High Court's Interconnection DecisionCreates TELRIC, UNE Hell

Posted: 04/1999

High Court’s Interconnection Decision
Creates TELRIC, UNE Hell
By Kim Sunderland

Where will be no calm after the storm leading up to the U.S. Supreme Court’s Jan. 25
decision in AT&T Corp. et al v. Iowa Utilities Board et al. Already, the
expected fallout is blinding.

In the 8th U.S. Circuit Court of Appeals from St. Louis, attorneys in 20 different law
firms representing the incumbent local exchange carriers (ILECs), Irving, Texas-based GTE
Corp. and several national associations have asked permission to present oral arguments
and briefs on the Federal Communications Commission’s (FCC’s) interconnection pricing
rules. The Supreme Court remanded the TELRIC (total element long run incremental cost)
methodology to the 8th Circuit.

At press time, the commission itself had received comments from AT&T Corp.,
BellSouth Corp., Atlanta; and MCI WorldCom Inc. on how to approach its remand issue from
the Supreme Court: unbundled network elements (UNEs). And already the Bells have taken to
their respective corners on their existing interconnection deals and access to UNEs.

"This is creating an environment that is becoming riper by the day for regulatory
intervention," says Eileen Polsky, vice president of Jersey City, N.J.-based
Regulatory Research Associates Inc. "Quite frankly, it is difficult to see how the
FCC can look away from the need to provide interim guidance."

In its January opinion, the Supreme Court took issue with several rulings by the 8th
Circuit, which had vacated key portions of the FCC’s landmark 1996 interconnection order
(Common Carrier Docket No. 96-98). The FCC had adopted rules in that order on new local
market entry, including what the ILECs could charge new entrants to interconnect with
their equipment. In mid-1997, however, the ILECs and several state utility commissions
said the FCC lacked jurisdiction to issue local competition pricing rules. The 8th Circuit
agreed, setting aside massive segments of the FCC’s order.

But the High Court in January overturned much of the 8th Circuit’s ruling, determining
that the FCC has authority under the Telecommuni-cations Act of 1996 to set such pricing.
But let it be noted that the Supreme Court didn’t rule on the FCC’s TELRIC method for
setting that pricing, only on whether the commission had the authority to issue such a
standard. The 8th Circuit now must pick it up from there.

In their filing, the ILECs and GTE have asked the 8th Circuit for an expedited
proceeding to challenge the FCC’s TELRIC standard for network interconnection and UNE
rates. SBC Communications Inc., San Antonio; Ameritech Corp., Hoffman Estates, Ill.; Bell
Atlantic Corp., Philadelphia; US WEST Inc., Denver; Cincinnati Bell Telephone Co.; GTE;
and several associations challenge the rules as unreasonable, and they argue that the 8th
Circuit should continue to delay the interconnection rules until the TELRIC issue is
decided.

"If the FCC’s rules were now to spring into effect, they would immediately call
into question the continuing validity of a large number of interconnection agreements,
requiring renegotiation of many of their terms," the companies stated in their Feb.
17 court filing. "Should the [8th Circuit] subsequently vacate some or all of the
FCC’s rules on their merits, [we] would be forced to renegotiate these agreements yet
again, in many cases restoring what they had just finished undoing."

"They are asking to submit new briefs, given their experience over the past two to
three years interconnecting with CLECs (competitive LECs)," explains Rosemary
McMahill, manager of regulatory services at Austin, Texas-based Cathey, Hutton &
Associates Inc. "I think that’s reasonable–they have a different perspective now
than those opinions they expressed on TELRIC in their original briefs filed with the 8th
Circuit two years ago.

"In the meantime," McMahill adds, "they want existing interconnection
agreements to remain unchanged–and this is also reasonable. It’s still ‘wait and see,’
even though the Supreme Court has definitely supported the federal side in this
matter."

The Bells and GTE–as well as lobby groups the United States Telephone Association
(USTA), the Rural Telephone Coalition, the National Telephone Cooperative Association, the
National Rural Telecom Association and the Organization for the Promotion and Advancement
of Small Telecom-munications Companies (OPASTCO)–want the 8th Circuit to modify its order
to be consistent with the Supreme Court’s ruling.

"We believe that the [8th Circuit] will benefit significantly from further
briefing by all parties in light of the changes in the legal landscape," the
companies stated in their filing. "The most obvious development … is the Supreme
Court’s decision … which cast additional light on the underlying merits of the pricing
rules."

The companies seek a fast track for this case and have asked the 8th Circuit to
schedule briefings and oral arguments before it takes summer recess. The court had not
made a determination on this request as of late February.

The FCC now is charged with redoing its list of the UNEs that ILECs must offer to
competitors.

At issue here is Rule 319, the FCC’s primary unbundling rule that sets forth a minimum
number of network elements that ILECs must make available to requesting carriers. The
Supreme Court vacated and remanded Rule 319, calling it inconsistent with the Telecom Act
because the FCC didn’t fully consider all factors "when it gave requesting carriers
blanket access to network elements."

In other words, the High Court wonders if the FCC is giving competitors access to UNEs
that go beyond what is "necessary" to provide basic local service, which is all
the Telecom Act called for. According to the Supreme Court, the FCC virtually ignored the
Telecom Act’s requirement that it consider whether forcing the ILECs to provide access to
each network element was "necessary" to promote competition, and whether new
entrants would be "impaired" by having to get the network element on their own.

The commission now must develop and apply a new test that’s consistent with the Supreme
Court’s decision, and publish a new rule identifying the network elements that must be
made available under the Telecom Act. GTE and the ILECs specifically want the 8th Circuit
Court to vacate all of Rule 319 and several other companies already are lobbying the FCC
hard on how the "necessary" and "impair" standard should be applied.

According to AT&T’s ex parte filing with the FCC, for instance, "The
Supreme Court held that the commission’s prior interpretation … was extreme–not in the
results it ultimately reached but in the standard it applied."

The Supreme Court found that the FCC’s interpretation–under which the commission
inquired whether the functionality performed by a proposed network element somehow could
be obtained from a different element in the same LEC network at no greater cost–virtually
guaranteed that any requested element would satisfy the Telecom Act. Now the FCC must
adopt a standard that’s more limited, according to AT&T.

AT&T officials suggest that the FCC set rules determining that: A UNE is
"necessary" if an ILEC or other carrier hasn’t made "a reasonable
substitute" available to a requesting carrier; and a requesting carrier’s ability to
offer telecom services is "impaired" if its inability to obtain a UNE
"materially reduces their ability to offer services."

Some of the factors that AT&T says should be considered in determining whether
access to a UNE is "necessary," or whether a requesting carrier’s ability to
offer services is "impaired," include:

The impact of the Supreme Court’s decision is clearly positive for AT&T, according
to Anna-Maria Kovacs of Janney Montgomery Scott Inc. It "assures AT&T of cheap
access to its customers, not only in the form of cheap lines to the customers, but also in
the form of pressure on access charges, a major cost factor for AT&T and the other
long distance carriers," she says.

In its ex parte filing, BellSouth stated that the FCC should lay out a series of
tests and standards addressing Rule 319, which state commissions also can follow in
determining whether a proposed or requested UNE meets the necessary and impair standard
(Rule 319) of the Telecom Act.

"It is imperative that the state commissions play an important part in defining
network elements due to their knowledge of local market conditions," according to
BellSouth’s filing.

The "essential first step," BellSouth says, in determining if the necessary
and impair standard has been met is to determine the relevant product market in which the
UNE will be offered. This would require the FCC to collect and evaluate "credible
data" on the availability and cost of various telecom services and facilities,
BellSouth adds, including the scope of the networks already constructed by non-ILECs; the
costs of expanding these networks; and a competitor’s costs to purchase facilities or
services from a company other than an ILEC.

Once the market for a UNE has been established, BellSouth suggests the FCC use a
two-part test that includes the necessary and impair standard. BellSouth also recommends
that, in some cases, UNEs being offered to competitors should be priced at market-based
rates.

MCI WorldCom in its ex parte filing with the FCC posed questions for the
commission’s expected Notice of Proposed Rulemaking for Rule 319, such as:

MCI WorldCom proposed literally dozens of other questions regarding such topics as
specific network elements, switching and operations support systems (OSSs).

"The FCC can redefine UNEs without seriously limiting the availability of UNEs and
[the] UNE platform to competitors," Kovacs says. "But this will take some time
and work."

She also suggests possible options for the FCC would be to define the UNE platform
itself as an element, or to define elements as necessary when no alternate supply is
available.

On the state level, the National Association of Regulatory Utility Commissions (NARUC)
in late February passed a resolution asking the FCC to stay the three-zone geographic
deaveraging rule for those states that have not required it yet.

NARUC explains that averaged rates exist in states where costs in expensive areas are
mixed with costs in cheaper areas to produce an "average" rate that applies
throughout a state. The FCC’s deaveraged rate rule requires a state to make three separate
geographic areas with separate rates, which would force states with averaged rates to
break up their statewide rate.

Because the Supreme Court has reinstated FCC rules requiring all states to utilize the
FCC pricing methodology for UNEs offered by ILECs, NARUC wants an en banc hearing
to mull what changes should be made to separations rules relating to the costs and
revenues associated with UNEs.

NARUC also asked the FCC to extend the Feb. 8 deadline on implementing intraLATA (local
access and transport area) dialing parity. The rule required all service providers’
customers to be able to make intraLATA calls without having to dial multiple digit codes.
The 8th Circuit had found the rule to be anti-competitive, but the Supreme Court
reinstated it in January.

"The extension gives states time to comply with the rule in light of their own
state law and policy," NARUC said in its resolution.

The more prominent points of contention that need regulatory clarification while Rule
319 is on remand, according to Polsky of Regulatory Research Associates, are:

"The FCC generally seems to be aiming for maintenance of the status quo that
existed prior to the Supreme Court order," Polsky says.

The Bells and GTE have given the commission assurances that they will operate in good
faith while the FCC reworks its UNE rules. BellSouth, however, is not providing UNE
combinations while that remand is pending. Both Ameritech and SBC will continue offering
access to UNEs per their existing interconnection agreements. Their disclaimer, though,
says that if a requesting carrier wants to modify "the status quo" or asks for
access to a UNE that previously wasn’t provided, the two Bells reserve their rights to
exercise their legal rights. US WEST plans to honor existing interconnection agreements,
too, and will extend the terms of any interconnection contracts near expiration until the
end of the year, allowing for the FCC’s new rules to be in place.

One FCC attorney expects more comments to be filed in the coming weeks as the
commission tries to determine the right track to take on the Rule 319 issue. FCC Common
Carrier Bureau Chief Larry Strickling says the commission plans to issue an NPRM and adopt
a new rule this summer.

Competitors Question Stringency of OSS Testing

The operative telecom phrase for 1999 is operations support systems (OSSs), those
back-office functions the Bell companies are trying to upgrade to meet competitive
requirements of the Telecommunications Act of 1996. The reward for an incumbent local
exchange carrier (ILEC) having a bang-up OSS is Section 271 approval to provide in-region
long distance service.

The Telecom Act requires ILECs to provide requesting carriers with access to their
networks on nondiscriminatory terms. And for the promise of nondiscriminatory access to
become reality, new OSSs and interfaces must be implemented to support local competition.
But the ILECs haven’t gotten there yet, and one industry trade group thinks it’s because
third-party OSS testing isn’t strict enough.

Bell Atlantic-New York and Pacific Bell (PacBell), San Francisco, for instance, have
devised separate OSS tests. Bell Atlantic’s third-party OSS tests were expected to be
completed around the end of February despite setbacks, delays and retesting. these systems
get up and running and they’re accepting orders, and large numbers of customers are able
to switch over and competing carriers are able to collocate and do all of the things that
we think they need to be able to do in order to have competition in New York," says
Maureen Helmer, chairwoman of the state’s Public Service Commission (PSC), "then I
think everyone will say this test is fair at the end of the day."

Nonetheless, the New York OSS test plan is more comprehensive than that proposed in
California by Pac-Bell, says the combined Competitive Telecommunications Association and
the America’s Carriers Telecom-munication Association (CompTel/ACTA) trade group.

PacBell’s "proposal appears to have been developed by [the company] with little
input from other parties," CompTel/ACTA states in its new white paper,
"Evaluating OSS Availability: A Blueprint for Third-Party Testing." And while
the proposed plan in California calls for testing by Pac Bell with participation by state
regulators and a third party, CompTel/ACTA says it’s unclear from the OSS test plan what
their level of participation will be.

Because of these and other third-party OSS tests being designed in Texas and
Pennsylvania, "it is vital that industry participants and federal and state
regulators devote the time and resources it will take to make sure that OSSs are
nondiscriminatory in practice as well as in theory," says H. Russell Frisby Jr.,
president of CompTel/ACTA. "Nothing less than the future of competition is at
stake."

CompTel/ACTA’s white paper outlines steps that state commissioners can use in
developing third-party testing on whether an ILEC has implemented nondiscriminatory access
to its OSS. The most valuable purpose for a third-party test is as a step in the process
to create a working OSS capable of supporting widespread local competition, according to
the paper.

"It should be as simple for a customer to switch residential service as it is to
switch long distance," says Terry Monroe, CompTel/ACTA’s vice president of state
affairs, who released the paper in late February during the National Association of
Regulatory Utility Commissioner’s (NARUC’S) winter meeting in Washington. "This is
critical."

The basic steps to conducting a valid third-party OSS test, according to CompTel/ACTA,
are:

CompTel/ACTA acknowledges in its white paper that while a third-party test can provide
a static measure of an ILEC’s compliance with the Telecom Act, an ILEC’s OSS must support
high commercial volume.

"Without reliable OSSs, tomorrow’s full-service market will become an extension of
the local monopoly," says telecom consultant Robert Falcone of UltraPro, who
co-authored the white paper along with consultant Joseph Gillan of Gillan &
Associates. "No third-party test can simulate the commercial volumes a [competitor]
will experience."

And while the trade group says that actual commercial usage is the only true test that
an ILEC’s OSS complies with regarding the market-opening requirements of the Telecom Act,
CompTel/ACTA says in a footnote that no single state experience to date has included each
of the features mentioned above. But if designed properly, conducting a third-party test
of an ILEC’s OSS is no less complicated than local entry itself, the paper says,
"although it ought not take as long or be nearly as expensive as actual entry."

State commissioners also shouldn’t expect "overnight results" in such tests,
Falcone says. "You have to give the [OSS] test enough time to get through the full
sequence of steps," he says. "The ultimate goal is to get it right the first
time."

–By Kim Sunderland

Industry Appeals Expected in FCC’s Payphone
Compensation Ruling
By Kim Sunderland

The interexchange carriers (IXCs) are satisfied, the payphone industry isn’t and the
incumbent local exchange carriers (ILECs) are hot. So sets the stage in the Federal
Communications Commission’s (FCC’s) third attempt at setting a compensation rate IXCs must
pay for originating dial-around and toll-free calls.

In its Jan. 28 order, the FCC reaffirms "that payphone compensation issues are
best addressed in the marketplace by negotiations between long distance companies and
payphone owners." Absent such negotiated rates, though, the FCC set a default rate of
24 cents per call, down 4.4 cents from the previous 28.4 cents rate.

In Common Carrier Docket No. 96-128, the commission also delayed a plan to move the
payphone industry to the final phase of its market-based compensation scheme, in which
that default rate for dial-around access and toll-free calls will be tied to the local
coin rate at each payphone. The FCC reportedly is concerned about implementing that
approach before IXCs can track in real time which calls originate from payphones and what
the local coin rate is at any single payphone. According to the order, the FCC will, after
three years, "entertain petitions" on adopting a more competitive system.

But the industry is up in arms now and appeals are threatened. The RBOC (regional Bell
operating company)/GTE Payphone Coalition, for instance, plans to challenge the per-call
compensation rate on appeal. It’s "unacceptably low and a threat to the survival of
thousands of the nation’s payphones," says James Hawkins, chairman of the coalition
and president of BellSouth Public Communications Inc., BellSouth’s payphone subsidiary.
"Our only recourse may be to challenge on appeal."

Hawkins says the true cost of providing payphones is much higher than the 24
cents-per-call compensation rate set by the FCC. He calls the commission’s policy
"profoundly regressive" and says local callers will be subsidizing business
travelers making toll-free and dial-around long distance calls.

Vince Sandusky, president of the American Public Communications Council (APCC), the
national group representing payphone service providers (PSPs) and their manufacturers and
suppliers, also "is deeply concerned" that the FCC’s policy is not in the public
interest. Because this rate does not cover costs, this order likely will lead to a
reduction in the number of payphones available to consumers, Sandusky says.

"APCC is evaluating all of its legal options at this point," he says,
"and will be fully involved in the expected appeals of this decision."

The FCC adopted its order Jan. 28 on remand by the U.S. Court of Appeals for the
District of Columbia Circuit. FCC attorney Glenn Reynolds explains that Section 276 of the
Telecommunications Act of 1996 instructs the FCC to come up with "fair
compensation."

"There are many ways to calculate that and there have been different ways asserted
to us from many parties" on how to calculate this compensation rate, Reynolds says.

In previous orders, the FCC calculated the cost of providing payphone service using a
"top-down" method that subtracted certain costs from the prevalent price of a
local payphone call. On appeal, the D.C. Circuit questioned this approach and found that
the FCC had not "adequately explained its reasoning." In this order, the FCC
instead chooses to use a "bottom-up" method, in which the costs of providing
payphone service are added together to calculate a fair compensation rate.

"We call this a ‘bottom-up’ approach to connote the idea that the price of
dial-around or compensable calls is calculated by ‘building up’ from a starting point of
zero using costs, instead of ‘building down’ from a starting point of the price of coin
calls using avoided costs," the FCC said in its order.

The commission also said in its order that the compensation rate was changed partly due
to new, more accurate cost data submitted by petitioners on reconsideration.

Contrary to the views expressed by APCC and the Bell and GTE payphone coalition, the
FCC order said its new per-call compensation rate won’t affect the current deployment of
payphones negatively and, in fact, promotes widespread deployment. "We have sought
… to ensure the continued deployment of existing payphones to the greatest practical
extent," according to the order.

And if PSPs, the IXCs and toll-free subscribers are unable or unwilling to resolve
technological issues regarding targeted call blocking, the FCC warned that their inaction
"may require us to move to a more regulatory approach."

The order takes effect 30 days after its publication in the Federal Register.
Payphone industry attorneys have told PHONE+ they will file their appeals at that time.