Regulation of Business Data Services for Rate-of-Return Local Exchange Carriers; Business Data Services in an internet Protocol Environment; Special Access for Price Cap Local Exchange Carriers, 67098-67123 [2018-27528]

Agencies

• FEDERAL COMMUNICATIONS COMMISSION

[Federal Register Volume 83, Number 248 (Friday, December 28, 2018)]
[Rules and Regulations]
[Pages 67098-67123]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27528]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 1, 32, 51, 61, and 69

[WC Docket Nos. 17-144, 16-143, 05-25; FCC 18-146]


Regulation of Business Data Services for Rate-of-Return Local 
Exchange Carriers; Business Data Services in an internet Protocol 
Environment; Special Access for Price Cap Local Exchange Carriers

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: The Commission continues its efforts to modernize its rules 
governing the pricing of business data services (BDS) by allowing rate-
of-return carriers to voluntarily elect to transition their BDS 
offerings out of rate-of-return regulation to a lighter-touch 
regulatory framework. This action is intended to promote competition 
and reduce costly regulatory burdens which no longer serve the public 
interest. Under this new framework, rate-of-return carriers would be 
incentivized to use the savings realized from the regulatory relief to 
improve existing networks and service.

DATES: The amendments contained in this final rule shall become 
effective February 26, 2019.

ADDRESSES: Federal Communications Commission, 445 12th Street SW, 
Washington, DC 20554.

FOR FURTHER INFORMATION CONTACT: Justin Faulb, Pricing Policy Division 
of the Wireline Competition Bureau at 202-418-1540 or by email at 
Justin.Faulb@fcc.gov.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Report 
and Order, released October 24, 2018. A full-text version may be 
obtained at the following internet address: https://www.fcc.gov/document/fcc-spurs-competition-rural-business-data-services-0.

I. Background

    1. In 1990, the Commission began the process of encouraging 
carriers to move from rate-of-return to incentive regulation by 
adopting price cap rules governing the largest incumbent LECs' 
interstate access charges and allowing other incumbent LECs to elect 
price cap regulation voluntarily. Price cap regulation was designed to 
``reward companies that became more productive and efficient, while 
ensuring that productivity and efficiency gains are shared with 
ratepayers.'' Through a series of subsequent decisions, the Commission 
allowed other carriers to convert voluntarily from rate-of-return to 
price cap regulation.
    2. Since then, the Commission has taken additional steps to 
transition certain services and revenues of rate-of-return carriers 
from rate-of-return regulation to other more efficient forms of 
regulation. In 2011, as part of comprehensive universal service and 
intercarrier compensation reform, the Commission imposed rate caps on 
rate-of-return carriers' switched access services, removing those 
services from the obligations that accompany traditional rate-or-return 
regulation. In the USF/ICC Transformation Order, 76 FR 73830, November 
29, 2011, the Commission also changed its method for calculating high-
cost universal service support received by rate-of-return affiliates of 
price cap carriers. Specifically, the Commission began to treat rate-
of-return operating companies affiliated with price-cap holding 
companies as price cap LECs for the purposes of the Connect America 
Fund (CAF) Phase I distribution mechanism. As a result, rate-of-return 
carriers affiliated with price-cap companies now receive the same type 
of fixed universal service support that their price cap affiliates 
receive.
    3. Two years ago, the Commission gave rate-of-return carriers the 
option of receiving forward looking, model-based universal service 
support based on the Alternative Connect America Cost Model (A-CAM), 
which more than 200 carriers opted to receive (A-CAM carriers). The 
Commission observed that ``the carriers that choose to take the 
voluntary path to the model are electing incentive regulation for 
common line offerings.'' Consequently, for A-CAM carriers, only their 
BDS offerings are currently subject to rate-of-return regulation.
    4. In 2016, the Commission also adopted the Alaska Plan Order, 81 
FR 69696, October 7, 2016, which allowed Alaskan rate-of-return 
carriers to elect fixed universal service support on a state-wide basis 
for a defined term in exchange for committing to deployment 
obligations. Specifically, the Commission provided a one-time 
opportunity for Alaskan rate-of-return carriers to elect to receive 
universal service support frozen at adjusted 2011 levels for a 10-year 
term in exchange for meeting individualized performance benchmarks to 
offer voice and broadband services. Subsequently, in 2016, the Wireline 
Competition Bureau (Bureau) authorized 13 Alaskan rate-of-return 
carriers to receive universal service support under the Alaska Plan 
(Alaska Plan carriers). Similar to A-CAM carriers, Alaska Plan carriers 
receive fixed universal service support that is not based on current 
cost, and only file cost studies for purposes of their BDS offerings.
    5. In addition to encouraging carriers to migrate from cost-based 
to incentive regulation, over time the Commission has reduced ex ante 
pricing regulation in favor of relying on competition to the extent 
possible. In 1999, the Commission granted pricing flexibility to price 
cap carriers that provided service in areas where carriers could 
demonstrate threshold levels of deployment by competitive providers. 
Pricing flexibility allowed eligible carriers to offer BDS using 
contract tariffs, volume and term discounts and, in markets that 
demonstrated higher levels of competition, at unregulated rates. 
Beginning in 2007, the Commission granted forbearance from dominant 
carrier regulation, including tariffing and pricing regulation, to a 
number of price cap incumbent LECs for their newer packet-based 
broadband services. These forbearance orders concluded that forbearance 
from dominant carrier regulation was warranted given the existence of 
competition for these newer services, which ensured that rates and 
practices for these services remained just and reasonable, adequately 
protected consumers, and was in the public interest.
    6. In 2017, the Commission adjusted BDS pricing regulation to the 
reality of a dynamically competitive BDS market in areas where 
incumbent LECs were subject to price cap regulation. The Commission 
premised its reductions in ex ante pricing regulation in part on a 
substantial data collection and in part on its predictive judgment that 
dynamic and growing competition in the BDS market, driven increasingly 
by the emergence of cable competition, would allow reliance on 
competition rather than regulation to ensure rates remain just and 
reasonable. The BDS Order, 82 FR 25660, June 2, 2017, represented yet 
another step in the process of reducing dominant carrier regulation in 
response to the growth of competition. In that order, the Commission 
found that reducing government intervention and allowing market forces 
to continue working would further spur entry, innovation, and 
competition in BDS markets served by price cap carriers.

[[Page 67099]]

The Commission applied ex ante pricing regulation ``only where 
competition is expected to materially fail to ensure just and 
reasonable rates'' and stated its preference to rely ``on competition 
rather than regulation, wherever purchasers can realistically turn to a 
supplier beyond the incumbent LEC.'' Based on the record before it, the 
Commission found that, on balance, competition was sufficient to ensure 
just and reasonable rates for packet-based business data services, TDM 
transport services, and higher bandwidth (i.e., above a DS3-level) TDM 
services (including OCn services) in the absence of ex ante pricing 
regulation in areas served by price cap carriers. It also adopted a 
competitive market test for lower bandwidth TDM end user channel 
terminations (i.e., DS3-level and lower) in price cap areas and 
refrained from ex ante pricing regulation of those services in areas 
deemed competitive by that test.
    7. Recently, the Eighth Circuit Court of Appeals upheld all aspects 
of the BDS Order save the portions of the order affecting price cap 
carriers' TDM transport service, which it vacated and remanded on 
notice grounds--namely that the Commission had not provided sufficient 
notice that it might relieve those services of ex ante pricing 
regulation.
    8. After the Commission adopted changes to its rules governing 
price cap carriers' BDS offerings, ITTA and USTelecom (together, 
Petitioners) filed a petition seeking the same regulatory treatment of 
BDS offerings for rate-of-return carriers receiving fixed support as 
that the Commission had recently adopted for price cap carriers (Joint 
Petition). According to Petitioners, rate-of-return regulation deters 
investment in networks and harms competition. Petitioners argue that 
the inflexibility of rate-of-return regulation makes it difficult to 
justify and fund upgrades to their rural networks. They point out that 
for rate-of-return carriers, ``the need to perform annual cost studies 
now applies only with respect to BDS.'' As a result, they argue that 
the expense associated with conducting cost studies and complying with 
other rate-of-return expenses are difficult to recover and burden rate-
of-return carriers receiving fixed support but not their competitors. 
The Bureau sought and received comment on the Joint Petition.
    9. Upon review of the record received in response to the Joint 
Petition, earlier this year, the Commission released a notice of 
proposed rulemaking (NPRM), 83 FR 22923, May 17, 2018, proposing to 
allow A-CAM and other rate-of-return carriers that receive fixed 
universal service support to voluntarily migrate their lower speed TDM-
based BDS offerings to incentive regulation. The Commission also sought 
comment on adopting a competitive market test to determine when the 
market for lower speed TDM-based BDS offerings offered by rate-of-
return carriers that receive fixed support are sufficiently competitive 
to justify eliminating ex ante pricing regulation of such offerings. 
Additionally, the NPRM sought comment on eliminating ex ante pricing 
regulation for such carriers' packet-based and higher speed TDM-based 
BDS offerings nationwide, while maintaining oversight authority through 
sections 201, 202, and 208 of the Communications Act of 1934, as 
amended (the Communications Act or the Act) to ensure BDS rates and 
practices remain just and reasonable.

II. An Administrable Framework for Business Data Services Offered By 
Rate-of-Return Carriers That Receive Fixed Support

    10. Upon review of the record, we allow rate-of-return carriers 
receiving fixed universal service support to choose to migrate their 
BDS offerings to a new, comprehensive, lighter-touch regulatory 
framework that is better aligned to the competitive realities of the 
BDS markets they serve. The framework we adopt includes voluntary 
incentive regulation with pricing flexibility for electing carriers' 
lower capacity (DS3 and below) TDM transport and end user channel 
termination services. We also adopt a competitive market test for such 
carriers' lower capacity TDM end user channel termination services to 
identify competition by study area. In electing carriers' study areas 
that the competitive market test deems competitive, we eliminate ex 
ante pricing regulation for lower capacity TDM end user channel 
termination services. We also remove ex ante pricing regulation from 
electing carriers' packet-based and higher capacity (above a DS3 
bandwidth level) TDM services and grant forbearance from tariffing 
requirements for those services. To reduce the burden of legacy rate-
of-return regulation on electing carriers, we also grant forbearance 
from cost assignment and separations rules and related reporting 
requirements, because we determine that such action is warranted by the 
non-cost-based regulation that will apply to electing carriers and the 
competitive circumstances of their BDS markets.
    11. We find that adopting the lighter-touch incentive regulatory 
framework proposed by the Commission for electing carriers will remove 
unnecessary regulatory burdens and encourage competition. Based on the 
record before us, we decline at this time to relieve electing carriers' 
lower capacity TDM transport (at or below a DS3-level) of ex ante 
pricing regulation nationwide, as Petitioners sought. Instead we allow 
electing carriers to move their lower speed TDM transport services to 
incentive regulation. Additionally, we adopt a competitive market test 
tailored to rate-of-return carriers' study areas, which will allow us 
to properly evaluate competition in the areas served by electing 
carriers and remove ex ante pricing regulation for end user channel 
terminations in areas deemed competitive, instead of basing our 
decision on the competitive characteristics of areas served by price 
cap carriers.
    12. We decline to adopt Petitioners' proposal to apply to electing 
carriers' BDS offerings the regulatory framework and the results of the 
price cap competitive market test adopted in the BDS Order for price 
cap carriers' BDS offerings. Petitioners argue that applying the price 
cap BDS rules to electing rate-of-return carriers would result in 
regulatory parity that ``would promote competition and make the rules 
less complex.'' TDS Telecom asserts that adopting a separate incentive 
regulatory framework is unnecessary. The price cap BDS rules, however, 
were based on an analysis of BDS competition in areas served by price 
cap carriers, consistent with our obligation to ensure that the rates 
charged by common carriers are just and reasonable. The Commission 
found sufficient evidence of competition in these areas to discipline 
pricing and therefore adopt a lighter touch regulatory framework for 
these carriers. That same history and record of competition for BDS 
services does not exist in the study areas served by rate-of-return 
carriers that Petitioners seek to have covered by price cap BDS 
regulation. Thus, we find that adopting a separate, albeit largely 
parallel, regulatory framework for rate-of-return carriers receiving 
fixed support will be better suited to their circumstances.

A. Transitioning to a New Framework

    13. Consistent with the Commission's proposal and the Joint 
Petition, we allow all rate-of-return carriers receiving fixed 
universal service support to voluntarily elect to move their BDS 
offerings out of rate-of-return regulation to the new lighter touch 
framework we adopt today. Carriers eligible to make this election 
include A-CAM carriers, rate-of-return carriers receiving fixed support 
by virtue of being affiliated with price cap carriers, Alaska Plan 
carriers,

[[Page 67100]]

and rate-of-return carriers that accept future offers of A-CAM support 
or otherwise transition away from legacy support mechanisms. The first 
three types of carriers receive fixed or model-based universal service 
support, rather than receiving high-cost support based on their costs, 
and therefore are currently required to prepare cost studies only for 
their BDS offerings. Relieving these carriers of rate-of-return 
regulation for their BDS will save them the expense of preparing 
burdensome cost studies only for those offerings.
    14. Similarly, to the extent the Commission provides future offers 
of A-CAM support or otherwise transitions carriers away from legacy 
support mechanisms, carriers that receive such support will only have 
to prepare cost studies for purposes of their BDS offerings. Therefore, 
if the Commission announces future offers of A-CAM support or otherwise 
transitions carriers away from legacy support mechanisms, the actions 
we take in this Order will allow carriers eligible for or subject to 
such transitions to elect the same lighter touch regulatory framework 
we provide for other rate-of-return carriers that receive fixed 
support, and may provide further incentives for rate-of-return carriers 
to elect to receive non-legacy, fixed or model-based support. This will 
further the Commission's longstanding objective of providing universal 
service support based on forward-looking efficient costs as opposed to 
actual costs that may be less efficient.
    15. Consistent with Commission precedent, we do not require all 
rate-of-return carriers receiving fixed support to migrate their BDS 
offerings away from rate-of-return regulation to the new framework, but 
instead allow each carrier to voluntarily make that determination based 
on its circumstances. When the Commission adopted price cap regulation 
in 1990, it made price cap regulation voluntary for all but the largest 
incumbent LECs. At that time, the Commission expressed concern that 
assigning one productivity factor on a mandatory basis to all LECs, 
regardless of size, could prove unduly burdensome for smaller and mid-
sized carriers that may have fewer opportunities than larger companies 
to achieve cost savings and efficiencies. Commenters echoed those 
concerns in this proceeding. By making the election voluntary, we 
ensure that only carriers that can achieve sufficient efficiencies are 
likely to elect incentive regulation; our new framework will not, 
therefore, impose additional burdens on smaller carriers that cannot 
achieve such efficiencies.
    16. We also adopt the Commission's proposal to require electing 
carriers to elect incentive regulation at the holding company-level for 
study areas in all states where that carrier receives fixed support. 
Commenters do not oppose requiring holding company-level election. AT&T 
requests that the Commission ``require that any A-CAM carrier that 
elects incentive regulation have that election apply across all its 
study areas'' because this prevents ``internal cost shifting among 
study areas.'' Holding company-level election will maximize the 
regulatory efficiencies achieved by incentive regulation, including 
maximizing cost savings from the elimination of cost studies for all 
electing carriers. It is also consistent with the Commission's past 
practices. For example, the Commission gave rate-of-return carriers the 
opportunity to elect between A-CAM and legacy cost-based support at a 
state-wide level. Likewise, the Commission required Alaska Plan 
carriers to elect fixed, frozen support on a state-wide basis. 
Requiring rate-of-return carriers receiving fixed support to elect 
regulatory treatment at the holding company-level is also consistent 
with the underlying premise of price cap regulation, which assumed a 
broad representation of carrier operations to provide a basis for 
establishing an industry-wide productivity factor.
    17. We provide eligible carriers with two opportunities to elect to 
move their BDS offerings out of rate-of-return regulation--one to be 
effective as of July 1, 2019 and a second effective as of July 1, 
2020--to encourage them to take advantage without undue delay of the 
benefits that will be realized by electing carriers under the new 
framework and to discourage potential gaming opportunities. We provide 
two opportunities to elect this new regulatory framework, in 
recognition of the fact that some carriers may not have sufficient time 
to assess their options in time for the July 1, 2019 effective date. 
Providing a second opportunity to elect incentive regulation will 
facilitate carriers' ability to assess incentive regulation for their 
BDS and ultimately enhance participation in the new regulatory 
framework, which will further reduce unnecessary regulatory burdens and 
positively impact competition in electing carriers' BDS markets.
    18. Some commenters recommend that we provide an ``annual 
opportunity to elect the new regime'' based on ``business strategy and 
compliance measures.'' Giving eligible carriers an annual opportunity 
to elect incentive regulation, however, would also give them an 
incentive to increase their operating costs and rate base under rate-
of-return regulation in order to raise rates prior to electing 
incentive regulation, then realize additional profits by cutting costs 
under incentive regulation at the expense of ratepayers. By providing 
only two opportunities to elect to move to the new framework, we 
discourage such gaming opportunities.
    19. We prohibit electing carriers from returning their study areas 
to rate-of-return regulation. One of the rationales for the 
Commission's ``all-or-nothing'' rules for price cap carriers is to 
prevent carriers from potentially switching back and forth between 
rate-of-return and price cap regulation to take advantage of uneven 
cycles of investment. We are likewise concerned with potential gaming 
opportunities for electing carriers if they are allowed to switch back 
and forth between rate-of-return and incentive regulation. Electing 
carriers could inflate their revenues by opting-out of incentive 
regulation, building a larger rate base under rate-of-return regulation 
in order to raise rates, and then, returning to incentive regulation or 
opting into price cap regulation, thus reducing costs back to an 
efficient level. These gaming opportunities would distort carriers' 
decisions to invest and frustrate the public interest because 
ratepayers would not see the benefit of capped and decreased rates in 
the manner intended under incentive regulation. Further, in the 1990 
Price Cap Order, 55 FR 42375, October 19, 1990, the Commission 
determined that for price cap regulation to work effectively and for 
incentives to develop and influence carrier behavior and earnings, an 
electing carrier must make a permanent commitment. We similarly find, 
that for incentive regulation to work properly, the election must be 
permanent. Accordingly, a carrier's voluntary election of incentive 
regulation will be irrevocable.
    20. AT&T requests that the ``Commission decline to waive the `all-
or-nothing' rule for these carriers and require that any A-CAM carrier 
that elects incentive regulation have that election apply across all 
its study areas and, even more critically, across all of its interstate 
services within a study area.'' The all-or-nothing rule AT&T cites, 
however, applies to price cap carriers, not to rate-of-return carriers 
that elect incentive regulation. While the incentive regulation rules 
we adopt for electing carriers impose price caps on some of the BDS 
services offered by electing carriers, electing carriers do not become 
price cap carriers by virtue of their election; therefore the all-or-

[[Page 67101]]

nothing rule is simply not applicable here.
    21. We allow electing carriers' switched access services to remain 
subject to the multi-year transition provided for rate-of-return 
carriers in the USF/ICC Transformation Order. We therefore decline to 
adopt AT&T's recommendation that electing carriers be required to 
convert all their services to price cap regulation, including their 
switched access services, which--compared to price-cap carriers' 
switched access services--benefit from a longer transition to bill-and-
keep and no phase-out of Connect America Fund Intercarrier Compensation 
replacement support.
    22. According to AT&T ``[w]hile different transitions for price cap 
carriers and rate-of-return carriers may have made sense in 2011, those 
distinctions should not unfairly benefit carriers'' electing incentive 
regulation and could lead to cost-shifting between types of services. 
We disagree with AT&T's assertion that electing carriers will 
``unfairly benefit'' from our decision not to convert all of their 
offerings to incentive regulation. The Commission adopted different 
intercarrier compensation transitions in the context of a complex 
rulemaking that were the result of a careful analysis of a variety of 
factors and policy considerations, including the differential impact of 
universal service and intercarrier compensation reform on price cap as 
compared to rate-of-return carriers. As TDS Telecom explains, in the 
intervening seven years, carriers have relied on those transitions to 
plan their businesses and make investments. Changing those transitions 
at this point would disrupt these settled expectations and potentially 
undermine, rather than encourage, investment and innovation in electing 
carriers' BDS markets. We also find AT&T's concerns about cost-shifting 
unfounded because switched access rates were capped and therefore 
removed from cost-based regulation in 2011 by the USF/ICC 
Transformation Order, eliminating the incentive for inappropriate cost 
shifting.
    23. Following the same logic, we decline to adopt AT&T's proposal 
that we require electing carriers to exit the National Exchange Carrier 
Association (NECA) tariff pool for their ``switched and special access 
services to avoid additional complexities in the annual tariff review 
process and to avoid potential gaming.'' As Petitioners argue, AT&T 
``fails to explain how any cost shifting would be useful given the 
switched access rules [that cap rates].'' Moreover, the scrutiny 
inherent in the part 61 tariff review process helps reduce the risk of 
cost-shifting or other gaming by pool participants. We do, however, 
require electing carriers currently participating in the NECA traffic-
sensitive tariff pool for their BDS or special access service offerings 
to remove their BDS and special access offerings from the pool since 
those services will be subject to incentive regulation.
    24. We find that the lighter touch regulatory framework we adopt 
provides electing carriers the right balance of relief from the 
burdensome aspects of rate-of-return regulation and pricing discipline. 
The efficiencies gained from reducing regulatory burdens on electing 
carriers, including the increased flexibility to compete in the market, 
will foster network investment and impose downward pressure on prices. 
We also find here, as we did in the BDS Order, that ``minimiz[ing] 
unnecessary government intervention . . . allows market forces to 
continue working to spur entry, innovation, and competition.''

B. Applying Voluntary Incentive Regulation to Electing Carriers' Lower 
Speed TDM Transport and End User Channel Termination Services

    25. In this section, we provide direction on implementing the 
voluntary incentive regulation we adopt today for electing carriers' 
lower capacity (i.e., at or below a DS3-level) TDM transport and end 
user channel termination services as part of our comprehensive lighter 
touch regulatory framework for electing carriers' BDS. We treat 
electing carriers' lower capacity TDM transport and end user channel 
terminations differently from packet-based and higher speed TDM-based 
BDS offerings because the record shows that packet-based offerings are 
subject to competition that will ensure just and reasonable rates for 
those services. By contrast, the record shows that demand for lower 
speed TDM-based transport and end user channel terminations services is 
shrinking as purchasers increasingly prefer higher speed and packet-
based services. Recognizing that the market is transitioning to new 
technologies, we provide protections for lower speed TDM-based 
transport and end user channel termination services. Based on the 
current record, we preserve ex ante pricing regulation for lower speed 
TDM-based transport services and adopt a competitive market test that 
will preserve ex ante pricing regulation in those study areas where we 
predict there is a substantial likelihood that competition will fail to 
ensure just and reasonable rates for the lower capacity TDM-based end 
user channel termination services.
    26. Rate-of-return carriers that make this election will convert to 
incentive regulation for their lower capacity TDM transport and end 
user channel termination services as well as other generally lower 
capacity non-packet-based services that are commonly considered special 
access services. Specifically, among other matters, we adopt a 
methodology for electing carriers to set their initial rates, allow an 
unfreeze of separations category relationships for carriers that 
elected to freeze them in 2001, adopt a productivity factor and measure 
of inflation to adjust rates, and grant pricing flexibility to electing 
carriers for their lower capacity TDM services.
1. Initial Rate Levels
    27. First, we adopt the methodology electing carriers must use to 
establish rates for their lower capacity TDM transport and end user 
channel termination services pursuant to incentive regulation. For 
rate-of-return carriers that file their own tariffed rates, we adopt 
the approach proposed in the NPRM to set initial BDS rate levels based 
on rates in effect on January 1, 2019 for carriers converting to 
incentive regulation as of July 1, 2019 and on rates in effect on 
January 1, 2020 for carriers that elect incentive regulation effective 
as of July 1, 2020. For rate-of-return carriers participating in the 
NECA traffic-sensitive tariff pool that elect incentive regulation 
effective July 1, 2019, we adopt the approach proposed in the NPRM for 
members exiting the pool to set their initial BDS rate levels by 
adjusting NECA pool rates in effect on January 1, 2019 by a net 
contribution or net recipient factor. Carriers electing incentive 
regulation as of July 1, 2020 must set their initial BDS rate levels by 
adjusting NECA pool rates in effect on January 1, 2020. Electing 
carriers will then adjust their rates using a methodology that is 
consistent with the price cap formulas in Sec. Sec.  61.45 to 61.47 of 
our rules, by applying the productivity factor (X-factor), inflation 
factor (Gross Domestic Product-Price Index (GDP-PI)), and any required 
exogenous cost changes. Carriers may adjust these rates to reflect the 
pricing flexibility permitted by the pricing bands in the Special 
Access category.
    28. Under rate-of-return regulation, incumbent LECs are permitted 
to recover through tariffed rates their revenue requirement, which is 
equal to their regulated operating costs plus a prescribed rate of 
return on their regulated rate base. Rate-of-return carriers set rates 
at levels that when

[[Page 67102]]

multiplied by demand will yield revenues equal to their revenue 
requirement, and are targeted to earn the Commission's prescribed rate 
of return. Rate-of-return carriers establish rates for BDS offerings 
either by filing their own interstate access tariffs and cost support 
pursuant to Sec.  61.38 or Sec.  61.39 of our rules or, for most rate-
of-return carriers, by participating in the NECA traffic-sensitive 
tariff and traffic-sensitive pool. NECA sets the BDS rates in the 
traffic-sensitive tariff based on projected aggregate costs (or average 
schedule settlements) and demand of all pool members, which are 
targeted to earn the authorized rate of return for NECA pool members.
    29. When the Commission launched price cap regulation in 1990, it 
found that interstate access rates as they existed on July 1, 1990, six 
months prior to the date price caps went into effect on January 1, 
1991, were the most reasonable basis from which to set initial rate 
levels under price cap regulation. In other words, those rates created 
the starting point for the indexing of rates under price cap 
regulation--setting their price cap index, actual price index and 
service band index at a value of 100. The price cap index is adjusted 
by the productivity offset (X-factor) and inflation (GDP-PI) for the 
first year, and each year thereafter. The Commission reasoned that 
interstate rates that existed on July 1, 1990 ``while perhaps not 
perfect, in general represent the best that rate-of-return regulation 
can produce.''
    30. Beginning with the Windstream Order, the Commission granted 
several waivers allowing price cap carriers to convert their rate-of-
return study areas to price cap regulation. Carriers were, among other 
things, required to establish initial price cap indexes using the rates 
in effect on January 1 of the conversion year, six months prior to the 
July 1 effective date of conversion, the demand from the preceding 
year, and required to target their rates using the X-factor in effect 
at that time. In the 2012 Average Schedule Conversion Order, the 
Commission permitted several rate-of-return carriers to, among other 
things, withdraw their average schedule study areas from the NECA pool 
and convert them to price cap regulation. In that order, the Commission 
approved a methodology for establishing initial price cap rates using 
existing NECA pool tariffed rates adjusted to reflect the extent to 
which the exiting study areas were either a net contributor to, or a 
net recipient from, the NECA pool.
    31. Carriers Currently Filing Their Own Tariffs. Consistent with 
past practice, we adopt the proposal in the NPRM for carriers that 
currently file their own tariffs to use existing tariffed rates to set 
their initial BDS rates under incentive regulation. Carriers first will 
set their price cap indexes based on their tariffed interstate special 
access rates in effect on January 1, 2019, or based on those rates in 
effect on January 1, 2020 for carriers electing to convert to incentive 
regulation effective July 1, 2020. The price cap indexes (i.e., the 
price cap index, actual price index, and service band index) will be 
assigned values of 100 as starting points, which correspond to rate 
levels in effect on January 1, 2019 or on January 1, 2020, as 
applicable. Carriers then will adjust the price cap index and the 
pricing band limits for each service category or subcategory consistent 
with Sec. Sec.  61.45 through 61.47 of our rules, by applying the X-
factor (2.0%), inflation factor (GDP-PI), and any required exogenous 
cost changes. Carriers, next, will set rates so that the actual price 
index, calculated pursuant to Sec.  61.46, does not exceed the price 
cap index, and the service band indexes for each service category or 
subcategory, calculated pursuant to Sec.  61.47, do not exceed the 
pricing band limits for each category or subcategory, for the first 
year of incentive regulation and each year thereafter.
    32. Carriers Participating in NECA Pool. We also adopt the approach 
proposed in the NPRM for electing carrier study areas exiting the NECA 
traffic-sensitive tariff pool to establish their initial BDS rates 
under incentive regulation by multiplying the NECA pool rate in effect 
on January 1, 2019 by a net contribution or net recipient factor or by 
doing so using the NECA pool rate in effect on January 1, 2020 for 
carriers electing conversion in 2020. No commenters opposed this 
proposal. Electing carriers exiting the NECA pool will adjust the NECA 
pool rate to reflect the extent they are either a net contributor or 
net recipient in order to ensure their rates are just and reasonable. 
Each NECA pool member receives a settlement from the pool based on its 
costs plus a pro rata share of the earnings, or based on its settlement 
pursuant to the average schedule formulas. NECA pool rates are lower 
than necessary for a net recipient to recover its revenue requirement, 
or higher than necessary for a net contributor to recover its revenue 
requirement and must be adjusted by the extent to which the existing 
study area is a net contributor to, or net recipient from, the NECA 
pool in order to satisfy the just and reasonable standard. Without an 
adjustment, electing carriers' BDS rates would be either artificially 
high or low going forward.
    33. First, to determine the appropriate net contributor or net 
recipient factor, electing carriers exiting the pool effective July 1, 
2019 will determine their interstate special access revenue for the 
period July 1 to December 31, 2018. An electing carrier exiting the 
NECA tariff shall determine its pool settlements to be used in 
developing the factor based on costs for the period July 1 through 
December 31, 2018, which reflects the first six months of tariff year 
2018-19, the 12-month period for which the costs underlying the January 
1, 2019 rates were projected. The pool settlements shall be adjusted to 
reflect the 10.5% rate of return which was used to establish the 
revenue requirement for the January 1, 2019 rates. Second, carriers 
will calculate the difference between the exiting pool member's 
interstate special access revenues for July 1 to December 31, 2018 and 
special access pool settlements reflecting the authorized rate of 
return for this same period. Third, this net contribution or net 
recipient amount will then be divided by interstate special access 
revenues for the same period to produce a percent net contribution or 
net recipient factor. Fourth, carriers shall proportionately adjust 
their special access NECA pool rates in effect on January 1, 2019 
downward by the net contribution factor or upward by the net recipient 
factor. Finally, carriers will adjust these rates further consistent 
with Sec. Sec.  61.45 through 61.47 of our rules, in the manner 
described above for carriers that file their own tariffs, to set their 
initial BDS rates for the first year of incentive regulation. Carriers 
electing to exit the NECA pool effective July 1, 2020 will use the same 
methodology to adjust their rates but using the corresponding dates 
that are one year later.
    34. We agree with Petitioners that recommend that initial rates be 
based on the existing tariffed rates at the time of a carrier's 
election of incentive regulation. AT&T and Sprint disagree and argue 
that the Commission should adjust initial BDS rates to account for the 
rate-of-return transition that is currently underway. The Commission 
adopted a six-year transition in 2016 to reduce the then-11.25% rate of 
return by 25 basis points per year until the rate of return reaches 
9.75% in 2021. AT&T and Sprint argue that the Commission should adjust 
electing carriers' initial BDS rates to reflect the fully-transitioned 
9.75% rate of return or, at a minimum, Sprint argues that the

[[Page 67103]]

Commission should adjust the price capped rates each year during the 
rate-of-return transition until it ends in 2021. AT&T claims that 
``[s]etting electing A-CAM carriers' initial rate-of-return at the 
9.75% level immediately upon converting to price cap, while not 
completely correcting, would help alleviate any rate disparities and 
aligns with the Commission's finding that a 9.75% rate of return is 
more than reasonable.''
    35. We find that existing tariffed rates targeting the transitional 
10.5% rate of return in effect is the more appropriate rate from which 
to launch incentive regulation for carriers electing to convert to 
incentive regulation effective July 1, 2019. AT&T and Sprint fail to 
accord any significance to the Commission's decision to implement 
changes in the prescribed rate of return over six years and the reasons 
for such a measured and lengthy transition. In granting a six-year 
transition, the Commission acknowledged that ``for almost 25 years, 
rate-of-return carriers have made significant infrastructure 
investments . . . and that represcribing the rate of return will have a 
financial impact on these carriers.'' Rate-of-return carriers' business 
plans and long-term capital investments are typically based on an 
expected multi-year revenue stream. The Commission determined that an 
immediate transition to a 9.75% rate of return would disrupt these 
carriers' reasonable reliance on these expected revenues. The 
Commission also recognized that ``rate-of-return incumbent LECs have 
been subject to significant regulatory changes in recent years, and 
that such changes are occurring at a time when these carriers are 
attempting to transition their networks and service offerings to a 
broadband world.'' Reflecting the balance of the six-year transition 
whether through a one-time adjustment, or through a series of three 
adjustments, would abandon this careful transition and would likely 
disrupt electing carriers' ability to invest in upgrading and 
transitioning their networks to provide broadband in the rural 
communities they serve.
    36. We also find that once a carrier elects incentive regulation, 
its rates should be based on that form of regulation and not 
effectively a hybrid or combination of rate-of-return and incentive 
regulation, which would be the result were we to adopt the annual 
adjustment the Commission has applied to carriers that are subject to 
cost-based rate-of-return regulation as proposed by Sprint. Capping BDS 
rates of an electing carrier that will be subject to incentive 
regulation and reducing them annually by the X-factor going forward 
will be sufficient to ensure these rates are just and reasonable while 
at the same time creating the right incentives to operate efficiently--
a goal we cannot expect to achieve by continuing to overlay rate-of-
return obligations on top of an incentive regulation scheme. An annual 
25 basis point adjustment would also be more administratively 
burdensome to implement. Rather than perpetuating policies associated 
with an inefficient rate-of-return system, we look to the ongoing 
operation of incentive regulation to spur carriers to be more efficient 
and productive than they were under rate-of-return regulation using X-
factor-based rate reductions.
    37. Finally, as some commenters explain, reducing initial BDS rate 
levels to account for the rate-of-return transition would ``reduce the 
motivation of a carrier to opt into incentive regulation'' contrary to 
the goals of this Order and the Commission's preference for incentive-
based regulation. If initial BDS rates were adjusted to the fully-
transitioned rate of return of 9.75%, carriers would be able to earn a 
higher return and revenue during the rate-of-return regulation 
transition that ends in 2021 than by moving to incentive regulation. 
This outcome is contrary to the Commission's long-standing policy 
preferring incentive-based regulation over rate-of-return regulation 
and encouraging conversions to incentive-based regulation. Incentive 
regulation will encourage electing carriers to be more efficient than 
they were under rate-of-return regulation, and pass some of these 
efficiencies on to consumers through rate reductions (or rates that are 
lower than otherwise) through the application of a price cap formula 
that reflects a properly calculated X-factor. Accordingly, we seek to 
encourage carriers to adopt incentive regulation by allowing electing 
carriers to set their initial rates under incentive regulation based on 
rates reflecting the transitional rate of return currently in effect.
    38. We agree with Petitioners that initial rates for lower capacity 
TDM transport and end user channel termination services should be based 
on existing tariffed deemed lawful rates--rates that target the 
effective transitional rate of return. We therefore set initial rates 
for carriers electing to convert to incentive regulation as of July 1, 
2019 for lower capacity TDM transport and end user channel termination 
services based on electing carriers' tariffed rates in effect on 
January 1, 2019, six months prior to when incentive regulation goes 
into effect on July 1, 2019. Similarly, initial rates for carriers 
electing to convert to incentive regulation as of July 1, 2020 will be 
based on the tariffed rates in effect on January 1, 2020. Existing 
tariffed rates filed pursuant to section 204(a)(3) of the Act that take 
effect, without prior suspension and investigation, are deemed lawful 
and conclusively presumed to be just and reasonable. Setting initial 
rates based on existing tariffed rates, as noted by commenters, is 
``consistent with the methodologies used in the past when rate-of-
return carriers have converted to price cap regulation.'' Further, the 
selection of tariffed rates in effect on a date that precedes the 
effective date of incentive regulation helps prevent rapid aggregate 
price increases in the period leading up to the incentive regulation 
that would inflate price cap baseline rates. Accordingly, price cap 
indexes under incentive regulation will be initially set at a value of 
100 based on rates in effect on January 1, 2019 for carriers electing 
incentive regulation as of July 1, 2019, and on rates in effect on 
January 1, 2020 for carriers electing incentive regulation as of July 
1, 2020. Business data services rates for carriers accepting future 
offers of A-CAM support or otherwise transition away from legacy 
support mechanisms will be effective on July 1 in the year following 
their election.
2. Category Relationships Unfreeze
    39. We give electing carriers subject to the category relationships 
freeze of our separations rules, including any such carriers that 
accept future offers of A-CAM support or otherwise transition away from 
legacy support mechanisms, the opportunity to opt out of that freeze. 
We agree with Petitioners and WTA that the category relationships 
freeze creates a cost recovery hardship for certain carriers and a 
distortion in rates that should not be incorporated into rates that 
electing carriers set for lower capacity circuit-based business data 
services under incentive regulation.
    40. Background. Rate-of-return incumbent LECs use their networks 
and other resources to provide both interstate and intrastate services. 
The Commission's part 36 jurisdictional separations rules are designed 
to help prevent the recovery of the same costs from both the interstate 
and intrastate jurisdictions and require that rate-of-return incumbent 
LECs divide their costs and revenues between the respective 
jurisdictions. The jurisdictional separations analysis begins with 
categorizing the incumbent LEC's regulated costs and revenues, a 
process requiring that the incumbent LEC assign the regulated 
investments, expenses, and revenues recorded in its part 32 accounts to 
various part 36

[[Page 67104]]

categories. The incumbent LEC then directly assigns to the interstate 
or intrastate jurisdiction, or allocates between those jurisdictions, 
the costs or revenues in each part 36 category.
    41. In 1997, the Commission initiated a proceeding to 
comprehensively reform its jurisdictional separations rules and 
referred that matter to the Federal-State Joint Board on Jurisdictional 
Separations (Joint Board) for preparation of a recommended decision. In 
the 2001 Separations Freeze Order, 66 FR 33202, June 21, 2001, the 
Commission froze the jurisdictional separations rules to allow time for 
the Joint Board to develop recommendations on comprehensive separations 
reform. Also, in that Order, the Commission granted rate-of-return 
carriers a one-time option to freeze their category relationships, 
enabling each carrier to determine whether such a freeze would be 
beneficial ``based on its own circumstances and investment plans.'' 
Carriers that elected this freeze assign regulated costs to separations 
categories based on separations category relationships from 2001, 
rather than on current data. Presently, approximately 28 rate-of-return 
carriers that receive fixed high-cost universal service support operate 
under this category relationships freeze.
    42. The Commission has repeatedly extended the separations freeze. 
The most recent extension is set to expire on December 31, 2018. In the 
2018 Separations Freeze Extension proceeding, the Commission proposed 
to extend the separations freeze for 15 years, while providing a one-
time opportunity for carriers that had elected to freeze their category 
relationships to opt out of that freeze and categorize their costs 
based on current data rather than separations category results from 
2001. The Commission has not yet acted on that proposal.
    43. Category Relationships Unfreeze. The category relationships 
freeze has now been in place for more than 17 years, and our rules 
prohibit carriers that elected that freeze from withdrawing from it. 
Rate-of-return carriers that chose to freeze their category 
relationships in 2001 assign costs within part 32 accounts to 
categories using their separations category relationships from 2000. 
This means that these companies are still separating their costs based 
on the technologies and services that were in place in 2000, instead of 
being able to adjust the amounts assigned to separations categories to 
reflect the current network costs and services that would allow these 
carriers to properly recover their costs. Investment by carriers is 
becoming more weighted toward BDS and away from switched access and 
common line categories. Thus, we agree with Petitioners that the result 
is that some, if not all, carriers with frozen category relationships 
are unable to recover their BDS costs from BDS customers or from NECA 
traffic sensitive pool settlements.
    44. We therefore allow electing carriers to unfreeze and update 
their category relationships in conjunction with setting their initial 
rates, which will enable such carriers to more closely align their BDS 
rates with their underlying costs as they set initial incentive 
regulation rates. Once an electing carrier implements incentive 
regulation rates for its BDS, it will no longer need to comply with the 
separations rules by virtue of our action below forbearing from 
application of the separations and other cost assignment rules to 
electing carriers. This, in turn, will allow the carriers and their 
customers to benefit from the efficiencies of incentive regulation.
    45. The Commission originally allowed rate-of-return carriers the 
flexibility to choose whether to freeze their category relationships 
because those carriers' size, cost structures, and investment patterns 
vary widely. For similar reasons, we conclude that the burden on 
electing carriers, were we to require all impacted carriers to unfreeze 
and update their category relationships, would outweigh any benefits, 
and thus grant these carriers the flexibility to choose. For example, 
some carriers may have based their current business plans and 
investment on a continuation of the freeze since it has been in effect 
for such a long period and compelling these carriers to unfreeze their 
categories now could be disruptive. Further, it would impose a 
disproportionate burden on companies with cost structures that have not 
changed significantly enough to warrant the administrative costs that 
these carriers would incur in updating their relationships. Moreover, 
the process of unfreezing and updating category relationships is 
resource-intensive, requiring carriers to develop detailed analyses for 
new categorization cost studies. As a result, we recognize that some 
electing carriers may choose not to unfreeze their category 
relationships in conjunction with setting initial incentive regulation 
rates for lower capacity circuit-based business data services because 
of the administrative costs they would incur in updating these 
relationships. We see no need to require that electing carriers incur 
these costs, particularly since one of the principal goals of this 
proceeding is to reduce unnecessary regulatory burdens.
    46. In adopting this option, we reject NARUC's contention that we 
are violating section 410(c) of the Communications Act by failing to 
meaningfully consult with, and receive a recommendation from the Joint 
Board. Section 410(c) applies only to the extent the Commission engages 
in ``the jurisdictional separation of common carrier property and 
expenses between interstate and intrastate operations.'' Here, we are 
not engaged in that process. Instead, we are determining which costs 
electing carriers should use to calculate their incentive regulation 
rates for lower capacity circuit-based BDS. In allowing electing 
carriers to set those rates using data from 2018, rather than 2000, we 
make no change to the jurisdictional separations rules.
    47. As set forth more fully below, we direct each electing carrier 
that chooses to update its separations category relationships to 
conduct two cost studies for 2018 and to use those cost studies in 
determining its initial incentive regulation rates. In so doing, we are 
exercising our authority over interstate rates and are not in any way 
requiring state commissions to make similar intrastate adjustments. On 
the contrary, our forbearance from application of the separations rules 
to electing carriers will allow the states to adopt their own rules for 
determining the costs carriers incur in providing intrastate services 
to the extent they have authority under state law.
    48. Moreover, even if we were to interpret 410(c) so broadly as to 
be applicable to the opportunity we provide electing carriers to 
unfreeze their category relationships, our actions are not in conflict 
with our obligations under section 410(c). In 2009, the Commission 
asked the Joint Board to consider whether the Commission should allow 
carriers a one-time opportunity to unfreeze their separations category 
relationships and requested that the Joint Board prepare a recommended 
decision on that matter. No recommendation has been forthcoming. 
Section 410(c) directs that, after a referral, the Joint Board ``shall 
prepare a recommended decision for prompt review and action by the 
Commission.'' Nothing in section 410(c) obligates the Commission to 
wait indefinitely for a recommended decision before acting. We conclude 
that the only reasonable interpretation of this statutory language 
allows the Commission to act unilaterally where, as here, an issue has 
been pending before the Joint Board for more than nine years without a 
recommended decision. Any contrary interpretation would allow the Joint 
Board to

[[Page 67105]]

indefinitely delay Commission action. Congress could not have intended 
that result while requiring that that the Commission act promptly once 
the Joint Board issues a recommended decision.
    49. Section 410(c) also requires that the Commission ``afford the 
State members of the Joint Board an opportunity to participate in its 
deliberations'' on ``decisional action[s]'' regarding matters that have 
been referred to the Joint Board. To the extent this provision can be 
read as applying to this proceeding, the notice and comment periods and 
permit-but-disclose rules governing this proceeding have provided 
plenty of opportunity for the state members of the Joint Board to voice 
their opinions on allowing electing carriers to opt out of the category 
relationships freeze.
    50. Implementation. To ensure that updated category relationships 
are properly reflected in incentive regulation rates, we require each 
electing carrier that chooses to update its frozen category 
relationships to conduct two 2018 cost studies--one based on frozen 
category relationships and one based on unfrozen relationships. To 
determine its incentive regulation rates for BDS, the carrier shall 
divide the BDS costs under the revised 2018 cost study by the BDS costs 
determined in the original 2018 cost study using frozen category 
relationships to develop a rate adjustment factor. The carrier shall 
apply this factor to the initial (prior to adjustments for the X-
factor, inflation factor, and any exogenous cost changes) rates 
established in accordance with the procedures explained elsewhere in 
this Order to set the carrier's initial rates for lower capacity 
circuit-based BDS under incentive regulation. The carrier shall adjust 
these rates for the X-factor, inflation factor, and any exogenous cost 
changes and may adjust these rates to reflect any pricing flexibility 
allowed among services within the special access basket. Carriers that 
elect incentive regulation effective as of July 1, 2020 will follow 
these directions, except that if an electing carrier chooses to update 
its frozen category relationships it will conduct two 2019 cost studies 
and use the results of these cost studies to complete the steps 
described in this paragraph.
    51. Unfreezing separations category relationships could result in a 
carrier recovering the same costs through higher BDS rates and 
unchanged switched access recovery. Incorporating updated category 
relationships into the 2018 cost study, or 2019 cost study for carriers 
electing the January 1, 2020 effective date, will change the costs 
assigned to the switched access category just as it will for BDS. The 
USF/ICC Transformation Order capped all interstate switched access 
rates at 2011 levels, subject to specified reductions over time. We do 
not permit electing carriers to increase their switched access rate 
caps. Unless cost reductions to interstate switched access are 
reflected in a carrier's revised base period revenue amount, a carrier 
will double-recover costs through its interstate switched access rates. 
To account for this effect, an electing carrier that unfreezes its 
separations category relationships must calculate the difference 
between the interstate switched access costs in the two 2018 cost 
studies. Each electing carrier must adjust its base period revenue by 
an amount equal to the interstate switched access cost difference 
between the two 2018 cost studies before applying the annual 5% 
reduction to the base period revenue. This is the process that the 
Commission employed in the Eastex proceeding. Carriers electing a 
January 1, 2020 effective date will do the same with 2019 cost studies.
    52. An electing carrier that participates in the NECA interstate 
switched access tariff must report to NECA the interstate switched 
access cost difference between the two 2018, or, 2019, studies and its 
revised base period revenue amount. These procedures protect both 
carriers and customers from any unintended consequences of moving BDS 
from rate-of-return regulation to incentive regulation. Any electing 
carrier that opts out of the category relationships freeze shall 
include, in its 2019 or 2020, respectively, annual filing, workpapers 
showing how it implemented the measures set forth above. This does not 
eliminate the need for an electing carrier to adjust its Eligible 
Recovery for any other instances of double recovery. Finally, we 
require NECA to reflect these base period revenue changes in its 
settlement procedures.
    53. We find that these measures provide a reasonable and not unduly 
burdensome method for ensuring that costs shifted from an electing 
carrier's unfreezing of its category relationships are carried forward 
into its incentive regulation rates for BDS without any double-
recovery. Each electing carrier that chooses to update its category 
relationships will necessarily need to perform detailed calculations to 
implement that choice. We minimize the associated burdens by specifying 
that the electing carrier adjust its business data service rates to 
account for the changes in the category relationships using the 2018 
cost study, or the 2019 cost study for carriers electing to convert 
effective July 1, 2020, that this Order requires of all electing 
carriers and therefore will impose only a minimal incremental burden on 
electing carriers.
3. Special Access Basket, Categories, and Subcategories
    54. We retain the special access basket, categories and 
subcategories, and the attendant rules governing the allowed annual 
rate adjustments for price cap regulation for incentive regulation. 
Commenting parties support this approach. The category and sub-category 
requirements limit the degree to which a carrier can raise rates for 
particular groups of services in any given year. Each electing carrier 
that elects incentive regulation must set its initial price cap indexes 
for the special access basket and associated service band indices at 
100 and use the rate adjustment rules for price cap carriers contained 
in Sec. Sec.  61.45 to 61.48 of our rules, as appropriate, to reflect 
the prescribed productivity factor, the inflation factor, and any 
required exogenous cost adjustment in the price cap index. These steps 
will ensure that the carrier's actual price index does not exceed its 
price cap index, and that its service band indexes for each category or 
subcategory do not exceed their upper limits.
4. Productivity X-Factor and Measure of Inflation
    55. Consistent with the price cap BDS Order, we adopt 2.0% as the 
productivity factor (X-factor) and the Gross Domestic Product-Price 
Index (GDP-PI) as the inflation factor used to adjust price cap indexes 
in the first year of incentive regulation, and each year thereafter. As 
proposed in the NPRM, we decline to incorporate a consumer productivity 
dividend adjustment into the X-factor.
    56. Background. Under price cap regulation, the price cap index 
seeks to replicate the beneficial cost-reducing incentives of a 
competitive market by limiting the prices that a price cap LEC may 
charge for services. After price cap carriers set initial price cap 
indexes based on going-in rate levels, these indexes are adjusted 
annually based primarily on the productivity factor (X-factor) and 
inflation factor (GDP-PI) as well as any exogenous cost adjustments. 
The X-factor adjustment is intended to capture the amount by which 
incumbent LECs could be expected to outperform economy-wide 
productivity gains and to pass those gains on to consumers in the form 
of lower prices. In the past, the Commission has also

[[Page 67106]]

applied a consumer productivity dividend adjustment to the X-factor to 
capture for ratepayers a portion of the benefits from expected 
productivity gains exceeding those incumbent LECs had historically 
achieved under rate-of-return regulation. The inflation factor is 
intended to adjust prices to capture economy-wide rates of inflation. 
Historically, the Commission has used the U.S. Department of Commerce's 
Bureau of Economic Analysis's GDP-PI, a chain-weighted index of overall 
national prices, as the inflation factor.
    57. In the BDS Order, the Commission adopted for price cap carriers 
a 2.0% productivity-based X-factor and retained GDP-PI as the inflation 
factor but declined to apply a consumer productivity dividend 
adjustment. The Commission found that 2.0% reflects its best estimate 
of the productivity growth that incumbent LECs will experience in the 
provision of BDS services relative to productivity growth in the 
overall economy. To determine the X-factor, the Commission applied a 
total factor productivity methodology, which measures the relationship 
between the output of goods and services to inputs. The Commission 
applied this methodology to the U.S. Bureau of Labor Statistics' 
Capital, Labor, Energy, Materials, and Services (KLEMS) dataset for the 
broadcasting and telecommunications industries for estimating incumbent 
LEC productivity and input prices. The Commission used these data to 
establish a zone of reasonable X-factor estimates based on four 
relevant time periods, and from this zone selected an X-factor of 2.0%. 
The Commission also retained GDP-PI as the measure of inflation. 
Accordingly, price cap LECs adjust their price cap indexes annually by 
the 2.0% X-factor and GDP-PI to ensure just and reasonable rates for 
these BDS services.
    58. Discussion. Consistent with the BDS Order, we adopt 2.0% as the 
productivity factor electing carriers will use to adjust their price 
cap indexes. In so doing, we reaffirm the Commission's finding in the 
BDS Order that the 2.0% X-factor represents our best estimate of BDS 
productivity gains or losses relative to the general economy and is a 
reasonable productivity factor with which to adjust price cap indexes 
for purposes of incentive regulation.
    59. WTA opposes adoption of the 2.0% productivity X-factor for 
incentive regulation, contending that ``given increasing broadband-
related labor costs and the fact that the typical WTA member has only 
10-to-20 employees, it does not appear possible for many small A-CAM 
and Alaska Plan companies to achieve productivity gains of two percent 
each year.'' We believe, however, that the 2.0% X-factor is the most 
reliable estimate of BDS productivity growth for carriers generally, 
including smaller carriers. The 2.0% X-factor was the product of an 
economically-sound total factor productivity methodology, consistent 
with past Commission practice, using the only reliable and internally 
consistent dataset in the record in the BDS proceeding, KLEMS, for 
measuring incumbent LEC productivity and input prices. WTA focuses on 
one type of input price--labor costs--for which KLEMS captures 
telecommunications industry trends, including broadband-related trends, 
for carriers of all sizes. WTA implicitly assumes that its members' 
labor costs will rise more quickly (or fall more slowly) than price cap 
carriers' labor costs. Even if we were to accept this assumption, WTA 
does not address whether other factors affecting BDS productivity 
growth, such as changes in BDS demand, offset any disparity in the rate 
of change in labor costs.
    60. The Commission sought comment on alternative X-factors for 
electing carriers but received no data or other information that would 
allow us to calculate an alternative X-factor. And while WTA provides 
anecdotal data on a selected portion of its members' costs, it has 
``not submitted the company-specific input price and output data that 
we would need to quantify'' the extent to which its members' 
productivity growth and ability to recover costs deviate from the 
industry average. In the BDS Order, the Commission declined to adjust 
the X-factor to account for conflicting and unquantifiable evidence in 
the record that the KLEMS dataset overstated or understated 
productivity growth. And the Eighth Circuit Court of Appeals upheld the 
Commission's decision not to adjust the KLEMS dataset ``in light of the 
conflicting evidence on what sort of adjustment was appropriate.'' In 
these circumstances, we see no valid basis on which to adopt an 
alternative X-factor.
    61. Notwithstanding WTA's concerns, we believe that most electing 
carriers will be able to achieve the 2.0% X-factor. Petitioners support 
our use of a 2.0% X-factor, even though they state that rate-of-return 
carriers may generally achieve lower productivity growth than price cap 
carriers, and TDS Telecom endorses the regulatory framework adopted in 
the BDS Order that includes a 2.0% X-factor. Given that rate-of-return 
carriers receiving fixed support are not required to move to incentive 
regulation, carriers unable to achieve the 2.0% X-factor will avoid any 
harm by simply not electing incentive regulation. The voluntary nature 
of incentive regulation therefore renders moot any risk involved in 
attempting today to determine what an appropriate productivity factor 
would be for this group of carriers. Carriers themselves are in the 
best position to determine whether they will benefit from incentive 
regulation and we have afforded them that flexibility.
    62. Inflation Factor. We adopt GDP-PI as the inflation factor as 
proposed in the NPRM. No commenter opposed this proposal. As we found 
in the BDS Order, there is no alternative measure of inflation 
presented in the record that is as accurate as GDP-PI in the medium- 
and long-term and that is not susceptible to carrier influence or 
manipulation. Accordingly, electing carriers will adjust their price 
cap indexes by GDP-PI during the first year of incentive regulation, 
and each year thereafter.
    63. Consumer Productivity Dividend. We decline to incorporate a 
consumer productivity dividend adjustment into the X-factor adopted in 
this Order. No commenter opposed this proposal in the NPRM. In the BDS 
Order, the Commission found that the 2.0% X-factor reflected all 
anticipated future BDS productivity growth and declined to include a 
consumer productivity dividend adjustment in the X-factor. For similar 
reasons, and to avoid regulatory disparity with price cap regulation, 
we decline to include a consumer productivity dividend in the X-factor 
for incentive regulation.
5. Exogenous Costs
    64. After reviewing the record, we adopt the proposal in the NPRM 
that exogenous costs be allocated based on a ratio of BDS revenues to 
total revenues from all regulated services and an electing carrier's 
universal service support payments. Exogenous costs are those costs 
that are beyond the control of the carrier, as determined by the 
Commission. We agree with Petitioners that allowing exogenous cost 
adjustments is appropriate. When costs are beyond the carrier's 
control, they are often of a nature that is not reflected in the 
measurement of productivity. It is therefore appropriate to allow 
adjustments to reflect exogenous events upon Commission approval.
    65. We reject Sprint's proposal that any exogenous cost changes 
should be limited by applying the ratio of BDS revenues to total 
enterprise revenues. Sprint does not define ``total enterprise 
revenues'' or explain why it would result in a more relevant comparison 
to BDS revenues than using total regulated

[[Page 67107]]

revenues, and we find it too expansive for use here. The exogenous 
costs being allocated are those associated with regulated services as 
determined by the part 64 allocation rules for assigning costs 
associated with non-regulated activities. Thus, we find that regulated 
BDS revenues compared to all regulated revenues and related support 
receipts is the most relevant relationship to allocate a portion of 
exogenous costs related to regulated services to BDS.
    66. Finally, we will not require electing carriers to incur the 
costs of filing a short form tariff review plan as price cap carriers 
are required to do. In recent years, the Bureau has waived the 
requirement that price cap LECs file the short form, finding that it 
would provide little value to the Commission, industry, and consumers. 
We find that the short form tariff review plan would also provide 
little value to the Commission, industry, and consumers in conjunction 
with incentive regulation for electing carriers. We accordingly do not 
require its filing.
6. Low-end Adjustment
    67. We adopt the low-end adjustment mechanism proposed in the NPRM 
to provide an appropriate backstop to ensure that electing carriers are 
not subject to protracted periods of low earnings. A below-normal rate 
of return over a prolonged period could threaten a carrier's ability to 
raise the capital necessary to provide modern, efficient services to 
customers. The low-end adjustment mechanism will permit a one-time 
adjustment to a single year's BDS rates to avoid back-to-back annual 
earnings below a set benchmark. This course should allow electing 
carriers to meet their existing obligations to debtholders and attract 
sufficient capital while continuing to provide BDS.
    68. We reject Sprint's argument that any low-end adjustment should 
be allowed only if a sharing mechanism is adopted for a carrier's 
earnings. A sharing mechanism is a process that allocates a portion of 
a carrier's excess earnings under price cap regulation to the consumer 
through a one-time reduction in a carrier's price cap index. The 
Commission eliminated the sharing mechanism for price cap carriers in 
1997. There is no causal link between the low-end adjustment mechanism 
and earnings sharing, and the two have not previously been tied 
together in other incentive regulation programs. The BDS Order allowed 
a low-end adjustment without a sharing mechanism and Sprint provides no 
convincing basis for diverging from that approach.
    69. We use 100 basis points below the authorized rate of return for 
rate-of-return carriers as the benchmark for establishing the low-end 
adjustment as we did in the BDS Order. This approach will approximate 
the transition to the authorized rate of return of 9.75%. A carrier 
asserting a claim for a low-end adjustment bears the burden of showing 
that its return is below the prescribed benchmark and that the revised 
rate(s) are consistent with the benchmark.
    70. Finally, as the Commission proposed in the NPRM, electing 
carriers that exercise downward pricing flexibility (for example, by 
entering into a contract tariff with a customer), or use generally 
accepted accounting principles (GAAP) rather than the part 32 Uniform 
System of Accounts, will be ineligible for a low-end adjustment. No 
party has opposed this limitation to the availability of the low-end 
adjustment mechanism. This limitation is consistent with that imposed 
in the BDS Order, and we see no reason to diverge from that approach 
here.
7. Pricing Flexibility for Lower Capacity TDM Transport and End User 
Channel Termination Services
    71. We adopt the proposal in the NPRM to grant pricing flexibility 
to electing carriers for their lower capacity TDM transport and end 
user channel termination services under incentive regulation similar to 
the pricing flexibility the Commission granted to price cap carriers' 
lower capacity TDM end user channel terminations in areas deemed non-
competitive. We agree with commenters that permitting electing carriers 
to offer contract tariff pricing and volume and term discounts will 
benefit both carriers and customers and will promote competition in 
electing carriers' BDS markets. Requiring that electing carriers also 
maintain generally available tariff rates for their lower capacity TDM 
transport and end user channel termination services will ensure that 
the rates of customers that do not negotiate contract-based or term and 
volume discounted rates for such services will continue to be just and 
reasonable. Additionally, we condition this grant of pricing 
flexibility on the requirement that electing carriers remove contract 
tariff demand from the relevant incentive regulation basket for 
purposes of determining their price cap indexes and actual price 
indexes, which will ensure that those customers that do not negotiate 
contract tariffs will not cross-subsidize customers that do.

C. Removal of Ex Ante Pricing Regulation of Lower Capacity TDM End User 
Channel Termination Services in Areas Deemed Competitive

    72. As part of our framework for moving electing carriers to less 
intrusive pricing regulation of their BDS offerings, we adopt a 
competitive market test to identify those areas served by electing 
carriers where competition or potential competition for lower speed 
(DS3 or less) TDM end user channel termination services justifies 
removing ex ante pricing regulation for those services. In adopting a 
competitive market test for electing carriers, we are guided by the 
Commission's previous work in developing a competitive market test for 
price cap carriers' BDS offerings. At the same time, we are persuaded 
by commenters that argue that the competitive market test should rely 
on evidence of competition in the study areas served by electing 
carriers.
    73. We adopt a competitive market test for electing carriers that 
is based on a modified version of the second prong of the BDS Order 
competitive market test, which uses publicly available Form 477 data to 
measure whether a cable operator offers a minimum of 10/1 Mbps in 75% 
of census blocks in a study area served by a price cap provider. We 
will apply this test in electing carriers' study areas, and in those 
study areas deemed competitive by the competitive market test, we 
remove ex ante pricing regulation of lower capacity TDM end user 
channel terminations.
    74. We are also constrained in the development of a competitive 
market test by the limited availability of data in the record regarding 
competition for BDS services in the study areas served by eligible 
rate-of-return carriers. We decline, however, to adopt any of the 
options we proposed in the NPRM for a competitive market test that 
would require a new data collection. Commenters strongly oppose a new 
information collection, arguing it would be burdensome and unnecessary. 
We agree. A new information collection for electing carriers would be 
especially burdensome given their relatively smaller size. The 
Commission similarly declined to require a new data collection even for 
larger price cap carriers in the BDS Order, as part of deciding to 
update the price cap competitive market test results, finding that the 
burdens would outweigh the benefits, and the burden of collecting the 
information would be considerable. Additionally, the burdens associated 
with an information collection could reduce incentives for eligible 
carriers to elect incentive regulation, counter to

[[Page 67108]]

our goals. A simple, administrable test will ensure more resources are 
available for competition and deployment in electing carriers' study 
areas.
    75. In the NPRM, we sought comment on whether to include lower 
capacity TDM transport services in the competitive market test. Given 
the lack of data in our record, we find that including such transport 
services would be unworkable at this time. We therefore decline to 
adopt a competitive market test for lower capacity TDM transport in 
electing carriers' study areas.
1. Criteria for a Competitive Market Test
    76. In this section, we address appropriate criteria for a 
competitive market test for electing carriers' lower speed TDM end user 
channel termination services, including the appropriate product market, 
number of competitors in a market, and geographic market.
    77. Product market. When defining a product market, to ensure our 
action affects an appropriate group of services, we look to which 
services are sufficiently similar to reasonably be considered 
substitutes. We find the Commission's analysis of the relevant market 
in the BDS Order to be applicable to the current situation, and, 
therefore find the relevant product market includes circuit- and 
packet-based business data services, legacy hybrid-fiber-coaxial, and 
copper. For the same reason, we find that the product market also 
includes unbundled network elements, dark fiber, and fixed wireless 
services and facilities used to provision BDS. These services play 
competitive roles in BDS markets. While the Commission did not find 
best-efforts services to be close substitutes for all types of BDS in 
the BDS Order, we acknowledge here as the Commission did there that 
they nonetheless place a degree of competitive pressure on BDS 
suppliers, particularly for lower capacity services. Further, we 
believe a best-efforts supplier with its own ubiquitous wireline 
network has strong incentives to supply BDS to locations where it 
currently does not, and all the more so to the extent that an existing 
supplier is charging supra-competitive prices. We also continue to 
expect that suppliers exercising any short-term market power generally 
will be constrained by supply-side substitution over the medium term 
(3-5 years) in locations where other providers, such as cable 
companies, offer best-efforts or other telecommunications services over 
their own facilities. We therefore find that the product market 
analysis that the Commission conducted for price cap areas in the BDS 
Order applies equally to electing carrier areas.
    78. Competition Within a Study Area. We must also determine the 
appropriate level of competition for any competitive market test. The 
Commission, in the BDS Order determined that a ``combination of either 
one competitive provider with a network within a half mile from a 
location served by an incumbent LEC or a cable operator's facilities in 
the same census block as a location with demand will provide 
competitive restraint'' more effectively than legacy regulation. The 
Commission decided that a ``nearby'' BDS competitor provides sufficient 
competition after analyzing three findings: (1) The geographic scope 
within which a likely BDS provider can realistically compete with an 
incumbent LEC; (2) a finding that one competitor in addition to the 
incumbent LEC provides a reasonable degree of competition; and, (3) the 
benefits of competition outweigh the potential unintended costs of 
regulation.
    79. We do not have data showing where there is a competitive 
provider with a network half a mile from a location served by carriers 
eligible to elect the lighter touch regulatory framework we adopt 
today. We do, however, have Form 477 data which is organized on a 
census block-level. We can therefore identify the census blocks served 
by an electing carrier where cable broadband services are also 
deployed. We find it appropriate to use cable broadband in the census 
blocks that comprise the electing carrier's study area as a proxy for 
competition because, as the Commission previously determined, ``cable 
companies have focused investment on building fiber networks for 
higher-bandwidth Ethernet services, which is enabling them to overcome 
limitations of traditional coaxial-based cable systems that cannot meet 
higher bandwidth demand.'' Cable providers have shifted to offering 
``higher (and more competitive) bandwidths. At the same time, cable 
operators' best efforts (and Ethernet over Hybrid Fiber-coaxial 
(EoHFC)) services continue to compete effectively against incumbent 
LECs' lower speed TDM services. The Commission also found that because 
cable operators have ``aggressive[ly] deploy[ed]'' it was ``highly 
likely the cable-only measure found in the Form 477 data will capture 
the vast bulk of additional deployments; it is likely that most non-
cable competitive extension of business data services networks will 
occur where cable is also deploying or has already deployed.'' This 
rationale is equally applicable to electing carriers' provision of BDS 
in their study areas.
    80. As the Commission found in the BDS Order, and as the Eighth 
Circuit Court affirmed, a single wireline competitor provides a 
substantial competitive effect by disciplining rates, terms, and 
conditions to just and reasonable levels. In industries with large sunk 
costs, such as wireline providers, the largest impact occurs with the 
entry of a second provider, with added benefits from additional 
competitors declining thereafter. This is because the presence of a 
nearby provider is likely to prevent or mitigate substantial abuse of 
market power, either through lack of innovation or high prices. This 
finding is not challenged in the record. Consistent with the analysis 
in the BDS Order, we find that the effect of a single BDS competitor is 
sufficient to limit anticompetitive behavior, and that the presence of 
a cable network offering a minimum of 10/1 Mbps broadband service in 
75% of the census blocks in a study area is sufficient to deem a study 
area competitive for the purposes of the competitive market test for 
electing carriers.
    81. Geographic Market. We find that an electing carrier's 
individual study area is the appropriate geographic market measure for 
the competitive market test because it is administratively feasible but 
is granular enough to capture reasonably similar competitive 
conditions. A study area is a geographic segment of a rate-of-return 
incumbent LEC's telephone operations that generally corresponds to the 
carrier's entire service territory within a state. Incumbent LECs 
determine eligibility for high-cost universal service support at the 
study area level, perform jurisdictional separations at the study area 
level and generally tariff their rates at the study area level. As a 
result, the Commission and the industry have substantial experience 
administering rules on a study area basis. What's more, a study area is 
granular enough to capture reasonably similar competitive conditions. 
Rate-of-return study areas vary in size but are significantly smaller 
than metropolitan statistical areas and generally smaller than counties 
and are therefore sufficiently granular to assess competitive 
conditions. Given their mostly rural nature, the average size of a 
rate-of-return study area is 992.82 square miles, compared to the 
average county, 1,180.40 square miles, and the average metropolitan 
statistical area, 2,720.95 square miles. Adopting study areas as the 
geographic market also avoids risk of competitive overlap by, for 
example, a rate-of-return study area

[[Page 67109]]

crossing county lines that are deemed competitive and noncompetitive.
    82. We also reject other proposals in the record, including 
suggestions to build a competitive market test for electing carriers 
that uses counties or census blocks as the relevant geographic market. 
We agree with Smithville that the selection of counties for use in the 
price cap competitive market test was ``a well-documented effective 
approach for competitive area evaluation for larger price cap carriers 
that operate service areas dimensioned at statewide levels but does not 
work well for carriers that have sub-county service areas.'' To the 
extent such proposals seek to assess competition in electing carriers' 
study areas based on competition elsewhere within the county, we reject 
that proposition--any competitive market test must be based on the 
competitive conditions each carrier faces, not those another carrier 
faces somewhere else in a county. Additionally, some study areas cross 
county lines. Using counties would potentially require us to subdivide 
study areas along county boundaries, which would involve unreasonable 
administrative burdens and could lead to varying treatment of a single 
study area depending on the counties in which it is located.
    83. In response to the 2017 Public Notice, Smithville argues that 
using census blocks to assess competition in electing carriers' study 
areas would be a better approach. We decline to adopt census blocks as 
a geographic measure for our competitive market test. The Commission 
previously found that census blocks or census tracts are too numerous 
to efficiently administer. Additionally, they can be impacted by 
changes in demand as small as a single building and could lead to a 
patchwork of different regulations that vary from census block-to-
census block, or even building-to-building. Study areas, on the other 
hand, are more administratively feasible because there are a limited 
number of study areas eligible to elect our BDS regulatory framework.
2. Competitive Market Test Methodology
    84. In this section, we describe the specific structure of the 
electing carriers' competitive market test we adopt for electing 
carriers' lower capacity TDM end user channel termination services. In 
determining whether electing carriers with lower capacity TDM-based end 
user channel termination services (at a DS3 or below), face sufficient 
competition to allow competition, rather than ex ante pricing 
regulation, to ensure rates are just and reasonable, we adopt a 
competitive market test modeled on a modified version of the second 
prong of the existing price cap competitive market test using data from 
census blocks served by electing carriers. The second prong of the 
price cap competitive market test uses Form 477 data to measure whether 
a cable operator offers a minimum of 10/1 Mbps broadband service in 75% 
of the census blocks in the price-cap service areas within a county. 
Having decided that we will use only existing data to gauge competition 
in the study areas served by an electing carrier, for purposes of the 
electing carriers' competitive market test, if a cable operator or 
other competitive provider offers a minimum of 10/1 Mbps broadband 
service in 75% of the census blocks in an electing carrier's study 
area, we will deem the study area competitive.
    85. We set 10 Mbps downstream and 1 Mbps upstream as minimum 
thresholds for a cable operator's service to be included in the 
competitive market test. Setting a minimum threshold ensures that the 
networks that supply these services are reasonable proxies for the type 
of network facilities needed to deliver BDS. As we observed in the BDS 
Order, ``when a cable provider is capable of providing internet 
broadband service within any census block, then generally they have the 
incentive to make the incremental investment necessary to serve 
locations with BDS demand in that census block, especially over the 
medium term.'' Cable operators are continuing to invest in and upgrade 
the capacities of their networks, which give us reasonable assurance 
that these networks will be capable of providing BDS competition over 
the short- to medium-term. Additionally, the 10/1 Mbps threshold is 
also the threshold that rate-of-return carriers accepting fixed A-CAM 
support are required to offer to funded locations.
    86. Using Form 477 data for electing carriers' study areas is 
administratively simple for both the Commission and electing carriers. 
We already regularly require providers to update their Form 477 
submissions, so we do not need to undertake a new data collection. 
Another benefit of the new electing carriers' competitive market test 
is the incorporation of the 78 rate-of-return-only counties that cannot 
be analyzed using the price cap competitive market test. Had we decided 
to allow electing carriers to opt-in to the price cap competitive 
market test, the competitive status of electing carriers serving any of 
those 78 rate-of-return-only counties would have been unresolved 
because they were not included in the original analysis.
    87. We recognize that under the electing carriers' competitive 
market test, a relatively small percentage of electing carriers' study 
areas will be deemed competitive at this time. The current result of 
the competitive market test we adopt today for rate-of-return carriers 
receiving fixed support is consistent with the rural nature and the 
nascent deployment of cable in many eligible carriers' study areas. We 
expect the number of electing carriers' study areas deemed competitive 
by the competitive market test will increase as competition grows and 
cable companies expand their reach. This administratively simple 
competitive market test ensures that all carriers are included in the 
electing carriers' competitive market test and will have an opportunity 
to be deregulated as competition develops.
3. Declining To Use the Results of the Price Cap Competitive Market 
Test
    88. Notwithstanding Petitioners' and some other commenters' request 
that we use the results of the price cap competitive market test 
adopted by the Commission in the BDS Order to determine where ex ante 
pricing regulation should be removed from electing carriers' lower 
capacity TDM end user channel termination services, we decline to do 
so. In arguing that the Commission should use the BDS Order price cap 
competitive market test for electing rate-of-return carriers, some 
commenters claim ``the same marketplace analyses the Commission 
undertook for price cap carriers apply equally to BDS provided by 
model-based rate-of-return carriers.'' While using the results of the 
existing competitive market test to determine whether an area served by 
an electing carrier is competitive would be fast, no data in the record 
support that approach. In fact, the result of the competitive market 
test we adopt for electing carriers, which results in very few study 
areas being deemed competitive, underscores our finding that 
application of the price cap competitive market test results to 
electing carriers--which would result in far more electing carriers' 
study areas being deemed competitive--would not accurately measure 
competition in the geographic areas served by rate-of-return carriers 
receiving fixed support.
    89. The BDS Order relied upon the largest information collection in 
the history of the Commission to analyze and determine the competitive 
nature of price cap carrier study areas. Even if a county contained 
both price cap and rate-of-return study areas, the Commission's 
analysis only included

[[Page 67110]]

the price cap study area. The Commission created the price cap 
competitive market test after a thorough review of the 2015 Collection, 
Form 477 data, and established the specific test metrics based upon an 
informed knowledge of the level of competition that existed and was 
necessary to protect consumers in the absence of regulation. 
Petitioners, however, offer no data showing the extent of BDS 
competition in areas served by rate-of-return carriers that receive 
fixed support. Instead, they argue that the level of competition on a 
county-by-county basis for price cap carriers' lower capacity TDM-based 
BDS offerings is comparable to the level of competition for lower 
capacity TDM-based BDS offerings of rate-of-return carriers that 
receive fixed support. The principal support Petitioners offer for this 
assertion is a study that purports to demonstrate that price cap rural 
areas immediately proximate to certain A-CAM study areas exhibit 
sufficiently similar characteristics that we should include A-CAM study 
areas in the same competitive market test that we used for price cap 
carriers. We find the Petitioners' study unpersuasive.
    90. The study suffers from several methodological defects. First, 
the study is not based on a representative sample of electing carriers' 
study areas. Instead, it relies solely on Consolidated Communications' 
rate-of-return study areas. We are doubtful, for example, that the 
Consolidated study areas are a good proxy for the Alaska rate-of-return 
carriers that are eligible to elect our new regulatory framework. 
Second, two of the study's principal metrics (population and housing 
density) are unlikely to be the critical drivers of competitive BDS 
deployment.
    91. Additionally, in some instances the study compares non-
urbanized price cap areas with areas served by rate-of-return carriers 
that receive fixed support that include urbanized areas. These areas 
are not comparable. At least some of the counties included in the 
study's comparison were deemed non-competitive by the price cap 
competitive market test. Inclusion in the price cap competitive market 
test of A-CAM areas in these instances would have no effect on the 
regulatory status of these study areas. The study does not directly 
compare study areas with high cable presence with competitive counties 
and study areas with low cable presence with non-competitive counties, 
as would be expected if the study was trying to show similarities.
    92. The study also compares the percentage of census blocks with 
cable broadband availability between price cap and nearby A-CAM areas 
and claims that, on average, ``the percentage of Census blocks in 
Consolidated tracts with cable service (21%) is similar to the 
surrounding rural price cap tracts (28%).'' But the study's use of 
average percentages obscures wide variations in percentage cable 
broadband deployment. For price cap study areas, cable broadband 
deployment was found to be 3.88% to 68.68%. For A-CAM study areas, 
broadband deployment in areas varied from 0.00% to 89.60%. The study 
further attempts to compare price cap areas with nearby A-CAM areas by 
claiming that the differences in the percentage of cable broadband 
deployment between the two sets of areas are small, ``only 15 
percentage points.'' This is not small.
    93. The study also does not state whether it limited its analysis 
of cable deployment in rate-of-return study areas to those deployments 
offering a minimum of 10/1 Mbps. The study may have included 
residential cable deployments at speeds lower than the threshold the 
Commission established for the price cap competitive market test. Any 
such deployments should not be included in a comparison of price cap 
and nearby A-CAM areas.
    94. We are also unable to rely on the conclusions in the 
Petitioners' study since it is based on a misplaced reliance on 
inaccuracies inherent in the structure of the price cap competitive 
market test--inaccuracies the Commission acknowledged when it adopted 
the competitive market test in the BDS Order. In the BDS Order, the 
Commission conceded that its county-based competitive market test 
unavoidably included a relatively small number of areas that would be 
inappropriately regulated or inappropriately deregulated. It explained 
that the only competitive market test that would be free of such 
inaccuracies would be one that would be run at a building level--with 
over a million buildings with BDS demand, an administratively 
unworkable option. It adopted percentage thresholds for both prongs of 
the competitive market test and employed certain statistical tools to 
ensure those thresholds were set at levels that would minimize 
inaccuracies. It further reasoned that competitive options would become 
available for many of these areas in the short- to medium-term given 
the dynamic nature of the BDS marketplace.
    95. The Petitioners' study attempts to compare A-CAM areas to some 
of the very price cap areas most likely to contain these inaccuracies 
and to argue that these inaccuracies justify inclusion of rural A-CAM 
areas in the price cap competitive market test. Extrapolating from the 
characterization of peripheral parts of price cap study areas to A-CAM 
areas is likely to exacerbate these inaccuracies. And unnecessarily so, 
since the competitive market test we adopt offers a simple way of 
estimating competition in A-CAM study areas. Further, these are areas 
the study concedes typically lack even the most basic evidence of BDS 
competition. Areas where there is little evidence of competition are 
also likely areas where there is little to no demand for BDS.
    96. Given these methodological and conceptual flaws, we conclude 
that the Petitioners' study fails to establish the comparability of 
price cap and nearby A-CAM areas or provide a reasonable basis on which 
to include A-CAM areas in the price cap competitive market test. We 
therefore decline to apply the results of the price cap competitive 
market test to electing carriers' serving areas.
4. Updating Competitive Market Test Results
    97. Consistent with the BDS Order competitive market test, we 
eliminate ex ante pricing regulation of circuit-based end user channel 
terminations at or below a DS3 level in study areas deemed competitive 
by the electing carriers' competitive market test. We direct the Bureau 
to release a Public Notice that lists the results of the competitive 
market test, and to provide the information on the Commission's 
website. We will re-run the electing carriers' competitive market test 
every three years to assess whether any additional electing carriers' 
study areas meet the 75% threshold. This will identify any additional 
electing carriers' study areas that should be deemed competitive. We 
believe a three-year timeframe balances the need to ensure the electing 
carriers' competitive market test remains accurate and the Commission's 
desire to avoid disrupting contracts and burdening carriers with overly 
frequent updates. The sunk and irreversible cost of providing business 
data services and deploying a network represents the biggest barrier to 
entry for providers. Once the barrier is overcome, the marginal cost of 
operating is low, so it is unlikely that competition will exit. Thus, 
electing carriers' study areas deemed competitive will not be 
reassessed.
    98. To avoid confusion from both carriers and businesses stemming 
from updates from the price cap competitive market test and the 
electing carriers competitive market test, we direct the Wireline 
Competition Bureau to re-run the three-year updates for both the BDS 
Order price cap competitive market test,

[[Page 67111]]

and the electing carriers competitive market test concurrently. Thus, 
the electing carriers' competitive market test will initially be re-run 
in 2020, at the same time as the BDS Order price cap competitive market 
test, to align the tests' timing. The re-running of these tests will 
coincide with the initial running of the test for carriers electing to 
convert to incentive regulation as of July 1, 2020. After that, both 
tests will be re-run every three years. This approach will make it 
easier for stakeholders to determine the regulatory status of price cap 
and rate-of-return BDS providers since the results will be published 
all at once and ease the burden on Commission resources. The Bureau 
shall release a Public Notice that lists newly competitive counties 
(for price cap areas) and study areas (for electing carriers' study 
areas) and shall also provide this information on the Commission's 
website. As with the BDS Order competitive market test, parties may 
challenge the results of the electing carriers' competitive market test 
by filing petitions for reconsideration or by seeking full Commission 
review through an application for review.
5. Removal of Ex Ante Pricing Regulation of Electing Carriers' Lower 
Capacity TDM End User Channel Termination Services
    99. We remove ex ante pricing regulation from electing carriers' 
lower capacity TDM end user channel termination services offered in 
study areas that are deemed competitive by the electing carriers' 
competitive market test. Such services are presumed to be subject to 
sufficient competitive pressure that removing this layer of regulation 
will not result in excessive rates. Removing this layer of regulation 
will reduce unnecessary regulatory burdens and will enable these 
carriers to contribute to BDS competition in their markets. Such 
services in such areas will be relieved of ex ante pricing regulation 
and detariffed in the same manner and with the same transition 
provisions as we adopt today for electing carriers' packet-based and 
higher capacity TDM BDS. As with packet-based and higher capacity TDM 
BDS, we continue to maintain our oversight over these TDM services 
pursuant to sections 201, 202, and 208 of the Act to ensure rates for 
these services remain just and reasonable. Lower capacity TDM transport 
and end user channel termination services in areas deemed 
noncompetitive by the competitive market test will continue to be 
subject to the incentive regulation and pricing flexibility we adopt 
today.

D. Ending Ex Ante Pricing Regulation for Electing Carriers' Packet-
Based and Higher Capacity TDM BDS Offerings

    100. We conclude that electing carriers' packet-based and higher 
capacity TDM-based BDS offerings above a DS3 bandwidth level (which 
includes both higher capacity TDM end user channel terminations and 
higher capacity TDM transport) should not be subject to ex ante pricing 
regulation and direct electing carriers to detariff these services 
following a transition period. Our decision to end ex ante pricing 
regulation for electing carriers' packet-based and higher capacity TDM 
BDS offerings will facilitate competition for and deployment of these 
packet-based and higher capacity TDM services and is consistent with 
the Commission's statutory obligation to ensure that rates are just and 
reasonable.
    101. In the BDS Order, after reviewing an extensive record, the 
Commission found that in price cap markets nationwide there was no 
compelling evidence of incumbent LEC market power for packet-based and 
higher capacity circuit-based BDS. Specifically, the record 
demonstrated that demand for these services was increasing, prices were 
declining, and competitive investment was growing significantly. The 
Commission also determined that the price cap BDS market for packet-
based and higher capacity TDM-based offerings had the characteristics 
of a bidding market such that even competitors that did not have pre-
existing facilities to serve a potential customer were nonetheless 
capable and willing to bid on requests for proposals by customers, 
particularly those with higher bandwidth needs.
    102. The record in this proceeding lacks the comprehensive and 
voluminous data collection available to the Commission in the price cap 
BDS proceeding. But, we recognize that re-creating such a similarly 
detailed data collection would have been more difficult for rate-of-
return carriers that receive fixed support, because they have vastly 
fewer resources to produce such information and the benefits of such a 
data collection would likely be far outweighed by its costs. Instead, 
we draw parallels where we can from our conclusions in the BDS Order to 
inform our analysis of the record in this proceeding.
    103. In the BDS Order, the fact that the Commission could not find 
compelling evidence to suggest market power in packet-based and higher 
capacity TDM BDS in price cap markets suggests that the same 
circumstances could exist in electing carriers' BDS markets. A variety 
of companies are investing in next generation networks, not legacy 
networks, to compete via different technologies, which is consistent 
with a lack of market power. Additionally, demand for high speed BDS 
exists nationwide. Customer requests for proposals (RFPs) are not 
restricted to price cap areas but seek proposals for service wherever 
they have demand. Thus, the characteristics of a bidding market that 
exist in price cap areas are also likely to be present in areas served 
by rate-of-return carriers that receive fixed support.
    104. Relatedly, there is evidence that the deployment of fiber and 
sales of packet-based BDS such as Ethernet continue to grow 
substantially and pervasively. Analysts report that, for the first 
time, fiber-connected commercial building penetration exceeded 50% in 
2017--the availability of optical fiber connectivity to large and 
medium size commercial buildings in the U.S. increased from 49.6% in 
2016 to 54.8% in 2017. In 2018, 98% of our nation's elementary and 
secondary school districts are served by fiber optic or other high 
speed connections. An analyst's equipment revenue forecast for 2017 to 
2022 projects that Ethernet access and aggregation will grow 9% 
annually. The record in this proceeding shows that these growth trends 
are also apparent in A-CAM carriers' served areas. For example, TDS 
Telecom, Great Plains, and Consolidated report a four-year average 
annual growth rate in Ethernet sales from December 2014 to 2017 of 
10.7%, 15.4%, and 38.3%, respectively. Over the same periods, these 
carriers report declines in legacy BDS in study areas that were similar 
to declines in legacy BDS in price cap areas. At the same time, 
consistent with the Commission's findings in the BDS Order, analysts 
report actual and forecasted growth in cable revenues, deployment and 
market share for small to national enterprise customers that are 
significantly contributing to overall growth and competition in the BDS 
market.
    105. There are other reasons to believe market power for packet-
based and higher capacity TDM business data services is not present in 
areas served by rate-of-return carriers that receive fixed support. The 
record shows that large customers have significant bargaining leverage 
over relatively smaller rate-of-return carriers that receive fixed 
support, limiting what the carriers may negotiate when bidding on 
contracts. For example, ex ante pricing regulation is unnecessary to 
protect large and powerful entities, such as wireless

[[Page 67112]]

carriers, that purchase large quantities of BDS.
    106. The Commission has repeatedly emphasized its preference for 
relying on competition instead of regulation. We seek to minimize the 
burdens of regulation while ensuring that rates and practices remain 
just and reasonable. The Commission previously identified packet-based 
services as the ``future of business data services'' that are also 
``readily scalable.'' While legacy TDM BDS is declining, carriers, 
including rate-of-return carriers that receive fixed support, are 
generally investing aggressively to deploy high speed networks in their 
study areas. The record shows growing demand for packet-based and 
higher capacity TDM BDS consistent with the Commission's findings in 
the BDS Order, and we find the record persuasive.
    107. Removing ex ante pricing regulation for packet-based and 
higher capacity TDM services, will also encourage innovation. As the 
Commission has previously found, the potential unintended costs of 
regulation are far greater for new services. The Commission has 
concluded that ex ante pricing regulation for these services should not 
be imposed even with ``insufficiently robust competition'' because it 
would be difficult to administer such complex regulations. We are 
keenly aware of the risk that heavy-handed regulation could discourage 
competitive investment which would have long-term negative consequences 
on competitive deployment over time.
    108. These considerations also apply to the study areas of rate-of-
return carriers that receive fixed support. Innovation does not stop at 
the borders of a price cap carrier's study areas. The record shows that 
all providers are accelerating their deployment of next generation 
packet-based services in response to customer demand. We find that the 
sensitivity of new and growing services to imprecise regulation, 
particularly rate regulation, is a factor in areas served by rate-of-
return carriers receiving fixed support as well as areas served by 
price cap carriers. For that reason, consistent with our decision in 
the BDS Order, we find that the costs and potential risks of ex ante 
pricing regulation for packet-based and higher capacity TDM business 
data services exceed the benefits and we therefore eliminate such 
regulation. This result provides regulatory parity between electing 
carriers and price cap carriers in their provision of packet-based and 
higher capacity TDM business data services which will benefit 
consumers.
    109. We eliminate ex ante pricing regulation on the provision of 
these services by electing carriers to hasten deployment of advanced 
services and because competition and the size of purchasers of these 
services is sufficient to protect consumers. We affirm, however, that 
the Commission retains authority under sections 201, 202, and 208 of 
the Act to ensure that packet-based and higher capacity TDM BDS rates 
and practices are just, reasonable, and not unreasonably 
discriminatory. The availability of the protections of sections 201 and 
202, and the importance of the formal fast-track complaint process of 
section 208, will provide sufficient protection against unreasonable 
rates and practices in this increasingly competitive market.

E. Implementation Issues

    110. We take a series of additional steps to ensure electing 
carriers will be able fully to implement the BDS regulatory framework 
we adopt today, including adopting deadlines for implementing incentive 
regulation, forbearing from cost assignment and jurisdictional 
separations rules, forbearing from Sec.  54.1305 reporting 
requirements, forbearing from section 203 tariffing requirements, 
allowing electing carriers to elect to use GAAP accounting instead of 
part 32 accounting, and adopting certain transitional timeframes to 
facilitate the detariffing of electing carriers' packet-based and 
higher capacity TDM offerings.
1. Effective Date of Elections
    111. We adopt the following requirements to implement voluntary 
incentive regulation for electing carriers. We adopt the proposal in 
the NPRM to make incentive regulation for electing carriers effective 
as of July 1, 2019 and add a second election date option for carriers 
that will be effective July 1, 2020. We agree with Petitioners that a 
January 1, 2019 effective date would be the least burdensome for 
carriers because cost studies are performed on a calendar year basis 
and ``would benefit customers and competition alike.'' However, a 
January 1, 2019 effective date is not practicable because the rules 
adopted in this Order contain new or modified information collection 
requirements triggering Paperwork Reduction Act review by the Office of 
Management and Budget (OMB), a process which takes approximately five 
months to complete. A January 1, 2019 effective date would also provide 
insufficient time for electing carriers in the traffic-sensitive NECA 
pool to remove their BDS offerings from the pool. Our rules require 
that annual access charge tariff filings be filed with a scheduled 
effective date of July 1. As such, a July 1 effective date is 
consistent with current tariffing procedures and will simplify the 
implementation of the changes adopted in this Order.
    112. Similarly, we adopt July 1 as the effective date for any 
future election. July 1 is the most efficient effective date because 
allowing carriers accepting future offers of A-CAM support to set their 
initial rates on another date would add cost and complexity to the 
process. Petitioners suggest using a January 1 effective date but doing 
so would require an electing carrier to make an additional tariff 
filing beyond the required July 1 annual filing. NECA, and the 
Commission, would have to undertake their associated review of the 
tariff, and NECA would be required to conduct its mid-year cost studies 
for the remaining pool members, calculate support for existing members, 
reband, and undertake other steps it would not do otherwise. 
Additionally, a January 1 effective date would be based on the previous 
year's cost study. Relying on year-old data would undermine the 
validity of the tariff filings. It is possible that an electing carrier 
could prepare a cost study for only a portion of the current year and 
multiply the results of the study to estimate a year's data, but that 
approach creates additional burdens for carriers, complicates NECA's 
implementation, and would still not represent a fully accurate picture 
of the carrier's costs and demand. When considered together, we find 
that using July 1 as a deadline for setting initial rates in any future 
A-CAM offer is the most efficient and feasible approach.
    113. Electing carriers currently in the NECA pool are required to 
notify NECA by March 1, 2019 that they will not participate in the 
upcoming NECA traffic-sensitive tariff for their BDS offerings 
consistent with Sec.  69.3 of our rules. Similarly, NECA pool carriers 
that elect to convert to incentive regulation effective July 1, 2020, 
must notify NECA that they will not participate in the NECA traffic-
sensitive pool for BDS offerings by March 1, 2020. NECA pool carriers 
that accept future offers of A-CAM support and elect the incentive 
regulation framework we adopt today or otherwise transition away from 
legacy support mechanisms must notify NECA by March 1 of their election 
year consistent with Sec.  69.3. The Commission proposed requiring 
electing carriers to provide the Bureau with 120 days' notice of their 
election to facilitate implementation of the revised tariffs but we now 
agree with Petitioners that

[[Page 67113]]

opposed granting so much advanced notice. Accordingly, we require 
electing carriers electing to convert to incentive regulation effective 
July 1, 2019 to provide the Bureau with notice of their election by May 
1, 2019. Carriers that elect our second incentive regulation option 
date, effective July 1, 2020, must notify the Bureau by May 1, 2020. 
Carriers that accept future offers of A-CAM support and carriers that 
otherwise transition away from legacy support mechanisms must provide 
notice of their election or transition to the Bureau by May 1 of the 
year of election or transition. Electing carriers that choose to update 
their separations category relationships pursuant to this Order shall 
include information to that effect in these notices to NECA and the 
Bureau.
2. Implementing Forbearance
    114. As part of implementing our new regulatory framework for 
electing carriers' BDS, we grant forbearance from certain existing 
Commission rules and statutory requirements, including our tariffing 
obligations for electing carriers' packet-based and higher capacity 
(i.e., above a DS3 bandwidth level) TDM business data services and 
lower capacity TDM end user channel termination services in study areas 
deemed competitive; our Cost Assignment Rules; and our Sec.  54.1305 
reporting requirements, for electing carriers' lower capacity (i.e., at 
or below a DS3 bandwidth level) TDM transport and end user channel 
termination services. Forbearance will be effective July 1, 2019 for 
carriers electing incentive regulation of their business data services 
as of July 1, 2019, and July 1, 2020 for carrier's electing incentive 
regulation as of July 1, 2020. Section 10 of the Act requires that the 
Commission forbear from applying any provision of the Act, or any of 
the Commission's regulations, if the Commission determines that: (1) 
Enforcement of the provision or regulation is not necessary to ensure 
that a telecommunications carrier's ``charges, practices, 
classifications or regulations'' are ``just and reasonable and are not 
unjustly or unreasonably discriminatory,'' (2) enforcement of the 
provision or regulation is ``not necessary for the protection of 
consumers,'' and (3) forbearance is consistent with the public 
interest. In making the public interest determination, the Commission 
must also consider, pursuant to section 10(b), ``whether forbearance 
from enforcing the provision or regulation will promote competitive 
market conditions.'' We find that granting forbearance in these 
instances will meet the statutory forbearance requirements and will 
facilitate electing carriers' transition to incentive regulation, 
putting them on a footing similar to that of price cap carriers in 
their provision of BDS.
a. Forbearance from Tariffing Requirements for Packet-Based and Higher 
Capacity TDM Services and Lower Capacity TDM End User Channel 
Terminations in Study Areas Deemed Competitive
    115. In order to effectuate our light-touch regulatory framework 
for packet-based and higher capacity TDM business data services above 
the DS3 bandwidth level, we grant forbearance, pursuant to section 10 
of the Act, from section 203 tariffing requirements for these services 
offered by electing carriers. In addition, we grant forbearance for 
lower capacity TDM end user channel terminations offered in electing 
carriers' study areas deemed competitive by the competitive market 
test. Forbearance from section 203 tariffing obligations is warranted 
under section 10 of the Act, is consistent with our finding that 
electing carriers lack market power in packet-based and higher capacity 
TDM business data services, and end user channel terminations in study 
areas deemed competitive by the competitive market test, and will 
enhance competition and deployment of these next generation services.
    116. Forbearance from section 203 tariffing requirements for 
packet-based and higher capacity TDM BDS offerings above the DS3 
bandwidth level, and for lower capacity TDM end user channel 
terminations in study areas deemed competitive by the competitive 
market test, satisfies all three prongs of the forbearance analysis. 
First, pursuant to section 10(a)(1), we conclude in the context of 
growing demand for high speed services detariffing these services will 
promote competitive market conditions, which will result in lower 
prices and better services, thus ensuring that electing carriers' 
relevant charges, practices, classifications, and regulations are just 
and reasonable and not unreasonably discriminatory. Similarly, the 
existence of demonstrated competition for end user channel terminations 
in markets deemed competitive will restrain anticompetitive behavior, 
lower prices, increase innovation, and protect consumers from charges, 
practices, classifications, and regulations that are not just and 
reasonable and unreasonably discriminatory. Competition will serve to 
limit electing carriers' behavior. Absent forbearance, as commenters 
argue, Commission regulation could have the inverse effect and harm 
competition and network deployment.
    117. We also conclude that, pursuant to section 10(a)(2), 
enforcement of our tariffing requirements for these services is ``not 
necessary for the protection of consumers.'' Indeed, by encouraging 
competition, granting forbearance from tariffing of these services will 
benefit consumers by increasing deployment and lowering cost. 
Competition among carriers and the roll-out of next generation packet-
based and higher capacity TDM circuit-based BDS will lower prices and 
provide new services. In study areas deemed competitive, competition 
will also protect consumers. The Commission has previously found that 
tariffs were originally required to protect consumers but they are 
unnecessary if a provider faces competitive pressures. If an electing 
carrier harms a consumer the consumer can switch to other competitors 
present in the study area. This threat protects consumers. Of course, 
in the event that there is risk of consumer harm, sections 201, 202, 
and 208 remain applicable to enforce the Commission's rules and protect 
consumers' welfare. Based on competition in the market and our 
statutory mandate as a backstop, we find that section 203 is not 
necessary to protect consumers in electing carriers' packet-based and 
higher capacity TDM markets, and for lower capacity TDM end user 
channel termination in study areas deemed competitive by the electing 
carriers' competitive market test.
    118. Third, we conclude that forbearance from these statutory and 
regulatory requirements is in the public interest. Forbearance from the 
tariffing requirement for these packet-based and higher capacity TDM 
services and for lower capacity TDM end user channel terminations in 
markets deemed competitive will promote competition, reduce compliance 
costs, increase investment and innovation, and facilitate the 
technology transitions. We therefore find that application of section 
203 is not necessary under sections 10(a)(1) and 10(a)(2), and is in 
the public interest, consistent with sections 10(a)(3) and 10(b).
b. Cost Assignment Rules Forbearance
    119. In light of our decision to relieve electing carriers of the 
obligation to conduct cost studies, we grant electing carriers 
forbearance, pursuant to section 10 of the Act, from the Commission's 
Cost Assignment Rules for their BDS services, although we grant 
forbearance for their lower capacity (i.e., at or below

[[Page 67114]]

a DS3 bandwidth level) TDM transport and end user channel termination 
services after they have set initial rates for those offerings. 
Additionally, electing carriers that participate in the NECA pool must 
conduct cost studies for the calendar year prior to their election and 
the first half of the year of their election to comply with their pool 
settlement requirements.
    120. Background. The Cost Assignment Rules generally require 
carriers to assign costs to build and maintain the network and revenues 
from services provided to specific categories. Categories include 
nonregulated or regulated service, the intrastate or interstate 
jurisdiction, and specific access services, such as local switching or 
common line. The Cost Assignment Rules also govern the accounting 
treatment of transactions between a carrier and its affiliate, such as 
the sale or transfer of assets between regulated and nonregulated 
affiliates. In addition, the rules include certain reporting 
requirements, which depend on the availability of data produced by the 
Cost Assignment Rules.
    121. As part of the regulatory accounting process, carriers first 
record their costs, including investments and expenses, into various 
accounts in accordance with the Uniform System of Accounts (USOA) 
prescribed by part 32 of the Commission's rules. Next, using the Cost 
Assignment Rules in part 64, carriers directly assign, or allocate if 
direct assignment is not possible, the costs and revenues associated 
with their regulated and nonregulated activities. After costs and 
revenues are divided between those that are regulated and nonregulated, 
interstate and intrastate costs and revenues are separated as provided 
in part 36. Federal and state regulatory jurisdictions apply their own 
ratemaking processes to the amounts assigned to each jurisdiction. 
Finally, the access charge rules in part 69 require carriers to 
separate regulated interstate costs into interexchange costs and access 
costs, and then apportion the latter among access categories or 
elements.
    122. The Commission adopted the Cost Assignment Rules to help 
ensure that carriers charge just and reasonable rates for the services 
they provide. The Commission adopted the Cost Assignment Rules prior to 
1991 when all incumbent LECs were subject to rate-of-return regulation, 
so that it could set rates that allowed carriers to recover their costs 
and earn a specific return on their regulated investment. Subsequently, 
the Commission moved away from rate-of-return regulation for the larger 
incumbent LECs. In its place, it adopted price cap regulation, a form 
of incentive regulation that seeks to ``harness the profit-making 
incentives common to all businesses to produce a set of outcomes that 
advance the public interest goals of just, reasonable, and 
nondiscriminatory rates, as well as a communications system that offers 
innovative, high quality services.''
    123. In 2008, the Commission granted AT&T conditional forbearance 
from the Cost Assignment Rules. The Commission conditioned the 
forbearance on, among other things, requiring AT&T to retain part 32 
Uniform System of Accounts data and submit a compliance plan describing 
in detail how it would fulfill its statutory and regulatory 
requirements. The Commission granted similar conditional forbearance 
from the Cost Assignment Rules to Verizon and Qwest. Subsequently, 
Qwest, Verizon, and AT&T obtained conditional forbearance from certain 
financial reporting requirements that relied on the Cost Assignment 
Rules. In 2013, the Commission extended the conditional forbearance 
granted the three carriers to all price cap carriers.
    124. In the Part 32 Order, 82 FR 20833, May 4, 2017, the Commission 
terminated the conditions that the Commission placed on a variety of 
carriers granted forbearance from our Cost Assignment Rules. The 
Commission noted that forbearance was expressly premised on the 
continued availability of part 32 accounting data and the filing of 
compliance plans consistent with that condition. The Commission 
determined that continuing to maintain these costly requirements on the 
speculation that at some point the Commission might do something with 
them failed any cost-benefit analysis.
    125. Discussion. We find that applying the Cost Assignment Rules to 
electing carriers is no longer necessary to ensure that charges and 
practices are just, reasonable, and not unjustly or unreasonably 
discriminatory; to protect consumers; or to protect the public 
interest. Much of the reasoning in the Commission's earlier decisions 
to grant price cap LECs forbearance from the Cost Assignment Rules 
applies equally to rate-of-return carriers receiving fixed support that 
elect incentive regulation. With respect to ensuring charges, 
practices, classifications, and regulations are just and reasonable and 
not unjustly or unreasonably discriminatory, as discussed above, the 
Cost Assignment Rules were developed when the incumbent LECs' 
interstate rates and many of their intrastate rates were set under 
rate-based, cost-of-service regulation. Because the incentive 
regulation we adopt severs for BDS the direct link between regulated 
costs and prices just as price cap regulation did, a carrier is not 
able automatically to recoup misallocated nonregulated costs by raising 
BDS rates, thus reducing incentives to shift nonregulated costs to 
regulated services. To the extent incentives remain, we find our 
positive experience with the waivers of the all-or-nothing rule 
provides confidence that the additional costs of maintaining the Cost 
Assignment Rules outweighs any possible benefit of maintaining them. 
There is no reason to impose on electing carriers cost assignment 
requirements that were ``designed to parallel the level of detail in 
the cost-of-service calculations that LECs performed to develop their 
rates for interstate access services.'' Moreover, if the need arises 
for cost data from electing carriers, we find there are less costly 
ways to meet that need.
    126. With respect to the second prong of the forbearance test, 
protecting consumers, the Commission adopted the Cost Assignment Rules 
in part to help protect consumers from improper cross-subsidization of 
competitive services provided on an integrated basis with 
noncompetitive services by dominant providers with individual market 
power. Because the rates for regulated services and the determination 
of the level of universal service support are no longer tied to 
accounting costs, electing carriers will have no incentive to shift 
costs between regulated and nonregulated services, or to services 
receiving universal service support, thus the consumer protection 
issues that animate the Cost Assignment Rules are not relevant for 
electing carriers.
    127. We also find that forbearing from the Cost Assignment Rules 
for electing carriers is in the public interest. Because neither rates 
nor universal service support will be cost-based for electing carriers, 
relieving electing carriers of the expense of compliance with the Cost 
Assignment Rules will allow electing carriers to offer more competitive 
rates and more innovative service, thus furthering the public interest.
    128. Finally, section 10(b) requires us to consider, as part of our 
analysis of the public interest prong, whether forbearance will promote 
competitive market conditions. We agree with Petitioners, TDS Telecom 
and other commenters that contend that forbearance will enhance 
competition. Eliminating unnecessary regulation will generally reduce 
electing carriers' costs and, in turn, benefit consumers through lower 
rates and/or more vibrant

[[Page 67115]]

competitive offerings. Because other providers of similar services are 
not subject to the rules, it also promotes competition by providing a 
more level playing field. Moreover, as noted above, we find that 
sufficient protections remain in place to prevent anti-competitive 
cross-subsidization.
    129. We note that there still may be instances in which an electing 
carrier seeks some other type of relief from the Commission that 
requires supporting cost assignment data. In such instances, the burden 
is on the carrier to retain data sufficient to make the required 
showing to the Commission in support of such a carrier-initiated 
request.
    130. As part of our forbearance from the Cost Assignment Rules, we 
also forbear from the NECA data reporting requirement in Sec.  54.1305 
of our rules and, by extension, from the related requirement to update 
information shared with NECA. Under the Commission's rules, incumbent 
LECs are required to report unseparated loop cost data to NECA 
annually. Price cap carriers and their affiliates have been exempt from 
this obligation since the Commission adopted the USF/ICC Transformation 
Order and various price cap cost assignment forbearance orders. This 
reporting requirement depends on the availability of data produced by 
the Cost Assignment Rules. As part of the forbearance adopted in this 
Order, we cease to require data that would otherwise be reported as 
part of a cost study. Retaining this obligation is thus inconsistent 
with our grant of forbearance and is inconsistent with past price cap 
carrier forbearance grants. Retaining this obligation would also 
eliminate one of the core incentives for rate-of-return carriers to 
elect incentive regulation--cost savings from the elimination of the 
obligation to undertake cost studies.
    131. Granting forbearance from NECA reporting requirements 
satisfies all three prongs of the forbearance analysis. The NECA data 
collection requirement is not necessary to ensure that carrier charges 
and practices are just and reasonable, as evidenced by the fact that 
price cap carriers have been operating without NECA reporting for 
nearly six years without issue. While no longer including electing 
carriers' data in the calculation of the national average cost per loop 
will affect that calculation, we do not think that any impact it may 
have outweighs the benefits of removing these reporting obligations. 
Since the very goal of incentive regulation is to disconnect cost and 
rates to promote competition in the marketplace, reporting cost data to 
NECA is also unnecessary to protect consumers. Additionally, because 
forbearance from enforcing these rules is necessary to obtain the 
benefit of reducing unnecessary regulatory compliance costs this Order 
seeks, forbearance is consistent with the public interest. Retaining 
the data collection and reporting requirements of Sec. Sec.  54.1305 
and 54.1306 would force electing carriers to continue to perform annual 
cost studies and would thus eliminate one of the chief sources of cost 
savings of this Order. Forbearing from these requirements will promote 
competition by allowing these resources to be redirected to increase 
network investment and to accelerate the technology transition from 
legacy circuit-based services to packet-based services such as 
Ethernet.
3. GAAP Accounting
    132. We allow electing carriers the option of using generally 
accepted accounting principles (GAAP) for keeping their accounts. The 
only commenters that oppose allowing electing carriers to use GAAP 
accounting incorrectly argue that for electing carriers part 32, cost 
studies and other protections are necessary because ``these electing 
carriers would continue to have certain of their interstate services 
under rate-of-return.'' In fact, as explained by Petitioners, all of 
the interstate telecommunications services offered by electing carriers 
will either be (1) subject to incentive regulation, (2) not subject to 
ex ante pricing regulation, or (3) capped and transitioning downward by 
the terms of the rate-of-return intercarrier compensation rules. Thus, 
there is no significant reason to continue to maintain burdensome part 
32 accounting for electing carriers.
    133. The Commission recently revised its part 32 accounting rules 
to allow price cap LECs to elect to use GAAP in recording and reporting 
their financial data, subject to two targeted accounting requirements. 
We subject electing carriers that choose to use GAAP accounting to the 
same data provisioning requirements as price cap carriers, including 
the requirements relating to the calculation of pole attachment rates. 
Electing carriers may either (a) calculate an Implementation Rate 
Difference between the attachment rates calculated by the carrier under 
the Uniform System of Accounts (USOA) and under GAAP as of the last 
full year preceding the carrier's initial opting-out of part 32 USOA 
accounting requirements; or (b) comply with GAAP accounting for all 
purposes other than those associated with setting pole attachment rates 
while continuing to use the part 32 accounts and procedures necessary 
to establish and evaluate pole attachment rates. Electing carriers must 
adjust their annually computed GAAP-based rates by the Implementation 
Rate Difference for a period of 12 years after the election. This will 
free electing carriers from having to maintain two sets of books: one 
for financial reporting purposes consistent with GAAP and one for 
regulatory reporting purposes consistent with the accounting 
requirements of part 32.
4. Transitions
    134. Consistent with our actions in the BDS Order, our detariffing 
actions in this Order for electing carriers' study areas will be 
mandatory after a transition that will provide electing carriers 
sufficient time to adapt their business data services operations to a 
detariffing regime.
    135. The transition period will begin on the date incentive 
regulation becomes effective for electing carriers, either July 1, 2019 
or July 1, 2020, and will end thirty-six (36) months thereafter, a 
period that we find sufficient for electing carriers to adapt to a 
detariffing regime. In addition, for six (6) months following the date 
incentive regulation becomes effective, we require electing carriers to 
freeze the tariffed rates for their business data services that are no 
longer subject to ex ante pricing regulation, including lower speed TDM 
end user channel terminations in newly deregulated study areas, 
provided those services remain tariffed. These transition mechanisms 
will ensure that small businesses and other purchasers have time to 
adjust to the new regulatory framework we adopt.
    136. Similarly, carriers electing incentive regulation in 
connection with a subsequent offer of A-CAM support, or carriers that 
the Commission otherwise transitions away from legacy support 
mechanisms must detariff the relevant business data services within 
thirty-six (36) months of the date on which their incentive-based rates 
take effect or their transition away from legacy support mechanisms 
becomes effective. Further, for six (6) months following such dates, 
such carriers will be required to freeze their tariffed rates for BDS 
that are no longer subject to ex ante pricing regulation, provided 
those rates remain tariffed.
    137. Tariffing for these services will be permissive during the 
transition--we will accept new tariffs and revisions to existing 
tariffs for the affected services during this time period. Electing 
carriers may also detariff during the transition. Apart from the rate 
freeze noted above, carriers will no longer be required to

[[Page 67116]]

comply with ex ante pricing regulation for these services. Once the 
rules adopted in this Order are effective, carriers that wish to 
continue filing tariffs under the permissive detariffing regime are 
free to modify such tariffs to reflect the new regulatory structure 
outlined in this Order for the affected services. This will allow 
carriers to be more competitive and introduce new business data 
services as they adapt to detariffing.
    138. Electing carriers may remove the relevant portions of their 
tariffs for the affected services at any time during the transition, 
and the rate freeze does not apply to services that are no longer 
tariffed. Electing carriers may not file or maintain any interstate 
tariffs for affected business data services once the transition ends. 
This will prevent electing carriers from obtaining ``deemed lawful'' 
status for tariff filings that are not accompanied by cost support and 
invoking the filed-rate doctrine in contractual disputes with 
customers. Business data service providers will also be prevented from 
picking and choosing when they are able to invoke the protections of 
tariffs.
    139. We do not intend our actions to disturb existing contractual 
or other long-term arrangements--a contract tariff remains a contract 
even if it is no longer tariffed. As we stated in the BDS Order, 
contract tariffs, term and volume discount plans, and individual 
circuit plans do not become void upon detariffing. All carriers are to 
act in good faith to develop solutions to ensure rates remain just and 
reasonable.

III. Other Rule Changes

    140. We adopt several other rule changes which can be found set out 
below. These rule changes include changes arising from this Order as 
well as corrections to inaccuracies in our current rules. Thus, we 
change (1) the cross reference to Sec.  61.3(aa) in Sec.  51.903(g) to 
Sec.  61.3(bb), (2) the cross reference to Sec.  61.3(ee) in Sec.  
61.41(d) to Sec.  61.3(ff), (3) the cross reference Sec.  61.3(x) in 
Sec.  69.114 to Sec.  61.3(ff), and (4) the cross reference to Sec.  
69.801(g) in Sec.  69.805(a) to Sec.  69.801(h). These cross references 
have been rendered inaccurate because of changes in the definitions 
contained in Sec.  61.3.

IV. Final Regulatory Flexibility Analysis

    141. As required by the Regulatory by the Regulatory Flexibility 
Act of 1980, as amended (RFA) an Initial Regulatory Flexibility 
Analysis (IRFA) was incorporated into the Notice of Proposed Rulemaking 
(NPRM) for the rate-of-return business data services (BDS) proceeding. 
The Commission sought written public comment on the proposals in the 
NPRM, including comment on the IRFA. The Commission received no 
comments on the IRFA. Because the Commission amends its rules in this 
Report and Order, the Commission has included this Final Regulatory 
Flexibility Analysis (FRFA). This present FRFA conforms to the RFA.

A. Need for, and Objectives of, the Rules

    142. In the NPRM, the Commission proposed to adopt a form of 
incentive regulation for the provision of business data services by 
rate-of-return carriers receiving fixed universal service support, 
conduct a market analysis to evaluate the characteristics of BDS 
markets served by rate-of-return carriers receiving fixed support, and 
adopt a new lighter touch regulatory framework for these carriers' BDS 
that in most respects parallels the framework recently adopted for 
price cap carriers in the BDS Order. This Order provides a new 
framework for BDS offered by rate-of-return carriers that receive fixed 
support that minimizes unnecessary regulatory burdens on certain rate-
of-return carriers and allows market forces to foster appropriate 
incentives for these carriers to be efficient, to innovate and to 
compete.
    143. In this Order, the Commission takes the next step in a series 
of steps to encourage carriers to move from rate-of-return to incentive 
regulation, and to remove ex ante pricing regulation where competitive 
conditions justify doing so. This Order focuses on allowing rate-of-
return carriers that currently receive fixed high-cost universal 
service support to voluntarily elect to transition out of rate-of-
return regulation for their BDS offerings. In so doing, the Commission 
amends its rules to allow such carriers to move their lower capacity 
time division multiplexing (TDM) circuit-based transport and end user 
channel termination offerings to incentive regulation while providing a 
path for those carriers that elect our new framework (electing 
carriers) to demonstrate that their lower capacity circuit-based end 
user channel termination offerings are competitive, and therefore 
should not be subject to ex ante pricing regulation. We also remove ex 
ante pricing regulation from electing carriers' higher capacity 
circuit-based and their packet-based BDS offerings.
    144. Allowing rate-of-return carriers that receive fixed support to 
move their BDS offerings away from rate-of-return regulation will help 
drive competition for BDS offerings in the communities served by those 
carriers. It will also reduce unnecessary regulatory burdens faced by 
electing carriers. They will no longer be required to provide cost-
based justification for their BDS rates and will therefore no longer 
need to conduct annual cost studies to justify those rates. They will 
also no longer be required to file tariffs for their packed-based and 
higher capacity TDM-based end user channel terminations offerings in 
areas deemed competitive. The regulatory burdens on electing carriers, 
most of which are small entities, will be vastly reduced.
    145. We take these steps while affirming our core statutory 
obligations pursuant to sections 201, 202, and 208 of the 
Communications Act to ensure that the rates and practices of these 
carriers' BDS remain just, reasonable and not unreasonably 
discriminatory. Collectively, these actions will streamline regulation, 
and spur entry, investment, innovation, and competition in the affected 
BDS markets to the benefit of businesses and other institutional users 
that rely on these services.

B. Summary of Significant Issues Raised by Public Comments in Response 
to the IRFA

    146. The Commission did not receive comments specifically 
addressing the rules and policies proposed in the IRFA.

C. Response to Comments by the Chief Counsel for Advocacy of the Small 
Business Administration

    147. The Chief Counsel did not file any comments in response to 
this proceeding.

D. Description and Estimate of the Number of Small Entities to Which 
the Rules Will Apply

    148. The RFA directs agencies to provide a description of, and 
where feasible, an estimate of the number of small entities that may be 
affected by the proposed rules, if adopted. The RFA generally defines 
the term ``small entity'' as having the same meaning as the terms 
``small business,'' ``small organization,'' and ``small governmental 
jurisdiction.'' In addition, the term ``small business'' has the same 
meaning as the term ``small-business concern'' under the Small Business 
Act. A small-business concern'' is one which: (1) Is independently 
owned and operated; (2) is not dominant in its field of operation; and 
(3) satisfies any additional criteria established by the Small Business 
Administration (SBA).
1. Total Small Entities
    149. Our proposed action, if implemented, may, over time, affect

[[Page 67117]]

small entities that are not easily categorized at present. We therefore 
describe here, at the outset, three comprehensive, statutory small 
entity size standards. First, as of 2013, the SBA estimates there are 
an estimated 28.8 million small businesses nationwide--comprising some 
99.9% of all businesses. In addition, a ``small organization'' is 
generally ``any not-for-profit enterprise which is independently owned 
and operated and is not dominant in its field.'' Nationwide, as of 
2007, there were approximately 1,621,315 small organizations. Finally, 
the term ``small governmental jurisdiction'' is defined generally as 
``governments of cities, towns, townships, villages, school districts, 
or special districts, with a population of less than fifty thousand.'' 
Census Bureau data for 2012 indicate that there were 90,056 local 
governmental jurisdictions in the United States. We estimate that, of 
this total, as many as 89,195 entities may qualify as ``small 
governmental jurisdictions.'' Thus, we estimate that most governmental 
jurisdictions are small.
2. Broadband internet Access Service Providers
    150. internet Service Providers (Broadband). Broadband internet 
service providers include wired (e.g., cable, DSL) and VoIP service 
providers using their own operated wired telecommunications 
infrastructure fall in the category of Wired Telecommunication 
Carriers. Wired Telecommunications Carriers are comprised of 
establishments primarily engaged in operating and/or providing access 
to transmission facilities and infrastructure that they own and/or 
lease for the transmission of voice, data, text, sound, and video using 
wired telecommunications networks. Transmission facilities may be based 
on a single technology or a combination of technologies. The SBA size 
standard for this category classifies a business as small if it has 
1,500 or fewer employees. U.S. Census data for 2012 show that there 
were 3,117 firms that operated that year. Of this total, 3,083 operated 
with fewer than 1,000 employees. Consequently, under this size standard 
the majority of firms in this industry can be considered small.
3. Wireline Providers
    151. Wired Telecommunications Carriers. The U.S. Census Bureau 
defines this industry as ``establishments primarily engaged in 
operating and/or providing access to transmission facilities and 
infrastructure that they own and/or lease for the transmission of 
voice, data, text, sound, and video using wired communications 
networks. Transmission facilities may be based on a single technology 
or a combination of technologies. Establishments in this industry use 
the wired telecommunications network facilities that they operate to 
provide a variety of services, such as wired telephony services, 
including VoIP services, wired (cable) audio and video programming 
distribution, and wired broadband internet services. By exception, 
establishments providing satellite television distribution services 
using facilities and infrastructure that they operate are included in 
this industry.'' The SBA has developed a small business size standard 
for Wired Telecommunications Carriers, which consists of all such 
companies having 1,500 or fewer employees. Census data for 2012 show 
that there were 3,117 firms that operated that year. Of this total, 
3,083 operated with fewer than 1,000 employees. Thus, under this size 
standard, the majority of firms in this industry can be considered 
small.
    152. Incumbent Local Exchange Carriers (Incumbent LECs). Neither 
the Commission nor the SBA has developed a small business size standard 
specifically for incumbent LEC services. The closest applicable size 
standard under SBA rules is for the category Wired Telecommunications 
Carriers as defined above. Under that size standard, such a business is 
small if it has 1,500 or fewer employees. According to Commission data, 
3,117 firms operated in that year. Of this total, 3,083 operated with 
fewer than 1,000 employees. Consequently, the Commission estimates that 
most providers of incumbent local exchange service are small businesses 
that may be affected by the rules and policies adopted. A total of 
1,307 firms reported that they were incumbent local exchange service 
providers. Of this total, an estimated 1,006 have 1,500 or fewer 
employees.
    153. Competitive Local Exchange Carriers (Competitive LECs), 
Competitive Access Providers (CAPs), Shared-Tenant Service Providers, 
and Other Local Service Providers. Neither the Commission nor the SBA 
has developed a small business size standard specifically for these 
service providers. The appropriate NAICS Code category is Wired 
Telecommunications Carriers, as defined above. Under that size 
standard, such a business is small if it has 1,500 or fewer employees. 
U.S. Census data for 2012 indicate that 3,117 firms operated during 
that year. Of that number, 3,083 operated with fewer than 1,000 
employees. Based on this data, the Commission concludes that the 
majority of Competitive LECS, CAPs, Shared-Tenant Service Providers, 
and Other Local Service Providers, are small entities. According to 
Commission data, 1,442 carriers reported that they were engaged in the 
provision of either competitive local exchange services or competitive 
access provider services. Of these 1,442 carriers, an estimated 1,256 
have 1,500 or fewer employees. In addition, 17 carriers have reported 
that they are Shared-Tenant Service Providers, and all 17 are estimated 
to have 1,500 or fewer employees. Also, 72 carriers have reported that 
they are Other Local Service Providers. Of this total, 70 have 1,500 or 
fewer employees. Consequently, based on internally researched FCC data, 
the Commission estimates that most providers of competitive local 
exchange service, competitive access providers, Shared-Tenant Service 
Providers, and Other Local Service Providers are small entities.
    154. We have included small incumbent LECs in this present RFA 
analysis. As noted above, a ``small business'' under the RFA is one 
that, inter alia, meets the pertinent small business size standard 
(e.g., a telephone communications business having 1,500 or fewer 
employees), and ``is not dominant in its field of operation.'' The 
SBA's Office of Advocacy contends that, for RFA purposes, small 
incumbent LECs are not dominant in their field of operation because any 
such dominance is not ``national'' in scope. We have therefore included 
small incumbent LECs in this RFA analysis, although we emphasize that 
this RFA action has no effect on Commission analyses and determinations 
in other, non-RFA contexts.
    155. Interexchange Carriers (IXCs). Neither the Commission nor the 
SBA has developed a definition for Interexchange Carriers. The closest 
NAICS Code category is Wired Telecommunications Carriers as defined 
above. The applicable size standard under SBA rules is that such a 
business is small if it has 1,500 or fewer employees. U.S. Census data 
for 2012 indicates that 3,117 firms operated during that year. Of that 
number, 3,083 operated with fewer than 1,000 employees. According to 
internally developed Commission data, 359 companies reported that their 
primary telecommunications service activity was the provision of 
interexchange services. Of this total, an estimated 317 have 1,500 or 
fewer employees. Consequently, the Commission estimates that the 
majority of IXCs are small entities that may be affected by our rules.

[[Page 67118]]

    156. Local Resellers. The SBA has developed a small business size 
standard for the category of Telecommunications Resellers. The 
Telecommunications Resellers industry comprises establishments engaged 
in purchasing access and network capacity from owners and operators of 
telecommunications networks and reselling wired and wireless 
telecommunications services (except satellite) to businesses and 
households. Establishments in this industry resell telecommunications; 
they do not operate transmission facilities and infrastructure. Mobile 
virtual network operators (MVNOs) are included in this industry. Under 
that size standard, such a business is small if it has 1,500 or fewer 
employees. Census data for 2012 show that 1,341 firms provided resale 
services during that year. Of that number, all operated with fewer than 
1,000 employees. Thus, under this category and the associated small 
business size standard, the majority of these prepaid calling card 
providers can be considered small entities.
    157. Toll Resellers. The Commission has not developed a definition 
for Toll Resellers. The closest NAICS Code Category is 
Telecommunications Resellers. The Telecommunications Resellers industry 
comprises establishments engaged in purchasing access and network 
capacity from owners and operators of telecommunications networks and 
reselling wired and wireless telecommunications services (except 
satellite) to businesses and households. Establishments in this 
industry resell telecommunications; they do not operate transmission 
facilities and infrastructure. Mobile virtual network operators (MVNOs) 
are included in this industry. The SBA has developed a small business 
size standard for the category of Telecommunications Resellers. Under 
that size standard, such a business is small if it has 1,500 or fewer 
employees. Census data for 2012 show that 1,341 firms provided resale 
services during that year. Of that number, 1,341 operated with fewer 
than 1,000 employees. Thus, under this category and the associated 
small business size standard, the majority of these resellers can be 
considered small entities. According to Commission data, 881 carriers 
have reported that they are engaged in the provision of toll resale 
services. Of this total, an estimated 857 have 1,500 or fewer 
employees. Consequently, the Commission estimates that the majority of 
toll resellers are small entities.
    158. Other Toll Carriers. Neither the Commission nor the SBA has 
developed a definition for small businesses specifically applicable to 
Other Toll Carriers. This category includes toll carriers that do not 
fall within the categories of interexchange carriers, operator service 
providers, prepaid calling card providers, satellite service carriers, 
or toll resellers. The closest applicable NAICS Code category is for 
Wired Telecommunications Carriers as defined above. Under the 
applicable SBA size standard, such a business is small if it has 1,500 
or fewer employees. Census data for 2012 show that there were 3,117 
firms that operated that year. Of this total, 3,083 operated with fewer 
than 1,000 employees. Thus, under this category and the associated 
small business size standard, the majority of Other Toll Carriers can 
be considered small. According to internally developed Commission data, 
284 companies reported that their primary telecommunications service 
activity was the provision of other toll carriage. Of these, an 
estimated 279 have 1,500 or fewer employees. Consequently, the 
Commission estimates that most Other Toll Carriers are small entities 
that may be affected by rules adopted pursuant to the Order.
    159. Operator Service Providers (OSPs). Neither the Commission nor 
the SBA has developed a small business size standard specifically for 
operator service providers. The appropriate size standard under SBA 
rules is for the category Wired Telecommunications Carriers. Under that 
size standard, such a business is small if it has 1,500 or fewer 
employees. According to Commission data, 33 carriers have reported that 
they are engaged in the provision of operator services. Of these, an 
estimated 31 have 1,500 or fewer employees and two have more than 1,500 
employees. Consequently, the Commission estimates that the majority of 
OSPs are small entities.
4. Wireless Providers--Fixed and Mobile
    160. Wireless Telecommunications Carriers (except Satellite). This 
industry comprises establishments engaged in operating and maintaining 
switching and transmission facilities to provide communications via the 
airwaves. Establishments in this industry have spectrum licenses and 
provide services using that spectrum, such as cellular services, paging 
services, wireless internet access, and wireless video services. The 
appropriate size standard under SBA rules is that such a business is 
small if it has 1,500 or fewer employees. For this industry, U.S. 
Census data for 2012 show that there were 967 firms that operated for 
the entire year. Of this total, 955 firms had employment of 999 or 
fewer employees and 12 had employment of 1000 employees or more. Thus 
under this category and the associated size standard, the Commission 
estimates that the majority of wireless telecommunications carriers 
(except satellite) are small entities.
    161. The Commission's own data--available in its Universal 
Licensing System--indicate that, as of October 25, 2016, there are 280 
Cellular licensees that will be affected by our actions today. The 
Commission does not know how many of these licensees are small, as the 
Commission does not collect that information for these types of 
entities. Similarly, according to internally developed Commission data, 
413 carriers reported that they were engaged in the provision of 
wireless telephony, including cellular service, Personal Communications 
Service, and Specialized Mobile Radio Telephony services. Of this 
total, an estimated 261 have 1,500 or fewer employees, and 152 have 
more than 1,500 employees. Thus, using available data, we estimate that 
the majority of wireless firms can be considered small.
    162. Wireless Communications Services. This service can be used for 
fixed, mobile, radiolocation, and digital audio broadcasting satellite 
uses. The Commission defined ``small business'' for the wireless 
communications services (WCS) auction as an entity with average gross 
revenues of $40 million for each of the three preceding years, and a 
``very small business'' as an entity with average gross revenues of $15 
million for each of the three preceding years. The SBA has approved 
these definitions.
    163. Wireless Telephony. Wireless telephony includes cellular, 
personal communications services, and specialized mobile radio 
telephony carriers. As noted, the SBA has developed a small business 
size standard for Wireless Telecommunications Carriers (except 
Satellite). Under the SBA small business size standard, a business is 
small if it has 1,500 or fewer employees. According to Commission data, 
413 carriers reported that they were engaged in wireless telephony. Of 
these, an estimated 261 have 1,500 or fewer employees and 152 have more 
than 1,500 employees. Therefore, a little less than one third of these 
entities can be considered small.
5. Cable Service Providers
    164. Because section 706 requires us to monitor the deployment of 
broadband using any technology, we anticipate that

[[Page 67119]]

some broadband service providers may not provide telephone service. 
Accordingly, we describe below other types of firms that may provide 
broadband services, including cable companies, MDS providers, and 
utilities, among others.
    165. Cable and Other Subscription Programming. This industry 
comprises establishments primarily engaged in operating studios and 
facilities for the broadcasting of programs on a subscription or fee 
basis. The broadcast programming is typically narrowcast in nature 
(e.g. limited format, such as news, sports, education, or youth-
oriented). These establishments produce programming in their own 
facilities or acquire programming from external sources. The 
programming material is usually delivered to a third party, such as 
cable systems or direct-to-home satellite systems, for transmission to 
viewers. The SBA has established a size standard for this industry 
stating that a business in this industry is small if it has 1,500 or 
fewer employees. The 2012 Economic Census indicates that 367 firms were 
operational for that entire year. Of this total, 357 operated with less 
than 1,000 employees. Accordingly, we conclude that a substantial 
majority of firms in this industry are small under the applicable SBA 
size standard.
    166. Cable Companies and Systems (Rate Regulation). The Commission 
has developed its own small business size standards for the purpose of 
cable rate regulation. Under the Commission's rules, a ``small cable 
company'' is one serving 400,000 or fewer subscribers nationwide. 
Industry data indicate that there are currently 4,600 active cable 
systems in the United States. Of this total, all but eleven cable 
operators nationwide are small under the 400,000-subscriber size 
standard. In addition, under the Commission's rate regulation rules, a 
``small system'' is a cable system serving 15,000 or fewer subscribers. 
Current Commission records show 4,600 cable systems nationwide. Of this 
total, 3,900 cable systems have fewer than 15,000 subscribers, and 700 
systems have 15,000 or more subscribers, based on the same records. 
Thus, under this standard as well, we estimate that most cable systems 
are small entities.
    167. Cable System Operators (Telecom Act Standard). The 
Communications Act also contains a size standard for small cable system 
operators, which is ``a cable operator that, directly or through an 
affiliate, serves in the aggregate fewer than 1% of all subscribers in 
the United States and is not affiliated with any entity or entities 
whose gross annual revenues in the aggregate exceed $250,000,000.'' 
There are approximately 52,403,705 cable video subscribers in the 
United States today. Accordingly, an operator serving fewer than 
524,037 subscribers shall be deemed a small operator if its annual 
revenues, when combined with the total annual revenues of all its 
affiliates, do not exceed $250 million in the aggregate. Based on 
available data, we find that all but nine incumbent cable operators are 
small entities under this size standard. The Commission neither 
requests nor collects information on whether cable system operators are 
affiliated with entities whose gross annual revenues exceed $250 
million. Although it seems certain that some of these cable system 
operators are affiliated with entities whose gross annual revenues 
exceed $250 million, we are unable at this time to estimate with 
greater precision the number of cable system operators that would 
qualify as small cable operators under the definition in the 
Communications Act.
    168. All Other Telecommunications. ``All Other Telecommunications'' 
is defined as follows: This U.S. industry is comprised of 
establishments that are primarily engaged in providing specialized 
telecommunications services, such as satellite tracking, communications 
telemetry, and radar station operation. This industry also includes 
establishments primarily engaged in providing satellite terminal 
stations and associated facilities connected with one or more 
terrestrial systems and capable of transmitting telecommunications to, 
and receiving telecommunications from, satellite systems. 
Establishments providing internet services or voice over internet 
protocol (VoIP) services via client-supplied telecommunications 
connections are also included in this industry. The SBA has developed a 
small business size standard for ``All Other Telecommunications,'' 
which consists of all such firms with gross annual receipts of $32.5 
million or less. For this category, census data for 2012 show that 
there were 1,442 firms that operated for the entire year. Of these 
firms, a total of 1,400 had gross annual receipts of less than $25 
million. Consequently, we estimate that the majority of All Other 
Telecommunications firms are small entities that might be affected by 
our action.

E. Description of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements for Small Entities

    169. Recordkeeping and Reporting. The rule revisions adopted in the 
Order include changes that will require electing rate-of-return 
carriers receiving fixed universal service support to make various 
revisions to their business data service tariffs. For example, rate-of-
return carriers receiving fixed support that elect incentive regulation 
will be required to file Tariff Review Plans and incentive regulation 
tariffs for their lower capacity TDM BDS. Packet-based BDS and higher 
capacity TDM BDS end user channel termination and lower capacity TDM 
BDS end user channel terminations offered by electing carriers in study 
areas deemed competitive by a competitive market test will be relieved 
of ex ante pricing regulation and will be subject to permissive 
detariffing for a period of 36 months at which time they will be 
subject to mandatory detariffing.
    170. The Commission also incorporates a productivity factor (X-
factor) of 2.0% and GDP-PI as the inflation factor used to adjust price 
cap indexes in the first year of incentive regulation, and each year 
thereafter for electing carriers. Electing carriers will be required to 
revise their rates and tariff review plans for business data services 
in filings with the Commission to reflect the new X-factor. Finally, 
the Commission grants forbearance from the requirement in Sec.  54.1305 
of our rules annually to report unseparated loop costs and other 
accounting data to NECA.

F. Steps Taken To Minimize the Significant Economic Impact on Small 
Entities and Significant Alternatives Considered

    171. The RFA requires an agency to describe any significant 
alternatives that it has considered in reaching its proposed approach, 
which may include (among others) the following four alternatives: (1) 
The establishment of differing compliance or reporting requirements or 
timetables that take into account the resources available to small 
entities; (2) the clarification, consolidation, or simplification of 
compliance or reporting requirements under the rule for small entities; 
(3) the use of performance, rather than design, standards; and (4) an 
exemption from coverage of the rule, or any part thereof, for small 
entities.
    172. Incentive Regulation. In the Order, the Commission sheds 
burdensome rate-of-return regulation in favor of lighter touch 
incentive regulation for electing carriers' lower capacity TDM 
transport and end user channel termination services. Additionally, the 
Commission adopted the proposal in the NPRM to grant pricing 
flexibility to electing carriers' lower capacity TDM transport and end 
user channel termination services under

[[Page 67120]]

incentive regulation similar to the pricing flexibility the Commission 
granted to price cap carriers' lower capacity TDM end user channel 
terminations in areas deemed non-competitive in the BDS Order. The 
pricing flexibility available to electing carriers, most of which are 
small entities, will enable them to sell their BDS using contract 
tariffs and term and volume discounts, enhancing their ability to 
respond to competition.
    173. Competitive Market Test. The Commission sought comment on four 
options for a competitive market test for electing rate-of-return 
carriers that receive fixed support. The option we selected is one of 
the least burdensome options and relies on existing Form 477 data, 
avoiding any additional burdensome data collection. We did not adopt 
the proposal to use both prongs of the BDS Order competitive market 
test to assess the competitiveness of study areas served by rate-of-
return carriers that receive fixed support despite its apparent 
simplicity because we found methodological and conceptual flaws in the 
proposal and in the study submitted by Petitioners to support the 
proposal. Among the flaws the Commission identified is that the study 
does not claim to be based on a representative sample of model-based 
rate-of-return carriers that receive fixed support, the study compares 
non-urbanized price cap areas with model-based rate-of-return areas 
that in some instances include urbanized areas, and some of the 
relevant counties included in the study were deemed non-competitive by 
the price cap competitive market test. Further, the Commission declined 
to adopt the other two options from the NPRM which would have required 
costly, time consuming, burdensome data collections. Instead, the Order 
found that the record supports adopting the second option from the NPRM 
which uses the second prong of the BDS Order competitive market test 
that is based on Form 477 data. As a result, ex ante pricing regulation 
of lower capacity TDM end user channel terminations will no longer 
apply in study areas served by rate-of-return carriers that receive 
fixed support that are deemed competitive.
    174. Packet-based and Higher Capacity TDM Business Data Services. 
The Commission removed ex ante pricing regulation for electing rate-of-
return carriers' packet-based and higher capacity TDM business data 
services and directed electing carriers to detariff these services 
following a transition period. This action is consistent with the 
Commission's preference to minimize the burdens of regulation.
    175. X-factor. Rate-of-return carriers that receive fixed support 
that elect incentive regulation are required to file revised annual 
access charge tariffs every year, which become effective on July 1. The 
annual filings include submission of tariff review plans that are used 
to support revisions to the rates, including revisions that pertain to 
the X-factor. To ease the burden on the industry in connection with 
this filing, and because base period demand and the value of GDP-PI 
reflected in the price cap indices typically are not updated during a 
tariff year, the Commission permits electing carriers to use, in their 
filings implementing the 2.0% X-factor, the same base period demand and 
value of GDP-PI as in the prior year's annual filing.
    176. Periodic Revision to Competitive Market Test. Related to the 
competitive market test proposal, the Commission also proposed future 
periodic data collections to allow for market test updates for 
determining competitive and non-competitive areas. The periodic 
collections could have resulted in a significant reporting burden on 
small entities. Instead, the Commission adopted a process for updating 
the competitive market test every three years using the data from Form 
477 that is already routinely filed by providers and thus entails no 
additional recordkeeping or reporting burden.
    177. Forbearance. The Commission granted forbearance, pursuant to 
section 10 of the Act, from the Cost Assignment Rules for electing 
carriers, subject to the requirement relating to the calculation of 
pole attachment rates. The Commission found that the Cost Assignment 
Rules are no longer necessary to ensure that charges and practices are 
just, reasonable, and not unjustly or unreasonably discriminatory; to 
protect consumers; and to protect the public interest. The Commission 
found that the rules were no longer necessary for carriers converting 
to incentive regulation and that eliminating unnecessary regulation 
will generally reduce providers' costs and provide a more level playing 
field because other providers of similar services are not subject to 
these requirements.
    178. Detariffing. To minimize economic impact, the Commission 
provides a transition period to provide electing rate-of-return 
carriers that receive fixed support with sufficient time to detariff 
their business data services. The Commission does not intend its 
actions to disturb existing contractual or other long-term 
arrangements, which it grandfathered and which continue to remain in 
effect for the length of the contract.

G. Report to Congress

    179. The Commission will send a copy of the Report and Order, 
including this FRFA, in a report to be sent to Congress pursuant to the 
Congressional Review Act. In addition, the Commission will send a copy 
of the Report and Order, including this FRFA, to the Chief Counsel for 
Advocacy of the SBA. A copy of the Order and FRFA (or summaries 
thereof) will also be published in the Federal Register.

V. Procedural Matters

    180. Paperwork Reduction Act Analysis. It was determined that the 
final rule makes only non-substantive changes to currently approved 
information collections and therefore does not require separate 
Paperwork Reduction Act approval. The rules are effective 60 days after 
publication in the Federal Register. In addition, we note that pursuant 
to the Small Business Paperwork Relief Act of 2002, we previously 
sought specific comment on how the Commission might further reduce the 
information collection burden for small business concerns with fewer 
than 25 employees. We describe impacts that might affect small 
businesses, which includes most businesses with fewer than 25 
employees, in the Final Regulatory Flexibility Analysis in Section IV 
above.
    181. Congressional Review Act. The Commission will send a copy of 
this Report and Order to Congress and the Government Accountability 
Office pursuant to the Congressional Review Act, see 5 U.S.C. 
801(a)(1)(A).
    182. Final Regulatory Flexibility Analysis. As required by the 
Regulatory Flexibility Act (RFA), an Initial Regulatory Flexibility 
Analysis (IRFA) was incorporated into the NPRM. The Commission sought 
written public comment on the possible significant economic impact on 
small entities regarding the proposals addressed in the NPRM, including 
comments on the IRFA. Pursuant to the RFA, a Final Regulatory 
Flexibility Analysis is set forth in Section IV above.
    183. Contact Person. For further information about this proceeding, 
please contact Justin Faulb, FCC Wireline Competition Bureau, Pricing 
Policy Division, 445 12th Street SW, Washington, DC 20554, (202) 418-
1589, Justin.Faulb@fcc.gov.

VI. Ordering Clauses

    184. Accordingly, it is ordered that, pursuant to sections 1, 2, 
4(i)-(j), 10, 201(b), 202(a), 214, 303(r), 403, of the

[[Page 67121]]

Communications Act of 1934, as amended, and section 706 of the 
Telecommunications Act of 1996, 47 U.S.C. 151, 152, 154(i)-(j), 160, 
201(b), 202(a), 214, 303(r), 403, 1302, this Report and Order IS 
ADOPTED and shall be effective sixty (60) days after publication in the 
Federal Register, except to the extent expressly addressed below.
    185. It is further ordered that parts 1, 32, 51, 61, and 69 of the 
Commission's rules, 47 CFR parts 1, 32, 51, 61, and 69, are amended as 
set forth below, and that such rule amendments shall be effective sixty 
(60) days after publication of this Report and Order in the Federal 
Register.
    186. It is further ordered that pursuant to sections 201(b) and 
202(a) of the Communications Act of 1934, as amended, 47 U.S.C. 201(b), 
202(a), rate-of-return carriers electing to offer business data 
services shall freeze the tariffed rates for packet-based and higher 
capacity TDM services and for TDM end-user channel terminations at or 
below a DS3 in study areas deemed competitive that the rate-of-return 
carrier continues to tariff for six (6) months following the applicable 
effective date of the carrier's election.
    187. It is further ordered that the Commission's Consumer & 
Governmental Affairs Bureau, Reference Information Center, shall send a 
copy of this Report and Order to Congress and the Government 
Accountability Office pursuant to the Congressional Review Act, see 5 
U.S.C. 801(a)(1)(A).
    188. It is further ordered, that the Commission's Consumer & 
Governmental Affairs Bureau, Reference Information Center, shall send a 
copy of this Report and Order to the Chief Counsel for Advocacy of the 
Small Business Administration.

List of Subjects

47 CFR Part 1

    Communications common carriers, Reporting and recordkeeping, 
Telecommunications.

47 CFR Part 32

    Communications, Reporting and recordkeeping requirements, 
Telephone, Uniform System of Accounts.

47 CFR Part 51

    Communications common carriers, Telecommunications.

47 CFR Part 61

    Communications common carriers, Radio, Reporting and recordkeeping 
requirements, Telegraph, Telephone.

47 CFR Part 69

    Communications common carriers, Reporting and recordkeeping 
requirements, Telephone.

Federal Communications Commission
Marlene Dortch,
Secretary.

RULES

    The Federal Communications Commission amends 47 CFR parts 1, 32, 
51, 61, and 69 as follows:

PART 1--PRACTICE AND PROCEDURE

0
1. The authority citation for part 1 continues to read as follows:

    Authority: 47 U.S.C. 151, 154(i) and (j), 155, 157, 160, 201, 
224, 225, 227, 303, 309, 310, 332, 1403, 1404, 1451, 1452, and 1455.


0
2. Section 1.1406 is amended by adding paragraph (e) to read as 
follows:


Sec.  1.1406  Commission consideration of the complaint.

* * * * *
    (e) A price cap company, or a rate-of-return carrier electing to 
provide service pursuant to Sec.  61.50 of this chapter, that opts-out 
of part 32 of this chapter may calculate attachment rates for its 
poles, ducts, conduits, and rights of way using either part 32 
accounting data or GAAP accounting data. A company using GAAP 
accounting data to compute rates to attach to its poles, ducts, 
conduits, and rights of way in any of the first twelve years after 
opting-out must adjust (increase or decrease) its annually computed 
GAAP-based rates by an Implementation Rate Difference for each of the 
remaining years in the period. The Implementation Rate Difference means 
the difference between attachment rates calculated by the carrier under 
part 32 and under GAAP as of the last full year preceding the carrier's 
initial opting-out of part 32 USOA accounting requirements.

PART 32--UNIFORM SYSTEM OF ACCOUNTS FOR TELECOMMUNICATIONS 
COMPANIES

0
3. The authority citation for part 32 continues to read as follows:

    Authority: 47 U.S.C. 219, 220 as amended, unless otherwise 
noted.


0
4. Section 32.1 is revised to read as follows:


Sec.  32.1  Background.

    The revised Uniform System of Accounts (USOA) is a historical 
financial accounting system which reports the results of operational 
and financial events in a manner which enables both management and 
regulators to assess these results within a specified accounting 
period. The USOA also provides the financial community and others with 
financial performance results. In order for an accounting system to 
fulfill these purposes, it must exhibit consistency and stability in 
financial reporting (including the results published for regulatory 
purposes). Accordingly, the USOA has been designed to reflect stable, 
recurring financial data based to the extent regulatory considerations 
permit upon the consistency of the well-established body of accounting 
theories and principles commonly referred to as generally accepted 
accounting principles (GAAP). The rules of this part, and any other 
rules or orders that are derivative of or dependent on the rules in 
this part, do not apply to price cap companies, and rate-of-return 
telephone companies offering business data services pursuant to Sec.  
61.50 of this chapter, that have opted-out of USOA requirements 
pursuant to the conditions specified by the Commission in Sec.  
32.11(g).

0
5. Section 32.11 is amended by revising paragraph (g) to read as 
follows:


Sec.  32.11  Companies subject to this part.

* * * * *
    (g) Notwithstanding paragraph (a) of this section, a price cap 
company, or a rate-of-return telephone company offering business data 
services pursuant to Sec.  61.50 of this chapter, that elects to 
calculate its pole attachment rates pursuant to Sec.  1.1406(e) of this 
chapter will not be subject to this Uniform System of Accounts.

PART 51--INTERCONNECTION

0
6. The authority citation for part 51 continues to read as follows:

    Authority: 47 U.S.C. 151-55, 201-05, 207-09, 218, 225-27, 251-
52, 271, 332 unless otherwise noted.


0
7. Section 51.903 is amended by revising paragraph (g) to read as 
follows:


Sec.  51.903  Definitions.

* * * * *
    (g) Rate-of-Return Carrier is any incumbent local exchange carrier 
not subject to price cap regulation as that term is defined in Sec.  
61.3(bb) of this chapter, but only with respect to the territory in 
which it operates as an incumbent local exchange carrier.
* * * * *

PART 61--TARIFFS

0
8. The authority citation for part 61 continues to read as follows:


[[Page 67122]]


    Authority: 47 U.S.C. 151, 154(i), 154(j), 201-05 and 403, unless 
otherwise noted.


0
9. Section 61.41 is amended by revising paragraph (d) and adding 
paragraph (f) to read as follows:


Sec.  61.41  Price cap requirements generally.

* * * * *
    (d) Except as provided in paragraph (e) of this section, local 
exchange carriers that become subject to price cap regulation as that 
term is defined in Sec.  61.3(ff) shall not be eligible to withdraw 
from such regulation.
* * * * *
    (f) Notwithstanding the requirements of paragraphs (c) and (d) of 
this section, a telephone company subject to rate-of-return regulation 
that is affiliated with a price cap local exchange carrier may provide 
business data services pursuant to Sec.  61.50 without converting other 
services to price cap regulation.

0
10. Section 61.50 is added to read as follows:


Sec.  61.50  Regulation of business data services offered by rate-of-
return carriers electing incentive regulation.

    (a) A rate-of-return carrier, as defined in Sec.  51.903(g) of this 
chapter, may elect to offer its business data services subject to 
incentive regulation pursuant to this section. A rate-of-return carrier 
may elect to offer business data services subject to incentive 
regulation pursuant to this section only if all affiliated rate-of-
return carriers meeting the requirements of paragraph (b) of this 
section make the election. A carrier's election under this section is 
irrevocable.
    (b) A rate-of-return carrier is eligible to elect incentive 
regulation for its business data services if the carrier:
    (1) Receives universal service payments pursuant to the 
Alternative-Connect America Cost Model pursuant to Sec.  54.311 of this 
chapter;
    (2) Is an affiliate of a price cap local exchange carrier operating 
pursuant to a waiver of Sec.  61.41;
    (3) Receives universal service payments pursuant to Sec.  54.306 of 
this chapter; or
    (4) Transitions away from legacy support mechanisms in the future.
    (c) A rate-of-return carrier electing to offer business data 
services pursuant to this section shall employ the procedures outlined 
in Sec. Sec.  61.42 through 61.49 to calculate rates for its business 
data services and adjust its indexes for those rates to the extent 
those sections are applicable to business data services, except that:
    (1) Exogenous costs associated with regulated services shall be 
allocated to business data services based on relative regulated 
business data services revenues, compared to regulated revenues and 
related support receipts; and
    (2) An electing carrier is not required to file a short form tariff 
review plan as required by Sec.  61.49(k).
    (d) A rate-of-return carrier electing to offer business data 
services pursuant to this section must remove its business data 
services from the NECA Traffic Sensitive Pool. Such a carrier may 
continue to participate in the NECA Traffic Sensitive Pool and tariff 
for access services other than business data services.
    (e) A rate-of-return carrier offering business data services 
pursuant to this section may offer those business data services at 
different rates in different study areas.
    (f) A rate-of-return carrier offering business data services 
pursuant to this section may make a low-end adjustment pursuant to 
Sec.  61.45(d)(1)(vii) unless it:
    (1) Exercises the regulatory relief pursuant to paragraph (g) of 
this section in any part of its service region; or
    (2) Exercises the option to use Generally Accepted Accounting 
Principles rather than the part 32 Uniform System of Accounts pursuant 
to Sec.  32.11(g) of this chapter.
    (g) A rate-of-return carrier electing to offer business data 
services pursuant to this section may offer time division multiplexed 
transport and end user channel termination services at or below a DS3 
bandwidth that include:
    (1) Volume and term discounts;
    (2) Contract-based tariffs, provided that:
    (i) Contract-based tariff services are made generally available to 
all similarly situated customers; and
    (ii) The rate-of-return carrier excludes all contract-based tariff 
offerings from incentive regulation; and
    (3) The ability to file tariff revisions on at least one day's 
notice, notwithstanding the notice requirements for tariff filings 
specified in Sec.  61.58.
    (h) A rate-of-return carrier electing to offer business data 
services pursuant to this section shall comply with the requirements of 
Sec.  69.805 of this chapter in its study areas deemed non-competitive 
pursuant to this section.
    (i) The regulation of other services offered by a carrier that 
offers business data services pursuant to this section shall not be 
modified as a result of the requirements of this section.
    (j)(1) The Wireline Competition Bureau will conduct an initial 
competitive market test for rate-of-return carriers eligible to elect 
incentive regulation pursuant to this section. Study areas of such 
carriers will be deemed competitive if 75 percent of the census blocks 
within the study area are reported to have a minimum of 10 Mbps 
download and 1 Mbps upload broadband service offered by a cable 
operator based on the most current publicly available Form 477 data. A 
list of study areas deemed competitive by the competitive market test 
will be published on the Commission's website.
    (2) The Wireline Competition Bureau will conduct subsequent 
competitive market tests for rate-of-return carriers electing incentive 
regulation pursuant to this section contemporaneously with the 
subsequent tests mandated by Sec.  69.803 of this chapter for price cap 
carriers.
    (3) A study area of an electing carrier deemed competitive by the 
competitive market test will retain its status in subsequent tests.
    (k)(1) Packet-based and time division multiplexed business data 
services above a DS3 bandwidth offered by a rate-of-return carrier 
pursuant to this section shall not be subject to ex ante pricing 
regulation.
    (2) Time division multiplexed end user channel termination business 
data services at or below a DS3 bandwidth offered by a rate-of-return 
carrier pursuant to this section in study areas deemed competitive by 
the competitive market test shall not be subject to ex ante pricing 
regulation.
    (3) A rate-of-return carrier electing incentive regulation for its 
business data services must detariff:
    (i) All packet-based and time division multiplexed business data 
services above a DS3 bandwidth within thirty-six months after the 
effective date of its election of incentive regulation; and
    (ii) All time division multiplexed end user channel termination 
business data services at or below a DS3 bandwidth in any study area 
deemed competitive by the competitive market test within thirty-six 
months after such services shall be deemed competitive in a study area.
    (l)(1) A rate-of-return carrier electing incentive regulation for 
its business data services effective July 1, 2019 must notify the Chief 
of the Wireline Competition Bureau of its election by May 1, 2019 for 
it to become effective concurrent with the annual access tariff filing 
in 2019.
    (2) A rate-of-return carrier electing incentive regulation for its 
business data services effective July 1, 2020 must notify the Chief of 
the Wireline Competition Bureau of its election by May 1, 2020 for it 
to become effective concurrent with the annual access tariff filing in 
2020.

[[Page 67123]]

    (3) A rate-of-return carrier accepting future offers of 
Alternative-Connect America Cost Model support or otherwise 
transitioning away from legacy support mechanisms and electing 
incentive regulation for its business data services must notify the 
Chief of the Wireline Competition Bureau of its election by May 1 
following its acceptance of the offer for it to become effective 
concurrent with that year's annual access tariff filing.

0
11. Section 61.55 is amended by revising paragraph (a) to read as 
follows:


Sec.  61.55  Contract-based tariffs.

    (a) This section shall apply to price cap local exchange carriers 
permitted to offer contract-based tariffs under Sec.  1.776 or Sec.  
69.805 of this chapter, as well as to the offering of business data 
services by rate-of-return carriers pursuant to Sec.  61.50.
* * * * *

PART 69--ACCESS CHARGES

0
12. The authority citation for part 69 continues to read as follows:

    Authority: 47 U.S.C. 154, 201, 202, 203, 205, 218, 220, 254, 
403.


0
13. Section 69.114 is amended by revising paragraph (a) to read as 
follows:


Sec.  69.114  Special access.

    (a) Appropriate subelements shall be established for the use of 
equipment or facilities that are assigned to the Special Access element 
for purposes of apportioning net investment, or that are equivalent to 
such equipment or facilities for companies subject to price cap 
regulation as that term is defined in Sec.  61.3(ff) of this chapter.
* * * * *

[FR Doc. 2018-27528 Filed 12-27-18; 8:45 am]
 BILLING CODE 6712-01-P