(a) Application. This section must apply to DCTUs with annual revenues from regulated telecommunications operations in Texas of $100 million or more for five consecutive years. An incumbent local exchange carrier that is not a Tier 1 local exchange company as of September 1, 1995, at that company's option, may adopt the cost studies approved by the commission for a Tier 1 local exchange company.     
      (b) Purpose. This section must be used to determine the long run incremental costs incurred by DCTUs in the provision of telecommunications services. The costs determined in this section must not be used to determine a company's revenue requirement during a proceeding under Public Utility Regulatory Act, Chapter 53, Subchapters C and D or E.     
      (c) Definitions. The following words and terms when used in this section must have the following meaning unless the context clearly indicates otherwise.      
        (1) Ancillary services--The category of basic network functions (BNFs) (as defined in paragraph (2) of this subsection) that provide for certain activities that either support or otherwise are adjuncts to other BNFs or finished services. This category of BNFs consists of three subcategories of BNFs: Billing and Collection; Measurement; and Operator Services.                  (A) Billing and collection--The subcategory of BNFs that provide for the function of compiling the information needed for customer billing, preparing the customer bill statement, disbursing the bill and collecting the customer payments.                   (B) Measurement--The subcategory of BNFs that provide the functions of assembling, collating and transmitting end office switch recorded call data (occurrence and duration).                   (C) Operator services--The subcategory of BNFs that provide for the provision of a number of live or mechanized assistance functions to aid customers in the following ways: obtaining customer telephone number, street address and ZIP code information (directory assistance); providing new telephone numbers or explanatory information to callers who dial numbers which have been changed or disconnected (intercepts); providing assistance to customers in completing operator handled toll or local calls (collect, credit card, third party, station-to-station or person-to-person); checking busy lines to make sure the line is not out of service (busy line verification); and interrupting busy lines (busy line interruption). These operator services are provided to end user customers as well as local exchange and interexchange carriers.         
        (2) Basic network function (BNF)--A discrete network function, which is useful either as a stand-alone function or in combination with other functions, for which costs can be identified.       
        (3) Capital costs--The recurring costs that result from expenditures for plant facilities that are capitalized. The annual capital costs consist of depreciation, cost of money, and income taxes.       
        (4) Categories of BNFs--All BNFs must fall into one of four categories of BNFs. The categories are: network access (as defined in paragraph (13) of this subsection); switching and switch functions (as defined in paragraph (16) of this subsection); dedicated and switched transport (as defined in paragraph (10) of this subsection); and ancillary services (as defined in paragraph (1) of this subsection).       
        (5) Common costs--Costs that are not directly attributable to individual cost objects. For the purposes of this section there are three types of common costs: general overhead costs; costs common to BNFs; and costs common to services.                  (A) General overhead costs--Costs incurred in operating and managing the company that are not directly attributable to BNFs or services.                   (B) Costs common to BNFs--Costs incurred in the provision of BNFs that can not be directly attributed to any one BNF individually but only to a category or subcategory of BNFs collectively.                   (C) Costs common to services--Costs incurred in the provision of two or more services that do not vary with changes in the relative proportions of the outputs of those services. Common costs are not directly attributable to any one service individually but only to a group of services collectively. In the event a BNF is used in the provision of two or more services then the volume insensitive cost of the BNF is a cost common to the services that use the BNF. However, if the technological requirements for the provision of one service alter the least cost technology choice for common BNFs or common facilities, then the increase in costs caused by the requirements for more advanced technologies is not a common cost but a cost directly attributable to the service that alters the least cost technology choice.         
        (6) Cost causation principle--The principle that only those costs that are caused by an activity (such as a network function, service, or group of services) in the long run are directly attributable to that activity. Costs are caused by an activity, in the long run, if the costs are brought into existence as a direct result of the activity.       
        (7) Cost driver--A specific condition, under which a BNF is provided, whose change causes significant and systematic changes in the cost of providing a BNF. For example, if the cost of providing a network access channel varies with the density and size of a wire center, then density and size are cost drivers for that BNF.       
        (8) Cost of debt--The rate of interest paid on borrowed money.       
        (9) Cost of money--The weighted annual cost to the DCTU of the debt and equity capital invested in the company.       
        (10) Dedicated and switched transport--The category of BNFs that provide for dedicated or shared transmission transport between two or more DCTU switching offices or wire centers. This BNF category consists of two subcategories of BNFs: Dedicated Transport and Switched Transport.                  (A) Dedicated transport--The subcategory of BNFs that provide for full period, bandwidth specific (e.g., DS-0, DS-1, DS-3) interoffice transmission paths between the originating and terminating points of channel connection.                   (B) Switched transport --The subcategory of BNFs that provide for shared interoffice transmission paths between originating and terminating points of switching.         
        (11) Group of services--A number of separately tariffed services that share significant common costs (as defined in paragraph (5) of this subsection) that are necessary and unique to the provision of those services and are not directly attributable to any one service individually. This term also refers to a situation in which two or more groups of services are part of a larger group of services because of significant common costs that are necessary and unique to the provision of all the services in the group but are not directly attributable to any one group or service individually.       
        (12) Measure of unit cost--The measure of usage used to calculate unit cost for a particular BNF (for example, a minute of use of a switching function, or a quarter mile of a DS-1 network access channel). The measure of unit costs may be multidimensional; for example, it may have both time and distance components. The measure of unit cost chosen for a BNF must correspond to the basis upon which the costs of that BNF are incurred.       
        (13) Network access--The category of BNFs that accommodate access to other network functions provided by DCTUs. Access is accomplished by transmission paths between customers and DCTU wire centers. This category consists of three subcategories of BNFs: network access channel; network access channel connection; and channel performance and other features and functions.                  (A) Network access (NA) channel--The subcategory of BNFs that provide the transmission path between the point of interface at the customer location and the main distribution frame, or equivalent (e.g., DSX-1, DSX-3), of a DCTU wire center.                   (B) Network access (NA) channel connection--The subcategory of BNFs that provide the interface between the network access channel and the DCTU wire center switching equipment, subsequent dedicated transport equipment (dedicated interoffice circuits), or subsequent channel equipment (dedicated intraoffice circuits).                   (C) Channel performance and other features and functions--The subcategory of BNFs that provide the channel functions associated with transmission or service type (e.g., analog, digital, coin, ISDN), bandwidth conversion, signaling, multiplexing, amplification, and channel performance.         
        (14) Significant--For the purposes of this section, the qualifying term significant is used to refer to instances in which costs or changes affect total study results by at least five percent. This general guideline for when costs or changes are significant may be relaxed by considering the cumulative effect of either including or excluding costs or changes from a study.       
        (15) Subcategories of BNFs--Groupings of closely related BNFs in a category of BNFs.       
        (16) Switching and switch functions--The category of BNFs that provide for switched access between two or more network access channels or between network access channels and other BNFs, such as interoffice transport. This function is accomplished through the establishment of a temporary transmission path between network access channels in the same switching office; between a network access channel and the interoffice facilities that interconnect switching offices; or between a network access channel and other BNFs. This BNF category must cover the first point of switching for a customer. This BNF category consists of three subcategories of BNFs: interoffice switching; intraoffice switching; and switching features.                  (A) Interoffice switching--The subcategory of BNFs that provide for: switching between network access channels and switched transport facilities which are connected to different wire centers; and switching between network access channels and switched transport facilities when a tandem switch is used as the first point of interface to the DCTU switched network (e.g., connection of facilities from an interexchange carrier's point of network interface).                   (B) Intraoffice switching--The subcategory of BNFs that provide for switching between two or more network access channels within the same wire center.         
      (d) General principles.      
        (1) Underlying the construction and application of this section is the recognition that the DCTU network consists of a finite number of BNFs that, when bundled in various combinations, can be used to deliver and market a vast variety of telecommunications services. Therefore, the determination of the cost of a service and the costs of a group of services under this section must involve the identification and costing of BNFs.       
        (2) The LRIC studies that the DCTU is required to file under this section must assume that the company is operating in the long run and employs least cost technologies, as those terms are defined in subsection (c) of this section.       
        (3) In order to obtain accurate LRIC study results, the DCTU must avoid the use of embedded cost data; expense items and capital costs must reflect long run incremental costs and the DCTU must justify any instance in which embedded cost data are used. Further, the fact that the costs determined under this section may differ from the company's embedded costs as determined during proceedings under the Public Utility Regulatory Act, Chapter 53, Subchapters C and D or E, should in no way cause the company to attribute any of this cost discrepancy to LRIC studies for BNFs, services, or groups of services.       
        (4) When a BNF is used in the provision of two or more services then the volume insensitive cost of the BNF is a cost common to the services (as defined in subsection (c)(5)(C) of this section) that use the BNF.       
        (5) When services share significant common costs (as defined in subsection (c)(5)(C) of this section), none of the common costs must be included in the LRIC studies for the services individually; instead, the company must identify which services share the common costs and attribute the cost recovery responsibility of these costs to the group of services collectively. Specifically, the individual LRIC studies for residential and business basic local exchange service, as these services are tariffed on the effective date of this section, must exclude any volume insensitive costs associated with the use of the network access channel basic level (as defined in subsection (e)(1)(A) of this section) and network access channel connection basic level (as defined in subsection (e)(2)(A) of this section).       
        (6) When two or more groups of services share common costs, none of the common costs must be included in the LRIC studies for groups individually; instead, the company must identify which groups share the common costs and assign the common cost recovery responsibility of these costs to these groups collectively.       
        (7) Nothing in this section is intended to either endorse or reject the DCTU's current rate and tariff structures.       
      (e) Identification of basic network functions. The DCTU must identify for each subcategory of BNFs the relevant and separately identifiable BNFs. The determination of the appropriate degree of aggregation of network components, functions, or activities into separately identifiable BNFs must be consistent with the principles described in subsection (d) of this section. Furthermore, in choosing BNFs, the DCTU must seek to minimize the number of network components, functions, or activities that are not included in BNFs. In addition to BNFs the company identifies under this subsection, the company must identify for each subcategory of BNFs the following prescribed BNFs:      
        (1) Required BNFs for subcategory network access (NA) channel:                 Cont'd...