Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) Telephone Number Portability ) CC Docket No. 95-116 ) RM 8535 FOURTH MEMORANDUM OPINION AND ORDER ON RECONSIDERATION Adopted: June 23, 1999 Released: July 16, 1999 By the Commission: Commissioner Furchtgott-Roth issuing a separate statement. TABLE OF CONTENTS I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . 1 II. BACKGROUND. . . . . . . . . . . . . . . . . . . . . . . 4 III. RECONSIDERATION ISSUES A. Commission Authority To Require Interim Number Portability 10 B. Commission Authority To Establish Cost Recovery Guidelines For Interim Number Portability. . . . . . . . . . . . . . . . . . . . . . . . . . 18 C. Cost Recovery Guidelines . . . . . . . . . . . . . . 32 D. Alternative Allocators for Cost Recovery of Interim Number Portability 53 E. Takings. . . . . . . . . . . . . . . . . . . . . . . 60 F. Retroactive Application of Cost Recovery Guidelines for Interim Number Portability. . . . . . . . . . . . . . . . . . . . . . . . . . 69 G. Terminating Access Charges . . . . . . . . . . . . . 73 H. Modification of Billing Systems to Accommodate the Sharing of Access Charges in Meet-Point Billing Type Arrangements. . . . . . . . . . . . 79 IV. SUPPLEMENTAL REGULATORY FLEXIBILITY ANALYSIS. . . . . . 82 V. ORDERING CLAUSES. . . . . . . . . . . . . . . . . . . . 94 APPENDIX A - LIST OF PARTIES Statement of Commissioner Furchtgott-Roth I. INTRODUCTION 1. On June 27, 1996, the Commission adopted the First Report and Order and Further Notice of Proposed Rulemaking in this docket, which implemented the provisions of section 251 of the Communications Act of 1934, as amended, that relate to telephone number portability. Specifically, section 251(b)(2) requires that all local exchange carriers (LECs) provide, "to the extent technically feasible, number portability in accordance with requirements prescribed by the Commission." Section 251(e)(2) provides that "the costs of establishing . . . number portability shall be borne by all telecommunications carriers on a competitively neutral basis as determined by the Commission." The 1996 Act defines "number portability" as "the ability of users of telecommunications services to retain, at the same location, existing telecommunications numbers without impairment of quality, reliability, or convenience when switching from one telecommunications carrier to another." In the First Report and Order, the Commission determined, among other things, that it has authority under section 251 to promulgate rules regarding long-term and currently available (or "interim") number portability, as well as to establish cost recovery methods for each. 2. Twenty-two parties filed petitions for reconsideration or clarification of the First Report and Order. Nineteen parties filed oppositions to or comments on the petitions, and 16 parties filed reply comments. The petitions raise a broad range of issues. On March 6, 1997, the Commission adopted a First Memorandum Opinion and Order on Reconsideration in this proceeding, addressing a number of these issues A Second Memorandum Opinion and Order on Reconsideration clarified that all LECs must discontinue using interim number portability in areas where a long-term number portability method has been implemented. The item also clarified that Remote Call Forwarding (RCF) and Flexible Direct Inward Dialing (DID) are not the exclusive methods of providing interim number portability that LECs are obligated to provide on a transitional basis. Instead, LECs may implement any technically feasible method of interim number portability comparable to RCF and DID. The Commission also held that a LEC is required to implement the specific method of interim number portability requested by a competing carrier, provided that provision of the requested method is not unduly burdensome. A Third Memorandum Opinion and Order on Reconsideration denied a petition for reconsideration that sought modification to the long-term number portability deployment schedule. In its Third Report and Order on number portability, the Commission adopted rules governing recovery of the costs of long-term number portability. 3. In this Fourth Memorandum Opinion and Order on Reconsideration, we address issues raised by petitioners relating to cost recovery for interim number portability. First, we affirm our conclusion that the Commission has the authority to establish cost recovery guidelines for interim number portability. Second, we reject claims that the cost recovery guidelines for interim number portability set forth in the First Report and Order are arbitrary and capricious, or constitute an unconstitutional taking. We deny the request that these cost recovery guidelines be applied retroactively. We also affirm our earlier decision to adopt general cost recovery guidelines for interim number portability while allowing states flexibility to continue using a variety of cost recovery approaches that are consistent with our guidelines. Finally, we clarify issues relating to terminating access charges, modification of billing systems, and the competitive neutrality of certain cost recovery allocators, as each of these issues relates to interim number portability. II. BACKGROUND 4. In the First Report and Order, the Commission exercised its authority to prescribe requirements governing the LECs' duty to provide number portability. After determining that section 251(b)(2) requires LECs to provide number portability in the short term, the Commission prescribed that such number portability be provided through Remote Call Forwarding (RCF), Flexible Direct Inward Dialing (DID), or other comparable methods. The Commission based this finding on its conclusion that section 251(b)(2), by referring to the provision of number portability "to the extent technically feasible," creates a dynamic requirement that allows for changes in the methods by which a LEC provides the required number portability. Accordingly, the Commission concluded that because RCF, DID, and other comparable measures currently are technically feasible number portability methods, section 251(b)(2) requires LECs to provide number portability through such methods. The Commission stated that, upon receipt of a specific request from another telecommunications carrier, a LEC must provide number portability through such measures as soon as reasonably possible, until such time as the LEC implements a long-term database method for number portability in that area. 5. In light of its finding that the Communications Act requires LECs to provide interim number portability, the Commission also determined that it must adopt cost recovery principles for interim number portability measures pursuant to section 251(e)(2). The Commission concluded that section 251(e)(2) "gives us specific authority to prescribe pricing principles that ensure that the costs of establishing number portability are allocated on a 'competitively neutral' basis." Applying section 251(e)(2) to interim number portability, the Commission concluded that it should adopt guidelines that the states must follow in mandating cost recovery mechanisms for interim number portability measures. 6. Section 251(e)(2) requires that "the costs of establishing number administration and number portability be borne by all telecommunications carriers on a competitively neutral basis." In the First Report and Order, the Commission determined that the costs of currently available (referred to here as interim) number portability are those "incremental costs incurred by a LEC to transfer numbers initially and subsequently forward calls to new service providers." The Commission also determined that for purposes of interim number portability, the phrase "all telecommunications carriers" was to be read literally, and included "any provider of telecommunications services," including incumbent LECs, new LECs, commercial mobile radio service (CMRS) providers, and IXCs. 7. The Commission also set forth two criteria with which any cost recovery method must comply in order to be considered competitively neutral. First, "a 'competitively neutral' cost recovery mechanism should not give one service provider an appreciable, incremental cost advantage over another service provider, when competing for a specific subscriber." Second, the cost recovery mechanism "should not have a disparate effect on the ability of competing service providers to earn normal returns on their investments." In the First Report and Order, the Commission provided some examples of methods currently in use that would comply with these criteria. Such methods include, but are not limited to: allocating incremental costs based on (a) the number of ported numbers, (b) the number of active telephone numbers, (c) the number of active telephone lines, (d) gross telecommunications revenues net of charges paid to other carriers; and (e) each carrier bearing its own costs. The Commission further stated that requiring new entrants to bear all of the costs of interim number portability, measured on the basis of incremental costs, would not comply with the statutory requirements of section 251(e)(2). In setting forth these criteria, however, the Commission left to the states the determination of the specific cost recovery mechanism to be utilized. 8. In August, 1997, the Commission adopted a Second Report and Order. The Second Report and Order addresses recommendations of the North American Numbering Council (NANC) regarding specific aspects of local number portability implementation. 9. On May 5, 1998, the Commission adopted a Third Report and Order that resolved numerous issues regarding the means by which carriers will bear the costs of providing long-term number portability. The Commission found that section 251(e)(2) expressly and unconditionally grants the Commission authority, and requires the Commission, to ensure that all telecommunications carriers bear the costs of providing number portability for interstate and intrastate calls on a competitively neutral basis. In making this finding, the Commission pointed to section 251(e)(2)'s requirement that carriers shall bear the costs of number portability "as determined by the Commission," and noted that section 251(e)(2) does not distinguish between costs incurred in connection with intrastate calls and costs incurred in connection with interstate calls. The Commission concluded that section 251(e)(2) addresses both interstate and intrastate matters and overrides section 2(b)'s reservation of authority to the states over intrastate matters. Thus, the Commission determined that section 251(e)(2) authorizes it to provide the distribution and cost recovery mechanism for all the costs of providing long-term number portability. The Commission further determined that an exclusively federal recovery mechanism for long-term number portability "will enable the Commission to satisfy most directly its competitive neutrality mandate, and will minimize the administrative and enforcement difficulties that might arise" if jurisdiction were shared between the states and the Commission. III. RECONSIDERATION ISSUES A. Commission Authority To Require Interim Number Portability 1. Background 10. In the First Report and Order, the Commission required LECs to provide interim number portability, based on the 1996 Act's requirement that LECs provide number portability "to the extent technically feasible." The Commission based this conclusion on the language of section 251(b)(2), which states that LECs have "[t]he duty to provide, to the extent technically feasible, number portability in accordance with requirements prescribed by the Commission." 11. Several carriers challenge the Commission's finding that the 1996 Act provides authority for the Commission to order LECs to provide interim number portability. BellSouth asserts that the phrase "to the extent technically feasible" in section 251(b)(2) is not a dynamic concept but should be strictly construed as a timing device regarding the Commission's long-term number portability implementation schedule. BellSouth asserts that any other reading would be an "overbroad" construction of Congress' long-term number portability mandate that would extend Commission jurisdiction to wholly intrastate functionalities. BellSouth also asserts that interim number portability is not number portability as required by the 1996 Act, because interim number portability is technically inferior to long-term number portability and the Communications Act defines number portability as the ability of consumers to retain existing telecommunications numbers "without impairment of quality." BellSouth also argues that the Commission inappropriately relies on section 271(c)(2)(B)(xi) to compel LEC provision of interim number portability by grafting section 271(c)(2)(B)(xi), which is applicable to BOCs who desire to get into the long distance business, onto sections 251(b)(2) and 153(30), which apply to all LECs. Several other commenters, on the other hand, assert that the Commission's determination that the definition of number portability is a dynamic one is correct, and more closely comports with the statute and the intent of Congress than the interpretation advanced by BellSouth. 2. Discussion 12. We reaffirm our earlier conclusion that we have authority to require that number portability be implemented "to the extent technically feasible" and that our authority under section 251(b)(2) encompasses all forms of number portability. Section 3(30) of the Act defines number portability as "the ability of users of telecommunications services to retain, at the same location, existing telecommunications numbers without impairment of quality, reliability, or convenience when switching from one telecommunications carrier to another." This definition is not limited to any one technical method of number portability. Nor is the duty of LECs pursuant to section 251(b)(2), to provide number portability "to the extent technically feasible . . . in accordance with requirements prescribed by the Commission," limited to long-term number portability. We acknowledge that some ambiguity exists regarding the statutory mandate to require the provision of interim number portability, because, while sections 251(b) and 3(30) refer to the provision of "number portability," section 271(c)(2)(B) refers to both "regulations pursuant to section 251 to require number portability" and "interim number portability" to be provided by BOCs until the Commission issues such regulations." We find, however, that our earlier interpretation of section 251(b)(2), that is, requiring all LECs to provide number portability to the extent technically feasible, is consistent with, and necessary to effectuate, Congress's goal to promote competition in the provision of local telecommunications service. Indeed, prior Commission decisions reflect our understanding of Congress's intent, stated in the First Report and Order, that number portability is a dynamic concept that allows for changes in the methods by which LECs provide it. Thus, we have referred to the fact that number portability methods change over time by calling number portability methods, such as RCF and DID, "currently available number portability," "interim number portability," and "transitional number portability." Each of these phrases refers to number portability using technology available at that time, and reflects the Commission's ongoing statutory mandate to require number portability "to the extent technically feasible." 13. Additionally, in placing number portability obligations within section 251, which is concerned overall with the development of competitive local markets, Congress recognized the importance of number portability to the development of local competition. We conclude that, if LECs were able to delay provision of number portability until long-term number portability becomes available, such delay likely would impede the development of local competition. Immediate availability of number portability, in contrast, even through currently available methods, will facilitate the development of local competition and, therefore, better serve the intent of the statute. Because the statutory language, like the language in the House bill, requires LECs to provide number portability "to the extent technically feasible" and according to requirements prescribed by the Commission, rather than "when technically feasible," we do not believe that this legislative history suggests an intent by Congress to prevent the Commission from requiring LECs to provide "interim," "currently available," or "transitional" number portability until "true" number portability becomes available. Rather, this language suggests an appreciation of the manner in which number portability could be provided at the time of consideration of the 1996 Act, and that the manner of providing number portability would change over time. 14. The Joint Explanatory Statement accompanying the Conference Report to the Telecommunications Act of 1996 notes that section 251 "incorporates provisions from both the Senate bill and the House amendment." The enacted language of section 251, that LECs have a duty pursuant to section 251(b)(2) to provide number portability "to the extent technically feasible" is identical to that in section 242(a)(4) of the House bill. The report on the House bill indicates that the duty to provide number portability includes both interim and long-term number portability. The House Report explains that the "technically feasible" requirement is important because "the software necessary for 'true' number portability, as opposed to 'interim' number portability (which is an advanced call forwarding feature) . . . is not presently available" and states its expectation that "true" number portability will "be deployed when it is technically feasible." Because the statutory language, like the language in the House bill, requires LECs to provide number portability "to the extent technically feasible" and according to requirements prescribed by the Commission, rather than "when technically feasible," we do not believe that this legislative history suggests an intent by Congress to prevent the Commission from requiring LECs to provide "interim" number portability until "true" number portability becomes available. As discussed above, this statutory language suggests an appreciation of the manner in which number portability could be provided at the time of consideration of the 1996 Act, and that the manner of providing number portability would change over time. Together with the broad definition of number portability in section 3(30), this language also suggests a Congressional understanding that although "interim" number portability was technically inferior to "true" number portability, both comprise number portability. 15. We find unpersuasive BellSouth's contention that, because Congress considered including a specific reference to interim number portability, but did not adopt it in section 251(b), the lack of such language demonstrates that the Commission is without jurisdiction in this area. In particular, BellSouth cites to language referring to interim and final number portability set forth in section 261 of Senate Bill 652. This language was not included in the final version of the legislation. Because the legislative history provides no explanation for the deletion of this language, it is subject to various interpretations, and we are not persuaded that BellSouth's is the most reasonable among them. The Joint Explanatory Statement of the Conference Report states that all differences between the Senate Bill, the House Amendment, and the substitute reached in conference are noted therein "except for clerical corrections, conforming changes made necessary by agreements reached by the conferees, and minor drafting and clerical changes." Because the Joint Explanatory Statement does not address the omission of section 261 of the Senate Bill from the final legislation, the more logical inference from the quoted statement is that Congress regarded the change as an inconsequential modification rather than a significant alteration. This view is supported by two additional facts noted above: first, the statement in the Joint Explanatory Statement that section 251 "incorporates provisions from both the Senate Bill and the House Amendment;" and second, the statements from the House Report suggesting that the Commission's authority to prescribe requirements for number portability extends both to interim number portability, which is being provided now, and to long-term number portability, which will "be deployed when it is technically feasible." 16. This reading of the term "number portability" to include all forms of number portability, whether interim or long-term, also is more consistent than BellSouth's reading with Congress' goal of fostering competition in the local exchange marketplace. Congress recognized that number portability is essential to meaningful competition in the provision of local exchange services, and the record in this proceeding demonstrates that customers are reluctant to switch carriers if doing so requires that they give up their current telephone numbers. Nor is this view inconsistent with the distinction between "interim number portability" and "section 251 number portability" referenced in section 271(c)(2)(B)(ix). The legislative history of the 1996 Act does not explain why Congress decided to refer specifically to interim number portability only in section 271(c)(2)(B)(ix). In the absence of such an explanation, and given the broad definition of number portability in section 3(30) and the legislative history described above, it seems unlikely that Congress's reference to interim number portability in section 271(c)(2)(B)(ix) was intended to narrow the concept of number portability as used elsewhere in the statute. Consistent with its purposes of increasing the competitiveness of local markets, Congress may have decided to impose a specific Congressional mandate to provide interim number portability on BOCs seeking to demonstrate that they had met the local competition requirements necessary for entry into long distance, prior to issuance of section 251(b) regulations, while otherwise permitting the Commission to determine the scope and timing of number portability for all LECs pursuant to section 251(b)(2). 17. Contrary to BellSouth's assertion, in the First Report and Order, we did not rely on section 271(c)(2)(B)(xi) as the basis for requiring all LECs to provide interim number portability. Rather, we merely referred to section 271(c)(2)(B)(xi) as offering further support for our interpretation of section 251(b)(2). In addition, we explained that our interpretation of section 251(b)(2) would prevent a BOC seeking interLATA authorization, pursuant to section 271 of the Act, from being able to avoid providing number portability during the time between the adoption of the Commission's number portability rules and the implementation of long-term number portability measures. Under BellSouth's interpretation, a BOC could refuse to offer interim number portability from the time of the adoption of the First Report and Order until the actual implementation of long-term number portability, yet still be in compliance with the number portability checklist requirement set forth in section 271. We believe that a more logical interpretation of these sections is that, in providing for both types of number portability, Congress did not intend for there to be such a time lag but instead required the provision of interim number portability until long-term number portability is in place. This interpretation is supported by the last sentence in section 271(c)(2)(B)(xi), which requires "full compliance" with the Commission's section 251 portability regulations after such regulations are issued. B. Commission Authority To Establish Cost Recovery Guidelines For Interim Number Portability 1. Background 18. In the First Report and Order, we asserted jurisdiction over interim number portability and established cost recovery guidelines for interim number portability measures for the states to implement. Several commenters assert that the Commission lacks authority to promulgate cost recovery guidelines for interim number portability. These parties contend that section 251(e)(2), which governs cost recovery for number portability, applies only to long-term number portability. Noting that section 251(e)(2) refers to the "cost of establishing telecommunications numbering administration arrangements and number portability," Bell Atlantic argues that because interim number portability is an adaptation of existing services, there is nothing to "establish." To the extent the Commission bases its authority to order LECs to provide interim number portability on Communications Act provisions other than those added by the 1996 Act, BellSouth maintains that the Commission lacks authority to depart from cost-causative pricing principles. Other parties argue that interim number portability is an intrastate service and that the Commission lacks jurisdiction to adopt cost recovery guidelines absent an explicit grant of authority over intrastate matters. Bell Atlantic asserts that the legislative history of the 1996 Act demonstrates that Congress intended that interim number portability compensation be subject to negotiated interconnection agreements. CTIA and Bell Atlantic NYNEX contend that states may adopt inconsistent state policies regarding number portability of CMRS carriers and urge the Commission to preempt all state number portability requirements. 19. Several parties support the Commission's jurisdictional authority, arguing that section 251(e)(2) extends the Commission's statutory authority over the establishment of cost recovery rules to both interim and long-term number portability. Sprint argues that the Commission should reject proposals to leave interim cost recovery to carrier negotiations because incumbent carriers have little incentive to negotiate. 2. Discussion 20. We uphold our earlier decision and affirm our authority to establish cost recovery guidelines for interim number portability measures. As discussed below, our interpretation of the statute finds support in the language of the 1996 Act, is consistent with the 1996 Act's underlying goals, and is consistent with the conclusions reached in the Third Report and Order. 21. We find that sections 251(b)(2) and 251(e)(2) grant the Commission explicit authority over, respectively, the provision of and the recovery of costs associated with number portability. We find that our authority under section 251(e)(2), as with section 251(b)(2), is not limited to long-term number portability, since the statutory definition of number portability draws no distinction between interim and long-term number portability. Section 3(30) of the Act defines number portability as "the ability of users of telecommunications services to retain, at the same location, existing telecommunications numbers without impairment of quality, reliability, or convenience when switching from one telecommunications carrier to another. This definition is not limited to one technical method of providing number portability. Similarly, sections 251(b)(2) and 251(e)(2) refer only to the provision and cost recovery of "number portability," but do not limit the term "number portability" to long-term measures. As discussed above, given the broad definition of number portability in section 3(30), it seems unlikely that Congress's reference to interim number portability in section 271(c)(2)(B)(ix) was intended to narrow the concept of number portability as used elsewhere in the statute, such as in sections 251(b)(2) and 251(e)(2). In addition, we find that our interpretation of section 251(b)(2), requiring all LECs to provide interim number portability, is consistent with, and necessary to effectuate Congress's goal to promote competition in the provision of local telecommunications service. 22. We also note that our conclusion that the Commission has statutory authority over interim number portability, regardless of whether it is characterized as an intrastate or interstate service, and the establishment of cost recovery rules for interim number portability, is consistent with our holdings in the Third Report and Order. In that order, we concluded that section 251(e)(2)'s express and unconditional grant of authority to the Commission grants us the authority to ensure that carriers bear the costs of providing number portability on a competitively neutral basis for both interstate and intrastate calls. Section 251(e)(2) states that carriers shall bear the costs of number portability "as determined by the Commission," and does not distinguish between costs incurred in connection with intrastate calls and costs incurred in connection with interstate calls. Thus, we conclude for interim number portability, as we did in the Third Report and Order for long-term number portability, that section 251(e)(2) addresses both interstate and intrastate matters and overrides the reservation of authority to the states over intrastate matters contained in section 2(b). 23. We also are not persuaded by the argument that the Commission lacks jurisdiction over cost recovery for interim number portability measures because the states have historically regulated the retail provision of RCF and DID. The states' regulation of rates for these services when provided on a retail basis does not preclude an express Congressional grant of authority to this Commission under section 251(e)(2) to regulate the cost recovery for interim number portability. As noted above, section 251(e)(2) states that carriers shall bear the costs of number portability "as determined by the Commission," and does not distinguish between costs incurred in connection with intrastate calls and costs incurred in connection with interstate calls. 24. We disagree with Bell Atlantic's claim that, because section 251(e)(2) refers to the costs of "establishing" number portability and there is nothing to "establish" with respect to interim number portability, the Commission is without authority to adopt cost recovery guidelines for the provision of interim number portability. In arguing that there is nothing to "establish" regarding interim number portability, Bell Atlantic defines the term "establish" narrowly, i.e, limiting the meaning of "establish" to physically upgrading the public switched telephone network or creating databases necessary for customers to retain their telephone numbers when switching carriers. We find that this interpretation is overly restrictive. To give full effect to the pro-competitive objectives of the 1996 Act, we conclude that the term "establish," as it relates to interim number portability, should be read more broadly. Although the functionalities necessary to provide interim number portability already exist in most public switched telephone networks, additional actions are necessary to implement interim number portability in a manner useful to new entrants. Interim number portability requires a LEC to transfer numbers initially and subsequently forward calls to new service providers using RCF, DID, or other comparable measures. The actions required to establish interim number portability and the associated costs vary according to where the call originates in a carrier's network. The provision of interim number portability results in switching and transport costs, and may include some small non-recurring costs, such as administrative costs. Because additional actions are required by LECs in the provision of interim number portability, we find that the process of transferring numbers and subsequently forwarding calls is what "establishes" (i.e., "creates" or "brings into existence") interim number portability for use by new entrants. 25. In addition to disagreeing with Bell Atlantic's narrow interpretation of the term "establish" in section 251(e)(2), we also find that it would be contrary to Congressional intent to conclude that the Commission's authority to impose a competitively neutral cost recovery mechanism is limited to long- term number portability. Congress imposed a number portability requirement on all LECs, and directed the Commission to adopt a competitively neutral cost recovery mechanism, in order to give new entrants a realistic opportunity to compete against incumbent LECs for local exchange customers. Mandating a number portability requirement without ensuring a competitively neutral cost recovery mechanism could significantly handicap the ability of new entrants to win customers, whether the method of porting numbers is long-term or interim. In the First Report and Order, we concluded that, because interim number portability costs will be small and incurred for a relatively short period, requiring carriers to bear their own costs would meet our competitive neutrality guidelines. We specifically prohibited incumbent LECs from shifting all of their costs onto new entrants, however. Such a direct cost shift from an incumbent LEC to a new entrant could act as a competitive barrier to the new entrant. Because both carriers would be competing for the same customer, the new provider may be forced to charge higher prices due to its need to recover the incumbent LEC's incremental costs of number portability, while the customer would face no additional charges if it stayed with the incumbent LEC. Despite the fact that such incremental costs are small, shifting all of an incumbent LEC's costs of interim number portability may materially disadvantage new entrants in competing for customers. As we stated in the First Report and Order, imposing the full incremental cost of interim number portability solely on new entrants would place them at an "appreciable, incremental cost disadvantage relative to another service provider when competing for the same customer" and would, therefore, violate the first criteria of the competitive neutrality mandate. Thus, we conclude that Bell Atlantic's interpretation -- that the Commission has authority under 251(e)(2) to impose a competitively neutral cost recovery mechanism for long-term number portability, but lacks such authority over interim number portability -- will not promote competition. For this reason, among others, we reject Bell Atlantic's interpretation of section 251(e)(2) as contrary to Congressional intent. 26. We similarly are not persuaded by Bell Atlantic's claim that cost recovery for interim number portability must be subject to negotiation between carriers, and that the Commission therefore lacks authority to establish cost recovery guidelines. Bell Atlantic's argument is based on language in the Senate Report discussing section 261 of Senate Bill 652, which states that interconnection agreements reached under section 251 must, if requested, provide for interim number portability, including the method by which it will be provided, and the amount of compensation. As discussed above, section 261, as it appeared in Senate Bill 652, distinguished between interim and final number portability, but was ultimately dropped from the final version of the 1996 Act. We find unpersuasive Bell Atlantic's interpretation of the legislative history. 27. We reject BellSouth's assertion that we lack authority to depart from cost-causative pricing principles. As we explained in the Third Report and Order, Congress imposed a number portability requirement on all LECs, and directed the Commission to adopt a competitively neutral cost recovery mechanism, in order to give new entrants a realistic opportunity to compete against incumbent LECs for local exchange customers. A cost causative basis for pricing number portability could defeat the purpose for which number portability was mandated. Mandating a number portability requirement without ensuring a competitively neutral cost recovery mechanism could significantly handicap the ability of new entrants to win customers, whether the method of porting numbers is long-term or interim, because they could be forced to bear all incremental costs of number portability and pass those costs onto customers in the form of higher prices. 28. Finally, we reject BellSouth's contention that we based our jurisdiction to order interim number portability on pre-1996 Act provisions and are therefore precluded from relying on 251(e)(2) for jurisdiction to determine cost recovery for such interim measures. To the contrary, in the First Report and Order we concluded only that sections 1 and 202 of the Communications Act provide a pre-existing and independent basis for our jurisdiction to require the provision of interim number portability methods. We did not rely solely on sections 1 and 202 as a basis for jurisdiction, and hereby clarify that, although we find that sections 1 and 202 provide an additional statutory basis on which the Commission may require interim number portability, we have independent authority to do so by virtue of sections 251(b)(2) and 251(e)(2) of the Act. 29. We reiterate our earlier finding, as discussed above, that section 251(e)(2) addresses both interstate and intrastate matters, and overrides section 2(b)'s reservation of authority to the states over intrastate matters. Although we assert federal jurisdiction over interim number portability and affirm our authority to establish cost recovery guidelines for interim number portability measures, we deny requests that we generally preempt state number portability cost recovery policies. Instead, we affirm our earlier conclusion that states may continue to utilize various cost recovery mechanisms as long as they meet the Commission's competitive neutrality guidelines. We note that this cost recovery approach is different than the one adopted in the Third Report and Order for long-term number portability cost recovery, in which we adopted an exclusively federal cost recovery mechanism. We note that in the Third Report and Order, we found that section 251(e)(2) authorizes the Commission to provide the distribution and recovery mechanism for all the costs of providing long-term number portability, but did not interpret the statute to require the adoption of an exclusively federal recovery mechanism for all forms of number portability. Instead, an exclusively federal cost recovery mechanism for long-term number portability was adopted for several policy reasons that are inapplicable to interim number portability. We determined in the Third Report and Order that an exclusively federal cost recovery mechanism for long-term number portability will enable the Commission "to satisfy most directly its competitive neutrality mandate and will minimize the administrative and enforcement difficulties that might arise were jurisdiction over long-term number portability divided." Additionally, an exclusively federal cost recovery mechanism for long-term number portability obviates the need for state allocation of the shared costs of the regional database, a task that would likely be complicated by the database's multistate nature. 30. Although we have determined that the Commission's authority to provide the distribution and recovery mechanism for all number portability costs extends to long-term and interim number portability, we do not find it necessary to establish an exclusively federal recovery mechanism for interim number portability. Instead, we will continue to permit states to provide for cost recovery in accord with the competitive neutrality standards adopted in the First Report and Order, and elaborated here, for the following reasons. First, we believe that adopting an exclusively federal cost recovery mechanism would be very disruptive to existing interim number portability cost recovery. States have been providing for interim number portability cost recovery since 1996. Also, cost recovery for interim number portability has been determined through existing interconnection agreements, as incumbent LECs are required by section 251(c) to provide for interim number portability in their interconnection agreements. Second, we believe that disruption of existing cost recovery mechanisms is not warranted because interim number portability will remain in place for a very limited period of time. Interim number portability was replaced by long-term number portability in switches in the 100 largest MSAs by the end of 1998, and will be replaced subsequently in other switches in which a bona fide request to provide number portability is received. Third, we believe that a cost allocation method that requires LECs to bear their own costs of interim number portability is competitively neutral, as individual carrier's costs will be small and no shared costs or database costs must be allocated. As previously indicated, to the extent that RCF, DID and other comparable methods are used to provide currently available number portability, and the capability for currently available number portability already exists in the incumbent LEC network, only the short-run incremental costs are properly attributed to interim number portability. Interim number portability requires little infrastructure investment. Having already provisioned their switches with enough capacity to carry all of their respective customers' incoming and outgoing calls, we do not expect incumbent LECs to incur additional costs with respect to switch capacity when a customer chooses to port its number to a new service provider and the incumbent LEC must forward calls using interim number portability methods. Although interim number portability requires an increased use of the incumbent LECs' switch capacity -- and an increase in transport costs -- to process incoming calls, this effect is offset by the fact that the incumbent LECs will no longer handle the outgoing calls originated by the ported customer. As a result, we expect little or no change in the level of incumbent LECs switching and transport costs per ported number. 31. As stated in the First Report and Order, if a carrier believes that a LEC's pricing provisions for number portability violate the Commission's competitive neutrality guidelines or violate a state- mandated cost recovery mechanism, a carrier may be able to seek relief from its state commission. If the carrier is not able to obtain relief in this way, or if a state has not yet adopted a cost recovery mechanism for cost recovery of interim number portability measures, a carrier may be able to bring action against the LEC in federal district court pursuant to section 207 for damages or file a section 208 complaint with this Commission against another carrier alleging a violation of the Act or the Commission's rules. Alternatively, if a carrier believes that a state has not properly applied the statute or our rules, or if a state's cost recovery mechanism is not competitively neutral because it improperly burdens new entrants with interim number portability costs, the carrier may file a request for declaratory ruling with the Commission or otherwise seek court review of the state cost recovery mechanism. C. Cost Recovery Guidelines 1. Background 32. In the First Report and Order, the Commission established two criteria with which any cost recovery method must comply in order to be considered competitively neutral. First, "a 'competitively neutral' cost recovery mechanism should not give one service provider an appreciable, incremental cost advantage over another service provider, when competing for a specific subscriber." Second, the cost recovery mechanism "should not have a disparate effect on the ability of competing service providers to earn normal returns on their investments." In setting forth these criteria, however, we left to the states the determination of the exact cost recovery mechanism to be utilized. 33. Several carriers have challenged our cost recovery guidelines. BellSouth asserts that the cost recovery guidelines established in the First Report and Order are arbitrary, capricious, and clear error. Specifically, BellSouth claims that, in establishing its competitively neutral guidelines, the Commission departed from traditional cost causation principles "without any meaningful explanation." BellSouth also argues that the guidelines adopted by the Commission are not competitively neutral and are "vague and ambiguous." Additionally, BellSouth submits that it is not competitively neutral for the Commission to adopt measures for transitional number portability in order to create an incentive for earlier implementation of long-term number portability. Bell Atlantic asserts that the Commission does not explain how the denial of the ability to recover incremental costs could be competitively neutral. AirTouch argues that it is not competitively neutral to require carriers that do not serve customers with ported numbers to share in the costs of interim number portability. GTE asks the Commission to reconsider and expand its definition of competitive neutrality by adding a third criterion, which would require that "a cost recovery mechanism must not influence a customer's selection of his or her service provider." Several carriers assert that the Commission should not interfere with existing state-mandated interim number portability cost recovery mechanisms. 34. Other commenters oppose these arguments and support the Commission's earlier conclusions. Several carriers support the Commission's requirement that the costs of interim number portability be borne by all carriers on a competitively neutral basis. ACSI asserts that the implementation of interim methods of number portability on a competitively neutral basis, as envisioned by the First Report and Order, is necessary to support the emergence of local competition. ACSI also argues that since long-term number portability is not yet available, and will not be in some areas until July 1999, the need for a competitively neutral cost recovery mechanism for interim number portability is especially severe. 3. Discussion 35. We reject the claims of those carriers that assert that our cost recovery guidelines are arbitrary, capricious, or plain error. Number portability promotes competition by allowing customers to switch carriers easily without having to change their telephone numbers. In the First Report and Order, we explained that the Commission departed from cost causation principles with respect to interim number portability because, "[d]epending on the technology used, to price number portability on a cost causative basis could defeat the purpose for which it was mandated." As we stated in the Third Report and Order, pricing number portability on a cost-causative basis could defeat Congress's purpose of removing barriers to local competition because the nature of the costs involved with some number portability solutions might make it economically infeasible for some carriers to compete for a customer serviced by another carrier." If it is assumed that the customer who ports his or her number is the cost causer, and all of the costs associated with forwarding a call are placed on the customer who switches carriers, customers who want to retain their telephone numbers could be deterred from switching carriers due to increased costs. This result is wholly contrary to the pro-competitive intent of sections 251(b)(2) and 252(e)(2) regarding the provision of number portability. 36. Additional economic and policy considerations also support our decision not to follow strict principles of cost causation in this specific context by imposing all interim number portability costs on new entrants. First, all customers benefit from number portability because number portability promotes competition, lower prices, increased choices, and greater innovation. In addition, other customers will benefit to the extent that they need not search for a customer's new number when that customer switches carriers. Since number portability generates an externality from which all customers benefit, the porting customers should not pay the full economic costs. Moreover, as discussed in the First Report and Order and Third Report and Order, if the costs are placed entirely on one carrier or group of carriers, "the new entrant's share of the cost [could be] so large, relative to its expected profits, that the entrant would decide not to enter." Preventing new, efficient entrants from offering service because of costs associated with number portability would directly contravene one of the 1996 Act's primary purposes, namely to encourage competition in the local exchange market. In sum, we reject BellSouth's claim that our decision to depart from traditional cost causation principles is arbitrary and capricious. 37. Furthermore, we agree with MCI that the costs of number portability should not be viewed narrowly as simply costs of entry, but more broadly as costs of creating a competitive environment that will benefit all consumers. In the Third Report and Order, the Commission concluded that applying principles of competitive neutrality to long-term number portability cost recovery would ensure that the cost of number portability does not undermine the goal of the 1996 Act to "promote a competitive environment" for the provision of local communications services. Similarly, we conclude that requiring incumbent LECs to share in the costs of providing both interim and long-term number portability is in the public interest and will contribute to the development of competition in the local exchange market. 38. BellSouth asserts that the cost recovery guidelines for interim number portability are "vague and ambiguous," and leave important terms undefined. Specifically, BellSouth complains that the Commission failed to define the phrases "appreciable cost advantage" and "normal return." As applied to our cost recovery guidelines, we clarify that, when we used the phrase "appreciable cost advantage" we meant a difference in costs that, if reflected in retail prices, would cause a not insignificant number of customers to change, or decline to change, carriers. We also find that a "normal return" in economic terms is the return sufficient to assure confidence in the financial integrity of the company so as to maintain its credit and attract capital. Normal return in this context does not guarantee that all firms will be profitable and, hence, remain in the industry. Rather, this concept means that number portability costs imposed on a particular carrier should not be so significant, by themselves, as to drive existing carriers out of the market or make continued operations unprofitable, or deter the entry of carriers that, but for the number portability costs, would have entered the market. 39. We find no merit to BellSouth's suggestion that the Commission's definition of, and criteria for, competitive neutrality, are novel or unprecedented. The "competitively neutral" principles established in the First Report and Order were drawn from well-accepted principles of economic theory. To be competitive, a firm must be able to offer a particular customer a service/price package which that customer finds comparable to that offered by other carriers, and it must be able to do so while earning a normal rate of return. In making business decisions, firms are concerned with both the short- run and the long-run. In the short-run, firms are concerned with their ability to compete, while in the long-run firms are concerned with remaining in the market. The first criterion of the competitive neutrality test addresses the short-run concern, in that carriers cannot compete effectively if one carrier has an appreciable, incremental cost advantage over other carriers. The second criterion addresses the concern that the cost recovery mechanism should not have a disparate effect on the ability of competing service providers to earn normal returns on their investments. 40. We also reject arguments that the methods currently suggested in the First Report and Order fail to meet the second criterion of competitive neutrality, which states that "[the allocation mechanism] should not have a disparate effect on the ability of competing service providers to earn normal returns on their investments." As applied to interim number portability, the methods for allocating the costs of interim number portability suggested in the First Report and Order, including allocation according to a carrier's number of active lines or number of active telephone numbers, meet the criteria established for competitive neutrality. Given the relatively small incremental costs of interim number portability, we conclude that using either the number of telephone lines or the number of active telephone numbers as the basis for allocation also meets the second criterion. Gaining a customer results in either an additional line or active telephone number for that carrier, which increases the relative amount that carrier has to pay. Although that carrier's costs for number portability go up relative to other carriers, it also receives the corresponding revenues generated by the new customer. One characteristic of these rules is that the costs allocated to particular carriers increase with the size of the carrier so that smaller carriers will not be driven from the market. 41. In creating the competitive neutrality criteria, we also were guided by the 1996 Act's pro- competitive objectives. As noted in the First Report and Order, "the Act envisions that removing legal and regulatory barriers to entry and reducing economic impediments to entry will enable competitors to enter markets freely, encourage technological development, and ensure that a firm's prowess in satisfying consumer demand will determine its success or failure in the marketplace." Number portability and competitively neutral cost recovery are necessary to fulfill the purpose and intent of the 1996 Act. 42. We also reject BellSouth's argument that it is arbitrary and capricious to use transitional measures as an incentive to adopt long-term number portability as quickly as possible. As discussed above, we find that we have jurisdiction over number portability, and that number portability is a dynamic, not static, concept. Section 271 of the Act explicitly states that BOCs must provide "interim telecommunications number portability" until "the date by which the Commission issues regulations pursuant to section 251 to require number portability." Additionally, as we stated in the First Report and Order, requiring incumbent LECs to share in the cost of interim number portability under section 251 provides some incentive for them to transition to long-term number portability with reasonable speed, rather than taking the maximum allowable time. While the costs of long-term number portability will be greater than those of interim number portability, carriers will be able to recover their costs through two separate federally-tariffed charges, an end-user charge and a query services charge. 43. We disagree with those commenters that assert that the Commission is interfering with existing state-mandated interim number portability cost recovery mechanisms. As we stated in the First Report and Order, we provide flexibility for the states to determine their own cost allocation mechanisms, subject to the guidelines set forth in the First Report and Order. If a state previously determined its cost allocation scheme without taking section 251(e)(2) into account, that state must now ensure that its method comports with the language in the 1996 Act and our implementing regulations. 44. We disagree with AirTouch's assertion that carriers that do not serve customers with ported numbers, such as wireless carriers, should not be required to share in the cost of number portability because such carriers do not benefit from number portability. Similarly, we deny the request of SCLP and SCI that the Commission specifically exempt all CMRS providers from contributing to the costs of interim number portability. In rejecting these arguments, we look to section 251(e)(2) of the Act, which plainly requires that the costs of establishing number portability be borne by "all telecommunications carriers on a competitively neutral basis as determined by the Commission." We have exercised our statutory mandate by articulating criteria for states to use in adopting cost recovery mechanisms. As the states develop cost recovery mechanisms pursuant to the statutory mandate, carriers will bear their own costs or states may allocate costs in a competitively neutral fashion on all telecommunications carriers that does not unduly burden any particular carrier or group of carriers. Additionally, as discussed above, if wireless carriers believe that a state's cost recovery mechanism is not competitively neutral or imposes an unfair burden, such carriers have a variety of remedies available to them. 45. We find no merit in SCLP and SCI's claim that requiring CMRS providers to contribute to number portability would have a "disparate effect" on their ability to earn a normal rate of return. These carriers have failed to present any evidence to support their claim that contributing to the costs of interim number portability would have such an effect. As noted in the First Report and Order, a disparate effect may be said to exist when a "new entrant's share of the [interim number portability] costs may be so large, relative to its expected profits, that the entrant would decide not to enter the market." With respect to existing carriers, we clarify that a disparate effect under our definition would exist if that carrier or class of carriers would be driven from the market, while other carriers would not, as a result of number portability costs. These carriers' unsupported allegations that contributing to the costs of interim number portability would have a disparate effect are insufficient to support their request for a blanket exemption for all CMRS carriers. 46. We also disagree with SCLP and SCI's assertion that our First Report and Order demonstrates an intent that the costs of interim number portability be placed on non-cost causers only where necessary to preserve competitive neutrality. In making this claim, SCLP and SCI rely on the word "relevant" in the Commission's statement that "states may apportion the incremental costs of interim measures among relevant carriers by using competitively neutral allocators." In using the term "relevant carriers," we intended to reflect that differing cost recovery mechanisms, all of which could satisfy our competitively neutral mandate, might encompass all, or a subset of all, telecommunications carriers, depending on the specifics of the cost recovery mechanism. For instance, states may find that the relevant carriers for a cost allocation mechanism may involve some, but not all carriers, such as a mechanism that requires each carrier to bear its own costs. 47. In the First Report and Order, we concluded that, in choosing the phrase "all telecommunications carriers," Congress intended to include all types of carriers in the cost recovery mechanism because, unlike the requirement to provide number portability which applies solely to local exchange carriers, the requirements relating to number portability cost recovery apply to "all telecommunications carriers on a competitively neutral basis." In drawing this conclusion, we adopted a literal reading of the statutory requirement and of the statutory definition of "telecommunications carriers." While our interpretation prevents an incumbent LEC from recovering its costs entirely from the new entrant, such an incumbent LEC may be able to recover its incremental interim number portability costs via the state-adopted allocation mechanism from "all telecommunications carriers" if a state implements such a cost recovery mechanism. Since the carrier providing the call forwarding itself falls within the category of "all telecommunications carriers," the carrier providing the forwarding is prevented by the statutory language from recovering all of its costs from other carriers. The allocation mechanism designed by the state, however, may allow the carrier incurring the costs to recover some portion of its costs from other carriers. In addition, states could permit incumbent LECs to recover any remaining costs in some other manner, e.g., from end-users. 48. We affirm our finding that a "mechanism that requires each carrier to pay for its own costs of interim number portability measures" is competitively neutral and would constitute an acceptable cost recovery scheme that states could adopt. First, no significant capital costs are incurred by the carrier winning the customer or by the carrier losing the customer. Thus, the cost recovery mechanism does not give one service provider an appreciable, incremental advantage over another service provider when competing for the same customer. Second, as discussed above, incumbent LECs should still be able to earn a normal return, as the anticipated costs of interim number portability measures are relatively small. LECs have already provisioned their switches for remote call forwarding (as offered to subscribers on a retail basis), and, therefore, no additional hardware or software costs are associated with interim number portability. No commenter has argued otherwise in this proceeding. 49. We disagree with BellSouth's argument that "having determined that the costs of [interim number portability] will be incurred solely by the incumbent LECs," it was arbitrary and capricious for the Commission to determine that requiring each carrier to bear its own costs does not operate to the competitive disadvantage of the incumbent LECs. We also disagree with Bell Atlantic's argument that the First Report and Order was not competitively neutral because we denied Bell Atlantic the ability to recover incremental costs of interim number portability. As a threshold matter, Bell Atlantic and BellSouth are incorrect when they assert that the Commission determined that the costs of providing interim number portability will be incurred solely by incumbent LECs. Although finding that "initially, the costs of providing interim number portability will be incurred primarily by the incumbent LEC, because the incumbent LECs currently hold the vast majority of numbers in use," the First Report and Order imposed interim number portability requirements on all local exchange carriers. We find that it would be competitively neutral for carriers to pay their own incremental interim number portability costs, that is, to absorb the costs themselves or pass the costs onto their own retail customers. Our competitive neutrality standard, however, prohibits LECs from directly shifting these costs onto new entrants, because the new entrant would be placed at an "appreciable, incremental cost disadvantage relative to another service provider when competing for the same customer." Additionally, we have not foreclosed incumbent LECs from recovering all of their incremental costs of interim number portability, but have permitted each state to adopt a cost recovery mechanism, consistent with our competitive neutrality guidelines. The First Report and Order does not deny any carrier the right to recover costs, but, rather than adopting a uniform federal cost recovery mechanism, adopts guidelines that states must follow in implementing a cost recovery mechanism. We therefore disagree with Bell Atlantic's claim that carriers are placed at a cost disadvantage because they allegedly will not be able to recover the costs of interim number portability. In any event, whether incumbent LECs incur most of, or virtually all of, the costs of interim number portability initially, we find that it would be competitively neutral for all carriers to bear their own costs of interim number portability because few numbers have been ported and the costs are likely to be small. Such de minimis costs should not place any one service provider at a competitive disadvantage in competing for an individual customer. 50. We also conclude that the assertion by Bell Atlantic and Cincinnati Bell that new entrants should be required to bear all the costs of interim number portability is not consistent with the pro- competitive intent of sections 251(b)(2), 252(e)(2), and the 1996 Act as a whole. As we stated in the Third Report and Order, we have interpreted the Congressional mandate of competitive neutrality to require the Commission to depart from cost-causation principles when necessary to ensure that the cost of number portability borne by each carrier does not significantly affect any carrier's ability to compete with other carriers. In the First Report and Order, we concluded that, because interim number portability costs will be small and incurred for a relatively short period, requiring carriers to bear their own costs would meet our competitive neutrality guidelines. We specifically prohibited incumbent LECs from shifting all of their costs onto new entrants, however. Such a direct cost shift from an incumbent LEC to a new entrant could act as a competitive barrier to the new entrant, because both carriers would be competing for the same customer, and the new provider may be forced to charge higher prices due to its need to recover the incumbent LEC's incremental costs of number portability, while the customer would face no additional charges if it stayed with the incumbent LEC. Despite the fact that such incremental costs are small, shifting all of an incumbent LEC's costs of interim number portability to a new entrant could result in a cost so large, "relative to expected profits," that the new entrant would decide not to enter the market. As we stated in the First Report and Order, imposing the full incremental cost of interim number portability solely on new entrants would place them at an "appreciable, incremental cost disadvantage relative to another service provider when competing for the same customer" and would, therefore, violate the first criteria of the competitive neutrality mandate. 51. We also are not persuaded by BellSouth's contention that the cost allocation mechanisms discussed in the First Report and Order guarantee the profitability of the new entrants. Number portability facilitates the development of competition among local providers. Through its competitive neutrality criteria and state-determined cost allocation mechanisms, the First Report and Order removes a potential barrier to entry that could otherwise result from high rates or charges that incumbent LECs potentially could impose for interim number portability on new entrants that possess their own switches. It does not, however, guarantee that a new entrant will be profitable or be able to compete successfully in the market. 52. GTE suggests a third criterion, that "a cost recovery mechanism must not influence a customer's selection of his or her service provider." While we agree with GTE that a cost recovery mechanism should not influence a customer's selection of his or her service provider, this criterion is effectively embodied in the first prong of our competitive neutrality test and, thus, we see no need to revise that test. GTE implies that requiring an incumbent LEC to bear a share of interim number portability costs will force it to increase prices and put it at a competitive disadvantage vis-a-vis new entrants. In fact, for reasons noted earlier, we find that the incremental costs of interim number portability incurred by incumbent LECs will be minimal. In addition, we find no evidence in the record to support GTE's assertion that an incumbent LEC's share of the incremental costs of interim number portability are so substantial, spread among its customer base, that such costs would require an incumbent LEC to raise rates to such an extent as to cause current customers to switch carriers. D. Alternative Allocators for Cost Recovery of Interim Number Portability 1. Background 53. In the First Report and Order, we provided a list of examples of allocators for interim number portability cost recovery that would meet the Commission's criteria for competitive neutrality. We stated, for example, that a cost allocator based on a carrier's number of active telephone numbers, or a carrier's relative number of presubscribed customers, would meet our competitive neutrality guidelines. Several parties ask the Commission to approve additional allocators, or take exception to cost allocators deemed to be competitively neutral by the Commission in the First Report and Order. For example, GTE urges the Commission to approve a federally administered cost pooling proposal, which is based on recovering costs from end users, as an acceptable allocator for interim number portability. GTE argues that none of the methods suggested in the First Report and Order are "competitively neutral," because they effectively force the incumbent LECs to recover costs through increased rates or burdening shareholders, which violates the second competitively neutral criterion. AirTouch argues that total retail minutes of use is the only competitively neutral allocator; gross revenues, total access lines, and presubscribed lines are not competitively neutral because they fail the Commission's second competitive neutrality criterion. Finally, Cincinnati Bell recommends a mandatory end user surcharge that would be applied to all local exchange customers. 2. Discussion 54. In the First Report and Order, we provided a non-exhaustive list of examples of allocators for interim number portability cost recovery that would meet the Commission's criteria for competitive neutrality. We disagree with GTE's argument that a federally-mandated cost pooling mechanism needs to be implemented. For the reasons discussed in the First Report and Order, we believe states should be able to adopt various cost recovery mechanisms based on our competitive neutrality guidelines. We are not, however, precluding states from selecting cost pooling as a cost recovery mechanism, nor are we determining that cost pooling is not competitively neutral for the recovery of interim number portability costs. Although in the Third Report and Order we rejected pooling of carriers' long-term number portability costs as a mechanism for recovery of these costs because pooling mechanisms, in general, reduce carrier incentives to provide service efficiently, states may find that these disadvantages are not as significant when pooling is used as a mechanism for the recovery of interim number portability costs. The incremental costs of implementing long-term number portability are substantial, while the incremental costs of interim number portability are relatively small. Because these costs are relatively small, given that incumbent LECs have already provisioned their switches with the capacity to provide the services needed for interim number portability, creating incentives for carriers to provide service efficiently may be less of a concern. We are allowing the states to utilize various cost recovery mechanisms, and states will make the decision as to whether they will choose pooling as a recovery mechanism and impose cost accounting and distribution mechanisms on carriers. 55. In clarifying that the list of potential allocators referenced in the First Report and Order is not exhaustive, we also affirm that a cost recovery mechanism based on a carriers' gross revenues is an acceptable means of allocating costs among carriers. We disagree with AirTouch's argument that such an allocator should be rejected because it is difficult to determine, treats carriers with different cost structures differently, and is not competitively neutral. Financial measures, including gross revenues, are developed for different uses, such as for tax filings, annual reports, and SEC filings, and are readily available. Additionally, such an allocator does not disparately affect the incremental costs of winning a specific customer or group of customers. A LEC with a small share of the market's revenues would pay a percentage of the incremental costs of interim number portability that is small enough that it will have no appreciable affect on its ability to compete for that customer. Accordingly, utilizing a gross revenues allocator does not violate our competitive neutrality guidelines. 56. It appears that carriers' concerns with some of the allocators approved by the Commission are focused on our second criterion, on whether losing a customer affects a firm's "normal return." Losing a customer will necessarily affect a firm's revenues and subsequent return on investment. That is what competition is all about. The First Report and Order did not intend to change that. Rather, as stated in the Third Report and Order, the second prong of the competitive neutrality test does not guarantee any particular rate of return, but merely states that an allocator should not disparately affect a carrier's ability to earn a normal return. For example, in the First Report and Order, we stated that, if the total costs of interim number portability were to be divided equally among four competing LECs within a specific service area, the incumbent LEC and three new entrants, the new entrant's share of the cost could be so large, relative to its expected profits, that the new entrant might decide not to enter the market. We also stated that allocating costs on an active telephone number basis would meet the second criteria, because it should not give any carrier a cost advantage, relative to its competitors. 57. In a written ex parte presentation to the Commission, AT&T summarized a number of existing state cost recovery mechanisms in effect at that time. In one method, cost elements required for interim number portability are attributed to the requesting carrier, which is deemed the cost causer, and must be borne by that entity. This method allocates all incremental costs of interim number portability to the new entrant. We have reiterated our earlier conclusion in the First Report and Order that a cost recovery mechanism that imposes the entire incremental costs of interim number portability on a facilities-based new entrant violates our competitive neutrality criteria. New entrants subjected to such a cost recovery mechanism may pursue one of the enforcement options discussed in the First Report and Order and reiterated above. 58. NYNEX suggests that allocating costs on the basis of total telecommunications retail revenues is competitively neutral and should be permitted as an allocator. We agree with NYNEX that such an allocation may meet our competitive neutrality guidelines because, as with allocators based on gross telecommunications revenues, it would not give one service provider an appreciable, incremental cost advantage over another service provider. Under this allocation method, a LEC with a small share of the market's revenues would pay a percentage of the incremental cost of number portability that will be small enough to have no appreciable affect on its ability to compete for a customer. We also reiterate our earlier finding that a variety of cost recovery mechanisms and allocation methods comply with our competitive neutrality criteria. 59. In sum, we reaffirm our determination to allow each state to determine the appropriate cost recovery mechanism for its jurisdiction as long as it meets our competitive neutrality criteria. We recognize that, in the First Report and Order, we tentatively concluded that a cost recovery mechanism for interim number portability that assesses charges based on a carrier's gross revenues less charges carriers paid to other carriers would meet our competitive neutrality guidelines, while in the Third Report and Order, we declined to utilize this allocator for long-term number portability cost recovery. We note, however, that interim number portability and long-term number portability, as implemented pursuant to industry-wide discussions, have very different cost characteristics. A cost recovery method that is appropriate for one may not be suitable for the other. Thus, although we have established one particular cost recovery mechanism for long-term number portability, we decline to issue an exclusive list of acceptable cost recovery methods for interim number portability from which the states may choose to adopt. Instead, states are free to adopt an appropriate cost recovery method, provided it meets our competitive neutrality criteria. As explained in more detail above, if a carrier believes that a LEC's pricing provisions for number portability violate the Commission's competitive neutrality guidelines or violate a state-mandated cost recovery mechanism, it may be able to seek relief from its state commission, this Commission, or an appropriate court. E. Takings 1. Background 60. Several petitioners claim that our cost recovery guidelines for interim number portability do not ensure adequate compensation and therefore constitute an unlawful taking under the Fifth and Fourteenth Amendments to the Constitution. Cincinnati Bell further asserts that it cannot recover its costs of interim number portability from the cost causers because the First Report and Order prohibits such a result. Nor can it recover these costs elsewhere, such as from its end users, according to Cincinnati Bell, because even if authority for end-user rate increases could be obtained from state regulators, the resultant rate increase would place it at a competitive disadvantage relative to new competitors. Cincinnati Bell asserts that such a result would not be competitively neutral. 61. In opposition, MCI states that incumbent LECs "obviously have confused the Commission's articulation of cost allocation principles with end user cost recovery," leading to incorrect assertions that the Commission's rules constitute a taking. AT&T asserts that incumbent LECs "have the same opportunity to recover their share of these costs in retail rates as do [new entrants]." In addition, Sprint asserts that the petitioners have offered no evidence supporting their claims of confiscation. 2. Discussion 62. We reject the claim that the cost recovery guidelines for interim number portability established in the First Report and Order violate the Fifth Amendment's mandate that no private property shall be "taken for public use without just compensation." As discussed below, we conclude that the petitioners' takings claim is premature. More importantly, in examining our cost recovery guidelines in light of criteria articulated by the Supreme Court, we find that the petitioners' takings claim fails on the merits. 63. In the First Report and Order, we clearly stated that, although our guidelines govern state allocation of costs of interim number portability, it is the responsibility of the states to adopt specific cost recovery mechanisms. Although petitioners have broadly stated that they believe that incumbent LECs will not receive adequate compensation as a result of the guidelines established in the First Report and Order, they have not shown the actual impact of the guidelines based on state orders. We conclude, therefore, that, absent an actual rate order under which the impact of the cost recovery guidelines can be evaluated, the petitioners' takings argument is premature. This conclusion is consistent with FPC v. Texaco Inc., in which the Supreme Court held that, [a]ny broadside assertion that indirect regulation will be confiscatory is premature. The consequences of indirect regulation can only be viewed in the entirety of the rate of return allowed on investment, and this effect will be unknown until the Commission has applied its scheme in individual cases over a period of time. 64. Assuming arguendo that the petitioners' takings claim is not premature, we find it without merit. The Supreme Court has made clear that "government may execute laws or programs that adversely affect recognized economic values" and that "given the propriety of governmental power to regulate, it cannot be said that the Takings Clause is violated whenever legislation requires one person to use his or her assets for the benefit of another." In fact, "government hardly could go on if to some extent values incident to property could not be diminished without paying for every such change in the general law." Despite the conclusory assertion of Cincinnati Bell to the contrary, our guidelines will not result in a significant economic impact on incumbent LECs. As noted in the First Report and Order, "the capability to provide number portability through interim methods, such as RCF and DID, already exists in most of today's networks, and no additional network upgrades are necessary." We also determined that "[t]he costs of interim number portability are the incremental costs incurred by a LEC to transfer numbers initially and subsequently forward calls to new service providers." The incremental costs associated with the utilization of pre-existing network functionality for purposes of interim number portability are relatively small. 65. In Duquesne Light Co. v. Barasch, the Supreme Court rejected a takings claim on the grounds that it was permissible to preclude certain costs from inclusion in an electric utility's rate base because the overall rate was within constitutional requirements. A rate is too low for constitutional purposes, according to the Court, if it is "so unjust as to destroy the value of [the] property for all the purposes for which it was acquired." The Court held: 'It is not the theory, but the impact of the rate order which counts.' . . . The Constitution protects the utility from the net effect of the rate order on its property. Inconsistencies in one aspect of the methodology have no constitutional effect on the utility's property if they are compensated by countervailing factors in some other aspect. 66. In determining that the overall impact of the rate order was not constitutionally objectionable and that the takings clause was not violated, the Court in Duquesne Light Company took note of the fact that [n]o argument has been made that these slightly reduced rates jeopardize the financial integrity of the companies, either by leaving them insufficient operating capital or by impeding their ability to raise future capital. Nor has it been demonstrated that these rates are inadequate to compensate current equity holders for the risk associated with their investments . . . . Similarly, no showing has been made that the cost recovery guidelines at issue here will "jeopardize the financial integrity" of incumbent LECs, nor have petitioners demonstrated that the cost recovery guidelines will result in state rate orders that are inadequate to compensate incumbent LEC investors "for the risk associated with their investments." 67. Having already provisioned their switches with enough capacity to carry all of their customers' incoming and outgoing calls, incumbent LECs should incur no additional costs with respect to switch capacity when losing customers and using RCF to provide number portability. Although RCF will require additional switch capacity -- and an increase in transport costs -- to process incoming calls, this effect is offset by the fact that the incumbent LEC will no longer handle the outgoing calls originated by the ported customer. As a result, little or no change in the level of incumbent LEC switching and transport costs per ported number should occur. We conclude, therefore, that the additional incremental costs of interim number portability to incumbent LECs will be extremely small. Additionally, incumbent LECs may be able to recover some portion of their costs from other carriers through state-mandated cost recovery mechanisms. In light of the fact that revenues for all incumbent LECs have been reported to be in excess of $103 billion per year, and the additional incremental costs of interim number portability will likely be a de minimis percentage of this total, we find that such costs are not significant for purposes of a Fifth Amendment takings claim. Additionally, as discussed above, if a carrier believes that a LEC's pricing provisions for number portability violate the Commission's competitive neutrality guidelines or violate a state-mandated cost recovery mechanism, a carrier has a variety of ways it may seek relief. 68. Moreover, as the Supreme Court has stated, "[t]hose who do business in the regulated field cannot object if the legislative scheme is buttressed by subsequent amendments to achieve the legislative end." Based on the extensive public debate that preceded enactment of the 1996 Act, it cannot be said that investors lacked adequate notice of possible changes to the Communications Act, including the number portability requirement at issue here. Indeed, while courts have readily found that a taking has occurred when interference with property rights can be characterized as a physical invasion or permanent appropriation, such a finding has not been reached when the challenged interference arises from a public program adjusting the benefits and burdens of economic life to promote the common good. Our number portability cost recovery guidelines, which are designed to facilitate local telephone competition and thereby benefit all consumers of telecommunications services, falls squarely into the latter category. In short, the petitioners have failed to demonstrate that the Commission's cost recovery guidelines violate the Fifth and Fourteenth Amendments. F. Retroactive Application of Cost Recovery Guidelines for Interim Number Portability 1. Background 69. ACSI asks the Commission to allow new entrants to recover retroactively number portability costs paid to incumbent LECs in excess of that required pursuant to the guidelines set forth in the First Report and Order. Specifically, ACSI requests that the Commission provide for a true-up of rates paid in excess of those required pursuant to the First Report and Order as far back as February 8, 1996, the date the 1996 Act became effective, or the date number portability was first provided to the new entrant, whichever is later. In the alternative, ACSI proposes that the Commission's cost recovery guidelines be applied as of the effective date of the First Report and Order, regardless of when a state adopts a specific cost recovery mechanism. 70. Several incumbent LECs oppose ACSI's request. Bell Atlantic and BellSouth argue that Congress did not intend that cost recovery rules for interim number portability be applied retroactively, and that recognized principles of administrative law and state statutes do not allow for retroactive application of these Commission guidelines. BellSouth also argues that retroactive application of rates to interim arrangements that have already been negotiated would improperly take away or impair vested rights acquired under existing law. 2. Discussion 71. We deny ACSI's request that our cost recovery rules for interim number portability be applied to number portability provided prior to the adoption and effective date of those rules. In section 251(e)(2) of the Act, Congress required that "the cost of establishing . . . number portability shall be borne by all telecommunications carriers on a competitively neutral basis as determined by the Commission." The plain language of this section demonstrates that, while establishing the parameters on how number portability costs are to be allocated (i.e., on a competitively neutral basis) and who should pay such costs (i.e., all telecommunications carriers), Congress intended that specific cost recovery rules were to be established by the Commission at some point in time following the enactment of the 1996 Act. We reject ACSI's argument that, because the number portability provision became effective on February 8, 1996, ACSI is merely seeking to have the Commission give effect to this pre- existing requirement. Section 251(e)(2) is not self-executing, but is dependent on Commission action. We see no basis in the record for applying the rules adopted pursuant to section 251(e) retroactively as requested by ACSI. 72. Our cost recovery guidelines for interim number portability became effective August 26, 1996, however, and we agree that it may be appropriate for states to provide a true-up of interim number portability costs from that date through the effective date of a state-approved cost recovery program. To provide the states with the flexibility during the interim period to continue using a variety of cost recovery approaches, we did not adopt a fixed cost recovery mechanism. Instead, we adopted guidelines for the states to follow in mandating cost recovery for interim number portability. We recognize, however, that a significant period of time may have elapsed before each state adopted a cost recovery mechanism for interim number portability. Thus, absent a true-up from the effective date of our First Report and Order, the benefits of a competitively neutral cost recovery mechanism for interim number portability may be lost for many new entrants if they have been paying cost recovery amounts in excess of what would be allowed under the competitive guidelines of the First Report and Order. We strongly encourage states to review their cost recovery mechanisms. Consistent with our competitive neutrality principles, we encourage states to adopt a true-up of amounts paid for interim number portability between August 26, 1996 and the date the state-approved cost recovery program takes effect, to the extent such amounts exceed what would have been paid under the state-approved plan, had it been in effect. G. Terminating Access Charges 1. Background 73. In the First Report and Order, we stated that terminating access charges for calls forwarded from an incumbent LEC to a competing provider through the use of a interim number portability method should be shared between the incumbent LEC, which is the donor switch, and the terminating switch carrier. We stated that the "overarching principle" in such billing arrangements was that carriers were to share in the access revenues for a ported call, because neither the incumbent LEC forwarding carrier nor the terminating carrier provides all the facilities used to terminate a ported call. We also held that incumbent LECs and new entrants should assess their terminating access charges on IXCs through meet- point billing arrangements. 74. MCI asserts that, regardless of what type of billing arrangement is adopted, IXCs should not be charged increased access charges as a result of the additional call routing and associated costs necessary to terminate a call to a ported number under interim number portability measures. MCI argues that such additional routing costs should be treated as the incremental costs of interim number portability, should be treated in a competitively neutral manner, and should not all be imposed on IXCs. MCI also asks that we clarify which specific costs involved in the routing of a call to a ported number would be subject to such a cost allocation method. GTE, on the other hand, argues that any additional switching and transport costs incurred as a result of the porting of numbers via interim number portability are the costs of access, not number portability, and should be borne by the IXC as part of access payments assessed by the LECs. Bell Atlantic agrees with GTE's proposal with some modifications and also asks us to clarify that, to prevent double recovery on the part of the terminating switch carrier, new entrants receiving a portion of access charges from IXCs for terminating calls may not also impose terminating charges on the incumbent LEC. 2. Discussion 75. IXCs currently pay LECs access charges for terminating calls on LEC switches. In a competitive local exchange market, an IXC terminating a call to a long distance customer that has ported his or her number to a new entrant will terminate the call to the incumbent LEC's switch, which then will forward it to the new entrant's switch utilizing interim number portability measures. Under this scenario, incumbent LECs and new entrants both provide facilities used to terminate calls to ported numbers using interim number portability. In the First Report and Order, we required both forwarding and terminating carriers to assess charges on IXCs for terminating access through meet-point billing arrangements. In requiring that these revenues be shared, we left to the carriers whether "each issues a bill for access on a ported call, or whether one of them issues a bill to the IXCs covering all of the transferred calls and shares the correct portion of the revenues with the other carriers involved." We further provided that, if carriers determine it more efficient to issue individual bills, the forwarding carrier must "provide the terminating carrier with the necessary information to permit the terminating carrier to issue a bill." 76. In forwarding a call to a ported number, local exchange carriers may incur additional costs that are specific to number portability. Contrary to GTE's argument, we find that these additional costs should not be included in the access charges paid by IXCs for terminating long-distance calls. We agree with MCI that any additional routing and transport costs that are a result of interim number portability are incremental costs of providing number portability. Such costs may be recovered through a local number portability cost recovery mechanism, or borne by the local exchange carrier that forwards the call, as determined by the state, on a competitively neutral basis. Because of their status as telecommunications carriers, IXCs may be required to contribute to the costs of interim number portability through the cost recovery mechanism adopted by state commissions. We also agree with Bell Atlantic, and clarify, that, to prevent double recovery on the part of the terminating switch carrier, new entrants receiving a portion of access charges from IXCs for terminating calls may not also impose terminating charges on the incumbent LEC. 77. As discussed in the First Report and Order, carriers may incur incremental costs for forwarding calls when utilizing interim number portability. MCI requests that we clarify what is included in these incremental costs and, thus, what should be shared by all carriers on a competitively neutral basis. The incremental costs of providing number portability via RCF, DID, or other comparable technically feasible measures are the costs that the forwarding carrier incurs in forwarding the call that it would not incur if it did not forward the call. As mentioned in the First Report and Order, such costs may differ depending on where the call originates within the network, and on the type of technology utilized to forward the call. For this reason, we decline to list each potential additional cost that may be incurred and who should be allowed to bill for those incremental costs. 78. Finally, in response to a Bell Atlantic request, we note that we have "not foreclose[d] arrangements in which one exchange carrier bills the entire amount [of access charges] and remits the other exchange carrier its share." The First Report and Order does not require that the carrier that owns the donor switch and the carrier that owns the terminating switch each issue a separate bill to the IXC. The First Report and Order states that "it is up to the carriers whether they each issue a bill for access on a ported call, or whether one of them issues a bill to the IXCs covering all of the transferred calls and shares the correct portion of the revenues with the other carriers involved." Thus, either the carrier that owns the donor switch or the carrier that owns the terminating switch may bill the entire amount of access charges and remit to the other local exchange carrier its share of the invoiced charges. In short, the First Report and Order does not prohibit carriers who mutually agree from sending one bill to the IXC and then splitting the access charges appropriately between themselves. H. Modification of Billing Systems to Accommodate the Sharing of Access Charges in Meet-Point Billing Type Arrangements 1. Background 79. In the First Report and Order, we concluded that meet-point billing between neighboring incumbent LECs provides the appropriate model for the proper access billing arrangement for interim number portability. In complying with the Commission's directive that forwarding and terminating carriers share access revenues received from IXCs for ported calls through meet-point billing arrangements, GTE argues that LECs should not be required to modify their billing systems. GTE asserts that existing billing systems and switch software do not have the capability to identify and link the records of the interexchange portion of the calls (from the IXC to the forwarding LEC) with the inter- office portion of the call (from the forwarding LEC to the terminating LEC). Time Warner argues that "the Commission should permit carriers to divide access charge revenues [based on traffic samples or total access charges per line] while interim solutions are deployed." When carriers cannot agree on a specific meet-point arrangement, GTE suggests that the parties look to "mediation or arbitration from the state PUC, informal assistance from the Commission's staff, or other forms of alternative dispute resolution." 2. Discussion 80. The First Report and Order did not specify whether carriers must modify their billing systems in order to accommodate the requirement that access charges be shared in meet-point billing type arrangements. The First Report and Order requires that the forwarding carrier provide "the necessary information to permit the terminating carrier to issue a bill," but does not specify whether carriers have to make modifications in their billing systems in order to do so. In general, interim number portability arrangements will be in place for a limited period of time; indeed, long-term number portability currently is available in many areas of the country. We thus agree with GTE and Time Warner that it would not be cost effective to require carriers to modify their billing systems to accommodate interim number portability. We do not require carriers to modify their billing systems to track and record the details of every call. We do require, however, that carriers adopt some method of implementing our requirement to share terminating access revenues, by, for example, providing information about PIU (percent interstate usage), traffic samples, or total access charges per line. 81. If carriers cannot agree on appropriate meet-point billing arrangements, we agree with GTE that this issue may be included in mediation or arbitration before a state commission, or be subject to other dispute resolution processes chosen by the carriers involved. We reject GTE's suggestion, however, that parties seek informal assistance from the Commission as a means of resolving meet-point billing arrangement disputes. Also, if a meet-point billing arrangement dispute arises in the context of an interconnection request made pursuant to section 251, the 1996 Act clearly places the responsibility for arbitration and/or mediation of unresolved issues on the state commissions. IV. SUPPLEMENTAL REGULATORY FLEXIBILITY ANALYSIS 82. As required by the Regulatory Flexibility Act (RFA), an Initial Regulatory Flexibility Analysis (IRFA) was incorporated in the First Report and Order. In addition, the Commission sought comments on the proposals included in the Initial Regulatory Flexibility Analysis (IRFA) in the First Report and Order. The Commission incorporated a Final Regulatory Flexibility Analysis in the Third Report and Order. The supplemental Regulatory Flexibility Analysis in this Memorandum Opinion and Order is as follows: 83. Need for and Objectives of Action: The Commission, in compliance with sections 251(b)(2), 251(d)(1), and 251(e)(2) of the Communications Act of 1934, as amended by the Telecommunications Act of 1996, adopted rules and procedures in the Third Report and Order that are intended to ensure the implementation of telephone number portability with the minimum regulatory and administrative burden on telecommunications carriers. Congress has recognized that number portability will lower barriers to entry and promote competition in the local exchange marketplace. To prevent the cost of number portability from itself becoming a barrier to local competition, section 251(e)(2) requires that "[t]he cost of establishing telecommunications numbering administration arrangements and number portability shall be borne by all telecommunications carriers on a competitively neutral basis as determined by the Commission." The Bureau, pursuant to authority delegated by the Commission in the Third Report and Order, issued this Memorandum Opinion and Order to address issues relating to cost recovery for interim number portability. Interim number portability utilizes an interim method to allow consumers to change carriers while retaining their telephone numbers before long-term number portability becomes available. 84. Summary of Significant Issues Raised by the Public Response to the FRFA: There were no comments submitted specifically in response to the Regulatory Flexibility Analysis. In the Third Report and Order, the Commission adopted rules and regulations to ensure that the way all telecommunications carriers, including small entities, bear the costs of number portability does not significantly affect any carrier's ability to compete with other carriers for customers in the marketplace. This Memorandum Opinion and Order addresses issues relating to cost recovery for interim number portability. This Memorandum Opinion and Order on Reconsideration affirms the Commission's conclusion that it has the authority to establish cost recovery guidelines for interim number portability. Second, the Commission rejects claims that the cost recovery guidelines for interim number portability set forth in the First Report and Order are arbitrary and capricious, or constitute an unconstitutional taking. The Memorandum Opinion and Order denies the request that these cost recovery guidelines be applied retroactively. The Memorandum Opinion and Order affirms the Commission's earlier decision to adopt general cost recovery guidelines for interim number portability while allowing states flexibility to continue using a variety of cost recovery approaches that are consistent with our guidelines. Finally, the Memorandum Opinion and Order clarifies issues relating to terminating access charges, modification of billing systems, and the competitive neutrality of certain cost recovery allocators, as each of these issues relates to interim number portability. 85. Description and Estimate of Number of Small Businesses to Which Actions Will Apply: The Regulatory Flexibility Act generally defines the term "small business" as having the same meaning as the term "small business concern" under the Small Business Act. A small business concern is one which: (1) is independently owned and operated; (2) is not dominant in its field of operation; and (3) satisfies any additional criteria established by the Small Business Administration (SBA). According to SBA's regulations, entities engaged in the provision of telephone service may have a maximum of 1,500 employees in order to qualify as a small business concern. This standard also applies in determining whether an entity is a small business for purposes of the RFA. 86. As described in the previous Regulatory Flexibility Analysis contained in the Third Report and Order, our rules governing number portability cost recovery apply to all telecommunications carriers, including incumbent LECs, new LEC entrants, and IXCs, as well as cellular, broadband PCS, and covered SMR providers. Small incumbent LECs subject to these rules are either dominant in their filed of operations or are independently owned and operated, and, consistent with the Commission's prior practice, are excluded from the definition of "small entities" and "small business concerns." Accordingly, our use of the terms "small entities" and "small businesses" does not encompass small incumbent LECs. Out of an abundance of caution, however, for regulatory flexibility analysis purposes, we will consider small incumbent LECs within this analysis and use the term "small incumbent LECs" to refer to any incumbent LECs that arguably might be defined by the SBA as "small business concerns." 87. Insofar as our rules apply to all telecommunications carriers, they may have an economic impact on a substantial number of small businesses, as well as on small incumbent LECs. The rules may have an impact upon new entrant LECs and small incumbent LECs, as well as cellular, broadband PCS, and covered SMR providers. Based upon data contained in the most recent census and a report by the Commission's Common Carrier Bureau, we estimate that 2,100 small entities could be affected. We have derived this estimate based on the following analysis. 88. According to the 1992 Census of Transportation, Communications, and Utilities, there were approximately 3,469 firms with under 1,000 employees operating under the Standard Industrial Classification (SIC) category 481 -- Telephone. See U.S. Dept. of Commerce, Bureau of the Census, 1992 Census of Transportation, Communications, and Utilities (issued May 1995). Many of these firms are the incumbent LECs and, as noted above, would not satisfy the SBA definition of a small business because of their market dominance. There were approximately 1,350 LECs in 1995. Industry Analysis Division, FCC, Carrier Locator: Interstate Service Providers at Table 1 (Number of Carriers Reporting by Type of Carrier and Type of Revenue) (December 1995). Subtracting this number from the total number of firms leaves approximately 2,119 entities which potentially are small businesses which may be affected. This number contains various categories of carriers, including small incumbent LECs, competitive access providers, cellular carriers, interexchange carriers, mobile service carriers, operator service providers, pay telephone operators, PCS providers, covered SMR providers, and resellers. Some of these carriers, although not dominant, may not meet the other requirement of the definition of a small business because they are not "independently owned and operated." For example, a PCS provider that is affiliated with a long distance company with more than 1,500 employees would not meet the definition of a small business. Another example would be if a cellular provider is affiliated with a dominant LEC. Thus, a reasonable estimate of the number of "small businesses" affected by this Memorandum Opinion and Order would be approximately 2,100. 89. Description of Projected Reporting, Recordkeeping and Other Compliance Requirements of the Rules: The Memorandum Opinion and Order provides guidance regarding issues relating to cost recovery for interim number portability. This Memorandum Opinion and Order on Reconsideration affirms the Commission's conclusion that it has the authority to establish cost recovery guidelines for interim number portability. Second, the Commission rejects claims that the cost recovery guidelines for interim number portability set forth in the First Report and Order are arbitrary and capricious, or constitute an unconstitutional taking. The Memorandum Opinion and Order denies the request that these cost recovery guidelines be applied retroactively. The Memorandum Opinion and Order affirms the Commission's earlier decision to adopt general cost recovery guidelines for interim number portability while allowing states flexibility to continue using a variety of cost recovery approaches that are consistent with our guidelines. 90. The Memorandum Opinion and Order also confirms an earlier Commission decision that a cost recovery mechanism based on a carrier's gross revenues is an acceptable means of allocating costs among carriers. The Memorandum Opinion and Order states that no additional recordkeeping will be required for this option of recordkeeping, because a such gross revenue reporting is readily available through such things as tax filings, annual reports and SEC filings, which are developed for other purposes. The Memorandum Opinion and Order does not require carriers to adopt any one billing arrangement for sharing costs when they forward calls while utilizing interim number portability. The Memorandum Opinion and Order allows carriers to determine the best method of splitting these costs between them, but requires them adopt some method of sharing terminating access revenues. Additionally, the Memorandum Opinion and Order affirms the Commission's earlier determination that meet-point billing between neighboring incumbent LECs provides the appropriate model for the proper access billing arrangement for interim number portability, but states that carriers are not required to modify their billing systems to track and record the details of every call. 91. Steps Taken to Minimize Impact on Small Entities Consistent with Stated Objectives: The record in this proceeding indicates that the need for customers to change their telephone numbers when changing local service providers is a barrier to local competition. Requiring number portability, and ensuring that all telecommunications carriers bear the costs of number portability on a competitively neutral basis, will make it easier for competitive providers, many of which may be small entities, to enter the market. The Bureau has attempted to keep regulatory burdens on all local exchange carriers to a minimum to ensure that the public receives the benefits of the expeditious provision of service provider number portability in accordance with the statutory requirements. For example, the Memorandum Opinion and Order affirms the Commission's earlier determination that meet-point billing between neighboring incumbent LECs provides the appropriate model for the proper access billing arrangement for interim number portability, but states that carriers are not required to modify their billing systems to track and record the details of every call. Such determination recognizes that number portability will cause some carriers, including small entities, to incur costs that they would not ordinarily have incurred in providing telecommunications services, but attempts to keep such costs to a minimum. 92. Report to Congress: The Commission will send a copy of this Memorandum Opinion and Order, including this supplemental RFA, in a report to Congress pursuant to the Small Business Regulatory Enforcement Fairness Act of 1996. In addition, the Commission will send a copy of the Third Report and Order and this supplemental RFA (or summaries thereof) to the Chief Counsel for Advocacy of the Small Business Administration. A copy of this Memorandum Opinion and Order and supplemental RFA (or summaries thereof) will also be published in the Federal Register. 93. Paperwork Reduction Act: This Memorandum Opinion and Order provides guidance regarding issues relating to cost recovery for interim number portability. The Third Report and Order concluded that carriers may recover the portion of their number portability joint costs that is demonstrably an incremental cost incurred in the provision of number portability. The Third Report and Order also requires incumbent LECs that choose to recover their carrier-specific costs directly related to providing number portability to use federally-tariffed end-user charges. The Commission also concluded that carriers may identify only those incremental overheads that they can demonstrate were incurred specifically in the provision of number portability. In this Memorandum Opinion and Order, the Commission affirms its earlier decision that it has the authority to establish cost recovery guidelines for interim number portability. Second, the Commission rejects claims that the cost recovery guidelines for interim number portability set forth in the First Report and Order are arbitrary and capricious, or constitute an unconstitutional taking. The Memorandum Opinion and Order denies the request that these cost recovery guidelines be applied retroactively. The Memorandum Opinion and Order affirms the Commission's earlier decision to adopt general cost recovery guidelines for interim number portability while allowing states flexibility to continue using a variety of cost recovery approaches that are consistent with our guidelines. The Memorandum Opinion and Order also confirms an earlier Commission decision that a cost recovery mechanism based on a carrier's gross revenues is an acceptable means of allocation costs among carriers. The Memorandum Opinion and Order states that no additional recordkeeping will be required for this option of recordkeeping, because such a gross revenue reporting is readily available through such things as tax filings, annual reports and SEC filings, which are developed for other purposes. The Memorandum Opinion and Order does not require carriers to adopt any one billing arrangement for sharing costs when they forward calls while utilizing interim number portability. The Memorandum Opinion and Order allows carriers to determine the best method of splitting these costs between them, but requires them adopt some method of sharing terminating access revenues. Additionally, the Memorandum Opinion and Order affirms the Commission's earlier determination that meet-point billing between neighboring incumbent LECs provides the appropriate model for the proper access billing arrangement for interim number portability, but states that carriers are not required to modify their billing systems to track and record the details of every call. These information collection requirements are contingent upon approval of the Office of Management and Budget (OMB). V. ORDERING CLAUSES 94. Accordingly, IT IS ORDERED that pursuant to authority contained in sections 1, 2, 4(i), 201-205, 215, 251(b)(2), 251(e)(2), and 332 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 152, 154(i), 201-205, 215, 251(b)(2), 251(e)(2), and 332, and Parts 1, 20 and 52 of the Commission's rules, 47 C.F.R.  1.106, 20, and 52, the Petitions for Reconsideration and/or Clarification ARE GRANTED to the extent indicated herein and otherwise ARE DENIED. 95. IT IS FURTHER ORDERED that the Motion to Accept Late-filed Comments of Telecommunications Resellers Association and the Motion to Accept Late-Filed Reply Comments of U S WEST ARE GRANTED. 96. IT IS FURTHER ORDERED that the Commission's Office of Public Affairs Reference Operations Division SHALL SEND a copy of this Memorandum Opinion and Order including the supplemental Regulatory Flexibility Analysis to the Chief Counsel for Advocacy of the Small Business Administration. FEDERAL COMMUNICATIONS COMMISSION Magalie Roman Salas Secretary APPENDIX A - LIST OF PARTIES Petitions for Reconsideration/Clarification (filed 8/26/96): AirTouch Communications, Inc. [AirTouch] American Communications Services, Inc. [ACSI] American Mobile Telecommunications, Inc. [AMTA] Bell Atlantic Bell Atlantic NYNEX Mobile, Inc. [BANM] BellSouth Corporation and BellSouth Telecommunications, Inc. [BellSouth] Cellular Telecommunications Industry Association [CTIA] Cincinnati Bell Telephone Company [Cincinnati Bell] GTE Service Corporation [GTE] John Staurulakis, Inc. [JSI] KMC Telecom, Inc. [KMC] MCI Telecommunications Corporation and MCIMetro [MCI] National Exchange Carrier Association, Inc. [NECA] National Telephone Cooperative Association and Organization for the Promotion and Advancement of Small Telecommunications Companies [NTCA/OPASTCO] Nextel Communications, Inc. [Nextel] NEXTLINK Communications LLC [NEXTLINK] NYNEX Telephone Companies [NYNEX] Pacific Telesis Group, Pacific Bell, Nevada Bell, Pacific Bell Mobile Services [PacTel] SBC Communications Inc. [SBC] United States Telephone Association [USTA] U S WEST, Inc. [U S WEST] Petitions for Reconsideration/Clarification (late-filed 8/30/96): Small Business in Telecommunications, Inc. [SBT] Oppositions/Comments to Petitions for Reconsideration (filed 9/27/96): ALLTEL Telephone Services Corporation [ALLTEL] AT&T Corp. [AT&T] Association for Local Telecommunications Services [ALTS] Bell Atlantic BellSouth CTIA Cincinnati Bell GTE IntelCom Group (USA), Inc. [ICG] MCI NEXTLINK NYNEX RAM Mobile Data USA Limited Partnership [RMD] Rural Telecommunications Group [RTG] PacTel Sprint Corporation [Sprint] Time Warner Communications Holdings, Inc. [Time Warner] USTA Oppositions/Comments to Petitions for Reconsideration (late-filed 9/30/96): Telecommunications Resellers Association [TRA] Replies (filed 10/7/96): Ameritech NEXTLINK Teleport Communications Group [TCG] Rural Cellular Association [RCA] NTCA/OPASTCO Replies (filed 10/10/96): ACSI Bell Atlantic BellSouth Cincinnati Bell GTE MCI NYNEX PacTel SBC USTA U S WEST SEPARATE STATEMENT OF COMMISSIONER HAROLD FURCHTGOTT-ROTH Re: Telephone Number Portability (CC Docket No. 95-116) I support today's Order addressing various petitions for reconsideration and/or clarification of the Commission's interim number portability rules. I write separately to express my fervent support for the involvement of the State commissions in determining the method and timing of cost recovery for interim number portability. Given the States' expertise in factors that affect local competition, I find their participation in such matters tremendously valuable. As I have stated previously, I also would have supported this approach in the context of long term number portability where I believe the Commission missed a similar opportunity to benefit from the participation of the States. I encourage the Commission to consult early and often with the States in all other regulatory matters.