VII. Access Costs and Pricing

The Commission asked parties to address access costs and pricing as part of this proceeding in the MFS Phase I proceeding. We stated in this regard:

Each party should include in its analysis, an identification of all costs and subsidies currently existing in each LEC's access charges and a proposed resolution for restructuring rates in a manner which permits an appropriate reduction of such charges. The scope of this analysis should also include a review of the costs and subsidies for new local exchange carriers access charges.

MFS I Order at p. 51.

A. Position of the Parties

AT&T believes that the common thread with all of the pricing problems is that carrier access charges are priced at "many multiples of their incremental cost." AT&T Reply Brief at p. 9. According to AT&T, a fundamental part of this proceeding is to reduce carrier access charges to the incremental cost of providing access. AT&T Reply Brief at p. 9. AT&T argues that the Federal Act now mandates cost based access rates. AT&T Reply Brief at p. 10. AT&T proposes that access rates be reduced to TSLRIC and that this is required by §§ 251(c)(2) and 252(d)(2) of the TA-96.

As to the magnitude of the problem, AT&T states that Bells's current incremental cost of switched access per conversation minute is significantly below its average access revenue per conversation minute. In fact, AT&T states that Bell's revenues exceed its costs many times over. AT&T Reply Brief at p. 10 (citing AT&T Stmt. 1.0 (Darrah III) at 45-46). Similarly, AT&T argues that United's revenues for switched access are almost 48 times its cost.

AT&T urges that the first corrective step for access reform would be the removal of the "excess levels of contribution from existing access charges and from ILEC toll charges and the use of the dollar amount of that contribution as the initial budget for a new "Pennsylvania Universal Service" fund. AT&T Main Brief at p. 17. The second phase involves sizing the fund correctly since access charges are not cost based. AT&T Main Brief at p. 17.

AT&T would initially calculate the size of the fund by computing the excess of Bell's 1994 intrastate switched access revenues less the cost of access. This amount would then be removed from Bell's access charges and included in the first element of the budget for the new funding mechanism.

With regard to the independents, AT&T witness Darrah calculated intrastate switched access revenues at about $94 million with rates at about 14 cents per minute. Using 0.3 cents as the cost of access, roughly $92 million of the ICO revenue is also excess contribution or subsidy according to AT&T and would become part of the funding mechanism. AT&T would also add to the funding mechanism the value of the reduction that would occur in Bell's and the independents' toll rates, assuming that they reduced their average per minute toll revenues to at least match AT&T.

AT&T states that the actual disbursement to service providers would depend on the results of the cost studies and the BUS rate established by the Commission. AT&T Reply Brief at p. 22. Finally, AT&T proposes an approximate $1.20 end user monthly surcharge to fund the funding mechanism.

AT&T has guaranteed that Pennsylvania consumers will receive the benefit of every single dollar of access price reductions that AT&T experiences, and has committed to provide proof to the Commission that it is meeting this guarantee. AT&T Main Brief at p. 12 (citing Surrebuttal Testimony of G. Blain Darrah III --- AT&T Stmt. 1.2 (Darrah) at 11-12).

AT&T states that there is no requirement under Bell's Chapter 30 plan that rates for residential local exchange services must be increased solely as a result of reductions in carrier access charges. AT&T Main Brief at p. 14. AT&T also argues that Bell is wrong when it asserts that its carrier access rates are "just and reasonable" as a result of its Chapter 30 plan and thus cannot be made the subject of Commission action. AT&T states that the fact that Bell's access charges may have passed muster in the old system is irrelevant to the new system and the Federal Act. AT&T Main Brief at p. 14.

PTA argues that the CCL charge should not be eliminated as advocated by AT&T and others. PTA states that intrastate access charges represent from 25% to 40% of the PTA companies' total intrastate revenues. PTA Stmt. 1.0 (DeFalco) at 12; PTA Main Brief at p. 47. Additionally, the CCL is a large component of total intrastate access charges, between 52% and 72%. PTA Main Brief at p. 47. Any access rate reduction will have a major impact upon the revenues to be rebalanced by the LEC prior to intraLATA presubscription. PTA Main Brief at p. 47. Even if one factors in a very conservative 25% reduction in access charges, the result is an access revenue reduction and an offsetting basic local exchange rate increases for all PTA companies. PTA Stmt. 1.0 (DeFalco) at 12; PTA Main Brief at p. 47.

PTA also argues that CCL should not be generally priced on the basis of TSLRIC. TSLRIC does not recover any of a service's use or common overhead costs. PTA St. 1-R at 24; PTA Main Brief at p. 47. PTA goes on to argue that access charges should continue to be addressed on a company-specific basis, individually in a manner which acknowledges the varied market conditions in which each separate LEC operates and addresses the impact on other services. PTA Stmt. 1 (DeFalco) at 12. In every proceeding, CCL has been reduced and/or capped based upon the particular circumstances of that individual carrier argues PTA. PTA Main Brief at p. 48.

On the record in this proceeding, the potential effect on Sprint/United of eliminating one subsidy element, the CCLC, in Pennsylvania, and shifting those revenues to residential basic service prices, would result in an average increase of 71% to BUS. If revenues were shifted equally to all basic service customers, including business customers, residential basic service prices would still increase an average of 58%. Sprint/United Stmt. 1.1 (Jamison) p. 8, Appendix B; Sprint/United Main Brief at p. 11.

Bell argues that AT&T's proposal is contrary to Pennsylvania law and is blatantly self-serving. Bell Reply Brief at p. 2. Bell also argues that AT&T's assumption that the Commission can unilaterally reduce access rates in this proceeding is clearly incorrect. Bell states that under Pennsylvania law, its rates may be changed only in a Chapter 13 proceeding, or on a revenue-neutral basis under Section 3007 of the Code. Bell Reply Brief at p. 11. Finally, Bell states that § 251 of the Federal Act does not require that access rates be reduced to TSLRIC as AT&T claims because this section does not pertain to the terms and conditions of existing switched access rates.

GTEN's proposed modifications to switched access rates are as follows:

1. Apply the GTE North Pennsylvania intrastate End Office Switching and Information Surcharge rates to the Contel jurisdiction;

2. Eliminate the residual subsidizing rate elements, namely the Carrier Common Line (CCL) charge;

3. Enable pricing flexibility for the traffic sensitive switched access rates, namely End Office Switching ("EOS") and Transport, including the ability to differentiate both these rate elements as competition warrants;

4. Establish the Local Transport Restructure ("LTR") in accordance with the new structure authorized by the FCC in Docket 91-213;

5. Consolidate the GTE North and former Contel access tariffs into a single, uniform, intrastate access tariff; and

6. Enable flexibility for entering into contracts with specific customers, both interexchange carriers (IXCs) and end users, for switched and special access

GTEN Stmt. 6.0 (Vogel) p. 6.

Finally, GTEN states that it will reduce its regulated access and toll tariff rates to eliminate the amount of implicit support which the Company currently receives (on a dollar-for-dollar basis) to equal the explicit support it would receive from a new state universal service fund. GTEN Stmt. 1.3 (Williams) p. 32.

Since LECs will probably continue to receive these contributions, it is imperative that these subsidies be accounted for in determining the appropriate level of universal service support to be received from a universal service fund. Otherwise, LECs would be permitted to receive a "double subsidy", i.e., an explicit subsidy from the universal service fund and an implicit subsidy from other sources such as access rates. ETC Stmt. 1.0 (Murray) p.7.

AT&T states that if the Commission were to permit the ILECs to continue to impose access charges at their currently high rates on top of the explicit subsidies that would be paid as part of a new universal service funding mechanism, it would be compounding the artificial and unjustified competitive advantages that high access charges already give those providers. AT&T Reply Brief at p. 11 (citing AT&T Stmt. 1.0 (Darrah) at 41; AT&T Stmt. 2.0 (Mayo) at 24).

OTS similarly argues that if a Universal Service support fund is established, it is imperative that all implicit sources of contribution (such as above-cost toll and access rates) be reflected in determining the level of Universal Service support to be received by carriers. OTS Main Brief at p. 31. OTS also argues that without this recognition, LECs would receive a "double subsidy" -- an explicit subsidy from the Universal Service fund and an "implicit" subsidy from other sources such as access rates. OTS Main Brief at p. 32 (citing ETC St. 1.0, p. 7). While Bell disputes that these sources need be accounted for since it believes that these funding sources will disappear rather quickly with competition, the record indicates that local competition will evolve. ETC Stmt. 1.2 ( p. 12; TCG Stmt. 2.2 (Gabel) pp. 19-23.

B. Discussion

The current switched access structure consists of a Switched Transport Facility charge (per access minute, per airline mile), a Switched Transport Termination charge (per access minute, per termination), an End Office Switching charge (based on originating and terminating access minutes), and in some instances an Information Surcharge (per originating and terminating access minutes). GTEN Stmt. 6.0 (Vogel) p. 4. The CCLC is one component of access charges. PTA St. 1 at 8; PTA Main Brief at p. 44. Other access rate elements, such as switching and transport recover non-loop related costs (referred to as traffic sensitive costs). CCLC, on the other hand, covers a portion of loop costs from access users. PTA Main Brief at p. 44.

In our December 28, 1983 Order at Docket No. P-83045, we required all LECs in Pennsylvania to "mirror" their interstate access rates for intrastate purposes.⁽²⁶⁾ In a final Order at that docket, entered August 9, 1985, the Commission affirmed the appropriateness of mirroring and, as to the independent telephone companies, ordered the implementation of Bell's then effective FCC Interstate CCL of $.0471 per minute of use for intrastate rates. Id. at 104-105. PTA Main Brief at p. 45. Since the 1985 Order, the Commission has not addressed access charges on a statewide generic basis.

PTA points out that since the Commission's August 9, 1985 Order, each company has proceeded differently in implementing its access pricing. PTA Main Brief at p. 46. For instance, we note that at various times since 1985, LECs have proposed different increases and/or decreases to access charges through the following processes: general rate cases, state tax adjustment roll-in filings, Tax Reform Act of 1986 roll-in filings, rate restructure filings and overearnings settlements. PTA notes that both Bell Atlantic and GTEN have significantly reduced their level of CCLC. PTA Stmt. 1.0 (DeFalco) at 10; PTA Main Brief at p. 46. Bell reduced its CCL to less than $0.01 per minute. Tr. 1355.; PTA Main Brief at p. 46.

PTA also notes that most LECs now have capped the rate of growth in the interLATA CCL revenue either on an absolute basis (revenue cap) or on a relative basis (CCL now stated using per access line units) PTA St. 1 at 10; PTA Main Brief at p. 46. It is important to note here that although intrastate interLATA CCL rates are capped on a flat-rate per access line per month basis, the intraLATA CCL rates are still charged on a per minute of use basis. PTA further notes that both Bell Atlantic and GTE which collectively represent more than 86% of total access lines in Pennsylvania, have placed a fixed dollar ceiling on their reduced CCL revenue levels (a revenue cap). PTA Stmt. 1.0 (DeFalco) at 10-11; PTA Main Brief at p. 46.

PTA further notes that all but a few of the remaining companies now have modified their intrastate interLATA CCL so that the charge is stated in terms of dollars per access line, rather than minutes of use, which has the effect of substantially reducing the growth in revenues received from this rate element. PTA Stmt. 1 (DeFalco) at 11. Most of the access line capped LECs used the 1985 ordered rates as a basis for the cap. PTA Main Brief at p. 47. Furthermore, the capped CCLC rate was developed on a revenue neutral basis using original CCL revenues in the year capped.

The evidence in the record appears clear that switched access charges, and in particular the CCLC component, make a significant contribution towards NTS joint and common costs. We cannot, however, on the basis of the limited record before on this issue, make any determinations as to what would constitute reasonable rate levels for access charges or the appropriate pricing structure in the future. Nor can we permit rate rebalancing at this time based solely upon the record in this proceeding without the necessary cost information and extensive consideration of needed reforms in this area.

We also disagree with AT&T that the Federal Act requires that access charges be immediately reduced to TSLRIC. Section 252(d) of the Federal Act clearly requires that local interconnection be set on a cost (plus a reasonable return) basis in the future. However, in recognition of the fact that the access charges traditionally assessed interexchange carriers have been handled separately under tariff, the Federal Act recognizes that reform of access charges will most likely proceed upon a separate track. In this regard, § 251(g) provides:

(g) CONTINUED ENFORCEMENT OF EXCHANGE ACCESS AND INTERCONNECTION REQUIREMENTS.--On and after the date of enactment of the Telecommunications Act of 1996, each local exchange carrier, to the extent that it provides wireline services, shall provide exchange access, information access, and exchange services for such access to interexchange carriers and information service providers in accordance with the same equal access and nondiscriminatory interconnection restrictions and obligations (including receipt of compensation) that apply to such carrier on the date immediately preceding the date of enactment of the Telecommunications Act of 1996 under any court order, consent decree, or regulation, order, or policy of the Commission, until such restrictions and obligations are explicitly superseded by regulations prescribed by the Commission after such date of enactment. During the period beginning on such date of enactment and until such restrictions and obligations are so superseded, such restrictions and obligations shall be enforceable in the same manner as regulations of the Commission.

Additionally subpart (d)(3) of § 251 preserves state access regulations. Consequently, we reject the position of AT&T that the Federal Act requires that access charges must be immediately reduced to reflect cost pursuant to § 252(d). Given the significant contribution access charges have traditionally made to local service rates, a flash-cut to cost would be untenable. This is best demonstrated by the testimony of a Sprint/United witness who stated that a reduction of switched access charges to cost on a flash-cut basis would result in local service rate increases of 71% in some instances.

Notwithstanding, we recognize that functionally, local transport and termination and interexchange access are similar and, therefore, that they should be priced in a similar fashion. Several parties in this proceeding have argued that if the two are not priced in a similar fashion that arbitrage will result.

Consequently, as our first step, we shall initiate a separate generic investigation to examine the costs and pricing structure of intrastate access charges. The investigation shall be assigned to the Office of Administrative Law Judge. The FCC is expected to initiate a comprehensive interstate access charge proceeding in the near future. The results of the FCC's investigation will no doubt have relevance with respect to state access charge pricing structures.

Second, we will cap the intrastate interLATA and intraLATA CCLC rates of the remaining LECs on a monthly CCLC per-line and monthly revenue neutral basis. We believe that this is a step in the right direction pending an in-depth review and investigation of intrastate access costs and prices. Exhibit B attached hereto shows the present intrastate interLATA and intraLATA access charges of Pennsylvania LECs.

It is important to note that, in certain instances, different CCLC rates are charged by the same LEC. In most instances, the interLATA CCLC is different than the intraLATA CCLC because the majority of LECs charge the interLATA CCLC on a flat monthly rate per access line basis while charging the intraLATA CCLC on a per minute of use basis. However, some LECs currently charge different intraLaTA CCLC rates depending on whether it is applicable to originating or terminating minutes of use. It would be our preference that each LEC establish a single company-wide CCLC rate on a per access line per month basis so as to eliminate the varying CCL rates that are currently charged by the same LEC. At the same time, we are aware that this requirement may result in rate increases to certain carriers who must pay the CCLC. Therefore, in an effort to alleviate this concern, we shall encourage each LEC to strive to develop a single company-side CCL rate on the condition that the proposed rate would not result in any large rate increases for a particular class of customer. We shall review each filing on a case-by-case basis to ensure that the proposed rate is just and reasonable to all carriers. Therefore, we shall require each ILEC to file its revised CCL rate with the Commission within 180 days after the date of entry of this Order, to become effective on 60 days' notice.

Third, as discussed below, non-LEC contributions into the fund will offset existing intrastate CCLC payments, to take into account existing IXC contributions. The offset recognizes and gives credit to the IXC for the contributions made towards NTS costs through the CCLC component of access charges. We agree with OTS and others that without this offset, the LECs would "double-recover" so-to-speak. Consequently, the calculation presumes a full intrastate CCLC offset at the level of non-LEC contributions into the fund.

We believe the measures we take today in the intrastate access charge area will provide some relief until we have an opportunity to complete our intrastate access charge reform docket.

We expect carriers such as AT&T which have made some very favorable commitments on the record to reduce toll rates in proportion to access charge reductions to keep their promise in this regard. We also take AT&T up on its offer to provide "proof" of such reductions to the Commission. Other than accepting AT&T's offer of proof, we have little recourse and certainly cannot require AT&T or other IXCs to reduce their rates since we no longer regulate the rates of interexchange carriers such as AT&T. Nonetheless, we will certainly take their willingness to abide by their commitments as it pertains to this case and the access charge reform docket we initiate today into account in the future.

VIII. Rate Rebalancing

A. Position of the Parties

Bell argues that instead of instituting a fund at this time, the Commission should permit LEC rate rebalancing. Bell Reply Brief at p. 4. Bell argues that rate rebalancing is the only way to reduce the size of the required subsidy. Bell Main Brief at p. 41.

Bell sums up its argument as follows:

Rate rebalancing is economically efficient because it aligns prices with their costs promoting efficient market entry and competition. Unless the incumbent LEC can lower prices that are priced above the competitive market price, it will lose customers and revenues -- not as a result of fair and efficient competition, but as a result of pricing established by regulation in an era when subsidies could exist because competitors did not.

Bell Main Brief at p. 43 (citing Bell Stmt. 5.0 (Eichenlaub) at 5-6.

Bell explains that its plan, while resulting in modest increases for customers in cell block 4 (rural customers), would result in rate decreases for customers in the first three density cells. Bell states that it has proposed toll rate reductions which should mitigate the impact any BUS rate increase. Bell Main Brief at pp. 45-46. Bell states that while its proposal begins to move below cost rates toward cost, the increases still do not result in the Company recovering its TSLRIC for BUS. Id. at p. 45.

Bell also submitted a set of its BUS subsidy estimates in its January 10, 1996 Rate Rebalancing proposal at Docket No. R-00953550, which was recently rejected by both the ALJ and Commission. See generally, Pennsylvania Public Utility Commission et al. v. Bell Atlantic- Pa., Inc., Docket No. R-00963550, Order entered March 1, 1996; Docket Nos. R-00963550 & R- 00963556, Order entered March 19, 1996.

Bell argues that the OCA's use of a $25 BUS rate in deriving its "doomsday scenario" is misleading. Bell states that it has not proposed to increase the rate for BUS to $25 either now or in the future. Bell Reply Brief at p. 33. Bell states that the highest BUS rate in Bell's rate rebalancing proposal is only $11.20. Bell Reply Brief at p. 33. Bell states that even Ms. Brockway's own analysis, which overestimates the impact on subscribership of various rate increases, shows that there would be no decrease in penetration if rates were increased to $11.20 (assuming a 0.03 elasticity factor). OCA Stmt. No. 2.1 (Brockway) at Sch. NB-Rebuttal 1.

GTEN also proposed a rate rebalancing plan in this Investigation. As part of its rate rebalancing plan, GTEN proposes a 33% reduction in intraLaTA MTS toll rates; a 48% reduction in intraLATA switched access rates and a 68% reduction in interLATA switched access rates. GTEN Main Brief at p. 36. GTEN Witness Vogel recommended consolidation of access tariffs into a single uniform tariff and reduction of the per minute switched access rate, for an overall annual decrease in access revenues of approximately $34.3 million. GTEN Stmt. 6.0 (Vogel) at pp. 6, 12. GTEN Witness Wilkinson, believes that both the local and intraLATA toll rates must be rebalanced immediately given the likelihood for increased competition in both markets. GTEN Stmt. 4.1 (Wilkinson) p. 3.

To offset these reductions in toll rates, GTEN proposes increases to residential BUS rates or rebalancing to support a target price of $25.00. The rate is assumed to be comprised of $18.00 for the access line, $3.50 for the SLC, $1.50 for touch tone and $2.00 for usage. Tr. 201; Tr. 209 ($2.00 usage assumes 100 calls per month of four minutes). GTEN witness Wilkinson recommended combining all business and residence network access line rates into a single price and separating usage charges from the fixed network access charge. GTEN witness Wilkinson utilized a proposed local service charge of $25.00 per month. The results are found in Attachments GFW-2, GFW-3 and GFW-4. GTEN witness Wilkinson also testified that the changes would be made in a revenue neutral fashion and that any revenue shortfall or overrun would be taken care of through an adjustment to access charges. GTEN St. 4.1 (Wilkinson) p. 14. GTEN has estimated that residential customers currently pay on average $13.44 for these same components of services, plus usage. OCA Late Filed Exh. 1; Tr. 213; OCA Main Brief at p. 28.

GTEN Witness Perry argues that the impact of both toll and access charge reductions and BUS residential increased rates of up to $30.00 would completely offset one another. GTEN Stmt. 7.0 (Perry); GTEN Stmt. 7.1 (Perry); and GTEN Stmt. 7.2 (Perry). In fact, GTEN states that given the toll and access reductions just discussed, and a monthly access rate for residential BUS of $25.00, subscribership levels would actually increase by .16%. GTEN Stmt. 7.0 (Perry). Witness Perry suggests that the penetration rate would actually increase despite a monthly basic service rate of $30.00 if GTEN is permitted to reduce its toll and access rates. GTEN Reply Brief at p. 38. GTEN Witness Perry criticized OCA Witness Brockway for ignoring the offsetting or cross-price elasticity effects of changes in toll rates on penetration levels. GTEN Main Brief at p. 37.

PTA argues that once the universal service fund is established, the LECs would begin a series of rate-rebalancing steps which would decrease toll/access charges and increase the residential rate to the $20.00 benchmark. PTA Main Brief at p. 14. Under PTA's proposal, once the benchmark rate was reached, the LEC would continue to reduce toll/access rates, but the transfer would come from the Universal Service Fund. Id. at p. 14. The LEC would in effect be reducing its toll/access rates toward cost and shifting the subsidy currently maintained in the access/toll rate structure to local service. Id. at p. 14.

Sprint/United argues in favor of both rate rebalancing and the use of support through the Universal Service Fund. Sprint/United submits that the Commission can allow companies to rate rebalance without the need for separate proceedings, contrary to the OTS argument. OTS Main Brief at p. 9; Sprint/United Reply Brief at p. 8. According to Sprint/United, the Commission's authority to do so lies in the language at 66 Pa. C.S. § 1308(a) which provides: "unless the Commission otherwise orders, no public utility shall make any change in any existing and duly established rate, except after sixty days' notice to the Commission...." If the Commission finds based upon the record in this proceeding, that an appropriate economic BUS rate has been established, then it can order companies to set that rate as the foundation for the Universal Service Fund. Sprint/United Reply Brief at p. 8.

Sprint/United claims that there are other effects of rate rebalancing that the Commission should consider. One effect is that rate rebalancing will decrease toll prices. Sprint/United Main Brief at p. 38. Sprint/United also points to a Federal Trade Commission study which it argues demonstrated that competition keeps IXC profit margins at normal levels, implying that access charge reductions do flow through to customers. Sprint/United Stmt. 1.2 (Jamison) pp. 5-6. Sprint/United argues that some customers will find rebalanced prices more attractive than existing prices. Sprint/United Stmt. 1.2 (Jamison) p. 6. Sprint/United, however, concedes that there are customers that may be adversely affected by rate rebalancing. Sprint/United witness Jamison notes that the Weinhaus-Makeeff study found that rural customers on average could pay higher total telephone bills without rural subsidies. Sprint/United Stmt. 1.2 (Jamison) pp. 7-8; Sprint/United Main Brief at p. 40.

Sprint/United argues that Ms. Brockway's reliance upon two demand studies actually confirms that decreases in long distance prices caused by competition, decreases in access charges and rate rebalancing, have had a positive impact on universal service. The two studies that were cited by the OCA witness actually show that a decrease in toll prices accounted for 816,870 more households having telephone service. Sprint/United Stmt. 1.2 (Jamison) p. 5; Sprint/United Main Brief at p. 38.

OSBA supports rate rebalancing and states that is entirely appropriate to begin to move basic local exchange rates closer to cost. The OSBA favors the proposal of the various parties in this proceeding to set a BUS monthly rate cap at or about $25. In so doing, rates paid by small business customers will likely decrease while rates paid by residential customers will increase. OSBA also suggests that any rate rebalancing scenario be considered in light of the customer's total bill. That is where a residential local rate increases, there are likely to be toll rate decreases which offset the impact of the rebalancing to a large degree. OSBA Reply Brief at p. 10.

PTA argues that AT&T has promised to flow through access charge decreases directly to its toll rates and that therefore, for each dollar of LEC access reduction, customers will receive a one dollar decrease in toll rates. Therefore, customers' overall bills should remain relatively the same. PTA Main Brief at p. 7.

In sharp contrast, OCA argues that "any rate rebalancing proposal or universal service funding measure which will result in increases to local exchange rates must be rejected as defeating the goal of making telephone service universal in this state" and that "...basic exchange rates can not be allowed to increase through the rate rebalancing proposals made by the LECs in this case." OCA Main Brief at 29. The OCA strenuously opposes the various proposals by the LECs to engage in rate rebalancing in order to address alleged existing subsidies in their rate structures between services. OCA Main Brief at p. 3.

OCA argues that any rate rebalancing proposal or universal service funding measure which will result in increases to local exchange rates must be rejected as defeating the goal of making telephone service universal. OCA Main Brief at p. 29. It is OCA's position that the Commission should implement a USF which uses as a benchmark an existing LEC's current local exchange rate. If subsidies are determined to exist after a 50% allocation of loop costs to local exchange has occurred, then such subsidies should be addressed through the operation of a competitively neutral Universal Service Funding mechanism. OCA Brief at p. 31.

Likewise, OTS argues that this proceeding should not be viewed as a "blank check" for LECs to rebalance and restructure rates. OTS urges that, if permitted, rate rebalancing should be based upon "sound legal grounds and sufficient proof demonstrated in a separate proceeding. OTS Main Brief at p. 10.

AT&T argues that "...a transition to a universal service fund premised on ILEC rate rebalancing will not solve the immediate competition problems which make a universal service fund necessary" and that "...pursuing this process would do nothing to effect the critical features of universal service reform, such as the reduction of carrier access charges to their incremental cost, which will have the positive effect of providing consumers with lower prices for both inter- and intraLATA calling." AT&T Main Brief at 52, emphasis added, footnotes omitted.

B. Discussion

In prior proceedings we have recognized and committed to consider, inter alia, rate rebalancing proposals by LECs, if reasonable and based upon legitimate cost studies. For instance, in the IntraLATA Presubscription Order at Docket I-00940034 entered December 14, 1995, pp. 10-11, we stated that as a result of increased competition in the intraLATA market due to presubscription, LECs should have the opportunity to propose revenue neutral filings. The Commission went on to note that administrative efficiency would suggest that the filing of rate rebalancing tariffs await the outcome of the Universal Service Investigation.

For purposes of any rate rebalancing within the context of this proceeding, we find that there is insufficient record evidence in this case to support the levels and magnitudes of rate rebalancing proposed by any of the parties at this time. We specifically found Bell's proposal to be unsupported by the record evidence in its rate rebalancing case at Docket No. R-963550 and we formally rejected Bell's proposal by Opinion and Order entered December 16, 1996. Likewise, we do not accept GTEN's proposals to raise BUS rates to $25.00, to accommodate access and toll rate decreases in similar magnitudes. GTEN's proposals are not supportable. Moreover, the level of residential dialtone rate increases proposed by GTEN is antithetical to the very notion of universal service. We also agree with OCA that any action on our part today approving rate rebalancing to the extent proposed would be putting the "cart before the horse".

No party to this proceeding has presented convincing evidence that there is a need to raise residential rates in any exchanges to accommodate price decreases in more competitive markets at this time. Residential dialtone revenues in the aggregate appear to in most instances exceed the costs of providing the service. Additionally, where costs do exceed revenues for a particular exchange, there is no indication of the direction of any subsidization that may exist and, in particular, which would necessitate raising rates in rural exchanges in order to accommodate rate reductions in more competitive urban markets as Bell proposes.

By the same token, we cannot accept AT&T's proposal in this regard since it also would result in large decreases to access rates without the benefit of a developed record on access costs and the need for reform of the access charge pricing structure at the Federal and state levels given the increased levels of competition that are emerging. As discussed below, since the state funding mechanism will not be implemented for at least 6-9 months, we will be initiating a separate proceeding dealing with intrastate access reform to be completed in this timeframe. Parties shall be required to incorporate the findings of that proceeding into their § 1308 filings in this proceeding.