# Access Charge Reform; Price Cap Performance Review for Local Exchange Carriers; Transport Rate Structure and Pricing; Usage of the Public Switched Network by Information Service and Internet Access Providers

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URL: https://www.frixlaw.com/law-library/documents/fr%3A97-2142

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** January 31, 1997
- **Citation:** 62 FR 4670

## Text

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 61 and 69

[CC Docket Nos. 96-262, 94-1, 91-213, 96-263; FCC No. 96-488]

Access Charge Reform; Price Cap Performance Review for Local
Exchange Carriers; Transport Rate Structure and Pricing; Usage of the
Public Switched Network by Information Service and Internet Access
Providers

AGENCY: Federal Communications Commission.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Notice of Proposed Rulemaking (NPRM) begins a review of
the Commission's interstate access charge rules, together with its
price cap rules, to establish fair rules of competition for both the
local and long distance markets and determine the extent to which it
must revise these rules in light of the local competition and Bell
Operating Company entry provisions of the 1996 Act and state actions to
open local networks to competition, the effects of potential and actual
competition on incumbent LEC pricing for interstate access, and the
impact of the Act's mandate to preserve and enhance universal service.
The Commission outlines two possible approaches for addressing claims
that existing access charge levels are excessive, for establishing a
transition to access charges that more closely reflect economic costs,
and for deregulating incumbent LEC exchange access services as
competition develops in the local exchange and exchange access markets.
The first approach is a market-based approach under which the
Commission would rely on potential and actual competition from new
facilities-based providers and entrants purchasing unbundled network
elements to drive prices for interstate access services toward economic
cost. The second approach is a prescriptive one under which the
Commission would specify the nature and timing of the changes to the
existing rate levels.

DATES: Comments for the notice of proposed rulemaking are due January
27, 1997,\1\ and replies are due February 13, 1997. Comments for the
notice of inquiry are due no later than March 3, 1997, and replies are
due April 1, 1997.

\1\ Note: This document was received at the Office of the
Federal Register on January 24, 1997.
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FOR FURTHER INFORMATION CONTACT: Richard Lerner, Attorney, Common
Carrier Bureau, Competitive Pricing Division, (202) 418-1530. For
additional information concerning the information collections contained
in this Report and Order contact Dorothy Conway at 202-418-0217, or via
the Internet at [email protected].

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Notice
of Proposed Rulemaking adopted December 23, 1996, and released December
24, 1996. The full text of this Proposed Rulemaking is available for
inspection and copying during normal business hours in the FCC
Reference Center (Room 239), 1919 M St., NW., Washington, DC. The
complete text also

[[Page 4671]]

may be obtained through the World Wide Web, at http://www.fcc.gov/
Bureaus/Common_Carrier/Notices/fcc96488.wp, or may be purchased from
the Commission's copy contractor, International Transcription Service,
Inc., (202) 857-3800, 2100 M St., NW., Suite 140, Washington, DC 20037.
Pursuant to the Telecommunications Act of 1996 and the decision by the
Circuit Court of Appeals for the District of Columbia in Competitive
Telecommunications Association v. FCC, 87 F.3d 522 (D.C. Cir. 1996)
(CompTel v. FCC), the Commission is releasing this NPRM to seek comment
on rules that would bring about cost-based access rates.

General

In passing the 1996 Act, Congress sought to establish a pro-
competitive, deregulatory national policy framework for the United
States telecommunications industry. The NPRM commences the third in a
trilogy of actions that collectively are intended to foster and
accelerate the introduction of efficient competition in all
telecommunications markets, pursuant to the mandate of the 1996 Act. In
August 1996, the Commission adopted rules to implement Sections 251 and
252 of the 1996 Act, which establish the basic obligations of carriers,
especially in the local exchange and exchange access markets. In
November 1996, pursuant to Section 254 of the 1996 Act, the Federal-
State Universal Service Joint Board issued its recommendations to the
Commission for reforming its system of universal service support so
that universal service is preserved and advanced, but in a manner that
permits the local exchange and exchange access markets to move from
monopoly to competition. The NPRM seeks comment on proposals to reform
our system of interstate access charges to make it compatible with the
competitive paradigm established by the 1996 Act and state actions to
open local networks to competition.

Scope

Depending on the individual proposal, the proposed rule revisions
considered in this NPRM apply to all LECs, only to incumbent LECs, or
only to incumbent price cap LECs. The NPRM generally proposes adopting
rules applicable only to price cap LECs, with certain limited
exceptions. Reforms in two areas would apply to all incumbent LECs: (1)
The proposals regarding reform of the transport rate structure,
including the transport interconnection charge (TIC); and (2) the
effects of the universal service changes under section 254 that the
Commission will adopt based upon the Joint Board Recommended Decision.
Federal-State Joint Board on Universal Service, CC Docket No. 96-45,
Recommended Decision, 61 FR 63778 (December 2, 1996) (Joint Board
Recommended Decision). The Commission also asks whether its common line
rate structure modifications should also apply to rate-of-return LECs.
The NPRM also seeks comment on whether terminating access services of
non-incumbent LECs should be regulated. The NPRM states that the
Commission will undertake comprehensive access reform for rate-of-
return incumbent LECs in a separate NPRM.

Part 69 Access Rate Structure

The NPRM seeks comment on a number of proposals to revise the
access rate structure rules so that they better reflect the manner in
which LECs incur costs when providing access. Following up on the Joint
Board's observation in the Universal Service Recommended Decision that
the current per-minute CCL charge is inefficient because common line
costs generally are not traffic sensitive, the NPRM seeks comment on
assessing a flat charge on IXCs on a per-presubscribed interexchange
carrier (PIC) basis, or on end users in cases where the end user has
not selected a PIC. The NPRM also seeks comment on permitting LECs to
assess flat monthly charges to recover the non-traffic-sensitive
portion of local switching costs and permitting LECs to establish a
per-message call setup charge.
The NPRM also proposes to adopt a permanent transport rate
structure, including phasing out the TIC. The NPRM seeks comment on how
the transport rate structure should be modified and addresses issues
raised in Comptel v. FCC. The NPRM seeks comment on alternative
resolutions to the TIC, including reassigning TIC costs to facility-
based access charges or to nonregulated activities; leaving some or all
of the costs in the TIC, subject to competitive market pressures; a
combination of the previous two approaches; or phasing TIC costs out
over a predetermined schedule.

Access Reform

The NPRM proposes that, regardless of the approach adopted for
access reform, the goal should be deregulation in the presence of
substantial competition. The NPRM seeks comment on how to determine
when substantial competition exists.
The NPRM seeks comment on alternative approaches for access reform:
a market-based approach, a prescriptive approach, or some combination
of the two approaches. It seeks comment on which would be the best
means to drive access rates to levels that would enable the Commission
to deregulate the interstate access market. A market-based approach to
access reform would rely on competition to move access prices toward
economic levels, and lift regulatory constraints in phases as
competition allows. The prescriptive approach would entail more
Commission involvement in moving access prices toward economic levels.
The NPRM seeks comment on whether the Commission should require
incumbent LECs to reprice their access services based on TSLRIC
studies. The NPRM also seeks comment on other methods of re-
initializing price cap indices and on increasing the X-Factor as
methods to drive access rates toward forward-looking economic costs, if
the Commission were to adopt a prescriptive approach to access reform.

Impact on Universal Service Proceeding

The NPRM observes that universal service funding may replace some
of the revenues collected by the carrier common line charge or other
interstate access charges, and tentatively concludes that a downward
exogenous cost adjustment to the LECs' price cap indices should be made
to reflect any allocation of additional universal service funds to the
interstate jurisdiction. The NPRM also invites parties to comment on
whether this downward adjustment should be across-the-board, or
targeted to a particular basket or service category.

Transition

IXCs and incumbent LECs agree that a significant ``gap'' exists
between the forward-looking, economic cost of providing unbundled
network elements and the embedded costs on which existing access
charges are based. The NPRM seeks comment on how this gap should be
calculated, and on several specific proposals for permitting LECs an
opportunity to recover some or all of that cost difference. The NPRM
also seeks comment on whether any cost difference resulting from
``under-depreciation'' warrants separate treatment from residual costs
resulting from other factors.

Terminating Access

The NPRM observes that, although the called party chooses the
terminating access provider, terminating access charges are not imposed
on the called party. As a result, competitive LECs may

[[Page 4672]]

exercise market power over terminating access. Therefore, the NPRM
seeks comment on whether there is need for any regulation of
terminating access offered by new entrants.

ESP Exemption

The NPRM and Notice of Inquiry observe that Internet usage has
increased dramatically in recent years. The Commission seeks comment on
the effects of this increased traffic on the public switched network,
and on whether the Commission should address the BOCs' request that the
Commission modify or eliminate the exemption from access charges that
enhanced service providers (ESPs) currently receive.

Regulatory Flexibility Analysis

As required by the Regulatory Flexibility Act, the NPRM contains an
Initial Regulatory Flexibility Analysis which is set forth in Section
XI.C of the NPRM.

Paperwork Reduction Act

This NPRM contains either a proposed or modified information
collection. The Commission, as part of its continuing effort to reduce
paperwork burdens, invites the general public and the Office of
Management and Budget (OMB) to comment on the information collections
contained in this NPRM, as required by the Paperwork Reduction Act of
1995, Public Law No. 104-13. Public and agency comments are due at the
same time as other comments on this NPRM; OMB notification of action is
due 60 days after publication of this summary in the Federal Register.
Comments should address: (a) whether the proposed collection of
information is necessary for the proper performance of the functions of
the Commission, including whether the information shall have practical
utility; (b) the accuracy of the Commission's burden estimates; (c)
ways to enhance the quality, utility, and clarity of the information
collected; and (d) ways to minimize the burden of the collection of
information on the respondents, including the use of automated
collection techniques or other forms of information technology.
Public reporting burden for the collection of information is
estimated as follows:
OMB Approval Number: None.
Title: Access Charge Reform.
Form No.: N/A.
Type of Review: New collection.

----------------------------------------------------------------------------------------------------------------
No. of
Information collection respondents Annual hour burden per response Total annual burden
(approx.)
----------------------------------------------------------------------------------------------------------------
Market-based Approach............ 13 137,986 hours.................. 1,793,818 hours.
Prescriptive Approach............ 13 400 hours...................... 5200 hours.
Transition Mechanism for access 13 220 hours...................... 2840 hours.
charges.
Regulating Terminating Access.... 3497 26 hours....................... 90,922 hours.
----------------------------------------------------------------------------------------------------------------

Total Annual Burden: 1,895,620 hours.
Respondents: Business or other for-profit.
Estimated costs per respondent: $0.
Needs and Uses: The NPRM would use the data submission under
consideration to bring about competition in the access charge market,
and to bring about cost-based access charges.
Dates: Comments are due on or before January 27, 1997, and Reply
Comments are due on or before February 13, 1997. Written comments must
be submitted by the Office of Management and Budget (OMB) on the
proposed and/or modified information collections on or before 60 days
after publication of this summary in the Federal Register.

SYNOPSIS OF NOTICE OF PROPOSED RULEMAKING, AND NOTICE OF INQUIRY

I. Introduction

A. Overview

1. In passing the Telecommunications Act of 1996 (1996 Act),
Congress sought to establish ``a pro-competitive, de-regulatory
national policy framework'' for the United States telecommunications
industry. With this NPRM, we commence the third in a trilogy of actions
that collectively are intended to foster and accelerate the
introduction of efficient competition in all telecommunications
markets, pursuant to the mandate of the 1996 Act. In August 1996, as
required by the 1996 Act, we adopted rules to implement Sections 251
and 252 of the Act, which establish the basic obligations of carriers,
especially in the local exchange and exchange access markets. In
November 1996, pursuant to Section 254 of the Act, the Federal-State
Universal Service Joint Board issued its recommendations to the
Commission for reforming our system of universal service so that
universal service is preserved and advanced, but in a manner that
permits the local exchange and exchange access markets to move from
monopoly to competition. In this proceeding, we seek to reform our
system of interstate access charges to make it compatible with the
competitive paradigm established by the 1996 Act and with state actions
to open local networks to competition.
2. The 1996 Act seeks to develop efficient competition by opening
all telecommunications markets through a pro-competitive, deregulatory
national policy framework. To that end, the 1996 Act eliminates state
and local legal and regulatory barriers to entry, and bans state and
local governmental actions that have the effect of prohibiting any
entity from offering any telecommunications service. The Act also
requires all telecommunications carriers to interconnect directly or
indirectly with other telecommunications carriers in order to
facilitate the creation of a ``network of networks.'' In addition, the
1996 Act requires all local exchange carriers (LECs) to establish
reciprocal compensation arrangements for the transport and termination
of calls, and prohibits incumbent LECs from charging more than the
additional cost incurred to transport and terminate a call. The Act
further directs all LECs to provide number portability and dialing
parity. The 1996 Act confers three fundamental rights on potential
competitors to incumbent LECs: the right to interconnect at rates based
on cost, including a reasonable profit; the right to obtain unbundled
network elements at cost-based rates; and the right to obtain an
incumbent LEC's retail services at wholesale discounts in order to
resell those services.
3. The Act also directs the Commission, after receiving the
recommendations of a Federal-State Joint Board, to define the services
to be supported by federal universal service mechanisms, to support
such services in a manner that is ``explicit and sufficient,'' and to
ensure that ``every telecommunications carrier that provides interstate
telecommunications

[[Page 4673]]

services shall contribute, on an equitable and non-discriminatory
basis, to the specific, predictable and sufficient mechanisms * * * to
preserve and advance universal service.'' The Act further provides that
multiple carriers may seek and obtain designation as carriers eligible
to receive universal service funds for service within a particular
geographic area. As a whole, these provisions of the 1996 Act, when
fully implemented, should greatly reduce the legal, regulatory,
economic, and operational barriers to entry in the local exchange and
exchange access market.
4. The 1996 Act also ends the prohibition against provision of
interLATA services by Bell Operating Companies (BOCs) that was imposed
by the Modification of Final Judgment. United States v. AT&T, 552
F.Supp. 131 (D.D.C. 1982) (MFJ). BOCs were permitted immediately upon
enactment of the 1996 Act to begin to provide certain interLATA
services, including out-of-region and incidental interLATA services. In
order to provide interLATA services originating in-region, however, a
BOC is first required to obtain Commission approval. In order to
approve such an application, the Commission must find that the BOC has
met the requirements of the ``competitive checklist,'' that the BOC
will comply with the Act's separate affiliate requirements, and that
grant of the application is consistent with the public interest,
convenience and necessity.
5. These fundamental changes in the structure and dynamics of the
telecommunications industry wrought by the 1996 Act now necessitate
that the Commission review its existing access charge regulations to
ensure that they are compatible with the 1996 Act's far-reaching
changes. We also seek to eliminate, either now or as soon as changes in
the marketplace permit, any unnecessary regulatory requirements on
incumbent LEC exchange access services. While a broad range of
telecommunications industry participants, including both interexchange
carriers (IXCs) and incumbent LECs, have long advocated for the
Commission to commence a comprehensive review of access charges, the
Act accelerates and intensifies the need for such a review. We commence
this review of the Commission's Part 69 interstate access charge rules,
together with its Part 61 price cap rules, to determine the extent to
which we must revise these rules to take account of the local
competition and Bell entry provisions of the 1996 Act and state actions
to open local networks to competition; to reflect the effects of
potential and actual competition on incumbent LECs' pricing for
interstate access; to implement the Act's direction to end implicit
universal service subsidies in favor of a system of explicit subsidies;
and to establish fair rules of competition for both the local exchange
and interexchange markets, especially as carriers begin to offer
service packages that bundle local and interexchange offerings.
6. We adopted our Part 69 rules at approximately the same time that
AT&T divested its local exchange operations and established the seven
regional Bell companies pursuant to the MFJ. The rules were designed to
promote competition in the interstate, interexchange market by ensuring
that all IXCs would be able to originate and terminate their traffic
over incumbent LEC networks at just, reasonable, and non-discriminatory
rates. While our Part 69 rules expressly contemplated competition in
the interexchange market, they were not designed to address the
potential effects of competition in the local exchange and exchange
access market. Indeed, these rules reflected the reality of the
telecommunications marketplace in 1983--and what was mandated in some
states prior to the 1996 Act--that the incumbent LEC was the monopoly
provider of local exchange and exchange access services. In adopting
the Part 69 rules, the Commission did not seek to eliminate implicit
support flows, but in fact incorporated such flows into the Part 69
rate structure. Our Part 69 rules are designed to be consistent with
our jurisdictional separations rules that govern the allocation of
incumbent LECs' expenses and investment between the interstate and
state jurisdictions. Consequently, the Part 69 access charge system
likely reflects any jurisdictional cost misallocations mandated by our
current separations rules. As such, the Part 69 rules are fundamentally
inconsistent with the competitive market conditions that the 1996 Act
attempts to create. We will soon begin a related proceeding to examine
our jurisdictional separations rules in light of the 1996 Act.
7. Competition isolates and highlights the inefficiencies and
distortions present in the current Part 69 access charge rules. Our
present interstate access charge regime, for example, requires
incumbent LECs to maintain rate structures that have been widely
criticized as economically inefficient. In particular, even though the
costs of the local loop do not vary with the amount of traffic carried
by the loop, our current rules require incumbent LECs to recover a
portion of those costs through traffic-sensitive carrier common line
(CCL) charges imposed on IXCs. While Part 69 mandates per-minute
charges for local switching, the portion of local switching costs that
is associated with ports appears to be driven by the number of lines
connected to the switch, not by the number of minutes of traffic routed
by the switch. The transport interconnection charge (TIC) is a non-
facilities-based, per-minute charge imposed on all switched access
customers regardless of whether they use the incumbent LEC's transport
facilities. Rather than fostering efficient pricing and competition,
these mandatory rate structures inflate usage charges and reduce
charges for connection to the network, in essence overcharging high-
volume end users in order to reduce rates for low-volume end users.
8. Although these inefficient rate structures might have been
sustainable in a local monopoly environment, the introduction of
competition from providers operating their own network facilities or
leasing network facilities as unbundled network elements may undermine
these access rate structures. A competing provider of exchange access
services entering a market can use its own facilities or lease
unbundled network elements to target selectively the incumbent LEC's
high-volume end users with efficiently priced access service offerings.
This places the incumbent LEC at a regulatorily-imposed disadvantage in
competing for high-volume end users, and jeopardizes the source of
revenue that permits the incumbent LEC to cover its costs of providing
service to low-volume end users. At the same time, these inefficient
rate structures and implicit support flows also create artificial
impediments to any new entrants that might seek to serve the subsidized
end users, because they must attempt to do so without the benefit of a
subsidy. As a result, these access rate structures may inhibit the
development of competition for service to low-volume end users.
9. Competition also allows entrants to arbitrage between different
pricing systems. For example, if transport and termination rates are
lower than access charge rates, a competitor would have an incentive to
funnel interexchange terminating access traffic through transport and
termination arrangements where possible. Whether traffic originates
locally or from a distant exchange, transport and termination of
traffic by a particular LEC involves the same network functions.
Ultimately, the rates that local carriers impose for the transport and
termination of local traffic

[[Page 4674]]

and for the transport and termination of long distance should converge.
As a legal matter, however, transport and termination of local traffic
by an incumbent LEC are different services from access service provided
by that incumbent LEC for long-distance telecommunications. Transport
and termination of local traffic are governed by 251(b)(5) and
252(d)(2), while access charges for interstate long-distance traffic
are governed by sections 201 and 202 of the Act.
10. This Commission has previously examined the impact of state-led
reforms in New York and Illinois on the existing access charge rate
structures, and has concluded that some interim modifications to the
incumbent LECs' rate structures were warranted where states had
implemented market-opening measures similar to those mandated by the
1996 Act. The Commission concluded that competitive developments in the
New York City, Chicago, and Grand Rapids LATAs justified granting NYNEX
and Ameritech limited waivers of our access charge rules to allow them
to recover the TIC on a geographically deaveraged basis and to bulk
bill some of their common line costs rather than recovering them
through the per-minute CCL charge.
11. In addition to their criticisms of the access charge rate
structures, IXCs, in particular, have insisted that the rate levels of
access charges are excessive and must be reduced. AT&T asserts, for
instance, that the current average per-minute access rates of the BOCs
are nearly seven times the forward-looking economic cost of providing
that service, and that total interstate access charges collected today
from interexchange carriers exceed forward-looking economic cost by $11
billion, or 70 percent of the total. IXCs argue that, if access prices
are allowed to remain at current levels, they will face an
anticompetitive disadvantage both in the local exchange market and in
the interexchange market whenever an incumbent LEC also provides
interexchange services.
12. In the Notice of Proposed Rulemaking portion of this item, we
initiate a comprehensive review of our interstate access charge regime.
We propose a series of reforms to the existing access charge rate
structure rules that are designed to eliminate the inefficiencies
summarized above. Our goal is to end up with access charge rate
structures that a competitive market for access services would produce.
13. We also outline in this item two possible approaches for
addressing claims that existing access charge levels are excessive, for
establishing a transition to access charges that more closely reflect
economic costs, and for deregulating incumbent LEC exchange access
services as competition develops in the local exchange and exchange
access market. The first is a market-based approach under which we
would rely on potential and actual competition from new facilities-
based providers and entrants purchasing unbundled elements to drive
prices for interstate access services toward economic cost. Under this
approach, we would gradually relax and ultimately remove existing Part
69 rate structure requirements and Part 61 restrictions on rate level
changes as marketplace forces provide the discipline on incumbent LEC
access prices that our rules are currently needed to apply. The second
is a more prescriptive approach to access reform under which this
Commission would specify the nature and timing of the changes to the
existing rate levels. These approaches could be employed singly or in
combination. We emphasize, however, that under either approach, our
ultimate goal is the same--adoption of revisions to our access charge
rules that will foster competition for these services and enable
marketplace forces to eliminate the need for price regulation of these
services.
14. Under the market-based approach to access reform, we propose
two intermediate phases, each of which would require an incumbent LEC
to demonstrate that certain circumstances exist in order to obtain
greater pricing flexibility than the current rules permit. We also
propose that an incumbent LEC's access services be deregulated, that
is, removed from price cap and tariff regulation, once they are subject
to substantial competition. At the first phase, an incumbent LEC would
have to show that its local market has been opened to competition and
potential rivals are able to enter through any of the three avenues
mandated by the 1996 Act--interconnection, unbundled network elements,
and resale. We ask whether an incumbent LEC making such a showing
should be permitted to deaverage geographically its rates for
interstate access services, to offer volume and term discounts, and to
offer contract-based tariff offerings for interstate access. We also
ask whether new services should be deregulated at that phase. At the
second phase in our market-based approach, an incumbent LEC would have
to show that it faces actual competition in the local exchange
marketplace. We ask whether, at that phase, we should eliminate service
categories within baskets, permit incumbent LECs to engage in
differential pricing of access to residential, single-line business,
and multi-line business customers, and eliminate mandatory rate
structures for local switching and transport. We also seek comment on
combining the trunking and traffic-sensitive baskets at that stage.
15. A second option for access reform is a more prescriptive
approach. Marketplace forces alone may not be sufficient to drive
access rates to forward-looking economic costs. Under this approach, we
ask whether we should require incumbent LECs to move prices for
interstate access in their service areas to more economically-efficient
levels pursuant to rules adopted in this proceeding. As with a market-
based approach, we also propose under this prescriptive approach that
we remove incumbent LEC access services subject to substantial
competition from price cap and tariff regulation.
16. In Section II, below, we seek comment on issues affecting the
scope of this proceeding. In Section III, we propose changes to our
existing interstate access charge rate structures to make them more
conducive to economic efficiency. We also discuss in Section III the
reassignment of certain network facilities costs that under current
rules are allocated to the Transport Interconnection Charge for
recovery. In Section IV, we summarize our two basic approaches to
access reform and propose eliminating price cap and tariff regulation
for services subject to substantial competition. We also there seek
comment on whether and when one approach or the other is preferable, or
if a combination of these approaches should be used, and also, how such
a combined approach should be structured. In Section V, we discuss in
detail a market-based approach to access reform. In Section VI, we
outline a more prescriptive approach to access reform.
17. In Section VII, we first discuss adjustments to the current
interstate access charge regime that may be required due to actions
taken in the Federal-State Universal Service Joint Board proceeding. We
also raise in that section the issue of whether there is a significant
difference between embedded incumbent LEC costs currently allocated to
the interstate jurisdiction and recovered through access charges, and
the forward-looking economic costs of interstate access. To the extent
that implementation of access charge reform is expected to cause a
significant reduction in incumbent LEC

[[Page 4675]]

access revenues from current levels, we seek comment on whether such
LECs are entitled or should be permitted to recover some or all of that
difference through a temporary special recovery mechanism.
18. In Section VIII, we seek comment on possible additional changes
to our access charge rules that may be necessary to make them
compatible with the competitive market envisioned by the 1996 Act,
including whether there is any special need for regulating terminating
interstate access service and ``open-end'' services, whether provided
by incumbent LECs or new entrants. We also discuss possible changes to
our existing treatment of the use by interstate information service
providers, such as Internet service providers, of incumbent LEC
switched access networks to originate interstate traffic. In Section
IX, we issue a Report and Order implementing the changes to the LEC
price cap rules discussed above that were proposed in the Second
Further Notice of Proposed Rulemaking in CC Docket No. 94-1, Further
Notice of Proposed Rulemaking in CC Docket No. 93-124, and Second
Further Notice of Proposed Rulemaking in CC Docket No. 93-197, 60 FR
49539 (September 26, 1995) (Price Cap Second FNPRM).
19. Finally, in Section X, we issue a Notice of Inquiry to examine
fundamental issues about the implications of usage of the public
switched network by information service and Internet access providers.

B. Background

1. Regulation of Interstate Exchange Access Service
20. For much of this century, most telephone subscribers obtained
both local and long distance services from the same company, the pre-
divestiture, integrated Bell System, owned and operated by AT&T.
Although some telephone subscribers received local telephone service
from non-Bell independent companies, AT&T still provided long distance
service to these customers. AT&T compensated its Bell Operating Company
subsidiaries for originating and terminating interstate calls through
revenue division arrangements and compensated the independent companies
for access pursuant to settlement agreements. In the 1970s, MCI and
other IXCs (then called ``other common carriers,'' or OCCs) began to
provide switched long distance services in competition with AT&T Long
Lines by attaching their own switches to local business lines purchased
from the incumbent LECs and reselling AT&T services. In 1979, AT&T and
the OCCs, under Commission supervision, entered into a comprehensive
interim agreement, known as Exchange Network Facilities for Interstate
Access (ENFIA), to replace the local business rates with a different
set of rates AT&T would charge OCCs for originating and terminating
interstate traffic over the facilities of its local exchange
affiliates. AT&T Long Lines continued to compensate its local exchange
affiliates and the independent exchange carriers for the use of their
facilities pursuant to their division of revenues and settlements
arrangements. Following a lengthy proceeding, the Commission in 1983
adopted uniform access charge rules that govern the provision of
interstate access services by all incumbent LECs, BOCs as well as
independents.
21. The costs that incumbent LECs recover through interstate access
charges are determined by a multi-step process. Incumbent LECs first
record all their booked expenses and their cost of investment in the
accounts prescribed by the Commission's Part 32 Uniform System of
Accounts (USOA). They next divide the recorded investment and expenses
between regulated and nonregulated services, pursuant to Part 64 of our
Rules. Incumbent LECs then divide regulated expenses and investment
between state and interstate jurisdictions pursuant to the separations
procedures contained in Part 36 of the Commission's rules. Incumbent
LECs then apportion their regulated interstate costs among the
interstate access and interexchange service categories. Finally, to
recover their access costs, incumbent LECs charge IXCs and end users
for access services in accordance with the Part 69 access charge rules
and, for incumbent LECs under price cap regulation, with the provisions
of the Part 61 price cap rules.
22. Commentators have pointed out that, because each of these
divisions of costs occurs pursuant to regulation rather than through
operation of a competitive marketplace, these divisions are subject to
distortions. In particular, commentators have focused on the
separations process, which apportions costs between the intrastate and
interstate jurisdictions. These commentators suggest that separations
allocation, in particular allocation of common plant, reflects not only
economic considerations, but also public policy considerations related
to universal service and the desirability of low local rates. To the
extent these allocation decisions have resulted in greater allocations
to interstate services than would be economically justified, these
distortions flow through Parts 69 and 61 into access charges.
23. Part 69 establishes two basic categories of access services:
special access services and switched access services. Special access
services do not use the local switch; they use dedicated facilities
that run directly between the end user and the IXC's point of presence
(POP). By contrast, switched access services use the local exchange
switch to route originating and terminating interstate toll calls. The
special access category includes a wide variety of services and
facilities, such as wideband data, video, and program audio services.
The Commission does not prescribe specific rate elements for special
access services in Part 69. Part 69 does, however, establish specific
switched access elements and a mandatory switched access rate structure
for each element tailored to the nature of each service in order to
promote competition in the interexchange services market and eliminate
discrimination within or among services. In general, we have attempted
to move toward rate structures that create incentives for the most
efficient utilization of all telecommunications facilities. These
elements generally correspond to the components of switched access
service, as shown in Figure 1.
24. Interoffice transmission services, known as transport services,
carry interstate switched access traffic between an IXC's POP and the
end office that serves the end user customer. Incumbent LEC
transmission facilities that carry interstate traffic between an IXC's
POP and the incumbent LEC end office serving the POP (called the
serving wire center or SWC) are known as entrance facilities. Part 69
requires incumbent LECs to impose flat-rate charges on IXCs to recover
the costs of entrance facilities. Incumbent LECs currently offer two
types of interstate switched transport service between a SWC and an end
user's end office. Under the first service, direct-trunked transport,
calls are transported between the SWC and the end office by means of a
direct trunk that does not pass through an intervening switch. To
recover the costs of direct-trunked transport facilities, Part 69
requires incumbent LECs to impose a flat-rate charge on IXCs. The
second service, tandem-switched transport, routes calls from the SWC to
the end office through a tandem switch located between the SWC and the
end office. Traffic travels over a dedicated circuit from the SWC to
the tandem switch, and then, over a shared circuit that carries the
calls of many different IXCs, from the tandem switch to the incumbent
LEC end office. For

[[Page 4676]]

tandem-switched transport, Part 69 prescribes a per-minute tandem-
switching charge and a per-minute transmission charge assessed on IXCs.
25. Incumbent LEC end offices serving end users switch interstate
traffic between the transport trunks carrying traffic to and from the
IXC POPs and the end users' local loops. Our Part 69 rules require
incumbent LECs to recover the costs of the local switch through a per-
minute local switching charge assessed on IXCs. Part 69 also requires
incumbent LECs to impose a per-minute TIC on interstate switched access
traffic. We note that an incumbent LEC's provision of transport and
local switching for terminating interstate traffic is functionally the
same as its provision of transport and termination service under the
1996 Act.
26. Finally, incumbent LECs assess end users a flat end user common
line charge (EUCL), also known as the subscriber line charge (SLC), to
recoup part or all of the local loop costs allocated to the interstate
jurisdiction. The SLC currently may not exceed the lesser of the actual
interstate loop cost, or $6 per month for multi-line business customers
and $3.50 for residential and single-line business customers. In
addition, IXCs are assessed a per-minute CCL charge to recover the
remaining interstate allocation of loop costs that is not recovered
through SLCs. IXCs with at least .05 percent of the total common lines
presubscribed to IXCs in all study areas are also assessed Universal
Service Fund and Lifeline service charges based on each IXC's share of
presubscribed access lines. In addition, Part 69 identifies several
other charges, including those for signalling and database queries.
27. The specific access charges currently assessed on interexchange
carriers and end users under our rules vary among incumbent LECs
because their embedded costs, on which access charges (even for price
cap incumbent LECs) are based, vary from state to state. Significant
differences in factors that affect a carrier's cost of providing
service, such as the topography and population density of its service
area, are reflected in different prices for access service.
28. The total regulated revenues of Class A incumbent LECs by
service rate elements are shown in Table 1, below. As indicated there,
more than 25 percent of the incumbent LECs' total regulated revenues
are derived from interstate access services. In addition, of the $11.9
billion in interstate switched access revenues that incumbent LECs
recover from IXCs, approximately 90 percent ($10.8 billion) is
recovered through per-minute charges (i.e., CCL, TIC, and local
switching).

Table 1.-- Class A Incumbent Local Exchange Carriers' 1995 Total
Regulated Revenues
[In billions]
------------------------------------------------------------------------

------------------------------------------------------------------------
Interstate Revenues:
Subscriber Line Charge.................... ........... $7.1
Per-Minute Switched Access Charges: ........... ...........
Carrier Common Line................... ........... 3.7
Transport Interconnection Charge...... ........... 2.9
Local Switching (and other T-S)....... ........... 4.2
-------------------------
Total Per-Minute Switched Access
Charges.......................... ........... 10.8
Transport (Facilities).................... ........... 1.1
Special Access............................ ........... 3.1
Information............................... ........... 0.3
Miscellaneous............................. ........... 1.0
-------------------------
Total Interstate Access Revenues........ ........... 23.4
Intrastate Revenues:
Basic Local Exchange Service.............. ........... 32.0
Intrastate Access......................... ........... 7.3
Other Intrastate Services................. ........... 28.0
-------------------------
Total Intrastate Revenues............... ........... 67.4
=========================
Total Regulated Revenues................ ........... 90.8
------------------------------------------------------------------------

29. The Part 61 price cap rules give incumbent LECs that are
subject to price cap regulation--generally the largest incumbent LECs--
a degree of flexibility in establishing the actual levels of their
access rates. Incumbent LEC price cap regulation is designed to promote
economic efficiency by easing restrictions on overall profits while
setting price ceilings at reasonable levels. The incumbent LEC price
cap plan is designed to simulate some of the efficiency incentives
found in competitive markets and to act as a transitional regulatory
scheme until the advent of actual competition makes price cap
regulation unnecessary. Price cap regulation encourages incumbent LECs
to improve their efficiency by harnessing profit-making incentives to
reduce costs, invest efficiently in new plant and facilities, and
develop and deploy innovative service offerings.
30. The price cap rules split interstate access services into three
discrete groups, called baskets. Two baskets are further grouped into
narrower service categories and subcategories. Price cap incumbent LECs
have some ability to raise and lower the charges for elements or
services that are included in the same basket as long as the actual
price index (API) for the basket does not exceed the price cap index
(PCI) for that basket. This pricing flexibility is limited by banding
rules that establish separate upper and lower pricing bands for each
service category or subcategory within a basket. The price cap for each
basket and the pricing bands for each service category and subcategory
are adjusted annually based on defined formulas. The price cap rules
place services subject to different competitive pressures into
different baskets, service categories, and service subcategories. These
measures limit the incumbent LECs' ability to offset reductions in
service prices that are subject to competition with increases in
service prices that are not subject to competition.

[[Page 4677]]

2. The 1996 Telecommunications Act
31. The 1996 Act seeks to open for all carriers the local and long
distance telecommunications markets to competition by removing
economic, regulatory, and operational impediments that have protected
monopolies in the local exchange market. The 1996 Act requires
incumbent LECs to open their networks to competition, and permits the
BOCs, upon meeting certain conditions, to enter the interLATA market
within their respective service areas. The 1996 Act also requires the
Commission to forbear from applying any regulation or any provision of
the Communications Act to telecommunications carriers or
telecommunications services, or classes thereof, if the Commission
determines that certain specified conditions are satisfied. The
Commission must forbear if the Commission determines: (1) That
enforcement of the regulation or provision is not necessary to ensure
that the charges, practices, classifications, or regulations by, for,
or in connection with that telecommunications carrier or service are
just and reasonable and are not unjustly or unreasonably
discriminatory; (2) that enforcement is not necessary for the
protection of consumers; and (3) that forbearance consistent with the
public interest. The forbearance authority applies to all provisions of
the Communications Act, except the provisions added by the 1996 Act
relating to interconnection and BOC entry into long-distance services.
a. Local Competition. 32. The local competition provisions of the
1996 Act added new sections 251, 252, and 253 to the Communications
Act. Section 251 establishes general interconnection obligations for
all telecommunications carriers, delineates further obligations for
LECs, and prescribes additional requirements for incumbent LECs.
Sections 251(c)(2) and (c)(3) require that incumbent LECs' ``rates,
terms, and conditions'' for interconnection, unbundled network elements
be ``just, reasonable, and nondiscriminatory in accordance with * * *
the requirements of sections 251 and 252.'' Section 252 generally sets
forth the procedures that state commissions, incumbent LECs, and new
entrants must follow to implement the requirements of section 251 and
establish specific interconnection arrangements. Finally, Section 253
bars state and local regulations that prohibit or have the effect of
prohibiting entities from offering telecommunications services.
33. The terms and conditions under which such facilities and
services are made available by incumbent LECs may be the subject of
negotiated agreements between an incumbent LEC and a requesting
carrier. If an incumbent LEC and requesting carrier are unable to reach
a negotiated agreement, either party may ask a state to arbitrate the
disputed issues.
34. As required by the 1996 Act, incumbent LECs must provide
interconnection and nondiscriminatory access to network elements on an
unbundled basis. In implementing the Act, we identified the following
minimum set of network elements that incumbent LECs must provide to
requesting telecommunications carriers, many of which are analogous to
interstate access rate elements: Network interface devices; local
loops; local and tandem switches (including all software features
provided by such switches); interoffice transmission facilities;
signalling and call-related database facilities; operations support
systems and information; and operator and directory assistance
facilities. States may require unbundling of additional elements.
b. Universal Service. 35. Section 254, added by the 1996 Act, for
the first time codifies the role of universal service in federal
telecommunications regulation. Section 254 directs the Commission to
commence a proceeding to implement sections 254 and 214(e) of the Act,
and to refer such proceeding to a Federal-State Joint Board. The Joint
Board was given nine months to make recommendations to the Commission,
including a definition of the services to be supported by federal
universal service support mechanisms and a timetable for the
implementation of such recommendations. We initiated the Joint Board
proceeding in March 1996, and the Joint Board issued its Recommended
Decision in November 1996.
36. The 1996 Act established several requirements for federal
universal service support mechanisms. The Commission, after receiving
the recommendations of the Joint Board, is to designate specific
services for federal universal service support. Such support is to be
available for the provision, maintenance and upgrading of facilities
and services for which the support is intended, and not for other
purposes. Such support is to be available to all eligible
telecommunications carriers. Such support is to be explicit, and, as
the Conference Report makes clear, shall not be implicit. Such support
is also to be funded on an equitable and non-discriminatory basis by
all telecommunications carriers that provide interstate
telecommunications services.
37. In its Recommended Decision, the Federal-State Joint Board
concluded that several universal service mechanisms currently
implemented through the jurisdictional separations and access charge
structures must be replaced or modified in order to meet the Act's
requirements that support mechanisms be explicit, specific, predictable
and sufficient to preserve and advance universal service. Accordingly,
the Joint Board recommended that changes be made to the high cost
assistance fund, and that the Dial Equipment Minutes (DEM) weighting
program and Long Term Support (LTS) be phased out, eliminated, and
replaced by a new explicit universal service mechanism. If the
Commission adopts the Joint Board's recommendations, our access charge
rules must be adjusted to reflect these changes, to prevent incumbent
LECs from recovering the same costs twice, and to provide the same
subsidies to non-incumbent LECs as are provided to incumbent LECs for
serving high-cost or low-income subscribers.
38. At the same time, we must also examine other features of our
access charge system to determine whether they contain implicit
universal service support, in contravention of the Act's requirement
that all universal service support be explicit and its requirements as
to funding of federal universal service support. In our Notice of
Proposed Rulemaking and Order Establishing Joint Board, 61 FR 10499
(March 19, 1996) (Universal Service NPRM), we asked whether the CCL
charge is an implicit universal service support mechanism. While the
Joint Board did not reach this question, it suggested that it would be
desirable for the CCL charge to be restructured to be collected on a
flat-rate rather than a per-minute basis because per-minute collection
is economically inefficient.
39. We continue to recognize that, because of the role that access
charges have played in funding and maintaining universal service, it is
important to implement changes in the access charge system together
with complementary changes in the universal service system. In Sections
III.B., below, we discuss whether the CCL charge must be restructured
to comply with the Act's universal service requirements.
3. Need for Access Reform
40. There is a consensus among virtually all participants in the
telecommunications industry on the need to reform our interstate access
charge rules. IXCs and incumbent LECs, for example, agree that current
per-minute interstate access charges exceed economically efficient
levels and that,

[[Page 4678]]

consequently, per-minute interstate access charges must be reduced.
They differ, however, as to the reasons why current charges exceed
forward-looking economic cost, the aggregate amount by which current
charges exceed economic cost, and the effects of particular factors
(e.g., alleged excessively-long prescribed depreciation schedules,
separations distortions, strategic investments, and operational
inefficiency). They also disagree on what portion, if any, of the
difference between forward-looking economic cost and the portion of
embedded costs allocated to the interstate jurisdiction incumbent LECs
should be permitted to recover.
41. Current access charges distort competition in the markets for
local exchange access. Our access charge rules create incentives for
IXCs to bypass the LEC switched access network for reasons that have
nothing to do with the economics of operating an access network. This
uneconomic bypass may occur for a variety of reasons; rates may be too
high, or our access charge rules may require rates for a LEC access
service to be too high in relation to the rates for an alternative LEC
service or for a comparable service offered by an alternative supplier.
Inefficient entry may occur if the price for a package of jointly-
provided services is above economic cost, even if the LEC would
actually be the most efficient provider of the service. Conversely, if
a package of jointly-provided services, including access, is priced too
low because of regulatory requirements, efficient entry by an otherwise
efficient provider may be precluded. In either case, the total cost of
telecommunications service will not be as low as it could be if all
services were priced at economic levels, thereby providing accurate
price signals to all market participants. High access charges may also
keep long-distance rates higher than they would otherwise be, which
restricts demand for service and harms long-distance consumers. We
describe more fully some of the causes of uneconomic bypass below.
42. Inefficient, mandatory rate structures are one reason that per-
minute interstate access charges exceed the economic cost of providing
service to certain customers. One example is the recovery through a
per-minute CCL charge of part of the allocated interstate costs for
incumbent LECs to provide local loops to end users. Recovering on a
per-minute basis the cost of the local loop, which is a fixed cost that
does not vary with usage, results in high-volume toll users paying
charges to their IXCs that exceed the cost of serving those customers,
while some low-volume toll users may pay rates that are below cost.
Mandatory per-minute charges for local switching, which probably has
significant fixed costs, also results in IXCs paying access charges for
high-volume toll users that exceed the cost of serving those customers.
Finally, the requirement that most rates be averaged on a ``study
area'' basis (i.e. generally, state-wide) precludes incumbent LECs from
setting rates to reflect cost differences in high-density and low-
density areas, leaving incumbents vulnerable to niche entry in high-
density areas, and precluding entry by firms that might otherwise seek
to serve low-density areas.
43. Assignment of costs to the wrong elements may also contribute
to high per-minute interstate access rates. As discussed in Section
III.E. below, the TIC currently recovers some costs that may be
appropriately included in the rates for services in the trunking
basket. This also results in higher-volume switched access toll users
paying rates that exceed cost.
44. Incumbent LECs, and to a lesser degree others such as AT&T,
argue that another reason current interstate access charges exceed
forward-looking economic cost is the over-allocation of costs to the
interstate jurisdiction in the separations process, which allocates
costs between the interstate and intrastate jurisdictions. According to
these parties, the revenues now recovered through interstate switched
access rate elements in the traffic-sensitive basket exceed the cost of
providing interstate switched access services, while intrastate rates
do not recover enough to cover the economic cost of providing
intrastate exchange and exchange access services.
45. A major focus of the IXCs, on the other hand, is the contention
that current interstate access charges exceed economic cost levels
because the incumbent LECs are inefficient. As a result, they argue,
the incumbent LECs' unseparated rate base is higher than it should be,
and all prices in both the interstate and intrastate jurisdictions
exceed economic cost-based levels that an efficient provider would
charge.
46. Several parties, including AT&T and MCI, argue that, to the
extent access services are not available to IXCs at their forward-
looking economic cost, incumbent LECs and their long-distance
affiliates will have an unfair competitive advantage in the market for
long-distance services. According to these IXCs, this is because the
incumbent LEC's affiliate's effective cost of obtaining ``in region''
access service is the incremental cost that its affiliated LEC incurs
in providing access. If an incumbent LEC that also provides long-
distance service can charge unaffiliated IXCs access prices that are
significantly higher than forward-looking economic cost, the IXCs argue
that the incumbent LEC may be able to create a ``price squeeze'' by
raising rivals' costs. Under these circumstances, the incumbent LEC
affiliate could lower its retail price to reflect its cost advantage,
and competing unaffiliated IXCs would be forced either to match the
price reduction and absorb profit margin reductions or maintain their
prices at existing levels and accept reductions in their market shares.
47. Additionally, to the extent that unbundled network elements
become available from incumbent LECs at economically efficient prices,
IXCs will have the ability to avoid paying access charges by purchasing
such elements to provide both local exchange and exchange access
service to end-user customers. IXCs may also take access service from a
competitive LEC that either provides its own facilities or takes
unbundled elements from the incumbent LEC. The availability of
unbundled network elements at their forward-looking economic cost would
appear to reduce the danger of a price squeeze insofar as IXCs can use
those elements to provide their own access to customers for whom they
are the local service provider. There may, however, be limits on the
extent to which access charges can be replaced by unbundled elements in
either the short or long-term, because an IXC may have to take access
service for those end-user customers for which it does not provide
local service.
48. Apart from any revisions to our rules that we may adopt in this
proceeding, the availability of this alternative to interstate access
service may force incumbent LECs to move their access charges to more
economically efficient levels, and may necessitate relief from
mandatory access charge rate structures that are not economically
efficient. We seek in this proceeding to explore ways in which we can
harness competitive forces to further our efforts to make our system of
interstate access charges more economically rational and compatible
with competitive local markets. We also seek to adopt rules and
policies that will facilitate a smooth transition from the current
system to one that can be sustained in competitive local markets.

II. Access Reform for Incumbent Local Exchange Carriers

A. Application of Reforms to Price Cap Carriers and Non-Price Cap
Carriers

49. Because our access charge rules apply only to dominant LECs,
the focus

[[Page 4679]]

of this proceeding is reform of our access charge regime that currently
applies to incumbent LECs. Although many of the reforms we propose in
this NPRM may be desirable changes to our regulation of non-price cap
incumbent LECs, we are limiting the scope of this proceeding to
incumbent LECs subject to price cap regulation, with limited exceptions
discussed below.
50. We note that price cap regulation governs almost 91 percent of
the interstate access charge revenues and more than 92 percent of the
total incumbent LEC access lines. Currently, all ten of the incumbent
LECs with more than two million access lines and 13 of the 17 non-NECA
incumbent LECs with more than 50,000 access lines are subject to price
cap regulation. The remaining incumbent LECs are telephone companies
subject to various forms of rate-of-return regulation. Therefore, even
though this proceeding applies only to price cap incumbent LECs, it
would nonetheless affect the vast majority of all access lines and
interstate access revenues.
51. The need for access reform is most immediate for those
incumbent LECs that may soon be subject to competition from the
availability of unbundled network elements. These are primarily the
price cap incumbent LECs. Many, if not all, non-price-cap incumbent
LECs may be exempt from, or eligible for a modification or suspension
of, the interconnection and unbundling requirements of the 1996 Act. By
contrast, all incumbent LECs that are ineligible for section 251(f)
exemptions, suspensions, or modifications are incumbent price cap LECs.
Because the latter incumbent LECs must fulfill the section 251(b) and
(c) duties to provide interconnection and unbundled elements to new
entrants, these incumbent LECs are likely to face significant
competition in the interstate exchange access market from new entrants
using unbundled network elements before the small and mid-sized rate-
of-return incumbent LECs face such competition. Although several
incumbent price cap LECs may be eligible to request suspension or
modification under section 251(f)(2) (e.g., Citizens, Frontier, Aliant,
and SNET), we note that these LECs may not receive state approval of
any such petition for suspension or modification. Thus, we conclude
that we should focus our efforts here on the immediate task of
reforming the access charge regime for price cap incumbent LECs. We
plan to initiate a separate proceeding in 1997 to undertake
comprehensive review of our regulation of rate-of-return incumbent
LECs. That inquiry will take up the issue of whether substantial
changes in our Part 69 cost allocation rules for the development of
access charges for rate-of-return carriers are needed.
52. We propose, however, limited exceptions to our decision to
confine this proceeding to price cap incumbent LECs. Specifically, we
propose to apply to all incumbent LECs the rules discussed in Section
VII.A, which addresses allocation of universal service support to the
interstate revenue requirement, and Sections III.D and E, which propose
reforms to the transport rate structure, including the TIC. Because
rate-of-return incumbent LECs will collect revenues from the new
universal service support mechanism, we need to determine in this
proceeding how these payments should alter the access charges currently
assessed by such incumbent LECs. Moreover, any changes we adopt to the
TIC pursuant to the court's remand in Competitive Telecommunications
Association v. FCC, 87 F.3d 522 (D.C. Cir. 1996) (CompTel v. FCC)
should also apply to rate-of-return incumbent LECs because their
transport rules were subject to the rates that were remanded by the
court in that decision. In Section III.B, we seek comment on whether we
should also apply our proposed changes to the common line rate
structure to rate-of-return incumbent LECs. In Section VIII.C., we seek
comment on updating the Part 69 access rules in light of various
developments. We seek comment on these tentative conclusions regarding
the scope of this proceeding. We further invite parties to comment on
the effect of these proposals and tentative conclusions on small
business entities, including small incumbent LECs and new entrants.

B. Applicability of Part 69 to Unbundled Elements

53. Pursuant to our jurisdiction over interstate access charges
under section 201 of the Act, we tentatively conclude that unbundled
network elements should be excluded from the Part 69 access charge
regime, regardless of whether the carrier that purchases unbundled
network elements uses those elements to provide local exchange services
or exchange access services. Thus, when using unbundled network
elements to originate and terminate interstate calls, requesting
carriers should not be required to pay the Part 69 access charges
corresponding to those elements. The 1996 Act permits
telecommunications carriers that purchase access to unbundled network
elements from incumbent LECs to use those elements to provide all
telecommunications services to customers, including access in order to
originate and terminate interstate calls. The 1996 Act in turn requires
requesting carriers to pay cost-based rates to compensate incumbent
LECs for all such use of the unbundled network elements. Thus, the
requesting carrier has already paid for the ability to originate and
terminate interstate calls. Nothing in the text of the 1996 Act compels
telecommunications carriers that use unbundled elements to pay
interstate access charges, nor limits these carriers' ability to use
unbundled elements to originate and terminate interstate calls. Nothing
in sections 201-205 of the Act requires a contrary result. We seek
comment on this tentative conclusion. We also note that the Part 69
interstate access charge rules do not apply to the transport and
termination of local traffic provided pursuant to section 251(b)(5).

III. Rate Structure Modifications

A. Overview

54. We tentatively conclude that several provisions in Part 69 of
our rules compel incumbent LECs to impose charges for access services
in a manner that does not accurately reflect the way those LECs incur
the costs of providing those services. For example, generally the costs
associated with the local loop are non-traffic-sensitive (NTS), but our
rules require incumbent LECs to recover a portion of those costs
through per-minute CCL charges. Similarly, at least some portion of the
costs of local switching is NTS, but our rules require incumbent LECs
to recover all local switching costs through per-minute charges. In
these and other cases, our rate structure rules do not send accurate
pricing signals to customers, and consequently, encourage inefficient
use of telecommunications services. These inaccurate pricing signals
encourage uneconomic bypass of incumbent LEC facilities and could very
well skew or limit the development of competition in the markets for
telecommunications services. Furthermore, these rates may not be
sustainable in the long run if unbundled network elements are made
available at cost-based prices and used to provide exchange access
services.
55. We propose to revise our rate structure requirements for
switched access service by eliminating some rate structure
requirements, prescribing some new requirements, or a combination of
both. We tentatively conclude that, regardless of which of the
approaches to access reform discussed in Section IV we choose,
establishing more economically rational rate

[[Page 4680]]

structure rules is a necessary first step in the new procompetitive
era. We seek through these changes to establish rate structures for
interstate access services that send more accurate pricing signals to
both consumers and competitors. Below, we invite comment on proposals
for rate structure rule changes to be applicable to all price cap
incumbent LECs. Specifically, we invite comment on rate structure rule
changes for common line, local switching, and transport. We then seek
comment on a number of proposals for phasing out the transport
interconnection charge, and on establishing rate structure rules for
SS7 signalling services. With the exception of the transport rule
revisions considered in Section III.D, and the revisions to the TIC
considered in Section III.E, we propose applying the rate structure
rule changes discussed in Section III only to incumbent price cap LECs.
As noted in Section II, rate structure revisions for non-price cap
incumbent LECs will be addressed in a separate proceeding.

B. Common Line

1. Background
56. Common line costs are the costs associated with the line
connecting the end user's premises with the local switch that have been
assigned to the interstate jurisdiction through the jurisdictional
separations process. These costs are not traffic-sensitive. A portion
of the incumbent LEC's common line costs are recovered through EUCL
charges, also called SLCs. These charges currently are limited to the
actual cost of the interstate portion of the local loop or $3.50 per
month for residential and single line business users, and $6.00 per
month for multi-line business users. The remaining common line costs,
if any, are recovered through carrier common line charges, which are
per-minute rates imposed on access customers.
57. The current common line rate structure, in which only a portion
of common line costs are recovered through flat monthly rates, does not
reflect the manner in which loop costs are incurred. As a result, the
common line rate structure forces incumbent LECs to recover costs in an
economically inefficient manner, and so may cause inefficient use of
the network and uneconomic bypass, as discussed in Section III.A,
above. Furthermore, in the original MTS and WATS Market Structure,
Third Report and Order, CC Docket No. 78-72, Phase 1, 48 FR 10319
(March 11, 1983) (Access Charge Order), the Commission found that
recovering NTS costs through flat monthly charges imposed on end users
by incumbent LECs would promote optimal utilization of
telecommunications facilities. The Commission decided at that time,
however, to place a limit on the SLC, and, consequently, required
incumbent LECs to recover the remainder of their common line costs
through per-minute CCL rates. The current CCL charge has been uniformly
criticized by both incumbent LECs and IXCs because it discourages
efficient use of the network and encourages uneconomic bypass. We
invite comment below on alternative common line rate structures.
2. Alternative Methods of Recovery of CCL Portion of Subscriber Loop
Costs
58. The Joint Board in its Recommended Decision recognized that the
current, traffic-sensitive CCL charge structure is economically
inefficient because the charge requires incumbent LECs to recover a
non-usage-sensitive cost in part through a usage-sensitive charge. The
Joint Board suggested that the Commission change the existing rate
structure so that incumbent LECs are no longer required to recover any
of the NTS cost of the local loop from IXCs on a per-minute basis. The
Joint Board noted that it would be preferable for costs related to the
loop to be recovered in a manner that is consistent with the manner in
which the costs are incurred. Because the cost of a loop generally does
not vary with the minutes of use transmitted over the loop, the Joint
Board concluded that the current CCL charge that mandates recovery of a
portion of loop costs through per-minute charges is an inefficient
cost-recovery mechanism.
59. We seek comment on possible revisions to the current CCL charge
structure so that incumbent price cap LECs are no longer required to
recover any of the NTS costs of the loop from IXCs on a traffic-
sensitive basis. One possible alternative, mentioned by the Joint
Board, involves permitting incumbent LECs to recover the costs not
recovered from SLCs through a flat, per-line charge paid by IXCs. An
administratively simple mechanism for recovery of such a flat-rate
charge would be to assess it against each customer's presubscribed
interexchange carrier (PIC). If carriers seek to pass on that charge to
end users, however, such an approach might encourage end users not to
select a PIC. To resolve this problem, the Joint Board suggested that
the Commission allow incumbent LECs to collect the flat-rate charge
that would otherwise be assessed against the PIC directly from any
customer who elects not to choose a PIC. We seek comment on this
approach and invite parties to discuss the potential problem created
when end-user customers have selected PICs but use other IXCs for
Internet, fax, interexchange or other interstate services by ``dialing-
around'' the PIC.
60. The Competition Policy Institute (CPI) has suggested several
other alternatives to the per-minute recovery of interstate NTS loop
costs. For example, interstate NTS loop costs may be recovered through
``bulk billing,'' in which carriers are assessed a charge based upon
their percentage share of interstate minutes of use or revenues. An
additional possible approach to recovering interstate NTS loop costs is
a ``capacity charge'' assessed on carriers based upon the number and
type of trunks that they purchase from the incumbent LECs.
Alternatively, LECs could assess a ``trunk port charge'' to each
carrier based upon the number of trunk-side ports, or connections it
has to the local switch. Another possibility is a ``trunk port and line
port'' charge, which would be based upon the number of trunk-side ports
and the number of line-side ports. We seek comment on these approaches
to recovery of interstate NTS local loop costs and ask parties to
propose other efficient recovery mechanisms. We invite parties to
comment on whether any changes that we adopt to the recovery of
interstate NTS local loop costs for price cap LECs should be extended
to rate-of-return LECs, and the relationship of interstate NTS loop
cost recovery under access charges to the Joint Board Recommended
Decision. Interested parties should address how such an extension to
rate-of-return LECs would affect small business entities, especially
small incumbent LECs.
61. Parties should also address whether, in the event that we
eliminate the SLC cap for lines used by multi-line business customers
and residential lines beyond the primary residential line as discussed
below, we need to adopt an alternative mechanism for recovering common
line costs currently recovered through the CCL charge imposed on such
lines. We also seek comment, in conjunction with our market-based
approach to access reform, on the circumstances under which we should
grant LECs rate structure flexibility in their recovery of interstate
common line costs from IXCs. Interested parties should also address the
extent to which any proposed alternative recovery mechanism for
recovering common line costs currently recovered through the CCL charge
will affect small business entities, including small incumbent price
cap LECs and new entrants.
62. Finally, we seek comment on whether there are any limitations
on our authority to assess flat-rated CCL

[[Page 4681]]

charges on IXCs. In particular, we note that section 254(g) also
requires IXCs to charge their subscribers in rural and high cost areas
within a state the same rates they charge to their subscribers in urban
areas in that state. Section 254(g) also requires IXCs to charge their
subscribers in each state rates no higher than the rates charged to
subscribers in any other state. Would this requirement preclude an IXC
from charging its customers the flat monthly rate assessed for that
line if the amount of that charge varied among states, or between urban
and rural areas within a state? If so, do conditions exist sufficient
to require the Commission to forbear from the application of section
254(g) to IXC recovery of flat-rate CCL charges? Parties should also
address the effect of section 254(g) if CCL charges vary among the
states, but end-user rates may not vary.
3. Alternative Methods of Recovery of SLC Portion of Subscriber Loop
Costs
63. In its Recommended Decision, the Joint Board determined that
eligible carriers should receive support for designated services
carried on the initial connection to a customer's primary residence and
single-line business customers. The Joint Board, however, recommended
that universal service support should not be provided for multi-line
business or residential connections beyond the primary residential
connection. The Joint Board further concluded that the current $3.50
SLC cap for primary residential and single-line business lines should
not be increased, but did not state that the SLC cap should be
maintained for multi-line business or residential connections beyond
the primary residential connection. Loop costs not recovered from the
current multi-line business SLCs, and SLCs for residential lines in
addition to the primary connection, are recovered through usage-
sensitive CCL charges, which in turn are recovered from toll users.
Since end user customers of multi-line business and multiple-line
residential services do not necessarily make large numbers of toll
calls, the toll payments of these end users may not cover the portion
of loop costs not recovered through the SLC. Moreover, toll rates are
higher than they otherwise would be, which discourages demand for such
services.
64. For these reasons, we propose to increase the cap on the SLC
for the second and additional lines for residential customers and for
all lines for multi-line business customers to the per-line loop costs
assigned to the interstate jurisdiction. This would allow incumbent
LECs to recover interstate common line costs for multi-line business
customers and for residential connections beyond the primary
residential connection in a manner consistent with the way costs are
incurred. Alternatively, we could eliminate the cap for multi-line
business customers and for residential connections beyond the primary
connection, especially where the incumbent LEC has entered into
interconnection agreements and taken other steps to lower barriers to
actual or potential local exchange competition. Under that approach, we
would not prohibit an incumbent LEC from charging a SLC for second and
additional lines for residential customers and for all lines for multi-
line business customers that exceeds the per-line loop costs assigned
to the interstate jurisdiction. We emphasize that this proposal would
not affect the current cap of $3.50 on the SLC that is charged to a
residential customer's primary line and to a single-line business
customer. We invite parties to comment on this proposal. We also invite
parties to comment on whether any changes that we adopt to the cap on
SLCs for price cap LECs should be extended to rate-of-return LECs, and
the relationship of any such changes to the Joint Board Recommended
Decision. Interested parties should address how applying such a cap on
SLCs to rate-of-return LECs would affect small business entities,
especially small incumbent LECs.
65. In the event we decide to increase or eliminate the cap on SLCs
for multi-line business lines and residential lines in addition to the
primary line, we also solicit comment on whether we should establish a
transition mechanism for this increase, whether such a transition could
be implemented consistent with section 254, and if so, how long this
transition period should be. We propose establishing no transition
period if the increase in the SLC is less than one dollar, and
establishing a three-year transition period if the increase is one
dollar or more, but we invite comments on other alternatives in
addition to these.
66. Finally, we seek comment on whether we should permit or require
incumbent LECs to deaverage SLCs as part of the baseline rate structure
that would be imposed on all incumbent price cap LECs. In particular,
we note that section 254(e) requires us to adopt only explicit support
subsidies for universal service support. We seek comment on whether
geographic averaging of SLCs is an implicit subsidy that is
inconsistent with the requirements of section 254(e), and thus on
whether we are required to deaverage SLCs.
4. Assessment of SLCs on Derived Channels
67. Integrated services digital network (ISDN) services permit
digital transmission over ordinary local loops through the use of
advanced hardware and software. ISDN offers data transmission at higher
speeds and with greater reliability than standard analog service. Most
incumbent LECs currently offer two types of ISDN service, Basic Rate
Interface (BRI) service and Primary Rate Interface (PRI) service. BRI
service allows a subscriber to obtain two voice-grade-equivalent
channels and a signalling/data channel over an ordinary local loop,
which generally is provided over a single twisted pair of copper wires.
PRI service allows subscribers to obtain 23 voice-grade-equivalent
channels and one data signalling channel over two pairs of twisted
copper wires. BRI service generally is used by individuals and small
businesses, and PRI service generally is used by larger businesses. LEC
services other than ISDN use derived channel technology to provide
multiple channels over a single facility. The LECs also use derived
channel technologies within their networks, for example, to provide
customers with individual local loops. In such situations, the end user
generally is not aware that the LEC is using this technology.
68. In the End User Common Line Charges, CC Docket No. 95-72,
Notice of Proposed Rulemaking, 60 FR 31274 (June 14, 1995) (ISDN SLC
NPRM), we noted that the application of SLCs under our existing rules
to ISDN services may discourage demand for these services, and we
sought comment on whether more than one subscriber line charge should
be applied to ISDN services, and if so, how many charges.
69. As shown in Table 2 below, the cost data submitted in response
to the ISDN SLC NPRM indicates that the ratio of NTS costs of BRI ISDN
to standard analog service is approximately 1.24 to 1. The ratio of NTS
costs of PRI ISDN to standard analog service, excluding NYNEX's data,
is roughly 10.5 to 1. As shown in Table 3, NYNEX's data appear to be
outliers and are therefore excluded from the calculation of the average
ratio for PRI ISDN to standard analog service because the ratios of its
outside plant and NTS costs for PRI ISDN to standard analog service are
almost twice those of other incumbent LECs. Interested parties filed
their comments in the ISDN SLC proceeding prior to the enactment of the
1996 Act. We ask for comment on the effect of the 1996 Act on

[[Page 4682]]

determining how many SLCs should be applied to ISDN services. Finally,
we solicit comment on whether mandatory rate structures or rate caps
should be prescribed for ISDN service or other derived channel
services.

Table 2.--Ratio of Costs of Standard Analog Service to BRI ISDN Service
------------------------------------------------------------------------
Outside
plant (loop All NTS
only) costs costs
------------------------------------------------------------------------
Ameritech..................................... 1:1.07 1:1.45
Bell Atlantic................................. 1:1.01 1:1.36
NYNEX......................................... 1:0.85 1:1.23
Pacific Bell.................................. 1:1.05 1:1.13
US West....................................... 1:0.80 1:1.07
Average ratio of costs........................ *1:0.96 *1:1.24
------------------------------------------------------------------------
*Averages may differ due to rounding.

Table 3.--Ratio of Costs of Standard Analog Service to PRI ISDN Service
----------------------------------------------------------------------------------------------------------------
Outside
Outside plant (loop All NTS
plant (loop only) costs All NTS costs
only) costs (excluding costs (excluding
NYNEX) NYNEX data)
----------------------------------------------------------------------------------------------------------------
Ameritech................................................... 1:5.68 1:5.68 1:8.9 1:8.9
Bell Atlantic............................................... 1:4.13 1:4.13 1:15.80 1:15.80
NYNEX....................................................... 1:10.94 excluded 1:27.74 excluded
Pacific Bell................................................ 1:4.67 1:4.67 1:8.70 1:8.70
US West..................................................... 1:5.33 1:5.33 1:10.60 1:10.60
Average ratio of costs...................................... *1:6.5 *1:4.95 *1:15.13 *1:10.5
----------------------------------------------------------------------------------------------------------------
*Averages may differ due to rounding.

C. Local Switching

70. The local switch connects a call coming in on one line or trunk
to another line or trunk connected to the switch. A local switch
consists of line and trunk cards, and an analog or digital switching
system. Line cards provide interfaces between subscriber lines and the
switch. Trunk cards or ``ports'' provide interfaces between the switch
and interoffice trunks. Because line cards, as well as trunk cards, are
deployed within the central office, they are accounted for in the
switching accounts of the USOA. These costs are therefore included in
the switching category for separations and cost allocation purposes.
The central processing portion of the switch performs the routing
function based on the telephone numbers dialed by the end user placing
the call.
1. Non-Traffic-Sensitive Charges
71. Currently, Section 69.106 of our rules requires incumbent LECs
to charge per-minute rates for local switching. A significant portion
of local switching costs, however, likely do not vary with usage. For
example, the costs associated with line cards or line-side ports appear
to vary with the number of loops connected to the switch, not with the
level of traffic over the loops. We tentatively conclude that it is
more reasonable and economically efficient to recover dedicated line
card costs through flat charges. We solicit comment on establishing a
flat rate element for NTS local switching costs. We also invite
commenters to recommend methods of identifying line card costs and
other NTS local switching costs.
72. The central processing portion of the switch, and many trunk-
side ports, are shared local switching facilities because they are used
to carry the traffic of several access customers, and so should be
priced on a usage-sensitive basis. By contrast, because trunks for
dedicated transport service are dedicated to individual IXCs, ports for
dedicated transport service also appear dedicated to individual
customers, and, consequently, the charges for such facilities should be
flat-rated. While flat rates appear reasonable for recovering costs
associated with dedicated ports and line cards, it is not clear what
rate structure would best reflect the manner in which incumbent LECs
incur costs associated with shared local switching facilities. If all
shared local switching costs are driven by the number of lines and
trunks served by the switch, flat rates would appear appropriate. On
the other hand, usage-sensitive charges might better reflect the way
incumbent LECs incur costs for shared local switching facilities.
Finally, a combination of flat-rate and usage-sensitive charges may
best reflect cost causation principles. AT&T and MCI have argued that a
substantial portion of local switching costs are non-usage-sensitive,
and the local switching rate structure, therefore, should include both
usage-sensitive and non-usage-sensitive rate elements. Ameritech has
stated that, for a majority of the switches in its network, more than
40 percent of switching costs are NTS. We seek comment generally on
this analysis, and on how we should establish an appropriate, efficient
rate structure for switching. We note that states may be considering
this same issue in the context of establishing rates for unbundled
local switching, and we seek comment on, and analysis of how, states
are addressing these issues under Section 252.a
2. Traffic-Sensitive Charges
73. In the following paragraphs, we seek comment on a number of
specific proposals for rate structures governing rates designed to
recover usage-sensitive local switching costs. Interested parties
should discuss which of these rate structure proposals most accurately
reflect traffic-sensitive local switching costs, and whether we should
permit or require incumbent LECs to assess these traffic-sensitive
charges. Parties advocating a particular rate structure should address
all the issues raised by that approach. We also invite parties to
propose other rate structures.

[[Page 4683]]

a. Call-Setup Charges. 74. Call setup is the process of
establishing a transmission path over which a phone call will be
routed. We could permit or require incumbent LECs to develop call-setup
charges if we find that usage-sensitive charges might better reflect
the way they incur certain costs for shared local switching facilities.
The per-minute rate structure prescribed by Part 69 for local switching
does not separately address costs that incumbent LECs may incur for
call setup and takedown. Call-setup costs would be incurred for each
call regardless of its duration or whether it is completed. Because no
separate charge exists for call setup, incumbent LECs must recover
these costs through the per-minute local switching charges, or possibly
through other rate elements. It is possible that some SS7 call-setup
costs are currently recovered through the TIC. Thus, longer-duration
calls recover a greater portion of call-setup costs than shorter calls
even if they do not impose greater call-setup costs. A per-call rate
element for call setup would more rationally reflect these costs.
75. In the past, the Commission has rejected incumbent LEC
petitions for waiver of Part 69 for purposes of imposing a call-setup
charge, on the grounds that such proposals should be considered in a
broader rulemaking. Accordingly, we now seek comment on whether we
should permit or require incumbent LECs to include a call-setup charge
in their local switching rate structures. We also request comment on
the extent to which the current local switching rate element recovers
costs that vary with the number of calls, rather than their duration.
Should a call-setup charge apply to all call attempts, or only to
completed calls? We seek comment on whether incumbent LECs incur
different call-setup costs depending on whether a call is delivered via
direct-trunked or tandem-switched transport service, and on the
different costs incurred when multifrequency (MF) and SS7 signalling
are used for call setup. Finally, we invite comment on whether any of
these cost differences should be reflected by establishing different
charges for different kinds of call setup. To the extent that parties
support a separate charge for SS7 call setup, those parties should
explain how such a charge would be consistent with the rate structure
for other SS7 services we discuss below.
b. Peak and Off-Peak Pricing. 76. We could direct or allow
incumbent LECs to develop peak and off-peak pricing for shared local
switching facilities. When incumbent LECs select the types of switches
that they will deploy in their networks, they base their decisions on
the anticipated peak demand. Thus, incumbent LECs arguably should be
permitted to establish separate rate elements for local switching
provided during peak periods and off-peak periods. The peak prices
would be per-minute rates, and designed to recover the costs of
additional capacity that an incumbent LEC must install to meet the peak
demand. Because off-peak traffic requires no additional capacity, the
costs of this traffic are lower, and accordingly, the access charges
for that traffic should be lower as well.
77. We previously sought comment on peak and off-peak pricing in
the Interconnection Between Local Exchange Carriers and Commercial
Mobile Radio Service Providers, CC Docket No. 95-185, Notice of
Proposed Rulemaking, 61 FR 3644 (February 10, 1996) (LEC/CMRS NPRM),
and addressed those comments in the Implementation of the Local
Competition Provisions of the Telecommunications Act of 1996, CC Docket
No. 96-98, First Report and Order, 61 FR 45476 (Aug. 29, 1996) (Local
Competition Order). We recognized in the Local Competition Order that
there might be practical problems with a rate structure that had
different peak and off-peak pricing. Therefore, we did not mandate a
peak-sensitive rate structure for unbundled network elements, although
we also did not preclude use of peak/off-peak pricing. Parties
supporting requiring rather than merely permitting peak and off-peak
pricing for local switching should explain why this rate structure is
more suitable for access rates than it is for unbundled network
elements.
c. Current Rate Structure. 78. As another alternative, we could
retain the existing per-minute local switching rate structure. Because
a significant portion of local switching costs may not vary with
minutes of use, however, the existing rate structure may be less
desirable than the other options discussed above. We invite parties
supporting the current rate structure to explain why they believe that
it adequately reflects the manner in which traffic-sensitive local
switching costs are incurred.

D. Transport

1. Background
79. Transport service is the component of interstate switched
access service corresponding to the transmission and switching of
traffic between incumbent LEC end offices and IXC POPs. Part 69 of our
rules requires incumbent LECs to develop charges for transport service
that may not reflect in some cases the manner in which they incur the
costs of providing these services. Thus, as we discussed with respect
to local switching charges above, it may be necessary to revise our
Part 69 rate structure requirements for transport services.
80. Since December 1993, transport has been provided pursuant to
interim rules that replaced the ``equal charge per unit of traffic''
requirement of the MFJ. We required incumbent LECs to establish flat
rates for: (1) ``Entrance facilities,'' transport service from the IXC
POP to the SWC, and (2) ``direct-trunked transport,'' transport service
from a SWC to an end office on dedicated facilities without switching
at a tandem switch. In addition, incumbent LECs were directed to
establish usage-based charges for ``tandem-switched transport,'' a
transport service from the SWC to the end office that provides
switching at a tandem switch. The tandem-switched transport service
charge includes an interoffice transmission charge, and a charge for
the tandem switch.
81. The initial rate levels for direct-trunked transport were
generally presumed reasonable if they were based on rates for
comparable special access services. The per-minute tandem-switched
transport transmission charge was based on assumptions about average
monthly DS1 and DS3 usage. The charge for the tandem switch was
initially set to recover 20 percent of the Part 69 tandem revenue
requirement. Finally, to make the restructure revenue neutral
initially, we required incumbent LECs to establish a non-cost-based
transport interconnection charge (TIC), to recover the revenue
difference between what the LECs would have realized under the equal
charge rate structure and what they would realize from the interim
facility-based transport rates, including the remaining 80 percent of
the tandem revenue requirement.
82. Subsequently, in the Transport Rate Structure and Pricing, CC
Docket No. 91-213, First Memorandum Opinion and Order on
Reconsideration, 58 FR 41184 (August 3, 1993) (First Transport
Reconsideration Order), the Commission required incumbent LECs to offer
two pricing options for tandem-switched transport service. First, an
IXC may purchase tandem-switched transport at usage-sensitive rates
with any mileage component computed on the basis of the distance
between the SWC and the end office, regardless of the actual physical
routing. Second, an

[[Page 4684]]

IXC may purchase direct-trunked transport between the SWC and the
tandem office and usage-rated tandem-switched transport between the
tandem office and the end office, with any tandem-switched transport
mileage component computed on the basis of the distance between the
tandem office and the end office.
83. In this section, we seek comment on whether to revise the
facility-based components of the transport rate structure. In the
following section, we seek comment on phasing out the TIC. Unlike the
other rate structure rules we consider in Section III, we contemplate
imposing any rules adopted relating to the transport rate structure or
the TIC on all incumbent LECs. We propose, for reasons articulated in
the Transport Rate Structure and Pricing, CC Docket No. 91-213, Report
and Order and Further Notice of Proposed Rulemaking, 57 FR 54717
(November 20, 1992) (First Transport Order), that the transport rate
structure be divided into three parts: (1) Charges for entrance
facilities; (2) charges for direct-trunked transport service; and (3)
charges for tandem-switched transport service. We seek comment on
adopting this basic framework for the transport rate structure rules.
In commenting on the transport issues in this section, parties should
bear in mind the interrelationship of these issues with those relating
to the TIC, which is discussed in Section III.E, below.
84. We also seek comment here and in Section III.E on the issues
remanded in CompTel v. FCC, in which the court remanded the Orders in
which we established the transport rate structure rules. The court held
that we did not adequately explain our decision to require incumbent
LECs to charge a non-cost-based TIC. The court remanded our decision to
set the tandem-based transport rate element to recover 20 percent of
the Part 69 tandem revenue requirement and to allocate the remaining
revenue requirement to the TIC, because the Commission did not
adequately explain why 20 percent would be more equitable than some
other allocation. The court also found that we did not explain our
decision to require incumbent LECs to allocate a greater proportion of
overhead costs to the tandem-switched transport switching charge than
to direct-trunked transport service rates. We address the TIC issue in
Section III.E below, and the other two remand issues in this section.
2. Entrance Facilities and Direct-Trunked Transport Services
85. For entrance facilities and direct-trunked transport service,
we tentatively conclude that the transport rate structure rules should
mandate flat-rated charges. These transport facilities appear to be
dedicated to individual customers, and we believe that flat rates
reflect the way incumbent LECs incur costs for dedicated facilities. We
invite comment on this tentative conclusion. We also seek comment on
whether incumbent LECs should be permitted to offer transport services
differentiated by whether the LEC or the IXC is responsible for channel
facility assignments. In the past, Ameritech and Bell Atlantic have
sought waivers of our Part 69 rules to offer such a switched access
service, alleging that it would permit them to utilize the access
network more efficiently. We seek comment on whether any rules beyond
those included in the interim rules are necessary to govern rate levels
for these services.
3. Tandem-Switched Transport Services
a. Rate Structure. 86. We present several options for the rate
structure associated with tandem-switched transport service facilities.
The first option would maintain the interim rate structure's treatment
of the tandem-switched transport charge, which gives IXCs a choice of
two pricing alternatives for purchase of tandem-switched transport
service. IXCs may elect to pay a single usage-sensitive charge, with
distance measured in airline miles from the SWC to the end office, if
applicable. Alternatively, IXCs may choose a flat-rated charge for a
dedicated facility from the SWC to the tandem office, and a usage-
sensitive charge for tandem-switched transport service from the tandem
office to the end office, with mileage computed separately for the two
segments, if applicable.
87. The second option would eliminate an IXC's ability to select
the first choice and require incumbent LECs to assess flat-rated
charges for the circuit between the SWC and the tandem, which typically
is a dedicated circuit, and to apply usage-based rates to the tandem-
to-end office link. This was the original transport rate structure the
Commission established in 1983 in the Access Charge Order.
88. In conjunction with either of the two options for pricing
tandem-switched transport service transmission facilities, we could
treat tandem switching similarly to one of our proposals for the local
switching rate structure, discussed in Section III.C above. As with the
end-office switch, the tandem switch may include equipment dedicated to
particular customers, such as the network ports through which a
particular IXC's traffic enters and leaves the tandem switch. Thus, we
could require incumbent LECs to develop usage-sensitive charges for
shared facilities (the tandem switching functions and the ports on the
end office side of the tandem switch), and a flat-rated charge for the
dedicated ports on the SWC side of the tandem switch. Alternatively,
shared tandem switching costs may be driven by the number of trunks on
the end-office side and the SWC side of the tandem switch, just as
shared local switching costs may be driven by the number of lines and
trunks connected to the switch. If this is the case, then flat monthly
rates may better reflect shared tandem switching costs. Parties are
invited to comment on whether tandem switches differ in any fundamental
way from end office switches with respect to the division of costs
associated with shared and dedicated facilities.
89. In addition to any of the tandem-switched transport service
options discussed above, we could permit or require incumbent LECs to
develop peak load pricing for tandem-switched transport service. Most
small IXCs use tandem-switched transport service for all or most of
their access traffic, while larger IXCs may use tandem-switched
transport service on relatively fewer routes, or may use it only to
handle their overflow traffic during peak hours. Thus, some portion of
tandem costs may be attributable to the need to accommodate this
overflow traffic from direct-trunked transport facilities. We invite
comment on whether to permit or require incumbent LECs to develop peak
and off-peak pricing for tandem switching. We also invite comment on
whether some portion of tandem switching costs should be recovered from
direct-trunked transport service customers, if in fact a portion of
tandem switching capacity is necessary to meet demand from direct-
trunked transport customers during peak period. Parties advocating peak
pricing should propose a method to determine the peak period. Because
some access customers may use some SWC-side trunks and ports to carry
overflow traffic, and the costs of those ports are not traffic-
sensitive, flat rates may better recover the tandem-switched transport
costs generated by that overflow traffic. We invite comment on this
analysis.
90. We seek comment on the benefits and detriments of each of the
above options for reforming the tandem-switched transport rate
structure. Parties are specifically asked to discuss whether any of
these options accurately reflect the way incumbent LECs incur tandem
switching costs. For example, we seek comment on the extent to

[[Page 4685]]

which tandem-switched and direct-trunked transport use the same or
different physical routing, and in light of this, on whether the
distance component of setting tandem-switched transport rates is most
appropriately measured between the SWC and the end office, or in two
charges, one for the SWC-to-tandem circuit and one for the tandem-to-
end office circuit. We invite parties to identify and quantify the
specific NTS costs associated with the tandem switch that they believe
are currently recovered through the usage-sensitive tandem charge. We
also invite parties to suggest additional options for the tandem-
switched transport charge.
b. Rate Levels. 91. We seek comment on how to establish a
reasonable tandem switching charge in light of the court's remand. The
interim transport restructure rules, which the court remanded, required
incumbent LECs to base their initial tandem switching charge on 20
percent of the interstate revenue requirement for tandem switching,
with the remaining 80 percent to be recovered through the TIC. Thus,
both the tandem charge and some portion of the TIC were designed to
recover the costs included in the tandem-switched transport revenue
requirement. The Commission found in the First Transport Order that
this revenue requirement included some SS7 signalling cost, in addition
to tandem switching costs. In Section III.E, below, we propose to
reassign costs included in the TIC to those rate elements to which they
are related, including the different transport rate elements. We seek
comment on what costs are appropriately associated with the tandem
switching function. Parties commenting on this issue should address how
their proposals are consistent with the court's remand directives. We
also ask parties to comment on whether, if we permit direct-trunked
transport or entrance facility rate structure options based on whether
the channel facility assignment is done by the IXC or the LEC, a
similar option should be available for tandem-switched transport. We
ask parties to comment on the interrelationship of the rate level issue
and how any decision on transport rate levels affects the options for
phasing out the TIC that are discussed in the following section.
92. The court in CompTel v. FCC also directed us to explain why we
permitted incumbent LECs to load a relatively large portion of their
transport overhead costs to tandem-switched transport rates, and to
base their direct-trunked transport overhead loadings on the lower
overhead loading factors used for special access. Our resolution of the
transport overhead loadings issue remanded by the court is also
affected by our treatment of the TIC. If we decide to reallocate costs
currently recovered through the TIC to other rate elements, this could
change the amount of overhead costs allocated to both direct-trunked
transport and tandem-switched transport. It is possible that
reallocating costs from the TIC to direct-trunked transport and tandem-
switched transport charges would result in cost-based direct-trunked
transport and tandem-switched transport charges, that is, direct-
trunked transport and tandem-switched transport charges that recover a
proportionate amount of overhead costs. Thus, reallocating costs from
the TIC could contribute to correcting any imbalance in overhead cost
allocations between transport rate elements. We invite parties to
discuss what other regulatory requirements are necessary to comply with
the court's mandate on transport service overhead loadings.
93. Furthermore, initial tandem-switched transport transmission
rates were presumed reasonable if set as a weighted average of the per-
minute cost of DS3 and DS1 rates calculated using 9000 minutes of use
per month. We note that USTA has alleged that the number of actual
minutes traversing tandem circuits is significantly below 9000 minutes
per month. We solicit comment on whether we should revise any transport
rate structure requirement, either as a result of CompTel v. FCC, or
for any other reason.
94. Finally, we solicit comment on the relationship between our
transport rate structure rules and the market-based access reform
proposals we discuss in Section IV, and on the relationship between the
transport rate structure rules and the prescriptive access reform
proposals we discuss in Section V. Is our goal of driving interstate
access rates to forward-looking economic cost consistent with retaining
rules governing transport rate level relationships? Is it possible to
comply with the court's mandate with regard to the tandem switching
charge and transport overhead cost allocations without retaining some
rules governing transport rate level relationships?

E. Transport Interconnection Charge

1. Background
95. Under our Part 36 separations rules, certain costs of the
incumbent LEC network are assigned to the interstate jurisdiction. The
Part 69 cost allocation rules allocate these costs among the various
access and interexchange services, including transport. In the First
Transport Order, we restructured interstate transport rates for
incumbent LECs. The restructure created facility-based rates for
dedicated transport services based on comparable special access rates
as of September 1, 1991, derived per minute tandem-switched transport
transmission rates from those dedicated rates, established a tandem
switching rate, and established a TIC that initially recovered the
difference between the revenues from the new facility-based rates and
the revenues that would have been realized under the preexisting
``equal charge rule.'' The TIC was intended as a transitional measure
that initially made the transport rate restructure revenue neutral for
incumbent LECs and reduced any harmful interim effects on small IXCs
caused by the restructuring of transport rates. Approximately 70
percent of incumbent LEC transport revenues are generated through TIC
charges, or approximately $2.9 billion out of $4.0 billion in transport
revenues.
96. The TIC is a per-minute charge assessed on all switched access
minutes, including those of competitors that interconnect with the LEC
switched access network through expanded interconnection. The usage-
rated TIC increases the per-minute access charges paid by IXCs and
long-distance consumers, thus artificially suppressing demand for such
services and encouraging customers to bypass the LEC switched access
network, particularly through the use of switched facilities of
providers other than the incumbent LEC. In addition, to the extent that
any portion of the TIC should properly be included in LEC transport
rates, other than the TIC, the TIC provides the LECs with a competitive
advantage for their interstate transport services because incumbent LEC
transport rates are priced below cost while the LECs' competitors using
expanded interconnection must pay a share of incumbent LEC transport
costs through the TIC.
97. Our goal in this proceeding is to establish a mechanism to
phase out the TIC in a manner that fosters competition and responds to
the court's remand. The resolution of the TIC issues is also related to
the resolution of three other issues. First, the Universal Service
Joint Board recently recommended establishing a universal service
support mechanism. In Section VII.A, below, we seek comment on how any
support amounts should be allocated to reduce interstate rates. Some of
those support amounts may reduce the amount that would otherwise be
recovered through the TIC. Second, the adoption of either the market-
based or prescriptive

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approach to access reform will establish the extent to which incumbent
LEC costs will be recovered through facility-based access charges.
Third, if we conclude that incumbent LECs should be permitted to
recover some embedded access costs for some period in a competitively
neutral manner, as discussed in Section VII.B, below, some of those
costs may be costs that are currently included in the TIC.
Consequently, resolution of these issues may reduce the costs currently
included in the TIC.
98. As we discuss more fully below, the costs now recovered in the
TIC could be addressed in several different ways. Some incumbent LECs
have urged us to give them significant pricing flexibility and allow
market forces to discipline the recovery of the TIC, either alone, or
in conjunction with a phase-out of the TIC. A second method of
eliminating the TIC would be to quantify and correct all identifiable
cost misallocations and other practices that result in costs being
recovered through the TIC. A third approach would be a combination of
these approaches. For example, we could address directly the most
significant and readily-corrected misallocations, and then rely on a
market-based approach to reducing what remains of the TIC. Finally, we
could provide for the termination of the TIC over a specified time
period, such as three years.
99. We address below some explanations for the amounts in the TIC,
and then seek comment on possible means of reducing or eliminating the
TIC.
2. Possible Sources of Costs in the TIC
100. In the NPRM included in the First Transport Order, the
Commission sought comment on the nature of the costs included in the
TIC so that those costs could be reallocated. Parties in the Transport
proceeding and in more recent ex parte filings have offered various
explanations of the composition of the costs included in the TIC. We
summarize below several of the more significant explanations presented
by the parties. Our discussion of these comments is divided into two
parts. One group of comments describes the costs included in the TIC as
the result of transport rate setting choices. The other group of
comments describes the costs as related to potential cost
misallocations.
a. Transport Rate Setting. 101. Tandem Switching and SS7 Costs. In
the First Transport Order, we concluded that the interim transport rate
structure should include a tandem element that would initially recover
20 percent of the interstate revenue requirement associated with the
tandem switch, while the remaining 80 percent of the interstate revenue
requirement would be assigned to the TIC. We took this action because
of our uncertainty about the specific sources of the costs that were in
the tandem switching revenue requirement and because of our concern
about possible adverse impacts on small and medium IXCs as the new rate
structure was introduced.
102. USTA submits that the portion of the tandem interstate revenue
requirement that is included in the TIC includes some costs incurred in
the provision of SS7 signalling, line information database (LIDB), and
other related signalling services. These costs bear no particular
relationship to the operation of the tandem switch. As discussed below,
under the interim transport rate structure, LECs recover a portion of
their SS7 costs through a flat-rated dedicated signalling transport
charge assessed on a per-line basis and a flat-rated STP port
termination charge. The costs associated with other signalling
functions, such as transporting SS7 messages within the signalling
network, are not recovered through any facility-based rate element,
having generally been incorporated in the transport function, and thus
are presumably embedded in the TIC. These SS7 costs relate to services
used by all LEC transport customers, and, in the future, potentially to
users who are not LEC transport customers. The costs associated with
the provision of signalling services are related to the new signalling
rate elements discussed below, and if we establish such signalling rate
elements, they would not need to be recovered through the TIC.
103. Tandem-Switched Transport Rate Setting. The Commission
employed several assumptions in setting tandem-switched transport
rates, which USTA alleges understate the rates for tandem-switched
transport. First, under the interim transport rules, per minute tandem-
switched transport transmission rates between the SWC and the end
office were presumed reasonable if they were based on a weighted mix of
DS1 and DS3 special access rates and assumed 9000 minutes of use per
voice grade circuit per month. USTA argues that the Commission's
assumption of 9000 minutes of use per circuit per month for tandem-
switched transport circuits resulted in tandem-switched transport rates
that were too low. It contends that the actual usage on tandem circuits
can be measured and often is far less than the 9000 minutes assumed by
the Commission. Second, USTA contends that the use of a per minute
tandem-switched transport transmission rate from the SWC to the end
office ignores that the SWC-to-tandem segment of tandem-switched
transport is provided over a circuit that is dedicated to an IXC. It
argues that the failure to price the SWC-to-tandem segment of tandem-
switched transport on a flat-rated basis led to some of those costs
being included in the TIC. Third, USTA also alleges that tandem-
switched transport uses low-density routes between small end offices
and tandem switches and thus does not use DS3 circuits to the same
extent that DS3 circuits are used for direct-trunked transport service.
Thus, according to USTA, the tandem-switched transport rate applicable
to these low-density routes is too low. Finally, USTA asserts that
distance-sensitive tandem-switched transport rates are too low because
the rules used airline miles from the SWC to the end office rather than
measuring distance through the tandem office. Each of these assumptions
has been said to result in tandem-switched transport rates that produce
revenues that are less than costs, with the difference being assigned
to the TIC.
104. Host-Remote Trunking Rate. The interim transport rules require
incumbent LECs to assess tandem-switched transport rates for the
carriage of traffic between a host switch and its remote. As with the
tandem-switched transport rate itself, USTA argues that the 9000
minutes of use per circuit reflects more usage than actually transits a
circuit, and that the trunks do not exhibit the ratio of DS3-DS1
relationship that was employed in setting the tandem-switched transport
rate. USTA contends that the rate therefore does not recover all the
costs of host-remote trunking.
105. Multiplexing Costs. USTA asserts that the existing transport
rates for transmission facilities do not account for all multiplexing
costs in two instances, and that this results in costs being recovered
through the TIC rather than in appropriate facility-based rates. First,
it alleges that none of the transmission rates reflects the cost of the
DS1/DS0 multiplexing needed to access those end office switches that
cannot handle DS1 interfacing, such as analog electronic switches. Such
switches constitute approximately 25 percent of the BOC switches.
Second, USTA contends that the TIC also includes the two additional
multiplexers needed in order to multiplex a DS3 circuit down to a DS1
level before being switched at the tandem, and then back up to DS3
afterward for transmission to an end office. To the extent that analog
tandem switches exist, two additional DS1/DS0

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multiplexers are needed to achieve the voice-grade interface with the
tandem switch.
106. Direct-Trunked Transport Rate. In the First Transport Order we
established initial direct-trunked transport rates that generally were
presumed reasonable if set at the LECs' September 1, 1992, rates for
comparable special access services. USTA and other incumbent LECs argue
that this resulted in costs being included in the TIC because
facilities-based transport rates are too low outside high-volume, low-
cost areas. These LECs argue that high-capacity special access is
provided primarily in high-volume, low-cost areas, making special
access rates a good surrogate for transport rates only in such areas.
They assert that transport in low-volume areas has significantly higher
costs that are not recovered by rates for transport facilities because
those rates were based on rates for special access service, which is
more heavily concentrated in low-cost urban areas than is transport.
SBC, for example, contends

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A97-2142. Public record. Not legal advice.