*Pages 1--13 from Microsoft Word - 11253.doc* Federal Communications Commission FCC 01- 218 Before the Federal Communications Commission Washington, D. C. 20554 In the Matter of 2000 Biennial Regulatory Review -- Requirements Governing the NECA Board of Directors under Section 69.602 of the Commission’s Rules And Requirements for the Computation of Average Schedule Company Payments under Section 69.606 of the Commission’s Rules ) ) ) ) ) ) ) ) ) ) ) ) ) CC Docket No. 01- 174 NOTICE OF PROPOSED RULEMAKING Adopted: July 31, 2001 Released: August 31, 2001 Comment Date: 30 days after publication in the Federal Register Reply Comment Date: 45 days after publication in the Federal Register By the Commission: I. INTRODUCTION 1. In this Notice of Proposed Rulemaking, we seek comment on certain of our rules pertaining to the National Exchange Carrier Association (NECA). In 1983, the Commission adopted rules providing for an exchange carrier association to administer access tariffs and to establish and operate a high cost fund. Beginning in 1984, all local exchange carriers participated in a mandatory common line tariff, and most participated in a traffic sensitive tariff. For each of these tariffs, the exchange carrier association, NECA, operates pooling mechanisms to collect and distribute revenues among its participating carriers. 1 At that time, the Commission adopted rules relating to the governance and functioning of NECA. 2 As part of our 2000 biennial regulatory review process, 3 we now re- examine these rules in light of today’s marketplace. 4 In particular, we propose to eliminate the annual election requirements for 1 See 47 C. F. R. § 69.601 et seq. 2 Id. 3 Section 11 of the Communications Act of 1934, as amended (Act), and section 202( h) of the Telecommunications Act of 1996, collectively require the Commission to review biennially its regulations that pertain to telecommunications service providers and to determine whether those regulations are no longer necessary in the public interest as a result of meaningful economic competition. See 47 U. S. C. § 161 and Telecommunications Act of 1996, Pub. L. No. 104- 104, § 202, 110 Stat. 56 (1996 Act). 4 See 2000 Biennial Regulatory Review, Report, FCC 00- 456 (rel. January 17, 2001). As detailed in the Report, the Commission agreed with staff recommendations to consider repealing or modifying a number of rules that may no longer be necessary in the public interest as a result of competitive, technological, legal, or other (continued….) 1 Federal Communications Commission FCC 01- 218 2 NECA’s board of directors under section 69.602 and seek comment on whether other measures, such as staggered terms and term limits are necessary. We also propose to streamline the average schedule formula process under section 69.606. 5 Our goal in this proceeding is to eliminate rules that may no longer be necessary in the public interest, reduce unnecessary regulatory burdens on the industry, including small entities, and update our rules and processes with measures that are more appropriate in today’s marketplace. We seek comment on the extent to which these proposals will achieve this goal. II. BOARD OF DIRECTORS 2. Today, all ILECs, regardless of size, are members of NECA. 6 Membership in NECA is grouped into three divisions or subsets: Bell Operating Companies (Subset 1); other carriers with annual revenues of $40 million or more (Subset 2); and all remaining carriers (Subset 3). Each of the subsets is represented on NECA’s 15- member board of directors, which governs the Association. The 15- member board is composed of 10 ILEC representatives – two from Subset 1, two from Subset 2, and six from Subset 3 – and five directors from outside the telecommunications industry representing all three subsets (outside directors). 7 Each subset nominates and elects its own representatives 8 and outside directors are elected by the entire NECA membership. 9 As required under our rules, all board members are selected through an annual election and serve a term of one year. 10 3. NECA contends that the annual election requirement for the board of directors under section 69.602 imposes a significant burden on NECA, its directors, and its member companies. 11 According to NECA, the cost of running elections for the board of directors each year includes fees for changes. The Commission noted that the biennial review process complements, but does not replace, longstanding efforts to continuously review, revise, and update its rules. The Commission agreed with staff recommendations to consider changing the schedules for the NECA Board elections and simplifying the average schedule process. Id. at para. 63. 5 NECA has also requested that we review our requirements in these areas. See Letter from Richard A. Askoff, Deputy General Counsel, NECA, to Magalie R. Salas, Secretary, FCC (July 26, 2000) (“ NECA Letter”) and comments filed by NECA on October 10, 2000 to the Biennial Regulatory Review 2000 Staff Report (“ NECA Comments”). 6 Under section 69.601( b) of the Commission’s rules “[ a] ll telephone companies that participate in the distribution of Carrier Common Line revenue requirement, pay long term support to association Common Line tariff participants, or receive payments from the transitional support fund administered by [NECA] shall be deemed to be members.” 47 C. F. R. § 69.601( b). 7 See 47 C. F. R. § 69.602( a) – (d). 8 See 47 C. F. R. § 69.602( e) which provides that “[ e] ach subset shall select the directors who shall represent it individually through an annual election in which each member of the subset shall be entitled to vote for the number of directors that will represent such members’ subset.” 9 See 47 C. F. R. § 69.602( f) which provides that “[ t] he association membership shall select the directors for the following calendar year who will represent all three subsets through an annual election in which each member of the association shall be entitled to one vote for each director position.” 10 See 47 C. F. R. §§ 69.602( e) and 69.602( f). Section 69.602( i) provides that “[ d] irectors shall serve for a term of one year commencing on January 1 and concluding on December 31 of each year.” 47 C. F. R. § 602.602( i). 11 NECA Letter at 2. 2 Federal Communications Commission FCC 01- 218 3 independent inspectors of elections and the cost of printing and mailing hundreds of ballots. 12 Incumbent directors, required to run for election each year, must incur the time and expense of annual campaigns. 13 NECA contends that the member companies are asked to participate in the elections, which imposes a considerable paperwork burden on these companies. 14 4. NECA argues that an annual election may have been reasonable in the initial years of the Commission’s access charge plan, when all ILECs were required to participate in NECA’s common line pooling process and when NECA’s responsibilities included administration of the Commission’s high cost and lifeline assistance funding mechanisms. 15 Since 1989, however, NECA’s common line and traffic sensitive pools have operated on a voluntary basis. In addition, the universal service high cost and lifeline assistance funding mechanisms are now administered by Universal Service Administrative Company (USAC). 16 NECA is a non- stock membership company incorporated in the state of Delaware. Under Delaware law, an annual election for the board of directors is not required. 17 NECA contends that inasmuch as Delaware law does not impose annual elections, and since NECA’s responsibilities under the Commission’s rules have changed considerably, it is time for the Commission to eliminate the annual election requirement and permit elections at more reasonable intervals. 18 5. NECA proposes that the Commission revise sections 69.602( e) and (f) to provide for periodic elections for the board of directors, instead of annual elections. 19 In addition, NECA proposes eliminating section 69.602( i), 20 which specifies that directors shall serve one- year terms. We seek comment on NECA’s proposals and on the specific benefits that changes to the annual election requirement and one-year term limit for board members would provide to ILEC members. Commenters should discuss whether the elimination of the annual election requirements would have any impact on adequate representation of the member companies and should also address the appropriate length of the board members’ term and whether term limits should be specified in our rules. We note that under our rules, we have adopted a three- year term for directors that serve on the board of USAC, NECA’s independent subsidiary. 21 Would a similar term appointment be appropriate for NECA board members? We also seek comment on alternative proposals that may be appropriate to consider at this time. For instance, would staggered terms, which would provide that the entire board would not run for election at the same time, be appropriate, and if so, does this alternative sufficiently address the cost burdens that NECA identified as being associated with annual elections? 12 Id. 13 Id. 14 Id. 15 Id. 16 Id. USAC is an independent not- for- profit subsidiary of NECA that was formed in 1997 to administer Universal Service Fund programs. 17 Id. 18 NECA Comments at 4. 19 NECA Letter at 3; NECA Comments at 5. See also supra. nn. 9 and 10. 20 NECA Letter at 3; NECA Comments at 5. See also supra. n. 11. 21 See 47 C. F. R. § 54.703( d). 3 Federal Communications Commission FCC 01- 218 4 III. AVERAGE SCHEDULE FORMULAS A. NECA’s Historical Role and the Changing Regulatory Environment 6. As noted above, NECA was established, and continues today, to develop and file interstate access tariffs and to administer interstate access revenue pools. 22 In the initial years following the Commission’s adoption of uniform access charge rules, all ILECs were subject to rate- of- return regulation, and all ILECs were required to participate in NECA’s access tariff and common line pooling process. 23 Under our access charge rules, ILECs were compensated either on the basis of their costs or under average schedules, which were permitted for some carriers as a way to avoid imposing the burdens and costs associated with performing cost separations studies needed to determine access charges. 24 From a regulatory perspective, the access charge model sought to ensure that ILECs charged customers an amount that covered their interstate costs, assessed charges through cost- causative rate elements that reflected the structure of the access network, and provided a reasonable return on their interstate investment. 7. Over the years, fundamental changes have occurred in the regulatory regime that governs access charges and tariff obligations, including the mandatory requirement that all ILECs participate in NECA’s access tariff and common line pooling process. 25 While allowing rate- of- return regulation to continue for some ILECs, our regulatory model governing access charges changed significantly in 1991, particularly with the adoption of price caps for the largest ILECs. 26 The 1996 Act called for further reforms. Today, our regulatory concern is focused on providing sufficient incentives for ILECs to become more efficient, 27 eliminating implicit subsidies, 28 and aligning access charge rate structure components with 22 See 47 C. F. R. § 69.603. 23 See supra. n. 1. 24 The larger ILECs participating in the NECA pools ascertain the costs they incur in providing interstate access by conducting cost studies (and are known as ‘cost companies’). We recognized, however, that many small carriers lacked sufficient financial resources and expertise to perform the detailed and costly separations studies necessary for determining their interstate access compensation. Thus, we permitted these smaller carriers to elect to receive interstate compensation from average schedules that were based on cost characteristics of a hypothetical exchange carrier representative of the average schedule companies. See ALLTEL Corp. v. FCC, 838 F. 2d 551 (D. C. Cir. 1988); National Association of Regulatory Utility Commissioners v. FCC, 737 F. 2d 1095 (D. C. Cir. 1984), cert. denied, 469 U. S. 1227 (1985). 25 See e. g., MTS and WATS Market Structure, Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Report and Order, FCC 87- 133, 2 FCC Rcd 2953 (1987) adopting rules, effective April 1989, to permit voluntary participation in NECA’s common line tariff and pooling system. 26 See Policy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87- 313, Second Report and Order, 5 FCC Rcd 6786 (1990). The Commission implemented a system of price cap regulation to govern the manner in which the largest ILECs (the BOCs and GTE) establish interstate access charges, and permitted other ILECs to elect price cap regulation voluntarily, provided that all their affiliates convert to price cap regulation and that they withdraw from the pools administered by NECA. Id. at 6818- 20. 27 Id. at 6787. The Commission’s price cap plan was intended to provide incentives to ILECs to cut costs, invest efficiently in new plant and facilities, and develop and deploy innovative service offerings while ensuring that productivity and efficiency gains were shared with ratepayers by setting price ceilings at reasonable levels. 28 See 47 U. S. C. § 254. The 1996 Act required the Commission to eliminate implicit universal service subsidies and to establish specific, predictable, and sufficient mechanisms to preserve and advance universal service. 4 Federal Communications Commission FCC 01- 218 5 cost- causation principles. 29 Today, none of the largest ILECs participates in NECA’s access tariff and pooling process. These ILECs instead charge access rates pursuant to the CALLS Order. 30 Many ILECs that remain subject to rate- of- return rules have also elected not to participate in NECA’s tariff and pooling process, but file their own access tariffs. Moreover, the Commission has sought comment on measures to reform the current access charge policies and adopt optional incentive regulation for rate- of- return carriers, as detailed in a proposal submitted by the Multi- Association Group (MAG Plan). 31 8. Our tariff requirements have changed as well. For all ILECs that file tariffs, we have engaged in continuous efforts to review, revise, and update rules to make our processes more streamlined. 32 Today, ILEC tariffs are no longer subject to the filing and approval requirements that were in place in 1983, but are subject to abbreviated review and effective date periods of either 7 or 15 days. 33 In addition, as the Federal- State Joint Board on Separations continues its efforts to bring about comprehensive reform of the jurisdictional separations rules, 34 the Commission has simplified the separations process by adopting a five- year interim freeze of the Part 36 category relationships and allocation factors for price cap carriers and a five- year interim freeze of allocation factors for rate- of- return carriers. 35 The separations freeze will provide substantial regulatory relief to all ILECs that must separate costs between interstate and intrastate jurisdictions until separations reform is completed. 9. Our reforms and various other streamlining measures have generally applied to price cap LECs and have been aimed at providing the ILECs with greater flexibility to set interstate access rates and to enable ILECs to compete more efficiently as competition develops, gradually replacing regulation with 29 See Access Charge Reform, CC Docket No. 96- 262, Sixth Report and Order in CC Docket Nos. 96- 262 and 94- 1, Report and Order in CC Docket No. 99- 249, Eleventh Report and Order in CC Docket No. 96- 45, FCC 00- 193 (rel. May 31, 2000) (CALLS Order). 30 Id. 31 See Access Charge Reform for Incumbent Local Exchange Carriers Subject to Rate- of- Return Regulation, CC Docket No. 98- 77; Federal- State Joint Board on Universal Service, CC Docket No. 96- 45; Prescribing the Authorized Rate of Return for Interstate Services of Local Exchange Carriers, CC Docket No. 98- 116; Jurisdictional Separations Reform and Referral to the Federal- State joint Board, CC Docket No. 80- 286, Notice of Proposed Rulemaking, FCC 00- 448 (rel. January 5, 2001). 32 See e. g., 1998 Biennial Regulatory Review – Part 61 of the Commission’s Rules and Related Tariffing Requirements, CC Docket No. 98- 131, and Implementation of Section 402( b)( 1)( A) of the Telecommunications Act of 1996, CC Docket No. 96- 187, Report and Order and First Order on Reconsideration, 14 FCC Rcd 12293 (rel. Aug. 3, 1999); also Petition for Forbearance of the Independent Telephone & Telecommunications Alliance, Sixth Memorandum Opinion and Order, 14 FCC Rcd 10840 (1999). 33 See 47 C. F. R. § 61.58. 34 Jurisdictional separations is the process that ILECs use to apportion costs between interstate and intrastate jurisdictions. It is a complex process that begins with an ILEC’s accounting system and ends with the establishment of rates for the ILEC's interstate and intrastate regulated services. See e. g., Jurisdictional Separations Reform and Referral to the Federal- State Joint Board, CC Docket No. 80- 286, Recommended Decision, FCC 00J- 2, 15 FCC Rcd 13162 (rel. July 21, 2000). 35 See Jurisdictional Separations Reform and Referral to the Federal- State Joint Board, CC Docket No. 80- 286, Report and Order, FCC 01- 162 (rel. May 22, 2001) (Separations Freeze Order). 5 Federal Communications Commission FCC 01- 218 6 competition as the primary means of setting prices. 36 Further streamlining and elimination of regulations will occur as competitive market forces emerge. 10. NECA’s joint tariff and settlement process, however, has not been subject to the reform and streamlining measures that have taken place for the access charge and tariff requirements of the largest ILECs and other ILECs that file outside the NECA process. Currently, approximately 1,240 ILECs, consisting of about 700 cost companies and about 540 average schedule companies, continue to participate in NECA’s tariff and settlement process. 37 We recognize that over the years NECA’s pooling process has provided ILECs with an efficient and streamlined alternative to individual tariff filings, and continues today to provide benefits to participating ILECs, particularly the small and rural ILECs. We believe, however, that review of our rules and the long- standing practices surrounding NECA’s tariff and settlement process for average schedule companies is appropriate and necessary at this time. Our goal is to eliminate unnecessary and complex requirements affecting carriers that may no longer be in the public interest. As discussed below, our review of NECA’s tariff and settlement process in this proceeding examines whether certain rules and practices applicable to the average schedule process continue to be necessary, and whether there may be alternative measures that are more appropriate in today’s environment. B. NECA’s Current Tariff Development and Settlement Process 11. Under NECA’s current access tariff and settlement process, NECA collects data from participating ILECs to develop the interstate access tariff rates. These tariff rates reflect the actual interstate costs of cost companies and the estimated interstate costs of the average schedule companies. Data collected from cost companies include detailed cost studies that determine jurisdictional separations and cost allocations. 38 Data collected from average schedule companies do not include such detailed cost studies. Rather, NECA uses interstate factors derived from the cost companies to estimate interstate costs for average schedule companies. 39 ILECs participating in NECA’s access tariffs charge interexchange carriers (IXCs) for access at the rates set out in NECA’s tariff. NECA pools the interstate access revenues collected by participating ILECs, and, through the settlement process, distributes compensation among pool members. 40 Cost companies receive compensation for the use of their facilities in originating and terminating interstate common carrier communications services on the basis of their actual interstate costs, including a return on investment. Average schedule companies receive compensation for the use of their facilities on the basis of average schedules formulas, which are developed by NECA and established, in part, by using estimated 36 See Access Charge Reform et al., CC Docket No. 96- 262, Fifth Report and Order and Further Notice of Proposed Rulemaking, FCC 99- 206, 14 FCC Rcd 14221 (1999). 37 ILECs that participate in NECA’s access tariffs may participate in one or both access charge revenue pools – the non- traffic sensitive (i. e., common line) pool or the traffic sensitive access tariff pools. According to recent data provided by NECA, currently 1,237 ILECs participate in NECA’s common line pool and 1,080 ILECs participate in NECA’s traffic sensitive pool. Of the pool participants, there are 693 cost companies and 541 average schedule companies in the common line pool; and 574 cost companies and 503 average schedule companies in the traffic sensitive pool. 38 Cost companies perform studies of their costs in accordance with Parts 32, 36, 64, 65, and 69 of the Commission's rules to determine their actual interstate costs. See 47 C. F. R. Parts 32, 36, and 64, 65, and 69. 39 See e. g., National Exchange Carrier Association, Inc. Proposed Modifications to the 1997 Interstate Average Schedule Formulas, Order on Reconsideration and Order, 13 FCC Rcd 10116, 10117- 19. 40 If an ILEC’s interstate access charge revenues exceed its costs, including a reasonable rate- of- return on the pool’s interstate investment, that ILEC pays money into the NECA pool in the settlement process. Conversely, if an ILEC’s costs exceed its interstate access revenues, the ILEC receives money from the NECA pool. 6 Federal Communications Commission FCC 01- 218 7 costs derived from cost companies. 41 12. As discussed in detail below, resources devoted both by NECA and by the Commission to average schedule formulas may be disproportionate, particularly given the fact that average schedule companies’ billed access charges and settlement revenues represent a relatively small component of the NECA pools. 42 Moreover, NECA’s current process for developing average schedule formulas may be unnecessarily complex in light of our extensive reform and simplification efforts for the largest ILECs and for ILECs that file outside the NECA process. 43 We find it is appropriate to examine the requirements and practices pertaining to NECA’s tariff and settlement process for average schedule companies and seek comment on various reform and simplification measures. As discussed below, we seek comment on both the manner in which NECA develops its average schedule formulas, and consequently our review and approval process of NECA’s proposed formula modifications. 1) Computation of Average Schedule Company Payments Through Average Schedule Formulas – Section 69.606 13. The rule governing the development of average schedule formulas is broadly stated in section 69.606( a). 44 NECA must develop formulas designed “to produce disbursements to an average schedule company that simulate the disbursements that would be received … by a [cost] company that is representative of average schedule companies.” 45 The rule provides NECA with flexibility on how to develop these formulas. NECA has chosen to implement the rule through a process that involves extensive data collection and detailed analysis of cost company data, statistical sampling of average schedule company data, and regression and related statistical estimations. Currently, NECA develops ten separate average schedule formulas for use in its access tariffs 46 and two average schedule formulas for obtaining support from the Universal Service Fund (USF). 47 14. NECA’s average schedule formula development process includes the following steps: (1) collection of cost accounting data, including jurisdictional separations cost data and demand data (e. g., access line counts, number of exchanges, access minutes) from a sample of cost companies; (2) determination of jurisdictional cost relationships for the sample cost companies; (3) collection of certain accounting cost data and demand data from a sample of average schedule companies; (4) application of the cost relationships 41 See infra. para. 14 for discussion on NECA’s process for developing average schedule company formulas. 42 Average schedule companies receive approximately 19% of the common line pool revenues and 38% of the traffic sensitive pool revenues, or approximately 27% of the combined total revenues of both pools. 43 See infra. para. 14. 44 47 C. F. R. § 69.606( a). 45 Id. 46 These formulas include two Common Line (or Non- traffic Sensitive) formulas: (1) Common Line; (2) Common Line Rate of Return; and eight Traffic- Sensitive formulas: (1) Traffic Sensitive Central Office; (2) Line Haul Non- Distance Sensitive; (3) Line Haul Distance Sensitive; (4) Intertoll Dial Switching; (5) Special Access; (6) Traffic Sensitive Rate of Return; (7) Signaling System 7; and (8) Database Query and Interim NXX Translation. 47 These formulas include (1) Local Switching Support and (2) USF Expense Adjustments. Although the Commission’s rules do not specifically provide for USF support to average schedule companies, the Commission has recognized that some average schedule companies may incur costs that warrant such support. See, e. g., NECA’s Proposed Revisions to the Average Schedules, Memorandum Opinion and Order, 5 FCC Rcd 4169. 7 Federal Communications Commission FCC 01- 218 8 determined in Step 2 to the sample average schedule companies to estimate jurisdictional costs for the sample average schedule companies; (5) development of mathematical models using Steps 3 and 4 to determine estimated interstate costs for the sample average schedule companies; (6) use of statistical regression techniques to develop formulas that relate estimated interstate costs of the average schedule company to various commonly- used demand units (e. g., access lines per exchange); (7) development of settlement formulas using Step 5; and (8) adjustment for projected changes in costs and demand. 15. The Commission does not mandate the above formula development process, but rather it is the process that NECA has chosen to use to meet the requirements of section 69.606( a) of our rules. Each year NECA engages in the above process to determine whether to propose revisions to the current average schedule formulas. Consequently, each year but one NECA has filed proposed revisions with the Commission that consist of complicated, detailed, and extensive formula computations. 48 This process is costly for NECA, interested parties that participate in the review of NECA’s proposals, and the Commission. 49 The current process clearly is not commensurate with our access charge reforms and streamlining measures for the largest ILECs, and we believe that a more streamlined approach is warranted. 16. Initially, we note that the premise of the entire rule governing the average schedule process is rate- of- return regulation. The Commission has long abandoned rate- of- return regulation for incentive regulation for the largest ILECs and now has under consideration the MAG Plan for non- price cap ILECs, which proposes to provide these carriers with the option to elect incentive regulation and thereby leave rate-of- return and average schedule regulatory models altogether. In light of such reform effort, we seek comment on whether and how section 69.606( a) should be modified. Our long- term goal is to get out of the business of rate regulation of ILECs where competitive market forces make regulatory oversight unnecessary. Recognizing, however, that transition will occur over a period of time, and that for the foreseeable future, certain carriers may remain average- schedule carriers, how can we modify the existing rule to better reflect today’s marketplace? In particular, as long as some companies remain on average schedules, is there a simpler but fair way to determine payments for these companies? Should the Commission continue to require that disbursements simulate the disbursements that would be received by a cost company representative of the average schedule companies? Should the similar disbursement language in section 69.606( a) be eliminated or revised to reflect some measure other than cost, such as, inflation, line growth, or network utilization? What are the benefits of such modifications? 17. We seek comment on several options to streamline the manner in which the average schedule formulas are developed by NECA. The Commission recently froze for five years the separations allocation factors for all carriers and gave rate- of- return carriers the option of electing to freeze their separations category relationships as well. 50 In light of this freeze, the first step of NECA’s current formula development process already will be streamlined, because NECA no longer will need to determine on a yearly basis the separations allocation factors from a sample of cost companies. One measure that would further simplify the formula development process would be to utilize the cost relationships from a sample of cost companies for a baseline year in developing formulas for average schedule companies in 48 Each year since 1984, except for its December 1999 filing in which it certified that no changes to the current formulas were warranted, NECA has submitted to the Commission for approval proposed revisions to the average schedule formulas. 49 The complexity of this process unquestionably leads to unnecessary administrative costs. These costs are included among the costs recovered by ILEC participants, and are ultimately passed on to customers in rates. See 93 FCC 2d 336. 50 See Separations Freeze Order at para. 21. 8 Federal Communications Commission FCC 01- 218 9 future years. 51 The net effect of the newly adopted separations freeze and this proposal would be to eliminate the need to examine on a yearly basis the jurisdictional cost relationships for the sample of cost companies; the relationships and ratios derived from the baseline year would be used to develop formulas for average schedule company payments in future years. This would eliminate much of the first and second step of NECA’s current process to develop average schedule formulas, as described above. 18. A second option would be for NECA to use the current approved average schedule formula structures in developing specific formulas for payments to average schedule companies in future years. This option would further streamline the formula development process by making it unnecessary for NECA to develop mathematical models to estimate the costs of average schedule companies, effectively eliminating the fifth step of the process currently used by NECA. 19. A third option would be for NECA to utilize the current formula structures and coefficients in developing formulas in future years for payments to average schedule companies. This option would significantly simplify NECA’s current formula development process, essentially placing a freeze on the current formula methodologies. As a result, NECA would no longer need to conduct regression analysis to develop formulas that relate company costs to commonly- used demand units, thereby effectively eliminating the sixth step of the process currently used by NECA. 20. If formula structures or formula coefficients were frozen in some fashion, there may be a need periodically to make adjustments to the existing formulas to reflect more global changes in the marketplace. If formulas were frozen in some fashion, would it be appropriate to require, or permit, NECA periodically to re- evaluate the formulas to take into account general trends in inflation, cost, demand growth, or network underutilization? If so, what specific time frame would be appropriate for re-evaluation of aspects of the current formulas? 21. We seek comments on these proposed options and other alternatives. Will relevant trends in demand growth and inflation provide a sufficient basis for reasonable changes in payment amounts? We note that any carrier that believes the average schedule formulas do not produce disbursements appropriate to its circumstances is free, under our existing rules, to settle with NECA based on its actual costs. Should average schedule company productivity factors be considered? Could the proposed options be implemented in conjunction with access reform for rate- of- return carriers? What implications do the proposed options have on interstate access charges in rural and small exchanges? How best can the Commission be assured that average schedule formulas result in appropriate interstate rates in areas where marketplace competition has not developed? Is a different method required if competition exists in a given area? If so, what should that method be? 2) Commission Review and Approval Cycle – Section 69.606( b) 22. Pursuant to section 69.606( a), payments to average schedule companies are made “in accordance with a formula approved or modified by the Commission.” As required under section 69.606( b), NECA either files its proposed revisions for average schedule formulas on or before December 31 of each year, or certifies that no revisions are necessary. 52 Once received, the Commission places 51 For instance, in developing the formula for local switching support for average schedule companies, NECA currently determines annually from a sample of cost companies what percentage of central office equipment is switching equipment. If these ratios were frozen for purposes of formula development, NECA would not need to examine actual costs and calculate new percentages on a yearly basis. 52 47 C. F. R. § 69.606( b). Specifically, section 606( b) provides: “The association shall submit a proposed revision of the formula for each annual period subsequent to December 31, 1986, or certify that a majority of the (continued….) 9 Federal Communications Commission FCC 01- 218 10 NECA’s filing on public notice and seeks comment from interested parties. Generally, the Commission’s review of NECA’s annual average schedule formula filing is complete and an order is issued approving or modifying NECA’s proposed formulas before the effective date of NECA’s annual access tariffs on July 1. 53 NECA’s annual tariffs are based, in part, on the average schedule formulas approved by the Commission. 23. Over the years, the Commission has undertaken a careful review of NECA’s proposed formula revisions, which to date have involved extensive and complex cost studies, regression models, and other statistical measures and estimation theory. 54 We seek to adopt a more streamlined and flexible procedural process for average schedule companies. In particular, we believe that if the formula development process is streamlined, a concomitant streamlining of the review process should follow. In addition, we note that the review periods today are much shorter for most Commission tariff filings. 55 For example, pursuant to our rules, NECA’s annual joint access tariff is filed on June 15 with an effective date of July 1, a fifteen- day review cycle. 56 24. NECA has proposed that the Commission consolidate its review of NECA’s proposed revisions to the average schedule formulas with its review of NECA’s access tariff filing. 57 We seek comment on the feasibility of consolidating these two review periods, which we believe would significantly reduce regulatory burdens on NECA. We note that the current tariff filings are subject to a 7 or 15 day review process. 58 We ask parties to comment on whether a 7 or 15 day review period will adequately accommodate both reviews of the tariff filing and the revised average schedule formulas. What benefits would be obtained through a shortened review process of the average schedule formulas? Will the Commission or interested parties have a reasonable opportunity to address issues raised by proposed formula revisions? Do the benefits of a shortened review period outweigh any burdens on the Commission and interested parties to review, comment on, and, if necessary, modify the formulas in this shortened time directors of the association believe that no revisions are warranted for such period on or before December 31 of the preceding year.” 53 Id. Except that NECA’s proposed formulas for universal support are filed on October 1 and scheduled to take effect on January 1. We have permitted this review and approval period for universal service formulas to keep consistent with our rules on universal service high cost support under Part 36 of our rules. See e. g., 47 C. F. R. §§ 36.601, 36.613. 54 See Access Tariff Filing Schedules, Report and Order, FCC 88- 283, 3 FCC Rcd 5496, 5498 (1988). 55 In implementing provisions of the 1996 Act, the Commission streamlined its tariff review process. See 47 U. S. C. § 204( a)( 3). The current filing and review cycle for most all industry access tariffs filed pursuant to section 204( a)( 3) of the Communications Act requires a notice period of seven (7) days for proposed decreases in rates only, and fifteen (15) days for proposed increases in rates or changes in terms and conditions. See 47 C. F. R. § 61.58. 56 Id. For tariffs not filed pursuant to 204( a)( 3) of the Communications Act, carriers must file tariffs on at least 16 days notice, however, the Commission may require the deferral of the effective date of any filing made on less than 120 days notice or of such other maximum period of notice permitted by section 203( b) of the Communications Act. See 47 C. F. R. § 61.58( a)( 2)( ii) and (iii). 57 See NECA Letter at page 3. NECA states having two different review periods is redundant because the proposed average schedule formula revisions are already incorporated into NECA’s annual tariff filing of June 15, which is subject to the Commission review and complaint process. 58 47 C. F. R. § 61.58. 10 Federal Communications Commission FCC 01- 218 11 period? Commenters should also address whether the length of the formula review process should depend on whether NECA simplifies its process for formula development. If the average schedule formula development process were streamlined as set forth in one of the options proposed above, a more abbreviated review period could be appropriate. We ask parties to comment on whether this combined filing process would permit interested parties to review and comment on the proposed formulas. We also ask parties to comment on whether it is appropriate for us to limit our review to the tariff filing only. What impact would our lack of oversight of the average schedule formulas have on customers of interstate access (namely, long distance companies), and, ultimately, long distance rates, particularly in areas where an average schedule company is not subject to competition from alternative providers of interstate access? 25. Finally, we note our concern that as we seek to further simplify the current access charge process surrounding average schedule companies, we must also seek to encourage investment and deployment of new services in areas served by average schedule companies. In addition, particularly in areas where there are no competitive alternative providers of exchange access, we remain concerned that consumers are not burdened with higher long distance rates because access charges are overstated. We seek comment on rule changes that will best address these concerns, while minimizing regulatory burdens, providing incentives for investments and new services, and protecting consumers. IV. PROCEDURAL ISSUES A. Ex Parte Presentations 26. This is a permit- but- disclose rulemaking proceeding. Ex parte presentations are permitted, except during the Sunshine Agenda period, if disclosed as provided in the Commission’s rules. See generally 47 C. F. R. §§ 1.1202, 1.1203, and 1.1206. B. Initial Regulatory Flexibility Certification 27. The Regulatory Flexibility Act of 1980, as amended (RFA), 59 requires that an RFA analysis be prepared for notice- and- comment rulemaking proceedings, unless the agency certifies that “the rule will not, if promulgated, have a significant economic impact on a substantial number of small entities.” 60 The RFA generally defines “small entity” as having the same meaning as the terms “small business,” small organization,” and “small governmental jurisdiction.” 61 In addition, the term “small business” has the same meaning as the term “small business concern” under the Small Business Act. 62 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 59 The RFA, see 5 U. S. C. § 601 et seq., has been modified by the Contract With America Advancement Act of 1996, Pub. L. No. 104- 121, 110 Stat. 847 (1996) (CWAAA). Title II of the CWAAA is the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA). 60 5 U. S. C. § 605( b). 61 5 U. S. C. § 601( 6). 62 5 U. S. C. § 601( 3) (incorporating by reference the definition of “small business concern” in Small Business Act, 15 U. S. C. § 632). Pursuant to 5 U. S. C. § 601( 3), the statutory definition of a small business applies “unless an agency, after consultation with the Office of Advocacy of the Small Business Administration and after opportunity for public comment, establishes one or more definitions of such term which are appropriate to the activities of the agency and publishes such definition( s) in the Federal Register.” 11 Federal Communications Commission FCC 01- 218 12 (SBA). 63 In this Notice of Proposed Rulemaking, we seek comment on certain of our rules pertaining to the National Exchange Carrier Association (NECA), which operates pooling mechanisms to collect and distribute revenues among its participating carriers. 64 In particular, we propose to eliminate the annual election requirements for NECA’s board of directors under section 69.602 and seek comment on whether other measures, such as staggered terms and term limits are necessary. We also propose to streamline the average schedule formula process under section 69.609. 28. For the reasons described below, we certify, pursuant to RFA, that the proposed rules will not have a significant economic impact on a substantial number of small entities. 65 NECA is a non- profit, quasi- governmental association created to administer the Commission’s interstate access tariff and revenue distributions processes. Because the proposed rule amendments affect only NECA directly, we find that no substantial number of small entities are potentially affected by our action. In addition, any economic effect that might result is positive (de- regulatory) and not significant. The Commission will send a copy of this Notice of Proposed Rulemaking, including this initial certification, to the Chief Counsel for Advocacy of the Small Business Administration, and it will be published in the Federal Register. 66 C. Comment Filing Procedures 29. Pursuant to sections 1.415 and 1.419 of the Commission's rules, 47 C. F. R. §§ 1.415, 1.419, interested parties may file comments on or before the date that is thirty (30) days after the date of this Notice’s publication in the Federal Register and reply comments on or before the date that is forty- five (45) days after the date of this Notice’s publication in the Federal Register. Comments may be filed using the Commission's Electronic Comment Filing System (ECFS) or by filing paper copies. 30. Comments filed through the ECFS can be sent as an electronic file via the Internet to . Generally, only one copy of an electronic submission must be filed. If multiple docket or rulemaking numbers appear in the caption of this proceeding, however, commenters must transmit one electronic copy of the comments to each docket or rulemaking number referenced in the caption. In completing the transmittal screen, commenters should include their full name, Postal Service mailing address, and the applicable docket or rulemaking number. Parties may also submit an electronic comment by Internet e- mail. To get filing instructions for e- mail comments, commenters should send an e-mail to ecfs@ fcc. gov, and should include the following words in the body of the message, "get form ." A sample form and directions will be sent in reply. 31. Parties who choose to file by paper must file an original and four copies of each filing. If participants want each Commissioner to receive a personal copy of their comments, an original plus nine copies must be filed. If more than one docket or rulemaking number appear in the caption of this proceeding, commenters must submit two additional copies for each additional docket or rulemaking number. All filings by paper must be sent to the Commission's Secretary: Magalie Roman Salas, Office of the Secretary, Federal Communications Commission, 445 12th Street, S. W., Washington, D. C. 20554. 32. Parties who choose to file by paper should also submit their comments on diskette. Diskettes should be submitted to: Ernestine Creech, Accounting Safeguards Division, Federal 63 Small Business Act, 15 U. S. C. § 632. 64 See 47 C. F. R. § 69.601 et seq. 65 See 5 U. S. C. § 605. 66 See 5 U. S. C. § 605( b). 12 Federal Communications Commission FCC 01- 218 13 Communications Commission, 445 12th Street, S. W., Washington, D. C. 20554. The required diskette copies of submissions should be on 3. 5- inch diskettes formatted in an IBM compatible format using Word or compatible software. Each diskette should be accompanied by a cover letter and should be submitted in "read only" mode. The diskette should be clearly labeled with the commenter's name, proceeding (CC Docket No. 01- 174), type of pleading (comment or reply comment), date of submission, and the name of the electronic file on the diskette. The label should also include the following phrase "Disk Copy - Not an Original." Each diskette should contain only one party's pleadings, preferably in a single electronic file. In addition, parties who choose to file by paper must send diskette copies to the Commission's copy contractor, Qualex International, Portals II, 445 12 th Street, S. W., Room CY- B402, Washington, D. C. 20554. Comments and reply comments will be available for public inspection during normal business hours in the FCC Reference Information Center, Courtyard Level, Suite CY- A257, 445 12th Street, S. W., Washington, D. C. V. ORDERING CLAUSES 33. Accordingly, IT IS ORDERED that, pursuant to the authority contained in sections 1, 4( i), 11, 201 - 205, 218 - 220, 254, and 403 of the Communications Act of 1934, as amended, 47 U. S. C. §§, 151, 154( i), 161, 201 - 205, 218 - 220, 254, and 403 this NOTICE OF PROPOSED RULEMAKING is hereby ADOPTED. 34. IT IS FURTHER ORDERED that the Commission's Consumer Information Bureau, Reference Information Center, SHALL SEND a copy of this NOTICE OF PROPOSED RULEMAKING, including the Initial Regulatory Flexibility Certification, to the Chief Counsel for Advocacy of the Small Business Administration. FEDERAL COMMUNICATIONS COMMISSION Magalie Roman Salas Secretary 13