Price Cap Performance Review for Local Exchange Carriers

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 61 and 69

[CC Docket No. 94-1; FCC 96-488]

Price Cap Performance Review for Local Exchange Carriers

AGENCY: Federal Communications Commission.

ACTION: Final Rule.

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

SUMMARY: On September 14, 1995, the Commission adopted a Second Further

Notice of Proposed Rulemaking in this docket, seeking comment on how

its price cap regulation of local exchange carriers should be revised

as the competition faced by those carriers grows. In particular, the

Commission sought comment on relaxing the procedural requirements for

establishing new rate elements for new switched access services, and

eliminating the lower boundaries of the service band indices. In this

Third Report and Order, the Commission adopts the rules it proposed.

These rule revisions are intended to make it easier for local exchange

carriers to introduce new services, and to lower rates.

EFFECTIVE DATE: Effective June 30, 1997.

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 Report

and Order adopted December 23, 1996, and released December 24, 1996.

The full text of this Report and Order 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 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.

The Commission released a Second Further Notice of Proposed Rulemaking,

CC Docket No. 94-1, Further Notice of Proposed Rulemaking, CC Docket

No. 93-124, and Second Further Notice of Proposed Rulemaking CC Docket

No. 93-197 (all three published at 60 FR 49539 (September 25, 1995))

(Price Cap Second FNPRM) to seek comment on the rules adopted in the

Third Report and Order.

Regulatory Flexibility Analysis: As required by the Regulatory

Flexibility Act, the Third Report and Order contains a Final Regulatory

Flexibility Analysis which is set forth in Section XI.F of the Third

Report and Order. The Commission concluded that the Regulatory

Flexibility Act is not applicable because the rules adopted in the

Third Report and Order will not have a significant impact on a

substantial number of small entities.

Paperwork Reduction Act: Public burden for the collection of

information is estimated as follows:

OMB Approval Number: None.

Title: Third Report and Order, Price Cap Performance Review for

Local Exchange Carriers.

Form No.: N/A.

Type of Review: New collection.

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

Annual hour Total

Information collection Number of burden per annual

respondents response burden

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

Elimination of the lower Service Band Index and Petition to offer new

switched access services................................................ 13 10 130

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

Total Annual Burden: 130 hours.

Respondents: Business or other for-profit.

Estimated costs per respondent: $0.

Needs and Uses: The agency will use the data submission to review

Local Exchange Carriers' proposed new switched access services. Public

reporting burden for the collection of information is estimated to

average 10 hours per response. Send comments on the agency's need for

this information, the accuracy of the provided burden estimates, and

any suggested methods for minimizing respondent burden, including

through the use of automated collection techniques to the Federal

Communications Commission, Records Management Branch, Washington, D.C.

20554.

Final Regulatory Flexibility Act Certification

In the Price Cap Second FNPRM, we certified that the Regulatory

Flexibility Act did not apply to this rulemaking proceeding because

none of the rule amendments under consideration would have a

significant economic impact on a substantial number of small entities.

We concluded that the proposed rules would apply only to carriers

subject to price cap regulation for local exchange access, and such

carriers are generally large corporations or affiliates of such

corporations. No comments were received concerning the proposed

certification. Since our initial certification, certain changes

occurred. The Regulatory Flexibility Act was amended by the Small

Business Regulatory Enforcement Fairness Act of 1996 (``SBREFA''), and

Citizens elected price cap regulation. Nonetheless, we certify that the

rules adopted herein will not have a significant economic impact

[[Page 4658]]

on a substantial number of small entities.

The Regulatory Flexibility Act defines a ``small business'' to be

the same as a ``small business concern'' under the Small Business Act.

Under the Small Business Act, a ``small business concern'' is one that:

(1) Is independently owned and operated; (2) is not dominant in its

field of operation; and (3) meets any additional criteria established

by the Small Business Administration. Section 121.201 of the Small

Business Administration regulations defines a small telecommunications

entity in SIC code 4813 (Telephone Companies Except Radio Telephone) as

any entity with 1,500 or fewer employees at the holding company level.

Entities directly subject to these rule changes are carriers subject to

price cap regulation. These entities, including the newest carrier

subject to price cap regulation, Citizens, are generally large

corporations that have more than 1,500 employees, or they are either

dominant in their fields of operations or are not independently owned

or operated. Thus, they are not ``small entities'' as defined by the

Small Business Act.

We therefore certify that the rules adopted herein will not have a

significant economic impact on a substantial number of small entities.

The Commission shall provide a copy of this certification to the Chief

Counsel for Advocacy of the Small Business Administration, and include

it in the report to Congress pursuant to the SBREFA. The certification

will also be published in the Federal Register.

Summary of Report and Order: We conclude that certain revisions to

our rules should be made upon issuance of this Order. These changes

include eliminating the price caps lower service band indices, and

substantially easing the requirements necessary for the introduction of

new services. We make these adjustments in order to remove obstacles to

lower access prices, and allow incumbent LECs to recover their costs in

a manner consistent with the way that costs are incurred. Moreover, we

believe that these changes will not adversely affect the development of

a competitive marketplace.

A. Lower Service Band Indices

i. Background

1. Our price cap rules divide incumbent LEC services among four

baskets, with each basket being subject to a separate price cap index

(PCI). Selected categories of services within the trunking and traffic-

sensitive baskets are also subject to individual SBIs. Each tariff year

the carrier must establish, for each such group of services, new upper

and lower bands that are set at specified percentages above and below

the SBI. Price changes are presumptively lawful if the API for the

basket is at or below the PCI, and the prices for each category of

services within the basket are within the established pricing bands.

Most categories of services are currently subject to lower bands that

limit the annual price reductions for those categories to ten percent,

relative to the percentage change in the PCI for that basket, such as

the service categories in the traffic-sensitive and trunking baskets

other than the TIC. Where incumbent LECs are permitted to deaverage

rates, as when an expanded interconnection cross-connect for special

access or transport service has been taken in a LEC study area, annual

price reductions within any zone of the service category are limited to

fifteen percent, although price reductions for the service category as

a whole cannot go down by more than 10 percent.

2. In the Price Cap Second FNPRM, we proposed eliminating the lower

pricing bands for service categories to permit incumbent LECs to reduce

prices to any level above average variable cost. We tentatively

concluded that the price cap indices and upper service band limits

would continue to inhibit predatory pricing effectively.

ii. Discussion

3. We find that removing the lower service band indices would be in

the public interest, and we therefore eliminate them. As set forth in

the Price Cap Second FNPRM, we find that this will lead to lower

prices, particularly as competition emerges and puts pressure on

incumbent LECs to charge rates that are related to the underlying costs

of providing exchange access services. We believe that the current PCI

and upper SBIs adequately control predatory pricing, and that we do not

need AT&T's conditions for eliminating the lower SBIs to address

predation. If an incumbent LEC lowers its prices in one year, the upper

SBIs prevent the incumbent LEC from immediately raising its rates back

to its previous levels. In addition, we remain skeptical that incumbent

LECs in this context successfully could engage in predatory pricing

(lowering prices to eliminate competitors and then raising prices to

above-competitive levels). The lower service band indices do not

prohibit below-band tariff filings. Rather, they establish higher cost

support requirements for below-band filings, and a presumption that

below-cap, within-band tariff filings are lawful. Based on the comments

submitted in response to the Price Cap Second FNPRM, and in light of

our continuing skepticism about the potential for an incumbent LEC to

engage successfully in predatory pricing, we conclude that the

presumption of lawfulness that we have applied to within-band tariff

filings can now be extended to all rate decreases.

4. We also find that AT&T's suggested conditions are not necessary

to limit the ``headroom'' an incumbent LEC might create by lowering

certain access rates within a basket. We are retaining the SBI upper

bands. Those upper bands constrain the incumbent price cap LECs'

ability to use headroom to increase rates for any particular access

service beyond specified percentages. This decision is consistent with

our current treatment of below-band filings, which are included in the

calculation of an incumbent LEC's API. In addition, in this NPRM, we

invite comment on two alternative approaches to access reform.

Regardless of which approach we adopt, access reform should result in

incumbent LECs' access rates moving closer to forward-looking economic

cost, and so would limit the extent to which an incumbent LEC could

take advantage of any headroom that may be created by lowering certain

access rates.

B. Waiver Requirement for Introduction of New Services

i. Background

5. In the Price Cap Second FNPRM, we noted that many incumbent LECs

have argued that new services and technologies often do not fit the

existing Part 69 rate structure requirements, and that obtaining a

waiver to introduce a new rate element is costly, time-consuming, and

poses a significant impediment to the introduction of new services.

Because we found that our rules may unnecessarily hinder the

introduction of new services, we proposed to eliminate the current Part

69 requirement that incumbent price cap LECs seek a waiver each time

they want to establish new rate elements for a new switched access

service. Specifically, we proposed to modify Part 69 to permit an

incumbent price cap LEC to introduce a new service by filing a petition

for the new service based on a public interest standard. We further

proposed that after the first incumbent LEC had satisfied the public

interest requirement for establishing new rate elements for a new

switched access service, other incumbent price cap LECs could introduce

identical new services, and their petitions would be

[[Page 4659]]

reviewed in an expedited fashion (i.e., within ten days).

ii. Discussion

6. We conclude that the relaxed procedures for introducing new

switched access services that we set forth in the Price Cap Second

FNPRM will further the public interest, and we therefore adopt them. We

find that requiring an incumbent LEC to file a waiver to introduce a

new rate element imposes a costly, time-consuming, and unnecessary

burden on incumbent LECs, and significantly impedes the introduction of

new services. Also, we believe that delaying implementation would not

assist in the development of a competitive marketplace. We therefore

amend Part 69 so that an incumbent LEC may introduce a new service by

filing a petition for the new service based on a public interest

standard.

7. We also amend Part 69 so that after the first incumbent LEC has

satisfied the public interest requirement for establishing new rate

elements for a new switched access service, another incumbent price cap

LEC can file a petition seeking authority to introduce identical rate

elements for an identical new service, and its petition will be

reviewed within ten days of the release of a Public Notice. Parties may

file comments in response to such a petition within seven days of the

Public Notice. The incumbent LEC shall have authority to introduce

these new rate elements after expiration of the ten-day period, unless

the Common Carrier Bureau has informed the LEC that the LEC has not

demonstrated that its new service qualifies as a ``me-too'' service.

The incumbent LEC may then file one subsequent new petition for ``me-

too'' authorization for that service or may file a public interest

petition seeking to introduce that service. An incumbent LEC may not

seek expedited review based on our public interest authorization of a

new service based on a competitive showing, such as was the case with

the NYNEX USPP and Ameritech Customers First waivers. In such cases, an

incumbent LEC must file its own petition seeking approval for a new

rate element.

Ordering Clauses

8. It is further ordered that, pursuant to Sections 1-4, 201-205,

and 303(r) of the Communications Act of 1934, as amended, 47 U.S.C.

151-154, 201-205, and 303(r) that the third report and order is

adopted, effective June 30, 1997. The collections of information

contained within are contingent upon approval by the Office of

Management and Budget.

9. It is further ordered that Parts 61 and 69 of the Commission's

rules, 47 CFR Parts 61 and 69 are amended as set forth below.

List of Subjects

47 CFR Part 61

Communications common carriers, Reporting and recordkeeping

requirements, Tariffs.

47 CFR Part 69

Access charges, Communications common carriers, Reporting and

recordkeeping requirements.

Federal Communications Commission.

William F. Caton,

Acting Secretary.

Rule Changes

Title 47 of the Code of Federal Regulations, Parts 61 and 69, are

amended as follows:

PART 61--TARIFFS

1. The authority citation for Part 61 continues to read as follows:

Authority: Secs. 1, 4(i), 4(j), 201-205, and 403 of the

Communications Act of 1934, as amended; 47 U.S.C. 151, 154(i),

154(j), 201-205, and 403, unless otherwise noted.

2. Section 61.47 is amended by revising paragraphs (e), (g)(1),

(g)(2), (g)(4), and (h)(2) and by removing paragraph (g)(6) to read as

follows:

Sec. 61.47 Adjustments to the SBI; pricing bands.

* * * * *

(e) Pricing bands shall be established each tariff year for each

service category and subcategory within a basket. Except as provided in

paragraphs (f), (g), and (h) of this section, each band shall limit the

pricing flexibility of the service category or subcategory, as

reflected in the SBI, to an annual increase of five percent, relative

to the percentage change in the PCI for that basket, measured from the

levels in effect on the last day of the preceding tariff year. For

local exchange carriers subject to price caps as that term is defined

in Sec. 61.3(x), there shall be no lower pricing band for any service

category or subcategory.

* * * * *

(g)(1) Local Exchange Carriers--Service Categories and

Subcategories. Local exchange carriers subject to price cap regulation

as that term is defined in Sec. 61.3(x) shall use the methodology set

forth in paragraphs (a) through (d) of this section to calculate two

separate subindexes: One for the DS1 services offered by such carriers

and the other for the DS3 services offered by such carriers. The annual

pricing flexibility for each of these two subindexes shall be limited

to an annual increase of five percent, relative to the percentage

change in the PCI for the special access services basket, measured from

the last day of the preceding tariff year. There shall be no lower

pricing band for these two subindexes.

(2) The upper pricing band for the tandem-switched transport

service category shall limit the annual upward pricing flexibility for

this service category, as reflected in its SBI, to two percent,

relative to the percentage change in the PCI for the trunking basket,

measured from the levels in effect on the last day of the preceding

tariff year. There shall be no lower pricing band for the tandem-

switched transport service category.

* * * * *

(4) Local exchange carriers subject to price cap regulation as that

term is defined in Sec. 61.3(x) shall use the methodology set forth in

paragraphs (a) through (d) of this section to calculate a separate

subindex for the 800 data base vertical features offered by such

carriers. The annual pricing flexibility for this subindex shall be

limited to an annual increase of five percent, relative to the

percentage change in the PCI for the traffic sensitive basket, measured

from the last day of the preceding tariff year. There shall be no lower

pricing band for this subindex.

* * * * *

(h) * * *

(2) The annual pricing flexibility for each of the subindexes

specified in paragraph (h)(1) of this section shall be limited to an

annual increase of five percent, relative to the percentage change in

the PCI for the trunking basket, measured from the levels in effect on

the last day of the preceding tariff year. There shall be no lower

pricing band for these subindexes.

Sec. 61.49 [Amended]

3. Section 61.49 is amended by removing paragraph (d) and

redesignating paragraphs (e) through (k) as paragraphs (d) through (j).

PART 69--ACCESS CHARGES

4. The authority citation for Part 69 continues to read as follows:

Authority: Sec. 4, 201, 202, 203, 205, 218, 403, 48 Stat. 1066,

1070, 1077, 1094, as amended; 47 U.S.C. 154, 201, 202, 203, 205,

218, 403.

5. Section 69.4 is amended by adding paragraph (g) to read as

follows:

Sec. 69.4 Charges to be filed.

* * * * *

[[Page 4660]]

(g)(1) Local exchange carriers subject to price cap regulation as

that term is defined in Sec. 61.3(x) of this chapter may establish one

or more switched access rate elements for a new service within the

meaning of Sec. 61.42(g) of this chapter, upon approval of a petition

demonstrating that:

(i) The establishment of the new rate element or elements would be

in the public interest; or

(ii) Another local exchange carrier has previously obtained

permission to establish one or more rate elements identical to those

proposed in the petition to offer the identical service; and the

original petition did not rely upon a competitive showing as part of

the public interest justification.

(2) The Chief, Common Carrier Bureau shall issue a Public Notice of

the filing of a petition under paragraph (g)(1)(ii) of this section.

Parties may file comments in response to such a petition within seven

days of the Public Notice. The local exchange carrier shall have

authority to introduce new rate elements under paragraph (g)(1)(ii) of

this section, after the expiration of ten days from issuance of the

Public Notice, unless the Chief, Common Carrier Bureau informs the LEC

that the LEC has not demonstrated that its new service meets the

standards of paragraph (g)(1)(ii) of this section. The incumbent LEC

may then file one subsequent petition for authorization of that service

under paragraph (g)(1)(ii) of this section.

[FR Doc. 97-2143 Filed 1-30-97; 8:45 am]

BILLING CODE 6712-01-P