In the Matter of Implementation of the Local Competition Provisions in the Telecommunications Act of 1996; Interconnection between Local Exchange Carriers and Commercial Mobile Radio Service Providers CC Docket No. 96-98; CC Docket No. 95-185 FEDERAL COMMUNICATIONS COMMISSION 1996 FCC LEXIS 4312 RELEASE-NUMBER: FCC 96-325 August 8, 1996 Released; Adopted August 1, 1996 ACTION: [*1] FIRST REPORT AND ORDER [PART 4 OF 5] JUDGES: By the Commission: Chairman Hundt and Commissioners Quello, Ness, and Chong issuing separate statements. OPINION: 841. Among new entrants, Time Warner believes an imputation rule is unnecessary because unbundled element rates will not exceed retail rates in most cases. n1999 It asserts that the Commission should not adopt an imputation rule during the transition period prior to the enactment of universal service reform, and that it is unlikely that competing providers will ignore competitive forces and uniformly retain non-competitive margins in order to support residential rates below TSLRIC. n2000 n1999 Time Warner comments at 83. n2000 Id. at 84-85 842. Several commenters express the view that imputation issues should be left for decision by the states. n2001 A number of state utility commissions that employ an imputation rule in their states endorse imputation as a way to prevent price squeezes, but either take no position on, or oppose, Commission adoption of imputation as a national standard. n2002 The Michigan Commission Staff believes that states should have flexibility to address imputation issues on their own, a process that has already [*2] begun in Michigan. n2003 The Washington Commission states that, although it has employed imputation as a method of ensuring that customers of monopoly services do not subsidize other more competitive services, the "threat" posed by below-cost rates generally has been overstated. n2004 n2001 See, e.g., Alabama Commission comments at 28; Florida Commission comments at 38 (no need for federal imputation role if each state may implement unbundled element pricing rules that cover costs); Wyoming Commission comments at 36. n2002 See, e.g., Colorado Commission comments at 56-57 (opposing a national imputation rule); Washington Commission comments at 35 (questioning the need for preemption order that would require that local service rates exceed costs); Illinois Commission comments at 56-58 (urging the Commission not to prohibit states from adopting imputation rules, but taking no position on the need for a national imputation rule pending further study by the federal-state joint board). n2003 Michigan Commission Staff comments at 16-17. n2004 Washington Commission comments at 36. 843. The National Association of State Utility Consumer Advocates and the Competition Policy [*3] Institute argue that the Commission lacks power to act in this area because of the intrastate/interstate jurisdictional divide established by section 152(b) of the Communications Act of 1934. n2005 n2005 Competition Policy Institute comments at 13; Natl. Ass'n of State Util. Consumer Advocates comments at 5-8; Joint Consumer Advocates reply at 14. 844. Responding to the concern, expressed in the NPRM, about requiring imputation for below-cost services, the Texas Commission observes that Texas law will permit waiver of its imputation rule in certain cases. n2006 Frontier states that in the case of subsidized services a limited offset could be applied to reflect the subsidy, but only in the uncommon case in which the incumbent LEC can affirmatively prove that the affected class of service is priced below its forward-looking incremental cost. n2007 n2006 Texas Commission comments at 29-30, Attachment II (Public Util. Regulatory Act of 1995, Tex. Rev. Civ. Shat. Ann., Art. 1446(c)) (Texas law requires the Texas Commission to adopt imputation rules by December 1, 1996). n2007 Frontier comments at 29-30. 845. Joint Consumer Advocates and the Ohio Commission suggest that adoption [*4] of an imputation rule is unnecessary because both the incumbent LEC and the new entrant will face the same burdens in providing below cost service, and each may recover their costs through other revenue sources, such as federal and state universal service funds. n2008 Joint Consumer Advocates and Ohio Consumers' Counsel take issue with the assumption that local service is subsidized, and argue imputation is unnecessary because retail rates are not significantly below cost. n2009 They assert that since other services, such as toll, also use the local loop, it is improper to load all of the costs of the local loop onto local service. n2010 n2008 Joint Consumer Advocates reply at 15-16; Ohio Commission comments at 67. n2009 Joint Consumer Advocates reply at 14-16; Ohio Consumers' Counsel comments at 3840. n2010 Id. 846. Several commenters voice concerns that an imputation rule would be difficult to implement in rural areas. n2011 The Minnesota Independent Coalition states that imputation could lead to increases in local rates for rural service, in contravention of the 1996 Act's universal service requirements of preserving rates in rural areas that are reasonably comparable [*5] to rates charged for similar services in urban areas, and the universal service policy requirements of 254(b). n2012 n2011 See, e.g., TCA Comments at 8. n2012 Minn. Ind. Coalition comments at 31, 33; see also Western Alliance comments at 34 (Commission should not adopt an imputation rule until other, explicit mechanisms are in place to ensure the statutory goal of reasonable parity of urban and rural rates). 847. Incumbent LECs also oppose imputation, claiming that it would create opportunities for arbitrage, n2013 fail to reflect the costs of unbundling incumbent LEC networks, n2014 put pressure on states to raise retail rates, n2015 create a de facto ceiling preventing incumbent LECs from recovering their costs, n2016 and constitute an unconstitutional taking of incumbent LEC revenues. n2017 NYNEX and BellSouth also assert that restrictions on cost recovery are inconsistent with the 1996 Act's requirement that unbundled element rates be based on costs. n2018 According to USTA and Ameritech, an imputation rule may cause incumbent LECs to subsidize new entrants, and lead to inefficient entry. n2019 BellSouth argues that intrastate retail prices are based on factors other [*6] than cost, such as the policies of the state commission that approved the charges, and that an imputation rule would interfere with the states' exclusive ratemaking authority over intrastate rates and charges. According to BellSouth, Congress did not establish any requirement or expectation that these pricing standards would yield charges that would bear any particular relationship to one another, and BellSouth asserts there is no reason to expect the sum of unbundled element prices to add up to the retail rate any more than one would expect that the individual parts of an automobile could be obtained for less than the price of an already-assembled car. n2020 n2013 E.g., USTA comments at 75. n2Ol4 See, e.g., Ameritech comments at 83-84 (rejecting a "sum-of-the-parts" test for unbundled element pricing, and arguing that an imputation rule must make allowance for costs of unbundling the network); GTE comments at 64-65. n2015 E.g., USTA comments at 77. n2016 E.g., NYNEX comments at 60 (asserting that such a price ceiling conflicts with the 1996 Act). n2017 See, e.g., NYNEX comments at 60-61; USTA comments at 77, reply at 31. n2018 BellSouth reply at 42; NYNEX comments at 61. [*7] n2019 Ameritech comments at 84; USTA comments at 77. n2020 BellSouth comments at 68; see also US Network Services comments at 5-6. c. Discussion 848. Although we recognize, as several commenters observe, that an imputation role could help detect and prevent price squeezes, we decline to impose an imputation requirement. Adoption of an imputation rule could force states to engage in a major rate rebalancing effort at this time, because it would impose substantial additional burdens on states at a time when they will need to devote significant resources to implementing the 1996 Act. 849. In addition to our practical concerns regarding implementation of an imputation rule, we find that an imputation rule may not be necessary to achieve the pro-competitive goals of the 1996 Act. As some commenters, including several state commissions, suggest, competing providers may be able to provide basic service, at less than the cost of facilities and associated management, just as incumbent LECs do currently, by selling customers higher profit vertical or intrastate toll services, or through receipt of access revenues and subsidies. Further, the Ohio Consumers' Counsel suggest that [*8] below-cost rates may not be sufficiently prevalent to justify a national imputation rule. n2021 The Joint Consumer Advocates and the Ohio Consumers' Counsel question whether local service is, in fact, underpriced. n2022 n2021 Ohio Consumers' Counsel comments at 39. n2022 Joint Consumer Advocates reply at 16; Ohio Consumers' Counsel comments at 39. 850. We give special weight to the comments of several State commissions that currently employ imputation rules. n2023 These state commissions endorse imputation as a tool to prevent price squeezes, but urge us only to provide states with the flexibility to adopt imputation rules. We agree with those state commission commenters that argue that nothing in the 1996 Act prohibits individual states from adopting imputation rules. While an imputation rule may be pro-competitive, we will leave the implementation of such rules to individual states for the time being. n2023 See, e.g., Colorado Commission comments at 56-57; Illinois Commission comments at 57-58; Michigan Commission Staff comments at 16-17; Washington Commission comments at 35. 3. Discrimination a. Background 851. In the NPRM, we noted the different usages of the [*9] term "discrimination" in the 1996 Act and the 1934 Act. n2024 Sections 251 and 252 require that interconnection and unbundled element rates be "nondiscriminatory." n2025 Similarly, section 251(c)(4) requires that, in making resale available, carriers not impose "discriminatory conditions or limitations on resale." n2026 Finally, section 252(e) provides that states may reject a negotiated agreement or a portion of the agreement if it "discriminates" against a carrier not a party to the agreement and section 252(i) requires incumbent LECs to "make available any interconnection, service, or network element provided under an agreement . . . to which it is a party to any requesting telecommunications carrier upon the same terms and conditions." n2027 In contrast, section 202(a) of the 1934 Act provides that "it shall be unlawful for any common carrier to make any unjust or unreasonable discrimination in charges . . . for . . . like communication service." n2028 n2024 NPRM para. 155. n2025 47 U.S.C. @@ 251(c)(2), (3), (6), and 252(d)(1). n2026 47 U.S.C. @ 251(c)(4)(B). See infra, Section VIII.C. n2027 47 U.S.C. @@ 252(e), (i). n2028 47 U.S.C. @ 202(a). 852. We sought [*10] comment on "the meaning of the term 'nondiscriminatory' in the 1996 Act compared with the phrase 'unreasonable discrimination' in the 1934 Act." We asked specifically whether Congress intended to prohibit all price discrimination, including measures such as density zone pricing or volume and term discounts, by choosing the word "nondiscriminatory." We further asked whether sections 251 and 252 could be interpreted to prohibit only unjust or unreasonable discrimination. Finally, we ought comment on whether the 1996 Act prohibited carriers from charging different rates to parties that are not similarly situated. n2029 n2029 NPRM at para. 156. b. Comments 853. Many state regulatory commissions, several incumbent LECs, and USTA maintain that the term "nondiscriminatory" used in the 1996 Act is synonymous with the prohibition of "unjust and unreasonable discrimination" used in the 1934 Act. n2030 Generally, these parties agree that pricing variations are only discriminatory when the affected parties are similarly situated. They argue that a blanket prohibition on all price differences, even when justified by costs, would be anti-competitive and would appear to defeat the process [*11] of negotiation. The Ohio Commission argues that smaller companies, not similarly situated to the larger telephone companies already in operation, need different treatment in order to compete. n2031 Finally, they contend that Congress did not intend to prohibit reasonably supported plans, such as volume and term discounts. The Pennsylvania Commission argues that, if Congress had intended to prohibit cost-based price differences, it would have included interconnection and unbundled elements in the prohibition against geographic price differences for toll rates, which is contained in Section 254(g). n2032 Pacific Telesis argues that different prices are permissible under the "nondiscriminatory" standard wherever incremental costs decline as output increases. n2033 n2030 See, e.g., Alabama Commission comments at 23; BellSouth comments at 58; California Commission comments at 31-33; Colorado Commission comments at 48; District of Columbia Commission comments at 25; Illinois Commission comments at 47; Indiana Commission comments at 25; MECA comments at 55-56; Ohio Commission comments at 51; PacTel comments at 76-77; USTA comments at 57-58. n2031 Ohio Commission comments at 53. n2032 Pennsylvania Commission comments at 32. [*12] n2033 PacTel comments at 77; but see AT&T reply at 35. 854. Other commenters, including MCI and MFS, assert that the term "nondiscriminatory" in the 1996 Act must be interpreted to have a more stringent meaning than the phrase "unjust and unreasonable discrimination" used in the 1934 Act. n2034 Several parties suggest that since the conferees considered and rejected a version of section 251 that applied an "unreasonably discriminatory" standard to the actions of incumbent LECs, the change in wording was purposeful. n2035 Generally, these parties argue that although the "nondiscriminatory" standard is more stringent, cost-based price differences are nonetheless permissible under the 1996 Act. n2036 The Independent Cable & Telecommunications Association contends that the only way to prevent incumbent LECs from discriminating against smaller companies and new entrants is to prohibit all non-cost based price differences. n2037 LDDS argues that only cost-based price differentials should be permitted, and that any non-cost-based volume discount should be prohibited, even if arrived at through agreement of the parties. n2038 n2034 See, e.g., MCI comments at 71; MFS comments at 63; ALTS reply at 40. [*13] n2035 NCTA comments at 31 n. 114 (citing S. 652, 104th Cong. 1st Sess. @ 101 (deleting Section 251(c)(2)(C)) (Draft, Nov. 27, 1995)); see also MFS comments at 63. n2036 See, e.g., MCI comments at 71-72; MFS comments at 64; Michigan Commission comments at 18; Municipal Utilities comments at 14-15; Pennsylvania Commission comments at 32; Sprint comments at 64-65. n2037 Ind. Cable & Telecomm. Ass'n reply at 11-12. n2038 LDDS reply at 40-41. 855. A third group of commenters argue for a strict reading of the term "nondiscriminatory." n2039 They argue that the plain meaning of the term "nondiscriminatory" without qualification demonstrates that under section 251 even reasonable discrimination is impermissible. n2040 R. Koch contends that if there is any discrimination, small entrants will be at a disadvantage. n2041 Finally, they maintain that the higher standard reflects the distinction between the carrier-user relationship being regulated in section 202(a) and the intercarrier relationship addressed in section 251 (c). n2042 n2039 See, e.g., AT&T comments at 68-69; NCTA comments at 31 (section 251(c) requires strict scrutiny of any discrimination, not solely unreasonable discrimination); WinStar comments at 7. [*14] n2040 See, e.g., WinStar comments at 7. n2041 See, e.g., R. Koch comments at 3. n2042 NCTA comments at 31. 856. CMRS providers argue that some state regulations treat CMRS providers differently than wireline new entrants with respect to the rates for interconnection with incumbent LECs. AT&T Wireless contends that the New York and Connecticut Commissions require incumbent LECs to charge two distinct interconnection rates depending on whether the carrier is classified as a CMRS provider or competing provider of local exchange service. n2043 According to AT&T Wireless, in New York, the wireline competitive LEC rate for termination of traffic on the incumbent LEC network is less than one cent per minute and the CMRS provider rate is approximately 2.6 cents ($ 0.026) per minute. n2044 AT&T Wireless further contends that, in order to obtain the lower rate, a CMRS provider in New York must comply with state regulations, such as universal service obligations associated with residential and Lifeline service. n2045 Bell Atlantic NYNEX Mobile submits that in Connecticut, the rate for wireline new entrants' termination of traffic on the incumbent LEC network is less than one [*15] cent ($ 0.01) per minute and the CMRS provider rate is 4.14 cents ($ 0.0414) per minute. n2046 AT&T Wireless states that California has ordered incumbent LECs to implement interim bill-and-keep compensation for interconnection for wireline entrants' interconnection but not for CMRS providers' interconnection, n2047 and Florida has ruled that no compensation shall be paid to mobile carriers by incumbent LECs for land-originated calls. n2048 n2043 Letter from Cathleen A. Massey, AT&T Wireless Services, to William F. Caton, Acting Secretary, FCC, July 2, 1996, filed in CC Docket Nos. 95-185 and 96-98, at 1-3 (AT&T July 2, 1996 Ex Parte). n2044 Id. n2045 See Order Instituting Framework for Directory Listings, Carrier Interconnection and Carrier Compensation, New York Public Service Commission, CASE 94-C-0095 (New York Commission, September 27, 1996) at 15. n2046 Bell Atlantic NYNEX Mobile comments in CC Docket No. 95-185, at Exhibit A. n2047 Competition For Local Exchange Service, Decision 95-07-054, Appendix A, para. 7 (California Commission, July 24, 1995). n2048 See Investigation Into the Rates For Interconnection of Mobile Service Providers With Facilities of Local Exchange Companies, Docket No. 940235-TL, slip op. at 24 (Florida Commission, Oct. 11, 1995). [*16] 857. In addition to their assertion regarding rate discrimination, CMRS providers maintain that state commissions permit incumbent LECs to treat CMRS providers in a discriminatory manner with respect to the terms and conditions of interconnection. n2049 Bell Atlantic NYNEX Mobile states that in Connecticut, Maryland, New York and Texas, the rates paid by Bell Atlantic NYNEX Mobile to the connecting LEC to terminate calls originated on Bell Atlantic NYNEX Mobile's network are more than twice the rates paid by competing wireline LECs to incumbent LECs. n2050 Bell Atlantic NYNEX Mobile also states that "these disparities have no rational cost basis since an incumbent LEC's costs to complete a call received from Bell Atlantic NYNEX Mobile should be no higher than its costs to complete calls received from other carriers." n2051 Similarly, APC states that its interconnection agreements with Bell Atlantic, which are identical in Maryland, Virginia, West Virginia, and District of Columbia, artificially inflate its costs by at least 3.1 cents ($ 0.031) per minute. n2052 n2049 AT&T comments in CC Docket No. 95-185, at 27; AirTouch Communications comments in CC Docket No. 95-185, at 33; Bell Atlantic NYNEX Mobile comments in CC Docket 95-185, at 5-6; Comcast Corporation comments in CC Docket No. 95-185, at 6-7; New Par comments in CC Docket No. 95-185, at 4-5. [*17] n2050 Bell Atlantic NYNEX Mobile comments in CC Docket No. 95-185, at Exhibit A, p.5. Bell Atlantic NYNEX Mobile's Exhibit A shows that LEC charges to competitive providers on an average rate per minute are considerably less than those to CMRS carriers: In Connecticut, Bell Atlantic NYNEX Mobile pays 4.14 cents/min. ($ 0.0414) to terminate local traffic on a LEC network while competitive providers pay 0.8 cents/min. ($ 0.008); in Maryland, Bell Atlantic NYNEX Mobile pays 2.27 cents/min. ($ 0.0227) to terminate local traffic on a LEC network, while competitive providers pay 0.5 cents/min. ($ 0.005); in New York, Bell Atlantic NYNEX Mobile pays 2.59 cents/min. ($ 0.0259) to terminate local traffic on a LEC network, while competitive providers pay only 0.98 cents/min.; and in Texas, Bell Atlantic NYNEX Mobile pays 1.7 cents/min. ($ 0.017) to terminate local traffic on a LEC network, while competitive providers pay zero cents/min. ($ 0.0). Id. n2051 Id. at 5-6. n2052 APC comments in CC Docket No. 95-185 at 5-6 (alleging it pays Bell Atlantic a monthly $ 25 per trunk surcharge between its mobile switching center and Bell Atlantic's tandem, a usage-sensitive charge for transport and switching elements, and $ 800 a month for termination for SS7 connectivity, while Bell Atlantic pays APC nothing in return). [*18] 858. Western Wireless also provides examples of discriminatory interconnection rates by LECs. n2053 Western Wireless states that it has been unable to reach an agreement with any incumbent LECs in its wireless service area that is based on cost or that provides reciprocal compensation. n2054 AT&T Wireless contends that states regularly permit LECs to charge wireless carriers significantly higher rates than competing LECs for intrastate interconnection. n2055 CTIA cites LEC-LEC interconnection agreements in 18 states that provide for rates much below the approximate nationwide average incumbent LEC-CMRS interconnection rate of three cents ($ 0.03) per minute. n2056 n2053 Letter from Doane F. Kiechel, counsel to Western Wireless Corporation, to William F. Caton, Acting Secretary, FCC, July 5, 1996, in CC Docket No. 96-98. n2054 Id. at 4. n2055 AT&T July 2, 1996 Ex Parte at 3. n2056 Letter from Randall S. Coleman, CTIA, to Michele Farquhar, Chief, Wireless Telecommunications Bureau, FCC, July 2, 1996, in CC Docket Nos. 95-185 and 96-98, at Attachments. c. Discussion 859. We conclude that the term "nondiscriminatory" in the 1996 Act is not synonymous with "unjust [*19] and unreasonable discrimination" in section 202(a), but rather is a more stringent standard. n2057 Finding otherwise would fail to give meaning to Congress's decision to use different language. We agree, however, with those parties that argue that cost-based differences in rates are permissible under sections 251 and 252. n2057 See supra, Section IV.G, discussing nondiscriminatory terms and conditions for interconnection, and supra, Section V.G., discussing nondiscriminatory terms and conditions for unbundled network elements. 860. Section 252(d)(1), for example, requires carriers to base interconnection and network element charges on costs. Where costs differ, rate differences that accurately reflect those differences are not discriminatory. This is consistent with the economic definition of price discrimination, which is "the practice of selling the same product at two or more prices where the price differences do not reflect cost differences . . . An important feature of the economic definition of price discrimination is that it occurs not only when prices are different in the presence of similar costs but also when the prices are the same and the costs of supplying customers [*20] are different." n2058 As one economist has recognized, differential pricing is "one of the most prevalent forms of marketing practices" of competitive enterprises. n2059 Strict application of the term "nondiscriminatory" as urged by those commenters who argue that prices must be uniform would itself be discriminatory according to the economic definition of price discrimination. If the 1996 Act is read to allow no price distinctions between companies that impose very different interconnection costs on LECs, competition for all competitors, including small companies, could be impaired. Thus, we find that price differences, such as volume and term discounts, when based upon legitimate variations in costs are permissible under the 1996 Act, if justified. n2058 David L. Kaserman & John W. Mayo, Government & Business: The Economics of Antitrust & Regulation at 273-74 (1995) (citing George J. Stigler, The Theory of Price (3d ed. 1966)) (emphasis added). n2059 Hal R. Varian, "Price Discrimination," in Handbook of Industrial Organization, vol.1, p. 598 (R. Schmalensce and R.D. Willig eds., 1989). 861. On the other hand, price differences based not on cost differences but on such [*21] considerations as competitive relationships, the technology used by the requesting carrier, the nature of the service the requesting carrier provides, or other factors not reflecting costs, the requirements of the Act, or applicable rules, would be discriminatory and not permissible under the new standard. Such examples include the imposition of different rates, terms and conditions based on the fact that the competing provider does or does not compete with the incumbent LEC, or offers service via wireless rather than wireline facilities. We find that it would be unlawfully discriminatory, in violation of sections 251 and 252, if an incumbent LEC were to charge one class of interconnecting carriers, such as CMRS providers, higher rates for interconnection than it charges other carriers, unless the different rates could be justified by differences in the costs incurred by the incumbent LEC. 862. State regulations permitting non-cost based discriminatory treatment are prohibited by the 1996 Act. This conclusion is consistent with both the letter and the spirit of the 1996 Act and our determination that the pricing for interconnection, unbundled elements, and transport and termination [*22] of traffic should not vary based on the identity or classification of the interconnector. n2060 n2060 See infra, Section XI.A., discussing transport and termination rates. VIII. RESALE 863. Section 251(c)(4) imposes a duty on incumbent LECs to offer certain services for resale at wholesale rates. Specifically, section 251(c)(4) requires an incumbent LEC: (A) to offer for resale at wholesale rates any telecommunications service that the carrier provides at retail to subscribers who are not telecommunications carriers; and (B) not to prohibit, and not to impose unreasonable or discriminatory conditions or limitations on, the resale of such telecommunications service, except that a State commission may, consistent with regulations prescribed by the Commission under this section, prohibit a reseller that obtains at wholesale rates a telecommunications service that is available at retail only to a category of subscribers from offering such service to a different category of subscribers. n2061 n2061 47 U.S.C. @ 251(c)(4). 864. The requirement that incumbent LECs offer services at wholesale rates is described in section 252(d)(3), which sets forth the pricing standard [*23] that states must use in arbitrating agreements and reviewing rates under BOC statements of generally available terms and conditions: [A] State commission shall determine wholesale rates on the basis of retail rates charged to subscribers for the telecommunications service requested, excluding the portion thereof attributable to any marketing, billing, collection, and other costs that will be avoided by the local exchange carrier. Section VIII.A. of this Order discusses the scope of section 251(c)(4). Section VIII.B. addresses the determination of "wholesale rates." Section VIII.C. considers the issue of conditions or limitations on resale under this section, Section VIII.D. discusses the resale obligations under section 251(b)(1), and Section VIII.E. considers the application of access charges in the resale environment. A. Scope of Section 251(c)(4) 1. Background and Comments 865. In the NPRM, we sought comment generally on the scope of section 251(c)(4). n2062 n2062 NPRM at para. 173. AT&T and MCI request that the Commission adopt a minimum list of services that should be available for resale under section 251(c)(4). n2063 Cable & Wireless, the Telecommunicatons [*24] Resellers Association, and others argue for an expansive definition of "telecommunications services." n2064 For example, MCI argues that we should explicitly identify the following as telecommunications services that must be made available for resale: measured-rate business, flat-rate business, measured-rate residential, flat-rate residential; custom calling features (including all CLASS services); call blocking services; voice messaging; Integrated Services Digital Network (ISDN), Basic Rate Interface (BRI), and Primary Rate Interface (PRI); flat-rated and measured mink services (including all types of PBX trunks); Automatc Number Identification (ANI) over T-1; data services; promotions, optional calling plans, special pricing plans; calling card, directory services, operator services; intraLATA toil; public access line service; semi-public coin telephone service; foreign exchange services; video dialtone; and Centrex and all feature packages. n2065 n2063 AT&T comments at 77 n. 113; MCI comments at 84. n2064 Cable & Wireless comments at 38-39; Telecommunications Resellers Ass'n comments at 18 n.47; AT&T comments at 76-78; MCI comments at 84. n2065 MCI comments at 84. [*25] 866. Incumbent LECs on the other hand, argue for a much more limited set of services, primarily those generally thought of as basic telephone services. n2066 For example, SBC lists the following as examples of services that should be excluded: billing and collection; enhanced billing products; enhanced white page listings; inside wire; BDS/LAN; customer premises equipment; and information services. n2067 n2066 See, e.g., MECA comments at 60; NYNEX comments at 76-7; SBC reply at 13. n2067 SBC comments at 67-68. 867. Some commenters argue that parties seeking discounted telecommunications services for their own telephony needs should not be allowed to purchase services at wholesale prices. For example, Roseville Telephone argues that (1) requests for discounted resale services must come from carriers, not from end users; (2) a wholesale customer must resell 95 percent of the services it purchases at wholesale prices to unaffiliated companies; and (3) limits should be placed on how much of what wholesale service is sold to any one subscriber. n2068 Similarly, GTE argues that new entrants must resell service they purchase under section 251(c)(4) and not simply use such services [*26] for their own internal or administrative purposes. n2069 Cincinnati Bell requests that we explicitly state that resellers of incumbent LEC service must be telecommunications carriers. n2070 Conversely, AT&T opposes predicating the ability to purchase services at wholesale rates on the percentage of customers that purchase the resold service. n2071 n2068 Roseville Tel. comments at 3-5. n2069 GTE comments at 47. n2070 Cincinnati Bell comments at 31. n2071 AT&T comments at 80 n. 120. 868. Some parties address the application of section 251(c)(4) to the services incumbent LECs sell to independent public payphone providers. The American Public Communications Council contends that independent public payphone providers are not "telecommunicatons carriers." n2072 The American Public Communications Council cites the definition in section 3(44) that excludes "aggregators," as defined in section 226 n2073 and points out that we have previously found that independent public payphone providers are aggregators insofar as they exercise control over payphones. n2074 Thus, the American Public Communications Council argues, services sold to independent public payphone providers [*27] by incumbent LECs would be "telecommunications service[s] that [an incumbent LEC] provides at retail to subscribers who are not telecommunications carriers," thereby making such services subject to section 251(c)(4). n2075 The American Public Communications Council also argues that nothing in section 251 requires an entity purchasing services for resale to be a "telecommunications carrier." n2076 NYNEX argues that independent public payphone providers do not purchase these services for resale, but for their own use. n2077 Additionally, NYNEX argues, independent payphone providers do not interpose themselves between incumbent LECs and their existing retail customers, and thus do not enable incumbent LECs to avoid some portion of costs they incur in dealing with those customers. n2078 MFS argues that no resale relationship exists between an incumbent LEC and an independent public payphone provider. n2079 n2072 American Public Communications Council comments at 2-3. n2073 47 U.S.C. @ 153(44). Section 226(a)(2) defines "aggregator" as "any person that, in the ordinary course of its operations, makes telephones available to the public or to transient users of its premises, for interstate telephone calls using a provider of operator services. 47 U.S.C. @ 226(a)(2). [*28] n2074 American Public Communications Council comments at 2 (citing Policies and Rules Concerning Operator Service Providers, Report and Order, 6 FCC Rcd 2744 (1991), recon. 7 FCC Rcd 3882 (1992)). n2075 American Public Communications Council at 3. n2076 Id. n2077 NYNEX reply at 39. n2078 Id. n2079 MFS reply at 32. 869. Parties dispute whether specially-priced bundles of services must be offered for resale. SNET argues that LECs are not required to resell bundled services, as long as the services are all offered separately. SNET contends that requiring wholesale offerings of bundled services would deter competitive offerings by incumbent LECs. n2080 SBC argues that bundled services are not single services and therefore not subject to the resale provisions of the 1996 Act. n2081 The Telecommunications Resellers Association, TCC, LDDS, and MCI take the opposite position, n2082 noting that bundled items are often sold at prices well below the sum of their stand-alone prices. n2080 SNET comments at 34. n2081 Id. at 72-73. n2082 Telecommunications Resellers Ass'n comments at 18; TCC comments at 44; LDDS comments at 83; MCI comments at 89. 870. [*29] The Telecommunications Resellers Association and Cable & Wireless argue that, where the incumbent LEC offers services only on a bundled basis, these services should be unbundled and offered separately, at wholesale rates. n2083 AT&T specifically argues that it should be allowed to purchase local exchange service without operator services. n2084 Pacific Telesis, NYNEX, and NCTA argue that incumbent LECs should not be subject to this requirement so long as the services are not offered to retail customers on a stand-alone basis. n2085 Bell Atlantic opposes AT&T's claim that Bell Atlantic "should be required to provide local service without operator services for resale. n2086 n2083 See, e.g., Telecommunications Resellers Ass'n comments at 19 n.49; Cable & Wireless comments at 48. n2084 AT&T comments at 81 n. 123. n2085 PacTel comments at 87; NYNEX comments at 73; NCTA comments at 57. n2086 Bell Atlantic reply at 25. 2. Discussion 871. Section 251(c)(4)(A) imposes on all incumbent LECs the duty to offer for resale "any telecommunications service that the carrier provides at retail to subscribers who are not telecommunications carriers." n2087 We conclude that an incumbent [*30] LEC must establish a wholesale rate for each retail service that: (1) meets the statutory definition of a "telecommunications service;" and (2) is provided at retail to subscribers who are not "telecommunications carriers." n2088 We thus find no statutory basis for limiting the resale duty to basic telephone services, as some suggest. n2087 47 U.S.C. @ 251(c)(4)(A). n2088 "Telecommunications service" is defined in section 3(46) to mean "the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used." 47 U.S.C. @ 153(46) "Telecommunications" is, in turn, defined in section 3(43) as "the transmission, between or among points specified by the user, of information of the user's choosing without change in the form or content of the information as sent and received." 47 U.S.C. @ 153(43). "Telecommunications carrier" is defined in section 3(44) to mean "any provider of telecommunications services, except that such term does not include aggregators of telecommunications services (as defined in section 226)." 47 U.S.C. @ 153(44). 872. We need not prescribe a [*31] minimum list of services that are subject to the resale requirement. State commissions, incumbent LECs, and resellers can determine the services that an incumbent LEC must provide at wholesale rates by examining that LEC's retail tariffs. The 1996 Act does not require an incumbent LEC to make a wholesale offering of any service that the incumbent LEC does not offer to retail customers. State commissions, however, may have the power to require incumbent LECs to offer specific intrastate services. n2089 n2089 See, e.g., Illinois Public Utilities Act, Section 13-505.5. 873. Exchange access services are not subject to the resale requirements of section 251(c)(4). The vast majority of purchasers of interstate access services are telecommunications carriers, not end users. It is true that incumbent LEC interstate access tariffs do not contain any limitation that prevents end users from "buying these services, and that end users do occasionally purchase some access services, including special access, n2090 Feature Group A, n2091 and certain Feature Group D elements for large private networks. n2092 Despite this fact, we conclude that the language and intent of section 251 clearly demonstrates [*32] that exchange access services should not be considered services an incumbent LEC "provides at retail to subscribers who are not telecommunications carriers" under section 251(c)(4). We note that virtually all commenterss in this proceeding agree, or assume without stating, that exchange access services are not subject to the resale requirements of section 251(c)(4). n2093 n2090 End users may purchase special access from incumbent LECs in order to use high volume services offered by IXCs, such as AT&T's Megacorn service. n2091 Feature Group A is similar to a local exchange service, but is used for interstate access. In such circumstances, the end user dials a seven-digit number to reach the LEC's "dial tone office" serving an IXC, where the LEC switches the call to the IXC's POP via a dedicated line-side connection. Feature Group A represents approximately one percent of incumbent LEC transport revenues. n2092 Feature Group D is the set of elements through which IXGs today almost universally purchase switched access services from incumbent LECs. n2093 See, e.g., Cincinnati Bell comments at 34; Citizens Utilities comments at 25; NYNEX comments at 35 n.70; Rural Tel. Coalition comments at 20; J. Staurulakis comments at 6; SBC reply at 13; USTA reply at 31; Wisconsin Commission comments at Attachment, pp. 7-8. [*33] 874. We find several compelling reasons to conclude that exchange access services should not be subject to resale requirements. First, these services are predominantly offered to, and taken by, IXCs, not end users. Part 69 of our rules defines these charges as "carrier's carrier charges," n2094 and the specific part 69 rules that describe each interstate switched access element refer to charges assessed on "interexchange carriers" rather than end users. n2095 The mere fact that fundamentally non-retail services are offered pursuant to tariffs that do not restrict their availability, and that a small number of end users do purchase some of these services, does not alter the essential nature of the services. Moreover, because access services are designed for, and sold to, IXCs as an input component to the IXC's own retail services, LECs would not avoid any "retail" costs when offering these services at "wholesale" to those' same IXCs. Congress clearly intended section 251(c)(4) to apply to services targeted to end user subscribers, because only those services would involve an appreciable level of avoided costs that could be used to generate a wholesale rate. Furthermore, as explained [*34] in the following paragraph, section 251(c)(4) does not entitle subscribers to obtain services at wholesale rates for their own use. Permitting IXCs to purchase access services at wholesale rates for their own use would be inconsistent with this requirement. n2094 47 U.S.C. @ 69.5(b). n2095 The one exception, as discussed below, is the SLC, which is assessed on end users regardless of who purchases the access services from the incumbent LEC. 875. We conclude that section 251(c)(4) does not require incumbent LECs to make services available for resale at wholesale rates to parties who are not "telecommunications carriers" or who are purchasing service for their "own use. The wholesale pricing requirement is intended to facilitate competition on a resale basis. Further, the negotiation process established by Congress for the implementation of section 251 requires incumbent LECs to negotiate agreements, including resale agreements, with "requesting telecommunications carrier or carriers," n2096 not with end users or other entities. We further discuss the definition of "telecommunications carrier" in Section IX. of the Order. n2096 47 U.S.C.@ 252(a)(1). 876. With regard [*35] to independent public payphone providers, however, we agree with the American Public Communication Council's argument that such carriers are not "telecommunications carriers" under section 3(44). We therefore also agree with the American Public Communications Council's contention that the services independent public payphone providers obtain from incumbent LECs are telecommunications services that incumbent LECs provide "at retail to subscribers who are not telecommunications carriers" and that such services should be available at wholesale rates to telecommunications carriers. Because we conclude that independent public payphone providers are not "telecommunicatons carriers," however, we conclude that incumbent LECs need not make available service to independent public payphone providers at wholesale rates. This is consistent with our finding that wholesale offerings must be purchased for the purpose of resale by "telecommunicatons carriers." 877. We conclude that the plain language of the 1996 Act requires that the incumbent LEC make available at wholesale rates retail services that are actually composed of other retail services, i.e., bundled service offerings. Section 251(c)(4) [*36] states that the incumbent LEC must offer for resale "any telecommunications service" provided at retail to subscribers who are not telecommunications carriers. The resale provision of the 1996 Act does not contain any language exempting services if those services can be "duplicated or approximated by combining other services. On the other hand, section 251(c)(4) does not impose on incumbent LECs the obligation to disaggregate a retail service into more discrete retail services. The 1996 Act merely requires that any retail services offered to customers be made available for resale. B. Wholesale Pricing 1. Background 878. As discussed above, section 251(c)(4) requires incumbent LECs to offer at "wholesale rates" any telecommunications services that the carrier provides at retail to subscribers who are not telecommunications carriers. Section 252(d)(3) establishes the standard that states must use in determining wholesale rates in arbitrations or in reviewing wholesale rates under BOC statements of generally available terms and conditions. Specifically, section 252(d)(3) provides that wholesale rates shall be set "on the basis of retail rates charged to subscribers for the telecommunications [*37] service requested, excluding the portion thereof attributable to any marketing, billing, collection, and other costs that will be avoided by the local exchange carrier." n2097 n2097 47 U.S.C. @ 252(d)(3). 879. In the NPRM, we generally sought comment on the meaning of the term "wholesale rates" in section 251(c)(4). n2098 We asked if we could and should establish principles for the states to apply in order to determine wholesale prices in an expeditious and consistent manner. We also sought comment on whether we should issue rules for states to apply in determining avoided costs. We stated that we could, for example, determine that states are permitted under the 1996 Act to direct incumbent LECs to quantify their costs for any marketing, billing, collection, and similar activities that are associated with offering retail, but not wholesale, services. n2099 We also sought comment on whether avoided costs should include a share of common costs and general overhead or "markup" assigned to such costs. LECs would then reduce retail rates by this amount, offset by any portion of expenses that they incur in the provision of wholesale rates. n2100 We noted that this approach appeared [*38] to be consistent with the 1996 Act, but would create certain administrative difficulties because all of the information regarding costs is under the control of the incumbent LECs. n2101 We also asked for comment on several alternative approaches. For example, we asked whether we could establish a uniform set of presumptions regarding avoided costs that states could adopt and that would apply in the absence of a quantification of such costs by incumbent LECs. n2102 Additionally, we asked whether we should identify specific accounts or portions of accounts in the Commission's Uniform System of Accounts ("USOA") n2103 that the states should include as avoided costs. n2104 We also requested comment on whether we "should establish rules that allocate avoided costs across services. n2105 We asked whether incumbent LECs should be allowed, or required, to vary the percentage wholesale discounts across different services based on the degree the avoided costs relate to those services. n2106 Finally, we asked whether we should adopt a uniform percentage discount off of the retail rate of each service. n2107 n2098 NPRM at para. 179. n2099 Id. at para. 180. n2100 Id. n2101 Id. [*39] n2102 Id. at para. 181. n2103 47 C.F.R. @ 32. n2104 NPRM at para. 181. n2105 Id. at para. 182. n2106 Id. n2107 Id. 2. Comments 880. Most commenters other than incumbent LECs and some states advocate establishment of national pricing rules regarding arbitrated rates for competitors' acquisition of services for resale under section 251(c)(4). n2108 Incumbent LECs and state commissions argue that we do not have the authority to establish such rules and, even assuming such authority exists, we should not exercise it. n2109 Bay Springs, et al., GVNW, and the Rural Telephone Coalition argue that establishing national wholesale pricing rules would insufficiently recognize differences in LECs' operations, resulting in inadequate compensation for small incumbent LECs. n2110 n2108 See, e.g., AT&T comments at 82; Cable & Wireless comments at 37; CompTel comments at 96; MFS comments at 72; LCI comments at 31; Telecommunications Resellers Ass'n comments at 24; Teleport comments at 55-56; TCC comments at 45. n2109 See, e.g., BellSouth comments at 67; SBC comments at 74; District of Columbia Commission comments at 32; Pennsylvania Commission comments at 37. [*40] n2110 Bay Springs, et al., comments at 17; GVNW comments at 40; Rural Tel. Coalition comments at 21. For example, the Rural Telephone Coalition points out that setting a national wholesale discount based on certain assumed levels of marketing expenses overstates avoided costs for small and rural incumbent LECs because such carriers face less competition and therefore have fewer marketing expenses. Rural Telephone Coalition comments at 21. Similarly, Bay Springs, et al., GVNW, and the Rural Telephone Coalition argue that smaller incumbent LECs will not be able to avoid as many shared costs because their smaller staffing and operational functions are less responsive to the overall size of the carriers' operations. Bay Springs, et al., comments at 17; GVNW comments at 40; Rural Tel. Coalition comments at 21. 881. Many commenterss preface their arguments concerning wholesale discounts calculation with a general discussion of the role of resale in creating a competitive local exchange market. IXCs and resellers argue that resale is the quickest method of developing ubiquitous competition and therefore encourage the Commission to adopt of national rules that would result in substantial [*41] wholesale discounts. n2111 AT&T argues that a discount that does not permit viable competition should be presumed unreasonable. n2112 Cable & Wireless and the Telecommunications Resellers Ass'n point out that resale will be a particularly important market entry strategy for small businesses that cannot afford the investments necessary to construct their own facilities or purchase unbundled elements. n2113 n2111 See, e.g., AT&T reply at Appendix E (Avoided Cost Model); Cable & Wireless comments at 38. n2112 AT&T comments at 85. n2113 Cable & Wireless at 35; Telecommunications Resellers Ass'n at 15. The Competition Policy Institute similarly argues that resale will bring both large and small (resale) carriers into the market. Competition Policy Institute comments at 24. 882. Incumbent LECs, cable companies, CAPs, and Sprint generally argue for low wholesale discounts. n2114 Facility-based competitors and potential competitors, such as MFS and cable operators, argue that we should focus our efforts on encouraging facilities-based competition. Such parties, including incumbent LECs, claim that large resale discounts will discourage the development of facilities by making [*42] it unnecessary for a new entrant to construct its own facilities in order to compete effectively on the basis of price. n2115 MFS and GTE state that wholesale pricing should only be applied in the absence of facilities-based competition and that once such competition exists, we should forbear from imposing wholesale pricing on incumbent LEC services offered for resale. n2116 Incumbent LECs, cable operators, and Sprint oppose AT&T's proposal that discounts that do not permit viable competition should be presumed unreasonable. n2117 n2114 See, e.g., GTE reply at 25-26; NYNEX comments at 40-41; NCTA comments at 23; TCI comments at 8; MFS reply at 34-36; Sprint reply at 41. n2115 See, e.g., NCTA comments at 29-30; Comcast comments at 21; Cox comments at 32; Time Warner comments at 70; MFS comments at 72; U S West comments, Exhibit A (Federal Implementation of the Telecommunications Act of 1996) at 26; BellSouth comments at Attachment (Interconnection and Economic Efficiency), p. 19; Bell Atlantic comments at Attachment (Declaration of Robert W. Crandall), pp. 4-5. n2116 This forbearance would be pursuant to 47 U.S.C. @ 160. MFS comments at 72 n.80; GTE reply at 26 n.44. [*43] n2117 See, e.g., Bell Atlantic reply at 24; Time Warner reply at 22; Sprint reply at 40. 883. Parties favoring national rules regarding resale differ as to the form such rules should take. Some propose that we establish a methodology for calculatng avoided costs. For example, certain parties advocate a rule requiring the use of long-run incremental cost. n2118 Others advocate some form of proxies or presumptions to determine avoided costs. NEXTLINK argues that the Commission should establish a uniform set of presumptions regarding the types of costs that are to be avoided and require that calculations of avoided costs be based on publicly available sources. n2119 NEXTLINK contends that these requirements would allow rapid identification of avoided costs and should lead to the development of presumptive percentage discounts that will apply to retail rates. n2120 n2118 See, e.g., GSA/DoD comments at 11. n2119 NEXTLINK comments at 33. n2120 Id. Also, the Telecommunications Resellers Ass'n advocates establishing a minimal discount, to which states may add, but not delete, unless they petition the FCC for express exemption. Telecommunications Resellers Ass'n comments at 24-25. [*44] 884. Incumbent LECs and MFS also argue that "avoided" costs are those that are actually avoided by such carriers instead of costs that are theoretically "avoidable." n2121 GTE argues that an "avoidable" standard improperly measures avoided costs in the long run versus actually avoided costs. n2122 IXCs and resellers argue that the standard should be "avoidable" costs; otherwise, incumbent LECs will be able to game their accounting systems and business practices to minimize actually "avoided" expense. n2123 n2121 See, e.g., GTE reply at 25-26; NYNEX comments at 81; SBC reply at 15 n.35; USTA reply at 30; MFS comments at 72. n2122 See Rebuttal Testimony of Douglas E. Wellemeyer, Rulemaking on the Commission Own Motion to Govern Open Access to Bottleneck Services and Establish a Framework for Network Architecture Development of Dominant Carrier Networks, R. 93-04-003 and I. 93-04-002 (California Commission July 10, 1996), submitted as attachment to Letter from Whitney Hatch, Assistant Vice President-Regulatory Affairs, GTE, to John Nakahata, Senior Legal Advisor, Chairman Reed E. Hundt, FCC, July 18, 1996. n2123 See, e.g., AT&T comments at 84 n. 129; Cable & Wireless reply at 29. [*45] 885. A number of parties propose that this Commission specify various USOA accounts as avoided costs. n2124 Several parties introduced models or studies that use accounting data to calculate wholesale discounts. These proposals are summarized in detail in the next section. n2124 See AT&T comments at 83-84 n.130-131; GCI comment at 15; MCI comments at Attachment 2 (Pricing of Wholesale Services); TCC comments at 45-46; Telecommunications Resellers Ass'n comments at 25-26; Sprint comments at Appendix C. While not providing specific USOA accounts, several parties encourage the Commission to identify these accounts. See, e.g., ACSI comments at 61. 886. Some parties recommend that we adopt a specific percentage discount from the retail rate. For example, the Massachusetts Attorney General recommends an interim discount of 25 percent until carrier-specific cost studies can be performed. n2125 ACTA suggests that we adopt a 25 percent discount as a national standard. n2126 Several cable interests recommend ten percent maximum discounts, at least until avoided cost studies can be performed. n2127 The Telecommunications Resellers Association suggests that discounts in the range of 30 [*46] to 50 percent off the retail rate are necessary to allow resellers to provide competition. n2128 AT&T argues that, whatever discount is selected, states should be allowed to increase it to promote competition. n2129 Furthermore, AT&T argues that states should be allowed to impose penalties in the form of increased discounts for failure to provide service of equivalent quality offered to incumbent LEC customers or to provide electronic interfaces to the incumbent LEC network. n2130 Incumbent LECs and MFS argue that the 1996 Act does not authorize the service quality penalties or competition-enhancing increased discounts suggested by AT&T. n2131 n2125 Mass. Attorney General comments at 24. n2126 ACTA comments at 31-32. n2127 See, e.g., Comcast comments at 21; NCTA comments at 41. n2128 Telecommunications Resellers Ass'n comments at 24. n2129 AT&T comments at 84. n2130 Id. at 84-85. n2131 See, e.g., MFS reply at 36; Bell Atlantic reply at 24; Sprint reply at 42. 887. MFS, Teleport, Time Warner, the Massachusetts Commission, and a number of incumbent LECs argue that joint, common, and overhead costs should not be included in the calculation of avoided [*47] costs. n2132 They argue that these costs are not avoided because they will continue to be incurred in providing wholesale service. AT&T, MCI, and others favor inclusion of a portion of joint, common, and overhead costs in avoided costs because these costs will decrease as the overall level of operations of an incumbent LEC decrease (as a result of downscaling their retail operations). n2133 n2132 See, e.g., MFS comments at 74; Teleport comments at 56-57; Time Warner comments at 77; Mass. Commission comments at 14-1 ; Ameritech comments at 80; BellSouth comments at 67; Cincinnati Bell comments at 35; GTE comments at 51; Lincoln Tel. reply at 8; U S West comments at 68-69; PacTel comments at 90; Rural Tel. Coalition reply at 15; USTA comments at Attachment (Affidavit of Jerry A. Hausman), p. 11. n2133 See, e.g., TCC comments at 45.-46; AT&T reply at Appendix E (Avoided Cost Model); MCI comments at Attachment 2 (Pricing of Wholesale Services), p. 9; Texas Public Utility Counsel comments at 45-46. 888. There is significant disagreement about whether wholesale rates should take into account any additional costs incumbent LECs incur in providing wholesale service, such as those [*48] relating to wholesale marketing and billing operations. Incumbent LECs, facilities-based competitors, Sprint, and others argue that wholesale rates must include such costs to ensure recovery from the cost-causing parties -- resellers. n2134 Some incumbent LECs note that these additional costs could also be recovered through a separate charge. n2135 IXCs and resellers argue that the plain language of the section 252(d)(3) does not provide for the recognition of these costs. n2136 They also add that allowing incumbent LECs to recover these costs from resellers discourages efficiency in their wholesale operations. n2137 n2134 See, e.g., Ameritech comments at 80; Bell Atlantic comments at 44-45; BellSouth comments at Attachment (Interconnection and Economic Efficiency), p. 20; Citizens Utilities comments at 25; USTA comments at Attachment (Affidavit of Jerry A. Hausman), p. 12, reply at 29; MFS comments at 73-74; Teleport comments at 57; Time Warner comments at 78; Ohio Commission comments at 59-60, 66; Sprint comments at 72; J. Staurulakis comments at 10. n2135 See, e.g., BellSouth comments at 67; NYNEX comments at 83. n2136 See, e.g., AT&T reply at 10; LDDS reply at 45; TCC comments at 47; Cable & Wireless reply at 28-29; Telecommunications Resellers Ass'n reply at 18. [*49] n2137 LDDS reply at 45. LDDS argues that such costs should be recovered in a competitively-neutral manner. Id. 889. A number of incumbent LECs oppose application of a single percentage discount rate for all services, arguing that avoided costs will vary among different services. n2138 Some state commissions also recommend against adoption of a uniform rate. n2139 MFS argues that, because section 252(d)(3) refers to retail rates charged to subscribers "for the telecommunications service requested," a uniform wholesale discount rate would frustrate Congressional intent. n2140 Advocates of a uniform discount, however, contend that incumbent LECs will be able to game any system involving a nonuniform allocation of avoided cost, because the information regarding such costs is under their control. n2141 Advocates of a uniform discount also argue that apportioning avoided costs over specific services can be difficult, while a uniform rate is simple to apply. Ameritech argues that the wholesale rate structure of an incumbent LEC should not mirror its retail rate structure. Rather, it should be based on a weighted average of all retail rates provided by the incumbent LEC, less avoided [*50] cost. n2142 n2138 See, e.g., Bell Atlantic comments at 46; USTA comments at 74-75; MFS comments at 73. n2139 See, e.g., California Commission comments at 37-38. n2140 MFS comments at 73. n2141 See, e.g., Cable & Wireless comments at 47; TCC comments at 47, Telecommunications Resellers Ass'n reply at 18-19; NEXTLINK comments at 33. n2142 Ameritech comments at 58. For example, this would average various time-of-day plans and usage plans. 3. The Models and Study 890. MCI and AT&T introduced models, and Sprint submitted a study for calculating wholesale rates. This section describes each of these proposals and summarizes the criticisms directed against them. AT&T and MCI offer models which, they contend, can be used to generate discount rates for each incumbent LEC's retail offerings. As an example of the avoided cost approach Sprint advocates, Sprint submits a study based on its United Telephone subsidiary operations in Tennessee. n2143 n2143 Sprint comments at Appendix C (Avoided Cost Study: Tennessee United Telephone--S.E., Inc.). 891. MCI's model uses publicly available USOA data. n2144 MCI analyzes three categories of avoided cost: (1) marketing, billing, [*51] and collection costs; (2) "other costs"; and (3) common costs allocated to avoided cost activities. MCI identifies the following USOA accounts as avoided marketing, billing, and collection costs: Account 6611 (product management) Account 6612 (sales) Account 6613 (product advertising) Account 6621 (call completion services) Account 6622 (number services) Account 6623 (customer services) Account 6722 (external relations) Account 6727 (research and development) MCI treats as "other" avoided costs all of the expenses recorded in the following accounts: Account 6113 (aircraft expense) Account 6341 (large PBX expense) Account 6351 (public telephone terminal equipment expense) Account 6511 (property held for future telecommunications use) Account 6512 (provisioning expense) Account 6562 (depreciation expense--property held for future telecommunications use) Account 6564 (amortization expense--intangible) MCI's model also allocates to avoided cost activities a portion of the general overhead and general support expenses recorded in the following accounts: general overhead Account 6711 (executive) Account 6712 (planning) Account 6721 (accounting [*52] and finance) Account 6723 (human resources) Account 6724 (information management) Account 6725 (legal) Account 6726 (procurement) Account 6728 (other general and administrative) Account 6790 (provision for uncollectible notes receivable) general support Account 6121 (land and building expense) Account 6122 (furniture and artworks expense) Account 6123 (office equipment expense) Account 6124 (general purpose computers expense) MCI uses an iterative process to determine separate avoided cost percentages for general overhead costs and for general support costs. n2145 The resulting percentages are based on the relative ratios of avoided costs to total operating expense. n2146 MCI's model assumes that incumbent LECs incur no additional expenses in providing wholesale services. n2144 MCI comments at Attachment 2 (Pricing of Wholesale Services). n2145 The formulae used by MCI in calculating certain overhead and general support costs are dependent on variables affected by the result of the calculation of such costs. Iteration is a means of solving for variables in such circumstances. n2146 Total Avoided Expense = [Not Avoided Expenses * 0%] + [Totally Avoided Expenses * 100%] + [Partially Avoided Expenses * a%] + [Partially Avoided Expenses * b%] Where: a = % Corporate Operations Avoidable = Total Avoided Expenses/Total Expenses - Depreciation & Amortization Expense b = % General Support Avoidable = Total Avoided Expenses/Total Expenses - General Support [*53] 892. After total avoided costs are determined, MCI subtracts the total avoided costs from total operating expenses to derive total wholesale expenses. MCI then calculates wholesale service revenue using a formula that allows the incumbent LEC the same proportional mark-up above costs on wholesale services as on its retail services. n2147 The formula sets the ratio of total revenue less total expenses to total revenue (retail markup) equal to the ratio of wholesale revenue less wholesale expenses to wholesale revenues (allowable wholesale markup) then computes wholesale revenue (and rates) by solving for that variable in a simple equation. n2148 MCI computes a wholesale discount rate as one minus the ratio of wholesale revenue over total revenue. Wholesale rates are computed by reducing retail rates by the wholesale discount. n2147 Wholesale Price Discount = 1 - Wholesale Service Revenue/Total Operating Revenue Where: Wholesale Service Revenue = Total Wholesale Expenses/(1 - Base Margin) Total Wholesale Expenses = Total Operating Expenses - Total Avoided Costs Base Margin = Total Operating Revenue - Total Operating Expenses/Total Operating Revenue n2148 Retail Revenue - Total Expenses/Retail Revenue = wholesale revenue - (total expenses - avoided expenses)/wholesale revenue Wholesale Revenue = Retail Revenue - [Avoided expenses X [Retail Revenue]/[Total Expenses]] This is as compared to: Wholesale Revenue = Retail Revenue - Avoided Expenses [*54] 893. MCI proposes that states use its model to calculate a single wholesale discount rate for each incumbent LEC that would apply in every state in which that incumbent LEC does business and for all services the incumbent LEC provides for resale. States would apply that rate to each of the incumbent LECs' retail services. For the seven BOCs and GTE, MCI's calculated wholesale discount factors range from 25 to 35 percent. n2149 MCI suggests that its study be declared presumptively valid by the Commission, but suggests that the Commission allow states to adopt a different resale discount by showing that the model does not produce an accurate result. n2150 n2149 MCI comments at Attachment 2 (Pricing of Wholesale Services), p. 12. n2150 MCI comments at 90. 894. Sprint, several incumbent LECs, and potential facilities-based entrants, criticize the MCI model. Lincoln Telephone faults the underlying MCI study for relying on a sample of only eight companies, arguing that the limited sample does not capture the variety of billing, costing and collecting arrangements of all existing carriers. n2151 Several incumbent LECs, although not criticizing the MCI study specifically, oppose [*55] any approach that utilizes USOA accounts, n2152 or calculates the resale discount by deducting avoidable, as opposed to actually avoided, costs. n2153 Others attack MCI's method of computing wholesale rates once avoided costs are measured. n2154 MFS argues that there is no statutory basis for MCI's use of a formula that removes the markup associated with avoided retail expenses from the retail rates. n2155 n2151 Lincoln Tel. comments at 8-9. n2152 See, e.g., BellSouth reply at 41; PacTel reply at 45-46. n2153 See, e.g., SBC reply at 15; NYNEX reply at 40; Ameritech reply at 37-39. n2154 MFS reply at 36. n2155 Id. This was also a point debated by incumbent LECs in various state proceedings. See, e.g., Petition for a Total Local Exchange Wholesale Service Tariff from Illinois Bell Telephone Company, Nos. 95-0458 and 95-0531 (consol.) (Illinois Commission June 26, 1996) at 5-20. Teleport argues that the Illinois Commission's decision to include a portion of profit contribution was incorrect. Teleport comments at 59. 895. AT&T's avoided cost model is similar to MCI's model in that it is an embedded cost approach that starts with publicly-available accounting data. [*56] n2156 AT&T's model, however, involves several additional layers of calculations. The model assigns incumbent LEC Automated Record Management Information Systems (ARMIS) revenue and expense data to five lines of business (units). For the local business unit, which it uses as the applicable unit for resale under section 251(c)(4), avoidable expenses are computed by USOA account. AT&T argues that all of the costs associated with the following USOA accounts categories should be excluded as avoided costs, many of which are summary accounts and subsume a set of other accounts: Account 5300 (uncollectibles) Account 6220 (operator systems expense) (if appropriate) Account 6533 (testing expense) Account 6534 (plant operations administration expense) Account 6610 (marketing expense) Account 6620 (customer service expense) AT&T further argues that the portion of the following USOA accounts associated with the incumbent LEC's retail operations should be excluded as avoided costs: Account 6110 (network support expense) Account 6120 (general support expense) Account 6560 (depreciation expense) Account 6710 (executive and planning expense) Account 6720 (general and administrative [*57] expense) Account 7240 (operating other taxes) Account 7540 (other interest deductions) AT&T also recommends partial avoidance of "Total Returns," which refers to portions of the retail rate that contributes to an incumbent LEC's earnings. Ultimately, under AT&T's model, the sum of avoided direct and indirect retail costs is divided by the local service-related revenues to derive the avoided cost discount. AT&T applies its model to each state, with the exception of Alaska, and derives discount rates that range from 23 percent to nearly 56 percent. Parties did not have an opportunity to comment specifically on the AT&T model during the pleading cycle of this proceeding because it was submitted with AT&T's reply. However, AT&T identified in its initial comments the list of fully and partially avoided USOA accounts that were ultimately used in its model. Criticisms of these classifications of fully and partially avoided costs are discussed below. n2156 AT&T reply at Appendix E (Avoided Cost Model). 896. Sprint submits a sample study of its LEC subsidiary operations in Tennessee as an example of how the avoided cost approach advocated by Sprint would be applied. n2157 It [*58] was undertaken at the request of the Tennessee Commission to be used under the 1996 Act for calculating wholesale costs. Specifically, the study examines rates for resale of bundled services, focusing on those categories of costs defined in the 1996 Act (marketing, billing, collection, and other costs). Sprint describes its study as employing an activity-based cost approach that identifies the avoided cost by cost category and assigns these costs to service groups, based on a computed factor that assigns each specific type of expense to the activity that creates or drives that expense. Sprint does not provide the worksheets detailing this cost assignment because Sprint considers the worksheets to be proprietary. Costs are identified at the subaccount level. Sprint computes the percentage of avoided costs of providing simple access service at wholesale as a percentage of simple access revenue to be 4.76 percent. Sprint computes a 7.19 percent figure for other services. In its reply comments, Sprint suggests that the AT&T and MCI models significantly overstate incumbent LEC avoided costs. n2157 Sprint comments at Appendix C (Avoided Cost Study: Tennessee United Telephone--S.E., Inc.). [*59] 897. Parties also commented on the specific USOA accounts that should be used to identify avoided costs. We summarize below the comments with respect to the various accounts: Marketing expenses--Account 6611 (product management, Account 6612 (sales), and Account 6613 (product advertising): Resellers and most IXCs, other than Sprint, all support identification of these accounts as completely avoidable, both because they are explicitly mentioned in the 1996 Act and because these expenses would not be necessary in a wholesale operation. n2158 Incumbent LECs, Sprint, MFS, and Time Warner argue that expenses recorded in these accounts would, in fact, be incurred in connection with the provision of wholesale services such as marketing to wholesalers. n2159 n2158 See, e.g., Cable & Wireless comments at 46 n.77; Telecommunications Resellers Ass'n comments at 25-26; AT&T comments at 84 n. 130; CompTel comments at 96-97; MCI comments at Attachment 2 (Pricing of Wholesale Services), p. 5-6. n2159 See, e.g., Ameritech reply at 38; Bell Atlantic reply at 23; GTE reply at 25 n.40; MFS reply at 35; Time Warner reply at 21; USTA reply at 30; Sprint reply at 38. Services expenses--Account [*60] 6621 (call completion services), Account 6622 (number services), and Account 6623 (customer services): IXCs and resellers contend that all of the expenses recorded in these accounts should be treated as avoidable costs because a reseller will either purchase these services separately or provide them itself. n2160 Incumbent LECs and Sprint argue that these services have no relation to local retail service and therefore cannot be included in avoided costs used to compute wholesale local service rates. n2161 n2160 See, e.g., AT&T comments at 84 n. 130; MCI comments at Attachment 2 (Pricing of Wholesale Services), p. 6; Cable & Wireless comments at 46 n.77; Telecommunications Resellers Ass'n comments at 25-26. CompTel states that such accounts should be avoided where appropriate. CompTel comments at 96-97. n2161 See, e.g., Bell Atlantic reply at 23 (with respect to account 6623); USTA reply at 30 (account 6623 includes costs devoted to customer service relating to interexchange service); Sprint reply at 38-39 (also identifies account 6623 as relating to separately billed services). PacTel agrees that costs of directory assistance call allowances, directory listing, and telephone directories will continue to be incurred. PacTel reply at 46. [*61] Information origination/termination expenses and other property, plant and equipment expenses--Account 6341 (large PBX expense), Account 6351 (public telephone terminal equipment expense), Account 6511 (property held for future telecommunications use), and Account 6512 (provisioning expense): MCI and Cable & Wireless identify accounts 6341 (large PBX expense), 6351 (public telephone terminal equipment expense), 6511 (property held for future telecommunications use) and 6512 (provisioning expense) as completely avoidable, n2162 while incumbent LECs, MFS and Sprint argue that these expenses are not associated with retail activities. n2163 n2162 MCI comments at Attachment 2 (Pricing of Wholesale Services), p. 8; Cable & Wireless comments at 46 n.77. n2163 MFS reply at 35-36; Sprint reply at 38; GTE reply at 25 n.40 (at least with respect to accounts 6341 and 6351). Account 6220 (operator systems expense): AT&T, TCC, and GCI argue that this account is wholly avoidable where resellers choose not to purchase operator services n2164 while Sprint argues that the account is unrelated to local service. n2165 n2164 AT&T reply at Appendix E (Avoided Cost Model); TCC comments at 45 n.45; GCI comments at 1. [*62] n2165 Sprint reply at 38. Account 6790 (provision for uncollectible notes receivable)/5300 (uncollectible revenue): AT&T, TCC, and GCI argue that the sum recorded in account 5300 represents a revenue offset that is wholly avoidable. n2166 MCI chooses to measure uncollectibles using account 6790, arguing that expenses in this account are partially avoidable. n2167 Sprint and Time Warner disagree with the contention that uncollectibles are avoidable at all, claiming that uncollectibles may actually increase in a wholesale operation. n2168 n2166 AT&T comments at 84 n. 130; AT&T reply, Appendix E (Avoided Cost Model); TCC comments at 45 n.45; GCI comments at 1. n2167 MCI comments at Attachment 2 (Pricing of Wholesale Services), p. 9. n2168 Sprint reply at 37; Time Warner reply at 21. Network support expenses (Accounts 6112-6116): AT&T, TCC, GCI, and the Telecommunications Resellers Association assert that all of these accounts are partially avoidable. n2169 MCI only discusses account 6113 (aircraft expense), identifying it as completely avoidable because it is not related to wholesale services. n2170 Sprint and MFS disagree, arguing that there is no evidence [*63] that costs in these accounts will decrease with wholesale offerings because these expenses will have to continue to be incurred. n2171 n2169 AT&T comments at 84 n.131; TCC comments at 46 n.46; GCI comments at 1; Telecommunications Resellers Ass'n comments at 25-26. n2170 MCI comments at Attachment 2 (Pricing of Wholesale Services), p. 8. n2171 MFS reply at 35 (only discusses account 6113); Sprint reply at 39-40. General support expenses (Accounts 6121-6124) and Account 6711 (executive), Account 6712 (planning), and Accounts 6721-6728 (general and administrative expenses): Resellers and IXCs contend that the shared expenses recorded in these accounts are partially avoidable. n2172 MCI and Cable & Wireless identify accounts 6722 (external relations) and 6727 (research and development) as completely avoidable. n2173 MCI argues that overhead costs support all of the activities, including the activities that are avoided when services are sold at wholesale. Therefore, according to MCI, a portion of overhead expenses must be treated as avoided cost. n2174 AT&T argues that wholesaling will necessarily lead to an overall reduction in the size of an incumbent LEC's operations [*64] and thus to a reduction in shared expenses. n2175 Sprint and Time Warner argue that there is no evidence to support a conclusion that resale will lead to a general reduction in shared expenses. n2176 n2172 See, e.g., Telecommunications Resellers Ass'n comments at 25-26; AT&T comments at 84 n.131. n2173 MCI comments at Attachment 2 (Pricing of Wholesale Services), p. 6-7; Cable & Wireless comments at 47 n.79. n2174 MCI comments at Attachment 2 (Pricing of Wholesale Services), p. 9. n2175 AT&T reply, Appendix E (Avoided Cost Model) at 2. n2176 Sprint reply at 39-40; Time Warner reply at 21 Depreciation and amortization expenses (Accounts 6561-6565) and operating taxes (Accounts 7220-7240): Resellers and IXCs also argue to varying degrees that such expenses are partially avoidable. n2177 MCI and Cable & Wireless argue for the complete avoidance of accounts 6562 (depreciation expense--property held for future telecommunications use) and 6564 (amortization expense--intangible). n2178 MFS, Sprint, and Time Warner argue that these costs will continue to be incurred for wholesale operations. n2179 n2177 See, e.g., Telecommunications Resellers Ass'n comments at 25-26; AT&T comments at 84 n. 131; CompTel comments at 97. [*65] n2178 MCI comments at Attachment 2 (Pricing of Wholesale Services), p. 9; Cable & Wireless comments at 47 n.79. n2179 MFS reply at 35-36 (account 6564 is not related to retail); Sprint reply at 39-40; Time Warner reply at 21. Other partially avoided accounts: AT&T, TCC, and GCI argue that accounts 6533 (testing expenses), 6534 (plant operations administration expense), and 7540 (other interest), and total returns are partially avoidable n2180 while Sprint disagrees. n2181 n2180 AT&T comments at 84 nn. 130-31; TCC comments at 46 n.46; GCI comments at 1. Sprint does not comment on account 7540. n2181 Sprint reply at 39-40. 4. State Decisions 898. Several state commissions have already made interim or final determinations with respect to wholesale rates. Some, like the California and Maryland commissions, did not purport to apply or interpret the 1996 Act. Others, including the Illinois and Georgia commissions, explicitly applied section 252(d)(3) in reaching their decisions. Post-1996 Act state decisions announced to date are summarized below. 899. California: The California Commission adopted interim rules, effective March 31, 1996, for the resale of local [*66] exchange services by competitive LECs within the areas served by Pacific and GTE. n2182 Although the record in that proceeding was closed before the passage of the 1996 Act, the California Commission applied a "retail rates minus avoided cost" standard similar to that contained in section 252(d)(3) for purposes of setting interim rates. The California Commission used an embedded cost study and USOA accounting data to calculate business discounts rates of 17 percent for PacTel and 12 percent for GTE. Because it had previously found that residential rates were already below direct embedded cost, the California Commission applied to residential services a reduced discount rate of 10 percent for PacTel and 7 percent for GTE. In arriving at this conclusion, the California Commission considered uncollectibles, marketing, and customer service expenses to be partially avoidable, to varying degrees. n2182 Order Instituting Rulemaking on the Commission's Own Motion into Competition for Local Exchange Service, R. 95-04-043 and I. 95-04-044 (California Commission April 26, 1996). Although the final order was not issued until April 26, 1996, it became effective March 31, 1996. 900. Colorado: [*67] The Colorado Commission established a business discount rate of 16 percent and a residential discount rate of 9 percent. n2183 Using Colorado-specific embedded cost information previously filed by U S West as part of an annual report to that commission, the Colorado Commission calculated avoided costs for five categories of services. The Colorado Commission treated the following costs as totally avoided: uncollectibles; direct expense associated with operator services; customer operations (product management sales, and product advertising); call completion; and number services. The Colorado Commission also considered 95 percent of the costs of customer services to be avoidable. General purpose computer expense and related depreciation, and general corporate overheads, were treated as partially avoided. The Colorado Commission concluded that wholesale discounts should be as follows: residential, 9 percent; business, 16 percent; toll services, 30 percent; central office-based features, 50 percent; all other services, 18 percent. n2183 U S West Communications, Inc. Filing Advice Letter No. 2610 in Compliance with Commission Decision No. C96-521 Adopting Emergency Rules, Docket No. 96S-233T (Colorado Commission June 21, 1996). [*68] 901. Georgia: The Georgia Commission established a 20.3 percent discount rate for wholesale residential service and a 17.3 percent discount rate for wholesale business service. n2184 The Georgia Commission used embedded cost information to calculate avoided direct expenses. The Georgia Commission also found that a percentage of general support, administrative, and corporate operations expenses should be considered avoided costs. In computing its final discounts, the Georgia Commission apportioned total avoided expense between residential and business services according to BellSouth's revenues for the two categories. Prior to such apportionment, the Georgia Commission's discount was 18.74 percent. n2184 Petition of AT&T for the Commission to Establish Resale Rules, Rates, Terms, and Conditions and Initiate Unbundling of Services, Docket No. 6352U (Georgia Commission June 21, 1996). 902. Illinois: The Illinois Commission released an order on June 26, 1996, setting wholesale discount rates for Ameritech and Centel local exchange services. n2185 The Illinois Commission applied the section 252(d)(3) pricing standard, but rejected use of embedded cost studies as inconsistent with [*69] the Commission's established cost of service rules. Instead, the Illinois Commission based its analysis on a methodology that begins with retail rates, then subtracts: (1) the "total assigned cost" of retail functions; and (2) a pro rata share of contribution attributable to the avoided retail costs. Total assigned costs include the long-run incremental costs of a service plus some shared and administrative costs. Contribution is the difference between retail price and long-run incremental cost. The Illinois Commission expects that this methodology, when applied to individual Ameritech services using the carrier's most recently-filed cost studies, will produce an average discount rate of 20.07 percent. n2186 The Illinois Commission applied the same rate to Centel, pending completion by Centel of the cost studies needed to apply the Illinois Commission's adopted methodology. n2185 Petition for a Total Local Exchange Wholesale Service Tariff from Illinois Bell Telephone Company, Nos. 95-0458 and 95-0531 (consol.) (Illinois Commission June 26, 1996). n2186 The Illinois Commission notes that the pricing methodology that it adopted would yield an average discount of 20.07 percent if applied at the individual service level and 16.63 percent if applied to the "family" service level. Id. at 10. Illinois decided that the individual service application avoided certain pricing anomalies and was more consistent with the 1996 Act. Id. at 20. [*70] 903. Louisiana: The Louisiana Commission established regulations concerning resale of telecommunications services on March 15, 1996. n2187 As an interim measure, until the Louisiana Commission can determine wholesale rates based on TSLRIC cost studies, the commission has set wholesale rates at the incumbent LEC's current tariffed retail rates minus 10 percent. This calculation reflects the incumbent LEC's avoidance of retail costs, including but not limited to, sales, marketing and customer services associated with the resold items. n2187 In re: Regulations for Competition in the Local Telecommunications Market, Docket U-200883 (Louisiana Commission March 15, 1996). 904. Maryland: The Maryland Commission adopted, without analyzing cost studies, an interim discount rate of 10 percent, pending completion of the instant rulemaking proceeding. n2188 n2188 Wholesale Rates for Telecommunications Services Ruling on AT&T's Petition for a Reduction on the Wholesale Rates of Bell Atlantic--Maryland, Inc., Case No. 8721 (Maryland Commission June 27, 1996). 905. New York: The New York Commission established temporary wholesale discounts for NYNEX and Rochester Telephone on July 18 [*71] of this year. n2189 The New York Commission calculates for NYNEX a 17 percent discount for residential service and an 11 percent discount for business service. Separate avoided cost percentages were derived for different shared expense categories, ranging from five percent for general and administrative expenses to 12.7 percent for network support expense. For marketing categories, 20 percent of product management, 50 percent of sales, and 50 percent of advertising expenses were considered avoidable. All uncollectibles were considered avoidable. Calculating these and other avoided costs, the New York Commission arrived at a 15 percent discount. Because the New York Commission observed that business lines produce higher overall revenue and thus artificially inflate avoided cost for business lines (and undervalue the avoided cost for residential lines), a 17 percent discount was set for residential service while only an 11 percent discount was set for business service. A uniform 13.5 percent discount was ordered for Rochester Telephone, based on a New York Commission analysis of Rochester's 1995 annual report, using principles similar to those applied to NYNEX. n2189 Joint Complaint of AT&T Communications of New York, Inc., MCI Telecommunications Corporation, WorldCom, Inc. d/b/a LDDS WorldCom and the Empire Association of Long Distance Telephone Companies, Inc. Against New York Telephone Company Concerning Wholesale Provisioning of Local Exchange Service by New York Telephone Company and Sections of New York Telephone's Tariff No. 900, Case 95-C-0657 (New York Commission July 18, 1996); Petition of Rochester Telephone Corp. for Approval of a Proposed Restructuring Plan, Case 93-C-0103 (New York Commission July 18, 1996). [*72] 906. Ohio: The Ohio Commission has established rules for pricing wholesale services for resale, but has not publicly released calculations of specific discounts for particular services. n2190 The Ohio Commission established a presumption that all expenses contained in the following USOA accounts will be avoided: 5300 (uncollectible revenue), 6611 (,product management), 6612 (sales), 6613 (product advertising), 6621 (call completion service), 6622 (number services expense), and 6623 (customer service). n2191 The Ohio Commission's rules require resellers seeking to avoid additional costs to prove that such costs would be avoided in wholesale operations. Beyond the avoided expenses discussed above, the Ohio Commission requires avoided costs to include "direct and indirect costs of all activities eliminated due to the wholesale provisioning." n2190 Commission Investigation Relative to the Establishment of Local Exchange Competition and Other Competitive Issues, Case No. 95-845-TP-COI (Ohio Commission June 12, 1996). n2191 The Ohio Commission also lists account 6610, which is the summary account for marketing expenses (accounts 6611-6613). 5. Discussion 907. Resale will be [*73] an important entry strategy for many new entrants, especially in the short term when they are building their own facilities. Further, in some areas and for some new entrants, we expect that the resale option will remain an important entry strategy over the longer term. Resale will also be an important entry strategy for small businesses that may lack capital to compete in the local exchange market by purchasing unbundled elements or by building their own networks. In light of the strategic importance of resale to the development of competition, we conclude that it is especially important to promulgate national rules for use by state commissions in setting wholesale rates. For the same reasons discussed in Section II.D of the Order, we believe that we have legal authority under the 1996 Act to articulate principles that will apply to the arbitration or review of wholesale rates. We also believe that articulating such principles will promote expeditious and efficient entry into the local exchange market. Clear resale rules will create incentives for parties to reach agreement on resale arrangements in voluntary negotiations. Clear rules will also aid states in conducting arbitrations [*74] that will be administratively workable and will produce results that satisfy the intent of the 1996 Act. The rules we adopt and the determinations we make in this area are crafted to achieve these purposes. We also note that clear resale rules should minimize regulatory burdens and uncertainty for all parties, including small entities and small incumbent LECs. n2192 n2192 See Regulatory Flexibility Act, 5 U.S.C. @@ 601 et seq. 908. The statutory pricing standard for wholesale rates requires state commissions to (1) identify what marketing, billing, collection, and other costs will be avoided by incumbent LECs when they provide services at wholesale; and (2) calculate the portion of the retail prices for those services that is attributable to the avoided costs. Our rules provide two methods for making these determinations. The first, and preferred, method requires slate commissions to identify and calculate avoided costs based on avoided cost studies. The second method allows states to select, on an interim basis, a discount rate from within a default range of discount rates adopted by this Commission. They may then calculate the portion of a retail price that is attributable [*75] to avoided costs by multiplying the retail price by the discount rate. 909. We adopt a minimum set of criteria for avoided cost studies used to determine wholesale discount rates. The record before us demonstrates that avoided cost studies can produce widely varying results, depending in large part upon how the proponent of the study interprets the language of section 252(d)(3). The criteria we adopt are designed to ensure that states apply consistent interpretations of the 1996 Act in setting wholesale rates based on avoided cost studies which should facilitate swift entry by national and regional resellers, which may include small entities. n2193 At the same time, our criteria are intended to leave the state commissions broad latitude in selecting costing methodologies that comport with their own ratemaking practices for retail services. Thus, for example, our rules for identifying avoided costs by USOA expense account are cast as rebuttable presumptions, and we do not adopt as presumptively correct any avoided cost model. n2193 See Id. 910. Based on the comments filed in this proceeding and on our analysis of state decisions setting wholesale discounts, we adopt a default [*76] range of rates that will permit a state commission to select a reasonable default wholesale rate between 17 and 25 percent below retail rate levels. A default wholesale discount rate shall be used if: (1) an avoided cost study that satisfies the criteria we set forth below does not exist; (2) a state commission has not completed its review of such an avoided cost study; or (3) a rate established by a state commission before release of this Order is based on a study that does not comply with the criteria described in the following section. A state commission must establish wholesale rates based on avoided cost studies within a reasonable time from when the default rate was selected. This approach will enable state commissions to complete arbitration proceedings within the statutory time frames even if it is infeasible to conduct full-scale avoided cost studies that comply with the criteria described below for each incumbent LEC. a. Criteria for Cost Studies 911. There has been considerable debate on the record in this proceeding and before the state commissions on whether section 252(d)(3) embodies an "avoided" cost standard or an "avoidable" cost standard. We find that "the portion [*77] [of the retail rate] . . . attributable to costs that will be avoided" includes all of the costs that the LEC incurs in maintaining a retail, as opposed to a wholesale, business. In other words, the avoided costs are those that an incumbent LEC would no longer incur if it were to cease retail operations and instead provide all of its services through resellers. Thus, we reject the arguments of incumbent LECs and others who maintain that the LEC must actually experience a reduction in its operating expenses for a cost to be considered "avoided" for purposes of section 252(d)(3). We do not believe that Congress intended to allow incumbent LECs to sustain artificially high wholesale prices by declining to reduce their expenditures to the degree that certain costs are readily avoidable. We therefore interpret the 1996 Act as requiring states to make an objective assessment of what costs are reasonably avoidable when a LEC sells its services wholesale. We note that Colorado, Georgia, Illinois, New York, and Ohio commissions have all interpreted the 1996 Act in this manner. n2194 n2194 See, e.g., U S West Communications, Inc. Filing Advice Letter No. 2610 in Compliance with Commission Decision No. C96-521 Adopting Emergency Rules, Docket No. 96S-233T (Colorado Commission June 21, 1996) at paras. 12-13; Petition of AT&T for the Commission to Establish Resale Rules, Rates, Terms, and Conditions and Initiate Unbundling of Services, Docket No. 6352U (Georgia Commission June 21, 1996); Petition for a Total Local Exchange Wholesale Service Tariff from Illinois Bell Telephone Company, Nos. 95-0458 and 95-0531 (consol.) (Illinois Commission June 26, 1996) at 27-34; Joint Complaint of AT&T Communications of New York, Inc., MCI Telecommunications Corporation, WorldCom, Inc. d/b/a LDDS WorldCom and the Empire Association of Long Distance Telephone Companies, Inc. Against New York Telephone Company Concerning Wholesale Provisioning of Local Exchange Service by New York Telephone Company and Sections of New York Telephone's Tariff No. 900, Case 95-C-0657 (New York Commission July 18, 1996); Petition of Rochester Telephone Corp. for Approval of a Proposed Restructuring Plan, Case 93-C-0103 (New York July 18, 1996); Commission Investigation Relative to the Establishment of Local Exchange Competition and Other Competitive Issues, Case No. 95-845-TP-COI (Ohio Commission June 12, 1990) at 30-31. [*78] 912. We find that, under this "reasonably avoidable" standard discussed above, an avoided cost study must include indirect, or shared, costs as well as direct costs. We agree with MCI, AT&T, and the California, Illinois, Ohio, Colorado, and Georgia commissions that some indirect or shared costs are avoidable and likely to be avoided when a LEC provides retail services to a reseller instead of to the end user. This is because indirect or shared costs, such as general overheads, support all of the LEC's functions, including marketing, sales, billing and collection, and other avoided retail functions. Therefore, a portion of indirect costs must be considered "attributable to costs that will be avoided" pursuant to section 252(d)(3). It is true that expenses recorded in indirect or shared expense accounts will continue to be incurred for wholesale operations. It is also true, however, that the overall level of indirect expenses can reasonably be expected to decrease as a result of a lower level of overall operations resulting from a reduction in-retail activity. 913. A portion of contribution, profits, or mark-up may also be considered "attributable to costs that will be avoided" n2195 [*79] when services are sold wholesale. MCI's model makes this attribution by means of a calculation that applies the same mark-up to wholesale services as to retail services. The Illinois Commission achieved a similar effect by removing a pro rata portion of contribution from the retail rate for each service. In AT&T's model, the portion of return on investment (profits) that was attributable to assets used in avoided retail activities was treated as an avoided cost. We find that these approaches are consistent with the 1996 Act. n2195 47 U.S.C. @ 252(d)(3). 914. An avoided cost study may not calculate avoided costs based on non-cost factors or policy arguments, nor may it make disallowances for reasons not provided for in section 252(d)(3). The language of section 252(d)(3) makes no provision for selecting a wholesale discount rate on policy grounds. We therefore reject NCTA's argument that discount rates should be ten percent or less in order to avoid discouraging facilities-based competition, as well as AT&T's suggestion that wholesale discount rates should be set at levels that ensure the viability of the reseller's business. We also reject, for example, MCI's assertion that [*80] no external relations or research and development costs should be allowed in wholesale rates because the activities represented by those costs are contrary to the interests of the LEC competitors that purchase wholesale services. n2196 Our analysis also precludes a state commission from adopting AT&T's suggestion that an increment should be added to the base discount rate to compensate resellers for alleged deficiencies in the provisioning of services. n2196 See MCI comments at Attachment 2 (Pricing of Wholesale Services), p. 6-7. 915. The 1996 Act requires that wholesale rates be based on existing retail rates, and thus clearly precludes use of a "bottom up" TSLRIC study to establish wholesale rates that are not related to the rates for the underlying retail services. We thus reject the suggestions of those parties that ask us to require use of TSLRIC to set wholesale rates. The 1996 Act does not, however, preclude use of TSLRIC cost studies to identify the portion of a retail rate that is attributable to avoided retail costs. TSLRIC studies would be entirely appropriate in states where the retail rates were established using a TSLRIC method. For example, the Illinois Commission [*81] calculated its wholesale rate using an avoided cost formula and long run incremental cost studies. Embedded cost studies, such as the studies used by the Georgia Commission, may also be used to identify avoided costs. Ideally, a state would use a study methodology that is consistent with the manner in which it sets retail rates. 916. We neither prohibit nor require use of a single, uniform discount rate for all of an incumbent LEC's services. We recognize that a uniform rate is simple to apply, and avoids the need to allocate avoided costs among services. Therefore, our default wholesale discount is to be applied uniformly. On the other hand, we also agree with parties who observe that avoided costs may, in fact, vary among services. Accordingly, we allow a state to approve nonuniform wholesale discount rates, as long as those rates are set on the basis of an avoided cost study that includes a demonstration of the percentage of avoided costs that is attributable to each service or group of services. 917. All costs recorded in accounts 6611 (product management), 6612 (sales), 6613 (product advertising) and 6623 (customer services) are presumed to be avoidable. The costs in these [*82] accounts are the direct costs of serving customers. All costs recorded in accounts 6621 (call completion services) and 6622 (number services) are also presumed avoidable, because resellers have stated they will either provide these services themselves or contract for them separately from the LEC or from third parties. These presumptions regarding accounts 6611-6613 and 6621-6623 may be rebutted if an incumbent LEC proves to the state commission that specific costs in these accounts will be incurred with respect to services sold at wholesale, or that costs in these accounts are not included in the retail prices of the resold services. 918. General support expenses (accounts 6121-6124), corporate operations expenses (accounts 6711, 6612, 6721-6728), and telecommunications uncollectibles (account 5301) are presumed to be avoided in proportion to the avoided direct expenses identified in the previous paragraph. Expenses recorded in these accounts are tied to the overall level of operations in which an incumbent LEC engages. Because the advent of wholesale operations will reduce the overall level of operations -- for example, staffing should decrease because customer inquiries and billing [*83] and collection activity will decrease -- overhead and support expenses are in part avoided. We select the revenue offset account of 5301 rather than accounts 5300 or 6790 because account 5301 most directly represents overheads attributable to the services being resold. 919. Plant-specific and plant non-specific expenses (other than general support expenses) are presumptively not avoidable. 920. In the case of carriers designated as Class B under section 32.11 of our rules that use certain summary accounts in lieu of accounts designated in this subsection of the Order, our avoided cost study criteria shall apply to the relevant summary account in its entirety. n2197 n2197 See Regulatory Flexibility Act, 5 U.S.C. @@ 601 et seq. b. Default Range of Wholesale Discount Rates 921. Parties to this proceeding present evidence or arguments supporting wholesale discount rates ranging from 4.76 percent to 55 percent: Sprint/United Telephone study Simple Access service: 4.76% Other services: 7.19% NCTA 10.0% Comcast 10.0% Massachusetts Attorney General 25.0% ACTA 25.0% MCI Model 25.6-33.2% n2198 Telecommunications Resellers Ass'n 30.0-50.0% AT&T Model 23.05%-55.52% n2199 [*84] n2198 MCI calculated rates based on actual accounting data for the years 1990-1995 for each RBOC and for GTE. For 1995 the rates ranged from 25.6 percent for U S West to 33.2 percent for Ameritech. MCI also calculates rates for 1996 using estimated data. MCI comments at Attachment 2 (Pricing of Wholesale Services), p. 1. n2199 AT&T calculated separate discount rates for each RBOC study area and for SNET and GTE Hawaiian Tel. 922. States applying wholesale pricing standards similar to the standards in section 252(d)(3) have set the following wholesale discounts: California PacTel Business 17.0% Residential 10.0% GTE Business 12.0% Residential 7.0% Colorado Residential 9.0% Business 16.0% Toll Services 30.0% Central Office-Based Features 50.0% n2200 All other services 18.0% Georgia Residential 20.3% Business 17.3% Illinois 20.07% n2201 New York NYNEX Business 17.0% Residential 11.0% Rochester Telephone 13.5% n2200 Central office-based services are custom calling features such as speed dialing and CLASS features, such as caller ID. U S West Communications, Inc. Filing Advice Letter No. 2610 in Compliance with Commission Decision No. C96-521 Adopting Emergency Rules, Docket No. 96S-233T (Colorado Commission June 21, 1996) at para. 13. [*85] n2201 The Illinois Commission requires wholesale discounts to be computed on a service-specific basis. The 20.07 percent figure represents an "average" discount using such a methodology. 923. We fund unpersuasive various arguments presented by parties at the lower and higher ends of the range of possible discounts. The Sprint/United Telephone study produces unreasonably low measures of avoided costs because the study considers only avoided direct expenses in five accounts. As explained above, we interpret the statutory language providing for a wholesale price that excludes the "portion [of a retail rate] attributable to any marketing, billing, collection, and other costs that will be avoided" n2202 to include indirect as well as direct costs. The proposals of NCTA and Comcast for a maximum discount of 10 percent are premised on the view that any greater discount would unduly discourage facilities-based competition. Section 252(d)(3), however, requires wholesale prices to be set based on avoided costs, not on any policy preference for facilities-based competition. For the same statutory reason, we reject as inconsistent with section 252(d)(3) the policy arguments of the Telecommunications [*86] Resellers Association and AT&T that we should establish national wholesale discounts at levels that will ensure that resale of local exchange services is a viable business. n2203 n2202 47 U.S.C. @ 252(d)(3). n2203 See AT&T comments at 81-86; Telecommunications Resellers Ass'n comments at 24. 924. We find AT&T's model unsuitable for purposes of establishing in this proceeding a range for default wholesale discount rates. The AT&T model does in many respects satisfy the general criteria we establish above for avoided cost studies. The model, however, incorporates numerous assumptions, cost allocation factors, and studies, and because AT&T submitted its model with its reply comments, and other parties have not analyzed the model in detail. We find that we would need to develop a more complete record on the AT&T model before deciding whether to endorse it. We do not, however, preclude a state commission from considering in a wholesale rate proceeding evidence developed using this model. 925. We find that we can use MCI's model, with some modifications, along with the results of certain state proceedings, to establish a range of rates that would produce an acceptable default [*87] wholesale discount rate that reasonably approximates the amount of avoided costs that should be subtracted from the retail rate. A default rate is to be used only in three instances: (1) in a state arbitration proceeding if an avoided cost study that satisfies the criteria we set forth above does not exist; (2) where a state has not completed its review of such an avoided cost study; (3) where a rate established by a state before the release date of this Order is based on a study that does not comply with the criteria described in the previous section. We emphasize that the default rate is to be used as an interim measure only, and should be replaced with an avoided cost study within a reasonable time. The MCI model is a reasonable attempt at estimating avoided cost in accordance with section 252(d)(3) using only publicly-available data. We find, however, that we should modify certain features of the model. 926. First, MCI treats account 6722 (external relations) and account 6727 (research and development) as avoidable costs. MCI argues that purchasers of wholesale services are competing with LECs and, therefore, should not be forced to fund regulatory activities reflected in account [*88] 6722. MCI claims that research and development are not of practical use for the services that resellers will purchase. As explained above, this type of disallowance is not contemplated by the avoided cost standard of section 252(d)(3). We therefore adjust the model to treat these costs in the same manner as other overhead expense accounts. 927. Second, MCI treats a number of accounts as "other avoided costs" on the grounds that the expenses in those accounts are not relevant to the provision of telecommunications services that an incumbent LEC currently provides. n2204 Public telephone terminal equipment expense and large PBX expense are not "avoided" precisely because they are unrelated to the retail services being discounted. We would not expect these expenses to be included in retail service rates for resold services; but if these expenses were included in retail rates, they would not be avoided when the services are purchased by resellers. The rest of MCI's "other" accounts contain costs that support all of the telecommunications services offered by the company. MCI has not shown that any of these costs are either reduced or eliminated when services are sold at wholesale. We, [*89] therefore, adjust the MCI model so as not to treat these accounts as avoidable costs. n2204 Based on this rationale, MCI excludes account 6113 (aircraft expense), account 6341 (large PBX expense), account 6511 (property held for future telecommunications use expense), account 6351 (public telephone terminal equipment expense), account 6512 (provisioning expense), account 6562 (depreciaton expense for property held for future telecommunications use), and account 6564 (amortization expense, intangible). 928. Third, MCI treats accounts 6611 (product management), 6612 (sales), 6613 (product advertising), and 6623 (customer services) as costs that are entirely avoided with respect to services purchased at wholesale. We agree that a large portion of the expenses in these accounts is avoided when service is sold at wholesale. We "also agree, however, with parties that argue that some expenses in these accounts will continue to be incurred with respect to wholesale products and customers, and that some new expenses may be incurred in addressing the needs of resellers as customers. No party in this proceeding has suggested a specific adjustment to the MCI model that would" account for [*90] these costs of the wholesale operation. We note that, in their own proceedings, several states have made varying estimates concerning the level of wholesale-related expenses in these accounts. Colorado, for example, estimated that none of the costs in accounts 6611-6613 would relate to wholesale services, and that only five percent of the costs in account 6623 would be incurred in a wholesale operation. n2205 The Georgia Commission, on the other hand, decided that 25 percent of sales and product advertising expenses would continue to be incurred in the wholesale operation. n2206 Given the lack of evidence, and the wide range of estimates that have been made by these states, we find it reasonable to assume, for purposes of determining a default range of wholesale discount rates, that ten percent of costs in accounts 6611, 6612, 6613, and 6623 are not avoided by selling services at wholesale. n2205 U S West Communications, Inc. Filing Advice Letter No. 2610 in Compliance with Commission Decision No. C96-521 Adopting Emergency Rules, Docket No. 96S-233T (Colorado Commission June 21, 1996) at para. 12 and n.20. The Colorado Commission explained that it chose 5 percent because "some small portion of customer services will remain for the interfaces of Operational Support Systems of [U S West] and the resellers, but nowhere near the amount necessary for direct customer contact services." Id. n.20. [*91] n2206 Petition of AT&T for the Commission to Establish Resale Rules, Rates, Terms, and Conditions and Initiate Unbundling of Services, Docket No. 6352U (Georgia Commission June 21, 1996) at Appendix 1. The Georgia Commission characterized its calculations with respect to sales expense as "conservative at best." 929. Fourth, MCI uses a complex formula to calculate the portions of overhead and general support expense that are attributable to avoided costs. We find that this formula is constructed in a way that tends to inflate the results of the calculation. We have, therefore, substituted a more straightforward approach in which we apply to each indirect expense category the ratio of avoided direct expense to total expenses. We also identify a slightly different list of accounts representing indirect costs than that proposed by MCI. 930. With the modifications described above, and using actual 1995 data, MCI's model produces the following results for the RBOCs and GTE: U S West 18.80% GTE 18.81% BellSouth 19.20% Bell Atlantic 19.99% SBC 20.11% NYNEX 21.31% Pacific 23.87% Ameritech 25.98% 931. We also take into account the experience of those state commissions, Illinois [*92] and Georgia, that have undertaken or approved detailed avoided cost studies under the pricing standard of section 252(d)(3) of the 1996 Act. Applying the statutory standard to the examination of significant cost studies, those commissions derived average wholesale discounts of 18.74 percent n2207 and 20.07 percent. We find that these decisions present evidence of an appropriate wholesale discount that should be given more weight than state commission decisions that have set their discounts under other pricing standards or only on an interim basis. n2208 n2207 Prior to apportioning avoided costs between business and residential services, the Georgia Commission's avoided cost computation would have yielded an aggregate wholesale discount rate of 18.74 percent. This figure is computed by dividing the total avoided costs computed by the Georgia Commission by the total BellSouth residential and business revenues (which were used individually both to apportion total avoided costs between residential and business service and as the denominator in the final wholesale discount calculations). n2208 See, e.g., Order Instituting Rulemaking on the Commission's Own Motion into Competition for Local Exchange Service, R. 95-04-043 and I. 95-04-044 (California Commission April 26, 1996); U S West Communications, Inc. Filing Advice Letter No. 2610 in Compliance with Commission Decision No. C96-521 Adopting Emergency Rules, Docket No. 96S-233T (Colorado Commission June 21, 1996); Wholesale Rates for Telecommunications Services Ruling on AT&T's Petition for a Reduction on the Wholesale Rates of Bell Atlantic-Maryland, Inc., Case No. 8721 (Maryland Commission June 27, 1996). [*93] 932. Accordingly, based on the record before us, we establish a range of default discounts of 17-25 percent that is to be used in the absence of an avoided cost study that meets the criteria set forth above. A state commission that has not set wholesale prices based on avoided cost studies that meet the criteria set forth above as of the release date of this Order shall use a default wholesale discount rate between 17 and 25 percent. A state should articulate the basis for selecting a particular discount rate. If this default discount rate is used, the state commission must establish wholesale rates based on avoided cost studies within a reasonable time. The avoided cost study must comply with the criteria for avoided cost studies described above. A state commission may submit an avoided cost study to this Commission for a determination of whether it complies with these criteria. If a party (either a reseller or an incumbent LEC) believes that a state commission has failed to act within a reasonable period of time, that party may file a petition for declaratory ruling with this Commission, asking us to determine whether the state has failed to comply with this rule. We will, in making [*94] such determinations, consider the particular circumstances in the state involved. If a state commission has adopted as of the release date of this Order an interim wholesale pricing decision that relies on an avoided cost study that meets the criteria set forth above, the state commission may continue to require an incumbent LEC to offer services for resale under such interim wholesale prices in lieu of the default discount range, so long as the state commission's interim pricing rules are fully enforceable by resellers and followed by a final decision w/thin a reasonable period of time that adopts an avoided cost study that meets the criteria set forth above. 933. We select the 17 to 25 percent range of default discounts based on our evaluation of the record. The adjusted results of the MCI model taken together with the results of those state proceedings discussed above that indicated they applied the statutory standard produces, a range between 18.74 and 25.98 percent. A majority of these wholesale discount rates fall between 18.74 and 21.11 percent. Other state commissions, such as California and New York, that have employed avoided cost studies have produced wholesale discount [*95] rates somewhat below the low end of this range. Furthermore, it has been argued that smaller incumbent LECs' avoided costs are likely to be less than those of the larger incumbent LECs, whose dam was used by MCI. Therefore, to allow for these considerations, we select 17 percent as the lower end of the range. n2209 We select 25 percent as the top of the range because it approximates the top of the range of results produced by the modified MCI model. This range gives state commissions flexibility in addressing circumstances of incumbent LECs serving their states and permits resale to proceed until such time as the state commission can review a fully-compliant avoided cost study. n2209 See Regulatory Flexibility Act, 5 U.S.C. @@ 601 et seq. 934. We have considered the economic impact of our rules in this section on small incumbent LECs. For example, Bay Springs, et al., argues that national wholesale pricing rules will insufficiently consider operational differences between small and large incumbent LECs. n2210 We take this into consideration in setting the default discount rate and in requiring state commissions to perform carrier-specific avoided cost studies within a reasonable [*96] period of time that will reflect carrier-to-carrier differences. We believe, however, that the procompetitive goals of the 1996 Act require us to establish a default discount rate for state commissions to use in the absence of avoided cost studies that comply with the criteria we set forth above. The presumptions we establish in conducting avoided cost studies regarding the avoidability of certain expenses may be rebutted by evidence that certain costs are not avoided, which should minimize any economic impact of our decisions on small incumbent LECs. We also note that certain small incumbent LECs are not subject to our rules under section 251(f)(1) of the 1996 Act, unless otherwise determined by a state commission, and certain other small incumbent LECs may seek relief from their state commissions from our rules under section 251(t)(2) of the 1996 Act. n2210 Bay Springs, et al., comments at 17. C. Conditions and Limitations 935. Section 251(c)(4) requires incumbent LECs to make their services available for resale without unreasonable or discriminatory conditions or limitations. This portion of this Order addresses various issues relating to conditions or limitations on resale. [*97] It first discusses restrictions, generally, in Section VIII.C.1. Next, it turns to promotional and discounted offerings and the conditions that may attach to such offerings in Section VIII.C.2., and then to refusals to resell residential and below-cost services in Section VIII.C.3. Limitations on the categories of customers to whom a reseller may sell incumbent LEC services are discussed in VIII.C.4. Resale restrictions in the form of withdrawal of service are discussed in VIII.C.5. Finally, Section VIII.C.6. discusses resale restrictions relating to provisioning. 1. Restrictions, Generally, and Burden of Proof a. Background and Comments 936. In the NPRM, we asked whether incumbent LECs should have the burden of proving that restrictions on resale are reasonable and nondiscriminatory. n2211 We stated our belief that, given the pro-competitive goals of the 1996 Act and the view that restrictions and conditions were likely to be evidence of an exercise of market power, the range of permissible restrictions should be quite narrow. n2212 n2211 NPRM at para. 175. n2212 Id. 937. A number of parties, including IXCs, resellers, and some state commissions, agree that incumbent [*98] LECs should have the burden of justifying any restrictions they impose on the resale of their services. n2213 For example, Jones Intercable proposes a requirement that incumbent LECs prove that a proposed condition or restriction will directly advance an important public policy objective and that the benefits of the condition plainly outweigh its anticompetitive effects. n2214 Many add the caveat that the only permissible restriction should be the cross-class restriction, section 251(c)(4)(B), prohibiting resellers that obtain at wholesale rates telecommunications services that are available at retail only to a category of subscribers' from offering such services to a different category of subscribers. n2215 The Texas Public Utility Counsel suggests that the relevant determination is whether an incumbent LEC could impose the condition in question in a competitive market. n2216 n2213 See, e.g., ACSI comments at 60; California Commission comments at 35-37; CFA/CU comments at 17; Citizens Utilities comments at 27; Colorado Commission comments at 52-53; Jones Intercable comments at 24; MFS comments at 70; NEXTLINK comments at 30; Pennsylvania Commission comments at 36; Ohio Commission comments at 62; TCC comments at 43; Telecommunications Resellers Ass'n comments at 20; Washington Commission comments at 32. [*99] n2214 Jones Intercable comments at 32-33. n2215 See, e.g., CFA/CU comments at 17; Citizens Utilities at 27; Colorado Commission comments at 52-53; TCC comments at 43. Many of these parties offer a narrow interpretation of section 251(c)(4)(B), which will be discussed, infra. n2216 Texas Public Utilities Counsel reply at 42. 938. Incumbent LECs support various restrictions and limitations. n2217 BellSouth and the Ohio Consumers' Counsel further suggest that the burden of justifying restrictions and limitations should not be placed on LECs. n2218 n2217 See, e.g., BellSouth comments at 66. n2218 BellSouth comments at 65; Ohio Consumers' Counsel comments at 35. b. Discussion 939. We conclude that resale restrictions are presumptively unreasonable. Incumbent LECs can rebut this presumption, but only if the restrictions are narrowly tailored. Such resale restrictions are not limited to those found in the resale agreement. They include conditions and limitations contained in the incumbent LEC's underlying tariff. As we explained in the NPRM, the ability of incumbent LECs to impose resale restrictions and conditions is likely to be evidence of market power and may [*100] reflect an attempt by incumbent LECs to preserve their market position. In a competitive market, an individual seller (an incumbent LEC) would not be able to impose significant restrictions and conditions on buyers because such buyers turn to other sellers. Recognizing that incumbent LECs possess market power, Congress prohibited unreasonable restrictions and conditions on resale. We, as well as state commissions, are unable to predict every potential restriction or limitation an incumbent LEC may seek to impose on a reseller. Given the probability that restrictions and conditions may have anticompetitive results, we conclude that it is consistent with the procompetitive goals of the 1996 Act to presume resale restrictions and conditions to be unreasonable and therefore in violation of section 251(c)(4). This presumption should reduce unnecessary burdens on resellers seeking to enter local exchange markets, which may include small entities, by reducing the time and expense of proving affirmatively that such restrictions are unreasonable. n2219 We discuss several specific restrictions below including certain restrictions for which we conclude the presumption of unreasonableness shall [*101] not apply. We also discuss certain restrictions that we will presume are reasonable. n2219 See Regulatory Flexibility Act, 5 U.S.C. @@ 601 et seq. 2. Promotions and Discounts a. Background and Comments 940. In the NPRM, we asked whether an incumbent LEC's obligation to make their services available for resale at wholesale rates applies to discounted and promotional offerings and, if so, how. n2220 We also asked, if the wholesale pricing obligation applies to promotions and discounts, whether the reseller entrant's customer must take service pursuant to the same restrictions that apply to the incumbent LEC's retail customers. n2221 n2220 NPRM at para. 175. n2221 Id. 941. Incumbent LECs and Time Warner argue that they should not be required to offer discounted and promotional offerings at wholesale rates. n2222 These parties argue that promotions and discounts are merely subsets of standard offerings, or that promotions and discounts are only devices for marketing underlying "telecommunications services." n2223 Thus, these parties argue, a discounted and promotional offering is not in itself a "telecommunications service" that is subject to the resale requirement as [*102] long as the standard offering is made available for resale at wholesale rates. n2224 n2222 See, e.g., Ameritech com