permit price cap LECs to introduce new services on a streamlined basis. 38. In addition, the Commission adopted Part 69 before the advent of competition. Now, the delay caused by the new service rules can place price cap LECs at a competitive disadvantage. Competitive LECs that have notice of a price cap LEC's Section 69.4(g) petition may be able to begin offering the service before the incumbent LEC has been granted permission to establish new rate elements for the new service, thus diminishing the incumbent's incentives to develop and offer new services. With the removal of this competitive disadvantage, price cap LECs will be better able to respond to competition from CLECs. 39. Accordingly, we revise Section 69.4 of the Commission's rules to eliminate the public interest showing required by Section 69.4(g), and to enable price cap LECs to establish any new switched access rate element, in addition to the access rate elements currently required by Section 69.4. We also eliminate the new services test in Sections 61.49(f) and (g) for all new services except loop-based services. We are concerned that new services that employ local loop facilities raise cost allocation issues that the Commission has not yet addressed. In the GTE DSL Reconsideration Order, for example, we referred to the Federal-State Joint Board for consideration in Docket No. 80-286 a petition for clarification and/or reconsideration filed by NARUC. NARUC's petition sought clarification regarding the application of our Part 36 separations rules while the Joint Board considered the proper allocation of loop costs associated with special access tariffs such as the GTE DSL tariff. Noting that the separations and cost allocation issues NARUC raised were beyond the scope of the limited investigation in the tariff proceeding, we stated that we would address these important issues in conjunction with the Joint Board. Until these issues are resolved, it is not appropriate to permit price cap LECs to file tariffs for new loop-based services without satisfying the cost support requirements of the new services test. 40. Bell Atlantic argues that price cap LECs should be permitted to file tariffs for new services on one day's notice. We conclude that Bell Atlantic's request is in the public interest. The current fifteen-day notice period is no longer warranted. A primary focus of our review of new service tariffs is to determine whether the LEC complied with the new service test. By eliminating the new services test, we greatly reduce the need for reviewing LEC new service tariff filings. In addition, no customer is required to purchase the new service. Furthermore, a longer notice period would delay the introduction of new services and thus undercut the reasons for revising the price cap new service rules here. 41. We are not persuaded by the arguments advanced by parties opposing further deregulation of new services offered by price cap LECs. Some IXCs are concerned that incumbent LECs might offer new services in a manner that would make them available only to the LECs' own long distance affiliates. These IXCs do not explain why or how streamlined introduction of new services would in any way affect the Commission's ability to enforce section 202 of the Act, which prohibits unreasonable discrimination. Accordingly, we conclude that permitting LECs to offer new services on a streamlined basis does not increase the likelihood of unreasonable discrimination. IXCs may file complaints under section 208 of the Act, should they believe that such unreasonable discrimination has occurred. 42. AT&T notes that the Commission made it easier for incumbent price cap LECs to introduce new services in the Price Cap Third Report and Order, and it argues that no further deregulation is necessary to encourage LECs to introduce new services. Regardless of LECs' incentives to introduce new services, we conclude above that the benefits of our current new service rules do not justify the delay caused by those rules, and we reject AT&T's argument. Elimination of the new services rules serves the Commission's goals of streamlining our regulations, removing unnecessary regulatory barriers, and increasing consumer choice. 43. We will not, however, permit price cap LECs to offer new services outside of price cap regulation, as parties suggest. MCI argues that offering new services outside of price cap regulation will encourage incumbent LECs to create "new" services that differ little from an existing service. Specifically, MCI theorizes that, as access customers shift to the new service, the demand weight placed on the existing service in calculating the actual price index (API) would decrease, thus enabling the LEC to raise the price of the existing service. Subsequently, according to MCI, the LEC could increase the new service price and leave access customers with no lower-priced alternatives. We agree with MCI that the introduction of new services outside of price caps ultimately might enable price cap LECs to raise rates for both new services and existing services to unreasonable levels. In contrast to the conditions we adopt elsewhere in this Order for removal of services from price caps, we do not predicate the new services relief we adopt here upon any showing of competition for the services at issue, thus we are not convinced by price cap LEC arguments that rates, terms, and conditions for new services will be constrained by market forces. 44. At this time, we revise only the new service requirements applicable to price cap LECs, not rate-of-return LECs, for several reasons. First, we have recently granted a petition to forbear from enforcing Part 69 rate structure requirements with respect to new service tariffs filed by a considerable number of rate-of-return LECs, i.e., those serving more than 50,000 access lines, but less than two percent of the nation's access lines. In addition, we note that the new services test is applicable only to price cap LECs, and so is irrelevant for rate-of-return LECs. Moreover, the Commission created a separate docket to consider the access reform issues specific to rate-of-return carriers. In that proceeding, the Commission invited comment on revising the new service requirements applicable to rate-of-return LECs, and we will address those issues on the basis of the record in that docket. Finally, we relax the new service requirements for price cap LECs in part to remove a competitive disadvantage from price cap LECs, so that they can better respond to developing competition from CLECs. Because rate-of-return LECs do not face competition to the same extent as price cap LECs, there is less need to remove any competitive disadvantage they face at this time. IV. REMOVAL OF INTERSTATE INTER- AND INTRALATA TOLL SERVICES FROM PRICE CAP REGULATION A. Introduction 45. The Commission currently regulates in the interexchange basket the rates that price cap LECs charge for particular interstate interexchange services. Among the services in this basket are certain interstate interLATA toll services, called "corridor" services, and interstate intraLATA toll services. We conclude that price cap LECs' corridor and interstate intraLATA toll services will face sufficient competition upon full implementation of inter- and intraLATA toll dialing parity to preclude the price cap LECs from exploiting over a sustained period any individual market power they may have with respect to these services. Consequently, once a price cap LEC has implemented inter- and intraLATA toll dialing parity everywhere it provides local exchange services at the holding company level, we will allow the price cap LEC to remove all of its corridor and interstate intraLATA toll services from price cap regulation, and subsequently to file tariffs for these services on one day's notice and without cost support. Allowing price cap LECs to do so removes unnecessary regulatory constraints and enhances the operation of competitive forces where they provide corridor and interstate intraLATA toll services. B. Background 46. The 1982 AT&T consent decree divided the former Bell territory into geographic units called "Local Access and Transport Areas," or "LATAs." Most states have multiple LATAs, and LATA boundaries generally are contained within a single state. Some LATAs, however, cross state lines. With certain exceptions, the consent decree prohibited the BOCs from transporting telecommunications traffic between LATAs (interLATA services), but permitted them to carry traffic within a LATA (intraLATA services). Thus, at the time of divestiture, IXCs were permitted to transport interLATA traffic but BOCs generally were not. Telephone calls that do not leave customers' immediate local calling areas are intraLATA local calls and are subject only to the monthly rate that customers pay for local services. Telephone calls to destinations outside of the local calling area are toll calls subject to an additional charge. A LATA often encompasses more than one immediate local calling area, so intraLATA calls can be either local or toll calls. 47. Despite the consent decree's provisions prohibiting BOCs from providing interLATA services, it made an exception for certain interstate interLATA services, called corridor services. Corridor services are toll services that carry traffic from five counties in Northern New Jersey into New York City, from Philadelphia and its suburbs into three counties in New Jersey, and from those three counties back into the Philadelphia area. At the time of the consent decree, these areas were in the Bell Atlantic and NYNEX regions. These companies have since merged. 48. BOCs and independent incumbent LECs also provide interstate intraLATA toll services. Interstate intraLATA toll calls are calls that leave an immediate local calling area and cross state lines but remain within a single LATA, such as some calls from Chicago, Illinois, to Gary, Indiana. The BOCs and independent incumbent LECs provide corridor and interstate intraLATA toll services in competition with the long-distance services of AT&T, Sprint, MCI, and many other long-distance companies. 49. Because the Commission has treated incumbent LECs as having market power in the provision of most services within their service areas, the rates that incumbent LECs may charge for corridor and interstate intraLATA toll services currently are subject to dominant carrier regulation. Dominant carriers are subject to price cap or rate-of-return regulation, must file tariffs -- on a minimum of seven days' notice and often more -- and usually with cost support data. Non-dominant carriers, on the other hand, are not subject to rate regulation and may file tariffs on one day's notice, without cost support, that are presumed lawful. 50. To spur competition, section 251(b)(3) of the Act requires LECs "to provide dialing parity to competing providers of telephone exchange service and telephone toll service." "Dialing parity" exists when a LEC customer can route telephone calls to at least one carrier other than that LEC without having to dial an access code. Pursuant to section 251(b)(3), the Commission issued an order in August 1996 requiring LECs to implement inter- and intraLATA toll dialing parity by February 8, 1999. The Commission concluded that a LEC must meet those obligations by allowing its customers to presubscribe to at least one carrier other than the LEC for intraLATA toll services, and to at least one carrier other than the LEC for interLATA toll services. 51. On August 22, 1997, the United States Court of Appeals for the Eighth Circuit vacated, on jurisdictional grounds, the Commission's intraLATA dialing parity rules as applied to intrastate intraLATA toll and interstate intraLATA local calls. The United States Supreme Court, however, reversed the Eighth Circuit decision on January 25, 1999. Following the Supreme Court decision, the Commission issued an order on March 23, 1999, in which it observed that intraLATA toll dialing parity had been implemented in most states. Nonetheless, the Commission concluded in light of the intervening Eighth Circuit and Supreme Court decisions that a limited waiver of the intraLATA toll dialing parity deadlines and a revised implementation schedule were warranted. Under the revised schedule, almost all LECs will have implemented inter- and intraLATA toll dialing parity by September 6, 1999. 52. Ameritech and USTA filed comments in January 1997, in response to the Access Charge Reform NPRM, asking the Commission to cease price cap regulation of corridor and interstate intraLATA toll services. Specifically, Ameritech proposed that the Commission remove these services from price cap regulation once toll dialing parity becomes available because toll dialing parity will eliminate any market power BOCs might have had. Ameritech repeated its proposal regarding corridor and interstate intraLATA toll services in a 1998 ex parte letter. Bell Atlantic filed a similar letter. The Commission sought comment on the Ameritech and Bell Atlantic proposals in an October 1998 Public Notice. C. Discussion 1. Price Cap LEC Ability to Exploit Market Power 53. A dominant carrier is "[a] carrier found by the Commission to have market power (i.e., power to control prices)." "Market power" is "the ability to raise prices by restricting output," or "to raise and maintain price above the competitive level without driving away so many customers as to make the increase unprofitable." Pursuant to the framework outlined in the Dominant/Non-Dominant Order, the Commission determines whether a carrier is dominant or non-dominant by: 1) delineating the relevant product and geographic markets for examination of market power, 2) identifying firms that are current or potential suppliers in that market, and 3) determining whether the carrier under evaluation possesses individual market power in that market. As a result of the competition that has developed since the consent decree and the Telecommunications Act of 1996, price cap LECs may now be non-dominant in the provision of corridor and interstate intraLATA toll services, particularly in light of the availability of inter- and intraLATA toll dialing parity. Although the record in this proceeding is insufficient for us to conduct the analysis outlined in the Dominant/Non-Dominant Order, we do conclude that developments in the markets for interexchange services make it unlikely that price cap LECs will be able to exploit over a sustained period any individual market power in their provision of corridor and interstate intraLATA toll services. 54. First, there currently exist a number of competitive alternatives to provision of these services by price cap LECs. Non-dominant IXCs such as AT&T, MCI, and Sprint already provide long-distance services in the price cap LECs' service areas. IXCs and competitive LECs not currently providing such services could do so quickly, either over their own facilities or by reselling the services of IXCs already in the market. Most customers of domestic interexchange services are sensitive to changes in price and are willing to shift their traffic if a carrier raises its prices. Thus, non-dominant IXCs and competitive LECs can compete with price cap LEC provision of corridor and interstate intraLATA toll services. Inter- and intraLATA toll dialing parity, which is -- or shortly will be -- available throughout the country pursuant to the March 23, 1999, Dialing Parity Extension Order, will facilitate such competition. The existence of these competitive alternatives and the availability of toll dialing parity will limit the ability of price cap LECs to exploit over a sustained period any individual market power in their provision of corridor and interstate intraLATA toll services. 55. Second, some of the larger IXCs have nationwide brand identification in connection with long-distance services. This brand identification, and an IXC's ability to offer customers long-distance services that span the nation, rather than just in discrete geographies, should help offset any advantages a price cap LEC might enjoy based on its brand identification and possible integration efficiencies in the provision of local services. Moreover, as the Commission has noted in the past: [a]n incumbent firm in virtually any market will have certain advantages -- including, perhaps, resource advantages, scale economies, established relationships with suppliers, ready access to capital, etc. Such advantages do not, however mean that these markets are not competitive, nor do they mean that it is appropriate for government regulators to deny the incumbent the efficiencies its size confers in order to make it easier for others to compete. Indeed, 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. The IXCs' nationwide brand identification and larger service areas will limit the ability of price cap LECs to exploit over a sustained period any individual market power in their provision of corridor and interstate intraLATA toll services. 2. Removal of Services from Price Caps and Relaxation of Tariff Requirements 56. In light of our determination that price cap LECs will be unable to exploit any individual market power over a sustained period in their provision of corridor and interstate intraLATA toll services, we will allow a price cap LEC to remove those services from price cap regulation on fifteen days notice, and subsequently to file tariffs for those services on one day's notice without cost support and with a presumption of lawfulness, once it has implemented inter- and intraLATA toll dialing parity everywhere it provides local exchange services at the holding company level. The Commission retains, however, the ability to reimpose some or all of these regulations on one or more of the price cap LECs should this prove necessary in the future. The price cap LECs' provision of these services is also subject to Title II of the Act, enabling the Commission to continue to ensure that the rates are just, reasonable, and nondiscriminatory. 57. Because price cap LECs will be unable to exploit any individual market power over a sustained period in their provision of corridor and interstate intraLATA toll services, we find that the burdens imposed by price cap regulation of those services outweigh the little benefit such regulation might provide, especially considering the relatively de minimis nature of corridor and interstate intraLATA toll traffic. We also find that the operation of market forces should make it unlikely that they will file unlawful tariffs. Thus, upon careful consideration of the benefits and burdens of our present regulations, we conclude that more limited advance review of price cap LECs' corridor and interstate intraLATA toll service filings, when combined with mechanisms such as the complaint process and our investigation authority, is in the public interest. We will, therefore, allow price cap LECs to file tariffs for those services on one day's notice and without cost support. We do so under the authority of section 203(b)(2), which allows the Commission, "in its discretion and for good cause shown, [to] modify any requirement made by or under the authority of this section either in particular instances or by general order applicable to special circumstances or conditions." The growth in competition for long-distance services, and the availability of toll dialing parity, present just such special circumstances with regard to price cap LEC provision of corridor and interstate intraLATA toll services. V. GEOGRAPHIC DEAVERAGING OF RATES FOR TRUNKING BASKET SERVICES A. Background 58. Our Part 69 rules generally require that an incumbent LEC charge rates for access elements that are geographically averaged across each of its study areas. The Commission has developed a system of density pricing zones, however, that permits an incumbent LEC to deaverage geographically its rates for special access and switched transport services if that LEC meets certain threshold interconnection requirements. The density zone pricing rules permit incumbent LECs to establish a "reasonable" number of zones, but the Commission has noted in the past that "LECs seeking to establish more than three zones shall be subject to increased scrutiny and must carefully justify the number of zones proposed in their density pricing zone plan." In addition, incumbent LECs must show that density zones reflect cost characteristics such as traffic density or other measures of traffic passing through particular central offices. The Commission sought comment in the Access Reform NPRM on whether to grant incumbent LECs greater flexibility to deaverage access charges. B. Discussion 59. In this Order, we amend Section 69.123 of the Commission's rules to permit incumbent LECs to deaverage geographically their rates for access services in the trunking basket. We will permit price cap incumbent LECs to define both the scope and number of zones, provided that each zone, except the highest-cost zone, accounts for at least 15 percent of the incumbent's trunking basket revenues in the study area, and we no longer require LECs to demonstrate that the zones reflect cost characteristics. Granting incumbent LECs more flexibility to deaverage these rates enhances the efficiency of the market for those services by allowing prices to be tailored more easily and accurately to reflect costs and, therefore, promotes competition in both urban and rural areas. 60. Since 1992, the Commission has permitted LECs to deaverage certain rates by geographic zone because of the concern that averaged rates might create a pricing umbrella for competitors that would deprive customers of the benefits of more vigorous competition. Adoption of this policy reflected the conclusion that non-cost-based, geographically-averaged access rates could not be maintained in a market subject to increasing competition. Deaveraged rates promote efficiency by allowing an incumbent LEC to compete for customers when it is, in fact, the lowest cost service provider and by removing support flows to the incumbent LEC's higher-cost services. Incumbent LECs argue, however, that our current rules fail to achieve these goals for a variety of reasons. First, they argue that the "increased scrutiny" applicable to the creation of more than three pricing zones per study area discourages LECs from offering such plans. As a result, incumbent LECs argue, the zones in most zone density pricing plans are too large to be of practical value. Finally, incumbent LECs argue that traffic density is not the most accurate means of determining appropriate geographic boundaries for deaveraging. 61. We agree with incumbent LECs that traffic density is not the optimal, or even an accurate, method of determining cost-based pricing zones and that LEC-designed zones are more likely to lead to efficient pricing that reflects underlying cost characteristics. As the Commission observed in the Access Reform NPRM, averaging across large geographic areas distorts the operation of markets in high-cost areas because it requires incumbent LECs to offer services in those areas at prices substantially lower than their costs of providing those services. Prices that are below cost reduce the incentives for entry by firms that could provide the services as efficiently, or more efficiently, than the incumbent LEC. Similarly, discrepancies between price and cost may create incentives for carriers to enter low-cost areas even if their cost of providing service is actually higher than that of the incumbent LEC. 62. Given these observations, if we grant incumbent LECs practical flexibility to choose the number of zones and the criteria for establishing zone boundaries, they are more likely to establish reasonable and efficient pricing zones than if their flexibility is more constrained. Therefore, in this Order, we amend our rules to eliminate all competitive prerequisites for the deaveraging of trunking basket service rates and to permit price cap incumbent LECs to define zone pricing plans in any manner they wish, so long as each zone, except the highest-cost zone, accounts for at least 15 percent of the incumbent LEC's trunking basket revenues in the study area. This limitation ensures that incumbent LECs cannot define zones that are, for all practical purposes, specific to particular customers. As we explain in Section VI, below, we will not permit incumbent LECs to offer customer-specific contract tariffs until they satisfy certain triggers related to the development of competition, and we are concerned that, absent a rule establishing the minimum size of a zone, incumbents might circumvent this requirement by using zone pricing as a substitute for contract tariffs. At the same time, the limit we adopt permits a maximum of seven zones, which we believe should provide the ability to adjust to any likely variation in cost conditions. We note that no incumbent LEC has requested more than five zones. Our requirement that a zone, except the highest-cost zone, account for at least 15 percent of trunking revenues within a study area ensures that any lower rates resulting from deaveraging are enjoyed by a range of customers. Section 69.123(c)(2) of our rules, which requires transport between points located in two different zones to be priced in accordance with the higher-priced zone, also limits incumbent LECs' ability to draw pricing zones too narrowly. 63. The permissive geographic deaveraging we discuss here applies to rates for all services in the trunking basket to which density zone pricing currently applies, i.e., rates for all services except for the transport interconnection charge (TIC), so long as the same zones are used for all transport elements. We will continue to prohibit geographic deaveraging of the TIC so as not to disrupt the scheduled phase-out of that charge. In addition, we relax the constraints on annual price increases within zones that are contained in Sections 69.123(e)(2) and 61.47(e) of our rules by raising the limit on permitted price increases within zones from five percent to 15 percent. Although such constraints limit price cap incumbent LECs' ability to implement deaveraging and rebalance rates in a manner that reflects the actual costs of providing the services at issue, some limit on the rate of price increases within zones remains desirable in order to prevent the disruptive effects of rapid and unexpected price increases. Under our price cap rules, however, deaveraging permits LECs to increase rates in one geographic zone only to the extent that they decrease rates in other geographic zones in the study area. As Sprint points out, particularly where demand has grown faster in high-density zones than in low-density zones, the five-percent limit on price increases sharply constrains the ability of incumbent LECs to make revenue-neutral price cuts in high-density zones. Increasing to 15 percent the limit on price increases should allow more rapid movement to cost-based rates without subjecting customers in high-cost areas to rate shock. The requirement we adopt that each zone, except the highest-cost zone, account for at least 15 percent of the incumbent's trunking basket revenues in a study area should deter incumbent LECs from establishing rates for low-cost zones that are so low as to enable them to raise rates to unreasonably high levels in high-cost zones. Thus, we are not persuaded by AT&T's claims that greater geographic deaveraging flexibility will lead to predatory pricing by incumbent LECs or arguments by CPI and the Washington Commission that any further deaveraging should result only in price decreases, i.e., that it be "downward only." 64. We reject the Washington Commission's argument that more liberal geographic deaveraging rules might lead to IXC violations of sections 254(b)(3) and 254(k) of the Act. Section 254(b)(3) of the Act requires the Joint Board and the Commission to ensure that consumers in rural, insular, and high cost areas have access to telecommunications services that are available at rates that are reasonably comparable to rates charged for similar services in urban areas. We conclude that further geographic deaveraging of trunking services that may result from this Order is unlikely to place significantly greater pressures on IXCs (purchasers of trunking services) to deaverage their rates, in part because deaveraging implies price decreases as well as increases. Section 254(k) prohibits a telecommunications carrier from using services that are not competitive to subsidize services that are subject to competition. As we discuss above, however, changes in incumbent LEC pricing zones resulting from this Order are likely to increase the degree to which trunking service prices reflect cost and thus would decrease the likelihood of cross-subsidization. 65. We will no longer require incumbent LECs to file zone pricing plans in advance of tariff filings, as the Commission has in the past, because we presume that market forces, along with the limitation we adopt regarding the size of zones, will result in plans that reflect cost characteristics. Parties wishing to challenge the reasonableness of incumbent LEC zone pricing plans may do so as part of the tariff approval process, pursuant to which incumbent LECs must file any tariffs that include both a rate increase and rate decrease upon fifteen days' notice, or in a formal complaint under section 208 of the Act. 66. We are not persuaded by arguments made by MCI that the failure of incumbent LECs to take full advantage of the geographic deaveraging currently available under our rules is sufficient grounds for not granting incumbent LECs greater flexibility to deaverage transport services. As we discuss above, lack of flexibility in our density zone pricing rules may be responsible for incumbent LECs' current failures to take full advantage of such opportunities. We conclude above that market forces are more likely to result in efficient pricing than is regulation, and, for this reason, the greater flexibility we grant here will benefit access customers through more efficient pricing of access services. VI. PRICING FLEXIBILITY BASED ON A COMPETITIVE SHOWING A. Background 67. The Commission has long recognized that it should allow incumbent LECs progressively greater pricing flexibility as they face increasing competition. In the Access Reform First Report and Order, the Commission adopted a market-based approach to access charge reform, pursuant to which it would relax restrictions on incumbent LEC pricing as competition emerges, thereby ensuring that "our own regulations do not unduly interfere with the development and operation of these markets as competition develops." At that time, the Commission deferred resolution of the specific timing and degree of pricing flexibility to a future Order. 68. In the previous two sections, we adopt forms of regulatory relief for price cap LECs that can be granted under current market conditions and do not require a further competitive showing. Below, we consider forms of regulatory relief which, if granted prematurely, might enable price cap LECs to (1) exclude new entrants from their markets, or (2) increase rates to unreasonable levels. Accordingly, as a condition for granting further pricing flexibility, we require incumbent LECs to show that markets are sufficiently competitive both to warrant pricing flexibility to enable incumbent LECs to respond to competition and to discourage incumbents from either excluding new entrants or raising rates to unreasonable levels. In other words, we adopt requirements that price cap LECs make "competitive showings," or satisfy "triggers," to demonstrate that market conditions in a particular area warrant the relief at issue. 69. The pricing flexibility framework we adopt consists of two phases. To obtain Phase I regulatory relief, the incumbent must show that competitors have made irreversible investments in the facilities needed to provide the services at issue, thus discouraging incumbent LECs from successfully pursuing exclusionary strategies. Phase I permits LECs to offer contract tariffs and volume and term discounts, while requiring them to maintain their generally available price cap- constrained tariffed rates, thus protecting those customers that lack competitive alternatives. To obtain Phase II relief, which allows LECs to raise and lower rates, the incumbent must demonstrate that competitors have established a significant market presence in the provision of the services at issue. Under those market conditions, the availability of alternative providers will ensure that rates are just and reasonable. The triggers we adopt below should permit incumbent LECs to make the required showings, with a minimum of administrative burden for the industry and the Commission. 70. In Section VI.B, we define the geographic areas within which we will grant pricing flexibility. In Section VI.C.2, we establish Phase I competitive showings for (1) dedicated transport, (i.e., entrance facilities, direct-trunked transport, and the dedicated component of tandem-switched transport service) and special access services other than channel terminations; and (2) channel terminations. In Section VI.C.3, we adopt Phase I competitive showings for common line and traffic-sensitive services, and the traffic-sensitive components of tandem- switched transport service. We specify the regulatory relief to be afforded for all these services at Phase I in Section VI.C.4, and, in Section VI.C.5, we adopt Phase II competitive showings for dedicated transport and special access services and specify the relief that is available upon satisfaction of these showings. In the Notice accompanying this Order, we seek comment on appropriate Phase II triggers for the traffic-sensitive components of tandem-switched transport service, and for services in the traffic-sensitive and common line baskets. In Section VI.D, we revise our price cap low-end adjustment rules with respect to those price cap LECs that qualify for and elect to exercise any of the pricing flexibilities we grant in this section. We set forth the procedural requirements governing requests for pricing flexibility in Section VI.E. We base our conclusions in this section on the record developed in response to the Price Cap Second FNPRM and the Access Reform NPRM, supplemented by pleadings filed in response to the October 5 Public Notice and the pending forbearance petitions. Finally, in Section VI.F, we extend by ninety days the statutory deadline applicable to U S West's pending petition for forbearance from dominant carrier regulation in Phoenix, Arizona. B. Geographic Scope of Relief 71. Background. In the Price Cap Second FNPRM, the Commission invited comment on the geographic area that it should use for purposes of reviewing requests for pricing flexibility. The Commission sought to define these geographic areas narrowly enough so that the competitive conditions within each area are reasonably similar, yet broadly enough to be administratively workable. Specifically, the Commission invited comment on whether individual wire centers, zone density pricing zones, metropolitan statistical areas (MSAs), or local access and transport areas (LATAs) are the most appropriate geographic areas within which to grant pricing flexibility. Later, in the Access Reform NPRM, the Commission solicited comment on using the geographic zones adopted by state public service commissions for pricing of unbundled network elements (UNEs), or the zones adopted in the Universal Service proceeding for determining high cost areas. 72. Discussion. We will grant pricing flexibility relief for both Phase I and Phase II on an MSA basis. We agree with those commenters that maintain that MSAs best reflect the scope of competitive entry, and therefore are a logical basis for measuring the extent of competition. Because competitive LECs generally do not enter new markets on a state-wide basis, we reject proposals to define the geographic scope of pricing flexibility on the basis of states or study areas. Granting pricing flexibility over such a large geographic area would increase the likelihood of exclusionary behavior by incumbent LECs by giving them flexibility in areas where competitors have not yet made irreversible investment in facilities. 73. We also decline to grant pricing flexibility on the basis of LATAs. Many LATAs include an entire state, and in those cases, LATAs would be inappropriate for the same reasons we reject states and study areas as relevant markets. Of course, other states contain many LATAs, in which cases LATAs are similar to MSAs. In those cases, relying upon MSAs rather than LATAs should make little difference in determining whether to grant pricing flexibility. 74. We also reject proposals to grant pricing flexibility on the basis of wire centers or central offices. CTSI and KMC suggest that competition may exist in only a small part of an MSA, but we believe that the triggers we establish below are sufficient to ensure that competitors have made sufficient sunk investment within an MSA. In addition, defining geographic areas smaller than MSAs would force incumbents to file additional pricing flexibility petitions, and, although these petitions might produce a more finely-tuned picture of competitive conditions, the record does not suggest that this level of detail justifies the increased expenses and administrative burdens associated with these proposals. 75. In addition, we reject proposals to permit incumbent LECs themselves to select the geographic area for which they seek pricing flexibility. Determining whether the incumbent has chosen an appropriate area is likely to generate controversy, thus undermining our desire to create a framework for granting pricing flexibility, where warranted, without delay and without imposing undue burden on the industry or on Commission staff. 76. Commenters supporting MSAs have provided little if any guidance for pricing flexibility in non-MSA areas. We will grant price cap LECs pricing flexibility within the non- MSA parts of a study area if they satisfy the triggers we adopt below throughout that area. We decline to mandate individual showings for each rural service area (RSA), as we do for MSAs, because we expect competitors to enter MSA markets first and then to extend their networks into less densely populated areas. Because rural areas by definition do not have large concentrations of population comparable to urban areas, we expect that competitive entry into rural areas will be less concentrated than in urban areas. Therefore, we do not expect that pricing flexibility will enable an incumbent to engage successfully in exclusionary pricing behavior with respect to one RSA because competitive entry is limited to another RSA. Because the danger of exclusionary pricing behavior is lessened, we place more weight on our goal of administrative ease, and permit incumbent LECs to file a single pricing flexibility petition for all the RSAs in a study area. In addition, price cap LECs report some service quality information on a non-MSA basis, and so it should be easy for price cap LECs to collect collocation information for pricing flexibility requests in those areas. C. Phase I and Phase II Pricing Flexibility 1. General Approach 77. We will grant Phase I pricing flexibility to a price cap incumbent LEC for special access and dedicated transport services when it demonstrates either that (1) competitors unaffiliated with the incumbent LEC have established operational collocation arrangements in a certain percentage of the incumbent LEC's wire centers in an MSA, or (2) unaffiliated competitors have established operational collocation arrangements in wire centers accounting for a certain percentage of the incumbent LEC's revenues from the services in question in that MSA. In both cases, the incumbent also must show, with respect to each wire center, that at least one collocator is relying on transport facilities provided by a transport provider other than the incumbent LEC. As explained above, Phase I of our pricing flexibility framework provides incumbent LECs with regulatory relief when competitors have made irreversible investments in facilities within a given MSA. At that point, we no longer need to protect competition from exclusionary pricing behavior by incumbent LECs, because efforts to exclude competitors are unlikely to succeed. In order to protect access customers that may lack competitive alternatives, we limit the extent to which Phase I flexibility permits incumbents to raise rates, because competitors that are sufficiently entrenched to survive attempts by incumbents to exclude them from the market may not yet have a sufficient market presence to constrain prices throughout the MSA. 78. For the reasons discussed below, and based on the record before us, we conclude that a collocation-based trigger for granting pricing flexibility for special access and dedicated transport reasonably balances our two goals: (1) having a clear picture of competitive conditions in the MSA, so that we can be certain that there is irreversible investment sufficient to discourage exclusionary pricing behavior; and (2) adopting an easily verifiable, bright-line test to avoid excessive administrative burdens. In Section VI.C.2, we adopt specific triggers for (1) dedicated transport and special access services other than channel terminations; and (2) channel terminations. As we explain in Section VI.C.3 below, however, we adopt a different approach to granting pricing flexibility for traffic-sensitive and common line services, by requiring price cap LECs to demonstrate the extent to which competitors offer these services over their own facilities. 79. Irreversible Investment. In the Access Reform NPRM, the Commission explained that the initial phase of pricing flexibility should enable incumbent LECs to "re-price access services in ways that respond to competitive pressure, but do not impede competitive entry." We conclude that irreversible, or "sunk," investment in facilities used to provide competitive services is the appropriate standard for determining when pricing flexibility is warranted. Phase I regulatory relief will increase the efficiency of the interstate access market and reduce prices to end-user customers; therefore, we should delay granting this relief no longer than necessary to protect the development of a competitive market. Although Phase I relief permits incumbent LECs to offer contract tariffs and expands their authority to offer volume and term discounts, it also requires LECs to maintain their existing price cap tariffed rates, thus precluding price cap LECs from abusing their market power by charging dramatically higher rates to customers that lack competitive alternatives. We are concerned, however, about the possibility that price cap LECs could use Phase I relief, which enables them to offer contract tariffs to individual customers, to engage in exclusionary pricing behavior and thereby thwart the development of competition. Economists have long noted the incentives that monopolists have to reduce prices in the short run and forgo current profits in order to prevent the entry of rivals or to drive them from the market. The monopolist then would be able to raise prices above competitive levels and earn higher profits than would have been possible if the exclusionary pricing behavior had not occurred and competitors had not exited or been deterred from entering the market. Joskow and Klevorick note the conditions that increase the likelihood, and the social cost, of exclusionary pricing behavior. Several of these conditions, including short-run monopoly power, low elasticity of demand, and high profits in the absence of regulatory or competitive constraints, appear to characterize the interstate access market. An incumbent can forestall the entry of potential competitors by "locking up" large customers by offering them volume and term discounts at or below cost. Specifically, large customers may create the inducement for potential competitors to invest in sunk facilities which, once sunk, can be used to serve adjacent smaller customers. To the extent the incumbent can lock in the larger business customers whose traffic would economically justify the construction of new facilities, the incumbent can foreclose competition for the smaller customers as well. Consequently, we believe that pricing flexibility must be structured to prevent exclusionary pricing behavior so as to safeguard the development of competition. 80. An incumbent monopolist will engage in exclusionary pricing behavior only if it believes that it will succeed in driving rivals from the market or deterring their entry altogether. Otherwise, the reduced profits caused by exclusionary pricing behavior will not be recouped by other sales under the resulting conditions of reduced competition, and the incumbent will be worse off than if it had not engaged in exclusionary pricing behavior. Once multiple rivals have entered the market and cannot be driven out, rules to prevent exclusionary pricing behavior are no longer necessary. Investment in facilities, particularly those that cannot be used for another purpose, is an important indicator of such irreversible entry. If a competitive LEC has made a substantial sunk investment in equipment, that equipment remains available and capable of providing service in competition with the incumbent, even if the incumbent succeeds in driving that competitor from the market. Another firm can buy the facilities at a price that reflects expected future earnings and, as long as it can charge a price that covers average variable cost, will be able to compete with the incumbent LEC. In telecommunications, where variable costs are a small fraction of total costs, the presence of facilities-based competition with significant sunk investment makes exclusionary pricing behavior costly and highly unlikely to succeed. We conclude, therefore, that our Phase I triggers should measure the extent to which competitors have made sunk investments in facilities used to compete with the incumbent LEC. 2. Phase I Triggers for Special Access and Dedicated Transport Services a. Collocation by Competitors 81. As we explain below, collocation by competitors in incumbent LEC wire centers is a reliable indication of sunk investment by competitors. In the Expanded Interconnection Orders, the Commission adopted rules requiring incumbent LECs to permit competitors to collocate equipment at incumbent LEC wire centers and other LEC locations, in order to enable competitors to terminate their transmission facilities at those locations. The Commission adopted these collocation rules, with only minor modifications, to implement the collocation requirements of section 251(c)(6) of the Act. More recently, the Commission expanded its collocation rules to facilitate the development of competition in the advanced services market, while promoting competition in the traditional circuit-switched voice market. In particular, incumbent LECs must make available shared caged and cageless collocation arrangements, and must permit competitors to collocate all equipment used for interconnection and/or access to UNEs, even if it includes a switching or enhanced service function. In many cases, a collocation arrangement indicates the existence of a competitor's transmission facilities terminating at that collocated equipment. Thus collocation usually represents a financial investment by a competitor to establish facilities within a wire center. We also note that competitors incur considerable expense to establish an operational collocation arrangement. The cost to a competitor of a single collocation arrangement can exceed $300,000. Commenters also point out that negotiating all the terms of a collocation agreement can require considerable time and effort. For example, MCI states that negotiations lasted an average of six to nine months during the period from mid-1994 to mid-1996. It also seems likely that, when a competitor initially enters a market, most of these transmission facilities will be "trunk-side" facilities, i.e., facilities leading from the collocated equipment to the IXC POP rather than to the customer premises. This is because competitors can use those facilities to carry highly concentrated traffic between, for example, serving wire centers and POPs, and so can use that investment to serve a number of customers. For the same reason, competitors will probably wait to invest in line-side facilities until they have all or most of their trunk-side facilities in place. In either case, the investment in transmission facilities associated with collocation arrangements is largely specific to a location; the competitive LEC's facilities cannot, for the most part, easily be removed and used elsewhere if entry does not succeed. 82. For all these reasons, we are confident that, in the past, the presence of an operational collocation arrangement in a wire center almost always implied that a competitor has installed transmission facilities to compete with the incumbent. This correlation between operational collocation arrangements and competitive transport facilities is somewhat attenuated, however, by the advent of services such as digital subscriber line (DSL) services. Competitors providing these services usually collocate in order to gain access to the incumbent's copper loops, a necessary input for DSL service, not to compete with the incumbent for the provision of transport services. DSL services often are marketed as broad-based offerings to small business and residential customers, thus requiring competitors to collocate in many, if not all, of the wire centers in an MSA, many of which may lack competitive transport facilities. In this case, therefore, they rely on the incumbent's transport facilities. Therefore, to ensure that our triggers continue to provide a clear picture of competitive conditions on a going-forward basis, we require incumbent LECs to show that at least one competitor relies on transport facilities provided by a transport provider other than the incumbent at each wire center listed in the incumbent's pricing flexibility petition as the site of an operational collocation arrangement. 83. We acknowledge that, because we will evaluate pricing flexibility requests on an MSA basis and do not require the presence of competitive facilities in every wire center in an MSA, there remains a theoretical possibility that an incumbent LEC could use pricing flexibility in a predatory manner to deter investment in competitive facilities in those wire centers where it as yet faces no competition. For the reasons given above, however, we believe the costs, particularly the administrative costs, of granting pricing flexibility on a wire center-by-wire center basis outweigh the benefits of protecting against such theoretical harms. To the extent that an incumbent LEC attempts to use pricing flexibility in a predatory manner, aggrieved parties may pursue remedies under the antitrust laws or before this Commission pursuant to section 208 of the Act. 84. Administrative Burdens. The Commission has tentatively concluded that it is important to base our triggers on "objectively measurable criteria . . . so as to avoid delay caused by protracted proceedings and to minimize administrative burdens." We conclude here that a collocation-based trigger provides an administratively simple and readily verifiable mechanism for determining whether competitive conditions warrant the grant of pricing flexibility. In the Price Cap Second FNPRM, the Commission invited comment on establishing a "competitive checklist" as a test for Phase I pricing flexibility. Specifically, the Commission sought comment on eight checklist items, seven of which were taken from legislation pending before Congress which led to the Telecommunications Act of 1996. The 1996 Act incorporated those seven criteria into the test for determining whether a Bell Operating Company (BOC) should be permitted into the market for in-region interLATA services. As a result of our review of several BOC 271 applications, the Commission has found that ascertaining whether the BOC adequately has demonstrated that it is providing these checklist items on a nondiscriminatory basis is not administratively simple or easily verifiable. These applications produce voluminous records in which the parties hotly contest BOC compliance with the checklist, and resolution of these disputes within the ninety days permitted by the statute imposes considerable burdens on both industry and the Commission. 85. In order to avoid these burdensome and costly proceedings, we will rely instead on the eighth criterion -- collocation in wire centers that account for a significant portion of the incumbent LEC's business lines or interstate access revenues. This approach has widespread support from diverse segments of the industry. MCI argues that, if we permit any pricing flexibility at all, we should do so only upon a showing that competitors have collocated in wire centers serving a certain percentage of the incumbent LECs' demand. Bell Atlantic and Ameritech also advocate granting regulatory relief when competitors have collocated in a certain percentage of wire centers in a market area, or in wire centers serving a certain percentage of the demand in a market area. We further conclude that such a collocation-based standard is administratively simple because several BOCs have provided data of this type in support of pending forbearance petitions. 86. Finally, we have determined that it is not burdensome to require incumbent LECs to demonstrate that at least one competitor relies on transport facilities provided by a transport provider other than the incumbent at each wire center listed in the incumbent's pricing flexibility petition as the site of an operational collocation arrangement. Competitors typically must hire the incumbent to install cable from the competitors' networks to their collocated equipment. Thus, incumbent LECs should be able to identify those collocators providing their own transmission facilities on the basis of their billing records. Furthermore, we do not require incumbent LECs to identify all the competitors collocated at each wire center and providing their own transport facilities, but rather merely to identify at least one competitor providing its own transport facilities at each wire center. 87. Other Triggers. We conclude that none of the other triggers proposed in this record is preferable to collocation with competitive transport. Ameritech advocates granting pricing flexibility when competitors have collocated in wire centers from which they can provide service to a certain percentage of the demand for a service in the market area, measured on the basis of DS1-equivalents. MCI argues, however, that a "DS1 equivalent" measure overstates competitive inroads in a market by placing disproportionate weight on entrance facilities (which are usually DS3 circuits) where competitive entry has been greatest. Because the price of one DS3 circuit is less than the price of 28 DS1 circuits, even though they provide equal capacity, MCI argues that measuring competitors' market presence on the basis of revenues gives a better indication of the extent to which competitors have made significant inroads into the market in question. We agree with MCI. Because competitors are drawn to new markets by the prospect of earning revenues, rather than merely opportunities to provide capacity, we find that revenue is a more relevant measure of market entry. Moreover, we want to adopt Phase I triggers that ensure that incumbent LECs can no longer successfully drive new entrants from the market. If we adopted a trigger based on percentage of demand measured in terms of DS1 equivalents, then an incumbent LEC might receive Phase I pricing flexibility for all dedicated transport services and all special access services other than channel terminations, even though competitive alternatives may exist only for entrance facilities. 88. In the Access Reform NPRM, the Commission sought comment on adopting triggers related to the degree to which local markets are open to competition, such as availability of UNEs at forward-looking economic cost, transport and termination at cost-based rates, and resale of retail services at a wholesale price. We find that collocation-based standards provide a better basis for Phase I triggers than standards based on availability of UNEs and resale, because availability does not indicate whether they actually have been purchased. Further, a competitor's use of UNEs or resale does not indicate that it has sunk investments in facilities in the MSA, because services provided over UNEs or through resale make use of the incumbent's facilities. Purchase of UNEs by a competitor does not, by itself, constitute the type of investment in facilities that warrants pricing flexibility for special access and dedicated transport services. UNEs, by definition, comprise incumbent LEC facilities that are leased to competitors. Because competitors have few "sunk costs" associated with UNEs, if an incumbent drives a UNE-based competitor from the market, that competitor does not leave facilities in place that another firm then can buy at a discount. Instead, a subsequent competitor would have to negotiate with the incumbent for use of those UNE facilities. As a result, such a competitor may be susceptible to an exclusionary pricing scheme. Similarly, the presence of a state-approved interconnection agreement or Statement of Generally Available Terms and Conditions, proposed as a trigger by USTA, does not by itself indicate that new market entrants have made sufficient sunk investments in facilities to resist exclusionary pricing behavior. Finally, although a transport and termination agreement between an incumbent and a competitor may imply that the competitor is carrying traffic over its own network, that may not provide evidence of investment in facilities used to compete with an incumbent LEC. For example, the competitor may carry wireless traffic, which may or may not be a competitive substitute for wireline connections, or the competitor may provide service over UNEs. Accordingly, we conclude that collocation arrangements are more likely than transport and termination agreements to demonstrate that competitors have invested in facilities sufficiently to resist exclusionary pricing behavior. 89. We also reject CFA's proposal to grant pricing flexibility only upon a showing of compliance with the section 271 criteria, among other things. Section 271 compliance demonstrates that a BOC has opened its local markets to competition, but it may not show the extent of competitive alternatives in the market for interstate access services. Competition may have developed to such a degree as to warrant granting pricing flexibility to such a BOC in part of a state, even if the incumbent has not satisfied the checklist, either because it is not interested in section 271 relief, or because, for example, it is working to bring its operations support systems (OSS) into compliance. Delaying pricing flexibility under these circumstances denies access customers the benefits of increased efficiency in the interstate access market. Furthermore, we determine above not to grant pricing flexibility on a state-by-state basis because competitors generally do not enter new markets on that basis. Because section 271 requires the Commission to make state-wide determinations, granting pricing flexibility upon compliance with the 14- point checklist raises the same concerns. 90. Furthermore, we will not require incumbent LECs to demonstrate that they no longer possess market power in the provision of any access services to receive pricing flexibility, for two reasons. First, as we explain in more detail below, regulation imposes costs on carriers and the public, and the costs of delaying regulatory relief outweigh any costs associated with granting that relief before competitive alternatives have developed to the point that the incumbent lacks market power. Second, non-dominance showings are neither administratively simple nor easily verifiable. As several BOCs note in their forbearance petitions, the Commission previously has based non-dominance findings on several complex criteria, including market share and supply elasticity. Market share analyses require considerable time and expense, and they generate considerable controversy that is difficult to resolve. For example, in response to U S West's Phoenix forbearance petition, several commenters assert that U S West overstates its market share losses by treating re-sold services as services provided by competitors, even though U S West continues to provide the underlying facilities. Sprint claims that we cannot rely on U S West's market share analysis without reviewing the underlying data. Measuring supply elasticity also can be controversial; a number of commenters claim, for example, that U S West underestimates its competitors' costs of extending their networks. ALTS argues, moreover, that excess capacity in competitors' networks is generally limited to particular routes, and incumbent LECs should not, therefore, rely on that existing excess capacity to support claims regarding the elasticity of supply in the interstate access market. 91. We do not address in this Order whether any BOC has adequately supported its market share or supply elasticity claims in its forbearance petition. Rather, we conclude here that it would be administratively burdensome to require incumbent LECs to perform and the Commission to evaluate market share or supply elasticity analyses before the LECs may obtain any regulatory relief, and so we decline to adopt such a requirement here. 92. Finally, we disagree with commenters opposing any additional pricing flexibility for price cap LECs at this time. These commenters either argue generally that price cap LECs have sufficient pricing flexibility to respond to competition under the current price cap rules, or that price cap LECs must not face meaningful competition because rates in the trunking basket are generally at the maximum permitted under the price cap rules. First, the existing rules clearly limit price cap LECs' ability to respond to competition. Price cap LECs are subject to both our Part 61 rules regarding rate levels and the mandatory rate structure rules set forth in Part 69 of our rules. Our rules precluding LECs from offering contract tariffs and limiting volume and term discount offerings may create a price umbrella for competitors. Second, as mentioned above, delaying regulatory relief imposes costs on carriers and the public, the latter of which is deprived of the benefits of more vigorous competition. We see no public benefit in any further delay in regulatory relief, once an incumbent LEC has satisfied the triggers we adopt below. Finally, price cap LECs were required to eliminate at least some of the headroom in the trunking basket as a result of the X-Factor increase adopted in Price Cap Fourth Report and Order. Observing that there is no headroom in the trunking basket does not necessarily mean, therefore, that price cap LECs face no competition, because we cannot know the extent to which the X-Factor puts downward pressure on rates that the price cap LECs otherwise might have lowered in response to competition. b. Dedicated Transport and Special Access Services, Other than Channel Terminations 93. We conclude that incumbent price cap LECs are entitled to Phase I pricing flexibility for dedicated transport services (entrance facilities, direct-trunked transport, and the flat-rated portion of tandem-switched transport) and special access services other than channel terminations upon demonstrating that competitors have collocated in 15 percent of an incumbent LEC's wire centers in the MSA, or in wire centers accounting for 30 percent of the incumbent LEC's revenues from these services. The relief granted upon satisfaction of this Phase I trigger, together with the relief we grant immediately in Sections III and V above, is comparable to much of the relief proposed by Bell Atlantic and Ameritech in their 1998 ex parte statements. We rely in part on the record developed in response to Bell Atlantic's and Ameritech's proposals in developing our Phase I triggers. Bell Atlantic proposes granting relief when competitors have collocated facilities, purchased UNEs, or installed their own facilities in 25 percent of the wire centers in the market area. Ameritech recommends granting relief when competitors have collocated in wire centers serving 25 percent of the demand in a market area, measured on a DS1-equivalent basis. MCI, however, recommends deferring relief until competitors account for at least 50 percent of the revenue in a market or 50 percent of the channel terminations between end offices and customer premises. 94. As we explain above, we conclude that it is appropriate to give incumbent LECs pricing flexibility when competitors have made irreversible, sunk investment in facilities. For the reasons discussed above, UNEs do not represent sunk investment in facilities used to compete with incumbent LECs in the provision of special access and dedicated transport services, and so we reject Bell Atlantic's proposal that we include purchase of UNEs as a measure of competitive presence within a wire center. We also reject Bell Atlantic's proposal that we grant flexibility when competitors have collocated facilities or installed their own facilities in 25 percent of the wire centers in the market area. Although the presence of competitive facilities within a wire center may well be the best evidence of irreversible investment, this type of trigger is neither simple to administer nor easily verifiable. Our review of the records developed in response to the pending forbearance petitions indicates widespread disagreement among the parties as to the scope and reach of competitive facilities within a particular geographic area. A competitor has "installed its own facilities" within a wire center if, for example, it has laid fiber anywhere within the area served by the wire center, but a separate analysis is required to determine what proportion of the incumbent's customers the competitor can serve with those facilities. Our desire to avoid these administratively burdensome proceedings compels us to adopt collocation as a measure of competitive presence. 95. We recognize, however, that evidence of collocation may underestimate the extent of competitive facilities within a wire center, because it fails to account for the presence of competitors that do not use collocation and have wholly bypassed incumbent LEC facilities. For this reason, and because the Phase I relief we are granting is not as extensive as that sought by the incumbent LECs, we find that a threshold lower than 25 percent is warranted. Based on the information submitted in support of several pending petitions for forbearance, it appears that collocation in 15 percent of an incumbent's wire centers in an MSA represents significant investment in competitors' facilities. For example, Bell Atlantic reports that competitors have collocated in 17.9 percent of its wire centers in the Norfolk LATA, and that competitors have installed about 2200 miles of fiber in that LATA. In three SBC MSAs in which competitors have collocated in slightly more than 15 percent of SBC's wire centers, SBC reports that competitors' networks average at least 736 miles. This figure seems conservative because SBC reports figures for only a few of its competitors within these MSAs. Because a competitor must devote significant time and expense to establish each collocation arrangement, the extent of collocation in those three SBC MSAs indicates that competitors have made considerable investment in these MSAs. We conclude, therefore, that collocation by competitors in 15 percent of the incumbent LEC's wire centers in an MSA is the appropriate trigger for Phase I relief with respect to dedicated transport services and special access services other than channel terminations. 96. Our selection of this 15 percent threshold and the other thresholds we adopt below, like ratemaking issues, is not an exact science. Rather, the thresholds are policy determinations based on our agency expertise, our interpretation of the record before us in this proceeding, and our desire to provide a bright-line rule to guide the industry. This latter factor counsels against adoption of triggers that may provide more comprehensive measures of competition but impose heavy burdens on both industry and the Commission. Our effort to select triggers that precisely measure competition for particular services also is hampered by the lack of verifiable data concerning competitors' revenues and facilities. Unlike incumbent LECs, competitors are not subject to Commission reporting requirements, and they often are unwilling to provide this information voluntarily. Given these constraints, we adopt triggers that, in our reasoned judgment, balance both the desires for precision and simplicity and the costs to carriers and customers alike of delaying the grant of pricing flexibility. 97. In some cases, a few wire centers may account for a disproportionate share of revenues for a particular service. For instance, Bell Atlantic claims that 93 percent of its special access demand measured on a DS-1 equivalent basis is concentrated in 20 percent of its wire centers. Although, as we explained above, measuring demand on a DS-1 equivalent basis overstates competitors' presence, we nevertheless find that Bell Atlantic has shown that demand is often concentrated in particular areas. We find that collocation in wire centers representing a significant percentage of incumbent LEC revenues from a particular service also indicates meaningful investment by competitors. Accordingly, we will permit price cap LECs to satisfy the Phase I trigger on a revenue basis, as well as by showing that competitors have collocated in a percentage of incumbent LEC wire centers in an MSA. 98. We conclude that the revenue-based trigger should be higher than the trigger based on percentage of wire centers in the MSA in which competitors have collocated. If certain wire centers account for a disproportionate share of revenues, then we need to establish revenue-based thresholds higher than the percentage-based threshold to ensure that competitors have extended their networks beyond a few revenue-intensive wire centers. Ameritech recommends granting relief if competitors have collocated in wire centers providing service to 25 percent of the demand for transport services measured on the basis of DS1-equivalents. MCI advocates conditioning relief on competitors achieving a 50 percent market share in revenue terms. Based on these pleadings, we conclude that incumbents will qualify for Phase I relief upon demonstrating that competitors have collocated in wire centers accounting for 30 percent of the incumbent's revenues for special access (other than channel terminations) and dedicated transport services. 99. Bell Atlantic asserts that a revenue-based trigger is unworkable because the proper allocation of revenues among offices for a special access or dedicated transport services routed through multiple offices might be open to dispute. Bell Atlantic's argument is unpersuasive with respect to channel terminations because those services are not routed through intermediate offices. With respect to other special access and dedicated transport services, however, we agree that there is a revenue allocation issue. Access customers order special access and dedicated transport services to provide a transmission path between two customer-designated locations. We therefore direct any LEC seeking pricing flexibility to allocate 50 percent of the revenue from a dedicated service routed through multiple offices to the office at each end of the transmission path, unless it can make a convincing case in its petition that some other allocation would better represent the extent of competitive entry in the MSA at issue. Although a 50 percent allocation rule seems reasonable, we cannot conclude that other allocation schemes might not also be reasonable under the circumstances. Although this is not a bright-line test like we have adopted elsewhere in this Order, determining whether a petitioner has made a convincing showing on this allocation issue should not be difficult. c. Channel Terminations 100. We conclude that pricing flexibility for channel terminations requires separate consideration of the degree of competition for channel terminations between an IXC POP and LEC serving wire center and channel terminations between a LEC end office and customer premises. Accordingly, incumbent LECs qualify for Phase I pricing flexibility with respect to channel terminations between an IXC POP and a LEC serving wire center by showing that competitors have collocated in 15 percent of the wire centers in an MSA, or in wire centers accounting for 30 percent of incumbent LEC revenues from these services. With respect to channel terminations between a LEC end office and a customer premises, incumbent LECs qualify for Phase I pricing flexibility by showing that competitors have collocated in 50 percent of incumbent LEC wire centers in the MSA, or in wire centers accounting for 65 percent of incumbent LEC revenues from these services. 101. We find that channel terminations between a LEC end office and a customer premises warrant different treatment than other special access and dedicated transport services. ALTS recommends treating channel terminations separately from other special access and dedicated transport services because channel terminations are not substitutes for those services. MCI recommends granting relief in the transport market only upon a showing that competitors have captured a 50 percent market share in revenue terms, or 50 percent of the channel terminations between end offices and customer premises. 102. We agree that pricing flexibility for channel terminations between a LEC end office and a customer premises requires a higher threshold than flexibility for other dedicated transport and special access services. Entrance facilities, direct-trunked transport, channel mileage, and the flat-rated portion of tandem-switched transport all involve carrying traffic from one point of traffic concentration to another. Thus, entering the market for these services requires less investment per unit of traffic than is required, for example, for channel terminations between an end office and customer premises. Furthermore, investment in entrance facilities enables competitors to provide service to several end users, while channel terminations between an end office and customer premises serve only a single end user. Accordingly, competitors are likely to enter the market for entrance facilities, direct-trunked transport, channel mileage, and the flat- rated portion of tandem-switched transport before they enter the market for channel terminations between a LEC end office and a customer premises. We therefore adopt a higher threshold for granting flexibility for these channel terminations than for other special access and dedicated transport services. 103. This higher threshold is warranted for another reason. As a number of parties indicate, a competitor collocating in a LEC end office continues to rely on the LEC's facilities for the channel termination between the end office and the customer premises, at least initially, and thus is susceptible to exclusionary pricing behavior by the LEC, and so collocation by competitors does not provide direct evidence of sunk investment by competitors in channel terminations between the end office and the customer premises. We recognize, therefore, the shortcomings of collocation as a measure of competition for channel terminations between end offices and customer premises, but it appears to be the best option available to us at this time. MCI's suggestion that LECs show that competitors have captured 50 percent of the market for these services is problematic because market share determinations are unreliable in the absence of verifiable data regarding competitors' revenues. The Commission has, to date, engaged only in voluntary data collection with respect to competitive providers of telecommunications services, and those efforts are not satisfactory for providing a comprehensive picture of the degree of competition in the marketplace. AT&T's most recent proposal to measure competition for channel terminations by comparing revenue represented by competitive facilities to revenue represented by incumbent LEC facilities suffers from the same deficiency. AT&T acknowledges that data used to support the revenue measure is not now available, either to the Commission or to the incumbents that would be required to satisfy any such trigger; it states that the data "would be developed by and drawn from the industry as necessary, subject to appropriate certification and verification procedures." Although we welcome suggestions from AT&T and others about the desirability of formal reporting requirements, we are not prepared to defer pricing flexibility to seek comment on those proposals. 104. Despite the shortcomings of using collocation to measure competition for channel terminations, moreover, it seems likely that a new market entrant would provide channel terminations through collocation and leased LEC facilities only on a transitional basis and will eventually extend its own facilities to reach its customers. It also seems likely, therefore, that the extent to which competitors have collocation arrangements in an MSA is probative of the degree of sunk investment by competitors in channel terminations between the end office and the customer premises throughout the MSA. In addition, as we discuss above, collocation is a conservative measure of competition in that it does not measure competition from competitors that bypass LEC facilities altogether. Given the lack of other data in the record, therefore, we conclude that it is reasonable to rely on collocation as a proxy for irreversible, sunk investment in channel terminations between the end office and the customer premises and to set the applicable thresholds high enough to account for the limitations inherent in this trigger. Based on this reasoning, we reach two conclusions: (1) we must require incumbent LECs to make separate showings for each kind of channel termination; and (2) the thresholds for channel terminations between the end office and the customer premises must be higher than the thresholds for channel terminations between the IXC POP and the serving wire center. 105. Thus, we reject incumbent LEC recommendations to the extent that they advocate adoption of the same triggers for all channel terminations as for other dedicated transport and special access services. Instead, we adopt a trigger for channel terminations between a LEC end office and a customer premises based in part on MCI's recommendation that incumbent LECs must demonstrate that competitors have gained a 50 percent market share in revenue terms, or 50 percent of the channel terminations between end offices and customer premises. In order to avoid administratively burdensome market share determinations, however, we adopt collocation rather than market share as a measure of competitive presence. Specifically, we will permit Phase I pricing flexibility for channel terminations between an incumbent LEC's end office and customer premises when competitors have collocated in 50 percent of incumbent LEC wire centers in the MSA. Bell Atlantic reports that competitors have collocated in 50 percent of its wire centers in two LATAs, New York Metro and Philadelphia. Furthermore, Bell Atlantic states that its competitors in Philadelphia include AT&T, with a 300-mile network, and MCI, with a 100-mile network. Bell Atlantic also lists five other competitors providing service in Philadelphia. It seems likely that some of that investment is in channel terminations, suggesting that collocation in 50 percent of the wire centers in a geographic area correlates to sunk investment in channel terminations. Accordingly, we conclude that collocation in 50 percent of an incumbent LEC's wire centers within an MSA is an appropriate threshold for channel terminations between that LEC's end office and customer premises. 106. As we found above with respect to dedicated transport and other special access services, demand for these channel terminations may be fairly concentrated. Therefore, we also permit incumbent LECs to demonstrate that competitors have collocated in wire centers accounting for 65 percent of incumbent LEC revenues from these services. This 65 percent threshold is 15 percent higher than the trigger based on percentage of the wire centers in an MSA where competitors have collocated. This 15 percent difference is consistent with the difference in the triggers we adopted for dedicated transport and other special access services, i.e., wire centers accounting for 30 percent of the incumbent LEC's revenues for those services, or collocation at 15 percent of the wire centers in the MSA. 107. We also find, however, that a lower threshold is warranted for channel terminations between a LEC serving wire center and an IXC POP. As explained above, competition is likely to develop first for those services that carry traffic between points of high traffic concentration. Moreover, a competitor collocated at a LEC serving wire center provides the channel termination to an IXC POP over its own facilities. We conclude that incumbent LECs may demonstrate sunk investment by competitors with respect to these channel terminations if competitors have collocated in 15 percent of the wire centers in an MSA, or in wire centers accounting for 30 percent of the demand, measured by revenues, for these channel terminations in the MSA. Because these channel terminations carry traffic between points of concentration similar to the points connected by entrance facilities, we conclude that they should have the same trigger. 3. Phase I Triggers for Other Switched Access Services 108. We conclude that an incumbent price cap LEC should be allowed Phase I pricing flexibility for common line and traffic-sensitive services, and the traffic-sensitive components of tandem-switched transport service, when it demonstrates that competitors, in aggregate, offer service over their own facilities to at least 15 percent of incumbent LEC customer locations in the MSA. 109. We conclude above that Phase I relief for a particular service is warranted when an incumbent LEC demonstrates that competitors have made irreversible investment in facilities used to compete with the incumbent LEC in the provision of that service. For special access and dedicated transport services, we adopt a trigger based on collocation by competitors because competitors historically have collocated in incumbent LEC wire centers in order to provide transport and special access services. Thus collocation furnishes evidence of irreversible investment in facilities in part because it indicates competitive transmission facilities terminating at the collocation site. Although we acknowledge that some competitors provide these services exclusively over their own facilities (total facilities bypass), the extent of such competition is difficult to measure. Because collocation traditionally has served as the building block for competitive transport services, we conclude that it constitutes a sufficient measure of the degree to which competitors have invested in facilities to provide these services. 110. Competition for common line and traffic-sensitive services, however, is a much more recent phenomenon, and it may not develop in this same manner. For this reason, a different approach to granting pricing flexibility for these services is warranted. For traffic-sensitive and common line services, we adopt a Phase I trigger that takes into account competitors that have wholly bypassed incumbent LEC facilities, as well as competitors that collocate in incumbents' wire centers so as to provide service over unbundled loops. 111. The 1996 Act opened the local exchange market and, hence, the market for switched access services, to competition. The Act envisions three alternatives that competitors might employ, either singly or in combination, to enter this market: total service resale, service using unbundled network elements, and service provided over the competitor's own facilities. Not all of these entry strategies, however, indicate that competitors have made irreversible investment in facilities used to compete with incumbents in the provision of switched access services. As we explain above, resold services employ only incumbent LEC facilities and thus do not indicate any irreversible investment by competitors whatsoever. Similarly, a competitor providing service solely over unbundled network elements leased from the incumbent (the so-called "UNE platform") has little, if any, sunk investment in facilities used to compete with the incumbent LEC. For these reasons we do not allow an incumbent LEC to qualify for Phase I relief as a result of competition solely from resale or unbundled network elements. 112. If, however, competitors offer switched access services either entirely over their own facilities or by combining unbundled loops with their own switching and transport, this indicates the type of irreversible investment in facilities that warrants Phase I pricing flexibility for these services. In the first case, the competitor bypasses incumbent facilities altogether; in the latter case, a competitor must collocate in an incumbent's wire center to connect the leased loops to its transport facilities. Although a trigger based solely on collocation is administratively simpler and more easily verified, we decline in this case to adopt such a trigger because we lack sufficient experience with competition in the local exchange and switched access markets to know the extent to which competitors might rely on either of these entry strategies. We note, for example, that the time and expense required to establish collocation arrangements and the difficulties associated provisioning of UNEs by incumbent LECs may encourage competition through total bypass. Because it is unclear, therefore, the extent to which competitors are pursuing UNE-based entry strategies, we conclude that data concerning total bypass may be particularly important in assessing the degree of competitive entry in the markets for switched services. 113. Rather than looking solely at collocation, therefore, we adopt a Phase I trigger for switched services that measures the extent to which competitors offer these services either exclusively or largely over their own facilities. We will grant Phase I pricing flexibility for common line and traffic-sensitive services to an incumbent LEC in an MSA if that LEC demonstrates that competitors offer service over their own facilities to 15 percent of the incumbent's customer locations in the MSA. As we explain above, a competitor provides service over its own facilities if it leases unbundled loops but provides its own switching and transport. A competitor is not, however, offering service over its own facilities to the extent it offers service through resale or exclusively through the use of unbundled network elements. We acknowledge that we have concluded, both for determining eligibility for universal service support under section 254(e) of the Act and for BOC applications under section 271 to provide in-region interLATA services, that a carrier's "own" facilities include UNEs provided by the incumbent LEC. For purposes of this Order, however, we use "own facilities" in a narrower sense, excluding UNEs provided by the incumbent LEC, except in the case of CLECs using unbundled loops in conjunction with their own switching and transport facilities. 114. We also decline at this time to permit incumbents to satisfy the Phase I trigger by showing that customer locations are served by mobile wireless competitors. Although Congress allowed the Commission to consider competition from Personal Communications Service (PCS) in the context of Bell Operating Company (BOC) applications for in-region interLATA authority when PCS serves as a substitute for the BOC's services, inclusion and evaluation of such data is problematic for purposes of determining whether an incumbent LEC is entitled to Phase I pricing flexibility, primarily because it is difficult to assess whether mobile (as opposed to fixed) wireless serves as a substitute for (and thus competes with) wireline service provided by an incumbent LEC. 115. In arriving at the 15 percent trigger, we note that the relief granted upon satisfaction of the Phase I trigger for common line and traffic-sensitive services, together with the relief we grant immediately in Sections III and V above, is comparable to much of the switched services relief proposed in ex parte submissions by Bell Atlantic, Ameritech, and USTA. 116. Bell Atlantic recommends granting relief when competitors have "demonstrated the capability" to provide service in wire centers representing, in aggregate, at least 25 percent of the demand for the service in question, i.e., residential/single-line-business and multi-line business. Under Bell Atlantic's proposal, competitors have demonstrated the ability to provide service in a wire center if they provided service with their own or ported telephone numbers to any of the relevant class of customers. Ameritech proposes granting relief when competitors have collocated in wire centers serving 25 percent of the demand in a market area, measured on an interstate minutes-of-use basis. USTA also proposes a 25 percent threshold, but bases it on the sum of line demand attributable to (1) wire centers in which there is operational collocation and competitors are taking unbundled loop or unbundled local switching UNEs and (2) lines located within 1000 feet of competitive facilities. 117. For the reasons we discuss above, we find that a competitor has not made irreversible investment in facilities to provide common line and/or traffic-sensitive services unless it does so through its own facilities. We therefore reject the triggers proposed by the incumbent LECs and USTA to the extent they can be satisfied by UNE platform and resale competition. Given, however, that we require evidence that competitors offer service over their own facilities, and that we do not grant relief as extensive as that sought by the incumbent LECs, we adopt a trigger lower than the 25 percent threshold they propose. We will therefore grant an incumbent LEC Phase I relief for common line and traffic-sensitive services when it demonstrates that competitors, in aggregate, offer service over their own facilities to at least 15 percent of incumbent LEC customer locations in the MSA. Because competitive provision of both local switching and traffic-sensitive components of tandem switched transport service are dependent on switch ownership, we conclude that Phase I relief for these services should be tied directly to the Phase I relief for common line services. 118. We reject Bell Atlantic and USTA's proposals that we allow incumbent LECs to qualify for pricing flexibility by class-of-service, e.g., for residential/single-line-business and multi-line business service, because we wish to encourage competition for both high-volume business customers and residential and low-volume business customers. 119. We acknowledge that demonstrating the degree to which competitors are providing service over their own facilities is more administratively burdensome than merely measuring the extent to which competitors have collocated in incumbent LEC wire centers. As discussed above, however, total bypass may represent a significant portion of competition for switched access services, thus we will not rely solely on collocation as a measure of competition for these services. We therefore conclude that any increased administrative burdens in measuring total facilities bypass competition are in the public interest. 120. We emphasize that incumbent LECs must demonstrate that competitors actually offer, not merely are capable of offering, common line and traffic-sensitive services to 15 percent of an incumbent LEC's customer locations within an MSA to qualify for Phase I relief. On the other hand, we are not requiring that competitors actually provide service to a specific percentage of customers. "Offering service" is an appropriate measure of competitive entry for these services because of the difficulties inherent in determining the extent to which competitors actually provide service to current or former customers of the incumbent. This constitutes sensitive competitive information that the incumbent may be unable, and a competitor unwilling, to provide. Moreover, we see no need to require this information. In contrast to special access or even dedicated transport services, competitors are likely to employ more broadly based entry strategies for common line and traffic-sensitive services. Once a competitor installs a switch in its network, it has every incentive to maximize the number of customers it serves with that switch, in order to spread the sunk switch investment over the broadest base possible. In addition, special access services may have diminished the demand among high volume users for competitive switched services, because high volume customers use special access as an alternative to switched access, an option that is not available to low volume users of switched services. Thus switched-based competitors may be more likely to seek customers through mass marketing than through highly-targeted sales. 121. We do not establish rules pertaining to how an incumbent LEC might demonstrate that competitors "offer service" over their own facilities. As we note above, competitors are likely to market switched services broadly, thus we expect that competitors will advertise their services in a variety of media. These advertisements may well be probative of the extent of competitive offerings. Furthermore, incumbents are aware, of course, of competitors' purchase of unbundled loops, and the pending forbearance petitions suggest that they possess considerable intelligence regarding the extent and location of competitive facilities. 4. Phase I Relief a. Introduction 122. Upon satisfaction of the Phase I triggers for particular services, we will permit price cap LECs to file, on one day's notice, tariffs offering volume and term discounts for those services, and we also will permit them to file contract tariffs for those services on one day's notice. Price cap LECs must remove their contract tariff offerings from price cap regulation. Currently, an incumbent LEC is free to lower its access rates as much as it wants, provided that it lowers its rates throughout the study area or density pricing zone in question. Under our Phase I regulatory relief, incumbent LECs are no longer required to choose between lowering a rate throughout the area at issue or not lowering the rate at all. Price cap LECs are required to maintain generally available tariffs subject to price cap regulation for all access services, however, so that access customers can choose between obtaining services pursuant to contract tariff or generally available tariff. This ensures that no access customer will be required to pay dramatically higher access rates as a result of Phase I pricing flexibility. In this section, we explain why we conclude that these two forms of relief are warranted in Phase I. b. Volume and Term Discounts 123. Background. Price cap LECs currently may offer volume and term discounts for special access services without any competitive showing. The Commission also permits incumbent LECs to offer cost-based volume and term discounts for several switched transport services when competitors have purchased either (1) 100 DS1-equivalent switched transport cross-connects in the incumbent LEC's "zone 1" wire centers, or (2) an average of 25 DS1-equivalent switched transport cross-connects per zone 1 wire center. By "cost-based" discounts, the Commission meant that the discounts should be based on per-unit of capacity differences in embedded costs incurred to provide high-volume service relative to the costs of non-high-volume offerings. In the Access Reform NPRM, the Commission invited comment on expanding volume and term discount authority upon satisfaction of Phase I triggers. 124. Discussion. Upon satisfaction of the Phase I triggers, we find that price cap LECs should be permitted to offer volume and term discounts to enable them to respond to competition. Prohibiting incumbent LECs from offering volume and term discounts when they have satisfied the Phase I triggers could distort the market for access services by preventing incumbent LECs from competing efficiently. In addition, permitting volume and term discounts creates little headroom that an incumbent could use to increase rates for other access services. For several years, the Commission has allowed volume and term discounts for certain access services in the trunking and traffic-sensitive baskets. There is nothing in the record before us to suggest either that the headroom resulting from those discounts has led to unreasonable rate increases for other access services in those baskets, or that headroom resulting from expanded volume and term discount authority will lead to unreasonable rate increases for other access services in those baskets in the future. Unlike contract tariffs, moreover, volume and term discounts are not tailored to individual customers, and incumbent LECs must make them available to any customer with sufficient volumes or willing to commit to a given term. 125. Several parties do not oppose volume and term discounts in their entirety, but rather oppose allowing volume and term discounts under conditions that might enable incumbent LECs to lock in customers or discriminate in favor of incumbents' long distance affiliates. The Phase I triggers we adopt above condition incumbent LEC volume and term discounts upon irreversible, sunk investment by competitors, thus making it less likely that an incumbent will try to use volume and term discounts to lock in customers. In addition, section 202 of the Act and our existing enforcement procedures are adequate to address unreasonable discrimination. 126. According to MCI, the Commission proposed permitting volume discounts to facilitate the development of rate structures that reflect the manner in which costs are incurred. MCI argues further that the Access Reform First Report and Order eliminated inefficiencies in the common line and local switching rate structures, and so volume discounts are no longer warranted for these services. Contrary to these arguments, however, the Commission proposed relaxing volume and term discount requirements not only to encourage incumbent LECs to develop efficient rate structures, but also to avoid distorting the market or impeding the development of effective competition. Therefore, the rate structure revisions adopted in the Access Reform First Report and Order do not obviate the need for relaxing volume discount requirements. 127. The Illinois Commission supports permitting incumbent LECs to offer volume and term discounts, but it recommends setting a price floor at total service long incremental cost (TSLRIC), or some other measure of forward-looking economic costs, below which such discounts would not be permitted because they could be anticompetitive. Historically, the Commission has required incumbent LECs to develop rate structures that reflect the manner in which they incur costs. Rate structures that are not cost-based tend to result in implicit subsidies between high-volume and low-volume users. We find that this concern is reduced, however, when the incumbent has met the Phase I trigger, because the existence of sunk investment by competitors limits the incentive to engage in anticompetitive pricing behavior. Furthermore, we will consider complaints filed under section 208 of the Act alleging that a rate charged pursuant to a volume discount is unreasonably low, in violation of section 201 of the Act. Moreover, any volume or term discount that results in a below-cost offering would give rise to an antitrust claim, which provides further protection to competitors. As a result, we conclude that the benefits of permitting volume and term discounts without requiring a cost showing outweigh any possible costs. We will not require that LECs demonstrate that the volume and term discounts they may offer at Phase I are cost-based. c. Contract Tariffs 128. Upon satisfaction of the Phase I triggers, we will permit price cap incumbent LECs to offer interstate access services pursuant to contract tariff. Access customers benefit from contract tariffs because they enable incumbent LECs to tailor services to their customers' individual needs. Incumbent LECs argue that they should be permitted to offer access services on a contract carriage basis, in part because these arrangements are common elsewhere in telecommunications and other industries. We agree that, once competitors have made irreversible, sunk investments in their networks, continuing to prohibit incumbent LECs from offering services under contract tariff could reduce the efficiency of the market for access services by reducing the incumbent LECs' ability to meet customers' needs. 129. AT&T, Frontier, and MCI submit that incumbent LECs will be able to tailor contract carriage tariffs to such a point that additional customers are unlikely to select the tariff, leaving the incumbent LECs free to discriminate in favor of their affiliates. Although any unreasonable restriction on the availability of contract tariff services would violate Section 202 of the Act, and any party that believes that it may be disadvantaged by an allegedly discriminatory contract tariff offering may file a complaint under section 208 of the Act, we agree that special safeguards are warranted with respect to contracts with affiliates. Permitting incumbent LECs to file contract tariffs on one day's notice provides little opportunity for the Commission or competing carriers to review the terms of the tariffs before they take effect. Issues regarding whether a particular tariff condition is unreasonably discriminatory and whether another carrier is in fact "similarly situated" may prove difficult to determine in a subsequent complaint proceeding, which, in any event, takes time to resolve. We adopt, instead, a bright-line rule to address concerns about discrimination in favor of affiliates. We will not permit an incumbent LEC to offer a contract tariff to an affiliate unless and until an unaffiliated customer first purchases service pursuant to that contract. 130. MCI contends that, if price cap LECs are permitted to offer contract tariffs before there is substantial competition in the market, those LECs will deter market entry through targeted rate reductions. We adopt Phase I triggers to ensure that incumbent LECs cannot drive competitors from the market through targeted rate reductions; these safeguards are adequate to address MCI's concern. Moreover, to the extent that an incumbent LEC attempts to use contract tariffs in an exclusionary manner by targeting them to specific customers, the Commission will enforce the requirement that they make contract tariffs available to all similarly situated customers. 131. Intermedia argues that granting incumbent LECs contract tariff authority will result in a price squeeze with respect to facilities-based CLECs that purchase UNEs, because the Commission has adopted average variable cost as a price floor for incumbent LEC wholesale and retail rates. According to Intermedia, CLECs providing service through the use of unbundled network elements are unable to compete with incumbent LEC services priced at average variable cost, because the Commission's pricing methodology for UNEs, Total Element Long Run Incremental Cost (TELRIC), includes costs, including joint and common costs, depreciation, and a reasonable profit, that are excluded from the calculation of average variable cost. Intermedia proposes that the Commission address this price squeeze by requiring resale, at a wholesale discount, of all incumbent LEC contract tariff offerings and volume and term discounts. Intermedia's concerns about potential a potential price squeeze are best addressed in the context of a complaint filed under section 208 of the Act alleging that a rate charged pursuant to a contract tariff or volume or term discount is unreasonably low and thus violates section 201. We note in this regard that such a complaint is not subject to dismissal merely because a given rate is at or above average variable cost; average variable cost is not necessarily a "reasonable" rate. 132. MCI and Time Warner argue that AT&T was permitted to offer contract tariff service only when the Commission found that AT&T faced "substantial competition," and that allowing incumbent LECs to offer contract carriage on a lesser showing is inconsistent with that precedent. We find that the precedent cited by MCI and Time Warner is not entirely on point, because, in contrast to the relief granted to AT&T, Phase I relief does not permit price cap LECs to provide services completely outside of price cap regulation. Rather, price cap LECs will be required to maintain generally tariffed access service offerings subject to price cap regulation. Because we are granting incumbent LECs much less pricing flexibility at Phase I than the Commission granted AT&T pursuant to the Interexchange Competition Order, we do not require price cap LECs to show that they face substantial competition. 133. Ameritech and Bell Atlantic also seek permission to respond to requests for proposals (RFPs). We find that the contract tariff authority we grant here is sufficient to enable price cap LECs to respond to RFPs, and so we need not grant any further pricing flexibility for this purpose. ALTS maintains that granting flexibility to respond to RFPs is inconsistent with a previous Commission Order terminating an investigation, in which the Commission concluded that a Southwestern Bell tariff revision designed to respond to RFPs was unreasonably discriminatory. ALTS's concern is unfounded. First, Southwestern Bell sought to respond to any RFP that indicated that the request involved a competitive situation. Unlike the Phase I triggers we adopt in this Order, Southwestern Bell's tariff did not in any way indicate whether its competitors had made irreversible investment in facilities. Second, the Commission's decision rested in part on Southwestern Bell's failure to submit adequate evidence of competition in its region at that time. The Commission did not decide, as ALTS seems to imply, that any RFP authority is inherently unreasonable. Finally, the Commission noted the pendency of this rulemaking proceeding, and that the record in this proceeding might provide a basis for permitting contract tariffs or competitive response tariffs. Thus, rather than precluding consideration of this RFP issue, the Southwestern Bell Transmittal 2633 Order expressly contemplated addressing that issue in this Order. d. Growth Discount 134. We reject Ameritech's and Bell Atlantic's proposal to allow incumbent LECs to offer growth discounts. Growth discounts refer to pricing plans under which incumbent LECs offer reduced per-unit access service prices to customers that commit to purchase a certain percentage above their past usage, or plans that offer reduced prices based on growth in traffic placed over an incumbent LEC's network. The Commission tentatively decided not to permit growth discounts in the Access Reform NPRM, because they create an artificial advantage for BOC long distance affiliates with no subscribers, relative to existing IXCs and other new entrants. The Commission also invited parties to comment on whether growth discounts would enhance the development of competitive access markets. 135. None of the parties supporting growth discounts explains why growth discounts enhance the development of competitive access markets. Instead, Ameritech asserts that the Commission could rely on the tariff review process to ensure that any growth discounts do not unreasonably advantage the incumbent LEC's long distance affiliate. Without any affirmative benefit to growth discounts presented in the record before us, we have no basis for allowing such discounts. e. X-Factor Reductions 136. Ameritech, Bell Atlantic, and USTA recommend reducing or eliminating the X-Factor in the price cap index (PCI) formula as competition grows. This regulatory relief is not warranted. Phase I pricing flexibility is designed to grant incumbent LECs more flexibility to lower prices for particular customers without subjecting other customers to higher rates. Because competition may not be sufficient to constrain prices throughout an MSA at Phase I, we require LECs to maintain their generally available tariffs in order to protect access customers. If we were to lower the X-Factor as competition increases, then the price cap-constrained tariffs might not be adequate to protect access customers from rate increases. 137. Ameritech maintains that the X-Factor should be eliminated in its proposed "Phase II," which is roughly analogous to our Phase I, because competitive pressures will constrain the incumbent LEC's ability to earn excessive profits. We find this reasoning unpersuasive, because the services for which the incumbent feels competitive pressure are the ones most likely to be offered under contract tariff, outside of price cap regulation. Therefore, the services that remain subject to price cap regulation are likely to be those for which the incumbent faces less competition. 138. Moreover, the Commission designed price cap regulation in part to replicate, to the extent possible, the results of a competitive market. Generally, as more competitors enter a market, supply increases, and this additional supply puts downward pressure on prices. Conversely, lowering the X-Factor decreases downward pressure on prices. Thus, lowering the X-Factor as competition increases would produce exactly the opposite result of a competitive market, thereby undercutting one of the Commission's goals in adopting price cap regulation. f. Other Price Cap Revisions 139. We reject the proposal by several LECs to consolidate the existing price cap baskets into one basket. Ameritech states that this restructuring would permit incumbent LECs to raise prices for some services to offset reductions in prices for other services. Nothing in the record suggests that the customers facing increased prices under this kind of pricing flexibility are likely to have many competitive alternatives relative to customers that benefit from price reductions. Thus, consolidating price cap baskets would deprive access customers of protection that remains necessary at Phase I. 140. For similar reasons, we also decline to adopt Bell Atlantic's suggestion that we increase upper service band index (SBI) limits to 10 percent per year for transport services upon satisfaction of its proposed "Phase II" triggers, which are similar to the Commission's Phase I triggers. Increasing the upper SBI limits upon satisfaction of our Phase I triggers could enable the incumbent LEC to increase a customer's access rates before that customer has a competitive alternative. 5. Phase II for Special Access and Dedicated Transport a. Introduction 141. We adopt Phase II triggers comparable to our Phase I triggers: we will grant Phase II pricing flexibility to incumbent LECs when competitors have collocated in a certain percentage of the incumbent's wire centers in an MSA, or in wire centers generating a certain percentage of an incumbent's revenues for the services at issue within the MSA. Because Phase II grants incumbent LECs considerably greater flexibility than Phase I, we adopt triggers to ensure that competitors have established a significant market presence, i.e., that competition for a particular service within the MSA is sufficient to preclude the incumbent from exploiting any monopoly power over a sustained period. Upon a Phase II showing for special access and dedicated transport services within an MSA, we will relax the price cap rules and the Part 69 rate structure requirements applicable to those services in that MSA. 142. By significant market presence, we mean that IXCs have a competitive alternative for dedicated transport services needed to reach the majority, although not necessarily all, of their long distance customers throughout the MSA, and that almost all special access customers have a competitive alternative. We find that Phase II regulatory relief is warranted upon satisfaction of the Phase II triggers within an MSA, even though such relief might lead to higher rates for access to some parts of an MSA that lack a competitive alternative, for several reasons. First, the customers for the services we address in this section are IXCs and large businesses, not residential or small business end users. These large and sophisticated customers generate significant revenues for the incumbent and are not without bargaining power with respect to the incumbent. 143. Second, delaying Phase II regulatory relief until access customers have a competitive alternative for access to each and every end user might give competitors the ability to "game the system." In other words, competitors might be able to prevent an incumbent from obtaining pricing flexibility in an MSA simply by choosing not to enter certain parts of that MSA or to serve certain customers. We will not distort the operation of the market in this manner. 144. Finally, because regulation is not an exact science, we cannot time the grant of regulatory relief to coincide precisely with the advent of competitive alternatives for access to each individual end user. We conclude that the costs of delaying regulatory relief outweigh the potential costs of granting it before IXCs have a competitive alternative for each and every end user. The Commission has determined on several occasions that retaining regulations longer than necessary is contrary to the public interest. Almost 20 years ago, the Commission determined that regulation imposes costs on common carriers and the public, and that a regulation should be eliminated when its costs outweigh its benefits. More recently, the Commission recognized that retaining tariffing requirements for non-dominant IXCs imposes costs in the form of a less efficient market. In Section III of this Order, we conclude that the new service rules currently in effect limit incumbents' incentives to innovate. The Part 69 rate structure can impose costs on an incumbent LEC by limiting its ability to develop rate structures in response to market forces. Thus, retaining the Part 69 rate structure imposes costs on society by perpetuating inefficiencies in the market for interstate access services. The triggers we adopt for Phase II flexibility are sufficient to ensure that incumbent LECs cannot exercise any remaining monopoly power indefinitely. If an incumbent LEC charges an unreasonably high rate for access to an area that lacks a competitive alternative, that rate will induce competitive entry, and that entry will in turn drive rates down. Accordingly, we will not delay Phase II regulatory relief until access customers have a competitive alternative for access to every end user. 145. As we did in Phase I, we establish different triggers for (1) special access services (other than channel terminations) and dedicated transport services, and (2) channel terminations. In this section of the Order, we adopt triggers for each of these services and adopt specific forms of regulatory relief for Phase II. In the Notice accompanying this Order, we invite interested parties to comment on Phase II triggers for other switched access services. b. Phase II Triggers 146. We note above that the regulatory relief proposed by Ameritech and Bell Atlantic for "Phase II" is analogous to our Phase I relief. Here, we find that Ameritech's and Bell Atlantic's Phase III proposals are analogous to the Phase II relief we adopt here. Therefore, we rely in part on the record developed in response to Bell Atlantic's and Ameritech's proposals in developing our Phase II triggers. Bell Atlantic proposes granting relief when competitors have collocated facilities, purchased UNEs, or installed their own facilities in 75 percent of the wire centers in the market area. Ameritech recommends granting relief when competitors have collocated in wire centers serving 75 percent of the demand in a market area, measured on a DS1- equivalent basis. 147. Access customers must have competitive alternatives throughout most of an MSA before we can grant Phase II regulatory relief to an incumbent LEC. The Ameritech and Bell Atlantic proposals recognize that our Phase II triggers must be high enough to ensure that competitive alternatives for the services at issue exist in the area for which flexibility is granted. The triggers we adopt, however, differ from those recommended by these incumbent LECs in two respects: as in Phase I, (1) we base our Phase II triggers on collocation in either a certain percentage of wire centers in an MSA, or in wire centers generating a certain percentage of the revenues for the services at issue in an MSA; and (2) we conclude that different services warrant different thresholds. 148. We determined in our Phase I analysis above that evidence of collocation may underestimate the extent of competitive facilities within a wire center, because it fails to account for the presence of competitors that have wholly bypassed incumbent LEC facilities. For this reason, we adopt a threshold lower than the 75 percent recommended by Ameritech and Bell Atlantic. For dedicated transport, and for special access services other than channel terminations, we grant Phase II pricing flexibility to incumbent LECs that demonstrate that competitors have collocated in 50 percent of an incumbent LEC's wire centers in the MSA at issue. SBC has shown that competitors have collocated in 51 percent of its wire centers in the San Diego MSA. According to SBC, competitors' networks in this MSA comprise at least 1150 route miles, and there are more than 360 buildings on those networks. Similarly, competitors have collocated in 58 percent of SBC's wire centers in the Los Angeles MSA. SBC submits that competitors' networks in this MSA comprise more than 2530 route miles, and there are more than 950 buildings on those networks. We explain above that establishing an operational collocation arrangement requires considerable time and expense. This evidence suggests that collocation in 50 percent of an incumbent LEC's wire centers corresponds to considerable investment by competitors in transmission facilities and the ability of competitors to serve customers in a large number of buildings. 149. As we explain in our Phase I discussion, a few wire centers may account for a disproportionate share of revenues for a particular service. For this reason, we also will grant Phase II pricing flexibility for these services upon a demonstration that competitors have collocated in wire centers accounting for 65 percent of the incumbent LEC's revenues from those services in an MSA. Similarly, we will grant Phase II pricing flexibility for channel terminations between an IXC POP and a LEC serving wire center when an incumbent demonstrates that competitors have collocated in 50 percent of its wire centers in an MSA, or in wire centers accounting for 65 percent of the incumbent's revenue for this service. As we explained in our discussion of Phase I triggers above, these services carry traffic between points of high traffic concentration and therefore warrant lower triggers than those we adopt for channel terminations between a LEC end office and a customer premises. 150. We adopt higher thresholds for channel terminations between an incumbent LEC's end office and customer premises, for the reasons we offered in our Phase I analysis. For these channel terminations, Phase II relief is available to LECs that demonstrate that competitors have collocated in 65 percent of the incumbent LEC's wire centers in the MSA at issue, or in wire centers accounting for 85 percent of the incumbent's revenues from those services in that MSA. Because these services do not carry traffic between points of high traffic concentration, and because the collocated competitors still rely on incumbent LEC facilities to reach the end user, we find that higher thresholds are warranted. 151. MCI argues that price cap LECs should be permitted Phase II regulatory relief, such as removal of services from price cap regulation, only when those LECs are "non-dominant," i.e., no longer have market power in the provision of the services at issue. We conclude that the Phase II regulatory relief we grant below is warranted when competitors have established a significant market presence in an MSA, and we need not require a showing of non-dominance. Upon a Phase II showing, we will not grant incumbent LECs all the regulatory relief we afford to non-dominant carriers. Specifically, incumbent LECs in Phase II are still required to file generally available tariffs, while non-dominant LECs and CAPs are permitted, but not required, to file tariffs. Furthermore, our relief is limited to certain services and certain areas, and will be granted only upon satisfaction of the triggers we adopt here. Thus, Phase II relief is not tantamount to non-dominant treatment. 152. In the Interexchange Competition Order, the Commission allowed AT&T to remove some interexchange services from price cap regulation based on a finding of "substantial competition," but it based that finding on a more detailed analysis than the Phase II triggers we adopt here, including an examination of, inter alia, demand and supply elasticities, pricing behavior, and market share. We conclude that this detailed substantial competition test is not warranted for special access and dedicated transport services because we grant incumbent LECs pricing flexibility only on a MSA-by-MSA basis, while the Commission granted AT&T pricing flexibility on a nationwide basis. Furthermore, the administrative burdens of a detailed substantial competition test are magnified when done on an MSA-by-MSA basis, and we believe our collocation-based triggers are sufficient to ensure that we do not grant pricing flexibility prematurely. Accordingly, we will rely on collocation-based triggers to indicate when competitors have established a significant market presence that warrants Phase II relief for special access and dedicated transport services. c. Phase II Relief 153. Upon satisfaction of the Phase II triggers we adopt above for special access and dedicated transport services, we will no longer require price cap LECs to comply with our Part 69 rate structure rules or Part 61 price cap rules with respect to those services within an MSA. An incumbent LEC should be permitted to remove services from price cap regulation when that LEC's competitors have established a significant market presence in the provision of those services. A significant market presence in an MSA ensures that the incumbent will not be able to exploit any monopoly power for a sustained period. We will, however, continue to require LECs to maintain generally available tariffs, but we will permit them to file such tariffs on one day's notice. In this section, we explain why we conclude that these two forms of relief are warranted upon satisfaction of the Phase II triggers. 154. Currently, Part 69 of the Commission's rules prescribes a rate structure for all switched access services, including dedicated transport. USTA recommends eliminating the Part 69 rate structure as a form of regulatory relief. In addition, in Section III above, we eliminate rate structure requirements for new services. We agree that elimination of our Part 69 rate structure rules for existing dedicated transport services is warranted, but not until the incumbent LEC meets our Phase II requirements. As explained in more detail in Section VIII.C. below, a rate structure can create implicit subsidies if it does not reflect accurately the manner in which incumbent LECs incur the costs of providing a service. Therefore, rate structure rules are necessary in the absence of a significant market presence by competitors. Once competitors have established a significant market presence in an MSA, however, we believe it is no longer necessary to impose efficient rate structures on incumbent LECs. Therefore, we will eliminate our rate structure rules for particular services once an incumbent LEC demonstrates the development of a significant market presence by competitors for those services by satisfying the Phase II trigger. Retaining our price cap and rate structure rules until LECs are non-dominant is unwarranted because doing so would delay the action of competition in setting efficient rate levels and rate structures. 155. We recognize that the regulatory relief we grant upon a Phase II showing may enable incumbent LECs to increase access rates for some customers. We conclude that this relief nonetheless is warranted upon a Phase II showing for two reasons. First, some access rate increases may be warranted, because our rules may have required incumbent LECs to price access services below cost in certain areas. Second, we find that a Phase II showing is sufficient evidence that competitors' market presences have become significant, and that the public interest is better served by permitting market forces to govern the rates for the access services at this point. In addition, we note that these services generally are purchased by IXCs, not individual end users. IXCs are sophisticated purchasers of telecommunications services, fully capable of finding competitive alternatives where they exist and determining which competitor can best meet their needs. 156. We decline to adopt any other Phase II regulatory relief proposed in the Access Reform NPRM. Two of those proposals, elimination of price cap service categories and consolidation of price cap baskets, are not relevant because Phase II relief removes services from price cap regulation. 157. The Access Reform NPRM also proposed allowing incumbent LECs to charge IXCs different rates for access to different classes of end user. Ameritech argues that class-of- customer pricing would enable incumbent LECs to respond to competition. We find that the pricing flexibility we grant in Phase I and Phase II is sufficient to enable incumbent LECs to respond to competition. Bell Atlantic argues that class-of-customer pricing is simply another form of deaveraging. We grant price cap LECs considerable flexibility to deaverage their rates in Section V of this Order, and Bell Atlantic does not explain why deaveraging by class of customer is necessary to enable incumbent LECs to respond to competition. Thus, the record does not provide a basis for granting this relief. D. Price Cap Issues 1. Revision of Price Cap Indices 158. We have determined that no adjustment to price cap LECs' PCIs is warranted when a LEC removes demand associated with services offered pursuant to contract tariff from a price cap basket, or when an entire service is removed from price cap regulation pursuant to a Phase II showing. When the Commission permitted AT&T to remove commercial long distance services from price cap regulation, it did not require AT&T to make any exogenous cost adjustment to the PCI for the basket from which those services were removed. Specifically, the Commission found that the removal of an individual service from a basket has no effect on the PCI, and it affects the API only by altering the base period revenue weights of the services remaining in the basket at the time a carrier revises some other rate in that basket. Thus, removing individual services from price cap regulation has only a de minimis effect on the headroom for the services remaining in the basket. 159. In accordance with this precedent, we do not require incumbent LECs to make any exogenous adjustment to their PCIs to reflect the removal of demand associated with contract tariff services from price cap regulation. Although the Commission did require a "recalibration" of AT&T's PCIs when other services were removed from price cap regulation, we find that the recalibration required by those Orders is not needed for removal of contract tariff demand. In those cases, the Commission removed all the services except one service category from the basket in question. Because the service band indices (SBIs) were designed to limit cross-subsidization between different types of services within a basket, and there is no danger of cross-subsidization when there is only one service category remaining in the basket, the Commission recalibrated AT&T's PCIs and APIs to eliminate the SBI for the remaining basket without affecting the headroom AT&T had previously. In the case of the relief we provide here, however, incumbent LECs will remove only some demand for some services from a basket; therefore, we will retain the SBIs, and there is no need for the recalibration we required of AT&T. 2. Low-End Adjustment Mechanism 160. Background. In the LEC Price Cap Order, the Commission adopted the low-end adjustment mechanism, which permits incumbent LECs earning rates of return less than 10.25 percent in a given year to increase their PCIs to a level that would enable them to earn 10.25 percent. The Commission decided to retain the low-end adjustment mechanism in the Price Cap Fourth Report and Order, to prevent confiscatory price cap rates in cases where differences in economic conditions in different price cap LECs' service regions might cause a LEC to earn a confiscatory return in a given tariff year. 161. In its petition for reconsideration of the Price Cap Fourth Report and Order, AT&T questions whether it is reasonable to retain the low-end adjustment mechanism after the elimination of sharing. In this Order, for the reasons discussed below, we partially grant AT&T's petition on this issue. We will consider other issues raised in AT&T's petition, along with other petitions for reconsideration of the Price Cap Fourth Report and Order, in a future Order. 162. Discussion. We eliminate the low-end adjustment mechanism for price cap LECs that qualify for and elect to exercise either the Phase I or Phase II pricing flexibility we grant in this Order. AT&T argues that the low-end adjustment mechanism blunts efficiency incentives just as sharing does and that, therefore, retaining it is inconsistent with the Commission's decision to eliminate sharing. AT&T also notes that several LECs opposed retention of the low-end adjustment mechanism, and those that supported it did so only as a means to provide "symmetry" to the sharing obligation. AT&T requests that we eliminate the low-end adjustment mechanism or re-introduce sharing. 163. We conclude that we should eliminate the low-end adjustment mechanism once price cap LECs qualify for and choose to exercise either the Phase I or Phase II pricing flexibility we grant in this Order. We agree with AT&T that the low-end adjustment mechanism tends to blunt efficiency incentives. We also conclude that this effect will be exacerbated by removing contract tariff services from price cap regulation, so that retention of the mechanism would be unreasonable for price cap LECs obtaining pricing flexibility. The low-end adjustment mechanism can create undesirable incentives for price cap LECs when they move some demand for some services out of price cap regulation. The low-end adjustment is a rate-of-return-based mechanism, and it therefore recreates some of the incentives of rate-of-return regulation, although not to the same extent as sharing obligations. Earnings from non-price cap services are currently not considered part of "total interstate earnings" for purposes of calculating low-end adjustments. As a result, price cap LECs must remove the costs of non-price cap services in order to calculate interstate earnings, and they have an incentive to underallocate those costs in order to minimize measured earnings. Currently, this underallocation incentive is not a serious concern, because non-price cap services represent a very small fraction of the price cap LECs' federally tariffed activities, and so the effects of any underallocation are minimal. Once a LEC has removed a significant amount of demand associated with contract tariff offerings from price cap regulation, however, its incentive to underallocate the costs of non-price cap services and the effects of such underallocation will be greater. 164. Our decision to eliminate the low-end adjustment mechanism for parties obtaining pricing flexibility is consistent with a proposal made by the Ad Hoc Telecommunications Users Committee (Ad Hoc) in response to the Access Reform NPRM. Ad Hoc argues that incumbent LECs either should be guaranteed a just and reasonable rate of return and recovery of all of their prudent investment, or they should be permitted to pursue market opportunities and maximize their earnings, but not both. Ad Hoc reasons that an incumbent LEC permitted unlimited profits under price cap regulation should not be shielded from any risk of stranded investment. Alternatively, Ad Hoc argues that an incumbent LEC seeking some stranded investment recovery should be subject to 100 percent sharing obligations for all earning in excess of 50 basis points over the authorized rate of return. Although we decline to reimpose sharing obligations, we agree with Ad Hoc that an incumbent LEC seeking pricing flexibility to compete more vigorously in the marketplace should not be afforded any rate-of-return-based protection from any risk associated with its competitive ventures. 165. We have considered whether it is possible to modify the low-end adjustment mechanism to limit the undesirable incentives discussed above. For example, USTA proposed requiring price cap LECs to maintain records regarding demand for services removed from price cap regulation, but permitting them to keep that information confidential. Under USTA's proposal, a price cap LEC seeking to make a low-end adjustment would be required to re-price its removed service demand at an "average price cap tariff rate." It would be difficult, however, for the Commission or other interested parties to verify that a price cap LEC claiming a low-end adjustment has re-priced its contract tariff demand properly. Specifically, whenever a contract tariff offering is a package of two or more access services, USTA's proposal requires the incumbent to allocate the contract rate among the services in the package. It would be difficult for the Commission to determine whether that allocation is reasonable, particularly in cases where the package includes nonregulated services and services removed from price cap regulation pursuant to a grant of pricing flexibility. Therefore, USTA's proposal would not be an adequate safeguard against cross-subsidization. 166. The other possible safeguard that we have considered would require the Commission to specify the cost allocation rules LECs would use to segregate costs and revenues from services in price cap regulation from the costs and revenues of services outside of price cap regulation. Such rules would be burdensome for carriers and the Commission and is inconsistent with the deregulatory framework envisioned by Congress when it adopted the Telecommunications Act of 1996. Indeed, we find that such cost accounting rules would make using the low-end adjustment mechanism just as burdensome as making an above-cap filing. We have retained the low-end adjustment mechanism in part to avoid costly above-cap filings. Burdening the low-end adjustment mechanism with cost allocation rules thus would undercut a major reason for retaining the low-end adjustment mechanism as part of the price cap plan. On the other hand, elimination of the low-end adjustment mechanism for an incumbent LEC might enable the Commission to relax, for that LEC, any accounting rules necessitated only by the rate-of-return-based low-end adjustment mechanism. For all these reasons, we eliminate the low-end adjustment mechanism for price cap LECs obtaining pricing flexibility. 167. Any LEC obtaining Phase I regulatory relief in any MSA will be precluded from making any low-end adjustment throughout its entire, holding-company-wide, service region, regardless of whether it files separate tariffs for each of its study areas. Permitting MSA-by-MSA low-end adjustments would require the same kind of burdensome cost allocation rules that we describe above. Furthermore, eliminating the low-end adjustment will not result in confiscatory rates, because we will continue to permit price cap LECs to make above-cap tariff filings. We also conclude that an above-cap tariff investigation provides the best forum for determining whether the above-cap tariff would implicitly force the LEC's regulated ratepayers to bear some of the risk of the LEC's competitive ventures. 168. We retain the low-end adjustment mechanism for price cap LECs that have not opted to exercise any Phase I or Phase II regulatory relief, however. As we note above, the flexibility we grant in Phase I and Phase II will exacerbate the efficiency-blunting effects of the low-end adjustment mechanism. By the same token, the inefficiencies associated with the low- end adjustment mechanism in the absence of these flexibilities are fairly minor. To be eligible for a low-end adjustment, a price cap LEC must earn less than a 10.25 percent rate of return, which would constitute a substantial earnings sacrifice for most price cap LECs. For those LECs, the benefits of the low-end adjustment mechanism would not justify such a sacrifice, because the mechanism permits only a one-time PCI adjustment to avoid back-to-back annual earnings below 10.25 percent. For this reason, we find that the benefits of retaining the low-end adjustment mechanism for those LECs that have not obtained Phase I or Phase II relief (ensuring that LECs' rates are not confiscatory without requiring above-cap filings) outweigh its effects on efficiency incentives. 3. Common Line Basket Issues 169. Above, we permit incumbent LECs to offer contract tariffs and volume and term discounts for access services once they satisfy the Phase I triggers. We also have designed our Phase I relief to limit headroom by requiring price cap LECs to remove the demand associated with contract tariff offerings from price caps, so that price cap LECs cannot use that pricing flexibility to raise access rates for those customers in the MSA that lack competitive alternatives. Phase I pricing flexibility for services in the common line basket does not raise the same concerns regarding headroom, because different price cap rules apply to the common line basket. There is no need to require price cap LECs to remove common line services offered pursuant to contract tariff from price caps, nor do we see any need for additional safeguards to prevent the creation of headroom as a result of volume and term discounts for services in the common line basket, because the current rules already preclude the creation of headroom in the common line basket. Specifically, Section 69.152(m) prohibits price cap carriers that choose to charge less than the maximum permitted end user common line charges (EUCLs) from making up any of that revenue through increases to other common line charges (primary interexchange carrier charges (PICCs) or carrier common line CCL) charges). Similarly, Section 69.153 requires incumbent LECs to base their PICC calculations on the maximum revenues permitted under the rules, rather than the actual revenues recovered. Thus, our rules do not permit a LEC to charge a higher PICC for some subscriber lines simply by reducing the PICC for other lines. Finally, Section 69.154 allows price cap LECs to impose CCL charges only to the extent that their permitted common line revenues exceed the maximum amount the LECs could have recovered through EUCLs and PICCs. E. Procedural Issues 1. Special Access and Dedicated Transport Services 170. Background. In the Access Reform NPRM, the Commission invited comment on the procedural requirements governing requests for pricing flexibility. The Commission did not propose any specific pleading cycle, but it proposed establishing a deadline for Commission action of 90 days. 171. Discussion. An incumbent LEC seeking pricing flexibility for special access or dedicated transport services under the framework we adopt in this Order may file a petition with the Commission identifying the relief it seeks and demonstrating that it has satisfied the applicable triggers. Comments on petitions will be due fifteen days after the petition is filed. Replies will be due ten days after the comments are due. The triggers established for special access and dedicated transport services are administratively simple and easy to verify. A relatively short pleading cycle is, therefore, sufficient to enable interested parties to examine the incumbent LEC's petition and to draft a response. We will notify interested parties of a pending pricing flexibility petition through the Competitive Pricing Division's Tariff Public Reference Log. In addition, we require incumbent LECs to submit pricing flexibility petitions through our Electronic Tariff Filing System (ETFS), so that interested parties may obtain copies of petitions through the Commission's website. 172. Incumbent LECs bear the burden of proving that they have satisfied the applicable trigger for the pricing flexibility they seek. An incumbent LEC is in the best position to present evidence of the extent of collocation in its wire centers within an MSA. We also adopt Ameritech's proposal to permit incumbent LECs to file petitions for multiple MSAs, as long as the data in those petitions are disaggregated by MSA. Specifically, to carry its burden of proof, the incumbent may show the following: (1) the total number of wire centers in the MSA; (2) the number and location of the wire centers in which competitors have collocated; (3) in each wire center on which the incumbent bases its petition, the name of at least one collocator that uses transport facilities owned by a provider other than the incumbent to transport traffic from that wire center; and (4) that the percentage of wire centers in which competitors have collocated satisfies the trigger we have adopted with respect to the pricing flexibility sought by the incumbent LEC. Alternatively, the incumbent may show the following: (1) the total base period revenues generated by the services for which the incumbent seeks relief in the MSA for which the incumbent seeks relief; (2) in each wire center on which the incumbent bases its petition, the name of at least one collocator that uses transport facilities owned by a provider other than the incumbent to transport traffic from that wire center; and (3) that the wire centers in which competitors have collocated account for a sufficient percentage of the incumbent's base period revenues generated by the services at issue within the relevant MSA or non-MSA area to satisfy the trigger we have adopted with respect to the pricing flexibility sought by the incumbent LEC. We codify these requirements in a new Section 1.774 of our rules, as set forth in Appendix B to this Order. 173. Currently, the Commission's new service rules require price cap LECs to determine the appropriate price cap basket and service band for their new services in the context of a subsequent annual access tariff filing, and to incorporate those new services into those baskets in that annual access filing. Whenever a price cap LEC can demonstrate in an annual access tariff filing that one of its new services would be properly incorporated into a basket or service band for which it has been granted Phase I or Phase II regulatory relief in any MSA or MSAs, it will be granted the same relief in the same MSAs for that new service. 174. We also amend Section 0.291, listing the authority delegated to the Chief, Common Carrier Bureau (Bureau), explicitly to delegate authority to issue Orders acting on petitions for pricing flexibility involving special access and dedicated transport services. Because the pricing flexibility triggers we adopt for those services are administratively simple bright-line tests, Bureau-level review is sufficient to determine whether the incumbent LEC has satisfied the applicable test. 175. Finally, a pricing flexibility petition for special access and dedicated transport services will be deemed granted unless the Bureau denies it within 90 days of the close of the pleading cycle, as the Commission proposed in the Access Reform NPRM. Ameritech recommends adopting a deadline of 90 days after the filing date of the petition, rather than 90 days after the close of the pleading cycle. Although we expect our pricing flexibility thresholds to be simple to administer, it is prudent to allow more time to review pricing flexibility petitions, at least until we gain more experience. The Bureau may, of course, issue an Order before this 90- day deadline if it has completed the review. Also, if experience shows that a full 90 days is not necessary to review pricing flexibility petitions, we may consider relaxing this or other procedural requirements. The period for filing applications for review begins the day the Bureau grants or denies the petition, or the day that the petition is deemed denied. 2. Treatment of Proprietary Data 176. In the event that a price cap LEC wishes to request confidential treatment of any information contained in a pricing flexibility petition, it should follow the procedures for obtaining confidential treatment of tariff cost support information. The price cap LEC must demonstrate, by a preponderance of the evidence, that the information should be withheld from public inspection in accordance with the requirements of Section 0.459 of the Commission's rules. A price cap LEC wishing to request confidential treatment of information contained in a pricing flexibility petition should demonstrate, by a preponderance of the evidence, that the information should be withheld from public inspection in accordance with the requirements of Section 0.459 of this chapter. 177. In their requests for confidentiality, carriers should indicate with specificity the extent to which they believe the information they submit, such as the identity of collocators, is subject to section 222(b) of the Act concerning confidential carrier information, and the bases for that belief. The information will be kept confidential, as appropriate, subject to Commission procedures concerning Freedom of Information Act (FOIA) requests. Although the Commission will consider any FOIA requests on a case-by-case basis, pursuant to applicable law, we note that FOIA exceptions, such as the exception for "trade secrets and commercial or financial information," may prevent disclosure of such information. A price cap LEC will be required, in any event: (1) to provide collocation information to parties to the extent that the parties are the collocators upon which the price cap LEC relies in its petition, (2) to certify in its petition that it has done so, and (3) to provide to the Commission a copy of the information it provides to those parties. In such cases, the LEC may provide the data to a party in redacted form, revealing to the party only the information relating to that party. 3. Other Switched Access Services 178. We will grant Phase I pricing flexibility for common line and traffic-sensitive services, and the traffic-sensitive components of tandem-switched transport service to a price cap LEC within an MSA if the LEC demonstrates that its competitors, in aggregate, offer service over their own facilities to at least 15 percent of incumbent LEC customer locations in the MSA. For the reasons we explain in Section VI.C.3, we do not prescribe a particular method by which a LEC may demonstrate satisfaction of this trigger. As a result, petitions seeking pricing flexibility for these services will not be as routine as petitions seeking pricing flexibility for special access and dedicated transport services. Because pricing flexibility petitions for common line, traffic- sensitive, and the traffic-sensitive components of tandem-switched transport services are not subject to a bright-line rule, and will require more fact-intensive investigation, they are best addressed at the Commission level. Accordingly, we do not delegate authority to the Bureau at this time to act on petitions for pricing flexibility involving these services. A pricing flexibility petition for these services will be deemed granted unless the Commission denies it within five months of the close of the pleading cycle for that petition. Otherwise, we adopt the same procedural requirements for pricing flexibility petitions for these services as we adopt above for pricing flexibility petitions for special access and dedicated transport services. As the Commission gains experience with such petitions, it may be possible for the Commission to act in less than the full five months, or to delegate authority to the Bureau with respect to these petitions. F. U S West Forbearance Petition 179. As we note above, several BOCs have filed petitions seeking forbearance, pursuant to section 160 of the Act, from dominant carrier regulation in the provision of certain special access and high capacity services. The first of these petitions, filed by U S West, is deemed granted if not denied by the Commission by August 24, 1999, unless the Commission extends the deadline for an additional ninety days. We conclude that such an extension is warranted here. In this Order, we adopt a comprehensive framework for granting price cap LECs such as U S West progressively greater pricing flexibility as competition develops, including much of the relief sought by U S West in its petition, and an extension of the deadline for acting on that petition will allow the Commission to consider U S West's request for relief in the context of the rules we adopt here. Accordingly, we extend the deadline for acting on U S West's petition by ninety days. VII. CLEC ACCESS CHARGES A. Background 180. In the Competitive Carrier Proceeding, the Commission established a comprehensive framework for determining whether carriers are dominant or non-dominant. Dominant carriers are carriers that possess individual market power and those without market power are non-dominant carriers. The Commission's policy since Competitive Carrier is that a carrier is non-dominant unless the Commission makes or has made a finding that it is dominant. New entrants into the exchange access market, such as competitive local exchange carriers (CLECs), have been presumptively classified as non-dominant because the Commission has not found that they are able to exercise market power in particular service areas. To date, the Commission has applied Parts 61 (Tariffs) and 69 (Access Charges) of its rules only to incumbent LECs. 181. In the Access Reform NPRM, the Commission sought comment on whether CLECs have market power with regard to terminating access services and whether and to what extent it should regulate terminating access services provided by CLECs. The Commission noted that, with originating access, the calling party has the choice of service provider, the decision to place a call, and the ultimate obligation to pay for the call. The calling party is also the customer of the IXC that purchases the originating access service. As long as IXCs can influence the choice of the access provider, a LEC's ability to charge excessive originating access rates is limited, as IXCs will shift their traffic from that carrier to a competing access provider. The Commission noted that, with terminating access, the choice of service provider for terminating access is made by the called party. The decision to place the call and payment for the call lies, however, with the calling party. The calling party, or its long-distance service provider, has little or no ability to influence the called party's choice of service provider. Furthermore, IXCs are required by statute to charge averaged rates. Consequently, not only does the calling party not choose the terminating LEC, but section 254(g) requires IXCs to spread the cost of terminating access rates among all end users. Because the paying party does not choose the carrier that terminates its interstate calls, CLECs may have incentive to charge excessive rates for terminating access. Accordingly, the Commission tentatively concluded in the Access Reform NPRM that terminating access may remain a bottleneck controlled by whichever LEC provides terminating access to a particular customer, even if competitors have entered the market. The Commission also recognized, however, that excessive terminating access charges might encourage IXCs to enter the access market in order to avoid paying these charges. 182. In the Access Reform NPRM, the Commission also sought comment on whether it should continue to treat incumbent LEC originating "open end" minutes, such as originating access for 800 service, as terminating minutes for access charge purposes, and whether it should extend this approach to CLECs. The Commission noted that, in some cases, such as 800 and 888 service, the called party, which pays for the call, is unable to influence the calling party's choice of provider for originating access services. 183. In the Access Reform First Report and Order, the Commission decided not to adopt any regulations governing CLEC terminating access charges and did not address the issue of CLEC originating access charges. Based on the available record, the Commission decided to continue to treat non-incumbent LECs as non-dominant in the provision of terminating access service. Although an IXC must use the CLEC serving an end user to terminate a call, the Commission found that the record did not indicate that CLECs previously had charged excessive terminating access rates or that CLECs distinguished between originating and terminating access in their service offerings. The Commission concluded that it did not appear that CLECs had structured their service offerings in ways designed to exercise any market power over terminating access and that, therefore, the concerns expressed in the Access Reform NPRM were not substantiated by the record. 184. The Commission further observed that, as CLECs attempt to expand their market presence, the rates of incumbent LECs or other potential competitors should constrain the CLECs' terminating access rates. In addition, the Commission found that overcharges for terminating access could encourage access customers to take competitive steps to avoid paying unreasonable terminating access charges. The Commission explained that, although high terminating access charges may not create a disincentive for the call recipient to retain its local carrier (because the call recipient does not pay the long distance charge), the call recipient may nevertheless respond to incentives offered by an IXC with an economic interest in encouraging the end user to switch to another local carrier. Thus, the Commission concluded that the possibility of competitive responses by IXCs would constrain non-incumbent LEC pricing. 185. Although the Commission declined at that time to adopt any regulations governing the provision of terminating access provided by CLECs because CLECs did not appear to possess market power, it noted that it could address the reasonableness of CLEC terminating access rates in individual instances through the exercise of its authority to investigate and adjudicate complaints under section 208. Moreover, the Commission stated that it would be sensitive to indications that the terminating access rates of CLECs were unreasonable. The Commission committed to revisit the issue of CLEC access rates if there were sufficient indications that CLECs were imposing unreasonable terminating access charges. B. AT&T's Petition for Declaratory Ruling 186. On October 23, 1998, AT&T filed a petition requesting that the Commission issue a declaratory ruling confirming that, under existing law and Commission rules and policies, IXCs may elect not to purchase switched access services offered under tariff by CLECs. AT&T contends that a substantial number of CLECs impose switched access charges that are significantly higher -- in some cases, by more than twenty times -- than those charged by the incumbent LEC against which the CLEC competes. AT&T's attempts to negotiate a resolution of this issue have stalled, it says, because many CLECs take the position that, due to the "filed tariff doctrine," AT&T is obligated to accept services from the CLEC at prices chosen by the CLEC, even though AT&T did not affirmatively order access from the CLEC. AT&T alleges that its petition is consistent with the Access Reform First Report and Order, in which the Commission stated that "terminating rates that exceed those charged by the ILEC serving the same market may suggest that a CLEC's terminating access rates are excessive." 187. The Commission has the discretion, on a case-by-case basis, to determine whether it is best to resolve a controversy by the adoption of a general rule or by an individual ad hoc proceeding, such as a declaratory ruling. The presence or absence of factual disputes is a significant factor in deciding whether a declaratory ruling is an appropriate method for resolving a controversy. AT&T contends that a declaratory ruling is appropriate here because the "facts are essentially undisputed and the governing law is clear." Despite AT&T's allegations to the contrary, however, the facts are not undisputed here. A number of carriers assert that AT&T's calculations of CLEC originating and terminating access rates are either incorrect or misleading. In response to these assertions, AT&T addressed only one of the concerns raised by commenters. Without agreement by the parties on the calculation and accuracy of both the incumbent LEC and CLEC rates, it is impossible compare them. Nor can the Commission evaluate AT&T's claim that its request for declaratory ruling is consistent with the Commission's statements in the Access Reform First Report and Order that CLEC terminating access rates that exceed those of the incumbent LEC may be excessive. 188. Moreover, the parties also dispute the applicable law. A number of opponents to AT&T's petition assert that AT&T mistakenly relies upon the Capital Network decision, in which the Commission found that an attempt to charge a party for a service that the party did not order would constitute an unreasonable practice within the meaning of section 201(b) of the Act, 47 U.S.C.  201(b). These opponents assert that AT&T failed to address the application of the constructive ordering doctrine, established in United Artists. In United Artists, the Commission found that affirmative consent was unnecessary to create a carrier- customer relationship when a carrier is interconnected with other carriers in such a manner that it can expect to receive access services, and when it fails to take reasonable steps to prevent the receipt of access services and does in fact receive such services. For all the foregoing reasons, and in the exercise of our discretion, we decline to address AT&T's concerns regarding CLEC access charges through a declaratory ruling. We therefore deny AT&T's petition. 189. In the Access Reform First Report and Order, however, the Commission committed to review the issue of CLEC access charges if there were evidence that CLECs were imposing unreasonable terminating access charges. The AT&T Petition for Declaratory Ruling, the comments provided in support of it, and the Bureau's recent decision in MGC Communications suggest the need to revisit the issue of CLEC access rates. Accordingly, in the accompanying Notice, we initiate a rulemaking to examine CLEC originating and terminating access rates. VIII. NOTICE OF PROPOSED RULEMAKING A. Geographic Deaveraging for Switched Access Services 190. In this section, we seek comment on whether to amend our Part 69 rules to permit price cap incumbent LECs to deaverage interstate common line and traffic-sensitive access charges within study areas without a competitive showing. Currently, Section 69.3(e)(7) of our rules requires an incumbent LEC to charges rates for access elements that are averaged across each of its study areas. 191. Common Line Basket. In the Access Reform NPRM, the Commission requested comment on deaveraging all interstate access rate elements except for the subscriber line charge (SLC) (and the primary interexchange carrier charge (PICC), which did not exist at the time). At that time, however, the Commission proposed to permit deaveraging only upon a showing of the degree to which local markets are open to competition. We now seek comment on whether to permit incumbent LECs to deaverage common line access elements without a competitive showing. To the extent that parties advocate conditioning deaveraging upon satisfaction of a competitive showing, we seek comment on the appropriate showing and the procedure by which evidence should be presented and evaluated. 192. We also seek comment on whether to condition an incumbent LEC's authority to deaverage common line access elements on certain regulatory developments, such as deaveraging of unbundled network elements in accordance with our rules, or establishment of explicit universal service high cost support mechanisms, and, if so, how. Should we impose these conditions in addition to any competitive showing that we may require? We note that, where unbundled network elements are deaveraged, continuing to require incumbents to charge access rates that are averaged across the study area may foreclose the incumbent LEC from meeting competition from unbundled network elements in low-cost areas. Similarly, an incumbent LEC's averaged rates will be below that LEC's cost in high-cost areas, thus discouraging competitive entry in those areas. We also seek comment on whether incumbent LECs should be required, as opposed to merely permitted, to deaverage certain or all common line access rate elements based on any conditions, such as the deaveraging of unbundled network element rates in a state. 193. Currently, incumbent LECs recover interstate common line costs through the SLC, PICC, and carrier common line charge (CCLC). The SLC and PICC are flat-rated charges that vary by class of customer, e.g., multi-line business, single-line business, primary residential line, and additional residential lines, subject to various caps. The CCLC is a per-minute charge that does not vary by class of customer. The SLC is assessed directly on end users while the PICC and CCLC are assessed on IXCs. Incumbent LECs are required to recover their interstate-allocated common line costs first through SLCs (subject to caps), then from PICCs (again, subject to caps), and finally from the CCLC. As the SLC and PICC caps rise, the CCLC gradually decreases and will someday be eliminated. 194. Parties supporting the deaveraging of interstate common line access charges should comment on the appropriate means of distributing deaveraged cost recovery among such charges. We request comment on whether any deaveraging of the SLC and PICC should be subject to current caps on those charges. At present, our rules provide that, to the extent the SLC caps on all lines and the PICC ceilings on primary residential and single-line business (SLB) lines prevent recovery of the full common line revenues permitted by our price cap rules, incumbent LECs may recover the shortfall through non-primary residential (NPR) and multi-line business (MLB) PICCs. Thus, if primary residential and SLB SLCs and PICCs have reached their caps, NPR and MLB PICCs may be funding at least part of this shortfall, i.e., subsidizing residential and SLB PICCs. This subsidy will decrease over time as the caps on the primary-residential and single-line business SLCs rise. To what degree should we condition deaveraging of common line rate elements on developments such as the elimination of the MLB PICC? What constraints, if any, should we place on the means by which certain foregone revenue may be recovered? For example, should we permit deaveraging only within a customer class and for a particular type of charge, e.g., prohibit incumbent LECs from recovering foregone SLC revenue through the CCLC or prohibit incumbent LECs from raising the NPR SLC to fund lower MLB SLCs? 195. Further, we seek comment on the means of recognizing any geographic variation in common line costs, i.e., methods of defining geographic pricing zones. Many states have defined at least three geographic zones for the pricing of unbundled loops pursuant to section 252(d)(1) of the Act. Universal service reform also may require defining zones to reflect different cost characteristics. We seek comment on whether geographic pricing zones for common line charges should be based on UNE or universal service zones or, perhaps, trunking basket service zones. Parties are invited to suggest additional bases for establishing geographic zones. For example, should we require LECs to establish identical geographic pricing zones for all access elements? 196. We seek comment on whether to permit incumbent LECs to define their own zones. If so, should we place any constraints on incumbent LEC zone pricing plans for common line service? For example, must an incumbent LEC demonstrate that such zones are based on cost? If so, how? Should there be a limit on the number or size of such zones? We note, for example, that in the accompanying Order we grant incumbent LECs greater flexibility to deaverage rates for services in the trunking basket, but we require each zone, except the highest-cost zone, to account for at least 15 percent of the incumbent's trunking basket revenues in the study area. 197. In addition, we seek comment on the procedures by which the Commission might permit incumbent LECs to define common line access charge zones. Should we require parties to submit for prior approval such zone pricing plans in advance of tariff filings, as we initially required for special access and switched transport zone pricing plans? If so, what information should we require parties to submit? 198. We also seek comment on whether the use of different zones for unbundled network elements, universal service, and access charges would create inefficiencies and arbitrage opportunities. We seek comment on alternative approaches for ensuring that the zones for these different purposes are compatible and that geographic zones generally reflect cost differences. 199. Traffic-sensitive basket. The traffic-sensitive basket includes local switching, information, data base access services, billing name and address, local switching trunk ports, and signaling transfer point port termination. In the past, parties have argued that traffic-sensitive service costs vary little, if at all, within study areas. Furthermore, we are unaware of any state commission that has deaveraged an incumbent LEC's rates for unbundled local switching. We invite parties to submit further evidence regarding the degree to which costs of traffic-sensitive services may vary geographically within incumbent LEC study areas and whether any such variance warrants permitting incumbent LECs to deaverage traffic-sensitive charges. We seek comment on whether we should establish similar or identical rules concerning any deaveraging of traffic-sensitive elements as we may establish for common line elements. For example, should we establish similar or identical rules regarding the methods and procedures for establishing rate zones for traffic-sensitive services, to the extent that they should differ from common line or transport zones? In Section VIII.C, infra, we seek comment on replacing the existing per-minute or per-call local switching rate structure rules with a capacity-based rate structure. How might deaveraging of traffic-sensitive charges be affected by such changes in the switching rate structure? B. Phase II Pricing Flexibility for Switched Service 200. In this section, we seek comment on Phase II pricing flexibility for common line and traffic-sensitive services, and the traffic-sensitive components of tandem-switched transport services offered by price cap incumbent LECs. We seek comment on the appropriate triggers for such relief and how Phase II relief for common line and traffic-sensitive services might differ from Phase II relief for dedicated transport and special access services that we establish in the Order accompanying this Notice. 1. Triggers 201. As we discuss in the Order, Phase II relief is warranted when an incumbent LEC demonstrates that competitors have established a significant market presence, i.e., that competition for a particular service within a geographic area is sufficient to preclude the incumbent from exploiting any monopoly power over a sustained period. In the Order, we conclude that an incumbent price cap LEC is entitled to Phase I pricing flexibility for common line and traffic-sensitive services in an MSA when it demonstrates that competitors, in aggregate, offer service over their own facilities to at least 15 percent of incumbent LEC customer locations in the MSA. We seek comment on whether we should predicate Phase II relief for these services on a similar showing that competitors offer these services over their own facilities but adopt a threshold higher than 15 percent, and, if so, what this threshold should be. If a different approach is warranted for Phase II relief, what should the relevant test(s) be? 202. In the Order, we decline to include customer locations served by mobile wireless competitors toward satisfaction of the Phase I trigger, due to the administrative burdens of determining when mobile wireless serves as a substitute for incumbent LEC wireline service. Should we exclude mobile wireless service from the Phase II trigger, as well? Are there reasons to believe that mobile wireless substitution will be easier or more important to measure in the context of requests for Phase II relief? 203. Some parties, such as Bell Atlantic and USTA, have proposed that we allow incumbent LECs to seek pricing flexibility for these services with respect to certain classes of customer, such as multi-line business customers, based on meeting triggers applicable only to a particular class of customers. We conclude, above, that we should not allow such separate showings for Phase I relief because we wish to encourage competition for both high-volume business customers and residential and low-volume business customers. Should we decline to permit such separate showings for Phase II pricing flexibility for common line and traffic-sensitive services? 2. Relief 204. In the Order, we conclude that an incumbent LEC that qualifies for Phase II relief for dedicated transport and special access services need not comply with Part 69 rate structure rules with respect to these services, may remove these services from price caps, and may file tariffs for these services on one day's notice (so long as such tariffs are made generally available). Should we grant similar Phase II relief for common line and traffic-sensitive service? If not, what relief is warranted upon satisfaction of the Phase II triggers for these services? 205. We also seek comment on whether we should impose certain safeguards with respect to Phase II relief for common line and traffic-sensitive services that we do not impose with respect to dedicated transport and special access services. Currently, incumbent LECs recover some of their common line costs through the SLC, which is assessed directly on the end user. As a condition of granting Phase II relief for common line services, should we require price cap incumbent LECs to charge some or all of the common line charge directly to the end user? If only some of the costs should be charged directly to the end user, on what basis should we establish a limit? What are the advantages and disadvantages of prohibiting some or all common line cost recovery from IXCs? What additional safeguards might we require? For example, should we limit in any way the extent to which incumbent LECs recover local switching costs from IXCs, as opposed to end users? 206. We also seek comment on the relationship between granting price cap LECs Phase II pricing flexibility for common line and traffic-sensitive services and their receipt of universal service support with respect to these services. If, for example, a price cap LEC is entitled to universal service support for a line if its costs exceed a particular benchmark, should we prohibit the LEC from charging a rate above that benchmark? Similarly, if eligibility for high cost support were determined on the basis of a revenue benchmark, should common line charges be limited by that benchmark? In what other ways should Phase II pricing flexibility for common line and traffic sensitive-services be affected or limited by universal service concerns? C. Switching Issues 1. Local Switching a. Introduction 207. We solicit comment on replacing the existing per-minute or per-call local switching rate structure rules with a capacity-based rate structure. Specifically, should we require price cap LECs to charge for local switching on the basis of the number of trunks connected to a given end office switch? Below, we seek comment on a capacity-based local switching rate structure. We then consider adding a factor to the traffic-sensitive PCI formula, designed to serve a function similar to the "g" factor in the common line PCI formula, in order to give access customers a reasonable portion of the benefits of demand growth. Finally, we seek comment on whether to require LECs to decrease their traffic-sensitive PCIs, so that LECs would not retain the benefits of past demand growth on a going-forward basis. b. Background 208. The Commission's long-standing policy is to require, to the extent possible, rate structures to reflect the manner in which carriers incur costs. Inefficient rate structures lead to inefficient and undesirable economic behavior, and create an implicit subsidy between high- volume users and low-volume users. For example, a rate structure that recovers non-traffic- sensitive costs through traffic-sensitive access rates increases the per-minute rates paid by IXCs and long-distance companies, thereby artificially suppressing demand for interstate long-distance services, and requiring high-volume customers to pay charges in excess of the costs of providing their service. Meanwhile, low-volume customers pay rates that are less than the cost of the dedicated equipment. 209. The Part 69 rules require incumbent LECs to charge per-minute rates for local switching, based on the Commission's 1983 finding that local switching services were traffic- sensitive. In the Access Reform First Report and Order, the Commission recognized that the local switching costs associated with line cards and trunk ports are non-traffic-sensitive, and revised the access charge rate structure to require incumbent LECs to recover those costs through non-traffic-sensitive rates. The Commission also concluded that the record at that time was not adequate to determine whether or to what extent the remaining local switching costs were traffic- sensitive or non-traffic-sensitive, and maintained the requirement that LECs recover those costs through traffic-sensitive rates. The Commission did, however, revise the local switching rate structure to permit, but not require, incumbent LECs to establish per-call local switching charges, in addition to per-minute rates. 210. The Commission also considered the nature of switching costs in the Local Competition Order, in the context of establishing pricing rules for local switching unbundled network elements (UNEs). At least one party to that proceeding, the Washington Utilities and Transportation Commission, advocated a rate structure based on peak usage for local switching in 1996, arguing that a flat rate based upon the cost of providing capacity at peak load is possibly the most economically correct pricing mechanism. In the Local Competition Order, the Commission concluded that shared local switching costs, i.e., local switching costs other than the costs of line cards and trunk ports, could be reasonably recovered through either flat or per- minute rate structures, and permitted state public service commissions to adopt either traffic- sensitive or non-traffic-sensitive rate structures for local switching unbundled network elements (UNEs). c. Capacity-based Local Switching Rate Structure 211. If costs are driven by peak demand, as suggested by the Washington Utilities and Transportation Commission, then local switching costs do not vary directly with total switched minutes in most cases. In the Access Reform First Report and Order, however, the Commission considered and rejected a proposal to require incumbent LECs to develop peak and off-peak rates for local switching, because the Commission concluded that LECs would have difficulty determining peak and off-peak hours with any degree of certainty, due to geographic, user-type, and service considerations. In addition, charging different prices for calls made during different times of the day may cause customers to shift their calling to less expensive times, thereby resulting in different peak times. We know of no reason to revisit our conclusion to reject peak and off-peak rates for local switching. Instead, we consider adopting a capacity-based local switching rate structure. If an increase in total minutes or total number of calls would lead to a measurable increase in local switching costs only when the increase at times of peak demand is so great as to require an expansion of switch capacity, then a capacity-based rate structure may reflect the manner in which incumbent LECs incur local switching costs better than the existing rate structure, without the difficulties raised by determining peak and off-peak hours. 212. A capacity-based local switching rate structure may offer other benefits. Most notably, if IXCs purchased a greater portion of their access services through non-traffic-sensitive rates, they would have an incentive to develop off-peak pricing plans to encourage long distance consumers to make more or longer off-peak calls. This, in turn, would encourage more efficient use of the public switched network. Such pricing plans are also likely to extend a greater share of the benefits of access cost reductions to residential long distance customers, because they are more likely than business customers to be off-peak users. 213. Accordingly, we seek comment on revising Section 69.106(f)(2) of the Commission's Rules to require price cap LECs to develop capacity-based local switching charges rather than per-minute charges. For example, should we require price cap LECs to calculate a capacity-based local switching charge by considering the aggregate number of trunks switched by the LEC? If local switching rates are based on number of trunk-side connections, how should we treat local switching access services with line-side connections, such as Feature Group A? 214. We also invite comment on the level of detail that we should specify in our local switching rate structure rules. Specifically, should Section 69.106 require incumbent LECs to charge for local switching based on the DS-1 equivalent capacity of an access customer's trunks connected to a particular end office switch, so that the DS-3 charge would be 28 times the DS-1 charge? Should we instead establish some initial rate relationship between DS-1 and DS-3, as the Commission did for transport? Is there some other rate structure we could prescribe that would better reflect how local switching costs vary with increases in peak demand that necessitate expansion of switch capacity? Alternatively, should we permit LECs to develop their own capacity-based local switching rate structures, and examine the reasonableness of those structures in the tariff review process? 215. We tentatively conclude that a capacity-based local switching rate structure, if it indeed reflects cost causation, would not artificially disadvantage smaller IXCs in the market for long distance services. As the Commission concluded in its decision to eliminate the unitary rate structure for tandem-switched transport, rules that protect small IXCs in competition with AT&T, or other large IXCs, are unnecessary because the long-distance market is competitive. We seek comment on this conclusion. 216. In addition, we invite parties to comment on whether permitting volume and term discounts for switched access services, as we propose above, would exacerbate any negative impact for smaller IXCs. We invite comment on whether a resale market for local switching services is likely to develop, and whether such a development would mitigate any negative impact that smaller IXCs might face. We note that the Commission already has a policy prohibiting carriers from placing restrictions on resale in their tariffs. We invite comment on whether any further resale protection is necessary. Alternatively, we invite comment on whether we should permit or require incumbent LECs to retain existing per-minute or per-call local switching charges concurrently with non-traffic-sensitive charges. Finally, we invite parties to make other proposals. d. Revision of Traffic-Sensitive PCI Formula 217. In the LEC Price Cap Order, the Commission concluded that it needed to adopt a formula for the common line basket PCI different from the PCI formula for the other baskets, to reflect that carrier common line rates are traffic-sensitive even though common line costs are non- traffic-sensitive. Accordingly, the Commission included a "g" factor in the common line PCI formula, where g represents per-minute growth per access line. The Commission found that including g would give all the benefits of demand growth to IXCs, while excluding g would give all the benefits of demand growth to LECs. The Commission incorporated g/2 as a compromise, because it found that both IXCs and LECs contribute to demand growth. The Commission did not attempt to measure at that time the relative contributions to demand growth made by IXCs and LECs, and expressly stated that a 50-50 split was not a precise reflection of the LECs' ability to influence usage. 218. If we decide to adopt a capacity-based local switching rate structure, it may be appropriate to include a factor in the traffic-sensitive PCI formula similar to the g factor currently in the common line PCI formula. Although, as discussed above, it is possible that a capacity- based local switching rate structure reflects costs better than a per-minute rate structure, capacity- based rates may not reflect local switching costs perfectly. More specifically, an increase in the number of trunks at a switch may not lead to a proportional increase in local switching costs. Rather, such an increase in trunks may lead to a measurable increase in local switching costs only when the increase of peak demand is so great as to require an expansion of switch capacity. If this is the case, then local switching costs may not vary directly with changes in per-trunk demand. We tentatively conclude that it would not be reasonable to permit incumbent LECs to retain all the benefits of trunk growth if they are not exclusively responsible for encouraging that growth. Accordingly, we invite parties to discuss whether the traffic-sensitive PCI formula should include a "q" factor, similar to the "g" factor in the common line PCI formula, to incorporate growth in number of trunks into the traffic-sensitive PCI formula. We also invite comment on whether to adopt a q factor if we decide not to revise the local switching rate structure as proposed above, or if we permit or require LECs to offer both usage-sensitive and capacity-based local switching rates. 219. We also request comment on the definition of this q factor if we decide to adopt it. For example, should it be based on the change in DS-1 equivalent capacity? Should price cap LECs measure changes in DS-3 equivalent capacity on some basis other than DS-1 equivalents? We intend to base any q factor we adopt on data that price cap LECs currently collect, or data that price cap LECs could collect at little or no additional cost. We therefore invite any party proposing a q factor definition to discuss whether and to what extent its definition would affect price cap LECs' data collection costs. 220. We also invite comment on the relationship between any q factor we add to the traffic-sensitive PCI formula and the g factor in the common line PCI formula. Specifically, the common line PCI formula currently includes "g/2", because the Commission found in the LEC Price Cap Order that both LECs and IXCs contribute to demand growth, and that "g/2" gives both IXCs and LECs a reasonable share of the benefits of per-minute demand growth. We note that we invite comment below on increasing the g factor in the common line PCI formula from g/2 to a full g. We therefore invite comment on whether any q factor we adopt for the traffic- sensitive PCI formula should be consistent the common line g factor, as revised in this proceeding. Alternatively, we invite comment on whether we should base the q factor in the traffic-sensitive basket on a different fraction than the common line g factor, because local switching does not make up all of the traffic-sensitive basket. e. Adjustment to Traffic-Sensitive PCIs 221. In the LEC Price Cap Order, the Commission concluded that failing to include a "g" factor in the common line PCI formula would not give IXCs any incentive to become more productive through encouraging demand growth. In other words, failure to include "g" would have created an imbalance between the interests of IXC customers and LEC stockholders. This imbalance would have been substantially similar to the imbalance found by the Commission in the 1995 LEC Price Cap Performance Review Order. In that Order, the Commission found that it had previously set the X-Factor lower than it intended, due to the inclusion of 1984-85 data in one of the original X-Factor studies. The Commission observed that LECs were supposed to become more efficient to earn more than would have been permitted under rate-of-return regulation, and ratepayers were to benefit from rates reduced to the level that would provide this challenge. The Commission then concluded that some portion of the LECs' earnings were obtained without any productivity improvements, and rates were not as low as the Commission intended. 222. If we find that local switching costs are more appropriately recovered through capacity-based charges, then permitting LECs to charge per-minute local switching rates since LEC price cap regulation was adopted in 1991, without including a q factor in the traffic-sensitive PCI formula, may have created an imbalance between the interests of IXC customers and LEC stockholders, similar to the imbalance found in the LEC Price Cap Performance Review Order resulting from the 1984-85 data discussed above. The existing per-minute rate structure provides the incumbent LEC with more revenue whenever per-minute demand increases, regardless of whether the LEC's costs have increased. This revenue increase results in higher earnings for the LEC, regardless of whether it has become more productive in its provision of local switching. This could explain, at least in part, why overall LEC earnings have increased in recent years, even though the Commission increased the X-Factor in 1995 and 1997. Furthermore, such an imbalance would remain embedded in the incumbent LECs' traffic-sensitive PCIs, regardless of whether we correct it by revising the local switching rate structure or including a q factor in the traffic-sensitive PCI formula on a forward-looking basis. Moreover, using per-minute charges without simultaneously using a q factor may have exacerbated this imbalance. Accordingly, we seek comment on whether to require a one-time downward adjustment of the LECs' traffic-sensitive PCIs to correct for any imbalance on a going-forward basis, similar to the adjustment required in the Price Cap Performance Review Order. Specifically, price cap LECs were required to reduce their PCIs to the levels that would have resulted had the Commission excluded the 1984 data point in its 1990 X-Factor determination. In this proceeding, we invite comment on whether price cap LECs should be required to reduce their traffic-sensitive PCIs to the levels that would have resulted had the Commission incorporated a q factor in the traffic-sensitive PCI formula that took effect in 1991. Alternatively, we invite comment on basing this PCI adjustment on a more recent year. 2. Tandem-Switched Transport 223. We solicit comment on whether we should revise the rate structure for tandem- switched transport, for the same reasons we consider revising the local switching rate structure discussed above. We also invite comment on all the issues we discussed in this section above, to the extent that they are relevant to tandem switching. Is tandem-switched transport different from local switching, such that capacity-based tandem switching rates are inappropriate? If capacity-based tandem switching rates are appropriate, how would they be developed? For example, they could be established based on the number of trunks between the IXC POP and the tandem switch. 224. If the tandem switching rate structure should remain usage-based, how could we prevent larger IXCs from maintaining an inadequate number of trunks to the LEC switch, and using tandem switching as inexpensive overflow? Could LECs establish a rate for IXCs that only use tandem-switched transport, and recover a higher rate for overflow from local switching? If so, we recognize that IXCs rely exclusively on tandem switching for certain routes, and so we believe that an overflow rate should be applied only on routes for which an IXC also has trunks to the local switch. 225. In addition, we invite parties to discuss whether we should add a q factor to the trunking basket PCI, if we conclude that tandem switching costs are more appropriately recovered through capacity-based rates. If so, how should that q factor be defined? Parties may also discuss whether we should adjust the trunking basket PCI to reflect that price cap LECs have recovered essentially flat costs through traffic-sensitive rates since LEC price cap regulation took effect in 1991, similar to the traffic-sensitive PCI adjustment we propose above. D. Price Cap Issues 1. Common Line Issues a. G Factor 226. The Commission proposed revisions to the common line formula in the Price Cap Fourth FNPRM, which established part of the record for the Price Cap Fourth Report and Order. The Commission decided against revising the common line formula in the Price Cap Fourth Report and Order, however, because it expected the common line PCI formula to be eliminated when per-minute CCL charges were eliminated, as a result of rules adopted in the Access Reform First Report and Order. The transition away from per-minute CCL charges, however, is progressing slowly for certain incumbent LECs. Accordingly, we take this opportunity to review some of the common line issues addressed in the Price Cap Fourth Report and Order. 227. Above, we explain why the Commission included a "g/2" term in the common line formula when it adopted LEC price cap regulation. Later, in 1995, the Commission found evidence that IXCs influence per-minute demand growth more than LECs, and considered increasing the g factor to reflect the IXCs' greater contribution to demand growth. The Commission did not revise the common line formula at that time, however, because it found that the separate common line formula could be eliminated completely if it adopted a moving average TFP-based X-Factor. The moving average X-Factor would incorporate the effects of growth into the PCI, and a separate g factor would no longer be necessary. Although the Commission did not adopt a moving average-based X-Factor in the 1997 Price Cap Fourth Report and Order, it nevertheless decided against revising the common line formula, because the Commission expected per-minute CCL rates and the separate common line formula to be phased out relatively quickly as a result of common line rule revisions adopted concurrently in the Access Reform First Report and Order. Our access reform rules have not eliminated per-minute CCL charges for some companies as quickly as the Commission had anticipated. As a result, this issue warrants re- examination. We invite comment on whether the g factor in the common line PCI formula should be increased, and if so, whether it should be increased to a full "g." Increasing the "g" factor would cause the common line PCI to decrease more quickly, which in turn would cause the per- minute CCL rate to decrease more quickly. The g factor would still be eliminated when the CCL is eliminated in the access reform transition. Parties advocating a "g" factor between g/2 and g should specify what fraction of g they believe should be included in the common line PCI formula, and explain their reasons. b. Reflection of Revised Common Line Rate Structure in Common Line Formula 228. We have determined that as long as the multi-line business PICC exists, to the extent that the ratio of primary residential and single line business lines to non-primary residential and multiline business lines changes, the common line formula may create a windfall or shortfall for some LECs. Accordingly, we seek comment on revising the common line PCI rules to eliminate any such windfall or shortfall. 229. Prior to the Access Reform First Report and Order, price cap LECs recovered all their common line revenues through two charges: (1) flat monthly end user common line charges (EUCL), also known as SLCs, imposed on end users; and (2) per-minute CCLCs imposed on IXCs. In the Access Reform First Report and Order, the Commission prescribed new flat common line rate elements, called PICCs, to be imposed on IXCs in most cases. PICC charges were designed to recover some of the revenues formerly recovered through per-minute CCL charges, and to annually increase until the per-minute CCL charge is phased out. 230. PICCs on single-line business and primary residential lines were set initially so that the sum of the PICC and SLC applicable to each of these lines was less than the average revenue per line permitted under the price cap rules. Those PICCs will increase until the sum of the applicable PICC and SLC is equal to the maximum permitted revenue per line. During the interim, price cap LECs are allowed to recover this shortfall through PICCs on multiline business lines. As a result, during this interim period, single-line business and primary residential lines receive an explicit subsidy from multiline business lines. 231. The growth rate of the amount received through this PICC subsidy ideally should be equivalent to the growth rate of primary residential and single-line business lines. The PICC subsidy, however, will grow too quickly or too slowly whenever the lines giving subsidy, multiline business lines, grow at a different rate than the lines receiving subsidy, single-line business and residential lines. This subsidy increases disproportionately if multiline business lines grow more quickly than single-line business and primary residential lines. This subsidy fails to keep up with line growth if multiline business lines grow less quickly than single-line business and primary residential lines. 232. For example, assume that the average permitted revenue per line in Year 1 is $6, and that the LEC provides 50 residential lines and 50 multiline business lines. Thus, the LEC is permitted $300 in revenue for residential lines (50*6), and $300 in multiline business lines (50*6). Assume also that the caps on SLCs and PICCs permit the LEC to collect $4 for each residential line, and $8 for each multiline business line. In this case, residential line charges recover only $200 in revenue, and so need $100 in subsidy. Multiline business lines recover $400 of revenue, and so generate $100 in subsidy. In this case, there is no windfall or shortfall in subsidy, and the LEC recovers an average of $6.00 per line. Now assume that, in Year 2, multiline business lines grow from 50 to 70, while residential lines remain at 50, and everything else in Year 1 remains the same. In this case, residential lines still require $100 in subsidy. The LEC, however, would collect $560 in revenue from each multiline business line (70*8). As a result, multiline business charges generate $160 in subsidy. Because the LEC's residential lines require only $100 in subsidy, the LEC receives a windfall of $60 in this example, and would recover an average of $6.33 per line. Thus, under our current rules, when calculating common line permitted revenue for the following year, the incumbent LEC would base those calculations on $6.33 per line rather than $6.00 per line. 233. If we permitted common line revenues to increase with the average growth rate of all common lines, we would eliminate the windfall or shortfall that now occurs whenever multiline business lines grow faster or slower than primary residential and single-line business lines. Accordingly, we invite comment on revising the formula in Section 61.46(d)(1) so that permitted common line revenues increase with the average growth rate of all common lines. We also invite interested parties to propose specific revisions to this formula. Finally, we solicit comment on whether any disproportionate increase or decrease in common line subsidy has created an imbalance between ratepayer and stockholder interests, of the kind we discussed at length in the LEC Price Cap Performance Review Order and in this Section of this Order. If so, should we require price cap LECs to make exogenous adjustments to their common line PCIs to correct this imbalance on a going-forward basis? 2. Reorganization of Baskets and Bands 234. In the Access Reform First Report and Order, the Commission revised the local switching rate structure to require LECs to charge flat charges for dedicated trunk ports. Price cap LECs established these new rate elements in tariffs that took effect on January 1, 1998. Because of the relative levels of demand for trunk ports and local switching, a price cap LEC could, in subsequent tariff filings, reduce its flat trunk port charges substantially, and make up that revenue through a relatively small increase in its per-minute local switching charge. Some price cap LECs did in fact reduce their recently-created flat trunk port charges substantially in their 1998 annual access filings, and some carriers have eliminated those charges in some study areas in their 1999 annual access filings. We invite comment on whether we should modify our price cap rules to place flat charges and traffic-sensitive charges in separate baskets, to prevent LECs from eliminating their existing flat trunk port charges, and thereby circumventing the local switching rate structure rules we adopted in the Access Reform First Report and Order. In addition, we invite parties to propose specific services to be included in each basket, if we decide that any modifications to the basket configurations are warranted. Alternatively, we invite comment on whether adopting a capacity-based local switching rate structure would be sufficient to preclude LECs from entirely circumventing the local switching rate structure rules adopted in the Access Reform First Report and Order. 3. Inflation Measure 235. Currently, the inflation measure in the PCI formula is the "Fixed Weight Price Index for Gross Domestic Product, 1987 Weights." The Bureau of Labor Statistics (BLS) now measures inflation with a chain-weighted GDP-PI, which bases weights for the current year's index on the prior year. We also note that the Commission used chain-weighted price indices in its calculation of a new X-Factor based on total factor productivity. We tentatively conclude that we should make the inflation measure in the PCI formula consistent with BLS's measure and with that used in setting the X-Factor. We seek comment on this tentative conclusion. E. CLEC Access Charges 1. Background 236. As we discuss above, the Commission requested comment in the Access Reform NPRM on the regulation of terminating access charges of both incumbent LECs and CLECs. The Commission noted that, with originating access, the calling party has the choice of service provider, the decision to place a call, and the ultimate obligation to pay for the call. The calling party also is the customer of the IXC that purchases the originating access service. The Commission noted that, unlike originating access, the choice of an access provider for terminating access is made by the recipient of the call. It suggested that, because neither the originating caller nor its long-distance service provider can exert substantial influence over the called party's choice of terminating access provider, the terminating end of a long-distance call may remain a bottleneck, controlled by the LEC providing access to a particular customer. The Commission also sought comment on the continued treatment of incumbent LEC originating "open end" minutes as terminating minutes for access charge purposes, and whether to extend that approach to CLECs. The Commission noted that, in some cases, such as 800 and 888 service, the called party, which pays for the call, is unable to influence the calling party's choice of provider for originating access services. 237. Based on the record submitted in response to the Access Reform NPRM, the Commission concluded that non-incumbent LECs should be treated as non-dominant in the provision of terminating access. The Commission found that there was insufficient evidence in the record to determine that CLECs had the ability to exercise market power in the provision of terminating access. The Commission further concluded that, as CLECs attempt to expand their market presence, the rates of incumbent LECs or other potential competitors would constrain the CLECs' terminating access rates. The Commission decided, therefore, not to adopt any regulations at that time governing the provision of terminating access provided by CLECs because CLECs did not appear to possess market power. The Commission indicated, however, that it would revisit the issue if there were sufficient indications that CLECs were imposing unreasonable terminating access charges. Although the Commission did not address the issue of CLEC originating access, it indicated, in the context of incumbent LEC originating access, that it believed that new entrants would eventually exert downward pressure on originating access rates. The Commission also concluded that the continued treatment of "open end" originating minutes, such as those for 800 or 888 services, as terminating minutes for access charge purposes was appropriate because the called party, which pays for the 800 or 888 calls, has limited ability to influence the calling party's choice of access provider. 238. Since that time, however, we have received indications that the Commission may have overestimated the ability of the marketplace to constrain CLEC access rates. In particular, IXCs allege that a substantial number of CLECs impose switched access charges that are significantly higher than those charged by the incumbent LECs with which they compete, suggesting that the Commission may need to revisit the issue of CLEC access rates. If market forces fail to constrain CLEC access rates, requiring IXCs to pay access charges set unilaterally by CLECs is not economically efficient and does not further the goals of the Telecommunications Act of 1996. We are reluctant, however, to regulate rates charged by competitive entrants to the local exchange and exchange access markets and prefer instead to seek a marketplace solution that might constrain CLEC access rates. 2. Discussion 239. Throughout the Access Reform proceeding, the Commission has questioned whether CLECs possess market power over terminating access service and whether such power precludes market forces from ensuring that terminating access charges are just and reasonable. In the Access Reform NPRM, the Commission invited parties to comment on whether CLECs have market power over IXCs that need to terminate long-distance calls to CLEC customers, and, if so, whether the Commission should subject CLEC terminating access rates to some form of regulation. Given the rapidly evolving telecommunications industry, we again invite parties to comment on this issue. 240. In particular, in response to the Access Reform NPRM, USTA challenges the fundamental premise that, because the called party is not paying for the call, terminating access charges are shielded from downward market pressures. According to USTA, if a LEC overprices terminating access relative to originating access, a pair of callers in repeated communications would have an incentive to alter their pattern of calls to favor the lower-priced alternative. In the Access Reform First Report and Order, the Commission stated that it was not convinced that a significant competitive impact would result from changes in calling patterns between pairs of callers. Based on their experiences since the Access Reform First Report and Order, we ask parties to comment on USTA's hypothesis. In addition, in response to the Access Reform NPRM, TCI disputes the premise that CLECs may possess market power. TCI asserts that CLECs do not have market power because IXCs can exercise bargaining power in negotiating terminating access charges with CLECs. TCI argues that the absence of an agreement will not prevent an IXC from completing many calls; instead, the IXC simply will have to pay terminating access to a different carrier. The absence of an agreement would be very costly to a CLEC, however, because it is quite possible that switched local service would not be a viable business without interconnection agreements with all the major IXCs. We ask parties to comment on TCI's hypothesis. 241. TCI's comments also raise the fundamental question of an IXC's obligation to accept or deliver traffic from or to a LEC. The Bureau recently released an order in which it found that AT&T had failed to take reasonable and necessary steps to terminate its access service arrangement with MGC, a CLEC. The Bureau also found, however, that MGC had failed to identify a legal impediment to an IXC declining to purchase a particular LEC's access service, but it emphasized that its holding was limited to the specific factual record and the arguments raised by the parties. The Bureau stated that: by holding that none of the obligations we discuss above prevents AT&T from declining MGC's originating access service, we do not imply that AT&T is entirely without constraint in determining where, how, or whom it will provide its long distance services. Naturally, in providing those services, AT&T remains subject to a broad variety of statutory and regulatory constraints that are too numerous to list here, but which include, without limitations, sections 201, 202, 203, and 214 of the Act and section 63.71 of the Commission's rules. 242. We now solicit comment on the issue the Bureau explicitly did not reach: whether any statutory or regulatory constraints prevent an IXC from declining a CLEC's access service. Commenters should identify any such constraints with particularity. If there are circumstances in which an IXC may decline to purchase a CLEC's access service, what are the ramifications for the customer of the CLEC? How would such a customer make or receive long-distance calls? Is such a regime consistent with the goals of section 254 of the Act that consumers in all regions of the nation have access to telecommunications services, including interexchange services? Provided that an IXC may refuse a CLEC's access traffic, is this a market-based solution to excessive CLEC rates that obviates the need for any regulatory action by the Commission? 243. If an IXC may refuse a CLEC's access service, we also solicit comment on whether an IXC can refuse to accept traffic from an incumbent LEC when there are no competitive alternatives to the LEC, e.g., a rural area with only one local exchange provider. We note that the Commission regulates incumbent LEC access charges. If an incumbent LEC's rates are within the Commission's mandates, should they be presumed to be just and reasonable? If so, should an IXC be allowed to refuse an incumbent LEC's access service despite the fact that the LEC's access rates are just and reasonable? What are the ramifications for the customer in that case? If there are no competitive alternatives, how would the end user of the LEC receive long-distance service if the IXC refused the LEC's access service? If in fact an IXC may refuse a LEC's access service, we also solicit comment on whether an IXC can accept traffic from incumbent LECs but refuse to accept traffic from CLECs. What are the ramifications for both the end users of the CLEC and the incumbent LEC? Would this lead to confusion on the part of the calling party who would not be aware until it placed its call, and the call did not go through, that the called party was served by a CLEC? Should an IXC's obligations to accept or deliver traffic from or to a CLEC differ for originating and terminating access services? 244. We acknowledge that CLEC access rates may, in fact, be higher due to the CLECs' high start-up costs for building new networks, their small geographical service areas, and the limited number of subscribers over which CLECs can distribute costs. Requiring IXCs to bear these costs, however, may impose unfair burdens on IXC customers that pay rates reflecting these CLEC costs even though the IXC customers may not subscribe to the CLEC. IXCs currently spread their access costs among all their end users. We solicit comments on solutions to this problem. Might the problem of excessive CLEC access rates be solved if IXCs charged different rates to end users within the same geographic area based upon the level of access charges levied by the end user's local exchange company? Because their long-distance bills would fluctuate based on the level of access charges, end users presumably would switch to LECs that charged lower access charges in order to reduce their long-distance bills. Is this a market-based solution to the issue of CLEC access rates? 245. If it is a market-based solution, we solicit comments on whether section 254(g) permits IXCs to charge different rates to end users within the same geographic area based upon the level of access charges levied by the end user's local exchange company. The legislative history of section 254(g) indicates that it is intended to ensure that rates between geographic areas are equal. If section 254(g) permits IXCs to charge different rates to end users within the same geographic area based upon the level of access charges levied by the end user's local exchange company, what practical difficulties might that raise with respect to ensuring that urban and rural rates are comparable? How, for example, might one compare urban and rural rates if IXCs charge different rates within an urban area? 246. We also seek comment on whether mandatory detariffing of CLEC interstate access charges might address any market failure to constrain terminating access rates. Mandatory detariffing would eliminate the CLECs' ability unilaterally to set terminating access rates by filing a tariff and to avoid negotiating those rates in the marketplace by relying on the filed tariff doctrine. To the extent that detariffing encourages parties to negotiate rates for terminating access, is it a market-based solution to excessive terminating access charges? We note, however, that our decision to require mandatory detariffing by IXCs has been stayed by the court of appeals, and the court's ultimate decision likely will implicate our ability to impose mandatory detariffing on CLECs. Finally, we seek comment on whether the adoption of any other solution should serve only as a "stopgap" measure until such time as we may be able to require detariffing. 247. We strongly prefer to rely upon a marketplace solution, such as those discussed above, to constrain CLEC access rates. Nonetheless, in the event that we conclude that legal or other impediments preclude adoption of a market-based solution, we also seek comment on a regulatory backstop to constrain CLEC access rates. In the Access Reform NPRM, the Commission invited parties to address whether the incumbent LECs' terminating access charges should serve as a benchmark to evaluate the reasonableness of CLECs' terminating rates. It suggested that a CLEC's terminating access charges might be presumptively just and reasonable if they were less than or equal to the terminating access charges of the incumbent LEC with which the CLEC competes. If, on the other hand, the CLEC's terminating access charges exceed the incumbent LEC's charges, the CLEC could be required to provide cost support for its charges or, alternatively, it might be required to collect the difference from its end users, rather than IXCs. We again seek comment on these proposals and whether they also should apply to originating access rates. Should access rates below a particular benchmark be presumed just and reasonable, thus providing CLECs with a defense in the context of a section 208 complaint? We seek comment on what rates to use as a benchmark, e.g., the incumbent LEC rate in the area served by the CLEC, or some other terminating access rate. 248. We also seek comment on whether any benchmark should vary depending on various criteria, such as, for example, whether the CLEC serves high cost areas or low cost areas. Alternatively, should any benchmark take the form of a sliding scale that declines as the number of access minutes per CLEC switch increases? Would it be appropriate to estimate this benchmark using incumbent LEC data? If parties believe that the benchmark should vary depending on various criteria, we solicit comment on these criteria, on what methodology we should use to establish alternative benchmarks, and what criteria we should use to determine which benchmark should apply to an individual CLEC. 249. Assuming we were to employ some form of a benchmark, we seek comment on whether to provide an "escape valve" that would allow CLECs wishing to charge more than the benchmark to collect those charges from end users (either the called party or calling party). In particular, we seek comment on an "end party pays" proposal that would require CLECs to collect the difference between the benchmark terminating access rate and the CLEC terminating access rate from end users (either the calling or called party) rather than from the IXC. We note that this "end party pays proposal" would resolve the problems associated with IXC averaging requirements, by in essence, "deaveraging" terminating access by charging the end user, rather than the IXC, for the terminating access. 250. In particular, if the called party pays, the person receiving the call would be charged the difference between the CLEC terminating access rate and the benchmark terminating access rate. We ask parties to comment on whether charging the called party would yield an increase in the number of uncompleted calls due to the called parties' refusal to accept the charges. In the Access Reform First Report and Order, the Commission found that a "called party pays" proposal may be disruptive to wireline services. Given the increasing popularity of wireless services and that most wireless companies charge the called parties for receiving calls, we seek comment on the continued validity of the Commission's concerns that consumers would be adverse to a "called party pays" proposal in the context of wireline services. In addition, we invite parties to address how to accomplish charging the customer receiving the call for terminating access. 251. If, conversely, the calling party pays, the person making the call, rather than the IXC, would be charged the difference between the CLEC terminating access rate and the benchmark terminating access rate. We seek comment on whether wireline consumers would be adverse to a "calling party pays" regime. We note that such a regime is offered widely by wireless providers abroad, and on a much more limited basis by some providers of cellular, paging and Personal Communications Service (PCS) in the United States. Further, we seek comment on whether requiring called or calling parties to pay for a portion of terminating access might encourage competition for terminating access. In addition, we question whether these "end party pays" proposals should be limited only to CLECs, and if so, whether this would result in confusion on the part of end users, i.e., incumbent LEC end users would not be charged for terminating access but CLEC end users would be. 252. Adoption of a "calling party pays" regime would require notification to the party making the call that it would be responsible for terminating access charges in addition to a long distance charge from its IXC. We seek comment on the development of a notification system. In particular, we seek comment on a proposal that the notification be developed in cooperation with the States and include: (1) notice that the calling party will be responsible for the terminating access charges; (2) the terminating access rates that the calling party incurs will be charged by the terminating LEC provider; and (3) notice that the calling party may terminate the call prior to incurring any charges. If we were to adopt a "called party pays" proposal, the called party would be notified at the time it signed up for service from a CLEC that it would have to pay terminating access charges for incoming long-distance calls. Accordingly, for the "called party pays proposal," we seek comment on the development of a more limited notification that merely delineates local calls from "called party pays" calls. 253. In response to AT&T's Declaratory Ruling Petition, Bell Atlantic proposes that the Commission link the terminating access rates of all local carriers, both CLECs and incumbent LECs, to originating access rates. Bell Atlantic argues that originating rates are not excessive because competitive forces keep them in check. It hypothesizes that, if the Commission required every carrier to set terminating rates at a level no higher than its originating rates, those competitive forces would constrain terminating access rates as well. We seek comment on Bell Atlantic's proposal. In order to address the potential that incumbent LECs might charge unreasonable rates for terminating access, the Commission limited price cap incumbent LEC recovery of TIC and common line costs from terminating access rates for a limited period, with the eventual elimination of any recovery of common line and TIC costs through terminating access charges. Furthermore, the Commission declined at that time to link terminating rates to originating rate levels because that approach would not substantially affect terminating access rates where originating access rates were not subject to competitive pressures. The Commission also found that linking an incumbent LEC's terminating access rates to its originating access rate might reduce the incumbent LEC's incentive to lower its originating access rates. We now seek comment on whether we should link the rates that all local carriers, both CLECs and incumbent LECs, charge for terminating access to originating access rates. We also seek comment on the possible effects on competition between incumbent LECs and CLECs if we were to adopt Bell Atlantic's proposal, but limit it to CLECs. 254. Some commenters have suggested that CLECs are charging excessive originating access rates. In the Access Reform NPRM, the Commission stated that as long as IXCs can influence the choice of the access provider, a LEC's ability to charge excessive originating access rates is limited, as IXCs will shift their traffic from that carrier to a competing access provider. In the Access Reform First Report and Order, the Commission did not specifically address the issue of CLEC originating access rates. Instead, in the context of incumbent LEC originating access rates, the Commission concluded that new entrants, by purchasing unbundled network elements or providing facilities-based competition, would eventually exert downward pressure on originating access rates. Given the complaints by AT&T and others regarding excessive CLEC originating access rates, we seek comment on a marketplace solution that would constrain CLEC originating access rates. In particular, we seek comment on whether any of the terminating access proposals discussed above also may apply to originating access rates. Finally, we seek comment on whether an entirely separate solution is necessary to resolve the issue of originating access charges. If a separate solution is necessary, we solicit comments on what that solution should be. 255. In the case of both originating access associated with "open end" services, such as 800 or 888 calls, and terminating access, the party paying for the call does not choose the access provider. We invite parties to comment on whether, therefore, to treat CLEC "open end" originating minutes the same as CLEC terminating minutes for access charge purposes. Assuming "open end" minutes are treated the same as terminating minutes for access charge purposes, we seek comment on whether the calling party and called party pays proposals set forth above also might work for "open end" minutes, or whether modifications are needed for "open end" minutes. For instance, if we were to adopt a calling party pays proposal for originating "open end" minutes, we might require the calling party to pay the portion of the access charges that exceed the benchmark for 800 or 888 calls, because it is the caller, in that instance, that makes the choice of provider for originating access. Finally, we seek comment on whether an entirely separate solution is necessary to resolve the issue of "open end" originating access charges. If a separate solution is necessary, we solicit comments on what that solution should be. 256. We strongly prefer not to intervene in the marketplace, particularly with respect to competitive new entrants, unless intervention is necessary to fulfill our statutory obligation to ensure just and reasonable rates. If market forces are not operating to constrain CLEC access charges, we seek the least intrusive means possible to correct any market failures. 257. Finally, in the Access Reform NPRM, the Commission sought comment on any less intrusive methods of ensuring that a CLEC's originating and terminating access charges are just and reasonable. We do so again. We further invite parties to comment on how small business entities, including small incumbent LECs and new entrants, will be affected by the proposals above regarding CLEC access charges. IX. PROCEDURAL ISSUES A. Final Regulatory Flexibility Analysis 258. As required by the Regulatory Flexibility Act (RFA), an Initial Regulatory Flexibility Analysis (IRFA) was incorporated in Access Reform NPRM. The Commission sought written comments on the proposals in the Access Reform NPRM, including the IRFA. The Commission's Final Regulatory Flexibility Analysis (FRFA) in this Order conforms to the RFA, as amended. To the extent that any statement contained in this FRFA is perceived as creating ambiguity with respect to our rules or statements made in preceding sections of this Order, the rules and statements set forth in those preceding sections shall be controlling. 1. Need for and Objectives of this Report and Order 259. This proceeding is being conducted to advance the pro-competitive, de-regulatory national policies embodied in the Telecommunications Act of 1996. The Commission continues the process it began in 1997 with the Access Reform First Report and Order to reform regulation of interstate access charges in order to accelerate the development of competition in all telecommunications markets and to ensure that our own regulations do not unduly interfere with the operation of these markets as competition develops. 2. Summary of Significant Issues Raised by the Public Comments in Response to the IRFA 260. We have already addressed the general concerns raised by Rural Telephone Coalition that this proceeding may "prejudge and prejudice" a later rulemaking for non-price cap LECs, and that the delay in implementing that rulemaking may injure non-price cap LECs. Otherwise, the comments filed do not address the specific issues contained in this Order. 3. Description and Estimate of the Number of Small Entities to which the Rules Will Apply: 261. The RFA directs agencies to provide a description of and, where feasible, an estimate of the number of small entities that may be affected by the proposed rules, if adopted. The RFA generally defines the term "small entity " as having the same meaning as the terms "small business," "small organization," and "small governmental jurisdiction." In addition, the term "small business" has the same meaning as the term "small business concern" under the Small Business Act. A small business concern is one which: (1) is independently owned and operated; (2) is not dominant in its field of operation; and (3) satisfies any additional criteria established by the Small Business Administration (SBA). The Small Business Administration has defined a small business for Standard Industrial Classification (SIC) category 4813 (Telephone Communications, Except Radiotelephone) to be a small entity that has no more than 1500 employees. Total Number of Telephone Companies Affected: 262. We have included small incumbent LECs in this present RFA analysis. As noted above, a "small business" under the RFA is one that, inter alia, meets the pertinent small business size standard (e.g., a telephone communications business having 1,500 or fewer employees), and "is not dominant in its field of operation." The SBA's Office of Advocacy contends that, for RFA purposes, small incumbent LECs are not dominant in their field of operation because any such dominance is not "national" in scope. We have therefore included small incumbent LECs in this RFA analysis, although we emphasize that this RFA action has no effect on FCC analyses and determinations in other, non-RFA contexts. 263. Price Cap Local Exchange Carriers. The rulemaking contained in this Order applies only to price cap LECs. We do not have data specifying the number of these carriers that are either dominant in their field of operations, are not independently owned and operated, or have more than 1,500 employees, and thus are unable at this time to estimate with greater precision the number of price cap LECs that would qualify as small business concerns under the SBA's definition. However, there are only 13 price cap LECs. Consequently, we estimate that significantly fewer than 13 providers of local exchange service are small entities or small price cap LECs that may be affected by these proposals. 4. Summary Analysis of the Projected Reporting, Recordkeeping, and Other Compliance Requirements 264. In this Report and Order, we adopt changes in pricing flexibility to price cap LECs in the form of streamlined introduction of new services, geographic deaveraging of rates for services in the trunking basket, and removal of interexchange services from price cap regulation. These changes will affect all price cap LECs, including small price cap LECs, and will require small price cap LECs to make one or more tariff filings should they desire to obtain the additional pricing flexibility, which will involve the usage of legal skills, and possibly accounting, economic, and financial skills. 5. Burdens on Small Entities, and Significant Alternatives Considered and Rejected 265. In Sections III, IV, and V, we adopt forms of regulatory relief for price cap LECs that can be granted under current market conditions and do not require a further competitive showing. Price cap LECs each will have to file at least one tariff to implement this relief, but the administrative burdens they will face in future filings will diminish as a result. In Section VI, we grant additional pricing flexibility to price cap LECs that make "competitive showings," or satisfy "triggers," to demonstrate that market conditions in particular areas warrant the relief at issue. In order to minimize the administrative burdens on price cap LECs, we base our triggering mechanisms on objectively measurable criteria. 266. We considered and rejected alternative triggers and granting a different amount of pricing flexibility. In setting the triggers and relief in the manner we did, we attempted to balance the interests of price cap LECs in being able to gain regulatory relief, with our interest in protecting ratepayers from unreasonable rate levels and new entrants from anti-competitive actions. 6. Report to Congress 267. The Commission will send a copy of this Report and Order, including this FRFA, in a report to be sent to Congress pursuant to the Small Business Regulatory Enforcement Fairness Act of 1996. In addition, the Commission will send a copy of this Report and Order, including FRFA, to the Chief Counsel for Advocacy of the Small Business Administration. A copy of this Report and Order and FRFA (or summaries thereof) will also be published in the Federal Register. B. Initial Regulatory Flexibility Act Analysis 268. As required by the Regulatory Flexibility Act (RFA), the Commission has prepared this present Initial Regulatory Flexibility Analysis (IRFA) of the possible significant economic impact on small entities by the policies and rules proposed in this Further Notice of Proposed Rulemaking (Further Notice). Written public comments are requested on this IRFA. Comments must be identified as responses to the IRFA and must be filed by the deadlines for comments on the Further Notice provided below in Section IX.D. The Office of Public Affairs will send a copy of the Further Notice, including this IRFA, to the Chief Counsel for Advocacy of the Small Business Administration. In addition, the Further Notice and IRFA (or summaries thereof) will be published in the Federal Register. 269. Need for, and objectives of, the proposed rules. Consistent with the Telecommunications Act of 1996, the Commission has revised its interstate access charges to facilitate competition in the provision of interstate access services. These proposals attempt to effect additional regulations reflective of the competitive marketplace. In Sections VIII.A and VIII.B we seek to establish additional pricing flexibilities for price cap incumbent LECs, while at the same time limit use of those flexibilities to deter entry, to drive existing competitors from the market, or to increase rates for those customers that lack competitive alternatives. In Section VIII.C, we seek to modify the common line rate structure should we determine that a capacity- based rate structure reflects the manner in which price cap LECs incur their costs better than the current traffic-sensitive rate structure. In Section VIII.D, we seek to refine several of our price cap rules to better reflect the manner in which price cap incumbent LECs costs are incurred. In Section VIII.E, we seek to prevent CLECs from charging unreasonable rates for terminating access service. 270. Legal Basis. The proposed action is supported by Sections 4(i), 4(j), 201-205, 208, 251, 252, 253 and 403 of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 154(j), 201, 205,208, 251, 252, 253, 403. 271. Description, potential impact and number of small entities affected. The RFA directs agencies to provide a description of and, where feasible, an estimate of the number of small entities that may be affected by the proposed rules, if adopted. The RFA generally defines the term "small entity " as having the same meaning as the terms "small business," "small organization," and "small governmental jurisdiction." In addition, the term "small business" has the same meaning as the term "small business concern" under the Small Business Act. A small business concern is one which: (1) is independently owned and operated; (2) is not dominant in its field of operation; and (3) satisfies any additional criteria established by the Small Business Administration (SBA). The Small Business Administration has defined a small business for Standard Industrial Classification (SIC) category 4813 (Telephone Communications, Except Radiotelephone) to be a small entity that has no more than 1500 employees. Total Number of Telephone Companies Affected: 272. We have included small incumbent LECs in this present RFA analysis. As noted above, a "small business" under the RFA is one that, inter alia, meets the pertinent small business size standard (e.g., a telephone communications business having 1,500 or fewer employees), and "is not dominant in its field of operation." The SBA's Office of Advocacy contends that, for RFA purposes, small incumbent LECs are not dominant in their field of operation because any such dominance is not "national" in scope. We have therefore included small incumbent LECs in this RFA analysis, although we emphasize that this RFA action has no effect on FCC analyses and determinations in other, non-RFA contexts. 273. Price Cap Local Exchange Carriers. The proposals in Section VIII.A-D apply only to price cap LECs. We do not have data specifying the number of these carriers that are either dominant in their field of operations, are not independently owned and operated, or have more than 1,500 employees, and thus are unable at this time to estimate with greater precision the number of price cap LECs that would qualify as small business concerns under the SBA's definition. However, there are only 13 price cap LECs. Consequently, we estimate that significantly fewer than 13 providers of local exchange service are small entities or small price cap LECs that may be affected by these proposals. 274. Competitive Local Exchange Carriers. The proposals in Section VIII.E apply only to competitive LECs. Neither the Commission nor the Small Business Administration has developed a definition of small providers of local exchange service. The closest applicable definition under Small Business Administration rules is for telephone telecommunications companies other than radiotelephone (wireless) companies. The most reliable source of information regarding the number of competitive LECs nationwide of which we are aware appears to be the data that we collect annually in connection with the Telecommunications Relay Service (TRS). According to our most recent data, 129 companies reported that they were engaged in the provision of either competitive access provider services or competitive local exchange carrier services. We do not have data specifying the number of these carriers that are either dominant in their field of operations, are not independently owned and operated, or have more than 1,500 employees, and thus are unable at this time to estimate with greater precision the number of competitive LECs that would qualify as small business concerns under the SBA's definition. Consequently, we estimate that fewer than 129 providers of local exchange service are small entities or small competitive LECs that may be affected by these proposals. 275. Reporting, record keeping and other compliance requirements. We expect that, on balance, the proposals in this Further Notice will slightly increase price cap LECs' administrative burdens. The proposals in Section VIII.A would require at least one additional tariff filing, and may require additional showings. The proposals in Section VIII.B will require a price cap LEC, to the extent that it chooses to avail itself of the additional flexibility, to file a petition demonstrating that it has met the triggers, and make an initial tariff filing. We expect that the proposals in Sections VIII.C and VIII.D would establish new methodologies that price cap LECs would need to apply in their tariff filings, but otherwise should not affect their administrative burdens. 276. We expect that the proposals in Section VIII.E will have no effect on the administrative burdens of competitive LECs, because they would have no additional filing requirement. They would only be required to respond to complaints. 277. Steps taken to minimize significant economic impact on small entities, and significant alternatives considered. In this Notice, we sought comment on how a number of proposals would affect small entities. We believe that overall, these proposals should have a positive economic impact on small price cap LECs. The proposals in Sections VIII.A, VIII.B, and VIII.C should enable small price cap LECs to price their regulated services in a manner that is more reflective of the underlying costs of these services. In Sections VIII.C, we have also sought comment on whether small interexchange carriers would be artificially disadvantaged if we adopt a capacity- based local switching rate structure. The proposals in Sections VIII.D and VIII.E should not have a significant economic impact on small entities. We seek comment on these proposals and urge that parties support their comments with specific evidence and analysis. 278. Federal rules which overlap, duplicate or conflict with this proposal. None. C. Paperwork Reduction Act 279. On April 1, 1997, the Office of Management and Budget (OMB) approved all of our proposed information collection requirements in accordance with the Paperwork Reduction Act. The OMB made one recommendation, suggesting that we try "to minimize the number of new filings that firms must create in order to be compliant with the rules adopted . . . ." We have carefully considered the recommendation of OMB, and in the course of preparing this Order, we have decided to modify several of the collection requirements proposed in the Access Reform NPRM. This Order has greatly reduced the number of filings a price cap LEC will have to submit to receive pricing flexibility. In addition, many of the filings should take less time to make than was originally proposed. For example, we estimate that based on the competitive triggers we adopted, it should only take five hours each to make two Phase II showings per MSA for all special access and dedicated transport services, whereas the original filing to OMB estimated that each Phase II showing would take approximately 300 hours. 280. The Further Notice of Proposed Rulemaking contains either a proposed or modified information collection. As part of its continuing effort to reduce paperwork burdens, we invite the general public and the OMB to take this opportunity to comment on the information collections contained in the Further Notice of Proposed Rulemaking, as required by the Paperwork Reduction Act of 1995, 44 U.S.C.  3501-3520. Public and agency comments are due at the same time as other comments on the Further Notice of Proposed Rulemaking; OMB comments are due 60 days from date of publication of the Further Notice of Proposed Rulemaking in the Federal Register. Comments should address: (a) whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information shall have practical utility; (b) the accuracy of the Commission's burden estimates; (c) ways to enhance the quality, utility, and clarity of the information collected; and (d) ways to minimize the burden of the collection of information on the respondents, including the use of automated collection techniques or other forms of information technology. D. Filing Comments 281. Pursuant to Sections 1.415 and 1.419 of the Commission's rules, 47 C.F.R.  1.415, 1.419, interested parties may file comments on or before October 29, 1999, and reply comments on or before November 29, 1999. Comments may be filed using the Commission's Electronic Comment Filing System (ECFS) or by filing paper copies. See Electronic of Documents in Rulemaking Proceedings, 63 Fed. Reg. 24,121 (1998). 282. Comments filed through the ECFS can be sent as an electronic file via the Internet to . Generally, only one copy of an electronic submission must be filed. If multiple docket or rulemaking numbers appears in the caption of this proceeding, however, commenters must transmit one electronic copy of the comments to each docket or rulemaking number referenced in the caption. In completing the transmittal screen, commenters should include their full name, Postal Service mailing address, and the applicable docket or rulemaking number. Parties may also submit an electronic comment by Internet e-mail. To get filing instructions for e-mail comments, commenters should send an e-mail to ecfs@fcc.gov, and should include the following words in the body of the message, "get form ." A sample form and directions will be sent in reply. 283. Parties who choose to file by paper must file an original and four copies of each filing. If more than one docket or rulemaking number appear in the caption of this proceeding, commenters must submit two additional copies for each additional docket or rulemaking number. All filings must be sent to the Commission's Secretary, Magalie Roman Salas, Office of the Secretary, Federal Communications Commission, 445 Twelfth St., S.W., Room TW-A325, Washington, DC 20554. X. ORDERING CLAUSES 284. Accordingly, IT IS ORDERED, pursuant to sections 1, 4(i), 4(j), 201-205, 303(r), and 403 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 154(j), 201- 205, 303(r), 403, and section 553 of Title 5, United States Code, that revisions to Parts 1, 61, and 69 of the Commission's rules, 47 C.F.R. Parts 1, 61, 69, ARE ADOPTED as set forth in Appendix B. 285. IT IS FURTHER ORDERED that the rule revisions adopted in this Order will be effective 30 days after publication of this Order in the Federal Register. The collections of information contained within are contingent upon approval by the Office of Management and Budget. 286. IT IS FURTHER ORDERED that, pursuant to section 10(c) of the Communications Act of 1934, 47 U.S.C.  160(c), the period for review by the Commission of the petition for forbearance filed by U S West Communications, Inc., CC Docket No. 98-157, IS EXTENDED by 90 days. 287. IT IS FURTHER ORDERED that the petition for declaratory ruling filed by AT&T, CCB/CPD File No. 98-63, IS DENIED. 288. IT IS FURTHER ORDERED that NOTICE IS HEREBY GIVEN OF the rulemaking described above and that COMMENT IS SOUGHT on these issues. 289. IT IS FURTHER ORDERED that the Commission's Office of Public Affairs, Reference Operations Division, SHALL SEND a copy of the Further Notice of Proposed Rulemaking, including the Regulatory Flexibility Act analysis, to the Chief Counsel for Advocacy of the Small Business Administration. FEDERAL COMMUNICATIONS COMMISSION Magalie Roman Salas Secretary APPENDIX A Parties Filing Pleadings I. Price Cap Second FNRPM A. Comments 1. Ad Hoc Telecommunications Users Group (Ad Hoc) 2. Ameritech 3. Association for Local Telephone Services (ALTS) 4. AT&T Corp. (AT&T) 5. Bell Atlantic Telephone Companies (Bell Atlantic) 6. BellSouth Telecommunications, Inc. (BellSouth) 7. California Cable Television Association (CCTA) 8. Cincinnati Bell Telephone Co. (Cincinnati Bell) 9. Comcast Corp. (Comcast) 10. Competitive Telecommunications Association (CompTel) 11. Cox Enterprises, Inc. (Cox) 12. General Services Administration (GSA) 13. GTE Service Corp. (GTE) 14. ICG Access Services, Inc. (ICG) 15. Information Industry Association (IIA) 16. LCI International, Inc. (LCI) 17. LDDS WorldCom (LDDS) 18. Lincoln Telephone and Telegraph Co. (Lincoln) 19. MCI Telecommunications Corp. (MCI) 20. Metropolitan Fiber Systems (MFS) 21. National Telephone Cooperative Association (NTCA) 22. NYNEX Telephone Companies (NYNEX) 23. Organization for the Protection and Advancement of Small Telephone Companies (OPASTCO) 24. Pacific Bell and Nevada Bell (together, Pacific Bell) 25. Southern New England Telephone Co. (SNET) 26. Southwestern Bell Telephone Co. (SBC) 27. Sprint Corporation (Sprint) 28. Sprint Telecommunications Venture 29. Tele-Communications Association (TCA) 30. Telecommunications Resellers Association (TRA) 31. Teleport Communications Group Inc. (Teleport) 32. Time Warner Communications Holdings, Inc., (Time Warner) 33. U S West Communications, Inc. (U S West) 34. United States Telephone Association (USTA) B. Replies 1. Ad Hoc 2. Ameritech 3. Association for Local Telecommunications Services (ALTS) 4. AT&T 5. Bell Atlantic 6. BellSouth 7. Cincinnati Bell 8. Comcast 9. Competitive Telecommunications Association (CompTel) 10. Cox 11. Frontier 12. General Services Administration (GSA) 13. GTE 14. LDDS 15. MCI 16. MFS 17. National Cable Television Association, Inc. (NCTA) 18. NYNEX 19. Pacific Bell 20. Southwestern Bell (SBC) 21. Sprint 22. Sprint Telecommunications Venture 23. Teleport 24. Time Warner 25. TRA 26. U S West 27. USTA II. Access Reform NPRM A. Comments 1. ACC Long Distance 2. Ad Hoc Telecommunications Users Committee (Ad Hoc) 3. AirTouch Communications, Inc. (AirTouch) 4. Alabama Public Service Commission (Alabama Commission) 5. Alaska Telephone Association 6. Aliant 7. Alliance for Public Technology 8. Allied Communications Group, Inc. (Allied) 9. ALLTEL Telephone Services Corporation (ALLTEL) 10. America On-Line 11. American Association for Adult and Continuing Education, et al. 12. American Association for Retired Person, Consumer Federation of America, and Consumers Union (AARP, et al.) 13. American Library Association 14. American Petroleum Institute (API) 15. America's Carriers Telecommunication Association (ACTA) 16. Ameritech 17. Association for Local Telecommunications Services (ALTS) 18. AT&T 19. Bankers Clearinghouse, et al. 20. Bell Atlantic Telephone Companies and NYNEX (BA/NYNEX) 21. BellSouth Corporation, BellSouth Telecommunications, Inc. (BellSouth) 22. California Cable Television Association (CCTA) 23. (People of the State of ) California and the Public Utility Commission of the State of California (California Commission) 24. Cathey, Hutton & Associates 25. Centennial Cellular Corp. 26. Cincinnati Bell Telephone Company (Cincinnati Bell) 27. Citizens for a Sound Economy Foundation (CSE) 28. Citizens Utilities Company (Citizens) 29. Commercial Internet Exchange Association (CIX) 30. Communications Workers of America (CWA) 31. Competition Policy Institute (CPI) 32. Competitive Telecommunications Association (CompTel) 33. Compuserve, Inc. and Prodigy Services Corp. (Compuserve) 34. Consumer Project on Technology (Consumer Project) 35. District of Columbia Public Service Commission (District of Columbia Commission) 36. Evans Telephone Company, et al. (Small Western LECs) 37. Excel Telecommunications, Inc. (Excel) 38. Florida Public Service Commission (Florida Commission) 39. Frederick & Warinner, L.L.C. 40. Frontier Corporation (Frontier) 41. General Communication, Inc. (GCI) 42. General Services Administration/Department of Defense (GSA/DOD) 43. Gray Panthers 44. GTE Service Corp. (GTE) 45. GVNW Inc./Management (GVNW) 46. Harris, Skrivan & Associates, LLC 47. ICG Telecom Group, Inc. (ICG) 48. Illinois Commerce Commission (Illinois Commission) 49. Illuminet 50. Independent Telephone and Telecommunications Alliance (ITTA) 51. Information Industry Association (IIA) 52. Interactive Services Association 53. International Communications Association (ICA) 54. Internet Access Coalition 55. ITCs, Inc. 56. IXC Long Distance, Inc. 57. John Staurulakis, Inc. (Staurulakis) 58. Kansas Corporation Commission (Kansas Commission) 59. LCI International Telecom Corp. (LCI) 60. MCI 61. Media Access Project, et al. 62. Microsoft Corporation (Microsoft) 63. Minnesota Independent Coalition (Minnesota Independent Coalition) 64. Missouri Public Service Commission (Missouri Commission) 65. National Association of Regulatory Utility Commissioners (NARUC) 66. National Cable Television Association, Inc. (NCTA) 67. National Exchange Carrier Association, Inc. (NECA) 68. New York State Department of Public Service (New York Commission) 69. Northern Arkansas Telephone Company 70. Northern Marianna Islands (Commonwealth of) 71. Ohio Consumers' Counsel (Ohio Consumers' Counsel) 72. Ohio Public Utilities Commission (Ohio Commission) 73. Ozarks Technical Community College 74. Pacific Telesis Group (PacTel) 75. Pennsylvania Internet Service Providers (Pennsylvania ISPs) 76. Personal Communications Industry Association (PCIA) 77. Public Utilities Commission of Texas (Texas Commission) 78. Public Utility Commission of Oregon (Oregon Commission) 79. Puerto Rico Telephone Company (PRTC) 80. Jon Radoff 81. Roseville Telephone Company (Roseville) 82. Rural Telephone Coalition (RTC) 83. Rural Telephone Finance Cooperative 84. Rural Utilities Service (RUS) 85. SDN Users Association, Inc. 86. Service-oriented Open Network Technologies, Inc. (SONETECH) 87. South Dakota Public Utilities Commission (South Dakota Commission) 88. Southern New England Telephone Co. (SNET) 89. Southwestern Bell (SBC) 90. Spectranet Interactive, Inc. (Spectranet) 91. Sprint 92. State Consumer Advocates 93. TCA, Inc. (TCA) 94. TDS Telecommunications Corporation (TDS) 95. Telco Communications Group, Inc. 96. Telecommunications Resellers Association (TRA) 97. Tele-Communications, Inc. (TCI) 98. Teleport 99. Tennessee Regulatory Authority (Tennessee Commission) 100. Texas Office of Public Utility Counsel (Texas Public Utility Counsel) 101. Time Warner Communications Holdings, Inc. (Time Warner) 102. U S West 103. USTA 104. Washington Independent Telephone Association (WITA) 105. Washington Utilities and Transportation Commission (Washington Commission) 106. Lyman C. Welch 107. Western Alliance 108. WinStar Communications, Inc. (WinStar) 109. WorldCom, Inc. (WorldCom) B. Replies 1. ACC Long Distance 2. Ad Hoc 3. Alarm Industry Communications Committee 4. State of Alaska (Alaska Commission) 5. Aliant 6. Alliance for Public Technology 7. ALLTEL Telephone Services Corporation (ALLTEL) 8. America On-Line 9. American Association for Adult and Continuing Education, et al. 10. American Association for Retired Person, Consumer Federation of America, and Consumers Union, and Texas Office of Public Utility Counsel (AARP, et al.) 11. American Communications Services, Inc. 12. Ameritech 13. API 14. Arch Communications Group 15. Association for Local Telecommunications Services (ALTS) 16. AT&T 17. Bankers Clearinghouse, et al. 18. Bell Atlantic Telephone Companies and NYNEX (BA/NYNEX) 19. BellSouth Corporation, BellSouth Telecommunications, Inc. (BellSouth) 20. (People of the State of) California and the Public Utility Commission of the State of California (California Commission) 21. Colorado Library Education and Healthcare Telecommunications Coalition 22. Commercial Internet Exchange Association (CIX) 23. Competitive Telecommunications Association (CompTel) 24. Compuserve 25. Consumer Project on Technology (Consumer Project) 26. Cox 27. General Communication, Inc. (GCI) 28. General Services Administration/Department of Defense (GSA/DOD) 29. Consumers' Utility Counsel Division, [Georgia] Governor's Office of Consumer Affairs (Georgia Consumers' Utility Counsel) 30. Georgia Public Service Commission (Georgia Commission) 31. GTE Service Corp. (GTE) 32. GVNW Inc./Management (GVNW) 33. State of Hawaii (Hawaii) 34. ICG Telecom Group, Inc. (ICG) 35. Internet Access Coalition 36. IXC Long Distance, Inc. 37. LCI International Telecom Corp. (LCI) 38. Maine Public Utilities Commission (Maine Commission) 39. MCI 40. Media Access Project, et al. 41. Minnesota Independent Coalition (Minnesota Independent Coalition) 42. Minnesota Internet Services Trade Association 43. National Cable Television Association, Inc. (NCTA) 44. National Exchange Carrier Association, Inc. (NECA) 45. Ohio Consumers' Counsel (Ohio Consumers' Counsel) 46. Ohio Public Utilities Commission (Ohio Commission) 47. Pacific Telesis Group (PacTel) 48. Personal Communications Industry Association (PCIA) 49. PSINet, Inc. (PSINet) 50. Puerto Rico Telephone Company (PRTC) 51. Roseville Telephone Company (Roseville) 52. Rural Telephone Coalition (RTC) 53. Southern New England Telephone Co. (SNET) 54. Southwestern Bell Telephone Company (SBC) 55. Sprint Corporation (Sprint) 56. State Consumer Advocates 57. TDS Telecommunications Corporation (TDS) 58. Telco Communications Group, Inc. 59. Tele-Communications, Inc. (TCI) 60. Teleport Communications Group Inc. (Teleport) 61. Texas Association of Broadcasters 62. Texas Office of Public Utility Counsel (Texas Public Utility Counsel) 63. The Gallegos Family Network 64. Time Warner Communications Holdings, Inc. (Time Warner) 65. U S West 66. USTA 67. WorldCom, Inc. (WorldCom) III. October 5 Public Notice A. Comments 1. Ad Hoc 2. America's Carriers Telecommunication Association (ACTA) 3. Ameritech 4. API 5. Association for Local Telecommunications Services (ALTS) 6. AT&T 7. Bell Atlantic 8. BellSouth 9. Cable & Wireless (Cable & Wireless) 10. Cincinnati Bell 11. CompTel 12. Consumer Federation of America (CFA) 13. Consumers Union 14. CoreComm Newco, Inc. (CoreComm) 15. CPI 16. CTSI, Inc. (CTSI) 17. CWA 18. ENTUA 19. Excel Telecommunications, Inc. (Excel) 20. General Services Administration (GSA) 21. GTE 22. KMC Telecom, Inc. (KMC) 23. MCI WorldCom, Inc. (MCI) 24. MediaOne Group, Inc. (MediaOne) 25. NEXTLINK Communications, Inc. (NEXTLINK) 26. Operator Communications, Inc. (OCI) 27. RCN Telecom Services, Inc. (RCN) 28. SBC (SBC) 29. United States Small Business Administration (SBA) 30. Small Business Survival Committee 31. Sprint 32. Time Warner 33. TRA 34. U S West 35. USTA 36. Washington Utilities and Transportation Commission (Washington Commission) 37. Western Wireless Corporation (Western Wireless) B. Replies 1. Ad Hoc 2. Ameritech 3. API 4. AT&T 5. Bell Atlantic 6. BellSouth 7. CFA 8. Cincinnati Bell 9. CompTel 10. CTSI 11. Excel 12. General Services Administration (GSA) 13. GST Telecom Inc. (GST) 14. GTE 15. ITTA 16. KMC 17. MCI WorldCom, Inc. (MCI) 18. NEXTLINK 19. RCN Telecom Services, Inc. (RCN) 20. SBC (SBC) 21. Sprint 22. TRA 23. U S West 24. USTA IV. AT&T Petition for Declaratory Ruling A. Comments 1. ALLTEL Communications 2. Ameritech 3. Association for Local Telecommunications Services (ALTS) 4. BellSouth Telecommunications, Inc. (BellSouth) 5. Cable & Wireless USA. Inc. (Cable & Wireless) 6. Cablevision Lightpath, Inc. and NEXTLINK Communications, Inc. 7. Cox Communications (Cox) 8. CTSI, Inc. (CTSI) 9. Freedom Ring Communications 10. Frontier Corp. (Frontier) 11. GTE Service Corp (GTE) 12. GVNW Inc./Management (GVNW) 13. Heart of Iowa Communications, Inc. 14. MCI WorldCom, Inc. (MCI) 15. MediaOne Group, Inc. (MediaOne) 16. MGC Communications, Inc. 17. Optel, Inc. 18. Rainer Cable, Inc. 19. SBC Communications (SBC) 20. Sprint Communications Co., L.P. (Sprint) 21. Telecommunications Resellers Association (TRA) 22. Teligent, Inc. 23. The Orlando Telephone Company 24. Time Warner Telecom (Time Warner) 25. Total Telecommunications Services, Inc. 26. U S West Communications, Inc. (U S West) 27. WinStar Communications, Inc. (WinStar) B. Replies 1. Ameritech 2. Association for Local Telecommunications Services (ALTS) 3. AT&T Corp. (AT&T) 4. Bell Atlantic 5. CTSI, Inc. (CTSI) 6. MCI WorldCom, Inc. (MCI) 7. MGC Communications, Inc. 8. NEXTLINK Communications, Inc. (NEXTLINK) 9. SBC Communications, Inc. (SBC) 10. Sprint Communications Co., L.P. (Sprint) 11. Total Telecommunications Services, Inc. 12. WinStar Communications, Inc. (WinStar) V. Forbearance Petitions 1. U S West, Phoenix MSA a. Comments 1. Ameritech Operating Companies (Ameritech) 2. AT&T Corp. (AT&T) 3. BellSouth Telecommunications, Inc. (BellSouth) 4. Competitive Telecommunications Association (CompTel) 5. GST Telecom Inc. 6. GTE Service Corp. (GTE) 7. MCI WorldCom, Inc. (MCI) 8. Qwest Communications Corp. (Qwest) 9. SBC Communications, Inc. (SBC) 10. Sprint Corporation (Sprint) 11. TSR Wireless LLC (TSR) 12. United States Telephone Association (USTA) b. Replies 1. Ad Hoc Telecommunications Users Committee (Ad Hoc) 2. AT&T Corp. (AT&T) 3. Bell Atlantic Telephone Companies (Bell Atlantic) 4. GST Telecom Inc. 5. MCI WorldCom, Inc. (MCI) 6. U S West Communications, Inc. (U S West) 2. SBC, Fourteen SBC MSAs a. Comments 1. Ameritech Operating Companies (Ameritech) 2. Association for Local Telecommunications Services (ALTS) 3. AT&T Corp. (AT&T) 4. Competitive Telecommunications Association (CompTel) 5. GST Telecom Inc. 6. Hyperion Telecommunications, Inc. (Hyperion) 7. KMC Telecom, Inc. (KMC) 8. Logix Communications Corporation. 9. MCI WorldCom, Inc. (MCI) 10. MediaOne Group, Inc. (MediaOne) 11. Network Access Solutions, Inc. 12. NEXTLINK Communications, Inc. 13. Sprint Corporation (Sprint) 14. Telecommunications Resellers Association (TRA) 15. Time Warner Communications Holdings, Inc. d/b/a Time Warner (Time Warner) 16. U S West Communications, Inc. (U S West) 17. United States Telephone Association (USTA) 18. UTC, The Telecommunications Association b. Replies 1. Ad Hoc Telecommunications Users Committee (Ad Hoc) 2. Bell Atlantic Telephone Companies (Bell Atlantic) 3. Hyperion Telecommunications, Inc. (Hyperior) 4. KMC Telecom, Inc. (KMC) 5. Level 3 Communications Inc. 6. Logix Communications, Corporation 7. NEXTLINK Communications, Inc. (NEXTLINK) 8. SBC Communications, Inc. (SBC) 9. Telecommunications Resellers Association (TRA) 3. U S West, Seattle MSA a. Comments 1. Association for Local Telephone Services (ALTS) 2. AT&T Corp. (AT&T) 3. Competitive Telecommunications Association/America's Carriers Telecommunications Association (CompTel) 4. Ms. Sue Conachan 5. Ms. Kathryn Fancher 6. Focal Communications, Inc. (Focal) 7. General Services Administration (GSA) 8. GST Telecom Inc. 9. Hyperion Telecommunications, Inc. (Hyperion) 10. MCI WorldCom, Inc. (MCI) 11. Network Access Solutions, Inc. 12. NEXTLINK Communications Inc. and Electric Lightwave, Inc. (NEXTLINK) 13. SBC Communications (SBC) 14. Sprint Corporation (Sprint) 15. Telecommunications Resellers Association (TRA) 16. Washington Association of Internet Service Providers 17. WGHT Pompton Lakes NJ b. Replies 1. Bell Atlantic Telephone Companies (Bell Atlantic) 2. General Services Administration (GSA) 3. Qwest Communications Corp. (Qwest) 4. U S West Communications, Inc. (U S West) 4. Bell Atlantic, Twelve Bell Atlantic Study Areas a. Comments 1. Association for Local Telecommunications Services (ALTS) 2. AT&T Corp. (AT&T) 3. Cablevision Lightpath, Inc 4. Capital One Financial Services 5. CBS Broadcasting Corporation, National Broadcasting Company, Turner Broadcasting System, Inc., and The Walt Disney Corporation 6. Competitive Telecommunications Association/America's Carriers Telecommunications Association (CompTel) 7. CTSI, Inc & RCN Telecom 8. General Services Administration (GSA) 9. Hyperion Telecommunications, Inc. (Hyperion) 10. Mr. Marcel Kates 11. KMC Telecom, Inc 12. Marriott Corporation (Marriott) 13. MCI WorldCom, Inc. (MCI) 14. MediaOne Group (MediaOne) 15. Network Access Solutions, Inc. 16. Network Plus, Inc. 17. NEXTLINK Communications, Inc. (NEXTLINK) 18. Sprint Corporation (Sprint) 19. Telecommunications Resellers Association 20. Mr. Jerry Thompson 21. Time Warner Communications Holdings, Inc. d/b/a Time Warner (Time Warner) 22. United States Telephone Association (USTA) 23. xDSL Networks, Inc. b. Replies 1. Bell Atlantic Telephone Companies (Bell Atlantic) 2. General Services Administration (GSA) 5. Ameritech, Chicago LATA a. Comments 1. Association for Local Telephone Services (ALTS) 2. AT&T Corp. (AT&T) 3. Competitive Telecommunications Association (CompTel) 4. Core Comm, Ltd. (CoreComm) 5. Focal Communications Corporation and KMC Telecom, Inc. 6. MCI WorldCom, Inc. (MCI) 7. McLeod USA Telecommunications Services, Inc. 8. NEXTLINK Communications, Inc. (NEXTLINK) 9. SBC Communications, Inc. (SBC) 10. Sprint Corporation (Sprint) 11. Telecommunications Resellers Association (TRA) 12. United States Telephone Association (USTA) b. Replies 1. Ameritech Operating Companies (Ameritech) APPENDIX B AMENDMENTS TO THE CODE OF FEDERAL REGULATIONS PART 0 -- COMMISSION ORGANIZATION 1. The authority citation continues to read as follows: Authority: Sec. 5, 48 Stat. 1068, as amended; 47 U.S.C. 155. 2. Revise  0.291 by adding paragraph (i) to read as follows:  0.291 Authority delegated. * * * * * (i) Authority concerning petitions for pricing flexibility. (1) The Chief, Common Carrier Bureau, shall have authority to act on petitions filed pursuant to Part 69, Subpart H, of this chapter for pricing flexibility involving special access and dedicated transport services. This authority is not subject to the limitation set forth in paragraph (a)(2) of this section. (2) The Chief, Common Carrier Bureau, shall not have authority to act on petitions filed pursuant to Part 69, Subpart H, of this chapter for pricing flexibility involving common line and traffic sensitive services. PART 1 -- PRACTICE AND PROCEDURE 3. The authority citation continues to read as follows: Authority: 15 U.S.C. 79 et seq., 47 U.S.C. 151, 154(i), 154(j), 155, 225, and 303(r). 4. Revise  1.773 by adding paragraph (a)(1)(v), to read as follows: (v) For the purposes of this section, any tariff filing by a price cap LEC filed pursuant to the requirements of Section 61.42(d)(4)(ii) of this chapter will be considered prima facie lawful, and will not be suspended by the Commission unless the petition requesting suspension shows each of the following: (A) That there is a high probability the tariff would be found unlawful after investigation; (B) That any unreasonable rate would not be corrected in a subsequent filing; (C) That irreparable injury will result if the tariff filing is not suspended; and (D) That the suspension would not otherwise be contrary to the public interest. 5. Add  1.774 to read as follows:  1.774 Pricing flexibility (a) Petitions. (1) A petition seeking pricing flexibility for specific services pursuant to Part 69, Subpart H, of this chapter, with respect to a metropolitan statistical area (MSA), as defined in Section 22.909(a) of this chapter, or the non-MSA parts of a study area, must show that the price cap LEC has met the relevant thresholds set forth in Part 69, Subpart H, of this chapter. (2) The petition must make a separate showing for each MSA for which the petitioner seeks pricing flexibility, and for the portion of the study area that falls outside any MSA. (3) Petitions seeking pricing flexibility for services described in Sections 69.709(a) and 69.711(a) of this chapter must include: (i) the total number of wire centers in the relevant MSA or non-MSA parts of a study area, as described in Section 69.707 of this chapter; (ii) the number and location of the wire centers in which competitors have collocated in the relevant MSA or non-MSA parts of a study area, as described in Section 69.707 of this chapter; (iii) in each wire center on which the price cap LEC bases its petition, the name of at least one collocator that uses transport facilities owned by a provider other than the price cap LEC to transport traffic from that wire center; and (iv)(A) the percentage of the wire centers in the relevant MSA or non-MSA area, as described in Section 69.707 of this chapter, in which competitors have collocated and use transport facilities owned by a provider other than the price cap LEC to transport traffic from that wire center; or (B) the percentage of total base period revenues generated by the services at issue in the petition that are attributable to wire centers in the relevant MSA or non-MSA area, as described in Section 69.707 of this chapter, in which competitors have collocated and use transport facilities owned by a provider other than the price cap LEC to transport traffic from that wire center. (4) Petitions seeking pricing flexibility for services described in Section 69.713(a) of this chapter must make a showing sufficient to meet the relevant requirements of Section 69.713. (b) Confidential treatment A price cap LEC wishing to request confidential treatment of information contained in a pricing flexibility petition should demonstrate, by a preponderance of the evidence, that the information should be withheld from public inspection in accordance with the requirements of Section 0.459 of this chapter. (c) Oppositions. Any interested party may file comments or oppositions to a petition for pricing flexibility. Comments and oppositions shall be filed no later than 15 days after the petition is filed. Time shall be computed pursuant to Section 1.4 of this part. (d) Replies. The petitioner may file a reply to any oppositions filed in response to its petition for pricing flexibility. Replies shall be filed no later than 10 days after comments are filed. Time shall be computed pursuant to Section 1.4 of this part. (e) Copies, service. (1)(i) Any price cap LEC filing a petition for pricing flexibility must submit its petition pursuant to the Commission's Electronic Tariff Filing System (ETFS), following the procedures set forth in Section 61.14(a) of this chapter. (ii) The price cap LEC must provide to each party upon which the price cap LEC relies to meet its obligations under paragraph (a)(3)(iii) of this section, the information it provides about that party in its petition, even if the price cap LEC requests that the information be kept confidential under paragraph (b) of this section. (A) The price cap LEC must certify in its pricing flexibility petition that it has made such information available to the party. (B) The price cap LEC may provide data to the party in redacted form, revealing only that information to the party that relates to the party. (C) The price cap LEC must provide to the Commission copies of the information it provides to such parties. (2)(i) Interested parties filing oppositions or comments in response to a petition for pricing flexibility may file those comments through ETFS. (ii) Any interested party electing to file an opposition or comment in response to a pricing flexibility petition through a method other than ETFS must file an original and four copies of each opposition or comment with the Commission, as follows: the original and three copies of each pleading shall be filed with the Secretary, FCC, Room CY-A257, 445 Twelfth St. S.W., Washington, D.C., 20554; one copy must be delivered directly to the Commission's copy contractor, International Transcription Service, Inc., 1231 Twentieth St. N.W., Washington, D.C. 20036. Additional, separate copies shall be served simultaneously upon the Chief, Common Carrier Bureau; the Chief, Competitive Pricing Division; and the Chief, Tariff and Pricing Analysis Branch of the Competitive Pricing Division. (iii) In addition, oppositions and comments shall be served either personally or via facsimile on the petitioner. If an opposition or comment is served via facsimile, a copy of the opposition or comment must be sent to the petitioner via first class mail on the same day as the facsimile transmission. (3) Replies shall be filed with the Commission through ETFS. In addition, petitioners choosing to file a reply must serve a copy on each party filing an opposition or comment, either personally or via facsimile. If a reply is served via facsimile, a copy of the reply must be sent to the recipient of that reply via first class mail on the same day as the facsimile transmission. (f) Disposition. (1) A petition for pricing flexibility pertaining to special access and dedicated transport services shall be deemed granted unless the Chief, Common Carrier Bureau, denies the petition no later than 90 days after the close of the pleading cycle. The period for filing applications for review begins the day the Bureau grants or denies the petition, or the day that the petition is deemed denied. Time shall be computed pursuant to Section 1.4 of this part. (2) A petition for pricing flexibility pertaining to common-line and traffic-sensitive services shall be deemed granted unless the Commission denies the petition no later than five months after the close of the pleading cycle. Time shall be computed pursuant to Section 1.4 of this part. PART 61 -- TARIFFS 6. The authority citation continues to read as follows: Authority: Secs. 1, 4(i), 4(j), 201-205, and 403 of the Communications Act of 1934, as amended; 47 U.S.C. 151, 154(i), 154(j), 201-205, and 403, unless otherwise noted. 7. Amend  61.3 by revising paragraph (m) and adding paragraphs (nn), (oo), and (pp), to read as follows:  61.3 Definitions. * * * * * (m) Contract-based Tariff. A tariff based on a service contract entered into between a non-dominant carrier and a customer, or between a customer and a price cap local exchange carrier which has obtained permission to offer contract-based tariff services pursuant to Part 69, Subpart H, of this chapter. * * * * * (nn) Corridor service. "Corridor service" refers to interLATA services offered in the "limited corridors" established by the District Court in United States v. Western Electric Co., Inc., 569 F. Supp. 1057, 1107 (D.D.C. 1983). (oo) Toll dialing parity. "Toll dialing parity" exists when there is dialing parity, as defined in Section 51.5 of this chapter, for toll services. (pp) Loop-based services. Loop-based services are services that employ Subcategory 1.3 facilities, as defined in Section 36.154 of this chapter. 8. Amend  61.42 by redesignating paragraph (d)(4) as (d)(4)(i), and adding paragraph (d)(4)(ii), to read as follows:  61.42 Price cap baskets and service categories. * * * * * (d) * * * (4) * * * (ii) If a price cap carrier has implemented interLATA and intraLATA toll dialing parity everywhere it provides local exchange services at the holding company level, that price cap carrier may file a tariff revision to remove corridor and interstate intraLATA toll services from its interexchange basket. 9. Amend  61.45 by revising paragraph (d)(1)(vii), to read as follows:  61.45 Adjustments to the PCI for local exchange carriers. * * * * * (d) * * * (1) * * * (vii) Retargeting the PCI to the level specified by the Commission for carriers whose base year earnings are below the level of the lower adjustment mark, subject to the limitation in Section 69.731 of this chapter. 10. Amend  61.46 to add paragraph (i) to read as follows:  61.46 Adjustments to the API. * * * * * (i) In no case shall a price cap local exchange carrier include data associated with services offered pursuant to contract tariff in the calculations required by this section. 11. Amend  61.47 to revise paragraphs (a) and (e)(1), and to add paragraphs (f) and (k), to read as follows:  61.47 Adjustments to the SBI; pricing bands. (a) In connection with any price cap tariff filing proposing changes in the rates of services in service categories, subcategories, or density zones, the carrier must calculate an SBI value for each affected service category, subcategory, or density zone pursuant to the following methodology: * * * * * * * * (e) Pricing bands shall be established each tariff year for each service category and subcategory within a basket. Each band shall limit the pricing flexibility of the service category, subcategory, as reflected in the SBI, to an annual increase of a specified percent listed in this paragraph below, relative to the percentage change in the PCI for that basket, measured from the levels in effect on the last day of the preceding tariff year. For local exchange carriers subject to price cap regulation as that term is defined in Section 61.3(x) of this part, there shall be no lower pricing band for any service category or subcategory. (1) Five percent: (i) Local switching (traffic sensitive basket) (ii) Information (traffic sensitive basket) (iii) Database Access services (traffic sensitive basket) (iv) 800 Database Vertical Services subservice (traffic sensitive basket) (v) Billing Name and Address (traffic sensitive basket) (vi) Local switching trunk ports (traffic sensitive basket) (vii) Signalling Transfer Point Port Termination (traffic sensitive basket) (viii) Voice grade (trunking basket) (ix) Audio/Video (trunking basket) (x) Total High Capacity (trunking basket) (xi) DS1 subservice (trunking basket) (xii) DS3 subservice (trunking basket) (xiii) Wideband (trunking basket) * * * (f) A local exchange carrier subject to price cap regulation may establish density zones pursuant to the requirements set forth in Section 69.123 of this chapter, for any service in the trunking basket, other than the interconnection charge set forth in Section 69.124 of this chapter. The pricing flexibility of each zone shall be limited to an annual increase of 15 percent, relative to the percentage change in the PCI for that basket, measured from the levels in effect on the last day of the preceding tariff year. There shall be no lower pricing band for any density zone. * * * * * (k) In no case shall a price cap local exchange carrier include data associated with services offered pursuant to contract tariff in the calculations required by this section. 12. In  61.49, revise paragraphs (f)(2) and (g), and add (f)(3) and (f)(4), to read as follows:  61.49 Supporting information to be submitted with letters of transmittal for tariffs of carriers subject to price cap regulation. * * * * * (f) * * * (2) Each tariff filing submitted by a price cap LEC that introduces a new loop-based service, as defined in Section 61.3(pp) of this part -- including a restructured unbundled basic service element (BSE), as defined in Section 69.2(mm) of this chapter, that constitutes a new loop-based service -- that is or will later be included in a basket, must be accompanied by cost data sufficient to establish that the new loop-based service or unbundled BSE will not recover more than a just and reasonable portion of the carrier's overhead costs. (3) A price cap LEC may submit without cost data any tariff filings that introduce new services, other than loop-based services. (4) A price cap LEC that has removed its corridor or interstate intraLATA toll services from its interexchange basket pursuant to Section 61.42(d)(4)(ii) of this part, may submit its tariff filings for corridor or interstate intraLATA toll services without cost data. (g) Each tariff filing submitted by a local exchange carrier subject to price cap regulation that introduces a new loop-based service or a restructured unbundled basic service element (BSE), as defined in Section 69.2(mm) of this chapter, that is or will later be included in a basket, or that introduces or changes the rates for connection charge subelements for expanded interconnection, as defined in Section 69.121 of this chapter, must also be accompanied by: * * * 13. Add  61.55 to read as follows:  61.55 Contract-based tariffs. (a) This section shall apply to price cap LECs permitted to offer contract-based tariffs under Section 69.727(a) of this chapter. (b) Composition of contract-based tariffs shall comply with Sections 61.54(b) through (i) of this part. (c) Contract-based tariffs shall include the following: (1) The term of contract, including any renewal options; (2) A brief description of each of the services provided under the contract; (3) Minimum volume commitments for each service; (4) The contract price for each service or services at the volume levels committed to by the customers; (5) A general description of any volume discounts built into the contract rate structure; and (6) A general description of other classifications, practices, and regulations affecting the contract rate. 14. Amend  61.58 to revise paragraphs (b) and (c), and add (d), to read as follows:  61.58 Notice requirements. * * * * * (b) Tariffs for new services filed by price cap local exchange carriers shall be filed on at least one day's notice. (c) Contract-based tariffs filed by price cap local exchange carriers pursuant to Sections 69.727(a) of this chapter shall be filed on at least one day's notice. (d)(1) A local exchange carrier that is filing a tariff revision to remove its corridor or interstate intraLATA toll services from its interexchange basket pursuant to Section 61.42(d)(4)(ii) of this part shall submit such filing on at least fifteen days' notice. (2) A local exchange carrier that has removed its corridor and interstate intraLATA toll services from its interexchange basket pursuant to Section 61.42(d)(4)(ii) of this part shall file subsequent tariff filings for corridor or interstate intraLATA toll services on at least one day's notice. PART 69 -- ACCESS CHARGES 15. The authority citation continues to read as follows: Authority: 47 U.S.C. 154, 201, 202, 203, 205, 218, 220, 254, 403. 16. Amend  69.4 by revising subparagraph (e)(7) to read as follows:  69.3 Filing of Access Service Tariffs * * * * * (7) Such a tariff shall not contain charges for any access elements that are disaggregated or deaveraged within a study area that is used for purposes of jurisdictional separations, except as otherwise provided in this chapter. 17. Amend  69.4 by revising paragraph (g) and adding paragraph (i), to read as follows:  69.4 Charges to be filed. * * * * * (g) Local exchange carriers subject to price cap regulation, as that term is defined in Section 61.3(x) of this chapter, may establish appropriate rate elements for a new service, within the meaning of Section 61.3(t) of this chapter, in any tariff filing with a scheduled effective date after [insert date 30 days after publication in the Federal Register]. * * * * * (i) Paragraphs (b) and (h) of this section are not applicable to a price cap local exchange carrier to the extent that it has been granted the pricing flexibility in Section 69.727(b)(1) of this part. 18. In  69.110, revise paragraph (e) to read as follows:  69.110 Entrance facilities. * * * * * (e) Except as provided in paragraphs (f), (g), and (h) of this section, and Subpart H of this chapter, telephone companies shall not offer entrance facilities based on term discounts or volume discounts for multiple DS3s or any other service with higher volume than DS3. 19. Amend  69.123 by revising paragraphs (a), (b), (e)(2), and (f)(1), to read as follows:  69.123 Density pricing zones. (a)(1) Incumbent local exchange carriers not subject to price cap regulation may establish a reasonable number of density pricing zones within each study area that is used for purposes of jurisdictional separations, in which at least one interconnector has taken the subelement of connection charges for expanded interconnection described in Section 69.121(a)(1) of this subpart. (2) Such a system of pricing zones shall be designed to reasonably reflect cost-related characteristics, such as the density of total interstate traffic in central offices located in the respective zones. (3) Non-price cap incumbent local exchange carriers may establish only one set of density pricing zones within each study area, to be used for the pricing of both special and switched access pursuant to paragraphs (c) and (d) of this section. (b)(1) Incumbent local exchange carriers subject to price cap regulation may establish any number of density zones within a study area that is used for purposes of jurisdictional separations, provided that each zone, except the highest-cost zone, accounts for at least 15 percent of that carrier's trunking basket revenues within that study area, calculated pursuant to the methodology set forth in Section 69.725 of this part. (2) Price cap incumbent local exchange carriers may establish only one set of density pricing zones within each study area, to be used for the pricing of all services within the trunking basket for which zone density pricing is permitted. (3) An access service subelement for which zone density pricing is permitted shall be deemed to be offered in the zone that contains the telephone company location from which the service is provided. (4) An access service subelement for which zone density pricing is permitted which is provided to a customer between telephone company locations shall be deemed to be offered in the highest priced zone that contains one of the locations between which the service is offered. * * * (e) * * * (2) Notwithstanding Section 69.3(e)(7) of this part, incumbent local exchange carriers subject to price cap regulation may charge different rates for services in different zones pursuant to Section 61.47(f) of this chapter, provided that the charges for any such service are not deaveraged within any such zone. (f)(1) An incumbent local exchange carrier that establishes density pricing zones under this section must reallocate additional amounts recovered under the interconnection charge prescribed in Section 69.124 of this subpart to facilities-based transport rates, to reflect the higher costs of serving lower density areas. Each incumbent local exchange carrier must reallocate costs from the interexchange charge each time it increases the ratio between the prices in its lowest-cost zone and any other zone in that study area. * * * * * 20. Revise Part 69 by adding Subpart H to read as follows: Subpart H -- Pricing Flexibility  69.701 Application of rules in this subpart. The rules in this subpart apply to all incumbent LECs subject to price cap regulation, as defined in Section 61.3(x) of this chapter, seeking pricing flexibility on the basis of the development of competition in parts of its service area.  69.703 Definitions. For purposes of this subpart: (a) Channel terminations. (1) A channel termination between an IXC POP and a serving wire center is a dedicated channel connecting an IXC POP and a serving wire center, offered for purposes of carrying special access traffic. (2) A channel termination between a LEC end office and a customer premises is a dedicated channel connecting a LEC end office and a customer premises, offered for purposes of carrying special access traffic. (b) Metropolitan Statistical Area (MSA). This term shall have the definition provided in Section 22.909(a) of this chapter. (c) Interexchange Carrier Point of Presence (IXC POP). The point of interconnection between an interexchange carrier's network and a local exchange carrier's network. (d) Wire center. For purposes of this subpart, the term "wire center" shall refer to any location at which an incumbent LEC is required to provide expanded interconnection for special access pursuant to Section 64.1401(a) of this chapter, and any location at which an incumbent LEC is required to provide expanded interconnection for switched transport pursuant to Section 64.1401(b)(1) of this chapter. (e) Study area. A common carrier's entire service area within a state.  69.705 Procedure. Price cap LECs filing petitions for pricing flexibility shall follow the procedures set forth in Section 1.774 of this chapter.  69.707 Geographic scope of petition. (a) MSA. (1) A price cap LEC filing a petition for pricing flexibility in an MSA shall include data sufficient to support its petition, as set forth in this subpart, disaggregated by MSA. (2) A price cap LEC may request pricing flexibility for two or more MSAs in a single petition, provided that it submits supporting data disaggregated by MSA. (b) Non-MSA. (1) A price cap LEC will receive pricing flexibility with respect to those parts of a study area that fall outside of any MSA, provided that it provides data sufficient to support a finding that competitors have collocated in a number of wire centers in that non- MSA region sufficient to satisfy the criteria for the pricing flexibility sought in the petition, as set forth in this subpart, if the region at issue were an MSA. (2) The petitioner may aggregate data for all the non-MSA regions in a single study area for which it requests pricing flexibility in its petition. (3) A petitioner may request pricing flexibility in the non-MSA regions of two or more of its study areas, provided that it submits supporting data disaggregated by study area.  69.709 Dedicated transport and special access services other than channel terminations between LEC end offices and customer premises. (a) Scope. This paragraph governs requests for pricing flexibility with respect to the following services: (1) Entrance facilities, as described in Section 69.110 of this part. (2) Transport of traffic over dedicated transport facilities between the serving wire center and the tandem switching office, as described in Section 69.111(a)(2)(iii) of this part. (3) Direct-trunked transport, as described in Section 69.112 of this part. (4) Special access services, as described in Section 69.114 of this part, other than channel terminations as defined in Section 69.703(a)(2) of this subpart. (b) Phase I Triggers. To obtain Phase I pricing flexibility, as specified in Section 69.727(a) of this subpart, for the services described in paragraph (a) of this section, a price cap LEC must show that, in the relevant area as described in Section 69.707 of this subpart, competitors unaffiliated with the price cap LEC have collocated: (1) in fifteen percent of the petitioner's wire centers, and that at least one such collocator in each wire center is using transport facilities owned by a transport provider other than the price cap LEC to transport traffic from that wire center; or (2) in wire centers accounting for 30 percent of the petitioner's revenues from dedicated transport and special access services other than channel terminations between LEC end offices and customer premises, determined as specified in Section 69.725 of this subpart, and that at least one such collocator in each wire center is using transport facilities owned by a transport provider other than the price cap LEC to transport traffic from that wire center. (c) Phase II Triggers. To obtain Phase II pricing flexibility, as specified in Section 69.727(b) of this subpart, for the services described in paragraph (a) of this section, a price cap LEC must show that, in the relevant area as described in Section 69.707 of this subpart, competitors unaffiliated with the price cap LEC have collocated: (1) in 50 percent of the petitioner's wire centers, and that at least one such collocator in each wire center is using transport facilities owned by a transport provider other than the price cap LEC to transport traffic from that wire center; or (2) in wire centers accounting for 65 percent of the petitioner's revenues from dedicated transport and special access services other than channel terminations between LEC end offices and customer premises, determined as specified in Section 69.725 of this subpart, and that at least one such collocator in each wire center is using transport facilities owned by a transport provider other than the price cap LEC to transport traffic from that wire center.  69.711 Channel terminations between LEC end offices and customer premises. (a) Scope. This paragraph governs requests for pricing flexibility with respect to channel terminations between LEC end offices and customer premises. (b) Phase I Triggers. To obtain Phase I pricing flexibility, as specified in Section 69.727(a) of this subpart, for channel terminations between LEC end offices and customer premises, a price cap LEC must show that, in the relevant area as described in Section 69.707 of this subpart, competitors unaffiliated with the price cap LEC have collocated: (1) in 50 percent of the petitioner's wire centers, and that at least one such collocator in each wire center is using transport facilities owned by a transport provider other than the price cap LEC to transport traffic from that wire center; or (2) in wire centers accounting for 65 percent of the petitioner's revenues from channel terminations between LEC end offices and customer premises, determined as specified in Section 69.725 of this subpart, and that at least one such collocator in each wire center is using transport facilities owned by a transport provider other than the price cap LEC to transport traffic from that wire center. (c) Phase II Triggers. To obtain Phase II pricing flexibility, as specified in Section 69.727(b) of this subpart, for channel terminations between LEC end offices and customer premises, a price cap LEC must show that, in the relevant area as described in Section 69.707 of this subpart, competitors unaffiliated with the price cap LEC have collocated: (1) in 65 percent of the petitioner's wire centers, and that at least one such collocator in each wire center is using transport facilities owned by a transport provider other than the price cap LEC to transport traffic from that wire center; or (2) in wire centers accounting for 85 percent of the petitioner's revenues from channel terminations between LEC end offices and customer premises, determined as specified in Section 69.725 of this subpart, and that at least one such collocator in each wire center is using transport facilities owned by a transport provider other than the price cap LEC to transport traffic from that wire center.  69.713 Common line, traffic-sensitive, and tandem-switched transport services. (a) Scope. This paragraph governs requests for pricing flexibility with respect to the following services: (1) Common line services, as described in Sections 69.152, 69.153, and 69.154 of this part. (2) Services in the traffic-sensitive basket, as described in Section 61.42(d)(2) of this chapter. (3) The traffic-sensitive components of tandem-switched transport services, as described in Sections 69.111(a)(2)(i) and (ii) of this part. (b) Phase I Triggers. (1) To obtain Phase I pricing flexibility, as specified in Section 69.727(a) of this subpart, for the services identified in paragraph (a) of this section, a price cap LEC must provide convincing evidence that, in the relevant area as described in Section 69.707 of this subpart, its unaffiliated competitors, in aggregate, offer service to at least 15 percent of the price cap LEC's customer locations. (2) For purposes of the showing required by paragraph (b)(1), the price cap LEC may not rely on service the competitors provide solely by reselling the price cap LEC's services, or provide through unbundled network elements as defined in Section 51.5 of this chapter, except that the price cap LEC may rely on service the competitors provide through the use of the price cap LEC's unbundled loops. (c) [Reserved.]  69.714-69.724 [Reserved.]  69.725 Attribution of revenues to particular wire centers. If a price cap LEC elects to show, in accordance with Sections 69.709 or 69.711 of this subpart, that competitors have collocated in wire centers accounting for a certain percentage of revenues from the services at issue, the LEC must make the following revenue allocations: (a) For entrance facilities and channel terminations between an IXC POP and a serving wire center, the petitioner shall attribute all the revenue to the serving wire center. (b) For channel terminations between a LEC end office and a customer premises, the petitioner shall attribute all the revenue to the LEC end office. (c) For any dedicated service routed through multiple wire centers, the petitioner shall attribute 50 percent of the revenue to the wire center at each end of the transmission path, unless the petitioner can make a convincing case in its petition that some other allocation would be more representative of the extent of competitive entry in the MSA or the non-MSA parts of the study area at issue.  69.727 Regulatory relief. (a) Phase I Relief. Upon satisfaction of the Phase I triggers specified in Sections 69.709(b), 69.711(b), or 69.713(b) of this subpart for an MSA or the non-MSA parts of a study area, a price cap LEC will be granted the following regulatory relief in that area for the services specified in Sections 69.709(a), 69.711(a), or 69.713(a) of this subpart, respectively: (1) Volume and term discounts; (2) Contract tariff authority, provided that (i) Contract tariff services are made generally available to all similarly situated customers; and (ii) The price cap LEC excludes all contract tariff offerings from price cap regulation pursuant to Section 61.42(f)(1) of this chapter. (iii) Before the price cap LEC provides a contract tariffed service, under Sections 69.727(a) of this subpart, to one of its long-distance affiliates, as described in Section 272 of the Communications Act of 1934, as amended, or Section 64.1903 of this chapter, the price cap LEC certifies to the Commission that it provides service pursuant to that contract tariff to an unaffiliated customer. (b) Phase II Relief. Upon satisfaction of the Phase II triggers specified in Sections 69.709(c) or 69.711(c) of this subpart for an MSA or the non-MSA parts of a study area, a price cap LEC will be granted the following regulatory relief in that area for the services specified in Sections 69.709(a) or 69.711(a) of this subpart, respectively: (1) Elimination of the rate structure requirements in Part 69, Subpart B, of this chapter; (2) Elimination of price cap regulation; and (3) Filing of tariff revisions on one day's notice, notwithstanding the notice requirements for tariff filings specified in Section 61.58 of this chapter.  69.729 New services. (a) Except for new services subject to paragraph (b) of this section, a price cap LEC may obtain pricing flexibility for a new service that has not been incorporated into a price cap basket by demonstrating in its pricing flexibility petition that the new service would be properly incorporated into one of the price cap baskets and service bands for which the price cap LEC seeks pricing flexibility. (b) Notwithstanding paragraph (a) of this section, a price cap LEC must demonstrate satisfaction of the triggers in Section 69.711(b) of this subpart to be granted pricing flexibility for any new service that falls within the definition of a "channel termination between a LEC end office and a customer premises" as specified in Section 69.703(a)(2) of this subpart.  69.731 Low-end adjustment mechanism. (a) Any price cap LEC obtaining Phase I or Phase II pricing flexibility for any service in any MSA in its service region, or for the non-MSA portion of any study area in its service region, shall be prohibited from making any low-end adjustment pursuant to Section 61.45(d)(1)(vii) of this chapter in all or part of its service region. (b) Any affiliate of any price cap LEC obtaining Phase I or Phase II pricing flexibility for any service in any MSA in its service region shall be prohibited from making any low-end adjustment pursuant to Section 61.45(d)(1)(vii) of this chapter in all or part of its service region. Separate Statement of Commissioner Susan Ness Re: Access Charge Reform (CC Docket No. 96-262); Price Cap Performance Review for Local Exchange Carriers (CC Docket No. 94-1). During the past decade, exchange access competition has increased significantly. I am optimistic that the investment and infrastructure deployment that has occurred demonstrates a strong and irreversible trend toward a multiplicity of carriers in the marketplace. We must ensure that our regulations do not impede this progress. Part of the calculus is to determine not just when to regulate, but when to deregulate. Today we take a measured step forward. By first providing incumbents with some downward pricing flexibility for high-capacity services, we allow them to respond to the new competitive marketplace for these services. Consumers should also benefit from lower prices. And, by using the presence of collocation in a market as the trigger for regulatory relief, incumbents should have additional incentives to work more cooperatively with new entrants - ironing out collocation wrinkles that should have disappeared long ago. Although I am enthusiastic about this step forward, I cast my vote with guarded optimism. I intend to watch marketplace reactions very carefully. I prefer to act incrementally, so that we can ensure that no harm to competition occurs. If the framework we set out today is successful, I expect to take more steps in this direction as we continue down a path toward deregulation. SEPARATE STATEMENT OF COMMISSIONER HAROLD FURCHTGOTT-ROTH APPROVING IN PART, CONCURRING IN PART, AND DISSENTING IN PART Re: Access Charge Reform, CC Docket No. 96-262, Price Cap Performance Review for Local Exchange Carriers, CC Docket No. 94-1, Interexchange Carrier Purchases of Switched Access Services Offered by Competitive Local Exchange Carriers, CCB/CPD File No. 98-63, Petition of U S West Communications, Inc. for Forbearance from Regulation as a Dominant Carrier in the Phoenix, Arizona MSA, CC Docket No. 98-157. It is very difficult to rationalize any occasion where the government stands between consumers and lower prices. Thus I support much of the regulatory relief contemplated in this item. As a result of the relief made possible by today's Order, the Commission will begin to release its regulatory hold on certain carriers operating in competitive markets. I respectfully dissent from portions of this item posing the mere suggestion of regulating competitive carriers in these same markets. I fully support the immediate regulatory relief granted in this item. In my view, any reduction of unnecessary regulatory burdens is beneficial. The Commission should streamline its procedures wherever possible to lessen the administrative burden imposed by regulation. Today's Order establishes triggering mechanisms that will open the door to a degree of regulatory relief that will, in turn, provide lower prices to consumers. While I support the relief made possible by these triggering mechanisms, I remain concerned that these tests may be more cumbersome than necessary. Although the goal of identifying competitive conditions in order to provide regulatory relief is commendable, I would have preferred a simpler approach. I am particularly concerned that the "trigger" for providing relief to providers of switched access services could prove extraordinarily cumbersome in its execution. Notwithstanding these concerns, however, I wholeheartedly support the idea of letting prices fall as a result of competitive forces, and accordingly, I concur with this section of the Order to the extent it makes this regulatory relief possible. Although the Notice of Proposed Rulemaking details additional deregulatory proposals that I can support, I object to the mere suggestion of adopting new regulatory approaches to CLEC terminating access. On numerous occasions, I have made clear my opposition to any suggestion that the Commission may return, despite the presence of competition, to old habits of regulating carriers. Any such proposal has a chilling effect on industry participants. Moreover, the mere suggestion of regulating a competitive market is antithetical to the Telecommunications Act of 1996. I also note that I am troubled by the suggestion to deaverage the Subscriber Line Charge and the Presubscribed Interexchange Carrier Charge based on geographic zones within a state, as I am not sure that it is appropriate for the federal government to set different rate elements for similar customers within a state.