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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of) ) Access Charge Reform )CC Docket No. 96-262 ) Price Cap Performance Review)CC Docket No. 94-1 for Local Exchange Carriers) ) Transport Rate Structure)CC Docket No. 91-213 and Pricing) ) Usage of the Public Switched )CC Docket No. 96-263 Network by Information Service ) and Internet Access Providers) ) NOTICE OF PROPOSED RULEMAKING, THIRD REPORT AND ORDER, AND NOTICE OF INQUIRY Adopted: December 23, 1996Released: December 24, 1996 NPRM Comment Date:January 27, 1997 NPRM Reply Date:February 13, 1997 NOI Comment Date: February 21, 1997 NOI Reply Date: March 24, 1997 By the Commission: Table of Contents Paragraph I.Introduction 1 A.Overview 1 B.Background 21 1.Regulation of Interstate Exchange Access Service 21 2.The 1996 Telecommunications Act 32 3.Need for Access Reform 41 II.Access Reform for Incumbent Local Exchange Carriers 50 A.Application of Reforms to Price Cap Carriers and Non-Price Cap Carriers 50 B.Applicability of Part 69 to Unbundled Elements 54 III.Rate Structure Modifications 55 A.Overview 55 B.Common Line 57 1.Background 57 2. Alternative Methods of Recovery of CCL Portion of Subscriber Loop Costs 59 3. Alternative Methods of Recovery of SLC Portion of Subscriber Loop Costs 64 4.Assessment of SLCs on Derived Channels 68 C.Local Switching 71 1.Non-Traffic-Sensitive Charges 72 2.Traffic-Sensitive Charges 74 D.Transport 80 1.Background 80 2. Entrance Facilities and Direct-Trunked Transport Services 86 3.Tandem-Switched Transport Services 87 E. Transport Interconnection Charge 96 1.Background 96 2.Possible Sources of Costs in the TIC 101 3. Possible Revisions to the TIC 112 F. SS7 Signalling 123 1.Background 123 2.Ameritech's SS7 Rate Structure 127 3.Other SS7 Issues 135 G.New Technologies 139 IV.Approaches to Access Reform and Deregulation 140 A. Different Approaches to Access Reform 140 B.The Goal -- Deregulation in the Presence of Substantial Competition 149 1.Objectives 149 2. Competitive Factors 156 V.Market-Based Approach to Access Reform 161 A.Introduction 161 B. Phase 1 -- Potential Competition 168 1. Trigger and Geographic Scope 169 2. Reforms 180 C.Phase 2 -- Actual Competition 201 1. Trigger and Relevant Markets 202 2. Reforms 211 VI.Prescriptive Approach to Access Reform 218 A. Introduction 218 B.Goal of Prescriptive Access Reform 220 C. Specific Regulatory Requirements 223 1. Readjustment of Rates to Economic Cost Levels 223 2.Reinitialization of Rates on Some Other Basis 228 3.Revision of LEC Price Cap Plan 231 4.Rate Prescription 236 D.Phases for Prescriptive Approach 239 VII.Transition Issues 241 A. Universal Service Joint Board Recommended Decision 242 B. Treatment of Any Remaining Embedded Costs Allocated to the Interstate Jurisdiction 247 1.Nature and Magnitude of Any Remaining Interstate-Allocated Costs 249 2.Recovery of Remaining Interstate-Allocated Embedded Costs256 3.Recovery Mechanisms 260 VIII.Other Issues 271 A.Regulation of Terminating Access 271 1.Price Cap Incumbent LECs 273 2.Non-Incumbent LECs 277 3."Open End" Services 281 B. Treatment of Interstate Information Services 282 C. Other Part 69 Revisions 291 1.Equal Access Network Reconfiguration Costs 291 2.Part 69 Allocation Rules 294 3.Other Proposed Part 69 Changes 295 IX.Third Report and Order 300 A. Lower Service Band Indices 301 1.Background 301 2.Comments 303 3.Discussion 305 B. Waiver Requirement for Introduction of New Services 307 1.Background 307 2.Comments 308 3.Discussion 309 X. Notice of Inquiry on Implications of Information Service and Internet Usage311 XI. Procedural Issues 319 XII.Ordering Clauses 349 APPENDIX AParties Filing Pleadings APPENDIX BAmendments to the Code of Federal Regulations I. INTRODUCTION A.Overview 1. In passing the Telecommunications Act of 1996 (1996 Act), Congress sought to establish "a pro-competitive, de-regulatory national policy framework" for the United States telecommunications industry. With this Notice, we commence the third in a trilogy of actions that collectively are intended to foster and accelerate the introduction of efficient competition in all telecommunications markets, pursuant to the mandate of the 1996 Act. In August 1996, as required by the 1996 Act, we adopted rules to implement Sections 251 and 252 of the Act, which establish the basic obligations of carriers, especially in the local exchange and exchange access markets. In November 1996, pursuant to Section 254 of the Act, the Federal-State Universal Service Joint Board issued its recommendations to the Commission for reforming our system of universal service so that universal service is preserved and advanced, but in a manner that permits the local exchange and exchange access markets to move from monopoly to competition. In this proceeding, we seek to reform our system of interstate access charges to make it compatible with the competitive paradigm established by the 1996 Act and with state actions to open local networks to competition. 2. The 1996 Act seeks to develop efficient competition by opening all telecommunications markets through a pro-competitive, deregulatory national policy framework. To that end, the 1996 Act eliminates state and local legal and regulatory barriers to entry, and bans state and local governmental actions that have the effect of prohibiting any entity from offering any telecommunications service. The Act also requires all telecommunications carriers to interconnect directly or indirectly with other telecommunications carriers in order to facilitate the creation of a "network of networks." In addition, the 1996 Act requires all local exchange carriers (LECs) to establish reciprocal compensation arrangements for the transport and termination of calls, and prohibits incumbent LECs from charging more than the additional cost incurred to transport and terminate a call. The Act further directs all LECs to provide number portability and dialing parity. The 1996 Act confers three fundamental rights on potential competitors to incumbent LECs: the right to interconnect at rates based on cost, including a reasonable profit; the right to obtain unbundled network elements at cost-based rates; and the right to obtain an incumbent LEC's retail services at wholesale discounts in order to resell those services. 3. The Act also directs the Commission, after receiving the recommendations of a Federal-State Joint Board, to define the services to be supported by federal universal service mechanisms, to support such services in a manner that is "explicit and sufficient," and to ensure that "every telecommunications carrier that provides interstate telecommunications services shall contribute, on an equitable and non-discriminatory basis, to the specific, predictable and sufficient mechanisms . . . to preserve and advance universal service." The Act further provides that multiple carriers may seek and obtain designation as carriers eligible to receive universal service funds for service within a particular geographic area. As a whole, these provisions of the 1996 Act, when fully implemented, should greatly reduce the legal, regulatory, economic, and operational barriers to entry in the local exchange and exchange access market. 4. The 1996 Act also ends the prohibition against provision of interLATA services by Bell Operating Companies (BOCs) that was imposed by the Modification of Final Judgment. BOCs were permitted immediately upon enactment of the 1996 Act to begin to provide certain interLATA services, including out-of-region and incidental interLATA services. In order to provide interLATA services originating in-region, however, a BOC is first required to obtain Commission approval. In order to approve such an application, the Commission must find that the BOC has met the requirements of the "competitive checklist," that the BOC will comply with the Act's separate affiliate requirements, and that grant of the application is consistent with the public interest, convenience and necessity. 5. These fundamental changes in the structure and dynamics of the telecommunications industry wrought by the 1996 Act now necessitate that the Commission review its existing access charge regulations to ensure that they are compatible with the 1996 Act's far-reaching changes. We also seek to eliminate, either now or as soon as changes in the marketplace permit, any unnecessary regulatory requirements on incumbent LEC exchange access services. While a broad range of telecommunications industry participants, including both interexchange carriers (IXCs) and incumbent LECs, have long advocated for the Commission to commence a comprehensive review of access charges, the Act accelerates and intensifies the need for such a review. We commence this review of the Commission's Part 69 interstate access charge rules, together with its Part 61 price cap rules, to determine the extent to which we must revise these rules to take account of the local competition and Bell entry provisions of the 1996 Act and state actions to open local networks to competition; to reflect the effects of potential and actual competition on incumbent LECs' pricing for interstate access; to implement the Act's direction to end implicit universal service subsidies in favor of a system of explicit subsidies; and to establish fair rules of competition for both the local exchange and interexchange markets, especially as carriers begin to offer service packages that bundle local and interexchange offerings. 6. We adopted our Part 69 rules at approximately the same time that AT&T divested its local exchange operations and established the seven regional Bell companies pursuant to the MFJ. The rules were designed to promote competition in the interstate, interexchange market by ensuring that all IXCs would be able to originate and terminate their traffic over incumbent LEC networks at just, reasonable, and non-discriminatory rates. While our Part 69 rules expressly contemplated competition in the interexchange market, they were not designed to address the potential effects of competition in the local exchange and exchange access market. Indeed, these rules reflected the reality of the telecommunications marketplace in 1983 -- and what was mandated in some states prior to the 1996 Act -- that the incumbent LEC was the monopoly provider of local exchange and exchange access services. In adopting the Part 69 rules, the Commission did not seek to eliminate implicit support flows, but in fact incorporated such flows into the Part 69 rate structure. Our Part 69 rules are designed to be consistent with our jurisdictional separations rules that govern the allocation of incumbent LECs' expenses and investment between the interstate and state jurisdictions. Consequently, the Part 69 access charge system likely reflects any jurisdictional cost misallocations mandated by our current separations rules. As such, the Part 69 rules are fundamentally inconsistent with the competitive market conditions that the 1996 Act attempts to create. We will soon begin a related proceeding to examine our jurisdictional separations rules in light of the 1996 Act. 7. Competition isolates and highlights the inefficiencies and distortions present in the current Part 69 access charge rules. Our present interstate access charge regime, for example, requires incumbent LECs to maintain rate structures that have been widely criticized as economically inefficient. In particular, even though the costs of the local loop do not vary with the amount of traffic carried by the loop, our current rules require incumbent LECs to recover a portion of those costs through traffic-sensitive carrier common line (CCL) charges imposed on IXCs. While Part 69 mandates per-minute charges for local switching, the portion of local switching costs that is associated with ports appears to be driven by the number of lines connected to the switch, not by the number of minutes of traffic routed by the switch. The transport interconnection charge (TIC) is a non-facilities-based, per-minute charge imposed on all switched access customers regardless of whether they use the incumbent LEC's transport facilities. Rather than fostering efficient pricing and competition, these mandatory rate structures inflate usage charges and reduce charges for connection to the network, in essence overcharging high-volume end users in order to reduce rates for low-volume end users. 8. Although these inefficient rate structures might have been sustainable in a local monopoly environment, the introduction of competition from providers operating their own network facilities or leasing network facilities as unbundled network elements may undermine these access rate structures. A competing provider of exchange access services entering a market can use its own facilities or lease unbundled network elements to target selectively the incumbent LEC's high-volume end users with efficiently priced access service offerings. This places the incumbent LEC at a regulatorily-imposed disadvantage in competing for high-volume end users, and jeopardizes the source of revenue that permits the incumbent LEC to cover its costs of providing service to low-volume end users. At the same time, these inefficient rate structures and implicit support flows also create artificial impediments to any new entrants that might seek to serve the subsidized end users, because they must attempt to do so without the benefit of a subsidy. As a result, these access rate structures may inhibit the development of competition for service to low-volume end users. 9. Competition also allows entrants to arbitrage between different pricing systems. For example, if transport and termination rates are lower than access charge rates, a competitor would have an incentive to funnel interexchange terminating access traffic through transport and termination arrangements where possible. Whether traffic originates locally or from a distant exchange, transport and termination of traffic by a particular LEC involves the same network functions. Ultimately, the rates that local carriers impose for the transport and termination of local traffic and for the transport and termination of long distance should converge. As a legal matter, however, transport and termination of local traffic by an incumbent LEC are different services from access service provided by that incumbent LEC for long-distance telecommunications. Transport and termination of local traffic are governed by 251(b)(5) and 252(d)(2), while access charges for interstate long-distance traffic are governed by sections 201 and 202 of the Act. 10. This Commission has previously examined the impact of state-led reforms in New York and Illinois on the existing access charge rate structures, and has concluded that some interim modifications to the incumbent LECs' rate structures were warranted where states had implemented market-opening measures similar to those mandated by the 1996 Act. The Commission concluded that competitive developments in the New York City, Chicago, and Grand Rapids LATAs justified granting NYNEX and Ameritech limited waivers of our access charge rules to allow them to recover the TIC on a geographically deaveraged basis and to bulk bill some of their common line costs rather than recovering them through the per-minute CCL charge. 11. In addition to their criticisms of the access charge rate structures, IXCs, in particular, have insisted that the rate levels of access charges are excessive and must be reduced. AT&T asserts, for instance, that the current average per-minute access rates of the BOCs are nearly seven times the forward-looking economic cost of providing that service, and that total interstate access charges collected today from interexchange carriers exceed forward-looking economic cost by $11 billion, or 70 percent of the total. IXCs argue that, if access prices are allowed to remain at current levels, they will face an anticompetitive disadvantage both in the local exchange market and in the interexchange market whenever an incumbent LEC also provides interexchange services. 12. In this item, we first adopt two initial steps toward reforming our system of access charges. In the sections that comprise the Third Report and Order in the Price Cap Performance Review for Local Exchange Carriers, we eliminate the lower service band indices, which unnecessarily restrict the ability of price cap LECs to lower their access prices. Under our existing rules a price cap LEC must specifically justify a proposal to lower its access charges below the pricing floors established by the indices. Thus, our rules currently discourage price cap LECs from lowering prices even when it would be economically efficient to do so. These rules also hamper a price cap LEC in responding to lower-priced access service offerings by competing access service providers. To encourage the development and prompt deployment of new switched access services, we also streamline the process for price cap LECs to offer such services. 13. In the Notice of Proposed Rulemaking portion of this item, we initiate a comprehensive review of our interstate access charge regime. We propose a series of reforms to the existing access charge rate structure rules that are designed to eliminate the inefficiencies summarized above. Our goal is to end up with access charge rate structures that a competitive market for access services would produce. 14. We also outline in this item two possible approaches for addressing claims that existing access charge levels are excessive, for establishing a transition to access charges that more closely reflect economic costs, and for deregulating incumbent LEC exchange access services as competition develops in the local exchange and exchange access market. The first is a market-based approach under which we would rely on potential and actual competition from new facilities-based providers and entrants purchasing unbundled elements to drive prices for interstate access services toward economic cost. Under this approach, we would gradually relax and ultimately remove existing Part 69 rate structure requirements and Part 61 restrictions on rate level changes as marketplace forces provide the discipline on incumbent LEC access prices that our rules are currently needed to apply. The second is a more prescriptive approach to access reform under which this Commission would specify the nature and timing of the changes to the existing rate levels. These approaches could be employed singly or in combination. We emphasize, however, that under either approach, our ultimate goal is the same -- adoption of revisions to our access charge rules that will foster competition for these services and enable marketplace forces to eliminate the need for price regulation of these services. 15. Under the market-based approach to access reform, we propose two intermediate phases, each of which would require an incumbent LEC to demonstrate that certain circumstances exist in order to obtain greater pricing flexibility than the current rules permit. We also propose that an incumbent LEC's access services be deregulated, that is, removed from price cap and tariff regulation, once they are subject to substantial competition. At the first phase, an incumbent LEC would have to show that its local market has been opened to competition and potential rivals are able to enter through any of the three avenues mandated by the 1996 Act -- interconnection, unbundled network elements, and resale. We ask whether an incumbent LEC making such a showing should be permitted to deaverage geographically its rates for interstate access services, to offer volume and term discounts, and to offer contract- based tariff offerings for interstate access. We also ask whether new services should be deregulated at that phase. At the second phase in our market-based approach, an incumbent LEC would have to show that it faces actual competition in the local exchange marketplace. We ask whether, at that phase, we should eliminate service categories within baskets, permit incumbent LECs to engage in differential pricing of access to residential, single-line business, and multi-line business customers, and eliminate mandatory rate structures for local switching and transport. We also seek comment on combining the trunking and traffic-sensitive baskets at that stage. 16. A second option for access reform is a more prescriptive approach. Marketplace forces alone may not be sufficient to drive access rates to forward-looking economic costs. Under this approach, we ask whether we should require incumbent LECs to move prices for interstate access in their service areas to more economically-efficient levels pursuant to rules adopted in this proceeding. As with a market-based approach, we also propose under this prescriptive approach that we remove incumbent LEC access services subject to substantial competition from price cap and tariff regulation. 17. In Section II, below, we seek comment on issues affecting the scope of this proceeding. In Section III, we propose changes to our existing interstate access charge rate structures to make them more conducive to economic efficiency. We also discuss in Section III the reassignment of certain network facilities costs that under current rules are allocated to the Transport Interconnection Charge for recovery. In Section IV, we summarize our two basic approaches to access reform and propose eliminating price cap and tariff regulation for services subject to substantial competition. We also there seek comment on whether and when one approach or the other is preferable, or if a combination of these approaches should be used, and also, how such a combined approach should be structured. In Section V, we discuss in detail a market-based approach to access reform. In Section VI, we outline a more prescriptive approach to access reform. 18. In Section VII, we first discuss adjustments to the current interstate access charge regime that may be required due to actions taken in the Federal-State Universal Service Joint Board proceeding. We also raise in that section the issue of whether there is a significant difference between embedded incumbent LEC costs currently allocated to the interstate jurisdiction and recovered through access charges, and the forward-looking economic costs of interstate access. To the extent that implementation of access charge reform is expected to cause a significant reduction in incumbent LEC access revenues from current levels, we seek comment on whether such LECs are entitled or should be permitted to recover some or all of that difference through a temporary special recovery mechanism. 19. In Section VIII, we seek comment on possible additional changes to our access charge rules that may be necessary to make them compatible with the competitive market envisioned by the 1996 Act, including whether there is any special need for regulating terminating interstate access service and "open-end" services, whether provided by incumbent LECs or new entrants. We also discuss possible changes to our existing treatment of the use by interstate information service providers, such as Internet service providers, of incumbent LEC switched access networks to originate interstate traffic. In Section IX, we issue a Report and Order implementing the changes to the LEC price cap rules discussed above that were proposed in the Price Cap Second FNPRM. 20. Finally, in Section X, we issue a Notice of Inquiry to examine fundamental issues about the implications of usage of the public switched network by information service and Internet access providers. B.Background 1.Regulation of Interstate Exchange Access Service 21. For much of this century, most telephone subscribers obtained both local and long distance services from the same company, the pre-divestiture, integrated Bell System, owned and operated by AT&T. Although some telephone subscribers received local telephone service from non-Bell independent companies, AT&T still provided long distance service to these customers. AT&T compensated its Bell Operating Company subsidiaries for originating and terminating interstate calls through revenue division arrangements and compensated the independent companies for access pursuant to settlement agreements. In the 1970s, MCI and other IXCs (then called "other common carriers," or OCCs) began to provide switched long distance services in competition with AT&T Long Lines by attaching their own switches to local business lines purchased from the incumbent LECs and reselling AT&T services. In 1979, AT&T and the OCCs, under Commission supervision, entered into a comprehensive interim agreement, known as Exchange Network Facilities for Interstate Access (ENFIA), to replace the local business rates with a different set of rates AT&T would charge OCCs for originating and terminating interstate traffic over the facilities of its local exchange affiliates. AT&T Long Lines continued to compensate its local exchange affiliates and the independent exchange carriers for the use of their facilities pursuant to their division of revenues and settlements arrangements. Following a lengthy proceeding, the Commission in 1983 adopted uniform access charge rules that govern the provision of interstate access services by all incumbent LECs, BOCs as well as independents. 22. The costs that incumbent LECs recover through interstate access charges are determined by a multi-step process. Incumbent LECs first record all their booked expenses and their cost of investment in the accounts prescribed by the Commission's Part 32 Uniform System of Accounts (USOA). They next divide the recorded investment and expenses between regulated and nonregulated services, pursuant to Part 64 of our Rules. Incumbent LECs then divide regulated expenses and investment between state and interstate jurisdictions pursuant to the separations procedures contained in Part 36 of the Commission's rules. Incumbent LECs then apportion their regulated interstate costs among the interstate access and interexchange service categories. Finally, to recover their access costs, incumbent LECs charge IXCs and end users for access services in accordance with the Part 69 access charge rules and, for incumbent LECs under price cap regulation, with the provisions of the Part 61 price cap rules. 23. Commentators have pointed out that, because each of these divisions of costs occurs pursuant to regulation rather than through operation of a competitive marketplace, these divisions are subject to distortions. In particular, commentators have focused on the separations process, which apportions costs between the intrastate and interstate jurisdictions. These commentators suggest that separations allocation, in particular allocation of common plant, reflects not only economic considerations, but also public policy considerations related to universal service and the desirability of low local rates. To the extent these allocation decisions have resulted in greater allocations to interstate services than would be economically justified, these distortions flow through Parts 69 and 61 into access charges. 24. Part 69 establishes two basic categories of access services: special access services and switched access services. Special access services do not use the local switch; they use dedicated facilities that run directly between the end user and the IXC's point of presence (POP). By contrast, switched access services use the local exchange switch to route originating and terminating interstate toll calls. The special access category includes a wide variety of services and facilities, such as wideband data, video, and program audio services. The Commission does not prescribe specific rate elements for special access services in Part 69. Part 69 does, however, establish specific switched access elements and a mandatory switched access rate structure for each element tailored to the nature of each service in order to promote competition in the interexchange services market and eliminate discrimination within or among services. In general, we have attempted to move toward rate structures that create incentives for the most efficient utilization of all telecommunications facilities. These elements generally correspond to the components of switched access service, as shown in Figure 1. 25. Interoffice transmission services, known as transport services, carry interstate switched access traffic between an IXC's POP and the end office that serves the end user customer. Incumbent LEC transmission facilities that carry interstate traffic between an IXC's POP and the incumbent LEC end office serving the POP (called the serving wire center or SWC) are known as entrance facilities. Part 69 requires incumbent LECs to impose flat-rate charges on IXCs to recover the costs of entrance facilities. Incumbent LECs currently offer two types of interstate switched transport service between a SWC and an end user's end office. Under the first service, direct-trunked transport, calls are transported between the SWC and the end office by means of a direct trunk that does not pass through an intervening switch. To recover the costs of direct-trunked transport facilities, Part 69 requires incumbent LECs to impose a flat-rate charge on IXCs. The second service, tandem-switched transport, routes calls from the SWC to the end office through a tandem switch located between the SWC and the end office. Traffic travels over a dedicated circuit from the SWC to the tandem switch, and then, over a shared circuit that carries the calls of many different IXCs, from the tandem switch to the incumbent LEC end office. For tandem-switched transport, Part 69 prescribes a per-minute tandem-switching charge and a per-minute transmission charge assessed on IXCs. 26. Incumbent LEC end offices serving end users switch interstate traffic between the transport trunks carrying traffic to and from the IXC POPs and the end users' local loops. Our Part 69 rules require incumbent LECs to recover the costs of the local switch through a per- minute local switching charge assessed on IXCs. Part 69 also requires incumbent LECs to impose a per-minute TIC on interstate switched access traffic. We note that an incumbent LEC's provision of transport and local switching for terminating interstate traffic is functionally the same as its provision of transport and termination service under the 1996 Act. 27. Finally, incumbent LECs assess end users a flat end user common line charge (EUCL), also known as the subscriber line charge (SLC), to recoup part or all of the local loop costs allocated to the interstate jurisdiction. The SLC currently may not exceed the lesser of the actual interstate loop cost, or $6 per month for multi-line business customers and $3.50 for residential and single-line business customers. In addition, IXCs are assessed a per-minute CCL charge to recover the remaining interstate allocation of loop costs that is not recovered through SLCs. IXCs with at least .05 percent of the total common lines presubscribed to IXCs in all study areas are also assessed Universal Service Fund and Lifeline service charges based on each IXC's share of presubscribed access lines. In addition, Part 69 identifies several other charges, including those for signalling and database queries. 28. The specific access charges currently assessed on interexchange carriers and end users under our rules vary among incumbent LECs because their embedded costs, on which access charges (even for price cap incumbent LECs) are based, vary from state to state. Significant differences in factors that affect a carrier's cost of providing service, such as the topography and population density of its service area, are reflected in different prices for access service. 29. The total regulated revenues of Class A incumbent LECs by service rate elements are shown in Table 1, below. As indicated there, more than 25 percent of the incumbent LECs' total regulated revenues are derived from interstate access services. In addition, of the $11.9 billion in interstate switched access revenues that incumbent LECs recover from IXCs, approximately 90 percent ($10.8 billion) is recovered through per-minute charges (i.e., CCL, TIC, and local switching). Table 1 Class A Incumbent Local Exchange Carriers' 1995 Total Regulated Revenues (in Billions) Interstate Revenues Subscriber Line Charge $ 7.1 Per-Minute Switched Access Charges Carrier Common Line $ 3.7 Transport Interconnection Charge $ 2.9 Local Switching (and other T-S) $ 4.2 Total Per-Minute Switched Access Charges$10.8 Transport (Facilities) $ 1.1 Special Access $ 3.1 Information $ 0.3 Miscellaneous $ 1.0 TOTAL INTERSTATE ACCESS REVENUES $23.4 Intrastate Revenues Basic Local Exchange Service $32.0 Intrastate Access $ 7.3 Other Intrastate Services $28.0 TOTAL INTRASTATE REVENUES$67.4 TOTAL REGULATED REVENUES$90.8 30. The Part 61 price cap rules give incumbent LECs that are subject to price cap regulation -- generally the largest incumbent LECs -- a degree of flexibility in establishing the actual levels of their access rates. Incumbent LEC price cap regulation is designed to promote economic efficiency by easing restrictions on overall profits while setting price ceilings at reasonable levels. The incumbent LEC price cap plan is designed to simulate some of the efficiency incentives found in competitive markets and to act as a transitional regulatory scheme until the advent of actual competition makes price cap regulation unnecessary. Price cap regulation encourages incumbent LECs to improve their efficiency by harnessing profit-making incentives to reduce costs, invest efficiently in new plant and facilities, and develop and deploy innovative service offerings. 31. The price cap rules split interstate access services into three discrete groups, called baskets. Two baskets are further grouped into narrower service categories and subcategories. Price cap incumbent LECs have some ability to raise and lower the charges for elements or services that are included in the same basket as long as the actual price index (API) for the basket does not exceed the price cap index (PCI) for that basket. This pricing flexibility is limited by banding rules that establish separate upper and lower pricing bands for each service category or subcategory within a basket. The price cap for each basket and the pricing bands for each service category and subcategory are adjusted annually based on defined formulas. The price cap rules place services subject to different competitive pressures into different baskets, service categories, and service subcategories. These measures limit the incumbent LECs' ability to offset reductions in service prices that are subject to competition with increases in service prices that are not subject to competition. 2.The 1996 Telecommunications Act 32. The 1996 Act seeks to open for all carriers the local and long distance telecommunications markets to competition by removing economic, regulatory, and operational impediments that have protected monopolies in the local exchange market. The 1996 Act requires incumbent LECs to open their networks to competition, and permits the BOCs, upon meeting certain conditions, to enter the interLATA market within their respective service areas. The 1996 Act also requires the Commission to forbear from applying any regulation or any provision of the Communications Act to telecommunications carriers or telecommunications services, or classes thereof, if the Commission determines that certain specified conditions are satisfied. a.Local Competition 33. The local competition provisions of the 1996 Act added new sections 251, 252, and 253 to the Communications Act. Section 251 establishes general interconnection obligations for all telecommunications carriers, delineates further obligations for LECs, and prescribes additional requirements for incumbent LECs. Sections 251(c)(2) and (c)(3) require that incumbent LECs' "rates, terms, and conditions" for interconnection, unbundled network elements be "just, reasonable, and nondiscriminatory in accordance with . . . the requirements of sections 251 and 252." Section 252 generally sets forth the procedures that state commissions, incumbent LECs, and new entrants must follow to implement the requirements of section 251 and establish specific interconnection arrangements. Finally, Section 253 bars state and local regulations that prohibit or have the effect of prohibiting entities from offering telecommunications services. 34. The terms and conditions under which such facilities and services are made available by incumbent LECs may be the subject of negotiated agreements between an incumbent LEC and a requesting carrier. If an incumbent LEC and requesting carrier are unable to reach a negotiated agreement, either party may ask a state to arbitrate the disputed issues. 35. As required by the 1996 Act, incumbent LECs must provide interconnection and nondiscriminatory access to network elements on an unbundled basis. In implementing the Act, we identified the following minimum set of network elements that incumbent LECs must provide to requesting telecommunications carriers, many of which are analogous to interstate access rate elements: network interface devices; local loops; local and tandem switches (including all software features provided by such switches); interoffice transmission facilities; signalling and call-related database facilities; operations support systems and information; and operator and directory assistance facilities. States may require unbundling of additional elements. b.Universal Service 36. Section 254, added by the 1996 Act, for the first time codifies the role of universal service in federal telecommunications regulation. Section 254 directs the Commission to commence a proceeding to implement sections 254 and 214(e) of the Act, and to refer such proceeding to a Federal-State Joint Board. The Joint Board was given nine months to make recommendations to the Commission, including a definition of the services to be supported by federal universal service support mechanisms and a timetable for the implementation of such recommendations. We initiated the Joint Board proceeding in March 1996, and the Joint Board issued its Recommended Decision in November 1996. 37. The 1996 Act established several requirements for federal universal service support mechanisms. The Commission, after receiving the recommendations of the Joint Board, is to designate specific services for federal universal service support. Such support is to be available for the provision, maintenance and upgrading of facilities and services for which the support is intended, and not for other purposes. Such support is to be available to all eligible telecommunications carriers. Such support is to be explicit, and, as the Conference Report makes clear, shall not be implicit. Such support is also to be funded on an equitable and non- discriminatory basis by all telecommunications carriers that provide interstate telecommunications services. 38. In its Recommended Decision, the Federal-State Joint Board concluded that several universal service mechanisms currently implemented through the jurisdictional separations and access charge structures must be replaced or modified in order to meet the Act's requirements that support mechanisms be explicit, specific, predictable and sufficient to preserve and advance universal service. Accordingly, the Joint Board recommended that changes be made to the high cost assistance fund, and that the Dial Equipment Minutes (DEM) weighting program and Long Term Support (LTS) be phased out, eliminated, and replaced by a new explicit universal service mechanism. If the Commission adopts the Joint Board's recommendations, our access charge rules must be adjusted to reflect these changes, to prevent incumbent LECs from recovering the same costs twice, and to provide the same subsidies to non-incumbent LECs as are provided to incumbent LECs for serving high-cost or low-income subscribers. 39. At the same time, we must also examine other features of our access charge system to determine whether they contain implicit universal service support, in contravention of the Act's requirement that all universal service support be explicit and its requirements as to funding of federal universal service support. In our Universal Service NPRM, we asked whether the CCL charge is an implicit universal service support mechanism. While the Joint Board did not reach this question, it suggested that it would be desirable for the CCL charge to be restructured to be collected on a flat-rate rather than a per-minute basis because per-minute collection is economically inefficient. 40. We continue to recognize that, because of the role that access charges have played in funding and maintaining universal service, it is important to implement changes in the access charge system together with complementary changes in the universal service system. In Sections III.B., below, we discuss whether the CCL charge must be restructured to comply with the Act's universal service requirements. 3. Need for Access Reform 41. There is a consensus among virtually all participants in the telecommunications industry on the need to reform our interstate access charge rules. IXCs and incumbent LECs, for example, agree that current per-minute interstate access charges exceed economically efficient levels and that, consequently, per-minute interstate access charges must be reduced. They differ, however, as to the reasons why current charges exceed forward-looking economic cost, the aggregate amount by which current charges exceed economic cost, and the effects of particular factors (e.g., alleged excessively-long prescribed depreciation schedules, separations distortions, strategic investments, and operational inefficiency). They also disagree on what portion, if any, of the difference between forward-looking economic cost and the portion of embedded costs allocated to the interstate jurisdiction incumbent LECs should be permitted to recover. 42. Current access charges distort competition in the markets for local exchange access. Our access charge rules create incentives for IXCs to bypass the LEC switched access network for reasons that have nothing to do with the economics of operating an access network. This uneconomic bypass may occur for a variety of reasons; rates may be too high, or our access charge rules may require rates for a LEC access service to be too high in relation to the rates for an alternative LEC service or for a comparable service offered by an alternative supplier. Inefficient entry may occur if the price for a package of jointly-provided services is above economic cost, even if the LEC would actually be the most efficient provider of the service. Conversely, if a package of jointly-provided services, including access, is priced too low because of regulatory requirements, efficient entry by an otherwise efficient provider may be precluded. In either case, the total cost of telecommunications service will not be as low as it could be if all services were priced at economic levels, thereby providing accurate price signals to all market participants. High access charges may also keep long-distance rates higher than they would otherwise be, which restricts demand for service and harms long-distance consumers. We describe more fully some of the causes of uneconomic bypass below. 43. Inefficient, mandatory rate structures are one reason that per-minute interstate access charges exceed the economic cost of providing service to certain customers. One example is the recovery through a per-minute CCL charge of part of the allocated interstate costs for incumbent LECs to provide local loops to end users. Recovering on a per-minute basis the cost of the local loop, which is a fixed cost that does not vary with usage, results in high-volume toll users paying charges to their IXCs that exceed the cost of serving those customers, while some low-volume toll users may pay rates that are below cost. Mandatory per-minute charges for local switching, which probably has significant fixed costs, also results in IXCs paying access charges for high- volume toll users that exceed the cost of serving those customers. Finally, the requirement that most rates be averaged on a "study area" basis (i.e. generally, state-wide) precludes incumbent LECs from setting rates to reflect cost differences in high-density and low-density areas, leaving incumbents vulnerable to niche entry in high-density areas, and precluding entry by firms that might otherwise seek to serve low-density areas. 44. Assignment of costs to the wrong elements may also contribute to high per-minute interstate access rates. As discussed in Section III.E. below, the TIC currently recovers some costs that may be appropriately included in the rates for services in the trunking basket. This also results in higher-volume switched access toll users paying rates that exceed cost. 45. Incumbent LECs, and to a lesser degree others such as AT&T, argue that another reason current interstate access charges exceed forward-looking economic cost is the over- allocation of costs to the interstate jurisdiction in the separations process, which allocates costs between the interstate and intrastate jurisdictions. According to these parties, the revenues now recovered through interstate switched access rate elements in the traffic-sensitive basket exceed the cost of providing interstate switched access services, while intrastate rates do not recover enough to cover the economic cost of providing intrastate exchange and exchange access services. 46. A major focus of the IXCs, on the other hand, is the contention that current interstate access charges exceed economic cost levels because the incumbent LECs are inefficient. As a result, they argue, the incumbent LECs' unseparated rate base is higher than it should be, and all prices in both the interstate and intrastate jurisdictions exceed economic cost-based levels that an efficient provider would charge. 47. Several parties, including AT&T and MCI, argue that, to the extent access services are not available to IXCs at their forward-looking economic cost, incumbent LECs and their long-distance affiliates will have an unfair competitive advantage in the market for long-distance services. According to these IXCs, this is because the incumbent LEC's affiliate's effective cost of obtaining "in region" access service is the incremental cost that its affiliated LEC incurs in providing access. If an incumbent LEC that also provides long-distance service can charge unaffiliated IXCs access prices that are significantly higher than forward-looking economic cost, the IXCs argue that the incumbent LEC may be able to create a "price squeeze" by raising rivals' costs. Under these circumstances, the incumbent LEC affiliate could lower its retail price to reflect its cost advantage, and competing unaffiliated IXCs would be forced either to match the price reduction and absorb profit margin reductions or maintain their prices at existing levels and accept reductions in their market shares. 48. Additionally, to the extent that unbundled network elements become available from incumbent LECs at economically efficient prices, IXCs will have the ability to avoid paying access charges by purchasing such elements to provide both local exchange and exchange access service to end-user customers. IXCs may also take access service from a competitive LEC that either provides its own facilities or takes unbundled elements from the incumbent LEC. The availability of unbundled network elements at their forward-looking economic cost would appear to reduce the danger of a price squeeze insofar as IXCs can use those elements to provide their own access to customers for whom they are the local service provider. There may, however, be limits on the extent to which access charges can be replaced by unbundled elements in either the short or long-term, because an IXC may have to take access service for those end-user customers for which it does not provide local service. 49. Apart from any revisions to our rules that we may adopt in this proceeding, the availability of this alternative to interstate access service may force incumbent LECs to move their access charges to more economically efficient levels, and may necessitate relief from mandatory access charge rate structures that are not economically efficient. We seek in this proceeding to explore ways in which we can harness competitive forces to further our efforts to make our system of interstate access charges more economically rational and compatible with competitive local markets. We also seek to adopt rules and policies that will facilitate a smooth transition from the current system to one that can be sustained in competitive local markets. II. ACCESS REFORM FOR INCUMBENT LOCAL EXCHANGE CARRIERS A.Application of Reforms to Price Cap Carriers and Non-Price Cap Carriers 50. Because our access charge rules apply only to dominant LECs, the focus of this proceeding is reform of our access charge regime that currently applies to incumbent LECs. Although many of the reforms we propose in this Notice may be desirable changes to our regulation of non-price cap incumbent LECs, we are limiting the scope of this proceeding to incumbent LECs subject to price cap regulation, with limited exceptions discussed below. 51. We note that price cap regulation governs almost 91 percent of the interstate access charge revenues and more than 92 percent of the total incumbent LEC access lines. Currently, all ten of the incumbent LECs with more than two million access lines and 13 of the 17 non- NECA incumbent LECs with more than 50,000 access lines are subject to price cap regulation. The remaining incumbent LECs are telephone companies subject to various forms of rate-of- return regulation. Therefore, even though this proceeding applies only to price cap incumbent LECs, it would nonetheless affect the vast majority of all access lines and interstate access revenues. 52. The need for access reform is most immediate for those incumbent LECs that may soon be subject to competition from the availability of unbundled network elements. These are primarily the price cap incumbent LECs. Many, if not all, non-price-cap incumbent LECs may be exempt from, or eligible for a modification or suspension of, the interconnection and unbundling requirements of the 1996 Act. By contrast, all incumbent LECs that are ineligible for section 251(f) exemptions, suspensions, or modifications are incumbent price cap LECs. Because the latter incumbent LECs must fulfill the section 251(b) and (c) duties to provide interconnection and unbundled elements to new entrants, these incumbent LECs are likely to face significant competition in the interstate exchange access market from new entrants using unbundled network elements before the small and mid-sized rate-of-return incumbent LECs face such competition. Thus, we conclude that we should focus our efforts here on the immediate task of reforming the access charge regime for price cap incumbent LECs. We plan to initiate a separate proceeding in 1997 to undertake comprehensive review of our regulation of rate-of- return incumbent LECs. That inquiry will take up the issue of whether substantial changes in our Part 69 cost allocation rules for the development of access charges for rate-of-return carriers are needed. 53. We propose, however, limited exceptions to our decision to confine this proceeding to price cap incumbent LECs. Specifically, we propose to apply to all incumbent LECs the rules discussed in Section VII.A, which addresses allocation of universal service support to the interstate revenue requirement, and Sections III.D and E, which propose reforms to the transport rate structure, including the TIC. Because rate-of-return incumbent LECs will collect revenues from the new universal service support mechanism, we need to determine in this proceeding how these payments should alter the access charges currently assessed by such incumbent LECs. Moreover, any changes we adopt to the TIC pursuant to the court's remand in CompTel v. FCC should also apply to rate-of-return incumbent LECs because their transport rules were subject to the rates that were remanded by the court in that decision. In Section III.B, we seek comment on whether we should also apply our proposed changes to the common line rate structure to rate-of- return incumbent LECs. In Section VIII.C., we seek comment on updating the Part 69 access rules in light of various developments. We seek comment on these tentative conclusions regarding the scope of this proceeding. We further invite parties to comment on the effect of these proposals and tentative conclusions on small business entities, including small incumbent LECs and new entrants. B.Applicability of Part 69 to Unbundled Elements 54. Pursuant to our jurisdiction over interstate access charges under section 201 of the Act, we tentatively conclude that unbundled network elements should be excluded from the Part 69 access charge regime, regardless of whether the carrier that purchases unbundled network elements uses those elements to provide local exchange services or exchange access services. Thus, when using unbundled network elements to originate and terminate interstate calls, requesting carriers should not be required to pay the Part 69 access charges corresponding to those elements. The 1996 Act permits telecommunications carriers that purchase access to unbundled network elements from incumbent LECs to use those elements to provide all telecommunications services to customers, including access in order to originate and terminate interstate calls. The 1996 Act in turn requires requesting carriers to pay cost-based rates to compensate incumbent LECs for all such use of the unbundled network elements. Thus, the requesting carrier has already paid for the ability to originate and terminate interstate calls. Nothing in the text of the 1996 Act compels telecommunications carriers that use unbundled elements to pay interstate access charges, nor limits these carriers' ability to use unbundled elements to originate and terminate interstate calls. Nothing in sections 201-205 of the Act requires a contrary result. We seek comment on this tentative conclusion. We also note that the Part 69 interstate access charge rules do not apply to the transport and termination of local traffic provided pursuant to section 251(b)(5). III. RATE STRUCTURE MODIFICATIONS A.Overview 55. We tentatively conclude that several provisions in Part 69 of our rules compel incumbent LECs to impose charges for access services in a manner that does not accurately reflect the way those LECs incur the costs of providing those services. For example, generally the costs associated with the local loop are non-traffic-sensitive (NTS), but our rules require incumbent LECs to recover a portion of those costs through per-minute CCL charges. Similarly, at least some portion of the costs of local switching is NTS, but our rules require incumbent LECs to recover all local switching costs through per-minute charges. In these and other cases, our rate structure rules do not send accurate pricing signals to customers, and consequently, encourage inefficient use of telecommunications services. These inaccurate pricing signals encourage uneconomic bypass of incumbent LEC facilities and could very well skew or limit the development of competition in the markets for telecommunications services. Furthermore, these rates may not be sustainable in the long run if unbundled network elements are made available at cost-based prices and used to provide exchange access services. 56. We propose to revise our rate structure requirements for switched access service by eliminating some rate structure requirements, prescribing some new requirements, or a combination of both. We tentatively conclude that, regardless of which of the approaches to access reform discussed in Section IV we choose, establishing more economically rational rate structure rules is a necessary first step in the new procompetitive era. We seek through these changes to establish rate structures for interstate access services that send more accurate pricing signals to both consumers and competitors. Below, we invite comment on proposals for rate structure rule changes to be applicable to all price cap incumbent LECs. Specifically, we invite comment on rate structure rule changes for common line, local switching, and transport. We then seek comment on a number of proposals for phasing out the transport interconnection charge, and on establishing rate structure rules for SS7 signalling services. With the exception of the transport rule revisions considered in Section III.D, and the revisions to the TIC considered in Section III.E, we propose applying the rate structure rule changes discussed in Section III only to incumbent price cap LECs. As noted in Section II, rate structure revisions for non-price cap incumbent LECs will be addressed in a separate proceeding. B.Common Line 1.Background 57. Common line costs are the costs associated with the line connecting the end user's premises with the local switch that have been assigned to the interstate jurisdiction through the jurisdictional separations process. These costs are not traffic-sensitive. A portion of the incumbent LEC's common line costs are recovered through EUCL charges, also called SLCs. These charges currently are limited to the actual cost of the interstate portion of the local loop or $3.50 per month for residential and single line business users, and $6.00 per month for multi-line business users. The remaining common line costs, if any, are recovered through carrier common line charges, which are per-minute rates imposed on access customers. 58. The current common line rate structure, in which only a portion of common line costs are recovered through flat monthly rates, does not reflect the manner in which loop costs are incurred. As a result, the common line rate structure forces incumbent LECs to recover costs in an economically inefficient manner, and so may cause inefficient use of the network and uneconomic bypass, as discussed in Section III.A, above. Furthermore, in the original Access Charge Order, the Commission found that recovering NTS costs through flat monthly charges imposed on end users by incumbent LECs would promote optimal utilization of telecommunications facilities. The Commission decided at that time, however, to place a limit on the SLC, and, consequently, required incumbent LECs to recover the remainder of their common line costs through per-minute CCL rates. The current CCL charge has been uniformly criticized by both incumbent LECs and IXCs because it discourages efficient use of the network and encourages uneconomic bypass. We invite comment below on alternative common line rate structures. 2. Alternative Methods of Recovery of CCL Portion of Subscriber Loop Costs 59. The Joint Board in its Recommended Decision recognized that the current, traffic- sensitive CCL charge structure is economically inefficient because the charge requires incumbent LECs to recover a non-usage-sensitive cost in part through a usage-sensitive charge. The Joint Board suggested that the Commission change the existing rate structure so that incumbent LECs are no longer required to recover any of the NTS cost of the local loop from IXCs on a per- minute basis. The Joint Board noted that it would be preferable for costs related to the loop to be recovered in a manner that is consistent with the manner in which the costs are incurred. Because the cost of a loop generally does not vary with the minutes of use transmitted over the loop, the Joint Board concluded that the current CCL charge that mandates recovery of a portion of loop costs through per-minute charges is an inefficient cost-recovery mechanism. 60. We seek comment on possible revisions to the current CCL charge structure so that incumbent price cap LECs are no longer required to recover any of the NTS costs of the loop from IXCs on a traffic-sensitive basis. One possible alternative, mentioned by the Joint Board, involves permitting incumbent LECs to recover the costs not recovered from SLCs through a flat, per-line charge paid by IXCs. An administratively simple mechanism for recovery of such a flat-rate charge would be to assess it against each customer's presubscribed interexchange carrier (PIC). If carriers seek to pass on that charge to end users, however, such an approach might encourage end users not to select a PIC. To resolve this problem, the Joint Board suggested that the Commission allow incumbent LECs to collect the flat-rate charge that would otherwise be assessed against the PIC directly from any customer who elects not to choose a PIC. We seek comment on this approach and invite parties to discuss the potential problem created when end-user customers have selected PICs but use other IXCs for Internet, fax, interexchange or other interstate services by "dialing-around" the PIC. 61. The Competition Policy Institute (CPI) has suggested several other alternatives to the per-minute recovery of interstate NTS loop costs. For example, interstate NTS loop costs may be recovered through "bulk billing," in which carriers are assessed a charge based upon their percentage share of interstate minutes of use or revenues. An additional possible approach to recovering interstate NTS loop costs is a "capacity charge" assessed on carriers based upon the number and type of trunks that they purchase from the incumbent LECs. Alternatively, LECs could assess a "trunk port charge" to each carrier based upon the number of trunk-side ports, or connections it has to the local switch. Another possibility is a "trunk port and line port" charge, which would be based upon the number of trunk-side ports and the number of line-side ports. We seek comment on these approaches to recovery of interstate NTS local loop costs and ask parties to propose other efficient recovery mechanisms. We invite parties to comment on whether any changes that we adopt to the recovery of interstate NTS local loop costs for price cap LECs should be extended to rate-of-return LECs, and the relationship of interstate NTS loop cost recovery under access charges to the Joint Board Recommended Decision. Interested parties should address how such an extension to rate-of-return LECs would affect small business entities, especially small incumbent LECs. 62. Parties should also address whether, in the event that we eliminate the SLC cap for lines used by multi-line business customers and residential lines beyond the primary residential line as discussed below, we need to adopt an alternative mechanism for recovering common line costs currently recovered through the CCL charge imposed on such lines. We also seek comment, in conjunction with our market-based approach to access reform, on the circumstances under which we should grant LECs rate structure flexibility in their recovery of interstate common line costs from IXCs. Interested parties should also address the extent to which any proposed alternative recovery mechanism for recovering common line costs currently recovered through the CCL charge will affect small business entities, including small incumbent price cap LECs and new entrants. 63. Finally, we seek comment on whether there are any limitations on our authority to assess flat-rated CCL charges on IXCs. In particular, we note that section 254(g) also requires IXCs to charge their subscribers in rural and high cost areas within a state the same rates they charge to their subscribers in urban areas in that state. Section 254(g) also requires IXCs to charge their subscribers in each state rates no higher than the rates charged to subscribers in any other state. Would this requirement preclude an IXC from charging its customers the flat monthly rate assessed for that line if the amount of that charge varied among states, or between urban and rural areas within a state? If so, do conditions exist sufficient to require the Commission to forbear from the application of section 254(g) to IXC recovery of flat-rate CCL charges? Parties should also address the effect of section 254(g) if CCL charges vary among the states, but end-user rates may not vary. 3. Alternative Methods of Recovery of SLC Portion of Subscriber Loop Costs 64. In its Recommended Decision, the Joint Board determined that eligible carriers should receive support for designated services carried on the initial connection to a customer's primary residence and single-line business customers. The Joint Board, however, recommended that universal service support should not be provided for multi-line business or residential connections beyond the primary residential connection. The Joint Board further concluded that the current $3.50 SLC cap for primary residential and single-line business lines should not be increased, but did not state that the SLC cap should be maintained for multi-line business or residential connections beyond the primary residential connection. Loop costs not recovered from the current multi-line business SLCs, and SLCs for residential lines in addition to the primary connection, are recovered through usage-sensitive CCL charges, which in turn are recovered from toll users. Since end user customers of multi-line business and multiple-line residential services do not necessarily make large numbers of toll calls, the toll payments of these end users may not cover the portion of loop costs not recovered through the SLC. Moreover, toll rates are higher than they otherwise would be, which discourages demand for such services. 65. For these reasons, we propose to increase the cap on the SLC for the second and additional lines for residential customers and for all lines for multi-line business customers to the per-line loop costs assigned to the interstate jurisdiction. This would allow incumbent LECs to recover interstate common line costs for multi-line business customers and for residential connections beyond the primary residential connection in a manner consistent with the way costs are incurred. Alternatively, we could eliminate the cap for multi-line business customers and for residential connections beyond the primary connection, especially where the incumbent LEC has entered into interconnection agreements and taken other steps to lower barriers to actual or potential local exchange competition. Under that approach, we would not prohibit an incumbent LEC from charging a SLC for second and additional lines for residential customers and for all lines for multi-line business customers that exceeds the per-line loop costs assigned to the interstate jurisdiction. We emphasize that this proposal would not affect the current cap of $3.50 on the SLC that is charged to a residential customer's primary line and to a single-line business customer. We invite parties to comment on this proposal. We also invite parties to comment on whether any changes that we adopt to the cap on SLCs for price cap LECs should be extended to rate-of-return LECs, and the relationship of any such changes to the Joint Board Recommended Decision. Interested parties should address how applying such a cap on SLCs to rate-of-return LECs would affect small business entities, especially small incumbent LECs. 66. In the event we decide to increase or eliminate the cap on SLCs for multi-line business lines and residential lines in addition to the primary line, we also solicit comment on whether we should establish a transition mechanism for this increase, whether such a transition could be implemented consistent with section 254, and if so, how long this transition period should be. We propose establishing no transition period if the increase in the SLC is less than one dollar, and establishing a three-year transition period if the increase is one dollar or more, but we invite comments on other alternatives in addition to these. 67. Finally, we seek comment on whether we should permit or require incumbent LECs to deaverage SLCs as part of the baseline rate structure that would be imposed on all incumbent price cap LECs. In particular, we note that section 254(e) requires us to adopt only explicit support subsidies for universal service support. We seek comment on whether geographic averaging of SLCs is an implicit subsidy that is inconsistent with the requirements of section 254(e), and thus on whether we are required to deaverage SLCs. 4.Assessment of SLCs on Derived Channels 68. Integrated services digital network (ISDN) services permit digital transmission over ordinary local loops through the use of advanced hardware and software. ISDN offers data transmission at higher speeds and with greater reliability than standard analog service. Most incumbent LECs currently offer two types of ISDN service, Basic Rate Interface (BRI) service and Primary Rate Interface (PRI) service. BRI service allows a subscriber to obtain two voice- grade-equivalent channels and a signalling/data channel over an ordinary local loop, which generally is provided over a single twisted pair of copper wires. PRI service allows subscribers to obtain 23 voice-grade-equivalent channels and one data signalling channel over two pairs of twisted copper wires. BRI service generally is used by individuals and small businesses, and PRI service generally is used by larger businesses. LEC services other than ISDN use derived channel technology to provide multiple channels over a single facility. The LECs also use derived channel technologies within their networks, for example, to provide customers with individual local loops. In such situations, the end user generally is not aware that the LEC is using this technology. 69. In the ISDN SLC NPRM, we noted that the application of SLCs under our existing rules to ISDN services may discourage demand for these services, and we sought comment on whether more than one subscriber line charge should be applied to ISDN services, and if so, how many charges. Several parties submitted comments in response to that Notice, and those parties are listed in Appendix A. All of the commenting parties except AT&T oppose our current rule that assesses a SLC per derived channel. Almost all of the LECs, user groups, equipment manufacturers, IXCs, and other commenters support a rule that would assess a SLC for each pair of copper wires, or a SLC for each ISDN facility. Under such a rule, LECs would assess one SLC for BRI service and one or two SLCs for PRI service. Many parties, including at least one BOC, support assessing SLCs for ISDN based on the relative NTS costs of providing ISDN service compared to standard analog service. 70. As shown in Table 2 below, the cost data submitted in response to the ISDN SLC NPRM indicates that the ratio of NTS costs of BRI ISDN to standard analog service is approximately 1.24 to 1. The ratio of NTS costs of PRI ISDN to standard analog service, excluding NYNEX's data, is roughly 10.5 to 1. As shown in Table 3, NYNEX's data appear to be outliers and are therefore excluded from the calculation of the average ratio for PRI ISDN to standard analog service because the ratios of its outside plant and NTS costs for PRI ISDN to standard analog service are almost twice those of other incumbent LECs. Interested parties filed their comments in the ISDN SLC proceeding prior to the enactment of the 1996 Act. We ask for comment on the effect of the 1996 Act on determining how many SLCs should be applied to ISDN services. Finally, we solicit comment on whether mandatory rate structures or rate caps should be prescribed for ISDN service or other derived channel services. TABLE 2 Ratio of Costs of Standard Analog Service to BRI ISDN Service Outside Plant (loop only) costs All NTS costs Ameritech 1:1.07 1:1.45 Bell Atlantic 1:1.01 1:1.36 NYNEX 1:0.85 1:1.23 Pacific Bell 1:1.05 1:1.13 US West 1:0.80 1:1.07 Average ratio of costs 1:0.96* 1:1.24* TABLE 3 Ratio of Costs of Standard Analog Service to PRI ISDN Service Outside Plant (loop only) costs Outside Plant (loop only) costs (excluding NYNEX) All NTS costs All NTS costs (excluding NYNEX data) Ameritech 1:5.68 1:5.68 1:8.9 1:8.9 Bell Atlantic 1:4.13 1:4.13 1:15.80 1:15.80 NYNEX 1:10.94 excluded 1:27.74 excluded Pacific Bell 1:4.67 1:4.67 1:8.70 1:8.70 US West 1:5.33 1:5.33 1:10.60 1:10.60 Average ratio of costs 1:6.5* 1:4.95* 1:15.13* 1:10.5* *Averages may differ due to rounding. C.Local Switching 71. The local switch connects a call coming in on one line or trunk to another line or trunk connected to the switch. A local switch consists of line and trunk cards, and an analog or digital switching system. Line cards provide interfaces between subscriber lines and the switch. Trunk cards or "ports" provide interfaces between the switch and interoffice trunks. Because line cards, as well as trunk cards, are deployed within the central office, they are accounted for in the switching accounts of the USOA. These costs are therefore included in the switching category for separations and cost allocation purposes. The central processing portion of the switch performs the routing function based on the telephone numbers dialed by the end user placing the call. 1.Non-Traffic-Sensitive Charges 72. Currently, Section 69.106 of our rules requires incumbent LECs to charge per-minute rates for local switching. A significant portion of local switching costs, however, likely do not vary with usage. For example, the costs associated with line cards or line-side ports appear to vary with the number of loops connected to the switch, not with the level of traffic over the loops. We tentatively conclude that it is more reasonable and economically efficient to recover dedicated line card costs through flat charges. We solicit comment on establishing a flat rate element for NTS local switching costs. We also invite commenters to recommend methods of identifying line card costs and other NTS local switching costs. 73. The central processing portion of the switch, and many trunk-side ports, are shared local switching facilities because they are used to carry the traffic of several access customers, and so should be priced on a usage-sensitive basis. By contrast, because trunks for dedicated transport service are dedicated to individual IXCs, ports for dedicated transport service also appear dedicated to individual customers, and, consequently, the charges for such facilities should be flat-rated. While flat rates appear reasonable for recovering costs associated with dedicated ports and line cards, it is not clear what rate structure would best reflect the manner in which incumbent LECs incur costs associated with shared local switching facilities. If all shared local switching costs are driven by the number of lines and trunks served by the switch, flat rates would appear appropriate. On the other hand, usage- sensitive charges might better reflect the way incumbent LECs incur costs for shared local switching facilities. Finally, a combination of flat-rate and usage-sensitive charges may best reflect cost causation principles. AT&T and MCI have argued that a substantial portion of local switching costs are non-usage-sensitive, and the local switching rate structure, therefore, should include both usage-sensitive and non-usage-sensitive rate elements. Ameritech has stated that, for a majority of the switches in its network, more than 40 percent of switching costs are NTS. We seek comment generally on this analysis, and on how we should establish an appropriate, efficient rate structure for switching. We note that states may be considering this same issue in the context of establishing rates for unbundled local switching, and we seek comment on, and analysis of how, states are addressing these issues under Section 252. 2.Traffic-Sensitive Charges 74. In the following paragraphs, we seek comment on a number of specific proposals for rate structures governing rates designed to recover usage-sensitive local switching costs. Interested parties should discuss which of these rate structure proposals most accurately reflect traffic-sensitive local switching costs, and whether we should permit or require incumbent LECs to assess these traffic-sensitive charges. Parties advocating a particular rate structure should address all the issues raised by that approach. We also invite parties to propose other rate structures. a.Call-Setup Charges 75. Call setup is the process of establishing a transmission path over which a phone call will be routed. We could permit or require incumbent LECs to develop call-setup charges if we find that usage-sensitive charges might better reflect the way they incur certain costs for shared local switching facilities. The per-minute rate structure prescribed by Part 69 for local switching does not separately address costs that incumbent LECs may incur for call setup and takedown. Call-setup costs would be incurred for each call regardless of its duration or whether it is completed. Because no separate charge exists for call setup, incumbent LECs must recover these costs through the per-minute local switching charges, or possibly through other rate elements. Thus, longer-duration calls recover a greater portion of call-setup costs than shorter calls even if they do not impose greater call-setup costs. A per-call rate element for call setup would more rationally reflect these costs. 76. In the past, the Commission has rejected incumbent LEC petitions for waiver of Part 69 for purposes of imposing a call-setup charge, on the grounds that such proposals should be considered in a broader rulemaking. Accordingly, we now seek comment on whether we should permit or require incumbent LECs to include a call-setup charge in their local switching rate structures. We also request comment on the extent to which the current local switching rate element recovers costs that vary with the number of calls, rather than their duration. Should a call-setup charge apply to all call attempts, or only to completed calls? We seek comment on whether incumbent LECs incur different call-setup costs depending on whether a call is delivered via direct-trunked or tandem-switched transport service, and on the different costs incurred when multifrequency (MF) and SS7 signalling are used for call setup. Finally, we invite comment on whether any of these cost differences should be reflected by establishing different charges for different kinds of call setup. To the extent that parties support a separate charge for SS7 call setup, those parties should explain how such a charge would be consistent with the rate structure for other SS7 services we discuss below. b.Peak and Off-Peak Pricing 77. We could direct or allow incumbent LECs to develop peak and off-peak pricing for shared local switching facilities. When incumbent LECs select the types of switches that they will deploy in their networks, they base their decisions on the anticipated peak demand. Thus, incumbent LECs arguably should be permitted to establish separate rate elements for local switching provided during peak periods and off-peak periods. The peak prices would be per- minute rates, and designed to recover the costs of additional capacity that an incumbent LEC must install to meet the peak demand. Because off-peak traffic requires no additional capacity, the costs of this traffic are lower, and accordingly, the access charges for that traffic should be lower as well. 78. We previously sought comment on peak and off-peak pricing in the LEC/CMRS NPRM, and addressed those comments in the Local Competition Order. We recognized in the Local Competition Order that there might be practical problems with a rate structure that had different peak and off-peak pricing. Therefore, we did not mandate a peak-sensitive rate structure for unbundled network elements, although we also did not preclude use of peak/off- peak pricing. Parties supporting requiring rather than merely permitting peak and off-peak pricing for local switching should explain why this rate structure is more suitable for access rates than it is for unbundled network elements. c. Current Rate Structure 79. As another alternative, we could retain the existing per-minute local switching rate structure. Because a significant portion of local switching costs may not vary with minutes of use, however, the existing rate structure may be less desirable than the other options discussed above. We invite parties supporting the current rate structure to explain why they believe that it adequately reflects the manner in which traffic-sensitive local switching costs are incurred. D.Transport 1.Background 80. Transport service is the component of interstate switched access service corresponding to the transmission and switching of traffic between incumbent LEC end offices and IXC POPs. Part 69 of our rules requires incumbent LECs to develop charges for transport service that may not reflect in some cases the manner in which they incur the costs of providing these services. Thus, as we discussed with respect to local switching charges above, it may be necessary to revise our Part 69 rate structure requirements for transport services. 81. Since December 1993, transport has been provided pursuant to interim rules that replaced the "equal charge per unit of traffic" requirement of the MFJ. We required incumbent LECs to establish flat rates for: (1) "entrance facilities," transport service from the IXC POP to the SWC, and (2) "direct-trunked transport," transport service from a SWC to an end office on dedicated facilities without switching at a tandem switch. In addition, incumbent LECs were directed to establish usage-based charges for "tandem-switched transport," a transport service from the SWC to the end office that provides switching at a tandem switch. The tandem- switched transport service charge includes an interoffice transmission charge, and a charge for the tandem switch. 82. The initial rate levels for direct-trunked transport were generally presumed reasonable if they were based on rates for comparable special access services. The per-minute tandem-switched transport transmission charge was based on assumptions about average monthly DS1 and DS3 usage. The charge for the tandem switch was initially set to recover 20 percent of the Part 69 tandem revenue requirement. Finally, to make the restructure revenue neutral initially, we required incumbent LECs to establish a non-cost-based transport interconnection charge (TIC), to recover the revenue difference between what the LECs would have realized under the equal charge rate structure and what they would realize from the interim facility-based transport rates, including the remaining 80 percent of the tandem revenue requirement. 83. Subsequently, in the First Transport Reconsideration Order, the Commission required incumbent LECs to offer two pricing options for tandem-switched transport service. First, an IXC may purchase tandem-switched transport at usage-sensitive rates with any mileage component computed on the basis of the distance between the SWC and the end office, regardless of the actual physical routing. Second, an IXC may purchase direct-trunked transport between the SWC and the tandem office and usage-rated tandem-switched transport between the tandem office and the end office, with any tandem-switched transport mileage component computed on the basis of the distance between the tandem office and the end office. 84. In this section, we seek comment on whether to revise the facility-based components of the transport rate structure. In the following section, we seek comment on phasing out the TIC. Unlike the other rate structure rules we consider in Section III, we contemplate imposing any rules adopted relating to the transport rate structure or the TIC on all incumbent LECs. We propose, for reasons articulated in the First Transport Order, that the transport rate structure be divided into three parts: (1) charges for entrance facilities; (2) charges for direct-trunked transport service; and (3) charges for tandem-switched transport service. We seek comment on adopting this basic framework for the transport rate structure rules. In commenting on the transport issues in this section, parties should bear in mind the interrelationship of these issues with those relating to the TIC, which is discussed in Section III.E, below. 85. We also seek comment here and in Section III.E on the issues remanded in CompTel v. FCC, in which the court remanded the Orders in which we established the transport rate structure rules. The court held that we did not adequately explain our decision to require incumbent LECs to charge a non-cost-based TIC. The court remanded our decision to set the tandem-based transport rate element to recover 20 percent of the Part 69 tandem revenue requirement and to allocate the remaining revenue requirement to the TIC, because the Commission did not adequately explain why 20 percent would be more equitable than some other allocation. The court also found that we did not explain our decision to require incumbent LECs to allocate a greater proportion of overhead costs to the tandem-switched transport switching charge than to direct-trunked transport service rates. We address the TIC issue in Section III.E below, and the other two remand issues in this section. 2. Entrance Facilities and Direct-Trunked Transport Services 86. For entrance facilities and direct-trunked transport service, we tentatively conclude that the transport rate structure rules should mandate flat-rated charges. These transport facilities appear to be dedicated to individual customers, and we believe that flat rates reflect the way incumbent LECs incur costs for dedicated facilities. We invite comment on this tentative conclusion. We also seek comment on whether incumbent LECs should be permitted to offer transport services differentiated by whether the LEC or the IXC is responsible for channel facility assignments. In the past, Ameritech and Bell Atlantic have sought waivers of our Part 69 rules to offer such a switched access service, alleging that it would permit them to utilize the access network more efficiently. We seek comment on whether any rules beyond those included in the interim rules are necessary to govern rate levels for these services. 3.Tandem-Switched Transport Services a.Rate Structure 87. We present several options for the rate structure associated with tandem-switched transport service facilities. The first option would maintain the interim rate structure's treatment of the tandem-switched transport charge, which gives IXCs a choice of two pricing alternatives for purchase of tandem-switched transport service. IXCs may elect to pay a single usage- sensitive charge, with distance measured in airline miles from the SWC to the end office, if applicable. Alternatively, IXCs may choose a flat-rated charge for a dedicated facility from the SWC to the tandem office, and a usage-sensitive charge for tandem-switched transport service from the tandem office to the end office, with mileage computed separately for the two segments, if applicable. 88. The second option would eliminate an IXC's ability to select the first choice and require incumbent LECs to assess flat-rated charges for the circuit between the SWC and the tandem, which typically is a dedicated circuit, and to apply usage-based rates to the tandem-to- end office link. This was the original transport rate structure the Commission established in 1983 in the Access Charge Order. 89. In conjunction with either of the two options for pricing tandem-switched transport service transmission facilities, we could treat tandem switching similarly to one of our proposals for the local switching rate structure, discussed in Section III.C above. As with the end-office switch, the tandem switch may include equipment dedicated to particular customers, such as the network ports through which a particular IXC's traffic enters and leaves the tandem switch. Thus, we could require incumbent LECs to develop usage-sensitive charges for shared facilities (the tandem switching functions and the ports on the end office side of the tandem switch), and a flat-rated charge for the dedicated ports on the SWC side of the tandem switch. Alternatively, shared tandem switching costs may be driven by the number of trunks on the end-office side and the SWC side of the tandem switch, just as shared local switching costs may be driven by the number of lines and trunks connected to the switch. If this is the case, then flat monthly rates may better reflect shared tandem switching costs. Parties are invited to comment on whether tandem switches differ in any fundamental way from end office switches with respect to the division of costs associated with shared and dedicated facilities. 90. In addition to any of the tandem-switched transport service options discussed above, we could permit or require incumbent LECs to develop peak load pricing for tandem-switched transport service. Most small IXCs use tandem-switched transport service for all or most of their access traffic, while larger IXCs may use tandem-switched transport service on relatively fewer routes, or may use it only to handle their overflow traffic during peak hours. Thus, some portion of tandem costs may be attributable to the need to accommodate this overflow traffic from direct- trunked transport facilities. We invite comment on whether to permit or require incumbent LECs to develop peak and off-peak pricing for tandem switching. We also invite comment on whether some portion of tandem switching costs should be recovered from direct-trunked transport service customers, if in fact a portion of tandem switching capacity is necessary to meet demand from direct-trunked transport customers during peak period. Parties advocating peak pricing should propose a method to determine the peak period. Because some access customers may use some SWC-side trunks and ports to carry overflow traffic, and the costs of those ports are not traffic-sensitive, flat rates may better recover the tandem-switched transport costs generated by that overflow traffic. We invite comment on this analysis. 91. We seek comment on the benefits and detriments of each of the above options for reforming the tandem-switched transport rate structure. Parties are specifically asked to discuss whether any of these options accurately reflect the way incumbent LECs incur tandem switching costs. For example, we seek comment on the extent to which tandem-switched and direct- trunked transport use the same or different physical routing, and in light of this, on whether the distance component of setting tandem-switched transport rates is most appropriately measured between the SWC and the end office, or in two charges, one for the SWC-to-tandem circuit and one for the tandem-to-end office circuit. We invite parties to identify and quantify the specific NTS costs associated with the tandem switch that they believe are currently recovered through the usage-sensitive tandem charge. We also invite parties to suggest additional options for the tandem-switched transport charge. b.Rate Levels 92. We seek comment on how to establish a reasonable tandem switching charge in light of the court's remand. The interim transport restructure rules, which the court remanded, required incumbent LECs to base their initial tandem switching charge on 20 percent of the interstate revenue requirement for tandem switching, with the remaining 80 percent to be recovered through the TIC. Thus, both the tandem charge and some portion of the TIC were designed to recover the costs included in the tandem-switched transport revenue requirement. The Commission found in the First Transport Order that this revenue requirement included some SS7 signalling cost, in addition to tandem switching costs. In Section III.E, below, we propose to reassign costs included in the TIC to those rate elements to which they are related, including the different transport rate elements. We seek comment on what costs are appropriately associated with the tandem switching function. Parties commenting on this issue should address how their proposals are consistent with the court's remand directives. We also ask parties to comment on whether, if we permit direct-trunked transport or entrance facility rate structure options based on whether the channel facility assignment is done by the IXC or the LEC, a similar option should be available for tandem-switched transport. We ask parties to comment on the interrelationship of the rate level issue and how any decision on transport rate levels affects the options for phasing out the TIC that are discussed in the following section. 93. The court in CompTel v. FCC also directed us to explain why we permitted incumbent LECs to load a relatively large portion of their transport overhead costs to tandem- switched transport rates, and to base their direct-trunked transport overhead loadings on the lower overhead loading factors used for special access. Our resolution of the transport overhead loadings issue remanded by the court is also affected by our treatment of the TIC. If we decide to reallocate costs currently recovered through the TIC to other rate elements, this could change the amount of overhead costs allocated to both direct-trunked transport and tandem-switched transport. It is possible that reallocating costs from the TIC to direct-trunked transport and tandem-switched transport charges would result in cost-based direct-trunked transport and tandem-switched transport charges, that is, direct-trunked transport and tandem- switched transport charges that recover a proportionate amount of overhead costs. Thus, reallocating costs from the TIC could contribute to correcting any imbalance in overhead cost allocations between transport rate elements. We invite parties to discuss what other regulatory requirements are necessary to comply with the court's mandate on transport service overhead loadings. 94. Furthermore, initial tandem-switched transport transmission rates were presumed reasonable if set as a weighted average of the per-minute cost of DS3 and DS1 rates calculated using 9000 minutes of use per month. We note that USTA has alleged that the number of actual minutes traversing tandem circuits is significantly below 9000 minutes per month. We solicit comment on whether we should revise any transport rate structure requirement, either as a result of CompTel v. FCC, or for any other reason. 95. Finally, we solicit comment on the relationship between our transport rate structure rules and the market-based access reform proposals we discuss in Section IV, and on the relationship between the transport rate structure rules and the prescriptive access reform proposals we discuss in Section V. Is our goal of driving interstate access rates to forward- looking economic cost consistent with retaining rules governing transport rate level relationships? Is it possible to comply with the court's mandate with regard to the tandem switching charge and transport overhead cost allocations without retaining some rules governing transport rate level relationships? E.Transport Interconnection Charge 1.Background 96. Under our Part 36 separations rules, certain costs of the incumbent LEC network are assigned to the interstate jurisdiction. The Part 69 cost allocation rules allocate these costs among the various access and interexchange services, including transport. In the First Transport Order, we restructured interstate transport rates for incumbent LECs. The restructure created facility-based rates for dedicated transport services based on comparable special access rates as of September 1, 1991, derived per minute tandem-switched transport transmission rates from those dedicated rates, established a tandem switching rate, and established a TIC that initially recovered the difference between the revenues from the new facility-based rates and the revenues that would have been realized under the preexisting "equal charge rule." The TIC was intended as a transitional measure that initially made the transport rate restructure revenue neutral for incumbent LECs and reduced any harmful interim effects on small IXCs caused by the restructuring of transport rates. Approximately 70 percent of incumbent LEC transport revenues are generated through TIC charges, or approximately $2.9 billion out of $4.0 billion in transport revenues. 97. The TIC is a per-minute charge assessed on all switched access minutes, including those of competitors that interconnect with the LEC switched access network through expanded interconnection. The usage-rated TIC increases the per-minute access charges paid by IXCs and long-distance consumers, thus artificially suppressing demand for such services and encouraging customers to bypass the LEC switched access network, particularly through the use of switched facilities of providers other than the incumbent LEC. In addition, to the extent that any portion of the TIC should properly be included in LEC transport rates, other than the TIC, the TIC provides the LECs with a competitive advantage for their interstate transport services because incumbent LEC transport rates are priced below cost while the LECs' competitors using expanded interconnection must pay a share of incumbent LEC transport costs through the TIC. 98. Our goal in this proceeding is to establish a mechanism to phase out the TIC in a manner that fosters competition and responds to the court's remand. The resolution of the TIC issues is also related to the resolution of three other issues. First, the Universal Service Joint Board recently recommended establishing a universal service support mechanism. In Section VII.A, below, we seek comment on how any support amounts should be allocated to reduce interstate rates. Some of those support amounts may reduce the amount that would otherwise be recovered through the TIC. Second, the adoption of either the market-based or prescriptive approach to access reform will establish the extent to which incumbent LEC costs will be recovered through facility-based access charges. Third, if we conclude that incumbent LECs should be permitted to recover some embedded access costs for some period in a competitively neutral manner, as discussed in Section VII.B, below, some of those costs may be costs that are currently included in the TIC. Consequently, resolution of these issues may reduce the costs currently included in the TIC. 99. As we discuss more fully below, the costs now recovered in the TIC could be addressed in several different ways. Some incumbent LECs have urged us to give them significant pricing flexibility and allow market forces to discipline the recovery of the TIC, either alone, or in conjunction with a phase-out of the TIC. A second method of eliminating the TIC would be to quantify and correct all identifiable cost misallocations and other practices that result in costs being recovered through the TIC. A third approach would be a combination of these approaches. For example, we could address directly the most significant and readily-corrected misallocations, and then rely on a market-based approach to reducing what remains of the TIC. Finally, we could provide for the termination of the TIC over a specified time period, such as three years. 100. We address below some explanations for the amounts in the TIC, and then seek comment on possible means of reducing or eliminating the TIC. 2.Possible Sources of Costs in the TIC 101. In the Notice included in the First Transport Order, the Commission sought comment on the nature of the costs included in the TIC so that those costs could be reallocated. Parties in the Transport proceeding and in more recent ex parte filings have offered various explanations of the composition of the costs included in the TIC. We summarize below several of the more significant explanations presented by the parties. Our discussion of these comments is divided into two parts. One group of comments describes the costs included in the TIC as the result of transport rate setting choices. The other group of comments describes the costs as related to potential cost misallocations. a.Transport Rate Setting 102. Tandem Switching and SS7 Costs. In the First Transport Order, we concluded that the interim transport rate structure should include a tandem element that would initially recover 20 percent of the interstate revenue requirement associated with the tandem switch, while the remaining 80 percent of the interstate revenue requirement would be assigned to the TIC. We took this action because of our uncertainty about the specific sources of the costs that were in the tandem switching revenue requirement and because of our concern about possible adverse impacts on small and medium IXCs as the new rate structure was introduced. 103. USTA submits that the portion of the tandem interstate revenue requirement that is included in the TIC includes some costs incurred in the provision of SS7 signalling, line information database (LIDB), and other related signalling services. These costs bear no particular relationship to the operation of the tandem switch. As discussed below, under the interim transport rate structure, LECs recover a portion of their SS7 costs through a flat-rated dedicated signalling transport charge assessed on a per-line basis and a flat-rated STP port termination charge. The costs associated with other signalling functions, such as transporting SS7 messages within the signalling network, are not recovered through any facility-based rate element, having generally been incorporated in the transport function, and thus are presumably embedded in the TIC. These SS7 costs relate to services used by all LEC transport customers, and, in the future, potentially to users who are not LEC transport customers. The costs associated with the provision of signalling services are related to the new signalling rate elements discussed below, and if we establish such signalling rate elements, they would not need to be recovered through the TIC. 104. Tandem-Switched Transport Rate Setting. The Commission employed several assumptions in setting tandem-switched transport rates, which USTA alleges understate the rates for tandem-switched transport. First, under the interim transport rules, per minute tandem- switched transport transmission rates between the SWC and the end office were presumed reasonable if they were based on a weighted mix of DS1 and DS3 special access rates and assumed 9000 minutes of use per voice grade circuit per month. USTA argues that the Commission's assumption of 9000 minutes of use per circuit per month for tandem-switched transport circuits resulted in tandem-switched transport rates that were too low. It contends that the actual usage on tandem circuits can be measured and often is far less than the 9000 minutes assumed by the Commission. Second, USTA contends that the use of a per minute tandem-switched transport transmission rate from the SWC to the end office ignores that the SWC-to-tandem segment of tandem-switched transport is provided over a circuit that is dedicated to an IXC. It argues that the failure to price the SWC-to-tandem segment of tandem- switched transport on a flat-rated basis led to some of those costs being included in the TIC. Third, USTA also alleges that tandem-switched transport uses low-density routes between small end offices and tandem switches and thus does not use DS3 circuits to the same extent that DS3 circuits are used for direct-trunked transport service. Thus, according to USTA, the tandem- switched transport rate applicable to these low-density routes is too low. Finally, USTA asserts that distance-sensitive tandem-switched transport rates are too low because the rules used airline miles from the SWC to the end office rather than measuring distance through the tandem office. Each of these assumptions has been said to result in tandem-switched transport rates that produce revenues that are less than costs, with the difference being assigned to the TIC. 105. Host-Remote Trunking Rate. The interim transport rules require incumbent LECs to assess tandem-switched transport rates for the carriage of traffic between a host switch and its remote. As with the tandem-switched transport rate itself, USTA argues that the 9000 minutes of use per circuit reflects more usage than actually transits a circuit, and that the trunks do not exhibit the ratio of DS3-DS1 relationship that was employed in setting the tandem-switched transport rate. USTA contends that the rate therefore does not recover all the costs of host- remote trunking. 106. Multiplexing Costs. USTA asserts that the existing transport rates for transmission facilities do not account for all multiplexing costs in two instances, and that this results in costs being recovered through the TIC rather than in appropriate facility-based rates. First, it alleges that none of the transmission rates reflects the cost of the DS1/DS0 multiplexing needed to access those end office switches that cannot handle DS1 interfacing, such as analog electronic switches. Such switches constitute approximately 25 percent of the BOC switches. Second, USTA contends that the TIC also includes the two additional multiplexers needed in order to multiplex a DS3 circuit down to a DS1 level before being switched at the tandem, and then back up to DS3 afterward for transmission to an end office. To the extent that analog tandem switches exist, two additional DS1/DS0 multiplexers are needed to achieve the voice-grade interface with the tandem switch. 107. Direct-Trunked Transport Rate. In the First Transport Order we established initial direct-trunked transport rates that generally were presumed reasonable if set at the LECs' September 1, 1992, rates for comparable special access services. USTA and other incumbent LECs argue that this resulted in costs being included in the TIC because facilities-based transport rates are too low outside high-volume, low-cost areas. These LECs argue that high-capacity special access is provided primarily in high-volume, low-cost areas, making special access rates a good surrogate for transport rates only in such areas. They assert that transport in low-volume areas has significantly higher costs that are not recovered by rates for transport facilities because those rates were based on rates for special access service, which is more heavily concentrated in low-cost urban areas than is transport. SBC, for example, contends that a study of its interoffice facilities indicates that transport may cost over five times more in low-density areas than in high-density areas. These parties submit that these higher costs are included in the TIC. b. Possible Cost Misallocations 108. As we noted above, the Commission's Part 36 separations and Part 69 cost allocation rules assign costs to access categories, including transport. Some of these costs were included in the TIC when it was established in 1993. Some LECs have indicated that some of the costs included in the TIC result from cost misallocations in these processes, as described below. 109. Central Office Equipment (COE) Maintenance Expenses. USTA alleges that the TIC includes costs allocated to transport by current separations and cost allocation procedures that are properly excluded from facility-based transport rates. For instance, the separations rules allocate all expenses for maintaining central office equipment (including circuit equipment, switches, and operator services equipment) among the separations categories for circuit equipment, switching, and operator service on the basis of the apportionment of total COE investment that is allocated to each of those three categories. The separations expense allocations are then carried over into Part 69 and allocated among the interexchange and access categories. These parties contend that a more cost-causative approach would allocate each of these three types of expense based on the allocation of the investment associated with that type of expense. For example, they would allocate circuit equipment maintenance expenses between the jurisdictions and among the Part 69 elements based on the allocation of circuit equipment investment. The LECs allege that this change would move costs primarily from the TIC to the local switching category. 110. Use of Circuit Terminations in Separating Costs Between Private Line and Message Services. Some parties contend that costs are included in the TIC because the separations procedures do not allocate costs to special access and transport categories in the same way, even though, as we concluded in the First Transport Order, the two categories of service use similar facilities. Specifically, these parties argue that the use of circuit termination counts in allocating trunking facilities under-allocates costs to the private line separations category. This occurs because a DS1 circuit (which generally carries 24 voice-grade circuits) used for private line service is counted as having only two terminations, while a similar circuit used for switched message services is counted as having 48 terminations (two per voice-grade circuit). Because the Commission used special access rates to establish the initial facility-based transport rate levels, and the TIC was derived from those rates, any under-allocation of costs to special access could result in the TIC containing costs that may be more appropriately recovered through facility- based special access rates. 111. Over-allocation of costs to the interstate jurisdiction. Some parties also allege that the TIC recovers costs allocated to the interstate jurisdiction that should properly be allocated to the intrastate jurisdiction. These parties contend that such costs were not included in the special access rates that were the basis for the initial transport rates, and that these costs therefore were included in the TIC. 3. Possible Revisions to the TIC 112. As we have noted earlier, 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. In this section we describe several approaches for revising the TIC and raise specific questions concerning the various approaches. 113. As discussed further below, one approach to revising the TIC that has been suggested by some incumbent LECs would be to give them significant pricing flexibility, thereby permitting them to address the TIC problem in a manner consistent with the dictates of the market. These LECs argue that the presence of unbundled elements makes it possible for competitors to reach all customers immediately and warrants significant pricing flexibility. They request various types of pricing flexibility now, including deaveraged rates, consolidation of price cap baskets, contract carriage, and access rates based on end-user customer class distinctions. 114. Ameritech and NYNEX have made such proposals. Ameritech favors phasing the TIC down over a short transition period of three to five years. Under this plan, the TIC reductions would not affect the basket PCI and thus rate increases for other services would be possible within the current bounds of the price cap rules. NYNEX claims that, if given sufficient pricing flexibility for facility-based rates and the TIC, it will be able to manage access pricing in a way that permits it a reasonable opportunity to recover its costs, while minimizing the effect on the competitive marketplace. For example, NYNEX would deaverage its rates downward in high-density areas to permit it to respond to competition, while leaving its other rates unchanged in order to permit it to continue recovering the existing contribution included in those rates. NYNEX does not propose any specific phase out of the TIC, because it asserts that the market will discipline its pricing practices. 115. We ask parties to comment on the need for some transitional mechanisms given that approximately seventy percent of interstate transport revenues are currently generated from TIC charges. We seek comment on what would constitute a sufficient reason to use a transition mechanism. For example, should any transition consider the extent to which IXCs must make significant adjustments to their network configurations in response to any revised TIC recovery methods? We also seek comment on the duration of any transition period. 116. Alternatively, we could revise the TIC by quantifying and correcting all identifiable cost misallocations and other practices that cause costs to be included in the TIC. This approach would require difficult, detailed analysis of individual LEC cost data and probably would not provide an explanation for all the costs in the TIC. Furthermore, it would undoubtedly identify cost allocation problems that we could not remedy in this proceeding because of the need to refer jurisdictional costs allocation issues to a Federal-State Joint Board. Once identified and quantified, the costs comprising the TIC could be: (1) left in the TIC subject to market pressures; (2) reassigned to various access services (including transport facility-based elements) and to nonregulated activities, as appropriate; (3) recovered in a competitively-neutral manner as a matter of public policy; or (4) removed from the regulated books of account. In evaluating these options, we would bear in mind that the incumbent LECs are in the best position to identify and quantify the reasons costs are in the TIC, and we would therefore place the burden on them to justify particular treatment of TIC costs. As with the preceding approach, we seek comment on the need for, and the duration of, any transition period. 117. As a third method, we could combine the forgoing alternatives. That is, we could reassign some costs to facility-based elements when warranted by forward-looking cost indicia and address the remaining costs in the TIC through a phase-out methodology. Under this approach, we could, for example, reassign those costs that were readily identifiable and quantifiable, or necessary to respond to the court's remand directives, and phase out the remainder of the TIC under either the market-based or prescriptive approach to access reform. We tentatively conclude that this approach better serves the public interest than would an attempt to determine exhaustively the sources of the costs included in the TIC because it is administratively simpler, and it is likely that we could not establish the causes for all the costs included in the TIC. We seek comment on the relationship of this method to whether we select a market-based or prescriptive approach to rate levels, as discussed further below. As with the preceding two approaches, we seek comment on the need for, and the duration of, any transition period. 118. Finally, as a fourth option, we could establish a schedule under which the costs included in the TIC are phased out. Under this option, we would establish a fixed time period during which incumbent LECs could in succeeding years recover a declining portion of the amounts included in the TIC. At the conclusion of the period, LECs could no longer recover any TIC revenues. In conjunction with the option of phasing out of the TIC, a LEC's PCIs, or SBIs, could be adjusted to reflect the phase-out of the TIC, or they could be left unchanged. Again, we seek comment on the relationship of this method to whether w