[ Text Version | Word97 Version ]

May 31, 2000


Re: Access Charge Reform, Price Cap Performance Review for Local Exchange Carriers, Low-Volume Long Distance Users, Federal-State Joint Board on Universal Service, Report and Order, CC Docket Nos. 96-262, 94-1, 99-249, 96-45.

The current structure of interstate access charges is irrational, and substantial revision of the Commission's access charge rules is needed. At present, the price of access to the local exchange carriers' networks bears very little relation to the way in which the costs of access are actually incurred - per-minute charges for access are far higher than they should be, whereas fixed charges are artificially low. As substitutes for traditional circuit-switched long-distance services, such as packet-switched Internet-based telephony, become more widely available, the regulatory distortions created by the Commission's rules are increasingly untenable.

Today's restructure of the access charge regime takes some steps in the right direction, and I concur in those aspects of this decision that permit price-cap local exchange carriers more fully to recover the fixed costs of the local loop through flat-rated charges. Indeed, I would have moved even more aggressively in this regard. I write separately, however, to express my profound disagreement with three aspects of this order.

The Process Through Which this Order Was Adopted Was Fundamentally Defective. This order is a product of a proposal that was originally submitted last summer by the Coalition for Affordable Local and Long Distance Service ("CALLS"). The Commission sought comment on this proposal last fall. See Notice of Proposed Rulemaking, Access Charge Reform, Low-Volume Long Distance Users, Federal-State Joint Board on Universal Service, CC Docket Nos. 92-262, 94-1, 99-249, 96-45 (Sept. 15, 1999).

In ordinary circumstances, the Commission would simply have rendered a decision on the CALLS proposal based on comments submitted by interested parties. The course the Commission took here, however, was very different. In the early part of this year, apparently prompted by objections to the original CALLS proposal raised by groups purporting to represent consumer interests, the Commission, acting chiefly through the Common Carrier Bureau, held a series of meetings with a select group of some - but by no means all - of the parties with interests in this proceeding. The substance of what was discussed at these meetings was not publicly disclosed. And a number of parties with interests in the outcome of this proceeding, including the Ad Hoc Telecommunications Users Committee, Time Warner Telecom, and the Association for Local Telecommunications Services, were not allowed to participate.

The Commission evidently refereed the negotiations at these meetings, and a "modified" CALLS proposal was reached near the end of February. Although this order announces that this "modified proposal" was put forth by members of the Coalition, see Order  1, it is undeniable that the proposal was a product of the negotiations that took place between the Commission and those parties that were allowed to participate in the negotiations - that is, members of the Coalition and some groups that purport to represent the interests of residential and small-business consumers. The Coalition's "modified proposal" simply memorialized aspects of the agreement that was reached between these parties and the Commission in the course of the meetings held in January and February of this year.

Even more dismaying, however, is what the "modified proposal" does not disclose. At some point in the course of the CALLS negotiations, proceedings that were unrelated to the issue of access charge reform became part of the negotiations. Incumbent local exchange carrier members of the Coalition apparently contended that they could not commit to certain modifications of the CALLS proposal unless they had confidence that two separate matters - a depreciation waiver item (1)

and the pending special access proceeding, which concerns the circumstances in which carriers may purchase combinations of unbundled loops and transport network elements (2) - would be resolved favorably to them. As a consequence, part of the final agreement reached by the participants to the CALLS negotiations concerned these two separate matters. With respect to this depreciation item, the Bureau agreed to recommend to the Commission that it approve the waiver that is the subject of this Notice and terminate the CPR audits. Additionally, the Bureau agreed to recommend to the Commission that it "clarify" the existing rules regarding special access and defer further rulemaking until 2001. The linkage between these unrelated items and the CALLS docket was very clear - at least internally. To brief the Commissioners and their staff regarding the outcome of the CALLS negotiations, the Bureau distributed briefing sheets outlining the incumbent carriers' concerns and making plain that the depreciation and special access matters had become a key part of the CALLS package. Nothing in this order, however, tells the public of this connection between this order and these other dockets.

In my view, the process by which the original CALLS proposal was modified is fundamentally inconsistent with principles of neutrality and transparency that must govern agency decisionmaking. By participating in the CALLS negotiations, the Commission plainly reached a view as to how the CALLS proceeding should be resolved, and its review of the comments it subsequently received regarding the "modified proposal" could not have been uninfluenced by the role it had played earlier. In addition, it was entirely improper for the Commission to have permitted the unrelated matters of depreciation and special access become part of the negotiations.

If the Bureau thought it would be helpful to narrow the differences between the various parties with interests in this docket in advance of a formal rulemaking proceeding, it could legally have done so by following the framework set forth in the Negotiated Rulemaking Act, 5 U.S.C.  561 et seq. This statute provides for the formation of a committee that will, with the assistance of the relevant agency, negotiate to reach a consensus on a given issue. 5 U.S.C.  563. An agency that undertakes a negotiated rulemaking must publish in the Federal Register a notice that, among other things, (1) announces the establishment of the committee; (2) describes the issues and scope of the rule to be developed; and (3) proposes a list of persons that will participate on the committee. 5 U.S.C.  564(a). In addition, the agency must give persons with interests that will be affected by the new rule an opportunity to apply to participate in the negotiated rulemaking process. Id.  564(b). If the committee reaches a consensus, the statute requires it to transmit to the agency that established the committee a report on a proposed rule. Id.  566(f). Significantly, although the agency may nominate a federal employee to facilitate the committee's negotiations, "[a] person designated to represent the agency in substantive issues may not serve as facilitator or otherwise chair the committee." Id.  566(c) (emphasis added).

None of those procedures was followed here. The public generally was not notified that the CALLS negotiations were taking place, nor were a number of parties that wished to be included in these negotiations permitted to participate. Not surprisingly, the final CALLS deal does not reflect the views of parties that were not included in the CALLS negotiations, such as the Ad Hoc Telecommunications Users Committee. For example, Ad Hoc has pointed out, in its comments and in a series of ex parte presentations to the Commission, that the retention of the multi-line business presubcribed interexchange carrier charge (or "PICC") imposes substantial costs on multi-line business consumers. See, e.g., Letter from James S. Blasak to Harold Furchtgott-Roth (May 23, 2000). Ad Hoc contended that the multi-line business PICC is often marked up by long-distance carriers, with the result that business subscribers pay more than they otherwise would. It therefore proposed that the multi-line business PICC be consolidated with the multi-line business subscriber line charge (or "SLC") and billed directly from the price-cap LEC to the end-user, to avoid a mark-up by the interexchange carrier. See Order 105-110. Elimination of the multi-line business PICC would have been consistent with the approach the Commission took with respect to the residential and single-line PICC. (Notably, groups purporting to represent the interests of residential and small-business consumers were at the table when the CALLS negotiations were held.) But the order declines to take Ad Hoc's approach. Had this party been permitted to present its views in the context of a negotiated rulemaking, I think the treatment of the multi-line business PICC might well have been different. And other aspects of this order would have been different as well.

Not only were interested parties excluded from the CALLS negotiations, but also the substance and scope of the CALLS negotiations was not made public, and there is no public record describing whatever consensus was finally reached. And, inconsistent with the policy set forth in 5 U.S.C.  566(c), the Bureau participated in these negotiations both substantively and as a facilitator. Had the Commission adhered to the statutory requirements set forth in the Negotiated Rulemaking Act, I believe it could have accomplished its goal of reforming the current access charge regime in a way that preserved its neutrality, allowed representatives of all interested parties to participate, and kept the public informed about the process taking place. (3)

To be clear, I do not believe that any employee of this agency acted in bad faith, nor do I call into question the propriety of public participation in the Commission's decisionmaking process by making ex parte presentations. In addition, I believe that the inefficiencies of the current access charge regime should be eliminated. But I cannot escape the conclusion that the process by which this Notice has been promulgated falls short of certain fundamental principles that govern the behavior of administrative agencies.

The Universal Service Subsidy Created in this Order Is Illegitimate. This order establishes a new $650 million fund universal service subsidy mechanism, which will be paid from contributions made by all interstate carriers almost exclusively to price-cap local exchange carriers. The Commission claims that this new subsidy is needed to replace the implicit "universal service" support mechanism currently present in interstate access charges.

It is important to understand what is occurring with the creation of this new subsidy. Until now, it has been interexchange carriers that have paid to local exchange carriers whatever "implicit subsidy" exists in access charges, and local exchange carriers have used this money to subsidize the cost of providing certain types of services within a limited geographical area (typically within a state). Thus, money might flow from a business end-user to a residential user, both within the incumbent's territory. Under this new mechanism, however, all carriers that provide interstate services will fund the access subsidy, and the costs of the subsidy will be spread nationwide. Thus, a wireless carrier in California (which is not eligible to receive any support from the $650 million fund) will now find itself footing the bill to subsidize local exchange carriers nationwide.

I do not think that the creation of this new fund is consistent with the statute's directive that the Commission "preserve and advance" universal service support mechanisms. See 47 U.S.C. 254. In my view, the subsidies present in the existing access charge regime do not come within the scope of section 254, and the Commission's reliance on section 254 as a basis for creating this new fund is inconsistent with the statute. Moreover, the only economically rational way for local exchange carriers to recover whatever subsidies are currently included in access charges is to increase the flat fees that subscribers pay for access. Paradoxically, this order decreases those charges. Although consumers may pay less in flat charges in the short term, I believe that this order does them a great disservice, since they will ultimately wind up paying far more to fund the subsidies that this Commission continues to manufacture in the name of "universal service."

The Commission's Requirement that Sprint and AT&T Comply with the Commitments these Companies Made in Letters to the Commission Is Unenforceable. In various letters to the Commission, Sprint and AT&T have made "commitments" regarding the CALLS proposal. Among other things, these companies have said they will "pass through" to consumers the savings that they realize in access charge reductions and that they will make various rate plans available to different types of consumers. The Commission orders Sprint and AT&T to comply with all the supposedly "voluntary" commitments they have made in these letters. See Order  247.

In my view, the Commission lacks the power to regulate AT&T's and Sprint's rates in this manner. As the Commission recognized in 1996, the long-distance market is a competitive one, and the Commission therefore no longer regulates the rates of any long-distance carrier. Order, Motion of AT&T To Be Classified as a Non-Dominant Carrier, 11 FCC Rcd 3271 (1996). In a competitive market, it is consumers - through their buying power - who tell carriers whether their rates are reasonable or not. Government regulation is no longer warranted. I therefore do not see how, even if these carriers fail to live up to their "commitment" letters, the Commission could possibly find these carriers' rates "unjust" or "unreasonable."

1. See Further Notice of Proposed Rulemaking,1998 Biennial Regulatory Review -- Review Of Depreciation Requirements For Incumbent Local Exchange Carriers, Ameritech Corporation Telephone Operating Companies' Continuing Property Records Audit, et al., CC Docket Nos. 98-137, 99-117 (Rel. Apr. 3, 2000).

2. See, e.g., Supplemental Order, Implementation of the Local Competition Provisions of the Telecommunications Act of 1996, CC Docket 96-98 (rel. Nov. 24, 1999).

3. Even under the Negotiated Rulemaking Act, however, the Bureau could not have promised that this Commission would abide by the negotiated rulemaking committee's consensus. See USA Group Loan Servs. Inc. v. Riley, 82 F.3d 708, 714 (7th Cir. 1996).