Sec. 61.45  Adjustments to the PCI for Local Exchange Carriers.

    (a) Local exchange carriers subject to price cap regulation shall 
file adjustments to the PCI for each basket as part of the annual price 
cap tariff filing, and shall maintain updated PCIs to reflect the effect 
of mid-year exogenous cost changes.
    (b) Adjustments to local exchange carrier PCIs for the baskets 
designated in Sec. 61.42(d) (2), (3), (4), (5), and (6) shall be made 
pursuant to the formula set forth in Sec. 61.44(b), and as further 
explained in Sec. 61.44 (e), (f), (g), and (h).
    (1) Notwithstanding the value of X defined in Sec. 61.44(b), the X 
value applicable to the baskets specified in Sec. 61.42(d) (2), (3), and 
(6) shall be 6.5%.
    (2) For the basket specified in Sec. 61.42(d)(4), the value of X, 
for all local exchange carriers subject to price cap regulation, shall 
be 3.0%.
    (3) Notwithstanding the value of X defined in Sec. 61.44(b), the 
value of X applicable to the basket specified in Sec. 61.42(d)(5) shall 
be 0%.
    (c)(1) Subject to paragraphs (c)(2) and (e) of this section, 
adjustments to local exchange carrier PCIs for the basket designated in 
Sec. 61.42(d)(1) shall be made pursuant to the following formula:

PCI1=PCIt-1[1+w[(GDP-PI-X-(g/2))/(1+(g/
2))]+ Z/R]
where

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GDP-PI=the percentage change in the GDP-PI between the quarter ending 
six months prior to the effective date of the new annual tariff and the 
corresponding quarter of the previous year,
X=productivity factor of 6.5%,
g=the ratio of minutes of use per access line during the base period, to 
minutes of use per access line during the previous base period, minus 1,
 Z=the dollar effect of current regulatory changes when 
compared to the regulations in effect at the time the PCI was updated to 
PCIt-1, measured at base period level of operations,
R=base period quantities for each rate element ``i'', multiplied by the 
price for each rate element ``i'' at the time the PCI was updated to 
PCIt-1,
w=R+ Z, all divided by R,
PCIt=the new PCI value, and
PCIt-1=the immediately preceding PCI value.

    (2) The formula set forth in paragraph (c)(1) of this section shall 
be used by a local exchange carrier subject to price cap regulation only 
if that carrier is imposing a carrier common line charge pursuant to 
Sec. 69.154 of this chapter. Otherwise, adjustments to local exchange 
carrier PCIs for the basket designated in Sec. 61.42(d)(1) shall be made 
pursuant to the formula set forth in Sec. 61.44(b), and paragraphs (i) 
and (j) of this section, and as further explained in Sec. 7thnsp;61.44 
(e), (f), (g), and (h). For the purposes of this paragraph, and 
notwithstanding the value of X defined in Sec. 61.44(b), the X value 
applicable to the basket specified in Sec. 7thnsp;61.42(d)(1), shall be 
6.5%.
    (d) The exogenous cost changes represented by the term `` 
Z'' in the formula detailed in paragraphs (b) and (c) of this section 
shall be limited to those cost changes that the Commission shall permit 
or require by rule, rule waiver, or declaratory ruling.
    (1) Subject to further order of the Commission, those exogenous 
changes shall include cost changes caused by:
    (i) The completion of the amortization of depreciation reserve 
deficiencies;
    (ii) Such changes in the Uniform System of Accounts, including 
changes in the Uniform System of Accounts requirements made pursuant to 
Sec. 32.16 of this chapter, as the Commission shall permit or require be 
treated as exogenous by rule, rule waiver, or declaratory ruling.
    (iii) Changes in the Separations Manual;
    (iv) Changes to the level of obligation associated with the Long 
Term Support Fund and the Transitional Support Fund described in 
Sec. 69.612;
    (v) The reallocation of investment from regulated to nonregulated 
activities pursuant to Sec. 64.901;
    (vi) Such tax law changes and other extraordinary cost changes as 
the Commission shall permit or require be treated as exogenous by rule, 
rule waiver, or declaratory ruling.
    (vii) Retargeting the PCI to the level specified by the Commission 
for carriers whose base year earnings are below the level of the lower 
adjustment mark.
    (viii) Inside wire amortizations.
    (ix) The completion of amortization of equal access expenses.
    (2)(i) Local exchange carriers specified in Sec. 61.41 (a)(2) or 
(a)(3) shall also make such temporary exogenous cost changes as may be 
necessary to reduce PCIs to give full effect to any sharing of base 
period earnings required by the sharing mechanism set forth in the 
Commission's Second Report and Order in Common carrier Docket No. 87-
313, FCC 90-314, adopted September 19, 1990. Such exogenous cost changes 
shall include interest, computed at the prescribed rate of return, from 
the day after the end of the period giving rise to the adjustment, to 
the midpoint of the period when the adjustment is in effect.
    (ii) Local exchange carriers specified in Sec. 61.41(a)(2) or (a)(3) 
shall not be subject to the sharing mechanism set forth in the 
Commission's Second Report and Order in Common Carrier Docket No. 87-
313, FCC 90-314, adopted September 19, 1990, with respect to earnings 
accruing on or after July 1, 1997/ This paragraph has no effect on any 
sharing obligation of any local exchange carrier relating to earnings 
accrued before July 1, 1997.
    (3) Local exchange carriers specified in Sec. 61.41 (a)(2) or (a)(3) 
of this part

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shall, in their annual access tariff filing, recognize all exogenous 
cost changes attributable to modifications during the coming tariff year 
in the obligations specified in Sec. 61.45(d)(1)(iv) as well as those 
changes attributable to alterations in their Subscriber Plant Factor and 
the Dial Equipment Minutes factor, and completions of inside wire 
amortizations and reserve deficiency amortizations.
    (4) Exogenous cost changes shall be apportioned on a cost-causative 
basis between price cap services as a group, and excluded services as a 
group. Exogenous cost changes thus attributed to price cap services 
shall be further apportioned on a cost-causative basis among the price 
cap baskets.
    (e) The ``w[(GDP-PI-X-[g/2))/(1+(g/2))]'' component of the PCI 
formula contained in paragraph (c) of this section shall be employed 
only in the adjustment made in connection with the annual price cap 
filing.
    (f) The exogenous costs caused by new services subject to price cap 
regulation must be included in the appropriate PCI calculations under 
paragraph (c) of this section beginning at the first annual price cap 
tariff filing following completion of the base period in which such 
services are introduced.
    (g) In the event that a price cap tariff becomes effective, which 
tariff results in an API value (calculated pursuant to Sec. 61.46) that 
exceeds the currently applicable PCI value, the PCI value shall be 
adjusted upward to equal the API value.
    (h) [Reserved]
    (i)(1) Notwithstanding the provisions of paragraphs (b) and (c) of 
this section, and subject to the limitations of paragraph (j) of this 
section, price cap local exchange carriers that are recovering 
interconnection charge revenues through per-minute rates pursuant to 
Sec. 69.124 or Sec. 69.155 of this chapter shall targt, to the extent 
necessary to eliminate the recovery of any residual interconnection 
charge revenues through per-minute rates, any PCI reductions associated 
with the baskets designated in Sec. 61.42(d) (1) and (2) that result 
from the application of the formula in Sec. 61.45(c) and, pursuant to 
Sec. 61.45(b), application of the formula in Sec. 61.44(b) as further 
explained in Sec. 61.44 (e), (f), (g), and (h), to the PCI for the 
basket designated in Sec. 61.42(d)(3), with no adjustment being made to 
the PCIs for the baskets designated in Sec. 61.42(d) (1) and (2) as a 
result of the application of the formulas in Secs.  61.44(b) and 
61.45(c). These reductions are to be made after the adjustment is made 
to the PCI for the basket designated in Sec. 61.42(d)(3) resulting from 
the application of the formula in Sec. 61.44(b), as further explained in 
Sec. 61.44 (e), (f), (g), and (h).
    (2) Notwithstanding the provisions of paragraph (b) of this section, 
and subject to the limitations of paragraph (j) of this section, price 
cap local exchange carriers that are recovering interconnection charge 
revenues through per-minute rates pursuant to Sec. 69.155 of this 
chapter shall target, to the extent necessary to eliminate the recovery 
of any residual interconnection charge revenues through per-minute 
rates, any PCI reduction associated with the basket designated in 
Sec. 61.42(d)(6) that result from the application, pursuant to 
Sec. 61.45(b), of the formula in Sec. 61.44(b), as further explained in 
Sec. 61.44 (e), (f), (g), and (h), to the PCI for the basket designated 
in Sec. 61.42(d)(3), with no adjustment being made to the PCIs for the 
basket designated in Sec. 61.42(d)(6) as a result of the application of 
the formula in Sec. 61.44(b). This reduction it to be made after any 
adjustment made pursuant to paragraph (i)(1) of this section.
    (3) Through December 31, 1997, the reduction in the PCI for the 
basket designated in Sec. 61.42(d)(3) that results from paragraph (i)(1) 
of this section shall be determined by diciding the sum of the dollar 
effects of the PCI reductions that would have applied to the baskets 
designated in Sec. 61.42(d)(1) and (d)(2) except for the provisions of 
paragraph (i)(1) of this section by the dollar amount associated with 
the PCI for the basket designated in Sec. 61.42(d)(3), and multiplying 
the PCI for the basket designated in Sec. 61.42(d)(3) by one minus the 
resulting ratio.
    (4) Effective January 1, 1998, the reduction in the PCI for the 
basket designated in Sec. 61.42(d)(3) that results from paragraphs 
(i)(1) and (i)(2) of this section shall be determined by dividing the 
sum of the dollar effects of the PCI

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reductions that would have been applied to the baskets designated in 
Sec. 61.42(d)(1), (d)(2), and (d)(6), except for the provisions of 
paragraphs (i)(1) and (i)(2) of this section, by the dollar amount 
associated with the PCI for the basket designated in Sec. 61.42(d)(3), 
and multiplying the PCI for the basket designated in Sec. 61.42(d)(3) by 
one minus the resulting ratio.
    (j) In determining the extent of the targeting that shall occur 
pursuant to paragraphs (i)(1) and (i)(1) of this section, local exchange 
carriers shall (1) compute their anticipated residual interconnection 
charge amount by excluding revenues that are expected to be reallocated 
to cost-causative facilities-based charges in the future. To determine 
interconnection charge amounts so excluded in connection with the July 
1, 1997 tariff filings, the following local exchange carriers shall use 
as an estimate of the residual interconnection charge revenues the 
specified residual interconnection charge percentage: NYNEX, 77.63 
percent; BellSouth, 56.93 persent; U S West, 59.14 percent; Bell 
Atlantic, 63.96 percent; Southwestern Bell Telephone, 69.11 percent; and 
Pacific Bell and Nevada Bell, 53.52 percent. Each remaining price cap 
local exchange carrier shall estimate a residual interconnection charge 
in an amount equal to 55 percent of its current interconnection charge 
revenues. For subsequent tariff filings in which the PCI reductions are 
to be targeted to the interconnection charge, these initial estimates 
shall be adjusted to reflect the actual amounts that have or will be 
reallocated. If the use of these estimates results in more PCI 
reductions being targeted to the interconnection charge that required to 
eliminate the per-minute interconnection charge, the local exchange 
carrier shall make the necessary exogenous adjustments to reverse the 
effects of the access targeting,
    (2) Not include the amount of any exogenous adjustments reflected in 
the z component of the formulas in Secs. 61.44(b) and 61.45(c). Any such 
exogenous adjustments shall be reflected in the various PCIs and SIBs in 
the same manner as they would if there were no targeting.
    (k) The calculation of the PCI for the basket designated in 
Sec. 61.42(d)(3) shall include any residual interconnection charge 
revenues recovered pursuant to Secs. 69.153 and 69.155 of this chapter.
    (l) The calculation of the PCI for the basket designated in 
Sec. 61.42(d)(6) shall include any marketing expense revenues recovered 
pursuant to Secs. 69.153 and 69.156 of this chapter.

[ 55 FR 42383 , Oct. 19, 1990;  55 FR 50558 , Dec. 7, 1990, as amended at  56 FR 21617 , May 10, 1991;  58 FR 36148 , July 6, 1993;  60 FR 19527 , Apr. 19, 
1995;  60 FR 52346 , Oct. 6, 1995;  62 FR 31930 , 31941, June 11, 1997;  62 FR 40460 , July 29, 1997]