Access Charge Reform; Price Cap Performance Review for Local Exchange Carriers; Transport Rate Structure

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 69

[CC Docket Nos. 96-262, 94-1, 91-213; FCC 97-368]

Access Charge Reform; Price Cap Performance Review for Local

Exchange Carriers; Transport Rate Structure

AGENCY: Federal Communications Commission.

ACTION: Final rule; petition for reconsideration.

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SUMMARY: On December 23, 1996, the Commission adopted a Notice of

Proposed Rulemaking in this docket, 62 FR 4670 (Jan. 31, 1997), seeking

comment on how the interstate access charge regime should be revised in

light of the local competition and Bell Operating Company entry

provisions of the Telecommunications Act of 1996 and state actions to

open local markets 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.

On May 7, 1997, the Commission adopted a First Report and Order, 62 FR

31040 (June 6, 1997), in which it adopted many of the rules it

proposed. In this Second Order on Reconsideration, the Commission

modifies some of the rules adopted in the First Report and Order. These

rule revisions are intended to foster competition, move access charges

over time to more economically efficient levels and rate structures,

preserve universal service, and lower rates.

EFFECTIVE DATES: The following rules or amendments thereto, shall

become effective January 1, 1998: 47 CFR 69.153(g), 69.4, 69.111(c)(1),

69.153(c)(1), 69.153(d)(1)(i), 69.153(d)(2)(i), and 69.155(c). The

Commission has requested emergency approval of the information

collection requirements to ensure that it may be

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effective on January 1, 1998. Written comments by the public on the new

and/or modified information collections are due November 13, 1997.

Written comments must be submitted to the Office of Management and

Budget (OMB) on the new and/or modified information collections on or

before October xx, 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 Judy Boley at 202-418-0214, or via the

Internet at [email protected].

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

and Order adopted October 8, 1997, and released October 9, 1997. 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., N.W., Washington, DC. The complete text also may be

obtained through the World Wide Web, at http://www.fcc.gov/Bureaus/

Common__Carrier/Orders/1997/fcc97368.wp, or may be purchased from the

Commission's copy contractor, International Transcription Service,

Inc., (202) 857-3800, 1231 20th Street, NW, Washington, DC 20036. The

rules adopted in this Second Order on Reconsideration are made in

response to petitions for reconsideration to Access Charge Reform, CC

Docket No. 96-262, Report and Order, 62 FR 31040 (June 6, 1997) (First

Report and Order), and to correct clerical errors of the First Report

and Order. This Second Order on Reconsideration contains new and/or

modified information collections subject to the Paperwork Reduction Act

of 1995 (PRA). It has been submitted to the Office of Management and

Budget (OMB) for review under the PRA. OMB, the general public, and

other Federal agencies are invited to comment on the new and/or

modified information collections contained in this proceeding. Please

note that the Commission has requested emergency review and approval of

this collection by November 13, 1997 under the provisions of 5 CFR

1320.13.

Final Regulatory Flexibility Analysis

In the First Report and Order, we conducted a Final Regulatory

Flexibility Analysis as required by Section 603 of the Regulatory

Flexibility Act, as amended by the Contract with America Advancement

Act of 1996, Pub. L. No. 104-121, 110 Stat. 847 (1996). The changes we

adopt in this Order do not affect that analysis.

Paperwork Reduction Act

This Order contains either a proposed or modified information

collection. As part of its continuing effort to reduce paperwork

burdens, we invite the general public and the Office of Management and

Budget (OMB) to take this opportunity to comment on the information

collections contained in this Order, as required by the Paperwork

Reduction Act of 1995, Public Law 104-13. Please note that the

Commission has requested emergency review and approval of this

collection by November 13, 1997 under the provisions of 5 CFR 1320.13.

OMB notification of action is due November 13, 1997. 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.

OMB Approval Number: 3060-0760.

Title: Access Charge Reform Second Order on Reconsideration

Type of Review: Revised Collection

Respondents: Business and other for profit.

Number of Respondents: 14.

Estimated Time Per Response: 128,907 hours.

Total Annual Burden: 1,804,690 hours.

Estimated Costs Per Respondent: $4,504,388.

Total Annual Estimated Costs: $63,061,430.

Needs and Uses: 1. In the First Report and Order (Order), CC Docket

No. 96-262, Access Charge Reform and the Second Order on

Reconsideration, the FCC adopts, that, consistent with principles of

cost-causation and economic efficiency, non-traffic sensitive (NTS)

costs associated with local switching should be recovered on an NTS

basis, through flat-rated, per month charges. The information

collections are as follows:

a. Showings Under the Market-Based Approach: As competition

develops in the market, the FCC will gradually relax and ultimately

remove existing Part 69 federal access rate structure requirements and

Part 61 price caps restrictions on rate level changes. Regulatory

reform will take place in two phases. The first phase of regulatory

reform will take place when an incumbent Local Exchange Carrier's (LEC)

network has been opened to competition for interstate access services.

The second phase of rate structure reforms will take place when an

actual competitive presence has developed in the marketplace.

Detariffing will take place when substantial competition has developed

for the access charge elements. In our initial statement, we proposed

that in order for LECs to meet this standard, they have to demonstrate

that: (1) Unbundled network element prices are based on geographically

deaveraged, forward-looking economic costs in a manner that reflects

the way costs are incurred; (2) transport and termination charges are

based on the additional cost of transporting and terminating another

carrier's traffic; (3) wholesale prices for retail services are based

on reasonably avoidable costs; (4) network elements and services are

capable of being provisioned rapidly and consistent with a significant

level of demand; (5) dialing parity is provided by the incumbent LEC to

competitors; (6) number portability is provided by the incumbent LEC to

competitors; (7) access to incumbent LEC rights-of-way is provided to

competitors; and (8) open and non-discriminatory network standards and

protocols are put into effect. We propose that the second phase of rate

structure reforms would take place when an actual competitive presence

has developed in the marketplace. LECs would have to show the following

to indicate that actual competition has developed in the marketplace

by: (1) Demonstrated presence of competition; (2) full implementation

of competitively neutral universal service support mechanisms; and (3)

credible and timely enforcement of pro-competitive rules. In the NPRM,

we sought comment on four options for a prescriptive approach:

reinitializing price cap indices (PCIs) to economic cost-based levels;

reinitializing PCIs to levels targeted to yield no more than an 11.25

percent rate of return, or some other rate of return; adding a policy-

based mechanism similar to the CPD to the X-Factor; or prescribing

economic cost-based rates. We have decided above to rely primarily on a

market-based approach, and impose prescriptive requirements only when

market forces are inadequate to ensure just and reasonable rates for

particular services or areas. We will determine the details of our

market-based approach in a future Order. In that Order, we will also

discuss in more detail what prescriptive

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requirements we will use as a backstop to our market-based access

charge reform. Because we are not adopting the prescriptive approach at

this time, we are removing the collections associated with the

prescriptive approach from our statement. If the collections are

adopted at a later date, we will request that OMB reinstates them at

that time. No change.

b. Cost Study of Local Switching Costs: The FCC does not establish

a fixed percentage of local switching costs that incumbent LECs must

reassign to the Common Line basket or newly created Trunk Cards and

Ports service category as NTS costs. In light of the widely varying

estimates in the record, we conclude that the portion of costs that is

NTS costs likely varies among LEC switches. Accordingly, we require

each price cap LEC to conduct a cost study to determine the

geographically-averaged portion of local switching costs that is

attributable to the line-side ports, as defined above, and to dedicated

trunk side cards and ports. These amounts, including cost support,

should be reflected in the access charge elements filed in the LEC's

access tariff effective January 1, 1998. No Change.

c. Cost Study of Interstate Access Service That Remain Subject to

Price Cap Regulation: The 1996 Act has created an unprecedented

opportunity for competition to develop in local telephone markets. We

recognize, however, that competition is unlikely to develop at the same

rate in different locations, and that some services will be subject to

increasing competition more rapidly than others. We also recognize,

however, that there will be areas and services for which competition

may not develop. We will adopt a prescriptive ``backstop'' to our

market-based approach that will serve to ensure that all interstate

access customers receive the benefits of more efficient prices, even in

those places and for those services where competition does not develop

quickly. To implement our backstop to market-based access charge

reform, we require each incumbent price cap LEC to file a cost study no

later than February 8, 2001, demonstrating the cost of providing those

interstate access services that remain subject to price cap regulation

because they do not face substantial competition. No Change.

The Order also adopts the following collection of information:

d. Tariff Filings: In the First Report and Order, the Commission

requires the filing of various tariffs, with modifications. For

example, the FCC directs incumbent LECs to establish separate rate

elements for the multiplexing equipment on each side of the tandem

switch. LECs must establish a flat-rated charge for the multiplexers on

the SWC side of the tandem, imposed pro-rata on the purchasers of the

dedicated trunks on the SWC side of the tandem. Multiplexing equipment

on the EO side of the tandem shall be charged to users of common EO-to-

tandem transport on a per-minute of use basis. These multiplexer rate

elements must be included in the LEC access tariff filings to be

effective January 1, 1998. In the Second Order on Reconsideration, the

FCC clarifies that the TIC exemption for access customers using

competitive transport providers only applies to that portion of the

residual per-minute TIC that is related to transport facilities, and

directs incumbent local exchange carriers to include, in their access

tariff filing, the amount of per-minute transport interconnection

charge (TIC) they anticipate will be allocated to facilities-based rate

elements in the future.

e. Third-Party Disclosure: In the Second Order on Reconsideration,

the Commission requires LECs to provide IXCs with customer-specific

information about how many and what type of presubscribed interexchange

carrier charges (PICCs) they are assessing for each of the IXC's

presubscribed customers. One of the primary goals of our First Report

and Order was to develop a cost-recovery mechanism that permits

carriers to recover their costs in a manner that reflects the way in

which those costs are incurred. Without access to information that

indicates whether the LEC is assessing a primary or non-primary

residential PICC, or about how many local business lines are

presubscribed to a particular IXC, the IXC will be unable to develop

rates that accurately reflect the underlying costs.

SYNOPSIS OF REPORT AND ORDER

I. Presubscribed Interexchange Carrier Charge

A. Implementation Issues

1. Background

1. In the First Report and Order, we adopted common line rate

structure modifications that will permit price cap LECs to shift

gradually from a cost-recovery mechanism that recovers a significant

portion of non-traffic sensitive common line costs through per-minute

CCL charges to one that recovers these costs through flat-rated

charges. The cost-recovery mechanism we adopted retains the current

$3.50 ceiling on the SLC for primary residential and single-line

business lines and increases the SLC ceilings on other lines to permit

LECs to recover a greater amount of the common line costs through flat-

rated charges assessed on the end user. To the extent that SLC ceilings

prevent price cap LECs from recovering their allowed common line

revenues from end users, LECs will recover the shortfall, subject to a

maximum charge, through a presubscribed interexchange carrier charge

(PICC), a flat, per-line charge assessed on the end-user's

presubscribed interexchange carrier.

2. The PICC, which over time will shift revenue recovery from the

per-minute CCL charges to a flat-rated charge assessed on IXCs, was

designed to allow price cap LECs to recover the difference between

revenues collected through the SLCs and the total revenue permitted for

the common line basket. In order to provide price cap LECs and IXCs

with adequate time to adjust to the new rate structure, we adopted an

approach that will gradually phase in the PICC over time. Specifically,

effective January 1, 1998, we capped PICCs for primary residential and

single-line business lines at $0.53 per month for the first year.

Beginning January 1, 1999, the ceiling on the monthly PICC on primary

residential and single-line business lines will be adjusted for

inflation and will increase by $0.50 per year until it equals the

monthly per-line common line revenues and residual interconnection

charge revenues permitted under our price cap rules, less the maximum

SLC charge allowed under our rules.

3. In addition, to the extent that the SLC ceilings on all lines

and the PICC ceilings on primary residential and single-line business

lines prevent recovery of the full common line revenues permitted by

our price cap rules, the new rate structure we adopted for price cap

LECs permits these carriers to recover the shortfall through PICCs

assessed on non-primary residential and multi-line business lines. For

the first year, the ceiling on the PICC will be $1.50 per month for

non-primary residential lines and $2.75 per month for multi-line

business lines.

4. Beginning January 1, 1999, the PICC ceilings for price cap non-

primary residential and multi-line business lines will be adjusted for

inflation and will increase by a maximum of $1.00 and $1.50 per year,

respectively, until incumbent LECs can recover all of their permitted

common line revenues through a combination of flat-rated SLCs and

PICCs. As the PICC ceilings on primary residential and single-line

business lines increase, the residual per-minute CCL charge will

decrease until it is eliminated. After the residual per-minute CCL

charge is eliminated and

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the PICC ceilings for primary residential and single-line business

lines increase, price cap LECs will reduce their PICCs on non-primary

residential and multi-line business lines by a corresponding amount.

Reductions will be targeted first to the PICCs on multi-line business

lines until the PICCs for those lines are equal to the PICCs for non-

primary residential lines. Thereafter, price cap LECs will apply the

annual reductions to both classes of customers equally until the

combined SLCs and PICCs for primary residential and single-line

business lines recover the full average per-line common line revenues

permitted under our price cap rules, and the additional PICCs on non-

primary residential and multi-line business lines no longer recover

common line revenues.

2. Sprint's Petition for Reconsideration

5. On July 11, 1997 Sprint filed a Petition for Expedited

Reconsideration and Clarification in which it requests that the

Commission reconsider certain implementation issues related to the

PICCs adopted in the First Report and Order. Sprint argues that these

issues need to be resolved prior to January 1, 1998, the effective date

of the PICCs. Specifically, Sprint requests that the Commission require

LECs to provide IXCs with customer-specific billing information that

specifies the number and type(s) of PICCs LECs will be assessing for

each of the IXCs' presubscribed customers. Sprint asserts that because

LECs will be assessing IXCs different PICCs for primary and non-primary

residential lines, IXCs may choose to develop different residential

rates for these lines. Sprint argues that IXCs will therefore need the

customer-specific PICC information in order to develop separate toll

rates for calls originated on these lines.

6. In addition, Sprint contends that in a typical multi-line

business configuration IXCs are unable to determine how many multi-line

business lines are presubscribed to them. According to Sprint, unless

the LECs provide customer-specific PICC information, IXCs are unable to

know how many of these local lines exist or how many PICCs are being

assessed for these lines. Sprint argues that IXCs need access to

customer-by-customer PICC data so that they have the ability to pass

through the PICCs directly to their customers if they so choose.

7. In its petition, Sprint seeks guidance from the Commission on

how LECs should assess PICCs where a LATA encompasses territory in more

than one state, and a customer has one IXC handling intraLATA

interstate calls and another IXC handling interLATA interstate calls.

Sprint suggests that the PICC should be assessed on the interLATA

interstate carrier.

3. Discussion

8. We grant Sprint's request that LECs be required to provide IXCs

with customer-specific information about the number and type(s) of

PICCs they are assessing for each of the IXC's presubscribed customers.

We agree with Sprint that this measure is necessary to provide IXCs the

opportunity to develop a rate structure that recovers these costs in a

cost-causative manner. One of the primary goals of our First Report and

Order was to develop a cost-recovery mechanism that permits carriers to

recover their costs in a manner that reflects the way in which those

costs are incurred. If an IXC were to receive a bill for the aggregate

amount of the PICCs assessed on its presubscribed lines and did not

have access to information that indicates for which lines the LEC is

assessing a primary or non-primary residential PICC, the IXC would be

unable to develop residential rates that accurately reflect the

underlying costs of providing service over those lines. Similarly, in a

multi-line business configuration, without information about the number

of local business lines that are presubscribed to a particular IXC and

the amount of PICCs being charged for which lines, the IXC will not be

able to recover the costs of serving its customers in an efficient

manner. We therefore conclude that LECs must provide IXCs with

information about how many and what type of PICCs they are charging

IXCs for each customer.

9. We conclude that there is insufficient evidence in the record to

support arguments that providing customer-specific PICC data to IXCs

will be overly burdensome and that discrepancies can be resolved

through normal billing reconciliation processes. In order to bill IXCs

the proper amount, LECs will presumably have to create a database for

purposes of determining how many lines are presubscribed to each IXC

and what type of PICC is being assessed for each of those lines. We

conclude that LECs must provide this information to the IXCs to enable

them to develop rate structures that will recover these costs

efficiently.

10. We also grant Sprint's request to clarify how LECs assess PICCs

in situations where a customer for a particular line has one

presubscribed carrier for interstate intraLATA calls and another for

interstate interLATA calls. Dividing the PICC between two IXCs based on

actual calling patterns would create an unnecessary administrative

burden that would outweigh any minimal benefit. Moreover, LATA

boundaries that cross state lines are the exception rather than the

rule, and interstate calls within a LATA thus represent only a small

portion of interstate traffic. We therefore conclude that in such

cases, the PICC shall be assessed on the interstate interLATA carrier.

B. PICC Calculation

1. Background

11. In its petition for reconsideration, Sprint argues that the

Commission's formula for calculating PICCs will not allow sufficient

recovery of loop costs, because the formula relies on base period

revenues divided by the projected number of loops in use for such

annual period. Sprint contends that such a formula would force PICCs

downward because revenues determined on a base period would not

adequately reflect revenue growth commensurate with projected growth in

loops. In turn, Sprint argues, under-recovery of loop costs through

flat-rated PICCs will necessitate greater reliance on usage charges to

recover non-traffic-sensitive costs, undermining the Commission's

efforts to align access charges with the manner in which costs are

incurred.

2. Discussion

12. We clarify in this Order that the rule describing the formula

for calculating PICCs relies on projected revenues and projected loop

counts. The use of projected revenues and projected loop counts is

applicable to PICC calculations conducted under sections 69.153(c) and

69.153(d) of our rules. We note that the rule setting forth the method

of calculating SLCs expressly incorporates projected revenues and

projected loop numbers. Although the PICC rule does not expressly state

that projected revenues are to be used in the formula, the rule has

been designed to use projected revenues rather than revenues derived

from a base period. Accordingly, there is no ``mismatch'' caused by

dividing projected loops by base period revenues. We will, however,

amend our rules to state explicitly that the projected revenues must be

used to conduct the PICC calculation.

13. In our First Report and Order, we adopted section 69.153(c)(1)

in which we directed incumbent LECs to calculate the maximum monthly

PICC for primary residential subscriber lines and single-line business

lines by using ``one twelfth of the sum of annual common line revenues

and residual

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interconnection charge revenues permitted under our price cap rules

divided by the projected average number of local exchange service

subscriber lines in use during such annual period, minus $3.50.'' On

further consideration of section 69.153(c)(1), we recognize that, as

written, this rule may not permit an incumbent LEC to recover its

residual interconnection charge revenues from primary residential and

single-line business lines when its maximum primary residential and

single-line business SLC is less than $3.50. On our own motion,

therefore, we take this opportunity to reconsider this issue and revise

section 69.153(c)(1). We replace the phrase ``minus $3.50'' with the

phrase ``minus the maximum subscriber line charge computed pursuant to

section 69.152(d)(2).''

In the First Report and Order, we also adopted section

69.153(d)(2)(i), which instructs incumbent LECs how to calculate the

maximum monthly PICC for multi-line business lines when the maximum

charge for the non-primary residential PICC is at its cap. The rule was

intended to provide that the calculation be performed by taking ``[o]ne

twelfth of the annual common line, residual interconnection charge, and

Sec. 69.156(a) marketing expense revenues permitted,'' less the maximum

amounts permitted to be recovered through the SLC, the other PICCs, and

other marketing expense recovery mechanisms. In crafting the language

of the rule, however, we identified the maximum amount permitted to be

recovered from the non-primary residential PICC as section

69.153(d)(1)(i) instead of section 69.153(d)(1). We correct this error

to take into account the fact that the cap on the non-primary

residential PICC limits the amount that charge can recover.

C. Application of PICCs to Centrex Lines

1. Background

15. The First Report and Order requires that the PICC recover

common line revenues not recovered from the SLC and other common line

charges, and that the PICC be applied on the same basis as the SLC.

Centrex arrangements are charged more SLCs than are similarly-sized PBX

arrangements. Consequently, the First Report and Order requires that

Centrex arrangements be assessed a greater number of PICCs than are

similarly-sized PBX arrangements.

22. Petitions

16. USTA, ICA, and the County of Los Angeles (Los Angeles) assert

that the number of PICCs that are assessed on Centrex arrangements

should equal the number of PICCs assessed on similarly-sized PBX

arrangements. They contend that the revenues recovered from Centrex

arrangements by the PICC are unrelated to the costs of providing

Centrex service. They argue that Centrex customers currently pay one

SLC per line, which recovers the full interstate portion of common line

costs used to provide Centrex service. They further contend that the

disproportionate level of PICC Centrex charges unfairly subjects

Centrex systems to anticompetitive and arbitrary charges, which is

contrary to the clear intent of Congress that subsidies be explicit and

cost-based.

17. ICA observes that the Commission's rules appear to apply to

lines that are toll restricted, thereby penalizing customers that

attempt to control costs and reduce the possibility of toll fraud.

According to ICA, many Centrex customers require that a portion of

their Centrex lines be toll restricted. ICA argues that toll-restricted

Centrex lines should not be subject to any PICCs.

18. Petitioners propose that LECs be permitted to reflect trunk

equivalency. They propose that the PICC on Centrex lines be assessed

using a line-to-trunk equivalency ratio. Such ratios are already set

forth in intrastate tariffs. In the absence of an intrastate tariff,

the LECs could develop such a ratio, or there could be agreed upon

industry relationships between the Centrex lines and trunks. USTA also

suggests that LECs should be permitted to count Network Access

Registers (NARs) for purposes of assessing the PICC on Centrex

customers. USTA contends that NARs are equivalent to PBX trunks since

one NAR provides one link to the switch. In an ex parte filing, USTA

has indicated that in order to address the complexity and verification

problems of using individual state tariffs or individual company

ratios, the Commission should adopt a uniform line-to-trunk equivalency

ratio of 9 to 1.

3. Discussion

19. We grant the petitions of USTA, ICA, and Los Angeles that the

PICC be assessed on Centrex lines using a line-to-trunk equivalency

ratio. For the reasons discussed below, we adopt USTA's proposal to use

a uniform 9:1 ratio. In large part, the multi-line business PICC is not

a cost-based charge, but a contribution, ``for a limited period, to the

recovery of common line costs that incumbent LECs incur to serve

single-line customers.'' It is therefore reasonable to consider non-

cost factors in determining how to assess the PICC. We conclude that

with respect to the PICC, Centrex customers should be treated similarly

to PBX customers, because the two arrangements are functionally

equivalent.

20. Petitioners state that Centrex and PBX arrangements are

functionally equivalent, and opposing parties do not dispute this

assertion. We do not wish to encourage a large customer to choose one

of these arrangements, PBX, over another, Centrex, simply because, as a

result of its IXC being charged substantially more PICCs, i.e., non-

cost-related charges, for Centrex service, the PBX service becomes

cheaper.

21. In addition, many Centrex users are government, education, and

health care facilities. We note that more than 25 percent (18,640) of

Los Angeles's 67,000 Centrex lines, which do not include Los Angeles

County public schools are used by health care facilities. Without using

a line-to-trunk equivalency ratio, Los Angeles could be required to pay

an additional $2.8 million annually in PICCs, if its presubscribed IXC

passes these charges through. New York could see the implementation of

the PICC increase its rates by over $2.4 million annually, if these

charges are passed through by its IXC. Boston University, with its

10,000 Centrex lines, faces a potential increase of $330,000 per year

in PICCs. By granting the petitions for relief, we ensure that all

multi-line business customers shoulder a similar portion of the PICC

contribution, irrespective of whether they use Centrex or PBX

arrangements.

22. Centrex arrangements are charged SLCs on a per-line basis, even

though this difference results in a higher rate than equivalent PBX

arrangements have to pay. That differential is due to the additional

common line costs that Centrex lines incur. Historically, the

Commission has declined to apply a trunk equivalency ratio for Centrex

services, under the rationale that ``[i]f Centrex uses more lines, then

Centrex necessarily creates more line costs.'' Unlike the SLC, in most

instances, the multi-line business PICC will not recover loop costs of

multi-line businesses. Instead, it will contribute to the recovery of

the cost of single-line business and residential loops, which have

lower SLC and PICC caps. Centrex and PBX are functionally equivalent in

most respects. Taking these factors into consideration, it would be

inequitable to require Centrex users to cause its presubscribed IXC to

bear a significantly larger PICC contribution than do similarly-sized

PBX users.

[[Page 56126]]

23. Therefore, we will limit the PICC charges that may be assessed

on IXCs serving Centrex customers on a line-to-trunk equivalency basis,

except where the multi-line business SLC ceiling does not permit the

recovery of all interstate-allocated loop costs from the end user. In

those instances, a somewhat greater PICC--one that includes the

difference between the per-line loop cost and the multi-line business

SLC cap--will be assessed on Centrex lines. Thus, for example, if on

January 1, 1998, in a particular region the loop cost is $9.40, and the

maximum permitted multi-line business PICC is being assessed, i.e.,

$2.75, each Centrex line would be assessed a $0.71 PICC, which is equal

to one-ninth of $2.75 plus the difference between the $9.40 loop cost

and the $9.00 SLC.

24. In determining the appropriate line-to-trunk equivalency ratio,

we consider several factors. First, we observe that many states, but

not all, already have trunk equivalency tables for their intrastate

tariffs. USTA has indicated that although these tables are similar,

they are not identical. For example, USTA states that a Centrex

customer with 70 lines is equivalent to a PBX customer with 13 trunks,

while Ameritech states that in Illinois, the equivalency tariff for 70

Centrex lines is 8 PBX trunks. Adopting the trunk equivalency ratios

set out in intrastate tariffs would result in different equivalency

ratios being used in different states and would not provide a trunk

equivalency ratio for many states. Because the trunk equivalency ratio

we adopt today is for an interstate charge, a national standard for

trunk equivalency ratio is appropriate.

25. We also desire administrative ease in calculating trunk

equivalency. Adoption of a single ratio would simplify the assessment

of PICCs on Centrex lines by eliminating the use of multiple ratios

from multiple tables or state tariffs. IXCs would have the benefit of

knowing that they will be assessed a set fraction of the PICC for each

Centrex line that is presubscribed to their service, even when Centrex

customers have lines presubscribed to different IXCs. Therefore, we

have elected to adopt a single trunk equivalency ratio for establishing

PICC charges for all Centrex lines. USTA suggested a ratio of nine (9)

Centrex lines to one (1) PBX trunk. It bases its recommendation on the

average of the weighted average trunk equivalency ratios or

relationship between NARs and Centrex lines that are employed in

several jurisdictions. Applying a 9:1 ratio would result in a maximum

PICC on Centrex lines of approximately $0.30 per line in 1998 for the

overwhelming majority of Centrex lines. We note that the ratio under

some state tariffs can approach 18 to 1 for certain Centrex customers.

Reducing the PICC from up to $2.75 to less than $0.31 achieves the goal

of spreading the PICC contribution more equitably among multi-line

business customers. Using a more complicated approach to establish

equivalency may only add a marginal benefit, increasing or reducing

PICCs by less than $0.16, and does not outweigh the additional

administrative costs. We adopt the 9:1 ratio proposed by USTA, finding

it to be reasonable and administratively simple.

26. Time Warner is correct in observing that our treatment of

Centrex arrangements differs from how we addressed ISDN service in the

First Report and Order. There, we set the SLC for PRI ISDN to be up to

five times the amount assessed multi-line business subscribers, because

that figure reflects the ratio of non-traffic sensitive loop costs

associated with PRI ISDN service to non-traffic sensitive costs

associated with other multi-line business loops. We also elected to

permit incumbent LECs to assess up to five PICCs on PRI ISDN service

because ``prohibiting incumbent LECs from charging as many as five

PICCs for PRI ISDN service could prevent them from recovering the

common line costs associated with providing PRI ISDN service in cases

where the common line costs exceed the SLC ceiling.''

27. In both our treatment of ISDN lines and Centrex lines, our goal

is to establish an equitable sharing of the multi-line business PICC.

Prior to the adoption of the First Report and Order, we had no rules

relating to the PICC. We had no evidence to the contrary that the

assessment of five PICCs for PRI ISDN was inappropriate, so we elected

to be consistent as between SLC and PICC assessment. Previously,

however, ISDN lines could be charged up to 24 SLCs. The adjustment from

24 SLCs to five SLCs and five PICCs does not create undue hardship on

ISDN subscribers, and the First Report and Order should reduce their

overall rates.

28. Time Warner also argues that imposing the PICC on Centrex on a

per-line basis is part of the Commission's access charge transition to

a more cost-causative rate structure. Although the multi-line PICC is

part of our transition, this alone does not justify requiring Centrex

customers to make a greater contribution toward recovery of the loop

cost of residential customers than do PBX customers. Teleport's

assertion that petitioners are exaggerating the impact of the PICC on

Centrex users, because the amount of the charge is substantially less

than the SLC, ignores the fact that the SLC recovers the additional

costs imposed by Centrex customers, while the PICC does not.

29. We deny ICA's petition that we not assess PICCs on toll-

restricted Centrex lines. Although the PICC is assessed upon IXCs for

all lines that are presubscribed to an IXC, the PICC is not a charge

based on toll usage or on the ability to place toll calls. The

Commission anticipated that some lines might not be used for long

distance when it adopted a rule allowing PICCs to be assessed directly

upon end users for any line not presubscribed to an IXC. The fact that

toll-restricted Centrex lines incur no long-distance charges is,

therefore, irrelevant. Also, costs for these lines are assigned to the

interstate jurisdiction by separations, regardless of whether the lines

are toll-restricted.

II. Transport

A. TIC Exemption

1. Background

30. The Commission created the TIC originally as a residual charge

to ensure that its adoption of the 1992 interim transport rate

structure was revenue-neutral for the incumbent LECs. As such, the

Commission required that the TIC be assessed on a per-minute basis on

all interstate access customers that interconnect with the LEC switched

access network. A portion of the TIC represented the 80 percent of the

costs of the tandem switch remaining after the Commission set the

tandem-switching rate to recover only 20 percent of the tandem-

switching revenue requirement. The rest of the revenues collected from

the TIC represented costs previously recovered through transport

charges that could not, at that time, be associated definitively with

specific facilities or services related to transport. The Commission

stated in the First Transport Order that, in addition to tandem-

switching costs, the TIC likely recovered: (a) Costs more appropriately

recovered through other rate elements; (b) costs that more properly

belong in the intrastate jurisdiction, but that the Part 36

jurisdictional separations rules allocate to the interstate

jurisdiction; (c) costs of facilities that were then in place, but not

needed for transport under the more efficient transport rate structure

being adopted; and (d) costs of not-fully-depreciated copper plant that

was nevertheless being replaced by less expensive fiber optic

facilities. Transport Rate Structure and Pricing, Report and Order and

Further Notice of Proposed Rulemaking, 57 FR 54717 (November 20, 1992)

(First Transport Order). The Commission also cited

[[Page 56127]]

assertions by parties to that proceeding that the TIC also recovered

(e) general support facilities (GSF) and central office equipment (COE)

maintenance expenses and GSF investment that were overallocated to the

transport category; and (f) additional costs that the Commission had

not then identified.

31. In reviewing the Commission's interim transport rate structure,

the United States Court of Appeals for the District of Columbia Circuit

(D.C. Circuit) found that the just and reasonable rates required by

Sections 201 and 202 of the Communications Act, 47 U.S.C. Secs. 201-

202, must ordinarily be cost-based, absent a clear explanation of the

Commission's reasons for a departure from cost-based ratemaking.

Competitive Telecommunications Ass'n v. FCC, 87 F.3d 522, 529 (D.C.

Cir. 1996) (``CompTel''). The D.C. Circuit, therefore, directed the

Commission to develop a cost-based alternative to the TIC, or to

provide a reasoned explanation for its departure from the principles of

cost-based ratemaking.

32. In the First Report and Order, we reformed the TIC and set

forth a plan that will eliminate per-minute TIC charges over the next

few years. We initially identified TIC amounts that could be associated

with particular network facilities and directed incumbent LECs to

reallocate these TIC amounts to access rate elements more closely

corresponding to those network facilities. These LECs will perform the

required reallocations in access tariffs filed to become effective

January 1, 1998, with some exceptions. For example, the portion of

tandem-switching costs that the Commission initially allocated to the

TIC will be reallocated to the tandem-switching rate element in three

approximately equal steps concluding January 1, 2000. In addition, the

costs of the incumbent LECs' tandem-switched transport transmission

facilities that are not recovered from tandem-switched transport users

under the unitary rate structure will be recovered through the TIC

until July 1, 1998.

33. For price cap LECs, the ``residual TIC,'' consisting of amounts

that the LEC has not reallocated as described above, will be recovered

through per-line PICCs, to the extent possible while remaining within

the PICC caps. Residual TIC amounts that the price cap LEC cannot

recover through PICCs will be recovered through a per-minute TIC on

originating access, up to a cap, with any remainder recovered from per-

minute charges assessed on terminating access.

In the First Report and Order, we recognized that the per-minute

TIC, because it is assessed on all transport minutes carried on

facilities that interconnect with the incumbent LEC's local switch, may

give the incumbent LEC a competitive advantage in the transport market.

We therefore provided a TIC exemption for switched minutes carried by

competitive access providers (CAPs) that interconnect with the

incumbent LEC switched access network at the end office, stating that,

``if the incumbent LEC's transport rates are kept artificially low and

the difference is recovered through the TIC, competitors of the

incumbent LEC pay some of the incumbent LEC's transport costs.'' This

TIC exemption is scheduled to take effect on January 1, 1998.

2. Petitions for Reconsideration and Petitions for Stay

a. AT&T and Teleport. 35. On reconsideration, AT&T and Teleport

request that we permit the per-minute residual TIC exemption for

switched minutes carried by CAPs that interconnect with the incumbent

LEC switched access network at the end office to take effect

immediately, rather than on January 1, 1998. According to Teleport, the

Commission, having recognized that the imposition of TIC charges on

CAP-transported minutes is ``inconsistent with the pro-competitive

goals of the 1996 Act,'' should not permit the practice to continue

throughout the balance of calendar 1997.

b. RCN. 36. RCN argues that the TIC exemption contained in the

First Report and Order preserves the incumbent LECs' competitive

advantage because it exempts CAP-transported minutes only from the

``residual'' TIC. In making this argument, RCN interprets the term

``residual TIC'' to include only non-facilities-related TIC amounts.

Under RCN's interpretation, the ``residual TIC'' would not include

facilities-related TIC amounts that will remain in the TIC until they

are reallocated as late as January, 2000.

c. U S West and NYNEX Petitions for Stay. 37. NYNEX and U S West

separately have filed petitions requesting that the Commission stay the

effectiveness, pending appeal, of 47 CFR 69.155(c), the rule we adopted

in the First Report and Order prohibiting local exchange carriers from

assessing the per-minute residual TIC on traffic that uses the LEC's

local switching services, but that does not use the LEC's local

transport services. NYNEX and U S West argue that such a stay is

warranted because they are likely to prevail on the merits of their

respective appeals and that the balance of equities favors a stay.

NYNEX and U S West further argue that the rule should be stayed in its

entirety, to allow them to recover the entire per-minute TIC, without

regard for the transport provider. In the alternative, however, NYNEX

requests a partial stay to allow it to so recover the non-facilities-

related portion of the TIC.

38. Procedurally, NYNEX maintains that the Commission failed to

offer an adequate opportunity for public comment on the residual TIC

exemption, in that the Commission's Notice, Access Charge Reform, CC

Docket No. 96-262, Notice of Proposed Rulemaking, 62 FR 6270 (January

31, 1997) (Notice), failed to provide adequate notice of the TIC

exemption and that the Commission improperly relied on a CompTel/

Teleport ex parte presentation made three weeks before the Order was

adopted.

39. Substantively, NYNEX argues that the Commission's decision to

prohibit assessment of the residual TIC on minutes that use CAP

transport networks is inconsistent with the Commission's findings that

a large portion of the TIC is not related to any specific transport or

other facilities.

40. NYNEX also argues that the Commission has failed to explain why

it is reasonable for the LEC to recover both service-related and non-

service-related TIC amounts from PICCs, but neither component from the

per-minute residual TIC.

41. NYNEX also argues that the use of price cap X-factor reductions

to decrease the per-minute TIC will effectively reallocate the per-

minute residual TIC to other rate elements as the per-minute TIC is

reduced to the exclusion of all other rate elements. According to

NYNEX, the residual TIC is completely excluded only to the extent that

the X-factor targeting has not reallocated it to a permitted rate

element. NYNEX argues that the Commission has not offered a

justification for disallowing TIC recovery only during this transition

period.

42. NYNEX argues that the CAP TIC exemption is arbitrary in that it

will have a disproportionately harsh effect on NYNEX, and that this

non-uniform impact will hinder the development of ``full and fair''

competition. Similarly, U S West argues that, by making it difficult or

impossible for it to collect the per-minute TIC, the TIC exemption is

contrary to the Commission's decision not to disallow any portion of

the current TIC.

43. NYNEX also argues that the TIC exemption contradicts the

Commission's conclusion that access

[[Page 56128]]

reform, in itself, should not produce overall rate reductions because

the price cap LECs' per-minute TIC revenues are likely to be less than

those calculated in the restructure. As a result, the price cap LECs

will be unable to collect the full amount of revenues from per-minute

residual TIC rates or PICCs that will be included in their January 1,

1998, tariff revisions.

44. NYNEX and U S West argue that an exemption for the service-

related portion of the TIC is inconsistent with the Commission's

continued reliance on subsidization of tandem-switching rates by

direct-trunked transport customers until December 31, 1999.

45. U S West argues that, after January 1, 1998, the TIC will

consist of implicit tandem switching and universal service support

subsidies (including the higher costs of providing rural transport) and

that the TIC exemption results in a collection system for this subsidy

that is non-sustainable, discriminatory, and inequitable.

3. Discussion

46. We decline to modify the effective date of 47 CFR 69.155(c) as

AT&T and Teleport request. Although some of the Commission's actions to

reform the interstate access charge system took effect in access

tariffs filed to become effective July 1, 1997, the majority of the

Commission's rate structure changes take effect on January 1, 1998, or

later. Because the TIC exemption at issue here is one part of our

larger effort to reform the system of interstate access charges to

preserve and promote competition, we believe that the rule should take

effect on January 1, 1998, at the same time as many of our other rules

relating to the transport rate structure. Incumbent LEC access tariffs

filed to become effective on that date will reallocate many of the

currently-identified facilities-related TIC amounts to other rate

elements. In addition, on January 1, 1998, for the first time, the

incumbent LECs will begin collecting remaining TIC amounts from PICCs

assessed to IXCs on a flat-rate, per-line basis. Because a portion of

the TIC, including some facilities-related TIC amounts, will be

allocated to PICCs on January 1, 1998, we conclude that the extent of

the exemption we adopt here will not be evident until these tariff

revisions take effect. Thus, we conclude that the exemption should take

effect only in concurrence with the implementation of the PICC.

47. We agree with RCN and MCI that we should clarify the extent of

the TIC exemption described in the First Report and Order. In addition,

in response to concerns raised in NYNEX's and U S West's petitions for

stay, we reconsider on our own motion our adoption of the TIC exemption

provided in the First Report and Order. 47 CFR 1.108. Under long-

established Commission practice, the filing of a petition for

reconsideration tolls the thirty day period our rules provide for sua

sponte reconsideration. E.g., Central Fla. Enters., Inc. v. FCC, 598

F.2d 37, 48 n.51 (D.C. Cir. 1978), cert. dismissed, 441 U.S. 957

(1979), and cert. denied 460 U.S. 1084 (1983); Radio Americana, Inc. 44

F.C.C. 2506, 2510 (1961). Upon further consideration, we conclude that

the TIC exemption provided in the First Report and Order could provide

an unjustified windfall to competitive providers of local transport.

Because the non-facilities-related portion of the residual TIC does not

relate to the use of the incumbent LEC's interstate transport

facilities, we need not exempt competitors from paying this portion of

the TIC in order to prevent them from paying for the incumbent LEC's

transport when that transport is not used. Therefore, incumbent LECs

may continue, after January 1, 1998, to assess upon all local switching

traffic that portion of their per-minute TIC charges that they do not

anticipate will be reallocated in the future to facilities-based rate

elements. This is the only portion of the per-minute TIC, however, that

may be assessed upon traffic that uses the incumbent LEC's local

switching services, but that does not use the incumbent LEC's local

transport services. Under this rule, interexchange traffic that is

switched at the incumbent LEC's local switch, but that is not

transported on the incumbent LEC's local transport network, will be

subject to the per-minute TIC, less the portion of the per-minute TIC

attributable to incumbent LEC tandem-switching and tandem-switched

transport transmission costs that have not yet been reallocated to

facilities-based rate elements. In access tariff revisions filed to

become effective January 1, 1998, incumbent LECs must show all such

facilities-related amounts that they anticipate will be reallocated in

the future, including appropriate documentation, and calculate separate

per-minute TIC charges for those minutes that use the incumbent LEC's

local transport facilities and those that do not.

48. In remanding the interim rate structure, the D.C. Circuit

instructed the Commission to ``move expeditiously * * * to a cost-based

alternative to the [TIC], or to provide a reasoned explanation of why a

departure from cost-based ratemaking is necessary and desirable in this

context.'' For our rate structure to be ``cost-based,'' costs must be

recovered (1) only from the party that causes the costs to be incurred;

and (2) in the manner in which the costs are incurred (e.g., non-

traffic-sensitive costs should be recovered on a non-traffic sensitive

basis).

49. Our First Report and Order identified certain costs within the

TIC that more properly should be recovered through other access rate

elements. These costs include additional trunking costs left

unrecovered by rates set assuming a uniform loading of 9000 minutes of

use per month on shared trunks, rather than rates set using actual

traffic levels, as well as misallocated costs of central office

equipment maintenance. In addition, we identified costs related to

multiplexing, SS7 signalling, and host/remote trunking that are

currently recovered through the TIC. LECs must reallocate all of these

costs to facilities-based rate elements in access tariffs filed to

become effective January 1, 1998. In addition, one third of the 80

percent of the costs of the tandem switch currently assigned to the TIC

will be reallocated to the tandem switching rate element on that date.

50. After January 1, 1998, the costs contained in the TIC that the

Commission has identified as facilities-related will have two primary

sources. The majority of the facilities-related TIC will consist of the

portion of the incumbent LEC's tandem-switching costs not yet

reallocated to the tandem-switching rate element. These costs will be

reallocated to the tandem-switching rate element in two additional

installments in tariffs filed to become effective on January 1, 1999,

and January 1, 2000. In addition, from January 1, 1998, until July 1,

1998, the TIC will also recover the costs of tandem-switched transport

transmission facilities that are not recovered by the incumbent LEC

from tandem-switched transport customers electing the unitary rate

structure. These TIC amounts are also facilities-related. In the First

Report and Order, we directed incumbent LECs to remove costs from the

TIC ``equal to the additional revenues realized from the new tandem-

switched transport rates * * * implemented in accordance with the

[final transport] rate structure.'' Because the three-part rate

structure will not take effect until July 1, 1998, we require incumbent

LECs to estimate in their tariffs filed to become effective January 1,

1998, the amount by which their tandem-switched transport transmission

revenues will increase under the three-part rate structure. This

amount, currently contained in the TIC, is facilities-related and

therefore subject to the exemption described in this order.

[[Page 56129]]

51. Neither the tandem-switching costs nor the tandem-switched

transport transmission costs contained in the TIC relate to facilities

used by purchasers of competitive alternatives to the incumbent LEC's

transport facilities. The D.C. Circuit remanded the interim transport

rate structure to the Commission in part because that rate structure

did not recover the costs of the tandem switch in a cost-causative

manner. Our First Report and Order, in reallocating these costs,

remedies this situation as expeditiously as possible while minimizing

the potential for rate shock that otherwise might accompany such a

shift. Because these costs are incurred on behalf of the incumbent

LEC's own transport operation, however, it would be inconsistent with

the principles of cost-causation to prolong the recovery of these costs

from users of competing transport facilities.

52. Our approach to access reform relies first on increasing

market-based pressures as competition develops to place downward

pressure on access charge levels. We conclude that, for this approach

to succeed, we should develop a rate structure that permits maximum

competitive pressure on each incumbent LEC revenue stream, absent

compelling public policy reasons to the contrary. It would impair the

effectiveness of our market-based approach for us to insulate a

significant portion of the costs of the incumbent LEC's transport

facilities from competition by mandating recovery of these costs from

incumbent LEC competitors.

53. We recognize that, during the two-year transition period, our

rules will continue to prohibit the incumbent LEC from allocating the

full, embedded cost of the tandem switch to the tandem-switching rate

element. The effect of our three-step reallocation process will be to

permit a continued subsidy of the incumbent LEC's tandem switch by

users of the incumbent LEC's direct-trunked transport facilities and

minimize any rate shock for tandem-switched transport customers.

Because the incumbent LEC's competitors offering transport services

will not be subject to this subsidy, they may enjoy a slight

competitive advantage over the incumbent LEC.

54. We find, however, that the competitive benefits to be gained

from recovering these costs only from the incumbent's customers and not

from customers using competitive transport providers outweigh any

potential dangers resulting from the small, temporary asymmetry caused

by the TIC exemption we provide here. Even though the full costs of the

incumbent LEC's tandem switch will not be borne by the users of the

tandem switch until January, 2000, the effects of the TIC exemption

will be reduced substantially before that time as the incumbent LEC

collects an increasing proportion of the tandem-switching costs

remaining in the TIC through PICCs. As discussed below, we continue to

permit the incumbent LEC to assess the full PICC on each of its loops,

without regard for the type or provider of the transport the IXC uses

to transport the minutes generated by that loop from the end office to

the IXC's facilities. As the portion of the incumbent LEC's tandem-

switching costs that is recovered through the per-minute TIC decreases,

any potential adverse effects of this small asymmetry will rapidly

decrease. In contrast, if we were to mandate recovery of this portion

of the incumbent LEC's tandem-switching costs from all customers using

the incumbent LEC's local switching facilities, without regard for

whether they make use of the incumbent LEC's transport facilities, we

would insulate this revenue from much of the pressure we anticipate

will develop as competitors enter the local service and access markets.

The resulting delay in competitive entry would be harmful to consumers,

who will benefit most from increased competition.

55. We revise the TIC exemption contained in our First Report and

Order, however, to permit the incumbent LEC to impose the remaining

non-transport costs assigned to the TIC on all minutes switched by the

incumbent LEC at its end office, without regard for whether those

minutes are carried on incumbent LEC or competitive transport

facilities. In contrast to the portion of the incumbent LEC's tandem-

switched transport costs that will remain in the TIC after January 1,

1998, we did not find in the First Report and Order that the remainder

of the TIC could be associated definitively with particular interstate

facilities on the record before us. Instead, we stated that a portion

of these TIC amounts may result from the operation of the

jurisdictional separations process, which allocates the costs of

private line and switched services differently between the state and

interstate jurisdictions, despite the fact that these two types of

services use comparable facilities. As a result, we recognized in the

First Report and Order the possibility that rates for direct-trunked

transport and tandem-switched transport transmission facilities may not

recover the full amount of the costs of switched facilities the

separations process allocates to the interstate jurisdiction.

56. We have recently begun a broad re-examination of the

jurisdictional separations process that may eventually correct this

problem. In the meantime, however, we are unable to associate these TIC

amounts with any particular interstate facilities. Instead, to the

extent that this portion of the TIC may result in part from

overallocation of costs to the interstate jurisdiction, thereby

lowering intrastate rates, this portion of the TIC may be a form of

implicit universal service support. As such, it would be inequitable to

mandate recovery of this portion of the per-minute TIC only from the

incumbent LEC's transport customers. Because these amounts do not

appear to be any more closely related to the incumbent LEC's interstate

transport facilities than they are to any other interstate facilities

of the incumbent, it is appropriate for all of the incumbent LEC's

access customers, and not just its transport customers, to pay a share

of this portion of the per-minute TIC. In the First Report and Order,

we stated our commitment to minimize the potential of the per-minute

TIC artificially to suppress demand for interstate toll services.

Because the non-facilities-related TIC is composed of amounts that have

not been demonstrated to reflect usage-sensitive costs, it does have

this undesirable effect. We have therefore required that it be

eliminated expeditiously through targeting of the X-factor reductions

to the interconnection charge service category and through conversion

of the residual TIC to a flat-rated charge.

57. In addition, we stated in the First Report and Order that a

portion of the costs remaining in the TIC may result from our use of

special access rates to develop initial geographically-averaged direct-

trunked transport and tandem-switched transport transmission rates. We

agreed in the First Report and Order that, while the use of such rates

appears to have been appropriate in urban areas, these rates may not

fully recover the higher costs of transport in less densely populated

rural areas. Because we are unable to quantify these cost differences,

and because it is likely that the cost differential varies greatly

across LECs and across study areas served by the same LEC, we did not

mandate any immediate reallocation of costs from the TIC to rural

transport rates. Instead, we expect that, as competition develops, the

incumbent LECs will come under increasing pressure to deaverage

transport rates under our existing deaveraging rules. We observe that,

as with the costs discussed in the previous paragraph, recovery of

rural transport

[[Page 56130]]

costs through the TIC supports a conclusion that at least a portion of

the non-facilities-related TIC may be related to the provision of

universal service.

58. We also here clarify that the ``residual TIC'' that the

incumbent LEC should recover from PICCs includes all TIC amounts that

have not been reassigned to other facilities-based rate elements,

including the portion of the incumbent LEC's tandem switching costs

that have not been reassigned to the tandem-switching rate element in

tariffs filed to become effective on January 1, 1998, and January 1,

1999. We direct price cap LECs that will recover only a portion of

their residual TIC from PICCs to allocate non-facilities-related TIC

amounts and facilities-related TIC amounts between PICCs and per-minute

charges on a pro rata basis. The incumbent LECs must reallocate the

full amount of the costs of their tandem switch to the tandem switching

rate element in installments on January 1, 1998, 1999, and 2000,

whether they are then contained in per-minute charges or in PICCs.

59. Accordingly, we revise the TIC exemption contained in our First

Report and Order to permit the incumbent LEC, in tariffs filed to

become effective January 1, 1998, to impose that portion of the per-

minute TIC that is not expected to be reassigned to particular

facilities on a cost-causative basis on all transport minutes switched

at its end office, without regard for whether those minutes are carried

on incumbent LEC or competitive transport facilities. Per-minute TIC

amounts that the LEC expects to reallocate to facilities-based rate

elements, in contrast, may be assessed only on minutes transported on

the incumbent LEC's own transport facilities.

60. TIC amounts that a price cap LEC will recover through PICC

charges may be assessed to an IXC for a particular loop without regard

for the type or provider of the transport the IXC uses to transport the

minutes generated by that loop from the end office to the IXC's

facilities. Although certain price cap LECs will recover a portion of

the costs of their tandem-switching facilities during the transition

through PICCs from IXCs that do not use the price cap LEC's transport

facilities to transport all of the minutes generated on a particular

loop, the administrative difficulties associated with calculating

partial PICCs in this context outweigh the benefits to be gained from

doing so. If an IXC were to use a combination of competitive- and

incumbent LEC-provided transport facilities between an end office and

its serving wire center, it would be needlessly complicated to

determine the portion of the minutes generated on each loop that were

carried on competitive transport links. Furthermore, unlike the per-

minute TIC, the flat-rated PICC will not substantially alter the

incremental cost of additional transport minutes transported over

competitive transport facilities. Thus, even if an IXC pays a full

PICC, this payment will not affect the IXC's decision whether to

purchase additional transport minutes from the incumbent LEC or a

competitive transport provider. As a flat-rated charge, the PICC will

not artificially suppress demand for interstate toll telecommunications

services.

61. In addition, the PICC is subject to competitive pressures,

whether or not it recovers TIC amounts for traffic transported by the

incumbent LEC's competitors. If the end user chooses an alternate

provider of local service, the incumbent LEC will no longer recover any

portion of the PICC for that loop. Thus, we conclude that the dangers

associated with the recovery of the full PICC without regard for the

transport provider are far more attenuated than the dangers that would

be associated with recovery of facilities-related costs from per-minute

TIC charges levied on competitive transport minutes.

62. We deny the petitions filed by U S West and NYNEX requesting a

stay of the per-minute TIC exemption rule. In determining whether to

stay the effectiveness of one of its rules or orders, the Commission

uses the four-factor test established in Virginia Petroleum Jobbers

Ass'n v. FPC, 259 F.2d 921, 925 (D.C. Cir. 1958), as modified in

Washington Metropolitan Area Transit Comm'n v. Holiday Tours, Inc., 559

F.2d 841, 843 (D.C. Cir. 1977). Under that test, petitioners must

demonstrate that: (1) They are likely to succeed on the merits on

review; (2) they would suffer irreparable injury absent a stay; (3) a

stay would not substantially harm other interested parties; and (4) a

stay would serve the public interest. We find that neither NYNEX nor U

S West has satisfied any of the four factors for granting a stay. In

light of the substantial relief we have granted above, however, we

provide only a brief analysis here of the petitioners' arguments. The

practical effect of our revisions to the TIC exemption, however, will

be to provide a substantial portion of the relief sought in the stay

petitions. In light of these revisions, we believe that the petitioners

are unlikely to succeed on the merits on review, that they will not

suffer irreparable injury absent a stay, that a stay would cause

substantial harm to the incumbent LECs' competitors, and that the

public interest is best served by the TIC exemption described here.

With respect to the portion of the TIC related to the costs of the

incumbent LEC's interstate transport facilities, we conclude that there

are sound policy reasons underlying our decision to maintain this

exemption and, consequently, we find against the petitioners here.

63. We conclude that NYNEX's objections to the sufficiency of our

notice are without merit. The Notice in this proceeding provided

adequate notice of the TIC exemption we ultimately adopted. Our Notice

in this proceeding stated that ``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 * * *. 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 [CompTel] court's remand.'' We went on to state, in the

section of the Notice entitled ``Possible Revisions to the TIC,'' that

``our goals are to move towards significantly more cost-based access

rates and competition in the access and interexchange markets. The

development of a competitive access market will be distorted by the

assessment of the TIC as a surcharge on local switching. The TIC

therefore will be unsustainable.'' We sought comment on the extent to

which various approaches to reducing the TIC would ``achieve the goals

of this proceeding'' and asked parties to ``address the relative merits

of each [approach], or of other approaches that they may suggest.'' We

conclude therefore that, beyond reasonable question, our Notice

provided adequate notice of ``the terms or substance of the proposed

rule or a description of the subjects and issues involved.''

64. In any event, courts require only that the rule, as adopted,

constitute a ``logical outgrowth'' of the proposed rule. E.g., National

Mining Ass'n v. Mine Safety and Health Admin., 116 F.3d 520, 531 (D.C.

Cir. 1997). To satisfy this standard, courts ask ``whether `the

purposes of notice and comment have been adequately served.' '' Factors

to be considered include ``whether a new round of notice and comment

would provide the first opportunity for interested parties to offer

comments that could persuade the agency to modify its

[[Page 56131]]

rule;'' American Water Works Ass'n v. EPA, 40 F.3d 1266, 1274 (D.C.

Cir. 1994), and whether ``the notice given affords `exposure to diverse

public comment,' `fairness to affected parties,' and `an opportunity to

develop evidence in the record.' '' We conclude that the Notice

language quoted above more than adequately meets this standard. The

Notice in this proceeding discussed possible revisions to the TIC rate

element for nine full pages, sought comment on four specific TIC-

reduction options, and invited commenters to suggest alternate

approaches. The Notice in this proceeding discussed expressly the anti-

competitive problems associated with the payment of TIC charges by

competitive providers of transport services, stated that the TIC would

be ``unsustainable'' in that form, and sought comment on approaches to

reform that would ``achieve the goals of this proceeding,'' among which

was the adoption of a transport rate structure that would foster

competition. In such circumstances, we conclude that commenters should

have anticipated that the Commission might eventually adopt a TIC

exemption for competitive transport providers, that our Notice afforded

adequate notice of the Commission's eventual adoption of such an

exemption, and that we provided an adequate opportunity for diverse

public comment.

65. In response to the Notice, several commenters, in their initial

comments, proposed TIC exemptions for competitive transport. WorldCom,

for example, argued that, ``the Commission should restructure the TIC

rate element * * * in a manner that maximizes competitive pressure on

the charge. As local and full-service competition begin[s] to emerge,

competitive carriers should be able to avoid the TIC to the extent that

they win customers away from incumbent LECs. This will create

competitive pressure for the LECs to reduce their TIC rate levels,

without necessitating any prescriptive action by the Commission.'' The

fact that several commenters raised this solution in their comments,

and in subsequent ex parte filings, supports our conclusion that the

Notice adequately raised this issue.

66. We also conclude that NYNEX's claims of irreparable harm are

without merit. Although the TIC exemption may impact some incumbent

LECs differently from others, the same can be said for virtually all of

the rules we adopt, simply because of differences in the circumstances

and business climate facing each LEC. Our focus in the context of a

stay petition must be on individualized allegations of irreparable

harm. We find that neither petitioner has met that standard with

respect to the TIC exemption we provide in this Order. Mere financial

or economic losses do not, in and of themselves, constitute irreparable

harm. In addition, because this portion of the per-minute TIC is likely

to be relatively small, in relation to the remainder of the TIC and

other transport charges, the incumbent LECs are unlikely to suffer

large-scale competitive losses as a result of the exemption, as

modified here. In any event, we have long held that ``revenues and

customers lost to competition which can be regained through competition

are not irreparable.''

67. In contrast, continued subsidy of the incumbent LECs' tandem

switching facilities by competitors is incompatible with the

development of competition in the local market. Without an exemption

permitting new entrants to cease subsidizing incumbent LEC transport

facilities, the incumbent LEC's revenue stream from facilities-related,

per-minute TIC charges would be insulated from competition. These new

entrants, having already shouldered financial burdens in seeking to

compete with the established monopoly incumbent LEC, should not be

required in addition to subsidize the facilities of the incumbent LEC

against whom they compete. Such a result would cause continued harm to

these new entrants, and would further delay the public interest

benefits of competition. Thus, we conclude that the petitioners have

failed to satisfy either of the last two factors we must consider in

evaluating their stay petitions. Accordingly, we deny the stay

petitions.

B. Deaveraged Tandem-Switched Transport Transmission Rates

68. We also take this opportunity to amend the language of section

69.111(c)(1) to specify the manner in which minutes are to be

determined through June 30, 1998, in calculating tandem-switched

transport transmission rates when an incumbent LEC has deaveraged rates

by density zone. Section 69.111(c)(2), which applies after July 1,

1998, includes such language. The First Report and Order did not intend

to take away the ability of incumbent LECs to deaverage transport

transmission rates if they have met the requisite qualifications.

Finally, we amend the references to section 69.124 in section 69.111 to

refer to section 69.123.

III. Rate-of-Return LECs

69. In the First Report and Order, we took steps to adopt, inter

alia, a cost-based transport rate structure and to comply with the D.C.

Circuit's CompTel remand. As acknowledged in the First Report and

Order, the CompTel remand applied to rate-of-return LECs as well as

price cap LECs.

70. Upon further consideration, we recognize that, absent

clarification, some language in the First Report and Order may be

ambiguous in delineating which of our decisions applied to all

incumbent LECs, including rate-of-return LECs. For example, in Section

III.C. of the First Report and Order, we directed ``all incumbent LECs

to discontinue the unitary rate structure option for the transmission

component of tandem-switched transport, effective July 1, 1998.'' In

contrast to this language, we stated at paragraph 335 in the First

Report and Order that we had restricted ``application of the rules we

adopt in this proceeding to the incumbent price cap LECs, with [three]

limited exceptions,'' for: (1) ``Universal service support to the

interstate revenue requirement for all incumbent LECs in Section

VI.D;'' (2) ``the changes to the TIC that we adopt[ed] in Section III.D

* * * will also apply to rate-of-return incumbent LECs;'' and (3) ``in

Section VI.A * * * our exclusion of unbundled network elements from

Part 69 access charges applies to all incumbent LECs.''

71. We take this opportunity to clarify that, with two limited

exceptions, the decisions made in Section III.C of the First Report and

Order relating to the rate structure and rate levels for entrance

facilities, direct-trunked transport, and tandem-switched transport

apply to all incumbent LECs, including rate-of-return LECs. The two

exceptions are that we did not create for rate-of-return LECs separate

rate elements for dedicated ports at the tandem switch and for

multiplexers at the tandem switch. Thus, for example, rate-of-return

LECs must discontinue the unitary rate structure option for tandem-

switched transport no later than July 1, 1998, when all incumbent LECs

must use only the three-part rate structure for cost recovery. These

transport modifications that are applicable to rate-of-return LECs are

in addition to those decisions made in Sections III.D, VI.A, and VI.D

that also apply to rate-of-return LECs.

IV. Ordering Clauses

72. Accordingly, it is ordered, pursuant to Sections 1-4, 201-205,

251, 254, 303, and 405 of the Communications Act of 1934, as amended,

47 U.S.C. Secs. 151-154, 201-205, 251, 254, 303, and 405, and pursuant

to section 1.108 of the Commission's rules, 47 CFR 1.108 that this

Order on Reconsideration is adopted.

[[Page 56132]]

73. It is further ordered That section 69.153(g) of the

Commission's rules, 47 CFR 69.153(g) is amended as set forth in the

rule changes.

74. It is further ordered that sections 69.4, 69.111(c)(1),

69.153(c)(1), 69.153(d)(1)(i), 69.153(d)(2)(i), and 69.155(c) of the

Commission's rules, 47 CFR 69.4, 69.111(c)(1), 69.153(c)(1),

69.153(d)(1)(i), 69.153(d)(2)(i), and 69.155(c) are amended as set

forth in the rule changes.

75. It is further ordered That the information collections

contained in these rules become effective January 1, 1998, following

OMB approval, unless a notice is published in the Federal Register

stating otherwise.

76. It is further ordered That, except as otherwise specified

herein, the policies and rules adopted here shall be effective January

1, 1998.

Federal Communications Commission.

William F. Caton,

Acting Secretary.

Rule Changes

PART 69--ACCESS CHARGES

77. The authority citation for Part 69 continues to read as

follows:

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

1070, 1072, 1077, 1094, as amended, 47 U.S.C. 154, 201, 202, 203,

205, 218, 403.

78. Section 69.4 is amended by removing paragraph (h)(6), and

revising paragraph (a) to read as follows:

Sec. 69.4 Charges to be filed.

(a) The end user charges for access service filed with this

Commission shall include charges for the End User Common Line element,

and for line port costs in excess of basic, analog service.

* * * * *

79. Section 69.111 is amended by revising paragraph (c) to read as

follows:

Sec. 69.111 Tandem-Switched Transport and Tandem Charge.

* * * * *

(c)(1) Until June 30, 1998:

(i) Except in study areas where the incumbent local exchange

carrier has implemented density pricing zones as described in section

69.123, per-minute common transport charges described in paragraph

(a)(1) of this section shall be presumed reasonable if the incumbent

local exchange carrier bases the charges on a weighted per-minute

equivalent of direct-trunked transport DS1 and DS3 rates that reflects

the relative number of DS1 and DS3 circuits used in the tandem to end

office links (or a surrogate based on the proportion of copper and

fiber facilities in the interoffice network), calculated using the

total actual voice-grade minutes of use, geographically averaged on a

study-area-wide basis, that the incumbent local exchange carrier

experiences based on the prior year's annual use. Tandem-switched

transport transmission charges that are not presumed reasonable shall

be suspended and investigated absent a substantial cause showing by the

incumbent local exchange carrier.

(ii) In study areas where the incumbent local exchange carrier has

implemented density pricing zones as described in section 69.123, per-

minute common transport charges described in paragraph (a)(1) of this

section shall be presumed reasonable if the incumbent local exchange

carrier bases the charges on a weighted per-minute equivalent of

direct-trunked transport DS1 and DS3 rates that reflects the relative

number of DS1 and DS3 circuits used in the tandem to end office links

(or a surrogate based on the proportion of copper and fiber facilities

in the interoffice network), calculated using the total actual voice-

grade minutes of use, averaged on a zone-wide basis, that the incumbent

local exchange carrier experiences based on the prior year's annual

use. Tandem-switched transport transmission charges that are not

presumed reasonable shall be suspended and investigated absent a

substantial cause showing by the incumbent local exchange carrier.

(2) Beginning July 1, 1998:

(i) Except in study areas where the incumbent local exchange

carrier has implemented density pricing zones as described in section

69.123, per-minute common transport charges described in paragraph

(a)(2)(i) of this section shall be presumed reasonable if the incumbent

local exchange carrier bases the charges on a weighted per-minute

equivalent of direct-trunked transport DS1 and DS3 rates that reflects

the relative number of DS1 and DS3 circuits used in the tandem to end

office links (or a surrogate based on the proportion of copper and

fiber facilities in the interoffice network), calculated using the

total actual voice-grade minutes of use, geographically averaged on a

study-area-wide basis, that the incumbent local exchange carrier

experiences based on the prior year's annual use. Tandem-switched

transport transmission charges that are not presumed reasonable shall

be suspended and investigated absent a substantial cause showing by the

incumbent local exchange carrier.

(ii) In study areas where the incumbent local exchange carrier has

implemented density pricing zones as described in section 69.123, per-

minute common transport charges described in paragraph (a)(2)(i) of

this section shall be presumed reasonable if the incumbent local

exchange carrier bases the charges on a weighted per-minute equivalent

of direct-trunked transport DS1 and DS3 rates that reflects the

relative number of DS1 and DS3 circuits used in the tandem to end

office links (or a surrogate based on the proportion of copper and

fiber facilities in the interoffice network), calculated using the

total actual voice-grade minutes of use, averaged on a zone-wide basis,

that the incumbent local exchange carrier experiences based on the

prior year's annual use. Tandem-switched transport transmission charges

that are not presumed reasonable shall be suspended and investigated

absent a substantial cause showing by the incumbent local exchange

carrier.

* * * * *

80. Section 69.153 is amended by revising paragraphs (c)(1) and

(d), and adding paragraph (g) to read as follows:

Sec. 69.153 Presubscribed interexchange carrier charge (PICC).

* * * * *

(c) The maximum monthly PICC for primary residential subscriber

lines and single-line business subscriber lines shall be the lower of:

(1) One twelfth of the sum of projected annual common line revenues

and residual interconnection charge revenues permitted under our price

cap rules divided by the projected average number of local exchange

service subscriber lines in use during such annual period, minus the

maximum subscriber line charge calculated pursuant to

Sec. 69.152(d)(2); or

(2) * * *

(d) To the extent that a local exchange carrier cannot recover its

full common line revenues, residual interconnection charge revenues,

and those marketing expense revenues described in Sec. 69.156(a)

permitted under price cap regulation through the recovery mechanisms

established in Secs. 69.152, 69.153(c), and 69.156 (b) and (c), the

local exchange carrier may assess a PICC on multi-line business

subscriber lines and non-primary residential subscriber lines.

(1) The maximum monthly PICC for non-primary residential subscriber

lines shall be the lower of:

(i) One twelfth of the projected annual common line, residual

interconnection charge, and Sec. 69.156(a) marketing expense revenues

permitted under our price cap rules, less the maximum amounts permitted

to be recovered through the recovery mechanisms under Secs. 69.152,

69.153(c), and 69.156 (b) and (c), divided by the total number of

[[Page 56133]]

projected non-primary residential and multi-line business subscriber

lines in use during such annual period; or

(ii) * * *

(2) If the maximum monthly PICC for non-primary residential

subscriber lines is determined using paragraph (d)(1)(i) of this

section, the maximum monthly PICC for multi-line business subscriber

lines shall equal the maximum monthly PICC of non-primary residential

subscriber lines. Otherwise, the maximum monthly PICC for multi-line

business lines shall be the lower of:

(i) One twelfth of the projected annual common line, residual

interconnection charge, and Sec. 69.156(a) marketing expense revenues

permitted under parts 61 and 69 of our rules, less the maximum amounts

permitted to be recovered through the recovery mechanisms under

Secs. 69.152, 69.153(c) and (d)(1), and 69.156 (b) and (c), divided by

the total number of projected multi-line business subscriber lines in

use during such annual period; or

(ii) * * *

* * * * *

(g)(1) The maximum monthly PICC for Centrex lines shall be one-

ninth of the maximum charge determined under paragraph (d)(2) of this

section, except that if a Centrex customer has fewer than nine lines,

the maximum monthly PICC for those lines shall be the maximum charge

determined under paragraph (d)(2) of this section divided by the

customer's number of Centrex lines.

(2) In the event the monthly loop costs for a multi-line business

line, as defined in Sec. 69.152(b)(1), exceed the maximum permitted End

User Common Line charge, as set in Sec. 69.152(b)(3), the maximum

monthly PICC for a Centrex line determined under paragraph (g)(1) of

this section shall be increased by the difference between the monthly

loop costs defined in Sec. 69.152(b)(1) and the maximum permitted End

User Common Line charge set in Sec. 69.152(b)(3). In no event, however,

shall the PICC for a Centrex line exceed the maximum established under

paragraph (d)(2) of this section.

81. Section 69.155 is amended by revising paragraph (c) to read as

follows:

Sec. 69.155 Per-minute residual interconnection charge.

* * * * *

(c)(1) No portion of the charge assessed pursuant to paragraphs (a)

or (b) of this section that recovers revenues that the local exchange

carrier anticipates will be reassigned to other, facilities-based rate

elements, including the tandem-switching rate element described in

Sec. 69.111(g), the three-part tandem switched transport rate structure

described in Sec. 69.111(a)(2), and port and multiplexer charges

described in Sec. 69.111(l), shall be assessed upon minutes utilizing

the local exchange carrier's local switching facilities, but not the

local exchange carrier's transport service.

(2) If a local exchange carrier cannot recover its full residual

interconnection charge revenues through the PICC mechanism established

in Sec. 69.153, and will consequently recover a portion of its residual

interconnection charge revenues through per-minute charges assessed

pursuant to paragraphs (a) and (b) of this section, then the local

exchange carrier must allocate its residual interconnection charge

revenues subject to the exemption established in paragraph (c)(1) of

this section between the PICC and the per-minute residual

interconnection charge in the same proportion as other residual

interconnection charge revenues are allocated between these two

recovery mechanisms.

[FR Doc. 97-28548 Filed 10-28-97; 8:45 am]

BILLING CODE 6712-01-P