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BACKGROUND p>"(# 3 XX` ` A. The Telecommunications Act of 1996 Video Programming Provisions ` p>"(# 3 XX` ` B. The Commission's Proceeding to Implement Open Video Systems ` p>"(# 7 X\III. THE PART 64 COST ALLOCATION PROCESS p>"(# 9 X\IV. PROBLEMS WITH EXISTING PART 64  ALLOCATION METHODOLOGIESp!(# 16 X\V. DISCUSSION p"(# 22 XX` ` A. Goals and Purposes ` p"(# 22 XX` ` B. Cost Pools and Allocation Methods ` p"(# 27 XX` ` X ` ` 1. Loop Plant p"(# 28 XX` ` X X a. Direct assignment p"(# 28 XX` ` X X b. Allocations based on usage measurements p"(# 30 XX` ` X X c. Allocation based on a ratio of directly assigned plant p"(# 34 XX` ` X X d. Establishment of a cost allocation ceiling p"(# 35 XX` ` X X e. Cost allocations based on fixed factors p"(# 37"(0*0*0* '"ԌXX` ` X ` ` 2. Switching Plant p"(# 43 XX` ` X X a. Current method of allocating switching plant costs p"(# 43 XX` ` X X b. Issues of changing technologies and discussion p"(# 44 XX` ` X ` ` 3. Interoffice Transmission Facilities p"(# 45 XX` ` X X a. Current method of allocating interoffice transmission facilities p"(# 45 XX` ` X X b. Discussion p"(# 46 XX` ` C. Methods for Allocating Expenses ` p"(# 47 XX` ` X ` ` 1. Networkrelated expenses p"(# 47 XX` ` X ` ` 2. Maintenance Expenses p"(# 48 XX` ` X ` ` 3. Marketing Expenses p"(# 49 XX` ` X ` ` 4. Overheads p"(# 50 XX` ` D. Other General Allocation Issues ` p"(# 51 XX` ` X ` ` 1. Allocation of Spare Facilities p"(# 51 XX` ` X ` ` 2. Pole Attachment and Conduit p"(# 55 X\VI. TREATMENT OF COST REALLOCATIONS UNDER  I/PRICE CAP REGULATIONp"(# 58 X\VII. PROCEDURAL MATTERS p"(# 64  Xy4XX` ` A. Ex Parte ` p"(# 64 XX` ` B. Comment Dates ` p"(# 65 XX` ` C. Regulatory Flexibility Analysis ` p"(# 68 X\VIII. ORDERING CLAUSE p"(# 69  X4J: I. INTRODUCTION ă  X4 e 1. ` ` The Telecommunications Act of 1996 (1996 Act) became law on February 8,  X4 x1996.9 X%4 xԍ Telecommunications Act of 1996, Pub. L. No. 104104, 101 Stat. 56 (1996). We refer to provisions of the 1996 Act using the sections at which they will be codified. The 1996 Act establishes an overarching goal that the Commission "provide for a pro xcompetitive, deregulatory national policy framework designed to accelerate rapidly private sector  xdeployment of advanced telecommunications and information technologies and services to all  Xg4 xAmericans by opening all telecommunications markets to competition. . . ."gb9 Xz4 x+ԍ Telecommunications Act of 1996 Conference Report, S. Rep. 104230 at 113 (Feb. 1,  Xc 41996) (Conference Report). Consistent with this  xgoal, the 1996 Act replaces the statutory prohibition against incumbent local exchange carrier  xprovision of video programming directly to subscribers in its telephone service area with a new  X"4 xregulatory model."9 X$4 xyԍ See Cable Communications Policy Act of 1984, Pub. L. No. 98549,  613(b) (codified  xat 47 U.S.C.  553(b)), enacting the telephonecable crossownership prohibition. The prohibition  xdid not apply "in rural areas" and could be waived by the Commission upon a "showing of good  X'4cause." Id. at  613(b)(3), (4). The 1996 Act offers common carriersJ"n 9 X4 xԍ The 1996 Act uses the term "incumbent local exchange carriers" to describe common  Xy4 xcarriers we have historically called "telephone companies." See 1996 Act sec. 101,  251(h). Throughout this item we use these terms interchangeably.J four ways to enter and compete in the""M0*(("  xvideo programming service marketplace. They may choose to: (1) provide transmission of video  X4 xprogramming on a common carrier basis under Title II of the Communications Act;RM9 X4ԍ 1996 Act sec. 302,  651(a)(2).R (2) provide  xlvideo programming service to subscribers through radio communication under Title III of the  X4 xICommunications Act;A9 Xj 4ԍ Id. at 651(a)(1).A (3) provide video programming service as a cable system under Title VI  X4 xof the Communications Act;F9 X 4ԍ Id. at  651(a)(3).F or (4) for local exchange carriers, provide video programming  X4 xservice by means of an "open video system" under new Section 653 of the Communications Act.d 9 X4 x+ԍ Id. at  651(a)(3)(4). Section 271(h) also permits Bell Operating Companies to offer video programming services across LATA (local access and transport area) boundaries.  X_4 e >2. ` ` In this Notice of Proposed Rulemaking (Notice) we initiate a proceeding to  ximplement these specific provisions of the 1996 Act by reexamining the Commission's rules  xlgoverning how incumbent local exchange carriers allocate their costs between regulated and  X 4 xnonregulated activities. x 9 X4 xWԍ By nonregulated activities, we mean activities not regulated under Title II of the  x Communications Act. This category generally consists of: activities that have never been subject  x8to regulation under Title II; activities subject to Title II regulation that we have preemptively  x4deregulated; and activities subject to Title II regulation that have been deregulated at the  xinterstate level, but not preemptively deregulated, that we decide should be classified as  XX4nonregulated activities for Title II accounting purposes. See 47 C.F.R. S 32.23(a). Specifically, we seek to amend our cost allocation rules and procedures  xRto accommodate an incumbent local exchange carrier's use of the same network facilities to  xAprovide video programming service and other competitive offerings not subject to Title II  xregulation, as well as telephony and other Title II offerings. The basic problem addressed in this  xEproceeding is how to allocate common costs between the nonregulated offerings that will be  xintroduced by incumbent local exchange carriers and the regulated services they already offer.  xOur current cost allocation rules were not designed for this task. Initially, we anticipate the most  xRdifficult problem we must address is how to allocate common costs associated with facilities  xIconnecting incumbent local exchange carrier switching facilities with customers' premises. We  xanticipate, however, that similar problems will arise concerning allocation of common costs of  xswitching equipment and interoffice trunks. While much of the focus of this proceeding is on  x<provision of video programming service by incumbent local exchange carriers, we note that this  x"is likely to be only the first major competitive service that will be provided jointly with regulated  xtelephone service. We anticipate that other such services will follow. Thus, in the short term,"@ 0*((]"  x[video services will account for the majority of nonTitle II use of the network facilities of  x}incumbent local exchange carriers. We anticipate that in the long term, however, that a panoply  xof broadbandbased, nonregulated services will share facilities with regulated services. We seek  xcomment on whether and how the procedures established in this proceeding should be applied  xto incumbent local exchange carrier provision of video programming services and other  X4 xpcompetitive offerings by those companies. 9 X4 xԍ Although the 1996 Act refers to the provision of video programming services by "common  x/carriers" we are concerned with offerings of "incumbent local exchange carriers" because only  x[the latter are subject to our rules governing the allocation of costs between regulated and nonregulated activities. In particular, we seek comment on how changes in usage over time should affect cost allocation between regulated and nonregulated activities.  X_' vf<II. BACKGROUND׃  X 'A. The Telecommunications Act of 1996 Video Programming Provisions  X 4 e 3. ` ` Section 302 of the 1996 Act establishes a new part V (Section 651653) of Title  xvVI of the Communications Act of 1934 setting forth the general regulatory treatment for video  xprogramming services provided by common carriers. As stated above, the specific entry options  xfor common carriers entering the video programming marketplace are set forth in Section 651,  xcwhich provides that they may provide video programming: (1) as a common carrier under Title  x}II; (2) through radio communications under Title III; (3) as a cable system under Title VI; or (4) if the common carriers is a local exchange carrier, as an open video system under Title VI.  X44 e 4. ` ` In allowing common carriers to enter the video programming marketplace, Congress stated:  XRecognizing that there can be different strategies, services and technologies for  entering video markets, the conferees agree to multiple entry options to promote  competition, to encourage investment in new technologies and to maximize  consumer choice of services that best meet their information and entertainment  X4needs.I 49 Xx4ԍ Conference Report at 172.I   Xe4 x/The Joint Explanatory Statement of the Committee of Conference notes that "the conferees  x"recognize that telephone companies need to be able to choose from among multiple video entry  xoptions to encourage entry," and therefore systems under this section should be "allowed to tailor  X"4 xpservices to meet the unique competitive and consumer needs of individual markets."; "9 X%4ԍ Id. at 177.; The 1996  xAct, thus, gives incumbent local exchange carriers broad flexibility in determining how to enter"  0*(("  xand compete in the video marketplace. Ultimately, the 1996 Act recognizes that vigorously competitive markets are the best way to serve consumers' interests.  X4 e e5. ` ` The concept of open video systems presented in Section 653 creates a new  xframework for entering the video marketplace. Generally, Section 653 provides that, if a local  xexchange carrier certifies that it complies with certain nondiscrimination and other requirements  xestablished by the Commission, its open video system will not be subject to regulation under  X_4 xATitle II and will be entitled to reduced regulation under Title VI.K _9 X4ԍ Id. at  653(a)(1), (c).K The Commission must  XH4 xapprove or disapprove any open video system certification request within ten days of receipt.FH{9 Xt 4ԍ Id. at  653(a)(1).F  X 4 e ,6. ` ` The 1996 Act also contains numerous other provisions that may result in common  xcarriers providing other competitive services that may be classified as "nonregulated activities"  x8for purposes of our Part 64 cost allocation process. This proceeding addresses methods for  x[allocating costs between regulated activities subject to Title II and nonregulated activities  x/including video services and other offerings that become subject to competition that will protect customers of regulated services against cost misallocations.  Xy' B. The Commission's Proceeding to Implement Open Video Systems  XK4 e 7. ` ` In a separate proceeding, the Commission is developing rules for open video  X44 xsystems.4.9 X4 x"ԍ See Implementation of Section 302 of the Telecommunications Act of 1996, Open Video  xSystems, Telephone CompanyCable Television CrossOwnership rules, Section 63.5463.58,  X4 xReport and Order and Notice of Proposed Rulemaking, CS Docket Not. 9646, CC Docket No.  X487266 (Terminated), FCC No. 9699 (Mar. 11, 1996) (Open Video Systems Notice). In general, the Open Video Systems Notice seeks to determine what Commission  x[action will best ensure that carriers meet the open video system requirements to promote  xVCongress' goals of open interconnection, enhanced competition, streamlined regulation, diversity  x+of programming choices, investment infrastructure and technology, and increased consumer  X4choice.n9 X+ 4ԍ Id. at para. 4, citing Conference Report at 172, 17778.n  X4 e 8. ` ` The Open Video Systems Notice notes that the Part 64 rules would require a  x'telephone company seeking certification for open video systems "to segregate its cost of  xproviding regulated telecommunications services from its cost of providing an unregulated service  Xi4 x(i.e., the provision of video programming service over an open video system)."jiS 9 Xm&4ԍ Id. at para. 70, citing the impendency of this proceeding.j That Notice"i 0*((q"  xalso seeks comment on what actions or representations regarding the Part 64 process the  X4Commission should require in the open video systems verification process.39 Xb4ԍ Id.3  X4  III. THE PART 64 COST ALLOCATION PROCESS ă  X4 e 9.` ` Part 64 of the Commission's rules governs an incumbent local exchange carrier's  xallocation of joint and common costs between activities regulated under Title II and nonregulated  X_4 xactivities.R_{9 X 4 xԍ If an expense is joint with respect to services A and B, the elimination of either service  xuA or B alone will not eliminate the cost. A costcausative relationship thus does not exist  X_ 4 xbetween the expense and individual services. If an expense is common with respect to services,  xa costcausative relationship can be determined by varying the service outputs and observing the  X34 x/effect on total cost. An expense is special with respect to services if the expense is dedicated  xto producing only that service. For an explanation of how common costs can be attributed to  X4 xindividual services in a costcausative manner, see Alfred E. Kahn, The Economics of Regulation:  X4Principles and Institutions, Vol. 1 (New York: John Wiley & Sons, 1970), Chapter 3. The Commission established these rules to protect ratepayers from bearing the costs  xand risks of nonregulated activities. The rules are intended to deter unreasonable cost shifting  X14both from cost misallocations of joint and common costs and from affiliate transactions.1 9 Xw4 xԍ See Separation of Costs of Regulated Telephone Service from Cost of Nonregulated  Xb4 xActivities, CC Docket No. 86111, Report and Order, 2 FCC Rcd 1298 (1987) (Joint Cost  XM4 xOrder), modified on recon., 2 FCC Rcd 6283 (1987) (Joint Cost Reconsideration Order),  X84 x*modified on further recon., 3 FCC Rcd 6701 (1988) (Joint Cost Further Reconsideration Order),  X#4aff'd sub nom. Southwestern Bell Corp. v. FCC, 896 F.2d 1378 (D.C. Cir. 1990).  X 4 e  10. ` ` The allocation of costs between regulated and nonregulated activities under Part  x64 uses the accounts established in our Part 32 Uniform System of Accounts (USOA) for  X 4 xtelecommunications companies.{ 9 Xz4ԍ 47 U.S.C. Part 32 Uniform System of Accounts for Telecommunications Companies.{ The USOA is an historical financial accounting system that  xRreports the results of operational and financial events in a manner that enables management,  xregulators, the financial community and others to assess these results within a specified  x/accounting period. The USOA reflects stable, recurring financial data kept in accordance with  Xy4generally accepted accounting principles.>y9 X"4ԍ 47 C.F.R.  32.1.>  XK4 e 9 11. ` ` Our Part 64 rules direct incumbent local exchange carriers to allocate the costs in  xythese accounts between regulated and nonregulated activities pursuant to a hierarchy of cost  xapportionment methods that emphasizes direct assignment and the use of costcausative allocation"V0*(("  xmethods. Part 64 applies to "incumbent local exchange carriers" as that term is defined in the  X41996 Act.9 Xb4 xԍ See 1996 Act sec. 101,  251(h). We note that our rules do not require incumbent local  x@exchange carriers subject to rateofreturn regulation that receive interstate revenues based on the  xaverage schedules prepared by the National Exchange Carrier Association to prepare cost  xallocation manuals. The schedules, however, are based on costs of companies that do follow the Part 64 procedures.  X4  X4 e  12. ` ` Whenever possible, costs in each Part 32 account are to be directly assigned to  xueither regulated or nonregulated activities. For example, the salary of a customer service  xrepresentative dealing exclusively with interexchange carriers taking access services would be  xdirectly assignable to regulated activities. If costs cannot be directly assigned, they are  xyconsidered common costs and placed in cost pools. These are homogeneous cost categories  XH4designed to facilitate the cost allocation process.0H9 X4 xԍ A category of cost is generally considered "homogeneous" if it contains the costs incurred  xlin the same way, if the facilities are used in the same way, or if the costs in the category are susceptible to the same allocation factor.0  X 4 e  13. ` ` The costs in each pool are then allocated between regulated and nonregulated  X 4 xMactivities using a usagebased allocation factor. Although the Joint Cost Order, which established  xthe Part 64 rules, did not prescribe a specific allocation factor for each cost pool, it established  xguidelines for carriers selecting allocation factors based on costcausative principles. Whenever  xpossible, common costs are to be directly attributed based upon direct analysis of the origin of  X 4 xthe costs themselves.? 9 X4 xԍ For example, the distribution of customer accounting service and equipment processing  xexpense could be directly attributed to regulated services and nonregulated activities on the basis of the number of regulated and nonregulated service orders.? Common costs that cannot be directly assigned are to be attributed based  X4 xon an indirect, but cost-causative linkage to another cost pool or group of cost pools for which  X{4 x"a direct assignment or attribution is available.{% 9 XQ4 xNԍ For example, the distribution of the time that craft employees worked on regulated  xpservices and nonregulated activities could be used to allocate their supervisors' salaries between  xpregulated services and nonregulated activities. In this example, the craft employees' time would be an indirect measure of cost causation to allocate supervisors' salaries. If direct or indirect measures of cost causation  xare not available, they are deemed "unattributable" and the cost pool is allocated using a  XM4prescribed general allocator.M9 X$4 xԍ For each subject carrier, its general allocator is the ratio of regulated to nonregulated  x+allocations for all expenses directly assigned or directly or indirectly attributed. 47 C.F.R.   Xa&4 x64.901(b); see Joint Cost Order, 2 FCC Rcd at 131819. The cost of maintaining a corporation as a legal entity is an example of an unattributable cost. "M0*(("Ԍ  X4 e $ 14. ` ` Each incumbent local exchange carrier with $100 million or more in annual  xoperating revenues must file cost allocation manuals setting forth the carrier's methodology for  X4 x<allocating costs between Title II regulated and nonregulated services.C9 X44ԍ 47 C.F.R.  64.903(a).C Each of these manuals  xmust: (a) describe the carrier's nonregulated activities; (b) list all of the carrier's incidental  X4 xactivities and the justification for treating each activity as incidental;y9 X4 xԍ "Incidental activities" include costs of nontariffed activities that are outgrowths of  xregulated operations totalling an amount less than one percent of a company's total revenues.  X 4 xJoint Cost Order, 2 FCC Rcd at 1308. For example, costs associated with moving cables during road repair or other construction operations would be an incidental activity. (c) contain a chart showing  x+all of the carrier's corporate affiliates; (d) describe affiliates that engage in or will engage in  x"transactions with the carrier and the nature, terms, and frequency of such transactions; and (e)  xprovide, for each Part 32 account, a detailed description of the cost pools to which amounts in  X14 xpthe account will be assigned and the basis on which each cost pool will be allocated.@19 X4ԍ 47 C.F.R.  64.903.@ The cost  X 4 x}allocation manuals must contain a description of the carrier's time reporting procedures.3 9 Xc4ԍ Id.3 In the  X 4 xCAM Uniformity Order,  K 9 X4 xԍ Implementation of Further Cost Allocation Uniformity, Memorandum Opinion and Order, 8 FCC Rcd 4664, 466570 (Com.Car.Bur. 1993). the Bureau prescribed cost pools and allocations for ten accounts within  xthe USOA that all incumbent local exchange carriers must use. The requirements were intended  xto ensure uniformity in the application of our rules among carriers and to permit more effective  X 4oversight.B! 9 XX4ԍ Id. at 4664.B  X4 e 15. ` ` A major element of the cost allocation manuals is the cost apportionment tables.  xThe tables generally describe the allocation process, including: the Part 32 accounts; descriptions  xof the cost pools; descriptions of the allocation procedures for each cost pool; and the allocations  xbetween regulated and nonregulated activities. Incumbent local exchange carriers subject to the  x<cost allocation manual filing requirements must file changes to their manuals whenever the cost  X4 xapportionment table is changed,C"9 Xj#4ԍ 47 C.F.R.  64.903(b).C 60 days before that change takes effect.#K9 X%4ԍ Id. The period for review of the changes may be extended by the Bureau to 180 days. A decision by an  xincumbent local exchange carrier to offer video programming service on a nonregulated basis will require a change to its cost apportionment tables."#0*(("Ԍ X'ԙ  IV. PROBLEMS WITH EXISTING PART 64  X' ALLOCATION METHODOLOGIES \  X4 e 16. ` ` Incumbent local exchange carriers' networks incur costs in providing two broad  xcategories of facilities: dedicated and shared. Dedicated facilities are those used by a single type  X4 xof service, e.g., regulated telephony service. Shared facilities are used by more than one type  Xx4 xof service, e.g., regulated telephony and nonregulated offerings. The incremental cost of a  xservice in a multiservice network is the difference between the cost of the facilities required for  xa complete system and the cost of the facilities in a system that does not provide that service.  xTo the extent that the incremental costs of all services do not exhaust the total cost of the system,  X 4there are common costs that must be allocated on some basis..$ 9 X 4 xԍ Strictly speaking, there may be costs that are common to groups of services that are not  xcommon to all services. We are concerned only with costs that are common to groups which include both regulated and nonregulated services..  X 4 e S17. ` ` Part 64 identifies classes of costs based on a hierarchy of accountingbased, cost xallocation methodologies that attempt to emulate the manner in which costs are incurred. This  xhierarchy includes: direct assignment; attribution based on an allocator logically related to cost  xpcausation; and allocation based on a general allocator. These procedures are discussed in detail  xin section III, above. Dedicated costs must be directly assigned. The costs of shared facilities  xthat have a traffic sensitive component are to be attributed on a costcausative basis. Costs of  xshared facilities that do not have a traffic sensitive component are assigned by the general allocator.  X!4 e 18. ` ` Virtually all incumbent local exchange carriers' outside plant is dedicated and  xassigned to regulated activities by direct assignment. The majority of central office equipment  xis allocated to regulated activities, with only a small portion allocated to nonregulated activities.  xcAll shared switching costs are allocated between regulated and nonregulated activities based on  xhthe ratio of projected peak regulated and nonregulated usage over a threeyear period, as  X4 xprescribed by the Part 64 rules.P%K9 X4ԍ See 47 C.F.R.  64.901(b)(4).P In the future, however, the outside plant that carries regulated  xyvoicegrade communications might also, for example, be used to transmit video programming  x8service for a carrier's open video or cable system or other nonregulated services. Thus, we  xcrecognize the need, and undertake in this proceeding, to address, for the first time, the allocation  xIbetween activities regulated under Title II of the Communications Act and other "nonregulated"  X;4activities of substantial amounts of common costs for outside plant categories.&;9 X#4 x_ԍ Operation of a cable system or open video system, while "nonregulated" is still subject to Title VI of the Communications Act. 1996 Act sec. 302,  251(a)(3)(4).  X 4 e `19. ` ` The basic problem this proceeding must address is how to allocate costs of shared  x<facilities that will be used jointly for regulated and nonregulated activities. For the nonregulated" &0*(("  xofferings contemplated in this proceeding, loop plant presents the greatest problem. Direct  xassignment is generally not available because loops capable of providing both regulated and  xnonregulated services generate common costs. Because loop plant is primarily traffic insensitive,  xthe usagebased allocation process prescribed by our Part 64 rules does not result in cost X4causative allocations.\'9 X4ԍ This is discussed in Section V.b.1.b, infra.\  Xv4 e 520. ` ` The rationale for allowing telephone companies to establish hybrid systems for  xboth regulated and nonregulated activities is that the costs to telephony and video ratepayers (and  xother nonregulated services) should be less for services provided over the hybrid system than the  xcosts of those services provided over standalone systems. In economic terms, the hybrid system  x<offers economies of scope. Ideally, our cost allocation process would assign all regulated costs  x}to regulated activities and all nonregulated costs to nonregulated activities. We seek to establish  xbounds on cost assignment that could prevent misallocations (or overallocation) of costs that are  xcommon to the regulated and nonregulated activities. An overallocation of common costs to  xregulated activities would cause regulated ratepayers to bear more costs than they would had the  xshared use facilities not been built. Conversely, an overallocation of common costs to  xunonregulated activities, could dissuade companies from entering nonregulated competitive  xmarkets, thus depriving regulated ratepayers of any benefit from the economies of scope using  Xb4 xfacilities to provide both services might have created.~(b{9 X4 xԍ We note that under rateofreturn regulation, costs allocated to regulated activities become  xthe basis for regulated prices. The link between allocated regulated costs and prices under price  X`4cap regulation is less direct. We discuss the effect on price caps in Section VI, infra. ~ Economists have addressed these issues  xIby defining the terms incremental and standalone costs. Economists would say that in order to  xgive incumbent local exchange carriers the proper incentives to build multiservice facilities,  xwhere such facilities are economically rational, cost allocated to each individual service or subset  xof services should be less than the standalone cost but greater than the incremental cost. Stand xalone costs represent the total cost of constructing facilities dedicated to a specific group of  xVservices, while incremental costs represents the additional cost that must be incurred in order to  X4 xprovide a group of services where facilities are in place to provide other services.) 9 Xr4 xNԍ The longrun incremental cost (LRIC) of a service is the theoretical foundation for  xefficient pricing of network services. We have defined LRIC as including "the full amount of  xincremental investment and expenses which would be incurred by reason of furnishing additional  xquantities of service, whether in a new or an existing service category." We added that in  xestimating LRIC, one "determine[s] prospectively the effect on total costs, including the effect  xon common costs, . . . of adding units of service." American Telephone & Telegraph Co., 55  xFCC 2d 224, 231 n. 18 (1976) (citing American Telephone & Telegraph Co., 18 FCC 2d 761,  x766 (1969)). Economists generally agree that prices based on LRIC reflect the true economic  xcost of a service and give appropriate signals to produces and consumers and ensure efficient  X&4 x3entry and utilization of the telecommunications infrastructure. See generally Alfred E. Kahn, The  X'4Economics of Regulation: Principles and Institutions at 85 (1970). These are" )0*(("  xcthe upper and lower bounds within which costs allocated to regulated and nonregulated services should fall.  X4 e 21. ` ` In the following section, we discuss how we might address the cost allocation  x+problems we have described. We first discuss the goals and purposes that should guide our  xefforts to establish necessary rules. We then discuss various mechanisms, some found in our current rules and others based on ideas outside of our current rules.  XH'v HV. DISCUSSION ă  X 4 A. Goals and Purposes  X 4 e K22. ` ` The goal of the 1996 Act is "to provide for a procompetitive, deregulatory  x}vnational policy framework designed to accelerate rapidly private sector deployment of advanced  xtelecommunications and information technologies and services to all Americans by opening all  X 4 xtelecommunications markets to competition. . . ."* 9 X 4 xԍ Joint Explanatory Statement, Conference Report at 113. The 1996 Act defines "advanced  xtelecommunications capability" as "highspeed, switched, broadband telecommunications  xcapability that enables users to originate and receive highquality voice, data, graphics, and video  X4telecommunications using any technology." 1996 Act at  706(c)(1).  Consequently, we recognize three basic goals  xfor this proceeding. First, we seek to give effect to the provisions of the 1996 Act, and the  xunderlying Congressional intent, that facilitate the development of competitive  x<telecommunications service offerings. Second, we intend to give effect to provisions relating in  xparticular to local exchange carrier entry into video distribution and programming services  x[markets. Our third goal is to ensure that ratepayers pay telephone rates that are just and  X4 x"reasonable, as mandated by Section 201(b) of the Communications Act of 1934, as amended,@+89 X4ԍ 47 U.S.C.  201(b).@  X4 xand that are just, reasonable and affordable, as mandated by Section 254(b)(1) of the 1996 Act.O,9 X4ԍ 1996 Act sec. 101(a),  254(b)(1).O  X4 x&We also seek to ensure, as mandated under Section 254(k) of the 1996 Act,L-9 X:4ԍ 1996 Act sec. 101(a),  254(k).L that incumbent local  xlexchange carriers do "not use services that are not competitive to subsidize services that are  X4 xVsubject to competition."3.K 9 X"4ԍ Id.3 Much of the network facilities incumbent local exchange carriers will  xuse to provide nonregulated services, including video programming services may also be used  xto provide telephone services that we regulate pursuant to Title II of the Communications Act.  xVTo ensure that telephone subscribers are not forced to pay for the nonregulated offerings of the  xincumbent local exchange carriers, including video programming services, we address specific  XN4issues concerning the allocation of joint and common costs. "N .0*((u"Ԍ X4 e  ę23. ` ` Our cost allocation proceeding is not intended to protect competitors in video  xhservice or other competitive markets. Consequently, our rules will intentionally allocate a  xsignificant part of common costs to nonregulated services. This is appropriate because we  xbelieve that telephone ratepayers are entitled to at least some of the benefit of the economy of  xscope between telephony and competitive services. Additionally, because cost allocation is  xinevitably imperfect, a policy of allocating all common costs to telephony would pose a  xsignificant risk that telephone ratepayers would pay more than standalone costs, and would thus  xbe crosssubsidizing the incumbent local exchange carriers' competitive operations in violation of the Act.  X 4 e B24. ` ` We seek to establish a system of cost allocation principles that inhibits carriers  xpfrom imposing on ratepayers the costs and risks of competitive, nonregulated ventures, including  xnonregulated video service ventures. We believe that such a system of cost allocation principles  x=must balance: administrative simplicity; adaptability to evolving technologies; uniform  xVapplication among incumbent local exchange carriers, in particular those that must file their cost  xallocation manuals with the Commission; and consistency with economic principles of costcausation.  Xb4 e v25. ` ` Administrative simplicity should result in clarity of our rules so that carriers can  xquickly and accurately implement these procedures in their cost allocation manuals.  x"Administrative simplicity would facilitate review of the revised manuals so that services can be  xpoffered without unnecessary delays. If allocation methods are too complex, they become costly  xand burdensome for companies to implement and for regulators to determine whether carriers are  xin compliance with such rules. Adaptability of the rules to technologies promotes viable  xcompetitive offerings. If the rules are not neutral with respect to the various alternative  xtechnologies available for providing a broad class of services, our cost allocation rules may  xinadvertently create an uneconomic incentive for carriers to use a technology other than the most  xefficient technology. The lack of such neutrality may also raise administrative costs by requiring  xuan unnecessary proliferation of rules and frequent revisions as new technologies develop.  xUniformity in the application of our rules brings the certainty and fairness that promote the  xcarriers' ability to compete effectively. This uniform interpretation and application of rules  xamong a large group of carriers reduces administrative costs carriers might otherwise incur when  x_they seek clarifications of rules and assists regulatory efforts to enforce those rules. Finally,  xpconsistency with economic principles of costcausation is the most direct means of assuring that telephone ratepayers do not bear the costs and risks of competitive, nonregulated activities.  X 4 e 26. ` ` We seek comments on these goals and purposes. We also invite parties to suggest  xany additional goals that should be considered in this proceeding. In particular, we seek  xcomment on how we can ensure that telephone ratepayers are protected by our processes for  xpallocating costs between regulated and nonregulated activities generally and regulated and video programming services in particular. "Q% .0*((e#"Ԍ X' B. Cost Pools and Allocation Methods  X4 e 27. ` ` We tentatively conclude that we should prescribe specific cost pools and allocation  xfactors in this proceeding for allocating video programming and other nonregulated service costs.  xSpecific cost pools and allocation factors will produce certainty and uniform treatment of costs  xby incumbent local exchange carriers. Uniformity will reduce administrative burdens on both  xycarriers and those reviewing carrier information. Uniform allocation methods will also foster  xccompetition in local exchange markets by allowing direct comparisons of cost allocations among  xIincumbent local exchange carriers and helping highlight anomalies that may signal competitively  X14 x8harmful cost misallocations. We invite comment on this tentative conclusion. We also seek  xcomment on whether this proceeding should prescribe specific rules for the allocation of video  xprogramming service costs or whether general guidelines could ensure realization of the goals  xpidentified in Section V.A above. Commenters should discuss the advantages and disadvantages  xof both approaches. While video may be the first significant nonregulated activity, it may not  x_be the only one. We therefore seek comment on how we should treat the costs of providing  X 4other nonregulated services vis a vis cost pools and allocation factors.  _  X{' 1. Loop Plant  XM' ` ` a. Direct assignment  X4 e 28. ` ` Direct assignment is most easily accomplished when accounting or operating  x_records demonstrate that particular facilities or resources are dedicated to regulated or  xnonregulated activities. We seek comment on the extent to which direct assignment can be used  xVto allocate the costs of loop plant used for services subject to regulation under Title II and video programming and other competitive services between regulated and nonregulated activities.  X4  X4 e 29.` ` One important issue is whether the developing changes in telecommunications  xltechnology make direct assignment impractical because either all or the vast majority of loop  xplant that would be used for video, highcapacity or otherwise competitive services would also  xbe used for regulated activities. Currently loop plant can be directly assigned to regulated  xactivities because the deployed loops are used exclusively to provide regulated incumbent local  x"exchange carrier services. Newer technologies, however, permit a single loop to be used for a  xmix of regulated and nonregulated services including the video programming services that the  x1996 Act now permits incumbent local exchange carriers to offer. A loop facility providing  xvideo programming service, for example, may also provide voicegrade telephone service. We  x"invite comment on which loop costs, if any, incurred in the provision of open video systems and other competitive services can be directly assigned to nonregulated activities.  X#' ` ` b. Allocations based on usage measurements  Xj$4  XS%4 e 30.` ` Where direct assignment of specific costs of loop plant to regulated or  xnonregulated activities is not possible, our rules would require that those costs be allocated based  xcon "the relative regulated and nonregulated use during the calendar year when nonregulated use"%' .0*((%"  X4 xis greatest in comparison to regulated use during a forecasted threeyear period."F/9 Xy4ԍ 47 C.F.R.  64.901(b)(4).F This cost  xallocation method has been applied to switching costs, which have been deemed traffic  X4 xsensitive.0y9 X4 xEԍ Technology is causing us to reexamine the assumption that switching costs are traffic  X4sensitive. See Section V.B.2. infra. For loop plant, usagebased methods would require the allocation of nontraffic  xpsensitive costs on a traffic sensitive basis. As discussed previously, the usage characteristics of  xqvideo programming, and possibly other highcapacity competitive offerings, may differ  xsignificantly from those of voicegrade services. For example, where video programming  xservices essentially constitute oneway communications, voicegrade services predominantly two xyway. Oneway video transmissions, such as motion pictures, may continue for several hours  xIwhile twoway, voicegrade communications are much shorter on average. Furthermore, video  xytransmission speeds (i.e., bits per second), and other highcapacity services, will dramatically  xpexceed those of voice transmissions. Thus, given an equal number of twoway voicegrade and  x}oneway video communications over loop plant, the video transmissions, and possibly other high x<capacity offerings, will account for the majority of minutes of use, and even higher percentages of the information transmitted.  X 4 e 31.` ` The use of loop plant by video programming services and voicegrade services also  xdiffers in another respect. The local exchange network carries numerous twoway, voicegrade  xcommunications, each unique, between the central office and a large number of widely dispersed  x'subscribers. Voicegrade circuits typically leave the central office in cables transmitting  x+numerous circuits that then branch into cables transmitting fewer and fewer circuits as they  xpapproach subscriber locations. Circuits transmitting video programming facilities, however, may  xtransmit the same signal over a wide area, using a single video programming service circuit,  xsimilar to cable television facilities, to carry the same collection of video signals to each  xcustomer. Under this scenario, compared to voicegrade facilities, video programming service  x<facilities would require much less circuit capacity near the central office, but much more circuit capacity near subscriber locations.  X4 e 32. ` ` With respect to circuit equipment costs, commenters should address whether these  xcosts are closely related to the relative use of the total circuit capacity created by that equipment.  xIf so, a circuit having ten times the capacity of another circuit may incur ten times the cost.  x_Alternatively, circuit equipment costs may be more closely tied to the number of times that a  xIcircuit is split by the circuit equipment than it is to the capacity of the individual circuits created.  x/This distinction may be important because an allocation factor based on the relative use of total  xcircuit capacity would not yield results reflecting cost causation if costs are related to the number of circuits used, irrespective of the capacity of those circuits.  X 4 e  33. ` ` We therefore tentatively conclude that differences in the usage characteristics of  xvideo programming services (and other highcapacity services that may be subject to competition)"!00*((% "  xand voicegrade services discussed above could cause prescribed factors that would be based on  xusage measurements to produce results inconsistent with the goals of the 1996 Act and our  xVguidelines for Part 64 discussed in Section V.A, above, particularly those listed in paragraph 24. We invite comment on this tentative conclusion.  X' ` ` c. Allocation based on a ratio of directly assigned plant  X_4 e !34. ` ` To the extent that the costs incurred by video and other competitive services do  xnot vary substantially with usage or cannot be fairly allocated based on usage factors, another  xpotential method of allocating the costs of loop plant that supports both regulated and  xnonregulated activities would be to develop a ratio that reflects the extent to which associated  xloop plant is directly assigned to regulated or nonregulated activities and apply that ratio to loop  xplant categories of common costs. Thus, if 40 percent of the directly assigned loop costs are  xassigned to regulated activities, then 40 percent of the loop costs of associated facilities would  xpbe allocated to regulated activities and 60 percent to nonregulated activities. We seek comment  xVon whether this is an appropriate method for allocating loop costs, and in particular, whether the  x amount of loop plant that would be directly assigned would be so small as to result in unreasonable allocation results or opportunities for manipulation.  XK'` ` d. Establishment of a cost allocation ceiling  X4 e "35. ` ` Another alternative would be to establish a ceiling on total loop costs that  x#incumbent local exchange carriers may allocate to regulated activities. For the video  xprogramming and other competitive services offered through hybrid systems, the economies of  xscope would be the difference between the cost of standalone telephone and standalone  xubroadband facilities, and the cost of the hybrid facilities. We cannot know these amounts  x_precisely. We do know, however, that if the provision of a hybrid system is an economically  xcefficient business decision, it will include economies of scope. The provision of telephony under  x/the hybrid system, therefore, should be less costly than under the current standalone telephony  xsystem. We seek comment on whether it would be reasonable to establish a ceiling based on the  xcosts of the current standalone telephone system, thus capping the amount of costs an incumbent local exchange carrier may assign to regulated activities.  X 4 e #36. ` ` We ask whether the costs for these hybrid systems could be recorded on an  xexchangebyexchange basis. If so, one possible way to define the ceiling on the allocation to  xregulated activities would be not to allow the cost per loop allocated from that exchange to  xregulated activities to increase. If the hybrid system includes economies of scope, we ask  xwhether we should expect the annual cost of telephone service in the exchange, in fact, to  xdecrease. If so, we seek comment on whether we should define that ceiling, for price cap  xIregulated companies, each year, by applying a modified price cap formula to total cost per loop;  Xh$4 x+i.e., adjust the pastyear total cost per loop by adding the inflation factor and subtracting the"h$00*((""  X4 xcompany's productivity factor.19 Xy4 xcԍ Pastyear total loop cost times (1+(GDPPI minus X)). "GDPPI" is the Gross Domestic  xuProduct Price Index used in the price cap formula to represent the effect of inflation; "X"  XK4 xrepresents the productivity factor elected by the incumbent local exchange carrier. See fn. 66  X64supra. The cost per loop to which the ceiling would apply would  X4 xinclude the capital and operating costs associated with the loop plant (e.g., return on net  xRinvestment, income taxes, depreciate expense, maintenance, and network administration and services) rather than the gross book value of the loop plant.  X' ` ` e. Cost allocations based on fixed factors  Xa4 e $37. ` ` The Commission's rules for allocating costs between interstate and intrastate  XJ4 xregulated services employ fixed (i.e., flat) allocation factors for allocating loop costs between the  X54 xpfederal and state jurisdictions.2589 X4 xԍ In addition, a fixed factor of 50 percent is prescribed for allocating certain billing  xlexpenses between the jurisdictions. 47 C.F.R.  36.380(c). Further, the Commission's rules  xrequire interexchange carriers to allocate residual circuit equipment costs based on factors frozen at 1985 levels. 47 C.F.R.  126(d)(3). The loop plant is considered to be nontraffic sensitive because  x<the costs of a loop do not vary with the volume of traffic it carries. The United States Court of  xAppeals for the District of Columbia Circuit has held that, for jurisdictional separations purposes,  X 4a fixed factor for loop plant is a rational alternative to a usagebased allocator.3 9 XE4ԍ See Rural Telephone Coalition v. F.C.C., 838 F.2d 1307, 131213 (D.C. Cir. 1988).  X 4 e z%38.NTS COSTS` ` Fixed factors generally have not been used in the Part 64 cost allocation process.  xAs video programming services and other highcapacity services become more prevalent,  xhowever, the use of fixed factors for allocating costs between regulated and nonregulated activities would simplify the allocation process by eliminating the need to measure usage.  XO4 e m&39. ` ` We seek comment in particular on specific allocation factors, such as 50 percent 4aOW 9 XW4 xԍ  See e.g. "Testimony of David F. Clark and Wayne R. Davis on behalf of The Southern  xNew England Telephone Company," Application of SNET Personal Vision, Inc. for a Certificate  xof Public Convenience and Necessity to Operate a Community Antenna Television System, State  xof Connecticut Department of Public Utility Control, Docket No. 9601, at 9 (Jan. 25, 1996),  xsubmitted with Southern New England Telephone Company's "Application Under Sec. 214 for  xVPermission to Construct Telecommunications Facilities," (filed with the Com. Car. Bur. January 25, 1996), discussing a fixed allocation factor of 50 percent.   xthat would split the costs of loop plant equally between regulated and nonregulated activities or  xsome other factor. For example, the cable television providers have proffered that 28 percent of"!40*(("  X4 x}common costs might be allocated to telephony.59 Xy4 xԍ Petition to Deny Pacific Bell's Section 214 Video Dialtone Applications of the California Cable Television Association, File Nos. WPC 6913 16, at 15 (filed Feb. 9, 1994). A fixed factor has the advantage of simplicity,  xyand would eliminate the need for usage projections and measurements as well as subsequent reallocations to adjust for inaccurate projections.  X4 e S'40. ` ` We tentatively conclude that we should prescribe a fixed factor for allocating loop  x+plant common costs between regulated and nonregulated activities. We reach this tentative  x_conclusion because it appears that usagebased allocations for loop plant would preclude our  xachieving the best possible balance of goals and objectives discussed in Section V.A of this Notice.  X 4 e (41. ` ` A fixed factor approach for nontraffic sensitive loop plant presumes that a cost xcausative allocation is not possible. When a costcausative method is not available, the allocation  xmust be based on other considerations such as demand or public policy considerations. Demand  xfor telephone service is at present highly inelastic. Thus, without either regulatory intervention  xcor workable competition, incumbent local exchange carriers have the ability to shift to telephone  xratepayers a large portion of the cost of facilities used for both regulated and nonregulated  xactivities. Such a result is contrary to the 1996 Act's requirement that ratepayers of regulated  x~service not bear the costs or risks of competitive ventures and, therefore, would be an  xunacceptable result. For this reason we tentatively conclude that relative demand cannot form the basis for allocating common loop costs between regulated and nonregulated services.  X4 e )42. ` ` Concerning our other goals described in Section V.A, a fixed factor would be  x4simpler to apply and to audit than a usagebased approach. Fixed factors can be applied  xuniformly among carriers. We invite comment on these tentative conclusions. Proponents of  xfixed allocation factors should address the basis for determining the factors. Parties should address the legal authority and support for the derivation of the factor they propose.  X'v 2. Switching Plant  Xe'` ` a. Current method of allocating switching plant costs  X74 e F*43.` ` Today, most traffic switched at incumbent local exchange carriers' central offices  xinvolves regulated vservice. A portion, however, of the switching costs is allocated to  xInonregulated activities. Based in part on the assumption that switching costs are predominantly  xtraffic sensitive, incumbent local exchange carriers must allocate switching costs between  xregulated and nonregulated activities based on the projected peak relative regulated and  xnonregulated usage over a threeyear period. Under this method, the allocation reflects the allocation of switching plant that the carrier anticipates will be used during the threeyear period. ""b50*(( "Ԍ X'` ` b. Issues of changing technologies and discussion  X4 e +44.` ` We invite comment on whether we should continue to require incumbent local  xexchange carriers to allocate switching costs between regulated and nonregulated activities based  x}on relative usage. More specifically, we ask whether or to what degree the duration of a call is,  xVor will continue to be a valid usage measurement. Traditional analog and digital switches set up  xa circuit for each call. The circuit is maintained for the duration of the call, making part of the  xdswitch unavailable for other transmissions during that period. The operation of newer  XH4 x@technologies, such as packet switching used to provide frame relay services,6H9 X 4 xuԍ Packet switching divides data to be sent into individual packets, each with a unique  xidentification and destination address. Each packet may arrive at the destination by a different  xcroute and may arrive in a different order from the order in which the packets were initially sent.  xThe identification allows the data to be reassembled in its proper sequence. "Frame relay" is a form of packet switching. and related services  X14 xoffering different capacities on demand, like asynchronous transfer mode (ATM),7 19 X4 xlԍ ATM is a flexible digital transmission method that allows different kinds of services to  xbe offered in one network. It accomplishes this by putting the digitized voice, data or video  xpsignal into standard, fixedlength packets of bytes, called cells. Cells are assembled from the bit  xstream of the source call or service. In the network, these cells may be intermixed with cells  xfrom other services. Cells receive their routing instructions at ATM switching points. At their  xdestination, the cells for each service are sorted, collected and disassembled into a bit stream  xappropriate to each service. Each cell moves through the network independent of other cells,  xEeven those of the same call. Cells for a given call, however, are routed over the same path.  x3There are, however, no assigned time slots, as there are in synchronous packet switching systems;  X04 x}hence the name asynchronous transfer mode. BOC Notes on the LEC Networks SRTSV002275, Section 7.10 (April, 1994) (Prepared and published by Bellcore). differ  x4substantially from the more traditional technologies used to transmit information. Packet  xJswitches, including frame relay switches and ATMs, do not dedicate a circuit to each  xcommunication throughout its duration. An important issue, thus, may be whether the duration  xof the call is a reasonable basis for allocating the costs of packet switches between regulated and  xnonregulated activities. We invite interested parties to discuss that issue in view of our goals and  xIpurposes. We ask commenters to also discuss whether specific usagebased allocations should  xbe used to separate the switch costs allocated to regulated and nonregulated activities.  Xy4 xCommenters endorsing relative use methodologies, e.g., relative number of packets routed during  x"peak periods, should explain the mechanics of usage measurements they recommend and how  x3we might evaluate the accuracy of carrier measurements. If switch costs are not traffic sensitive,  xyeconomic principles of cost causation would appear to support a fixed allocator for switching  x}costs. Commenters should assess the allocation methods they endorse, whether usagebased or  x}a fixed allocation factor, in terms of the criteria discussed in paragraph 24 in Section V.A of this Notice. "70*(("Ԍ X'v 3. Interoffice Transmission Facilities  X'` ` a. Current method of allocating interoffice transmission facilities  X4 e ,45. ` ` Local exchange carrier interoffice trunk facilities are directly assigned to regulated  xvactivities. These facilities receive the same cost allocation treatment as loop plant, discussed above at Section V.B.1.b.  XH'` ` b. Discussion  X 4 e -46. ` ` Like loop plant, interoffice transmission facilities will be used to provide activities  xsubject to regulation under Title II as well as nonregulated video programming and other  xcompetitive services. We invite comment on whether we should prescribe specific allocation  xmethods to accommodate this change. We also ask whether our rules should distinguish between  x}loops and interoffice trunks for Part 64 cost allocation purposes. In this regard, we ask whether  xRour tentative conclusion to allocate loop costs based on a fixed factor is equally applicable to  xEinteroffice trunk facilities. We ask parties to discuss what allocation methods for interoffice  xtrunks would be most consistent with the goals of the 1996 Act and the purposes discussed in Section V.A of this Notice.  X4' vC. Methods for Allocating Expenses  X' 1. Networkrelated expenses  X4 e .47. ` ` Under our existing rules, incumbent local exchange carriers allocate network xrelated expenses, vother than maintenance expenses, in proportion to the allocation of the  xunderlying network facilities. The allocation of networkrelated expenses associated with  x[switching plant, for example, is based on a carrier's projected peak relative regulated and  xnonregulated usage over a threeyear period. Expenses allocated according to these rules include  x<items, such as depreciation, that track the carriers' investment in network plant. We tentatively  xconclude that the allocation of these expenses should be based on the network plant allocation. We invite comment on this tentative conclusion.  X '6 2. Maintenance Expenses  X4 e /48. ` ` Maintenance expenses, in contrast, are currently allocated based on usage.X89 XT"4ԍ See Joint Cost Order, 2 FCC Rcd at 1320.X6  x Allocating these expenses based on a measure of relative regulated and nonregulated use appears  xto be a costly process and of questionable relevance because the majority of network plant  x/investment is nontraffic sensitive. We tentatively conclude that, instead of our current method  x}for allocating maintenance expenses based on measurements, we should use a fixed factor, and,  xdin particular, the same factor we propose to use to allocate the maintained plant itself. "h${80*((""  xVCommenters should compare how well the current usage based factor and a fixed factor would  x/meet the goals of the 1996 Act and this proceeding, and, in particular, how well each meets the criteria set forth in paragraph 24, above.  X' 3. Marketing Expenses  Xv4 e 049. ` ` We require marketing expenses that cannot be directly assigned or directly or  x"indirectly attributed to be allocated based on the allocation between regulated and nonregulated  xactivities of those marketing costs that can be directly assigned or directly or indirectly attributed.  xuWe invite comment on whether we should retain this method to ensure that our allocation  xmethods for video programming services and other nonregulated activities are consistent with cost  x}causality and ensure that subscribers of regulated services are not forced to pay for the costs of  xIcompetitive offerings. Commenters should assess their positions in terms of our goals as stated in Section V.A above, in particular, the criteria discussed in paragraph 24.  X ' 4. Overheads  Xy4 e 150. ` ` Our rules require incumbent local exchange carriers to apportion overhead  xpexpenses between regulated and nonregulated activities, based on direct or indirect measures of  XK4 xcost causation.@9K9 X4ԍ 47 C.F.R.  64.901.@ Where direct or indirect attribution is not possible, our rules require the carriers  xcto allocate overhead expenses, other than marketing expenses, based on a general allocator that  xis computed using the ratio of all expenses directly assigned or directly or indirectly attributed  X4 xVto regulated and nonregulated activities.K:y9 X04ԍ 47 C.F.R.  64.901(b)(3)(iii).K We invite comment on whether we should retain this  x"approach and, in particular, on whether it is consistent with the goals and purposes described in Section V.A of this Notice.  X' vD. Other General Allocation Issues  Xe' 1. Allocation of Spare Facilities  X74 e  251.` ` Our rules require incumbent local exchange carriers to allocate network plant  x"vinvestment between regulated and nonregulated activities based on the peak "relative regulated  X 4 xand nonregulated usage" projected over a threeyear period.F; *9 X#4ԍ 47 C.F.R.  64.901(b)(4).F This method allocates spare (or  x}reserve) capacity based on how the incumbent local exchange carrier projects that the deployed  xNplant will be used during the threeyear period. The projected use approach did not raise  xsignificant cost allocation problems in the past because only outside plant accounted for  x<significant portions of spare facilities and virtually all outside plant usage has been used only for"!;0*((? "  xregulated activities. The potential introduction of video programming services and the growth  xof other highcapacity services that may be nonregulated, cause us to reexamine whether basing  x/allocations for outside plant on peak relative regulated and nonregulated usage projected over a  xzthreeyear period would be: consistent with economic principles of cost causation;  x'administratively simple; adaptable to evolving technologies; and uniformly applied among  xcarriers. We discuss and seek comment on this question for outside plant generally in Section V.B.1 and 3.  XH4 e 352. ` ` In the past, networks were designed primarily to carry voicegrade services over  X14 x<copper cables . As telecommunications networks evolve to include fiber cables deployed closer  xand closer to subscribers' premises and for interoffice trunks, however, the relative magnitude  xof spare facilities appears to be increasing. In some cases, spare capacity may be as great as the  X 4 x"capacity of working facilities. < 9 Xe 4 x"ԍ During 1991, 1992, 1993 and 1994, the LECs' total spare fiber, as a percent of total fiber  xpdeployment, was approximately 65 percent, 63 percent, 70 percent and 65 percent, respectively. FCC Report 4308 (199194).  Because the allocation of spare capacity follows the allocation  xof deployed outside plant, this fiber, including the spare capacity, has been supported by  xregulated services. As a result of the 1996 Act, however, much of this spare capacity may be used exclusively for nonregulated activities.  Xy4 e e453.` ` We believe that Congress did not intend that telephone exchange service or  xexchange access subscribers pay rates designed to recover the costs of spare capacity that  XK4 x8eventually will be used for video programming and other services that may be competitive.I=KK9 XG4ԍ 1996 Act sec. 101,  254(k).I  xNThis could occur, however, if, for example, spare facilities intended for competitive video  xprogramming services are allocated to residual categories that include spare facilities reserved for  xtelephone services. We invite comment on how spare facility costs should be allocated between  xregulated and nonregulated activities, in particular, video programming service costs. We also ask whether we should establish separate cost pools for the costs associated with spare facilities.  X4 e   554. ` ` In raising these questions, we recognize that they may present just a small facet  xof a more general issue: to what extent will and should today's ratepayers pay for network  ximprovements incumbent local exchange carriers make in anticipation of future competition in  xhtheir core markets. We seek comment and information on which types of plant currently  xallocated to regulated activities might be used to provide competitive offerings. We also seek  xinformation on amounts and types of plant currently allocated to regulated activities that might be readily adaptable for use in providing competitive services. " =0*(("Ԍ X' 2. Pole Attachment and Conduit  X4 e 655. ` ` Section 224(g) of the 1996 Act requires utilities providing telecommunications or  xNcable services to "impute to its costs of providing such services (and charge any affiliate,  x<subsidiary, or associate company engaged in the provision of such services) an equal amount to  X4 xlthe pole attachment rate for which such company would be liable under this section."I>9 X4ԍ 1996 Act sec. 703,  224(g).I Pole  Xv4 xhattachment rates also include charges for conduits, ducts, and rightsofway.C?vy9 X 4ԍ 47 U.S.C.  224(a)(4).C We invite  xcomment on how this requirement should affect our rules for allocating outside plant costs between regulated and nonregulated activities.  X 4 e 756. ` ` One possible approach would be for the local exchange carrier to subtract the  xamounts it and its affiliates, subsidiaries, and associate companies engaged in the provision of  xtelecommunications or cable services would be liable for pole attachments under Section 224  x<from the amounts recorded in USOA accounts before beginning the process of allocating those  xaccounts between regulated and nonregulated activities. Alternatively, we could require carriers  xto assign all costs that our pole attachment formulas allocate to pole attachments to separate costs  x[pools that would be created within each USOA account. These cost pools could then be  xlallocated between regulated and nonregulated activities based on the relative number of pole  xattachments the carriers and their affiliates, subsidiaries, and associate companies use for  xregulated and nonregulated activities. A third method would be for the carrier to perform the  ximputation after allocating costs between regulated and nonregulated activities. Under this  xVapproach, any difference between the costs allocated to regulated and nonregulated activities in  x/the Part 64 cost allocation process and the pole attachment rates chargeable under Section 224  xcould be allocated between regulated and nonregulated activities using an allocator reflecting the  xrelative number of pole attachments the carrier uses to provide telecommunications and cable services.  X4 e 857. ` ` We invite comment on whether each of these approaches would be consistent with  xthe language of, and Congressional intent behind, Section 224(g). We ask commenters to address  x<whether these approaches are consistent with our goals and purposes as stated in Section V.A,  x"above. In particular, we ask commenters to discuss how well each of these alternatives meets  xhthe criteria set forth in paragraph 24 above. We also invite commenters to propose other  X 4alternatives that might better implement those goals and purposes.  X4   VI. TREATMENT OF COST REALLOCATIONS UNDER  X'PRICE CAP REGULATION ă  X!4 e 958.` ` We rely upon price cap, rather than rateofreturn, regulation to assure that rates  xyfor the interstate services of the largest incumbent local exchange carriers, including the Bell""*?0*((!"  xOperating Companies, are reasonable. Under our system of price caps, most changes in a  X4 xcarrier's costs of providing regulated services are treated as "endogenous" and do not result in  x<adjustments to the carrier's price cap indices. The Commission, however, has identified certain  xcost changes, triggered by administrative, legislative, or judicial action that are beyond the control  X4 x/of the carriers, that can trigger adjustments to those indices. @V9 X4 xlԍ Policy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87313, 5,  X4 xMFCC Rcd 6786, 6807 (1990) (LEC Price Cap Order), Erratum, 5 FCC Rcd 7664 (Com. Car. Bur.  X4 x1990), modified on recon., 6 FCC Rcd 2637 (1991) (LEC Reconsideration Order), aff'd, National  X4 xrural Telecom Ass'n v. FCC, 988 F.2d 174 (D.C. Cir. 1993), citing Policy and Rules Concerning  X 4 xRates for Dominant Carriers, CC Docket No. 87313, Notice of Proposed Rulemaking, 2 FCC  X 4 xRcd 5208 (1987); Further Notice of Proposed Rulemaking, 3 FCC Rcd 3195 (1988); Report and  X 4 xOrder and Second Further Notice of Proposed Rulemaking, 4 FCC Rcd 2873 (1989) (AT&T  X 4Price Cap Order) 4 FCC Rcd 2873, 3187; modified on recon., 6 FCC Rcd 665 (1990).  The Commission concluded that  xfailing to recognize these cost changes by adjusting price cap indices would either unjustly punish  Xv4or reward the carrier by leading to unreasonably high or unreasonably low rates.3Av9 X 4ԍ Id.3  XH4 e :59.` ` The Commission determined, however, that not all changes beyond the carrier's  x}control should be treated exogenously. For example, a general change in tax rates is outside the  X 4 x"carrier's control, but will be reflected in the inflation factor used to adjust price caps annually.B 9 Xd4 xԍ Id. at 6808. GNPPI, the gross national product price index, was replaced by the gross domestic product price index (GDPPI) as the inflation factor in the price cap formula.  xAExogenous treatment of a tax change would thus unfairly "double count" its impact. The  x"Commission concluded that only changes that "uniquely or disproportionately affect [incumbent  X 4local exchange carriers]" would be considered for exogenous treatment.3C 5 9 X4ԍ Id.3  X 4 e ;60. ` ` Our price cap rules specify that "[s]ubject to further order of the Commission ...,  X4 x/exogenous cost changes . . .  include those caused by . . . [t]he reallocation of investment from  Xy4 xregulated to nonregulated activities pursuant to" our Part 64 cost allocation rules.Dy9 X 4 x@ԍ 47 C.F.R.  61.45(d)(1)(v). See also 47 C.F.R.  61.44(c)(4). Costs claimed as exogenous  xpthat appear to fit within this category are presumed exogenous. They must be shown, however,  xto comply with the underlying definition of exogenous costs that they are incurred by means  x"beyond the control of the carrier and that they are not otherwise accounted for in the price cap formula.  Under a strict  xreading of this rule, a presumption that cost reallocations due to changes in the Part 64 cost  xyallocation process are exogenous would only apply to amounts reallocated "from regulated to  xnonregulated activities." We seek comment on this interpretation and whether all such  xreallocations to nonregulated activities that may result from the offering of video programming"?D0*(("  xservices or other nonregulated activities should trigger decreases in related price cap indices. We  xValso seek comment with respect to each of the allocation methodologies discussed above on the  x/effect of Part 64 exogenous changes on the incentives for price cap carriers to enter video and other competitive, nonregulated service markets.  X4 e (<61.` ` Price cap carriers continue to report their earnings for monitoring and sharing.  xPrice cap carriers subject to sharing obligations must reduce their price cap indices if earnings  X_4 xexceed specified benchmarks.OE_9 X4ԍ See 47 C.F.R.  61.45(d)(2).O In their most recent annual tariff filings, however, all but four  XH4 xlincumbent local exchange carriers subject to our price cap rulesFH{9 Xt 4 x4ԍ The exceptions are Southern New England Telephone Company, Citizens Utilities Companies, US West Communications and a portion of GTE. elected the highest interim  xproductivity factor we had prescribed, which exempts them from sharing obligations for the 1995 X 4 x96 access year.G| 9 X4 xԍ In the LEC Price Cap Performance Review, the Commission adopted interim price cap  xrules establishing three productivity factors from which local exchange carriers could select  x}4.0 percent, 4.7 percent and 5.3 percent. No sharing obligation for the interim period is required  xof local exchange carriers that choose the highest factor. Price Cap Performance Review for  X4 xILocal Exchange Carriers, First Report and Order, 10 FCC Rcd 8961 (1995) (LEC Price Cap  Xq4Performance Review). Under the current price cap rules, carriers may elect a different productivity  xRfactor each year. Accordingly, the price cap incumbent local exchange carriers may decide whether to participate in sharing on a yeartoyear basis.  X 4 e =62. ` ` We seek comment on the need for Part 64 processes in our regulation of price cap  xcarriers that are not subject to sharing obligations. We also seek comment on how the  xrelationship of our cost allocation rules to price cap companies should influence the outcome of  xIthis proceeding. We note that the states have not uniformly adopted the same price cap model.  xWe ask whether this should influence any conclusion we reach on the continuing need for Part 64 rules.  X4 e >63. ` ` We also invite parties to comment on whether there are conditions under which  xthese cost allocation rules will not be necessary. For example, parties should address whether  xsome form of cost allocation should be required as long as services are offered that are not  x subject to competition. Parties should address the statutory and legal requirements placed on both  x4the Commission and on companies to allocate costs between regulated and nonregulated activities. "Y G0*(("Ԍ X4 y+ VII. PROCEDURAL MATTERS ă  X4 A. Ex Parte   X4 e 5?64.` ` This is a nonrestricted notice and comment rulemaking proceeding. Ex parte  xypresentations are permitted, except during the Sunshine Agenda period, provided they are  Xy4disclosed as provided in the Commission's rules.kHy9 X4ԍ See generally 47 C.F.R.  1.1202, 1.1203, 1.1204(a).k  XK' B. Comment Dates   X 4 e @65.` ` We invite comment on the issues set forth above. Interested commenters may file  xcomments on or before May 28, 1996, and reply comments on or before June 7, 1996. To file  x[formally in this proceeding, you must file an original and six copies of all comments, reply  xcomments, and supporting comments. If you want each Commissioner to receive a personal copy  xpof your comments, you must file an original plus eleven copies. You should send comments and  x/reply comments to Office of the Secretary, Federal Communications Commission, Washington,  xD.C. 20554. A courtesy copy should also be sent to Ernestine Creech, Accounting and Audits  xDivision, 2000 L Street, N.W., Washington, D.C. 20554. Commenters should also provide one  xcopy of any documents filed in this proceeding to the Commission's copy contractor, International  xTranscription Service (ITS), 2100 M Street, N.W., Suite 140, Washington, D.C., 20037.  xComments and reply comments will be available for inspection during regular business hours in  xythe FCC Reference Center, Room 239, 1919 M Street, N.W., Washington, D.C. 20554. For further information contact Ernestine Creech at 202 4180850.  X4 e `A66. ` ` In order to facilitate review of comments and reply comments, both by parties and  xby Commission staff, we require that comments be no longer than twentyfive (25) pages and  x+reply comments be no longer than fifteen (15) pages. Comments and reply comments must  X4include a short and concise summary of the substantive arguments raised in the pleading.I{9 X4 xԍ Comments and reply comments must also comply with Section 1.49 and all other  X4 xapplicable sections of the Commission's rules. See 47 C.F.R.  1.49. We require, however, that  xa summary be included with all comments and reply comments, regardless of length. The  X4summary may be paginated separately from the rest of the pleading (e.g., as "i, ii").   Xh4 e B67. ` ` Parties are also asked to submit comments and reply comments on diskette.  xDiskette submissions would be in addition to and not a substitute for the formal filing  x requirements addressed above. Parties submitting diskettes should submit them to Andrew Mulitz  xof the Common Carrier Bureau, Accounting and Audits Division, Room 257, 2000 L Street,  xN.W., Washington, D.C. 20054. Such a submission should be on a 3.5 inch diskette formatted  xin an IBM compatible format using WordPerfect 5.1 software. The diskette should be submitted  xin "read only" mode. The diskette should be clearly labelled with the party's name, proceeding,"I0*(("  xtype of pleading (comment or reply comment) and date of submission. The diskette should be accompanied by a cover letter.  X' C. Regulatory Flexibility Analysis  X4 e ,C68. ` ` We certify that the Regulatory Flexibility Act is not applicable to the rule changes  xwe are proposing in this proceeding. If the proposed rule changes are promulgated, there will  xnot be a significant economic impact on a substantial number of small business entities, as  xdefined by Section 601(3) of the Regulatory Flexibility Act. entities directly subject to the rule  xchanges, and proposed rule changes, are engaged in the provision of local exchange, exchange  xaccess, and interexchange telecommunications services. These entities are generally large  xcorporations, affiliates of large corporations, or are dominant in their fields of operation, and thus,  X 4 xcare not "small entities" as defined by the Act.CJ 9 Xe 4ԍ 15 U.S.C.  632(a)(1).C We are nevertheless committed to reducing the  x"regulatory burdens on small communications services companies whenever possible, consistent  x"with our other public interest responsibilities. The Secretary shall send a copy of this Notice of  x<Proposed Rulemaking to the Chief Counsel for Advocacy of the Small Business Administration  X4 xin accordance with Section 603(a) of the Regulatory Flexibility Act, 5 U.S.C.  601, et seq. (1981).  XM4 VIII. ORDERING CLAUSE ׃  X4 e `D69.` ` Accordingly, IT IS ORDERED that, pursuant to Sections 302 and 703 of the 1996  xAct, and sections 1, 4(i), 4(j), 201, 215, 218 and 220 of the Communications Act of 1934, as  x#amended, 47 U.S.C.  151, 154(i), 154(j), 201, 215, 218, 220), a Notice of Proposed Rulemaking is hereby ADOPTED.  X4 e E70. ` ` IT IS FURTHER ORDERED that the Secretary shall send a copy of this Notice  x"of Proposed Rulemaking, including the Regulatory Flexibility Certification, to the Chief Counsel  x}3for Advocacy of the Small Business Administration, in accordance with paragraph 603(a) of the  Xg4Regulatory Flexibility Act, 5 U.S.C.  601 et seq. (1981). ` `  hhCFEDERAL COMMUNICATIONS COMMISSION ` `  hhCWilliam F. Caton ` `  hhCActing Secretary3