Adopted Sections An agency may take final action on a section 30 days after a proposal has been published in the Texas Register. The section becomes effective 20 days after the agency files the correct document with the Texas Register, unless a later date is specified or unless a federal statute or regulation requires implementation of the action on shorter notice. If an agency adopts the section without any changes to the proposed text, only the preamble of the notice and statement of legal authority will be published. If an agency adopts the section with changes to the proposed text, the proposal will be republished with the changes. TITLE. 16. ECONOMIC REGULATIONS Part II. Public Utility Commission of Texas Chapter 23. Substantive Rules Rates The Public Utility Commission of Texas adopts the repeal and new sec.23.27, concerning rate-setting flexibility for services subject subject to significant competition. New sec.23.27 is adopted with changes to the proposed text as published in the April 28, 1992, issue of the Texas Register (17 TexReg 3045). The repeal is adopted without changes and will not be republished. The new sec.23.27 specifies the information a local exchange carrier must include in an application to declare a service market subject to significant competitive challenge and to obtain regulatory flexibility pursuant to the Public Utility Regulatory Act (PURA or the Act), sec.18(e) .The new sec.23.27 identifies the factors the commission must consider when evaluating such an application and determining whether to declare the market subject to significant competitive challenge and to grant the request for regulatory flexibility. Additionally, the new sec.23.27 more clearly sets forth the requirements and standards applicable to the filing, review, and approval of customer-specific contracts. Several of the provisions of sec.23.27 are revised from the April publication in response to specific comments received by the commission, which are discussed infra. The following submitted comments in response to the April 28, 1992, Texas Register publication: AT&T Communications of the Southwest, Inc. (AT&T); Centex Telemanagement, Inc. (Centex); Central Telephone Company of Texas, Kerrville Telephone Company, Lufkin-Conroe Telephone Exchange, Inc. and Sugar Land Telephone Company (Central); Consumers Union; Digital Direct of Dallas, Inc. (Digital Direct); GTE Southwest Inc. and Contel of Texas, Inc. (GTE); MCI Telecommunications Corporation (MCI); Metropolitan Fiber Systems, Inc. (MFS); Office of Public Utility Counsel (OPC); Southwestern Bell Telephone Company (SWBT); Sprint Communications Company L.P. (Sprint); Teleport Communications Group (Teleport); Texas Association of Long Distance Telephone Companies (TEXALTEL); Texas Statewide Telephone Cooperative, Inc. (TSTCI); Texas Telephone Association (TTA); U.S. Metroline Services, Inc. (USM) ; and United Telephone Company of Texas, Inc. (United). Reply comments were filed by Centex, Central, Consumers Union, Digital Direct, GTE, MCI, MFS, OPC, SWBT, Sprint, Teleport, TEXALTEL, TSTCI, and TTA. Additionally, Centex, Central, Digital Direct, GTE, MCI, MFS, OPC, SWBT, Teleport, TEXALTEL, and TSTCI provided oral comments at an October 13, 1992, public hearing on this matter. Central, GTE, SWB, TSTCI, TTA, and United generally opposed adoption of the proposed replacement of sec.23.27. The local exchange carriers (LECs) generally construed the rule as inconsistent with PURA because it fails "to provide an equal opportunity to all telecommunications utilities in a competitive marketplace," as required by PURA, sec.18(1). Generally, the LECs claimed that sec.23.27 is inconsistent with this legislative directive because it does not apply equally to all providers of telecommunications service in the local exchange. For example, GTE argued that the rule burdens the LECs with stringent regulatory requirements while abdicating all regulatory authority over competitive access providers (CAPs). According to the LECs, any regulatory scheme that applies different regulatory constraints to providers of the same service within an exchange inherently cannot provide an equal opportunity to all telecommunications utilities as required by PURA, sec.18(a). SWB, TSTCI, and United stated that limiting the applicability of the rule to LECs results in unlawful asymmetrical regulation with respect to the LECs and their competitors. According to the LECs, a consistent method of certification and jurisdictional oversight is required for all telecommunications utilities. In other words, upon entry all carriers should be treated the same and should be subject to the same regulatory constraints. GTE stated that the crucial issue is whether uneven treatment of the LECs and their competitors is warranted. TSTCI added that because LECs remain saddled with universal service obligations, the result is not competition but forced market allocation. Digital Direct, MCI, and MFS commented that the "equal opportunity" language of PURA, sec.18(a) does not require equal regulation. Digital Direct, MFS, and MCI believed that the LECs enjoy significant competitive advantages (e.g., control of bottleneck facilities) and thus must be regulated more stringently than new market entrants. These commenters claimed that LECs have both the incentives and abilities to engage in predatory behavior in competitive or potentially competitive markets in which they operate. MCI suggested that given these incentives and abilities there is nothing "equal" about the competitive posture desired by the LECs. Sprint and Teleport emphasized the phrase "in a competitive marketplace" contained in PURA, sec.18(a) and stated that a competitive marketplace does not exist today for services provided within an exchange. Sprint and Teleport commented that the rule will allow competition to emerge in the local exchange marketplace. Supporting commenters further stated that asymmetrical regulation is required, because PURA can exert only limited jurisdiction over nondominant carriers such as CAPs. Supporting commenters stated generally that subjecting all service providers to the same regulatory requirements would be contrary to the plain language of the Act. These commenters argued that the legislature constructed in PURA, sec.18 a statutory framework designed to promote competition by protecting the emerging competitors from the monopoly power of the LECs and, at the same time, by providing for flexible regulation of LECs, once effective competition has in fact been established. MFS commented that if the Legislature had intended the interpretation advanced by the LECs, then it would not have left to the commission the task of determining the "appropriate regulatory treatment" for LECs and whether competition is "significant," as required by PURA, sec.18(e). The commission believes that the crucial issue, in responding to the LEC comments concerning "equal opportunity" and "asymmetric regulation," is whether it is appropriate for the commission to treat LECs in the same manner as it treats non-LECs. The commission finds that PURA does not institute a statutory scheme in which LEC and non-LEC providers of competitive telecommunications services are treated the same. In PURA, sec.18(a) the legislature recognizes that "the telecommunications industry through technical advancements, federal judicial and administrative actions, and the formulation of new telecommunications enterprises has become and will continue to be in many and growing areas a competitive industry." Despite the statutory acknowledgement that "the formulation of new telecommunications enterprises" is, in part, driving the development of that competitive industry, the legislature did not amend PURA to require that such telecommunications enterprises be certificated prior to providing service; rather, it amended PURA to offer LECs the possibility of regulatory flexibility in response to "significant competitive challenges." Clearly, if the legislature intended to institute a statutory scheme in which all providers of a specific competitive service are treated the same, there would exist no need for regulatory flexibility for LECs, as provided for in PURA, sec.18(e). The commission fully explored this issue in its preamble to sec.23.61 of this chapter, relating to telephone utilities. The amendment to sec.23.61 was adopted (in Project Number 9708) primarily to clarify the commission's policy regarding telecommunications competition in the local exchange. The commission herein incorporates its analysis in Project Number 9708 in support of its conclusion that the directive of PURA, sec.18(a) to "provide equal opportunity to all telecommunications utilities in a competitive marketplace" does not require the commission to institute the type of regulatory scheme advocated by the LECs. Indeed, an equal opportunity would not be achieved if the LECs were treated as nondominant carriers with respect to their provision of services determined to be subject to significant competitive challenges. The commission finds that the "equal" treatment requested by the LECs would preclude the commission from complying with PURA, sec.18(g) requirements. If the commission could not regulate the LECs' competitive services, the LECs would be able to use their monopoly services to disadvantage their competitors. This result hardly represents an equal opportunity for the competitors vis-a-vis the LECs. GTE asserted that competition without equal treatment has not proven to be in the overall public interest, citing consumer experience with company-owned coin- operated telephone service (COCOTS) and operator service providers (OSPs). GTE stated that end-users suffer when all providers of a particular telecommunications service are not regulated in the same manner. According to GTE, regulatory agencies have neither a legal nor a moral obligation to aid competitors; in fact, the competitors should not be aided at all if such aid will not serve the public interest. USM argued the opposite position, contending that it is the affirmative duty of the regulatory agency to see to the displacement of monopolies by competitors. The commission finds that the "equal treatment" which GTE seeks is statutorily impermissible, for the reasons described supra. Given the dominant/nondominant statutory scheme mandated by PURA, the commission does not have the authority to establish a form of regulation over nondominant carriers not expressly provided by PURA. In response to complaints concerning OSPs, the legislature did amend PURA by adding sec.18A, directing the commission to promulgate rules consistent with that section that "shall be nondiscriminatory and designed to promote competition that facilitates consumer choice." However, the commission finds that USM's assertion is not supported by the statute. Therefore, the commission makes no changes to the rule based upon the comments of GTE and USM. The LECs generally argued that the effect of the rule is to further restrict the LECs and to prevent them from responding to competition, particularly that posed by CAPs. TSTCI alleged that the CAPs want the commission to encumber the LECs' ability to compete with pricing flexibility until the CAPs firmly establish a market presence. SWB stated that competitors are simply seeking to avoid or delay competition from LECs. United argued that competition in the local exchange market cannot be promoted by "hamstringing" the LECs. Supporting commenters generally believed that the proposed rule strikes the appropriate balance between encouraging competition and allowing regulatory flexibility for LECs after the development of significant competition. MCI observed that the LEC commenters would have the commission confuse a market which is competitive with one in which there are competitors. According to MFS, lifting competitive protections prematurely, prior to the development of significant competition, would crush emerging competitors, create an insurmountable barrier to entry, and injure consumers as a result of monopoly resurgence. OPC, which favored efforts to encourage competition, expressed the position that the rule should be directed at ensuring entrance into the telecommunications market by LEC competitors. TEXALTEL contended it would be a violation of the public interest to allow or encourage LECs to prevent competition. The commission is not persuaded that proposed sec.23.27 "hamstrings" or otherwise prevents the LECs from responding to competition; instead, it is consistent with the statutory directive to promulgate rules and establish procedures applicable to LECs to allow them to respond to significant competitive challenges. The commission therefore makes no changes in response to the LEC comments. Central stated that the rule is inconsistent with sec.23.61 of this chapter, relating to telephone utilities, because sec.23.27 creates "extensive" procedures for regulating the price of LEC services that sec.23.61 removes from regulatory supervision. The commission finds that Central misconstrues the effect of sec.23.61. LEC services excluded from the definition of local exchange service are not "removed" from regulatory supervision. As the commission explained in the preamble to sec.23.61, it would be impossible for the commission to comply with the directive of PURA, sec.18(g) if the legislature had intended the commission to regulate only those LEC services that constitute "local exchange service." To prevent the LECs from cross-subsidizing their competitive services with revenues from monopoly services, and to grant pricing flexibility to the LECs that is not anticompetitive, predatory, or discriminatory, the commission must necessarily retain regulatory authority over all LEC telecommunications services-local exchange service as well as services subject to significant competitive challenges. The LECs generally argued that the proposed sec.23.27 does not allow the smaller LECs a meaningful opportunity to respond to competitive challenges. Smaller LECs contended that they lack the resources to comply with the provisions of the rule. Central and TSTCI argued that they would lose their one or two target customers before an application for regulatory flexibility could be granted. TSTCI correctly noted that the rule offers the LEC no opportunity to request and receive flexible pricing simultaneously with CAP entry, as existed with the commission's October 1991 proposal. In reply, TEXALTEL noted that nothing prevents TSTCI members from reacting effectively to competition. According to TEXALTEL, LECs are in an excellent position to assess competitors' threats to their businesses and to react to the competition. TEXALTEL stated that if a LEC's prices to a particular customer or class of customers are far above cost and are likely to invite competition, that LEC should consider repricing as soon as possible. TEXALTEL commented that PURA, sec.43 and existing tariff provisions, such as special assembly, allow smaller LECs adequate flexibility to respond to competitive challenges. While the commission is sympathetic to the concerns raised by the smaller LECs, it finds that PURA, sec.18(e)(2) applies to all LECs; it makes no distinction between smaller and larger LECs. Therefore, the commission cannot, on behalf of the smaller LECs, modify the statutory criteria for determining the level of competition within a specific market or submarket. The commission, however, does modify the rule by adding new sec.23.27(b)(4) to allow the commission, in determining whether it is appropriate to grant pricing flexibility to LECs with less than 50,000 access lines, to consider competition in exchanges other than those in which the LEC will provide the service. Thus, an LEC that qualifies under the new sec.23.27(b)(4) need not await entry of a competitor before asking the commission to consider whether a service is subject to a significant competitive challenge in its territory. TSTCI commented that the probable outcome of an LEC application to declare a market subject to significant competition and for regulatory flexibility will be an extended proceeding with little guarantee that the commission will act upon the LEC's request in a timely manner. TSTCI therefore urged that the proposed rule, particularly sec.23.27(b)(3), be modified to include definitive timelines to which all parties must adhere. TSTCI, however, did not propose any specific timelines. At the October 13, 1992, public hearing, the LECs generally urged that the commission impose limits on commission consideration of an LEC application for pricing flexibility citing, among other things, the competitive disadvantage resulting from regulatory delay. In response to these concerns, the commission modifies the proposed rule by including new sec.23.27(b)(4), which imposes a deadline by which the commission must act on an application for pricing flexibility. According to paragraph (4), the commission must generally act on an application for pricing flexibility no later than 180 days after completion of notice. To accommodate this expeditious processing, however, the commission believes that it must modify the rule to limit LEC requests for pricing flexibility to only those services and components thereof that are subject to significant competitive challenges. Consequently, the commission modifies numerous provisions of the rule to clarify that the LEC may not include in its application for pricing flexibility any service not subject to significant competitive challenge. To the extent the LEC provides noncompetitive services in connection with or as an adjunct to a flexibly-priced service, the LEC must do so pursuant to a commission-approved tariff; the LEC, however, may provide both the flexibly-priced and tariffed services pursuant to a single customer-specific contract. Section 23.27(b)(1)(B), (2), (3)(C), (3)(D), (3)(I), (c)(4)(C) have been revised to reflect this modification. Because imputation of tariffed rates is inconsistent with this modification, the commission modifies sec.23. 27(b)(1)(A), (3)(B)(ii), (6)(D)(i) (proposed sec.23.27(b)(4)(D)(i)) and (c)(7) (B)(v) (proposed sec.23.27(c)(8)(B)(v)) to delete the imputation requirement contained in each of those provisions. These five provisions are revised to require that minimum rates recover the long-run incremental cost associated with the flexibly-priced service. TSTCI comments that the rule contains no provision for the protection of universal service goals. TSTCI contends that the commission must amend sec.23. 53 of this chapter, relating to universal service fund, to accommodate CAP market entry before any action can be taken with respect to this rule. TSTCI contends that competition in the large companies' service areas affects the small companies because of the statewide universal support mechanisms in which all local exchange companies participate. The commission refers to PURA, sec.98, which states that the "universal service fund shall be funded by a statewide uniform charge payable by all telecommunications utilities that have access to the customer base." Thus, contrary to TSTCI's implication, participation is not limited to LECs. Section 23.53 of this chapter, relating to universal service fund, and sec.23.56 of this chapter, relating to statewide dual-party relay service, set forth the current universal service fund assessments. The commission believes that it is appropriate to address the USF issue in a separate rulemaking. The commission need not postpone action in this rulemaking pending a decision on changes to the USF assessments. Many commenters, after discussing the failings of the repealed rule, claimed that the proposed rule is worse than that which it would replace. SWB stated that the commission, after proposing revisions to sec.23.27 in October 1991 that were legally flawed, has replaced an unworkable rule with a version even more onerous. SWB supported its assertions regarding the difficulty of obtaining pricing flexibility under the repealed rule by citing its experience with three applications for pricing-flexibility: Docket Numbers 9244, 9301, and 9960. Like SWB, TSTCI stated that the rule is more burdensome than the rule it replaces, characterizing it as "a giant step backward for flexible pricing." TSTCI believed that the rule failed to meet the spirit of the Senate Bill 444 changes. TTA noted that the repealed version of sec.23.27 was ambiguous and burdensome. Digital Direct stated that the rule clarifies the confusing and ambiguous language used in various sections of the repealed rule. Moreover, Digital Direct believed that the rule provides a more logical, organized format for proceedings conducted under the rule and is more closely aligned with the criteria established in PURA, sec.18. Sprint and TEXALTEL commented that the rule is designed to structure a reasonable transitional framework from a one-supplier (LEC) market to a healthy competitive marketplace. A number of commenters reviewed the procedural history of SWB's three applications for pricing flexibility and concluded that those applications do not demonstrate that the repealed rule was unworkable. MFS stated that SWB seemed intent on finding the rule unworkable merely because the process did not produce the desired result. As both SWB and Digital Direct recognized, the proposed rule is more closely aligned with the statutory criteria established in PURA, sec.18(e) than the repealed rule. Consistent with PURA, sec.18(e)(1), the rule provides a framework "for determining the level of competition in specific telecommunications markets and submarkets and providing appropriate regulatory treatment to allow local exchange companies to respond to significant competitive challenges." The commission finds that the rule effectuates the determination contemplated by the statute. SWB does not complain that the proposed rule is legally flawed or otherwise inconsistent with the commission's authority under PURA, sec.18(e). Moreover, the commission believes that it is essential to obtain, at the outset of the proceeding, adequate information relating to an LEC request for pricing flexibility if the commission is to expedite its consideration of the LEC's application. The commission makes no changes to the rule based on the comments that the proposed rule is more onerous than the repealed rule. Rather, the commission finds that the rule is consistent with both the letter and the spirit of PURA. Central, Consumers Union, GTE, OPC, SWB, TTA, TSTCI, and United generally stated that the commission must either clarify or delete the language used in sec.23.27(b)(1)(A), (3)(B)(ii), (6)(D)(i) (proposed sec.23.27(b)(4)(D)(i)), (c) (4)(J), and (7)(B)(v) (proposed sec.23.27(b)(8)(B)(v)), with respect to the pricing of monopoly components. Additionally, these parties submitted that the terms "monopoly components" and "nonmonopoly components" when used in these provisions must be defined or deleted. Each of these provisions requires that the LEC's minimum rates for a flexibly-priced service be set to yield revenues that are equal to or greater than "the cost of the monopoly components of the service at unbundled, nondiscriminatory rates plus 105%" of either the system- wide or customer-specific "long-run incremental costs of the service associated with nonmonopoly components." Similar language is used in subsection (b)(3)(D), which requires that the LEC demonstrate that "monopoly components are offered on an unbundled nondiscriminatory basis to all customers." Commenters generally raised three issues stemming from this language. First, the parties commented that the use of undefined terms ensures uncertainty in the rule's application as well as protracted proceedings in which definitions are developed. Second, the parties stated that the rule contains no standards for determining what constitutes a "monopoly component" or "nonmonopoly component." Third, the LECs contended that the "monopoly component" approach is inconsistent with PURA, sec.18(e) because the proper issue is whether the service is subject to competition, not whether every component is subject to competition. Additionally, SWB considered the word "component" ambiguous. SWB stated that the term suggests a physical facility, although the intended meaning appears to be more akin to a service "feature." A number of commenters proposed alternative language with respect to these six provisions. OPC, which was generally supportive of the provisions concerning monopoly components, suggested that "monopoly" should be replaced with "noncompetitive" in each of those provisions because "monopoly" can be construed too narrowly. TEXALTEL proposed language defining "monopoly components" as "those portions of the LEC's service that most of the LEC's competitors are expected to need to purchase from the LEC in order to provide a competitive service and without which there would be significant barriers to entry." In reply comments, it urged the commission to consider Teleport's definition of "effective competition" as a definition of "monopoly component:" "A market is effectively competitive only if users can continue to obtain the services they desire at roughly the same prices and without major inconvenience or disturbance in the event any single provider, including the previously dominant provider, exits the market." (Emphasis in original.) Central opposed TEXALTEL's proposal. Central argued that the issues raised by TEXALTEL's definition proves that the rule, as structured, would require extensive litigation before the LEC could ever obtain pricing flexibility. SWB opposed any language that recognized the concept of monopoly components. Digital Direct commented that provisions concerning monopoly components recognize that the services for which a LEC seeks pricing flexibility are likely to include monopoly components. Digital Direct added that these provisions reflect a commission awareness of the importance of the commission's responsibilities under PURA and provide a means by which the commission can ensure that an LEC's flexibly-priced services are not subsidized either directly or indirectly by regulated monopoly services, as required by PURA, sec.18(g). MFS commented that the rule accurately translates the legislative intent embodied in PURA,sec.18(e). MFS further commented that the rule actually benefits the LECs by allowing pricing flexibility for the competitive component of a bundled service, rather than postponing pricing flexibility until all components of a bundled service are competitive. The commission believes that the concerns regarding definitions and standards in sec.23.27(b)(1)(A), (3)(B)(ii), (D), (6)(D)(i) (proposed sec.23. 27(b)(4)(D)(i)), (c)(4)(J), and (7)(B)(v) (proposed sec.23.27(c)(8)(B)(v)) have been raised because these provisions, as published, created a category of LEC services that are not necessarily contemplated by PURA, sec.18(e)(2): the monopoly component. PURA,sec.18(e)(2) authorizes pricing flexibility only with respect to services determined to be subject to significant competitive challenges. As noted supra, the commission modified the rule, including these provisions, to limit an application for pricing flexibility to a service subject to significant competitive challenge. The commission believes that by eliminating the categories of monopoly and nonmonopoly components and limiting an application for pricing flexibility to a service subject to significant competitive challenge, the rule is more accurately aligned with the statutory scheme. The commission believes that the third concern, a perceived inconsistency with PURA, sec.18, is predicated upon an unnecessarily restrictive interpretation of "component." Given the broad and inclusive definition of "service" in PURA, sec.3(s), the commission believes that a component as used in this rule is generally a service in its own right, such as access to the public switched network. The commission therefore makes no changes in response to the third concern outlined supra. A number of commenters raised concerns regarding the use of "costs" in subsections (b)(1)(A), (3)(B)(ii), (6)(D)(i) (proposed sec.23.27(b)(4)(D)(i)), (c)(4)(J), and (7)(B)(v) (proposed sec.23.27(c)(8)(B)(v)). Central objected to the absence of a cost standard in the rule for recovering the cost of monopoly components (e.g., fully allocated or incremental). Central also commented that the practical difficulties associated with the costing of monopoly components renders the rule unworkable and precludes preparation of a viable application. SWB, which found "cost" misleading, proposed substituting either "rate" or "charge." OPC noted that the rule applied a long-run incremental cost standard with respect to nonmonopoly components; the absence of a standard with respect to monopoly components suggested that some other cost standard applied. OPC, with the concurrence of Centex and Consumers Union, recommended that until the commission establishes a cost standard to be used in the pricing of monopoly services, it employ a "price floor" with respect to these services. TEXALTEL commented that these five provisions contain no definition of "costs;" an LEC, therefore, is free to define and identify costs to its advantage. TEXALTEL asserted that the commission must define "costs" in the rule. TEXALTEL also noted that the pricing provisions require the LEC to impute merely the cost of a monopoly component, while it is free to charge its competitors a higher rate for that same component. To obviate the "tremendous" competitive advantage the LEC retains under such a scheme, TEXALTEL proposed that the pricing language be revised to add the phrase "greater of the rate or the cost of the monopoly component." MCI supported TEXALTEL's proposal. SWB, however, argued that adoption of the proposal would require the LEC to impute the greater of the monopoly cost or tariffed rate, thereby ensuring that the competitor will always enjoy a price advantage. The commission agrees that these commenters identified an ambiguity deriving from the wording of the five provisions as published. Among other things, these provisions were intended to require that the LEC impute to itself the tariffed rate applicable to each monopoly component involved in the provision of the service. As the commenters' concerns indicate, however, the word "cost" failed to properly capture that intention. For the reasons explained supra, however, these five provisions have been modified and both the word "cost" and the imputation requirement have been deleted. Section 23. 27(b)(1)(A), (3)(B)(ii), (6)(D)(i) (proposed sec.23.27(b)(4)(D)(i)), (c)(4)(J), and (7)(B)(v) (proposed sec.23.27(c)(8)(B)(v)), as revised, refer only to the long-run incremental cost associated with the LEC's provision of the flexibly-priced service. The commission believes that these modifications obviate the need to define "costs," to establish a cost standard applicable to monopoly components, or to institute a "price floor" applicable to monopoly components, as recommended by various commenters. Requiring the LEC to provide a noncompetitive service at a tariffed rate also eliminates competitive advantages or disadvantages that might accrue either from imputation of cost, when cost is less than the tariffed rate, or from imputation of the greater of the cost or tariffed rate. TEXALTEL commented that loopholes in the long-run incremental cost standard should be closed to make the computation of incremental costs as uncontroversial as possible. TEXALTEL proposed that concluding language be added to sec.23.27(b)(3)(B)(ii) to include in the incremental cost calculation "all items of plant utilized in the provision of service, even if portions of the plant used are stranded or otherwise already exist." TEXALTEL's proposal specifically permitted the LEC to seek a good cause exception to exclude certain costs in determining a rate. MCI and OPC agreed with the proposed revision. The commission does not believe that this rulemaking is the appropriate proceeding in which to resolve the commenters' concerns regarding incremental cost studies. Further, the commission is not convinced that adoption of the proposed revision would achieve TEXALTEL's objective of eliminating loopholes in the LEC computation of incremental costs. Indeed, the commission believes that the adoption of a single restriction may constitute an implicit affirmation of practices not otherwise addressed. The commission believes, however, that TEXALTEL has identified a problem with costing practices that may allow the LEC to subsidize the flexibly-priced service with revenues from regulated monopoly services. Consequently, the commission modifies sec.23.27(b) (3)(L) to incorporate TEXALTEL's comment. Specifically, subparagraph (L), which requires that the LEC propose a mechanism to prevent subsidization, is modified to include a reference to all items of plant used in the provision of the service. Central asserted that the 105% requirement contained in sec.23.27(b)(1)(A), (3)(B)(ii), (6)(D)(i) (proposed sec.23.27(b)(4)(D)(i)), (c)(4)(J), and (7)(B)(v) (proposed sec.23.27(c)(8)(B)(v)) ensures that competitors will always have a 5. 0% price advantage. Centex commented that the 105% requirement establishes a price floor that protects against predatory pricing. According to MCI, Central's argument is valid only if the competing entities incur exactly the same cost to provide the service. MCI added that it is consistent with economic theory for the LEC to enjoy cost advantages by virtue of economies of scale derived from the LEC's ubiquitous network. The commission is not persuaded that the contribution requirement grants LEC competitors a price advantage, for the reasons described by MCI. The commission, which agrees with Centex, finds that the contribution requirement serves to satisfy the legislative requisite in PURA, sec.18(g) that rates for flexibly- priced services are not predatory or anticompetitive. The commission makes no change to the rule based on Central's comment. GTE, SWB, and TSTCI proposed the deletion of all language in sec.23.27 relating to the pricing of monopoly components. According to SWB, an LEC seeking either pricing flexibility or approval of a customer-specific contract should be required to show only that "the minimum rates shall yield revenues that are at least 105% of the relevant incremental costs of the service." According to SWB, no subsidy exists if the rate for the service covers the incremental unit cost of that service; SWB argued that because a tariffed rate includes both incremental costs plus potential contribution, the imputation requirement is "overstrong" for the purposes of demonstrating that the competitive service is not subsidized. TSTCI stated that the LEC should be able to package rates for a service in any manner it chooses if the service is competitive, as long as basic pricing guidelines are upheld. MCI and Sprint opposed this proposed deletion. MCI noted that the rule as published is consistent with the commission's obligation under PURA, sec.38. Sprint observed that adoption of SWB's proposal would give the LEC a significant and unfair competitive advantage. MFS strongly supported the requirement that the LEC impute the cost of monopoly components. MFS argued that absent such a provision the LEC can charge competitors a higher price for access to bottleneck local exchange facilities than it "charges" itself. MFS stated that absent access to the LEC's bottleneck monopoly resources on the same economic and technical basis as the monopoly carrier itself has access, real competition cannot emerge. MFS also commented that unless the commission carefully regulates how costs are allocated between monopoly services and emerging competitive services, cross-subsidization and predatory conduct designed to both raise barriers to entry and undercut the emergence of competition are not only possible but-given economic theory and historical examples-likely to occur. The commission modifies the proposed rule to delete language in sec.23.27 referring to the pricing of monopoly components, but does so for reasons different than those offered by the opposing commenters. The commission agrees with the supporting commenters that the imputation requirement contained in the published version prevents the LEC from deriving a significant and unfair competitive advantage vis-a-vis its competitors. The commission believes that granting the LECs such an advantage would be inconsistent with the commission's mandate pursuant to PURA, sec.18(a) to provide an equal opportunity to all telecommunications utilities in a competitive marketplace. Opposing commenters failed to identify any public interest benefit to be obtained from deleting the imputation requirement, given the competitive safeguards it provides. Although, for reasons discussed supra, the rule has been modified to delete this requirement, those safeguards are retained by requiring that the LEC provide a noncompetitive service only on a tariffed basis and as an adjunct to the flexibly-priced service. The commission believes that MFS' concerns regarding cost allocation are alleviated by those modifications. MFS commented that it would reinforce the imputation provisions by requiring the LEC to permit unrestricted sharing and resale of both any service determined to be sufficiently competitive and any separately tariffed monopoly component of such a service. TEXALTEL supported MFS' proposal with respect to unrestricted resale. Centex proposed that unlimited sharing, resale, and joint use be a prerequisite to flexible pricing. Centex argued that eliminating restrictions on sharing, resale, and joint use will enable competition to serve as a truly effective surrogate for regulation and will protect competitors and end-users from possible cross-subsidization and predatory pricing. Centex was particularly concerned about small telecommunications users who-due to their size-have limited access to competitive services. SWB opposed Centex's proposal, although it did not respond to MFS' suggested revision. According to SWB, the approach urged by Centex would be a substantial expansion beyond anything contemplated in PURA, sec.18(e) or in this rule. SWB asserted that Centex raises issues that are more properly addressed in other pending proceedings, including Docket Number 11109, Request of Southwestern Bell Telephone Company to Obsolete and Grandfather Centrex Services and Joint Application of the Parties to Determine if the Restrictions, Terms, and Condition Associated with the Sharing of Centrex and Plexar Services are Unreasonable as a Matter of Regulatory Policy or in Violation of any Law. While the commission believes that Centex and MFS raise valid concerns, it does not have in this rulemaking record a basis upon which to eliminate restrictions on resale, sharing, and joint use. However, neither does the commission believe that the pending proceedings cited by SWB are the appropriate forums in which to resolve this issue, since the proceedings cited by SWB involve only its central office-based PBX-type services. The commission believes that it is in the public interest to scrutinize proposed restrictions on resale, sharing, and joint use when an LEC seeks pricing flexibility. Consequently, the commission adds a new subparagraph (N) to sec.23.27(b)(3) to clarify that, except for LEC requests to detariff a service, the LEC must include in its application proposed tariff sheets. Additionally, subparagraph (N) requires the LEC to identify any language in those proposed tariff sheets that restricts the resale, sharing, or joint use of the service that is the subject of an application for pricing flexibility and any component thereof and to demonstrate that the restrictive tariff language is consistent with the policy established in PURA, sec.18(a). Central, GTE, SWB, and TTA urged the commission to proceed with an evidentiary hearing rather than adopting the rule. GTE contended that because the rule is not supported by an evidentiary record the result is a rule that is not based on sound policy considerations and is patently unfair to LECs. GTE construed the rule as based on staff's presumption that benefits to be enjoyed by CAPs and their largest customers will not be obtained at the expense of other end-users; it requested proof of such a presumption in an evidentiary hearing. Centex, MFS, and Sprint stated that the policy and legal arguments put forth in this rulemaking are appropriately addressed in a rulemaking proceeding. Sprint observed that despite LEC requests for an evidentiary hearing, the LECs have failed to indicate what evidence they would produce in that hearing that they could not present in their written comments in this rulemaking. Centex and Sprint agreed that an evidentiary hearing is unnecessary and would serve only to delay resolution of the issues addressed in this rulemaking. Centex stated that a hearing is unnecessary from a due process perspective in that interested parties have had an adequate opportunity to be heard. Centex also argued that the burdens and delay engendered by a hearing are not in the public interest; it pointed out that small businesses, unlike LECs, are unable to pass the costs of participating in a hearing directly to a group of captive ratepayers. Parties have had ample opportunity to support their positions in this rulemaking proceeding. The commission finds that those LECs who argue strongly in favor of an evidentiary hearing fail to demonstrate that they have been denied, in this rulemaking proceeding, an opportunity to present information that they believe to be important to the commission. While GTE claimed the rule was premised on an unsubstantiated staff presumption, it offered nothing in rebuttal. The commission believes that a rulemaking with respect to the issue of LEC pricing flexibility is specifically contemplated by PURA, sec.18(e) , which expressly grants the commission all necessary power and authority to promulgate rules and establish procedures applicable to LECs for determining the level of competition in specific telecommunications markets and submarkets and providing appropriate regulatory treatment to allow LECs to respond to significant competitive challenges. The commission agrees with the supporting commenters that the policy and legal issues raised in this proceeding are appropriately resolved in a rulemaking. Central, GTE, SWB, and TSTCI recommended that the commission return to the October 25, 1991, approach, because it imposed application and reporting requirements on the nondominant providers of services within the exchange and generally tied competitive entry to LEC pricing flexibility. TTA supported a return to the October 25, 1991, approach as an alternative to an evidentiary hearing. TSTCI urged the commission to instruct the staff to work with the parties in an effort to achieve a compromise rule or to draft a proposed rule that complies with the commissioners' views expressed at the September 18, 1991, final order meeting. The commission submits that it has already taken the action urged by TSTCI. After the September 18, 1991, meeting, the staff met with various interested parties and held a workshop that resulted in the proposed rule published on October 25, 1991. The comments received in response to the proposed rule demonstrated that the proposal was neither in the public interest nor consistent with the requirements of PURA as a whole. The commission need not address herein the comments received in response to that proposal. Several non-LEC commenters recommended that the commission withdraw the proposed rule. Consumers Union and OPC recommended deferring action on the proposed rule until a costing methodology was in place to ensure that residential ratepayers are not subsidizing LEC competitive services. Consumers Union stated that it was unclear what perceived defects the proposed rule was intended to correct. According to Consumers Union, the proposed rule shifts the focus from whether competition exists to the appropriateness of pricing flexibility. Teleport urged that the commission withdraw the proposed rule because the only true safeguard against LEC abuse-an effectively competitive telecommunications market -does not currently exist in Texas. Teleport argued that barriers to competition must be removed before the commission revises sec.23.27. Specifically, Teleport proposed that the commission promulgate rules directing LECs to make available to potential "competitive local carriers" nine forms of interconnection it claimed were essential to the development of effective competition in the local telecommunications service market. Central and SWB opposed Teleport's proposal. SWB claimed that interconnection standards designed to facilitate the ability of competitors other than LECs to compete with the LECs have no place in sec.23.27. USM recommended rejection, arguing that the proposed rule was conceptually flawed because the commission lacks the authority to decide who may compete in the telecommunications industry and on what terms. Digital Direct stated that the rule was "appropriate" and properly reflected the commission's awareness of its responsibilities under PURA. MCI observed that because the commission already has a rule that allows the LECs to seek pricing flexibility, deferral or withdrawal of the rule does not resolve the issues raised by these parties. MCI stated that going forward with the repeal and replacement of sec.23.27 offers an opportunity to ensure that the rule accomplishes the purposes established in the Act. The commission agrees with MCI that withdrawal of the proposed rule does not resolve the parties' concerns regarding a LEC costing methodology and barriers to competition. However, neither of these issues are resolved in the version of sec.23.27 that would remain in effect if the commission withdrew the proposed rule. The commission finds that the proposed rule more appropriately implements the statutory provisions. Therefore, the commission does not withdraw this proposed rule. Teleport has not requested changes nor is the commission making changes in this rule in response to Teleport's interconnection proposal. The commission notes that Teleport is free to petition the commission for a rulemaking on this issue. In addition to general comments, the parties commented on specific provisions of the rule. MCI proposed the deletion of the phrase "that are subject to the ratemaking jurisdiction of the commission" from sec.23.27(a) because it suggests that some LECs are outside the commission's jurisdiction. The commission agrees with MCI and amends the subsection accordingly. TSTCI stated that the rule should apply to any telecommunications utility, not just LECs. The commission finds that TSTCI's suggestion is contrary to the clear language of PURA, sec.18(e), which authorizes pricing flexibility only with respect to LECs. Finally, USM took issue with subsection (a), commenting that this provision ties rate-setting flexibility "to the defective definition of LECs in sec.23.61." USM's concerns with respect to the sec.23.61 definition of LECs are addressed in Project Number 9708, the commission's rulemaking to amend sec.23.61 of this chapter, relating to telephone utilities. Centex commented that both sec.23.27(b)(1) and (d) should be revised so that any entity with an interest may seek to have a service declared subject to significant competition. Centex contended that LECs should not have the exclusive right to seek such a designation. PURA, sec.18(e) directs the commission to provide appropriate regulatory treatment "to allow local exchange companies" to respond to significant competitive challenges. The commission believes that had the legislature intended to implement the statutory scheme Centex proposed, it would not have used this language. The commission therefore declines to adopt Centex's proposal. In response to sec.23.27(b)(1)(A), AT&T argued that if a LEC is authorized to offer banded rates for switched access, those rates should be capped at the Year-4 level established in Southwestern Bell's most recent rate case, Docket Number 8585, Inquiry of the General Counsel into the Reasonableness of the Rates and Services of Southwestern Bell Telephone Company. Central and TSTCI stated that AT&T's comments concerning pricing were outside the scope of the rulemaking; Central observed that appropriate benchmark rates are addressed in sec.23.23 of this chapter, relating to rate design. The commission agrees with the LECs that this rulemaking is not the proper forum in which to address AT&T's concerns. The commission makes no changes to this subparagraph based on AT&T's comments. GTE and TTA opposed the use of "system-wide" in sec.23.27(b)(1)(A), (3)(B) (ii), and (6)(D)(i) (proposed sec.23.27(b)(4)(D)(i)). GTE argued that "system- wide" could encompass costs that are outside Texas and therefore beyond the commission's jurisdiction. GTE also commented that the concept ran counter to the economic rationale supporting pricing flexibility, which is to eliminate overly broad averaging of costs and prices. TTA stated that system-wide costs do not reflect the geographic nature of competition. MCI stated that GTE's comments "do not make sense" since the provision does not apply to customer-specific contracts. The commission agrees with the opposing commenters that geographic deaveraging is appropriate in a competitive market. While the legislature enacted a statutory scheme that encourages the development of a competitive telecommunications market, it did not provide for statewide or systemwide average rates for all telecommunications customers. The commission believes that in PURA, sec.18(e)(3)(B) the legislature implicitly authorized the LECs to charge deaveraged rates in a competitive market by explicitly authorizing the LECs to price certain services on a customer-specific basis. The commission finds, moreover, that the deaveraging contemplated in this rule does not affect the availability of a service. While the service may be found to be subject to a significant competitive challenge in one or more exchanges, that service nonetheless continues to be offered system-wide on a tariffed basis; the same or a similar service may also be available from non-LEC providers, as well. The commission therefore modifies sec.23.27(b)(1)(A), (3)(B)(ii), and (6) (D)(i) (proposed sec.23.27(b)(4)(D)(i)) by deleting "system-wide" and adding language to clarify that the long-run incremental costs pertain to the geographic area in which the LEC is seeking pricing flexibility. Both SWB and TSTCI sought greater flexibility to change banded rates than that provided for in sec.23.27(b)(1)(A). SWB stated that PURA does not indicate that the process of changing banded rates is to be less flexible than the process to establish those rates. TSTCI argued that once a service is declared competitive, the LEC should be allowed the greatest flexibility possible for changing its rates. SWB proposed that the LEC be allowed to change its banded rates either in a "general" rate proceeding "if one were pending" or in a subsequent sec.23.27 application. MCI found SWB's proposal reasonable. TSTCI provides no support, statutory or otherwise, for its position. Similarly, SWB provides no support for its assumption that a sec.23.27 application to establish banded rates would be more flexible than a proceeding under PURA, sec.sec.42, 43, or 43B to change those rates. Even if these positions are ultimately supportable, the commission is not willing to delay adoption of this rule pending development of a record that supports specific procedures to allow for changes in the minimum and maximum rates. The commission notes that TSTCI and SWB are free to petition for a rule change after adoption, if they believe that they can provide support for their positions. Under the rule as adopted, the commission notes that an LEC may charge a different rate, as long as that rate is between the minimum and maximum rates, merely by filing a revised tariff on or before the effective date of the rate change. The commission believes that an LEC would be permitted to seek a change in banded rates in a "pending" general rate case, as suggested by SWB, only if that rate change was included in the original filing under PURA, sec.sec.42, 43, or 43B or if the examiner granted an amendment to the filing. TEXALTEL proposed language to sec.23.27(b)(1)(A) to clarify that the LEC must uniformly apply its current rate to all customers in the exchanges for which banded rates have been approved. Both MCI and TSTCI supported the proposal; SWB stated that the proposed clarification was consistent with its understanding of banded rates. The commission adopts the suggested modification and revises sec.23.27(b)(1)(A) accordingly. GTE, SWB, United, and TTA commented that sec.23.27(b)(1)(C) creates a disincentive for a LEC to detariff a service. GTE recommended deleting the last sentence of this subparagraph, arguing that if shareholders bear all the risk of detariffed services, they should also retain all the rewards. SWB stated that it would be preferable to treat profits and losses the same, by flowing both to the books of the regulated entity. MCI and OPC disagreed with these comments. MCI noted that the language was permissive, not mandatory, with respect to the commission's treatment of revenues in excess of the long-run incremental costs, and stated that the LEC was free to argue the proper treatment of such revenues at the time the issue was raised in a rate case. Additionally, MCI commented that the LEC proposals may violate PURA. OPC stated that requiring shareholders or private beneficiaries to absorb business risks would ensure against the possibility of cross-subsidization. The commission makes no change to sec.23.27(b)(1)(C) in response to the comments of GTE, SWB, TTA, and United. As MCI observed, the published rule did not provide for the mandatory assignment of revenues in excess of the long-run incremental costs of the service. The LECs are therefore free, during a rate proceeding, to argue the proper allocation of earnings from detariffed services. The commission believes that the ability to assign losses protects the LECs' ratepayers from possibly subsidizing competitive services. MCI proposed additional language to sec.23.27(b)(1)(C) to clarify the phrase "above the line." TSTCI concurred in this proposal, although it conditioned its support upon commission adoption of changes to sec.23.53 of this chapter, relating to universal service fund, to require noncertificated carriers operating within an exchange to contribute to the universal service fund. TEXALTEL, with MCI's concurrence, proposed additional language to subparagraph (C) to avoid rate deaveraging. The commission modifies subparagraph (C) to provide that it may determine the appropriate ratemaking treatment of any revenues from or costs of providing a detariffed service in a proceeding under PURA, sec.sec.42, 43, or 43B. Consequently, the commission need not clarify "above the line," as the phrase has been deleted. The commission declines to adopt TEXALTEL's proposal. The commission believes that detariffing is intended to allow the LEC greater regulatory flexibility than customer-specific pricing. The commission finds that requiring the LEC to uniformly apply the rates specified in its current price list, as TEXALTEL suggested, offers the LEC less regulatory flexibility and therefore is inconsistent with the concept of detariffing. USM contended that sec.23.27(b)(1)(D) is unlawful because the commission has no license to grant any other type of pricing flexibility it finds to be in the public interest. The commission finds USM's assertion contrary to the plain language of PURA, sec.18(e)(3), which provides that the "regulatory treatments which the commission may implement include, but are not limited to, " rate- banding, customer-specific pricing, and detariffing. AT&T observed that sec.23.27(b)(1)(A)-(C) contained language ("[i]f an LEC is granted the authority to") implying that an evidentiary hearing would precede a grant of pricing flexibility. AT&T expressed concern that sec.23.27(b)(1)(D), which did not contain language similar to that included in subparagraphs (A)-(C), lacked a similar implication. To clarify that pricing flexibility may not be granted without the safeguards contained in subsection (b)(4), the commission revises sec.23.27(b)(1)(D) to include language similar to that included in subparagraphs (A)-(C). GTE found the first sentence of sec.23.27(b)(2) and (c)(7)(B)(i) (proposed sec.23.27(c)(8)(B)(i)) internally inconsistent. According to GTE, the "(D)" in the references to subsection (c)(1)(A)-(D) and paragraph (1)(A)-(D) must be replaced with "(E)." MCI disagreed with GTE, observing that each sentence referred to "services specified in" subparagraphs (A)-(D); because no service is specified in subparagraph (E), "(E)" need not be included. The commission agrees with MCI's explanation and makes no change in response to GTE's comments. MCI requested that the commission clarify the second sentence's reference to "other than customer-specific contracts" in sec.23.27(b)(2). The commission included the phrase because the services listed in subparagraphs (A)-(D) are those services for which the legislature expressly authorized customer-specific pricing pursuant to PURA, sec.18(e)(3)(B). The legislature did not specifically authorize other types of pricing flexibility, such as detariffing of rates, for these services. If an LEC seeks a type of pricing flexibility for one of these services "other than customer-specific contracts, " then-as required by PURA, sec.18(e)-it must demonstrate that the requested pricing flexibility is appropriate to allow that LEC to respond to a significant competitive challenge. TSTCI and USM objected to the commission's failure to define "basic local exchange service" in sec.23.27(b)(2). USM added that the commission has no legal authority to prevent pricing flexibility in basic local exchange service. MCI noted that the term "basic local exchange service" need not be defined as it is a term used in the statute. The commission notes that PURA, sec.18(j) prohibits the commission from granting an LEC pricing flexibility for basic local exchange service. At this time, because basic local exchange service is an emerging and evolving concept, the commission finds it more appropriate to decide on a case- by-case basis whether a particular service constitutes basic local exchange service. AT&T asserted that the prohibition in sec.23.27(b)(2) on customer-specific contracts for "switched access services for interexchange carriers" is discriminatory and that pricing flexibility for switched access should be applied uniformly. TSTCI concurred. MCI stated it concurred with AT&T if AT&T was suggesting deletion of the phrase "for interexchange carriers." PURA, sec.18(j) states that PURA, sec.18(e)(3)(B), pertaining to customer-specific pricing, "is not applicable to message telecommunications services, switched access services for interexchange carriers, or wide area telecommunications service." The commission believes that the legislative intent of this language was to preclude customer-specific pricing of LECs' switched access services purchased from the LECs' access tariffs. Generally, it is interexchange carriers that purchase these access services. The commission believes that it is appropriate to incorporate AT&T's suggested modification to prevent discrimination between IXCs and other access customers and modifies sec.23.27(b) (2), (3)(K), (6)(B) (proposed sec.23.27(b)(4)(B)), and (c)(1)(D) accordingly. USM stated that the criteria in sec.23.27(b)(3) bear no relevance to the standards to be applied in the evidentiary hearing to determine the level of competition in a specific market. The commission finds that sec.23.27(b)(3) is relevant to the statutory criteria to be considered in determining the level of competition in a specific market or submarket. Section 23.27(b)(3)(H)(i)-(v) clearly tracks the criteria of PURA, sec.18(e)(2)(A)-(E). The commission makes no change in response to this comment. TSTCI recommended that the commission delete from sec.23.27(b)(3)(C) and (c) (4)(C) the requirement that LEC applications for pricing flexibility include functional and technical descriptions of the service. TSTCI argued that the requirements were burdensome and that the descriptions were valuable only as product intelligence to competitors, not as criteria by which to evaluate the competitiveness of a given market. MCI urged the commission to reject TSTCI's recommendations. Noting that LECs often assign different names to identical services, MCI considered the information necessary to determine the service for which pricing flexibility would be sought. The commission agrees with MCI's comments. Additionally, in order to determine the level of competition with respect to a particular service, it is critical to understand the functional and technical nature of the service. The commission believes that the LEC's provision of information such as functional and technical descriptions is essential if the commission is to review and act on an LEC application for pricing flexibility within the timeframe established in new sec.23.27(b)(4). The commission declines to adopt TSTCI's recommendations. MCI "wholeheartedly" agreed with the philosophy reflected by the language of sec.23.27(b)(3)(D). However, believing that the requirement would be more meaningful if it tracked the preceding subparagraph, MCI proposed that sec.23. 27(b)(3)(D) be revised to require the LEC to "identify by functional and technical descriptions" the monopoly components of the service. OPC agreed with MCI's proposed modification. The commission agrees and incorporates the proposed modification into subparagraph (D). Central and SWB commented specifically on the unbundling requirement contained in sec.23.27(b)(3)(D). Central stated that it is unclear as to whether a LEC may file an application for pricing flexibility before unbundling a service into its competitive and monopoly portions. SWB recommended that the commission reject what it termed "ad hoc unbundling." SWB contended that, given residual ratemaking practices, such unbundling could lead to anomalous results. The commission believes that to ensure equal opportunity to all telecommunications entities in a competitive marketplace, the commission must ensure that all providers-LEC and competitor-obtain access to noncompetitive components at the same rates, terms, and conditions. In other words, if the LEC's competitor (or a customer of that competitor) must buy a noncompetitive component on a bundled basis at a tariffed rate, then so must the LEC. The commission finds that absent such a requirement, the LEC is free to discriminate in favor of itself. The commission finds that a rule that would allow such discrimination would be contrary to PURA, sec.47, which provides that "[n]o public utility may discriminate against any person or corporation that performs services in competition with the public utility, nor may any public utility engage in any other practice that tends to restrict or impair such competition." As modified, the rule ensures against such potential discrimination by clearly providing that if a service includes components that are not subject to significant competitive challenges, then the LEC may not be granted pricing flexibility for that service. As for SWB's concerns regarding "ad hoc unbundling," the commission finds that, given the modifications discussed supra, ad hoc unbundling will not occur in the context of an LEC application for pricing flexibility. The commission notes that a proceeding to unbundle and tariff specific services is the appropriate forum in which to address SWB's concerns. SWB recommended that sec.23.27(b)(3)(D) be revised to preclude only "unreasonable discrimination" among "similarly situated" customers or customers "within a classification." In support of this position, SWB noted that residential customers in the Austin exchange pay a lower "basic rate" than customers residing in the larger Houston exchange. According to SWB, the appropriate legal standard under PURA, sec.45 is that "as to rates and services" the public utility not make or grant any "unreasonable" preference or advantage or subject any person "within any classification" to any "unreasonable prejudice or disadvantage." SWB also cited PURA, sec.18(e) in support of this position. MCI opposed SWB's proposal to limit the requirement to "similarly situated customers" and recommended, instead, adoption of sec.23.27(b)(3)(D) as published. MCI commented that, given the commission's obligation to prevent anticompetitive rates and practices, it was "cautious" about any provision that would allow an LEC to determine which customers are "similarly situated." MCI cited PURA, sec.38 in support of its position that the LEC cannot discriminate in the application of rates between classes of customers. The commission declines to adopt SWB's proposal to revise sec.23.27(b)(3)(D) to preclude only "unreasonable discrimination" by the LEC among "similarly situated customers" or "customers within a classification." The commission does not dispute that there may be circumstances in which reasonable discrimination among customers within a classification is permissible, as in the pricing of customer- specific contracts. However, the commission finds that SWB has neither alleged nor demonstrated that such circumstances are present with respect to the LEC's provision of components not subject to significant competitive challenges, where an LEC not only uses those components to provide service to its own customers but also controls the rates, terms, and conditions under which competitors are able to purchase those components. A number of commenters opposed the exchange- by-exchange approach of sec.23.27(b) (3)(E). Consumers Union, OPC, TEXALTEL, and TSTCI argued that the exchange-by-exchange approach will encourage deaveraging which, in turn, will adversely affect the LECs' rural customers. These commenters believe that rural customers may be subsidizing competitive services but live in areas that are unlikely to benefit from competition, which focuses on large urban business-district customers. TEXALTEL commented that statewide availability of new services (within a certificated area) and statewide consistency in pricing have been the best tools available to bring the fruits of competition to rural Texas. OPC recommended that the commission adopt a scheme in which pricing flexibility is granted on a statewide or systemwide basis, or, alternatively, on a LATA-wide basis. TEXALTEL proposed revisions to sec.23.27(b)(3)(E) to implement its recommendation that the commission should structure rules so that rates are not deaveraged unless the LEC can establish by persuasive evidence that deaveraging is both necessary and in the public interest. MCI concurred in TEXALTEL's proposal. Central argued that average rates aid in creating a "price umbrella" for competitors. As explained supra, the commission is not persuaded that average rates are appropriate in a competitive marketplace. As discussed supra, applications for LEC pricing flexibility do not affect the deployment or availability of services in those exchanges in which the LEC has not requested regulatory flexibility. The commission believes that the legislature contemplated deaveraged rates in a competitive market. The commission therefore makes no change to sec.23.27(b)(3)(E) in response to these comments. The commission believes that consequences of rate deaveraging may be raised and considered in the context of several provisions of the rule, including sec.23.27(b)(6)(C)(viiix) (proposed sec.23.27(b)(4)(C)(ix)), which directs the commission to consider "whether the ability of the LEC to flexibly price the service within the designated exchange(s) would have any significant impact on universal service." OPC raised a number of additional objections to the exchange-by-exchange approach set forth in sec.23.27(b)(3)(E). OPC argued that such an approach is administratively burdensome and ignores the economic reality that the network is ubiquitous and an integrated system. According to OPC, pockets of competition do not constitute structurally competitive conditions. OPC contended that providing the LEC with "quick-strike" flexibility in selected locales where competitive niches have arisen may hinder the development of truly effective competition. TSTCI also commented on sec.23.27(b)(3)(E), requesting clarification as to whether a geographic market area involves interexchange services. MCI responded that no clarification is necessary as an LEC may designate more than one exchange in its application for pricing flexibility. The commission agrees with OPC that the exchange-by-exchange approach may be administratively burdensome. The commission believes, however, that the administrative burden is outweighed by the benefits to be obtained from such an approach. Pockets of competition may not constitute conditions that warrant pricing flexibility on a system-wide basis. However, a mechanism that permits LECs to seek pricing flexibility on an exchange-by-exchange basis offers the LEC the opportunity to respond in those geographic areas in which significant competitive challenges occur. The commission disagrees with OPC's characterization of the exchange-by-exchange approach as providing the LECs with "quick-strike" flexibility and believes it may have misconstrued the manner in which the rule will function. Implicit in OPC's comments and characterization is the notion that the commission will grant an LEC application for pricing flexibility to respond to the mere presence of competitors. PURA, sec.18 prohibits such a grant; the regulatory flexibility granted must be "appropriate" to allow the LEC to respond to "significant" competitive challenges. The commission makes no changes to these comments by OPC. The commission also declines to make any changes in response to TSTCI's comments, for the reasons stated by MCI. TEXALTEL recommended that sec.23.27(b)(3)(G) be amended so that applications for pricing flexibility include information concerning the LEC's market share vis-a-vis its competitors. OPC agreed with TEXALTEL. SWB, however, opposed TEXALTEL's proposal, arguing that the incremental value of the information is outweighed by the expense and delay in obtaining and considering it. The commission believes that, generally, the market share information TEXALTEL and OPC seek may be derived from information provided by the LEC in response to other provisions of sec.23.27(b)(3). The commission makes no change based on the comments of TEXALTEL and OPC. TSTCI and United opposed the requirement set forth in sec.23.27(b)(3)(G), claiming that the small LECs must lose the few customers they have to show that actual alternatives exist in the marketplace. MCI disputed these comments, characterizing them as doomsday scenarios. As noted, the commission cannot modify the statutory criteria for determining the level of competition in a specific telecommunications market or submarket. The commission, however, has modified the rule to allow the commission, in determining whether it is appropriate to grant pricing flexibility to LECs with less than 50,000 access lines, to consider competition in exchanges other than those in which the LEC will provide the service. The commission believes that the rule, as modified, adequately responds to the concerns of TSTCI and United, given the statutory constraints imposed by PURA, sec.18(e). TSTCI and TTA asserted that it is extremely difficult for an LEC to meet the requirements of sec.23.27(b)(3)(H), particularly clauses (iii) and (iv). These commenters argued that the subparagraph essentially requires the LEC to obtain market intelligence to which it has no access. TSTCI proposed amending the section by adding the language "where possible the telecommunications utility should attempt to provide the following." MCI commented that it is difficult to envision a situation in which an LEC will know it is facing a significant competitive challenge yet have no information about where or to whom a competitor might offer a service. MCI also observed that the LEC must merely "discuss" the criteria set forth in subparagraph (H). The commission notes that in sec.23.27(b)(3)(H) the LEC is directed to discuss the statutory criteria specified in PURA, sec.18(e)(2) as they apply to products or services that are the same, equivalent, or substitutable for the LEC service which is the subject of the application for pricing flexibility. PURA specifically instructs the commission to consider these criteria before making any determination as to the level of competition in a particular market or submarket. Neither TSTCI nor TTA have explained how the commission could make the requested determination absent this information. The commission makes no changes to subparagraph (H) based on the comments of TSTCI and TTA. GTE recommended that the commission delete sec.23.27(b)(3)(I) in its entirety, because a showing under subparagraph (G) is sufficient to demonstrate that a service is subject to effective competition. MCI strongly opposed GTE's recommendation, arguing that the language of the subparagraph is consistent with the statutory mandate. MCI proposed reorganizing sec.23.27(b)(3) by moving subparagraph (I) to the beginning, because this subparagraph states such a fundamental requirement. Digital Direct commented that the language of this subparagraph more closely tracks the language of PURA, sec.18(e) and will make it easier for LECs to obtain pricing flexibility for a service. The commission agrees with Digital Direct and MCI that sec.23.27(b)(3)(I) contains a fundamental statutory requirement. The commission believes that GTE's comments are predicated on an interpretation of PURA, sec.18(e)(2) that authorizes the commission to grant an LEC pricing flexibility in response to the "presence" of competition. GTE's suggestion would relieve the LEC seeking pricing flexibility from demonstrating that the level of competition poses a significant competitive challenge to the LEC's service and whether the requested flexibility is an appropriate response to that significant competitive challenge, as expressly required by PURA, sec.18(e)(2). GTE has not demonstrated that sec.23.27(b)(3)(G) is adequate to make these determinations. The commission therefore declines to delete this subparagraph. It also declines to reorganize sec.23.27(b)(3), as requested by MCI, as MCI neither claimed nor demonstrated such reorganization would facilitate the commission's implementation of the rule. USM objected to the fact that sec.23.27(b)(3)(I) neither defined the phrase "significant competitive challenge" nor provided standards for determining such challenge. USM commented that PURA, sec.18(e)(2) mandates an evidentiary hearing under specified standards of proof imposed on the telephone company in order to determine the level of competition and, thus, whether there is a "significant competitive challenge." The commission notes that USM proposed neither a definition nor standards to address its concerns. Further, the commission notes that PURA, sec.18(e)(2) does not set forth standards, but rather sets forth the types of information the commission must consider in the evidentiary hearing. The commission believes that USM's comments indicate that it has failed to read the rule as a whole. The commission has structured this rule so that, pursuant to sec.23.27(b)(3)(H)(i)-(v), an LEC seeking pricing flexibility must provide the information that PURA, sec.18(e)(2)(A)-(F) requires the commission to consider in making a determination regarding the level of competition. Pursuant to sec.23.27(b)(6)(C) (proposed sec.23.27(b)(4)(C) ) the commission must consider this information, in the evidentiary hearing, to determine whether the level of competition in a specific market or submarket constitutes a "significant competitive challenge." The commission therefore declines to modify sec.23.27(b)(3)(I) in response to USM's comments. TSTCI, which construed sec.23.27(b)(3)(I) to require an LEC to produce market share data, recommended that the commission modify sec.23.27(b)(3)(I) by adding the phrase, "to the extent that such information is not prohibitively difficult to produce." The commission does not agree that subparagraph (I) requires the LEC to specifically produce market share data, although such data could be provided by the LEC pursuant to this subparagraph. The commission believes that TSTCI's proposed language allows an applicant to effectively disregard the basic statutory requirement embodied in subparagraph (I). The commission therefore declines to modify the subparagraph as suggested by TSTCI. In response to sec.23.27(b)(3)(J), both TSTCI and USM commented that if the term "basic local exchange service" is used in the rule it should be defined. MCI replied that the term, which is statutory, need not be defined. USM added that there is no legal authority to prevent pricing flexibility in "basic local exchange service." For the source of its authority, the commission refers USM to PURA, sec.18(j). The commission previously discussed its decision not to define "basic local exchange service" in its discussion of comments to sec.23.27(b)(2). For the reasons set forth therein, the commission declines to modify this subparagraph. TSTCI objected to the prohibition on detariffing contained in sec.23.27(b)(3) (K) and (b)(6)(B) (proposed sec.23.27(b)(4)(B)), asserting that the prohibition is inconsistent with PURA. According to TSTCI, the only statutory limitation with respect to flexible pricing of message telecommunications service (MTS), switched access service for interexchange carriers, and wide area telecommunications service (WATS) is a prohibition on customer-specific pricing. MCI disagreed with TSTCI, noting that the appropriate characterization would be that the detariffing prohibition is not expressly provided in PURA. MCI commented that the language of the subparagraph appears consistent with the level and nature of competition in the marketplace for MTS and WATS. MCI added, however, that it would reconsider its position if the LECs agreed to compete on a 1+ basis for such traffic. The commission finds that the prohibition on detariffing specified in sec.23. 27(b)(3)(K) and (6)(B) (proposed sec.23.27(b)(4)(B)) is consistent with PURA, which prohibits customer-specific pricing of MTS, switched access for interexchange carriers, and WATS. The commission finds that detariffing and customer-specific pricing are similar in that the LEC is not required to maintain specific rates applicable to all customers. However, the commission believes that detariffing offers an LEC more regulatory flexibility than customer-specific pricing, because the legislature has not imposed on a detariffed service the requirements of PURA, sec.18(e)(3)(B), such as submission of a contract or a showing that the rates recover the appropriate costs of the service. Because detariffing provides greater regulatory flexibility than does customer-specific pricing, the commission believes it is consistent with the legislative intent embodied in PURA to extend the prohibitions that apply to customer-specific pricing to detariffing. Therefore, the commission declines to modify sec.23.27(b)(3)(K) and sec.23.27(b)(6)(B) (proposed sec.23.27(b)(4)(B)) in response to TSTCI's comments. GTE and TSTCI proposed that the commission delete sec.23.27(b)(3)(L), which requires the LEC to propose a mechanism to prevent the subsidization of the service for which it seeks pricing flexibility. These commenters agreed that if the LEC has made the showing required in sec.23.27(b)(3)(B)(ii), concerning cost recovery, then cross-subsidization concerns are not present. SWB objected to the requirement because it presumes that subsidization would occur in all cases in the absence of specific preventive mechanisms. SWB proposed alternative language so that, "if appropriate," the LEC is to "demonstrate" that cross-subsidization does not occur with respect to class costs that are not included in the LEC's long-run incremental cost study. MCI stated that it was willing to accept SWB's proposed revisions except the phrase "if appropriate," which MCI claimed rendered the requirement optional. OPC objected to SWB's proposal on the grounds that it rendered the requirement optional; it strongly supported sec.23.27(b)(3)(L) as published. The commission declines to eliminate this requirement, which it considers consistent with PURA, sec.18(g). However, to address both SWB's concerns regarding an implicit presumption of subsidization and the concerns of commenters who argue that this requirement, as published, is duplicative of sec.23.27(b)(3)(B)(ii), the commission modifies sec.23.27(b)(3)(L) to clarify that the mechanisms are required only with respect to costs associated with the LEC's provision of the service that are not included in either its incremental cost study or its tariffed rates. Subparagraph (L) reflects the commission's recognition that there may be costs associated with providing a competitive service that are not reflected in either a long-run incremental cost study or the tariffed rates for components not subject to significant competitive challenge. The commission finds that GTE and TSTCI, with their suggestions to delete this section, would have the commission ignore both these costs and any consideration of how to prevent these costs from being recovered from monopoly ratepayers. The commission finds that SWB's suggested modification would render sec.23.27(b)(3)(L) an optional showing limited to class costs. As noted in response to TEXALTEL's comments concerning incremental cost studies, supra, sec.23.27(b)(3)(L) was not intended to be so limited. TSTCI supported sec.23.27(b)(3)(M), but urged that this requirement be imposed on any telecommunications utility that enters an exchange market area. To that end, TSTCI recommended revisions to sec.23.61 of this chapter, relating to telephone utilities, to revise the commission's filing requirements. MCI opposed TSTCI's suggestion, commenting that TSTCI once again raises the "equal opportunity" issue. Because revisions to sec.23.61, relating to telephone utilities, are outside the scope of this rulemaking, the commission makes no changes to this subparagraph based on the comments of TSTCI. TSTCI is free to petition for a rulemaking on this topic. USM contended that "consideration" of statutory criteria, as provided for in sec.23.27(b)(6) (proposed sec.23.27(b)(4)), is inadequate; according to USM, the LEC must meet the statutory standards in an evidentiary hearing. The commission disagrees with USM. The plain language of the statute provides that the commission "shall hold an evidentiary hearing to consider" the criteria specified in PURA, sec.18(e)(2)(A)-(F)." (emphasis added). The commission makes no changes to this paragraph. MCI proposed revising sec.23.27(b)(6)(C)(i)-(iv) (proposed sec.23.27(b)(4)(C) (i)-(iv)) by adding the phrase "within the exchange(s) designated pursuant to subsection (b)(3)(E) of this section." According to MCI, this revision is consistent with sec.23.27(b)(6)(C)(ix) (proposed sec.23.27(b)(4)(C)(ix)) and makes it clear that the competition being analyzed is the competition actually present in the exchange(s) in which the LEC has chosen to offer the service, as opposed to competition the LEC may be experiencing elsewhere. The commission agrees with MCI's suggested modification and revises sec.23.27(b)(6) (C)(i)-(iv) (proposed sec.23.27(b)(4)(C)(i)-(iv)) accordingly. For consistency, the commission similarly modifies sec.23.27(b)(3)(I). USM asserted that including the phrase "equivalent or substitutable service" in sec.23.27(b)(6)(C)(v) (proposed sec.23.27(b)(4)(C)(v)), pertaining to entry and exit barriers, alters the statutory standard in PURA, sec.18(e)(2). The commission disagrees. PURA, sec.18(e)(2)(A)-(D) specifically refers to "the same, equivalent, or substitutable" service or services. USM has neither alleged nor demonstrated that including this language in clause (v) leads to a result that is inconsistent with the statutory standard. The commission therefore makes no change to this clause in response to USM's comments. GTE, SWB, and TSTCI urged the commission to delete sec.23.27(b)(6)(C)(vi) and (vii) (proposed sec.sec.23.27(b)(4)(C)(vi) and (vii)). GTE considered these provisions redundant and unnecessary. SWB stated that the provisions posed an irresistible temptation for potential competitors to seek to hamstring the LEC. Rather than require the LEC to propose a mechanism to minimize potential anticompetitive practices identified in the record, SWB suggested that the better approach would be to address perceived anticompetitive behavior as it arises, in response to complaints filed by LEC competitors. Both GTE and TSTCI argued that if the LEC makes the requisite showing concerning costs, it need not propose a mechanism to address that which can be presumed not to exist: subsidization of the service. MCI and OPC opposed LEC recommendations to either delete or modify these provisions. MCI observed that the requirement in sec.23.27(b)(6)(C)(vi) (proposed sec.23.27(b)(4)(C)(vi)) applies only in the event anticompetitive practices have been identified in the record. MCI commented that the commission's obligation to prevent subsidization of competitive services supports retention of sec.23.27(b)(6)(C)(vii) (proposed sec.23.27(b)(4)(C)(vii)). The commission makes no changes to sec.sec.23.27(b)(6)(C)(vi) and (vii) (proposed sec.23.27(b)(4)(C)(vi) and (vii)) in response to the comments of GTE, SWB, and TSTCI. The commission does not believe it would be consistent with PURA, sec.18(g) to ignore anti-competitive practices that have been identified in the record. Commenters opposing sec.23.27(b)(6)(C)(vii) (proposed sec.23.27(b) (4)(C)(vii)) raised virtually the same arguments as those raised against sec.23. 27(b)(3)(L). The commission believes that these opposing commenters' concerns have been adequately addressed by clarifying subparagraph (L) to require mechanisms only with respect to costs associated with the LEC's provision of the service that are not included in its incremental cost study. During the October 13, 1992, public hearing, various parties discussed issues pertaining to customer specific contracts, particularly contracts for the provision of central office based PBX-type services. According to SWB, the legislature in PURA, sec.18(e)(3)(B) granted the LECs authority to enter into customer-specific contracts for central office based PBX-type services to allow the LECs to compete with PBX vendors. The commission therefore modifies sec.23.27(c)(1)(A) to clarify that the pricing flexibility referenced in sec.23. 27(c)(1)(A) extends only to services that compete directly with customer premise equipment (CPE) provided by PBX vendors. Additionally, because the delay in approving these customer specific contracts often results from inclusion of services other than those that compete with CPE provided by PBX vendors, the commission believes that this modification addresses the concern raised by the LECs regarding the need to expedite review of customer specific contracts to accommodate customer demand and competitive challenge. TEXALTEL proposed that the rule be revised to bar an LEC from refiling an application for pricing flexibility before one year has elapsed from denial. TEXALTEL neither proposed language nor recommended that any particular section be revised to accomplish this result. SWB opposed TEXALTEL's suggestion, arguing that no justification existed for imposing such a bar. The commission agrees with SWB and declines to adopt TEXALTEL's suggestion. To the extent some basis, such as res judicata, exists to bar an LEC from refiling an application for pricing flexibility, that issue may be raised and resolved at the time the LEC refiles its application. In response to sec.23.27(c)(1)(D), TEXALTEL proposed a revised definition of "customized services" that included the addition of "features" and "functions" as defining characteristics and a prohibition on LEC bundling of unrelated services. TEXALTEL commented that describing a customized service as a "package" could be used by an LEC to discriminate among customers. TEXALTEL stated that customized services should be defined as services in which all components are unique and not available as tariffed services. According to TEXALTEL, a tariffed service that is an integral part of a customized service should be sold pursuant to existing tariffs. TEXALTEL's definition also directed the LEC to make available to any customer at nondiscriminatory rates a customized service that is provided to any other customer. MCI agreed in principle with TEXALTEL's recommendation; SWB did not. SWB argued that TEXALTEL's definition would render the pricing flexibility authorized in PURA, sec.18(e) meaningless with respect to customized services. SWB added that language directing LECs to make customized services available at nondiscriminatory rates transformed customized services into tariffed services. The commission deletes the term "package" in the definition of "customized service" to respond to TEXALTEL's concerns regarding possible discriminatory treatment by the LEC. However, because the commission believes that inclusion of additional defining characteristics would exacerbate TEXALTEL's concerns regarding possible discriminatory treatment by the LEC, the commission declines to adopt TEXALTEL's suggestion to add to the definition the terms "features" and "functions." The commission notes that sec.23.27(c)(4)(L)(i) requires that the LEC demonstrate, in its application for approval of a customer-specific contract, that the terms of the contract and associated tariff sheets are not unreasonably preferential, prejudicial, or discriminatory. The commission believes that LEC compliance with this provision of the rule should adequately address TEXALTEL's remaining concerns regarding possible discriminatory treatment. In response to sec.23.27(c)(2), TEXALTEL commented that a 10-day notice period is beneficial only if that notice is published in some publicly-available log. TEXALTEL proposed that the commission assign such notices a project number and list them on commission logs, a procedure TSTCI commented it could support. Alternatively, TEXALTEL proposed a revision to sec.23.27(c)(2) that would require the LEC to furnish written notice of applications for approval of customer-specific contracts to each person who has made a written request to the LEC for copies of said notices. MCI stated that it agreed with TEXALTEL that notice to persons and entities other than OPC is appropriate and supported TEXALTEL's recommendations. SWB opposed the recommendation that the LEC maintain a mailing list, arguing that maintenance of such a list is burdensome and unjustified. According to SWB, once a service is declared "subject to competition" no one other than the commission and OPC have a legitimate interest in obtaining notice of every contract filed. The commission declines to adopt TEXALTEL's recommendations with respect to sec.23.27(c)(2), because notice of such filings is published in a publicly- available log. Section 23.27(c)(3) requires that the commission publish in the Texas Register notice of the LEC's intent to file an application for approval of a customer-specific contract. Additionally, the commission notes that under its current practices notices of intent are routinely assigned tariff numbers and included on the commission's weekly listing of new filings. SWB commented that the phrase "description of the exchange(s)" in sec.23. 27(c)(2)(E) is unclear and may lead to confusion as to what would be a "description." SWB recommended that the subparagraph be revised to require the LEC to state whether the service is to be provided on a statewide basis or whether it will only be offered in specific LATAs or specific exchanges. MCI agreed with SWB's suggested clarification. The commission notes that SWB did not propose a similar revision to sec.23.27(b)(3)(E), pertaining to the designation of exchange(s) in which the LEC seeks pricing flexibility. The commission declines to adopt SWB's proposed revision as it believes that proposal fails to accomplish the purpose of this subparagraph: to require the LEC to identify the exchange(s) in which the LEC actually will be pricing on a customer-specific basis. The commission agrees with SWB and MCI that the term "description" may be confusing, given that both sec.23.27(b)(3)(E) and (c)(4)(D) use the verb "designate." The commission therefore modifies the subparagraph to require the LEC "to designate the exchange(s) in which the service will be offered under the contract." GTE commented that sec.23.27(c)(4) does not allow the LEC to adequately protect information it designates confidential and therefore proposed the addition of a new subparagraph (N) to sec.23.27(c)(4). GTE's recommended modification provided that "[t]echnical descriptions and customer specific information which are proprietary information shall be so identified and available only under protective nondisclosure agreement." SWB agreed that the rule required additional language to address LEC concerns regarding information claimed to be confidential. SWB, which recommended providing the same level of protection afforded by the repealed rule, proposed language virtually identical to that contained in repealed sec.23.27(m). TSTCI stated that customer-specific information contained in tariffs should be protected as highly confidential. MCI, which generally supported protection of information claimed to be confidential, stated that it concurred in GTE's and SWB's recommendations to the extent the information the LEC sought to protect would qualify for protection pursuant to the type of protective order typically entered in proceedings before the commission. GTE and SWB requested that the commission treat as confidential the LEC's technical descriptions, cost information, and the customer-specific contract. The commission does not believe such information is presumptively confidential under the Texas Open Records Act, Texas Civil Statutes, Article 6252-17a (Vernons Supplement 1992)(hereinafter the "Open Records Act"). The Open Records Act, sec.3(a), provides that "[a]ll information collected, assembled, or maintained by or for governmental bodies, except in those situations where the governmental body does not have either a right of access to or ownership of the information, pursuant to law or ordinance or in connection with the transaction of official business is public information and available to the public." To attain its statutory objectives, PURA, Article V grants the commission the right of access to information; consequently, the commission considers all information "collected, assembled, or maintained" by it to be presumptively public information. While the Open Records Act excludes from this designation many categories of information, GTE and SWB have neither alleged nor demonstrated that the information they seek to withhold from disclosure falls within any exception to the Open Records Act. The commission concludes that treating this information as presumptively confidential is contrary to both the spirit and letter of the Open Records Act. The commission cannot prescribe access to information that is more restrictive than the Open Records Act. It therefore declines to modify sec.23.27(c)(4) in response to the comments of GTE, SWB, and MCI. The commission notes, however, that this rule does not preclude an LEC from making a showing to entitle the LEC to protection of information that it considers confidential. SWB commented that compliance with sec.23.27(c)(4)(C) would require duplicative filings, particularly with respect to billing and collection contracts. SWB stated that it would be burdensome and unnecessary to provide the required information in every application for approval of a customer-specific contract. SWB therefore requested that the commission delete the requirements of sec.23.27(c)(4)(C)(ii), (iii), and (iv). MCI urged the commission to reject SWB's recommendation because it did not believe that an allegation that these provisions were burdensome constituted sufficient basis to delete clauses (ii), (iii), and (iv). The commission finds that SWB's concern regarding potential duplicative filings does not warrant deletion of sec.23.27(c)(4)(C)(ii)-(iv) with respect to all services for which the LEC enjoys customer-specific pricing. As MCI noted in comments to sec.23.27(b)(3)(C), LECs often assign different names to identical services. Consequently, the commission believes that this information is necessary so that the commission may ensure that the LEC is indeed offering the service for which it has received pricing flexibility. The commission notes that SWB did not quantify what percentage of its applications for approval of customer-specific contracts would likely result in duplicative filings. The commission makes no change to sec.23.27(c)(4)(C) in response to SWB's comments. SWB, TSTCI, and TTA all requested that the commission modify sec.23.27(c)(4) (D) to delete the requirement that an LEC include in its application for approval of a customer-specific contract a map or maps of the designated exchanges. MCI urged that the commission modify this provision to clarify its intention; MCI stated that the LECs express a legitimate concern if the commission merely seeks copies of maps currently on file. In response to these comments, the commission modifies sec.23.27(c)(4)(D) to delete the requirement that a LEC include a map or maps in its application for approval of a customer- specific contract. SWB commented that the affidavit requirements set forth in sec.23.27(c)(4)(I) should be modified. SWB proposed that the affiant should be required to attest only to an awareness of competitive choices rather than attest to an active consideration of competitive sources. SWB also proposed that applications for approval of "recasts" (defined by SWB as contracts typically involving recognition of new payment terms and conditions and/or rate structure) should not require an affidavit, unless the service arrangement is changing. MCI concurred with SWB's comment that an affidavit is unnecessary unless the customer's service arrangement is changing. PURA, sec.18(e)(3)(B) specifically requires that a customer-specific contract to provide the four services specified in sec.23.27(c)(1)(A) must be "accompanied with an affidavit from the person or entity contracting for the telecommunications service stating that he considered the acquisition of the same, equivalent, or substitutable services by bid or quotation from a source other than the local exchange company." Thus, the legislature included in PURA, sec.18(e)(3)(B) both the requirement of a customer affidavit and the language of that affidavit. The commission is not convinced that SWB's suggested language is consistent with the legislative intent embodied in PURA, sec.18(e) (3)(B), given the specificity of that statutory provision. The commission therefore declines to modify sec.23.27(c)(4)(I) in response to SWB's comments. It also declines to add a contract "recast" to the exceptions contained in the subparagraph. The commission understands a "recasted" contract to be one that has been renegotiated. Because the renegotiated contract supersedes the commission- approved contract, the commission believes it should be treated as a new contract. TSTCI opposed filing tariff sheets associated with a customer-specific contract, as required by sec.23.27(c)(4)(K), because it claimed that customer- specific rates constitutes highly confidential information. TSTCI stated that it would provide such information under seal. MCI recommended adoption as published, observing that SWB, the only LEC that has significantly used customer-specific pricing, did not object to this requirement. For the reasons set forth supra, the commission believes that treating rate information as presumptively confidential is contrary to both the spirit and letter of the Open Records Act. The commission therefore declines to modify sec.23.27(c)(4)(K) in response to TSTCI's comments. In response to sec.23.27(c)(5), both GTE and SWB reiterated their comments and recommendations made in response to sec.23.27(c)(4) for additional protection of information filed as part of an application for approval of a customer-specific contract. SWB again recommended adding the language from repealed sec.23.27(m). GTE proposed that sec.23.27(c)(5) be amended to include the masking not only of customer identity and address but of "other information identified as proprietary." The commission believes that adoption of either GTE's or SWB's proposed language would allow an LEC to unilaterally conceal information for which there may be no ascertainable basis for confidential treatment. For the reasons stated supra, the commission believes that the presumption of confidentiality the LECs seek is contrary to the Open Records Act. The commission therefore declines to adopt either GTE's or SWB's proposed modification. Additionally, the commission notes that commenters opposed to the interim approval procedures set forth in sec.23.27(c)(6) (proposed sec.23. 27(c)(7)) indirectly raised concerns regarding the anticompetitive effect that results from the masking of customer identity. The commission is persuaded that absent identification of the customer, neither the competitor nor the commission can detect anticompetitive patterns and practices. Given that the commission does not favor a presumption of confidentiality and given that the masking of customer identity raises concerns regarding competitive consequences the commission deletes sec.23.27(c)(5). The commission finds that disclosure of customer identity will not place the LEC at a competitive disadvantage, since the customer will have entered into a contract with the LEC prior to submission of the application. MFS urged the elimination of the interim approval procedures set forth in sec.23.27(c)(6) (proposed sec.23.27(c)(7)). MFS considered these provisions unnecessary given the commission's expedited review and approval of customer- specific contracts. Additionally, MFS commented that interim approval encourages the anticompetitive tactic of "locking up" customers. MCI and TEXALTEL, in reply comments, concurred with MFS. According to TEXALTEL, once service is approved on an interim basis "the deal cannot be undone without harm to the customer, the LEC, and to competition." SWB and TSTCI supported the interim approval provisions. Stating that these provisions were a "positive proposal," SWB recommended expanding the provisions to encompass those services specified in sec.23.27(c)(1)(A)-(D). TSTCI also supported interim approval procedures applicable to all customer-specific contracts; it commented that such relief was not contrary to PURA, sec.18. Absent such relief, TSTCI stated, CAP installation interval would always be shorter than the LECs. The commission finds that MFS, MCI, and TEXALTEL raise valid concerns regarding the possible anticompetitive consequences of permitting the LECs to obtain interim approval of customer-specific contracts. However, the commission also recognizes that without interim approval an LEC occasionally may be unable to adequately respond to customer needs or demands. The commission concludes that the most reasonable means by which to reconcile these competing interests is to retain the procedures for interim approval set forth in sec.23.27(c)(6) (proposed sec.23.27(c)(7)), but to modify sec.23.27 to require the LEC to identify both in its notice of intent and in its application the customer that is the subject of its application, and to require the LEC to demonstrate and the examiner to find good cause for interim approval. The commission finds that disclosure of customer identity will assist both the competitor and the commission in detecting anticompetitive practices resulting from interim as well as permanent approval. The commission believes that the good cause showing will tend to limit LEC requests for interim approval to those instances in which the rule's expedited approval procedures are clearly inadequate. The commission also modifies sec.23.27(c)(7) (proposed sec.23.27(c)(8)) so that interim approval of a docketed application may not be granted sooner than 10 days after the filing of an application. The commission believes that this modification is necessary to eliminate a possible incentive for an LEC to seek interim approval by initiating a docketed proceeding. The commission makes no changes to sec.23.27 in response to the comments of SWB and TSTCI. PURA, sec.18(e)(3)(B) specifically requires the filing of contracts for services specified in sec.23.27(c)(1)(A)- (D) "at least 30 days before initiation of the service contracted for." Neither SWB nor TSTCI reconciled this statutory language with the shorter approval period provided in sec.23.26(c)(6)(C)(ii) (proposed sec.23.27(c)(7)(C)(ii)). SWB recommended deleting from sec.23.27(c)(7)(A) (proposed sec.23.27(c)(8)(A)) language granting the examiner the discretion to docket at any time an application for approval of a customer-specific contract. SWB, claiming that "time is frequently of the essence in these applications," argued that reliance on procedural timelines is thwarted if the examiner can docket without having made a decision on administrative review. TSTCI proposed that the examiner be limited to approving or disapproving an application. TSTCI added that the applicant LEC may request docketing if the examiner recommends disapproval. MCI supported adoption of the language as published. MCI commented that it may be more efficient, from an administrative standpoint, to go forward with a docketed application rather than filing anew. The commission agrees with MCI that administrative efficiency warrants the grant of discretion contained in sec.23.27(c)(7)(A) (proposed sec.23.27(c)(8)(A)) . The commission does not find the comments of SWB and TSTCI persuasive. In fact, the commission finds SWB's argument internally inconsistent. SWB failed to reconcile its statement that "time is frequently of the essence in these applications" with the delay inherent in requiring the examiner to continue to engage in an administrative review even after concluding that the application must be docketed. TSTCI provided no explanation for its proposed modification. The commission makes no change to sec.23.27(c)(7)(A) (proposed sec.23.27(c)(8)(A) ) based on these comments. All comments, including those not specifically referenced herein, were fully considered by the commission. 16 TAC sec.23.27 The repeal is adopted under Texas Civil Statutes, Article 1446c, sec.16, which provide the Public Utility Commission of Texas with the authority to make and enforce rules reasonably required in the exercise of its powers and jurisdiction, and sec.18, which provides that the public interest requires that new rules, policies, and principles be formulated and applied to protect the public interest and to provide equal opportunity to all telecommunications utilities in a competitive marketplace. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on October 28, 1992. TRD-9214568 John Renfrow Secretary Public Utility Commission of Texas Effective date: November 18, 1992 Proposal publication date: April 28, 1992 For further information, please call: (512) 458-0100 The new section is adopted under Texas Civil Statutes, Article 1446c, sec.16, which provide the Public Utility Commission of Texas with the authority to make and enforce rules reasonably required in the exercise of its powers and jurisdiction, and sec.18, which provides that the public interest requires that new rules, policies, and principles be formulated and applied to protect the public interest and to provide equal opportunity to all telecommunications utilities in a competitive marketplace. sec.23.27. Rate-Setting Flexibility for Services Subject to Significant Competitive Challenges. (a) Application. The provisions of this section apply to local exchange companies (LECs), as defined by sec.23.61 of this title (relating to Telephone Utilities). (b) Pricing flexibility. (1) The types of pricing flexibility that an LEC may request are set forth in subparagraphs (A) -(D) of this paragraph. (A) Banded rates. If an LEC is granted the authority to charge banded rates, the minimum rates shall yield revenues that are equal to or greater than 105% of the long run incremental cost of the service in the geographic market in which the service will be provided. When an LEC is granted the authority to charge banded rates, the LEC shall file a tariff showing the minimum and maximum rates and specifying its current rate. The current rate, as specified in the LEC's tariff, shall be applied uniformly to all customers of the service in each exchange for which the commission has approved banded rates. If the LEC desires to charge a rate different from its current rate, but between the minimum and maximum rates, it shall file a revised tariff on or before the effective date of the rate change. The minimum and maximum rates may only be changed as provided for in the Act, sec. sec.42, 43, or 43B. (B) Customer-specific contracts. If an LEC is granted the authority to enter into customer-specific contracts, the contract shall be filed and approved pursuant to subsection (c) of this section. Customer-specific contracts filed pursuant to subsection (c) of this section may include services in addition to the service for which the LEC has been granted authority to price on a flexible basis only if each such adjunct service is clearly specified in the contract and provided pursuant to a tariff approved by the commission. (C) Detariffing. If an LEC is granted the authority to detariff a service, the LEC shall maintain at the commission a current price list for the service, and the commission shall retain authority to regulate the quality, terms and conditions of the detariffed service, other than rates. The commission may determine the appropriate ratemaking treatment of any revenues from or costs of providing a detariffed service in a proceeding under the Act, sec.sec.42, 43, or 43B. (D) Other types of pricing flexibility. If an LEC is granted the authority to engage in a type of pricing flexibility that the commission finds to be in the public interest other than those specified in subparagraphs (A) -(C) of this paragraph, that pricing flexibility shall be offered under such terms and conditions as the commission orders. (2) LECs have the authority to enter into customer-specific contracts for those services specified in subsection (c)(1)(A)-(D) of this section. For those services, LECs may apply to the commission pursuant to this subsection to obtain a type of pricing flexibility specified in paragraph (1) of this subsection other than customer-specific contracts. For other services, LECs may apply to the commission pursuant to this subsection to obtain any type of pricing flexibility specified in paragraph (1) of this subsection. However, nothing in this subsection shall permit an LEC to obtain pricing flexibility for basic local exchange service, including local measured service, or for any service that includes as a component a service not subject to significant competitive challenge. Additionally, nothing in this subsection shall permit an LEC to enter into customer-specific contracts or to obtain detariffing with respect to message telecommunications services, switched access services, or wide area telecommunications service. (3) An application for pricing flexibility filed under this paragraph shall: (A) include a statement of the LEC's intention to use the procedures established in this subsection; (B) specify the type of pricing flexibility requested and, if the type of pricing flexibility requested is either banded rates or some other type of pricing flexibility pursuant to paragraph (1)(D) of this subsection that involves rate-setting: (i) state the proposed rates, and if the type of pricing flexibility is banded rates, state the maximum and minimum rates; (ii) include detailed documentation demonstrating that the minimum rates yield revenues that are equal to or greater than 105% of the long run incremental cost of the service in the geographic market in which the service will be provided; (iii) demonstrate that the rates are not unreasonably preferential, prejudicial or discriminatory; (iv) demonstrate that the rates are such that the service identified pursuant to subparagraph (C) of this paragraph will not be subsidized directly or indirectly by regulated monopoly services; and (v) demonstrate that the rates are not predatory or anticompetitive; (C) identify the service for which the LEC is requesting pricing flexibility, including each component thereof, and provide functional and technical descriptions of the service, including: (i) the functions that the service is intended to perform for the customer; (ii) the types of equipment used to provide the service (including, but not limited to, transmission facilities, switching facilities, customer equipment, software functions, and protocol); (iii) the network configurations used to provide the service; and (iv) schematics; (D) identify each service that is not subject to significant competitive challenge but that, at the time the LEC files its application for pricing flexibility, the LEC intends to provide as a tariffed adjunct to the service identified in subparagraph (C) of this paragraph and, for each such service, provide: (i) functional and technical descriptions; and (ii) citations to the tariff provisions pursuant to which each such service will be provided; (E) designate the exchange(s) as to which the LEC is seeking pricing flexibility; (F) include a map or maps of the exchange(s) designated pursuant to subparagraph (E) of this paragraph that can be coordinated with the official commission boundary maps; (G) describe the products or services known to the LEC that are currently available in the exchange(s) designated pursuant to subparagraph (E) of this paragraph, and that are the same, equivalent, or substitutable for the service identified pursuant to subparagraph (C) of this paragraph, and identify the providers of those products or services; (H) with respect to the products or services described pursuant to subparagraph (G) of this paragraph, discuss: (i) the number and size of telecommunications utilities or other persons providing such products or services; (ii) the extent to which such products or services are available; (iii) the ability of customers to obtain such products or services at rates, terms, and conditions comparable to those that the LEC will offer; (iv) the ability of telecommunications utilities or other persons to make such products or services readily available at rates, terms, and conditions comparable to those that the LEC will offer; and (v) the existence of any significant barrier to the entry or exit of a provider of such products or services; (I) demonstrate that the level of competition with respect to all components of the LEC's service identified pursuant to subparagraph (C) of this paragraph represents a significant competitive challenge within the exchange(s) designated pursuant to subparagraph (E) of this paragraph that warrants the pricing flexibility specified pursuant to subparagraph (B) of this paragraph; (J) demonstrate that the service identified pursuant to subparagraph (C) of this paragraph is not basic local exchange service, including local measured service; (K) if the type of pricing flexibility requested pursuant to subparagraph (B) of this paragraph is customer-specific pricing or detariffing, demonstrate that the service identified pursuant to subparagraph (C) of this paragraph is not message telecommunications service, switched access service, or wide area telecommunications service; (L) to prevent the subsidization of the service identified pursuant to subparagraph (C) of this paragraph with revenues from regulated monopoly services, propose mechanisms to recover costs that may not be identified and recovered in a long run incremental cost study, including but not limited to costs associated with advertising, unsuccessful bids, and all items of plant used in the provision of the service; (M) identify and address the impact that approval of the application for pricing flexibility may have on universal service; (N) for any type of pricing flexibility other than detariffing, include proposed tariffs and identify any tariff language that restricts the resale, sharing, or joint use of the service identified pursuant to subparagraph (C) of this paragraph and any component thereof and demonstrate why such restrictive tariff language is consistent with the policy established in the Act, sec.18(a); and (O) include any other information that the LEC wants considered in connection with the review of its application. (4) An application for pricing flexibility shall be docketed and assigned to a presiding examiner. No later than 10 working days after the filing of an application for pricing flexibility, the presiding examiner shall issue an order scheduling a prehearing conference for the purposes of determining notice, establishing a procedural schedule, and addressing other matters as may be appropriate. The presiding examiner shall issue an order setting a procedural schedule that ensures that a final determination is made by the commission no later than 180 days after the completion of notice, as ordered by the presiding examiner. However, this 180-day period shall be extended two days for each one day of actual hearing on the merits of the case that exceeds 15 days. The presiding examiner or commission, upon a showing of good cause relating to the applicant's failure or refusal to prosecute, including but not limited to the applicant's unreasonable resistance to discovery, may further extend the timeline, provided that the order shall specifically identify the facts found to constitute good cause. This deadline may be expressly waived by the applicant. (5) For LECs with less than 50,000 access lines, the commission shall not be limited under paragraph (6)(C)(i)-(x) of this subsection to considering only competition within the exchange(s) where the LEC will provide the service. Pursuant to paragraph (3)(O) of this subsection, an LEC with less than 50,000 access lines may provide information that addresses the criteria of paragraph (3)(G)-(I) of this subsection with respect to products or services available outside the exchange(s) designated in paragraph (3)(E) of this subsection. (6) An application for pricing flexibility shall be approved if, after an evidentiary hearing, the commission finds, based on the evidence, that: (A) no service for which pricing flexibility is sought is basic local exchange service, including local measured service; (B) no service for which the LEC requests detariffing of rates or authority to enter into customer-specific contracts is message telecommunications service, switched access service, or wide area telecommunications service; (C) no service for which pricing flexibility is sought includes a component that is not subject to significant competitive challenge; (D) the grant of pricing flexibility for the service identified pursuant to paragraph (3)(C) of this subsection within the exchange(s) designated pursuant to paragraph (3) (E) of this subsection is appropriate to allow the LEC to respond to a significant competitive challenge, based upon consideration of the following: (i) the number and size of telecommunications utilities or other persons providing the same, equivalent, or substitutable service within the exchange(s) designated pursuant to paragraph (3)(E) of this subsection; (ii) the extent to which the same, equivalent, or substitutable service is available within the exchange(s) designated pursuant to paragraph (3)(E) of this subsection; (iii) the ability of customers to obtain the same, equivalent, or substitutable services at comparable rates, terms, and conditions within the exchange(s) designated pursuant to paragraph (3)(E) of this subsection; (iv) the ability of telecommunications utilities or other persons to make the same, equivalent, or substitutable service readily available at comparable rates, terms, and conditions within the exchange(s) designated pursuant to paragraph (3)(E) of this subsection; (v) the existence of any significant barrier to the entry or exit of a provider of the same, equivalent, or substitutable services within the exchange(s) designated pursuant to paragraph (3)(E) of this subsection; (vi) whether there are mechanisms to minimize potential anti-competitive practices, to the extent that any such practice has been identified in the record; (vii) whether there are mechanisms to prevent the subsidization of the service with revenues from regulated monopoly services; (viii) whether the ability of the LEC to flexibly price the service within the designated exchange(s) would have any significant impact on universal service; (ix) whether the type of pricing flexibility requested is appropriate in light of the level and nature of competition within the exchange(s) where the LEC will provide the service; and (x) any other relevant information contained in the record; (E) the rates, if the type of pricing flexibility granted is either banded rates or some other type of pricing flexibility pursuant to paragraph (1)(D) of this subsection that involves rate-setting, are just and reasonable and: (i) yield revenues that are equal to or greater than 105% of the long run incremental cost of the service in the geographic market in which the service will be provided; (ii) are not unreasonably preferential, prejudicial, or discriminatory; (iii) are such that the service will not be subsidized directly or indirectly by regulated monopoly services; and (iv) are not predatory or anticompetitive. (7) Nothing in this subsection is intended to prevent the presiding examiner from recommending, based on the record evidence, relief other than that requested in the application. (c) Customer-specific contracts. (1) An LEC shall have the authority to enter into customer-specific contracts for: (A) central office based PBX-type services for systems of 200 stations or more, as those services compete with customer premises equipment provided by PBX vendors; (B) billing and collection services; (C) high-speed private line services of 1.544 megabits or greater; (D) customized services that are unique because of size or configuration, provided that such customized services shall not include basic local exchange service, including local measured service, or message telecommunications services, switched access services, or wide area telecommunications service; and (E) any other service for which the commission has authorized the LEC to enter into customer-specific contracts pursuant to this section. (2) An LEC shall apply to the commission for approval of customer-specific contracts and, at least 10 days before any application for approval of a customer-specific contract and associated tariff sheets is filed, the LEC shall file a notice of intent with the commission and serve a copy of such notice upon the Office of Public Utility Counsel. Such notice of intent shall: (A) state the expected filing date; (B) state the LEC's intent to use the provisions of this subsection; (C) state whether the LEC will request interim approval pursuant to paragraph (6) of this subsection; (D) identify the customer; (E) include a brief description of the service; and (F) designate the exchange(s) in which the service will be offered under the contract. (3) The commission shall publish notice of the LEC's intent to file such application in the Texas Register. (4) The LEC shall file an application for approval of a customer-specific contract and associated tariff sheets that shall: (A) include a statement of the LEC's intention to use the procedures described in this subsection; (B) cite the specific statutory provision or commission order that granted the LEC the authority to enter into a customer-specific contract for the service identified in subparagraph (C) of this paragraph; (C) identify the service for which the LEC has been granted the authority to enter into customer-specific contracts; specify each additional service that the LEC will provide the customer at tariffed rates pursuant to the customer- specific contract; and provide functional and technical descriptions of the service for which the LEC has been granted the authority to enter into customer- specific contracts, including: (i) the functions that the service is intended to perform for the customer; (ii) the types of equipment used to provide the service (including, but not limited to, transmission facilities, switching facilities, customer equipment, software functions, and protocol); (iii) the network configurations used to provide the service; and (iv) schematics; (D) designate the exchange(s) in which the LEC will provide the service; (E) include information demonstrating that the service is a customized service, if the LEC claims that the service for which it is seeking approval of a customer-specific contract is a customized service; (F) include proof that the LEC's notice of intent has been filed with the commission and served upon the Office of Public Utility Counsel at least 10 days prior to the filing of the application; (G) specify the date on which the customer has requested initiation of the service; (H) include a copy of the contract; (I) for those services specified in paragraph (1)(A)-(D) of this subsection, include an affidavit from the person or entity contracting for the service stating that such person or entity considered acquiring the same, equivalent, or substitutable service from a source other than the LEC; however, in situations involving additions, changes, or deletions to a contract which has been previously approved by this commission, an additional affidavit from the person or entity contracting for the telecommunications service is not required unless the person or entity seeks to renew the contract or extend the contract period beyond that which was initially approved by the commission; (J) include detailed documentation demonstrating that the rates included in the customer-specific contract yield revenues that are equal to or greater than 105% of the customer-specific long run incremental cost of the service for which the LEC has been granted the authority to enter into customer-specific contracts; (K) include proposed tariffs; (L) demonstrate that the terms of the customer-specific contract and associated tariff sheets: (i) are not unreasonably preferential, prejudicial, or discriminatory; (ii) are such that the service identified pursuant to subparagraph (C) of this paragraph will not be subsidized directly or indirectly by regulated monopoly services; and (iii) are not predatory or anticompetitive; and (M) include any other information that the LEC wants considered in connection with the administrative review of its application. (5) The application filed pursuant to paragraph (4) of this subsection shall be filed at least 30 days before initiation of the service under the contract, unless interim approval is requested pursuant to paragraph (6) of this subsection. (6) For good cause, an LEC may request interim approval of a customer-specific contract and associated tariff sheets for services other than those specified in paragraph (1)(A)-(D) of this subsection. (A) The application filed pursuant to paragraph (4) of this subsection shall clearly indicate that the LEC is requesting interim approval of the contract and associated tariff sheets and that the service is eligible for such treatment under this subsection, and shall include a showing of good cause that warrants the requested interim relief. (B) Immediately upon filing its application, the LEC shall hand-deliver to the commission's telephone division, the commission's general counsel, the commission's director of hearings, and the Office of Public Utility Counsel a file-stamped copy of the application. (C) The request for interim approval shall be reviewed administratively. (i) The presiding examiner shall issue an order setting forth a procedural schedule for review of the request for interim approval, including: (I) dates by which interested persons and the Office of Public Utility Counsel may file comments or recommendations concerning the request; and (II) a date by which the commission's general counsel shall file comments or a recommendation concerning the request. (ii) The presiding examiner shall rule on the request for interim approval no sooner than 10 working days after the filing of an application. (D) Nothing in this paragraph shall be deemed to supersede the procedures and timelines set forth in paragraph (7) of this subsection, relating to the approval of customer-specific contracts and associated tariff sheets. (7) Approval of a customer-specific contract and associated tariff sheets is as follows. (A) An application for approval of a customer-specific contract and associated tariff sheets considered under this subsection shall be reviewed administratively, unless the LEC requests that the application be docketed or the presiding examiner, for good cause, determines at any point during the review that the application should be docketed. For good cause the presiding examiner may grant interim approval of an application that has been docketed, but may do so no sooner than 10 working days after the filing of the application. (i) The effective date of the customer-specific contract and associated tariff sheets shall be the later of: (I) 30 days after the filing of a sufficient application, as determined by the presiding examiner; (II) 30 days after publication of the notice of intent in the Texas Register; or (III) the date on which the LEC proposed in its application that the service contracted for be initiated. (ii) The effective date of the customer-specific contract and associated tariff sheets may be suspended for an additional 35 days for good cause. (iii) The presiding examiner shall issue an order setting forth a procedural schedule for review of the application for approval of a customer-specific contract and associated tariff sheets, including, but not limited to: (I) dates by which any interested person, the Office of Public Utility Counsel, or the commission's general counsel may file comments as to the sufficiency of the application; (II) procedures for expedited responses to requests for information; (III) dates by which interested persons and the Office of Public Utility Counsel may file comments or recommendations concerning the approval of the application; (IV) dates by which the commission's general counsel shall file comments or recommendations concerning the approval of the application. (iv) The presiding examiner shall review the application for approval of a customer-specific contract and associated tariff sheets filed pursuant to paragraph (4) of this subsection for sufficiency. If the presiding examiner concludes, after a review of the application and all comments, that material deficiencies exist in the application, the LEC shall be notified of any specific deficiency within 10 working days of the filing of its application. (B) After a sufficient application for approval of a customer-specific contract and associated tariff sheets has been filed, the presiding examiner shall review the application and all comments and recommendations filed to determine whether the LEC's application meets the requirements set forth in clauses (i)-(vi) of this subparagraph. If the presiding examiner finds that the application does not satisfy one or more of these requirements, the presiding examiner shall deny the application or, upon prior request of the LEC, docket the application. If docketed, the commission's rules applicable to docketed proceedings shall apply and the contracted service shall not be initiated without the approval of the commission or the presiding examiner. The application shall be approved by the presiding examiner if all of the following requirements are satisfied: (i) the contracted service is a service for which customer-specific contracts have been authorized pursuant to this section, or is a service specified in paragraph (1)(A)-(D) of this subsection; (ii) notice was provided as required by paragraphs (2) and (3) of this subsection; (iii) the contract includes language that informs the customer: (I) that the contract is subject to regulatory approval; (II) that the service may not commence under the contract until it has received regulatory approval; and (III) if interim approval is requested pursuant to paragraph (6) of this subsection, that interim regulatory approval of the contract may be reversed; (iv) an affidavit from the person or entity contracting for the service stating that such person or entity considered acquiring the same, equivalent or substitutable service from a source other than the LEC was provided, unless, pursuant to paragraph (4)(I) of this subsection, no affidavit is required; (v) the rates proposed in the customer-specific contract and associated tariff sheets yield revenues that are equal to or greater than 105% of the customer- specific long run incremental cost of the service for which the LEC has been granted authority to enter into customer-specific contracts; (vi) the terms of the customer-specific contract and associated tariff sheets are: (I) not unreasonably preferential, prejudicial or discriminatory; (II) such that the contracted service will not be subsidized directly or indirectly by regulated monopoly services; and (III) are not predatory or anticompetitive. (d) Subsequent review. The commission may review, modify, or revoke upon notice and hearing the authorization of any type or types of pricing flexibility granted pursuant to this section. (e) Review of cost standards under this section. Any costs standards established by the commission in this section shall be subject to change pending the commission's deliberations in the cost standards rulemaking required by the Act, sec.18(h). (f) Severability. If any provision of this section or the application thereof to any person or any circumstances is held invalid, such invalidity shall not affect other provisions or applications of this section that can be given effect without the invalid provision or application. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on October 28, 1992. TRD-9214569 John Renfrow Secretary of the Commission Public Utility Commission of Texas Effective date: November 18, 1992 Proposal publication date: April 28, 1992 For further information, please call: (512) 458-0100 Quality of Service 16 TAC sec.23.61 The Public Utility Commission of Texas adopts an amendment to sec.23.61, concerning telephone utilities, with changes to the proposed text as published in the April 28, 1992, issue of the Texas Register (17 TexReg 3050). The commission adopts the amendment primarily to clarify the commission's policy regarding telecommunications competition in the local exchange. Several of the definitions in sec.23.61(a) are revised from the April publication in response to specific comments received by the commission. These revisions are explained in the summary of comments. The section as adopted will clarify several definitions, including the definition of local exchange service. The term "local exchange service" is used numerous times in the Public Utility Regulatory Act (PURA or the Act). However, PURA does not define the term. Because the provision of local exchange service is one means by which a telecommunications utility is determined to be dominant, the commission's adoption of a revised definition of local exchange service will have a significant impact on the development of competition in the local exchange. The following submitted comments in response to the April 28, 1992, Texas Register publication: American Petroleum Institute (API); Central Telephone Company of Texas, Kerrville Telephone Company, Lufkin-Conroe Telephone Exchange, Inc., and Sugar Land Telephone Company (Central et al.); Digital Direct of Dallas, Inc. (Digital Direct); GTE Southwest Incorporated and Contel of Texas, Inc. (GTE); MCI Telecommunications Corporation (MCI); Metropolitan Fiber Systems, Inc. (MFS); Office of Public Utility Counsel (OPC); Southwestern Bell Telephone Company (SWBT); Sprint Communications Company L.P. (Sprint); Teleport Communications Group (Teleport); Texas Association of Long Distance Telephone Companies (TEXALTEL); Texas Statewide Telephone Cooperative, Inc. (TSTCI); Texas Telephone Association (TTA); and U.S. Metroline Services, Inc. (USM). Reply comments were filed by Centex Telemanagement, Inc. (Centex), Central et al., Digital Direct, GTE, MCI, MFS, SWBT, Sprint, Teleport, TEXALTEL, Texas Cable TV Association (TCTA), TSTCI, TTA, and USM. In addition, the commission held a public hearing on October 13, 1992, to receive additional comments. The local exchange carriers (LECs) generally argue that upon adoption of the proposed definition of local exchange service, the commission must necessarily deregulate the LECs with respect to the services listed in sec.23. 61(a)(17)(B) (those services excepted from the definition of local exchange service). The crux of the LECs' argument is that the proposed amendment results in asymmetrical regulation that is contrary to the express requirements of PURA. PURA, sec.3(c)(2)(B) states: "dominant carrier when used in this Act means (i) a provider of any particular communication service which is provided in whole or in part over a telephone system who as to such service has sufficient market power in a telecommunications market as determined by the commission to enable such provider to control prices in a manner adverse to the public interest for such service in such market; and (ii) any provider of local exchange telephone service within a certificated exchange area as to such service. A telecommunications market shall be statewide until January 1, 1985. After this date the commission may, if it determines that the public interest will be served, establish separate markets within the state. Prior to January 1, 1985, the commission shall hold such hearings and require such evidence as is necessary to carry out the public purpose of this Act and to determine the need and effect of establishing separate markets. Any such provider determined to be a dominant carrier as to a particular telecommunications service in a market shall not be presumed to be a dominant carrier of a different telecommunications service in that market" (emphasis added). Generally, the LECs contend that the foundation for the commission's dominant carrier regulatory authority over them is their provision of local exchange service (as defined by the commission) and that the commission's authority is specific to that service. In supporting this position, the LECs rely on the language in PURA sec.3(c)(2)(B)(ii) that states that "dominant carrier means any provider of local exchange telephone service within a certificated exchange area as to such service." The LECs argue that the phrase "as to such service" prohibits the commission from regulating the LECs as dominant carriers with respect to any services other than those that are defined as local exchange service, absent a determination of dominance under PURA sec.3(c)(2)(B)(i). According to the LECs, their provision of local exchange service is not a threshold condition that confers upon the commission the authority to apply dominant carrier regulation to all other services they offer. The LECs contend, therefore, that the commission must necessarily deregulate them with respect to those services listed in sec.23.61(a)(17)(B). The LECs acknowledge, however, that dominant carrier regulation for the services listed in sec.23.61(a)(17)(B) could be reinstated on a company- and service-specific basis upon a determination of dominance under PURA, sec.3(c)(2) (B)(i). (see, e.g., Central et al . comments at 3-4, GTE reply at 8-9, SWBT comments at 2, 9, 14-16, and 38- 39, TSTCI comments at A1-A3, TSTCI reply at 3, and TTA comments at 3). The LECs also rely on the requirement in PURA, sec.3(c)(2)(B)(ii) that "[a] ny such provider determined to be a dominant carrier as to a particular telecommunications service in a market shall not be presumed to be a dominant carrier of a different telecommunications service in that market." The LECs submit that this requirement is further evidence that PURA prohibits the commission from exercising its dominant carrier regulatory authority over the LECs with respect to the services listed in sec.23.61(a)(17)(B), absent a dominance proceeding. The LECs contend that the referenced language requires a presumption of nondominance with respect to any services other than those included in the definition of local exchange service. The LECs believe that a dominance proceeding must precede any commission exercise of dominant carrier regulation with respect to the services listed in sec.23.61(a)(17)(B) (see, e.g. , Central et al. comments at 2, Central et al. reply at 2-3, GTE reply at 9, SWBT comments at 2, 9, 14-16, and 38-39, TTA comments at 4, TSTCI comments at A2, and TSTCI reply at A1-A2). Commenters other than the LECs express concern that the LECs might indeed use the proposed definition to claim that the commission would no longer be able to fully regulate the LECs with respect to the services listed in sec.23. 61(a)(17)(B) (see, e.g., OPC comments at 1-3, and TEXALTEL comments at 1-2). These commenters ask that the commission confirm its intent to continue full regulatory authority over these services when provided by the LECs. Implicitly, the LECs' interpret PURA, sec.3(c)(2)(B) in the following manner: in determining who or what constitutes a dominant carrier, the phrase "as to such service" in sec.3(c)(2)(B)(ii) must be read to refer to "any provider of local exchange telephone service" (i.e., any provider of local exchange telephone service as to its provision of local exchange telephone service). In other words, any entity that provides local exchange service within a certificated exchange area is a dominant carrier only with respect to the "local exchange telephone service" offered by it. With respect to its provision of all other services, that entity (the LEC) is presumptively a nondominant telecommunications utility, according to the LECs. Consequently, the LECs believe that the commission's full regulatory authority extends only to the rates and services offered by an LEC for its local exchange service; all other rates and services offered by the LEC are subject only to minimal regulation absent a dominance proceeding as described in PURA, sec.3(c)(2)(B)(i) . The commission finds that the LECs' interpretation of PURA, sec.3(c)(2)(B) is inconsistent with the provisions of PURA as a whole and is not required by the plain language of the referenced sections of PURA. The commission finds that the Act expressly provides that full regulatory authority over LEC services extends well beyond the regulation of local exchange service. The LECs are dominant carriers by virtue of their provision of local exchange telephone service, and the commission is given full regulatory authority over all telecommunications services provided by the LECs. This interpretation is consistent with PURA as a whole. PURA, sec.16(a) provides that "[t]he commission has the general power to regulate and supervise the business of every public utility within its jurisdiction and to do all things, whether specifically designated in this Act or implied herein, necessary and convenient to the exercise of this power and jurisdiction." This section of PURA ensures that the commission may exercise its regulatory authority to the fullest extent over all rates and services of the local exchange company. Numerous other sections of PURA require that the commission exercise its full regulatory authority over all of the LECs' services. PURA, sec.18(g) recognizes that competitors must be protected from the exercise of anticompetitive, predatory, or discriminatory practices and also recognizes that ratepayers must be protected from cross-subsidization of competitive services by noncompetitive services. It would be impossible for the commission to comply with the directive of PURA, sec.18(g) under the LECs' interpretation of PURA. To prevent the LECs from cross-subsidizing their competitive services with revenues from monopoly services, and to grant pricing flexibility to the LECs for their competitive services that is not anticompetitive, predatory, or discriminatory, the commission must necessarily retain regulatory authority over all LEC telecommunications services. PURA, sec.47 prohibits public utilities from discriminating "against any person or corporation that sells or leases equipment or performs services in competition with the public utility, nor may any public utility engage in any other practice that tends to restrict or impair such competition." Again, the commission must necessarily retain full regulatory authority over all LEC services to ensure that the discrimination described in PURA, sec.47 does not occur. For example, LECs could price their competitive services below cost and sustain those prices until competitors are driven from the market. Absent the authority to approve rates for competitive services offered by the LECs, the commission would be powerless to prevent this type of discrimination (see also Digital Direct reply at 7-8, MCI reply at 3-8, MFS reply at 6-9, Teleport reply at 6-9, and TEXALTEL reply at 2-5). The commission finds that PURA, sec.3(c)(2)(B) must be construed so as to render a result that is consistent with the entire Act. Under a construction that harmonizes with the Act in its entirety, the commission finds that PURA, sec.3(c)(2)(B)(ii) must be read so that the entire phrase "within a certificated exchange area as to such service" refers to "any provider of local exchange telephone service." Under this construction, the phrase "as to such service" modifies "within a certificated exchange area" (i.e., within an exchange area that has been certificated as to the provision of local exchange service). In other words, any entity that provides local exchange service within an exchange area that has been certificated with respect to the provision of local exchange service is a dominant carrier. Unlike the LEC reading of PURA, sec.3(c)(2)(B), the commission's reading does not limit the dominance designation to a carrier's provision of local exchange service. Rather, the dominance designation attaches to the provider and, therefore, applies to all services of that provider. Additionally, the commission finds that the phrase "[a]ny such provider determined to be a dominant carrier in a market" refers to the provisions of PURA, sec.3(c)(2)(B)(i). Only PURA, sec.3(c) (2)(B)(i) refers to carriers being "determined" to be dominant "in a market." Therefore, the phrase "[a]ny such provider determined to be a dominant carrier" must refer to a carrier found dominant under PURA, sec.3(c)(2)(B)(i). The phrase has no applicability to LECs who are defined, because they provide local exchange service, as dominant carriers under PURA, sec.3(c)(2)(B)(ii) (see also Digital Direct reply at 13-14, MFS reply at 7-8, and TEXALTEL reply at 4). Additionally, the LECs' contention that adoption of these amendments results in unlawful asymmetrical regulation cannot be reconciled with the statutory changes made in 1987 pursuant to Senate Bill 444, whereas the commission's interpretation of PURA is consistent with the provisions of the bill. Senate Bill 444 amended PURA, sec.3(v) and sec.18(e)-(k). The bill analysis that accompanied the report of the House Committee on State Affairs describes the purpose of the amendments as "regulat[ing] local exchange companies with greater flexibility in the areas of competitive services." This stated purpose implies that the local exchange companies would experience competition from nonlocal exchange companies (see also Digital Direct reply at 5). The Senate Bill 444 amendments to PURA dictate the asymmetrical regulation that the LECs characterize as unlawful. PURA sec.18(e) grants the commission authority to "promulgate rules and establish procedures applicable to local exchange companies for determining the level of competition in specific telecommunications markets and submarkets and providing appropriate regulatory treatment to allow local exchange companies to respond to significant competitive challenges" (emphasis added). Implicitly, the competitive challenges would come from companies other than local exchange companies. The rules dictated by the legislature are applicable to LECs because they would need regulatory relief once the competitive challenge presented by the non LEC- competitors was significant. The LECs' interpretation of PURA, sec.3(c)(2) (B), however, negates the need to provide "appropriate regulatory treatment" for the LECs. Under the LEC scheme, every carrier would be treated exactly the same: all providers would be regulated as dominant carriers with respect to their provision of local exchange service and all providers would be regulated as nondominant carriers with respect to their provision of services other than local exchange service. Why would the LECs need relief from this "symmetrical regulation" and "level playing field?" Clearly, if the legislature intended that LECs were to be "nondominant" with respect to all competitive services-that is, with respect to services other than local exchange service-there would exist no need for greater regulatory flexibility. Additional evidence that the legislature envisioned that the dominant LECs would experience competition from nondominant carriers can be found in PURA, sec.18(e)(2), which states that "in determining the level of competition the commission shall consider the number and size of telecommunications utilities or other persons providing the same, equivalent, or substitutable service." In determining the level of competition so as to provide the local exchange companies with appropriate regulatory flexibility, the commission must consider the number and size of telecommunications utilities providing substitutable services. The legislature, in using different terms to describe the LECs (local exchange companies) and their competitors (telecommunications utilities), gives evidence that it intended to make a significant distinction between the LECs and their competitors. Moreover, Senate Bill 444 added PURA, sec.3(v), which defines "local exchange company." According to PURA, sec.3(v), an LEC is "a telecommunications utility certificated to provide local exchange service within the state." In amending PURA by adding sec.3(v), the legislature must have intended to distinguish a dominant, certificated LEC from its nondominant, noncertificated competitor (see also Digital Direct reply at 4). SWBT acknowledges that the LECs already provide a number of fully regulated services that are outside the current definition of local exchange service (e. g., intraLATA toll and WATS services and interexchange private line services). SWBT asserts that notwithstanding the express language of PURA, SWBT, and the other LECs voluntarily submitted to commission regulation after the adoption of the current version of PURA, sec.3(c)(2)(B) in 1983. SWBT states that this voluntary submission to regulation was part of a regulatory bargain: the LECs submit their services to full regulation for the right to operate with little or no competition. (SWBT comments at 16-17). MFS believes that a more "credible" explanation is that the LECs and the commission recognized that the legislature intended for the commission to continue to regulate all services offered by the LECs (MFS reply at 7). The commission finds that its regulatory authority is not dependent on the voluntary submission of the LECs, as claimed by SWBT. Rather, as explained in the earlier discussion regarding the commission's interpretation of PURA, sec.3(c)(2)(B), the LECs are dominant carriers by virtue of the fact that they are providers of local exchange service, and the commission is therefore provided full regulatory authority over all of the services provided by the LECs. In supporting their argument that asymmetrical regulation is unlawful, the LECs also rely on PURA, sec.18(a), which directs the commission to "provide equal opportunity to all telecommunications utilities in a competitive marketplace." The LECs submit that any attempt to continue regulation of the LECs as dominant carriers with respect to the services listed in sec.23.61(a) (17)(B) would be inconsistent with the "equal opportunity" language of PURA, sec.18(a). According to the LECs, any regulatory scheme that applies different regulatory constraints to providers of the same service within an exchange inherently cannot provide an equal opportunity to all telecommunications utilities (see, e.g., GTE comments at 3, SWBT reply at 18, and TSTCI comments at 6-7, 9-10, and A2-A3). Several other commenters state that the "equal opportunity" language of PURA, sec.18(a) does not require equal regulation. These commenters believe that the LECs enjoy significant competitive advantages (e.g., control of bottleneck facilities) and thus must be regulated more stringently than new market entrants (see, e.g., Digital Direct reply at 5-7 and at 8, MCI reply at 7-8, and MFS reply at 5-6). Sprint and Teleport emphasize the phrase "in a competitive marketplace" contained in PURA, sec.18(a) and state that a competitive marketplace does not exist today for services provided within an exchange. They submit that the proposed rule will allow competition to emerge in the local exchange marketplace (Sprint reply at 3-4 and Teleport reply at 9-10). TEXALTEL believes that it is appropriate for the commission to continue to regulate the LECs with respect to those services that are not included in the definition of local exchange service because the LECs have a pervasive network and an established customer base that is not rivaled by any competitor (TEXALTEL reply at 2). In other words, asymmetric market conditions warrant asymmetric regulatory policies. The commission finds that the directive of PURA, sec.18(a) to "provide equal opportunity to all telecommunications utilities in a competitive marketplace" does not require the commission to institute the type of regulatory scheme advocated by the LECs. Indeed an equal opportunity would not be achieved if the LECs were treated as nondominant carriers with respect to the services listed in sec.23.61(a)(17)(B). The commission finds that the LECs' interpretation of PURA would preclude the commission from complying with PURA, sec.18(g) requirements. If the commission could not regulate the LECs' competitive services, the LECs would be able to use their monopoly services to disadvantage their competitors. That would not be an equal opportunity. Several parties contend that SWBT has consistently used the existence of competition to gain regulatory flexibility. These parties submit that it is disingenuous for SWBT now to claim that either the competitors should be regulated or SWBT should be freed from regulation (see, e.g., Digital Direct comments at 19-22, Digital Direct reply at 9-12, and TEXALTEL reply at 3). SWBT attempts to explain this inconsistency (that SWBT needed regulatory flexibility in 1987 because of uncertificated competitors, but now claims that competitors such as Digital Direct, MFS, and Teleport must be regulated exactly the same as SWBT is regulated) by claiming that the regulatory flexibility granted in PURA, sec.18 was strictly to allow the LECs to compete with PBX equipment providers, interexchange private line providers, and companies that constructed, but did not operate, private networks for large customers. SWBT believes that if a "new" company (other than PBX equipment providers, interexchange private line providers, and companies that construct, but do not operate, private networks for large customers) wants to provide telecommunication service within an exchange it must first obtain a certificate of convenience and necessity (CCN) and then it may apply to the commission for regulatory flexibility as allowed by PURA, sec.18 (SWBT reply at 11-18). Central et al. agrees with SWBT's assessment of the kind of competition envisioned by the legislature. (Central et al. comments at 9, Central et al. reply at 8). The commission cannot accept the analysis by SWBT and Central et al. of PURA, sec.18. It is clear that the legislature realized as early as 1983, when it adopted the language in PURA, sec.18(a), that the telecommunications industry would continue to grow as a competitive industry. The commission believes that the intent of PURA, sec.18(e) is to establish a process by which LECs can be granted regulatory flexibility when they face a significant competitive challenge. There is no indication in PURA that the legislature intended to limit the LECs' competitors to PBX equipment providers, interexchange private line providers, companies that construct, but do not operate, private networks for large customers, and "new" companies that obtain a CCN. Indeed, the legislature authorized specific regulatory relief, in PURA, sec.18(e)(3)(B), to allow the LECs to more readily compete with the types of competitors enumerated by SWBT. However, the legislature anticipated that competition would develop in other areas and anticipated that competition from the enumerated competitors could increase. In recognition of such developments, the legislature directed the commission in PURA, sec.18(e)(1) to establish a process by which the LECs could seek further relief. (See also Digital Direct reply beginning at 3, MCI reply at 5-7, and TEXALTEL reply at 3-5). Several parties state that PURA recognizes competition and implicitly directs the commission to consider the development of competition in its decisions. PURA, sec.2 describes competition as the "normal force" that operates in a free enterprise society. PURA, sec.18(a) recognizes that the telecommunications industry "will continue to be in many and growing areas a competitive industry which does not lend itself to traditional public utility regulatory rules, policies, and principles." PURA, sec.18(e) sets forth the process by which LECs should be allowed to respond to significant competitive challenges. PURA, sec.18(g) directs the commission to establish "procedures so as to incorporate an appropriate mix of regulatory and market mechanisms reflecting the level and nature of competition in the marketplace" (see, e.g., Digital Direct comments at 11-13, Digital Direct reply at 5-7, MCI comments at 4-7, MCI reply at 4-5 and MFS comments at 4-5). The commission agrees that PURA consistently recognizes competition as a natural market regulator. The commission believes that, generally, competition should be encouraged. The commission believes that the competitive marketplace encouraged by these amendments is in the public interest. SWBT states that the proposed definition of local exchange service creates "two categories of local exchange service providers -the certificated LECs and the new noncertificated LECs." (SWBT comments at 13). The commission disagrees. The proposed definition clarifies that a carrier providing the services listed in sec.23.61(a)(17)(B), but not providing other services within a certificated exchange area, is not providing "local exchange service," and is therefore not subject to certification as a dominant carrier. However, a carrier that provides "telecommunications service within an exchange," in addition to services listed in sec.23.61(a)(17)(B), is providing "local exchange service," and is subject to certification as a dominant carrier if that exchange is certificated to another carrier for the provision of local exchange service. GTE states that the asymmetrical regulation imposed by the proposed amendment will provide competitive access providers (CAPs) with a significant competitive advantage that could be used strategically against the LECs if the competitors concentrate on the LECs' largest customers, resulting in loss of contribution to the joint and common costs of the LECs (GTE comments at 1 of summary). SWBT states that the competition allowed by these amendments will allow "further deaveraging of rates for the benefit of big business and the detriment of the large body of residence and small business ratepayers in Texas". (SWBT reply at4). SWBT and TSTCI refer to statements made by MFS's president asserting that MFS intends to target business customers. SWBT also surmises that since MFS offers services in Dallas and Houston only, it is the large business customers that MFS targets (SWBT reply at 5-6, TSTCI comments at 4-5). In reply, MFS contends that competition will benefit all ratepayers because it will protect the LEC ratepayers from bearing the burden of obsolete technology (MFS reply at 2-5). Teleport replies that competition will encourage privately financed companies to invest in the Texas telecommunications infrastructure with no risk to LEC ratepayers (Teleport reply at 5-6 and 8). The commission finds that GTE and SWBT have not supported their claim that the amendment will result in lost contribution that will in turn harm the public interest. In fact, neither GTE nor SWBT provided any information about the amount of contribution that may be lost due to competition. Indeed, they failed to provide the commission with any information regarding the level of contribution generated by the services listed in sec.23.61(a)(17)(B). The commission does not find the claim of GTE and SWBT credible. The commission notes that the statements of MFS and Teleport might not be true if the LECs lose all of the contributions generated by the services listed in sec.23.61(a) (17)(B); however, the commission has no grounds to believe such a situation will occur. In fact, given that the LECs enjoy significant advantages such as established rights of way, economies of scope and scale, and control of the ubiquitous networks, the commission believes that the LECs will continue to retain a significant share of whatever contributions the services currently generate. SWBT claims that because the LECs will be restricted to offering customer- specific pricing or tariffed rates, the LEC-competitors will be provided with target prices that antitrust laws would prohibit the LEC-competitors from establishing themselves (SWBT reply at 4-5). The commission notes that the legislature, by adopting PURA, sec.18(g), has directed the commission to "balance the public interest in a technologically advanced telecommunications system with traditional regulatory concerns for preserving universal service, prohibiting anticompetitive practices, and preventing the subsidization of competitive services with revenues from regulated monopoly services." The commission finds that the potential for LEC cross-subsidy of its competitive services mandates the public scrutiny of the LEC's prices. If the level of competition warrants extraordinary relief, detariffing is an available remedy. SWBT states that MFS has been less than candid with the commission given that MFS has argued against asymmetrical regulation before the Federal Communications Commission (FCC), but is arguing for asymmetrical regulation before this commission (SWBT reply at 6-8). SWBT points to various statements made in behalf of Teleport before this commission and contends that Teleport has changed its position regarding what services constitute local exchange service (SWBT reply at 8-11). SWBT also contends that Teleport portrays itself as a local service provider to its customers, yet argues before the commission that it is not a local service provider (SWBT reply at 11). The commission makes no specific changes to the proposed amendments based on these comments of SWBT. TSTCI claims that the CAPs intend to offer switched services that would not be excluded from the definition of local exchange service pursuant to sec.23. 61(a)(17)(B) (TSTCI reply at 2 and A4). If the CAPs provide services within a certificated exchange, other than those services specifically delineated in sec.23.61(a)(17)(B), they must do so pursuant to a final order in a docketed proceeding, a rule change, or a certificate. The commission makes no changes in response to these comments of TSTCI. Central et al. claims that other states have tied any decision to permit competition in the exchange with a decision regarding pricing flexibility for the LECs. Further, Central et al. claims that other states have required telecommunications utilities such as MFS and Teleport to obtain CCNs and have limited the services MFS and Teleport are allowed to provide to high speed, non- voice services (Central et al. comments at 67, Central et al. reply at 3-6). Both Central et al. and TSTCI urge the commission to adopt a rule that requires the LEC-competitors to seek some form of commission authorization to provide services (Central et al. comments at 14, TSTCI comments at 3). MFS replies that in those other states referenced by Central et al., interexchange carriers are also required to obtain CCNs and that none of those other states has the dominant/nondominant regulatory scheme found in PURA. MFS also replies that no state prohibits it from transmitting voice traffic and that in most states MFS is limited as to the services it can provide only because MFS itself chose to limit its request for authority (MFS reply at 10-12). Because of the dominant/nondominant statutory scheme mandated by PURA, the commission does not have the authority to establish the form of regulation over nondominant carriers contemplated by Central et al. In fact, PURA, sec.3(c)(2)(A) and sec.18(c) expressly limit the commission's authority over nondominant carriers. As for the comment of Central et al. that LEC pricing flexibility must be addressed, sec.23.27 of the commission's rules sets forth, in accordance with the requirements of PURA, the process under which LECs can receive regulatory pricing flexibility. The commission makes no change in response to these comments of Central et al. or TSTCI. GTE claims that the proposed definition is based on a snapshot view of the telecommunications industry and does not offer a long-term solution (GTE comments at 7-8). The commission does not agree with GTE. Telecommunications utilities can expand the list of competitive services by receiving a final order under proposed sec.23.61(a)(17)(B)(xi) (renumbered sec.23.61(a)(17)(B)(ix)) . Additionally, telecommunications utilities may expand the list of competitive services by petitioning the commission for a rulemaking. The commission's view that the definition is and must be structured in a manner that allows modification is consistent with PURA, sec.18(a), which states that "the telecommunications industry has become and will continue to be in many and growing areas a competitive industry which does not lend itself to traditional public utility regulatory rules, policies, and principles, and that therefore, the public interest requires that new rules, policies, and principles be formulated and applied to protect the public interest and to provide equal opportunity to all telecommunications utilities in a competitive marketplace." In addition, this view is consistent with MCI's observation that the local exchange service definition describes service markets that have to date been monopolized, rather than service markets that will continue to be monopolized (MCI comments at 6) (See also MFS comments at 10). TCTA states that cable TV providers often furnish equipment, capacity, or services to a municipality pursuant to a franchise agreement. TCTA urges the commission to affirm that the furnishing of these services over a cable system does not bring the cable TV provider under the commission's jurisdiction (TCTA reply at 2). PURA, sec.3(c)(2)(A) specifically states that nothing in the Act shall be construed to apply to "community antenna television services." If the services described by TCTA qualify as "community antenna television services," the cable providers would not be subject to the commission's jurisdiction. Furthermore, if the services described by TCTA qualify as the furnishing of a private system under PURA, sec.3(c)(2)(A), the cable providers would not be subject to the commission's jurisdiction. Numerous parties, mainly LECs, urge the commission to proceed with an evidentiary hearing rather than adopting the proposed definition of local exchange service (see, e.g., Central et al. reply at 9, GTE comments at 2-3, GTE reply at 1 and at 8, SWBT comments at 4-37, TTA comments at 2 and 7, TTA reply at 2, and USM comments at 20). Other parties submit that the policy and legal arguments put forth in this rulemaking are appropriately addressed in a rulemaking proceeding (see, e.g., API at 2, Centex reply at 10-12, Digital Direct reply at 15-20, MFS reply at 9-10, and Sprint reply at 2-3). Central et al. and TTA suggest that the commission could adopt minor changes to the current definition of local exchange service to remove the circular reference to local exchange tariffs and then proceed with an evidentiary hearing (Central et al. comments at 4-5, TTA comments at 2). TTA submits that it is inappropriate to engage in this substantive rulemaking while related contested proceedings are pending (TTA comments at 1). SWBT submits that the commission can best protect the public interest by conducting an evidentiary hearing. (SWBT comments at 5). SWBT believes that only in an evidentiary hearing can the commission evaluate how the "unrestrained" competition allowed by the proposed definition would affect the public interest (SWBT comments at 3). For example, SWBT believes that the commission's duty to protect the public interest, including the universal service policy, weighs more heavily than does the commission's duty to foster competition. SWBT points to Docket Number 5113, Petition of the Public Utility Commission of Texas for an Inquiry Concerning the Effects of the Modified Final Judgment and the Access Charge Order Upon Southwestern Bell Telephone Company and the Independent Telephone Companies of Texas and Docket Number 5220, Application of Southwestern Bell Telephone Company for Authority to Change Rates, for support (SWBT comments at 30-37). SWBT also believes that regulatory policies, especially the establishment of high access charges, have set the stage for competitors to successfully enter the market (SWBT comments at 32-37). For further support of its position that an evidentiary hearing is required, SWBT states that the commission, in Docket Number 6450, Application of Southwestern Bell Telephone Company for Approval of Tariff Revisions Pertaining to shared tenant services, imposed significant restrictions on Shared Tenant Services (STS) providers. SWBT implies that the commission may want to impose similar restrictions on other competitors (SWBT comments at 26-28). SWBT implies that these concerns are best addressed in an evidentiary hearing. The commission observes that the issues raised in this rulemaking have been addressed in numerous filings and meetings over the last two years. Additional delay in the form of a contentious, protracted evidentiary hearing is not necessary and is not in the public interest. Parties have had ample opportunity to support their positions in this rulemaking proceeding. A rulemaking is an appropriate vehicle for effectuating the commission's policy that the provision of certain services within an exchange does not require a telecommunications utility to obtain a CCN. In fact, this rulemaking is consistent with the Texas case law associated with Docket Number 5952, Application of Southwestern Bell Telephone Company for Declaratory Relief for a Cease and Desist Order Against HLG&W Telecommunications and Travis Telecommunications, Inc. The Texas Court of Appeals, in the case that followed the Docket Number 5952 commission proceeding, stated that for many reasons a rulemaking might be a fairer vehicle to effect the type of policy that the commission decided on a case-by-case basis in Docket Number 5952, i.e., whether or not a company was providing local exchange service. Indeed, in that case, SWBT argued that a rulemaking was the appropriate vehicle for establishing such policy. The commission, in engaging in this rulemaking, is acting consistently with the court's analysis by clarifying that the provision of the services listed in sec.23.61(a)(17)(B) will not constitute the provision of local exchange service. LECs and others who argue strongly in favor of an evidentiary hearing have had, in this rulemaking proceeding, every opportunity to present information that they believe to be important to the commission in making its decision that certain services do not constitute local exchange service. The LECs have simply failed to take advantage of that opportunity. For example, the LECs allege that they will lose contribution from their access services that will somehow harm the general body of ratepayers. However, no LEC has provided information to quantify that harm. The LECs imply that the commission should impose restrictions on competitors. Any restrictions suggested are discussed infra where the various proposed excepted services are discussed. The commission also notes that it cannot, as suggested by Central et al. and TTA, make minor changes to the current definition to remove the circular reference and then proceed as usual to decide on a case-by-case basis whether the provision of certain services falls within the definition of local exchange service. Nationwide, the level of competition in the local exchange is changing rapidly. As required by PURA, sec.18(a), the commission must institute new rules and policies "to protect the public interest and provide an equal opportunity to all telecommunications utilities in a competitive marketplace." The commission cannot move forward using a 15-year-old definition as its basis for addressing local competition. The commission notes that Teleport takes exception to SWBT's statement that high access prices are the primary reason access competitors have entered the marketplace. Teleport references a survey that states that price was the seventh factor considered by customers, after factors such as reliability and quality, in choosing a telecommunication provider. Teleport also submits that telecommunications dependent businesses often use LEC-competitors to achieve operational and strategic diversity. Additionally, Teleport states that enhanced service providers and interexchange carriers (IXCs) are reluctant to continue to rely on their largest potential competitors (the Bell companies) as the line-of- business restrictions imposed pursuant to the Modification of Final Judgment (MFJ) are lifted for critical telecommunications needs (Teleport reply at 6-7). Teleport suggests no specific changes based on these comments and the commission makes none. TSTCI urges the commission to instruct the staff to work with parties in an effort to achieve a compromise rule or to draft a proposed rule that complies with the commissioners' views expressed at the September 18, 1991, final order meeting (TSTCI reply at 1). The commission submits that such an effort has already been made. After the September 18, 1991, meeting, the staff met with various interested parties and held a workshop that resulted in the proposed rule published on October 25, 1991. The comments received in response to that proposed rule demonstrated that the proposal was neither in the public interest nor consistent with the requirements of PURA as a whole. Several parties seem to imply that the commission should return to the October 25, 1991, approach, because it imposed application and reporting requirements on the nondominant providers of services within the exchange and generally tied competitive entry to LEC pricing flexibility (see, e.g., Central et al. comments at 7, GTE comments at 5, SWBT comments at 7-8, and TSTCI comments at 7). As stated supra, the comments received in response to the October 25, 1991, proposed rule demonstrated that that proposal was neither in the public interest nor consistent with the requirements of PURA as a whole. The commission need not address herein the comments received in response to that proposal. MCI states that it is not clear to what sections the definitions contained in sec.23.61 will apply because sec.23.61(a) contains an ambiguous phrase, "when used in these sections" (MCI comments at 7). As noted by MCI, the section number of a commission substantive rule refers to the digits following the period after the number "23." The number "23" denotes the chapter. Therefore, the commission amends sec.23.61(a) to read "when used in this chapter." TSTCI submits that sec.23.61(a)(17) is inappropriate because it does not define local exchange service or basic local exchange service (TSTCI comments at 9 and A2). TEXALTEL also notes that sec.23.61(a)(17) does not define basic local exchange service, although TEXALTEL does not suggest that the definition be changed (TEXALTEL comments at 2). PURA, sec.18(j) prohibits the granting of pricing flexibility to local exchange carriers for basic local exchange service. The commission believes that it may be appropriate in the future to specifically define basic local exchange service. However, at this time, because local competition is an emerging and evolving concept, the commission finds that it is more appropriate to define local exchange service as discussed herein. Local exchange service is first defined to include all telecommunications services provided within the exchange, and then certain services that the commission believes can and should be provided on a competitive basis are specifically excluded from the definition. MCI contends that sec.23.61(a)(17) should define the term "local exchange telephone service" rather than "local exchange service" because "local exchange telephone service" is the term used in PURA, sec.3(c)(2)(B) (MCI comments at 7). The commission adds a sentence to sec.23.61(a)(17)(A) to clarify that the term "local exchange telephone service" and the term "local exchange service" are interchangeable since the Act uses both terms. USM submits that sec.23.61(a)(17), the definition of local exchange service, uses the term "exchange," which is undefined (USM comments at 12). The commission notes that sec.23.61(a)(11), the definition of exchange area, includes a sentence that clarifies that an exchange area may be referred to as an exchange. Hence no change is made. SWBT submits that Texas case law related to Docket Number 5952 requires that the definition of local exchange service consider the scope and magnitude of the operations of entities in determining whether the services provided by those entities constitute local exchange service. SWBT submits that the proposed definition fails to meet this legal requirement (SWBT comments at 23-28). USM contends that the Texas Court of Appeals appropriately established that there are two kinds of providers of local exchange service: those whose operations are of sufficient scope and magnitude to warrant dominant carrier regulation and those whose operations are not of sufficient scope and magnitude to warrant dominant carrier regulation (USM reply at 1-3). Under the commission's reading of the case law associated with Docket Number 5952, the court found that it is appropriate for the commission to consider the scope and magnitude of operations when deciding whether a particular telecommunications utility's provision of a service constitutes local exchange service. The court did not state that the definition of local exchange service must set forth the scope and magnitude standards as alleged by SWBT and USM (see also MFS reply at 9-10). Therefore, no change is made. USM submits that the proposed definition of local exchange service is vague, broad, and discretionary. USM contends that the definition provides no clear standards by which a company can determine whether it can safely enter the telecommunications market in Texas. USM further claims that this rulemaking is a heavy-handed attempt to grant favors to providers of point-to-point services, while discriminating against those providers that do not provide their own transmission facilities. Basically, USM believes that the sec.23.61(a)(17)(B) exceptions are too narrow. As an alternative, USM proposes a new rule to replace several definitions in sec.23.3, the entirety of sec.23.27, sec.23.31 as it applies to telephone utilities, the entirety of sec.23.49, and the entirety of sec.23.61. USM's proposed rule is based on three basic premises. First, USM contends that the term exchange must be equated with the term "local access and transport area" (LATA), because that is consistent with the federal district court's use of the term in the modification of final judgment and because the LATAs represent meaningful divisions in the LECs' networks. Second, USM contends that the commission can in no way interfere with competition. Third, USM contends that market dominance is the only standard to be used to determine dominant carrier status (USM comments at 1-9 and beginning at 20, USM reply at 3). The commission makes no changes based on these comments of USM. The commission finds that the amendment adopted in this rulemaking is an appropriate exercise of its authority and that the amendment clarifies which services, when provided within a certificated exchange, do not constitute the provision of "local exchange service" (see also Digital Direct comments at 3, MCI comments at 5, MFS comments at 7-8, Teleport comments at 2, and Teleport reply at 2). The commission does not agree that it is bound by the federal district court's use of the term "exchange." Additionally, the commission does not agree with USM that the commission's only proper role should be to displace monopoly providers with competitors. This assertion of USM cannot be reconciled with PURA, sec.18(a). USM's assertion that market dominance is the only standard to be used to determine dominant carrier status cannot be reconciled with PURA, sec.3(c)(2)(B). (see also GTE reply beginning at 6). Teleport submits that local exchange service has historically been equated with plain old telephone service (POTS), which Teleport describes as the provision of single-line seven-digit dialing service for the initiation and receipt of two- way voice calling. Teleport states that the proposed definition "reaffirms" the proper meaning of local exchange service and will encourage investment in and the development of the telecommunications infrastructure in Texas (Teleport comments at 1-2). The commission believes that the adopted definition properly describes local exchange service in today's environment. The commission, at this time, does not equate local exchange service and POTS. Furthermore, the commission does not believe that it is necessary in the context of this rulemaking to make such a statement. Several LECs express concern regarding whether the LEC-competitors will be required to support the Universal Service Fund (USF) (see, e.g., Central et al. comments at 13, TSTCI comments at 5, and TTA comments at 2). The commission refers to PURA, sec.98, which states that the "universal service fund shall be funded by a statewide uniform charge payable by all telecommunications utilities that have access to the customer base." Section 23.53, universal service fund, and sec.23.56, statewide dual-party relay service, set forth the current universal service fund assessments. The commission believes that it is appropriate to address the USF issue in a separate rulemaking. The commission need not postpone action in this rulemaking pending a decision on changes to the USF assessments (See also MCI reply at 9). Some parties recommend that several exceptions be omitted because they are not defined and are based on technology (see, e.g., SWBT comments at 43-44, and TSTCI comments at A2 and A5). The commission's goal is to establish policies that will encourage competition where it is compatible with the public interest. The commission is not convinced that better public policy will be achieved by grinding out narrow definitions for all of the services listed in sec.23.61(a)(17)(B). In fact, the commission believes that narrow definitions will provide parties with additional terminology with which to make picayune arguments about whether a particular service qualifies under one of the exceptions. The commission believes that the descriptions provided in sec.23.61(a)(17)(B), as modified, are generally understood by the industry and provide a good basis for telecommunications utilities to make decisions about which services they can provide without obtaining a CCN. The commission does not agree that the exceptions must be omitted because they are not defined in specific terms or because they focus on technology. In its reply comments, MCI states that it continues to support all of the exceptions after considering the comments of other parties (MCI reply beginning at 10). The commission discusses the individual exceptions infra. Section 23.61(a)(17)(B)(i) excepts from the definition of local exchange service those services for which LECs have been granted authority to enter into customer-specific contracts pursuant to the Act. SWBT claims that this exception: is redundant with subsection (a)(17)(B)(iii), which excepts private line services, and proposed subsection (a)(17)(B)(v), which excepts centrex and PBX-type services; fails to distinguish between interexchange and intraexchange private line services; and fails to define customized services (SWBT comments at 40-41). The commission makes no change based on this comment of SWBT. Although there is some overlap between the sec.23.61(a)(17)(B)(i) services and the sec.23.61(a)(17)(B)(iii) services, these clauses are far from redundant. Whereas sec.23.61(a)(17)(B)(i) would exclude high-speed private line services of 1.544 megabits or greater from the definition of local exchange service, proposed sec.23.61(a)(17)(B)(iii) would exclude all private line services. The commission deletes proposed sec.23.61(a)(17)(B)(v), discussed infra ; thus it is not necessary to address SWBT's concern that clause (v) is redundant with sec.23.61(a)(17)(B)(i). Section 23.61(a)(17)(B)(i) need not distinguish between interexchange and intraexchange private line services, because this distinction is made by sec.23.61(a)(17)(A), which limits local exchange service to services provided within an exchange. The commission notes that the term "customized services" is not defined in PURA, sec.18(e)(3)(B), but it is defined in sec.23.27 of the commission's rules. Therefore, the commission modifies sec.23.61(a)(17)(B)(i) by adding the phrase "as those services are described in sec.23.27 of this title (relating to Rate-Setting Flexibility for Services Subject to Significant Competitive Challenges)." Because they are already subject to "effective" competition, MFS claims that it is appropriate to exclude from the local exchange service definition the following: services for which the LECs have been granted authority to enter into customer-specific contracts pursuant to the Act (sec.23.61(a)(17)(B) (i)); services for which a LEC has been granted authority to engage in pricing flexibility pursuant to sec.23.27 (sec.23.61(a)(17)(B)(ii)); private line services (sec.23.61(a)(17)(B)(iii)); resale of local exchange service (sec.23. 61(a)(17)(B)(iv)); and dedicated and virtually dedicated access services (renumbered sec.23.61(a)(17)(B)(vii)) (MFS comments at 10). Although Digital Direct agrees that these services should be excepted, Digital Direct questions MFS's characterization of private line and dedicated and virtually dedicated access services as subject to "effective" competition. Digital Direct questions MFS's statements because Digital Direct believes that CAPs have less than 1.0% of the market in the largest Texas cities (Digital Direct reply at 20-21). The commission finds that it is appropriate to exclude the sec.23.61(a) (17)(B)(i) and (ii) services because the LECs are granted pricing flexibility for those services. The commission's reasoning for the sec.23.61(a)(17)(B)(iii), (iv), and renumbered (vii) exceptions are discussed infra. USM contends that the exceptions of sec.23.61(a)(17)(B)(i) and (ii) seem necessary only because the commission has "unlawfully" approved customer=- specific contracts for LECs that "complain" that they face "fierce competition" (USM comments at 13). The commission makes no change based on this comment of USM. The commission's decisions to approve customer-specific contracts are not at issue in this rulemaking. Several parties endorse the exception for private line services, sec.23.61(a) (17)(B)(iii). These parties believe that competitors of the LECs offer benefits that are important to business customers (see, e.g., API comments at 6-15, Sprint comments at 1-2, Digital Direct comments at 5-7, and MFS comments at 5 and 12-13). These benefits include diverse routing, redundancy, priority circuit restoration, increased service capabilities, more timely provisioning and repair, and higher service quality standards. API and Digital Direct claim that the exception is consistent with prior commission decisions. API refers to the bypass discussion in Docket Number 5113 and also refers to Docket Number 6181, Application of Southwestern Bell Telephone Company for Approval of Customer Specific Pricing Plan Tariff for High Capacity Network Services, in which the commission granted pricing flexibility for SWBT's high-speed private line services (API comments at 15-19). Digital Direct refers to the following sources: Docket Number 6181; Docket Number 5827, Petition of Southwestern Bell Telephone Company for Rulemaking, in which the commission denied SWBT's petition to amend the definition of local exchange service to include all telecommunications connections between customers within an exchange, including private line connections, and also denied SWBT's petition to amend sec.23.31, certification criteria, to require a telecommunications utility to obtain a certificate to provide voice grade private line services within an exchange; Docket Number 5952, in which the commission decided that an STS provider was not providing local exchange service even though it was providing direct connections between tenants of the building it served; and the 1989 report to the Texas Legislature, Status of Competition in Long Distance and Local Telecommunications Markets in Texas, in which the commission acknowledged the existence of LEC- competitors, but did not question their legality (Digital Direct comments at 13- 18). Digital Direct also submits that SWBT relied upon the existence of competition from private line services to gain increased pricing flexibility. Digital Direct refers to the passage of Senate Bill 444, Docket Number 6181, SWBT's testimony filed in Docket Number 6450, and SWBT's comments filed when the commission initially adopted sec.23.27 of its substantive rules (Digital Direct comments at 19-22). Central et al. in its reply takes exception to Digital Direct's reliance on Docket Number 5952 and the Status of Competition in Long Distance and Local Telecommunications Markets in Texas report as support for its position that private line and dedicated and virtually dedicated services should not be considered "local exchange service" (Central et al. reply at 6-8). The commission believes that these references are appropriate as background information. Digital Direct did not state that the commission decided the question of who could provide private line, dedicated access, and virtually dedicated access services in Docket Number 5952. Rather, Digital Direct simply stated that if the same reasoning used by the examiner were applied to private line services, dedicated access services, and virtually dedicated access services, these services would not be considered "local exchange service." As for the Status of Competition report, Teleport is specifically mentioned in the report as one of the providers of private network service arrangements. It is unlikely that the networks provided by Teleport in 1989 were customer-owned (which according to Central et al. is permissible), but are not customer-owned today (which according to Central et al. is not permissible). Digital Direct did not, as Central et al. seems to think, claim that the Status of Competition report substituted for this rulemaking. Digital Direct merely referenced the report as support for its position that the sec.23.61(a)(17)(B)(iii) exception is consistent with precedent. The commission believes that the sec.23.61(a)(17)(B)(iii) exception is appropriate because competition in the private line market offers significant benefits and no party has provided convincing evidence that this exception is not in the public interest. The commission notes that modifications to proposed sec.23.61(a)(17)(B)(iii) are made pursuant to comments summarized in the discussion of proposed sec.23.61(a)(17)(B)(ix) (renumbered sec.23.61(a)(17) (B)(vii)). SWBT criticizes sec.23.61(a)(17)(B)(iii) because it does not distinguish between interexchange and intraexchange private line services (SWBT comments at 41). The commission finds that it is not necessary to make this distinction. Based on the language of sec.23.61(a)(17)(A), this exception clarifies that private line services provided within an exchange would not be local exchange service. Therefore, sec.23.61(a)(17)(B)(iii) necessarily refers to intraexchange private line services. Interexchange private line services are not captured by sec.23.61(a)(17)(A), and therefore it is not necessary to except interexchange private line services. TSTCI submits that intraexchange private line services should not be excluded from the definition of local exchange service because the LECs' private line tariffs include Foreign Exchange (FX) and Foreign Serving Office (FSO) services that are bundled services and include service components which provide access to the Public Switched Network (PSN) (TSTCI comments at A4). MCI claims that the issue of how to treat services that bundle monopoly and competitive components should be addressed in sec.23.27 (MCI reply at 10). Although the treatment of bundled services may be addressed under sec.23.27, as MCI claims, doing so will not solve the issue in this rulemaking of what services will be excepted from the definition of local exchange service. The commission notes that FX is an interexchange service. As an interexchange service, FX is not captured by sec.23.61(a)(17)(A). Additionally, the commission finds that the definition of private line in sec.23.61(a)(27) determines whether a service constitutes a private line service. The placement of the service in the LEC's tariff is not determinative. The modified definition of private line (sec.23.61(a)(27)), discussed infra, clearly excludes both FX and FSO services. USM refers to the sec.23.61(a)(17)(B)(iii) services as a "pork barrel" exception for fiber carriers (USM comments at 13). It is not clear what change USM proposes based on this remark, and the commission makes no change. TEXALTEL suggests using the phrase "provision of private lines" rather than "private line services" in sec.23.61(a)(17)(B)(iii). (TEXALTEL comments at 3.) The commission does not believe that this clarification is necessary. The phrase, as proposed, is more consistent with the other exceptions of sec.23.61(a)(17)(B). API and MCI recommend that the commission explicitly exclude dark fiber from the definition of local exchange service even though API recognizes that sec.23.61(a)(17)(B)(iii) implicitly accomplishes this. (API comments at 19-23, MCI reply at 13). Central et al. opposes a separate exception for dark fiber because dark fiber is simply a particular employment of technology. Further, Central et al. contends that dark fiber falls within the category of private line services and is therefore already excluded from the definition of local exchange service (Central reply at 9). The commission agrees with API and MCI that an explicit exception for dark fiber is appropriate. Dark fiber is installed fiber optic cable not carrying a signal. With the modifications to the definition of private line in sec.23.61(a)(27), it is not clear that dark fiber would fall within the category of private line services. The commission excludes dark fiber from the definition of local exchange service via sec.23.61(a)(17)(B)(v). Central et al. suggests that the phrase "resale of local exchange service" in sec.23.61(a)(17)(B)(iv) should be revised to "services provided by resellers of local exchange services" (central et al. comments at 10). The commission does not make this change, as the language proposed by Central et al. could be interpreted to mean that a reseller could provide any services, as long as it, at a minimum, resold local exchange service. Section 23.61(a)(17)(B)(iv) provides that resale of local exchange service, where allowed by commission approved tariffs, shall not be considered to be the provision of local exchange service. MFS submits that the sec.23.61(a)(17) (B)(iv) services are already subject to competition (MFS comments at 10). Digital Direct believes that this exception is consistent with prior commission decisions because resale of local exchange service was at the heart of the STS proceedings (Digital Direct comments at 16). SWBT states that this exception is not consistent with past policy because SWBT's General Exchange tariff, sec.23, currently prohibits resale of local exchange service (SWBT comments at 41-42). TSTCI submits that it makes no sense for the commission to give up its jurisdiction just because the service is resold (TSTCI comments at A5). USM contends that this exception simply perpetuates the unlawful resale prohibition in SWBT's General Exchange tariff and contradicts Docket Numbers 5827, 5952, 6450, and 7438. (Docket Number 7438 was styled as Complaint of Metro Net, Inc. Against Southwestern Bell Telephone Company) (USM comments at 13). The commission finds that this exception does not conflict with past policy as stated by SWBT because the exception is qualified by the phrase "where that resale is allowed by commission approved tariffs." Furthermore, the term "local exchange service" as used in this exception refers to the definition of local exchange service contained in this rule, not to any particular SWBT tariff. However, SWBT's comment does bring to light the fact that it is SWBT's Joint User tariff that allows certain sharing of local exchange service. In recognition of the sharing arrangements allowed by SWBT's Joint User tariff, the commission modifies the language of sec.23.61(a)(17)(B) (iv) to refer to sharing as well as resale. The commission finds no support for TSTCI's claim that the commission should retain full regulatory jurisdiction over the provision of resold services. If the service is resold, the customer clearly has a choice: she could buy the service directly from the regulated local exchange company or she could buy the service from the reseller. The commission finds that this exception is necessary because, for example, without the exception one could argue that STS providers would require certification even though the commission and the courts have decided to the contrary. USM's comment is premised on its contention that the commission can in no way interfere with competition. For the reasons discussed earlier, the commission rejects USM's contention. Several parties identify problems associated with proposed sec.23.61(a)(17)(B)(v), which excludes centrex and PBX-type services from the definition of local exchange service (see, e.g., API comments at 24-26, GTE comments at 6, MFS comments at 11-12, OPC comments at 3, SWBT comments at 42, and TSTCI comments at A5). Parties express concern that this exception could be interpreted to include public switching functions. As such, this exception as proposed could significantly broaden the scope of the competitive marketplace. Some parties submit that centrex and PBX-type services bundle monopoly and competitive components. There is not consensus about which components fall into either category. Among these commenters, the non-LEC parties generally contend that proposed sec.23. 61(a)(17)(B)(v) should be revised to describe only the competitive components of centrex and PBX-type services. Some parties describe the competitive component as consisting of only the intercom switching function. MCI contends that the issue of how to treat services that bundle monopoly and competitive components should be addressed in sec.23.27 (MCI reply at 11). In its reply comments, Centex states that centrex is one of several types of central office based PBX-type services and proposes modifying the exception to refer to central office based PBX-type services (Centex reply at 6). The commission deletes this exception because of the potential for competitive public switching and the unresolved issues regarding which components of centrex and PBX-type services are competitive. The commission notes however that sec.23. 61(a)(17)(B)(i), as modified, exempts from the definition of local exchange service central office based PBX-type services for systems of 200 stations or more, as those services compete with customer premises equipment provided by PBX vendors. The commission believes that it is necessary to maintain the clause (i) exception because the LECs are granted pricing flexibility for "central office based PBX-type services for systems of 200 stations or more" pursuant to the Act. In its reply comments, Centex urges the commission to exempt "central office based PBX-type services" from the definition of local exchange service. In addition, Centex argues that the continuous property restrictions in SWBT's Joint User tariff are necessarily superseded if central office based PBX-type services are no longer local exchange services. Centex states that elimination of the continuous property restrictions will allow small businesses in Texas to access the "feature-rich" central office based PBX-type services (Centex reply at 3-9). SWBT expresses concern that competitors will make such an argument and claims that such supersedure will potentially allow for usurpation of large portions of SWBT's service (SWBT comments at 42). Centex replies that the intent of excepting central office based PBX-type services from the definition of local exchange service is to foster competition where competition is feasible and appropriate. Centex argues that for such competitive services there is no basis for maintaining the continuous property restrictions that arbitrarily restrict access (Centex reply at 4-5). Further, Centex states that the concerns explored in the STS case (Docket Number 6450), which the continuous property restrictions were designed to address, do not apply to the sharing of central office based PBX-type services, such as Centrex and Plexar. STS providers aggregate their end users' traffic at an on-premises PBX switch and route that traffic over a lesser number of LEC local exchange access lines than were previously being used. Such aggregation does not occur with sharing of central office based PBX-type services (Centex reply at 6-9). For reasons previously expressed, the commission declines to exempt centrex and PBX-type services from the definition of local exchange service. The commission does not have in this rulemaking record an adequate basis upon which to eliminate restrictions on resale, sharing, and joint use. The commission believes that a better record upon which to decide the issues Centex raises will be available in a proceeding currently pending at the commission, Docket Number 11109, Request of Southwestern Bell Telephone Company to Obsolete and Grandfather Centrex Services and Joint Application of the Parties to Determine if the Restrictions, Terms, and Conditions Associated with the Sharing of Centrex and Plexar Services are Unreasonable as a Matter of Regulatory Policy or in Violation of any Law. Proposed sec.23.61(a)(17)(B)(vi) excepts packet switching services from the definition of local exchange service. Central et al. stated that packet switching is generally described as a method of transmission rather than as a service (Central et al. comments at 10-11). MFS stated that packet switching services may not be effectively competitive today, but these services are potentially competitive and are clearly outside the scope of "basic local exchange service" (MFS comments at 12). TSTCI opposes this exception to the extent it includes access to the public switched network and recommends limiting the exception to non-switched services. (TSTCI comments at A5-A6). The commission finds that packet switching is a type of data transmission service. Therefore, packet switching services are already exempted under the exemption for non-voice data transmission services. Packet switching allows data to be subdivided into individual bundles or packets. Each packet is uniquely identified and carries its destination address. The packets can be transmitted over different routes and may arrive at the destination in a different order than they were shipped. Since packet switching is not used today to transmit voice, it is clearly included within the exception for non-voice data transmission services and is outside the scope of "basic local exchange service" as described by MFS. Because packet switching may someday be used to transmit voice, a separate exemption for packet switching could lead to the competitive provisioning of switched voice services. Even with the deletion of the separate exemption for packet switching, competitors will be authorized to provide non- voice packet-switched data communications services under renumbered sec.23.61(a)(17)(B)(vi); however, competitors will not be authorized to provide voice packet-switched services without further action of the commission. Proposed sec.23.61(a)(17)(B)(vii) (renumbered sec.23.61(a)(17)(B)(vi)) excepts data transmission services from the definition of local exchange service. MFS stated that data transmission services may not be effectively competitive today, but are potentially competitive and are clearly outside the scope of "basic local exchange service" (MFS comments at 12). The major concern raised by the parties is that voice, when digitized for transmission, can be considered to be "data transmission" and that the transmission of tones (the punching of buttons on the phone as required by an automated response system) can be considered "data transmission" (see, e.g., SWBT comments at 44 and Central et al. comments at 11). The commission clarifies this exception in response to the comments by limiting it to non-voice data transmission. As for the transmission of tones in conjunction with an otherwise voice call, the commission fails to see this as a problem. Because the two components of the call cannot be provided by separate carriers, a non-LEC could not provide any component of the call, unless of course the service qualified under some other exception to the definition of local exchange service, such as dedicated access service. Proposed sec.23.61(a)(17)(B)(viii) excepts services offered over an integrated services digital network (ISDN) from the definition of local exchange service. MFS stated that these services may not be effectively competitive today, but are potentially competitive and are clearly outside the scope of "basic local exchange service" (MFS comments at 12). The major concern expressed by the parties was that switched services that traditionally have been considered part of "local exchange service" would be allowed under this exception. In other words, POTS, when provided on an ISDN network, would be outside the scope of "local exchange service" (see, e.g., Central et al. comments at 11, GTE comments at 6, OPC comments at 3, SWBT comments at 43, and TSTCI comments at A6). TSTCI also contends that this exception raises the issue of telephone number ownership (TSTCI comments at A6). API supports the inclusion of switched services among those services that can be provided by competitors. However, API is concerned that the commission may allow the additional controversy associated with competitive provisioning of switched services to delay any decision with respect to the other services (API comments at 24-26). Sprint offers a suggestion to clarify that the exception does not allow the provision of basic local exchange service. Sprint suggests adding the adjective "enhanced" at the beginning of proposed sec.23.61(a)(17)(B) (viii). (Sprint reply at 5). Because of the unanswered concerns that this exception would allow POTS to be provided over an ISDN network, the commission deletes this exception. The commission finds that Sprint does not sufficiently develop its suggestion. Proposed sec.23.61(a)(17)(B)(ix) (renumbered sec.23.61(a)(17)(B)(vii)) excepts dedicated and virtually dedicated access services from the definition of local exchange service. Generally the comments about this exception mirror the comments about the exception for private line services, sec.23.61(a)(17)(B) (iii). Additionally, some parties state that this exception is consistent with the commission's decision in Docket Number 568, Complaint of Southwestern Bell Telephone Company Against MCI Telecommunications Corporation, CPI Microwave, Inc, Southern Pacific Communications Company and Western Union Telegraph Company (see, e.g., API comments at 15, MCI comments at 5-6, and Sprint comments at 3). In Docket Number 568, the commission affirmed, despite SWBT's objections, that the provision of connections between customers within an exchange and the facilities of IXCs serving the exchange does not in itself constitute local exchange service. In Docket Number 568 the connections at issue were provided as part of an overall interexchange service. SWBT argues that the services provided by CAPs are not in themselves interexchange in nature as were the services at issue in Docket Number 568. SWBT submits that the services offered by the CAPs originate and terminate in the same exchange. Therefore, SWBT would have the commission define CAPs who provide such services as local exchange companies. In other words, if an IXC provides a connection between a customer and the IXC's facility, SWBT agrees that the provision of that connection is not local exchange service, but if the IXC contracts with a CAP to provide the connection, the connection becomes local exchange service (SWBT reply at 16-18). Sprint states that this exception will drive down access charges in Texas, to the customer's ultimate advantage (Sprint reply at 4). The commission finds that it is not reasonable to restrict the provision of connections between customers and the facilities of IXCs serving the exchange to the certificated local exchange companies, to IXCs that provide such connections as part of their overall interexchange service, and to companies that construct, but do not operate, such facilities. As for Sprint's comments that access charges will be driven down, the commission agrees and finds that there are sources other than this rule exerting significantly greater downward pressure on access charges, such as the recent FCC interconnection decisions. Additionally, the commission's response presented in the discussion of sec.23.61(a)(17)(B)(iii) applies. TSTCI takes exception to a comment made by Sprint that could imply that the amendment mandates interconnection (TSTCI reply at A6). The commission finds that the amendment in itsself does not mandate interconnection, nor does it indicate a presumption against interconnection. Sprint stated that the amendment would allow CAPs to provide dedicated connections between an IXC's point-of- presence and a LEC's switching facilities. The commission interprets Sprint's statement as referring to a CAP ordering access services from the LEC on behalf of an IXC. Several parties recommend that the term "virtually dedicated" be defined (see, e.g., API comments at 19-20, MCI reply at 12, and MFS comments at 13-14). The term "virtually" is used in proposed sec.23.61(a)(17)(B)(ix) (renumbered sec.23.61(a)(17)(B)(vii)) and indirectly, through the proposed definition of private line, in sec.23.61(a)(17)(B)(iii). In order to clarify the use of this term, the commission adopts a definition for "virtual private line" (sec.23. 61(a)(34)) and amends sec.23.61(a)(17)(B)(iii) to include both private line services and virtual private line services. The definition of virtual private line should serve to clarify the use of the term "virtually" in proposed sec.23. 61(a)(17)(B)(ix) (renumbered sec.23.61(a)(17)(B)(vii)). Proposed sec.23.61(a)(17)(B)(x) (renumbered sec.23.61(a)(17)(B)(viii)) provides that "any service provided within an exchange if, when the service is first made available, such service is not provided by the LEC(s) certificated to provide service within that exchange" shall not be considered to be local exchange service. Central et al. asks who will keep the official calendar of initial service dates and whether the exception applies to existing services (Central et al. comments at 12). TEXALTEL suggests language to clarify that the exception applies on a forward looking basis and to clarify that the exception applies when the new services are provided by an entity other than the LEC (TEXALTEL comments at 3). MCI supports TEXALTEL's suggestion (MCI reply at 12). The commission agrees with TEXALTEL and MCI and adopts a clarification based on TEXALTEL's suggestion. As to the "official calendar" concern, the commission believes that question can be resolved on a case-by-case basis if necessary. SWBT submits that the commission does not know what it is excepting via proposed sec.23.61(a)(17)(B)(x) (renumbered sec.23.61(a)(17)(B)(viii)) (SWBT comments at 45). TSTCI contends that if a carrier is the first to provide a service, that carrier must be dominant because there would be no other providers of the service (TSTCI comments at A7). The commission is not persuaded to delete this exception. The commission wants to encourage the introduction of new services. This exception will encourage all telecommunications utilities to be responsive to customers. If a telecommunications utility that provides a new service is dominant because there are no substitutable services, the commission could find that utility to be dominant pursuant to PURA, sec.3(c)(2)(B)(i), if appropriate. USM opposes proposed sec.23.61(a)(17)(B)(x) (renumbered sec.23.61(a)(17)(B) (viii)) and (xi) (renumbered (ix)) because they "unlawfully" restrict competitors to the provision of services that the LEC chooses not to provide or to the provision of services that the commission, not the marketplace, deems appropriate (USM comments at 14). This argument is based on USM's belief that the commission can in no way interfere with competition and that market dominance is the only standard to be used to determine dominant carrier status. The commission disagrees and makes no changes based on these comments of USM. The earlier discussion responding to USM's comment that the definition of local exchange service is vague, broad, and discretionary also applies. Proposed sec.23.61(a)(17)(B)(xi) (renumbered sec.23.61(a)(17)(B)(ix)) provides that "any service that the commission deems by final order is not local exchange service" shall not be considered to be local exchange service. TSTCI suggests that this exception be limited to a final order that results from a litigated proceeding (TSTCI comments at A8). TSTCI does not explain what it means by "litigated proceeding." If TSTCI is trying to preclude the commission from using the rulemaking process to modify the definition in the future, the commission does not agree. The rulemaking process will continue to be one vehicle available for establishing the commission's policy regarding competition in the local exchange. Because the rulemaking remedy is available pursuant to the Administrative Procedure and Texas Register Act (APTRA), it is not addressed in clause (ix). However, in response to TSTCI's comment the commission modifies renumbered sec.23.61(a)(17)(B)(ix) by adding the phrase "in a docketed proceeding." SWBT contends that proposed sec.23.61(a)(17)(B)(xi) (renumbered sec.23.61(a) (17)(B)(ix)) provides no standards that can be relied on by the public and theoretically would allow the commission to find that POTS does not constitute local exchange service (SWBT comments at 45). The commission adopts the exception as proposed. The discussion supra regarding the need for and ability of the commission to effectuate changes to the definition of local exchange service applies. Additionally, SWBT presumably believes that PURA prohibits POTS from being excluded from the definition of local exchange service because the LECs cannot be granted pricing flexibility for basic local exchange service pursuant to PURA, sec.18(j). The commission finds that this exception does not violate PURA, sec.18(j). Renumbered sec.23.61(a)(17)(B)(ix) makes no decision as to whether POTS can be excluded from the definition of "local exchange service." The exception only acknowledges that competition in the local exchange is in a state of evolution. The commission is simply recognizing that it will be appropriate in some instances to proceed on a case-by-case basis to determine whether a service should be defined as local exchange service. A LEC will be free to participate in a case where the commission may issue an order that deems a particular service to be outside the scope of local exchange service. The LEC can argue its position about what PURA allows in that case (See also MCI reply at 13). Proposed sec.23.61(a)(17)(C) states that the provisions of sec.23.61(a)(17)(B) "shall be liberally construed to foster a competitive industry." TTA states that this requirement promotes what TTA believes is the commission staff's perception that PURA mandates unregulated competition in the local exchange (TTA comments at 5-6). Central et al. and TTA submit that PURA, sec.18(e) sets forth the regulatory relief available to LECs in the event of significant competitive challenges, but in no way requires the local exchange to be opened to unregulated competitors (Central et al. comments at 9-10, TTA comments at 5-6). TSTCI submits that this subparagraph does not foster competition, but merely allocates certain markets between the CAPs and LECs (TSTCI comments at 9). USM submits that this subparagraph is an attempt to "dress up" an otherwise anticompetitive definition (USM comments at 14). In response to the comments of Central et al., TSTCI, and TTA, the commission modifies the language of sec.23.61(a)(17)(C) by replacing the phrase "foster a competitive industry" with the phrase "encourage the development of a competitive marketplace." The commission believes that the new language is more consistent with PURA, sec.18(a). The commission finds that sec.23.61(a)(17) (C) is necessary to avoid picayune arguments about whether a particular service qualifies under one of the exceptions. USM's comment is again based on its interpretation of PURA with which the commission does not agree. USM states that sec.23.61(a)(1), the definition of base rate area, is an unlawful delegation of the commission's authority to the LECs (USM comments at 11). The commission disagrees and makes no change. The commission approves the LECs' tariffs, and therefore would approve any changes to the base rate areas. USM contends that sec.23.61(a)(11), the definition of exchange area, allows utilities to define boundaries because LEC boundary maps are "superficially" stamped by the commission as approved. Additionally, USM submits that the LATAs should define the exchange boundaries (USM comments at 11). The commission disagrees and makes no change. The boundary maps are approved by the commission, and as discussed supra, the commission is not convinced that the LATAs should define the exchange boundaries. TEXALTEL suggests a revision to sec.23.61(a)(12), the definition of grade of service, that would replace the phrase "served on a line" with the phrase "a customer access line is designated to serve" (TEXALTEL comments at 2-3). TEXALTEL makes this suggestion because many multi-party lines only serve one party. The commission modifies the definition in response to concerns raised by TEXALTEL. USM contends that sec.23.61(a)(14), the definition of line, allows only LECs to provide lines because only LECs have central offices (USM comments at 11). The commission disagrees and makes no change. Section 23.61(a)(5) defines a central office in terms of a switching unit that provides services to the general public. The commission is not convinced that defining a line in terms of a channel extending from a central office to the customer's location will impair competition. USM submits that sec.23.61(a)(15), the definition of local calling area, is designed to exclude competitors. USM contends that only the LECs provide telecommunications service "under a specific schedule of exchange rates." USM also contends that the definition fails to recognize the competitive metro services that are flat rated by SWBT and its competitors (USM comments at 11- 12). The commission finds that the definition of "local calling area" has no anticompetitive effect because it merely describes a geographic area. USM's contention regarding the language "under a specific schedule of exchange rates" is irrelevant. USM criticizes sec.23.61(a)(16), the definition of local exchange company, because only certificated utilities can be providers of local exchange service. USM doubts that the commission would certificate a competitive provider given what USM characterizes as the commission's "history of sheltering" the LECs (USM comments at 12). GTE submits that the definition of local exchange company should depend on the services provided, and not on whether the company is certificated (GTE comments at 9). The commission finds that the definition of local exchange company in sec.23.61(a)(16) corresponds to the statutory definition of local exchange company (PURA, sec.3(v)). Therefore, no change is made. USM contends that sec.23.61(a)(21), the definition of long distance telecommunications service, would allow SWBT to determine that a small area of Austin constitutes a local calling area and then declare all calls between that area and the rest of Austin to be long distance (USM comments at 14-15). The commission disagrees. SWBT could not make the changes suggested by USM without commission approval. USM submits that sec.23.61(a)(23), the definition of message rate service, allows SWBT to institute message rate service (USM comments at 15). The commission disagrees. SWBT already has a message rate service. Any LEC not currently having a message rate service could not institute such a service without commission approval. USM contends that sec.23.61(a)(27), the definition of private line, has no place in modern telecommunications networks. USM states that there is no significant distinction between a "private line" and a "switched line" (USM comments at 15). The commission disagrees. A thorough reading of the comments submitted in this proceeding reveals that the telecommunications industry clearly makes distinctions between private and switched services. Therefore, no change is made. GTE argues that sec.23.61(a)(27), the definition of private line, is too broad because it includes all subscriber loops. GTE suggests that the current exclusion of circuits connected to central office switching should be retained (GTE comments at 9). The commission believes that GTE's suggestion has merit in today's telecommunications environment. Subscriber loops are currently considered to be an integral component of the public switched network. However, the commission notes that the rapid evolution of the telecommunications industry could radically change the nature of the subscriber loop. The commission incorporates GTE's suggestion by adding language to exclude (from the definition of private line) circuits connected to a switching facility of a telecommunications utility, with the exception that a dedicated transmission path between switching facilities of interexchange carriers shall be considered a private line. Because the commission has adopted a separate definition for virtual private line and has amended sec.23.61(a)(17)(B)(iii) to exclude virtual private line services from the definition of local exchange service, the commission does not believe that this more restrictive definition of private line will limit competitors in the services they can provide. GTE argues that sec.23.61(a)(33), the definition of trunk, is too broad and would include the local loop connecting a customer-owned PBX to the line side of the central office (GTE comments at 9-10). GTE fails to demonstrate why the inclusion of a connection between a customer-owned PBX and the central office in the definition of trunk is a problem. Therefore, the commission has no basis for changing this definition. GTE submits that the commission should be required to publish the results of its findings under sec.23.61(m) (GTE comments at 10). The commission plans to use the information gathered pursuant to sec.23.61(m) in its status of competition report due biennially to the legislature. TSTCI believes that the commission will have difficulty obtaining information under sec.23.61(m) because the commission will not have dominant carrier jurisdiction over the LEC-competitors (TSTCI comments at A3). The commission refers to PURA, sec.18(c), which gives the commission the jurisdiction over nondominant telecommunications utilities to conduct investigations necessary to determine the existence, impact, and scope of competition and to require the filing of reports. Therefore, no change is made in response to TSTCI's comment. The use of "see also" in this preamble indicates that the cited comments generally support the proposition, but does not indicate the commission's agreement with all aspects of the comments. All comments, including those not specifically referenced herein, were fully considered by the commission. The amendment is adopted under Texas Civil Statutes, Article 1446c, sec.16, which provide the Public Utility Commission of Texas with the authority to make and enforce rules reasonably required in the exercise of its powers and jurisdiction, and sec. 18, which provides that the public interest requires that new rules, policies, and principles be formulated and applied to protect the public interest and to provide equal opportunity to all telecommunications utilities in a competitive marketplace. sec.23.61. Telephone Utilities. (a) Definitions. The following words and terms, when used in this chapter, shall have the following meanings, unless the context clearly indicates otherwise. (1) Base rate area-A specific area within an exchange area as set forth in the local exchange carriers' tariffs, maps, or descriptions. Local exchange service within this area is furnished at uniform rates without extra mileage charges. (2)-(10) (No change.) (11) Exchange area-The geographic territory delineated as an exchange area by official commission boundary maps. An exchange area usually embraces a city or town and its environs. There is usually a uniform set of charges for telecommunications service within the exchange area. An exchange area may be served by more than one central office. An exchange area may also be referred to as an exchange. (12) Grade of service-The number of customers a line is designated to serve. (13) Intercept service-A service arrangement provided by the local exchange carrier whereby calls placed to a disconnected or discontinued telephone number are intercepted and the calling party is informed by an operator or by a recording that the called telephone number has been disconnected, or discontinued, or changed to another number, or that calls are being received by another telephone, etc. (14) Line-A circuit or channel extending from a central office to the customer's location to provide telecommunications service. One line may serve one customer, or all customers served by a multiparty line. (15) Local calling area-The area within which telecommunications service is furnished to customers under a specific schedule of exchange rates. A local calling area may include more than one exchange area. (16) Local exchange company-A telecommunications utility certificated to provide local exchange service within the state. A local exchange company is also referred to as a local exchange carrier. (17) Local exchange service- (A) Telecommunications service provided within an exchange for the purpose of establishing connections between customer premises within the exchange, including connections between a customer premises and a long distance service provider serving the exchange. Local exchange service may also be referred to as local exchange telephone service. (B) Notwithstanding subparagraph (A) of this paragraph, the following services are not local exchange service: (i) services for which local exchange carriers have been granted authority to enter into customer-specific contracts pursuant to the Act, sec.18(e)(3)(B), as those services are described in sec.23.27 of this title (relating to Rate- Setting Flexibility for Services Subject to Significant Competitive Challenges); (ii) services for which a local exchange carrier has been granted authority to engage in pricing flexibility pursuant to sec.23.27 of this title; (iii) private line services and virtual private line services; (iv) resale or sharing of local exchange service, where that resale or sharing is allowed by commission approved tariffs; (v) dark fiber services; (vi) non-voice data transmission services; (vii) dedicated and virtually dedicated access services; (viii) any service initially provided within an exchange, after adoption of this rule, if first provided by an entity other than the local exchange carrier(s) certificated to provide service within that exchange; and (ix) any service that the commission determines by final order in a docketed proceeding is not local exchange service. (C) The provisions of subparagraph (B) of this paragraph shall be liberally construed to encourage a competitive marketplace. (18) Local message-A completed call between customer access lines located within the same local calling area. (19) Local message charge-The charge that applies for a completed telephone call that is made when the calling customer access line and the customer access line to which the connection is established are both within the same local calling area, and a local message charge is applicable. (20) Local service charge-The charge for furnishing facilities to enable a customer to send or receive telecommunications within the local calling area. This local calling area may include more than one exchange area. (21) Long distance telecommunications service-That part of the total communication service rendered by a telecommunications utility which is furnished between customers in different local calling areas in accordance with the rates and regulations specified in the utility's tariff. (22) Message-A completed customer telephone call. (23) Message rate service-A form of local exchange service under which all originated local messages are measured and charged for in accordance with the utility's tariff. (24) Nondominant carriers-Interexchange telecommunications carriers (including resellers of interexchange telecommunications services), specialized communications common carriers, other resellers of communications, other communications carriers who convey, transmit, or receive communications in whole or in part over a telephone system, and providers of operator services (except that subscribers to customer-owned pay telephone service shall not be deemed to be telecommunications utilities) who are not dominant carriers. (25) Out-of-service trouble report-An initial customer trouble report in which there is complete interruption of incoming or outgoing local exchange service. On multiple line services a failure of one central office line or a failure in common equipment affecting all lines is considered out of service. If an extension line failure does not result in the complete inability to receive or initiate calls, the report is not considered to be out of service. (26) Primary service-The initial provision of voice grade access between the customer's premises and the switched telecommunications network. This includes the initial connection to a new customer or the move of an existing customer to a new premises, but does not include complex services. (27) Private line-A transmission path that is dedicated to a customer and that is not connected to a switching facility of a telecommunications utility, except that a dedicated transmission path between switching facilities of interexchange carriers shall be considered a private line. (28) Public telephone service-An individual line customer service equipped with a coin collecting or coinless public telephone instrument installed for use of the general public in locations where the general public has access to these telephones. (29) Regrade-An application for a different grade of service. (30) Repeated trouble report-A customer trouble report regarding a specific line or circuit occurring within 30 days or one calendar month of a previously cleared trouble report on the same line or circuit. (31) Station-A telephone instrument or other terminal device. (32) Telecommunications utilities-Dominant carriers and nondominant carriers. (33) Trunk-A circuit facility connecting two switching systems. (34) Virtual private line-Circuits or bandwidths, between fixed locations, that are available on-demand and that can be dynamically allocated. (b)-(l) (No change.) (m) Evaluation of competition. Annually, the commission shall gather information necessary to determine the existence, impact, and scope of competition in the telecommunications industry. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on October 28, 1992. TRD-9214570 John Renfrow Secretary of Commission Public Utility Commission of Texas Effective date: November 18, 1992 Proposal publication date: April 28, 1992 For further information, please call: (512) 458-0100 TITLE 22. EXAMINING BOARDS Part XIV. Texas Optometry Board Chapter 271. Examinations 22 TAC sec.271.4 The Texas Optometry Board adopts an amendment to sec.271.4, concerning re- examination, without changes to the proposed text as published in the July 10, 1992, issue of the Texas Register (17 TexReg 4927). The amendment is one of housekeeping and will clarify the examination to be taken when a candidate has failed the examination for a third time. The amendment will inform candidates prior to sitting for the examination the requirements for re-examination if the examination is failed for a third time; the housekeeping language will bring the rule into compliance with all subchapters under Chapter 271. No comments were received regarding adoption of the amendment. The amendment is adopted under Texas Civil Statutes, Article 4552, sec.2.14, which provide the Texas Optometry Board with the authority to promulgate procedural and substantive rules. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on October 28, 1992. TRD-9214632 Lois Ewald Executive Director Texas Optometry Board Effective date: November 19, 1992 Proposal publication date: July 10, 1992 For further information, please call: (512) 835-1938 Chapter 279. Interpretations 22 TAC sec.279.13 The Texas Optometry Board adopts new sec.279.13, concerning board interpretation number thirteen, without changes to the proposed text as published in the July 10, 1992, issue of the Texas Register (17 TexReg 4927). The new section is necessary to establish criteria for optometrists to follow when requested to conduct examinations for patients at industrial sites. It further safeguards the public by fixing professional responsibility in regard to patient care and follow-up. The new section will make licensee optometrists professionally responsible to patients, even when conducting examinations for patients at industrial sites, away from their principal office; the rule establishes follow-up procedures when the optometrist is not able to do so, assuring patient care. No comments were received regarding adoption of the new section. The new section is adopted under Texas Civil Statutes, Article 4552, sec.2. 14, which provide the Texas Optometry Board with the authority to promulgate substantive and procedural rules. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on October 28, 1992. TRD-9214633 Lois Ewald Executive Director Texas Optometry Board Effective date: November 19, 1992 Proposal publication date: July 10, 1992 For further information, please call: (512) 835-1938 Part XXIV. Texas Board of Veterinary Medical Examiners Chapter 573. Rules of Professional Conduct Prescribing and/or Dispensing Medications 22 TAC sec.573.40 The Texas Board of Veterinary Medical Examiners adopts an amendment to sec.573.40 concerning labeling of medications dispensed, without changes to the proposed text as published in the September 29, 1992, issue of the Texas Register (17 TexReg 6669). The amendment will ensure that all medications dispensed by DVMs are properly labeled so that consumers know what medicines they are administering to their pets and in case of accidental injestion by humans. The amendment will require all veterinarians to label all medications dispensed. No comments were received regarding adoption of the amendment. The amendment is adopted under Texas Civil Statutes, Article 8890, sec.7(a), which provides the Texas Board of Veterinary Medical Examiners with the authority to make, alter, or amend such rules and regulations as may be necessary or desirable to carry into effect the provisions of this Act. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on October 28, 1992. TRD-9214660 Buddy Matthijetz Executive Director Texas Board of Veterinary Medical Examiners Effective date: November 20, 1992 Proposal publication date: September 29, 1992 For further information, please call: (512) 447-1183 TITLE 28. INSURANCE Part II. Texas Workers' Compensation Commission Chapter 53. Carrier's Report of Initiation and Suspension of Compensation Payments. 28 TAC sec.53.47 The executive director of the Texas Workers' Compensation Commission adopts the repeal of sec.53.47, concerning payment of partial benefits for specific injuries. Repeal of this section eliminates unnecessary information requirements for claims subject to the law in effect prior to January 1, 1991. Since adoption, the volume of claims subject to the provisions of this section has dropped significantly. No comments were received on the proposed repeal of this section. The repeal of this section is adopted under Texas Civil Statutes, Article 8307, sec.4(a), which provide Texas Workers' Compensation Commission with the authority to adopt rules necessary to administer the workers' compensation laws and sec.17.12(b) of Senate Bill One, Second Called Session, 1989, which delegates authority to the executive director to administer the workers' compensation laws in effect prior to the effective date of the Workers' Compensation Act. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on November 2, 1992. TRD-9214765 Susan Cory General Counsel Texas Workers' Compensation Commission Effective date: December 1, 1992 Proposal publication date: September 8, 1992 For further information, please call: (512) 440-3592 Chapter 114. Self-Insurance 28 TAC sec.sec.114.1-114.15 The Texas Workers' Compensation Commission adopts new sec. sec.114.1-114.15. Sections 114.2-114.15 are adopted with changes to the proposed text as published in the August 14, 1992, issue of the Texas Register (17 TexReg 5663). Section 114.1 and sec.114.15 are adopted without changes and will not be republished. These sections are adopted because Texas Civil Statutes, Article 8308-3. 51- 3.70 require the commission to adopt rules to implement self-insurance in Texas. These sections clarify who can become self-insured, how they apply, and what financial, safety, and other requirements must exist to become and remain self- insured. These sections also describe the process of certification to be self- insured and what happens when a self-insured employer becomes impaired or is removed from self-insured status. Changes made to these sections are addressed in following section as part of the commission's response to comments. Comments supporting changes to the proposed sections were received from Texas Utilities Services; Hammerman & Gainer; Insurors Data Management, Inc.; Texas Self-Insurance Association; Owens-Corning Fiberglas Corporation; Marriott Corporation; Rollins Burdick Hunter of Illinois, Inc.; Ashland Oil, Inc.; GAB Business Services Inc.; GRCC Associates; Aluminum Company of America; CNA Insurance Companies; Rockwell International Corporation; Bell Helicopter Textron Inc.; Paccar, Inc.; The LTV Corporation; and Employers Casualty Company recommending changes to the text of the proposed sections. These comments with the commission responses are summarized as follows. Section 114.1(a) says these rules guarantee full and timely payments by self- insurers. Other commission rules govern timeliness and correctness of payment, but these rules do not. Recommend reference to full and timely payment needs to be eliminated. The commission disagrees. While other commission rules which already establish how much has to be paid and when it has to be paid are not incorporated here, these rules do guarantee that the injured employee will be paid in full and within the time limits established by the law when a self-insurer becomes impaired. To the extent that it correctly addresses the purpose of these rules related to the liabilities of impaired employers, this rule will not be changed as the commenter suggests. The definition of "retention" in sec.114.2(b)(5) should be changed to: "means all payments made for claims filed under the Workers' Compensation Act including: indemnity benefits, medical payments, death benefits, and all other related claims expenses not otherwise covered by excess insurance." This needs to be clearly defined to prevent the Guaranty Association (Association) from becoming responsible because a self-insured doesn't meet the retention threshold for covered benefits. The commission agrees. The changes recommended in the definition identify more clearly what the employer is electing to retain liability for, and appropriately extends to include related claims expenses as well as benefits. The term "third party administrator" as used in the Act and sec.114.2 is ambiguous and the commission should clarify what it intends the term to mean. Recommend that a new subsection be added to clarify and would suggest the following language. "Third Party Administrator-A business entity that has on its staff an individual licensed under the Texas Insurance Code, Article 21.07-4, but not limited to business entities licensed under the Texas Insurance Code, Article 21.07-6." The commission disagrees with the recommendation to add a new definition. The commission believes the statute is clear in its intent that a third party administrator (TPA) must employ a licensed adjuster, but the statute does not require a third party administrator license for the TPA company. The definition of excess insurance in sec.114.2 could be interpreted to mean that the self-insurer must obtain aggregate insurance when there are other types available such as specific excess. The commission disagrees. The definition is intended to define the term "excess insurance"; it is not intended to establish any type of requirement. However, in sec.114.5 (relating to Excess Insurance Requirements) the statutory requirement is included and that requirement is for specific excess. Recommend adding a paragraph (8) to sec.114.2; "Standard compensation premium means premium calculated using the Texas competitive fund middle rate for each payroll classification adjusted by the experience modifier, if any." The commission disagrees. The standard compensation premium will be calculated based on the rates established by the State Board of Insurance and published in the NCCI Texas Basic Manual of Rules, Classifications, and Rates. The approach used by the commission to determine stability and financial strength in sec.114.3 places a heavy emphasis on historical asset accounting values which frequently distort financial reality. A cash flow criteria would be more appropriate, but would also be subject to distortion. Recommend the commission adopt a provision that allows for self-insuring on the basis of being rated as investment-grade. These credit evaluations are more likely to correctly identify financial strength and stability than the present rule. Specifically, change subsection (e) to delete paragraphs (1)-(10) and replace with: Dun & Bradstreet or other recognized credit reporting agency's ratings; and debt ratings from Standard and Poor's or Moody's. It is unclear from sec.114.3 how the commission intends to determine "industry norms" or different structures within identical industries. Recommend the commission evaluate companies along the lines of the I.A.I.A.B.C. Model Rules and Regulations for Self-Insurance. Also, a company's credit rating in "investment grade" categories is universally accepted as evidence of a company's ability to meet it's financial obligations. The commission agrees that using a credit/debt analysis and rating from nationally recognized experts, providing independent review of an applicant's financial strength and stability, would be administratively expedient and the rule will be changed to require the applicant to submit his or her credit or debt rating analysis with his or her application, though the other factors will remain to allow consideration of those applicants who do not have either a credit or debt rating and who do not intend to obtain such an analysis and to allow consideration of all relevant factors. The commission, in sec.114.3, should allow a single application from a parent company to meet the security requirements and provide a parental guarantee for the subsidiaries. The commission agrees. The application Form TWCC 160 addresses this subject. At the parent corporation's option its subsidiaries may be included in the parent's corporation's application and a single application may be filed. The parent corporation is required by the Act, sec.3.56(k), to provide a parent guaranty for its subsidiaries. The second sentence of sec.114.3(e), should allow for director flexibility by using "may" in place of "will" and adding that the director would not be limited to the factors stated. The commission disagrees. The applicant should be able to determine what factors the director will apply and should be assured that the director will apply them. The language will be strengthened to require consideration of the factors by changing the word "will" to "shall." The director will have discretion to weigh the factors and determine whether the applicant will be able to meet the obligations of a self-insured employer. Section 114.3(e)(1) is too vague regarding which financial standard an employer will have to meet and it doesn't address the privacy rights of privately held corporations. Recommend the commission have one simple standard. The commission disagrees. Approving an employer's application to become self- insured is neither simple nor is it an action to be taken lightly. The commission has a responsibility to make certain that the applicant is financially strong and stable, which requires the review of many aspects of an employer's business. Regarding the issue of privacy rights: employers are going to have to make decisions about how they want to handle their business with the understanding that information submitted to the commission for the purpose of becoming self-insured is open to review as a public record pursuant to the Open Records Act, Texas Civil Statutes, Article 6252-17a. Recommend the commissioners change the language of sec.114.3(d) from "...an interim report may be required." to "a 10-Q report will be accepted." The commission disagrees. Not all companies are regulated by SEC. The current wording allows us to obtain 10-Qs or other similar reports and the commission believes this flexibility is necessary and appropriate. Recommend changing sec.114.4(a) to "Security may be one or a combination of any of the following:". The commission agrees with the recommended change in subsection (a). Changing subsection (a) by adding "one or" will clarify that security may be provided through one source and is not required to be split between more than one type of security. Recommend you changing sec.114.4(d) to "The amount of security shall be the greater of $300,000 or 125% of the applicant's incurred liability." because the law sets that as the upper limit of security requirements. The commission disagrees with the recommended change to subsection (d). Several commenters suggested that the Act sets the limit for securities at $300,000 or 125% of incurred liabilities, whichever is higher. However, the Act says the "sum of the deposited securities must be at least equal to the greater of..." which the commission interprets to mean the security can be set at whatever level the commission believes is appropriate to secure the risk a self-insurer wishes to take as long as that security is at least $300,000 or 125% of incurred liabilities. Recommend you change sec.114.4(e) to reflect 15 days rather than 10. The commission agrees with the recommendation that more time be allowed for the guarantor to provide the security. However, the commission prefers to extend that time period by clarifying that the 10 days is 10 working days. This rule, sec.114.4, creates a duty for the employer of having to monitor the financial status of the surety or issuer of the letter of credit. This is unnecessary and burdensome. The commission disagrees. The commission would expect the surety or letter of credit guarantor to notify the employer if it will not be able to continue to secure the bond or guarantee the letter of credit so the employer would not have to monitor, but would have to respond to any notice or other knowledge it receives regarding a change in the guarantor or surety's financial status. Suggest sec.114.5(b)(3) be revised to: "The association must be named as an additional insured on the excess policy and may assume the rights and responsibilities of the self-insurer under the policy when the self-insurer is declared to be impaired." The commission agrees with the recommended revision of subsection (b)(3). Several commenters had pointed out that this will more surely bind the excess carrier to pay once the association assumes the liabilities of an impaired employer. Suggest sec.114.5(d) be deleted as it is unnecessary. The commission disagrees. While the self-insurer is required to carry excess insurance, the amount of that excess is established by the commission and the commission is responsible for assuring that the self-insurer is indeed covered. To make that assurance, the commission must be informed when a self-insurer is canceling excess insurance. Since the self-insurer is electing to cancel or not renew the policy, the self-insurer should be required to keep the commission informed of that action and to describe the details of the new policy of excess insurance required for the employer to remain self-insured. Sections 114.5(b)(1) and (2) require carriers to give 60 days' advance notice of cancellation, but subsection (d) allows the self-insurer to provide 10 days' notice. Recommend that both the self-insurer and the carrier provide the same amount of notice and that it be 30 to 60 days. The commission agrees that the reporting requirement should be the same for both the self-insurer and the excess carrier. Subsection (d) will be changed to require 60 days' notice. Section 114.5(c)(2) requires the excess carrier to certify that a policy will be issued upon self-insurer certification. The carrier cannot control the self- insurer, but can only offer the policy and issue it if the self-insurer requests the coverage and pays the premium. The commission agrees that the excess insurance carrier cannot control the self-insurer and this subsection does not request that. Certification simply means formal written testimony that something is true, certain, accurate, etc. and the commission is requiring the applicant for self-insurance to obtain from an excess insurance carrier certification to show that the carrier will, in fact, issue the policy which the self-insurer negotiates so long as the self- insurer pays the premium. Section 114.5(a) should specify the upper limit as well as the reasons for increasing to an upper limit of liability. The commission disagrees. Upper limits to excess insurance must be based on the financial strength of the company and the likelihood of catastrophic accidents. As such, they are and must remain company specific, which is not possible in a rule. The reasons for increasing the limit will also be company specific based on financial strength, stability, ability to pay claims, specific security, and other issues. This rule (sec.114.5) should not increase excess insurance requirements based only on the type of business and a history of catastrophic accidents in that industry. The commission agrees that the level of excess insurance should not be established solely on the basis of the industry experience. This rule allows the director latitude for setting the excess requirement at a level which the director deems appropriate based on the experience of a particular employer and on the expectation of future liability. Many factors will play a part in this sort of determination and the nature of the business will certainly have to be considered. Since the limits of any required excess insurance policy in sec.114.5 will not be known before the director sets it, it is unrealistic to expect the insurer to state that a policy will be issued on certification of the employer as a self- insurer. The commission agrees that an insurer will not be in a position to guess what the director might require. However, the employer should be in the position of determining the excess it believes it needs and establishing that the carrier will provide that level of excess. If the director requires more than that agreed to, the employer will need to see if the insurer will provide that additional coverage, or the employer will have to purchase other policies to meet the requirement. Recommend deletion of sec.114.6(2). Replace with "a written safety policy or policies which states clearly the commitment of management to the safety program." Add sec.114.6(3) requiring the safety program to provide services similar to those set out in sec.166.1 (relating to Required Accident Prevention Services). These sec.114.6 safety program requirements are potentially more stringent than those imposed on either covered employers or insurance carriers and may be impossible to comply with economically. No other state requires the type of annual reporting, claims investigation, and inspections at every site for businesses established in sec.114.6. These requirements are onerous and unreasonable from a time, cost, and efficiency standpoint. The privilege to self-insure should be reasonably attainable by financially solvent companies with a commitment to loss prevention and effective control of their workers' compensation losses and we recommend the commission adopt a more flexible and reasonable safety rule than sec.114.6. Recommend the commission not require a professional source be physically located at each business location within the State of Texas which sec.114.6 may require. Section 114.6(b)(6) may be well intentioned, but it has no significant safety or health benefit as it would require expending resources on inspections of offices and other lower risk areas. Recommend the language include "...requires at least annually two scheduled safety inspections of every site over 10 employees to be inspected...." Unscheduled inspections as provided in sec.114.6 serve no purpose. Let OSHA perform unscheduled inspections. Private industry can inspect more thoroughly by scheduling inspections when all the operations are on line at the time of the inspection. The program monitoring system proposed under sec.114.6(c) is already mandatory under OSHA, why not just ask for a copy of it? Recommend deletion of this subsection. Section 114.6(b)(2) requires a worksite analysis of every site. This appears impractical especially when the self-insurer has many identical locations with low risk activities. Safety committees should never be mandated as sec.114.6 does. Complaint procedures should be part of the law. The commission agrees with the general import of these comments and as a result this rule has been revised to address the overall concerns about the need to have a simpler, more flexible safety rule consistent with the self-insurer's role as carrier and employer. The commission disagrees with specific concepts in these comments as follows: unscheduled inspections serve the very useful purpose of determining whether the employees work as safely when they are not expecting to be checked as they do when they know they are being watched; OSHA may have mandated a program monitoring system, but it is not specifically directed to the self-insured employers in Texas, so would not meet the needs of the commission; complaint procedures have to be flexible to allow employers structured differently to have effective procedures for receiving and responding to complaints; and safety committees have proven to be effective tools for dealing with safety issues so mandating them may be appropriate. If self-insurers are going to have to post notices, pursuant to sec.114.6, as the covered employers do, those notices will have to be changed to delete references to an insurance company and to add third party administrators as the contact. The commission agrees. When the employer becomes self-insured, the employer retains many employer responsibilities, including posting requirements. The standard notices will not all be appropriate for self-insurers to post. Edited notices will be provided with the certificate of self-insurance. This section (sec.114.6) requires employers to employ a certified safety professional, which seems to go beyond what the statute contemplated. The commission agrees that the employer should be free to either train an existing employee, hire a person appropriately qualified, or hire an independent contractor. In either case, the person performing the analysis must be qualified. It does not exceed the statute for the commission to require persons performing this specialized analysis and inspection to be adequately prepared to do the job correctly and the certification establishes that the person is qualified. Section 114.7(c)(2) says the director shall consider certification based on whether a company exceeds 120% of the industry norm for each financial measure being reviewed. Recommend this requirement be dropped. Simply being 120% better than the industry norm does not guarantee financial strength if the entire industry is in trouble. If a company is comparable to other self-insurers in the same industry and can provide the required security, it should be allowed to become self-insured. The commission agrees with the concern about using the 120% comparison and will consider an alternative using debt or credit ratings, minimum tangible net worth, and ratio of tangible net worth to long term debt which does not include this comparison. Section 114.7(a) should be modified to replace "The division shall..." with "The director shall..." The commission agrees. Using the title fixes responsibility on a certain individual while the term division simply leaves it open. Recommend a change in sec.114.8(d) from "commissioners may grant" to "commissioners will grant." The commission disagrees. Since there is no statutory time limit on commissioner action, using the permissive "may" is more appropriate. The appeal process in sec.114.8 is vague and ill-defined. Appeals should go to an independent board, not the one that already ruled against the employer. The commission disagrees. Establishing administrative appeal through the same board that originally denied a request allows the employer an opportunity to supplement the record to include everything that employer believes will support it's application and it allows the commission the opportunity to review the decision based on complete information and to correct any administrative or clerical errors that may have occurred in filing the original decision. In addition, the statute provides that certification and denial is done by the commissioners, so there is no independent board with the authority to consider the issue. Section 114.8(c) should say "31st day after applicant receives...." The commission agrees. The word "received" will be replaced by "receives." Section 114.8(d) should be reworded to read that the commission's failure to take action is deemed approval. The commission disagrees. The applicant is appealing a denial. To deem the application accepted and grant self-insured status to a company that the commission denied, without requiring the evidence to be pursuasive or even on point, would be a misuse of the commission's discretion. Since this is an administrative appeal which establishes whether a denial is final, and the employer will have recourse in the courts based on the denial being deemed final, the recommendation will not be adopted. If the applicant can be reconsidered by the commission, provision should be made in sec.114.8 to allow the applicant to be reconsidered by the Association. The commission disagrees. These rules address Association approval only because the statute requires that approval before the commission can certify an employer. These rules do not establish procedural rules for the Association because that function will be carried out by the Association when it is formed. A new subsection should be added to sec.114.8 to require an applicant to notify the commission within 10 days of notice of denial of the intent to appeal which would set the time frames for appeal and hopefully avoid questions of due process. The commission disagrees. The rule currently establishes that the denial is final on the 31st day after the applicant received the denial if the applicant has not responded to the denial. This should provide ample opportunity for an applicant to respond. Recommend deletion of sec.114.9 in its entirety. Self-insurers should be required to provide the same type reports required of insurance carriers providing safety services. Section 114.9(a)(3)(A)-(F) should include a requirement that the information should be provided by an approved professional source. Safety and health programs should be developed and analyzed by a safety professional. Section 114.9 requires reports of subjective information which commission rules do not clearly describe the use for. We recommend either including a description of the commission's evaluative process or deletion of paragraph (3) (A), (D), and (F). Section 114.9(a) requires a voluminous annual safety report which appears burdensome, unrealistic, and costly to both the self-insurer and the commission. Recommend requiring a lesser status report. Subsection (b) requires extensive review and inspection procedures for both new and renewal applications which seems unreasonable in terms of time and labor for both the self-insurer and the commission. The commission agrees with the concerns reflected in these comments. In concert with changes to sec.114.6 (relating to Safety Program Requirements) this section will be changed. The change will make this rule relate only to the initial inspection of the safety program. Reporting requirements will be included in sec.114.12 (relating to Required Annual Reports) and will be consistent with reporting requirements which carriers currently have. This rule (sec.114.9) is discriminatory if not applied to the insured employer as well and is not mandated by law. The commission disagrees. Whenever the law or administrative rules establish that certain individuals, businesses, or groups are allowed to do something that others are not allowed to do, the regulatory bodies are allowed to require information from those individuals, businesses, or groups which the regulator may not require of others. Recommend changing sec.114.10(c) to require investigation of each injury reportable under the Act. The commission agrees. The word "reportable" will be inserted in the sentence prior to the word "claim." Requiring, as sec.114.10 does, a claims adjuster for all claims is erroneous, costly, and not needed. It negates one of the primary reasons for being self- insured (claims management). The commission disagrees. As far as claims management is concerned, the legislature established the requirement that claims management be performed by a separate business entity from the employer. Since a license is generally accepted as proof of competence, and the commission believes competent claims management is imperative for the self-insured employer, the requirement that claims be processed by a licensed adjuster is appropriate. Section 114.10(b) should state that each proposed contract must be approved by the director. The commission agrees and will add "proposed" to subsection (b). Section 114.11(a) should say the division will audit each self-insurer at least once every three years. The commission agrees and will incorporate the recommended text in the rule. Additional changes to this rule will be made to provide for ongoing inspection requirements. Recommend deletion of sec.114.12(a)(2) since this requirement is addressed in sec.114.9. The commission disagrees. Changes in sec.114.9 eliminate this apparent duplication. Section 114.12(a)(1) requires a claims report which, if it includes all the data elements in sec.114.6(2) and (3), may be prohibitively expensive to produce if the third party administrator can gain access to or recreate all the information for the preceding three calendar years. The commission agrees. A claims report establishes what the potential liability of a self-insurer will be for workers' compensation. Since claims filed before an employer becomes self-insured will be handled by the insurance company writing the policy, those claims would not reflect the self-insured's liability. Changes in sec.114.6 (relating to Safety Programs) included deletion of these data elements. Section 114.12 is burdensome and unnecessary for all small businesses in Texas and will result in forcing some out of business. It does not provide valuable information to keep employees safe or insure compliance with the state program. The commission disagrees. Only large, financially strong employers can qualify to participate in this program. There will be no effect on small businesses in Texas. Strongly suggest dropping sec.114.13(a) and (b) from this section. The commission is requesting information about a proposed action that could adversely effect the company if released before the action takes place. The commission disagrees that (a) and (b) should be deleted. However, staff agrees that they should be modified to require notice after the fact. Depending on certain conditions, the company may be prevented by other federal and state regulatory bodies from releasing information about a proposed change. Section 114.14(1) should be replaced with: "Calling the security deposit and placing the funds in the account of the guarantee fund." The commission agrees and will change the rule accordingly. Section 114.14(2) should have the following phrase added just in front of "trust fund": "...impaired self-insured's account with the..." The commission agrees with this recommendation and will change the rule accordingly in both paragraphs (1) and (2). Section 114.14(3) should have the following phrase added: ", once the self- insured's security account has been expended." The commission agrees with the recommendation and will change the rule accordingly. The new sections are adopted under Texas Civil Statutes, Article 8308-2. 09(a), which authorizes the commission to adopt rules necessary to administer the Act and Texas Civil Statutes, Article 8308-3.51-3.70, which require and allow the commission to adopt rules to describe requirements for employers to become and remain self-insured, to establish what will occur if an employer becomes impaired, and to provide timelines for appeals from denials of employer applications. sec.114.2. Definitions. (a) The following words and terms are defined in Article 8308-3.51, and are so used in this chapter: (1) Association; (2) director; (3) impaired employer; (4) incurred liability; and (5) qualified claims servicing contractor. (b) The following words and terms, when used in this chapter, shall have the following meanings, unless the context clearly indicates otherwise. (1) Certificate-A certificate of authority to self-insure issued by the commissioners under Article 8308-3.51(d) which entitles an employer to be a self-insurer and is valid only for the persons, firms, or corporations named on the certificate. (2) Claims contractor-A qualified claims servicing contractor. (3) Division-The Division of Self-Insurance of the Texas Workers' Compensation Commission. (4) Excess insurance-Insurance that an employer purchases to pay claim costs that exceed the employer's retention amount up to a specified limit. (5) Retention-All payments made for claims filed under the Workers' Compensation Act including: indemnity benefits, medical payments, death benefits, and all other related claims expenses not otherwise covered by insurance. (6) Self-insurer-An employer who has been granted and holds a valid certificate. (7) Trust fund-The Texas certified self-insurer guaranty trust fund created by the fee assessed by the Association for emergency payment of the compensation liabilities of an impaired employer. sec.114.3. Initial Application Form and Financial Information Requirements. (a) Employers shall make an application by filing a completed and signed form TWCC-160 and required attachments: (1) if required to file a Form 10-K by the Security and Exchange Commission (SEC), the applicant's Form 10-K for the preceding three fiscal years; and (2) the applicant's independently audited financial statements with the accompanying footnotes and the auditor's opinion for the preceding three fiscal years. The independent auditor must be a certified public accountant (CPA) who is not an employee of the applicant. (b) Incomplete applications may be returned to the applicant. (c) The sworn affidavit required on the TWCC-160 also applies to all attachments. (d) If the report under subsection (a)(2) of this section is dated more than six months prior to the date of the application, an interim report may be required. (e) Applicants will be evaluated for stability and financial strength. In addition to the factors specified in Article 8308-3.56, the applicant must submit a credit or debt rating analysis, and the director shall consider: (1) liquidity ratio; (2) ratio of tangible net worth to annual self-insurance retention; (3) ratio of current assets to current liabilities; (4) ratio of tangible net worth to long term debt; (5) ratio of tangible net worth to annual standard compensation premium; (6) ratio of tangible net worth to sales; (7) ratio of tangible net worth to total liabilities; (8) cash flow; (9) working capital; (10) profitability; and (11) Dun & Bradstreet or other recognized credit reporting agency's ratings; or (12) Debt ratings from Standard & Poor's or Moody's. sec.114.4. Security Requirements. (a) Security may be one or a combination of any of the following: (1) surety bond. The surety bond is issued by a company authorized to conduct such business in Texas and possessing a current A.M. Best Rating of B+ or better or possessing a Standard & Poor's rating of claims paying ability of A or better; (2) security deposit of cash, bonds, or other evidence of indebtedness issued, assumed, or guaranteed by the United States of America or the State of Texas. Any such securities shall be deposited with the state treasurer pursuant to a trust agreement prescribed by the director; or (3) irrevocable letter of credit issued by a Texas State chartered bank or a federally chartered bank with a branch office in Texas. The bank shall have a long-term debt rating of at least "A" or better in the current monthly edition of "Moody's Statistical Handbook" or a long-term investment grade rating of at least "A" or better in the current quarterly edition or monthly supplement of "Financial Institutions Rating" prepared by Standard & Poor's Corporation. If the bank's rating subsequent to issuing the letter of credit falls below the acceptable rating, the self-insurer shall replace the letter of credit within 60 days with a new letter issued by a bank with an acceptable rating. (b) Bonds and irrevocable letters of credit must be in a form approved by the director. (c) Security in the form of cash must be in United States currency. (d) The amount of security shall in no case be less than the retention amount of the excess insurance required by the director. (e) The application shall include a letter from the potential guarantor of the security to indicate that security will be provided within 10 working days after the commissioners issue a certificate. (f) The self-insurer shall notify the director if the security bond or letter of credit no longer meets the requirements of subsection (a) of this section. This notice shall be provided in writing to the director within 30 days of that change. (g) The director may require a substitution of securities in the event that the self-insurer's surety or guarantor no longer meets the requirements of subsection (a) of this section. sec.114.5. Excess Insurance Requirements. (a) The upper limit of liability for a contract or policy of excess insurance shall be in the amount required by the director. The minimum amount the director may require is $5 million per accident or occurrence. (b) A contract or policy of excess insurance must be issued by an insurance company authorized by the State of Texas to transact such business and shall include the following provisions: (1) cancellation requires written notice to the director, return receipt requested or by personal delivery at least 60 days before termination; (2) nonrenewal requires written notice to the director, return receipt requested or by personal delivery at least 60 days before the end of the policy; (3) the association must be named as an additional insured on the excess policy and may assume the rights and responsibilities of the self-insurer under the policy when the self-insurer is declared to be impaired; and (4) all of the following benefits to which the injured employee is entitled under the Act must be applied toward reaching the retention amount: (A) payments made by the employer; (B) payments due and owing by the employer; (C) payments made on behalf of the employer by any form of security as required by the Act or commission rules; and (D) payments made by the association pursuant to Article 8308-3.70. (c) The excess insurance carrier must send a letter to the director certifying: (1) that the self-insurer has a policy of excess insurance which fully complies with the requirements of this section together with a copy of the declarations page of the policy; or (2) that the policy will be issued to an applicant upon certification. (d) The self-insurer who elects to cancel or chooses not to renew a policy of excess insurance shall notify the director 60 days prior to the cancellation or termination. sec.114.6. Safety Program Requirements. (a) To qualify as an effective safety program, accident prevention plans are required to include the following: (1) the seven components referenced in sec.164.4(a) of this title (relating to Formulation of Accident Prevention Plan); (2) a plan for the promotion of industrial health which includes: (A) support for the rehabilitation of the occupationally injured; (B) encouragement of personal health maintenance; and (C) the facilitation of placement of individuals according to their physical capacities in work which the individual can perform without endangering his or her own health and safety or that of their fellow employees; (3) a plan for the periodic evaluation and, if necessary, monitoring of worker exposures to substances or work practices which may lead to occupational illness or disease; (4) a drug policy which meets the requirements of sec.169.1 and sec.169.2 of this title (relating to Notification of Drug Abuse Policy and Required Elements of Drug Abuse Policy); and (5) a system for receiving and addressing complaints about safety issues from employees. (b) Each self-insurer will employ at least one employee or independent contractor who qualifies as a professional source under sec.164.9 of this title (relating to Approval of Professional Sources for Safety Consultations), to oversee the implementation of the safety program and who has the authority to communicate directly with the employer's top management regarding health and safety issues. sec.114.7. Certification Process. (a) The director shall request review and approval of the association by forwarding applications to the association, return receipt requested, immediately after the director deems the application complete and finds the applicant's financial information required under sec.114.3 of this title (relating to Initial Application Form and Financial Information Requirements) reflects one of the following: (1) Dunn & Bradstreet rating of 3A1 or better; (2) Standard & Poor's rating of BBB or better; (3) Moody's rating of Baa or better; or (4) minimum tangible net worth of $5 million with a ratio of tangible net worth to long term debt of 1.5 to one or greater. (b) The director may audit information supplied by an employer applying for a certificate. (c) The director shall recommend an applicant for certification only with approval of the application by the association. Failure of the association to respond within 40 days of the association receiving the application will be deemed association approval of the applicant being certified. (d) Within a reasonable time after accepting a completed application packet, the director will recommend to the Commissioners approval or denial of the application and supply a complete copy of supporting information. (e) After January 1, 1994, the reasonable time referred to in subsection (d) of this section is 60 days. sec.114.8. Refusal to Certify an Employer. (a) When the commissioners determine an application should be denied, the applicant will be notified of the following: (1) the specific reasons for the denial; (2) the specific conditions, if any, the applicant must meet to become certified; (3) that the applicant has a 30-day period from the date the applicant receives the notice to meet the conditions required or provide compelling information to the commission to rebut the reasons for denial; and (4) the form and format required to notify the commission of the actions taken by the applicant to overcome the denial. (b) The notice described in subsection (a) of this section shall be: (1) in writing; and (2) sent to the contact person, return receipt requested. (c) The denial becomes final on the 31st day after the applicant receives the notice of denial if the applicant has not responded. (d) When the applicant timely responds to the denial, the commissioners may grant or deny the application by majority vote within 130 days after the applicant received the notice of denial, and such action shall be final immediately. If the commission fails to take action within 130 days after the applicant received the notice of denial, the denial becomes final on the 131st day. sec.114.9. Required Initial Safety Program Inspection. An employer seeking to obtain a certificate shall have its safety program reviewed and inspected by the commission prior to the issuance of its certificate. To facilitate this process, the employer shall provide the commission with access to all of the documents related to its safety program and its workers' compensation claims and shall permit the inspection of any of its worksites during working hours. sec.114.10. Claims Contractor Requirements. (a) Claims administration must be performed by an adjuster licensed in Texas to handle workers' compensation claims. (b) Each proposed contract to provide claims services to a self-insurer must be approved by the director prior to recommending approval of an application to self-insure or, if a self-insurer is changing from one claims contractor to another, prior to the effective date of the new contract. (c) The claims contractor must promptly investigate each reportable injury and either pay benefits or controvert, as required by the Act and commission rules. sec.114.11. Audit and Inspection Program. (a) The director shall audit and inspect self-insurers as frequently as necessary to assure compliance with the Act and commission rules, but shall audit and inspect each self-insurer at least once every three years. (b) An audit may include, but not be limited to: (1) any representation made on an initial or renewal application; (2) payroll and classification; (3) loss history; (4) claims administration; (5) loss reserve; (6) safety programs; (7) interviews of the self-insurer, their agents, or employees regarding any matter within their knowledge and pertaining to the obligations of the self- insurer under the Act or commission rules; and (8) any other issue deemed appropriate by the director. (c) A written report shall be provided to the self-insurer within 30 days after the audit is completed. (d) Unreasonable refusal to make the required information available constitutes: (1) grounds for revocation of the certificate; and (2) a Class A administrative violation, with each day of noncompliance constituting a separate violation. sec.114.12. Required Annual Reports. (a) Each self-insurer shall file with the division annual reports which include the following: (1) a claims report in electronic format which is due, beginning in 1994, on or before March 1 and which includes the three preceding calendar years; (2) beginning in 1994, a safety report is due on or before March 1 and must include: (A) a summary of the safety and health training provided to management, supervisors, and employees; and (B) an analysis of accident trends which: (i) identifies losses by location, occupation, or job function; and (ii) provides an analysis of those losses based on: (I) nature, source, and severity of the injury; (II) cause of the injury; (III) parts of the body affected; (IV) equipment involved in the injury; (V) number of injuries and fatalities other than occupational diseases; (VI) identification of the number of occupational diseases; and (3) a financial report, filed on the form prescribed by the commission, which is due no later than 60 days prior to the expiration of the certificate. (b) If any of the reports is more than six months old, an interim report may be required prior to renewal or as the director deems appropriate. (c) A renewal application will not be complete until all parts of the annual report and any required interim reports are filed. sec.114.13. Required Notices to the Director. (a) A self-insurer that amends its charter, articles of incorporation, or partnership agreement to change its identity or business structure, or in any other manner materially alters its status as it existed at the time of issuance of its certificate shall, within 30 days after the amendment or other action, notify the director in writing of such action and provide the director with a copy of such amendment or other action. (b) A self-insurer that ceases doing business entirely, or ceases doing business in Texas, or disposes of, by sale or otherwise, the controlling interest of the business for which the certificate was issued, shall immediately notify the director in writing of such action and the director will notify the commissioners who will act on the notice pursuant to Article 8308-3.65. (c) A self-insurer shall give written notice to the director of any change in contact person within 10 working days of this change. The notice shall include the name, title, office address, and telephone number of the new contact person. (d) A self-insurer shall give written notice to the director at least 30 days prior to any change in the claims contractor. The notice shall include the name, title, office address, and telephone number of the person or persons appointed to administer both the existing cases and the new cases and the location or locations of records required to be kept and maintained pursuant to Article 8308-3.61. (e) A self-insurer shall notify the director of any change or expected change which will significantly alter the liability or solvency of the self-insurer within 30 days of the self-insurer's knowledge of the change. sec.114.14. Impaired Employer. If a self-insurer becomes an impaired employer, the director shall protect the employees of such employer by promptly: (1) calling the security deposit and placing the funds in the impaired employer's account in the trust fund; (2) notifying the association to assume the liabilities of the impaired employer and, pursuant to Article 8308-3.70(c), to begin paying benefits out of the impaired employer's account with the trust fund; and (3) estimating the amount of any additional funds needed to supplement the security deposit and available assets of the impaired employer and advise the association of the amount the association will need to assess each self-insurer to cover the estimated liabilities once the impaired employer's security account has been expended. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on October 30, 1992. TRD-9214696 Susan Cory General Counsel Texas Workers' Compensation Commission Effective date: January 1, 1993 Proposal publication date: August 14, 1992 For further information, please call: (512) 440-3592. Chapter 134. Medical Benefits-Guidelines for Medical Services, Charges, and Payments Subchapter A. Medical Policies 28 TAC sec.134.6 The Texas Workers' Compensation Commission adopts an amendment to sec.134. 6 concerning travel expenses, without changes to the text as published in the August 14, 1992, issue of the Texas Register (17 TexReg 5667). Since the statute does not provide clear and specific guidance, this amended section is adopted to clarify the process to follow when a dispute arises over travel for medical care. These changes specify the appeal process to follow when a dispute arises regarding the expense of travel for medical care. No comments were received regarding adoption of the amendment. The amendment is adopted under Texas Civil Statutes, Article 8308-2.09(a) which authorizes the commission to adopt rules necessary to administer the Act, and Texas Civil Statutes, Article 8308-8.21(b)(3) which requires that the commission develop a program for resolving disputes regarding health care treatments and services. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on October 30, 1992. TRD-9214695 Susan Cory General Counsel Texas Workers' Compensation Commission Effective date: December 1, 1992 Proposal publication date: August 14, 1992 For further information, please call: (512) 440-3592 Chapter 134. Guidelines for Medical Services, Charges, and Payments Subchapter I. Provider Billing Procedures 28 TAC sec.134.802 The Texas Workers' Compensation Commission adopts an amendment to sec.134. 802 concerning provider billing procedures, with changes to the proposed text as published in the August 14, 1992, issue of the Texas Register (17 TexReg 5667). The change involved deletion of all of subsections (c) and (d) and substitution of new language for subsection (c) which indicates that the detailed information required to be filed will be specified by the commission in the form of instruction sheets. The amendments to this section were needed to allow the commission to deal with the work load of medical bills without being overwhelmed by bills for pharmaceuticals and to streamline the submission process by making use of currently available technology and services to reduce overall cost to the system. This section eliminates pharmacy bills from the bills the carrier is required to provide the commission and requires electronic submission of other bills. Changes to the proposed text were made in response to verbal comments regarding the information needed for electronic submission as opposed to paper submission. Changes were made: in subsection (a), to delete references to subsections (c) and (d); in (c), to require the commission to identify the form, format, and content of the submission through instruction sheets and to delete paragraphs (1)-(10); and deleting all of subsection (d). Comments opposing this section and recommending changes to it were received from: Alliance of American Insurers; American Insurance Association; and Utica National Insurance Group, and the following summarizes those comments and the commission's response to them. Mandatory electronic claim submission creates an unfair burden on small carriers. The commission disagrees. While this system will result in an initial investment in equipment or in ongoing contractual obligations with a servicing company, the commission believes the long-term benefits of more accurate billings, less subsidizing of inefficient carrier processing, and less direct costs to the commission, outweigh these direct carrier costs. Mandatory electronic data submission will reduce carrier availability and adversely impact data processing resources, as mid-size and smaller carriers do not have either the capacity or resources to comply. The commission disagrees. Mandatory electronic data submission is designed to decrease the processing time of claims forwarded to carriers as well as increase administrative organization and security. Streamlining the system reduces the costs to the system and the carriers and allows the carrier additional time and resources to increase its current processing capabilities. The Texas Workers' Compensation Act (the Act) does not require carriers to submit all medical bills, nor must they be submitted electronically. The commission disagrees. Article 8308-8.01(b) requires the commission to maintain a statewide database of medical charges, actual payments, and treatment protocols. Article 8308-8.21 states the commission shall adopt rules necessary to enable the commission to compel the production of documents, establish standards of reporting and billing governing both form and content, as well as requiring the commission to monitor treatment being administered. Article 8308- 2.11(f) gives the commission authority to establish the manner in which information is transmitted to the commission. The Act provides that the commission must adopt rules necessary to compel the production of documents, meaning written or printed paper in accordance with Webster's Dictionary and the commission should limit mandatory production to printed documents. The commission disagrees. Article 8308-8.21 requires the commission to establish standards of reporting and billing governing both form and content which allows the commission to require information in electronic format. Many carriers are unable to submit electronically at this time. The commission agrees. Many carriers have not established a method for electronically submitting medical bills at this time. However, carriers can arrange to have these bills electronically submitted either through additional equipment or through use of a service agency and be prepared to comply by January 1, 1993. Texas Workers' Compensation Commission Electronic Claims Submission project requirements are not compatible with other national projects from the United States Department of Human Services, Work group for Electronic Data Interchange teamed up with the American National Standards Institute and the International Association of Industrial Accident Boards and Commission, who are currently developing standardized electronic submission systems, and it should be. The commission disagrees. These national projects are currently working on submission of the initial report of the claim, not the medical bill information. Also, they are not being designed to collect the Texas specific data that the commission is mandated to collect nor is there any assurance that the data collected in these projects would be available to the commission. However, the information collected by the commission will probably be more than adequate to meet the national needs; when the commission collects all the data the carriers may avoid the necessity of supplying the data in two or more formats to more than one place. Delay consideration of proposal until national projects produce a uniform compatible system. The commission disagrees. To delay the implementation of electronic data collection in Texas does not move the national projects forward nor does it allow Texas employers to begin reaping the benefits envisioned with the passage of the Act in 1989. The national projects are not likely to collect Texas specific data such as the commission is mandated to collect. Recommend a sampling of provider bills which would be statistically valid in lieu of submitting all bills. The commission disagrees. To develop a system ensuring a statistically valid sampling of all medical bills statewide, as the basis for a statewide database would not allow the commission to meet the statutory mandate which staff believes means to record and use as many of the actual bills as possible rather than a statistically valid sample. The commission is required to produce treatment and other guidelines and to monitor treatment provided which requires actual data rather than samples. Carriers should not be liable for improperly completed bills or the authenticity of provider information. The commission disagrees. Carriers are required to audit medical bills for proper completion and compliance with various provisions of the Act and commission rules. It is quite appropriate to hold the carrier accountable for assuring that the data collected from those bills and submitted to the commission is complete and correct to the best of the carrier's ability to ascertain. Proposed rule duplicates equipment and personnel costs already incurred by the commission. The commission disagrees. The commission is currently contracting with outside vendors to data enter bills not electronically submitted. To continue the current contracts for data entry and pass those costs back through premium taxes means that companies who submit electronically will subsidize companies that don't. Electronic submission will save the cost of copying and mailing all the paper documents. Finally, if carriers are required to submit electronically, competition and accountability will assure that the industry will develop and use the most economical and efficient methods of electronic data submission. The amendment is adopted under Texas Civil Statutes, Article 8308-2.09(a), which authorize the commission to adopt rules necessary to administer the Act and Texas Civil Statutes, Article 8308-8.21(b)(4),(5),(6), and (7) which require the commission to adopt rules related to monitoring fees charged, to detect patterns or practices of unreasonable denial of fees, and to increase the intensity of review for a health care provider who charges amounts inconsistent with the fee guidelines developed by the commission. sec.134.802. Insurance Carrier's Submission of Medical Bills To The Commission. (a) Within 15 days after final payment of an original bill from a health care provider, or reimbursement to any person who has paid a health care provider's bill, insurance carriers shall, except for the Statement of Pharmacy Services, Forms TWCC-66a and TWCC-66c, submit a copy of the bill to the commission in Austin. (b) Effective January 1, 1993, each insurance carrier shall submit information electronically in the form and format prescribed by the commission. (c) The commission shall prescribe the form, format, and content of the required submission using generally available instruction sheets. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on October 30, 1992. TRD-9214694 Susan Cory General Counsel Texas Workers' Compensation Commission Effective date: December 1, 1992 Proposal publication date: August 14, 1992 For further information, please call: (512) 440-3592. Chapter 164. Extra-Hazardous Employer Program 28 TAC sec.164.1 The Texas Workers' Compensation Commission adopts an amendment to sec.164. 1 concerning criteria for identifying extra-hazardous employers, with changes to the proposed text as published in the August 14, 1992, issue of the Texas Register (17 TexReg 5668). These changes include the addition of text to describe the actual formula for calculation of the extra-hazardous employer status, to define terms used in that calculation, to notify the public that variable information will be published in a separate rule, and to describe which Standard Industrial Classification (SIC) code will be used for determining the expected rate of injuries. This amendment is necessary to allow effective and efficient implementation of the program as mandated by law. This section establishes the method which will be used to identify extra- hazardous employers. Comments opposing and recommending changes to this amendment were received from American Constructors, Inc; J. C. Evans Construction; General Motors Corporation; Kelly Services; City of Austin; Gibco; Delta Drilling Company; International Association of Drilling Contractors; AGC of Texas; Delta Air lines, Inc.; Jeanneret and Associates, Inc.; Brown and Root, Inc; Texas Association of Business; Manpower; Federal Express; and Emerson Construction Company, Inc. Those comments and the commission responses are summarized as follows: Subsection (b) is not clear in its statement: "an individual employer's rate of injuries per 100 employees within its business or industry...". The commission should clarify whether this means that only employees engaged in the primary industry of the employer are counted. Also, if the commission intends to use only one month's employee count, it will not address the high turnover common in some industries. The commission agrees. In order to give the employer the benefit of any doubt in the identification process, the commission will use the highest employment recorded during the review period for the appropriate SIC code and amend subsection (b) to confirm that. The phrase "within its business or industry" includes employees directly engaged in activities described by the SIC code as well as employees who support those activities. For example administrative personnel who support a trucking industry will be counted with the truck drivers. The calculation purports to use expected injury rates established by the Bureau of Labor Statistics (BLS). However, the BLS publishes estimates of the number and frequency (incidence rates) of occupational injuries and illnesses. This estimate is based on small samples and the BLS warns that the annual fluctuations need to be interpreted with caution. If the commission intends to use these estimates of past performance as indicators of future expectations, it should be stated in these amendments. The commission agrees. The rule will clearly state that the commission will use the BLS information as a primary source of information and also indicate the circumstances under which other information will be used. Suggest the proposed amendments include an administrative procedure for the submission of alternative data for approval by the commissioners. The commission disagrees. Such a procedure is unnecessary. The current proposal gives the commission a great deal of discretion to determine what data it will use. Eliminating the requirement that the commission use the four digit Standard Industrial Classification code (SIC) allows the commission too much latitude and use of three or even two digit codes groups employers too broadly. Suggest the amendments require the use of a four digit SIC code. The commission agrees. The rule will reflect that the commission will use the four digit code whenever available and will then drop to the three digit code in the event the four digit is not available and a three digit is, or a two digit code in the event that there is no four or three digit code available. It is unclear why the commission applies the phrase: "...after publication pursuant to subsection (f) of this section..." only to (c)(4) and (5). The commission should publish all the necessary information at the same time. The commission agrees that all necessary information should be made available at the same time. Paragraphs (1)-(3) are all necessary for the initial identification of extra-hazardous employers and will be published at the same time in the form of a rule. Paragraphs (4) and (5) are not needed for that initial identification, though they will be needed later when the commission has the staff resources to deal with the increased work load that will result. These subsections will become effective only after the commission amends the rule in which they are included. The severity of an injury is not a meaningful measure of the effectiveness of the employer's safety program. The goal of a safety program is to identify and mitigate those factors that cause an injury to occur. Failure to mitigate a slippery floor problem can result in injuries ranging from a bruised ego to a fatality, with the difference being what the person does when they begin to fall, how quickly they react, and whether the person falls forward or backward. The only factor under the control of the employer is the slippery floor hazard. Suggest that the commission consider all elements of the injury definition equally and, if the fatality will carry more weight than other injuries, the no lost time injury should be given a lesser weight than the other injuries. The commission disagrees. The number of fatalities and fatal incidents are, in themselves, a frequency count of a category of injury. The commission believes that the fatality frequency warrants additional weight to reflect the increased attention required to eliminate the potential for future fatalities and to allocate resources. The proposed amendments should establish a less subjective method of determining the level at which an employer's incidence rate is deemed to have substantially exceeded industry expectations. The commission agrees that the identification process should not be subjective. With the decision to publish the variables in a rule, the identification process becomes very objective. Any one will be able to apply the criteria and determine whether they will be identified as extra-hazardous. Using only workers' compensation claims data does not reflect the effectiveness of the existing safety programs. The commission disagrees. Using workers' compensation claims data does reflect the effectiveness of the safety program at eliminating on-the-job injuries. That is the focus given the commission by the legislature and the current rule achieves that focus. Calculation of the injury rate does not include actual hours worked and therefore does not accurately reflect exposure to risk. The commission agrees in part. As proposed, the employer will report the number of employees and the rate of injury per 100 employees will be used. The number of employees can be translated to an average of 2,000 hours per year. Although hours worked can be used to reflect exposure, the exposure of a high turnover of workers is better reflected in an employee count. Each method has positive and negative points in reflecting exposure. Since current reporting available to the commission is in number of employees, that method has been selected. As reporting systems are reviewed, a transition to hours worked will be considered. Deadlines for response and implementation of the program are unrealistically short. The commission disagrees. While any program such as this could be developed over many years and could be applied with equally elastic time lines to the employers, the goal is to achieve safer work places in the immediate future. If this program has no other effect than to raise the level of awareness of safety issues, it could be judged a success. However, the program will do more than just raise awareness, it will cause employers to change unsafe working conditions in the near future. It is essential to competition that unnecessary administrative burdens not be required where extensive regulation and effective safety programs already exist. The commission agrees. Effective safety programs will prevent injuries and result in employers not being identified. Ineffective programs will not prevent injuries and the employer will be identified as extra-hazardous. If the objective of these proposed rules is to create a safer work environment, identification of temporary help service companies will not accomplish it. The safety hazards are supplied by the client company's worksite. The commission disagrees. While a client company supplies the hazards, the temporary help service company supplies the exposure. Both are culpable and should be identified. Employment is the key to identification. If the employee works for the temporary help service company and an injury occurs, regardless of whether that is on the premises of the temporary help service company, the injury will count against the employer (temporary help service company). The temporary help service company can control exposure through their contract provisions and through proper training of the employees they place. Statistics reported to the Bureau of Labor Statistics do not include temporary staff in some industries so the extra-hazardous identification process will identify companies that handle mostly temporary employees. The commission disagrees. Temporary staff should be reported under SIC codes 7361 or 7363, which roll up, for rating purposes, to the three digit code 736. Since the commission will be considering only workers' compensation claims, the non-subscribers will not be identified. The commission disagrees. Non-subscribers are required to report injuries to the commission and will be considered by the commission for identification beginning in January 1993 when one year of injury data is available for the first group of non-subscribers. All regulated employers should have more than 30 days advance notice of any change in the targeting method and be given an opportunity to comment on the details of that method. The commission agrees. The targeting method and all variables are now included in rules that are subject to the appropriate rule-making, and public notice requirements. Adding a new factor for fatalities is extremely unfair because there is no distinction between the type of injury or severity of injuries. Adding additional weighting factor will result in a distorted and unfair outcome. The commission disagrees. The statute allows the commission latitude to introduce specific considerations within the broad statutory provisions. In the case of fatalities, the commission considered that fatal injuries are less frequent than other types of injuries and occur under circumstances where that outcome may have been prevented. Clearly, the commission wants to focus its limited resources on those areas which may be the most preventable with proper safety precautions. The commission believes that focusing on the employers who have fatalities is proper and is within the commission's statutory authority. The commission should not use statistical information from the National Safety Counsel (NSC) for targeting public sector employers. Only NSC members submit data, and that is a voluntary submission used by those with good records to get the NSC Safety Recognition Awards given each year. The commission disagrees. The NSC rates serve to establish a baseline that will apply to all employers in those specific industries. Identification will be based on substantially exceeding that baseline. Recommend a narrower definition of injury than subsection (c)(4) and (5) will provide or eliminate them completely. These categories are subject to unreliable and inconsistent reporting. The commission disagrees. The intent is to provide room for expansion of injury categories as the program matures and data reporting becomes more accurate and complete and as resources become available to deal with the increased workload. Initial identification will not include these categories. An explanation of the time allotted for the administrative review and for the hearing request should be included. The commission disagrees. Each administrative review is contingent on the company's injury experience and verifying information provided by the employer, both of which are beyond the control of the division. In subsection (b) the "other sources approved by the commissioners" is too vague. The exact source should be spelled out in the rule. The commission disagrees. This phrase is used to allow flexibility should additional sources of data become apparent. Those that are known are included in a new rule being proposed by the commission and any additions will be by rule. Clearly OSHA has authority over safety and health regulation in Texas. These rules overstep the OSHA authority. They may be subject to a constitutional challenge and should not be adopted. The commission disagrees. The rules implement a program as directed by the legislature and are not preempted by OSHA law or regulations. The possibility of a constitutional challenge should not prevent the commission from carrying out the legislative mandate. The commission should incorporate the non-subscribers even though a full year of data has not been collected. Whatever data is available should be normalized to 12 months. The commission disagrees. To use actual data for subscribing employers and projected data for non-subscribers is not fair or equitable. To avoid erroneous identifications resulting from coding and other errors in the data, recommend the rule provide that the division will verify the accuracy of the injury data with the employer prior to completing the formal identification. The commission agrees. This is part of the procedure the division has followed and intends to follow. Including this in the rule is appropriate. Subsection (b) should provide that the commissioners, rather than the division, will establish threshold adjustments. The commission agrees. Threshold adjustments are now part of a new rule being proposed and, as such, will have to be established by the commissioners. Subsection (b) should be changed. The phrase: "...BLS or other suitable source identified by the commissioners." should be changed to "...BLS or, if not available from the BLS publication, other suitable sources identified by the Commissioners." The commission agrees. This makes it clear that the source of data will only change when the BLS has not identified a rate. The rule should specify the time frame for injuries used in the calculations. Recommend 12 months. The commission agrees. The rule will refer to a 12 month period. Subsections (a) and (f) refer to a threshold without clarifying what that is. Recommend a change in the rule to include or at least describe the threshold. The commission agrees but will handle this recommendation by making the threshold the subject of another rule. The amendment is adopted under Texas Civil Statutes, Article 8308-2.09(a) which authorizes the commission to adopt rules necessary to administer the Act and Texas Civil Statutes, Article 8308-7.04 which requires the commission to establish a program to identify extra-hazardous employers and oversee the development and implementation of accident prevention programs. sec.164.1. Criteria for Identifying Extra-hazardous Employers. (a) The Texas Workers' Compensation Commission (the commission) shall identify employers subject to sec.7.01 of the Texas Workers' Compensation Act as extra- hazardous based on criteria established by the commission in chapter 164 rules. Each employer identified, continued, or monitored shall have the right to administrative review of the findings of the commission by the director of the Division of Workers' Health and Safety. In addition, each employer identified, continued or monitored shall have the right to request a hearing to contest the findings of the commission. (b) The following calculation shall be used to determine extra-hazardous status: An individual employer's rate of injuries per 100 employees, within its business or industry, calculated using the formula: R = (I/E) x 100 is adjusted for the employer's fatalities by multiplying it by a Fatality Index (FI) calculated using the formula: FI = 1 + [(1 + (F/E)) x N x Y]. The resultant number is divided by the expected injury rate (R [sub]expected) for that business, published by the Bureau of Labor Statistics (BLS), or if not available from the BLS publication, other suitable sources approved by the commissioners. The resultant number is compared to the threshold level established by the commissioners by rule which will adjust for employer size. If the resultant number is greater than the established threshold, the employer is identified as extra-hazardous. (1) E = Highest employment recorded for the SIC code used in subsection (b)(10) of this section. (2) F = Employer's total number of fatalities. (3) I = Employer's total number of injuries as defined in this Chapter. (4) N = The number of fatality incidents an employer experienced. (5) R = Employer's injury rate normalized to the number of injuries per 100 employees using the formula (I/E) x 100. (6) Y = A variable established by rule by the commissioners. (7) Fatality Incident = An incident that results in one or more fatalities. (8) F [sub]index = a weight factor applied to an employer's injury rate (R) based on the number of fatalities and fatality incidents the employer had. The weight will be calculated based on 1 + [(1 + (F/E)) x N x Y]. (9) R [sub]adjusted = Employer's injury rate adjusted for fatalities based on the formula R x F [sub]index. (10) R [sub]expected = An employer's expected injury rate per 100 employees for the employer's most specific applicable SIC code: four digit if available; if not, three digit if available; or if not, two digit. When the published SIC code injury rate is less than one in 100, a minimum injury rate of one in 100 will be used. (c) As used in the calculation, injuries include: (1) injuries (excluding occupational diseases and fatalities) which result in eight or more days of lost time; (2) occupational diseases; (3) fatalities; (4) injuries (excluding occupational diseases and fatalities) resulting in more than one, but less than eight days lost time, when provided for by rule; and (5) medical only, no lost time injuries with impairment (excluding occupational diseases) when provided for by rule. (d) Fatalities, as used in the calculation shall be given a weight greater than non-fatal injuries. (e) The threshold level, as used in the calculation, shall be established within workload and staff resource limitations so as to insure that an identified employer's injury frequencies substantially exceed those that may reasonably be expected in the employer's business or industry and that the commission resources are focused on preventing the maximum number of injuries. (f) The commissioners will by rule establish values for the following factors, considering workload and staff resources: (1) the threshold; (2) the date after which each of the expanded injury definitions, described in subsection (c) of this section, will be used; (3) the source of expected injury rate information; (4) the "Y" variable; and (5) the 12 month period to be used for counting injuries. (g) Prior to final identification, the employer will be given opportunity to verify employment and injury data. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on October 30, 1992. TRD-9214693 Susan Cory General Counsel Texas Workers' Compensation Commission Effective date: December 1, 1992 Proposal publication date: August 14, 1992 For further information, please call: (512) 440-3592 TITLE 34. Public Finance Part I. Comptroller of Public Accounts Chapter 5. Funds Management (Fiscal Affairs) Claims Processing-Purchase Vouchers 34 TAC sec.5.54 The Comptroller of Public Accounts adopts the repeal of sec.5.54, concerning requirements for consultant and professional services contracts. The section is being repealed so that a substantially revised section may be adopted. No comments were received regarding adoption of the repeal. The repeal is adopted under Texas Civil Statutes, Article 6252-11c, sec.17(a) , which require the comptroller to adopt rules for the efficient and effective administration of the consulting services law. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on November 2, 1992. TRD-9214757 Martin Cherry Chief, General Law Section Comptroller of Public Accounts Effective date: November 23, 1992 Proposal publication date: July 24, 1992 For further information, please call: (512) 463-4028 34 TAC sec.5.54 The Comptroller of Public Accounts adopts new sec.5.54, concerning consulting services contracts, to replace sec.5.54 that is being repealed, with changes to the proposed text as published in the July 24, 1992, issue of the Texas Register (17 TexReg 5184). The new section covers the procedures that state agencies must follow when entering into consulting services contracts or amending, renewing, or extending those contracts. The new section also specifies the requirements that state agencies must satisfy when submitting purchase vouchers to the comptroller to make payments under consulting services contracts. The text of the new section has already been submitted to the governor and the General Services Commission for their review and comments. The following is a summary of the changes made to the proposed text. A new definition of "state agency" was inserted in subsection (f). The definition applies only to that subsection. The definition is necessary because the source law for the subsection, the State Purchasing and General Services Act, has a definition of "state agency" that is different from the definition in the consulting services law. One comment was received about the proposed text of the new section. Andersen Consulting said that multiphase systems development projects should not be subject to subsection (f)(2). Subsection (f)(2) prohibits a state agency from accepting a person's offer or proposal if the agency paid compensation to the person to help prepare the specifications or request for proposals on which the offer is based. Subsection (f)(2) merely reflects the requirements of the State Purchasing and General Services Act, a statute over which the comptroller has no interpretive authority. Therefore, the comptroller believes that each state agency should interpret subsection (f)(2) in light of specific factual circumstances, attorney general opinions, and judicial decisions. The new section is adopted under the Texas Civil Statutes, Article 6252-11c, sec.17(a), which require the comptroller to adopt rules for the efficient and effective administration of the consulting services law. sec.5.54. Consulting Services Contracts. (a) Definitions. The following words and terms, when used in this section, have the following meanings, unless the context clearly indicates otherwise. (1) Consulting service-A study conducted for a state agency or advice provided to a state agency under a contract that does not involve the traditional relationship of employer and employee. The term does not include a routine service that is necessary to the functioning of a state agency's programs. (2) Executive director-The individual who is the chief administrative officer of a state agency. The term excludes a member of a governing body. (3) Executive head-The elected or appointed state official who is authorized by law to administer a state agency if the agency is not headed by a governing body or the executive director of a state agency if the agency is headed by a governing body. (4) Include-A term of enlargement and not of limitation or exclusive enumeration. The use of the term does not create a presumption that components not expressed are excluded. (5) May not-A prohibition. The term does not mean "might not" or its equivalents. (6) Private consultant-An individual or entity that performs or proposes to perform consulting services. (7) State agency-A state department, commission, board, office, institution, facility, or other agency the jurisdiction of which is not limited to a geographical portion of the state. The term includes a university system and an institution of higher education as defined in the Education Code, sec.61.003. The term does not include a public junior college. (b) Applicability of this section. This section applies to a consulting service that a state agency purchases with funds: (1) appropriated by the Texas legislature; (2) generated by the statutory duties of a state agency, regardless of whether the Texas legislature has appropriated those funds; or (3) received from the federal government to the extent that federal laws or regulations do not conflict with this section. (c) Exemptions. (1) This section does not apply to consulting services provided by: (A) a profession listed under the Texas Civil Statutes, Article 664-4, Professional Services Procurement Act; (B) a private legal counsel; (C) an investment counselor; (D) an actuary; (E) a medical service provider; or (F) a dental service provider. (2) This paragraph applies if the governing board of a retirement system trust fund determines that consulting services are necessary for the performance of the board's fiduciary duties under the Texas Constitution. Unless paragraph (1) of this subsection makes this section inapplicable to those services, only the requirements of subsection (i) of this section apply to the purchase of the services. Those requirements apply even though the governing board is not subject to the requirements of subsection (h) of this section. (3) The comptroller, the governor, and the General Services Commission may jointly decide to subject the purchase of a particular consulting service to the procedures required by Texas Civil Statutes, Article 601b, State Purchasing and General Services Act, Article 3, instead of the procedures required by this section. They may make this decision only if: (A) they conclude that using the procedures required by the State Purchasing and General Services Act, Article 3, would be more advantageous to the state; and (B) they each adopt by rule a memorandum of understanding that states the substance of their decision. (d) Effect of noncompliance with this section. (1) If a state agency contracts for consulting services or renews, amends, or extends a consulting services contract without complying with the requirements of subsections (h)-(j) of this section, then the contract, renewal, amendment, or extension is void. (2) If a state agency executes a contract for consulting services without first obtaining a finding of fact from the governor's Budget and Planning Office in accordance with subsection (g)(1)(C) of this section, then the contract is void. (3) If a private consultant contracts with a state agency without complying with the requirements of subsection (m) of this section, then the contract is void. (4) When a contract, renewal, amendment, or extension is void under this subsection, the comptroller may not: (A) draw a warrant or transmit funds to satisfy an obligation under the contract, renewal, amendment, or extension; or (B) reimburse a state agency for a payment made under the contract, renewal, amendment, or extension. (5) When a contract, renewal, amendment, or extension is void under paragraph (1) of this subsection, a state agency may not make any payments under the contract, renewal, amendment, or extension from any state or federal funds held in or outside the state treasury until the agency has complied with subsections (h)-(j) of this section, as applicable. (e) Necessity for consulting services. A state agency may use a private consultant only if: (1) there is a substantial need for the consulting services; and (2) the agency cannot adequately perform the consulting services with its own personnel or through a contract with another state agency. (f) Selection of private consultants. (1) In selecting a private consultant, a state agency shall: (A) base its choice on demonstrated competence, knowledge, and qualifications, and on the reasonableness of the proposed fee for the services; and (B) when other considerations are equal, give preference to a private consultant whose primary place of business is within the state or who will manage the consulting engagement wholly from one of its offices within the state. (2) A state agency may not accept a person's offer or proposal to provide consulting services to the agency if: (A) the person received compensation from the agency to participate in the preparation of the specifications or request for proposals on which the offer is based; and (B) the person would receive compensation from the agency for providing consulting services to the agency. (3) In paragraph (2) of this subsection, "state agency" has the meaning assigned by the State Purchasing and General Services Act. (g) Notice of intent to employ a private consultant. (1) Before contracting with a private consultant whose fee is reasonably foreseeable to be more than $10,000, a state agency shall: (A) notify the Legislative Budget Board and the governor's Budget and Planning Office of the agency's intent to contract with a private consultant; (B) supply the Legislative Budget Board and the governor's Budget and Planning Office with information demonstrating that the agency has complied or will comply with subsections (e) and (f)(1) of this section; and (C) obtain a finding of fact from the governor's Budget and Planning Office that the consulting services are necessary. (2) A state agency that receives a finding of fact from the governor under paragraph (1)(C) of this subsection shall send a notification to the Legislative Budget Board and the appropriate committees of the senate and house of representatives. The notification must be sent by no later than the 30th day after the governor issues the finding. The notification must describe the consulting services to be purchased and the cost of the services, and must contain the other information required by the Legislative Budget Board. (h) Publication before execution of a consulting services contract. (1) By no later than the 30th day before executing a consulting services contract with a reasonably foreseeable value of more than $10,000, a state agency shall file a document with the secretary of state for publication in the Texas Register. The document must: (A) invite private consultants to provide offers of consulting services to the agency; (B) identify the individual employed by the agency who should be contacted by a private consultant who intends to provide an offer; (C) specify the closing date for the receipt of offers; and (D) describe the procedure by which the state agency will award the consulting services contract. (2) If a consulting service needed by a state agency relates to services previously performed by a private consultant, the agency must disclose that fact in the invitation for offers required by paragraph (1)(A) of this subsection. If the agency intends to award a consulting services contract to the private consultant that previously performed the services unless a better offer is submitted, the agency must also disclose this intention in the invitation for offers. (i) Publication after execution of a consulting services contract. By no later than the 10th day after executing a consulting services contract, a state agency that is subject to the requirements of subsection (h) of this section shall file with the secretary of state for publication in the Texas Register: (1) a description of the activities that the private consultant will conduct; (2) the name and business address of the private consultant; (3) the total value of the contract; (4) the beginning and ending dates of the contract; and (5) the due dates of documents, films, recordings, or reports that the private consultant is required to provide to the agency. (j) Renewals, extensions, or amendments of consulting services contracts. (1) A state agency must comply with this paragraph when the agency intends to renew, extend, or amend a consulting services contract the original value of which was reasonably foreseeable to be more than $10,000. (A) If the reasonably foreseeable value of the renewal, extension, or amendment is $10,000 or less, then the agency shall file the information required by subsection (i) of this section with the secretary of state for publication in the Texas Register. The information must be filed by no later than the 10th day after the renewal, extension, or amendment is executed. (B) If the reasonably foreseeable value of the renewal, extension, or amendment is more than $10,000, then the agency shall comply with the requirements of subsections (g)(1) and (h) of this section. (2) A state agency must comply with this paragraph when the agency intends to renew, extend, or amend a consulting services contract the original value of which was reasonably foreseeable to be $10,000 or less. If the reasonably foreseeable value of the renewal, extension, or amendment plus the reasonably foreseeable value of the original contract is more than $10,000, then the agency shall comply with the requirements of subsections (g)(1) and (h) of this section. (k) Dividing contracts. A state agency may not divide a consulting services contract or a renewal, amendment, or extension of a consulting services contract into more than one contract, renewal, amendment, or extension in order to avoid the requirements of this section. (l) Reporting of financial interests. (1) This subsection applies only to an officer or employee of a state agency who has a financial interest or who is related within the second degree of consanguinity or affinity to an individual who has a financial interest in an association, partnership, firm, or corporation that submits an offer to provide consulting services to the agency. For the purpose of this subsection, degrees of relationship must be determined in accordance with Texas Civil Statutes, Article sec.96h. (2) An officer or employee of a state agency shall report the financial interest to the executive head of the agency by no later than the 10th day after the day on which the association, partnership, firm, or corporation submits the offer. (3) This subsection applies to the initial execution, renewal, amendment, or extension of a consulting services contract. (m) Consulting services provided by former state employees. (1) Paragraphs (2) and (3) of this subsection apply only to an individual who has been employed by a state agency at anytime during the 24 months preceding the date on which the individual offers to perform a consulting service for a state agency. (2) An individual shall disclose in an offer to perform a consulting service for a state agency: (A) the nature of the individual's employment with the agency or another state agency; (B) the date of the termination of the employment; and (C) the annual rate of compensation for the employment at the time of its termination. (3) A state agency that accepts an offer to provide consulting services from an individual described in paragraph (1) of this subsection must include, in the information filed under subsection (i) of this section, a statement about: (A) the individual's employment with a state agency; and (B) the nature of that employment. (4) Notwithstanding anything else in this section, a state agency may not use funds appropriated by the General Appropriations Act to make a payment under a consulting services contract with an individual who was employed by that agency at anytime during the 12 months before the contract was executed. (n) Archives. (1) After a state agency's contract with a private consultant has ended, the agency shall, upon request, supply the Legislative Budget Board and the governor's Budget and Planning Office with a copy of each document, film, recording, or report developed by the consultant. (2) A state agency shall file with the Texas State Library a copy of each document, film, recording, or report developed by a private consultant. (o) Actions by state agencies on recommendations from private consultants. As part of the biennial budgetary hearing process, a state agency shall report to the Legislative Budget Board and the governor's Budget and Planning Office the action that the agency took in response to the recommendations made by each private consultant employed by the agency during the previous biennium. (p) Emergency purchases of consulting services. A state agency that needs to make an emergency purchase of consulting services, in a time frame that makes compliance with all or part of this section infeasible, shall comply with the governor's rules about emergency waivers of the requirements of this section. (q) Mixed contracts. When a contract involves both consulting services and one or more types of other services, this section applies if the primary objective of the contract is the purchase of consulting services. (r) Competitive bidding. This section neither requires nor prohibits the use of competitive bidding procedures to purchase consulting services. (s) Procurement of consulting services by the General Services Commission. (1) At the request of a state agency, the General Services Commission is required to procure consulting services for the agency. (2) When the General Services Commission procures consulting services for a state agency under paragraph (1) of this subsection: (A) the commission may require the agency to reimburse the commission for the costs incurred by the commission in procuring the services; and (B) the commission must comply with the requirements of this section that would apply if the state agency were procuring the consulting services. (t) Purchase voucher requirements. (1) This paragraph applies when a purchase voucher is submitted to the comptroller that requests a payment under a consulting services contract with a reasonably foreseeable value of $10,000 or less. The voucher must contain the following information and be supported by the following documentation: (A) the reasonably foreseeable value of the contract; (B) the cumulative total of prior payments made under the contract; (C) a copy of the contract if the copy has not already been provided to the comptroller; and (D) a statement that the payment complies with subsections (e), (f), and (m) of this section. (2) This paragraph applies when a purchase voucher is submitted to the comptroller that requests a payment under a consulting services contract with a reasonably foreseeable value of more than $10,000. The voucher must contain the following information and be supported by the following documentation: (A) the reasonably foreseeable value of the contract; (B) the cumulative total of prior payments made under the contract; (C) a copy of the contract if the copy has not already been provided to the comptroller; (D) the volume and page number of the Texas Register in which the requirements of subsections (h), (i), and, if applicable, (m)(3) of this section were fulfilled; (E) a copy of the governor's finding of fact that the consulting services are necessary if the copy has not already been provided to the comptroller; and (F) a statement that the payment complies with subsections (e), (f), and (m) of this section. (3) This paragraph applies when a purchase voucher is submitted to the comptroller that requests a payment under a renewed, an extended, or an amended consulting services contract the original value of which was reasonably foreseeable to be more than $10,000. (A) This subparagraph applies if the reasonably foreseeable value of the renewal, extension, or amendment is $10,000 or less. The voucher must contain the following information and be supported by the following documentation: (i) the reasonably foreseeable value of the original contract; (ii) the reasonably foreseeable value of the renewal, extension, or amendment; (iii) the cumulative total of prior payments made under the original contract; (iv) the cumulative total of prior payments made under the renewal, extension, or amendment of the contract; (v) a copy of the original contract if the copy has not already been provided to the comptroller; (vi) a copy of the renewal, extension, or amendment if the copy has not already been provided to the comptroller; (vii) the volume and page number of the Texas Register in which the requirements of subsections (h), (i), and, if applicable, (m)(3) of this section were fulfilled when the original contract was executed; (viii) the volume and page number of the Texas Register in which the requirements of subsections (j)(1)(A) and, if applicable, (m)(3) of this section were fulfilled when the renewal, extension, or amendment was executed; (ix) a copy of the governor's finding of fact that the consulting services under the original contract are necessary if the copy has not already been provided to the comptroller; and (x) a statement that the payment complies with subsections (e), (f), and (m) of this section. (B) This subparagraph applies if the reasonably foreseeable value of the renewal, extension, or amendment is more than $10,000. The voucher must contain the following information and be supported by the following documentation: (i) the reasonably foreseeable value of the original contract; (ii) the reasonably foreseeable value of the renewal, extension, or amendment; (iii) the cumulative total of prior payments made under the original contract; (iv) the cumulative total of prior payments made under the renewal, extension, or amendment of the contract; (v) a copy of the original contract if the copy has not already been provided to the comptroller; (vi) a copy of the renewal, extension, or amendment if the copy has not already been provided to the comptroller; (vii) the volume and page number of the Texas Register in which the requirements of subsections (h), (i), and, if applicable, (m)(3) of this section were fulfilled when the original contract was executed; (viii) the volume and page number of the Texas Register in which the requirements of subsections (j)(1)(B) and, if applicable, (m)(3) of this section were fulfilled when the renewal, extension, or amendment was executed; (ix) a copy of the governor's finding of fact that the consulting services under the original contract are necessary if the copy has not already been provided to the comptroller; (x) a copy of the governor's finding of fact that the consulting services under the renewal, extension, or amendment are necessary if the copy has not already been provided to the comptroller; and (ix) a statement that the payment complies with subsections (e), (f) , and (m) of this section. (4) This paragraph applies when a purchase voucher is submitted to the comptroller that requests a payment under a renewed, an extended, or an amended consulting services contract the original value of which was reasonably foreseeable to be $10,000 or less. (A) This subparagraph applies if the reasonably foreseeable value of the renewal, extension, or amendment plus the reasonably foreseeable value of the original contract is more than $10,000. The voucher must contain the following information and be supported by the following documentation: (i) the reasonably foreseeable value of the original contract; (ii) the reasonably foreseeable value of the renewal, extension, or amendment; (iii) the cumulative total of prior payments made under the original contract; (iv) the cumulative total of prior payments made under the renewal, extension, or amendment of the contract; (v) a copy of the original contract if the copy has not already been provided to the comptroller; (vi) a copy of the renewal, extension, or amendment if the copy has not already been provided to the comptroller; (vii) the volume and page number of the Texas Register in which the requirements of subsections (j)(2) and, if applicable, (m)(3) of this section were fulfilled when the renewal, extension, or amendment was executed; and (viii) a copy of the governor's finding of fact that the consulting services under the renewal, extension, or amendment are necessary if the copy has not already been provided to the comptroller; and (ix) a statement that the payment complies with subsections (e), (f) , and (m) of this section. (B) This subparagraph applies if the reasonably foreseeable value of the renewal, extension, or amendment plus the reasonably foreseeable value of the original contract is $10,000 or less. The voucher must contain the following information and be supported by the following documentation: (i) the reasonably foreseeable value of the original contract; (ii) the reasonably foreseeable value of the renewal, extension, or amendment; (iii) the cumulative total of prior payments made under the original contract; (iv) the cumulative total of prior payments made under the renewal, extension, or amendment of the contract; (v) a copy of the original contract if the copy has not already been provided to the comptroller; (vi) a copy of the renewal, extension, or amendment if the copy has not already been provided to the comptroller; and (vii) a statement that the payment complies with subsections (e), (f), and (m) of this section. (5) When a state agency has received an emergency waiver of the requirements of this section from the governor, the agency must submit a copy of the emergency waiver with each purchase voucher submitted to the comptroller to request a payment under the consulting services contract covered by the waiver. (u) Effective dates. (1) Subsections (a)-(s) of this section apply to a consulting services contract or an extension, amendment, or renewal of a consulting services contract that is executed after August 31, 1991. (2) Subsection (t) of this section applies to a purchase voucher that is received by the comptroller on or after the effective date of this section. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on November 3, 1992. TRD-9214837 Martin Cherry Chief, General Law Section Comptroller of Public Accounts Effective date: November 23, 1992 Proposal publication date: July 24, 1992 For further information, please call: (512) 463-4028 Part IV. Employees Retirement System of Texas Chapter 87. Deferred Compensation 34 TAC sec.sec.87.1, 87.5-87.21, 87.29 The Employees Retirement System of Texas adopts amendments to sec.sec.87.1, 87.5-87.21, and 87.29 concerning deferred compensation, without changes to the proposed text as published in the September 11, 1992, issue of the Texas Register (17 TexReg 6262). The amendments are necessary in order to maintain consistency between rules and administrative procedures. They are also necessary in order to clarify vendor quarterly reporting procedures; clarify compliance with sec.457 of the Internal Revenue Code; and to offer new, positive features for the benefit of plan participants. The amendments will provide for the transferability of funds in undercollateralized bank accounts, deposits in excess of $100,000 in a credit union, and will restrict future sales of life insurance as an independent product. One comment was received by a member who stated he was in favor of and was urging the adoption of the rule amendment to sec.87.5(1)(6)(B), which will allow long term state employees who have in excess of $100,000 in deferred compensation plans to deal with only one vendor upon retirement. The amendments are adopted under Texas Civil Statutes, Article 6252-3g, sec.2.45, which provide the Employees Retirement System of Texas with the authority to adopt rules, regulations, plans, and procedures to carry out the purposes of this Act. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on October 30, 1992. TRD-9214776 Charles D. Travis Executive Director Employees Retirement System of Texas Effective date: November 23, 1992 Proposal publication date: September 11, 1992 For further information, please call: (512) 867-3336 TITLE 40. SOCIAL SERVICES AND ASSISTANCE Part I. Texas Department of Human Services Chapter 15. Medicaid Eligibility Subchapter D. Resources 40 TAC sec.15.435 The Texas Department of Human Services (DHS) adopts an amendment to sec.15. 435 concerning liquid resources, without changes to the proposed text as published in the October 2, 1992, issue of the Texas Register. The amendment is justified to explain when certain cash payments received for medical or social services are exempt as a resource for Medicaid eligibility. The amendment will function to ensure that countable resources are applied to determine Medicaid eligibility. No comments were received regarding adoption of the amendment. The amendment is adopted under the Human Resources Code, Title 2, Chapters 22 and 32, which authorizes the department to administer public and medical assistance programs. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on November 2, 1992. TRD-9214742 Nancy Murphy Agency Liaison, Policy and Document Support Texas Department of Human Services Effective date: December 15, 1992 Proposal publication date: October 2, 1992 For further information, please call: (512) 450-3765 TITLE 43. TRANSPORTATION Part I. Texas Department of Transportation Chapter 2. Environmental Affairs Subchapter B. Memorandum of Understanding with Natural Resource Agencies 43 TAC sec.2.21, sec.2.22 The Texas Department of Transportation (TxDOT) adopts new sec.2.21 and sec.2.22, concerning purpose and memorandum of understanding with the Texas Parks and Wildlife Department. Section 2.22 is adopted with changes to the proposed text as published in the June 5, 1992, issue of the Texas Register (17 TexReg 4082). Section 2.21 is adopted without changes and will not be republished. Texas Civil Statutes, Article 6673g, enacted by Senate Bill 352, 72nd Legislature, 1991, required the department to adopt a memorandum of understanding with each state agency that has responsibilities for the protection of the natural environment or for the preservation of historical or archeological resources. Article 6673g also requires the department and each of the resource agencies to adopt the memoranda and all revisions by rule. In order to meet this legislative intent and to ensure that natural resources are given full consideration in accomplishing the department's activities, these new sections are being adopted on a permanent basis. Section 2.21 describes the department's intent to adopt a memorandum of understanding with each state agency that has responsibilities for the protection of the natural environment or for the preservation of historical or archaeological resources. Section 2.22 adopts as Exhibit A a memorandum of understanding between the department and Texas Department of Parks and Wildlife (TPWD) which provides for the review of department projects that have the potential to affect natural resources within the jurisdiction of TPWD and concerns the development of a system by which information developed by TxDOT and TPWD may be exchanged to their mutual benefit. On June 25, 1992, the department and the Texas Parks and Wildlife Department conducted a joint public hearing to seek comments regarding the proposed adoption of rules concerning memoranda of understanding with natural resource agencies and concerning a memorandum of understanding (MOU) between the Texas Department of Transportation (the department) and TPWD. Representatives of the Association of General Contractors and the Lone Star Chapter of the Sierra Club were in attendance and indicated they were in favor of the new rules. No comments were received opposing the adoption of the rules, however, commenters suggested revisions. Two commenters gave oral testimony at this hearing. The department also received one written response by mail. One of the commenters expressed support for the MOU. Another commenter stated that "it is encouraging to see the department attempt to develop a policy that will enable a better working relationship with the Texas Parks and Wildlife Department." The third commenter did not express either support for or opposition to the MOU. All three commenters expressed specific concerns or requested specific revisions to the MOU. The following discussion addresses their specific concerns and suggestions. One commenter stated that she did not agree with the determination that there would be no effect on local governments or small businesses as a result of enforcing the proposed section, since the MOU includes a provision to suspend construction if unforeseen impacts to endangered or threatened species or habitat are identified after construction has commenced. The department would then enter into consultation with TPWD. The organization stated that such a suspension would affect the involved construction contractors and that indefinite delays would also affect local businesses and area residents. Concern was expressed that TPWD could evoke the suspension provision arbitrarily. The commenter suggests that wording be included that would relegate any suspension related dispute to the dispute resolution process described in Section V of the MOU; thus, providing for a finite time frame for resuming construction. The department acknowledges that suspension of work would affect the contractors involved with construction of a project and would inconvenience area businesses and residents. However, the department believes that the benefits of the environmental protection and preservation provided by the MOU more than off-set the adverse effects which would result in the unlikely event of a suspension. It should be noted that, though the suspension would be automatic upon the identification of endangered or threatened species impact, the dispute resolution process would apply to the consultation provision, unless the suspension was related to a species protected under the federal Endangered Species Act. In cases involving federally protected threatened or endangered species, consultation with the United States Fish and Wildlife Service would be required. One commenter suggested that Section I.E. be revised to read, "in order to assist the department in making environmentally and economically sound decisions." Another commenter indicated that economics should not be a consideration in the coordination and review process. Section V.A. states that "comments received from TPWD will be evaluated in conjunction with all applicable factors" in an attempt to arrive at an acceptable plan of action. Since cost is identified as a factor to be considered no revision is necessary. One commenter indicated that the criteria for coordination listed in Section IV.A.l. is too broad, that very few projects would be excluded from TPWD review, and the review time established in Section IV is excessive. Another commenter indicated that the length of review allowed in the document is appropriate. The department considers TPWD project review to be valid means to further ensure successful implementation of the department's policy to preserve the environment to the extent possible and to enhance the environment when practicable. TPWD is in agreement that the established criteria for review is appropriate. The review period was determined based on available personnel resources and the anticipated number of projects to be reviewed, and is necessary in order to ensure thorough project reviews. Two of the commenters indicated that the MOU should be expanded to address all types of transportation projects. This MOU was developed to comply with Texas Civil Statutes, Article 6673g which directs the department to adopt a MOU with natural resource agencies. The statutory requirements for the content of the MOU is limited to agency review of department "highway projects." The department agrees that it would be beneficial to also provide for TPWD review of other department projects and will seek to develop a separate MOU with TPWD as may be appropriate. One commenter indicated that the definition of "monitor" in Section II should be expanded to allow for corrective action if problems are observed during construction. The definition of "monitor" in Section II is to "observe" for the purpose of "ensuring" that certain goals/objectives are obtained. This implies, as is the department's intent, that corrective actions will be taken when necessary in order to fulfill environmental commitments. One commenter indicated that size limits should be deleted from Section IV. A.l.(a) i, ii, and iii since some undeveloped or natural-like areas within otherwise urban areas could be excluded from review due solely to their size. The department recognizes that there are sometimes unique circumstances that warrant review by TPWD. It is the intent as well as the practice of the department to coordinate projects with unique environmental resources regardless of size in order to ensure that environmentally sound decisions are made. One commenter stated that Section IV.A.l.(a).v. should include definitions of "mature" and "substantially." A specific definition of "mature" would vary according to the particular type of occurring brush and would require the establishment of lengthy, descriptive biological criteria that are not appropriate to this MOU. The term "substantially" is considered to have sufficient meaning in regard to making judgments in determining whether the vegetation within existing right-of-way is sufficiently different than outside the right-of-way. Making precise measurements on-site would not be necessary to perform judgments. One commenter stated that Section IV.A.l.(b) should include definitions of "qualified biologist" as well as criteria for determining "native," "introduced," and "mixed." The term "qualified biologist" was included in the MOU to preclude use of the term "qualified engineer" or someone without a biological background. Using professional judgment a qualified biologist will verify the biological and natural resource information contained in the environmental documentation; therefore, inclusion of criteria for determining "native," "introduced," and "mixed" are not necessary. One commenter indicated that Section IV.A.l.(b).ii should be revised to reflect that photographs of the project area will be provided to TPWD along with project documentation. During the preparation of the MOU, it was the intent of the department and TPWD to avoid requiring photographs for every project when in many instances TPWD will perform an independent field investigation of the project area. Photographs will be provided when requested by TPWD or when needed to facilitate TPWD project review. One commenter stated that the word "reasonably" should be deleted from the third sentence in Section IV.A.l.(c). The MOU provides that TPWD may request additional information that is not included in the department's environmental documentation and requires the department to provide the information if it is available or "can be reasonably obtained." The term "reasonably obtained" is intended to apply to information that is obtainable only without prohibitive expense or delay. One commenter stated that in order to eliminate a "loophole" in the MOU that the terms "Reasonably accessible" and "as available" should be deleted from Section IV.A.l.(e). The department will furnish TPWD property information that has been obtained through the project development and environmental processes. "As available" is redundant and has been deleted from the text. One commenter stated that "as appropriate" should be deleted from the end of Section IV.A.2.(a). In many cases, actions are taken to avoid impacting a resource. Such activities may or may not be specifically reflected in the construction plans. "As appropriate" is used in the text to allow flexibility in the manner in which mitigation plans are developed and implemented. In reference to Section IV.A.3.(c)., one commenter stated that "60 days" should be substituted for "ample opportunity" and that the word "appropriate" should be deleted. The commenter stated that this would ensure "that TPWD has enough time to consider maintenance programs and get comments in that will be of value to TxDOT." Due to the broad scope and often statewide application of maintenance programs/plans, it would be difficult to establish an absolute length of review. Maintenance programs/plans will be coordinated to the extent necessary to ensure that resources under the jurisdiction of TPWD are fully considered. "Appropriate" has been deleted from the text. In regards to Section IV.B., one commenter stated that "when applicable" should be deleted from the first sentence and that the last sentence of item 3 which begins "Wherever reasonably practical" should be deleted altogether. The commenter stated that the sentence "will be used by TxDOT to try to force TPWD to be for a project." It is the intent of the MOU to allow TPWD the flexibility to tailor their comments to the individual characteristics of each project and project area. Use of the term "when applicable" preserves this flexibility. The sentence which begins "Wherever reasonably practical" is used to ensure that alternatives identified in the environmental documents (prepared in accordance with the National Environmental Policy Act of 1969) are given full consideration. However, the sentence does not preclude TPWD from suggesting that an additional alternative(s) be evaluated. Under Section V.A., one commenter suggested that "all" be substituted for "the affected;" thus, ensuring that "all parties will be contacted and the department will try to coordinate with them to see if an agreeable resolution can be found." One purpose of the MOU is to establish a mechanism by which the department and TPWD may resolve disputes involving TPWD review of department projects. It is beyond the purpose and scope of this document to attempt to resolve concerns of all parties that may be interested in the project. Concerning Section IV, Review of MOU, one commenter stated that "five years is too long a period to wait for revision. Every two-three years is better." Texas Civil Statutes, Article 6673g, 352 directs TxDOT to "adopt a memorandum of understanding with each state agency that has responsibilities for the protection of the natural environment." Article 6673g also requires that the MOU be reviewed "not later than January 1, 1997, and every fifth year after that date." This provision will not prevent the agencies from revising or updating the MOU at anytime if deemed necessary to ensure coordination among agencies. One commenter suggested that language be included in the MOU which would allow TPWD to monitor construction projects to ensure that agreed upon mitigation is implemented. Section IV.A.2.(a) states that "when necessary, coordination between TxDOT and TPWD shall continue through the construction phase to provide for the protection of natural resources." It is the department's position that this statement provides TPWD a mechanism for monitoring construction projects when, based on professional judgment, they deem it appropriate. One commenter expressed concern about the exchange of sensitive information contained in the TPWD Heritage Program data base and indicated that his organization would be interested in reviewing the Agreement to be developed under Section IV.C.2. The department recognizes the sensitivity of Heritage Program information and will act responsibly with regard to it's use and distribution. However, it should be noted that any information obtained from the Heritage Program, as well as department environmental documents, may be considered public information and may be subject to public review and copying under the Texas Open Records Act. Further, without information from resource agencies, such as the Heritage Program, it would be impossible for the department to plan and develop projects sensitive to unique natural resources. The agreement to be developed under Section IV.C.2. will also be public information and will be available for review and copying by any interested parties. One commenter expressed concern that while the MOU requires the department to coordinate with TPWD it does not require the department to implement TPWD recommendations. The department intends to fully consider and, to the maximum extent practicable, implement recommendations received from TPWD. It should be noted that when determining practicability, the department must balance various and sometimes conflicting factors, as well as availability of physical and financial resources, in order to provide a safe, efficient, and environmentally sensitive transportation system for the State of Texas. Section 2.22 has been reformatted for clarity, with no substantive change. The new sections are adopted under Texas Civil Statutes, Articles 6666 and 6673g, which provide the Texas Transportation Commission with the authority to promulgate rules and regulations for the conduct of the work of the Texas Department of Transportation, and specifically for the adoption by rule of memoranda of understanding with natural resource agencies. sec.2.22. Memorandum of Understanding with the Texas Department of Parks and Wildlife. (a) The Texas Department of Transportation (TxDOT) adopts as Exhibit A-22 a memorandum of understanding between TxDOT and the Texas Department of Parks and Wildlife (TPWD) concerning: (1) the review of department projects which have the potential to affect natural resources within the jurisdiction of TPWD, in order to assist TxDOT in making environmentally sound decisions; and (2) the development of a system by which information developed by TxDOT and TPWD may be exchanged to their mutual benefit. (b) The memorandum of understanding follows as Exhibit A-22. [graphic] This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on November 2, 1992. TRD-9214835 Diane L. Northam Legal Administrative Assistant Texas Department of Transportation Effective date: November 24, 1992 Proposal publication date: June 5, 1992 For further information, please call: (512) 463-8630 43 TAC sec.2.23 The Texas Department of Transportation (TxDOT) adopts new sec.2.23, concerning memorandum of understanding with the Texas Water Commission, with changes to the proposed text as published in the July 14, 1992, and August 7, 1992, issues of the Texas Register (17 TexReg 5012 and 5524). Texas Civil Statutes, Article 6673g, enacted by Senate Bill 352, 72nd Legislature, 1991, requires the department to adopt a memorandum of understanding with each state agency that has responsibilities for the protection of the natural environment or for the preservation of historical or archeological resources. Article 6673g also requires the department and each of the resource agencies to adopt the memoranda and all revisions by rule. In order to meet this legislative intent and to ensure that natural resources are given full consideration in accomplishing the department's activities, this new section is adopted on a permanent basis. Section 2.23 adopts as Exhibit A a memorandum of understanding between the department and the Texas Water Commission (TWC) which provides for the review of department projects that have the potential to affect natural resources within the jurisdiction of TWC and concerns the development of a system by which information developed by TxDOT and TWC may be exchanged to their mutual benefit. On August 21, 1992, the department and the Texas Water Commission (TWC) conducted a joint public hearing to seek comments regarding the proposed adoption of a rule concerning a memorandum of understanding (MOU) between the department and the TWC. Earth First! expressed support for the MOU, while the Save Barton Creek Association expressed support for "much of the proposed TxDOT/TWC MOU." The Sierra Club supported the concept of the MOU, but stated that they could not "support this proposal without changes." The Barton Springs/Edwards Aquifer Conservation District offered comments, but expressed neither support for or opposition to the MOU. All of the commenters expressed specific concerns, made specific suggestions, or requested specific revisions to the MOU. Their specific concerns, requests, and suggestions are addressed in the following discussion. One commenter requested that his organization be represented on the interagency committee to be established in accordance with Section IV.I. Another commenter suggested that the Texas Parks and Wildlife Department and the United States Fish and Wildlife Service be represented on the interagency committee. Upon final adoption of the MOU, the department and TWC will form the interagency committee and will jointly determine appropriate membership. The request and suggestions will be considered at that time. One commenter objected to the wording of Section IV.B. which states that the "level of documentation prepared and provided to TWC will be in compliance with NEPA, TxDOT environmental rules, and other state laws, rules, and regulations." The commenter stated "that given the fact that there's a new urgency in protecting the Edwards Aquifer we ought to go beyond just what the laws that exist now are. I think that we need to get tougher laws that are consistent with protecting the quality of water in the aquifer" Texas Civil Statutes, Article 6673g, requires the department to adopt an MOU with each state agency that has responsibilities for the protection of the natural environment. TWC is such an agency. The purpose of the MOUs is to provide a mechanism for or formalize coordination between the department and the resource agencies with regards to department highway construction projects. Establishing or proposing new legislation, as suggested by the commenter, is beyond the scope of the MOU and legislative intent. However, it is the policy of the department to preserve and, where practicable, to enhance the environment and the department intends to administer this policy pro-actively. Further, the department recognizes the sensitivity of the Edwards Aquifer and is striving to fulfill the mission of the agency in a manner consistent with promotion of water quality. One commenter stated that the MOU "should be not only a legally-based document but a scientifically-based document." He stated that the MOU should include "some indication of the scientific methodology as a basis for this agreement." Article 6673g provides that the MOU must describe agency responsibilities regarding review of highway projects, specify the types of information the department will provide to the reviewing agency, and specify the length of time in which the reviewing agency must review the project. The MOU, therefore, is a policy-setting document which provides for TWC review of highway projects. Under the provisions of the MOU, TWC staff will review environmental documentation prepared by TxDOT and will provide comments to TxDOT regarding water quality impacts. All comments received from TWC will be considered fully by the department. Specific scientific methodology to be used in reviewing projects in beyond the scope of the MOU. One commenter questioned a recent action by the Austin Transportation Study Policy Advisory Committee, the metropolitan planning organization for the Austin area, concerning the approval of water quality mitigation devices for a highway in southwest Travis County. The commenter also expressed concern about the department's maintenance practices for existing water quality mitigation devices. Neither of the comments pertain to the content of the MOU. Questions concerning actions of the Austin Transportation Study Policy Advisory Committee should be addressed to the committee members. Concerns about maintenance of existing water quality mitigation devices should be expressed to the responsible department district office. One commenter indicated that "as far as practicable" should be deleted from Section III.A.l.a. The department concurs with the comment and the document has been revised accordingly. Two commenters suggested that the phrase "to the extent practicable" should be deleted from Section IV.D.l. One of the commenters indicated that deleting the phrase would strengthen the document and emphasize the importance of minimizing environmental impacts. The department agrees with the comment and has deleted the phrase from the section. One commenter objected to "the cost of mitigation" being listed as a factor to be considered by TWC when establishing conditions of approval for projects over the Edwards Aquifer recharge zone. "The cost of mitigation" has been deleted from Section IV.D.2. of the document. The first sentence of Section IV. D.2. now reads, "The TWC shall weigh all factors in the review process including the significance of the impact to water quality and public interest. " One commenter expressed objection to the use of the term "human environment. " He indicated that the definition of environment should be broader. The department interprets "human environment" comprehensively to include the natural and physical environment and the relationship of people with that environment. This definition is consistent with regulations adopted by the Council on Environmental Quality (40 Code of Federal Regulation 1508.14). One commenter expressed concern about the sequencing of some construction projects. He specifically cited an example where the permanent water quality controls were to be built after completion of the actual roadway. He stated that if the permanent controls were constructed prior to roadway construction the benefits of the controls would be realized during the construction phase. The department shares the commenters concerns and is striving to plan, design, construct, and maintain the state highway system in a manner consistent with the promotion of water quality. However, it should be noted that it is not generally feasible to construct the permanent controls prior to the commencement of actual roadway construction; therefore, temporary erosion controls are used to minimize the amount of sediment escaping from the project site. It should also be noted that the concern is beyond the scope of the MOU. Two commenters expressed concern that Section IV.D. of the MOU either conflicts with or weakens the Edwards Aquifer rules (31 TAC Chapter 313) adopted by TWC in March of 1990. In response to these concerns several changes have been made to Section IV.D. Specifically, as previously stated, "to the extent practicable" has been deleted from Item 1 and "the cost of mitigation" has been deleted from Item 2. In addition, Item 3 has been deleted entirely and Item 4 has been moved to a more appropriate section of the MOU. The department recognizes the sensitivity of the Edwards Aquifer and will continue to fully comply with 31 TAC Chapter 313. It should be noted that as state agencies, both the department and TWC have a responsibility to consider public interest when making decisions concerning activities under their jurisdiction. The new section is adopted under Texas Civil Statutes, Articles 6666 and 6673g, which provide the Texas Transportation Commission with the authority to promulgate rules and regulations for the conduct of the work of the Texas Department of Transportation, and specifically for the adoption by rule of memoranda of understanding with natural resource agencies. sec.2.23. Memorandum of Understanding with the Texas Water Commission. (a) The Texas Department of Transportation (TxDOT) adopts as Exhibit A-23 a memorandum of understanding between TxDOT and the Texas Water Commission (TWC) concerning: (1) the review of department projects which have the potential to affect natural resources within the jurisdiction of TWC, in order to assist TxDOT in making environmentally sound decisions; and (2) the development of a system by which information developed by TxDOT and TWC may be exchanged to their mutual benefit. (b) The memorandum of understanding follows as Exhibit A-23. [graphic] This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on November 3, 1992. TRD-9214836 Diane L. Northam Legal Administrative Assistant Texas Department of Transportation Effective date: November 24, 1992 Proposal publication date: July 14, 1992 For further information, please call: (512) 463-8630