Special Access Rates for Price Cap Local Exchange Carriers, 19381-19396 [05-7350]

Agencies

• FEDERAL COMMUNICATIONS COMMISSION

[Federal Register Volume 70, Number 70 (Wednesday, April 13, 2005)]
[Proposed Rules]
[Pages 19381-19396]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-7350]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 69

[WC Docket No. 05-25; RM-10593; FCC 05-18]


Special Access Rates for Price Cap Local Exchange Carriers

AGENCY: Federal Communications Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: In this document, the Commission initiates a rulemaking 
proceeding to determine the regulatory framework to apply to price cap 
local exchange carriers' (LECs) interstate special access services 
after June 30, 2005, including whether to maintain, modify, or repeal 
the pricing flexibility rules. Bell Operating Company (BOC) interstate 
special access services have assumed increasing significance as a key 
input for business customers, commercial mobile radio service (CMRS) 
providers, interexchange carriers (IXCs), and competitive LECs, and BOC 
revenues from these services have increased significantly since price 
cap regulation began.

DATES: Comments are due on or before June 13, 2005 and reply comments 
are due on or before July 12, 2005.

ADDRESSES: All filings must be sent to the Commission's Secretary, 
Marlene H. Dortch, 445 12th Street, SW., TW-B204, Washington, D.C. 
20554. Parties should also send a copy of their paper filings to 
Margaret Dailey, Pricing Policy Division, Wireline Competition Bureau, 
Federal Communications Commission, Room 5-A232, 445 12th Street, SW., 
Washington, DC 20554. Parties shall also serve one copy with the 
Commission's copy contractor, Best

[[Page 19382]]

Copy and Printing, Inc. (BCPI), Portals II, 445 12th Street, SW., Room 
CY-B402, Washington, DC 20554.

FOR FURTHER INFORMATION CONTACT: Margaret Dailey, Wireline Competition 
Bureau, Pricing Policy Division (202) 418-1520, 
margaret.dailey@fcc.gov.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Notice 
of Proposed Rulemaking (NPRM) in WC Docket No. 05-25, RM-10593, FCC 05-
18, adopted on January 19, 2005, and released on January 31, 2005. The 
full text of this document is available on the Commission's Internet 
site at https://www.fcc.gov and for public inspection Monday through 
Thursday from 8 a.m. to 4:30 p.m. and Friday from 8 a.m. to 11:30 a.m. 
in the FCC's Reference Information Center, Room CY-A257, 445 12th 
Street, SW., Washington, DC 20554. Alternative formats are available to 
persons with disabilities by contacting Brian Millin at (202) 418-7426 
or TTY (202) 418-7365. The full text of the NPRM may also be purchased 
from the Commission's duplicating contractor, Best Copy and Printing, 
Inc., Portals II, 445 12th Street, SW., Washington, DC 20554, telephone 
(202) 488-5300, facsimile (202) 488-5563, e-mail at fcc@bcpiweb.com, or 
via its Web site at https://www.bcpiweb.com.

Initial Paperwork Reduction Act of 1995 Analysis

    This document does not contain proposed information collection 
requirements subject to the Paperwork Reduction Act of 1995, Public Law 
104-13. In addition, therefore, it does not contain any proposed 
information collection burden ``for small business concerns with fewer 
than 25 employees,'' pursuant to the Small Business Paperwork Relief 
Act of 2002, Public Law 107-198. 44 U.S.C. 3506(c)(4).

Introduction

    This NPRM, adopted January 19, 2005 and released January 31, 2005 
in WC Docket No. 05-25, RM-10593, FCC 05-18, initiates a proceeding to 
determine the regulatory framework to apply to incumbent price cap LECs 
interstate special access services after June 30, 2005, including 
whether to maintain, modify, or repeal the pricing flexibility rules.

Background

    Price cap LECs charge IXCs, competitive LECs, CMRS providers, and 
end users for access services in accordance with parts 61 and 69 of the 
Commission's rules, 47 CFR parts 61 and 69. There are two types of 
access service: (1) Special access, which does not use local switches, 
instead employing dedicated facilities that run directly between end 
users and IXCs or between two end users; and (2) switched access, which 
uses local switches. Charges for special access are divided into 
channel termination charges and channel mileage charges. The special 
access rates for incumbent price cap LECs currently are subject to two 
pricing regimes--price caps and pricing flexibility.

Price Cap Regulation

    Prior to 1991 the Commission determined the appropriate charges for 
access service through rate-of-return regulation, pursuant to which 
LECs were limited to recovering their costs plus a prescribed return on 
investment. In 1991, in the LEC Price Cap Order, 55 FR 42375, Oct. 19, 
1990, the Commission implemented price cap regulation, which, in 
contrast to rate-of-return regulation, limits the profits a LEC may 
earn by focusing on the prices that a LEC may charge and the revenues 
it may generate from interstate access services. Price cap carriers 
whose interstate access charges are set by price cap rules are 
permitted to earn returns significantly higher, or potentially lower, 
than the prescribed rate of return that incumbent LECs are allowed to 
earn under rate-of-return rules. 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 services, while setting 
price ceilings at reasonable levels. Price cap regulations also give 
incumbent LECs greater flexibility in determining the amount of 
revenues that may be recovered from a given access service. The price 
cap rules group services together into different baskets, service 
categories, and service subcategories, and then identify the total 
permitted revenues for each basket or category of services. Within 
these baskets or categories, incumbent LECs are given some discretion 
to determine the portion of revenue that may be recovered from specific 
services, and thus to alter the rate levels associated with a given 
service. In the short run, the behavior of individual companies has no 
effect on the prices they are permitted to charge, and they are able to 
keep any additional profits resulting from reduced costs. This creates 
an incentive to cut costs and to produce efficiently. In this way, 
price caps act as a transitional regulatory scheme until the advent of 
actual competition makes price cap regulation unnecessary.
    With passage of the Telecommunications Act of 1996, Pub. Law 104-
104, 110 Stat. 56, the Commission began reforming access charges, 
stating in the Access Charge Reform Order, 62 FR 31939, June 11, 1997, 
that it would rely on competition as the primary method for bringing 
about cost-based access charges and anticipating that it would lessen, 
and eventually eliminate, rate regulation as competition developed. To 
assist in this effort, the Commission said it would require price cap 
LECs to start forward-looking cost studies no later than February 8, 
2001, for all services then remaining under price caps.
    Subsequently, in 2000, in the CALLS Order, 65 FR 38684, June 21, 
2000, the Commission adopted the industry-proposed CALLS plan, which 
represents a five-year interim regime designed to phase out implicit 
subsidies in access charges and move towards a more market-based 
approach to rate setting. In adopting the CALLS plan, the Commission 
offered price cap LECs the choice of completing the forward-looking 
cost studies required by the Access Charge Reform Order or voluntarily 
making the rate reductions required under the five-year CALLS plan. All 
price cap carriers opted for the CALLS plan.
    The CALLS plan separated special access services into their own 
basket and applied a separate X-factor to the special access basket. 
The X-factor under the CALLS plan, unlike under prior price cap 
regimes, is not a productivity factor, but represents a transitional 
mechanism to lower special access rates for a specified period of time. 
The special access X-factor was 3.0 percent in 2000 and 6.5 percent in 
2001, 2002, and 2003. In addition to the X-factor, access charges under 
the CALLS plan are adjusted for inflation as measured by the Gross 
Domestic Product-Price Index (GDP-PI). For the final year of the CALLS 
plan (July 1, 2004--June 30, 2005), the special access X-factor is set 
equal to inflation, thereby freezing rate levels. Thus, absent the 
implementation of a new price cap regime when the CALLS plan expires, 
price cap LECs' special access rates will remain frozen at 2003 levels 
unless the Commission makes regulatory changes requiring adjustments in 
PCIs. In adopting the CALLS plan, the Commission hoped that, by the end 
of the five-year interim period, competition would exist to such a 
degree that deregulation of access charges for price cap LECs would be 
the next logical step.

[[Page 19383]]

Pricing Flexibility

    In addition to general access charge reform, the Commission began 
exploring whether and how to remove price cap LECs' access services 
from regulation once they became subject to substantial competition. In 
1999, it adopted the Pricing Flexibility Order, 64 FR 51258, Sept. 22, 
1999, which established triggers to measure the extent to which 
competitors had made irreversible, sunk investment in collocation and 
transport facilities. A price cap LEC that satisfies these triggers may 
obtain pricing flexibility to offer special access services at 
unregulated rates through generally available and individually 
negotiated tariffs (i.e., contract tariffs). A price cap LEC may obtain 
pricing flexibility in two phases, each on a Metropolitan Statistical 
Area (MSA) basis. Under Phase I, a price cap LEC may offer volume and 
term discounts and contract tariffs for interstate special access 
services unconstrained by the Commission's part 61 and part 69 rules. 
The price cap LEC, however, must continue to offer its generally 
available, price cap constrained (i.e., subject to parts 61 and 69) 
tariff rates for these services. Under Phase II, a price cap LEC may 
file individualized special access contract tariffs, subject only to 
continuing to make available generalized special access tariff 
offerings. Neither the contract tariffs nor the general offerings are 
constrained by parts 61 or 69.

AT&T's Petition for Rulemaking

    On October 15, 2002, AT&T filed a Petition for Rulemaking 
requesting that the Commission revoke the pricing flexibility rules and 
revisit the CALLS plan as it pertains to the rates that price cap LECs, 
and the BOCs in particular, charge for special access services. AT&T 
claims that the Pricing Flexibility Order's triggers fail to predict 
price-constraining competitive entry and such entry has not occurred. 
It further contends that, based on ARMIS date, the BOCs' interstate 
special access revenues more than tripled between 1996 and 2001, and 
that their returns on special access services were between 21 and 49 
percent in 2001, but that for every MSA for which pricing flexibility 
was granted, BOC special access rates either remained flat or 
increased. Thus, AT&T claims that BOC special access rates are unjust 
and unreasonable in violation of section 201 of the Communications Act, 
47 U.S.C. 201, and the Commission must initiate a rulemaking to revisit 
its pricing flexibility rules. During the pendency of this rulemaking, 
AT&T requests that the Commission grant interim relief by: (1) Reducing 
the rates for all special access services subject to Phase II pricing 
flexibility to the rates that would generate an 11.25 percent rate of 
return, and (2) imposing a moratorium on granting the BOCs further 
pricing flexibility.
    Price cap LECs generally oppose the AT&T Petition for Rulemaking. 
They claim that their special access rates are reasonable and lawful, 
that there is robust competition in the market for special access 
services, that the collocation-based triggers of the Pricing 
Flexibility Order accurately measure competition, and that the data 
relied upon by AT&T are unreliable. The BOCs also contend that their 
special access revenues per line declined between 1996 and 2001.

Notice of Proposed Rulemaking

    The Commission commences this rulemaking to seek comment on the 
interstate special access regime that it should put in place post-
CALLS. We also seek comment on whether, as part of a special access 
regulatory regime, we should maintain, modify, or repeal the 
Commission's pricing flexibility rules. Thus we grant AT&T's petition 
inasmuch as we initiate a rulemaking proceeding.
    As a separate issue we seek comment on what interim relief, if any, 
is necessary to ensure that special access rates remain reasonable 
while we consider what regulatory regime will follow the CALLS plan. 
Given the complexities discussed in the following NPRM, there is a 
strong likelihood that we will not complete the rulemaking proceeding 
before expiration of the CALLS plan on June 30, 2005. The record here 
contains substantial evidence suggesting that productivity in the 
provision of special access services has increased and continues to 
increase. Currently, however, the CALLS plan contains no productivity 
factor to require price cap LECs to share any of their productivity 
gains with end users. 47 CFR 61.45(b)(1)(iv). Accordingly, we 
anticipate adopting an order prior to June 30, 2005, that will 
establish an interim plan to ensure special access price cap rates 
remain just and reasonable while the Commission considers the record in 
the rulemaking proceeding. One interim option would be to impose the 
last productivity factor adopted by the Commission and upheld upon 
judicial review, 5.3 percent. We seek comment on this option and other 
reasonable interim alternatives. The Commission requests that any party 
that comments on the appropriate post-CALLS special access regulatory 
regime and/or proposes that the Commission alter in any way the 
existing pricing flexibility rules include in its comments specific 
language that would codify its proposed special access regulatory 
regime and/or its proposed pricing flexibility rule change(s).

Price Cap LEC Interstate Special Access Rates Post CALLS

    First, we must determine the type of rate regulation, if any, that 
should apply. We tentatively conclude that we should continue to 
regulate special access rates under a price cap regime and that the 
price cap regime should continue to include pricing flexibility rules 
that apply where competitive market forces constrain special access 
rates. Such a regime, we tentatively conclude, would result in just and 
reasonable rates as required by section 201 of the Communications Act, 
47 U.S.C. 201. We seek comment on these tentative conclusions. We also 
seek comment on how to resolve the major issues involved in 
implementing a price cap regime for special access services, as 
outlined below.

Changes in the Special Access Market

    Automated Reporting Management Information System (ARMIS) data show 
that, in the 2001-2003 period, BOC special access operating revenues, 
operating expenses, accounting rates of return, and the number of 
special access lines increased annually (i.e., compound annual growth 
rates over the period) by approximately 12, 7, 17, and 18 percent, 
respectively. BOC special access average investment decreased at a 
compounded annual rate of less than one percent over the same period. 
The overall (i.e., not compounded annually) BOC interstate special 
access accounting rates of return were approximately 38, 40, and 44 
percent in 2001, 2002, and 2003, respectively. In the period 1992-2000, 
a period that precedes the CALLS plan and significant pricing 
flexibility, BOC interstate special access operating revenues, 
operating expenses, average investment, accounting rates of return, and 
special access lines increased at a compounded annual rate of 
approximately 16, 12, 11, 11, and 32 percent, respectively. The overall 
(non-compounded) BOC special access accounting rates of return varied 
over this period from a low of approximately 7 percent in 1995 to a 
high of approximately 28 percent in 2000.
    These accounting data suggest that the BOCs have realized special 
access scale economies throughout the entire period of price cap 
regulation, including before and after the Commission adopted pricing 
flexibility and the CALLS plan. Special access line demand increased at

[[Page 19384]]

a significantly higher rate than operating expenses and investment 
throughout both periods, suggesting that the BOCs realized scale 
economies in both periods. Although, some parties contend that the 
accounting rates of return derived from ARMIS data are meaningless, we 
use ARMIS data here for the limited purpose of examining the 
relationship between demand growth and growth in expenses and 
investment. To the extent the accounting rules have remained the same 
over the period analyzed, the analysis of growth rates and scale 
economies should not be significantly affected by the cost allocation 
issues these parties raise. We invite parties to comment on the 
relevance of these data and the relationship between demand growth and 
growth in expenses and investment in the special access market. To 
demonstrate the possible impact of cost allocations during the price 
cap period of regulation, including before and after the Commission 
adopted pricing flexibility and the CALLS plan, we invite parties: (1) 
To remove from the BOCs' interstate special access operating expenses 
and average investment data reported in ARMIS any expenses and 
investments that are not directly assignable; and (2) to calculate the 
compound annual growth rates for BOC interstate special access 
operating expenses and average investment using these adjusted data.

Developing a Special Access Price Cap Regime

    The PCI, the core component of price cap regulation, has three 
basic components: (1) A measure of inflation, i.e., the Gross Domestic 
Product (chain weighted) Price Index (GDP-PI); (2) a productivity 
factor or ``X-Factor,'' that represents the amount by which price cap 
LECs can be expected to outperform economy-wide productivity gains; and 
(3) adjustments to account for ``exogenous'' cost changes that are 
outside the LEC's control and not otherwise reflected in the PCI. While 
we seek comment on whether and, if so, how to develop a new special 
access price cap, we focus our inquiry below on productivity and growth 
issues and on developing service categories and subcategories. Parties 
may comment on whether we should include inflation and exogenous cost 
adjustments in a new special access price cap regime. We tentatively 
conclude, however, that, except as otherwise discussed herein, we 
should retain the same method of revising the PCI to reflect inflation 
and exogenous cost adjustments that presently apply to special access 
services.
    Productivity Factor or X-Factor. The productivity or X-factor 
contained in the PCI has varied over the course of price cap 
regulation. Most recently, in the CALLS Order, 65 FR 38684, June 21, 
2000, the Commission changed the X-factor from a productivity-based 
factor to a transitional mechanism to reduce special access rates for a 
specified period, setting the special access X-factor at 3.0 percent in 
2000, 6.5 percent for the next three years, and equal to the GDP-PI 
thereafter, essentially freezing the special access PCI (after 
accounting for exogenous cost adjustments). In recent years, the BOCs 
have earned special access accounting rates of return substantially in 
excess of the prescribed 11.25 rate of return that applies to rate of 
return LECs. The BOCs' collective average special access accounting 
rates of return over the last six years (1998-2003) have been 18, 23, 
28, 38, 40, and 44 percent, respectively. We seek comment on whether a 
rate of return in excess of the Commission's prescribed rate of return 
for rate-of-return LECs is a valid benchmark for determining the need 
for an X-factor, or an X-factor that is higher than the factor under 
the CALLS plan or the pre-CALLS price cap regime. If it is appropriate 
for us to examine an X-factor in light of these rates of return, we 
seek comment on whether we should re-impose a productivity-based X-
factor as a method of reducing the special access PCI.
    We ask parties to submit studies quantifying an appropriate X-
factor for special access services. In the Phase I Accounting 
Streamlining Order, 65 FR 16328, March 28, 2000, the Commission sought 
to reduce incumbent LEC accounting and reporting requirements by, among 
other things, eliminating the requirement that LECs report the expense 
matrix data used in calculating the X-factor, but expected LECs to 
provide such data upon request. We now request that price cap LECs 
submit their expense matrix data from 1994 to 2004 (or 2003, if 2004 
data are not yet available). These data should correspond exactly to 
the expense matrix data required in 1999 under part 32 of the 
Commission's rules, 47 CFR 32.5999(f).
    Given that we propose to address special access services 
independent of switched access services, we seek comment on whether it 
is necessary to estimate and apply to special access services an X-
factor that is unique to these services. Assuming that this is 
necessary, we seek comment on whether it is possible to calculate 
accurately such an X-factor. If it is only possible to measure 
productivity accurately for the entire firm, or for some broader 
category of services than special access services, we invite commenters 
to address the reasonableness of applying this broader X-factor to 
special access services alone. We seek comment on the consequences of 
using in the special access PCI a productivity factor that is based on 
a broad-based productivity study such as the total factor productivity 
growth rate (TFP) study prepared by Commission staff in support of the 
6.5 percent X-factor adopted in the 1997 Price Cap Review Order, 62 FR 
31939, June 11, 1997.
    Growth Factor. In the LEC Price Cap Order, 55 FR 42375, Oct. 19, 
1990, the Commission adopted a price cap formula for the common line 
basket that included a growth or ``g'' factor to account for price cap 
LEC average cost decreases attributable to demand growth. While the 
Commission has applied a uniform X-factor for a multi-year period to 
all price cap carriers and price cap services, the ``g'' factor, in 
contrast, varies by LEC, year, and service because it relies on each 
individual LEC's prior year's demand growth rate for a specific service 
element or basket. In the LEC Price Cap Order, because per-minute 
traffic growth was not directly indicative of per-line cost increases, 
the Commission developed ``g'' to represent per-minute growth per 
access line. The Commission found that including ``g'' would give all 
of the benefits of MOU demand growth to IXCs, while excluding ``g'' 
would give all of the benefits of MOU demand growth to LECs. The 
Commission therefore incorporated g/2 into the PCI formula because it 
found that both IXCs and LECs contribute to demand growth.
    If we adopt new special access price cap regulation for price cap 
LECs, it may also be appropriate to include a factor in the special 
access PCI formula similar to the ``g'' factor currently in the common 
line formula. ARMIS data suggest that special access line demand growth 
does not produce a proportional increase in special access costs. In 
such a circumstance, use of a special access PCI formula that does not 
include a growth factor may produce unreasonable rates. We therefore 
invite parties to comment on whether a special access PCI formula 
should include a growth factor similar to the ``g'' factor in the 
common line PCI formula. We also seek comment on how to define a 
special access line growth factor. For example, should this factor be 
based on the change in DS-1 equivalent capacity, changes in DS-3 
equivalent capacity, or some basis other than capacity equivalents? We 
seek comment on whether the demand growth benefits reflected in a ``g'' 
factor should be

[[Page 19385]]

shared between the LECs and the special access customers. Finally, 
parties advocating for a ``g'' factor should comment on how to avoid 
including demand growth-related efficiencies in both the ``g'' factor 
and the X-factor.
    Sharing and Low End Adjustment. In establishing the initial price 
cap regime in 1990, in the LEC Price Cap Order, 55 FR 42375, Oct. 19, 
1990, the Commission required price cap LECs to share with their 
customers 50 percent of their earnings above a rate of return of 12.25 
or 13.25 percent, depending on whether an individual price cap LEC 
selected a productivity factor of 3.3 or 4.3 percent. Price cap LECs 
with rates of return above 16.25 or 17.25 percent had to share 100 
percent of their excess earnings, depending on the productivity factor 
selected. The Commission also allowed price cap LECs with rates of 
return less than 10.25 percent to make a ``low end adjustment,'' or to 
increase their PCIs in the following year to a level that would allow 
them to earn at least a 10.25 percent rate of return. The Commission 
adjusted the sharing and low end adjustment rules in the 1995 Price Cap 
Review Order, 60 FR 19526, April 19, 1995, and, in the 1997 Price Cap 
Review Order, 62 FR 31939, June 11, 1997, it eliminated the sharing 
requirements altogether, finding that sharing severely blunts the 
incentives of price cap regulation by reducing the rewards for LEC 
efficiency gains. The Commission also found that eliminating sharing 
requirements removed the last vestige of rate-of-return regulation that 
had created incentives to shift costs between services to evade sharing 
in the interstate jurisdiction. We tentatively conclude, for the same 
reasons that the Commission eliminated sharing, that we should not now 
require LECs to share earnings if we decide to adopt a price cap plan 
for special access services. We seek comment on this tentative 
conclusion.
    In the Pricing Flexibility Order, 64 FR 51258, Sept. 22, 1999, the 
Commission eliminated the low end adjustment mechanism for price cap 
LECs that qualify for and elect to exercise either Phase I or Phase II 
pricing flexibility. The Commission retained the low-end adjustment for 
price cap LECs that have not qualified for and elected to exercise 
either Phase I or Phase II pricing flexibility to protect these LECs 
from events beyond their control that would affect earnings to an 
extraordinary degree. For the same reason, we tentatively conclude 
that, if we adopt a price cap plan for special access services, we 
should retain a low-end adjustment mechanism for price cap LECs that 
have not implemented pricing flexibility. We seek comment on this 
tentative conclusion. We further seek comment on the nature of a low-
end adjustment for special access services only. We request that 
parties identify the relationship between the low-end adjustment level 
and any new authorized rate of return we develop in this proceeding. 
For example, should the low-end adjustment continue to be 100 basis 
points below the authorized rate of return?

Rate Structure--Interstate Special Access Baskets and Bands

    Within the special access service price cap basket, services 
currently are grouped into service categories and subcategories. 47 CFR 
61.42(e)(3). Similar services are grouped together into service 
categories within a single basket to act as a substantial bar on the 
LEC's ability to engage in anticompetitive behavior, including cost 
shifting. The Commission in the LEC Price Cap Order, 55 FR 42375, Oct. 
19, 1990, established upper and lower pricing bands for each separate 
category or subcategory, initially setting pricing bans for most 
service categories at five percent above and below the Service Band 
Index (SBI). Subsequently, it eliminated the lower service band 
indices, finding that the PCI and upper pricing bands adequately 
control predatory pricing and that greater downward pricing flexibility 
would benefit consumers both directly through lower prices and 
indirectly by encouraging only efficient entry. The Commission seeks 
comment on what categories and subcategories we should establish in a 
special access service basket if we adopt a price cap method to 
regulate special access prices. Should the Commission retain without 
modification the existing special access categories and subcategories? 
If not, parties should identify the specific categories and 
subcategories of special access service that they contend we should 
adopt. We also ask parties to discuss the advantages and disadvantages 
of having a special access basket with relatively few categories or 
subcategories compared to one with many.
    We seek comment on whether to place competitive services and non-
competitive services in separate and distinct categories and/or 
subcategories. Arguably, this would minimize the opportunity for a LEC 
to offset rate decreases for services for which there are competitive 
alternatives with rate increases for services for which there are no 
competitive alternatives. AT&T alleges that such competitive imbalances 
occur for DS1 and DS3 channel termination services between the LEC end 
office and the customer premises, where often there is little or no 
competition. It also claims that competition might not be quite so 
limited for DS1 and DS3 channel terminations between the IXC POP and 
the LEC serving wire center, and DS1 and DS3 channel mileage facilities 
between the LEC end office and the LEC serving wire center. We seek 
comment on whether we should establish separate categories for DS1 and/
or DS3 special access services and subcategories for (1) special access 
channel terminations between the LEC end office and the customer 
premises, (2) special access channel terminations between the IXC POP 
and the LEC serving wire center, or (3) any other special access 
product market. Should any special access services be combined into a 
single category or subcategory? We also seek comment on whether we 
should take the same approach with regard to high capacity services 
above the DS-3 level (e.g., OCn), or whether these higher capacity 
services should be placed in a high capacity category without sub-
categories for special access channel terminations to customer 
premises, special access channel terminations to the IXC POP, and other 
special access facilities.
    Some price cap LECs assert that broadband service such as DSL 
services account for a significant and growing portion of their special 
access revenues. These services may be subject to competition from 
high-speed cable modem services or wireless broadband offerings. We 
seek comment on whether to establish a separate category or subcategory 
for broadband services that are subject to some competition or are 
likely to be subject to competition in the near future. We note that, 
in the LEC Price Cap Order, 55 FR 42375, Oct. 19, 1990, the Commission 
excluded packet-switched services from price cap regulation because 
they were not included in its study of LEC productivity. We seek 
comment on whether such services should be included in price caps 
today. If not, what is the proper regulatory treatment of these 
services?
    We seek comment on whether to establish separate subcategories for 
wholesale services and retail services. Arguably, this approach would 
minimize the extent to which a price cap LEC could manipulate headroom 
by offsetting rate decreases that apply to services purchased by a 
wholesale customer (e.g., a rate decrease for a DS3 channel termination 
service purchased by an IXC) with rate increases that apply

[[Page 19386]]

to services purchased by an end-user customer (e.g., a rate increase 
for a retail DSL service purchased by a small business or residential 
customer.) We seek comment on whether this objective is desirable.
    We also seek comment on what criteria and data we should examine to 
determine which services to place in which categories or subcategories. 
We ask parties to propose categories or subcategories, to explain in 
detail the bases for their proposed categories or subcategories, and to 
support their proposals with data and studies. Do competitive or non-
competitive services placed in the same subcategory need to have 
similar demand or supply elasticities? Should we establish separate 
categories or subcategories based on special access line densities? For 
example, channel termination services extending between a LEC end 
office and customer premises in areas where there are more than 10,000 
special access lines per square mile could be placed in a particular 
subcategory. We also seek comment on whether to use a single basket or 
multiple baskets and the advantages and disadvantages of each approach.
    For the same reasons that the Commission eliminated the lower 
pricing bands, we tentatively conclude that there should be no lower 
band for service categories or subcategories to restrict the price cap 
LECs' downward pricing flexibility. We seek comment on this tentative 
conclusion. We seek comment on the upper band value to limit the price 
cap LECs' upward pricing flexibility for the categories or 
subcategories. Should we retain five percent as the value? Should we 
use different values for different categories or subcategories? What 
criteria and data should we use to determine these values?

Initial Special Access Price Cap Rates Post-CALLS

    We must ensure that the initial rates under a new price cap plan 
will be just and reasonable. 47 U.S.C. 201(b). In this proceeding AT&T 
asserts that current special access rates are too high based on BOC 
special access rates of return, and that current rates for special 
access under price caps are lower than rates established after a grant 
of pricing flexibility. The BOCs respond that accounting rates of 
return are meaningless and the Commission expected that rates in some 
instances would increase when a carrier is granted pricing flexibility. 
They also present evidence purporting to show that overall special 
access revenues per line have decreased. As a preliminary matter, 
therefore, we solicit comment as to whether it is necessary for us to 
reinitialize rates to ensure that they are just and reasonable. To the 
extent we decide to reinitialize rates, we solicit comment as to 
several alternative approaches.
    Rate-of-Return Benchmark. We seek comment on whether the 11.25 
percent rate of return that the Commission prescribed for LECs in 1991 
is a valid benchmark for determining that a price cap LECs' special 
access rates are just and reasonable. The costs of debt and equity 
financing that are supposed to be reflected in the rate of return 
likely have changed significantly since 1991. If parties believe that 
we should use rate of return as a benchmark for determining the 
reasonableness of price cap LEC special access rates, is there a rate 
of return other than 11.25 percent that we should use to make that 
determination? We invite parties to submit studies supporting an 
alternative rate of return.
    The aim of price cap regulation is rates that approximate the rates 
a competitive firm would charge, and competitive firms make business 
decisions based on economic, not accounting, rates of return. Thus the 
BOCs contend that accounting rates of return do not represent a valid 
basis for evaluating price cap rates in general, and that our cost 
allocation rules and the current separations freeze may undermine the 
usefulness of an examination of rates of return derived from ARMIS 
data. Accordingly, we seek comment generally on whether accounting 
rates of return are meaningful statistics for evaluating the 
reasonableness of price cap rates. What factors may affect the 
relevance of ARMIS data to our examination of special access rates? 
Even if the overall accounting rate of return has evidentiary value, we 
also seek comment on whether an accounting rate of return for a subset 
of services, i.e., the special access basket, is meaningful to this 
inquiry. The allocation of common costs to multiple services according 
to our accounting rules necessarily reflects policy judgments that may 
not reflect how price cap LECs would allocate common costs if they 
operated in fully competitive markets. Thus we seek comment on the need 
to evaluate the special access rate of return in the context of the 
price cap LECs' overall rates of return. We note that the Commission 
has never examined accounting rates of return for specific categories 
of services to determine whether a price cap LEC must share over-
earnings or can make a low-end adjustment to compensate for 
underearnings, but instead has determined whether such adjustments 
should be made based on the price cap LEC's overall interstate access 
rate of return. We therefore seek comment on what measures or 
indicators we may use in addition to, or in lieu of, rate of return to 
determine whether current special access rates are just and reasonable. 
We invite parties to submit any such measures or indicators they deem 
appropriate.
    The recent significant growth in BOC DSL subscribers and revenues 
creates a unique issue in using the accounting rate of return solely 
for the special access basket. Some BOCs may book the full amount for 
DSL revenues as special access revenues, while at the same time, the 
incremental cost booked to the special access category for DSL service 
may not be nearly as large as these DSL revenues. Generally, there are 
no incremental DSL-related loop-side structure costs (e.g., for 
trenching, poles, manholes, or conduit) booked to the special access 
category. These otherwise account for a large majority of a typical 
price cap LEC's total network costs. We seek comment on the extent to 
which the accounting treatment of DSL revenues, expenses, and 
investment under the Commission's rules accounts for the BOCs' recent 
high special access rates of return. If DSL growth is a significant 
factor in the high accounting special access rates of return, rather 
than growth in traditional DS1 or DS3 services, for example, how should 
we interpret these rates of return?
    We seek comment on the need for a comprehensive review of detailed 
cost studies to establish initial rate levels for each special access 
service. Alternatively, is there a simpler, less burdensome method of 
setting initial rate levels without having to rely on cost studies? To 
develop initial rates based on an 11.25 percent rate of return, we 
would: (1) Calculate, for the most recent calendar year, a price cap 
LEC's special access rate of return, based on ARMIS data; (2) calculate 
the percentage by which revenues would have had to have been lower to 
earn an 11.25 percent rate of return; (3) reduce that price cap LEC's 
current special access rates across the board by that percentage; and 
(4) use these reduced rates as the initial rates under a new price cap 
plan. We seek comment on this approach to establishing just and 
reasonable initial rates, on variants of this approach, and on other 
approaches that avoid use of cost studies.
    Cost Studies. Parties commenting that we should use detailed cost 
studies to set initial special access rates under a new price cap plan 
should also

[[Page 19387]]

comment on whether such studies should be based on historical 
accounting costs, i.e., embedded costs, or forward-looking economic 
costs. Generally, forward-looking costs are viewed as more relevant, 
and embedded costs as less relevant, to setting prices in a competitive 
market. Further, the Commission stated its goal in the Access Charge 
Reform Order, 62 FR 31868, June 11, 1997, that interstate access 
charges reflect forward-looking costs, and envisioned in the CALLS 
Order, 65 FR 38684, June 21, 2000, a proceeding near the expiration of 
the CALLS plan to determine whether and to what degree it could 
deregulate price cap LECs due to the existence of competition. We seek 
comment on whether setting rates based on forward-looking costs, as 
suggested in these orders, should guide us in selecting a method to set 
initial rates under a new special access price cap plan. Parties that 
support the use of historical costs rather than forward-looking costs 
should comment on and submit calculations showing the magnitude of any 
difference between the implied depreciation expense in LECs' special 
access actual realized revenues and regulatory accounting deprecation 
expense calculated pursuant to the Commission's rules during the price 
cap years. By implied depreciation, we mean total booked revenues less 
total booked expenses (excluding accounting depreciation expense) less 
an 11.25 percent rate of return on the rate base, expressed in dollars. 
If the implied depreciation expense significantly exceeds the 
regulatory accounting depreciation expense, in setting the initial 
rates would we need to adjust downward the rate base to avoid the 
eventual over-recovery of the original cost of the LECs' assets? 
Further, any party that supports the use of a cost study, forward-
looking or historical, to set rates should submit such a study and 
support its use.
    Use of Comparable Services. Some special access services are 
comparable to switched access transport services. For example, a 
special access channel termination service extending between an IXC POP 
and a LEC serving wire center is comparable to a switched access 
entrance facility. We therefore seek comment on whether setting initial 
special access prices under a new price cap plan at levels equal to 
current prices for comparable switched access transport would result in 
just and reasonable rates. Parties should address whether this approach 
is improperly circular, given that some transport rates, e.g., direct 
trunked transport rates, were presumed reasonable by the Commission in 
the First Transport Order, 57 FR 54717, Nov. 20, 1992, if they were set 
based on rates for comparable special access services. Such an approach 
may be feasible for some services, e.g., DS1 or DS3 special access 
services, but not necessarily for all special access services. Assuming 
that this approach is reasonable for some subset of special access 
services, we ask for comment on how to establish initial just and 
reasonable rates for the remaining special access services. For 
example, is it reasonable to establish rates for the remaining services 
by adding to the rate for the comparable switched access transport 
service the percentage difference or the dollar differences between the 
current rate for comparable special access service and the current rate 
for the non-comparable special access service? We request that parties 
that believe that initial rates, in whole or in part, should be based 
on rates for comparable switched access transport services submit such 
studies.
    Incentives. We seek comment on whether, in determining whether 
special access rates will be just and reasonable, we should consider as 
a significant factor the risk of reducing price cap LECs' incentives to 
operate at minimum cost and to innovate under future price cap plans. 
Specifically, we question the effect of reallocating benefits resulting 
from price cap LEC efforts to minimize costs and innovate under the 
existing price cap plan on LEC expectations of future regulatory 
action. We seek comment on the potential effect of reducing current 
rates in the first year of a new price cap plan on price cap LEC 
incentives to operate efficiently and to innovate.
    Periodic Adjustment. We further seek comment on whether a new price 
cap plan should include a requirement that rates be adjusted up or down 
at fixed intervals (e.g., every three or five years) based on the 
prescribed rate of return, or some other measure of price cap LEC 
performance. For example, under one variant of such a price cap plan, 
LECs would not be required to share any earnings in excess of the 
prescribed rate of return, and generally the core elements of the plan 
(e.g., the productivity factor) would remain constant throughout the 
specified interval. If a price cap LEC's achieved rate of return (or 
other performance measure) were greater or lesser than the prescribed 
rate of return (or other performance benchmark) by a predetermined 
amount during the interval, then rates would be adjusted down or up at 
the beginning of the next interval. At the beginning of the latter 
interval, the adjusted rates would reflect the prescribed rate of 
return or other performance benchmark. We seek comment on whether to 
adopt such an adjustment mechanism in a price cap plan. We also seek 
comment on how such a plan would affect price cap LEC incentives to 
operate efficiently and to innovate. How would price cap LEC incentives 
under such a plan differ from the incentive effects of a plan that 
included an earnings sharing requirement (i.e. required price cap LECs 
to share earnings in excess of the prescribed rate of return by 
adjusting rates downward in the year immediately following the year in 
which they over-earned)? Parties supporting this type of adjustment 
should provide the operational details of their proposed plan, 
including specifying the length of the interval that should be used 
under any such plan. We also seek comment on other variants of an 
approach that would require rate adjustments at fixed intervals to 
target the prescribed rate of return, or other performance benchmark.

Pricing Flexibility

    In the Pricing Flexibility Order, 64 FR 51258, Sept. 22, 1999, the 
Commission essentially determined that irreversible, sunk investment by 
competitive carriers in the special access market, as evidenced by the 
satisfaction of certain collocation and competitive transport 
facilities deployment triggers, demonstrates sufficient competitive 
market entry in specific geographic markets to constrain monopoly 
behavior, including exclusionary conduct, by incumbent price cap LECs. 
The Commission acknowledged that incumbent price cap LECs might enjoy 
high market shares at the time pricing flexibility was granted, but 
concluded that they could not exercise market power where they faced 
competition from entrants using their own facilities. It relied on the 
collocation-based triggers rather than performing an unduly burdensome 
market power analysis. Pricing flexibility provided incumbent price cap 
LECs with the ability to lower rates in specific markets (MSAs) in 
response to competitive pressure.
    In this proceeding, parties have introduced evidence that, in MSAs 
where incumbent price cap LECs have received Phase II pricing 
flexibility, they have not lowered special access rates, but instead 
have either maintained or raised them. Therefore, as part of our 
examination of the proper price cap special access regulatory regime to 
adopt post-CALLS, we also examine whether the Commission's pricing 
flexibility rules have worked as

[[Page 19388]]

intended and, if not, whether they should be modified or repealed. This 
inquiry is consistent with our ongoing commitment to ensure that our 
rules, particularly those based on predictive judgments, remain 
consistent with the public interest, as evidenced by empirical data. 
Our questions below are focused on Phase II, not Phase I, pricing 
flexibility because, once Phase II flexibility is granted, incumbent 
price cap LECs no longer need to offer their generally available price 
cap tariffs.
    As a threshold matter, parties providing information regarding the 
rates they are charging or paying for special access services should 
identify whether the rates they identify are from the LEC's price cap 
tariff, a contract tariff, or a Phase II pricing flexibility tariff. 
Parties also should identify the percentage of special access services 
(by market) that are provided or obtained, as the case may be, from 
each of these three types of tariffs. We further request that parties 
identify whether the rates are the month-to-month rates or volume and 
term rates from the relevant tariff. Finally, we note that the Pricing 
Flexibility Order treats dedicated transport services (i.e., entrance 
facilities, direct-trunked transport, and the flat-rated portion of 
tandem-switched transport) in the same manner as non-channel 
termination special access services. We, therefore, tentatively 
conclude that any changes we make to the pricing flexibility rules for 
non-channel termination special access services shall apply equally to 
the pricing flexibility rules for dedicated transport. We seek comment 
on this tentative conclusion.

Assessing Competition in the Marketplace

    Whether or not we perform a full market power analysis, two issues 
are relevant to assessing the state of competition in a market. First, 
if a market is or is presumed to be competitive, the level of 
competition can be assessed by determining whether there have been 
substantial and sustained price increases. Second, because the 
characteristics of different markets vary, an analysis of the level of 
competition should also include an examination of the cost functions of 
the industry at issue. In analyzing each issue, both the product or 
service market (e.g., interstate special access services) and the 
relevant geographic market (e.g., MSAs) should be well-defined.
    Substantial and Sustained Price Increases. To measure competition, 
we first must determine whether there are substantial and sustained 
price increases for interstate special access services in well-defined 
markets. A substantial price increase need not be a large increase. For 
example, the United States Department of Justice and Federal Trade 
Commission Horizontal Merger Guidelines (DOJ Merger Guidelines) are 
designed to determine if a merger will result in a small but 
significant non-transitory price increase in the relevant produce 
market. AT&T claims in its petition that price cap LECs have increased 
interstate special access rates in some of the MSAs in which they have 
obtained Phase II pricing flexibility. We ask parties to provide data 
more recent data than the 2001 data in AT&T's petition that demonstrate 
whether or not substantial and sustained special access price increases 
have occurred in MSAs where price cap LECs have received Phase II 
pricing flexibility. Parties submitting such data should show the price 
changes that occurred after Phase II pricing flexibility and whether 
the changes were substantial (i.e., did or did not result in rates 
above just and reasonable levels). We ask parties to establish an 
objective benchmark against which to measure the most recent rate 
levels, and to justify and explain, not merely assert, the usefulness 
of that benchmark. Parties that critique data purporting to show 
substantial rate increases (for example, in reply comments) should 
explain in detail why the rate increases should not be considered 
substantial. Parties that critique the benchmark proposed by other 
parties should propose an alternative benchmark.
    If a price cap LEC is unable to maintain a substantial rate 
increase, i.e., if another entity enters the market and offers the 
service at a lower rate, then the rate increase is not sustainable, and 
the original price cap LEC does not possess market power. Parties 
should therefore provide a measurement of the sustainability of any 
rate increases.
    The BOCs claim that recent special access revenue increases result 
from high special access demand growth, rather than high and sustained 
special access rates, and that special access revenues per line are 
declining. We seek information to validate these claims, including: (1) 
Calculations of an Average Price Index (API) for all special access 
services (both those under price caps and those under pricing 
flexibility), (2) an SBI for each special access service category and 
subcategory, and (3) the revenues associated with the API and SBIs. In 
the Commission's annual access tariff review process, price cap LECs 
file an API, SBIs, and associated revenues for the special access 
basket. The LECs exclude from their calculations revenues for special 
access services provided in MSAs where they exercise pricing 
flexibility. In providing the information we request here, price cap 
LECs should recalculate the API, SBIs, and associated revenues for all 
special access services, including the services removed from price caps 
due to pricing flexibility, beginning in the year 2000, using the 
Tariff Review Plan RTE-1 and IND-1 electronic formats.
    We invite parties to proffer evidence regarding whether the 
predictive judgments on which Phase II pricing flexibility was granted 
are supported by subsequent marketplace developments. We also invite 
parties to support claims of substantial and sustained price increases 
by identifying the product market (e.g., channel terminations between 
LEC end offices and customer premises), the customer segment (e.g., 
businesses in large or medium-sized buildings; large companies or small 
companies), or any other more detailed demarcation of the special 
access market in which these price increases occur.
    Determination of Level of Market Competitiveness. Next, our 
analysis of the existence of substantial competition must analyze the 
cost functions in the industry. This analysis may include evaluation of 
the relevant product market, geographic market, demand responsiveness, 
supply responsiveness, market share, entry barriers, and other pricing 
behavior in well-specified markets. In the Pricing Flexibility Order, 
64 FR 51258, Sept. 22, 1999, for example, the Commission relied on 
entry barrier and supply responsiveness analyses to develop the 
competitive triggers. The Commission determined that, if price cap LECs 
receive pricing flexibility and raise rates excessively, competitors 
will enter the market, thus providing additional supply of special 
access services at (presumably) lower prices than the incumbent. The 
Commission also determined that, if competitors make a significant 
amount of irreversible, sunk investment (specifically in collocation 
and transport facilities), this investment would signify that entry 
barriers in that market have been overcome. The Commission found it 
unnecessary to perform additional forms of market competitive analysis, 
concluding generally that such analyses would be unduly burdensome.
    We seek comment on whether our pricing flexibility rules reflect a 
sufficiently robust assessment of the level of interstate special 
access competition. Parties should address whether actual market place 
developments have validated the supply

[[Page 19389]]

responsiveness and entry barrier predictive judgments made in the 
Pricing Flexibility Order, and, if not, whether different supply 
responsiveness and entry barrier assessments are necessary. Parties 
should also address whether, in assessing our pricing flexibility 
regime, we should consider additional measures of competition, such as 
demand responsiveness and the other analytic methods discussed below.
    Relevant Product Market. In the Pricing Flexibility Order, 64 FR 
51258, Sept. 22, 1999, the Commission identified three categories of 
product markets for special access services: (1) Special access channel 
terminations between a LEC end office and the customer premises, (2) 
special access channel terminations between an IXC POP and a LEC 
serving wire center, and (3) other special access facilities. We seek 
comment on whether these are the relevant product markets. In the 
Pricing Flexibility Order, the Commission acknowledged the greater cost 
of entry into the product market for channel terminations between the 
LEC end office and the customer premises, and, therefore, adopted 
higher triggers that incumbent price cap LECs must satisfy in order to 
obtain Phase II pricing flexibility for this product market. Commenters 
should specifically address, therefore, whether channel terminations 
from the LEC end office to the customer premises constitute a separate 
and distinct product market.
    Parties argue that a price cap LEC that has obtained Phase II 
pricing flexibility in an MSA may, in fact, be the only provider of 
special access channel terminations in that MSA, but can theoretically 
be free from all rate regulation of these channel terminations. We ask 
parties to refresh the record and address whether there have been 
substantial and sustained rate increases for channel terminations 
between LEC end offices and customer premises since the Commission 
began granting Phase II pricing flexibility. We also ask parties to 
address the degree of existing competition for special access channel 
termination services, including any available quantifications of market 
developments after the grant of Phase II pricing flexibility. Because 
Phase II pricing flexibility is a statistically significant variable in 
explaining any substantial and sustained special access rate increases, 
parties should show that pricing behavior changed significantly when 
and where price cap LECs obtained Phase II pricing flexibility.
    We seek comment on whether product markets should be further 
subdivided by transmission capacity. For example, parties should 
comment (and provide data supporting their positions) on whether DS-1 
special access channel terminations between the LEC end office and the 
customer premises are in the same product market(s) as DS-3 and OCn 
channel terminations.
    Although we have not previously classified special access customers 
by factors such as annual revenue per building or required capacity, 
such differentiation may be important for a thorough analysis of the 
level of competition. Is the question of whether CMRS providers, IXCs, 
or enterprise business customers, for example, constitute one or 
multiple customer classes relevant to this analysis? Parties should 
support any proposed customer classes with reliable empirical data, 
including econometric estimates of cross elasticity of demand or 
marketing studies showing consumer substitutability of demand for 
competing services.
    In discussing the relevant product markets, we ask parties to 
consider not only special access services provided over incumbent price 
cap LEC networks, but also whether services provided over other 
platforms, e.g., cable, wireless, and satellite, as well as over 
competitive LEC, self-provisioned wireline facilities, could provide 
the equivalent of price cap LEC special access services. We seek 
comment on the willingness and ability of users to purchase equivalent 
special access services as substitutes for an incumbent price cap LEC's 
special access services. We ask parties to discuss whether significant, 
intermodal special access service price and quality differentials exist 
and, if so, whether the presence of such differentials implies that 
equivalent special access services and special access services provided 
by incumbent price cap LECs are in different product markets.
    Geographic Market. To define the relevant market, we typically 
determine not only the relevant product market, but also the relevant 
geographic market(s). We ask parties to provide their analyses 
consistent with their proposed geographic market. In the Pricing 
Flexibility Order, 64 FR 51258, Sept. 22, 1999, the Commission 
identified the relevant geographic market for granting pricing 
flexibility for special access services as the MSA. We seek comment on 
whether the MSA remains the appropriate geographic market for each of 
the special access product markets identified above or by commenting 
parties.
    Some parties claim that competition is concentrated in a small 
number of areas within MSAs and that, therefore, the MSA is too large 
to be the relevant geographic market. They allege that a pricing 
flexibility trigger based on collocation coupled with competitive 
transport does not consider the ubiquity of competitive transport 
facilities throughout an MSA. The collocation trigger, they contend, 
may demonstrate that numerous carriers have provisioned transport from 
their switches to collocation arrangements in a single wire center, 
such as a LEC serving wire center, but does not demonstrate the 
existence of competitive transport to interconnect the collocation 
arrangements to similar arrangements in any other price cap LEC wire 
centers. If, for example, a collocated competitor uses its own 
transport to carry traffic from a price cap LEC serving wire center to 
an IXC POP, this alternative transport may establish competition for 
this facility, but it is not sufficient to establish competition for 
other special access services. These parties conclude that the 
collocation trigger does not reveal the geographic extent of 
``irreversible sunk investments'' by competitors throughout the MSA for 
which the incumbent price cap LEC has obtained pricing flexibility. 
Thus, they argue, incumbent price cap LECs may be able to exercise 
monopoly power through the use of exclusionary pricing strategies in 
some portions of the MSA. We seek comment on these contentions.
    In the Pricing Flexibility Order , 64 FR 51258, Sept. 22, 1999, the 
Commission established two alternative collocation triggers: percentage 
of revenue associated with wire center collocation, or percentage of 
wire centers with collocation. We note that all price cap LEC pricing 
flexibility petitions to date have relied on the percentage of revenue 
trigger rather than the percentage of wire centers with collocation 
trigger. Because the percentage of revenue trigger requires 
collocation, and hence facilities deployment, in fewer wire centers in 
the MSA, we invite commenters to address whether the MSA remains a 
reasonable geographic market in which to measure irreversible sunk 
investment in the relevant special access product markets, particularly 
for channel terminations between the LEC end office and the customer 
premises.
    One reason that competition may not develop throughout an entire 
MSA is that the difference between the expected per unit costs of any 
potential competitor versus that of an incumbent price cap LEC may be 
considerably greater in some areas of an MSA than others. Any such cost 
disadvantages may be smaller in areas of relatively high special access 
line density, e.g., downtown Boston, than in areas of

[[Page 19390]]

relatively low density, e.g., suburban Boston. We seek comment on the 
degree to which special access line density affects the cost 
disadvantage a potential entrant would face relative to an incumbent 
price cap LEC, and the reasons for any such disadvantage. We also seek 
comment on whether special access line density should be used to re-
define the relevant geographic market, and, specifically, whether line 
density might be used to subdivide, not supplant, the MSA as the 
relevant geographic market, or whether line density might replace the 
MSA.
    We request comment on how to establish line density zones, were we 
to use line density to define the relevant geographic market. We note 
that Commission rules generally require states to de-average state-wide 
UNE rates into at least three zones to reflect cost differences within 
the state. 47 CFR 51.507(f). Most states set rate zones for voice grade 
loops and DS1 loops, and some states also set rate zones for UNE loops 
with capacities higher than DS1 and for dedicated transport and 
entrance facility UNEs with various capacities. Would it be appropriate 
to use the rate zones already established by the states for comparable 
UNEs as the density zones for interstate special access services? Are 
UNEs and special access services comparable? For example, if a state 
does not de-average the rate for DS3 UNE loops, should the Commission 
use zones that the state established for DS1 loops for DS3 special 
access services? If a state does not de-average rates for dedicated 
transport or entrance facility UNEs, should the Commission use the 
zones that the state established for DS1 loops as the density zones for 
interoffice special access services? More generally, is it necessary to 
establish different sets of density zones for special access channel 
termination services extending between the LEC end office and the 
customer premises, for channel termination service extending between 
the LEC serving wire center and the IXC POP, and for interoffice 
facilities?
    We also seek comment on alternative methods to develop line density 
zones for special acce