Prescription of Local Exchange Carrier Price Cap Productivity Offset (``X-Factor'')

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 61

[CC Docket Nos. 94-1 and 96-262; FCC 99-345]

Prescription of Local Exchange Carrier Price Cap Productivity

Offset (``X-Factor'')

AGENCY: Federal Communications Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document seeks comment on the represcription of the

productivity offset, or ``X-factor,'' in the local exchange carrier

price cap formula. The X-factor of 6.5 percent prescribed by the

Commission in the 1997 Price Cap Performance Review Order was reversed

and remanded to the agency by the U.S. Court of Appeals for the D.C.

Circuit. Therefore, the Commission seeks comment on the retroactive

prescription of the X-factor for the period affected by the court's

remand, from July 1, 1997 to June 30, 2000, and on the prospective

prescription, from July 1, 2000 forward. The Further Notice of Proposed

Rulemaking (``FNPRM'') identifies three studies on which the historical

component of the X-factor prescription may be based: the 1997 staff

total factor productivity (``TFP'') study relied upon in the 1997

order; a new 1999 staff TFP study; or a staff Imputed X study. This

document also seeks comment on whether a consumer productivity dividend

(``CPD'') should be included in the X-factor.

DATES: Comments are due on or before December 30, 1999, and reply

comments are due on or before January 14, 2000.

ADDRESSES: Federal Communications Commission, 445 12th Street, S.W.,

Washington, DC 20554.

FOR FURTHER INFORMATION CONTACT: Aaron Goldschmidt, (202) 418-1520.

SUPPLEMENTARY INFORMATION: In 1997, the Commission represcribed the

amount by which it annually adjusts price caps for incumbent local

exchange carriers subject to the price cap rules (``price cap LECs'').

Price Cap Performance Review for Local Exchange Carriers, 62 FR 31939,

June 11, 1997 (``1997 Price Cap Review Order''). The revised price cap

adjustment required price cap LECs to reduce inflation-adjusted prices

for interstate access services by an ``X-factor'' of 6.5 percent

annually. Pursuant to petitions for review of the Commission's order,

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

reversed and remanded the Commission's decision. USTA v. FCC, 188 F.3d

521 (D.C. Cir. 1999). The court has stayed issuance of its mandate

until April 1, 2000, to allow time for the Commission to conduct this

proceeding. USTA v. FCC, Nos. 97-1469 et al., (D.C. Cir. June 21,

1999).

In this Further Notice of Proposed Rulemaking (``FNPRM'') we seek

comment on how we should represcribe an X-factor. More specifically, we

seek comment on prescribing two separate X-factors to address

retroactively the period affected by the court remand (July 1, 1997 to

June 30, 2000), and prospectively the period from July 1, 2000 forward,

or a single X-factor to cover the combined period. Specifically, we

seek comment on three possible bases for setting the historical

component of the X-factor: (1) by relying on the results of the 1997

staff TFP study used in the 1997 order; (2) by relying on the results

of a new 1999 staff TFP study that makes several adjustments to the

1997 staff study; or (3) by relying on the results of a new staff

Imputed X study that determines the X-factor that would have produced a

competitive level of capital compensation in the interstate

jurisdiction during the period between price cap performance reviews.

Further, we seek comment on resetting, on a forward-looking basis,

price cap LEC prices to a level that is consistent with any X-factor

prescription in order to rebalance the sharing of benefits of price

caps between LECs and their customers. This FNPRM is limited to issues

surrounding the setting of the X-factor, and does not include any

broader changes to our method of price cap regulation.

In a separate but related proceeding, the Commission is seeking

comment on a proposal submitted by the Coalition for Affordable Local

and Long Distance Services (``CALLS''). See Access Charge Reform, Price

Cap Performance Review for Local Exchange Carriers, Low-Volume Long

Distance Users, Federal-State Joint Board on Universal Service, 64 FR

50527, September 16, 1999. The CALLS proposal would purportedly

eliminate the necessity of retrospectively adjusting the X-factor in

response to the court's remand. Instead, it would keep the X-factor at

6.5 percent, but would target X-factor reductions to the traffic-

sensitive price cap basket. Once local switching rates reached a

certain level, all price cap indices would be frozen. Adoption of the

CALLS proposal would also eliminate the need to prescribe an X-factor

on a going-forward basis. We seek comment in this proceeding on the

prescription of the X-factor because, in the event that the CALLS

proposal is not adopted, or not all price cap LECs become signatories

to the proposal, the Commission must be prepared to prescribe a new X-

factor before April 1, 2000.

Option 1: The 1997 Staff TFP Study

We seek comment on whether we should use only the results from the

1997 staff TFP study in setting the historical component of the X-

factor for the remand period. We seek comment on whether, in addressing

the court's remand, we are precluded from revising the X-factor using

any other methodology, or from supplementing the data in the 1997 staff

TFP study.

The court did not find fault with the 1997 staff TFP study, and did

not ask us to revisit it. Instead, the court limited its critique of

TFP to our selection of a value at the upper end of the reasonableness

range, and with the upward adjustment to the reasonable range.

In their responses to a 1998 request to refresh the record in our

Access Charge Reform proceeding, both USTA and AT&T used the

methodology in the 1997 staff TFP study to extend the calculation of

the X-factor through 1997. USTA has also calculated an X-factor for

1998. We seek comment on the legal and logical arguments supporting

consideration of data that have become available after the

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close of the record for the remanded prescription. We note that USTA

and AT&T did not agree with each other on the value of the historical

component for 1996 and 1997. We seek comment on USTA's and AT&T's

updates of the 1997 staff TFP study, and on their recommendations for

prescribing an X-factor.

If we set the X-factor by using the 1997 staff TFP study, the

court's remand requires that we justify our selection from within the

reasonable range. Within the reasonable range, should we use some

measure of central tendency, e.g., the mean or median, as the best

estimator of productivity? Could and should we consider prescribing

above the mean? If the reasonable range includes a statistically

meaningful trend, should this inform our choice? What other

justifications could be made for selecting above or below some measure

of central tendency? Should these justifications affect our selection

from the reasonable range, or are they more relevant to the selection

of a CPD?

Option 2: The 1999 Staff TFP Study

In comments filed with the Commission late last year, several

parties identified what they believe is a problem in the way in which

the 1997 staff TFP study employed the TFP methodology commonly used in

economic analysis to set an X-factor. The 1999 staff TFP study takes

this potential problem as a point of departure and attempts to correct

it. We seek comment on the 1999 staff TFP study, and on its premise

that the 1997 staff TFP study methodology may fail to calculate an X-

factor that is consistent with the objectives of our price cap plan.

The 1997 staff TFP study subtracts the cost of the labor and

material inputs from revenues, and the residual revenue is assumed to

be the cost of the capital input. The 1999 staff TFP study attempts to

capture the gains in productivity that would have been revealed in a

competitive marketplace by varying total capital compensation according

to a measure of the competitive capital compensation rate.

We seek comment on the following method for adjusting the capital

compensation in the 1997 staff TFP study. The first step is to identify

a competitive price index series to use as a surrogate for the annual

change for the cost of capital in a competitive market. The second step

is to assume LEC capital compensation in 1991, the first full year of

LEC price cap, was at a competitive level. Because price caps were

implemented in 1991, the 1999 staff TFP study assumes that LECs earned

a normal return in that year. The third step is to combine the

competitive price index and the 1991 LEC capital compensation rate to

create a competitive LEC capital compensation rate for the historical

period. The fourth step is to increase or decrease LEC capital

compensation based on this competitive LEC capital compensation rate.

The fifth step is to adjust LEC revenues, making appropriate allowance

for taxes, for the change in capital compensation. The final step is to

recalculate LEC historical TFP using these revised capital compensation

and revenue data.

In addition to updating the data for the period 1996-1998, the 1999

staff TFP study makes three other modifications to the 1997 staff TFP

study. First, the 1999 staff TFP study uses the recently revised Bureau

of Labor Statistics (``BLS'') series on multifactor productivity in

place of the antecedent series. Second, the 1999 staff TFP study uses

the number of dial equipment minutes, rather than the number of calls,

in calculating the local service output index. Third, the 1999 staff

TFP study recalculates the labor input to adjust for the fact that all

the costs, but only a fraction of the benefits, of the 1992-95 employee

buyouts have been recognized on the accounting books. We seek comment

on these modifications to the 1997 staff TFP study.

Several additional aspects of the 1997 staff TFP study may warrant

highlighting and comment. The 1999 staff TFP study does not make these

adjustments because they either are not easily quantified, or do not

make a significant impact on the level of the X-factor. We seek comment

on the decision of the 1999 staff TFP study to not make any of these

adjustments. We also seek comment on whether there are any additional

issues that necessitate adjusting the X-factor, how any such

adjustments would affect the X-factor, and how they should be made.

The court's remand requires that we justify our selection from

within a reasonable range. We seek comment on how we should determine

the reasonable range and how we should select from within this range.

In our determination of the reasonable range in the 1997 Price Cap

Review Order, we gave recent years more weight than more distant years.

Should we continue to discount more distant years? Should the period

under price cap regulation be given more weight than the period under

rate-of-return regulation? Given that price cap regulation may have

been anticipated by price cap LECs for some years before its

introduction, what years should be included in the price cap period?

We also seek comment on whether additional years of data should be

considered in the remand, or whether the X-factor we select should rely

on the same years of data as used in the 1997 Price Cap Review Order.

We seek comment on the legal and logical arguments supporting

consideration of data that have become available after the close of the

record for the remanded prescription. Would it be more responsive to

the court's remand to prescribe an X-factor based on data available in

1997 or to consider the additional data that has become available in

the interim in setting the X-factor on a going-forward basis?

Option 3: The Staff Imputed X Study

As an alternative to either of the TFP methodologies, the Bureau

staff also has performed a study, the staff Imputed X study, designed

to calculate the X factor that yields the aggregate revenues that would

have been generated in a competitive market. While price caps provide

incentives for cost reduction similar to those of competition, they do

not guarantee that revenues will follow a similar path. In a

competitive market, revenues on average will be equal to costs,

including compensation of capital at a competitive market level. This

method is intended to replicate the effects of a competitive market in

apportioning the gains from successful operation between carriers and

consumers. The approach used here differs from the TFP approach, inter

alia, in that it measures productivity growth by looking at aggregate

expense and revenue data rather than by weighting and aggregating

categories of physical inputs and outputs. In contrast to both of the

TFP approaches, this method appears to have modest data requirements

and to be computationally simple and easily understandable.

Nevertheless, this method should have the same incentive effects as the

TFP approach or any other method of calculating an X-factor.

The staff Imputed X study calculates the change in 1998 revenue and

operating income for each price cap LEC that would result from imposing

a hypothetical X-factor from the inception of price caps in 1991

through 1998. The results for all price cap LECs are aggregated, and

the X-factor required to produce revenues equal to costs, including a

competitive level of capital compensation in the aggregate for all

LECs, is calculated. The calculation was also performed for 1991

through 1995 for comparison with the original TFP study. The

calculation takes account of

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the increase in the demand for service that would have resulted from

the lower price. Changes in the competitive cost of capital were

accounted for by adjusting the capital compensation found reasonable by

the Commission at the inception of price caps by an index of bond rates

over the period. The index is the same one used for the 1999 staff TFP

study to measure the price of capital. Moody's Baa corporate bond rate

was used. We noted above that, in a competitive capital market, indexes

of bond rates will agree closely. Further, in an efficient market,

there are no persistent arbitrage opportunities between different

financial instruments, so that we have no reason to expect that the

trend of bond rates would differ over time from that of the return on

an efficient diversified portfolio. Thus, applying any of several

published indices to the allowed rate at the beginning of the period

will yield approximately the same estimate of the end-period rate.

The data used for these estimates differ from those used for the

TFP calculations in that they are purely interstate in nature. The TFP

calculations used total company data because of the difficulty of

separating interstate and intrastate costs for the TFP calculations,

despite interstate data being conceptually more appropriate for

representing the services regulated by the Commission under price caps.

The data for the staff Imputed X study also include all price cap

carriers, whereas the TFP studies use data for the regional Bell

operating companies (``RBOCs'') only. The calculations assume that a

decrease in price would result in an increase in the quantity of

service purchased, while the TFP calculations necessarily reflect only

experience under the prices that were actually in effect. Finally, the

staff Imputed X study does not make an adjustment in expense data

comparable to the adjustment made in the 1999 staff TFP study to

compensate for the accounting treatment of employee buyouts. To provide

a check on the revised TFP calculations, the X-factor calculations

using the staff Imputed X study were repeated using data only for the

RBOCs and assuming no demand growth in response to lower prices. These

calculations were performed for both 1995 and 1998.

We note that the approach described here is similar to the Direct

Model proposed by AT&T, which the Commission has referred to as the

Historical Revenue Approach in the 1997 price cap performance review

proceeding. The staff Imputed X study differs from the approach

proposed by AT&T primarily in that the staff calculation includes an

adjustment to take account of likely demand stimulation resulting from

a lower price cap, and the calculation takes account of changes over

time in competitive return to capital. Data sources and calculations

also differ somewhat. In the Price Cap Performance Review for Local

Exchange Carriers, 60 FR 19526, April 19, 1995 (``1995 Price Cap Review

Order''), the Commission noted that the Historical Revenue Approach has

the advantage that it reflects performance in providing the interstate

services that are subject to price caps, and includes input cost

changes. In comments in the 1997 price cap performance review

proceeding, GSA supported the Historical Revenue Approach and noted

that it incorporates both TFP growth and the input price differential.

Most criticisms of AT&T's Historical Revenue Approach dealt with

the data and methodology used by AT&T in its calculations. Commenters

responding to AT&T's proposal pointed out that data reported under

Commission accounting, separations, and other rules may not accurately

track economic costs. In its comments in the 1997 price cap performance

review proceeding, NYNEX criticized use of the Historical Revenue

Approach on the grounds that accounting-based rules are a poor measure

of a firm's economic performance. We note that the Commission declined

to adopt the Historical Revenue Approach in the 1997 Price Cap Review

Order due to administrative concerns and incentive effects.

We seek comment on the validity of the staff Imputed X study for

estimating the appropriate level of the X-factor. Does the X-factor

estimated using these data and assumptions accurately represent the

productivity growth achievable by the price cap LECs over the period

examined? We request comment on the theoretical appropriateness of this

methodology. We also seek comment on the following questions: Is an

interstate-only calculation conceptually proper, and do the data allow

an accurate measure of interstate revenues, expenses, and investment?

Calculations reported in the staff Imputed X study show that X-factors

calculated on an annual basis appear to increase over time. Are there

explanations for the trend we see other than increasing efficiency?

Does this apparent trend suggest that an additional adjustment, such as

the CPD, is necessary in addition to revising the calculation of the X-

factor? Alternatively, is the CPD no longer necessary because the

approach described here sufficiently passes the benefits of increased

efficiency to ratepayers? What is the appropriate method for

determining the competitive cost of capital? Is applying an index of

bond rates to the rate of return used by the Commission to initialize

rates at the inception of price caps a reasonable approach? Would

taking account of the mix of debt and equity held by the LECs yield a

more accurate estimate of the trend in the cost of capital?

We request comment on the data and calculations used in the staff

Imputed X study. Are more appropriate data sources available, and can

adjustments be made that would improve the accuracy of the calculations

reported here? AT&T in its Historical Revenue Approach in 1994 used

Price Cap Indices (``PCIs'') from the Commission's Tariff Review Plan

data to measure actual changes in allowed rates. This approach includes

all changes that occurred in the price caps, including exogenous

changes not related to the operation of the X factor. Is such an

approach conceptually appropriate? Would use of PCIs rather than the X

factor in effect more accurately reflect price performance for purposes

of these calculations?

We also seek comment on whether, in responding to the remand, it is

appropriate to use data for the period that was available to us at the

time of the 1997 Price Cap Review Order, or whether we should make use

of the best information available to us now, including data for

subsequent years that have become available in the meantime. We seek

comment on the legal and logical arguments supporting consideration of

data that have become available after the close of the record for the

remanded prescription. Would it be more responsive to the court's

remand to prescribe an X-factor based on data contemporaneous with the

prescription and to consider the additional data in setting the X-

factor on a going-forward basis? In addition, the court's remand

requires that we justify our selection from within a reasonable range.

How should we determine a reasonable range for setting the X-factor

using the staff Imputed X study, and how we should select from within

that range?

Consumer Productivity Dividend

In Policy and Rules Concerning Rates for Dominant Carriers, 55 FR

42375, October 19, 1990 (``LEC Price Cap Order''), the Commission

included a CPD of 0.5 percent in the X-factor offset to ensure that

access customers received the first benefits of price caps in the form

of reduced rates. This CPD was also included in the X-factor in

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subsequent price cap review orders, including the 1997 Price Cap Review

Order, in which it was intended to offset the elimination of sharing

requirements. These requirements had compelled price cap LECs to share

a portion of their earnings above set percentages with access

customers. The sharing requirements were intended to protect consumers

against the possibility of an error in the establishment of the X-

factor. Pursuant to the court's remand, the Commission seeks comment on

whether to retain the CPD.

In remanding this issue to the Commission, the court specifically

questioned the quantification of the CPD. When the Commission made its

decision to include a CPD in the 1997 X-factor, the record included a

study by Strategic Policy Research (``SPR'') that addressed the effects

of eliminating the sharing requirements. The SPR study found that the

LEC price cap plan with sharing requirements produced less than 35

percent of the efficiency incentives of unregulated competition. Those

incentives decreased to 18 percent for price cap LECs whose earnings

were in the 50-50 sharing category for each year of the four-year

review cycle. The Commission discussed the SPR study in some detail in

the 1995 Price Cap Review Order. Although the Commission did not

determine whether the SPR study accurately quantified the effects of

sharing on productivity growth, it concluded that the study showed that

there ``are substantial gains in incentives that [sharing]

suppresses.'' 1995 LEC Price Cap Review Order. The results of the SPR

study were challenged by the Ad Hoc Telecommunications Users Committee

(``Ad Hoc''), but Ad Hoc's own results indicated that sharing

substantially reduced efficiency incentives. Ad Hoc's more conservative

calculations indicated that elimination of sharing would increase

efficiency incentives by at least 17 percent for all LECs, and by 41

percent for LECs in the 50-50 sharing category. We seek comment on the

CPD amount justified on the basis of these studies to ensure that the

benefits of sharing elimination would be apportioned between LECs and

ratepayers. We also seek comment on additional methods for quantifying

a CPD designed to ensure that consumers get a reasonable portion of the

benefits from the elimination of sharing.

We also seek comment on whether a CPD should be included to reduce

rates and correct for prior years when the X-factor may have been set

too low. As noted above, the calculations used to set prior year X-

factors may have underestimated LEC productivity. This underestimation

may have caused rates to be set at too high a level. A mistake in the

X-factor may not be self-correcting, but instead may cause increasingly

erroneous prices over time. To obtain efficient prices in the future,

it may be necessary both to adjust the value of the X-factor and to

reset prices. Therefore, we seek comment on whether we should include

in the X-factor a CPD designed to reduce rates, either by a one-time

adjustment, or over a multi-year period, if we conclude that the X-

factor historically has been set too low. If the reduction occurs over

a multi-year period, should we account for the time value of money,

and, if so, how should we calculate the reduction?

Prescribing the X-Factor on a Going-Forward Basis

We seek comment on whether we should prescribe an X-factor that

would apply as of July 1, 2000 that is different from the retrospective

X-factor applicable to the period affected by the court's remand, or

whether the X-factor that we prescribe for the period beginning July 1,

1997 should continue in place until the next price cap performance

review. We also seek comment on whether to include a prospective CPD

adjustment in future X-factors to correct for any significant

divergences between historic LEC productivity and prior X-factors, and

on whether any such adjustment should be made at once or be phased in

over several years.

In this FNPRM we seek comment on prescribing a future X-factor

based on the results of the 1999 staff TFP study. In the alternative,

we could prescribe an X-factor based on the results of the staff

Imputed X study. Finally, we invite parties to comment on other

alternatives that could serve as a basis for a future X-factor.

We also seek comment on how the prescription of the X-factor would

affect smaller price cap LECs differently from other price cap LECs,

and whether there should be a separate X-factor calculated for smaller

price cap LECs.

In addition, we seek comment on how the Commission's proposed

adjustments to the price cap rate structure in Access Charge Reform, 64

FR 51258, September 22, 1999 (``Pricing Flexibility Order'') should

affect the annual reductions required by our price cap rules. We

proposed in the Pricing Flexibility Order to add a ``q'' factor to the

formulae used to adjust annually the price cap indices (``PCIs'') for

the baskets that contain the charges for local switching and tandem

switching. The q factor would reduce switching charges based on growth

in demand. The q factor would operate similarly to the g factor present

in the common line PCI formula. The g factor is used to share with IXCs

the benefits of demand growth that LECs receive from per-minute growth

per access line. As proposed, the affected baskets would be reduced

annually by both the X-factor and the q factor. The staff studies

attached herein, however, may capture in their X-factor estimates some

or all of the effect intended to be captured by the q factor. We seek

comment on whether a q factor is necessary if an X-factor is adopted

that captures its effect, and on how to remove any double counting that

might result from the application of both factors. For example, if the

X-factor reduction was $10, and the q factor reduction was $4, then we

could directly apply $4 to the baskets containing local and tandem

switching, and allocate the remaining $6 amongst all the baskets

according to our price cap rules.

We also proposed to adjust on a prospective basis for the past

absence of a q factor in the formulae that annually adjust the PCIs of

the baskets containing charges for local and tandem switching. We seek

comment on how any such adjustment should affect any proposed

adjustment to the PCIs for all price cap baskets to offset the

cumulative effect of past X-factors that may have been set below the

rate of cost reduction actually achieved by LECs. Should we apply the

logic suggested in the example of the previous paragraph? If so, should

the shift of switching ports to common line increase the common line

basket's share of any adjustment based on the past absence of a q

factor?

In addition to proposing a q factor, we proposed to increase the

``g'' factor that applies to certain revenues in the common line basket

from g/2 to a full g. We seek comment on whether any prospective

adjustment to our X-factor prescription would be appropriate to account

for this.

Finally, we proposed to replace the existing per-minute rate

structure for local switching and tandem switching with capacity

charges. We seek comment on whether replacing per-minute charges with

capacity charges affects future growth in LEC productivity. We seek

comment on whether any prospective adjustment to our X-factor is

required and on how we would quantify this adjustment.

Ex Parte Presentations

This proceeding shall be treated as a ``permit-but-disclose''

proceeding in accordance with 47 CFR 1.1206(b). Ex parte presentations

are permissible if disclosed in accordance with

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Commission rules, except during the Sunshine Agenda period when

presentations, ex parte or otherwise, are generally prohibited. Persons

making oral ex parte presentations are reminded that memoranda

summarizing the presentations must contain summaries of the substance

of the presentations and not merely a listing of the subjects

discussed. More than a one or two sentence description of the views and

arguments presented generally is required. See 47 CFR 1.1206(b)(2).

Additional rules pertaining to oral and written presentations are set

forth in Sec. 1.1206(b).

Initial Regulatory Flexibility Act Analysis

As required by the Regulatory Flexibility Act (``RFA''), 5 U.S.C.

603, the Commission has prepared this Initial Regulatory Flexibility

Analysis (``IRFA'') of the possible significant economic impact on

small entities by the policies and rules proposed in this FNPRM. The

RFA, 5 U.S.C. 601 et seq., has been amended by the Contract With

America Advancement Act of 1996, Public Law 104-121, 110 Stat. 847

(1996) (``CWAAA''). Title II of the CWAAA is the Small Business

Regulatory Enforcement Fairness Act of 1996 (``SBREFA''). Written

public comments are requested on this IRFA. Comments must be identified

as responses to the IRFA and must be filed by the deadlines for

comments on the FNPRM provided below. The Office of Public Affairs will

send a copy of the FNPRM, including this IRFA, to the Chief Counsel for

Advocacy of the Small Business Administration. In addition, the FNPRM

and IRFA (or summaries thereof) will be published in the Federal

Register. 5 U.S.C. 603(a).

Need for and Objectives of the Proposed Rules. The court has

remanded to the Commission the selection of a 6.5 percent productivity

offset, or X-factor, in the LEC price cap formula. In this FNPRM we

seek comment on how we should represcribe an X-factor. We seek comment

on prescribing one or more X-factors to address retroactively the

period affected by the court remand (July 1, 1997 to June 30, 2000),

and we seek comment on represcribing one or more X-factors from July 1,

2000 forward. Further, we seek comment on resetting, on a forward-

looking basis, price cap LEC prices to a level that is consistent with

any X-factor prescription in order to rebalance the sharing of benefits

of price caps between LECs and their customers.

Legal Basis. The proposed action is supported by sections 1, 4(i),

4(j), 201-205, and 303(r) of the Communications Act of 1934, as

amended, 47 U.S.C. 151, 154(i), (j), 201-205, and 303(r).

Description and Estimate of the Number of Small Entities to Which

the Proposed Rules Will Apply. The RFA directs agencies to provide a

description of and, where feasible, an estimate of the number of small

entities that may be affected by the proposed rules, if adopted. 5

U.S.C. 603(b)(3). The RFA generally defines the term ``small entity''

as having the same meaning as the terms ``small business,'' ``small

organization,'' and ``small governmental jurisdiction.'' 5 U.S.C.

601(6). In addition, the term ``small business'' has the same meaning

as the term ``small business concern'' under the Small Business Act. 15

U.S.C. 632. A small business concern is one which: (1) is independently

owned and operated; (2) is not dominant in its field of operation; and

(3) satisfies any additional criteria established by the Small Business

Administration (``SBA''). 5 U.S.C. 601(3) (incorporating by reference

the definition of ``small business concern'' in 15 U.S.C. 632).

Pursuant to the RFA, the statutory definition of a small business

applies ``unless an agency, after consultation with the Office of

Advocacy of the Small Business Administration and after opportunity for

public comment, establishes one or more definitions of such term which

are appropriate to the activities of the agency and publishes such

definition(s) in the Federal Register.'' 5 U.S.C. 601(3). The SBA has

defined a small business for Standard Industrial Classification

(``SIC'') category 4813 (Telephone Communications, Except

Radiotelephone) to be an entity that has no more than 1,500 employees.

13 CFR 121.201.

We have included small incumbent LECs in this RFA analysis. As

noted above, a ``small business'' under the RFA is one that, inter

alia, meets the pertinent small business size standard (e.g., a

telephone communications business having 1,500 or fewer employees), and

``is not dominant in its field of operation.'' 5 U.S.C. 601(3). The

SBA's Office of Advocacy contends that, for RFA purposes, small

incumbent LECs are not dominant in their field of operation because any

such dominance is not ``national'' in scope. See Letter from Jere W.

Glover, Chief Counsel for Advocacy, SBA, to William E. Kennard,

Chairman, FCC (May 27, 1999). SBA regulations interpret ``small

business concern'' to include the concept of dominance on a national

basis. 13 CFR 121.102(b). Since 1996, out of an abundance of caution,

the Commission has included small incumbent LECs in its regulatory

flexibility analyses. See, e.g., Implementation of the Local

Competition Provisions of the Telecommunications Act of 1996, 61 FR

45476, August 29, 1996. We have therefore included small incumbent LECs

in this RFA analysis, although we emphasize that this RFA action has no

effect on Commission analyses and determinations in other, non-RFA

contexts.

The proposals in the FNPRM apply only to price cap LECs. At the

current time, there are 13 price cap LECs. Of these companies, 11 are

listed in the Commission's most recent Statistics of Communications

Common Carriers (``SOCC'') report as having more than 1,500 employees.

Consequently, we estimate that 2 or fewer providers of local exchange

service are small price cap LECs that may be affected by these

proposals.

Description of Projected Reporting, Recordkeeping and Other

Compliance Requirements. We expect that, on balance, the proposals in

this FNPRM will not change price cap LECs' administrative burdens or

cause price cap LECs to incur any additional costs associated with

proposed reporting and recordkeeping requirements. The studies would

establish new X-factors that price cap LECs would need to utilize in

their price cap calculations, but otherwise should not affect their

administrative burdens or costs.

Steps Taken to Minimize Significant Economic Impact on Small

Entities, and Significant Alternatives Considered. The RFA requires

agencies to describe any significant alternatives that it has

considered in reaching its proposed approach, which may include the

following four alternatives: (1) the establishment of differing

compliance or reporting requirements or timetables that take into

account the resources available to small entities; (2) the

clarification, consolidation, or simplification of compliance or

reporting requirements under the rule for small entities; (3) the use

of performance rather than design standards; and (4) an exemption from

coverage of the rule, or any part thereof, for small entities. 5 U.S.C.

603(c)(1)-(4). In the instant proceeding we are seeking comment on the

prescription of the productivity offset, or X-factor, portion of the

price cap formula. Therefore, only the first and last possible

alternatives listed in section 603(c) of the RFA would be applicable.

In the FNPRM, we seek comment on how the prescription of the X-factor

would affect smaller price cap LECs differently from other price cap

LECs, and whether there should be a separate X-factor calculated for

smaller price cap LECs. We also do

[[Page 66447]]

not believe it would be appropriate to exempt small price cap LECs from

the application of an X-factor. We seek comment on these issues and

urge commenting parties to support their comments with specific

evidence and analysis.

Federal Rules that May Duplicate, Overlap, or Conflict With the

Proposed Rules. None.

Filing of Comments and Reply Comments

Pursuant to 47 CFR 1.415, 1.419, interested parties may file

comments on or before December 30, 1999 and reply comments on or before

January 14, 2000. Comments may be filed using the Commission's

Electronic Comment Filing System (``ECFS'') or by filing paper copies.

Comments filed through the ECFS can be sent as an electronic file

via the Internet to http://www.fcc.gov/e-file/ecfs.html>. In

completing the transmittal screen, commenters should include their full

name, Postal Service mailing address, and the applicable docket or

rulemaking number. Parties may also submit an electronic comment by

Internet e-mail. To get filing instructions for e-mail comments,

commenters should send an e-mail to [email protected], and should include

the following words in the body of the message, ``get form .'' A sample form and directions will be sent in reply. Only

one copy of electronically-filed comments must be submitted.

Parties who choose to file by paper must file an original and four

copies of each filing. All filings must be sent to the Commission's

Secretary, Magalie Roman Salas, Office of the Secretary, Federal

Communications Commission, 445 12th Street, S.W., Room TW-B204,

Washington, D.C. 20554.

Parties who choose to file by paper should also submit their

comments on diskette. The diskette should be submitted to: Wanda

Harris, Federal Communications Commission, Common Carrier Bureau,

Competitive Pricing Division, 445 12th Street, S.W., Fifth Floor,

Washington, D.C. 20554. The submission should be on a 3.5 inch diskette

formatted in an IBM compatible format using WordPerfect 5.1 for Windows

or compatible software. The diskette should be accompanied by a cover

letter and should be submitted in ``read only'' mode. The diskette

should be clearly labeled with the commenter's name, proceeding

(including the docket number in this case), type of pleading (comments

or reply comments), date of submission, and the name of the electronic

file on the diskette. The label should also include the following

phrase: ``Disk Copy--Not an Original.'' Each diskette should contain

only one party's pleadings, preferably in a single electronic file. In

addition, commenters must send diskette copies to the Commission's copy

contractor, International Transcription Service, Inc., 1231 20th

Street, N.W., Washington, D.C. 20036. Comments and reply comments will

be available for public inspection during regular business hours in the

FCC Reference Center, 445 12th Street, S.W., Room CY-A257, Washington,

D.C. 20554.

Ordering Clauses

Pursuant to the authority contained in sections 1, 4(i), 4(j), 201-

205, and 303(r) of the Communications Act of 1934, as amended, 47

U.S.C. 151, 154(i), (j), 201-205, and 303(r), Notice Is Hereby Given of

the rulemaking described above and that Comment Is Sought on those

issues.

The Commission's Office of Public Affairs, Reference Operations

Division, Shall Send a copy of this Further Notice of Proposed

Rulemaking, including the Initial Regulatory Flexibility Analysis, to

the Chief Counsel for Advocacy of the Small Business Administration.

List of Subjects in 47 CFR Part 61

Communications common carriers, Tariffs.

Federal Communications Commission.

Magalie Roman Salas,

Secretary.

[FR Doc. 99-30741 Filed 11-24-99; 8:45 am]

BILLING CODE 6712-01-P