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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 Jurisdictional Separations and Referral to the Federal-State Joint Board ) ) ) ) CC Docket No. 80-286 REPORT AND ORDER Adopted: May 11, 2001 Released: May 22, 2001 By the Commission: TABLE OF CONTENTS Paragraph I. INtRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. BACKGROUND . . . . . . . 3 III. PART 36 FREEZE . . . . . 9 A. Establishment and Purpose of a Freeze . . . . . . . . . . . . . . . 10 B. Legal Authority to Implement a Freeze . . . . . . . . . . . . . . . 15 C. Components of the Freeze. . . . . . . . . . . . . . . . . . . . . . 18 1. Application of the Freeze to Price Cap and Rate-of-Return Carriers. . . . . .18 2. Frozen Categories and Allocation Factors. . . . . . . . . . . . . 22 3. Base Year of the Freeze . . . . . . . . . . . . . . . . . . . . . 25 4. Length of the Freeze. . . . . . . . . . . . . . . . . . . . . . . 28 5. Effective Date and Continuing Review of the Freeze. . . . . . . . 30 6. Pre-Freeze Adjustments - Dial Equipment Minutes (DEM) Factor. . . . . . 34 7. Data Collection and Reporting During Freeze . . . . . . . . . . . 43 8. Adjustments During the Freeze . . . . . . . . . . . . . . . . . . 48 9. Exogenous Cost Changes. . . . . . . . . . . . . . . . . . . . . . 54 IV. PROCEDURAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . .56 A. Final Regulatory Flexibility Certification. . . . . . . . . . . . . 56 B. Paperwork Reduction Act . . . . . . . . . . . . . . . . . . . . . . 60 V. ORDERING clauseS. . . . . . . . . . . . . . . . . . . . . . . . . . .61 Appendix A Parties Filing Comments and Reply Comments Appendix B Category Relationships and Jurisdictional Allocation Factors to Freeze Appendix C Final Rules I. INTRODUCTION 1. Today we take a significant step towards reforming outdated regulatory mechanisms that are out of step with today's rapidly-evolving telecommunications marketplace. Specifically, we take action to freeze, on an interim basis, the Part 36 jurisdictional separations rules, in order to stabilize and simplify the separations process while we continue to work on more comprehensive separations reform. The current Part 36 separations regime, which has been largely unmodified for the past several decades, was developed when local telephone service was provided largely through circuit-switched networks operated by companies with monopoly power in the local market, with clear delineation between interstate and intrastate services. Since the enactment of the Telecommunications Act of 1996, however, and the growing presence of new, high-bandwidth technologies and services in the local market, including the Internet, the telecommunications landscape has changed significantly, and lines between interstate and intrastate services are becoming increasingly blurred. In addition, with the emergence of some competitive local exchange providers, we need to reexamine regulatory structures that apply only to incumbent local exchange carriers. We take the first step in this Report and Order towards the eventual reform or elimination of one such regulatory structure. 2. In this Report and Order, we adopt the recommendation of the Federal-State Joint Board established in CC Docket No. 80-286 (Joint Board) to impose an interim freeze of the Part 36 category relationships and jurisdictional cost allocation factors. Specifically, pending comprehensive reform of the Part 36 separations rules, we adopt a freeze of all Part 36 category relationships and allocation factors for price cap carriers, and a freeze of all allocation factors for rate-of-return carriers. The interim freeze will be in effect for five years or until the Commission has completed comprehensive separations reform, whichever comes first. We further conclude that several issues, including the separations treatment of Internet traffic, should be addressed in the context of comprehensive separations reform. We believe that these measures will bring simplification and regulatory certainty to the separations process in a time of rapid market and technology changes until reform is completed. III. BACKGROUND 4. Jurisdictional separations is the process by which incumbent local exchange carriers (ILECs) apportion regulated costs between the intrastate and interstate jurisdictions. Historically, one of the primary purposes of the separations process has been to prevent ILECs from recovering the same costs in both the interstate and intrastate jurisdictions. Jurisdictional separations is the third step in a four-step regulatory process that begins with an ILEC's accounting system and ends with the establishment of rates for the ILEC's interstate and intrastate regulated services. First, carriers record their costs, including investments and expenses, into various accounts in accordance with the Uniform System of Accounts (USOA) prescribed by Part 32 of the Commission's rules. Second, carriers assign the costs in these accounts to regulated and nonregulated activities in accordance with Part 64 of the Commission's rules to ensure that the costs of non-regulated activities will not be recovered in regulated interstate service rates. Third, carriers separate the regulated costs between the intrastate and interstate jurisdictions in accordance with the Commission's Part 36 separations rules. Finally, carriers apportion the interstate regulated costs among the interexchange services and rate elements that form the cost basis for their interstate access tariffs. Carriers perform this apportionment in accordance with Part 69 of the Commission's rules. The intrastate costs that result from application of the Part 36 rules form the foundation for determining carriers' intrastate rate base, expenses, and taxes. 5. The first step in the separations process requires carriers to assign regulated costs to various categories of plant and expenses. In certain instances, costs are further disaggregated among service categories. In the second step, the costs in each category are apportioned between the intrastate and interstate jurisdictions. These jurisdictional apportionments of categorized costs are based upon either a relative use factor, a fixed allocator, or, when specifically allowed in the Part 36 rules, by direct assignment. For example, loop costs are allocated by a fixed allocator, which allocates 25% of the loop costs to the interstate jurisdiction and 75% of the costs to the intrastate jurisdiction. 6. In 1997, the Commission initiated a proceeding seeking comment, among other things, on the extent to which legislative changes, technological changes, and market changes warrant comprehensive reform of the separations process. The Commission noted that the current network infrastructure is vastly different from the network and services used to define the cost categories appearing in the Commission's current Part 36 rules, and that the separations process codified in the current Part 36 rules was developed during a time when common carrier regulation presumed that interstate and intrastate telecommunications service must be provided through a regulated monopoly. In addition, the Commission sought comment on several proposals previously submitted to the Commission. The Commission also invited the State Members of the Joint Board (State Members) to develop a report that would identify additional issues that should be addressed by the Commission in its comprehensive separations reform effort. 7. On December 21, 1998, the State Members filed a report setting forth additional issues that they believe should be addressed by the Joint Board in connection with its consideration of comprehensive separations reform. The State Report proposed an interim freeze, among other things, to reduce the impact of changes in telephone usage patterns and resulting cost shifts from year to year. 8. On July 21, 2000, the Joint Board issued its Recommended Decision for an interim freeze of the Part 36 category relationships and allocation factors. The Joint Board recommended interim action to provide simplicity and stability to the separations process while the Commission and the Joint Board continue to review comprehensive reform in light of legislative, technological, and market changes. Accordingly, the Joint Board recommended that, until comprehensive reform can be achieved, the Commission should freeze Part 36 category relationships and jurisdictional allocation factors for price cap carriers and allocation factors only for rate-of-return carriers. The Joint Board further recommended that the Commission implement the freeze based on data from the twelve-month period immediately prior to the Commission's issuance of an order on the Recommended Decision. 9. The Joint Board also recommended that, if the Commission finds that Internet traffic is jurisdictionally interstate in the Intercarrier Compensation for ISP-Bound Traffic Remand Proceeding, the Commission should freeze the local DEM factor for the duration of the freeze at some substantial portion of the current year level based on data from the twelve months preceding the implementation of the freeze. The Joint Board recommended that, based on the record established in connection with the Recommended Decision, the precise percentage of the current year's local DEM should be established according to how much of a reduction in local DEM is warranted in light of any effects that Internet usage has had on jurisdictional allocations or consumers. Finally, the Joint Board recommended that the Commission continue to consider, in the context of comprehensive reform, other proposals in the record, such as the NYNEX single frozen factor proposal. X. PART 36 FREEZE 11. In this Report and Order, we adopt the Joint Board's recommendation to freeze the Part 36 category relationships and jurisdictional allocation factors for price cap carriers and the allocation factors only for rate-of-return carriers. The specific category relationships and allocation factors to be frozen are enumerated in Appendix B of this Report and Order. The frozen category relationships and allocation factors will be based on data from the carriers' calendar-year 2000 separations studies and will be effective July 1, 2001. The freeze will be in effect for five years from July 1, 2001, to June 30, 2006, or until the Commission has completed comprehensive reform of the Part 36 separations rules, whichever comes first. With limited exceptions, no adjustments to the frozen category relationships and allocation factors will be allowed during the freeze. We do not adopt the Joint Board's recommendation to reduce local dial equipment minutes (DEM) at the outset of the freeze to compensate for the impact of the Internet on local calling patterns, because we do not believe that the record allows us to quantify with any degree of accuracy the impact of the Internet on a nationwide basis. Concurrent with the implementation of the freeze, we will continue to work with the Joint Board to address several issues as detailed below, including the separations treatment of Internet traffic. A. Establishment and Purpose of a Freeze 12. The Joint Board recommended that, for five years or until such time as comprehensive reform of separations can be implemented, the Commission should institute an interim freeze of the Part 36 category relationships and jurisdictional allocation factors. The Joint Board stated that a freeze was necessary to provide stability and simplification for the separations process pending comprehensive reform. The vast majority of commenters support the freeze as proposed by the Joint Board. Only the California Public Utilities Commission and AT&T oppose the freeze altogether, on grounds that the freeze would lock in current flaws in the separations process, and also fail to properly allocate future costs as they arise. 13. In this Report and Order, we conclude that an interim freeze of Part 36 should be adopted. Under a freeze, price cap carriers will calculate 1) the relationships between categories of investment and expenses within Part 32 accounts and 2) the jurisdictional allocation factors, as of a specific point in time, and then lock or "freeze" those category relationships and allocation factors in place for a set period of time. The carriers will use the "frozen" category relationships and allocation factors for their calculations of separations results and therefore will not be required to conduct separations studies for the duration of the freeze. As discussed below, rate-of-return carriers will only be required to freeze their allocation factors, but will have the option to freeze their category relationships at the outset of the freeze. 14. We agree with the Joint Board and the commenters that instituting a mandatory interim freeze of Part 36 is consistent with our goals of stabilizing and simplifying the Part 36 separations process pending comprehensive reform. First, with regard to the goal of stability, we believe that a freeze will achieve the goal of stability and provide regulatory certainty for carriers by minimizing any cost shift impacts on separations results that might occur as a result of circumstances not contemplated by the Commission's current Part 36 rules, such as growth in local competition and new technologies. Since the NPRM was released in 1997, there have been rapid changes in the telecommunications infrastructure, such as the growth in Internet usage and the increased usage of packet switching. We believe that these types of changes may produce cost shifts in separations results because these and other new technologies, such as digital subscriber line (DSL) services, as well as a competitive local exchange marketplace, are not sufficiently contemplated by the current Part 36 rules. We believe, therefore, that the most effective action at this time will be to freeze the separations process on an interim basis, until the Commission and the Joint Board have had the opportunity to more comprehensively reform Part 36. We recognize that some commenters oppose a freeze on grounds that a freeze would not account for major changes in the telecommunications marketplace and would only serve to continue what they claim is a current misallocation of costs to the interstate jurisdiction. We believe that such concerns are offset by the added regulatory certainty that carriers will enjoy, since freezing the separations process in place will avoid any sudden cost shifts in this time of rapid change. We stress that, under the principles of Smith v. Illinois, extreme precision is not required in the separations process, and therefore the freeze is a reasonable and legally sound method by which to stabilize the separations process pending further reform. 15. Second, with regard to simplification, we believe that a freeze of the separations process will reduce regulatory burdens on carriers during the transition from a regulated monopoly to a deregulated, competitive environment in the local telecommunications marketplace. At the present time, ILECs are required under the Part 36 rules to perform separations studies, while CLECs have no similar requirements. We believe that a freeze will further the Commission's stated goal in the NPRM of achieving greater competitive neutrality during the transition to a competitive marketplace by simplifying the separations process for those carriers subject to Part 36. 16. The freezing of factors and categories will reduce the Part 36 administrative burden on ILECs in several specific ways. First, those carriers will no longer have to develop jurisdictional allocation factors for interstate purposes, as frozen factors will be carried forward from year to year and used by carriers to calculate their separations results. Second, price cap carriers and rate-of-return carriers who elect to freeze their categories will not have to perform the analyses necessary to categorize annual investment changes for interstate purposes. The categories of investment, such as central office equipment (COE) and cable and wire facilities (C&WF) investment, will be assigned to categories and, where appropriate, subcategories for the given year based on the frozen category relationships. A. Legal Authority to Implement a Freeze 17. The Joint Board asserted that the Commission has legal authority to institute an interim freeze to provide stability to the separations process and to preserve the status quo pending comprehensive reform. First, the Joint Board stated that an interim freeze of the Part 36 allocation factors and category relationships would not contravene the United States Supreme Court's ruling in Smith v. Illinois. The Joint Board argued that, under an interim freeze, the costs and revenues associated with ILEC operations would still be separated between the intrastate and interstate jurisdictions, consistent with Smith v. Illinois, which does not require "extreme nicety" in the separations process. Accordingly, the Joint Board concluded that a freeze whereby category relationships and/or factors are not recalculated on an annual basis using current data, but instead are frozen as of a specific year, satisfies the Smith v. Illinois requirement for cost allocation. Second, the Joint Board found that there is precedent for the Commission's "freezing" of certain regulations and, in particular, freezing elements of Part 36 of the Commission's rules, such as its 1982 decision to freeze the subscriber plant (SPF) factor. The Joint Board noted that the Commission previously has frozen certain regulations in order to address changes in the telephone network and its usage, and to reduce any potential, sudden cost shift impact of such changes. 18. The overwhelming majority of commenters believe that the Commission has sufficient legal authority to adopt the recommended freeze. Only the California PUC disagrees with the Joint Board on this issue. The California PUC contends that the recommended freeze would have a far greater impact on carriers and consumers than the SPF freeze involved in MCI v. FCC, because the SPF allocated non-traffic sensitive costs and the recommended freeze would lock traffic-sensitive allocation factors in place. The California PUC argues that the recommended freeze would therefore fail to properly allocate costs as changes occur in traffic patterns during the freeze and thereby violate cost causation principles. Furthermore, the California PUC believes that the recommended freeze would result in separations results that fail to reflect shifts in investment and usage and therefore would not meet the requirement of Smith v. Illinois. 19. We agree with the Joint Board and the majority of commenters that the Commission has sufficient legal authority under the Communications Act to adopt the recommended freeze. Moreover, we believe the recommended freeze is consistent with Smith v. Illinois and prior Commission decisions implementing "freezes" of certain rules. We disagree with the California PUC's contention that the recommended freeze is inconsistent with the SPF freeze. Both freezes represent interim measures used to preserve the status quo pending reform and provide for a reasonable allocation of costs between the jurisdictions consistent with MCI v. FCC and Smith v. Illinois. Indeed, as previously stated, Smith v. Illinois does not require absolute precision in the separations cost allocation process. Furthermore, since the freeze is not a permanent freeze, but rather a transitional measure we adopt for five years, and because separations results have not fluctuated widely in recent years, there will not be such large cost misallocations that the freeze will produce results contrary to the principles of Smith v. Illinois. In sum, we conclude that the interim freeze is a reasonable and legally permissible approach for the Commission to take for a 5-year period in order to simplify and stabilize the separations process prior to taking up comprehensive reform. A. Components of the Freeze 1. Application of the Freeze to Price Cap and Rate-of-Return Carriers 20. The Joint Board recommended that a categories and factors freeze be mandatory for all price cap carriers subject to the Commission's Part 36 rules, as advocated by many commenters. For rate-of return carriers, however, the Joint Board recommended that a mandatory factors-only freeze apply. Although the Joint Board recognized that a factors and categories freeze would provide more certain separations results for all carriers, the Joint Board was persuaded by the record that a categories freeze may harm rate-of-return carriers. The Joint Board agreed with certain parties that rate-of-return carriers, whose investment patterns may fluctuate more than those of price cap carriers from year to year, will retain maximum flexibility for recovering costs from new plant investments (upgrades) by not freezing their category relationships. The Joint Board concluded that a categories freeze may harm rate-of-return carriers by limiting their ability to account for changes in investment through the separations process. In this regard, the Joint Board was concerned that a mandatory categories freeze for all rate-of-return carriers would provide disincentives for these carriers to deploy new technologies due to insufficient cost recovery. 21. Furthermore, the Joint Board recognized that a categories freeze may have a negative impact on some rate-of-return carriers' current universal service high cost support levels. The Joint Board noted that COE Category 4.13 and CW&F Category 1.3 are included in the current Universal Service High Cost Loop formula that is used for the rate-of-return carriers under Part 36. The investment levels in these two categories may increase for rate-of-return carriers as new technologies are deployed, such as facilities to provide DSL services. If the category relationships are frozen at the current year level, rate-of-return carriers may not be able to recover these costs in the future through increased loop support under the Universal Service High Cost Loop formula. In contrast, the Joint Board found that price cap carriers, due to their sheer size, have little fluctuation in the relative category levels within their investment accounts. In other words, the category relationships for price cap carriers generally remain relatively constant on an annual basis. 22. Of those commenters that support a freeze, many support the Joint Board's recommendation for a bifurcated freeze approach for price cap and rate-of-return carriers. Several commenters, however, recommend that rate-of-return carriers be given a one-time option to freeze their category relationships at the onset of the freeze. 23. We agree with the Joint Board that a freeze of both category relationships and allocation factors is appropriate for price cap carriers in order to achieve maximum stability and simplification for those carriers. We conclude, furthermore, that because of their different investment and cost structures, rate-of-return carriers should only be required to freeze their jurisdictional allocation factors at this time. We understand, however, that some rate-of-return carriers may prefer the added simplification and stability from a freeze of their category relationships. Based on the record before us today, we are persuaded that providing rate-of- return carriers with an option to freeze their category relationships as well could have benefits for some rate-of-return carriers. We therefore will provide all rate-of-return carriers with a one-time option to freeze their category relationships at the outset of the freeze. Those rate-of-return carriers who elect to freeze their category relationships must notify the Commission of their election on or before July 1, 2001. We believe that this approach will give each rate-of-return carrier the flexibility to decide, based on its own circumstances and investment plans, whether a freeze of its category relationships will be beneficial. 1. Frozen Categories and Allocation Factors 24. We find that, for all price cap carriers and for those rate-of-return carriers that elect to have their categories frozen, all separations categories and subcategories, as specified in Part 36, shall be frozen at their calendar year 2000 percentage ratios. Part 36 requires some categories of costs to be further sub-divided into additional classifications, but does not refer to those further classifications as "categories" or "subcategories." If we were to require carriers to continue subdividing costs into these classifications, carriers still would need to perform cost studies. Because a goal of the freeze is to reduce administrative burdens on carriers, we find that any Part 36 requirement to segregate costs recorded in Part 32 accounts into categories, subcategories, or further sub-classifications shall be frozen at their percentage relationship for the calendar year 2000. 25. Similarly, we find that in order to relieve all carriers of performing traffic or relative- use studies for separations purposes, all allocation factors used to assign Part 36 categories, subcategories, or further subdivisions to the state or interstate jurisdictions shall be frozen utilizing the factors calculated for the calendar year 2000. Categories or portions of categories that have been directly assigned in the past, however, will continue to be directly assigned to each jurisdiction. In other words, the frozen factors shall not have an effect on the direct assignment of costs for categories, or portions of categories, that are directly assigned. Since those portions of facilities that are utilized exclusively for services within the state or interstate jurisdiction are readily identifiable, we believe that the continuation of direct assignment of costs will not be a burden on carriers, nor will it adversely impact the stability of separations results throughout the freeze. 26. Appendix A of the Recommended Decision provides the Joint Board's recommendation of the categories and factors to be frozen. SBC, however, noted that Appendix A of the Recommended Decision failed to include Telephone Operator Expense and Published Directory Listing as frozen categories of Account 6620-Services. Because these costs and relative use factors fall within the parameters of the freeze, we agree with SBC that it is appropriate to include these costs and their relative use factors in the freeze and therefore amend the list of categories and factors as specified in Appendix B of this Report and Order. 1. Base Year of the Freeze 27. The Joint Board recommended that, for all carriers, the Part 36 freeze should be based on data from the twelve-month period immediately prior to the date of the Commission's release of a Report and Order implementing the Recommended Decision. The Joint Board believes that a freeze based on carriers' most recent data would provide the greatest measure of stability for the separations process. Specifically, for price cap carriers, the Joint Board recommended that costs should be assigned to the Part 36 categories based upon the current year percentage relationship of each Part 36 category to the total amount recorded in its associated Part 32 account. For example, Central Office-Switching, Account 2210, for separations purposes, is categorized into Category 2 (Tandem Switching) and Category 3 (Local Switching). If current year Category 2 costs are twenty percent of total Account 2210 and current year Category 3 costs are eighty percent of total Account 2210 costs, then during the interim freeze, twenty percent of Account 2210 will continue to be assigned to Category and eighty percent will be assigned to Category 3. 28. Several commenters oppose the Joint Board's recommendation for the base year of the freeze, and instead propose allowing carriers to use their most recently completed calendar- year studies. Several commenters representing the interests of rate-of-return carriers recommend basing the freeze on data from an average of years 1995-1997 to mitigate the impact of increased Internet traffic. The Pennsylvania PUC supports the recommended freeze basis of data from the twelve months preceding the implementation of the freeze. 29. We conclude that the base year of the freeze shall be calendar year 2000, and not the twelve-month period immediately preceding the release of this Report and Order. We make this minor departure from the Joint Board's recommendation because we find that any benefit realized by using the prior 12-month period in an attempt to make the freeze as current as possible is outweighed by the simplicity and efficiency achieved through requiring all carriers to base the frozen category relationships and allocation factors on their calendar year 2000 data (i.e., their calendar year 2000 separations cost studies). Furthermore, we note that, due to the structure of the reporting requirements, carriers may not, at the date of release of this Report and Order, possess data for the entire 12-month period immediately preceding the release of this Report and Order. Finally, by allowing carriers to use calendar year 2000 studies, carriers also would not be required to create any new studies in order to calculate their frozen category relationships and allocation factors. 1. Length of the Freeze 30. The Joint Board recommended that the Commission institute the Part 36 freeze for a five-year period, or until the Commission takes further action in this docket. The Joint Board believes that a five-year freeze period is adequate as an interim measure to maintain stable separations results while the Joint Board considers long-term, comprehensive separations reform. The Joint Board recommended that the freeze automatically expire at the end of five years, unless extended by the Commission upon the recommendation of the Joint Board. Several commenters support the recommended five-year freeze period. Other commenters are concerned that five years is too long and may discourage efforts toward comprehensive reform, resulting in the freeze becoming a de facto rule. 31. We agree with the Joint Board that five years is a reasonable length of time for the interim freeze. The five-year interim freeze period will maintain stability in jurisdictional separations, while allowing the Commission and the Joint Board sufficient time to assess and consider further separations reform. In the event that the Commission and the Joint Board are able to complete comprehensive separations reform within five years, then the freeze should be discontinued and the reformed structures implemented. We believe, furthermore, that five years is not such an unduly long period of time, and efforts towards further reform will not be discouraged or lose momentum over a five-year span. We also conclude that, prior to the expiration of the five-year period, the Commission shall, in consultation with the Joint Board, determine whether the freeze period shall be extended. The determination of whether the freeze should be extended at the end of the five-year period shall be based upon whether, and to what extent, comprehensive reform of separations has been undertaken by that time. 1. Effective Date and Continuing Review of the Freeze 32. The Recommended Decision was silent on the issue of the appropriate effective date for the recommended freeze. All commenters who addressed the issue recommended an effective date of January 1, 2001. In the interest of implementing the freeze efficiently and swiftly, we adopt July 1, 2001, as the effective date of the freeze. We do not believe that January 1, 2001 would be an appropriate effective date of the freeze, because in the interest of simplicity and efficiency, we do not wish the freeze to have any potential retroactive effects. 33. The Joint Board also recommended that the Commission seek comment on the impact of the freeze after it has been in effect for two years. The Joint Board also recommended that the Commission continue its comprehensive review of the separations process during the freeze in order to provide a clear pathway for comprehensive reform of separations. Specifically, the Joint Board recommended that several issues be addressed by the Joint Board and the Commission in the near future as a result of the emergence of new technologies and local exchange service competition. These issues included the appropriate separations treatment of: 1) unbundled network elements (UNEs); 2) digital subscriber line (DSL) services; 3) private lines; and 4) Internet traffic. Accordingly, the Joint Board recommended that the Commission commit to addressing these issues and to developing a pathway to comprehensive reform in the near term. 34. Several commenters contend that any review of the impact of the freeze during the freeze period would drain resources that should be devoted to the effort to reform the separations process, given that a freeze by its very nature would eliminate the collection of certain data and studies. In contrast, the Pennsylvania PUC recommends that the Commission seek comment on the impact at the end of the first year. With regard to the four issues specified above, several commenters recommend that the Joint Board and the Commission address these issues during the freeze. Other commenters see these issues as unnecessary distractions from devoting time and resources during the freeze to comprehensive separations reform. 35. We agree with the Joint Board that it would be beneficial to seek comment on the impact of the freeze prior to the expiration of the freeze. We agree with the Joint Board that two years would generally be an appropriate time to seek comment on the impact of the freeze, but believe that it is premature for us to specify at what exact point in time such review shall occur. We also agree with the Joint Board that the comprehensive review of the separations process must continue during the freeze, and we thus commit to working with the Joint Board on a continuing basis during the freeze. As part of that continuing effort towards comprehensive reform, we commit to working with the Joint Board to begin to address the four specified issues during the freeze. 1. Pre-Freeze Adjustments - Dial Equipment Minutes (DEM) Factor 36. The Joint Board noted in the Recommended Decision that there has been an increase in intrastate usage patterns since 1995, as evidenced by the growth in local dial equipment minutes (DEM). The Joint Board suggested that one factor in this growth in local minutes may be the increase in the use of the local network to connect to the Internet, and the attendant long holding times associated with Internet usage. The Joint Board also recognized, however, that other factors may be contributing to the growth in intrastate usage, including changes in the telecommunications environment that are resulting from the local competition provisions in the 1996 Act, or changes in technology. The Joint Board recommended that the Commission further develop the record on this issue, and in particular, determine what, if any, impact the growth in local minutes has had on jurisdictional allocations and consumers. 37. The Joint Board recommended that, if the Commission finds in Intercarrier Compensation for ISP-Bound Traffic Remand proceeding that Internet traffic is interstate, the Commission should freeze the local DEM factor for the duration of the freeze at some substantial portion of the current year level based on data from the twelve months preceding the implementation of the freeze. Specifically, the Joint Board recommended that the Commission determine the precise percentage reduction of local DEM by looking to record evidence demonstrating the effect that Internet usage has had on jurisdictional allocations or consumers. Given the inadequate record on this issue, the Joint Board stated that it could not recommend with precision what amount to reduce the DEM level by before application of the freeze. In order to facilitate the development of a specific record, however, the Joint Board suggested, as a default estimate, that the local DEM be frozen at 95% of the current year level based on data from the twelve months preceding the implementation of the freeze. In other words, the Joint Board recommended that, at the outset of the freeze, the local DEM level for the base year be reduced by 5%, and that 5% would be shifted to interstate DEM, and the adjusted levels would be frozen. 38. Following the issuance of the Recommended Decision, the Common Carrier Bureau released a Public Notice that, among other things, sought comment on the Internet/DEM reduction issue as framed by the Joint Board. The Bureau sought specific comment on "the impact of Internet traffic growth on jurisdictional allocations since 1995." The Bureau asked that commenters provide specific information on Internet usage minutes, including the percentage of local minutes attributable to Internet traffic, from ISPs both affiliated and non- affiliated with incumbent LECs. The Bureau also requested that, when estimates were used, the commenters provide explanations and underlying documentation supporting those estimates. 39. A number of parties oppose any reduction of the local DEM factor in conjunction with the interim freeze. BellSouth and Verizon argue that this course of action would undermine the stability that is one of the stated goals of the freeze, because, among other things, it would result in an immediate cost shift, and interject uncertainty into the Commission's position on the jurisdictional nature of Internet traffic. Moreover, USTA, SBC, and several other commenters recommend that the Commission move forward quickly to adopt a straightforward freeze, and address the Internet issue in the context of comprehensive separations reform. Verizon contends that a local DEM reduction would contravene cost-revenue matching principles so long as the costs of ISP-bound traffic are recovered through state tariffs. In addition, Pac-West and RCN note that it is impossible to accurately determine the appropriate level for a local DEM reduction. AT&T and WorldCom oppose the local DEM reduction on the grounds that such actions would improperly allocate costs between the jurisdictions. AT&T contends that Internet costs are properly allocated to the intrastate jurisdiction for separations purposes based on cost causation principles and also contends that the record in this proceeding is inadequate to support any local DEM reduction. Alternatively, several commenters, including the California PUC and SBC, suggest that the Commission simply treat Internet traffic as interstate for separations purposes and avoid the need for any local DEM factor reduction. 40. On the other hand, NECA, many of the small rate-of-return carriers, Qwest, and several state commissions support the Joint Board's proposed 5 % DEM factor reduction (or a greater reduction ranging from 5 % to 35 %) to address the increased local usage that is alleged to be attributable to Internet traffic. Commenters' estimates on the percentage of intrastate traffic that represents Internet traffic range from 3.1% to 71.5%. The commenters who provided these estimates, however, did not provide much detail explaining how they arrived at those estimates, nor did they provide detailed studies or documentation. No party, furthermore, provided concrete evidence demonstrating rate increases or other actions directly attributable to increased Internet usage. 41. The Joint Board's concerns regarding increased Internet usage stem from the fact that costs for ISP-bound traffic, despite the jurisdictionally interstate nature of this traffic, are booked as intrastate for separations purposes. The Commission has directed carriers to treat the traffic- sensitive local switching costs that ISPs incur through their connections to LEC end-offices as intrastate for separations purposes, because these switching costs are recovered through intrastate business tariffs, and enhanced service providers such as ISPs are exempt from paying carrier access charges. Revenue for ISP connections to LEC end offices, therefore, is collected on the intrastate side, and the Commission has previously concluded that costs for ISP-bound traffic should be booked as intrastate in order to avoid cost-revenue mismatches. 42. The Joint Board proposed a DEM reduction as a short-term way to shift some costs to the interstate jurisdiction, pending further review of the issue of how Internet-bound traffic should be treated for separations purposes. Even though the Commission recently reaffirmed in the Intercarrier Compensation for ISP-Bound Traffic Remand proceeding that Internet traffic is jurisdictionally interstate, we decline to reduce the local DEM factor as recommended by the Joint Board. Based on the record developed from the Recommended Decision, we conclude that we lack reliable data upon which to set the amount of any local DEM factor reduction that may be warranted. We recognize that the record demonstrates some growth in local calling patterns, and we recognize that it may be reasonable to assume that some portion of this growth is attributable to increased Internet usage. Despite our efforts to focus the record on this issue, the parties have not presented reliable evidence that would allow us to quantify with any reasonable certainty the portion of local usage that can be attributed to Internet usage, and thus establish a reasonable amount of local DEM reduction that should be applied. No party has produced specific documentation of increased investment outlays, local rate increases, or requests for relief from carriers that have stemmed from sharp increases in local calling patterns due to increased Internet usage. We have no reliable data, therefore, upon which to set any reasonable local DEM reduction on an across-the-board, nationwide basis in order to compensate for any effects that Internet usage may have had on jurisdictional allocations or consumers. More importantly, we have no concrete evidence before us that the current situation has, in fact, had any detrimental impact upon consumers. In short, there is no demonstrable evidence in this record that freezing the local DEM factor at current levels would produce irrational results. 43. We note that our decision in the Intercarrier Compensation for ISP-Bound Traffic Remand proceeding has not affected our prior decision that local switching costs for ISP-bound traffic be treated as intrastate for separations purposes, because the ESP exemption remains in place and the local switching revenues for ISP-bound traffic continue to be collected on the intrastate side. As the Commission explained in the GCI Order, assigning ISP traffic-sensitive costs to the intrastate jurisdiction is a "reasonable measure" based on sound policy choices. The assignment of the traffic-sensitive costs of ISP-bound traffic to the intrastate jurisdiction that follows from the ESP exemption derives from the application of the Commission's general separations principles to ISP-bound traffic in implementing the ESP exemption, and prevents a cost-revenue mismatch that the separations rules are designed to avoid. Moreover, the Commission's decision to retain the ESP exemption has been affirmed as a lawful exercise of the Commission's discretion. Our decision in the Intercarrier Compensation for ISP-Bound Traffic Remand Order has not altered the ESP exemption, nor the policy reasons for treating ISP- bound traffic as intrastate for separations purposes. 44. While we depart from the Recommended Decision and decline to require a local DEM reduction at the onset of the freeze, we do, however, commit to working with the Joint Board on a continuing basis to address the impact of the Internet and the growth in local minutes during the interim freeze. Furthermore, when the Commission and the Joint Board seek comment on the impact of the freeze after the freeze has been in effect for some time, we will seek specific comment on the status of the ISP-bound traffic issue, and the impact of the freeze on this situation. If we are in the future presented with evidence that demonstrates with greater precision the impact of increased Internet usage on consumers or carriers, we can revisit this issue. 1. Data Collection and Reporting During Freeze 45. The Joint Board recommended that all carriers continue to report separations results under the Commission's current reporting rules. Under the Joint Board's recommendation, ARMIS-reporting companies would continue to report separations results to the Commission, and companies participating in NECA pools would continue to report separations results to NECA. The Joint Board recommended, however, that the Commission no longer require price cap carriers to conduct certain underlying separations studies to assign costs to the Part 36 categories, and also recommended that neither price cap nor rate-of-return carriers should be required to calculate updated jurisdictional allocation factors. 46. Most commenters assert that carriers should not be required to file Part 36 separations reports and related cost studies during the freeze, noting that this easing of administrative burden is a primary benefit of the freeze. Several commenters, however, support requiring carriers to continue annual separations reports and underlying studies to assign costs to the Part 32 categories and to compute the jurisdictional allocation factors. These commenters contend that continuing the separations reporting and study requirements are necessary to effectively evaluate the freeze and accomplish meaningful separations reform. 47. We conclude, consistent with the Joint Board recommendation, that price cap carriers need not conduct separations studies to assign costs to the Part 36 categories and that neither price cap carriers nor rate of return carriers need to perform such studies to calculate allocation factors. We agree with the Joint Board that removal of this intermediary step will simplify the separations process and thereby ease administrative burdens on all ILECs. 48. We also agree with the Joint Board that carriers should continue to report separations results for the duration of the interim freeze. We conclude, however, that we can streamline our current separations reporting requirements, while receiving sufficient information to evaluate the freeze and consider further separations reform. We will freeze category relationships and allocation factors for price cap carriers based on the information provided by those carriers in the ARMIS 43-04 on April 1, 2001, which covers data for calendar year 2000. We will revise ARMIS 43-04 for subsequent years so that price cap carriers no longer need to report all of the information required in the current 43-04. Instead, under the streamlined ARMIS 43-04, price cap carriers will only report data necessary to evaluate further separations reform. Price cap carriers will file the new streamlined ARMIS 43-04 beginning April 1, 2002 and shall file that report on an annual basis for the duration of the freeze. 49. We conclude that these modifications will simplify carrier reporting during the interim freeze, because carriers will no longer be required to compile and report all of the data currently required under the ARMIS 43-04. At the same time, the data provided in the streamlined ARMIS 43-04 will provide the Commission and Joint Board with the selected data necessary to evaluate further action in this area. 1. Adjustments During the Freeze 50. As explained above, the intent of the freeze is to stabilize and simplify the separations process. Accordingly, the Joint Board recommended that carriers should generally not be allowed to adjust the separations category relationships and allocation factors of price cap carriers or the allocation factors of rate-of-return carriers during the freeze. The Joint Board found that this prohibition of adjustments during the freeze is consistent with the stability sought through the freeze, pending more comprehensive reform of the separations process. The Joint Board noted, however, that carriers may request a waiver of the Part 36 freeze pursuant to the Commission's regulations, in order to make adjustments where special circumstances warrant such action. 51. In recommending that adjustments to the separations category relationships and allocation factors should not be permitted during the freeze, the Joint Board recognized that, during the freeze, carriers may merge affiliated operations, or acquire from or sell exchanges to non-affiliated carriers. The Joint Board recommended that a carrier selling or otherwise transferring exchanges to another carrier's study area continue to employ its pre-transfer frozen factors and, if applicable, category relationships. The Joint Board recommended, however, that the acquiring carrier be required to recalculate its frozen factors and category relationships. The acquiring carrier would calculate new, composite frozen factors and category relationships based on a weighted average of both the seller's and purchaser's existing frozen factors and frozen category relationships. This weighted average would be based on the number of access lines currently being served by the acquiring carrier and the number of access lines in the transferred exchanges. The Joint Board believes that this approach will result in factors and category relationships that more accurately reflect the acquiring carrier's post-transfer study area. 52. The Joint Board also recognized that, when exchanges are transferred, the transferred exchanges may not include all of the categories of investment found in the selling carrier's study area. Wishing to avoid the anomaly of creating categories of investment in the new study area that are not actually transferred to the purchaser, the Joint Board recommended that the Commission require the acquiring carrier to remove all categories of investment from the selling carrier's category relationships where no such category investment exists within the sold exchange(s). The seller's remaining category relationships would then be increased proportionately to total 100 percent. Finally, the adjusted seller's category relationships would be composited with those of the acquiring carrier to determine the category relationships for the acquiring carrier's post-transfer study area. 53. Several commenters support the recommendation that no adjustments during the freeze should be allowed and also support the proposed treatment of the sale or transfer of exchanges during the freeze. Several commenters support the recommendation, as a general matter, but propose that two exceptions be carved out: 1) when rate-of-return carriers incur new categories of investment during the freeze; and 2) when rate-of-return average schedule companies convert to become rate-of-return cost companies. USTA, NECA, and several commenters representing the interests of small carriers recommend that the Commission permit theses two exceptions for adjustments to the allocation factors of rate-of-return carriers during the freeze. 54. We adopt the recommendations of the Joint Board regarding adjustments during the freeze, including the Joint Board's recommended treatment of the sale or transfer of exchanges. We agree with the Joint Board that this approach is an administratively simple one that is consistent with our goal of stabilizing the separations process by halting any jurisdictional cost shifts. In the event of any anomalies, we believe that the Commission's waiver process will provide a mechanism for relief when special circumstances warrant deviation from the freeze. 55. We do, however, recognize that the two exceptions proposed by the commenters present unique circumstances that may occur with some frequency. Accordingly, we adopt rules to address these two exceptions consistent with the recommendations of the commenters. Rate- of-return carriers who incur new categories of investment during the freeze shall calculate new factors for the investment and then freeze the new factors for the duration of the freeze. We agree with USTA that, without this exception, some rate-of-return carriers may be precluded from allocating their costs for recovery of the new investment from the proper jurisdictions. We also recognize that carriers convert from average-schedule settlement status to cost-based settlement status every year. Rate-of-return carriers who convert from average schedule to cost company status during the freeze shall calculate new factors based on the twelve-month period immediately following the conversion and then freeze the new factors for the remainder of the freeze. We believe that providing this exception will expedite the process for those carriers by eliminating the need for waiver requests to calculate new factors following conversion. 1. Exogenous Cost Changes 56. Section 61.45 of the Commission's rules allows carriers subject to federal price cap regulation to adjust their price cap indices (PCIs) for "exogenous cost changes" to ensure that their PCIs accurately reflect all exogenous cost changes that may have taken place before the annual tariff filing. The types of exogenous cost changes allowed are limited to those cost changes that the Commission shall permit or require by rule, rule waiver, or declaratory ruling. Specifically, the exogenous cost changes allowed under the Commission's rules include those caused by "changes to the Separations manual." As a general matter, therefore, changes to the Part 36 rules that result in a cost change to a price cap carrier are allowable exogenous cost changes. 57. We specifically find in this Report and Order that, based on the nature of the changes to Part 36 that we are adopting, price cap carriers shall not be allowed to claim exogenous cost adjustments under Part 61 of the Commission's rules as a result of the implementation of the freeze. Because the freeze will be based upon the most currently-available separations data at the time of its implementation, the freeze would not cause any cost changes for price cap carriers, and therefore we see no grounds upon which to allow for exogenous adjustments, including exogenous adjustments based on projections of where cost levels would be if not for the existence of the freeze. Furthermore, we note that because we are not adopting a local DEM adjustment, there will be no cost shifts between the jurisdictions as a result of any DEM adjustments, and therefore no grounds for exogenous cost adjustments under Part 61. LVIII. PROCEDURAL MATTERS A. Final Regulatory Flexibility Certification. 59. The Regulatory Flexibility Act of 1980, as amended (RFA), requires that an RFA analysis be prepared for notice-and-comment rulemaking proceedings, unless the agency certifies that "the rule will not, if promulgated, have a significant economic impact on a substantial number of small entities." The RFA generally defines "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). Section 121.201 of the Small Business Administration regulations defines a small telecommunications entity in SIC code 4813 (Telephone Companies Except Radio Telephone) as any entity with 1,500 or fewer employees at the holding company level. As we described in the previous IRFA analysis in this proceeding, we recognize that proposals such as a freeze of the Part 36 separations process will affect all incumbent local exchange carriers providing interstate services, including some entities employing1500 or fewer employees at the holding company level. 60. In the instant Report and Order, we amend Part 36 of our rules to adopt a variation of the freeze proposals set forth in the NPRM. Specifically, the Commission adopts a five-year freeze of the Part 36 category relationships and allocation factors for price cap carriers and a freeze of the allocation factors only for rate-of-return carriers. The objectives of the modified rules adopted in this Report and Order are to freeze the separations process in order to ease the administrative burden of regulatory compliance and to provide greater regulatory certainty for all local exchange carriers subject to the Commission's Part 36 rules, including small incumbent local exchange carriers (ILECs). For the reasons described below, we certify, pursuant to the RFA, that the rules adopted in this Report and Order will not have a significant economic impact on a substantial number of small entities. The interim freeze will eliminate the need for all ILECs, including ILECs with 1500 employees or fewer, to complete certain annual studies formerly required by the Commission's rules; if this action can be said to have any affect under the RFA, it is to reduce a regulatory compliance burden for small ILECs by eliminating the aforementioned separations studies and providing these carriers with greater regulatory certainty. 61. We note that we specifically considered the impact of the freeze on small ILECs (in general, rate-of-return carriers) in this Report and Order and provided them with the option to freeze their category relationships at the onset of the freeze. We recognized that some small ILECs may be harmed if subject to a categories freeze, as it may reduce their ability to recover investment and receive sufficient universal service support, while other small ILECs may benefit from the added regulatory simplification and stability provided by a categories freeze. Our action, therefore, either retains the status quo for small ILECs choosing to freeze their category relationships, or results in less regulatory burden for those opting for the categories freeze. Furthermore, we have committed to addressing the impact of Internet traffic on the separations results of all carriers, including small ILECs, in the context of the Commission's comprehensive separations reform, as we do not believe carriers are harmed by the current separations treatment of Internet traffic and will not be harmed as a result of the freeze. 62. The Commission will send a copy of this Report and Order, including this final certification, in a report to Congress pursuant to the Congressional Review Act, see 5 U.S.C.  801(a)(1)(A). In addition, the Report and Order and this certification will be sent to the Chief Counsel for Advocacy of the Small Business Administration, and will be published in the Federal Register. See 5  U.S.C.  605(b). A. Paperwork Reduction Act 63. The action contained herein has been analyzed with respect to the Paperwork Reduction Act of 1995 and found to impose new or modified reporting and recordkeeping requirements or burdens on the public. Implementation of these new or modified reporting and recordkeeping requirements will be subject to approval by the Office of Management and Budget (OMB) as prescribed by the Act and will go into effect upon announcement in the Federal Register of OMB approval. LXIV. ORDERING clauseS 65. Accordingly, IT IS ORDERED that, pursuant to sections 1, 2, 4, 201-205, 215, 218, 220, 229, 254, and 410 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 152, 154, 201-205, 215, 218, 220, 229, 254 and 410 that the amendments to Part 36 of the Commission's rules, 47 C.F.R. Part 36, as described in this Report and Order and specified in Appendix C of this Report and Order ARE ADOPTED. 66. IT IS FURTHER ORDERED that Part 36 of the Commission's rules, 47 C.F.R. Part 36, IS AMENDED as set forth in Appendix C hereto, effective immediately upon publication in the Federal Register. Pursuant to 5 U.S.C.  553(d)(3), we find that good cause exists to have the rules take effect immediately upon publication in the Federal Register. July 1, 2001 is the start of a new tariff year and, as such, it is essential that the amended rules take effect immediately upon publication in the Federal Register to enable carriers to keep their records in accordance with the Commission's rules. The interim freeze of Part 36 of the Commission's Rules, 47 C.F.R.  36 et seq., shall also be effective July 1, 2001. The revised collections of information contained within are contingent upon approval by the Office of Management and Budget. FEDERAL COMMUNICATIONS COMMISSION Magalie Roman Salas Secretary APPENDIX A Parties Filing Comments and Reply Comments Comments: 1. AT&T Corp. 2. BellSouth Corporation / BellSouth Telecommunications, Inc. 3. CHR Solutions, Inc. 4. General Services Administration 5. GVNW Consulting, Inc. 6. John Staurulakis, Inc. 7. National Exchange Carrier Association, Inc., National Rural Telecom Association, National Telephone Cooperative Association, and Organization for the Promotion and Advancement of Small Telecommunications Companies 8. Pennsylvania Public Utilities Commission 9. Qwest Corporation 10. SBC Telecommunications, Inc. 11. Telcom Consulting Associates 12. Telephone Association of New England 13. United States Telecom Association 14. Verizon Telephone Companies 15. Vermont Public Service Board 16. WorldCom, Inc. Reply Comments: 1. AT&T Corp. 2. BellSouth Corporation / BellSouth Telecommunications, Inc. 3. CHR Solutions, Inc. 4. General Services Administration 5. GVNW Consulting, Inc. 6. John Staurulakis, Inc. 7. National Exchange Carrier Association, Inc., National Telephone Cooperative Association, National Rural Telecom Association, and Organization for the Promotion and Advancement of Small Telecommunications Companies 8. Pennsylvania Public Utilities Commission 9. People of the State of California and the California Public Utilities Commission 10. Public Service Commission of Wisconsin 11. Qwest Corporation 12. SBC Communications, Inc. 13. Telecom Consulting Associates 14. Telephone Association of New England 15. United States Telephone Association 16. Verizon Telephone Companies 17. Vermont Public Service Board 18. Warinner, Gesinger & Associates, LLC 19. WorldCom, Inc. Appendix B Category Relationships and Jurisdictional Allocation Factors to Freeze Categories/Subcategories to Freeze (by account) Account 2210 - Central Office Switching Category 2 Tandem Switching Equipment Category 3 Local Switching Equipment Account 2220 Operator Systems Category 1 Operator Systems Equipment (by type of board) § Separate toll boards § Separate local manual boards § Combined local manual and toll boards § Combined toll and DSA boards § Separate DSA and DSB boards § Service observing boards § Auxiliary service boards § Traffic service positions Account 2230 Circuit Equipment Category 4 Circuit Equipment Subcategory 4.1 Exchange Circuit Equipment 4.11 Wideband Exchange Line Circuit Equipment 4.12 Exchange Trunk Circuit Equipment 4.13 Exchange Line Circuit Equipment § State private line and state WATS § Interstate private line and interstate WATS § Message telephone service 4.2 Interexchange Circuit Equipment 4.21 Interexchange circuit equipment furnished to another company for IS use 4.22 Interexchange circuit equipment used for WDBD services including satellite and earth station equipment 4.23 All other interexchange circuit equipment § State private line and state WATS § Interstate private line and interstate WATS § Message telephone service 4.3 Host/Remote Message Circuit Equipment Account 2310 Information Origination/Termination (IOT) Equipment Category 1 Other information origination / termination equipment Category 2 Customer premises equipment Account 2410 Cable & Wire Facilities Category 1 Exchange Line C&WF Subcategory 1.1 - State private line and state WATS 1.2 - Interstate private line and interstate WATS 1.3 - Subscriber lines jointly used for local exchange and exchange access Category 2 Wideband and Exchange Trunk C&WF Category 3 Interexchange C&WF Subcategory 3.1 - State private line and state WATS 3.2 - Interstate private line and interstate WATS 3.3 Message telephone service Category 4 Host/Remote Message C&WF Account 6620 Services Telephone Operator Expenses Published Directory Listing Category 1 Local Business Office Expense § End user service order processing § End user payment and collection § End user billing inquiry § Interexchange carrier service order processing § Interexchange carrier payment and collection § Interexchange carrier billing inquiry § Coin collection and administration Category 2 Revenue Accounting Expense § Message processing expense Ø Toll ticket processing Ø Local message processing § Other billing and collection expense § Carrier access charge billing and collecting expense Category 3 All Other Customer Services Expense Factors to Freeze (by Jurisdiction) 1. Subscriber Line Minutes of Use (SLU) 2. Weighted Standard Work Seconds (WSWS) by type of board 3. Tandem switch minutes of use (Tdm MOU) 4. Dial Equipment Minutes (DEM) measured (i.e. unweighted) 5. Exchange Trunk Minutes of Use (Exch Trk MOU) 6. Wideband Minutes of Use (WDBD MOU) 7. Conversation Minutes (CM) 8. Conversation Minute Kilometers (CMKm) 9. Host-Remote Minute of Use Kilometers (MOUKm) 10. Equal Access Minutes of Use (EA MOU) 11. End User service order processing contact factor 12. End User payment & collection revenue factor 13. End User billing inquiry contact factor 14. IXC service order processing contact factor 15. IXC payment & collection revenue factor 16. IXC billing inquiry contact factor 17. Coin collection & administration revenue factor 18. Marketing - billed revenue factor 19. SP + RC messages 20. TSPS Relative Processor Real Time (in seconds) [to allocate RTA investment in end office] APPENDIX C Final Rules Part 36 of Title 47 of the Code of Federal Regulations is amended as follows: PART 36 JURISDICTIONAL SEPARATIONS PROCEDURES; STANDARD PROCEDURES FOR SEPARATING TELECOMMUNICATIONS PROPERTY COSTS, REVENUES, EXPENSES, TAXES AND RESERVES FOR TELECOMMUNICATIONS COMPANIES Subpart A General 1. Section 36.3 is added as follows:  36.3 Freezing of jurisdictional separations category relationships and/or allocation factors (a) Effective July1, 2001, through June 30, 2006, all local exchange carriers subject to Part 36 rules shall apportion costs to the jurisdictions using their study area and/or exchange specific separations allocation factors calculated during the twelve month period ending December 31, 2000, for each of the categories/sub-categories as specified herein. Direct assignment of private line service costs between jurisdictions shall be updated annually. Other direct assignment of investment, expenses, revenues or taxes between jurisdictions shall be updated annually. Local exchange carriers that invest in telecommunications plant categories during the period July 1, 2001, through June 30, 2006, for which it had no separations allocation factors for the twelve month period ending December 31, 2000, shall apportion that investment among the jurisdictions in accordance with the separations procedures in effect as of December 31, 2000 for the duration of the freeze. (b) Effective July 1, 2001, through June 30, 2006, local exchange carriers subject to price cap regulation, pursuant to  61.41, shall assign costs from the Part 32 accounts to the separations categories/sub-categories, as specified herein, based on the percentage relationships of the categorized/sub-categorized costs to their associated Part 32 accounts for the twelve month period ending December 31, 2000. If a Part 32 account for separations purposes is categorized into more than one category, the percentage relationship among the categories shall be utilized as well. Local exchange carriers that invest in types of telecommunications plant during the period July 1, 2001, through June 30, 2006, for which it had no separations category investment for the twelve month period ending December 31, 2000, shall assign such investment to separations categories in accordance with the separations procedures in effect as of December 31, 2000. (1) Local exchange carriers not subject to price cap regulation, pursuant to  61.41, may elect to be subject to the provisions of  36.3(b). Such election must be made prior to July 1, 2001. Local exchange carriers electing to become subject to  36.3(b) shall not be eligible to withdraw from such regulation for the duration of the freeze. Local exchange carriers participating in Association tariffs, pursuant to  69.601 et seq., shall notify the Association prior to July 1, 2001, of such intent to be subject to the provisions of  36.3(b). Local exchange carriers not participating in Association tariffs shall notify the Commission prior to July 1, 2001, of such intent to be subject to the provisions of  36.3(b). (c) Effective July 1, 2001, through June 30, 2006, any local exchange carrier that sells or otherwise transfers exchanges, or parts thereof, to another carrier's study area shall continue to utilize the factors and, if applicable, category relationships as specified in  36.3(a) and (b). (d) Effective July 1, 2001, through June 30, 2006, any local exchange carrier that buys or otherwise acquires exchanges or part thereof, shall calculate new, composite factors and, if applicable, category relationships based on a weighted average of both the seller's and purchaser's factors and category relationships calculated pursuant to  36.3(a) and (b). This weighted average should be based on the number of access lines currently being served by the acquiring carrier and the number of access lines in the acquired exchanges. (1) To compute the composite allocation factors and, if applicable, the composite category percentage relationships of the acquiring company, the acquiring carrier shall first sum its existing (pre-purchase) access lines (A) with the total access lines acquired from selling company (B). Then, multiply its factors and category relationship percentages by (A/(A+B)) and those of the selling company by (B/(A+B)) and sum the results. (2) For carriers subject to a freeze of category relationships, the acquiring carrier should remove all categories of investment from the selling carrier's list of frozen category relationships where no such category investment exists within the sold exchange(s). The seller's remaining category relationships must then be increased proportionately to total 100 percent. Then, the adjusted seller's category relationships must be combined with those of the acquiring carrier as specified in  36.3(d)(i) to determine the category relationships for the acquiring carrier's post- transfer study area. (e) Any local exchange carrier study area converting from average schedule company status, as defined in Part 69.605(c), to cost company status during the period July 1, 2001, through June 30, 2006, shall, for the first twelve months subsequent to conversion categorize the telecommunications plant and expenses and develop separations allocation factors in accordance with the separations procedures in effect as of December 31, 2000. Effective July1, 2001 through June 30, 2006, such companies shall utilize the separations allocation factors and account categorization subject to the requirements of  36.3(a) and (b) based on the category relationships and allocation factors for the twelve months subsequent to the conversion to cost company status. Subpart B Telecommunications Property Central Office Equipment 2. Section 36.123 is amended as follows:  36.123 Operator systems equipment - Category 1. (a) . . . (5) Effective July 1, 2001, through June 30, 2006, study areas subject to price cap regulation, pursuant to 61.41, shall assign the average balance of Account 2220, Operator Systems, to the categories/subcategories, as specified in  36.123(a)(1) above, based on the relative percentage assignment of the average balance of Account 2220 to these categories/subcategories during the twelve month period ending December 31, 2000. (6) Effective July 1, 2001 through June 30, 2006, all study areas shall apportion the costs assigned to the categories/subcategories, as specified in  36.123(a)(1), among the jurisdictions using the relative use measurements for the twelve month period ending December 31, 2000 for each of the categories/subcategories specified in  36.123 (b) through (e) below. 3. Section 36.124 is amended as follows:  36.124 Tandem switching equipment - Category 2. (a) . . . (c) Effective July 1, 2001, through June 30, 2006, study areas subject to price cap regulation, pursuant to 61.41, shall assign the average balances of Accounts 2210, 2211, 2212 and 2215, to the Category 2, Tandem Switching Equipment based on the relative percentage assignment of the average balances of Account 2210, 2211, 2212 and 2215 to Category 2, Tandem Switching Equipment during the twelve month period ending December 31, 2000. (d) Effective July1, 2001, through June 30, 2006, all study areas shall apportion costs in Category 2, Tandem Switching Equipment, among the jurisdictions using the relative number of study area minutes of use, as specified in  36.124(b), for the twelve month period ending December 31, 2000. Direct assignment of any subcategory of Category 2 Tandem Switching Equipment between jurisdictions shall be updated annually. 4. Section 36.125 is amended as follows:  36.125 Local switching equipment - Category 3. (a) . . . (h) Effective July 1, 2001, through June 30, 2006, study areas subject to price cap regulation, pursuant to 61.41, shall assign the average balances of Accounts 2210, 2211, 2212, and 2215 to Category 3, Local Switching Equipment, based on the relative percentage assignment of the average balances of Account 2210, 2211, 2212 and 2215 to Category 3, during the twelve month period ending December 31, 2000. (i) Effective July 1, 2001, through June 30, 2006, all study areas shall apportion costs in Category 3, Local Switching Equipment, among the jurisdictions using relative dial equipment minutes of use for the twelve month period ending December 31, 2000. (j) If during the period from January 1, 1997, through June 30, 2006, the number of a study area's access lines increased or will increase such that, under  36.125(f) the weighting factor would be reduced, that lower weighting factor shall be applied to the study area's 1996 unweighted interstate DEM factor to derive a new local switching support factor. The study area will restate its Category 3, Local Switching Equipment factor under  36.125(f) and use that factor for the duration of the freeze period. 5. Section 36.126 is amended as follows:  36.126 Circuit equipment - Category 4. (a) . . . (b) . . . (1) . . . (5) Effective July 1, 2001, through June 30, 2006, study areas subject to price cap regulation, pursuant to 61.41, shall assign the average balances of Accounts 2230 through 2232 to the categories/subcategories as specified in  36.126(b)(1) through (b)(4) based on the relative percentage assignment of the average balances of Accounts 2230 through 2232 costs to these categories/subcategories during the twelve month period ending December 31, 2000. (b) . . . (1) . . . (4) Effective July 1, 2001, through June 30, 2006, all study areas shall apportion costs in the categories/subcategories, as specified in  36.126(b)(1) through (b)(4), among the jurisdictions using the relative use measurements or factors, as specified in  36.126(c)(1) through (c)(3) for the twelve month period ending December 31, 2000. Direct assignment of any subcategory of Category 4.1 Exchange Circuit Equipment to the jurisdictions shall be updated annually. (e) . . . (1) . . . (4) Effective July1, 2001, through June 30, 2006, all study areas shall apportion costs in the categories/subcategories specified in  36.126(e)(1) through (e)(3) among the jurisdictions using relative use measurements or factors, as specified in  36.126(e)(1) through (e)(3) for the twelve month period ending December 31, 2000. Direct assignment of any subcategory of Category 4.2 Interexchange Circuit Equipment to the jurisdictions shall be updated annually. (b) . . . (1) . . . (2) Effective July1, 2001, through June 30, 2006, all study areas shall apportion costs in the subcategory specified in  36.125(f)(1) among the jurisdictions using the allocation factor, as specified in  36.125(f)(1)(i), for this subcategory for the twelve month period ending December 31, 2000. Direct assignment of any Category 4.3 Host/Remote Message Circuit Equipment to the jurisdictions shall be updated annually. Information Origination/Termination Expenses 2. Section 36.141 is amended as follows:  36.141 General. (a) . . . (c) Effective July 1, 2001, through June 30, 2006, local exchange carriers subject to price cap regulation, pursuant to  61.41, shall assign the average balance of Account 2310 to the categories, as specified in  36.141(b), based on the relative percentage assignment of the average balance of Account 2310 to these categories during the twelve month period ending December 31, 2000. 3. Section 36.142 is amended as follows:  36.142 Categories and apportionment procedures. (a) . . . (c) Effective July 1, 2001, through June 30, 2006, all study areas shall apportion costs in the categories, as specified in  36.141(b), among the jurisdictions using the relative use measurements or factors, as specified in  36.142(a), for the twelve month period ending December 31, 2000. Direct assignment of any category of Information Origination/Termination Equipment to the jurisdictions shall be updated annually. Cable and Wire Facilities 4. Section 36.152 is amended as follows:  36.152 Categories of Cable and Wire Facilities. (a) . . . (d) Effective July 1, 2001, through June 30, 2006, study areas subject to price cap regulation, pursuant to  61.41, shall assign the average balance of Account 2410 to the categories/subcategories, as specified in 36.152(a) through (c), based on the relative percentage assignment of the average balance of Account 2410 to these categories/subcategories during the twelve month period ending December 31, 2000. 5. Section 36.154 is amended as follows:  36.154 Exchange Line Cable and Wire Facilities (C&WF) Category 1 - apportionment. (a) . . . (g) Effective July 1, 2001, through June 30, 2006, all study areas shall apportion Subcategory 1.3 Exchange Line C&WF among the jurisdictions as specified in  36.154(c). Direct assignment of subcategory Categories 1.1 and 1.2 Exchange Line C&WF to the jurisdictions shall be updated annually as specified in  36.154(b). 6. Section 36.155 is amended as follows:  36.155 Wideband and exchange trunk C&WF Category 2 apportionment procedures. (a) . . . (b) Effective July 1, 2001, through June 30, 2006, all study areas shall apportion Category 2 Wideband and exchange trunk C&WF among the jurisdictions using the relative number of minutes of use, as specified in  36.155(a), for the twelve-month period ending December 31, 2000. Direct assignment of any Category 2 equipment to the jurisdictions shall be updated annually. 7. Section 36.156 is amended as follows:  36.156 Interexchange Cable and Wire Facilities (C&WF) Category 3 apportionment procedures. (a) . . . (c) Effective July 1, 2001, through June 30, 2006, all study areas shall directly assign Category 3 Interexchange Cable and Wire Facilities C&WF where feasible. All study areas shall apportion the non-directly assigned costs in Category 3 equipment to the jurisdictions using the relative use measurements, as specified in  36.156 (b), during the twelve-month period ending December 31, 2000. 8. Section 36.157 is amended as follows:  36.157 Host/Remote message Cable and Wire Facilities (C&WF) Category 4 apportionment procedures. (a) . . . (b) Effective July 1, 2001, through June 30, 2006, all study areas shall apportion Category 4 Host/Remote message Cable and Wire Facilities C&WF among the jurisdictions using the relative number of study area minutes-of-use kilometers applicable to such facilities, as specified in  36.157(a)(1), for the twelve month period ending December 31, 2000. Direct assignment of any Category 4 equipment to the jurisdictions shall be updated annually. Equal Access Equipment 9. Section 36.191 is amended as follows:  36.191 Equal access Equipment. (a) . . . (d) Effective July 1, 2001, through June 30, 2006, all study areas shall apportion Equal Access Equipment, as specified in  36.191(a), among the jurisdictions using the relative state and interstate equal access traffic, as specified in  36.191(c), for the twelve month period ending December 31, 2000. Subpart C Operating Revenues and Certain Income Accounts Operating Revenues 10. Section 36.212 is amended as follows:  36.212 Basic local services revenue Account 5000. (a) . . . (c) . . . (1) Effective July 1, 2001, through June 30, 2006, all study areas shall apportion Wideband Message Service and TWX revenues among the jurisdictions using the relative number of TWX minutes of use for the twelve- month period ending December 31, 2000. 4. Section 36.214 is amended as follows:  36.214 Long distance message revenue Account 5100. (a) . . . (1) Effective July 1, 2001, through June 30, 2006, all study areas shall apportion Wideband Message Service and TWX revenues among the jurisdictions using the relative number of TWX minutes of use for the twelve-month period ending December 31, 2000. Subpart D Operating Expenses and Taxes Customer Operations Expenses 5. Section 36.372 is amended as follows:  36.372 Marketing Account 6610. (a) . . . (1) Effective July 1, 2001, through June 30, 2006, all study areas shall apportion expenses in this account among the jurisdictions using the analysis, as specified in  36.372(a), during the twelve-month period ending December 31, 2000. 6. Section 36.374 is amended as follows:  36.374 Telephone Operator Expenses. (a) . . . (b) Effective July 1, 2001, through June 30, 2006, study areas subject to price cap regulation, pursuant to  61.41, shall assign the average balance of Account 6620-Services to the Telephone operator expense classification based on the relative percentage assignment of the average balance of Account 6620 to this classification during the twelve month period ending December 31, 2000. (c) Expenses in this classification are apportioned among the operations on the basis of the relative number of weighted standard work seconds as determined by analysis and study for a representative period. (d) Effective July 1, 2001, through June 30, 2006, all study areas shall apportion Telephone operator expenses among the jurisdictions using the relative number of weighted standard work seconds, as specified in  36.374(c), during the twelve-month period ending December 31, 2000. 7. Section 36.375 is amended as follows:  36.375 Published directory listing. (a) . . . (b) . . . (1) . . . (5) Effective July 1, 2001, through June 30, 2006, study areas subject to price cap regulation, pursuant to  61.41, shall assign the average balance of Account 6620-Services to the classifications, as specified in  36.375(b)(1)-(4), based on the relative percentage assignment of the average balance of Account 6620 to these classifications during the twelve month period ending December 31, 2000. (6) Effective July 1, 2001, through June 30, 2006, all study areas shall apportion Published directory listing expenses using the underlying relative use measurements, as specified in  36.375(b)(1)-(4), during the twelve-month period ending December 31, 2000. Direct assignment of any Publishing directory listing expense to the jurisdictions shall be updated annually. 2. Section 36.377 is amended as follows:  36.377 Category 1 Local business office expense. (a) . . . Effective July 1, 2001, through June 30, 2006, study areas subject to price cap regulation, pursuant to  61.41, shall assign the average balance of Account 6620-Services to the subcategories, as specified in  36.377(a), based on the relative percentage assignment of the average balance of Account 6620 to these categories/subcategories during the twelve month period ending December 31, 2000. (1) . . . (i) . . . A (ix) Effective July 1, 2001, through June 30, 2006, study areas subject to price cap regulation, pursuant to  61.41, shall assign the average balance of Account 6620-Services to the categories/subcategories, as specified in  36.377(a)(1)(i) through (viii), based on the relative percentage assignment of the average balance of Account 6620 to these categories/subcategories during the twelve month period ending December 31, 2000. (a) Effective July 1, 2001, through June 30, 2006, all study areas shall apportion TWX service order processing expense, as specified in  36.377(a)(1)(viii) among the jurisdictions using relative billed TWX revenues for the twelve-month period ending December 31, 2000. All other subcategories of End-user service order processing expense, as specified in  36.377(a)(1)(i)-(vii), shall be directly assigned. (2) . . . (i) . . . (vii) Effective July 1, 2001, through June 30, 2006, study areas subject to price cap regulation, pursuant to  61.41, shall assign the average balance of Account 6620- Services to the subcategories, as specified in  36.377(a)(2)(i) through (vi), based on the relative percentage assignment of the average balance of Account 6620 to these categories/subcategories during the twelve month period ending December 31, 2000. (a) Effective July 1, 2001, through June 30, 2006, all study areas shall apportion TWX payment and collection expense, as specified in  36.377(2)(vi) among the jurisdictions using relative billed TWX revenues for the twelve-month period ending December 31, 2000. All other subcategories of End User payment and collection expense, as specified in  36.377(a)(2)(i)-(vi), shall be directly assigned. (3) . . . (i) . . . (vii) Effective July 1, 2001, through June 30, 2006, study areas subject to price cap regulation, pursuant to  61.41, shall assign the average balance of Account 6620-Services to the subcategories, as specified in  36.377(a)(3)(i) through (vi), based on the relative percentage assignment of the average balance of Account 6620 to these subcategories during the twelve month period ending December 31, 2000. (a) Effective July 1, 2001, through June 30, 2006, all study areas shall apportion TWX billing inquiry expense, as specified in  36.377(a)(3)(v) among the jurisdictions using relative billed TWX revenues for the twelve-month period ending December 31, 2000. All other subcategories of End user billing inquiry expense, as specified in  36.377(a)(3)(i)-(iv),(vi) shall be directly assigned. (4) . . . (i) . . . (vii) Effective July 1, 2001, through June 30, 2006, study areas subject to price cap regulation, pursuant to  61.41, shall assign the average balance of Account 6620-Services to the subcategories, as specified in  36.377(a)(4)(i) through (vi), based on the relative percentage assignment of the average balance of Account 6620 to these subcategories during the twelve month period ending December 31, 2000. (a) All subcategories of Interexchange carrier service order processing expense, as specified in  36.377(a)(4)(i)-(vi), shall be directly assigned. (5) . . . (i) . . . (vii) Effective July 1, 2001, through June 30, 2006, study areas subject to price cap regulation, pursuant to 61.41, shall assign the average balance of Account 6620-Services to the subcategories, as specified in  36.377(a)(5)(i) through (vi), based on the relative percentage assignment of the average balance of Account 6620 to these subcategories during the twelve month period ending December 31, 2000. (a) All subcategories of Interexchange carrier payment expense, as specified in  36.377(a)(5)(i)-(vi), shall be directly assigned. (6) . . . (i) . . . (vii) Effective July 1, 2001, through June 30, 2006, study areas subject to price cap regulation, pursuant to  61.41, shall assign the average balance of Account 6620-Services to the subcategories, as specified in  36.377(a)(6)(i) through (vi), based on the relative percentage assignment of the average balance of Account 6620 to these subcategories during the twelve month period ending December 31, 2000. (a) All subcategories of Interexchange carrier billing inquiry expense, as specified in  36.377(a)(6)(i)-(vi), shall be directly assigned. (7) . . . (i) Effective July 1, 2001, through June 30, 2006, study areas subject to price cap regulation, pursuant to  61.41, shall assign the average balance of Account 6620-Services to the subcategories, as specified in  36.377(a)(7), based on the relative percentage assignment of the average balance of Account 6620 to these subcategories during the twelve month period ending December 31, 2000. (ii) Effective July 1, 2001, through June 30, 2006, all study areas shall apportion Coin collection and administration expense among the jurisdictions using the relative state and interstate revenues deposited in the public and semi-public telephones, as specified in  36.377(a)(7), for the twelve month period ending December 31, 2000. Direct assignment of any Coin collection and administration expense among the jurisdictions shall be updated annually. 8. Section 36.378 is amended as follows:  36.378 Category 2 Customer services (revenue accounting). (a) . . . (b) . . . (i) Effective July 1, 2001, through June 30, 2006, study areas subject to price cap regulation, pursuant to  61.41, shall assign the average balance of Account 6620-Services to the classifications, as specified in  36.378(b), based on the relative percentage assignment of the average balance of Account 6620 to those classifications during the twelve month period ending December 31, 2000. 3. Section 36.379 is amended as follows:  36.379 Message processing expense. (a) . . . (b) . . . (i) Effective July 1, 2001, through June 30, 2006, study areas subject to price cap regulation, pursuant to  61.41, shall assign the average balance of Account 6620-Services to the subcategories, as specified in  36.379(b), based on the relative percentage assignment of the average balance of Account 6620 to those subcategories during the twelve month period ending December 31, 2000. (ii) Effective July 1, 2001, through June 30, 2006, all study areas shall apportion Toll Ticketing Processing Expense among the jurisdictions using the relative number of toll messages for the twelve-month period ending December 31, 2000. Local Message Process Expense is assigned to the state jurisdiction. 3. Section 36.380 is amended as follows:  36.380 Other billing and collecting expense. (a) . . . (d) Effective July 1, 2001, through June 30, 2006, study areas subject to price cap regulation, pursuant to  61.41, shall assign the average balance of Account 6620-Services to the Other billing and collecting expense classification based on the relative percentage assignment of the average balance of Account 6620 to those subcategory during the twelve month period ending December 31, 2000. (e) Effective July 1, 2001, through June 30, 2006, all study areas shall apportion Other billing and collecting expense among the jurisdictions using the allocation factor utilized, pursuant to  36.380(b) or (c), for the twelve month period ending December 31, 2000. 4. Section 36.381 is amended as follows:  36.381 Carrier access charge billing and collecting expense. (a) . . . (c) Effective July 1, 2001, through June 30, 2006, study areas subject to price cap regulation, pursuant to  61.41, shall assign the average balance of Account 6620- Services to the Carrier access charge billing and collecting expense classification based on the relative percentage assignment of the average balance of Account 6620 to that classification during the twelve month period ending December 31, 2000. (d) Effective July 1, 2001, through June 30, 2006, all study areas shall apportion Carrier access charge billing and collecting expense among the jurisdictions using the allocation factor, pursuant to  36.381(b), for the twelve-month period ending December 31, 2000. 5. Section 36.382 is amended as follows:  36.382 Category 3 - All other customer services expense. (a) Effective July 1, 2001, through June 30, 2006, study areas subject to price cap regulation, pursuant to  61.41, shall assign the average balance of Account 6620-Services to this category based on the relative percentage assignment of the average balance of Account 6620 to this category during the twelve month period ending December 31, 2000. (b) Category 3 is apportioned on the basis of Categories 1 and 2.