Price Cap Performance Review for Local Exchange Carriers

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 61

[CC Docket No. 94-1; FCC 95-406]

Price Cap Performance Review for Local Exchange Carriers

AGENCY: Federal Communications Commission.

ACTION: Further notice of proposed rulemaking.

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SUMMARY: On March 30, 1995, the Federal Communications Commission

adopted a First Report and Order in this docket, revising its price cap

regulations applicable to local exchange carriers (LECs). In that

Order, the Commission also stated that it would consider adopting

further rule revisions in the near future.

In this Further Notice, the Commission seeks comment on revising

its rules governing calculation of the ``X-Factor'' in the price cap

index (PCI) formula, and revising the rules governing sharing

obligations. The Commission also seeks comment on revising the rules

governing the price cap common line formula, and the rules governing

treatment of exogenous costs. In a previous further notice of proposed

rulemaking, the Commission sought comment on how the price cap rules

should be adjusted as the competition faced by local exchange carriers

(LECs) develops in the future. The intended effect of this action is to

revise the price cap rules to strengthen the existing incentives for

LECs to become efficient and innovative.

DATES: Comments must be submitted on or before November 27, 1995. Reply

Comments must be submitted on or before December 27, 1995.

ADDRESSES: Tariff Division, Common Carrier Bureau, Room 518, 1919 M

Street, NW., Washington, D.C. 20554.

FOR FURTHER INFORMATION CONTACT:

Steven Spaeth or C. Anthony Bush, Tariff Division, Common Carrier

Bureau, (202) 418-1530.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Fourth

Further Notice adopted September 27, 1995, and released September 27,

1995. The full text of this Commission decision is available for

inspection and copying during normal business hours

[[Page 52363]]

in the FCC Public Reference Room (Room 230), 1919 M St., N.W.,

Washington, DC. The complete text of this decision may also be

purchased from the Commission's copy contractor, International

Transcription Service, Suite 140, 2100 M Street, N.W., Washington, D.C.

20037.

Regulatory Flexibility Analysis

We have determined that section 605(b) of the Regulatory

Flexibility Act of 1980, 5 U.S.C. 605(b), does not apply to these rules

because they do not have a significant economic impact on a substantial

number of small entities. The definition of a ``small entity'' in

section 3 of the Small Business Act excludes any business that is

dominant in its field of operation. Local exchange carriers do not

qualify as small entities because they have a nationwide monopoly on

ubiquitous access to the subscribers in their service area. The

Commission also has found all exchange carriers to be dominant in its

competitive carrier proceeding. See 85 FCC 2d 1, 23-24 (1980). To the

extent that small telephone companies will be affected by these rules,

we hereby certify that these rules will not have a significant effect

on a substantial number of ``small entities.''

Summary of Report and Order

In this Further Notice, we seek comment on a number of possible

rule revisions. The first set of rules we consider revising is related

to the calculation of the ``X-Factor.'' The productivity factor, or X-

Factor, was included in the LEC price cap plan adopted in 1990 to

reflect the fact that productivity growth in the telecommunications

industry historically was greater than productivity growth in the

economy as a whole. This Further Notice invites comments on three

alternative X-Factor calculation methods. The first is Total Factor

Productivity (TFP). A TFP method would base the X-Factor on the ratio

of an index of total outputs to an index of total inputs. The output

index would represent the quantities of goods or services produced, and

the input index would represent the quantities of goods or services

consumed. The second X-Factor calculation method under consideration is

the Historical Revenue Method, which would set the X-Factor at the

level necessary to reprice cap LECs' access services so that those LECs

would earn a rate of return of 11.25 percent. The third X-Factor

calculation method under consideration is the Historical Price Method.

This is basically the method used by the Commission to set the X-Factor

when it adopted LEC price cap regulation originally in 1990. It would

set the X-Factor so that the historical difference between

telecommunications price trends and economy-wide price trends will

continue in the future.

The Commission invites comment on a number of other X-Factor

issues, such as whether the X-Factor should include a consumer

productivity dividend. The Commission also seeks comment on the number

of X-Factors that should be established in the price cap plan, to

reflect the fact that each LEC serves regions with different economic

conditions and population densities, and so cannot be reasonably

expected to achieve the same level of productivity growth. In addition,

this Further Notice solicits comment on whether the Commission should

adopt X-Factors that would remain fixed until the next scheduled

performance review, as the Commission did in the initial price cap

plan. Alternatively, the Commission could adopt X-Factors based on a

moving average of past productivity measures, which would be updated on

a periodic basis, such as in the annual access tariff filings.

The Commission also seeks comment on whether the sharing mechanism

can be eliminated. In the First Report and Order in this Docket, 60 FR

19526, Apr. 19, 1995, the Commission found that the sharing requirement

blunts the efficiency incentives otherwise created by the price cap

plan. Therefore, the Commission tentatively concluded that one of the

X-Factors in the long-term price cap plan should have no sharing

obligations, and established a goal in the First Report and Order to

eliminate sharing eventually. Sharing serves three beneficial

functions, however: (1) A ``backstop'' mechanism, in case the X-Factor

was substantially in error, or in case a particular LEC's productivity

varied substantially from the average; (2) a ``flow-through''

mechanism, to flow through to customers gains made by carriers in

reducing their unit costs in excess of specified levels, as measured by

interstate earnings; and (3) a ``matching'' mechanism, to encourage

LECs to choose the X-Factor that most closely matches their actual rate

of productivity growth. This Further Notice seeks comment on the extent

to which the Commission can establish other mechanisms to replace the

functions served by sharing. Specifically, the Commission seeks comment

on whether a moving average X-Factor, together with multiple X-Factors,

could replace the backstop function and the flow-through function of

sharing. To replace the matching function, the Commission could develop

a mechanism to assign an appropriate X-Factor to each LEC.

Alternatively, the Commission could permit additional pricing

flexibility to LECs electing higher X-Factors.

Finally, the Commission seeks comment on a number of related

issues. First, based on the method of calculation of the X-Factor, can

the Commission eliminate the separate price cap formula for the common

line basket? Second, based on the method of calculation of the X-

Factor, would it still be necessary for the Commission to treat some

costs as exogenous?

Ordering Clauses

Accordingly, it is ordered that notice is hereby given of the

rulemaking described above and that comment is sought on these issues.

It is further ordered that pursuant to applicable procedures set

forth in Sec. 1.399 and 1.411 et seq. of the Commission's rules, 47 CFR

1.399, 1.411 et seq., comments shall be filed with the Secretary,

Federal Communications Commission, Washington, D.C. 20554 no later than

November 27, 1995. Reply comments shall be filed no later than December

27, 1995. To file formally in this proceeding, participants must file

an original and four copies of all comments, reply comments, and

supporting comments. If participants want each Commissioner to receive

a personal copy of their comments, an original plus nine copies must be

filed. In addition, parties should file two copies of any such pleading

with the Tariff Division, Common Carrier Bureau, Room 518, 1919 M

Street, NW., Washington, DC 20554, and one copy of any pleadings should

be submitted on computer disk to the Industry Analysis Division, Common

Carrier Bureau, Room 534, 1919 M Street, NW., Washington, DC 20554.

Comments and reply comments will be available for public inspection

during regular business hours in the FCC Reference Center, Room 239,

1919 M Street, NW., Washington, DC 20554.

List of Subjects in 47 CFR Part 61

Communications common carriers, Tariffs.

Federal Communications Commission.

William F. Caton,

Acting Secretary.

[FR Doc. 95-24882 Filed 10-5-95; 8:45 am]

BILLING CODE 6712-01-M